-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TlvgbU29nKahQITUvz2hqbauoWAoeNCCoIzJF+LnVD/c/BusQmzWxQv56tahHsW1 1gY6bHddVj8rHsMAMAslJA== 0000895810-01-000006.txt : 20010409 0000895810-01-000006.hdr.sgml : 20010409 ACCESSION NUMBER: 0000895810-01-000006 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 85 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PRIME MEDICAL SERVICES INC /TX/ CENTRAL INDEX KEY: 0000895810 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MISC HEALTH & ALLIED SERVICES, NEC [8090] IRS NUMBER: 742652727 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-22392 FILM NUMBER: 1588803 BUSINESS ADDRESS: STREET 1: 1301 CAPITAL OF TEXAS HWY STREET 2: SUITE C-300 CITY: AUSTIN STATE: TX ZIP: 78746 BUSINESS PHONE: 5123282892 FORMER COMPANY: FORMER CONFORMED NAME: PRIME MEDICAL SERVICES INC /TX/ DATE OF NAME CHANGE: 19940224 FORMER COMPANY: FORMER CONFORMED NAME: NEW PMSI INC DATE OF NAME CHANGE: 19930112 10-K 1 0001.txt SEC FORM 10-K FYE 12/31/00 - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 2000 [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from _____ to _____ Commission File Number: 0-22392 ------------------------- PRIME MEDICAL SERVICES, INC. (Exact name of registrant as specified in its charter) DELAWARE 74-2652727 (State or other jurisdiction of (I.R.S. Employer incorporation or organization Identification No.) 1301 Capital of Texas Highway, Austin, Texas 78746 (Address of principal executive offices) (Zip Code) (512) 328-2892 (Registrant's telephone number, including area code) Check whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO --- --- Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-K contained in this form, and no disclosure will be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of the Form 10-K or any amendment to this Form 10-K. _____ State the aggregate market value of the voting stock held by non-affiliates computed by reference to the price at which the stock was sold, or the average bid and asked prices of such stock, as of a specified date within 60 days prior to the date of filing. Aggregate Market Value at March 15, 2001: $101,157,771 Indicate the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date. Number of Shares Outstanding at Title of Each Class March 15, 2001 ------------------- -------------- Common Stock, $.01 par value 15,562,734 DOCUMENTS INCORPORATED BY REFERENCE Selected portions of the Registrant's definitive proxy material for the 2001 annual meeting of shareholders are incorporated by reference into Part III of the Form 10-K. 1 PRIME MEDICAL SERVICES, INC., ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000 PART I ITEM 1. BUSINESS - ------ -------- Prime Medical Services, Inc., a Delaware corporation ("Prime" or the "Company"), is the largest provider of lithotripsy services in the United States. Lithotripsy is a non-invasive procedure for the treatment of kidney stones, typically performed on an outpatient basis, that eliminates the need for lengthy hospital stays and extensive recovery periods associated with surgery. The Company has 67 lithotripters of which 60 are mobile and seven are fixed site. The Company's lithotripters performed approximately 36,000 procedures in the United States in 2000 through a network of approximately 450 hospitals and surgery centers in 34 states. Lithotripters fragment kidney stones by use of extracorporeal shock wave lithotripsy. The Company provides services related to the operation of the lithotripters, including scheduling, staffing, training, quality assurance, maintenance, regulatory compliance and contracting with payors, hospitals and surgery centers. Medical care is rendered by the urologists utilizing the lithotripters. Management believes that the Company has collected the industry's largest and most comprehensive lithotripsy database, containing detailed treatment and outcomes data on over 160,000 lithotripsy procedures. The Company and its associated urologists utilize this database in seeking to provide the highest quality of lithotripsy services as efficiently as possible. From 1992 through 2000, the Company completed 13 acquisitions involving 58 lithotripters. Since 1992, the Company has divested its original non-lithotripsy businesses. During 1997 the Company acquired a 75% interest in a manufacturing company which provides manufacturing services, and installation, refurbishment and repair of major medical equipment for mobile medical services providers. The primary intention of this acquisition was to provide vertical integration with the lithotripsy business. However, the non-lithotripsy business of the manufacturing segment has continued to increase. In addition to manufacturing services for lithotripsy trailers, the manufacturing segment also provides manufacturing services for magnetic resonance imaging ("MRI") trailers, cardiac catheterization lab trailers and postitron emission tomography ("PET") trailers. During 1999 and 2000, the Company completed six acquisitions totaling eleven refractive centers in the rapidly growing field of refractive vision correction (RVC). These six acquisitions now operate fifteen laser vision correction facilities, which performed approximately 33,000 procedures on an annualized basis during 2000. These facilities provide laser vision correction of common refractive vision disorders such as myopia (nearsightedness), hyperopia (farsightedness) and astigmatism. The Company also opened its first internally developed center in 2000. There are currently two procedures that use the excimer laser ("laser") to correct vision disorders: Laser in-situ Keratomileusis ("LASIK") and Photorefractive Keratectomy ("PRK"). LASIK is an outpatient procedure that accounts for nearly 90% of laser procedures done today. In LASIK, an ophthalmic surgeon uses a special knife called a microkeratome to peal back the top layers of the cornea and ablates the underlying corneal tissue with the laser before replacing the corneal layer. LASIK has three key advantages over PRK where the laser is used without creating the corneal flap: less pain, shorter recovery time, and fewer visual side effects. The Company has three reportable segments: lithotripsy, manufacturing and RVC. Other operating segments, which do not meet the qualitative thresholds for reportable segments, include prostatherapy services. See Note N to the consolidated financial statements for segment disclosures. Lithotripsy Segment Overview - ---------------------------- Kidney stones develop from crystals made up primarily of calcium which separate from urine and build up on the inner surfaces of the kidney. The exact cause of kidney stone formation is unclear, and there is no known preventive cure in the vast majority of cases. Approximately 25% of all kidney stones do not pass spontaneously and therefore require medical or surgical treatment. Kidney stone treatments used by urologists include lithotripsy, drug therapy, endoscopic extraction or open surgery. While the nature and location of a kidney stone impacts the choice of treatment, the Company believes the majority of all kidney stones that require treatment are treated with lithotripsy because it is non-invasive, typically requires no general anesthesia, and rarely requires hospital stays. After fragmentation by lithotripsy, the resulting kidney stone fragments pass out of the body naturally. Recovery from the procedure is usually a matter of hours. Kidney stone disease is most prevalent in the southern United States. Men are afflicted with kidney stones more than twice as frequently as women, with the highest incidence occurring in men 45 to 64 years of age. During 2000 the Company received approximately 64% of its revenues from the lithotripsy segment. Kidney Stone Treatment Methods A number of kidney stone treatments are used by urologists ranging from non-invasive procedures, such as drug therapy or lithotripsy, to invasive procedures, such as endoscopic extraction or open surgery. The type of treatment a urologist chooses depends on a number of factors, such as the size and chemical make-up of the stone, the stone's location in the urinary system and whether the stone is contributing to other urinary complications such as blockage or infection. Certain types of less common kidney stones may be dissolved by drugs which allow normal passage from the urinary system. Stones located in certain areas of the urinary tract may be extracted endoscopically. These procedures commonly require general or local anesthesia and can injure the involved areas of the urinary tract. Frequently, kidney stones are located where they are not accessible by an 2 endoscopic procedure. Prior to the development of lithotripsy, stones lodged in the upper urinary tract were often treated by open surgery or percutaneous stone removal, both major operations requiring an incision to gain access to the stone. After such procedures, the patient typically spends several days in the hospital followed by a convalescence period of three to six weeks. As the technology for treating kidney stones has improved, there has been a shift from more expensive and complicated invasive procedures to safer, more cost efficient and less painful non-invasive procedures, such as lithotripsy. Extracorporeal Shock Wave Lithotripsy General. The lithotripter has dramatically changed the course of kidney stone disease treatment since lithotripsy is normally performed on an outpatient basis, often without general anesthesia. Recovery times are generally only a few hours, and most patients can return to work the next day. There are two basic types of lithotripsy treatment currently available: electromagnetic and spark-gap. A decision regarding which type is used in any instance may depend on several factors, among which are the treating physician's preferences, treatment times, stone location and anesthesia considerations. The Company has 55 electromagnetic machines and 12 spark-gap machines. Electromagnetic Technology. These lithotripters utilize an electromagnetic shock wave component that eliminates the need for disposable electrodes. The use of lithotripters employing electromagnetic technology allows for more precise focusing of shock wave energy and more predictable energy delivery than other lithotripsy technologies, which eliminates the need for anesthesia in most cases. Utilization of systems employing electromagnetic technology usually results in fragmentation of the kidney stone in between 60 and 90 minutes. Spark Gap Technology. With these lithotripsy systems, shock waves generated by a disposable high-voltage spark electrode are focused on a kidney stone. Utilization of systems employing spark gap technology usually results in fragmentation of the kidney stone in less than 60 minutes. The use of spark-gap technology often requires the administration of sedatives or intravenous anesthesia care and in some cases requires general anesthesia. Manufacturing Segment Overview - ------------------------------ In September 1997, the Company, through its acquisition of a 75% interest in AK Associates, L.L.C. ("AK"), began providing manufacturing services and installation, upgrade, refurbishment and repair of major medical equipment for mobile medical services providers. The Company paid $4.8 million for this interest, plus an earn-out of $1.1 million, which was paid in February 1999. Certain members of AK management own the remaining 25% of AK. During 1998 AK became certified by General Electric Company ("GE") to provide trailers for MRI equipment, and during 1999 AK became certified by two additional companies to provide trailers for their equipment. These certifications have resulted in increased revenues in the manufacturing segment. Currently, AK manufactures MRI, cardiac catheterization lab and PET trailers. The sales prices for these trailers range from $270,000 to $360,000. AK either has a sales contract prior to beginning the manufacturing process or enters into a sales contract prior to 3 completion of the trailer. AK is certified to manufacture trailers for GE, Siemens, Philips and Marconi. In addition, AK repairs, refurbishes and upgrades existing trailers. Although repair and upgrade work was less than 5% of total sales in 2000, this opportunity will continue to grow as more and more units are placed into service. The Company received approximately 17 % of its revenues from the manufacturing segment in 2000. RVC Segment Overview - -------------------- During 1999, the Company entered into the RVC field through two acquisitions. Effective September 1, 1999, the Company acquired a 60% interest in three refractive surgery centers, owned and operated by Barnet Dulaney Eye Center in Phoenix and Tucson, Arizona for approximately $8.8 million in cash, a warrant to purchase 29,000 shares of the Company's common stock and a contingent earn-out obligation totaling $1 million which was paid in 2000. Also effective September 1, 1999, the Company acquired, through a majority owned subsidiary, 60% of the outstanding stock of Horizon Vision Centers, Inc. ("Horizon") for approximately $10.9 million in cash, which operated four refractive surgery centers in the San Francisco and Oakland bay area. During 2000, Horizon opened three additional refractive centers. Effective March 1, 2000, the Company purchased a 60% interest in a refractive surgery center owned and operated by the Mann Berkeley Caplan Laser Center of Austin, Texas. The Company paid approximately $3.8 million in cash and issued warrants to purchase 27,000 shares of the Company's common stock. Additionally in conjunction with this transaction, the Company issued warrants to purchase 28,000 shares of common stock to a third party. Also effective March 1, 2000, the Company purchased a 60% interest in a refractive surgery center in Los Angeles owned and operated by the Caster Eye Center. The Company paid approximately $5.8 million in cash. Additionally in conjunction with this transaction, the Company issued warrants to purchase 44,000 shares of the Company's common stock to a third party. Effective April 1, 2000, the Company purchased a 65% interest in a refractive surgery center in New York City owned and operated by New York Eye Specialists. The Company paid approximately $8.9 million in cash. Additionally in conjunction with this transaction, the Company issued warrants to purchase 67,000 shares of the Company's common stock to a third party. During 2000, this Company subsidiary opened a new center in Connecticut. Effective September 1, 2000, the Company purchased a 65% interest in a Kansas City refractive surgery center owned and operated by Vision Correction Centers of Kansas City. The Company paid approximately $4.5 million in cash for the center in October 2000. Additionally in conjunction with this transaction, the Company issued warrants to purchase 33,750 shares of the Company's common stock to a third party. In 2000, the Company also opened its first internally developed refractive vision correction center in St. Louis. This center was developed in conjunction with certain principals in Barnet Dulaney Eye Center and two local doctors. 4 The Company received approximately 18% of its revenue from the RVC segment in 2000. Refractive Disorders The primary function of the human eye is to focus light. The eye works much like a camera; light rays enter the eye through the cornea, which provides most of the focusing power. Light then travels through the lens where it is fine-tuned to focus properly on the retina. The retina, located at the back of the eye, acts like the film in the camera, changing light into electric impulses that are carried by the optic nerve to the brain. To see clearly, light must be focused precisely on the retina. The amount of refraction required to properly focus images depends on the curvature of the cornea and the size of the eye. If the curvature is not correct, the cornea cannot properly focus the light passing through it onto the retina, and the viewer will see a blurred image. Refractive disorders, such as myopia, hyperopia and astigmatism, result from an inability of the cornea and the lens to focus images on the retina properly. Laser Vision Correction Procedures In both PRK and LASIK the physician assesses the corneal correction required and programs the laser. The laser's software calculates the optimal number of pulses needed to achieve the corneal correction. Both PRK and LASIK are performed on an outpatient basis without general anesthesia, using only topical anesthetic eye drops. The eye drops eliminate the reflex to blink, while an eyelid holder is inserted to prevent blinking. The patient reclines in a chair, with his or her eye focused on a target, and the surgeon positions the patient's cornea for the procedure. The surgeon uses a foot pedal to apply the laser beam, which emits a rapid succession of laser pulses. The actual laser treatment takes 15 to 90 seconds to perform and the entire procedure, from set-up to completion, takes 10 to 15 minutes. Prostatherapy Segment Overview - ------------------------------ In October 1997, the Company began providing thermotherapy services for the treatment of benign prostatic hyperplasia ("BPH"). BPH is the non-cancerous enlargement of the prostate, a condition common in men over age 60. Thermotherapy uses microwaves to apply heat to the prostate, resulting in relief of the symptoms of BPH without damaging surrounding tissues. Thermotherapy relieves the symptoms of BPH without incurring the risks of complications often associated with surgery and more invasive procedures. The Company operated three mobile thermotherapy devices servicing hospitals and surgery centers in eastern North Carolina, Texas, and southern California. The Company received approximately 1% of its revenues from the prostatherapy segment in 2000. In January 2001, the Company sold its prostatherapy segment in exchange for a three year unsecured non-recourse note receivable for $950,000. The Company also entered into a mutual covenant not to compete with the buyer in exchange for an unsecured non-recourse note receivable for $150,000. Potential Liabilities-Insurance - ------------------------------- All medical procedures performed in connection with the Company's business activities are conducted directly by, or under the supervision of, physicians 5 who are not employees of the Company. The Company does not provide medical services to any patients. However, patients being treated at health care facilities at which the Company provides its non-medical services could suffer a medical emergency resulting in serious injury or death, which could subject the Company to the risk of lawsuits seeking substantial damages. The Company currently maintains general and professional liability insurance with a total limit of $1,000,000 per loss event and $3,000,000 policy aggregate and an umbrella excess limit of $5,000,000, with a deductible of $50,000 per occurrence. In addition, the Company requires medical professionals who utilize its services to maintain professional liability insurance. All of these insurance policies are subject to annual renewal by the insurer. If these policies were to be canceled or not renewed, or failed to provide sufficient coverage for the Company's liabilities, the Company might be forced to self-insure against the potential liabilities referred to above. In that event, a single incident might result in an award of damages which might have a material adverse effect on the operations of the Company. Government Regulation and Supervision - ------------------------------------- The Company is subject to extensive regulation by both the federal government and the states in which the Company conducts its business. The Company is subject to Section 1128B of the Social Security Act (known as "the Illegal Remuneration Statute"), which imposes civil and criminal sanctions on persons who solicit, offer, receive or pay any remuneration, directly or indirectly, for referring, or arranging for the referral of, a patient for treatment that is paid for in whole or in part by Medicare, Medicaid or similar government programs. The federal government has published regulations that provide exceptions or a "safe harbor" for certain business transactions. Transactions that are structured within the safe harbors are deemed not to violate the Illegal Remuneration Statute. Transactions that do not satisfy all elements for a relevant safe harbor do not necessarily violate the Illegal Remuneration Statute, but may be subject to greater scrutiny by enforcement agencies. The arrangements between the Company and the partnerships and other entities in which it owns an indirect interest and through which the Company provides most of its lithotripsy services and all of its prostatherapy services (and the corresponding arrangements between such partnerships and other entities and the treating physicians who own interests therein and who use the lithotripsy and prostatherapy facilities owned by such partnerships and other entities) could potentially be questioned under the illegal remuneration prohibition and generally do not fall within the protection afforded by these safe harbors. Many states also have laws similar to the Federal Illegal Remuneration Statute. While failure to fall within the safe harbors may subject the Company to scrutiny under the Illegal Remuneration Statute, such failure does not in and of itself constitute a violation of the Illegal Remuneration Statute. Nevertheless, these illegal remuneration laws, as applied to activities and relationships similar to those of the Company, have been subjected to limited judicial and regulatory interpretation, and the Company has not obtained or applied for any opinion of any regulatory or judicial authority that its business operations and affiliations are in compliance with these laws. Therefore, no assurances can be given that the Company's activities will be found to be in compliance with these laws if scrutinized by such authorities. 6 In addition to the Illegal Remuneration Statute, Section 1877 of the Social Security Act ("Stark II") imposes certain restrictions upon referring physicians and providers of certain designated health services under the Medicare and Medicaid Programs ("Government Programs"). Subject to certain exceptions, Stark II provides that if a physician (or a family member of a physician) has a financial relationship with an entity: (i) the physician may not make a referral to the entity for the furnishing of designated health services reimbursable under the Government Programs; and (ii) the entity may not bill Government Programs, any individual or any third-party payor for designated health services furnished pursuant to a prohibited referral under the Government Programs. Entities and physicians committing an act in violation of Stark II will be required to refund amounts collected in violation of the statute and also are subject to civil money penalties and exclusion from the Government Programs. Physicians are investors in 51 of the Company's 65 lithotripsy operations, all of the three Company affiliates engaged in thermotherapy services and each of the Company's refractive vision correction facilities. The Company lithotripsy and thermotherapy affiliates with physician-investors are referred to herein as the "Company Physician Entities". Many key terms in Stark II are not defined and the statute is silent regarding its application to vendors, such as the Company Physician Entities, contracting "under arrangements" with hospitals for the provision of outpatient services. Prior to the publication of the Proposed Stark Regulations described below, the Company interpreted Stark II consistently with the informal view of the General Counsel for Health and Human Services, and concluded that the statute did not apply to its method of conducting business. Based upon a reasonable interpretation of Stark II, by referring a patient to a hospital furnishing the outpatient lithotripsy or thermotherapy services "under arrangements" with the Company Physician Entities, a physician investor in a Company Physician Entity is not making a referral to an entity (the hospital) in which they have an ownership interest. On January 9, 1998, the Health Care Financing Administration ("HCFA") published proposed regulations designed to interpret and clarify the application of Stark II. As these regulations were simply proposed and subject to future modification or repeal, the Company awaited the issuance of final Stark II regulations. On January 4, 2001 HCFA issued the first of two rules intended to implement the final Stark II regulations (the "Final Regulations"). The first rule ("Phase I") implements the Final Regulations pertaining to (i) Stark II's general prohibition against physician self-referrals to entities in which they have a financial relationship, (ii) the general exceptions applicable to both the ownership and compensation arrangement prohibitions, (iii) certain new regulatory exceptions, and (iv) the definitions that are used throughout Stark II. HCFA intends to publish a second final rule ("Phase II") shortly which will address the remainder of the Stark II statute and its application to the Medicaid program, as well as certain proposals for new exceptions not included in the proposed Stark II regulations, but suggested in the public comments thereto. Phase I will become effective on January 4, 2002. HCFA has delayed the effective date of Phase I to allow individuals and entities engaged in business arrangements impacted by Phase I time to restructure those arrangements to comply with the provisions in Phase I. 7 Currently, Medicare and Medicaid only reimburse for lithotripsy if the service is provided through a hospital. The lithotripsy services to be provided by the Company Physician Entities pursuant to the hospital service contracts to Medicare/Medicaid hospital outpatients will be provided "under arrangements" with hospitals, with the treatment being billed under the hospital's provider billing number. HCFA acknowledged in its commentary to the proposed Stark II regulations that physician overutilization of lithotripsy is unlikely and solicited comments on whether there should be a regulatory exception to Stark II specifically for lithotripsy services. Upon consideration of numerous public comments received on the proposed regulations and upon review of the Stark II legislative history, HCFA concluded in its commentary to the Final Regulations that it does not have the authority to exclude lithotripsy from the inpatient and outpatient hospital services covered by Stark II. Consequently, the Company Physician Entities practice of providing lithotripsy services "under arrangements" to hospitals for treatment of Medicare and Medicaid patients must comply with the provisions of the Final Regulations. Although the Final Regulations do not provide a specific Stark II exception for lithotripsy services, the regulations do provide needed clarity and certain opportunities for the Partnership to operate in compliance with Stark II. In the Commentary to the Final Regulations, HCFA notes its desire to permit physician-owned lithotripsy ventures to continue if such ventures are structured such that no direct or indirect compensation arrangement is created, or the arrangement fits within a compensation arrangement exception to Stark II. The Final Regulations accomplish HCFA's desire in part by: (i) clarifying that physician-owned lithotripsy vendors providing services "under arrangements" with hospitals can comply with Stark II by either being structured such that they are not compensation arrangements, as defined in the Final Regulations, or qualifying under a compensation exception (but not an ownership interest exception as well); (ii) broadening certain existing Stark II statutory exceptions by redefining certain standards to allow "per-use" lithotripsy payments, as long as such payments are at fair market value; and (iii) adding two new Stark II regulatory exceptions that are potentially available for Company Physician Entity operations. In order for the Company Physician Entities to comply with Stark II as modified by the Final Regulations, the entities financial relationships with hospitals must either fall outside the definition of a compensation arrangement, or comply with a Stark II compensation arrangement exception. The Company has worked to establish a compliance program that is in the process of implementation. As noted above, due to the Final Regulations delayed effective date, the Company has until January 4, 2002 to take reasonable steps to review the Company Physician Entities operations under the Final Regulations. Specifically, the Company Physician Entities intend to work with hospitals to review and modify, if necessary, the service contracts so that they satisfy the standards set forth in the new Final Regulations. To the extent financial arrangements with the contract hospitals meet the definition of "indirect compensation arrangements" under the Final Regulations, then the Company Physician Entities intend to see that such agreements fit within the new indirect compensation arrangement exception. Indirect compensation arrangements have several important elements, including the presence of an intervening entity, that directly links referring physician owners with the entity providing the designated health service (e.g., the contract hospital). In order to comply with the indirect compensation exception, the Company Physician Entities hospital contracts must meet each of the following standards: 8 o The compensation received directly by the Company Physician Entities from the hospitals must be fair market value for the items or services provided under the arrangement and must not take into account the value or volume of referrals or other business generated by the referring physician for the contract hospital; o The compensation arrangement between the Company Physician Entities and the hospitals must be set out in writing, signed by the parties, and specify the services covered by the arrangement; and o The compensation arrangement must not violate the Anti-Kickback Statute or any laws or regulations governing billing or claims submission. In regard to the Company Physician Entities proposed operations, the indirect compensation arrangement exception may be used with respect to any or all payments made by the hospitals to the entities, including payments for the use of the lithotripters, as well as the personal services of a technician and/or nurse. It is important to note that the Final Regulations allow fair market value per-use payments for lithotripsy services. The Company believes that its current financial relationships with hospitals are compliant or can be modified to the extent necessary to satisfy the requirements of the indirect compensation arrangement exception, and that accordingly, the Company Physician Entities will be able to operate in compliance with Stark II. To succeed with its compliance plan, the Company Physician Entities must obtain the hospitals' cooperation in making any necessary revisions to their service contracts consistent with the indirect compensation arrangement exception. Whereas the Company believes that the service contracts which create financial relationships with the hospitals have always met the fair market value standard, the Final Regulations place the burden on the contracting parties that rely on the indirect compensation exception to prove the standard is met. The Company intends to engage a valuation expert or pursue other commercially reasonable methodologies to assist it in meeting that burden of proof. The Company believes it will successfully implement the above described compliance plan, however, there can be no assurance that such will be the case. The hospitals may not cooperate with the Company Physician Entities. If hospitals chose not to continue a financial relationship with the Company Physician Entities, this could have a material adverse effect on the entities. Should that occur, then the Company intends to explore and implement any other available options that would allow the Company Physician Entities to comply with Stark II, as well as all other material health care statutes and regulations. Such alternative options may include contracting with ambulatory surgery centers ("ASCs") rather than hospitals, since lithotripsy services at ASCs are not covered by Stark II. The Medicare and Medicaid programs, however, do not reimburse for lithotripsy services at ASCs at this time. It is anticipated that ASCs will receive reimbursement for treatment of Medicare and Medicaid patients in the near future, but there can be no assurance that such will be the case. It should be noted that there can be no assurance that compliance action taken by the Company under any potential alternative, or contract decisions by hospitals, will occur in a manner that does not have a material adverse effect on the Company Physician Entities. 9 Stark II compliance efforts may reduce Company revenues and limit future growth by (i) reducing or eliminating revenues attributable to the treatment of Government Program patients by the Company Physician Entities, (ii) reducing revenues from the treatment of non-government patients by Company Physician Entities due to physician, hospital and third-party payor anxiety and concern created by Stark II, (iii) requiring the Company Physician Entities to restructure their operations to comply with Stark II, (iv) restricting the acquisition or development of additional lithotripsy or thermotherapy operations that will both treat Government Program patients and have referring physician-investors, (v) impairing the Company's relationship with urologists and (vi) otherwise materially adversely impacting the Company. Many states currently have laws similar to Stark II that restrict a physician with a financial relationship with an entity from referring patients to that entity. Often these laws contain statutory exceptions for circumstances where the referring physician, or a member of his practice group, treats their own patients. States also commonly require physicians to disclose to patients their financial relationship with an entity. The Company believes that it is in material compliance with these state laws. Nevertheless, these state self-referral laws, as applied to activities and relationships similar to those of the Company, have been subjected to limited judicial and regulatory interpretation, and the Company has not obtained or applied for any opinion of any regulatory or judicial authority that its business operations and affiliations are in compliance with these laws. Therefore, no assurances can be given that the Company's activities will be found to be in compliance with these laws if scrutinized by such authorities. In addition, upon the occurrence of changes in the law that may adversely affect operations, the Company is required to purchase the interests of physician-investors for certain of the Company Physician Entities. These mandatory purchase obligations require the payment by the Company of purchase prices calculated using various formulas ranging from capital account value to a multiple of earnings similar to multiples used by the Company in pricing the original acquisition of such interests. To the extent the Company is required to purchase such interests, such purchases might cause a default under the terms of the Company's senior credit facility and senior subordinated notes, impair the Company's relationship with physicians and otherwise have a material adverse impact on the Company. Regulatory developments might also dictate that the Company purchase all the interests of its physician-investors, regardless of any contractual requirements to do so, or substantially alter its business and operations to remain in compliance with applicable laws. Accordingly, there can be no assurance that the Company will not be required to change its business practices or its investment relationships with physicians or that the Company will not experience a material adverse effect as a result of any challenge made by a federal or state regulatory agency. In addition, there can be no assurance that physician-investors who, voluntarily or otherwise, divest of their interests in Company Physician Entities will continue to refer patients at the same rate or at all. Some states require approval, usually in the form of a certificate of need ("CON"), prior to the purchase of major medical equipment exceeding a predesignated capital expenditure threshold or for the commencement of certain clinical health services. Such approval is generally based upon the anticipated utilization of the service and the projected need for the service in the relevant geographical area of the state where the service is to be provided. CON 10 laws differ in many respects, and not every state's CON law applies to the Company. Most of the Company's operations originated in states which did not require a CON for the Company's services, and the Company has obtained a CON in states where one is required. Some states also require registration of lithotripters with the state agency which administers its CON program. Such registration is not subject to any required approval, but rather is an administrative matter imposed so that the state will be aware of all existing clinical health services. The Company registers in those states which require these filings. All states in which the Company operates require registration of the fluoroscopic x-ray tubes which are utilized to locate the kidney stones treated with the Company's lithotripters. The registration requirements are imposed in order to facilitate periodic inspection of the fluoroscopic tubes. Some states have regulations that require facilities such as mobile lithotripters and thermotherapy facilities to be licensed and to have appropriate emergency care resources and qualified staff meeting the stated educational and experience criteria. The Company's lithotripsy equipment is subject to regulation by the U.S. Food & Drug Administration, and the motor vehicles utilized to transport the Company's mobile lithotripsy and thermotherapy equipment are subject to safety regulation by the U.S. Department of Transportation and the states in which the Company conducts its mobile lithotripsy and thermotherapy business. The Company believes that it is in material compliance with these regulations. Except as provided herein, the Company believes it complies in all material respects with the foregoing laws and regulations, and all other applicable regulatory requirements; however, these laws are complex and have been broadly construed by courts and enforcement agencies. Thus, there can be no assurance that the Company will not be required to change its practices or its relationships with treating physicians who are investors in the Company Physician Entities, or that the Company will not experience material adverse effects as a result of any investigations or enforcement actions by a federal or state regulatory agency. A number of proposals for healthcare reform have been made in recent years, some of which have included radical changes in the healthcare system. Healthcare reform could result in material changes in the financing and regulation of the healthcare business, and the Company is unable to predict the effect of such changes on its future operations. It is uncertain what legislation on healthcare reform, if any, will ultimately be implemented or whether other changes in the administration or interpretation of governmental healthcare programs will occur. There can be no assurance that future healthcare legislation or other changes in the administration or interpretation of governmental healthcare programs will not have a material adverse effect on the results of operations of the Company. Equipment - --------- The Company purchases its equipment, and maintenance is generally provided pursuant to service contracts with the manufacturer or other service companies. The cost of a new lithotripter ranges from $400,000 to $600,000. For mobile lithotripsy and thermotherapy, the Company either purchases or leases the 11 tractor, usually for a term up to five years, and purchases the trailer or a self contained coach. The cost of the laser equipment utilized in RVC ranges from $300,000 to $500,000. Employees - --------- As of March 15, 2001, the Company employed approximately 350 full-time employees and approximately 50 part-time employees. Competition - ----------- The market to provide lithotripsy services is highly fragmented and competitive. The Company competes with other private facilities and medical centers that offer lithotripsy services and with hospitals, clinics and individual medical practitioners that offer conventional medical treatment for kidney stones. Certain of the Company's current and potential competitors have substantially greater financial resources than the Company and may compete with the Company for acquisitions and development of operations in markets targeted by the Company. A decrease in the purchase price of lithotripters as a result of the development of less expensive lithotripsy equipment could decrease the Company's competitive advantage. Most of the Company's lithotripsy services agreements have matured past their initial terms and are now in annual renewal terms or are on a month-to-month basis. The Company also competes with three public companies, all of which are also manufacturers of lithotripsy equipment, which may create different incentives for such providers in pricing lithotripsy services. Moreover, while the Company believes that lithotripsy has emerged as the superior treatment for kidney stone disease, the Company competes with alternative kidney stone disease treatments. The Company's manufacturing segment competes with at least three privately held, national companies. The primary competitive factors are price and quality, including product manufacturing differences. Additionally, two of the three largest competitors are certified to provide GE trailers. The Company believes it manufactures a high quality product at a competitive price. The RVC market is fragmented and competitive. The Company competes with several national, public companies as well as individual ophthalmologists, hospitals and smaller service companies. The principal methods for competition are pricing and quality issues. The larger competitors are primarily focused on pricing, while the smaller competitors compete using both pricing and quality issues. While there are lower cost competitors in the geographic areas where the Company currently has operations, the Company believes it provides a higher quality service for a competitive price. ITEM 2. PROPERTIES - ------ ---------- The Company's principal executive office is located in Austin, Texas in an office building owned by American Physicians Service Group, Inc. ("APS"). The Company pays APS approximately $18,000 per month, which includes rental payment for approximately 11,600 square feet of office space, reception and telephone services, and certain other services and facilities. The office space lease expires in December 2002. 12 The Company's manufacturing subsidiary owns a building containing approximately 78,000 square feet of manufacturing and office space in Harvey, Illinois. ITEM 3. LEGAL PROCEEDINGS - ------ ----------------- The Company is involved in various claims and legal actions that have arisen in the ordinary course of business. Management believes that any liabilities arising from these actions will not have a material adverse effect on the financial condition, results of operations or cash flows of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - ------ --------------------------------------------------- On June 14, 2000, an annual meeting of the shareholders of the Company was held to consider and vote on the proposal described below. Proxies for this meeting were solicited pursuant to Regulation 14 under the Act. 1) Election of seven directors to the board of directors; The nominees for director were: David Dulaney, M.D., Joseph Jenkins, M.D., J.D., J.A. McEntire IV, William A. Searles, Kenneth S. Shifrin, Michael J.Spalding, M.D. and James M. Usdan. All nominees were elected. The voting was as follows: Nominee Votes For Votes Against Votes Withheld David Dulaney, M.D. 15,195,059 1,010,579 -- Joseph Jenkins, M.D., J.D. 15,195,059 1,010,579 -- J.A. McEntire IV 15,195,059 1,010,579 -- William A. Searles 15,195,059 1,010,579 -- Kenneth S. Shifrin 15,195,059 1,010,579 -- Michael J. Spalding, M.D. 15,195,059 1,010,579 -- James M. Usdan 15,195,059 1,010,579 -- 13 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED - ------- ------------------------------------------------- STOCKHOLDER MATTERS ------------------- The following table sets forth the high and low closing prices for the Company's common stock in the over-the-counter market as reported by the National Association of Securities Dealers, Inc., Automated Quotations System, for the years ended December 31, 2000 and 1999 (NASDAQ Symbol "PMSI"). 2000 1999 ---------------- ---------------- High Low High Low ---- --- ---- --- First Quarter $ 9.06 $ 7.13 $ 8.44 $ 7.13 Second Quarter $ 9.06 $ 6.81 $ 7.56 $ 6.75 Third Quarter $ 9.50 $ 7.50 $ 9.75 $ 7.44 Fourth Quarter $ 8.25 $ 4.91 $ 10.63 $ 8.13 On March 15, 2001, the Company had approximately 594 holders of record of its common stock. The Company has not declared any cash dividends on its common stock during the last two years and has no present intention of declaring any cash dividends in the foreseeable future. In addition, the Company is not permitted by its current credit facility and terms of senior subordinated notes to declare or make any payments for dividends. It is the present policy of the Board of Directors to retain all earnings to provide funds for the growth of the Company. The declaration and payment of dividends in the future will be determined by the Board of Directors based upon the Company's earnings, financial condition, capital requirements, debt covenants and such other factors as the Board of Directors may deem relevant. 14 ITEM 6. SELECTED FINANCIAL DATA - ------- ----------------------- (In thousands, except per share data) Years Ended December 31, ------------------------ 2000 1999 1998 1997 1996 ---- ---- ---- ---- ---- Revenues: Lithotripsy $83,335 $89,180 $92,053 $93,113 $71,602 Manufacturing 22,157 17,527 11,066 2,358 -- RVC 23,501 3,414 -- -- -- Other 1,702 2,053 1,517 508 802 -------- ------- ------- ------- ------- Total $130,695 $112,174 $104,636 $95,979 $72,404 ======== ======== ======== ======= ======= Income: Net income $10,657 $15,039 $10,794 $14,856 $8,961 ======= ======= ======= ======= ====== Diluted earnings per share $0.66 $0.88 $0.57 $0.76 $0.49 ===== ===== ===== ===== ===== Dividends per share None None None None None Total assets $276,218 $246,972 $240,198 $224,905 $201,175 ======== ======== ======== ======== ======== Long-term obligations $123,172 $103,797 $100,987 $71,198 $70,910 ======== ======== ======== ======= =======
Quarterly Data March 31 June 30 Sept. 30 Dec. 31 - -------------- -------- ------- --------- -------- 2000 - ---- Revenues $29,443 $32,966 $35,445 $32,841 Net income $3,297 $3,102 $3,168 $1,090 Per share amounts (basic): Net income $0.20 $0.19 $0.20 $0.07 Weighted average shares outstanding 16,435 16,218 15,943 15,749 Per share amounts (diluted): Net income $0.20 $0.19 $0.20 $0.07 Weighted average shares outstanding 16,607 16,303 16,025 15,750 1999 - ---- Revenues $25,382 $28,608 $30,632 $27,552 Net income $3,162 $4,302 $4,339 $3,236 Per share amounts (basic): Net income $0.18 $0.25 $0.26 $.20 Weighted average shares outstanding 17,387 17,098 16,818 16,553 Per share amounts (diluted) Net income $0.18 $0.25 $0.26 $0.19 Weighted average shares outstanding 17,495 17,196 17,000 16,788 15 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS ----------------------------------------------------------------------- OF OPERATIONS OF THE COMPANY ---------------------------- Forward-Looking Statements - -------------------------- The statements contained in this Report on Form 10-K that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including statements regarding the Company's expectations, hopes, intentions or strategies regarding the future. Readers should not place undue reliance on forward-looking statements. All forward-looking statements included in this document are based on information available to the Company on the date hereof, and the Company assumes no obligation to update any such forward-looking statements. It is important to note that the Company's actual results could differ materially from those in such forward-looking statements. In addition to any risks and uncertainties specifically identified in the text surrounding such forward-looking statements, the reader should consult the Company's reports on Form 10-Q and other filings under the Securities Act of 1933 and the Securities Exchange Act of 1934, for factors that could cause actual results to differ materially from those presented. The forward-looking statements included herein are necessarily based on various assumptions and estimates and are inherently subject to various risks and uncertainties, including risks and uncertainties relating to the possible invalidity of the underlying assumptions and estimates and possible changes or developments in social, economic, business, industry, market, legal and regulatory circumstances and conditions and actions taken or omitted to be taken by third parties, including customers, suppliers, business partners and competitors and legislative, judicial and other governmental authorities and officials. Assumptions related to the foregoing involve judgements with respect to, among other things, future economic, competitive and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond the control of the Company. Any of such assumptions could be inaccurate and therefore, there can be no assurance that the forward-looking statements included in this Report on Form 10-K will prove to be accurate. Year ended December 31, 2000 compared to the year ended December 31, 1999 - ------------------------------------------------------------------------- Total revenues increased $18,521,000 (17%) as compared to the same period in 1999. Revenues from lithotripter operations decreased by $5,845,000 (7%) primarily due to renegotiation of contracts which resulted in a larger number of contracts providing for per diem pricing, and slightly lower procedure volumes related to contracts lost due to non-renewal and competition. Manufacturing revenue increased by $4,630,000 (26%) due to increased sales of MRI and cardiac catheterization lab trailers as well as the Company's expansion into the sales of PET trailers. RVC revenues increased $20,087,000 (588%) as 2000 revenues included a full year of operations for five centers and partial year of operations for eleven new centers, while 1999 revenues included partial year of operations for two entities. Prostatherapy revenues decreased $256,000 (14%). 16 Costs of services and general and administrative expenses (excluding depreciation and amortization) increased from 40% to 47% of revenues and increased $16,955,000 (38%) in absolute terms, compared to the same period in 1999. Cost of services associated with lithotripter operations decreased $585,000 (3%) in absolute terms and increased from 26% to 27% of lithotripter revenues. Cost of services associated with manufacturing increased $4,269,000 (33%) in absolute terms and from 73% to 77% of manufacturing revenues due to expansion into new product lines. Cost of services associated with RVC operations increased $11,902,000 (609%) in absolute terms, and from 57% to 59% of RVC revenues due to full year of operation for five centers in 2000 and partial year of operations for the additional eleven centers. Cost of services associated with prostatherapy increased $39,000 and the Company recognized an impairment on its prostatherapy segment of $1,230,000 in 2000 in connection with approving the disposal of this segment in a transaction which closed in January 2001. Corporate expenses decreased from 4% to 3% of revenues, as the Company was able to successfully grow without proportionately adding overhead. Corporate expenses decreased $541,000 (11%) primarily due to a consolidation of corporate functions. Other deductions increased $2,069,000 from 1999 to 2000. This increase is partially attributable to an increase in interest expense of $1,155,000 during 2000. Also contributing to the increase in other deductions was income recognition in 1999 of $1,140,000 due to the release of a contractual obligation related to a management incentive compensation program accrued at December 31, 1998. Minority interest in consolidated income increased $3,246,000 primarily due to the decline in lithotripsy revenue discussed above. Earnings before interest, taxes, depreciation, and amortization (EBITDA) attributable to minority interests was $32,328,000 for the year ended December 31, 2000 compared to $28,554,000 for the same period in 1999. EBITDA is not intended to represent net income or cash flows from operating activities in accordance with generally accepted accounting principles and should not be considered a measure of the Company's profitability or liquidity. Income tax expense for 2000 decreased $2,706,000 over 1999 primarily due to the decrease in pretax income. Year ended December 31, 1999 compared to the year ended December 31, 1998 - ------------------------------------------------------------------------- Total revenues increased $7,538,000 (7%) as compared to the same period in 1998. Revenues from lithotripter operations decreased by $2,873,000 (3%) primarily due to renegotiation of contracts which resulted in a larger number of contracts providing for per diem pricing, and contracts lost due to non-renewal and competition. Despite the lithotripsy revenue declines, lithotripsy procedure volume was constant from 1998 to 1999, which the Company believes is indicative of its market share preservation. Manufacturing revenue increased by $6,461,000 (58%) due to increased sales of MRI trailers as well as the Company's expansion into manufacturing and sales of cardiac catheterization lab trailers. RVC revenues were $3,414,000 in 1999 and included fee revenue of $3,004,000 and equity income of $410,000. The RVC operations were acquired during the third quarter of 1999. Prostatherapy revenues increased $627,000 (52%) as1999 revenues included a full year of operations for three entities, while 1998 revenues included a full year of operations for one entity and a partial year of operations for two entities. 17 Costs of services and general and administrative expenses (excluding depreciation and amortization) increased from 38% to 40% of revenues and increased $5,466,000 (14%) in absolute terms, compared to the same period in 1998. Cost of services associated with lithotripter operations increased $327,000 (1%) in absolute terms and from 25% to 26% of lithotripter revenues. Cost of services associated with manufacturing increased $3,676,000 (40%) due to the increase in sales. Cost of services associated with RVC was $1,954,000, which represents approximately 4 months of operations. Cost of services associated with prostatherapy increased $482,000 due to increased operations. Corporate expenses decreased from 5% to 4% of revenues and increased $101,000 (2%) in absolute terms, as the Company was able to successfully grow without proportionately adding overhead. Other deductions decreased $4,318,000 from 1998 to 1999. This decrease is attributable to a decrease in loan fees and stock offering costs of $4,412,000 due to costs recognized in 1998 of $4,978,000 associated with the $100 million senior subordinated notes offering and the $50 million increase in the senior revolving credit facility, partially offset by 1999 expenses of $566,000 related to a restructuring of the Company's $100 million senior revolving credit facility. Also contributing to the decrease in other deductions was income recognition in 1999 of $1,140,000 due to the release of a contractual obligation related to a management incentive compensation program accrued at December 31, 1998. These decreases were partially offset by an increase in interest expense of $939,000, primarily due to the $100 million debt offering which closed in March 1998. Minority interest in consolidated income decreased $282,000 in 1999 as compared to 1998 primarily due to the decline in lithotripsy revenue discussed above. EBITDA attributable to minority interests was $28,554,000 for the year ended December 31, 1999 compared to $28,077,000 for the same period in 1998. Income tax expense for 1999 increased $2,055,000 over 1998 primarily due to the increase in pretax income. Liquidity and Capital Resources - ------------------------------- Cash and cash equivalents were $15,530,000 and $20,064,000 at December 31, 2000 and 1999, respectively. The Company's subsidiaries generally distribute all of their available cash quarterly, after establishing reserves for estimated capital expenditures and working capital. For the years ended December 31, 2000 and 1999, the Company's subsidiaries distributed cash of approximately $27,092,000 and $27,180,000, respectively, to minority interest holders. Cash provided by operations was $45,180,000 for the year ended December 31, 2000 and $35,744,000 for the year ended December 31, 1999. From 1999 to 2000 fee and other revenue collected increased by $12,256,000 and was offset by the increase in cash paid to employees, suppliers of goods and others of $11,092,000. These fluctuations are attributable to increased operations as well as the timing of accounts receivable collections and accounts payable and accrued expense payments. An increase in interest payments of $1,052,000 was due to the Company drawing on its line of credit during 2000 related to the refractive acquisitions 18 made during 2000. Taxes paid decreased $2,555,000 from 1999 to 2000. Additionally, the Company purchased investments of $3,714,000 during 2000, offset by proceeds from sales and maturities of $6,615,000. Cash used by investing activities for the year ended December 31, 2000, was $33,802,000 primarily due to $23,784,000 used in four refractive acquisitions and as well as payments of earnouts related to a prior year acquisition. The Company purchased equipment and leasehold improvements totaling $12,975,000. The Company received $2,680,000 in distributions from investments. Cash used by investing activities for the year ended December 31, 1999, was $26,241,000 primarily due to $23,580,000 used in two refractive acquisitions and as well as payments totaling $5,790,000 for the purchase of equipment and leasehold improvements. The Company received $2,352,000 in distributions from investments. Cash used in financing activities for the year ended December 31, 2000, was $15,912,000, which was primarily due to distributions to minority interests of $27,092,000 and purchases of treasury stock of $7,703,000 partially offset by net borrowings of $18,517,000 and contributions of $202,000 received from holders of minority interests related to expansion of existing partnerships and new partnership formations. Cash used in financing activities for the year ended December 31, 1999, was $29,585,000, primarily due to distributions to minority interests of $27,180,000, purchases of treasury stock of $8,382,000, partially offset by net borrowings of $3,181,000 and contributions of $2,636,000 received from holders of minority interests related to expansion of existing partnerships and new partnership formations. The Company's credit facility as of December 31, 2000 is comprised of a revolving line of credit. The revolving line of credit has a borrowing limit of $100 million, $18 million and $12 million of which was drawn at December 31, 2000 and March 15, 2001, respectively. During 2000, the Company completed a restructuring of its revolving line of credit to enable the Company to borrow for RVC acquisitions. The restructuring split the credit facility into two facilities: one for $14,000,000 for refractive acquisitions by certain subsidiaries, another for the remaining $86,000,000 for lithotripsy, manufacturing, refractive and prostatherapy acquisitions, stock repurchases and working capital. On March 27, 1998, the Company completed an offering of $100 million of senior subordinated notes due 2008 (the "Notes") to qualified institutional buyers. The net proceeds from the offering of approximately $96 million was used to repay all outstanding indebtedness under the Company's bank facility, with the remainder used for general corporate purposes, including acquisitions. In connection therewith, the Company recorded a charge to earnings in 1998 of approximately $4.4 million for debt issuance costs associated with the Notes. The Notes bear interest at 8.75% and interest is payable semi-annually on April 1st and October 1st. Principal is due April 2008. The Company intends to increase the number of its lithotripsy operations primarily through acquisitions, the number of its RVC operations through both acquisitions and development, and its manufacturing operations through acquisitions and by increasing its product lines through additional certifications. The Company intends to fund the purchase price for future acquisitions and developments using borrowings under its senior credit facility and cash flow from operations. In addition, the Company may use shares of its common stock in such acquisitions where appropriate. 19 During 1998, the Company announced a stock repurchase program of up to $25.0 million of common stock. In February 2000, the Company announced an increase in the authorized repurchase amount from $25.0 million to $35.0 million and in January 2001 this amount was increased to $45.0 million. From time to time, the Company may purchase additional shares of its common stock where, in the judgment of management, market valuations of its stock do not accurately reflect the Company's past and projected results of operations. The Company intends to fund any such purchases using available cash, cash flow from operations and borrowings under its senior credit facility. The Company has purchased 3,820,200 shares of stock for a total of $32,524,000 as of March 15, 2001. The Company's ability to make scheduled payments of principal of, or to pay the interest on, or to refinance, its indebtedness, or to fund planned capital expenditures will depend on its future performance, which, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond its control. Based upon the current level of operations and anticipated cost savings and revenue growth, management believes that cash flow from operations and available cash, together with available borrowings under its senior credit facility, will be adequate to meet the Company's future liquidity needs for at least the next several years. However, there can be no assurance that the Company's business will generate sufficient cash flow from operations, that anticipated revenue growth and operating improvements will be realized or that future borrowings will be available under the senior credit facility in an amount sufficient to enable the Company to service its indebtedness or to fund its other liquidity needs. Inflation - --------- The operations of the Company are not significantly affected by inflation because the Company is not required to make large investments in fixed assets. However, the rate of inflation will affect certain of the Company's expenses, such as employee compensation and benefits. ITEM 7. A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - --------- ---------------------------------------------------------- Interest Rate Risk As of December 31, 2000, the Company had long-term debt (including current portion) totaling $125,709,000, of which $100 million has a fixed rate of interest of 8.75%, $1,517,000 has fixed rates of 6% to 9%, $6,030,000 bears interest at a variable rate equal to a specified prime rate, $18 million bears interest at a variable rate equal to LIBOR + 1 to 2% and $162,000 does not bear any interest. The Company is exposed to some market risk due to the floating interest rate debt totaling $24,030,000. The Company makes monthly or quarterly payments of principal and interest on $6,030,000 of the floating rate debt. An increase in interest rates of 1.5% would result in a $360,000 annual increase in interest expense on this existing principal balance. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - ------ ------------------------------------------- The information required by this item is contained in Appendix A attached hereto. 20 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND - ------- --------------------------------------------------------------- FINANCIAL DISCLOSURE -------------------- None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT - -------- -------------------------------------------------- The information required by this item is contained in the definitive proxy material of the Company to be filed in connection with its 2001 annual meeting of shareholders, except for the information regarding executive officers of the Company, which is presented below. The information required by this item contained in such definitive proxy material is incorporated herein by reference. As of March 15, 2001, the executive officers of the Company are as follows: Name Age Position Kenneth S. Shifrin 51 Chairman of the Board Brad A. Hummel 44 Chief Executive Officer and President Cheryl L. Williams 49 Chief Financial Officer, Senior Vice President-Finance and Secretary Stan Johnson 47 Vice President David Vela, M. D. 53 Vice President The foregoing does not include positions held in the Company's subsidiaries. Officers are elected for annual periods. There are no family relationships between any of the executive officers and/or directors of the Company. Mr. Shifrin has been Chairman of the Board and a director of the Company since October 1989. In addition, Mr. Shifrin has served in various capacities with APS since February 1985, and is currently Chairman of the Board and Chief Executive Officer of APS. Mr.Shifrin is a member of the World Presidents' Organization. Mr. Hummel has been President and Chief Executive Officer since June 2000. From October 1999 until June 2000, Mr. Hummel was Executive Vice President and Chief Operating Officer of the Company. Prior to joining the Company, Mr. Hummel was with Diagnostic Health Services, Inc. ("DHS") since 1984, most recently serving as the President and Chief Executive Officer, and as a member of the Board of Directors. DHS filed for Chapter 11 bankruptcy reorganization in March 2000 and re-emerged from bankruptcy in October 2000. From 1981 to 1984, Mr. Hummel was an associate with Covert, Crispin and Murray, a Washington, D.C. and London-based management consulting firm. Mr. Hummel also serves as a member of APS's Board of Directors. 21 Ms. Williams has been Chief Financial Officer, Senior Vice President - Finance and Secretary of the Company since October 1989. Ms. Williams was Controller of Fairchild Aircraft Corporation from August 1988 to October 1989. From 1985 to 1988, Ms. Williams served as the Chief Financial Officer of APS Systems,Inc., a wholly-owned subsidiary of APS. Mr.Johnson has been a Vice President of the Company and President of Sun Medical Technologies, Inc. ( "Sun "), a wholly-owned subsidiary of the Company, since November 1995. In March 2000, Mr. Johnson was named a Group Vice President of the Company. Mr. Johnson was the Chief Financial Officer of Sun from 1990 to 1995. Dr. Vela has been a Group Vice President of the Company since March 2000. Dr. Vela received his medical degree in 1984. Dr. Vela developed and operated various outpatient centers throughout the United States from 1986 to 1995. From February 1997 to March 2000, Dr. Vela served as Regional Vice President of the Company for the Central Region. ITEM 11. EXECUTIVE COMPENSATION - -------- ---------------------- The information required by this item is contained in the definitive proxy statement of the Company to be filed in connection with its 2001 annual meeting of shareholders, which information is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT - ------- -------------------------------------------------------------- The information required by this item is contained in the definitive proxy statement of the Company to be filed in connection with its 2001 annual meeting of shareholders, which information is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - -------- ---------------------------------------------- The information required by this item is contained in the definitive proxy statement of the Company to be filed in connection with its 2001 annual meeting of shareholders, which information is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K - ------- ---------------------------------------------------------------- (a) 1. Financial Statements. -------------------- The information required by this item is contained in Appendix A attached hereto. 22 2. Financial Statement Schedules. ----------------------------- None. (b) Reports on Form 8-K. ------------------- None. (c) Exhibits. (1) -------- 3.1 Certificate of Incorporation of the Company. (2) 3.2 Bylaws of the Company. (2) 4.1 Specimen of Common Stock Certificate. (2) 10.1* Prime Medical Services, Inc. 1993 Stock Option Plan. (3) 10.2* First Amendment to the Prime Medical Services, Inc. 1993 Stock Option Plan. (12) 10.3* Second Amendment to the Prime Medical Services, Inc.1993 Stock Option Plan. (12) 10.4* Third Amendment to the Prime Medical Services, Inc. 1993 Stock Option Plan. (13) 10.5 Rights Agreement dated October 18,1993 between the Company and American Stock Transfer and Trust Company. (3) 10.6 Form of Indemnification Agreement dated October 11, 1993 between the Company and certain of its officers and directors. (3) 10.7 Partnership Agreement of Metro Atlanta Stonebusters, G.P. (5) 10.8 Management Agreement dated July 28, 1994 between the Alabama Renal Stone Institute, Inc. and Alabama Kidney Stone Foundation, Inc. (6) 10.9 Asset Purchase Agreement dated July 21, 1999 among Prime Lithotripsy Services, Inc., Reston Hospital Lithotripter Joint Venture, Reston Lithotripsy Associates, Inc., Columbia Arlington Healthcare System, L.L.C. and Robert Ball,M.D. (15) 10.10 Not used 10.11 Not used 10.12 Not used 23 10.13 Not used 10.14 Amended and Restated Joint Venture Agreement dated April,1989, between Prime Diagnostic Imaging Services, Inc. and The Shasta Diagnostic Imaging Medical Group. (4) 10.15 Agreement of Limited Partnership of Mobile Kidney Stone Centers of California III, L.P. (15) 10.16 Amendments to First Amended and Restated Agreement of Limited Partnership of Ohio Mobile Lithotripter, Ltd. (15) 10.17 Second Amendment to Agreement of Limited Partnership of Pacific Medical Limited Partnership (15) 10.18 Amendments to Agreement of Limited Partnership of Texas Lithotripsy Limited Partnership VII, L.P. (15) 10.19 Fourth Amendment to Agreement of Limited Partnership of San Diego Lithotripters Limited Partnership (15) 10.20 Amendment to Agreement of Limited Partnership of Fayetteville Lithotripters Limited Partnership - Virginia I (15) 10.21 Amendments to Agreement of Limited Partnership of Fayetteville Lithotripters Limited Partnership - South Carolina I (15) 10.22 Amendment to Agreement of Limited Partnership of Fayetteville Lithotripters Limited Partnership - Utah I (15) 10.23 Third Amendment to Agreement of Limited Partnership of Florida Lithotripters Limited Partnership I (15) 10.24 Fourth Amendment to Agreement of Limited Partnership of Indiana Lithotripters Limited Partnership I (15) 10.25 Sixth Amendment to Agreement of Limited Partnership of Texas Lithotripsy Limited Partnership III, L.P. (15) 10.26 Agreement of Limited Partnership of Mobile Kidney Stone Centers of California II, L.P. (15) 10.27 Fourth Amendment to Agreement of Limited Partnership of Louisiana Lithotripsy Investment Limited Partnership (15) 10.28 Operating Agreement for Southern California Stone Center, L.L.C. (9) 24 10.29 Lease Agreement dated July 1, 1995 between Kidney Stone Center of South Florida, L.C. and Madorsky and Pinon Kidney Stone Center of South Florida, P.A. (9) 10.30 Not used 10.31 Not used 10.32 Partnership Interest Purchase Agreement dated May 1, 1997 among Prime Lithotripter Operations, Inc., Tenn-Ga Stone Group Two, L.P., NGST, Inc. and all the Shareholders of NGST, Inc. (12) 10.33 Stock Purchase Agreement dated June 1, 1997 between Sun Medical Technologies, Inc. and Executive Medical Enterprises, Inc. (12) 10.34 Contribution Agreement dated October 8, 1997 between Prime Medical Services, Inc. and AK Associates. (12) 10.35 Confidential Assignment Summary for Pacific Medical Limited Partnership. (14) 10.36 Limited Partnership Agreement for Texas Lithotripsy VII, L.P. (14) 10.37 Agreement and Plan of Merger of Texas Lithotripsy Limited Partnership II, L.P., Texas Lithotripsy Limited Partnership IV,L.P. and Texas ESWL/Laser Lithotripter,Ltd.(14) 10.38 Limited Partnership Agreement for Big Sky Urological Limited Partnership. (14) 10.39 Operating Agreement for Kentucky I Lithotripsy, LLC. (14) 10.40 Not used 10.41 Not used 10.42 Not used 10.43 Operating Agreement for Washington Urological Services,LLC(14) 10.44* Amended and Restated 1993 Stock Option Plan, as amended June 10, 1998. (10) 10.45 Agreement of Limited Partnership of Wyoming Urological Services, L.P. (14) 10.46 Indenture Agreement dated March 27, 1998 between Prime Medical Services, Inc. and State Street Bank and Trust Company of Missouri, N.A. (8) 10.47 Loan Agreement dated January 31, 2000 for $14,000,000 Advancing Term Loan between Prime Refractive Management, L.L.C., Bank of America, N.A. as Administrative Agent, Bank Boston, N.A. as Documentation Agent and the Lenders Named Therein (15) 25 10.48 Fourth Amended and Restated Loan Agreement dated January 31, 2000 for $86,000,000 Revolving Credit Loan between Prime Medical Services Inc., Bank of America, N.A. as Administrative Agent, BankBoston, N.A. as Documentation Agent and the Lenders Named Therein (15) 10.49 Pledge and Security Agreements dated January 31, 2000 relating to $14,000,000 Advancing Term Loan and $86,000,000 Revolving Credit Loan (15) 10.50 Borrower Security Agreements dated January 31, 2000 relating to $14,000,000 Advancing Term Loan and $86,000,000 Revolving Credit Loan (15) 10.51 Guarantor Security Agreements dated January 31, 2000 relating to $14,000,000 Advancing Term Loan and $86,000,000 Revolving Credit Loan (15) 10.52 Guarantor Copyright Security Agreements dated January 31, 2000 relating to $14,000,000 Advancing Term Loan and $86,000,000 Revolving Credit Loan (15) 10.53 Guaranty Agreements dated January 31, 2000 relating to $14,000,000 Advancing Term Loan and $86,000,000 Revolving Credit Loan (15) 10.54 Note dated January 31, 2000 in the amount of $1,050,000 between Prime Refractive Management and Guaranty Federal Bank, F.S.B. (15) 10.55 Note dated January 31, 2000 in the amount of $1,575,000 between Prime Refractive Management and Fleet National Bank (15) 10.56 Note dated January 31, 2000 in the amount of $3,150,000 between Prime Refractive Management and BankBoston, N.A. (15) 10.57 Note dated January 31, 2000 in the amount of $4,725,000 between Prime Refractive Management and Bank of America, N.A. (15) 10.58 Note dated January 31, 2000 in the amount of $2,100,000 between Prime Refractive Management and Bank One, Texas, N.A. (15) 10.59 Note dated January 31, 2000 in the amount of $12,900,000 between Prime Medical Services, Inc. and Bank One, Texas, N.A. (15) 10.60 Note dated January 31, 2000 in the amount of $8,600,000 between Prime Medical Services, Inc. and LaSalle Bank, National Association (15) 26 10.61 Note dated January 31, 2000 in the amount of $8,600,000 between Prime Medical Services, Inc. and Cooperative Centrale Raiffeisen-Boerenleenbank B.A., "Rabobank Nederland", New York Branch (15) 10.62 Note dated January 31, 2000 in the amount of $8,600,000 between Prime Medical Services, Inc. and Credit Lyonnais New York Branch (15) 10.63 Note dated January 31, 2000 in the amount of $5,375,000 between Prime Medical Services, Inc. and Fleet National Bank (15) 10.64 Note dated January 31, 2000 in the amount of $8,600,000 between Prime Medical Services, Inc. and Imperial Bank(15) 10.65 Note dated January 31, 2000 in the amount of $6,450,000 between Prime Medical Services, Inc. and Guaranty Federal Bank, F.S.B. (15) 10.66 Note dated January 31, 2000 in the amount of $16,125,000 between Prime Medical Services, Inc. and Bank of America, N.A. (15) 10.67 Note dated January 31, 2000 in the amount of $10,750,000 between Prime Medical Services, Inc. and BankBoston, N.A. (15) 10.68 Note dated January 31, 2000 in the amount of $1,400,000 between Prime Refractive Management and LaSalle Bank, National Association (15) 10.69 Not used 10.70 Contribution Agreement dated September 1, 1999 and First Amendment dated January 31, 2000 among Barnet Dulaney Eye Center,P.L.L.C., David Dulaney, M.D., Ronald W. Barnet, M.D., Mark Rosenberg, Prime Medical Services Inc., Prime Medical Operating Inc., LASIK Investors, L.L.C., Prime/BDR Acquisition, L.L.C. and Prime/BDEC Acquisition, L.L.C (15) 10.71 Loan Agreement dated September 1, 1999 between Prime Medical Operating, Inc. and Prime/BDR Acquisition, L.L.C. (15) 10.72 Limited Liability Company Agreement of Prime/BDR Acquisition, L.L.C. (15) 10.73 Limited Liability Company Agreement of Prime/BDEC Acquisition, L.L.C. (15) 10.74 Non-Competition Agreements dated September 1, 1999 between Robert B. Pinkert, O.D. and Scott A. Perkins, M.D. for the benefit of Prime Medical Services Inc., Prime Medical Operating, Inc., Prime/BDR Acquisition, L.L.C., Prime/BDEC Acquisition, L.L.C., Barnet Dulaney Eye Center, P.L.L.C., LASIK Investors, L.L.C., Ronald W. Barnet, M.D., David D. Dulaney, M.D., and Mark Rosenberg (15) 27 10.75 Promissory Note dated September 1, 1999 from Prime/BDR Acquisition, L.L.C., to Prime Medical Operating, Inc. (15) 10.76 Collocation Agreement dated September 1, 1999 by and between Barnet Dulaney Eye Center, P.L.L.C. and Prime/BDR Acquisition, L.L.C. (15) 10.77 Membership Interest Transfer Restriction Agreement dated September 1, 1999 (15) 10.78 Assignment and Security Agreement dated September 1, 1999 between Prime Medical Operating, Inc. and LASIK Investors, L.L.C.(15) 10.79 Promissory Note dated September 1, 1999 from Prime/BDR Acquisition, L.L.C., to Prime Medical Operating, Inc. (15) 10.80 Loan Agreement dated January 31, 2000 between Prime Refractive, L.L.C. and Prime Refractive Management, L.L.C.(15) 10.81 Promissory Note dated January 31, 2000 between Prime Refractive, L.L.C. and Prime Refractive Management, L.L.C.(15) 10.82 Assignment and Security Agreement dated January 31, 2000 between Prime Refractive Management, L.L.C. and LASIK Investors, L.L.C. (15) 10.83 Limited Liability Company Agreement dated September 1, 1999 of Prime Refractive, L.L.C. (15) 10.84 Stock Purchase Agreements dated September 1, 1999 relating to the acquisition of Horizon Vision Center, Inc. (15) 10.85 Assignment and Security Agreements relating to the acquisition of Horizon Vision Center, Inc. (15) 10.86 Exclusive Use Agreements relating to the acquisition of Horizon Vision Center, Inc. (15) 10.87 Amended and Restated Bylaws for the regulation of Horizon Vision Center, Inc. (15) 10.88 Assignment and Security Agreement by and between Prime Medical Operating, Inc. and Prime/BDR Acquisition, L.L.C. (15) 10.89 Limited Liability Company Agreement of Caster One, L.L.C. (16) 10.90 Contribution Agreement dated March 1, 2000 among Prime Medical Services, Inc., Prime Refractive, L.L.C., Andrew Caster, M.D., and Caster Eye Center Medical Group (16) 28 10.91 Facility Use Agreement dated March 1, 2000 by and among Caster One,L.L.C., Andrew Caster, M.D., and Caster Eye Center Medical Group (16) 10.92 First Amendment and Restated Limited Liability Company Agreement dated March 1, 2000 of Caster One, L.L.C. (16) 10.93 First Amendment to Facility Use Agreement dated July 2000 by and among Caster One, L.L.C., Andrew Caster, M.D., and Caster Eye Center Medical Group (16) 10.94 Contribution Agreement dated September 1, 2000 among Prime Medical Services, Inc., Prime RVC, Inc., Prime Refractive - Kansas City, L.L.C., Vision Correction Centers of Kansas City, P.C., Kansas City Laser Vision Correction Centers, L.L.C., and Jeffrey Couch, M.D. (16) 10.95 Limited Liability Company Agreement dated September 1, 2000 of Prime Refractive - Kansas City, L.L.C. (16) 10.96 Facility Use Agreement dated September 2000 by and among Vision Correction Centers of Kansas City, P.C., Kansas City Laser Vision Correction Centers, L.L.C., Jeffrey Couch, M.D. and Prime Refractive - Kansas City (16) 10.97 Limited Liability Company Agreement of Horizon Vision Centers, L.L.C. (16) 10.98 Non-Competition Agreement dated April 1, 2000 by Horizon Vision Centers, L.L.C., for the benefit of Prime RVC and each of Prime RVC's affiliates (16) 10.99 Specimen of First Amendment to Assignment and Security Agreement dated April 1, 2000 relating to Horizon Vision Centers, Inc. (16) 10.100 Specimen of Consent and Agreement dated April 1, 2000 of Horizon Vision Centers, Inc., for the benefit of the Existing Center, Horizon Vision Centers, L.L.C., Prime RVC, Inc., and the parent companies and affiliates of each of the Existing Center, the New Center and Prime RVC (16) 10.101 Contribution Agreement dated March 1, 2000 among Prime MBC, L.L.C., MBC Holding Company, L.L.C., Mann Berkeley Eye Center, P.A., Paul Michael Mann, M.D., Ralph G. Berkeley, M.D., Michael B. Caplan, M.D., Mark F. Micheletti and Prime RVC, Inc. (16) 10.102 Membership Interest - Transfer Restriction Agreement dated March 1, 2000 by and among MBC Holding Company, L.L.C., Prime RVC, Inc., Paul Michael Mann, M.D., Ralph G. Berkeley, M.D. Michael B. Caplan, M.D., and Mark Micheletti (16) 10.103 Limited Liability Company Agreement of Prime MBC, L.L.C. (16) 29 10.104 Refractive Laser Center Management Agreement dated March 1, 2000 by and between Prime MBC, L.L.C. and Mann Berkeley Eye Center, P.A. (16) 10.105 Incidental Registration Rights Agreement dated March 1, 2000 by and among Prime Medical Services, Inc. and MBC Holding Company, L.L.C. (16) 10.106 Contribution Agreement dated April 1, 2000 among Prime Medical Services, Inc., Prime RVC, Inc., New York Laser Management, L.L.C., Ken Moadel, M.D., and Ken Moadel, M.D., P.C. (16) 10.107 Limited Liability Company Agreement of New York Laser Management, L.L.C. (16) 10.108 Office and Equipment Use Agreement dated April 1, 2000 by and among New York Laser Management, L.L.C., Ken Moadel, M.D. and Ken Moadel, M.D., P.C. (16) 10.109 Loan Agreement dated April 1, 2000 by and between Prime Medical Services, Inc. and New York Laser Management,L.L.C(16) 10.110 Assignment and Security Agreement dated April 1, 2000 by and between Prime Medical Services, Inc. and Ken Moadel, M.D. (16) 10.111 Limited Liability Company Agreement of Prime Refractive Management, L.L.C. (16) 10.112 Delaware Certificate of Incorporation Prime RVC, Inc. (16) 10.113 Bylaws as of January 31, 2000 of Prime RVC, Inc. (16) 10.114 Intercompany Agreement dated April 1, 2000 by and between Prime Medical Operating,Inc., Prime RVC, Inc.,Prime Refractive Management, L.L.C. and Prime/BDR Acquisition, L.L.C. (16) 10.115 First Amended and Restated Limited Liability Company Agreement dated September 1, 1999 of Prime/BDEC Acquisition, L.L.C. (16) 10.116 Consent and Liability Waiver dated March 31, 2000 by David D. Dulaney, M.D., Ronald W. Barnet, M.D., Mark Rosenberg, Barnet Dulaney Eye Center, P.L.L.C., LASIK Investors, L.L.C., Prime Refractive, L.L.C., Prime/BDR Acquisition, L.L.C. for the benefit of Prime Medical Services, Inc. (16) 10.117 Assignment Agreement and Second Amendment to Contribution Agreement dated April 1, 2000 by and between Prime Medical Services, Inc., Prime Medical Operating, Inc., Prime RVC,Inc., Prime Refractive Management,L.L.C., Barnet Dulaney Eye Center, P.L.L.C., LASIK Investors, L.L.C., Prime/BDR Acquisition, L.L.C., Prime/BDEC Acquisition, L.L.C., Prime Refractive, L.L.C., David D. Dulaney, M.D., Ronald W. Barnet, M.D. and Mark Rosenberg (16) 30 10.118 Stock Purchase Agreement dated December 31, 2000 by and between Prime Medical Services, Inc. and Innovative Medical Technologies, Inc. (16) 10.119 Mutual Non-Competition Agreement dated December 31, 2000 between Prime Medical Services, Inc., Prostatherapies, Inc., Innovative Medical Technologies, Inc. and Ronald Sorensen, M.D. (16) 10.120 Assignment and Security Agreement dated December 31, 2000 by and between Prime Medical Services, Inc. and Innovative Medical Technologies, Inc. (16) 10.121 Promissory Note dated December 31, 2000 by Innovative Medical Technologies, Inc. to Prime Medical Services Inc. (16) 10.122 Promissory Note dated December 31, 2000 by Innovative Medical Technologies, Inc. to Prime Medical Services Inc. (16) 10.123 Executive Employment Agreement dated November 1, 2000 by and between Prime Medical Services,Inc. and Kenneth S, Shifrin(16) 10.124 Executive Employment Agreement dated November 1, 2000 by and between Prime Medical Services, Inc. and Brad A. Hummel (16) 10.125 Executive Employment Agreement dated September 1, 2000 by and between Prime Medical Services, Inc. and Cheryl Williams (16) 10.126 Non-Competition Release and Severance Agreement dated December 29, 2000 by and between Prime Medical Services, Inc. and Joseph Jenkins, M.D. (16) 10.127 Confidential Private Placement Memorandum for Fayetteville Lithotripters Limited Partnership - Arizona I (16) 10.128 First Amendment to the Confidential Private Placement Memorandum dated August 14,2000 for Fayetteville Lithotripters Limited Partnership - Arizona I (16) 10.129 Second Amendment to the Confidential Private Placement Memorandum dated February 6, 2001 for Fayetteville Lithotripters Limited Partnership - Arizona I (16) 10.130 Confidential Private Placement Memorandum for Florida Lithotripters Limited Partnership I (16) 10.131 First Amendment to the Confidential Private Placement Memorandum dated March 31, 2000 for Florida Lithotripters Limited Partnership I (16) 10.132 Second Amendment to the Confidential Private Placement Memorandum dated April 14, 2000 for Florida Lithotripters Limited Partnership I (16) 31 10.133 Third Amendment to the Confidential Private Placement Memorandum dated April 19, 2000 for Florida Lithotripters Limited Partnership I (16) 10.134 Fourth Amendment to the Confidential Private Placement Memorandum dated May 2, 2000 for Florida Lithotripters Limited Partnership I (16) 10.135 Confidential Private Placement Memorandum for Indiana Lithotripters Limited Partnership I (16) 10.136 First Amendment to the Confidential Private Placement Memorandum dated August 9, 2000 for Indiana Lithotripters Limited Partnership I (16) 10.137 Second Amendment to the Confidential Private Placement Memorandum dated September 12, 2000 for Indiana Lithotripters Limited Partnership I (16) 10.138 Third Amendment to the Confidential Private Placement Memorandum dated September 26, 2000 for Indiana Lithotripters Limited Partnership I (16) 10.139 Confidential Private Placement Memorandum for Mobile Kidney Stone Centers of California III, L.P. (16) 10.140 First Amendment to the Confidential Private Placement Memorandum dated June 28, 2000 for Mobile Kidney Stone Centers of California III, L.P. (16) 10.141 Confidential Private Placement Memorandum for Mobile Kidney Stone Centers of California II, L.P. (16) 10.142 First Amendment to the Confidential Private Placement Memorandum dated June 1, 2000 for Mobile Kidney Stone Centers of California II, L.P. (16) 10.143 Second Amendment to the Confidential Private Placement Memorandum dated September 28, 2000 for Mobile Kidney Stone Centers of California II, L.P. (16) 10.144 Confidential Private Placement Memorandum for Fayetteville Lithotripters Limited Partnership - South Carolina II (16) 10.145 Amendment to the Confidential Private Placement Memorandum and Consent dated February 18, 2000 for Fayetteville Lithotripters Limited Partnership - South Carolina II (16) 10.146 First Amendment to the Confidential Private Placement Memorandum dated December 22, 1999 for Fayetteville Lithotripters Limited Partnership - South Carolina II (16) 32 10.147 Second Amendment to the Confidential Private Placement Memorandum dated January 14, 2000 for Fayetteville Lithotripters Limited Partnership - South Carolina II (16) 10.148 Confidential Private Placement Memorandum for Tennessee Lithotripters Limited Partnership I (16) 10.149 First Amendment to the Confidential Private Placement Memorandum dated January 14, 2000 for Tennessee Lithotripters Limited Partnership I Assignment Offering (16) 10.150 Second Amendment to the Confidential Private Placement Memorandum dated February 29, 2000 for Tennessee Lithotripters Limited Partnership I Assignment Offering (16) 10.151 Confidential Private Placement Memorandum for Fayetteville Lithotripters Limited Partnership - Utah I (16) 10.152 First Amendment to the Confidential Private Placement Memorandum dated October 17, 2000 for Fayetteville Lithotripters Limited Partnership - Utah I (16) 10.153 Confidential Private Placement Memorandum for Washington Urological Services, LLC (16) 10.154 First Amendment to the Confidential Private Placement Memorandum dated June 6, 2000 for Washington Urological Services, L.L.C. (16) 10.155 Second Amendment to the Confidential Private Placement Memorandum dated September 28, 2000 for Washington Urological Services, LLC (16) 10.156 Confidential Private Placement Memorandum for Western Kentucky Lithotripters Limited Partnership(16) 10.157 Agreement of Limited Partnership for Western Kentucky Lithotripters Limited Partnership (16) 10.158 First Amendment to the Confidential Private Placement Memorandum dated January 31, 2000 for Western Kentucky Lithotripters Limited Partnership (16) 10.159 Second Amendment to the Confidential Private Placement Memorandum dated February 24, 2000 for Western Kentucky Lithotripters Limited Partnership (16) 10.160 Third Amendment to the Confidential Private Placement Memorandum dated March 29, 2000 for Western Kentucky Lithotripters Limited Partnership (16) 10.161 Limited Liability Company Agreement of Connecticut Laser Management, L.L.C. (16) 33 10.162 Limited Liability Company Agreement of Prime Refractive - St. Louis, L.L.C. (16) 10.163 Amended and Restated Agreement of Limited Partnership of Texas Lithotripsy Limited Partnership VIII (16) 10.164 Management Agreement dated October 13, 2000 by and between Texas Lithotripsy Limited Partnership VIII and Lithotripers, Inc. (16) 10.165 Acquisition of 100% of the Issued and Outstanding Capital Stock of the Windsor Group, Inc. (16) 10.166 Confidential Private Placement Memorandum for Texas Lithotripsy Limited Partnership VII, L.P.(16) 10.167 First Amendment to Confidential Private Placement Memorandum for Texas Lithotripsy Limited Partnership VII, L.P.(16) 10.168 Second Amendment to Confidential Private Placement Memorandum for Texas Lithotripsy Limited Partnership VII, L.P.(16) 10.169 Third Amendment to Confidential Private Placement Memorandum for Texas Lithotripsy Limited Partnership VII, L.P.(16) 12 Computation of ratio of earnings to fixed charges. (16) 21.1 List of subsidiaries of the Company. (16) 23.1 Independent Auditors' Consent of KPMG LLP. (16) -------------- * Executive compensation plans and arrangements. (1) The exhibits listed above will be furnished to any security holder upon written request for such exhibit to Cheryl L. Williams, Prime Medical Services, Inc., 1301 Capital of Texas Highway, Suite C-300, Austin, Texas 78746. The Securities and Exchange Commission (the "SEC") maintains a website that contains reports, proxy and information statements and other information regarding registrants that file electronically with the SEC at "http://www.sec.gov". (2) Filed as an Exhibit to the Registration Statement on Form S-4 (Registration No. 33-56900) of the Company and incorporated herein by reference. (3) Filed as an Exhibit to the Current Report on Form 8-K of the Company dated October 18, 1993 and incorporated herein by reference. (4) Filed as an Exhibit to the Annual Report on Form 10-K of Old Prime, Commission File Number 0-9963, for the year ended December 31, 1992 and incorporated herein by reference. (5) Filed as an Exhibit to the Current Report on Form 8-K dated May 5, 1994 of the Company and incorporated herein by reference. (6) Filed as an Exhibit to the Current Report on Form 8-K dated July 28, 1994 of the Company and incorporated herein by reference. (7) Filed as an Exhibit to the Current Report on Form 8-K dated September 13, 1994 of the Company and incorporated herein by reference. 34 (8) Filed as an Exhibit to the Quarterly Report on Form 10-Q for the period ended June 30, 1998 (9) Filed as an Exhibit to the Annual Report on Form 10-K of the Company for the year ended December 31, 1995. (10) Filed as an Exhibit to the Registration Statement on Form S-8 (Registration No. 333-62245) of the Company and incorporated herein by reference. (11) Not used. (12) Filed as an Exhibit to the Annual Report on Form 10-K of the Company for the year ended December 31, 1997. (13) Filed as an Exhibit to the Quarterly Report on Form 10-Q for the period ended September 30, 1998. (14) Filed as an Exhibit to the Annual Report on Form 10-K of the Company for the year ended December 31, 1998. (15) Filed as an Exhibit to the Annual Report on Form 10-K of the Company for the year ended December 31, 1999. (16) Filed herewith. 35 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. PRIME MEDICAL SERVICES, INC. By: /s/ Brad A. Hummel ---------------------- Brad A. Hummel, President and Chief Executive Officer Date: March 30, 2001 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated. By: /s/ Kenneth S. Shifrin - -------------------------- Kenneth S. Shifrin Chairman of the Board Date: March 30, 2001 By: /s/ Cheryl L. Williams - -------------------------- Cheryl L. Williams Senior Vice President of Finance, Secretary and Chief Financial Officer (Principal Financial and Accounting Officer) Date: March 30, 2001 36 By: /s/ Joseph Jenkins - ---------------------- Joseph Jenkins, M.D., Director Date: March 30, 2001 By: /s/ John McEntire - --------------------- John McEntire, Director Date: March 30, 2001 By: /s/ William A. Searles - -------------------------- William A. Searles, Director Date: March 30, 2001 By: /s/ Michael Spalding - ------------------------ Michael Spalding, M.D., Director Date: March 30, 2001 By: /s/ James M. Usdan - ---------------------- James M. Usdan, Director Date: March 30, 2001 By: /s/ David Dulaney, M. D. - ---------------------------- David Dulaney, M. D., Director Date: March 30, 2001 37 APPENDIX A INDEX Page Independent Auditors' Report A-2 Consolidated Financial Statements: Consolidated Statements of Income for the years ended December 31, 2000, 1999 and 1998. A-3 Consolidated Balance Sheets at December 31, 2000 and 1999. A-4 Consolidated Statements of Stockholders' Equity for the years ended December 31, 2000, 1999 and 1998. A-6 Consolidated Statements of Cash Flows for the years ended December 31, 2000, 1999 and 1998. A-7 Notes to Consolidated Financial Statements. A-10 Independent Auditors' Report The Board of Directors and Shareholders Prime Medical Services, Inc.: We have audited the consolidated financial statements of Prime Medical Services, Inc. and subsidiaries ("Company") as listed in the accompanying index. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Prime Medical Services, Inc. and subsidiaries at December 31, 2000 and 1999, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America. /s/:KPMG LLP Austin, Texas March 6, 2001 PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME ($ in thousands, except per share data) Years Ended December 31, 2000 1999 1998 Revenue: Lithotripsy: Fee revenues $ 77,143 $ 80,880 $ 83,879 Management fees 3,684 5,719 5,284 Equity income 2,508 2,581 2,890 ------ ------ ------ 83,335 89,180 92,053 Manufacturing 22,157 17,527 11,066 Refractive 23,501 3,414 - Prostatherapy 1,578 1,834 1,207 Other 124 219 310 ------- ------- ------- Total revenue 130,695 112,174 104,636 ------- ------- -------- Cost of services and general and administrative expenses: Lithotripsy 22,416 23,001 22,674 Manufacturing 17,149 12,880 9,204 Refractive 13,856 1,954 - Prostatherapy 1,324 1,285 803 Other 135 165 249 Corporate 4,486 5,027 4,926 Relocation of central billing office 698 - - Nonrecurring development, impairment and other costs, net 1,830 627 1,617 ------ ------ ------ 61,894 44,939 39,473 Depreciation and amortization 14,187 10,848 10,476 ------ ------ ------ Total operating expenses 76,081 55,787 49,949 ------ ------ ------ Operating income 54,614 56,387 54,687 Other income (deductions): Interest and dividends 1,176 1,505 1,417 Interest expense (10,563) (9,408) (8,469) Loan fees (173) (566) (4,978) Release of contractual obligation - 1,140 - Other, net 83 (79) 304 ------ ------ ------- (9,477) (7,408) (11,726) ------ ------ ------- Income before provision for income taxes and minority interest 45,137 48,979 42,961 Minority interest in consolidated income 27,754 24,508 24,790 Provision for income taxes 6,726 9,432 7,377 ------ ------ ------ Net income $ 10,657 $ 15,039 $ 10,794 ====== ====== ====== Basic earnings per share: Net income $ 0.66 $ 0.89 $ 0.58 ====== ====== ====== Weighted average shares outstanding 16,085 16,958 18,650 ====== ====== ====== Diluted earnings per share: Net income $ 0.66 $ 0.88 $ 0.57 ====== ====== ====== Weighted average shares outstanding 16,170 17,114 18,783 ====== ====== ======
See accompanying notes to consolidated financial statements. A-3 PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ($ in thousands) December 31, 2000 1999 ASSETS ---- ---- Current assets: Cash and cash equivalents $15,530 $20,064 Investments 1,241 4,120 Accounts receivable, less allowance for doubtful accounts of $212 in 2000 and $224 in 1999 30,152 23,273 Other receivables 6,619 3,637 Deferred income taxes 1,032 1,066 Prepaid expenses and other current assets 1,629 2,322 Inventory 5,068 3,676 ------ ------ Total current assets 61,271 58,158 ------ ------ Property and equipment: Equipment, furniture and fixtures 53,553 42,128 Building and leasehold improvements 3,574 2,092 ------ ------ 57,127 44,220 Less accumulated depreciation and amortization (30,873) (25,567) ------ ------ Property and equipment, net 26,254 18,653 ------ ------ Other investments 10,229 18,963 Goodwill, at cost, net of amortization 172,824 149,088 Other noncurrent assets 5,640 2,110 -------- -------- $276,218 $246,972 ======== ========
See accompanying notes to consolidated financial statements. A-4 PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (continued) ($ in thousands, except share data) December 31, 2000 1999 ---- ---- LIABILITIES Current liabilities: Current portion of long-term debt $ 3,705 $ 1,763 Accounts payable 4,611 3,290 Accrued distributions to minority interests 7,930 8,332 Accrued expenses 6,908 7,254 ------ ------ Total current liabilities 23,154 20,639 Long-term debt, net of current portion 122,004 103,797 Deferred compensation liability 1,168 - Deferred income taxes 9,502 6,400 ------- ------- Total liabilities 155,828 130,836 Minority interest 20,599 19,454 STOCKHOLDERS' EQUITY Preferred stock, $.01 par value, 1,000,000 shares authorized; none outstanding - - Common stock, $0.01 par value, 40,000,000 shares authorized; 19,524,533 issued in 2000 and 19,367,267 isssued in 1999 195 194 Capital in excess of par value 88,978 87,655 Accumulated earnings 44,311 33,654 Treasury stock, at cost, 3,961,799 shares in 2000 and 2,875,300 shares in 1999 (33,693) (24,821) ------ ------ Total stockholders' equity 99,791 96,682 -------- -------- $276,218 $246,972 ======== ========
See accompanying notes to consolidated financial statements. A-5 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY For the years ended December 31, 2000, 1999 and 1998 ($ in thousands, except share data) Capital in Issued Common Stock Excess of Accumulated Treasury Stock Shares Amount Par Value Earnings Shares Amount Total ------ ------ --------- -------- ------ ------ ----- Balance, January 1, 1998 19,306,267 $ 193 $ 84,050 $ 7,821 - $ - $ 92,064 Net income for the year - - - 10,794 - - 10,794 Tax benefits on exercised warrants - - 3,096 - - - 3,096 Exercise of stock options including tax benefit of $140 on non-qualifying exercises 44,000 1 234 - - - 235 Purchase of treasury stock - - - - (1,845,200) (16,439) (16,439) ---------- ---- ------ ------ ----------- -------- ------ Balance, December 31, 1998 19,350,267 194 87,380 18,615 (1,845,200) (16,439) 89,750 Net income for the year - - - 15,039 - - 15,039 Issuance of warrants - - 170 - - - 170 Exercise of stock options including tax benefit of $18 on non-qualifying exercises 17,000 - 105 - - - 105 Purchase of treasury stock - - - - (1,030,100) (8,382) (8,382) ---------- ---- ------ ------ ----------- -------- ------ Balance, December 31, 1999 19,367,267 194 87,655 33,654 (2,875,300) (24,821) 96,682 Net income of the year - - - 10,657 - - 10,657 Issuance of warrants - - 1,211 - - - 1,211 Stock options exercised under a deferred compension plan 141,599 1 - - (141,599) (1,169) (1,168) Exercise of stock options including tax benefit of $18 on non-qualifying exercises 15,667 - 112 - - - 112 Purchase of treasury stock - - - - (944,900) (7,703) (7,703) ---------- ---- ------ ------ ----------- -------- ------ Balance, December 31, 2000 19,524,533 $ 195 $ 88,978 $ 44,311 $ (3,961,799) $ (33,693)$ 99,791 ========== ==== ====== ====== =========== ======== ======
See accompanying notes to consolidated financial statements. A-6 PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS ($ in thousands) Years Ended December 31, 2000 1999 1998 ------------ ----------- ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Fee and other revenue collected $ 120,507 $ 108,251 $ 98,649 Cash paid to employees, suppliers of goods and others (63,236) (52,144) (39,748) Purchases of investments (3,714) (9,222) - Proceeds from sales and maturities of investments 6,615 5,003 - Interest received 1,154 1,505 1,417 Interest paid (10,405) (9,353) (7,261) Taxes paid (5,741) (8,296) (7,506) ------------ ----------- ------------ Net cash provided by operating activities 45,180 35,744 45,551 ------------ ----------- ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of equity investments and entities (23,784) (23,580) - Purchases of equipment and leasehold improvements (12,975) (5,790) (5,213) Proceeds from sales of equipment 277 207 224 Distributions from investments 2,680 2,352 2,532 Other - 570 315 ------------ ----------- ------------ Net cash used in investing activities (33,802) (26,241) (2,142) ------------ ----------- ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Payments on notes payable, exclusive of interest (3,075) (1,403) (80,484) Borrowings on notes payable 21,592 4,584 100,025 Distributions to minority interest (27,092) (27,180) (25,799) Debt issuance costs - - (4,417) Contributions by minority interest 202 2,636 72 Exercise of stock options 164 160 9 Purchase of treasury stock (7,703) (8,382) (16,439) ------------ ----------- ------------ Net cash used in financing activities (15,912) (29,585) (27,033) ------------ ----------- ------------ NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (4,534) (20,082) 16,376 Cash and cash equivalents, beginning of period 20,064 40,146 23,770 ------------ ----------- ------------ Cash and cash equivalents, end of period $ 15,530 $ 20,064 $ 40,146 ============ =========== ============
See accompanying notes to consolidated financial statements. A-7 PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) ($ in thousands) Years Ended December 31, 2000 1999 1998 ------------ ------------ ------------ Reconciliation of net income to net cash provided by operating activities: Net income $ 10,657 $ 15,039 $ 10,794 Adjustments to reconcile net income to cash provided by operating activities: Minority interest in consolidated income 27,754 24,508 24,790 Depreciation and amortization 14,187 10,848 10,476 Provision for uncollectible accounts 110 702 252 Equity in earnings of affiliates (2,342) (2,802) (2,890) Debt issuance costs - - 4,417 Provision for deferred income taxes 1,298 2,875 (442) Write down of equipment 1,230 1,149 - Settlement of contingent liability - (500) - Release of contractual liability - (1,140) - Other (161) (66) (100) Changes in operating assets and liabilities, net of effect of purchase transactions: Investments 2,879 (4,120) - Accounts receivable (7,729) (1,851) (3,186) Other receivables (3,400) (1,570) (910) Other assets (839) (2,585) (1,244) Accounts payable 556 (2,665) 822 Accrued expenses 980 (2,078) 2,772 ------------ ------------ ------------ Total adjustments 34,523 20,705 34,757 ------------ ------------ ------------ Net cash provided by operating activities $ 45,180 $ 35,744 $ 45,551 ============ ============ ============
See accompanying notes to consolidated financial statements. A-8 PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) ($ in thousands) Years Ended December 31, 2000 1999 1998 ---------- ------------ ------------ SUPPEMENTAL INFORMATION OF NON-CASH INVESTING AND FINANCING ACTIVITIES: At December 31, the Company had accrued distributions payable to minority interests. The effect of this transaction was as follows: Current liabilities increased by $ 7,930 $ 8,332 $ 8,951 Minority interest decreased by 7,930 8,332 8,951 In 2000, the Company acquired four refractive centers. These transactions are discussed further in Note D. The acquired assets and liabilities were as follows: Current assets increased by 594 - - Noncurrent assets increased by 7,221 - - Goodwill increased by 20,899 - - Current liabilities increased by 701 - - Noncurrent liabilities increased by 2,082 - - Minority interest increased by 1,005 - - Capital in excess of par value increased by 1,142 - - In 2000, 147,000 options were exercised into a deferred compensation plan. Noncurrent liabilities increased by 1,168 - - Stockholder's equity decreased by 1,168 - - In 1999, the Company acquired, through a majority owned subsidiary 60% of the outstanding stock of Horizon Vision Centers. This transaction is discussed further in Note D. The acquired assets and liabilities were as follows: Current assets increased by - 710 - Noncurrent assets increased by - 3,057 - Goodwill increased by - 9,174 - Current liabilities increased by - 1,489 - Noncurrent liabilities increased by - 413 - Minority interest increased by - 910 - In 1998, the Company recognized tax benefits associated with warrants previously exercised. The effect of this was as follows: Current liabilities decreased by - - 1,512 Noncurrent liabilities decreased by - - 1,584 Stockholders' equity increased by - - 3,096
See accompanying notes to consolidated financial statements. A-9 PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A. ORGANIZATION AND OPERATION OF THE COMPANY Prime Medical Services, Inc. ("Prime"), through its direct and indirect wholly-owned subsidiaries, provides non-medical management services for lithotripsy, refractive and prostatherapy operations. The Company provides its services in 34 states. The Company also manufactures trailers for major medical equipment manufacturers and mobile medical service providers. References to the Company are to Prime and its controlled and affiliated entities. B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Consolidation The consolidated financial statements include the accounts of Prime, its wholly-owned subsidiaries, entities more than 50% owned and partnerships where Prime has control, even though its ownership is less than 50%. Investments in entities in which the Company's investment is less than 50% ownership, and the Company does not have significant influence, are accounted for by the equity method if ownership is between 20% - 50%, or by the cost method if ownership is less than 20%. Through December 31, 2000, the Company had recognized approximately $274,000 in undistributed earnings using the equity method. This amount represents undistributed earnings from entities, in which the Company owns 50% or less, and does not have significant influence. All significant intercompany accounts and transactions have been eliminated. Cash Equivalents The Company considers as cash equivalents demand deposits and all short-term investments with an original maturity of three months or less. Investments The Company classifies its investments in debt securities as trading securities in accordance with Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities. Trading securities are reported at fair value, with unrealized gains and losses included in earnings. The change in net unrealized holding gain or loss on trading securities was not material for the years ended December 31, 2000 and 1999. Property and Equipment Property and equipment are stated at cost. Major betterments are capitalized while normal maintenance and repairs are charged to operations. Depreciation is computed by the straight-line method using estimated useful lives of three to ten years. Leasehold improvements are generally amortized over ten years or the term of the lease, whichever is shorter. When assets are sold or retired, the corresponding cost and accumulated depreciation or amortization are removed from the related accounts and any gain or loss is credited or charged to operations. A-10 B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Intangible Assets The Company records as goodwill the excess of the purchase price over the fair value of the net assets associated with acquired businesses. Goodwill is amortized using the straight-line basis over a period not to exceed twenty five years for the refractive segment and forty years for the lithotripsy segment. Accumulated amortization at December 31, 2000 and 1999 is $23,950,000 and $18,155,000, respectively. Goodwill is reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If the sum of the expected future undiscounted cash flows is less than the carrying amount of the goodwill, a loss is recognized for the difference between the discounted cash flows and carrying value of the goodwill. Revenue Recognition Revenues generated from management services and the manufacture of trailers are recognized as they are earned. The Company's lithotripsy fee revenues are based upon fees charged for services to hospitals, commercial insurance carriers, state and federal health care agencies, and individuals, net of contractual fee reductions. The Company's refractive revenues are based on fees charged for services to individuals or commercial insurance carriers, net of contractual fee reductions. Major Customers and Credit Concentrations A significant portion of the Company's manufacturing revenues are from four customers. For the years ended December 31, 2000 and 1999, sales to these four customers accounted for 80% and 71% of each year's manufacturing revenues, respectively. Concentrations of credit risk with respect to receivables are limited due to the wide variety of customers, as well as their dispersion across many geographic areas. Other than as disclosed below, the Company does not consider itself to have any significant concentrations of credit risk. At December 31, 2000, approximately 15% of accounts receivable relate to units operating in Texas, 8% relate to units located in Louisiana, 8% relate to units operating in Virginia, and 9% relate to units located in California. At December 31, 1999, approximately 14% of accounts receivable relate to units operating in Texas, 8% relate to units located in Louisiana, 7% relate to units located in Virginia, and 12% relate to units located in California. Income Tax Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on A-11 B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Long-Lived Assets Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If the sum of the expected future undiscounted cash flows is less than the carrying amount of the asset, a loss is recognized, for the difference between the fair value and carrying value of the asset. Accounts Receivable Accounts receivable are recorded based on revenues, less allowance for doubtful accounts and contractual adjustments. Inventory Inventory is stated at the lower of cost or market. Cost is determined using the average cost method. Certain components that meet the Company's manufacturing requirements are only available from a limited number of suppliers. The inability to obtain components as required or to develop alternative sources, if and as required in the future, could result in delays or reduction in product shipments, which in turn could have a material adverse effect on the Company's manufacturing business, financial condition and results of operations. Stock-Based Compensation Upon adoption of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation ("Statement 123"), in 1996, the Company continued to measure compensation expense for its stock-based employee compensation plans using the intrinsic value method prescribed by APB Opinion No. 25, Accounting for Stock Issued to Employees. The Company provides proforma disclosures of net income and earnings per share as if the fair value-based method prescribed by Statement 123 had been applied in measuring compensation expense. (See Note J). Debt Issuance Costs The Company expenses debt issuance costs as incurred. Estimates Used to Prepare Financial Statements Management uses estimates and assumptions in preparing financial statements in accordance with generally accepted accounting principles. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and A-12 B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) the reported revenues and expenses. Actual results could vary from the estimates that were assumed in preparing the financial statements. Reclassification Certain reclassifications have been made to amounts presented in previous years to be consistent with the 1999 presentation. Earnings Per Share Basic earnings per share is based on the weighted average shares outstanding without any dilutive effects considered. Diluted earnings per share reflects dilution from all contingently issuable shares, including options and warrants. A reconciliation of such earnings per share data is as follows: (In thousands, except per share data) Net Per Share For the year ended December 31, 2000 Income Shares Amounts - ------------------------------------ ------ ------ ------- Basic $10,657 16,085 $0.66 ===== Effect of dilutive securities: Options - 85 ------- ------ ----- Diluted $10,657 16,170 $0.66 ======= ====== ===== For the year ended December 31, 1999 - ------------------------------------ Basic $15,039 16,958 $0.89 ===== Effect of dilutive securities: Options - 156 ------- ------ ----- Diluted $15,039 17,114 $0.88 ======= ====== ===== For the year ended December 31, 1998 - ------------------------------------ Basic $10,794 18,650 $0.58 ===== Effect of dilutive securities: Options - 133 ------- ------ ----- Diluted $10,794 18,783 $0.57 ======= ====== ===== Unexercised employee stock options and warrants to purchase 1,638,000, 1,247,000 and 1,708,000 shares of Prime common stock as of December 31, 2000, 1999 and 1998, respectively, were not included in the computations of diluted EPS because the exercise prices were greater than the average market price of Prime's common stock during the respective periods. A-13 C. INVESTMENTS Barnet Dulaney Eye Center Effective September 1, 1999 the Company purchased a 60% interest in two laser (refractive) surgery centers operated by Barnet Dulaney Eye Center for approximately $8,807,000 in cash and a warrant to purchase 29,000 shares of Company common stock, plus a contingent earn-out obligation totaling $1 million which was paid in 2000 at the end of the first year of post- acquisition operations. The contingent earn-out obligation was based on the operating performance of one of the two surgery centers for one year. This investment was accounted for using the equity method until June 30, 2000. Effective July 1, 2000, the Company amended certain agreements related to its 60% interest in Barnet Dulaney Eye Center. As a result of these amendments, the Company's investment in the Barnet Dulaney Eye Center has been consolidated in the accompanying financial statements as of July 1, 2000. Tenn-GA In May 1997, the Company acquired a 38.25% general partner interest in a partnership that provides mobile lithotripsy service in Tennessee and Georgia. The purchase price was cash of $3,470,000. This investment is accounted for using the equity method. Southern California Effective June 1, 1995, the Company acquired a 32.5% interest in a limited liability company that operates a fixed site lithotripter near Los Angeles, California. This investment is accounted for using the equity method. Ohio and Louisiana Partnerships In December 1994, the Company acquired all of the common stock of two corporations. Each corporation is the general partner and holds an approximate 20% interest in a limited partnership which operates a mobile lithotripter. Ohio Mobile Lithotripter, Ltd. operates a mobile lithotripter in Ohio. Arklatx Mobile Lithotripter, L.P. operates a mobile lithotripter in Louisiana. These investments are accounted for using the equity method. American Physicians Service Group, Inc. At December 31, 2000 and 1999, the Company owned 111,000 and 1,000 shares of common stock, respectively, representing less than 1%, of the outstanding common stock of American Physicians Service Group, Inc. (APS). APS owned approximately 15% and 14% of the outstanding common stock of the Company at December 31, 2000 and 1999, respectively. Two of the Company's six board members are also on the board of APS. The Company occupies approximately 11,600 square feet of office space owned by APS. The Company also shares certain personnel with APS. The monthly rent and personnel cost is approximately $18,000. The Company purchased treasury stock shares through APS Financial A-14 C. INVESTMENTS (continued) Services, Inc. (a wholly owned subsidiary of APS). For the years ended December 31, 2000 and 1999, the Company paid commissions of approximately $8,000 and $25,000, respectively, to acquire 136,200 and 420,100 shares, respectively, which management believes was competitive with commissions charged by other firms offering such services. D. ACQUISITIONS Effective March 1, 2000, the Company purchased a 60% interest in the Mann Berkeley Caplan Laser Center of Austin, Texas, a refractive vision correction center. The Company paid approximately $3.8 million in cash and issued warrants to purchase 27,000 shares of common stock, and has accounted for this transaction using the purchase method of accounting. Additionally in conjunction with this transaction, the Company issued warrants to purchase 28,000 shares of common stock to a third party. Effective March 1, 2000, the Company purchased a 60% interest in the Caster Eye Center, a refractive vision correction center. The Company paid approximately $5.8 million in cash, and has accounted for this transaction using the purchase method of accounting. Additionally in conjunction with this transaction, the Company issued warrants to purchase 44,000 shares of common stock to a third party. Effective April 1, 2000, the Company purchased a 65% interest in New York Eye Specialists, a refractive vision correction center. The Company paid approximately $8.9 million in cash, and has accounted for this transaction using the purchase method of accounting. Additionally in conjunction with this transaction, the Company issued warrants to purchase 67,000 shares of common stock to a third party. Effective September 1, 2000, the Company purchased a 65% interest in Vision Correction Centers of Kansas City, a refractive vision correction center. The Company paid approximately $4.5 million in cash for the center in October 2000, and has accounted for this transaction using the purchase method of accounting. Additionally in conjunction with this transaction, the Company issued warrants to purchase 34,000 shares of common stock to a third party. Effective September 1, 1999, the Company acquired 60% of the outstanding stock of Horizon Vision Centers, Inc. (Horizon). Horizon operates seven laser (refractive) surgery centers in California. The Company paid approximately $10.9 million in cash for this acquisition and has accounted for the transaction using the purchase method of accounting. Additionally in conjunction with a modification to the purchase agreement in 2000, the Company issued warrants to purchase 81,000 shares of common stock to a third party. Certain of the acquisitions discussed above have contingent earn-out clauses based on the future operations of the related centers exceeding certain performance measurements. The Company does not believe any future payments would be significant. A-15 D. ACQUISITIONS (continued) Unaudited proforma combined income data for the years ended December 31, 2000 and 1999 of the Company, the acquisitions discussed above and the acquisition of Barnet Dulaney Eye Center's refractive surgery centers discussed in Note C assuming they were effective January 1, 1999 is as follows: ($ in thousands, except per share data) 2000 1999 ---- ---- Total revenues $140,865 $139,919 Total expenses $128,485 $122,516 -------- -------- Net income $ 12,380 $17,403 ======== ======= Diluted earnings per share $0.77 $1.02 ======== ======== E. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts and estimated fair values of the Company's significant financial instruments as of December 31, 2000 and 1999 are as follows: 2000 1999 ---- ---- Carrying Fair Carrying Fair ($in thousands) Amount Value Amount Value ------ ----- ------ ----- Financial assets: Cash $15,530 $15,530 $20,064 $20,064 Investments 1,241 1,241 4,120 4,120 Accounts receivable 30,152 30,152 23,273 23,273 Other receivables 6,619 6,619 3,637 3,637 Financial liabilities: Debt 125,709 111,709 105,560 97,560 Accounts payable 4,611 4,611 3,290 3,290 The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments. Cash The carrying amounts for cash approximate fair value because they mature in less than 90 days and do not present unanticipated credit concerns. Investments The carrying value of investments approximates fair value as they are reported based on quoted market rates. A-16 E. FAIR VALUE OF FINANCIAL INSTRUMENTS (continued) Accounts Receivable and Other Receivables The carrying value of these receivables approximates the fair value due to their short-term nature and historical collectibility. Debt The fair value at December 31, 2000 and 1999 for the $100 million fixed rate senior subordinated notes was valued using the market rate of 11.66% and 10.2%, respectively. The carrying value of the debt bearing interest at prime rate approximates fair value. Accounts Payable The carrying value of the payables approximates fair value due to the short-term nature of the obligation. Limitations Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. Fair value estimates are based on existing on balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Other significant assets and liabilities that are not considered financial assets or liabilities include deferred tax assets and liabilities, property and equipment, equity investment in partnerships, goodwill, other noncurrent assets and accrued expenses. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the aforementioned estimates. A-17 F. ACCRUED EXPENSES Accrued expenses consist of the following: December 31, ($ in thousands) 2000 1999 ---- ---- Legal fees $ 146 $291 Accrued group insurance costs 60 193 Compensation and payroll related expense 1,472 1,393 Taxes, other than income taxes (benefit) (26) 343 Accrued interest 2,404 2,247 Deferred payments for acquisitions -- 54 Other 2,852 2,733 ----- ----- $ 6,908 $ 7,254 ===== ===== G. INDEBTEDNESS Long-term debt is as follows: ($ in thousands) December 31, 2000 1999 ---- ---- Interest Rates Maturities 8.75% 2000-2008 $100,000 $100,808 Floating 2000-2003 24,030 4,464 None 2000-2006 162 162 6%-9% 2000-2004 1,517 126 ----------- ------------ $125,709 $105,560 Less current portion of long-term debt 3,705 1,763 ----------- ----------- $122,004 $103,797 ======== ======== In March 1998, the Company completed an offering of an aggregate $100 million of unsecured senior subordinated notes (the "Notes") due 2008. The issue price of the notes was 99.50 with an 8.75% coupon. Interest is payable semi-annually on April 1 and October 1, beginning October 1, 1998. The financing costs associated with this offering totaling $4,418,000 were expensed during 1998 in the accompanying consolidated statements of income. A portion of the proceeds from the offering were used to pay off the Company's $77 million of term loans under its existing credit facility. The Note Indenture restricts, among other things, the ability of the Company and its Restricted Subsidiaries to incur additional indebtedness and issue preferred stock, enter into sale and leaseback transactions, incur liens, pay dividends or make certain other restricted payments, A-18 G. INDEBTEDNESS (continued) apply net proceeds from certain asset sales, enter into certain transactions with affiliates, merge or consolidate with any other person, sell stock of subsidiaries and assign, transfer, lease, convey or otherwise dispose of substantially all of the assets of the Company. During 1998, the Company amended its syndicated bank facility from $135 million to $100 million. The facility consists of a $100 million revolving credit facility bearing interest of LIBOR + 1 to 2%, maturing in April 2003. At December 31, 2000, the Company had drawn $18 million on the revolving credit facility. At December 31, 2000, interest on the Company's bank facility was 8.59%. The assets of the Company and the stock of its subsidiaries collateralize the bank facility. The stated principal repayments for all indebtedness as of December 31, 2000 are payable as follows: ($ in thousands) 2001 $ 3,705 2002 2,292 2003 19,165 2004 217 2005 261 Thereafter 100,069 H. COSTS OF SERVICES AND GENERAL AND ADMINISTRATIVE EXPENSES Costs of services and general and administrative expenses consist of the following: Years Ended December 31, 2000 1999 1998 ---- ---- ---- ($ in thousands) Salaries, wages and benefits $19,767 $16,230 $16,294 Other costs of services 11,121 7,789 7,136 General and administrative 6,844 5,770 3,225 Legal and professional 2,516 2,167 2,551 Manufacturing costs 15,851 11,902 8,294 Advertising 3,143 255 157 Other 2,652 826 1,816 ------- ------- ------- $61,894 $44,939 $39,473 ======= ======= ======= A-19 I. COMMITMENTS AND CONTINGENCIES The Company is involved in various claims and legal actions that have arisen in the ordinary course of business. Management believes that any liabilities arising from these actions will not have a material adverse effect on the financial condition, results of operations or cash flows of the Company. The Company sponsors a partially self-insured group medical insurance plan. The plan is designed to provide a specified level of coverage, with stop-loss coverage provided by a commercial insurer. The Company's maximum claim exposure is limited to $35,000 per person per policy year. At December 31, 2000, the Company had 256 employees enrolled in the plan. The plan provides non-contributory coverage for employees and contributory coverage for dependents. The Company's contributions totaled $1,025,000, $966,000 and $623,000, in 2000, 1999 and 1998 respectively. In 2000, 147,000 options were exercised with exercise prices of $.25 and $.56 in conjunction with the establishment of a deferred compensation plan. The related common stock is held in the deferred compensation plan.The Company has a related deferred compensation liability of $1,168,000 recorded on the accompanying balance sheet. J. COMMON STOCK OPTIONS AND WARRANTS 1993 Stock Option Plan The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and related Interpretations in accounting for its employee stock options. The Company provides proforma disclosures of net income and earnings per share as if the fair-value based method prescribed by Statement 123 had been applied in measuring compensation expense. Under APB 25, because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. On October 12, 1993, the Company adopted the 1993 Stock Option Plan which authorizes the grant of up to 2,000,000 shares to certain key employees, directors, and consultants and advisors to the Company. Options granted under the 1993 Stock Option Plan shall terminate no later than ten years from the date the option is granted, unless the option terminates sooner by reason of termination of employment, disability or death. In June 1997, the Company adopted an amendment to the 1993 Stock Option Plan that authorized an additional 500,000 shares. In June 1998, the Company adopted an amendment to the 1993 Stock Option Plan that authorized an additional 750,000 shares. In June 1999 the Company adopted an amendment to the 1993 Stock Option Plan that authorized an additional 400,000 shares. A-20 J. COMMON STOCK OPTION AND WARRANTS (continued) A summary of the Company's stock option activity, and related information for the years ended December 31, follows: 2000 1999 1998 Options Weighted-Average Options Weighted-Average Options Weighted-Average (000) Exercise Price (000) Exercise Price (000) Exercise Price --------------------------------- -------------------------------- ------------------------ Outstanding-beginning of year 2,294 $9.10 1,892 $10.10 1,394 $11.04 Granted 441 7.21 695 7.56 825 8.63 Exercised (163) .89 (17) 5.10 (44) 3.73 Forfeited (168) 12.49 (276) 12.20 (283) 12.58 ------ ----- ----- ------- ------- ------- Outstanding-end of year 2,404 $9.09 2,294 $9.10 1,892 $10.10 ====== ===== ===== Exercisable at end of year 1,563 $9.82 1,137 $9.89 806 $10.74 Weighted-average fair value of options granted during the year $2.71 -- $2.96 -- $3.40 --
The following table summarizes the Company's outstanding options at December 31, 2000: Outstanding Options Exercisable Options Weighted Average Weighted Weighted Remaining Average Average Options Contractual Exercise Options Exercise Range of Exercise Prices (000) Life Price (000) Price - ------------------------ ----- ---- ----- ----- ----- $0.25 - $4.91 130 4.1 years $4.91 -- $ -- $4.92 - $8.50 1,198 3.4 years 7.53 626 7.38 $8.51 - $12.25 621 3.1 years 9.78 517 9.92 $12.26 - $15.32 455 1.3 years 13.43 420 13.35 --- --- Total 2,404 1,563 ===== =====
Proforma information regarding net income and earnings per share is required by Statement 123, and has been determined as if the Company had accounted for its employee stock options under the fair value method of that Statement. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for 2000, 1999 and 1998, respectively: risk-free interest rates of 6.6%, 6.5% and A-21 J. COMMON STOCK OPTION AND WARRANTS (continued) 5.2%; dividend yields of 0%, 0% and 0%; volatility factors of the expected market price of the Company's common stock of .42, .44 and .42; and a weighted-average expected life of the option of 4 years. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. For purposes of proforma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's proforma information follows (in thousands except for earnings per share information): 2000 1999 1998 Pro forma net income $8,512 $11,960 $7,817 Pro forma earning per share: Basic $0.53 $0.71 $0.42 Diluted $0.53 $0.70 $0.42 As of December 31, 2000, the Company had issued warrants to purchase approximately 310,000 shares of common stock to third parties. The exercise prices of the warrants range from $7.73 to $10.38 per share. These warrants were issued in conjunction with the refractive acquisitions discussed in Note D. K. LONG-LIVED ASSETS TO BE DISPOSED OF In accordance with Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, equipment which management has both the ability and intent to remove from service is reported in the financial statements at the lower of carrying amount or fair value less costs to sell. In December 2000, the Company committed to dispose of its prostatherapy segment and entered into an agreement to dispose of this segment in January 2001. In exchange for 100% of its interest in its prostatherapy segment, the Company received an unsecured non-recourse note receivable. An estimated impairment of $1,230,000 was recognized to adjust the segment net assets to fair value less the estimated costs to sell in the caption "nonrecurring development, impairment and other costs, net" in the accompanying statement of income. A-22 K. LONG-LIVED ASSETS TO BE DISPOSED OF (continued) During 1999, the Company approved the removal from service of five lithotripter units. Three of these units were removed from service by the end of 1999 and the remaining two were removed from service in the first quarter of 2000. These assets were held by the lithotripsy segment. The customers of these units are now serviced by other equipment. A loss of approximately $1.1 million was recognized on the write-down to fair value less costs to sell in the caption "nonrecurring development, impairment and other costs, net" of the accompanying statement of income. The minority interest portion of this loss was approximately $600,000. L. INCOME TAXES The Company files a consolidated tax return with its wholly owned subsidiaries. A substantial portion of consolidated income is not taxed at the corporate level as it represents income from partnerships. Accordingly, only the portion of income from these partnerships attributable to the Company's ownership interests is included in taxable income in the consolidated tax return and financial statements. The minority interest portion of this income is the responsibility of the individual partners. Income tax expense consists of the following: Years Ended December 31, ($ in thousands) 2000 1999 1998 ---- ---- ---- Federal: Current $4,494 $5,490 $6,404 Deferred 1,298 2,875 (442) State 934 1,067 1,415 ------ ------ ------ $6,726 $9,432 $7,377 ====== ====== ====== A reconciliation of expected income tax (computed by applying the United States statutory income tax rate of 35% to earnings before income taxes) to total income tax expense in the accompanying consolidated statements of income follows: Years Ended December 31, ($ in thousands) 2000 1999 1998 ---- ---- ---- Expected federal income tax $6,084 $8,565 $6,360 State taxes 607 694 920 Other 35 173 97 ------ ------ ------ $6,726 $9,432 $7,377 ====== ====== ====== A-23 L. INCOME TAXES (continued) The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2000 and 1999 are presented below: ($ in thousands) 2000 1999 ---- ---- Deferred tax assets: Capitalized costs $1,079 $1,948 Loan origination fees amortizable for tax purposes 644 949 Accounts receivable, principally due to allowance for doubtful accounts - 73 Accrued expenses deductible for tax purposes when paid 1,032 994 ----- ----- Total gross deferred tax assets 2,755 3,964 Less valuation allowance -- -- ----- ----- Net deferred tax assets $2,755 $3,964 ----- ----- ($ in thousands) 2000 1999 ---- ---- Deferred tax liabilities: Property and equipment, principally due to differences in depreciation $ (245) $ (99) Investments in affiliated entities, principally due to undistributed income (1,820) (2,329) Intangible assets, principally due to differences in amortization periods for tax purposes (9,160) (6,870) ------ ------ Total gross deferred tax liability (11,225) (9,298) ------- ------ Net deferred tax liability $ (8,470) $ (5,334) ======= ====== There is no valuation allowance for deferred tax assets at December 31, 2000 and 1999. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods which the deductible temporary differences reverse, management believes it is more likely than not the Company will realize the benefits of these deductible differences at December 31, 2000. A-24 M. SEGMENT REPORTING The Company has three reportable segments: lithotripsy, manufacturing and refractive. The lithotripsy segment provides services related to the operation of the lithotripters, including scheduling, staffing, training, quality assurance, maintenance, regulatory compliance and contracting with payors, hospitals and surgery centers. The manufacturing segment provides manufacturing services and installation, upgrade, refurbishment and repair of major medical equipment for mobile medical service providers. The refractive segment, which was added in 1999, provides services related to the operations of refractive vision correction centers. Other operating segments which do not meet the quantitative thresholds for reportable segments include prostatherapy services, which was disposed in January 2000. The accounting policies of the segments are the same as those described in Note B, the summary of significant accounting policies. The Company measures performance based on the pretax income or loss after consideration of minority interests from its operating segments, which do not include unallocated corporate general and administrative expenses and corporate interest income and expense. Additionally, certain consolidated entities that are reported as "corporate" own and operate lithotripsy equipment. The revenue and depreciation expense related to this equipment is included in the lithotripsy segment. However, the equipment is included in corporate assets. The Company's segments are divisions that offer different services, and require different technology and marketing approaches. The majority of the lithotripsy segment is comprised of acquired entities, as are the manufacturing and refractive segments. The prostatherapy segment was developed internally. The presentation of segments for 1998, which included two segments for medical and manufacturing, have been recast to conform to the Company's operating segments for 2000 and 1999. All of the Company's revenues are earned in the United States and long-lived assets are located in the United States. The Company does not have any major customers who account for more than 10% of its revenues. A-25 M. SEGMENT REPORTING (continued) ($ in thousands) Lithotripsy Manufacturing Refractive Other ----------- ------------- ---------- ----- 2000 - ---- Revenue from external customers $83,335 $22,157 $23,501 $1,702 Intersegment revenues -- 298 -- -- Interest income 408 12 5 14 Interest expense 499 125 1,003 -- Depreciation and amortization 9,798 165 3,688 394 Segment profit 26,916 3,541 2,418 82 Segment assets 193,683 13,489 57,403 4 Investment in equity method investees 9,696 -- -- -- Capital expenditures 4,961 172 6,283 500 1999 - ---- Revenue from external customers $89,180 $17,527 $3,414 $2,053 Intersegment revenues -- 243 -- -- Interest income 341 -- -- 4 Interest expense 269 98 457 -- Depreciation and amortization 9,754 264 363 336 Segment profit 32,115 3,430 450 337 Segment assets 195,012 13,122 23,254 3,021 Investment in equity method investees 8,814 - 9,375 -- Capital expenditures 4,367 161 548 298 A-26 M. SEGMENT REPORTING (continued) ($ in thousands) Lithotripsy Manufacturing Refractive Other ----------- ------------- ---------- ----- 1998 ---- Revenue from external customers $92,053 $11,066 -- $1,517 Intersegment revenues -- 255 -- -- Interest income 444 -- -- 3 Interest expense 235 38 -- -- Depreciation and amortization 9,899 223 -- 252 Segment profit 35,484 1,142 -- 209 Segment assets 203,653 9,916 -- 2,628 Investment in equity method investees 10,696 -- -- -- Capital expenditures 2,770 1,580 -- 787 The following is a reconciliation of revenues per above to the consolidated revenues per the consolidated statements of income: ($ in thousands) 2000 1999 1998 ---- ---- ---- Total revenues for reportable segments $129,291 $110,364 $103,374 Other segment 1,702 2,053 1,517 Elimination of intersegment revenues (298) (243) (255) -------- ------- -------- Total consolidated revenues $130,695 $112,174 $104,636 ======== ======== ======== A-27 M. SEGMENT REPORTING (continued) The following is a reconciliation of profit per above to income before taxes per the consolidated statements of income: ($ in thousands) 2000 1999 1998 ---- ---- ---- Total profit for reportable segments $32,875 $35,995 $36,626 Other segment 82 337 209 Unallocated corporate expenses: General and administrative (4,486) (5,027) (4,926) Net interest expense (8,199) (7,424) (7,226) Loan fees and stock offering costs (173) (566) (4,978) Relocation of central billing office (698) -- -- Nonrecurring development and other costs (1,830) 475 (1,617) Release of contractual obligation -- 1,140 -- Other, net (188) (459) 83 -------- -------- -------- Unallocated corporate expenses total (15,574) (11,861) (18,664) -------- ------- ------- Income before income taxes $17,383 $24,471 $18,171 ======= ======= ======= The following is a reconciliation of segment assets per above to the consolidated assets per the consolidated balance sheets: ($ in thousands) 2000 1999 1998 ---- ---- ---- Total assets for reportable segments $264,575 $231,388 $213,569 Other segment 4 3,021 2,628 Unallocated corporate assets 11,639 12,563 24,001 -------- -------- -------- Consolidated total $276,218 $246,972 $240,198 ======== ======== ======== A-28 M. SEGMENT REPORTING (continued) The reconciliation of the other significant items to the amounts reported in the consolidated financial statements is as follows: Eliminating ($ in thousands) Segments Corporate Entries Consolidated -------- --------- ------- ------------ 2000 Interest income $439 $1,992 $(1,255) $1,176 Interest expense 1,627 10,191 (1,255) 10,563 Depreciation and amortization 14,045 142 -- 14,187 Capital expenditures 11,916 1,059 -- 12,975 1999 Interest income $345 $1,250 $(90) $1,505 Interest expense 824 8,674 (90) 9,408 Depreciation and amortization 10,717 131 -- 10,848 Capital expenditures 5,374 416 -- 5,790 1998 Interest income $447 $1,007 $(37) $1,417 Interest expense 273 8,233 (37) 8,469 Depreciation and amortization 10,374 102 -- 10,476 Capital expenditures 5,137 76 -- 5,213 The amounts in 2000, 1999 and 1998 for interest income and expense, depreciation and amortization and capital expenditures represent amounts recorded by the operations of the Company's corporate functions, which have not been allocated to the segments. N. CONDENSED FINANCIAL INFORMATION REGARDING GUARANTOR SUBSIDIARIES Condensed consolidating financial information regarding the Company, Guarantor Subsidiaries and non-guarantor subsidiaries as of December 31, 2000 and 1999 and for each of the years in the three-year period ended December 31, 2000 is presented below for purposes of complying with the reporting requirements of the Guarantor Subsidiaries. Separate financial statements and other disclosures concerning each Guarantor Subsidiary have not been presented because management has determined that such information is not material to investors. The Guarantor Subsidiaries are wholly-owned subsidiaries of the Company who have fully and unconditionally guaranteed the Notes described in Note G. A-29 PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Condensed Consolidating Statement of Income Year Ended December 31, 2000 Prime Medical Guarantor Non-Guarantor Eliminating Consolidated ($ in thousands) Services, Inc. Subsidiaries Subsidiaries Entries Total ------------------------------ -------------- -------------- -------------- Revenue: Lithotripsy: Fee revenues $ - $ 15,490 $ 61,653 $ - $ 77,143 Management fees - 2,131 1,553 - 3,684 Equity income 24,615 18,666 530 (41,303) 2,508 -------------- -------------- -------------- -------------- -------------- 24,615 36,287 63,736 (41,303) 83,335 Manufacturing - - 22,157 - 22,157 Refractive 2,211 5,025 22,577 (6,312) 23,501 Prostatherapy - - 1,578 - 1,578 Other - 124 - - 124 -------------- -------------- -------------- -------------- -------------- Total revenue 26,826 41,436 110,048 (47,615) 130,695 -------------- -------------- -------------- -------------- -------------- Cost of services and general and administrative expenses: Lithotripsy - 792 21,624 - 22,416 Manufacturing - - 17,149 - 17,149 Refractive - 164 13,692 - 13,856 Prostatherapy - (288) 1,612 - 1,324 Other - 135 - - 135 Corporate 54 4,432 - - 4,486 Relocation of central billing office - 698 - - 698 Nonrecurring development, impairment - - - and other costs 1,230 600 - - 1,830 -------------- -------------- -------------- -------------- -------------- 1,284 6,533 54,077 - 61,894 Depreciation and amortization - 7,266 6,921 - 14,187 -------------- -------------- -------------- -------------- -------------- Total operating expenses 1,284 13,799 60,998 - 76,081 -------------- -------------- -------------- -------------- -------------- Operating income 25,542 27,637 49,050 (47,615) 54,614 -------------- -------------- -------------- -------------- -------------- Other income (deductions): Interest income 197 542 437 - 1,176 Interest expense (9,741) (28) (794) - (10,563) Loan fees and stock offering costs (173) - - - (173) Other, net 49 (51) 85 - 83 -------------- -------------- -------------- -------------- -------------- Total other income (deductions) (9,668) 463 (272) - (9,477) -------------- -------------- -------------- -------------- -------------- Income before provision for income taxes and minority interest 15,874 28,100 48,778 (47,615) 45,137 Minority interest in consolidated income - - - 27,754 27,754 Provision for income taxes 5,217 1,274 235 - 6,726 -------------- -------------- -------------- -------------- -------------- Net income $ 10,657 $ 26,826 $ 48,543 $ (75,369) $ 10,657 ============== ============== ============== ============== ==============
A-30 PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Condensed Consolidating Statement of Income Year Ended December 31, 1999 Prime Medical Guarantor Non-Guarantor Eliminating Consolidated ($ in thousands) Services, Inc. Subsidiaries Subsidiaries Entries Total ------------------------------ -------------- -------------- -------------- Revenue: Lithotripsy: Fee revenues $ - $ 20,303 $ 60,577 $ - $ 80,880 Management fees - 3,304 2,415 - 5,719 Equity income 32,763 18,799 - (48,981) 2,581 -------------- -------------- -------------- -------------- -------------- 32,763 42,406 62,992 (48,981) 89,180 Manufacturing - - 17,527 - 17,527 Refractive 346 410 3,004 (346) 3,414 Prostatherapy - - 1,834 - 1,834 Other - 219 - - 219 -------------- -------------- -------------- -------------- -------------- Total revenue 33,109 43,035 85,357 (49,327) 112,174 -------------- -------------- -------------- -------------- -------------- Cost of services and general and administrative expenses: Lithotripsy - 1,995 21,006 - 23,001 Manufacturing - - 12,880 - 12,880 Refractive - - 1,954 - 1,954 Prostatherapy - (198) 1,483 - 1,285 Other - 165 - - 165 Corporate 248 4,779 - - 5,027 Nonrecurring development, impairment and other costs, net (570) 173 1,024 - 627 -------------- -------------- -------------- -------------- -------------- (322) 6,914 38,347 - 44,939 Depreciation and amortization 5 5,216 5,627 - 10,848 -------------- -------------- -------------- -------------- -------------- Total operating expenses (317) 12,130 43,974 - 55,787 -------------- -------------- -------------- -------------- -------------- Operating income 33,426 30,905 41,383 (49,327) 56,387 -------------- -------------- -------------- -------------- -------------- Other income (deductions): Interest income 749 510 246 - 1,505 Interest expense (9,111) 438 (735) - (9,408) Loan fees and stock offering costs (492) (74) - - (566) Release of contractual obligation - 1,140 - - 1,140 Other, net (662) 522 61 - (79) -------------- -------------- -------------- -------------- -------------- Total other income (deductions) (9,516) 2,536 (428) - (7,408) -------------- -------------- -------------- -------------- -------------- Income before provision for income taxes and minority interest 23,910 33,441 40,955 (49,327) 48,979 Minority interest in consolidated income - - - 24,508 24,508 Provision for income taxes 8,871 332 229 - 9,432 -------------- -------------- -------------- -------------- -------------- Net income $ 15,039 $ 33,109 $ 40,726 $ (73,835) $ 15,039 ============== ============== ============== ============== ==============
A-31 PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Condensed Consolidating Statement of Income Year Ended December 31, 1998 Prime Medical Guarantor Non-Guarantor Eliminating Consolidated ($ in thousands) Services, Inc. Subsidiaries Subsidiaries Entries Total ------------------------------ -------------- -------------- -------------- Revenue: Lithotripsy: Fee revenues $ - $ 22,487 $ 61,392 $ - $ 83,879 Management fees - 3,126 2,158 - 5,284 Equity income 30,952 20,077 - (48,139) 2,890 -------------- -------------- -------------- -------------- -------------- 30,952 45,690 63,550 (48,139) 92,053 Manufacturing - - 11,066 - 11,066 Prostatherapy - - 1,207 - 1,207 Other - 310 - - 310 -------------- -------------- -------------- -------------- -------------- Total revenue 30,952 46,000 75,823 (48,139) 104,636 -------------- -------------- -------------- -------------- -------------- Cost of services and general and administrative expenses: Lithotripsy - 3,977 18,697 - 22,674 Manufacturing - - 9,204 - 9,204 Prostatherapy - - 803 - 803 Other - 249 - - 249 Corporate 203 4,723 - - 4,926 Nonrecurring development, impairment and other costs, net 1,617 - - - 1,617 -------------- -------------- -------------- -------------- -------------- 1,820 8,949 28,704 - 39,473 Depreciation and amortization 7 5,221 5,248 - 10,476 -------------- -------------- -------------- -------------- -------------- Total operating expenses 1,827 14,170 33,952 - 49,949 -------------- -------------- -------------- -------------- -------------- Operating income 29,125 31,830 41,871 (48,139) 54,687 -------------- -------------- -------------- -------------- -------------- Other income (deductions): Interest income 735 305 377 - 1,417 Interest expense (8,234) (44) (191) - (8,469) Loan fees and stock offering costs (4,978) - - - (4,978) Other, net (39) 331 12 - 304 -------------- -------------- -------------- -------------- -------------- Total other income (deductions) (12,516) 592 198 - (11,726) -------------- -------------- -------------- -------------- -------------- Income before provision for income taxes and minority interest 16,609 32,422 42,069 (48,139) 42,961 Minority interest in consolidated income - - - 24,790 24,790 Provision for income taxes 5,815 1,470 92 - 7,377 -------------- -------------- -------------- -------------- -------------- Net income $ 10,794 $ 30,952 $ 41,977 $ (72,929) $ 10,794 ============== ============== ============== ============== ==============
A-32 PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Condensed Consolidating Balance Sheet December 31, 2000 Prime Medical Guarantor Non-Guarantor Eliminating Consolidated ($ in thousands) Services, Inc. Subsidiaries Subsidiaries Entries Total ------------------------------ -------------- -------------- ------------- ASSETS Current assets: Cash $ 427 $ 7,393 $ 7,710 $ - $ 15,530 Investments 1,241 - - - 1,241 Accounts receivable, net - 3,453 26,699 - 30,152 Other receivables 2,137 2,720 1,762 - 6,619 Deferred income taxes 305 727 - - 1,032 Prepaid expenses and other current assets 40 312 1,277 - 1,629 Inventory - - 5,068 5,068 -------------- -------------- -------------- -------------- ------------- Total current assets 4,150 14,605 42,516 - 61,271 -------------- -------------- -------------- -------------- ------------- Property and equipment: Equipment, furniture and fixtures - 6,301 47,252 - 53,553 Building and leasehold improvements - 535 3,039 - 3,574 -------------- -------------- -------------- -------------- ------------- - 6,836 50,291 - 57,127 Less accumulated depreciation and amortization - (4,109) (26,764) - (30,873) -------------- -------------- -------------- -------------- ------------- Property and equipment, net - 2,727 23,527 - 26,254 Investment in subsidiaries and other investments 226,154 35,342 - (251,267) 10,229 Goodwill, at cost, net of amortization - 172,824 - - 172,824 Other noncurrent assets 770 4,154 716 - 5,640 -------------- -------------- -------------- -------------- ------------- $ 231,074 $ 229,652 $ 66,759 $ (251,267) $ 276,218 ============== ============== ============== ============== ============= LIABILITIES Current liabilities: Current portion of long-term debt $ - $ - $ 3,705 $ - $ 3,705 Accounts payable 73 555 3,983 - 4,611 Accrued expenses 4,613 751 9,474 - 14,838 -------------- -------------- -------------- -------------- ------------- Total current liabilities 4,686 1,306 17,162 - 23,154 Long-term debt, net of current portion 118,000 119 3,885 - 122,004 Deferred compensation liability 1,168 - - - 1,168 Deferred income taxes 7,429 2,073 - - 9,502 -------------- -------------- -------------- -------------- ------------- Total liabilities 131,283 3,498 21,047 - 155,828 Minority interest - - - 20,599 20,599 STOCKHOLDERS' EQUITY Common stock 195 - - - 195 Capital in excess of par value 88,978 - - - 88,978 Accumulated earnings 44,311 - - - 44,311 Treasury stock (33,693) - - - (33,693) Subsidiary net equity - 226,154 45,712 (271,866) - -------------- -------------- -------------- -------------- ------------- Total stockholders' equity 99,791 226,154 45,712 (271,866) 99,791 -------------- -------------- -------------- -------------- ------------- $ 231,074 $ 229,652 $ 66,759 $ (251,267) $ 276,218 ============== ============== ============== ============== =============
A-33 PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Condensed Consolidating Balance Sheet December 31, 1999 Prime Medical Guarantor Non-Guarantor Eliminating Consolidated ($ in thousands) Services, Inc. Subsidiaries Subsidiaries Entries Total ------------------------------ -------------- -------------- ------------- ASSETS Current assets: Cash $ 2,043 $ 2,682 $ 15,339 $ - $ 20,064 Investments 4,120 - - - 4,120 Accounts receivable, net - 3,069 20,204 - 23,273 Other receivables 437 1,689 1,511 - 3,637 Deferred income taxes 94 972 - - 1,066 Prepaid expenses and other current assets 14 1,195 1,113 - 2,322 Inventory - - 3,676 3,676 -------------- -------------- -------------- -------------- ------------- Total current assets 6,708 9,607 41,843 - 58,158 -------------- -------------- -------------- -------------- ------------- Property and equipment: Equipment, furniture and fixtures - 5,549 36,579 - 42,128 Building and leasehold improvements - 498 1,594 - 2,092 -------------- -------------- -------------- -------------- ------------- - 6,047 38,173 - 44,220 Less accumulated depreciation and amortization - (4,514) (21,053) - (25,567) -------------- -------------- -------------- -------------- ------------- Property and equipment, net - 1,533 17,120 - 18,653 Investment in subsidiaries and other investments 196,347 50,721 - (228,105) 18,963 Goodwill, at cost, net of amortization - 139,989 9,099 - 149,088 Other noncurrent assets 281 643 1,186 - 2,110 -------------- -------------- -------------- -------------- ------------- $ 203,336 $ 202,493 $ 69,248 $ (228,105) $ 246,972 ============== ============== ============== ============== ============= LIABILITIES Current liabilities: Current portion of long-term debt $ - $ - $ 1,763 $ - $ 1,763 Accounts payable 70 1,256 1,964 - 3,290 Accrued expenses 3,670 1,242 10,674 - 15,586 -------------- -------------- -------------- -------------- ------------- Total current liabilities 3,740 2,498 14,401 - 20,639 Long-term debt, net of current portion 100,000 162 3,635 - 103,797 Deferred income taxes 2,914 3,486 - - 6,400 -------------- -------------- -------------- -------------- ------------- Total liabilities 106,654 6,146 18,036 - 130,836 Minority interest - - - 19,454 19,454 STOCKHOLDERS' EQUITY Common stock 194 - - - 194 Capital in excess of par value 87,655 - - - 87,655 Accumulated earnings 33,654 - - - 33,654 Treasury stock (24,821) - - - (24,821) Subsidiary net equity - 196,347 51,212 (247,559) - -------------- -------------- -------------- -------------- ------------- Total stockholders' equity 96,682 196,347 51,212 (247,559) 96,682 -------------- -------------- -------------- -------------- ------------- $ 203,336 $ 202,493 $ 69,248 $ (228,105) $ 246,972 ============== ============== ============== ============== =============
A-34 PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Condensed Consolidating Statement of Cash Flows Year Ended December 31, 2000 Prime Medical Guarantor Non-Guarantor Eliminating Consolidated ($ in thousands) Services, Inc. Subsidiaries Subsidiaries Entries Total ------------------------------ -------------- -------------- -------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net cash provided by (used in) operating activities $ (13,222) $ 17,034 $ 41,368 $ - $ 45,180 -------------- -------------- -------------- -------------- -------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of investments and entities - (23,784) - - (23,784) Purchases of equipment and leasehold improvements - (2,032) (10,943) - (12,975) Proceeds from sales of equipment - - 277 - 277 Distributions from subsidiaries 19,145 11,958 - (31,103) - Investments (18,000) - - 18,000 - Distributions from investments - 2,680 - - 2,680 Other - - - - - -------------- -------------- -------------- -------------- -------------- Net cash provided by (used in) investing activities 1,145 (11,178) (10,666) (13,103) (33,802) -------------- -------------- -------------- -------------- -------------- CASH FLOWS FROM FINANCING ACTIVITIES: Payments on notes payable exclusive of interest - - (3,075) - (3,075) Borrowings on notes payable 18,000 - 3,592 - 21,592 Distributions to minority interest - - - (27,092) (27,092) Contributions by minority interest - - 202 - 202 Exercise and issuance of stock options 164 - - - 164 Purchase of treasury stock (7,703) - - - (7,703) Contributions from parent - 18,000 - (18,000) - Distributions to equity owners - (19,145) (39,050) 58,195 - -------------- -------------- -------------- -------------- -------------- Net cash provided by (used in) financing activities 10,461 (1,145) (38,331) 13,103 (15,912) -------------- -------------- -------------- -------------- -------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,616) 4,711 (7,629) - (4,534) Cash and cash equivalents, beginning of period 2,043 2,682 15,339 - 20,064 -------------- -------------- -------------- -------------- -------------- Cash and cash equivalents, end of period $ 427 $ 7,393 $ 7,710 $ - $ 15,530 ============== ============== ============== ============== ==============
A-35 PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Condensed Consolidating Statement of Cash Flows Year Ended December 31, 1999 Prime Medical Guarantor Non-Guarantor Eliminating Consolidated ($ in thousands) Services, Inc. Subsidiaries Subsidiaries Entries Total ------------------------------ ------------- -------------- -------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net cash provided by (used in) operating activities $ (20,940) $ 5,205 $ 51,479 $ - $ 35,744 -------------- -------------- ------------- -------------- -------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of investments and entities - (13,451) (10,129) - (23,580) Purchases of equipment and leasehold improvements - (1,193) (4,597) - (5,790) Proceeds from sales of equipment - 167 40 - 207 Distributions from subsidiaries 15,407 17,424 - (32,831) - Investments - 2,352 - - 2,352 Other - - 570 - 570 -------------- -------------- ------------- -------------- -------------- Net cash provided by (used in) investing activities 15,407 5,299 (14,116) (32,831) (26,241) -------------- -------------- ------------- -------------- -------------- CASH FLOWS FROM FINANCING ACTIVITIES: Payments on notes payable exclusive of interest - - (1,403) - (1,403) Borrowings on notes payable - - 4,584 - 4,584 Distributions to minority interest - - - (27,180) (27,180) Contributions by minority interest - - 2,636 - 2,636 Exercise and issuance of stock options 160 - - - 160 Purchase of treasury stock (8,382) - - - (8,382) Distributions to equity owners - (15,407) (44,604) 60,011 - -------------- -------------- ------------- -------------- -------------- Net cash provided by (used in) financing activities (8,222) (15,407) (38,787) 32,831 (29,585) -------------- -------------- ------------- -------------- -------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (13,755) (4,903) (1,424) - (20,082) Cash and cash equivalents, beginning of period 15,798 7,585 16,763 - 40,146 -------------- -------------- ------------- -------------- -------------- Cash and cash equivalents, end of period $ 2,043 $ 2,682 $ 15,339 $ - $ 20,064 ============== ============== ============= ============== ==============
A-36 PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Condensed Consolidating Statement of Cash Flows Year Ended December 31, 1998 Prime Medical Guarantor Non-Guarantor Eliminating Consolidated ($ in thousands) Services, Inc. Subsidiaries Subsidiaries Entries Total ------------------------------ ------------- -------------- -------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net cash provided by (used in) operating activities $ (10,215) $ 9,608 $ 46,158 $ - $ 45,551 -------------- -------------- ------------- -------------- -------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of equipment and leasehold improvements - (2,000) (3,213) - (5,213) Proceeds from sales of equipment - 179 45 - 224 Distributions from subsidiaries 26,228 16,665 - (42,893) - Investments (408) 2,940 - - 2,532 Other 22 166 127 - 315 -------------- -------------- ------------- -------------- -------------- Net cash provided by (used in) investing activities 25,842 17,950 (3,041) (42,893) (2,142) -------------- -------------- ------------- -------------- -------------- CASH FLOWS FROM FINANCING ACTIVITIES: Payments on notes payable exclusive of interest (79,000) (5) (1,479) - (80,484) Borrowings on notes payable 100,000 - 25 - 100,025 Distributions to minority interest - - - (25,799) (25,799) Debt issuance costs (4,417) - - - (4,417) Contributions by minority interest - - 72 - 72 Exercise and issuance of stock options 9 - - - 9 Purchase of treasury stock (16,439) - - - (16,439) Distributions to equity owners - (26,228) (42,464) 68,692 - -------------- -------------- ------------- -------------- -------------- Net cash provided by (used in) financing activities 153 (26,233) (43,846) 42,893 (27,033) -------------- -------------- ------------- -------------- -------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 15,780 1,325 (729) - 16,376 Cash and cash equivalents, beginning of period 18 6,260 17,492 - 23,770 -------------- -------------- ------------- -------------- -------------- Cash and cash equivalents, end of period $ 15,798 $ 7,585 $ 16,763 $ - $ 40,146 ============== ============== ============= ============== ==============
A-37 EX-10.89 2 0002.txt EXHIBIT 10.89 L. L. C. AGREEMENT OF CASTER ONE LIMITED LIABILITY COMPANY AGREEMENT OF CASTER ONE, L.L.C. Organized under the Delaware Limited Liability Company Act (the "Act"). ARTICLE I. NAME AND LOCATION Section 1.1. Name. The name of this limited liability company is Caster One, L.L.C. (the "Company"). Section 1.2. Members. The only members of the Company upon the execution of this Limited Liability Company Agreement (this "Agreement") shall be Prime Refractive, L.L.C., a Delaware limited liability company ("Prime"), and Caster Eye Center Medical Group, a California professional corporation ("Caster, Inc."). For purposes of this Agreement, the "Members" shall include such named members and any new members admitted pursuant to the terms of this Agreement, but does not include any person or entity who has ceased to be a member in the Company. Section 1.3. Principal Offices. The principal offices of the Company shall be located at 1301 Capital of Texas Hwy., Suite C-300, Austin, Texas 78746-6550, 9100 Wilshire Blvd. #265E, Beverly Hills, California, 90212, and at such other locations as may be selected by the Members. Section 1.4. Registered Agent and Address. The name of the registered agent and the address of the registered office of the Company as set forth in the Certificate of Formation of the Company are: The Corporation Trust Company 1209 Orange Street Wilmington, Delaware 19801 Section 1.5. Other Offices. Other offices and other facilities for the transaction of business shall be located at such places as the Managers may from time to time determine. Section 1.6 Contribution Agreement. The Company was initially formed with a single member, Andrew Caster, M.D. ("Caster") for the purpose of consummating the transactions contemplated by that certain Contribution Agreement dated effective as of March 1, 2000, by and among Prime Medical Services, Inc., a Delaware corporation ("PMSI"), Prime Refractive, L.L.C., a Delaware limited liability company, Caster, Inc., Caster, and the Company (the "Contribution Agreement"). The parties have executed this Agreement concurrent with the consummation of the transactions contemplated by the Contribution Agreement. This agreement supercedes and replaces any prior membership agreement or other governing or organizational document of the Company. Section 1.7 Certain Defined Terms. Unless otherwise defined in this Section 1.7 of elsewhere in this Agreement, all capitalized terms used in this Agreement shall have the meanings ascribed to them in the Contribution Agreement. The following terms used in this Agreement shall (unless expressly provided herein or unless the context otherwise requires) have the following respective meanings: "Adjusted Capital Account Deficit" shall mean, with respect to any Member, the deficit balance, if any, in a Member's Capital Account as of the end of the Company's fiscal year, after giving economic effect to the following adjustments: (i) credit to such Capital Account for any amounts which a Member is obligated to restore pursuant to any provision of this Agreement or is deemed to be obligated to restore pursuant to the provisions of Regulations ss.ss.1.704-2(g)(1) and 1.704-2(i)(5) and (ii) debit to such Capital Account for the items enumerated in Regulations ss.ss.1.704-1(b)(2)(ii)(d)(4)-(6). The foregoing definition of "Adjusted Capital Account Deficit" is intended to comply with the provisions of Regulations ss.1.704-1(b)(2)(ii)(d) and shall be construed as being consistent therewith. "Capital Account" shall mean, with respect to each Member, the capital account which is maintained as part of the Company's books and records, in accordance with the following: (i) Each Member's Capital Account will be credited with the amount of money contributed by such Member to the capital of the Company, plus the initial Gross Asset Value of any property (other than money) contributed by such Member to the capital of the Company (net of liabilities securing such contributed property that the Company is considered to assume or take subject to under Section 752 of the Code) plus the amount of any Net Income allocated to such Member, and the amount of any items in the nature of income or gain specially allocated to such Member pursuant to Sections 6.3 or 6.4; (ii) Each Member's Capital Account will be debited by the amount of money distributed to such Member by the Company (exclusive of a guaranteed payment within the meaning of ss.707(c) of the Code paid to such Member), plus the Gross Asset Value of any property distributed to such Member by the Company (net of liabilities securing such distributed property that such Member is considered to assume or take subject to under ss.752 of the Code) and decreased further by the amount of any Net Loss allocated to such Member and the amount of any items in the nature of loss or deduction specially allocated to such Member pursuant to Sections 6.3 or 6.4. (iii) The Capital Account of a Member who receives a distribution in liquidation of his Membership Interest that gives rise to an adjustment to the adjusted tax basis of Company property under ss.734 of the Code shall have a corresponding adjustment made to such Member's Capital Account in accordance with the provisions of Regulation ss.1.704-1(b). In the event of any other Distribution (as hereinafter defined) to a Member that gives rise to an adjustment under Code ss. 734, an adjustment shall be made to the Capital Accounts of all of the Members in accordance with Regulation ss. 1.704-1(b)(iv)(m)(4). (iv) In the event the Gross Asset Value of Company assets are adjusted pursuant to the terms of this Agreement, the Capital Accounts of the Members shall be adjusted simultaneously to reflect the aggregate net adjustment as if the Company recognized gain or loss equal to the amount of such aggregate net adjustment and such gain or loss was allocated to the Members pursuant to the appropriate provisions of this Agreement. (v) The foregoing Capital Account definition and the other provisions of this Agreement relating to the maintenance of Capital Accounts are intended to comply with Regulations ss.1.704-1(b)(2)(iv), and shall be interpreted and applied in a manner consistent with such Regulations, with such optional adjustments as the Managers shall determine appropriate in order to provide that the Company's allocations shall meet the "substantial economic effect" test of the applicable Regulations. "Company Minimum Gain" shall have the same meaning as ascribed to the term " partnership minimum gain" set forth in Regulations ss.ss. 1.704-2(b)(2) and 1.704-2(d). "Distribution" shall mean money or property distributed to a Member in its capacity as a Member pursuant to Article V hereof. "Gross Asset Value" means, with respect to any asset of the Company, the asset's adjusted basis for federal income tax purposes; provided, however, that (a) the Gross Asset Value of any asset contributed by a Member to the Company or distributed to a Member by the Company shall be the gross fair market value of such asset (without taking into account ss.7701(g) of the Code), as reasonably determined by the contributing or distributee Member, as the case may be, and the Company or in the case of assets initially contributed the amounts set forth on Schedule A, (b) the Gross Asset Values of all Company assets shall be adjusted to equal their respective gross fair market values (taking into account ss.7701(g) of the Code), as reasonably determined by the Managers upon the termination of the Company for federal income tax purposes pursuant to ss.708(b) of the Code; and (c) the Gross Asset Values of all Company assets may be adjusted in the discretion of the Managers to equal their respective gross fair market value (taking into account ss.7701(g) of the Code), as reasonably determined by the Managers as of (i) the date of the acquisition of an additional interest in the Company by any new or existing Member in exchange for more than a de minimis contribution to the capital of the Company; (ii) upon the distribution by the Company to a retiring or continuing Member of more than a de minimis amount of Company property or money in reduction of such Member's interest in the Company; or (iii) upon the liquidation of the Company within the meaning of Regulations ss.1.704-1(b)(2)(ii)(g); provided, however, that the adjustments made pursuant to clauses "(i)" and "(ii)" above shall be made only if the Managers reasonably determine that such adjustments are necessary or appropriate to reflect the relative economic interests of the Members in the Company. "Member Minimum Gain" shall mean an amount, determined with respect to each Member Non-Recourse Debt, equal to the Company Minimum Gain that would result if such Member Non-Recourse Debt were treated as a Non-Recourse Liability, determined in accordance with Regulations ss.1.704-2(i)(3). "Member Non-Recourse Debt" shall have the same meaning as ascribed to the term "partnership nonrecourse gain" pursuant to Regulations ss.1.704-2(i)(5). "Member Non-Recourse Deductions" shall have the same meaning as ascribed to the term "partner nonrecourse deductions" pursuant to Regulations ss.1.704-2(i)(2). The amount of Member Non-Recourse Deductions with respect to a Member Non-Recourse Debt during a Company taxable year shall equal the excess, if any, of the net increase, if any, in the amount of Member Minimum Gain attributable to a Member Non-Recourse Debt during that taxable year, over the aggregate amount of any Distributions during that taxable year to the Member who bears the economic risk of loss for such Member Non-Recourse Debt, to the extent that such Distributions are from the proceeds of such Member Non-Recourse Debt and are allocable to an increase in Member Minimum Gain attributable to such Member Non-Recourse Debt, determined in accordance with the Regulations ss.1.704-2(i)(2). "Net Income" or "Net Loss" shall mean the taxable income or gain and taxable loss as determined in accordance with the accounting methods followed by the Company for federal income tax purposes, pursuant to Code ss.703(a) (and for purposes of determining Net Income or Net Loss, all items of income, gain, loss or deduction required to be stated separately pursuant to Code ss.703(a)(1) shall be included in Net Income or Net Loss) subject to the following adjustments: (i) Any Company income that is exempt from federal tax, and not otherwise taken into account in computing Net Income or Net Loss, shall be added to such taxable income or loss; (ii) Any Company expenditures which are described in Code ss.705(a)(2)(B) (or deemed to be such expenditures pursuant to Regulations ss.1.704-1(b)(2)(iv)(i)(1)) and not otherwise taken into account in computing Net Income or Net Loss pursuant to this definition shall be subtracted from such taxable income or loss; (iii) Any deductions for depreciation, cost recovery or amortization attributable to any assets of the Company shall be determined by reference to their Gross Asset Value, except that if the Gross Asset Value of an asset differs from its adjusted tax basis for federal income tax purposes at any time during such year or other period, the deductions for depreciation, cost recovery or amortization attributable to such asset from and after the date during such year or period in which such difference first occurs shall bear the same ratio to the Gross Asset Value as of such date as the federal income tax depreciation, amortization or other cost recovery deduction for such year or other period from and after such date bears to the adjusted tax basis as of such date; provided, however, that if the adjusted basis for federal income tax purposes of an asset at the beginning of such fiscal year is zero, such deductions for depreciation, cost recovery, or amortization shall be determined with reference to such beginning Gross Asset Value using any reasonable method selected by the Managers. (iv) Gain or loss, resulting from the Company taxable disposition of any Company property with respect to which gain or loss is recognized for federal income tax purposes, shall be computed by reference to the Gross Asset Value of the disposed property, notwithstanding the fact that the adjusted tax bases of such property may differ from its Gross Asset Value; and (v) Any items of income or loss which are specially allocated pursuant to Sections 6.3 and 6.4 shall not be taken into account in computing the Company's Net Income or Net Loss. "Non-Recourse Deductions" shall have the meaning established by Regulations ss.1.704-2(b)(1). The aggregate of Non-Recourse Deductions for a taxable year of the Company shall equal the excess of the net increase, if any, in the amount of Company Minimum Gain, during that taxable year over the aggregate amount of Distributions during that taxable year of proceeds of a Non-Recourse Liability which are allocable to an increase in Company Minimum Gain, determined pursuant to Regulations ss.1.704-2(d). "Non-Recourse Liability" shall have the meaning established by Regulations ss.1.704-2(b)(3). ARTICLE II. MEMBERSHIP Section 2.1. Members' Interests. The "Membership Interest" of each Member is set forth on Exhibit A. Section 2.2. Admission to Membership. The admission of new Members shall be only by the vote of the Managers pursuant to Section 8.9 hereof. If new Members are admitted, this Agreement shall be amended to reflect each Member's revised Membership Interest. Section 2.3. Property Rights. No Member shall have any right, title, or interest in any of the property or assets of the Company. Section 2.4. Liability of Members. No Member of the Company shall be personally liable for any debts, liabilities, or obligations of the Company, including under a judgment decree, or order of court. Nothing contained in this Section 2.4 shall be construed to limit the liability of Members to each other or the Company under the terms of any provision of the Contribution Agreement or other Transaction Documents. Section 2.5. Transferability of Membership. Except as provided below, Membership Interests in the Company are transferable only with the unanimous written consent of all Members. If such unanimous written consent is not obtained when required, the transferee shall be entitled to receive only the share of profits or other compensation by way of income and the return of contributions to which the transferor Member otherwise would be entitled. Notwithstanding the foregoing, the following shall not be deemed to violate any provision of this Agreement (each, a "Permitted Transfer"): (i) the Membership Interests of Prime may be freely transferred, without consent, to any entity that is then owned and controlled, directly or indirectly, by PMSI (or its successor in interest), (ii) the Membership Interests of any Member may be freely assigned, pledged or otherwise transferred, without consent, to secure any debt, liability or obligation owed to Prime by the Company, any Member or any entity affiliated with the Company, (iii) the Membership Interests of any Member may be freely assigned, pledged or otherwise transferred, without consent, in favor of the Lender(s) under, or by the Lender(s) as a result of the enforcement of any security interest arising pursuant to, those certain Credit Facilities (the "Credit Facilities") of PMSI and/or any of PMSI's subsidiaries, (iv) the pledge by Caster, Inc. (pursuant to Section 10.2 of the Contribution Agreement) of its right to receive distributions from the Company in respect of its Membership Interest, and (v) the Membership Interests of Caster, Inc. may be transferred (A) to a trust or trusts (a "Permitted Trust") for the benefit of Caster and/or members of Caster's immediate family (including an entity owned by a Permitted Trust) but only where Caster either controls the trust or retains during his lifetime the exclusive ability to vote the Membership Interests (pursuant to a written proxy or other instrument reasonably acceptable in form and substance to Prime), (B) to an entity (a "Permitted Entity") that is wholly-owned, directly or indirectly, by Caster and/or members of Caster's immediate family, but only where Caster either controls the entity or retains during his lifetime the exclusive ability to vote the Membership Interests (pursuant to a written proxy or other instrument reasonably acceptable in form and substance to Prime), or (C) from a Permitted Trust or Permitted Entity to Caster. Notwithstanding the foregoing, after the expiration of the six (6) year period immediately following the Closing Date (as such term is defined in the Contribution Agreement), Caster, Inc. shall be entitled to sell all or any portion of its Membership Interest and Caster may sell or cause Caster, Inc. to sell, any portion of the Stock Interest (as hereinafter defined) to one or more ophthalmologists that are primarily engaged in Refractive Surgery and reasonably acceptable to Prime; provided, however, that Prime's refusal to approve of any proposed transferee(s) as required by this sentence shall be deemed to have been reasonable for all purposes if such transferee(s) cannot demonstrate to the reasonable satisfaction of Prime that such transferee(s) would have generated the same annual level of revenue and profitability for the Company following such transfer as did Caster, on average, for the two (2) years immediately preceding such transfer (in each case multiplied by the percentage of Caster, Inc.'s total Membership Interest, or Caster's percentage of outstanding Stock Interest, as the case may be, being conveyed). Caster, Inc. represents and warrants to Prime and the Company that all of its ownership interests (the "Stock Interests") are, as of the date it enters into this Agreement, owned solely by Caster. Any transfer, issuance, sale, conveyance or encumbrance of any Stock Interests, or any interest therein, by Caster or Caster, Inc. shall be subject to the same restrictions on transfer as are set forth above with respect to transfers of Membership Interests. Accordingly, any transfer of any Stock Interests in violation of these restrictions shall, if Caster, Inc. is then the owner of any Membership Interest, be deemed a transfer of Caster, Inc.'s Membership Interest in violation of this Agreement. Similarly, any transfer of any Stock Interests in a transaction described in clauses (ii), (iii) or (v) above as a Permitted Transfer shall be permitted as well. As an express condition to any transfer by Caster, Inc. or any transferee of Caster, Inc., the proposed transferee shall have agreed in writing, in form and substance reasonably satisfactory to Prime, that such proposed transferee will be bound by all of the terms and provisions of this Agreement, the Contribution Agreement and any other Transaction Document (as defined in the Contribution Agreement) which by reasonable implication are applicable to the Membership Interest being transferred and not solely Caster or Caster, Inc. as a selling party under the Contribution Agreement. Notwithstanding any other provisions of this Agreement, if Caster dies or becomes incapacitated, or can no longer manage his affairs, Caster's executor, administrator, conservator, guardian, trustee, personal representative, or the holder of a power of attorney from Caster may exercise all of the rights of Caster, Inc. under this Agreement, including the right to vote, to designate a Manager, and to receive distributions. In the event of Caster's death, the transfer of Stock Interests to Caster's heirs or legatees, whether by the laws of descent and distribution, operation of law or otherwise, or to the beneficiaries of a Permitted Trust, shall be deemed to be a Permitted Transfer. By signing this Agreement in his capacity as an officer of Caster, Inc., Caster is also acknowledging and agreeing to the restrictions on transfer of the Stock Interests as provided herein. Section 2.6. Resignation of Members. A Member may not withdraw from the Company except on the unanimous consent of the remaining Members. The terms of the Member's withdrawal shall be determined by agreement between the remaining Members and the withdrawing Member. ARTICLE III. MEMBERS' MEETINGS Section 3.1. Time and Place of Meeting. All meetings of the Members shall be held at such time and at such place within or without the State of Delaware as shall be determined by the Managers. Section 3.2. Annual Meetings. In the absence of an earlier meeting at such time and place as the Managers shall specify, annual meetings of the Members shall be held at the principal office of the Company on the date which is thirty (30) days after the end of the Company's fiscal year if not a legal holiday, and if a legal holiday, then on the next full business day following, at 10:00 a.m., at which meeting the Members may transact such business as may properly be brought before the meeting. Section 3.3. Special Meetings. Special meetings of the Members may be called at any time by any Member. Business transacted at special meetings shall be confined to the purposes stated in the notice of the meeting. Section 3.4. Notice. Written or printed notice stating the place, day and hour of any Members' meeting, and, in the case of a special meeting, the purpose or purposes for which the meeting is called, shall be delivered not less than ten (10) days nor more than thirty (30) days before the date of the special meeting, either personally or by mail, by or at the direction of the person calling the meeting, to each Member entitled to vote at such meeting. If mailed, such notice shall be deemed to be delivered three (3) days after it is deposited in the United States mail, postage prepaid, to the Member at his address as it appears on the records of the Company at the time of mailing. Section 3.5. Quorum. Members present in person or represented by proxy, holding more than fifty percent (50%) of the total votes which may be cast at any meeting shall constitute a quorum at all meetings of the Members for the transaction of business. If, however, such quorum shall not be present or represented at any meeting of the Members, the Members entitled to vote, present in person or represented by proxy, shall have power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present or represented. When any adjourned meeting is reconvened and a quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally noticed. Once a quorum is constituted, the Members present or represented by proxy at a meeting may continue to transact business until adjournment, notwithstanding the subsequent withdrawal therefrom of such number of Members as to leave less than a quorum. Section 3.6. Voting. Members shall only have the right to vote in instances or with respect to matters where member voting or consent is required by applicable law or to the extent expressly set forth in this Agreement, including but not limited to, Sections 2.5 (transfers of Membership Interests), 7.1(b) (dissolution), 8.1 (changing the number of Managers), 8.11 (compensation of Managers) and 13.1 (amendments to operating agreement, certificate of formation). With respect to any act or transaction that requires the affirmative vote or consent by the Members under applicable law, the affirmative vote or written consent of two of the three Managers (one of whom must, as long as Caster has not delivered the written notice described in Section 9.3(a) of the Contribution Agreement, be the Manager designee of Caster, Inc.) shall also be required in order to approve the act or transaction, in each instance. Subject to the foregoing, when a quorum is present at any meeting, the vote of the Members, whether present or represented by proxy at such meeting, holding more than fifty percent (50%) of the total votes which may be cast at any meeting shall be the act of the Members, unless the vote of a different number is required by the Act, the Certificate of Formation or this Limited Liability Company Agreement. Each Member shall be entitled to one vote for each percentage point represented by their Membership Interest. Fractional percentage point interests shall be entitled to a corresponding fractional vote. The provisions of this Section shall in all events be subordinate to with the provisions of Section 8.9 relating to acts or transactions requiring the written approval of two (2) or more Managers, one of which must be a Manager designated by Caster, Inc. Section 3.7. Proxy. Every proxy must be executed in writing by the Member or by his duly authorized attorney-in-fact, and shall be filed with the Secretary of the Company prior to or at the time of the meeting. No proxy shall be valid after eleven (11) months from the date of its execution unless otherwise provided therein. Each proxy shall be revocable unless expressly provided therein to be irrevocable and unless otherwise made irrevocable by law. Section 3.8. Action by Written Consent. Any action required or permitted to be taken at any meeting of the Members may be taken without a meeting if a consent in writing, setting forth the action so taken, shall be signed by all of the Members entitled to vote with respect to the subject matter thereof, and such consent shall have the same force and effect as a unanimous vote of Members. Section 3.9. Meetings by Conference Telephone. Members may participate in and hold any meeting of Members by telephone (including a conference telephone) conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and such participation in such a meeting shall constitute presence in person at such meeting, except where a person participates in the meeting for the express purpose of objecting to the transaction of any business on the ground that the meeting is not lawfully called or convened. ARTICLE IV. MEMBERSHIP CAPITAL CONTRIBUTIONS Section 4.1. Capital Contributions. Each Member has contributed to the Company the assets set forth in Schedule A, having the agreed fair market values, as set forth on Schedule A, which amount shall be credited to each Member's Capital Account as their initial capital contribution. Except for each Member's initial capital contribution made in connection with the formation of the Company, no capital contributions shall be required of any Member without the unanimous approval of all the Members to raise additional capital, and only then proportionately as to each Member. Section 4.2. Intentionally Omitted. Section 4.3. Deficit Capital Account Balances. Upon liquidation of the Company, no Member with a deficit balance in its Capital Account shall have any obligation to restore such deficit balance, or to make any contribution to the capital of the Company. Section 4.4. Tax Matters Partner. The Managers shall designate one Manager by majority vote to act as the tax matters partner (the "TMP") of the Company (as defined in the Code), and the TMP is hereby authorized and required to represent the Company, or designate another person or firm to represent the Company, (in each case, at the Company's expense) in connection with all examinations of the Company's affairs by tax authorities, including resulting administrative and judicial proceedings, and to expend Company funds for professional services and costs associated therewith. The initial TMP shall be Teena Belcik. The Members agree to cooperate with the TMP and its designee, if any, and to do or refrain from doing any or all things reasonably required by the TMP or its designee, if any, to conduct such proceedings. The Company will reimburse the TMP and any such designee for all expenses incurred in connection with its duties as TMP and any costs associated with any administrative or judicial proceeding with respect to the tax liabilities of the Members. ARTICLE V. DISTRIBUTION TO MEMBERS Section 5.1. Distributions of Available Excess Earnings. At the end of each calendar month, subject only to the qualifications and limitations set forth below, the Company shall, unless provided otherwise in accordance with Section 8.9(b) or Section 8.9(c), distribute its Available Excess Earnings (as hereinafter defined) to its members, to be divided among them in accordance with their Membership Interests. As used herein, "Available Excess Earnings" shall mean and refer to all cash and cash equivalents of the Company that would not be reasonably required in order to (a) satisfy all accounts payable and payment obligations of the Company that will become due in the ordinary course within thirty (30) days of the date of determination (assuming no receipt of additional cash or cash equivalents during such ninety (30) day period) or (b) establish adequate reserves to satisfy liabilities or obligations of the Company that are foreseen and can be reasonably estimated on the date of determination. Distributions in kind shall be made on the basis of agreed value as determined by the Managers. Notwithstanding the foregoing, the Company may not make a distribution to its Members to the extent that, immediately after giving effect to the distribution, all liabilities of the Company, other than liabilities to the Members with respect to their interests and liabilities for which the recourse of creditors is limited to specified property of the Company, exceed the fair value of the Company assets; except that the fair value of property that is subject to liability for which recourse of creditors is limited, shall be included in the Company assets only to the extent that the fair value of the property exceeds that liability. Section 5.2 Distributions to Pay Tax. In the event the distributions, with respect to any fiscal year, to any Member are less than the Income Tax Liability (as hereinafter defined) of such Member for that fiscal year, then, notwithstanding anything to the contrary in this Agreement, within two and one half (2.5) months after the close of such fiscal year distributions shall be made to the Members in proportion to their respective Membership Interests in an aggregate amount equal to the Income Tax Liability (as hereinafter defined). As used in this Agreement, the "Income Tax Liability" shall mean the product of the net income of the Company for such fiscal year multiplied by the highest marginal rate applicable to individuals for federal and California income tax purposes, and giving effect to any federal income tax deduction for California tax. If the Company may not make a distribution pursuant to this Section 5.2 as a result of the application of Section 5.1, the Company may, with the approval of the Managers, make a loan to each Member in an amount equal to the difference between the amount of the Income Tax Liability determined pursuant to the preceding sentence and the amount otherwise distributed to such Member pursuant to Sections 5.1 and 5.2. ARTICLE VI. ALLOCATION OF NET PROFITS AND LOSSES Section 6.1. Allocation of Net Income and Net Loss. Net Income and Net Loss for each fiscal year shall be allocated between the Members in accordance with their respective Membership Interests. Section 6.2. Loss Limitation. Notwithstanding Section 6.1, Net Loss shall not be allocated to any Member to the extent such allocation would cause such Member to have an Adjusted Capital Account Deficit. Any Net Loss that cannot be allocated to a Member by virtue of this Section 6.2 shall be reallocated to other Members. If both Members have an Adjusted Capital Account Deficit, the balance of the Net Loss shall be allocated between the Members in proportion to their Membership Interest. Section 6.3. Special Allocations. The following special allocations shall be made in the following order: (a) Company Minimum Gain Chargeback. Notwithstanding any other provision of this Article 6, if there is a net decrease in Company Minimum Gain during any fiscal year, each Member shall be specially allocated items of Company income and gain for such year (and, if necessary, subsequent years) in proportion to, and to the extent of, an amount equal to such Member's share of the net decease in Company Minimum Gain, determined in accordance with ss.1.704-(2)(g)(2) of the Regulations. This Section 6.3(a) is intended to comply with the minimum gain chargeback requirement of the Regulations and shall be interpreted consistently therewith. (b) Member Minimum Gain Chargeback. Notwithstanding any other provision of this Article 6 except Section 6.3(a), if there is a net decrease in Member Minimum Gain attributable to a Member Nonrecourse Debt during any fiscal year, each Member with a share of the Member Minimum Gain attributable to such Member Nonrecourse Debt, determined in accordance with ss.1.704-2(i)(5) of the Regulations, shall be specially allocated items of Company income and gain for such year (and, if necessary, subsequent years) in proportion to, and to the extent of, an amount equal to such Member's share of the net decease in Member Minimum Gain attributable to such Member Nonrecourse Debt, determined in accordance with ss.1.704-2(i)(5) of the Regulations. This Section 6.3(b) is intended to comply with the Member minimum gain chargeback requirement of the Regulations and shall be interpreted consistently therewith. (c) Qualified Income Offset. In the event any Member unexpectedly receives any adjustments, allocations or distributions described in ss.ss.1.704-1(b)(2)(ii)(d)(4), (5) and (6) of the Regulations, items of Company income and gain shall be specially allocated to each such Member in an amount and manner sufficient to eliminate, to the extent required by the Regulations, the Adjusted Capital Account Deficit of such Member as quickly as possible, provided that an allocation pursuant to this Section 6.3(c) shall be made only if and to the extent that such Member would have an Adjusted Capital Account Deficit after all other allocations provided for in this Article 6 have been tentatively made as if this Section 6.3(c) were not in the Agreement. (d) Nonrecourse Deductions. Any Nonrecourse Deductions for any fiscal year or other period shall be specially allocated among the Members in proportion to their Membership Interests. (e) Member Nonrecourse Deductions. Any Member Nonrecourse Deductions for any fiscal year or other period shall be allocated to the Member who bears the economic risk of loss with respect to the Member Nonrecourse Debt to which such Member Nonrecourse Deductions are attributable in accordance with Regulations ss.1.704-2(i). Section 6.4 Curative Allocations. The "Regulatory Allocations" consist of the allocations to a Member (or its predecessor) under Sections 6.3(a), 6.3(b), 6.3(c), 6.3(d) and 6.3(e) hereof. Notwithstanding any other provisions of this Article 6 (other than the Regulatory Allocations), the Regulatory Allocations shall be taken into account in allocating other items of income, gain, loss and deduction among the Members so that, to the extent possible, the net amount of such allocations of other items and the Regulatory Allocations to each Member shall be equal to the net amount that would have been allocated to each such Member if the Regulatory Allocations had not occurred. For purposes of applying the foregoing sentence (i) no allocations pursuant to this Section 6.4 with respect to allocations pursuant to Section 6.3(a) shall be made prior to the fiscal year during which there is a net decrease in Company Minimum Gain, and then only to the extent necessary to avoid any potential economic distortions caused by such net decease in Company Minimum Gain, (ii) no allocations pursuant to this Section 6.4 shall be made with respect to allocations pursuant to Sections 6.3(b) and 6.3(e) relating to a particular Member Nonrecourse Debt prior to the fiscal year during which there is a net decrease in Member Minimum Gain attributable to such Member Nonrecourse Debt, and then only to the extent necessary to avoid any potential economic distortions used by such net decease in Member Minimum Gain, and (iii) allocations pursuant to this Section 6.4 shall be deferred with respect to allocations pursuant to Section 6.3(e) hereof relating to a particular Member Nonrecourse Debt to the extent the Managers reasonably determine that such allocations are likely to be offset by subsequent allocations pursuant to Section 6.3(b) hereof. The Managers shall have reasonable discretion, with respect to each fiscal year, to (i) apply the provisions of this Section 6.4 in whatever order is likely to minimize the economic distortions that might otherwise result from the Regulatory Allocations, and (ii) divide all allocations pursuant to this Section 6.4 among the Members in a manner that is likely to minimize such economic distortions. Section 6.5 Tax Allocations; Code ss.704(c). In accordance with Code ss.704(c) and the Regulations thereunder, income, gain, loss, and deduction with respect to any property contributed to the capital of Company, or any Company asset which is subject to adjustment in its Gross Asset Value, any such property or asset of the Company shall, solely for tax purposes, be allocated among the Members so as to take account of any variation between the adjusted basis of such property or asset to the Company for federal income tax purposes and its Gross Asset Value. Any elections or other decisions relating to such allocations shall be made by the Managers in any manner that reasonably reflects the intent of this Agreement. Allocations pursuant to this Section 6.5 are solely for purposes of federal, state, and local taxes and shall not affect, or in any way be taken into account in computing, any person's Capital Account or share of Net Income, Net Loss, other items, or Distributions pursuant to any provision of this Agreement. ARTICLE VII. DISSOLUTION AND WINDING UP Section 7.1. Dissolution. Notwithstanding any provision of the Act, the Company shall be dissolved only upon the first of the following to occur: (a) Forty (40) years from the date of filing the Certificate of Formation of the Company; or (b) Written consent of all the then current Members to dissolution. Section 7.2. Winding Up. In the event of dissolution of the Company, the Managers (excluding any Manager holding office pursuant to designation by a Member subject to bankruptcy proceedings) shall wind up the Company's affairs as soon as reasonably practicable. On the winding up of the Company, the Managers shall pay and/or transfer the assets of the Company in the following order: (a) In discharging liabilities (including loans from Members) and the expenses of concluding the Company's affairs; and (b) The balance, if any, shall be distributed to the Members in accordance with the positive balances of the Members Capital Accounts. Upon dissolution and distribution of the Company assets, such distributed assets shall be deemed sold with the resulting Net Income or Net Loss being allocated among the Members and credited or debited to their respective Capital Accounts pursuant to Articles IV and VI. ARTICLE VIII. MANAGERS Section 8.1. Selection of Managers. Management of the Company shall be vested in the Managers. Initially, the Company shall have three (3) Managers, being Brad Hummel and Teena Belcik (as the initial Manager designees of Prime), and Andrew Caster, M.D. (as the initial Manager designee of Caster, Inc.). Thereafter, for so long as there are three (3) Managers, (a) Prime shall be entitled to designate two (2) of the Managers; and (b) Caster, Inc. shall be entitled to designate the remaining one (1) Manager. Notwithstanding the foregoing, a Member shall not be entitled to designate any Manager unless its Membership Interest: (y) has not (other than as allowed under Section 2.5 of this Agreement) been transferred, repurchased, assigned, pledged, hypothecated or in any way alienated; and (z) equals or exceeds thirty percent (30%) of the aggregate Membership Interests (after including in such determination all Membership Interests held by the permitted transferees of such Member); provided, however, that the foregoing limitations shall not apply in the event the parties restructure their relationship pursuant to this Agreement in an effort to comply with any applicable law, rule or regulation that makes such restructuring necessary. The Members may, by unanimous vote of all Members, from time to time, change the number of Managers of the Company and remove or add Managers accordingly. A Manager shall serve as a Manager until his or her resignation or removal pursuant to Section 8.2 or 8.3 of this Article VIII. Managers need not be residents of the State of Delaware or Members of the Company. Section 8.2. Resignations. Each Manager shall have the right to resign at any time upon written notice of such resignation to the Members. Unless otherwise specified in such written notice, the resignation shall take effect upon the receipt thereof, and acceptance of such resignation shall not be necessary to make same effective. The Member who designated a resigning manager shall be entitled to designate the successor thereto without any further action by the Members or other Managers. If any action of the Members is required under applicable law, the Members agree to take such action and any other action as may be necessary from time to time to effectuate the provisions of this Section 8.2. Section 8.3. Removal of Managers. Any Manager may be removed, for or without cause, at any time, but only by the Member who designated such Manager, upon the written notice to all Members. The Member who designated such removed Manager shall be entitled to designate the successor without any further action by the Members or other Managers. If any action of the Members is required under applicable law, the Members agree to take such action and any other action as may be necessary from time to time to effectuate the provisions of this Section 8.3. Section 8.4. General Powers. The business of the Company shall be managed by its Managers, which may, by the vote or written consent in accordance with this Agreement, exercise any and all powers of the Company and do any and all such lawful acts and things as are not by the Act, the Certificate of Formation or this Limited Liability Company Agreement directed or required to be exercised or done by the Members, including, but not limited to, contracting for or incurring on behalf of the Company debts, liabilities and other obligations, without the consent of any other person, except as otherwise provided herein. Section 8.5. Place of Meetings. The Managers of the Company may hold their meetings, both regular and special, either within or without the State of Delaware, and any Manager shall be entitled to attend any meeting by telephone. Section 8.6. Annual Meetings. The annual meeting of the Managers shall be held without further notice immediately following the annual meeting of the Members, and at the same place, unless by unanimous consent of the Managers that such time or place shall be changed. Section 8.7. Regular Meetings. Regular meetings of the Managers may be held without written notice at such time and place as shall from time to time be determined by the Managers. As long as Caster has not delivered the written notice described in Section 9.3(a) of the Contribution Agreement, no meeting of the Managers shall be held without the Manager designee of Caster, Inc. being given at least seven (7) days prior notice. Section 8.8. Special Meetings. Special meetings of the Managers may be called by any Manager on seven (7) days notice to each Manager, with such notice to be given personally, by mail or by telecopy, telegraph or mailgram. Section 8.9. Quorum and Voting. ----------------- (a) At all meetings of the Managers the presence of at least two (2) Managers shall be necessary and sufficient to constitute a quorum for the transaction of business, and the affirmative vote of at least a majority of the Managers present at any meeting at which there is a quorum shall be the act of the Managers, except as may be otherwise specifically provided by the Act, the Contribution Agreement, the Certificate of Formation, this Limited Liability Company Agreement or any other Transaction Document. If a quorum shall not be present at any meeting of Managers, the Managers present there may adjourn the meeting from time to time without notice other than announcement at the meeting, until a quorum shall be present. (b) In addition to the other provision contained in this Agreement requiring the unanimous vote of the Members or the consent of Caster, Inc. or Caster, Inc.'s designated Manager, as long as Caster has not died or become permanently disabled, and no Trigger Event (as defined in the Contribution Agreement) has occurred (subject to Caster's right to withdraw any Termination Notice), the following acts or transactions by, or involving, the Company may not be taken without first obtaining the written consent of (A) Caster, Inc., any person to whom Caster, Inc.'s Membership Interest has been rightfully transferred pursuant to the Section 2.5, or the Manager designee of Caster, Inc., and (B) Prime, any person to whom Prime's Membership Interest has been rightfully transferred pursuant to the Section 2.5, or each of the two (2) Manager designees of Prime; provided, however, that no written consent of any party is required under this subsection to take a particular action if (but only to the extent that) such action is required to be taken pursuant to the express terms and provisions of the Contribution Agreement: i. Disposition, sale, assignment or other transfer by the Company of any interest it owns in the Company, except that such interest may be extinguished without the approval required under this Article. ii. The election or removal of officers, and establishing or changing the compensation for officers or other employees in a manner inconsistent with past practices. iii. Initiating or settling any litigation or regulatory proceeding, or confessing any judgment. iv. Hiring or changing the Company's accountants or legal counsel. v. Opening or closing bank or other depository accounts, and establishing or changing the signature withdrawal authority with respect to any such accounts. vi. Waiving, refusing to enforce, amending, restating, superseding or modifying any of the provisions of this Agreement or any Transaction Document. vii. Entering into or terminating agreements with medical doctors with respect to the performance of procedures in the Company's facilities relating to Refractive Surgery or otherwise. viii. Moving the location of the Company's principal place of business. ix. Amending, modifying, canceling, extending, or renewing the Facility Use Agreement or any other agreement to which the Company is a party and relating to Caster's performance of medical services, the Business, or Refractive Surgery, or the Company's entering into, amending, modifying, canceling, extending or renewing any other similar agreement with any other person, firm, or entity relating to Caster's performance of medical services, the Business, or Refractive Surgery Caster. x. Mergers, consolidations or combinations of the Company with another limited liability company or other entity. xi. Filing bankruptcy or seeking relief under any debtor relief law. xii. The admission of any new Member or the issuance of any interest in the Company to any party. xiii. The determination of "Available Excess Earnings." xiv. The determination to not make Distributions otherwise required by this Agreement, making any disproportionate distribution to a Member of cash or property in-kind, or, subject to the provisions of Section 8.11, making any distribution of cash or property to any Manager in his or her capacity as a Manager; xv. Sale, lease or other transfer of all or substantially all of the Company's assets, or any material amount of the Company's assets other than in the ordinary course of the Company's business. xvi. Borrowing or incurring any material indebtedness, other than open accounts payable to unaffiliated third parties, guaranteeing any material indebtedness or obligation of any party, or granting any collateral or security interest in Company property to secure payment or performance of any indebtedness, obligation, or guaranty. xvii. Purchasing or leasing assets or property, or entering into any contract or obligation, which obligates the Company to pay in excess of $10,000 in the aggregate in one or any series of installments. xviii. Causing a material change in the nature of the Company's business or the legal name of the Company. xix. Entering into a transaction or other action with any Manager, officer or Member not otherwise described in this Section 8.9 that is not fair and reasonable to the Company or the Members or that would be considered a breach of fiduciary duty. xx. Materially reducing the amount or scope of the insurance coverage described in Schedule 3.10 to the Contribution Agreement, except for the addition of the additional assureds described on Schedule 3.10. The Company covenants to continuously maintain said insurance coverage for so long as Caster, Inc. is a Member. xxi. Taking any other action which, by the terms of this Agreement, requires the approval or consent of not less than sixty-six percent (66%) of the Members. xxii. Settling any actual or threatened claim, litigation, or regulatory proceeding, or confessing any judgment, arising out of or connected with any actual or alleged error, omission, negligence, or willful misconduct of Caster. xxiii. Issuing any new Membership Interests that will reduce the Membership Interests of the existing Members other than on a pro rata basis. xxiv. Taking any action, making any determination, or making any election with respect to a right granted to the Managers pursuant to Section 1.7, Article V or Article VI. xxv. Engaging in any act or transaction not in the ordinary course of the Company's business. (c) Notwithstanding any other provision contained in this Agreement requiring the unanimous vote of the Members or the consent of Caster, Inc. or Caster, Inc.'s designated Manager, as long as Caster has not breached the provisions of ARTICLE VIII or ARTICLE IX of the Contribution Agreement, the following acts or transactions by, or involving, the Company may not be taken without first obtaining the written consent of (A) Caster, Inc., any person to whom Caster, Inc.'s Membership Interest has been rightfully transferred pursuant to the Section 2.5, or the Manager designee of Caster, Inc., and (B) Prime, any person to whom Prime's Membership Interest has been rightfully transferred pursuant to the Section 2.5, or each of the two (2) Manager designees of Prime; provided, however, that no written consent of any party is required under this subsection to take a particular action if (but only to the extent that) such action is required to be taken pursuant to the express terms and provisions of the Contribution Agreement: i. Mergers, consolidations or combinations of the Company with another limited liability company or other entity. ii. Filing bankruptcy or seeking relief under any debtor relief law. iii. Taking any action, making any determination, or making any election with respect to a right granted to the Managers pursuant to Section 1.7, Article V or Article VI. iv. Sale, lease or other transfer of all or substantially all of the Company's assets, or any material amount of the Company's assets other than in the ordinary course of the Company's business. v. Entering into a transaction or other action with any Manager, officer or Member not otherwise described in this Section 8.9 that is not fair and reasonable to the Company or the Members or that would be considered a breach of fiduciary duty. vi. Taking any other action which, by the terms of this Agreement, requires the approval or consent of not less than sixty-six percent (66%) of the Members. vii. Issuing any new Membership Interests that will reduce the Membership Interests of the existing Members other than on a pro rata basis. viii. The determination of "Available Excess Earnings"; provided, that this will not prevent the accumulation and non-distribution by the Company of six (6) times the average monthly Available Excess Earnings (averaged using the preceding six (6) months) after satisfying any obligation to distribute Available Excess Earnings pursuant to Section 5.2 hereof. ix. The determination to not make Distributions otherwise required by this Agreement, making any disproportionate distribution to a Member of cash or property in-kind, or, subject to the provisions of Section 8.11, making any distribution of cash or property to any Manager in his or her capacity as a Manager; x. Engaging in any act or transaction not in the ordinary course of the Company's business. xi. Notwithstanding the provisions of Sections 8.9(b)(vi) and 8.9(b)(ix), waiving, refusing to enforce, amending, restating, superseding or modifying any of the provisions of this Agreement or any Transaction Document (including the Facility Use Agreement) with respect to any matter described in this Section 8.9(c). xii. Unless Caster is no longer exclusively using the Company's facilities in the manner contemplated in Section 9.3(a) of the Contribution Agreement (regardless of whether Section 9.3(a) is then enforceable), materially reducing the amount or scope of the insurance coverage described in Schedule 3.10 to the Contribution Agreement, except for the addition of the additional assureds described on Schedule 3.10. The Company covenants to continuously maintain said insurance coverage for so long as Caster, Inc. is a Member. (d) Any of the above actions taken by the Company without the necessary approval pursuant to Section 8.9(b) or Section 8.9(c) is void ab initio. A Member shall be deemed to have materially breached this Agreement if the Company, acting pursuant to the apparent authority of the Manager designee(s) of such Member, takes any of the above actions without the necessary approval pursuant to Section 8.9(b) or Section 8.9(c). Section 8.10. Committees. The Managers may, by resolution passed by sixty-six percent (66%) of the Managers, designate committees, each committee to consist of two or more Managers (at least one of which must be a Manager designee of Prime and one of which, as long as Caster has not delivered the written notice described in Section 9.3(a) of the Contribution Agreement, must be a Manager designee of Caster, Inc.), which committees shall have such power and authority and shall perform such functions as may be provided in such resolution (subject to applicable law), which in all events shall be consistent with the other provisions of this Agreement and the Transaction Documents and shall not be contrary to the provisions of Section 8.9 of this Agreement. Such committee or committees shall have such name or names as may be designated by the Managers and shall keep regular minutes of their proceedings and report the same to the Managers when required. The foregoing paragraph notwithstanding, the Managers shall establish a Medical Executive Committee, the size and composition of which shall be established by the affirmative vote or written consent of two of the three Managers (one of whom must, as long as Caster has not delivered the written notice described in Section 9.3(a) of the Contribution Agreement, be the Manager designee of Caster, Inc.). Members of the Medical Executive Committee must be licensed physicians, but need not be Members, Managers, or officers of the Company. The Medical Executive Committee shall meet at such time or times as it may, by majority vote of its members, elect and may adopt procedures for the conduct of its meetings. The Medical Executive Committee shall have authority and control over the nonprofessional medical aspects of the Company's business, and shall provide advice to the Managers on decisions relating to equipment purchases, technological obsolescence, quality assurance, credentialing, and such other matters as shall be requested by the Managers. The Medical Executive Committee shall be advisory only and shall not have the authority to bind the Company. The majority of the members of the Medical Executive Committee shall constitute a quorum for the transaction of its business and the affirmative vote of the majority of the members of the Medical Executive Committee shall constitute action validly taken by that body; provided, however, that a quorum shall not be deemed to exist unless, as long as Caster has not delivered the written notice described in Section 9.3(a) of the Contribution Agreement, the Manager designee of Caster, Inc. has been given reasonable prior notice of such meeting and an opportunity to participate in such meeting. Section 8.11. Compensation of Managers. The Members, by unanimous approval, shall have the authority to provide that any one or more of the Managers shall be compensated, and may, by unanimous approval, fix any compensation (which may include expenses) they elect to pay to any one or more of the Managers. Section 8.12. Action by Written Consent. Any action required or permitted to be taken at any meeting of the Managers or of any committee designated by the Managers may be taken without a meeting if written consent, setting forth the action so taken, is signed by all the Managers or of such committee, and such consent shall have the same force and effect as a unanimous vote at a meeting. Section 8.13. Meetings by Conference Telephone. Managers or members of any committee designated by the Managers may participate in and hold any meeting of the Managers or such committee by telephone (including a conference telephone) or similar communications equipment by means of which all persons participating in the meeting can hear each other, and such participation in such a meeting shall constitute presence in person at such meeting, except where a person participates in the meeting for the express purpose of objecting to the transaction of any business on the ground that the meeting is not lawfully called or convened. Section 8.14. Liability of Managers. No Manager of the Company shall be personally liable for any debts, liabilities, or obligations of the Company, including under a judgment, decree, or order of the court, except as expressly provided otherwise in an agreement between the Manager and the Company or another party. Section 8.15. Specific Power of Managers. The Managers shall have the authority to enter into and execute all documents in relation to the formation of the Company including, but not limited to, issuance of the Certificate of Formation and this Limited Liability Company Agreement. ARTICLE IX. NOTICES Section 9.1. Form of Notice. Whenever under the provisions of the Act, the Certificate of Formation or this Limited Liability Company Agreement notice is required to be given to any Manager or Member, and no provision is made as to how such notice shall be given, notice shall not be construed to mean personal notice only, but any such notice may also be given in writing, by mail, postage prepaid, addressed to such Manager or Member at such address as appears on the books of the Company, or by telecopy, telegraph or mailgram. Any notice required or permitted to be given by mail shall be deemed to be given three (3) days after it is deposited, postage prepaid, in the United States mail as aforesaid. Section 9.2. Waiver. Whenever any notice is required to be given to any Manager or Member of the Company under the provision of the Act, the Certificate of Formation or this Limited Liability Company Agreement, a waiver thereof in writing signed by the person or persons entitled to such notice, whether signed before or after the time stated in such waiver, shall be deemed equivalent to the giving of such notice. ARTICLE X. OFFICERS Any Manager may also serve as an officer of the Company. The Managers may designate one or more persons to serve as officers and may designate the titles of all officers. The initial officers of the Company shall be: Ken Shifrin, Chairman of the Board; Brad Hummel, President; Teena Belcik, Vice President, Secretary and Treasurer; Mark Rosenberg, Vice President; and Andrew Caster, M.D., Vice President. The officers of the Company shall have powers commensurate with the corporate powers ordinarily associated their respective titles, as limited, extended or otherwise modified pursuant to any resolution of the Managers, and otherwise consistent with the terms of this Agreement and the Transaction Documents. ARTICLE XI. INDEMNITY Section 11.1. Indemnification. The Company shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative, arbitrative or investigative, any appeal in such an action, suit or proceeding and any inquiry or investigation that could lead to such an action, suit or proceeding (whether or not by or in the right of the Company), by reason of the fact that such person is or was a manager, officer, employee or agent of the Company or is or was serving at the request of the Company as a director, manager, officer, partner, venturer, proprietor, trustee, employee, agent or similar functionary of another corporation, employee benefit plan, other enterprise, or other entity, against all judgments, penalties (including excise and similar taxes), fines, settlements and reasonable expenses (including attorneys' fees and court costs) actually and reasonably incurred by him in connection with such action, suit or proceeding to the fullest extent permitted by any applicable law, and such indemnity shall inure to the benefit of the heirs, executors and administrators of any such person so indemnified pursuant to this Article XI. The right to indemnification under this Article XI shall be a contract right and shall not be deemed exclusive of any other right to which those seeking indemnification may be entitled under any law, bylaw, agreement, vote of members or disinterested managers or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office. Any repeal or amendment of this Article XI by the Managers (pursuant to Section 8.9 hereof) or by changes in applicable law shall, to the extent permitted by applicable law, be prospective only, and shall not adversely affect the indemnification of any person who may be indemnified at the time of such repeal or amendment. Section 11.2. Indemnification Not Exclusive. The rights of indemnification and reimbursement provided for in this Article XI shall not be deemed exclusive of any other rights to which any such Manager, officer, employee or agent may be entitled under the Certificate of Formation, this Limited Liability Company Agreement, agreement or vote of Members, or as a matter of law or otherwise. Section 11.3. Other Indemnification Clauses. Notwithstanding the foregoing, this Article XI shall not be construed to contradict the indemnification provision of the Contribution Agreement. Notwithstanding anything contained herein, this Article XI shall be ineffectual and shall not permit or require indemnification for all, or any, losses, costs, liabilities, claims or expenses arising, directly or indirectly, from any action or omission permitting or requiring indemnification under the Contribution Agreement; and in no event may any indemnity be allowed under this Agreement or pursuant to any provision of the Act for an amount paid or payable pursuant to the indemnification provisions of the Contribution Agreement. ARTICLE XII. MISCELLANEOUS Section 12.1. Fiscal Year. The fiscal year of the Company shall be the calendar year. Section 12.2. Records. At the expense of the Company, the Managers shall maintain records and accounts of all operations of the Company. At a minimum, the Company shall keep at its principal place of business the following records: (a) A current list of the full name and last known business or residence address of each Member and of each holder of an economic interest in the Company set forth in alphabetical order, together with the Capital Contributions and share in Net Profits and Net Losses of each Member and holder of an economic interest; (b) A current list of the full name and business or residence address of each Manager; (c) A copy of the Certificate of Formation and Limited Liability Company Agreement of the Company, and all amendments thereto, together with executed copies of any powers of attorney pursuant to which any of the foregoing were executed; (d) Copies of the Company's federal, state and local income tax or information returns and reports, if any, for the six most recent fiscal years; and (e) Correct and complete books and records of account of the Company. Section 12.3. Seal. The Company may by resolution of the Managers adopt and have a seal, and said seal may be used by causing it or a facsimile thereof to be impressed or affixed or in any manner reproduced. Any officer of the Company shall have authority to affix the seal to any document requiring it. Section 12.4. Agents. Every Manager and Officer is an agent of the Company for the purpose of the business. The act of a Manager or Officer, including the execution in the name of the Company of any instrument for carrying on in the usual way the business of the Company, binds the Company; provided, however, if such act requires the approval of the Members of the Managers, such approval has first been obtained. Section 12.5. Checks. Subject to the provisions of Section 8.9(b)(v), all checks, drafts and orders for the payment of money, notes and other evidences of indebtedness issued in the name of the Company shall be signed by such officer, officers, agent or agents of the Company and in such manner as shall from time to time be determined by resolution of the Managers. In the absence of such determination by the Managers, such instruments shall be signed by the Treasurer or the Secretary and countersigned by the President or a Vice President of the Company, if the Company has such officers. Section 12.6. Deposits. Subject to the provisions of Section 8.9(b)(v), all funds of the Company shall be deposited from time to time to the credit of the Company in such banks, trust companies or other depositories as the Managers may select. Section 12.7. Annual Statement. The Managers shall present at each annual meeting a full and clear statement of the business and condition of the Company. Section 12.8. Financial Statements. As soon as practicable after the end of each fiscal year of the Company, but in no event later than April 15 immediately following the end of such fiscal year, a balance sheet as at the end of such fiscal year, and a profit and loss statement for the period ended, shall be distributed to the Members, along with such tax information (including all information returns) as may be necessary for the preparation of each Member of its federal, state and local income tax returns. The balance sheet and profit and loss statement referred to in the previous sentence may be as shown on the Company's federal income tax return. Section 12.9. Binding Arbitration. Any controversy between the Members regarding this Agreement or any other Transaction Document, any claims arising out of any breach or alleged breach of this Agreement or any other Transaction Document, and any claims arising out of the relationship between the Members created hereunder, shall be submitted to binding arbitration by all Members involved in accordance with the procedures for arbitration contained in the Contribution Agreement. Section 12.10. Authority to Execute Facility Use Agreement. The Members hereby authorize the Managers to execute and deliver to Caster, Inc. the Facility Use Agreement attached to the Contribution Agreement as Exhibit C. Section 12.11. Cross Default; Remedies. Each of the Members agrees that a breach by it (or any entity controlling, controlled by, or under common control with it) of any of the provisions of the Contribution Agreement or any other Transaction Document shall also be deemed to be a breach of this Agreement (subject to any right to cure provided with respect to such breach). The remedies contemplated provided in Section 9.7(a) and (b) of the Contribution Agreement shall in all events be the exclusive remedies for any and all acts or omissions of Caster that result in a material breach of any of the provisions of Article VIII and Article IX thereof, regardless of whether such acts or omissions, in the absence of this sentence, would give rise to a claim under any of the Transaction Documents. Section 12.12 Expenses. Each Member agrees that, notwithstanding the prior practices associated with the Business (as defined in the Contribution Agreement) as conducted prior to the Closing Date, all liabilities, obligations, costs and expenses that arise after the Closing Date and are personal to such Member (or arose from transactions or occurrences that directly benefited such Member in a capacity other than as a Member) shall not be considered expenses of the Company and shall be borne solely by such Member, unless agreed otherwise by the unanimous vote or written consent of the Managers, or unless (and only to the extent) provided otherwise in the Facility Use Agreement. With respect to any such personal expenses that were incurred prior to the Effective Time (as defined in the Contribution Agreement), such expenses shall not be incurred or reimbursed by, or charged to, the Company after the Effective Time. Section 12.13 Consents. To be valid and effective, all consents of the Managers or Members required or permitted by this Agreement shall be in writing and signed by each party giving consent. ARTICLE XIII. AMENDMENTS Section 13.1. Amendments. Except to the extent expressly provided otherwise herein, this Agreement may only be altered, amended or repealed and a new limited liability company agreement may only be adopted by the unanimous vote of the Members at any regular meeting of the Members or at any special meeting of the Members called for that purpose, or by execution of a written consent in accordance with the provisions of Section 3.8. Except to the extent expressly provided otherwise therein, the Certificate of Formation of the Company, and any other corporate governance document of the Company, or any other document which establishes, creates or governs the relations between the Members or the Managers may only be altered, amended or repealed by the unanimous vote of the Members at any regular meeting of the Members or at any special meeting of the Members called for that purpose, or by execution of a written consent in accordance with the provisions of Section 3.8. Section 13.2. When Limited Liability Company Agreement Silent. It is expressly recognized that when the Limited Liability Company Agreement is silent or in conflict with the requirements of the Act as to the manner of performing any Company function, the provisions of the Act shall control. Section 13.3. Integration with Contribution Agreement. To the extent of any inconsistency between the provisions of the Contribution Agreement and this Agreement, the terms and provisions of the Contribution Agreement shall control. Accordingly, no Member or Manager shall be deemed to have breached any fiduciary duty owed to any other Member or the Company as a result of investing in, acquiring or developing any facility, business or operations that are related or similar to, or in direct competition with, the Company's business if such act or transaction is allowed or not prohibited by the provisions of Article VIII of the Contribution Agreement, or the termination of such provisions. [Signature page follows] S-1 SIGNATURE PAGE TO LIMITED LIABILITY COMPANY AGREEMENT IN WITNESS WHEREOF, the undersigned Members hereby adopt this Limited Liability Company Agreement as the Limited Liability Company Agreement of the Company, effective as of the 1st day of March, 2000. Caster Eye Center Medical Group ------------------------------------ Andrew Caster, M.D., President Prime Refractive, L.L.C. Teena Belcik, Treasurer CONSENT OF SPOUSE The undersigned spouse of Caster acknowledges on her own behalf that: I have read the foregoing Agreement and I know its contents. I am aware that by its provisions Caster Eye Center Medical Group grants the Company certain assets that may be community property and may restrict my ability to later transfer my community property interest in such assets, my spouse's interest in Caster Eye Center Medical Group and Caster Eye Center Medical Group's Membership Interest in the Company. I hereby approve of the provisions of the Agreement, including the contribution of my community property interest, if any, in the assets contributed to the Company, and agree that such Membership Interest and Stock Interests and my interest in them are subject to the provisions of the Agreement and that I will take no action at any time to hinder operation of the Agreement on such Membership Interest and Stock Interests or my interest in them. Jacqueline Caster A-1 043838.0000 AUSTIN 167621 v12 EXHIBIT A OWNERSHIP INTERESTS Name Contribution Membership Interest Prime Assets with agreed fair market 60% Caster, Inc. Assets with agreed fair market 40% value of $244,325 EX-10.90 3 0003.txt EX 10.90 COPNTRIBUTION AGREEMENT FOR CASTER CONTRIBUTION AGREEMENT Among PRIME MEDICAL SERVICES, INC., PRIME REFRACTIVE, L.L.C., CASTER ONE, L.L.C., ANDREW CASTER, M.D., and CASTER EYE CENTER MEDICAL GROUP -------------------- Dated as of March 1, 2000 3 043838.0000 AUSTIN 169304 v11 CONTRIBUTION AGREEMENT This Contribution Agreement (this "Agreement") is entered into to be effective as of March 1, 2000 (the "Effective Time"), among Prime Medical Services, Inc., a Delaware corporation ("PMSI"), Prime Refractive, L.L.C., a Delaware limited liability company ("Prime"), Caster Eye Center Medical Group, a California corporation ("Seller"), Caster One, L.L.C., a Delaware limited liability company ("Newco") and Andrew Caster, M.D., an individual residing in Beverly Hills, California and the sole shareholder of Seller ("Caster"). The parties hereto agree as follows: ARTICLE I Agreement of Purchase and Sale 1.1 Agreement. Upon the basis of the representations and warranties, for the consideration, and subject to the terms and conditions set forth in this Agreement, (a) Prime agrees to purchase from Seller, as of the Effective Time, by payment of $366,489 (the "Asset Purchase Price"), an undivided sixty percent (60%) interest in all of the Assets (as hereinafter defined); (b) Prime agrees to purchase from Caster, as of the Effective Time, sixty percent (60%) of the Goodwill (as hereinafter defined), by payment of $5,462,235 (the "Goodwill Purchase Price") (c) Prime agrees to contribute to Newco, as of the Effective Time, its entire interest in the Assets it purchased from Seller in return for a sixty percent (60%) ownership interest in Newco which Newco hereby agrees to issue to Prime; and (d) Seller agrees to contribute to Newco, as of the Effective Time, the entire remaining interest in the Assets not purchased by Prime in return for the other forty percent (40%) ownership interest in Newco. The Goodwill Purchase Price and Asset Purchase Price are herein referred to in the aggregate as the "Aggregate Purchase Price." The parties agree that: (y) immediately prior to the Closing (as hereinafter defined), all of the outstanding membership interests of Newco shall be owned by Caster, and, immediately after the Closing, Prime shall own sixty percent (60%) of all of the outstanding membership interests of Newco and Seller shall own forty percent (40%) of all of the outstanding membership interests of Newco; and (z) prior to the Closing Date, Prime and Seller shall have executed the limited liability company agreement, in the form attached hereto as Exhibit A, and any other organizational documents of Newco (collectively, the "Organizational Documents"). 1.2 Closing. The closing of the purchase and sale contemplated by Section 1.1 (the "Closing") shall take place at the offices of Akin, Gump, Strauss, Hauer & Feld, L.L.P., 1900 Frost Bank Plaza, 816 Congress Avenue, Austin, Texas 78701, or at such other location as the parties may agree. The date on which the Closing occurs is hereinafter referred to as the "Closing Date." 1.3 Assets. As used in this Agreement, the term "Assets" shall mean and include all of the items listed on Schedule 1.3(a) attached hereto, all Permits (as hereinafter defined), all business records (excluding medical records) related to the Business (as hereinafter defined) conducted after the Effective Time, copies of the business records (excluding medical records) related to the Business conducted during the period beginning January 1, 1998 and ending on the Effective Time, any and all rights of Seller under leases (including rights to receive returns of deposits under such leases) or contracts listed on Schedule 1.3(a), the name "Caster Eye Center" and all likenesses thereof, and all trademarks, service marks and applications for trademarks or service marks that are related to the iris in motion portrayal utilized by Caster in connection with the Business (the "Iris IP"). Notwithstanding the foregoing, the following shall not be deemed "Assets", and shall not be acquired by Prime: (a) all activities that constitute the practice of medicine; (b) the books of account and record books of Seller up to and including the Effective Time (provided, that Caster must give to Prime, prior to the Closing Date, complete and accurate copies thereof, insofar as they relate to the Business during the period beginning January 1, 1998 and ending on the Effective Time); (c) Seller's rights under this Agreement; (d) all medical records of Seller and Caster; (e) any limited partnership interest owned by Seller in Keratome Leasing Associates, LLC, a California limited liability company; (f) all cash, cash equivalents, and accounts receivable arising from procedures done or work performed prior to the Effective Time, and all bank accounts and other deposit accounts (but excluding cash on deposit in such accounts that arose from procedures done or work performed after the Effective Time); (g) all assets that are neither used in, nor relied on for, the conduct of the Business; (h) except as expressly set forth in this Agreement, assets that are owned individually by Caster, including, without limitation, (A) all stock owned by Caster in Aris Vision Centers and Presby Corp., (B) any copyright, held individually by Caster, for the medical book entitled "The Eye Laser Miracle: The Complete Guide to Better Vision" and authored by Caster, (C) that certain United States Patent No. 5,711,045, issued January 27, 1998, pertaining to an infant sleep device, (D) all of Caster's medical records, (E) the practice of medicine by Caster, and (F) Caster's rights under this Agreement; (i) any written or oral employment, payor or personal service agreement with respect to any medically trained person required to be licensed under the California Business and Professions Code, including physicians, registered nurses and optometrists; (j) any refund of any amount to which Seller claims entitlement and which is specifically identified in the Schedules hereto as being retained by Seller after the Closing; and (k) any artwork depicting Caster's children. As used in this Agreement, "Business" shall mean the business related to the conduct of Refractive Surgery and related activities that are incidental thereto, excluding in all cases the practice of medicine. As used in this Agreement, "Technical Assistance" shall mean, collectively, the rendering of personnel and technical assistance in relation to the operation of the Business, other than the practice of medicine, including, without limitation, personnel, equipment, space and services, in connection with Refractive Surgery acquired by Caster personally as a bi-product of his practice of medicine and "Goodwill" shall mean the goodwill arising solely from the Technical Assistance. As used in this Agreement, "Refractive Surgery" shall mean any current and/or future surgical procedures intended to correct refractive error, including, without limitation, myopia, hyperopia, presbyopia or astigmatism of the eye. Notwithstanding anything in this Agreement to the contrary, "Refractive Surgery" shall not include any specific procedure that, at the time the procedure is to be performed, is required in the exercise of a physician's independent professional judgment as to the individual patient to be performed in an operating room approved by the American Association of Ambulatory Surgical Centers or Joint Commission on Accreditation of Healthcare Organizations (or any similar or successor accreditation board or body) with the capability of general anesthesia, in each instance within either an ambulatory surgical center or acute care hospital that, in either case, meets all licensing requirements applicable in the State of Texas (provided, however, that this sentence shall not exclude from "Refractive Surgery" any surgical procedure included in "Refractive Surgery" at the Effective Time, and if any applicable regulatory change occurs that would result in such a reclassification, the parties to this Agreement will work together to restructure the operating mechanics of their relationship in a manner that allows the operations of the Business to comply with such regulatory change and also preserves the economic benefits of the parties arising under this Agreement and the other Transaction Documents). 1.4 Assumed Liabilities. Seller and Caster each agree that, at the Closing, Newco shall assume only the following (collectively, the "Assumed Liabilities") (a) those executory lease or other contract obligations accruing after the Effective Time under leases or contracts specifically identified as Assumed Liabilities on Schedule 1.3(a), and (b) those trade payables on open account with unrelated third parties incurred with respect to goods and services received or used by Seller on or after the Effective Time (the "Trade Payables"). With respect to inventory items included in the Assets, there will be a pro-ration of the cost of such inventory items based on the extent to which the inventory items were used prior to or after the Effective Time. The parties agree to cooperate in good faith to account for such pro-ration and remit amounts that may become due another party based on such pro-ration. The parties specifically agree that Newco will have no responsibility, liability or obligation whatsoever for (x) those obligations under such leases or contracts which accrued prior to the Effective Time, (y) any breaches or defaults under such leases or contracts, which occurred or were alleged to have occurred prior to the Closing Date and (z) trade payables not included in the definition of "Assumed Liabilities" above. Except for the Assumed Liabilities, Seller and Caster each agree that any and all debts, liabilities, and obligations of Seller or Caster, whether known or unknown, absolute, contingent or otherwise (including, but not limited to, federal, state, and local taxes, any sales taxes, use taxes and property taxes, any taxes arising from the transactions contemplated by this Agreement and any liabilities arising from any litigation or civil, criminal or regulatory proceeding involving or related to Seller or its business) shall remain the sole responsibility of Seller or Caster (whichever owed such debt, liability or obligation), and each covenants to pay promptly and otherwise fulfill all such debts, liabilities or obligations as and when the same become due (unless contested in good faith). Except for the assumption by Newco of the Assumed Liabilities, and without otherwise limiting the foregoing provisions of this Section, each of Seller and Caster specifically acknowledges and agrees that none of PMSI, Prime, any affiliate of PMSI or Prime, or Newco shall assume any claims, debts, liabilities or obligations whatsoever of Seller or Caster, including, without limitation, those related to or arising out of or under any claim or other action disclosed on Schedule 3.13. Notwithstanding the foregoing, PMSI may, if and only to the extent required pursuant to the express provisions of Section 10.11, be required to pay amounts under certain guarantees of contracts listed on Schedule 1.4 attached hereto. 1.5 Payment and Allocation of Purchase Price. Prime agrees to pay the Asset Purchase Price to Seller at the Closing by cashier's check, wire transfer or delivery of other immediately available funds. Prime agrees to pay the Goodwill Purchase Price to Caster at the Closing by cashier's check, wire transfer or delivery of other immediately available funds. The Asset Purchase Price will be allocated among the Assets in accordance with Schedule 1.5 attached hereto. ARTICLE II Representations and Warranties of PMSI and Prime PMSI and Prime hereby represent and warrant to Caster and Seller, jointly and severally, that each of the following matters is true and correct in all respects as of the Closing Date (with the understanding that such representations and warranties shall survive the Closing and are being materially relied on by Caster and Seller in entering into and performing this Agreement and each of the other contracts, documents, instruments or agreements to be entered into in connection with or as contemplated by this Agreement, all of which, including this Agreement, are collectively referred to as the "Transaction Documents"): 2.1 Due Organization and Principal Executive Office. Prime is a limited liability company duly organized, validly existing, and in good standing under the laws of the State of Delaware and has full corporate power and authority to carry on its business as now conducted and as proposed to be conducted. PMSI is a corporation duly organized, validly existing, and in good standing under the laws of the State of Delaware and has full corporate power and authority to carry on its business as now conducted and as proposed to be conducted. Each of PMSI's and Prime's principal executive offices are located at 1301 Capital of Texas Highway, Austin, Texas 78746. Since the Effective Time, there has been no material adverse change in the financial condition or operations of PMSI or Prime. 2.2 Due Authorization. Each of PMSI and Prime has full corporate power and authority to enter into and perform this Agreement and each Transaction Document required to be executed by it in connection herewith. With respect to each of PMSI and Prime, this Agreement and each Transaction Document required herein to be executed by it has been duly and validly authorized, executed and delivered by it, and the terms and provisions of this Agreement and each such Transaction Document constitute the valid, binding and enforceable obligations of it. With respect to each of PMSI and Prime, the execution, delivery, and performance of this Agreement and each Transaction Document required herein to be executed by it will not (a) violate any federal, state, county, or local law, rule, or regulation (collectively, "Laws") applicable to it or its properties (provided, however, that any representation or warranty by Prime or PMSI with respect to Laws regulating or legislating the provision of healthcare or the practice of medicine shall be limited to the actual knowledge possessed by Prime and PMSI on the Closing Date), (b) violate or conflict with, or permit the cancellation of, any agreement to which it is a party or by which it or its properties are bound, (c) permit the acceleration of the maturity of any indebtedness of, or any indebtedness secured by the property of, it or (d) violate or conflict with any provision of its organizational documents. Except for the filing requirements of PMSI arising under the Securities and Exchange Act of 1934, no action, consent, or approval of, or filing with, any federal, state, county, or local governmental authority is required by either of PMSI or Prime in connection with the execution, delivery or performance of this Agreement or any Transaction Document. Furthermore, neither Prime nor PMSI has any actual knowledge on the Closing Date that the structure of the transactions contemplated by this Agreement is reasonably certain to result in a breach by Caster or Seller of the representations made by them with respect to (y) compliance with Laws regulating or legislating the provision of healthcare or the practice of medicine, or (z) the effect of any such Laws on any Permits of Caster or Seller. 2.3 Brokers and Finders. Neither PMSI nor Prime has engaged, or caused to be incurred any liability to, any finder, broker, or sales agent (and neither has paid, or will pay, any finder's fee or similar fee or commission to any person) in connection with the execution, delivery, or performance of this Agreement or the transactions contemplated hereby. 2.4 Claims and Proceedings. No inquiry, action, or proceeding has been asserted, instituted, or (to the knowledge of Prime or PMSI) threatened against Prime or PMSI, by any court, federal, state or local governmental agency or other body having the right to regulate all or any portion of their respective business operations, to restrain or prohibit the carrying out of the transactions contemplated by this Agreement or to challenge the validity of such transactions or any part thereof or seeking damages on account thereof. 2.5 Investment Representations. Each of PMSI and Prime: -------------------------- (a) Is an "accredited investor," and has not retained or consulted with any "purchaser representative" (as such terms are defined in Rule 501 of Regulation D promulgated under the Securities Act of 1933, as amended (the "Securities Act")) in connection with its execution of this Agreement and the consummation of the transactions contemplated hereby; (b) Has such knowledge and experience in financial and business matters that it is capable of evaluating the merits and risks of an investment in Newco; (c) Will acquire any Newco interests for its own account for investment and not with the view toward resale or redistribution in a manner which would require registration under the Securities Act or the Texas Securities Act, as amended, and it does not presently have any reason to anticipate any change in its circumstances or other particular occasion or event which would cause it to sell its Newco interests, or any part thereof or interest therein, and it has no present intention of dividing the Newco interests with others or reselling or otherwise disposing of the Newco interests or any part thereof or interest therein either currently or after the passage of a fixed or determinable amount of time or upon the occurrence or nonoccurrence of any predetermined event or circumstance; (d) In connection with entering into this Agreement and each of the other Transaction Documents to which it is a party, and in making the investment decisions associated therewith, it has neither received nor relied on any representations or warranties from Newco, Caster, Seller, the affiliates of Caster or Seller, or the officers, directors, shareholders, employees, partners, members, agents, consultants, personnel or similarly related parties of Caster or Seller, other than those representations and warranties contained in this Agreement and the other Transaction Documents; (e) Is able to bear the economic risk of an investment in the Newco interests and it has sufficient net worth to sustain a loss of its entire investment without material economic hardship if such a loss should occur; and (f) Acknowledges that the Newco interests have not been registered under the Securities Act, or the securities laws of any of the states of the United States, that an investment in the Newco interests involves a high degree of risk, and that the Newco interests are an illiquid investment. ARTICLE III Representations and Warranties of Seller and Caster Caster and Seller hereby represent and warrant to Prime, jointly and severally, that each of the following matters is true and correct in all respects as of the Closing Date (with the understanding that such representations and warranties shall survive the Closing and are being materially relied on by Prime and PMSI in entering into and performing this Agreement). 3.1 Due Organization. Seller is a corporation duly organized, validly existing, and in good standing under the laws of the State of California and has full power and authority to carry on its business as now conducted and as proposed to be conducted. Seller is qualified to do business and is in good standing in every jurisdiction where such qualification is required for the conduct of Seller's business as conducted on the Closing Date. As of the Closing Date, Caster is the sole holder of all equity ownership interests in Seller, after assuming the conversion, exercise or exchange of any and all rights or securities that are convertible into, or exercisable or exchangeable for, equity ownership interests in Seller. 3.2 Subsidiaries. Seller does not directly or indirectly have (or possess any options or other rights to acquire) any subsidiaries or any direct or indirect ownership interests in any person, business, corporation, partnership, limited liability company, association, joint venture, trust, or other entity. 3.3 Due Authorization. Each of Seller and Caster has full power and authority to enter into and perform this Agreement and each Transaction Document required to be executed by Seller or Caster in connection herewith. The execution, delivery, and performance of this Agreement and each such Transaction Document has been duly authorized by all necessary action of Seller, its directors, its officers and its shareholders. This Agreement and each such Transaction Document has been duly and validly executed and delivered by Seller and Caster and constitutes a valid and binding obligation of Seller and Caster, enforceable against each of them in accordance with its terms. The execution, delivery, and performance of this Agreement, and each Transaction Document required herein to be executed by Caster and/or Seller do not (a) violate any Law applicable to Seller, the Business or the Assets (provided, however, that the representation and warranty in this sentence, the first sentence, and the last sentence of this Section 3.3 does not extend to any Law that might give rise to Covered Taxes, as such term is hereinafter defined, and provided further, that any representation or warranty by Caster or Seller with respect to Laws regulating or legislating the provision of healthcare or the practice of medicine shall be limited to the actual knowledge possessed by Caster and Seller on the Closing Date), (b) violate or conflict with, or permit the cancellation of, any agreement to which Seller is a party, or by which Seller or its properties are bound, or result in the creation of any lien, security interest, charge, or encumbrance upon any of such properties, (c) permit the acceleration of the maturity of any indebtedness of Caster or Seller, or any indebtedness secured by the property of Seller (but this provision does not extend to any assertion of Covered Taxes), or (d) violate or conflict with any provision of the organizational documents of Seller. No action, consent, waiver or approval of, or filing with, any federal, state, county or local governmental authority is required by Caster or Seller in connection with the execution, delivery, or performance of this Agreement (or any Transaction Document). 3.4 Financial Statements. The unaudited balance sheet and income statement of Seller as of and for each of the years ended December 31, 1998 and 1999, and the unaudited balance sheet and income statement of Seller as of and for the period beginning on January 1, 2000, and ending on February 29, 2000 (the "Balance Sheet Date") are attached hereto as Exhibit B (collectively, the "Financial Statements"). To the knowledge of Seller, the Financial Statements have been prepared using the cash method of accounting consistently applied (except as specifically noted therein or in Schedule 3.4), and the Financial Statements (taking into account the effect of the obligations specifically disclosed in the Schedules to this Agreement which may not be reflected on such financial statements) fairly present the financial position and results of operations of Seller as of the indicated dates and for the indicated periods. Except as reflected on the Financial Statements or in the Schedules to this Agreement, and except for open account trade payables incurred in the ordinary course of business and amounts owed to Caster, as of the Closing Date, Seller has no claims, debts, liabilities, or obligations, whether known or unknown, absolute, contingent or otherwise (including, but not limited to, federal, state, and local taxes, any sales taxes, use taxes and property taxes, and any liabilities arising from any litigation or civil, criminal or regulatory proceeding involving or related to Seller, its assets or the Business). Seller and Caster each agree to indemnify and hold harmless Prime and its affiliates from and against any and all such claims, debts, liabilities and obligations. Except as set forth in Schedule 3.4 hereto, since the Effective Time there has been no material adverse change in the assets of Seller, the Business, or the results of operations or financial position of Seller. 3.5 Conduct of Business; Certain Actions. Except as set forth on Schedule 3.5 attached hereto, and except as expressly required or contemplated under the terms of this Agreement and the other Transaction Documents, since the Balance Sheet Date, Seller has conducted its operations in the ordinary course and consistent with its past practices and has not (a) increased the compensation of any employees, agents, contractors, vendors or other parties providing services to Seller, except for wage and salary increases made in the ordinary course of business and consistent with the past practices of Seller, (b) sold any asset (or any group of related assets) in any transaction (or series of related transactions) in which the purchase price or book value for such asset (or group of related assets) exceeded $10,000, (c) suffered or permitted any lien, security interest, claim, charge, or other encumbrance to arise or be granted or created against or upon any of its assets, real or personal, tangible or intangible, (d) amended its organizational documents, (e) made or paid any severance or termination payment to any director, officer, employee, agent, contractor, vendor or consultant, (f) made any change in its method of accounting, (g) made any investment or commitment therefor in any person, business, corporation, association, partnership, limited liability company, joint venture, trust, or other entity, (h) amended, terminated or experienced a termination of any material contract, agreement, lease, franchise, or license to which it is a party, (i) entered into any other material transactions except in the ordinary course of business, (j) changed or suspended its procedures for collecting accounts receivable and paying its accounts payable, (k) entered into any contract, commitment, agreement, or understanding to do any acts described in the foregoing clauses (a)-(j) of this Section, (l) suffered any material damage, destruction, or loss (whether or not covered by insurance) to any assets, (m) experienced any strike, slowdown, or demand for recognition by a labor organization by or with respect to any of its employees, or (n) experienced or effected any shutdown, slow-down, or cessation of any operations conducted by, or constituting part of, it. 3.6 Assets; Licenses, Permits, etc. Other than the personnel, the Assets include all property and assets, real, personal and mixed, tangible and intangible (other than goodwill), including, without limitation, leases and contracts, equipment, instruments, computer software used in connection with the equipment or instruments, Permits, personal property, furniture, business records and other assets that are necessary in the Business as conducted prior to the Closing Date, or used primarily in, materially relied on for, or substantially related to the conduct of the Business by Seller as it exists on the Closing Date. Except as set forth on Schedule 3.6(a), Seller has good and marketable title to all of the Assets, in each case free and clear of all liens, security interests, claims, rights of another, and encumbrances of any kind whatsoever. The Assets are in good operating condition and repair, subject to ordinary wear and tear, taking into account the respective ages of the properties involved and are all that are necessary for the conduct of the Business. Attached hereto as Schedule 3.6(b) is a list and description of all federal, state, county, and local governmental licenses, certificates, certificates of need, permits, waivers, filings and orders held or applied for by Seller and used or relied on (or to be used or relied on) in connection with the Assets or the Business ("Permits"). Seller has complied in all material respects, and Seller is in compliance in all material respects, with the terms and conditions of any such Permits. No additional Permit is required from any federal, state, county, or local governmental agency or body thereof in connection with the conduct of the Business as presently conducted (provided that, with respect to any Permit required under a Law regulating or legislating the provision of healthcare or the practice of medicine, this representation shall be limited to the actual knowledge possessed by Seller and Caster on the Closing Date). No claim has been made by any governmental authority (and, to the knowledge of Caster and Seller, no such claim has been threatened) to the effect that a Permit not possessed by Seller is necessary in respect of the Business. Except as specifically noted on Schedule 3.6(b), no Permit is or will be adversely affected by the consummation of the transactions contemplated by this Agreement (provided that, with respect to any Permit required under a Law regulating or legislating the provision of healthcare or the practice of medicine, this representation shall be limited to the actual knowledge possessed by Seller and Caster on the Closing Date). 3.7 Environmental Issues. (a) For purposes of this Agreement, the term "environmental laws" shall mean all laws and regulations relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport, or handling, or the emission, discharge, or release, of any pollutant, contaminant, chemical, or industrial toxic or hazardous substance or waste, and any order related thereto. (b) Seller has complied in all material respects with and obtained all authorizations and made all filings required by all applicable environmental laws. The properties occupied or used by Seller have not been contaminated with any hazardous wastes, hazardous substances, or other hazardous or toxic materials in violation of any applicable environmental law, the violation of which could have a material adverse impact on the Business or the financial position of Seller. (c) Seller has not received any notice from the United States Environmental Protection Agency that it is a potentially responsible party under the Comprehensive Environmental Response, Compensation and Liability Act ("Superfund Notice"), any citation from any federal, state or local governmental authority for non-compliance with its requirements with respect to air, water or environmental pollution, or the improper storage, use or discharge of any hazardous waste, other waste or other substance or other material pertaining to its business ("Citations") or any written notice from any private party alleging any such non-compliance; and there are no pending or unresolved Superfund Notices, Citations or written notices from private parties alleging any such non-compliance. 3.8 Intellectual Property Rights. To the knowledge of Seller and Caster, and except for: (i) the Iris IP; (ii) rights granted under medical equipment contracts to which Seller is a party; and (iii) those items disclosed on Schedule 3.8, there are no patents, trademarks, trade names, or copyrights, and no applications therefor, owned by or registered in the name of Seller or Caster or in which Seller or Caster has any right, license, or interest; provided, however, that the foregoing representation does not apply to any patents, tradenames, copyrights or applications owned by or registered in the name of Caster to the extent such items do not pertain to the conduct of the Business. Except as disclosed on Schedule 3.8, Seller is not a party to any license agreement, either as licensor or licensee, with respect to any patents, trademarks, trade names, or copyrights. Seller has not received any notice that it is infringing any patent, trademark, trade name, or copyright of others. 3.9 Compliance with Laws. To the knowledge of Seller and Caster, Seller has complied in all material respects, and Seller is in compliance in all material respects, with all Laws currently in effect (provided however, that any representation or warranty by Caster or Seller with respect to Laws regulating or legislating the provision of healthcare or the practice of medicine shall be limited to the actual knowledge possessed by Caster and Seller on the Closing Date). No claim has been made or (to the knowledge of Seller and Caster) threatened by any governmental authority against Seller to the effect that the business conducted by Seller fails to comply in any respect with any law, rule, regulation, or ordinance. 3.10 Insurance. Attached hereto as Schedule 3.10 is a list of all policies of fire, liability, business interruption, and other forms of insurance (including, without limitation, professional liability insurance) and all fidelity bonds held by or applicable to Seller at any time within the past three (3) years, which schedule sets forth in respect of each such policy the policy name, policy number, carrier, term, type of coverage, deductible amount or self-insured retention amount, limits of coverage, and annual premium. To the knowledge of Seller and Caster, no event directly relating to Seller has occurred which will result in a retroactive upward adjustment of premiums under any such policies or which is likely to result in any prospective upward adjustment in such premiums. There have been no material changes in the type of insurance coverage maintained by Seller during the past three (3) years, including without limitation any change which has resulted in any period during which Seller had no insurance coverage. Excluding insurance policies which have expired and been replaced, no insurance policy of Seller has been canceled within the last three (3) years and no threat has been made to cancel any insurance policy of Seller within such period. 3.11 Employee Benefit Matters. Except as set forth on Schedule 3.11, Seller does not maintain nor does it contribute nor is it required to contribute to any "employee welfare benefit plan" (as defined in section 3(1) of the Employee Retirement Income Security Act of 1974 (and any sections of the Code amended by it) and all regulations promulgated thereunder, as the same have from time to time been amended ("ERISA")) or any "employee pension benefit plan" (as defined in ERISA). Seller does not presently maintain and has never maintained, or had any obligation of any nature to contribute to, a "defined benefit plan" within the meaning of the Code. 3.12 Contracts and Agreements. Except for Trade Payables, attached hereto as Schedule 3.12 is a list of all written or oral contracts, commitments, leases, and other agreements (including, without limitation, all promissory notes, loan agreements, and other evidences of indebtedness, mortgages, deeds of trust, security agreements, pledge agreements, service agreements, and similar agreements and instruments and all confidentiality agreements) to which Seller is a party or by which Seller or any of its Assets is bound, pursuant to which the obligations thereunder of any party thereto are, or are contemplated as being, in respect of any such individual contracts, commitments, leases, or other agreements during any year during the term thereof, $25,000 or greater (collectively the "Contracts" and individually, a "Contract"). Seller is not and, to the best knowledge of Seller and Caster, no other party thereto is in default (and no event has occurred which, with the passage of time or the giving of notice, or both, would constitute a default by Seller or, to the best knowledge of Seller and Caster, by any other party thereto) under any Contract. Seller has not waived any material right under any Contract, and no consents or approvals (other than those obtained in writing and delivered to Prime prior to Closing) are required under any Contract in connection with the consummation of the transactions contemplated hereby. Seller has not guaranteed any obligation of any other person or entity. 3.13 Claims and Proceedings. Attached hereto as Schedule 3.13 is a list and description of all claims, actions, suits, proceedings, and investigations pending or, to the knowledge of Seller and Caster, threatened against Seller or Caster, at law or in equity, or before or by any court, municipal or other governmental department, commission, board, agency, or instrumentality. Except as set forth on Schedule 3.13 attached hereto, none of such claims, actions, suits, proceedings, or investigations will result in any liability or loss to Seller which (individually or in the aggregate) is material, and Seller has not been, and Seller is not now, subject to any order, judgment, decree, stipulation, or consent of any court, governmental body, or agency that could reasonably be expected to materially and adversely affect the Assets or the Business. No inquiry, action, or proceeding has been asserted, instituted, or (to the knowledge of Seller or Caster) threatened against Seller or Caster to restrain or prohibit the carrying out of the transactions contemplated by this Agreement or to challenge the validity of such transactions or any part thereof or seeking damages on account thereof. 3.14 Taxes. All federal, foreign, state, county, and local income, gross receipts, excise, property, franchise, license, sales, use, withholding, and other tax (collectively, "Taxes") returns, reports, and declarations of estimated tax (collectively, "Returns") which were required to be filed by Seller on or before the date hereof have been filed within the time (including any applicable extensions) and in the manner provided by law, and all such Returns are true and correct in all material respects and accurately reflect the Tax liabilities of Seller. Seller has provided Prime with true and complete copies of all Returns filed for or with respect to any period occurring between January 1, 1996 and December 31, 1999. All Taxes, assessments, penalties, and interest which have become due pursuant to such Returns have been paid or will be paid by Caster or Seller when due (but shall not, under any circumstances, be included in Assumed Liabilities). Seller has not executed any presently effective waiver or extension of any statute of limitations against assessments and collection of Taxes. There are no pending or threatened claims, assessments, notices, proposals to assess, deficiencies, or audits (collectively, "Tax Actions") against Seller with respect to any Taxes owed or allegedly owed by Seller. There are no tax liens on any of the assets of Seller. Proper and accurate amounts have been withheld and remitted by Seller from and in respect of all persons from whom it is required by applicable law to withhold for all periods in compliance with the tax withholding provisions of all applicable laws and regulations. Seller is not a party to any tax sharing agreement. 3.15 Personnel. Attached hereto as Schedule 3.15 is a list of names and current annual rates of compensation of the officers, employees or agents of Seller who are necessary for the operation of the Business or who utilize (or are necessary for the utilization of) the Assets (collectively, the "Employees"). Except as set forth on Schedule 3.15, there are no bonus, profit sharing, percentage compensation, company automobile, club membership, and other like benefits, if any, paid or payable by Seller to any Employees that are not fully and specifically reflected in the Financial Statements. Schedule 3.15 attached hereto also contains a brief description of all material terms of employment agreements and confidentiality agreements to which Seller is a party and all severance benefits which any director, officer, Employee or sales representative of Seller is or may be entitled to receive. Seller has delivered to Prime accurate and complete copies of all such employment agreements, confidentiality agreements, and all other agreements, plans, and other instruments to which Seller is a party and under which its employees are entitled to receive benefits of any nature. Schedule 3.15 also sets forth personal expenses incurred by Seller for any of its employees that were not incurred in the ordinary course of Seller's business. Except as described on Schedule 3.13 attached hereto, there is no pending or (to the knowledge of Seller or Caster) threatened (i) labor dispute or union organization campaign relating to Seller, (ii) claims against Seller by any employees of Seller, or (iii) terminations, resignations or retirements of any employees of Seller. None of the employees of Seller are represented by any labor union or organization. There is no unfair labor practice claim against Seller before the National Labor Relations Board or any strike, labor dispute, work slowdown, or work stoppage pending or (to the knowledge of Seller or Caster) threatened against or involving Seller. 3.16 Business Relations. Seller has no reason to believe and has not been notified that any supplier or customer of Seller will cease or refuse to do business with Seller in the same manner as previously conducted with Seller as a result of or within one (1) year after the consummation of the transactions contemplated hereby, to the extent such cessation or refusal might affect the Goodwill, the Assets or the Business. Seller has not received any notice of any disruption (including delayed deliveries or allocations by suppliers) in the availability of the materials or products used by Seller. 3.17 Agents. Except as set forth on Schedule 3.17 attached hereto, Seller has not designated or appointed any person (other than Seller's employees, officers and directors) or other entity to act for it or on its behalf pursuant to any power of attorney or any agency which is presently in effect. 3.18 Indebtedness To and From Directors, Officers, Shareholders and Employees. Except as specifically reflected in the Financial Statements or set forth on Schedule 3.18, Seller does not owe any indebtedness to Caster or any of its directors, officers, shareholders, employees or affiliates, or have indebtedness owed to it from Caster or any of its directors, officers, shareholders, employees or affiliates, excluding indebtedness for travel advances or similar advances for expenses incurred on behalf of and in the ordinary course of business of Seller and consistent with Seller's past practices. As of the Effective Time and the Closing Date all amounts due Seller from any of its directors, officers, employees or affiliates (or any of their family members) shall have been repaid in full. 3.19 Commission Sales Contracts. Except as disclosed in Schedule 3.19 attached hereto, Seller does not employ or have any relationship with any individual, corporation, partnership, or other entity whose compensation from Seller is in whole or in part determined on a commission basis. 3.20 Certain Consents. Except as set forth on Schedule 3.20 attached hereto, and except for consents obtained and provided to Prime prior to or at the Closing, there are no consents, waivers, or approvals required to be executed and/or obtained by Seller from third parties (including, without limitation, the spouse, if any, of Caster) in connection with the execution, delivery, and performance of this Agreement or any other Transaction Document (provided that, with respect to any such consent required under a Law regulating or legislating the provision of healthcare or the practice of medicine, this representation shall be limited to the actual knowledge possessed by Seller and Caster on the Closing Date). 3.21 Brokers. Seller has not engaged, or caused any liability to be incurred to, any finder, broker, or sales agent (and has not paid, and will not pay, any finders fee or similar fee or commission to any person) in connection with the execution, delivery, or performance of this Agreement or the transactions contemplated hereby. 3.22 Interest in Competitors, Suppliers, and Customers. Except as set forth on Schedule 3.22 attached hereto, neither Seller nor any affiliate of Seller, and to the knowledge of Seller and Caster, no director, officer, employee or affiliate of Seller or any affiliate of any director, officer, employee or affiliate of Seller, has any ownership interest in any competitor, customer or supplier of Seller (other than the ownership of securities of a publicly held entity of which it owns less than five percent (5%) of any class of outstanding securities) or any property used in the operation of the Business. 3.23 Warranties. Except as set forth on Schedule 3.23, Seller has not made any warranties or guarantees to third parties with respect to any products sold or services rendered by it, other than those arising solely by operation of law without any agreement or arrangement by Seller. Except as set forth on Schedule 3.23 attached hereto, no claims for breach of product or service warranties have ever been made against Seller in connection with Refractive Surgery. 3.24 Billing Arrangement. Prior to the Closing, Seller has operated subject to an arrangement between Seller and Westside Ambulatory Surgical Medical Center, Inc., a California corporation ("Westside"), pursuant to which Westside has performed certain billing and related tasks on behalf of Seller. With respect to Westside: (a) Caster is the sole owner of all of the outstanding capital stock and other ownership interests of Westside (assuming the conversion, exercise or exchange of all rights and securities that are convertible into, or exercisable or exchangeable for, capital stock or other ownership interests of Westside); (b) since its formation, Westside has not engaged in any material business operations that were not related to the Business and the operations of Seller; and (c) Westside has provided to Prime prior to the Closing true and complete copies of each and every written contract, agreement or arrangement to which Westside is a party, and has also provided to Prime prior to the Closing a complete and accurate description reflecting each oral contract, agreement or arrangement to which Westside is a party (with sufficient detail to accurately depict all material aspects of the terms and provisions thereof). 3.25 Investment Representations. Each of Seller and Caster: -------------------------- (a) Is an "accredited investor," and has not retained or consulted with any "purchaser representative" (as such terms are defined in Rule 501 of Regulation D promulgated under the Securities Act of 1933, as amended (the "Securities Act")) in connection with its execution of this Agreement and the consummation of the transactions contemplated hereby; (b) Has such knowledge and experience in financial and business matters that it is capable of evaluating the merits and risks of an investment in Newco; (c) Will acquire any Newco interests for its own account for investment and not with the view toward resale or redistribution in a manner which would require registration under the Securities Act or the California Corporate Securities Law of 1968, as amended, and it does not presently have any reason to anticipate any change in its circumstances or other particular occasion or event which would cause it to sell its Newco interests, or any part thereof or interest therein, and it has no present intention of dividing the Newco interests with others or reselling or otherwise disposing of the Newco interests or any part thereof or interest therein either currently or after the passage of a fixed or determinable amount of time or upon the occurrence or nonoccurrence of any predetermined event or circumstance; (d) In connection with entering into this Agreement and each of the other Transaction Documents to which it is a party, and in making the investment decisions associated therewith, it has neither received nor relied on any representations or warranties from Newco, PMSI, Prime, the affiliates of PMSI or Prime, or the officers, directors, shareholders, employees, partners, members, agents, consultants, personnel or similarly related parties of PMSI or Prime, other than those representations and warranties contained in this Agreement and the other Transaction Documents; (e) Is able to bear the economic risk of an investment in the Newco interests and it has sufficient net worth to sustain a loss of its entire investment without material economic hardship if such a loss should occur; and (f) Acknowledges that the Newco interests have not been registered under the Securities Act, or the securities laws of any of the states of the United States, that an investment in the Newco interests involves a high degree of risk, and that the Newco interests are an illiquid investment. ARTICLE IV Covenants 4.1 Use of Name. Each of Caster and Seller agrees that following the Closing Date, Seller will change its name from, and cease using the name, "Caster Eye Center Medical Group" or any words or phrases which are deceptively similar to such name; provided, however, that Seller shall not be required to change its legal name from "Caster Eye Center Medical Group" for the period beginning on the Closing Date and ending on the earlier of (i) the expiration of one hundred eighty (180) days immediately following the Closing Date and (ii) Seller's receipt of a new Medicare/Medicaid provider number applicable to the name Seller intends to use after the Closing (the "Interim Period"); and provided further that Seller may use such name as the name of Seller during the Interim Period, and Newco hereby grants a non-exclusive license to Seller to use such name after the Interim Period, limited in both cases to only the following instances: (a) advertising and promotional materials, as long as such use is not in connection with, or for the promotion of, any activity that is a violation of this Agreement, including, without limitation, Section 9.2 of this Agreement, (b) billing for procedures or services that involve the use of Newco's equipment or facilities, and (c) any other use that is consistent with the express provisions of this Agreement and any other Transaction Document. The foregoing license and use of such name shall be terminated (y) upon delivery of notice to Caster by Newco of a material breach (subject to any rights to cure such breach) by Caster or Seller of this Agreement or any other Transaction Document or (z) automatically upon any delivery of the Termination Notice pursuant to Section 9.3(a) hereof or breach by Caster of the provisions of or default under ARTICLE VIII or ARTICLE IX hereof (either, a "Trigger Event"). Promptly following any such termination, Seller agrees to terminate any use of such name and to execute all documents reasonably necessary or requested by Prime concerning such cessation of use and the vesting of use in Prime or Prime's nominee. Notwithstanding any contrary provision of this Agreement, nothing herein shall preclude Caster from using his full legal individual name and professional accomplishments in the practice of medicine. 4.2 Cooperation Relating to Financial Statements. Seller agrees to cooperate with Prime, at Newco's expense, in the preparation of any financial statements of Seller which Prime or its affiliates may be required by any applicable law to prepare. 4.3 Action by Owners; Joint and Several Liability of Caster. Caster agrees to vote any interest it owns in Seller, and to take such other actions as may be necessary in his capacity as the sole director and sole shareholder of Seller, to authorize and direct Seller to perform all of its obligations under this Agreement and under the Organizational Documents and other Transaction Documents to which Seller is a party. Furthermore, Caster and Seller each agree that, until such time as neither of them owns any direct or indirect ownership interest in Newco, neither of them will, without obtaining the prior written consent of Prime, which consent may be withheld in Prime's sole and absolute discretion, (i) authorize the issuance of any additional capital stock or other ownership interest in Seller to any person other than Caster, a Permitted Trust or a Permitted Entity (as such terms are defined in Newco's Limited Liability Company Agreement) or (ii) transfer, assign, pledge, hypothecate, or in any way alienate any capital stock of Seller, or any interest therein, whether voluntarily or by operation of law, or by gift or otherwise, to any person other than Caster, a Permitted Trust or a Permitted Entity, without the prior written consent of Prime. Any purported transfer in violation of this Section shall be void ab initio without any action by any party, and shall not operate to transfer any interest or title to the purported transferee. All evidences of ownership in Seller, including, without limitation, all stock certificates, shall bear the following legend: "THE INTERESTS REPRESENTED HEREBY AND THE SALE, ASSIGNMENT, TRANSFER, PLEDGE OR OTHER DISPOSITION THEREOF ARE SUBJECT TO CERTAIN RESTRICTIONS CONTAINED IN A CONTRIBUTION AGREEMENT AMONG THE COMPANY AND THE WITHIN NAMED PARTIES, AND ANY AMENDMENT THERETO. THE CONTRIBUTION AGREEMENT LIMITS THE USE OF THE INTERESTS REPRESENTED HEREBY AS COLLATERAL FOR ANY LOAN WHETHER BY PLEDGE, HYPOTHECATION OR OTHERWISE. A COPY OF THE CONTRIBUTION AGREEMENT AND ALL APPLICABLE AMENDMENTS THERETO WILL BE FURNISHED BY THE COMPANY TO THE HOLDER HEREOF WITHOUT CHARGE UPON WRITTEN REQUEST TO THE COMPANY AT ITS PRINCIPAL PLACE OF BUSINESS OR REGISTERED OFFICE." Caster shall be jointly and severally liable for the payment and performance of each and every obligation of Seller hereunder and under each of the Transaction Documents, including without limitation, under the Limited Liability Company Agreement of Newco. 4.4 Public Statements and Press Releases. The parties hereto covenant and agree that, except as provided for herein below, each will not from and after the date hereof make, issue or release any public announcement, press release, statement or acknowledgment of the existence of, or reveal publicly the terms, conditions and status of, the transactions provided for herein, without the prior written consent of the other parties hereto as to the content and time of release of and the media in which such statements or announcement is to be made, provided, however, that in the case of announcements, statements, acknowledgments or revelations which either party is required by law to make, issue or release, the making, issuing or releasing of any such announcement, statement, acknowledgments or revelation by the party so required to do so by law shall not constitute a breach of this Agreement if such party shall have given, to the extent reasonably possible, prior notice to the other parties hereto; provided further, that the foregoing prohibition shall not preclude oral disclosures by Caster after the Closing to other individuals concerning the existence of the transactions contemplated by this Agreement and the other Transaction Documents. Each party hereto agrees that it will not unreasonably withhold any such consent or clearance. The provisions of this Section shall not limit or restrict any party's communications with its personal consultants or advisors, including, without limitation, its attorneys, accountants and financial advisors. 4.5 Joint and Several Liability of PMSI. PMSI shall be jointly and severally liable for the payment and performance of each and every obligation of Prime hereunder and under each of the other Transaction Documents. Without limiting the foregoing, PMSI agrees that if Prime shall default in any obligation to pay to Seller or Caster any amount then due and payable by Prime to Seller or Caster under ARTICLE I or ARTICLE VII hereunder, PMSI shall immediately pay such amount to Seller or Caster. PMSI hereby agrees not to require Seller or Caster to proceed against Prime or any other person or to pursue any other remedy before proceeding against PMSI under this Agreement. 4.6 Working Capital Line. Caster hereby agrees to loan amounts to Newco, from time to time, during the first four (4) months immediately following the Closing Date, not to exceed $200,000 in the aggregate, upon request by Prime, to cover any actual deficit in working capital that Newco may experience. The parties agree that amounts borrowed must be repaid by Newco prior to Newco's distribution of any of its earnings to Prime. ARTICLE V Conditions to Closing 5.1 Prime's Conditions to Closing. Prime's obligation to consummate the transactions contemplated in this Agreement is subject to the satisfaction, prior to or at the Closing, of each of the following conditions, any one or more of which may be waived by Prime in writing. Upon failure of any of the following conditions, Prime may terminate this Agreement: (a) each of Caster, Seller and Newco shall have executed and delivered each of the Transaction Documents to which it is a party (including, without limitation, the Limited Liability Company Agreement of Newco attached hereto as Exhibit A, and financing statements securing the rights granted pursuant to Section 10.2 hereof for the States of Texas and California, and to the extent permitted under applicable law, the California county of Los Angeles, and the Texas county of Travis), and shall have performed or complied in all respects with its agreements and covenants required by this Agreement or any other Transaction Document to have been performed or complied with by it prior to or at the Closing; (b) each of Caster, Seller and Newco shall have executed and delivered that certain Facility Use Agreement, in the form attached hereto as Exhibit C (the "Facility Use Agreement"); (c) since the Effective Time, except as set forth on Schedule 3.4 hereto, there shall not have been any material adverse change in the condition (financial or otherwise) of Seller, the Assets or the Business; (d) Prime and PMSI shall have obtained the approval of their unaffiliated lenders under any of the credit facilities of PMSI or any subsidiary of PMSI that owns, directly or indirectly, an interest in Prime; (e) each of the representations and warranties made by Caster or Seller in this Agreement or any other Transaction Document shall be true, correct and not misleading in any material respect; and (f) each of Caster and Seller shall have delivered such good standing certificates, officer certificates, and similar documents and certificates as counsel for Prime may have reasonably requested. 5.2 Caster's and Seller's Conditions to Closing. Each of Caster's and Seller's obligation to consummate the transactions contemplated in this Agreement is subject to the satisfaction, prior to or at the Closing, of each of the following conditions, any one or more of which may be waived by Caster and Seller in writing. Upon failure of any of the following conditions, Caster or Seller may terminate this Agreement: (a) each of Prime and Newco shall have executed and delivered each of the Transaction Documents to which it is a party (including, without limitation, the Limited Liability Company Agreement of Newco, attached hereto as Exhibit A, and the Facility Use Agreement), and shall have performed or complied in all respects with its agreements and covenants required by this Agreement or any other Transaction Document to have been performed or complied with by it prior to or at the Closing, including, without limitation, the payment of the Asset Purchase Price to Seller and the Goodwill Purchase Price to Caster; (b) since the Effective Time, except as set forth on Schedule 3.4 hereto, there shall not have been any material adverse change in the condition (financial or otherwise) of Prime or PMSI; (c) each of the representations and warranties made by Prime in this Agreement or any other Transaction Document shall be true, correct and not misleading in any material respect; and (d) Prime shall have delivered such good standing certificates, officer certificates, and similar documents and certificates as counsel for Caster and Seller may have reasonably requested. ARTICLE VI Indemnification of Prime 6.1 Indemnification of Prime. Each of Caster and Seller agrees to indemnify and hold harmless Prime, each parent company, subsidiary and/or affiliate of Prime (including, without limitation, Seller and Newco) and each parent company, subsidiary, affiliate, shareholder, member, partner (or other owner), officer, director, manager, agent, employee and representative of any of the foregoing (collectively, the "Prime Indemnified Parties") from and against any and all damages, losses, claims, liabilities, demands, charges, suits, penalties, costs, and expenses (including court costs and attorneys' fees and expenses incurred in investigating and preparing for any litigation or proceeding) (collectively, "Indemnified Costs") in connection with the commencement or assertion of any action, proceeding, demand, or claim by a third party (collectively, a "Third-Party Action") which any of the Prime Indemnified Parties may sustain, arising out of or related to (a) any breach or default by Caster or Seller of any of the representations, warranties, covenants or agreements contained in this Agreement or any Transaction Document, (b) except for Assumed Liabilities, any claim, debt, obligation or liability of Caster or Seller, (c) except for Assumed Liabilities, any actual or alleged actions or omissions by Caster, Seller, or any of Seller's directors, officers, shareholders, agents, employees, representatives, subsidiaries and/or affiliates occurring prior to the Closing Date (regardless of whether such Indemnified Costs are asserted at any time before or after the Closing Date), and (d) all Taxes owed by Seller or Caster, including, without limitation, Taxes arising as a result of the transactions contemplated by this Agreement, including, without limitation, any Covered Taxes (as hereinafter defined) in excess of Covered Taxes required to be paid or reimbursed by Prime or PMSI pursuant to Section 7.1(b); provided this clause (d) shall not be construed to require Sellers or Caster to provide any indemnity for the amounts required to be reimbursed by Prime or PMSI pursuant to Section 7.1(b) Prior to receiving indemnification under this Section, a Prime Indemnified Party must seek recovery from then existing applicable insurance policies, but in no event is a Prime Indemnified Party required to exhaust remedies against insurance companies if coverage is non-existent, limited or declined; provided, however, that the Prime Indemnified Party may be required, upon request by the indemnifying parties, to obtain the advice of such Prime Indemnified Party's own legal counsel advising that there is a reasonable basis for denial of insurance of limitation of insurance coverage; and provided further, that the Prime Indemnified Party must, as a condition to receiving recovery under this Section, assign whatever rights to denied benefits that such Prime Indemnified Party may have and may legally assign, subject to any contractual or other limitations on assignment. Without in any manner restricting a Prime Indemnified Party's right to independently obtain insurance, no Prime Indemnified Party shall be required to acquire or maintain insurance as a condition to exercising its rights under this Section. For purposes of this Section 6.1 only, any decrease in the value of a Prime Indemnified Party's ownership interest (if any) in Newco, as a result of the acts, omissions or circumstances described in clause (c) of this Section, shall, to the extent indemnification with respect thereto has not already been paid directly to a Prime Indemnified Party, be deemed an Indemnified Cost, and such Prime Indemnified Party shall be entitled to indemnification hereunder in an amount equal to such decrease in value. Notwithstanding any provision of this Agreement or any other Transaction Document to the contrary, none of Caster, Seller or any other Seller Indemnified Party may, and each hereby agrees not to, seek contribution, indemnification or reimbursement from Newco for any amount Caster or Seller is required to pay pursuant to this ARTICLE, regardless of whether Caster, Seller or such other Seller Indemnified Party is entitled to contribution, indemnification or reimbursement under any Transaction Document, the organizational documents of Newco or applicable law. Furthermore, the Prime Indemnified Parties, collectively, may not, with respect to any Indemnified Cost, recover more than the aggregate amount of such Indemnified Cost, or recover Indemnified Costs in the event of any act or omission of Caster or Seller resulting solely and exclusively from Caster's death or Permanent Disability (including, without limitation, a breach or default under this Agreement resulting solely and exclusively therefrom). For purposes of this Agreement, "Permanent Disability" with respect to Caster shall mean Caster's having a mental or physical incapacity that can reasonably be anticipated to prevent Caster's resumption of the normal performance of his medical practice within the six (6) months succeeding the commencement of Caster's incapacity, or (b) Caster's receipt of benefits for a period of six (6) consecutive months by reason of disability under a salary continuation, or other disability plan. In addition, and notwithstanding any provision of this Agreement or any other Transaction Document to the contrary, the provisions of ARTICLE VI concerning the indemnification of Prime Indemnified Parties shall have no application to a violation or breach by Caster or Seller of any applicable covenant or provision contained in ARTICLE VIII or in ARTICLE IX of this Agreement, it being the intent of the parties that the remedies provided for in Sections 9.7(a) and 9.7(b) of this Agreement shall constitute the sole remedies of the Prime Indemnified Parties. 6.2 Defense of Third-Party Claims. A Prime Indemnified Party shall give prompt written notice to Caster, of the commencement or assertion of any Third-Party Action in respect of which such Prime Indemnified Party shall seek indemnification hereunder. Any failure to so notify Caster shall not relieve Caster or Seller from any liability that either may have to such Prime Indemnified Party under this ARTICLE unless the failure to give such notice materially and adversely prejudices Caster. Caster shall have the right to assume control of the defense of, settle, or otherwise dispose of such Third-Party Action on such terms as it deems appropriate; provided, however, that: (a) The Prime Indemnified Party shall be entitled, at his, her, or its own expense, to participate in the defense of such Third-Party Action; (b) Caster shall obtain the prior written approval of the Prime Indemnified Party, which approval shall not be unreasonably withheld, before entering into or making any settlement, compromise, admission, or acknowledgment of the validity of such Third-Party Action or any liability in respect thereof if, pursuant to or as a result of such settlement, compromise, admission, or acknowledgment, injunctive or other equitable relief would be imposed against the Prime Indemnified Party; (c) Caster shall not consent to the entry of any judgment or enter into any settlement that does not include as an unconditional term thereof the execution and delivery of a release from all liability in respect of such Third-Party Action by each claimant or plaintiff to, and in favor of, each Prime Indemnified Party; (d) Caster shall not be entitled to control (but shall be entitled to participate at its own expense in the defense of), and the Prime Indemnified Party shall be entitled to have sole control over, the defense or settlement, compromise, admission, or acknowledgment of any Third-Party Action as to which Caster fails to assume the defense within thirty (30) days; provided, however, that the Prime Indemnified Party shall make no settlement, compromise, admission, or acknowledgment which would give rise to liability on the part of Caster, without the prior written consent of Caster, which consent may be given, withheld, or conditioned in Caster's sole and absolute discretion; (e) Caster shall make payments of all amounts required to be made pursuant to the foregoing provisions of this ARTICLE to or for the account of the entitled Prime Indemnified Party from time to time promptly upon receipt of bills or invoices relating thereto or when otherwise due and payable, provided that the Prime Indemnified Party has agreed in writing to reimburse Caster for the full amount of such payments if the Prime Indemnified Party is ultimately determined not to be entitled to such indemnification; and (f) The parties hereto shall extend reasonable cooperation in connection with the defense of any Third-Party Action pursuant to this ARTICLE and, in connection therewith, shall furnish such records, information, and testimony and attend such conferences, discovery proceedings, hearings, trials, and appeals as may be reasonably requested. Without limiting the foregoing, with respect to any Indemnified Costs asserted pursuant to Section 6.1(e), Prime agrees to cooperate fully with Caster to vigorously defend the assertion of any Covered Taxes. ARTICLE VII Indemnification of Caster and Seller 7.1 Indemnification of Caster and Seller. (a) PMSI and Prime, jointly and severally, agree to indemnify and hold harmless Caster, Seller, their respective affiliates, including Westside, and each of their agents, employees and representatives (collectively, the "Seller Indemnified Parties"), from and against any and all Indemnified Costs in connection with the commencement or assertion of any Third-Party Action which any of the Seller Indemnified Parties may sustain, arising out of or related to (i) any breach or default by Prime of any of the representations, warranties, covenants or agreements contained in this Agreement or any Transaction Document, (ii) any claim, debt, obligation or liability of PMSI or Prime, and (iii) any actual or alleged actions or omissions by PMSI, Prime, or the directors, officers, shareholders, agents, employees, representatives, subsidiaries and/or affiliates of either of PMSI or Prime occurring prior to the Closing Date (regardless of whether such Indemnified Costs are asserted at any time before or after the Closing Date). (b) Each of PMSI and Prime, jointly and severally, agrees to indemnify and promptly reimburse Seller and/or Caster, as and when incurred, for any corporate income and/or corporate franchise taxes that either or both the State of California or the United States Internal Revenue Service may assess against Seller as a result of the consummation of the transactions contemplated by Section 1.1 of this Agreement and only (notwithstanding the other provisions of this ARTICLE) those actually paid by Seller (collectively, the "Covered Taxes"), together with one-half of any interest and penalties related to Covered Taxes and one-half of any costs (including actual attorney's fees and costs) arising out of, incurred and paid by either or both of Seller and Caster in connection with any audit, administrative proceeding or suit by or against a taxing authority or governmental entity related to any Covered Taxes. Notwithstanding the foregoing, Prime's and PMSI's aggregate obligation under this subsection (b) shall not exceed (i) an amount equal to the lesser of thirty-seven and one half percent (37.5%) of the amount of any Covered Taxes or $900,000, plus (ii) fifty percent (50%) of all interest and penalties related to Covered Taxes, plus (iii) fifty percent (50%) of all costs (including actual attorneys' fees and costs) arising out of, incurred and paid by either or both of Seller and Caster in connection with any audit, administrative proceeding, or suit by or against a taxing authority or governmental entity related to any Covered Taxes. Furthermore, Prime's and PMSI's obligation under this subsection (b) is contingent on Seller's and Caster's compliance with their obligations under Section 7.2. Seller and Caster, jointly and severally, agree that they shall indemnify Prime and PMSI from and against any Covered Taxes (and such related amounts described above) that are in excess of the amount Prime and PMSI are required to pay pursuant to this subsection (b). (c) Prior to receiving indemnification under this Section, a Seller Indemnified Party must seek recovery from then existing applicable insurance policies, but in no event is a Seller Indemnified Party required to exhaust remedies against insurance companies if coverage is non-existent, limited or declined; provided, however, that the Seller Indemnified Party may be required, upon request by the indemnifying parties, to obtain the advice of such Seller Indemnified Party's own legal counsel advising that there is a reasonable basis for denial of insurance of limitation of insurance coverage; and provided further, that the Seller Indemnified Party must, as a condition to receiving recovery under this Section, assign whatever rights to denied benefits that such Seller Indemnified Party may have and may legally assign, subject to any contractual or other limitations on assignment. Without in any manner restricting a Seller Indemnified Party's right to independently obtain insurance, no Seller Indemnified Party shall be required to acquire or maintain insurance as a condition to exercising its rights under this Section. (d) For purposes of this Section 7.1 only, any decrease in the value of a Seller Indemnified Party's ownership interest (if any) in Newco, as a result of the acts, omissions or circumstances described in clause (a)(iii) of this Section, shall, to the extent indemnification with respect thereto has not already been paid directly to a Seller Indemnified Party, be deemed an Indemnified Cost, and such Seller Indemnified Party shall be entitled to indemnification hereunder in an amount equal to such decrease in value. (e) Notwithstanding any provision of this Agreement or any other Transaction Document to the contrary, none of Prime, PMSI or any other Prime Indemnified Party may, and each hereby agrees not to, seek contribution, indemnification or reimbursement from Newco for any amount Prime or PMSI is required to pay pursuant to this ARTICLE, regardless of whether Prime, PMSI or such other Prime Indemnified Party is entitled to contribution, indemnification or reimbursement under any Transaction Document, the organizational documents of Newco or applicable law. (f) Furthermore, the Seller Indemnified Parties, collectively, may not, with respect to any Indemnified Cost, recover more than the aggregate amount of such Indemnified Cost. 7.2 Defense of Third-Party Claims. A Seller Indemnified Party shall give prompt written notice to Prime of the commencement or assertion of any Third-Party Action in respect of which such Seller Indemnified Party shall seek indemnification hereunder. Any failure so to notify Prime shall not relieve Prime from any liability that it may have to such Seller Indemnified Party under this ARTICLE unless the failure to give such notice materially and adversely prejudices Prime. Prime shall have the right to assume control of the defense of, settle, or otherwise dispose of such Third-Party Action on such terms as it deems appropriate; provided, however, that: (a) The Seller Indemnified Party shall be entitled, at his or its own expense, to participate in the defense of such Third-Party Action; (b) Prime shall obtain the prior written approval of the Seller Indemnified Party, which approval shall not be unreasonably withheld, before entering into or making any settlement, compromise, admission, or acknowledgment of the validity of such Third-Party Action or any liability in respect thereof if, pursuant to or as a result of such settlement, compromise, admission, or acknowledgment, injunctive or other equitable relief would be imposed against the Seller Indemnified Party (provided, however, that Prime may, but is not obligated to, pay directly to the appropriate agency or service provider any amount it is required to pay pursuant to Section 7.1(b), without obtaining the prior written approval of the Seller Indemnified Party); (c) Prime shall not consent to the entry of any judgment or enter into any settlement that does not include as an unconditional term thereof the execution and delivery of a release from all liability in respect of such Third-Party Action by each claimant or plaintiff to, and in favor of, each Seller Indemnified Party; and (d) Prime shall not be entitled to control (but shall be entitled to participate at its own expense in the defense of), and the Seller Indemnified Party shall be entitled to have sole control over, the defense or settlement, compromise, admission, or acknowledgment of any Third-Party Action as to which Prime fails to assume the defense within thirty (30) days; provided, however, that the Seller Indemnified Party shall make no settlement, compromise, admission, or acknowledgment which would give rise to liability on the part of Prime without the prior written consent of Prime, which consent may be given, withheld, or conditioned in Prime's sole and absolute discretion. (e) Prime shall make payments of all amounts required to be made pursuant to the foregoing provisions of this ARTICLE to or for the account of the Seller Indemnified Party from time to time promptly upon receipt of bills or invoices relating thereto or when otherwise due and payable, provided that the Seller Indemnified Party has agreed in writing to reimburse Prime for the full amount of such payments if the Seller Indemnified Party is ultimately determined not to be entitled to such indemnification. (f) The parties hereto shall extend reasonable cooperation in connection with the defense of any Third-Party Action pursuant to this ARTICLE and, in connection therewith, shall furnish such records, information, and testimony and attend such conferences, discovery proceedings, hearings, trials, and appeals as may be reasonably requested. (g) Notwithstanding the foregoing provisions of this Section 7.2, this subsection 7.2(g) shall apply with respect to the assertion of Covered Taxes. Seller and Caster shall have the right to control the defense of, settle, or otherwise dispose of such Third-Party Action, as long as they vigorously contest such Third-Party Action; provided, however, that Seller and Caster shall not enter into any settlement or other agreement with any governmental taxing authority regarding Covered Taxes without having first obtained the consent of Prime (not to be unreasonably withheld). Further, Caster shall obtain Prime's consent (not to be unreasonably withheld) on all material aspects of the defense of such Third-Party Action, including without limitation, the selection of lead tax counsel, necessary appraisers, and, if necessary, accountants. Prime shall cooperate fully with Caster and Seller to vigorously defend the assertion of any Covered Taxes, and shall be entitled, at its own expense, to participate in the defense of such Third-Party Action. The other provisions of this Section 7.2 which are not inconsistent with the terms of this subsection 7.2(g) shall apply to Third Party Actions relating to the assertion of Covered Taxes. ARTICLE VIII Covenants Regarding Future Acquisitions and Developments in Los Angeles County, California 8.1 Restrictions on Acquisitions and Development in Los Angeles County, California. (a) De Novo Development. Except as expressly provided below, each of PMSI, Prime, the Company and Caster agrees that, following the Closing Date, it will not, without obtaining the prior written consent of the other parties to this Agreement, directly or indirectly through any affiliate, except through Newco or one of its subsidiaries, develop or establish (which does not include the acquisition of an existing facility) a facility equipped to perform, among other things, Refractive Surgery (a "New Center"), anywhere within Los Angeles County, California (the "Restricted Area"). (b) Acquisitions. Except as expressly provided below, each of PMSI, Prime, the Company and Caster agrees that, following the Closing Date, it will not, without obtaining the prior written consent of the other parties to this Agreement, directly or indirectly through any affiliate, except through Newco or one of its subsidiaries, acquire an existing facility or business, or convert such an acquisition into a facility or business, that provides Refractive Surgery as a substantial component of its business operations (an "Existing Center"), anywhere within the Restricted Area. 8.2 Additional Qualifications, Limitations. In addition to the qualifications and limitations set forth elsewhere in this ARTICLE, the following shall apply: (a) Notwithstanding the provisions of Section 8.1, any party shall be free to independently develop or acquire all or any portion of any New Center or any Existing Center (collectively, "Target Centers" and individually, "Target Center") whose physical location is outside the Restricted Area; (b) No provision of this Article shall be construed to require any party to this Agreement to acquire or develop any Target Center; (c) Notwithstanding the provisions of Section 8.1, any party shall be free to independently acquire all or any portion of the assets and business of any Target Center, that are not related to Refractive Surgery or ophthalmology, regardless of whether such Target Center is in the Restricted Area, to the extent those assets and business are not used primarily in, materially relied on for, or substantially related to the conduct of Refractive Surgery by such Target Center; (d) Notwithstanding the provisions of Section 8.1, as part of a larger acquisition transaction any party shall be free to independently acquire, or with respect to PMSI or Prime merge with, any existing business if, with respect to such existing business, (i) the prior year's revenues that arose from Refractive Surgery comprise not more than ten percent (10%) of the total prior year's revenues or (ii) the number of Refractive Surgery procedures done during the prior year within the Restricted Area comprise not more than ten percent (10%) of the total number of Refractive Surgery procedures done during the prior year; provided, however, that if PMSI acquires, directly or indirectly, an interest in a center that is located within the Restricted Area (an "Incidental Center"), then PMSI shall, to the extent allowed under the credit facilities of PMSI and its subsidiaries, within thirty (30) days of such acquisition, notify Caster thereof and provide him with such information concerning the Incidental Center as he shall reasonably request in order to make his investment decision hereunder), and Caster shall have thirty (30) days following receipt of such notice within which Caster may elect to acquire a forty percent (40%) profits interest (not ownership interest) with respect to PMSI's economic interest in such Incidental Center (the "Profits Acquisition"). For example, and only for purposes of illustration, if a subsidiary of PMSI acquired a sixty percent (60%) ownership interest in an Incidental Center, the Profits Acquisition pursuant to this subsection (d) would enable Caster to acquire, indirectly through such subsidiary, the right to twenty-four percent (24%) of the profits of the Incidental Center (i.e. 40% multiplied by 60%). The closing of any Profits Acquisition must occur within sixty (60) days following delivery of Caster's election to acquire a profits interest, with the price determined using the allocable portion of the purchase price paid by PMSI or its affiliate in the acquisition giving rise to the Incidental Center, and upon such other terms and conditions as may be negotiated by the parties in good faith. If Caster elects not to acquire a profits interest in an Incidental Center, or fails to notify PMSI of his election to do so within the 30-day period provided above (which shall be deemed an election not to acquire), or if such acquisition is prohibited under the credit facilities or subordinated debt indenture of PMSI or its subsidiaries, then PMSI must elect, or cause its acquiring subsidiary to elect, among the following alternative actions, which selected action must be taken within the time period specified below. (i) Within one hundred twenty (120) days of such election not to acquire a profits interest, Prime or PMSI, as applicable, shall convert the Incidental Center to a Discount Center (as hereinafter defined). (ii) Within one hundred twenty (120) days of such election not to acquire a profits interest, Prime or PMSI, as applicable, shall terminate all of the operations of such Incidental Center that consist of and are reasonably related to the conduct of Refractive Surgery. (iii) Within one (1) year of such election not to acquire a profits interest, PMSI shall (but only if PMSI has not elected one of the alternatives specified in clauses (i) and (ii) above) sell all of its direct or indirect interest in such Incidental Center to a third party, retaining no interest of any kind, whether direct or indirect, in said Incidental Center (except that PMSI may retain a creditor interest, but not a profits interest or other interest measured by operations or results of operations, with respect to any deferred portion of the purchase price applicable to such sale); provided further, that PMSI must exercise commercially reasonable efforts to sell such interest as soon as practical, and PMSI will ensure that neither it nor any of its affiliates or subsidiaries will share Proprietary Information (as hereinafter defined) with the Incidental Center pending such sale. 8.3 Exceptions. Notwithstanding the provisions of Section 8.1, the following acquisitions or developments of Target Centers located or to be located within the Restricted Area are permitted: (a) Developments of Volume Centers. The development of any New Center by any party if the following conditions are satisfied: (i) the standard, undiscounted fee that will generally be charged to the patients treated at such New Center will be less than the product of fifty-four percent (54%) multiplied by the greater of (A) the Patient Fee (as defined in the Facility Use Agreement) then being charged with respect to procedures done by Caster utilizing Newco's facilities (taking into account any imminent or planned reductions by Newco) and (B) $1,435 (such product is hereinafter referred to as the "Threshold Patient Fee", and a New Center satisfying the criteria in (i) is also referred to herein as a "Discount Center"); and (ii) Caster (if the developing party is Prime) or Prime (if the developing party is Caster) has been offered the opportunity to purchase and receive up to ten percent (10%) of the interest being acquired by the developing party (or, if the developing party is Prime, such lesser percentage interest as would allow Prime to acquire not less than fifty-one percent (51%) of the aggregate ownership interests of the New Center), on the same terms and conditions afforded the developing party; provided, however, that nothing in this subsection (a) shall require that the developing party be given a guarantee or other financial or credit assistance from Newco or any other party; (b) Developments of Luminary Centers. The development of any New Center by any party if the following conditions are satisfied: (i) the standard, undiscounted fee that will generally be charged to the patients treated at such New Center will be greater than the Threshold Patient Fee; (ii) Newco has been offered the opportunity to develop the New Center but is financially unable to develop the New Center using its existing financial resources (without requiring a guarantee or other financial or credit assistance from any of its members or their affiliates), as reasonably determined in good faith by the affirmative vote or written consent of two of the three managers of Newco (provided that, as long as a Trigger Event has not previously occurred, Caster, Seller or their manager designee must be one of the affirming managers); and (iii) two of the three managers of Newco elect to require capital contributions from Newco's members in order to develop such New Center (provided that, as long as a Trigger Event has not previously occurred, Caster, Seller or their manager designee must be one of the affirming managers), and Caster or Seller (if the developing party is Prime) or Prime (if the developing party is Caster) fails to contribute to Newco its proportionate share (in accordance with its membership interest in Newco) of the costs necessary to fund the development of such New Center, in each case, on or before the date that development of such New Center could begin following the determination made in (ii) above. Nothing in this subsection (b) shall require that the developing party be given a guarantee or other financial or credit assistance from Newco or any other party. Furthermore, and notwithstanding the foregoing, neither Caster nor Seller shall be required to make any contribution of any kind for the development of a New Center undertaken by Newco without Caster's or Seller's manager designees' consent; provided this shall not be construed to allow the revocation of any consent once given. 8.4 Acquisition of Existing Centers. In determining the manner of funding an acquisition of an Existing Center desired by the managers of Newco, Newco agrees to acquire the Existing Center using its own resources prior to seeking contributions from its members; provided further, that any contribution sought by Newco from its members shall be allocated among the Members according to their respective percentage ownership interests of Newco, and no member or its affiliates shall be required to contribute its share of such contribution or otherwise provide any money, or any guarantee or financial or credit assistance, for such acquisition. If, however, two of the three managers of Newco elect to require capital contributions from Newco's members in order to acquire such Existing Center (provided that, as long as a Trigger Event has not previously occurred, Caster, Seller or their manager designee must be one of the affirming managers), such decision shall be final, and if either Caster or Seller on the one hand, or Prime on the other hand, fails to contribute to Newco its proportionate share (in accordance with its membership interest in Newco) of the costs necessary to acquire the Existing Center, in each case, on or before the earliest date such Existing Center can be acquired, the other party shall be entitled to independently acquire the Existing Center, notwithstanding the provisions of Section 8.1. Notwithstanding the foregoing, neither Caster nor Seller shall be required to make any contribution of any kind for the acquisition of an Existing Center undertaken by Newco without Caster's or Seller's manager designee's consent; provided this shall not be construed to allow the revocation of any consent once given. 8.5 Automatic Termination. This entire ARTICLE shall terminate and become null and void automatically: (a) If any party to this Agreement: (i) becomes insolvent, or makes a transfer in fraud of creditors, or makes an assignment for the benefit of creditors, or admits in writing its inability to pay its debts as they become due; (ii) generally is not paying its debts as such debts become due, and one of the other parties, in good faith, determines that such event or condition could frustrate the operation of this ARTICLE or otherwise inhibit the delinquent party's ability to perform its obligations under this Agreement or any Transaction Document; (iii) has a receiver, trustee or custodian appointed for, or take possession of, all or substantially all of the assets of such party, either in a proceeding brought by such party or in a proceeding brought against such party; (iv) files a petition for relief under the United States Bankruptcy Code or any other present or future federal or state insolvency, bankruptcy or similar laws (all of the foregoing hereinafter collectively called "Applicable Bankruptcy Law"), or an involuntary petition for relief is filed against such party under any Applicable Bankruptcy Law, or an order for relief naming such party is entered under any Applicable Bankruptcy Law which is not discharged within ninety (90) days of filing, or any composition, rearrangement, extension, reorganization or other relief of debtors now or hereafter existing is requested or consented to by such party; (v) fails to have discharged within a period of ninety (90) days any attachment, sequestration or similar writ levied upon, or any claim against or affecting, any property of such party; or (vi) fails to pay within thirty (30) days any final money judgment against such party (the events described in this Section are hereinafter referred to as "Bankruptcy Events"); (b) If, at any time after the Closing, Caster, Seller and any entity owned or controlled by Caster, and all Permitted Trusts and Permitted Entities, collectively own less than forty (40%) of the total outstanding membership interests of Newco (after assuming the conversion, exchange or exercise of any and all securities or rights convertible into, or exchangeable or exercisable for, ownership interests of Newco), unless and only to the extent Prime consented in writing to the transaction(s) that caused the decrease in Caster's, Seller's and such other entities' percentage ownership of Newco; (c) upon the expiration or termination of the Restricted Period (as hereinafter defined), unless and as long as Caster is still complying with the provisions of Section 9.3(b) hereof as if there was no six (6) year limitation on the obligations contained in Section 9.3(b); (d) upon a material breach (subject to any applicable cure period) by either party of the provisions of this ARTICLE or ARTICLE IX; or (e) upon the death or Permanent Disability of Caster. ARTICLE IX Restrictive Covenants 9.1 Confidentiality Agreement. Each of Caster, Seller, PMSI and Prime agrees that it has been and may continue to be, through its relationship with Newco, exposed to confidential information and trade secrets pertaining to, or arising from, the business of the other parties hereto (including, without limitation, Newco) and/or each of the other parties' present or future affiliates (which, with respect to Prime and PMSI, includes each present or future affiliate or subsidiary of PMSI) (in any instance, the party or parties to whom such information belongs are hereinafter referred to, individually and collectively, as "Discloser"). The parties agree that such information and trade secrets are unique and valuable and that Discloser would suffer irreparable injury if this information or trade secrets were divulged to those in competition with Discloser. Therefore, each of Caster, Seller, Prime and PMSI agrees to keep in strict secrecy and confidence, both during and after the period during which Discloser owns any interest in Newco, any and all information concerning Discloser which it acquires, or to which it has access through its relationship with Discloser, that has not been publicly disclosed by Discloser or that is not a matter of common knowledge among Discloser's competitors (collectively, "Proprietary Information"). The Proprietary Information of Discloser covered by this Agreement shall include, but shall not be limited to, information of Discloser relating to any inventions, processes, software, formulae, plans, devices, compilations of information, technical data, mailing lists, management strategies, business distribution methods, names of suppliers (of both goods and services) and customers, names of employees and terms of employment, arrangements entered into with suppliers and customers, including, but not limited to, proposed expansion plans of Discloser, marketing and other business and pricing strategies, and trade secrets of Discloser. Notwithstanding the foregoing, "Proprietary Information" shall exclude confidential information and trade secrets (a) substantially pertaining to or arising from the business of Seller and Caster prior to the Closing Date or (b) that constitute the practice of medicine. Except with prior written approval of Discloser, each of Caster, Seller, Prime and PMSI agrees that it will not: (i) directly or indirectly, disclose any Proprietary Information to any person except authorized personnel of Discloser or (ii) use Proprietary Information in any way; provided, however, that nothing in this Section shall preclude Prime from disclosing the Proprietary Information of Newco for the purpose of benefiting affiliates and subsidiaries of Prime or PMSI that operate other centers in a manner not prohibited by this Agreement. Within forty-eight (48) hours of the time at which any of Caster, Seller, Prime or PMSI no longer directly or indirectly owns any voting equity interests in Newco, whether the result of voluntary or involuntary disposition, such party will deliver to the remaining owners of Newco (without retaining copies thereof) all documents, records or other memorializations including copies of documents and any notes which it has prepared, that contain Proprietary Information or relate to Newco's business, all other tangible Proprietary Information in its possession or control, and all of Newco's credit cards, keys, equipment, vehicles, supplies and other materials that are in possession or under its control. The provisions of this Section shall not limit or restrict any party's communications with its personal consultants or advisors, including, without limitation, its attorneys, accountants and financial advisors. 9.2 Non-Solicitation and Non-Interference Agreement. Each of the parties to this Agreement hereby agrees that during the Restricted Period (as hereinafter defined), and thereafter as long as Caster is retired from the practice of medicine, such party will not, directly or indirectly, either for its own benefit or for the benefit of any other person, corporation or other entity, without the prior written consent of the other parties to this Agreement, commit any of the following acts, which acts shall be considered violations of this Section: (y) Request or advise any person, firm, physician, corporation or other entity having a business relationship with another party to this Agreement (or any of such party's affiliates), to withdraw, curtail, or cancel its business with such party; or (z) Hire any employee of, or induce or attempt to induce the termination of such employee's employment by, another party to this Agreement (or any of such party's affiliates). 9.3 Exclusive Use and Efforts Agreement. (a) As used in this Agreement, the "Restricted Period" shall mean the period of time beginning on the Closing Date and ending on the later of (i) the expiration of eight (8) years following the Closing Date or (ii) the expiration of two and one-half (2.5) years following delivery of written notice by Caster stating that Caster desires to terminate the terms of this Section 9.3 (the "Termination Notice"); provided, that Caster cannot deliver notice of termination prior to the expiration of five and one-half (5.5) years following the Closing Date, and any Termination Notice may be withdrawn in writing delivered to Prime (which Prime may reject in writing in its sole discretion within fifteen days of receiving the withdrawal notice) prior to the expiration of two and one-half (2.5) years following delivery thereof (with the understanding that, if the Withdrawal Notice is not rejected by Prime, the Restricted Period will remain in effect until the expiration of a contiguous two and one-half (2.5) year period following delivery of a subsequent Termination Notice that is not withdrawn). Except as expressly otherwise provided in the immediately following sentence, and notwithstanding the provisions of subsection (b) below, during the Restricted Period, Caster hereby agrees that Caster will, and will direct any other medically trained or licensed medical professionals under the direction or control of Caster to, perform Refractive Surgery and any services related to Refractive Surgery at and using the facilities and equipment of Newco. Notwithstanding the foregoing, the parties agree that the following shall not be a breach by Caster of this Section (including the provisions of subsection (b) below): (i) the performance of procedures by Caster at a facility described in Section 10.8 hereof, but only to the extent and subject to the conditions under which such procedures are allowed under Section 10.8 hereof; (ii) the performance of procedures by Caster at a facility described in Section 10.9 hereof, but only to the extent and subject to the conditions under which such procedures are allowed under Section 10.9 hereof; or (iii) Caster's cessation of his professional medical services at the end of six (6) months following Caster's notice of termination as described in this Section 9.3(a). Furthermore, Caster's inability to comply with this subsection (a) because of a temporary disability occurring during the period while Caster is obligated under subsection (b) below shall not be deemed a breach of this subsection (a), but the running of the Restricted Period shall be tolled until such time as the temporary disability no longer prevents compliance with the obligations under subsection (b). (b) Without limiting or restricting the provisions of subsection (a) of this Section, Caster further agrees that, at all times prior to the expiration of six (6) years immediately following the Closing Date, Caster shall devote Caster's full business time and attention (above or consistent with Caster's practices prior to the Effective Time) to rendering professional ophthalmic and medical services in Beverly Hills, California or the immediate vicinity thereof. Without limiting or restricting the provisions of subsection (a) of this Section, the parties agree that the following shall not be a breach by Caster of this subsection (b): (i) the devotion of a reasonable amount of time to charitable and community activities; (ii) the management of personal investments that are passive in nature; (iii) the writing or editing of books, articles and journals or other literature pertaining to Refractive Surgery, ophthalmology, or the practice of medicine; (iv) Caster's taking of vacation, holidays or sick time consistent with past practices; (v) the death or Permanent Disability of Caster; (vi) attending continuing education and other professional conferences; (vii) the management of any interest in any Target Center independently acquired by Caster pursuant to ARTICLE VIII hereof; or (viii) the management of any center established pursuant to Section 10.8 hereof, but only to the extent allowed under Section 10.8 hereof; provided however, that the time and effort spent on activities described in clauses (i) through (iv) and (vi) (inclusive) of this sentence must be below or consistent with the time and effort devoted to such matters prior to the Effective Time. The parties expressly acknowledge and agree that (I) Caster's inability to comply with this subsection (b) because of a temporary disability shall not be deemed a breach of this subsection (b), but the running of six (6) year period described above shall be tolled until such time as the temporary disability no longer prevents compliance, and (II) without limiting the application of this subsection (b), the retirement or cessation by Caster of professional medical services during the six (6) year period described above (as extended due to any temporary disability) shall necessarily be a breach and default under this subsection (b). 9.4 Practice of Medicine. Notwithstanding any provision of this Agreement or any other Transaction Document to the contrary, the provisions of this ARTICLE shall not be construed to require Caster, or any other medically trained or licensed medical professionals under the direction or control of Caster, to perform Refractive Surgery at the facilities of, or use the equipment of, Newco, if in Caster's professional medical judgment, such use would be detrimental to Caster's patients. Provided further, that this Agreement shall not apply to any Refractive Surgery or related services that are to be paid for, or reimbursed by, Medicare, Medicaid, Champus, or any other state or federal health care program, or in any other instance where the operation of this Agreement would constitute a violation of applicable law. 9.5 Compliance with Applicable Law. In accordance with Texas Business & Commerce Code Section 15.50 (the "Applicable Statutory Provision"), this Agreement hereby provides for the following: (a) Caster shall not hereby be denied access to any list of Caster's patients whom Caster has seen or treated; (b) Caster shall not hereby be denied access to medical records of Caster's patients upon authorization of the patient, and any copies of such medical records obtained or possessed by any of PMSI, Prime, Seller or Newco shall be provided to Caster for a reasonable fee as established by the Texas State Board of Medical Examiners under Section 5.08(o), Medical Practice Act (Article 4495b, Vernon's Texas Civil Statutes); (c) access to any such list of patients or to any such patients' medical records referred to in (i) or (ii) above, shall not require such list or records to be provided in a format different than that by which such records are maintained, except by the mutual consent of Newco and Caster; (d) Caster shall be entitled to buy out his performance of obligations arising under Sections 9.2 and 9.3 of this Agreement (but only such obligations as is necessary in order for this Agreement to comply with the Applicable Statutory Provision) for an amount equal to the Aggregate Purchase Price, less any amounts paid pursuant to Section 9.7 hereof; provided, however, that in order for such buy out to be effective, Caster must also convey or cause to be conveyed, free of any encumbrance, any equity interest in Newco held by either Caster or Seller; and (e) Caster shall not hereby be prohibited from providing continuing care and treatment to a specific patient or patients during the course of an acute illness. Caster agrees that the buy out amount set forth in this Section is a reasonable price and represents a fair value for his performance of Caster's obligations hereunder. Caster and Prime have each elected to utilize such reasonable price in lieu of arbitration pursuant to the Applicable Statutory Provision. 9.6 Restrictions Reasonable. Each party hereto has reviewed and carefully considered the provisions of this ARTICLE and, having done so, agrees that the restrictions applicable to it as set forth herein (a) are fair and reasonable with respect to time, geographic area and scope, (b) are not unduly burdensome to it, and (c) are reasonably required for the protection of the interests of the other parties hereto for whose benefit such restrictions were agreed upon. 9.7 Remedies. (a) General. Each party agrees that a violation on its part of any applicable covenant contained in this ARTICLE or in ARTICLE VIII will cause the other parties hereto for whose benefit such restrictions were agreed upon irreparable damage for which remedies at law may be insufficient, and for that reason, it agrees that the other parties shall be entitled as a matter of right to equitable remedies, including specific performance and injunctive relief, therefor; provided, however, that no party shall be entitled to seek specific performance or injunctive relief (except for a breach of the provisions of Section 9.1) if Prime, PMSI or any of their affiliates has received full payment from Caster of the liquidated damages provided for in (b) below. (b) Liquidated Damages. Because of the difficulty of measuring economic losses to the other parties as a result of a material breach of any provision of this ARTICLE or ARTICLE VIII (subject to any right to cure such breach), the parties agree that, in the event of such a breach by Caster and/or Seller, (i) Caster and Seller shall be obligated to pay to Prime as liquidated damages, an amount determined by multiplying the Aggregate Purchase Price by a fraction, the numerator of which is the difference between sixty (60) and the number of entire consecutive months passed after the Closing Date and prior to such breach, and the denominator of which is the number sixty (60), (ii) Prime, PMSI and Newco shall be released from all of their obligations under this ARTICLE (excluding the provisions of Section 9.1 which shall remain enforceable), ARTICLE VIII and, to the extent elected by Prime, the Facility Use Agreement, and (iii) Caster and Seller shall lose, and hereby agree not to exercise or seek to exercise (directly or through any otherwise required approval of a Caster or Seller designated manager of Newco), any mandatory right of approval or consent as a member or manager (or through a manager designee) of Newco and which mandatory right of approval or consent is otherwise required or provided for in this Agreement or any other Transaction Document (including, without limitation, Newco's Limited Liability Company Agreement). It is understood and agreed that the provisions of clause (iii) of the preceding sentence is not intended, and should not be construed, to result in any of the following: (x) the requirement that Caster or Seller be required to make any capital contribution to Newco after the Closing without Caster's or Seller's consent or the consent of Caster's or Seller's manager designee (it being understood that this is not intended to allow the revocation of any consent once given), (y) Newco being relieved of its obligation to make distributions to pay taxes as provided in Section 5.2 of Newco's Limited Liability Company Agreement, or (z) Caster, Seller or any Caster or Seller designated manager of Newco losing any approval or consent rights which arise solely under the Delaware Limited Liability Company Act and not under the terms of this Agreement or Any Transaction Document. Upon payment of such liquidated damages to Prime, Caster and Seller shall be excused from any further performance under this ARTICLE (excluding the provisions of Section 9.1 which shall remain enforceable), ARTICLE VIII and the Facility Use Agreement. Each of PMSI and Prime agrees that, in the event of a material breach of this ARTICLE or ARTICLE VIII (subject to any right to cure such breach), Caster and Seller shall be excused from any further performance under this ARTICLE (excluding the provisions of Section 9.1 which shall remain enforceable), ARTICLE VIII and, to the extent elected by Caster and Seller, the Facility Use Agreement. (c) Cure Right. As a condition to the right of a party to seek any remedy under this Agreement (excluding injunctive relief), the breaching party shall be given thirty (30) days following delivery of written notice by the party asserting the breach, identifying such material breach, within which the breaching party may attempt to cure such material breach; and, such 30-day period shall be extended up to sixty (60) additional days as long as the breaching party is diligently attempting to cure such material breach. Notwithstanding the foregoing or any other provision of this Agreement or any other Transaction Document, the parties agree that a breach by Caster of the provisions of Section 9.3(b) of this Agreement cannot be cured. (d) Death or Permanent Disability. The parties hereby acknowledge and agree that, although the death or Permanent Disability of Caster shall not be a breach of any of the provisions of this Agreement, Prime, PMSI and Newco shall have the following rights upon the occurrence of either Caster's death or Permanent Disability: (i) Prime, PMSI and Newco shall be released from all of their obligations under this ARTICLE (excluding the provisions of Section 9.1 which shall remain enforceable), ARTICLE VIII and, to the extent elected by Prime, the Facility Use Agreement. ARTICLE X Post Closing Agreements 10.1 Transition of Business. Each of Caster and Seller agrees to cooperate fully with Prime and Newco in transitioning the Business existing prior to the Closing, including the relationships maintained by Caster and Seller with respect to the Business, to Newco after the Closing; and, each of Prime, PMSI, Caster and Seller agrees not to take any action or make any disclosure, including disclosures related to the transactions contemplated by this Agreement, which might alter or impair any relationship with any patient, or other service recipient, person or entity which did business with Seller prior to the Closing. 10.2 Right of Set Off. Caster and Seller agree that Newco shall have rights of offset against distributions to them in respect of any ownership interest they may have in Newco at any time following the Closing, for any and all debts, obligations or liabilities that they may have to Prime, PMSI or any affiliate or subsidiary of PMSI, including, without limitation, any liability arising out of or relating to its obligations under Section 6.1 of this Agreement, or other obligations owed under this Agreement or any other Transaction Document. Caster and Seller each hereby authorizes and directs Newco to, and hereby agrees that Newco is entitled to, withhold and pay such offset amounts to Prime and to take all other actions necessary to make such payment. Newco hereby agrees to promptly remit any and all such offset amounts to Prime upon request. Without limiting or adversely affecting the rights of Prime under this Section, and in order to secure full and prompt payment of the obligations of Caster and Seller under this Agreement and each other Transaction Document, Caster and Seller hereby grant to Prime a continuing security interest in and to distributions they may be entitled to receive at any time after the Closing in respect of any ownership interest held by them in Newco. In connection with the grant of a security interest contained in this Section, each of Caster and Seller agrees (i) to execute all documents, agreements, instruments and certificates, and to take such other actions, as are reasonably necessary in order to fully evidence and perfect such security interest, and (ii) that it, for a period of five (5) years after the Closing, will not, without obtaining the express prior written consent of Prime in each instance, grant or assign to any person or entity rights of any nature in the distributions covered by the security interest granted in this Section, irrespective of whether such rights are to be senior or subordinate to the rights granted under this Section; provided, however, that clause (ii) shall not prohibit Permitted Transfers (as such term is defined in the Organizational Documents) of its ownership interest in Newco, as long as the transferee (A) executes a certificate acknowledging that such distributions with respect to the ownership interest transferred remain subject to the offset rights and security interest granted under this Section as though such transferee and it were one and the same person and (B) executes and consents to the filing of all documents, agreements, instruments and certificates, and takes such other actions, as are necessary in order to fully evidence and perfect such security interest. Caster and Seller acknowledge and agree that the rights and obligations contained in this Section shall remain attached to any membership interests of Newco conveyed by them, regardless of whether the conveyance was permitted pursuant to the Organizational Documents and/or consented to by Prime. In addition, Prime may require any such transferee to execute an acknowledgment recognizing the applicability of the rights and obligations contained in this Section to the membership interest transferred. 10.3 Ratification by Newco. Each of Prime, Caster and Seller agrees that by executing this Agreement it is deemed to be voting any ownership interests it may have in Newco (whether now or at any time after the Closing) to authorize Newco to enter into and perform this Agreement and each of the other Transaction Documents to which Newco is a party. Each of Prime, Caster and Seller agrees to execute such resolutions and written consents, and take such other actions, in their capacities as owners of Newco, as any party shall reasonably require after the Closing to have Newco ratify and adopt this Agreement, notwithstanding the time of creation of Newco or the time of execution of the Organizational Documents. 10.4 Post-Closing Capital Contributions. All parties to this Agreement acknowledge and agree that no member of Newco, nor any other party, has any obligation after the Closing to make a capital contribution to Newco, except as may be expressly provided otherwise in Section 8.3 hereof or pursuant to Newco's Limited Liability Company Agreement. 10.5 Legend. On and after the Closing, each certificate or document representing Caster's, Seller's or Prime's ownership of any of Newco's ownership interests, and each certificate or document that may be issued and delivered by Newco upon transfer of any such certificate, shall contain a legend conspicuously noted in substantially the following form: THE INTERESTS REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AND THEY MAY NOT BE SOLD OR TRANSFERRED EXCEPT PURSUANT TO AN EXEMPTION FROM, OR OTHERWISE IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF SUCH ACT. IN ADDITION, SUCH INTERESTS MAY BE TRANSFERRED ONLY IN COMPLIANCE WITH CERTAIN CONDITIONS SPECIFIED IN (I) A CERTAIN CONTRIBUTION AGREEMENT DATED EFFECTIVE AS OF MARCH 1, 2000, AND (II) THE COMPANY'S LIMITED LIABILITY COMPANY AGREEMENT, COMPLETE AND CORRECT COPIES OF WHICH ARE AVAILABLE FOR INSPECTION AT THE PRINCIPAL OFFICE OF THE COMPANY AND WILL BE FURNISHED TO THE HOLDER HEREOF UPON WRITTEN REQUEST AND WITHOUT CHARGE. 10.6 Covenants Relating to Westside. Caster hereby covenants that he will not transfer, assign or encumber in any way any of his capital stock of (or other ownership interests in) Westside or allow Westside to issue any capital stock or other rights or interests convertible into, or exercisable or exchangeable for, its capital stock. Caster further agrees, in Caster's capacity as the sole owner of all of the outstanding capital stock of Westside, to take all actions (including, without limitation, the election of new directors) that may be necessary to cause Westside, notwithstanding any existing contract, agreement or arrangement between Westside and Seller and/or Newco to the contrary, (a) to operate exclusively for the benefit of Newco, (b) to continue to perform, for the benefit of Newco, the same services that Westside performed for Seller prior to the Closing, and any additional services determined by the affirmative vote or written consent of two of the three managers of Newco (provided that, as long as a Trigger Event has not previously occurred), Caster or Seller's manager designee must be one of the affirming managers), (c) to promptly remit to Newco, without request therefor, all gross revenues received by Westside for services provided after the Effective Time, regardless of the source of such revenues, without offset or deduction made for any expenses or costs of Westside of any nature. As long as Westside complies with the foregoing, Newco shall reimburse Westside for its accounting and tax expenses paid to unrelated third parties and incurred solely as a result of its provision of services to Newco following the Closing Date. As a condition to such reimbursement, the amount of such expenses must have been agreed upon by the affirmative vote or written consent of two of the three managers of Newco (provided that, as long as a Trigger Event has not previously occurred, Caster or Seller's manager designee must be one of the affirming managers). 10.7 Warrants. As partial consideration for Caster's covenants and agreements contained herein, PMSI agrees that it shall, subject to satisfaction of the conditions set forth in this Section, issue to Caster, on or before April 30 in the years 2001, 2002, 2003, 2004 and 2005 (the "Warrant Issue Dates"), five warrants (one on each Warrant Issue Date) in substantially the form attached hereto as Exhibit D (the "Warrants"), each entitling Caster to purchase twenty thousand (20,000) shares (as adjusted for any stock splits, stock dividends, recapitalizations and the like after the Effective Time) of $0.01 par value common stock of PMSI. As used herein, a "Warrant Issue Period" shall mean, with respect to any Warrant Issue Date, the preceding twelve (12) month period ending on the last day of February of that year. As a condition to PMSI's obligation to issue a Warrant on the Warrant Issue Date of April 30, 2001, Newco's consolidated net income, determined using generally accepted accounting principles consistently applied ("Consolidated Net Income"), for the respective Warrant Issue Period must exceed one hundred twenty percent (120%) of the Consolidated Net Income for the period beginning March 1, 1999 and ending February 29, 2000. As a condition to PMSI's obligation to issue a Warrant on any of the Warrant Issue Dates in the years 2002, 2003, 2004 and 2005, Newco's increase in Consolidated Net Income for the respective Warrant Issue Period must exceed a target amount to be determined in advance of each Warrant Issue Period by the vote or written consent of two of the three managers of Newco; provided, however, that such target amount cannot exceed (a) one hundred twenty percent (120%) of the Consolidated Net Income for the Warrant Issue Period ending on the last day of February in the full calendar year immediately preceding the Warrant Issue Date, or (b) with respect to Warrants issuable on or after the 2003 Warrant Issue Date, one hundred forty-four percent (144%) of the Consolidated Net Income for the Warrant Issue Period ending on the last day of February in the second most recent full calendar year that precedes the Warrant Issue Date. The rights under each Warrant issued pursuant to this Section shall vest twenty percent (20%) upon the expiration of each full year following the date of grant, until completely vested, and the Warrant and any unexercised right to purchase shares shall terminate immediately upon the expiration of six (6) years following the date of grant. The per share exercise price applicable to each Warrant shall equal one hundred percent (100%) of the average of the closing NASDAQ per share price for the ten (10) trading days immediately prior to December 31 of the year immediately preceding the date of grant of such Warrant. The total maximum number of shares with respect to which Warrants may be issued pursuant to this Section is one hundred thousand (100,000) (as adjusted for any stock splits, stock dividends, recapitalizations and the like after the Effective Time). The total maximum number of Warrants that may be issued pursuant to this Section is five (5). 10.8 Mexico Facility. The parties agree that, notwithstanding the provisions of Section 9.3, and subject to the terms and conditions of this Section, Caster shall be entitled to invest in and perform procedures at any center in the country of Mexico that provides the performance of Refractive Surgery procedures that cannot, at the time such procedures are performed, be lawfully performed in the United States; provided, however, that Caster's investment in and/or use of such a facility shall be at any point in time restricted to a single facility identified in written notice delivered by Caster to Prime, and Caster may elect to change the facility by delivering written notice to Prime naming the successor facility (the "Mexico Center"). Caster may not spend more than twelve (12) days per calendar year performing procedures at the Mexico Center, and all twelve (12) of those days must occur on Saturdays, Sundays, or calendar days that Caster has not historically performed procedures at Seller's facilities. Caster may only perform procedures at the Mexico Facility if, at the time such procedures are performed, they cannot be lawfully performed in the United States. In addition, as a condition to the availability of Caster's rights under this Section, all pre-operative and post-operative care related to procedures performed at the Mexico Center must, to the extent legally permitted, be done at Newco's center and using Newco's facilities. Caster shall be solely entitled to the surgeon fees arising out of any operation described in this Section. For purposes of this Section, "surgeon fees" shall mean the total fees for the surgical procedure less (a) travel expenses for Caster and the patient and (b) the amounts paid for the use of the Mexico facility, its equipment and supplies. Notwithstanding the foregoing sentence, Newco will be entitled to a co-management fee in an amount equal to twenty percent (20%) of the surgeon fees. 10.9 Autonomous Laser Center. The parties acknowledge that Caster is currently performing certain procedures at the Cedars-Sinai facility using an autonomous laser that, in light of the nature of such procedures, is deemed by Caster to be a medically necessary alternative to the lasers owned or leased by Seller at the time of Closing. The parties agree that, notwithstanding the provisions of Section 9.3, and subject to the terms and conditions of this Section, Caster shall be entitled to perform procedures at (but not invest in, manage or benefit from any similar relationship) a facility (which can be the Cedars-Sinai facility) providing use of an autonomous laser of substantially the type located at the Cedars-Sinai facility (the "Autonomous Center"); provided, however, that Caster may only perform at the Autonomous Center those procedures that (a) in Caster's medical judgment, cannot be performed using the facilities or equipment made available at such time by Newco and (b) cannot, in Caster's judgment, be postponed until such time as Newco is able to make available the necessary facilities. In addition, as a condition to the availability of Caster's rights under this Section, the full Facility Usage Fee (as defined in the Facility Use Agreement) that would have been payable if Caster had used Newco's facilities shall be paid to Newco, and Newco shall pay any facility usage fee owed to the Autonomous Center (not to exceed the amount paid to Newco). 10.10 Insurance After Closing. The parties hereto agree that Schedule 3.10 attached hereto sets forth all of the insurance relating to or benefiting Newco (and the other insureds described therein) or Newco's business that are required to be in force immediately following the Closing, and each party agrees to cause Newco to maintain such insurance in effect, and with the additional assureds described on Schedule 3.10 in accordance with the provisions of Newco's Limited Liability Company Agreement governing changes to insurance. In addition, Newco hereby agrees that if both Seller and Prime are members of Newco upon Caster's retirement from the practice of medicine, Newco will, as long as Caster and Seller are not then in material breach of this Agreement or any Transaction Document (subject to any right to cure), acquire a tail insurance policy providing coverage substantially similar to the coverage benefiting Caster prior to such retirement, for a period of time customarily applicable to retiring physicians in ophthalmology. Subject to the foregoing obligations of Newco and any other obligations of Newco pursuant to its Limited Liability Company Agreement, each party may elect to acquire in its own name and maintain whatever level or amount of insurance it desires, without seeking or obtaining the advice or consent of the other parties hereto. 10.11 Guarantees By PMSI and Prime. With respect to any contractual obligation that is an Assumed Liability hereunder, and that has been clearly identified on Schedule 1.4 as having been personally guaranteed by Caster, each of Prime and PMSI agrees that it shall guarantee the same obligation, to the same extent actually guaranteed by Caster, on a joint and several basis with Caster, when and if the party to whom such obligation is owed seeks to enforce Caster's guaranty. Caster shall give prompt written notice to Prime after any such party threatens or actually commences any enforcement action. Caster and PMSI agree that they shall bear any liability under such guaranty 40%/60%, respectively, and shall indemnify and hold the other harmless from amounts in excess thereof. ARTICLE X Miscellaneous 11.1 Collateral Agreements, Amendments, and Waivers. This Agreement (together with the other Transaction Documents) supersedes all prior documents, understandings, and agreements, oral or written, relating to this transaction and constitutes the entire understanding among the parties with respect to the subject matter hereof. Any modification or amendment to, or waiver of, any provision of this Agreement (or any Transaction Document unless otherwise expressly provided therein) may be made only by an instrument in writing executed by each party thereto. 11.2 Successors and Assigns. No party's rights or obligations under this Agreement may be assigned without the prior written consent of all parties hereto, except that Prime may assign its rights and obligations hereunder to any entity, more than fifty percent (50%) of the voting equity ownership interests of which is at the time owned, directly or indirectly, by PMSI. Any assignment in violation of the foregoing shall be null and void. Subject to the preceding sentences of this Section, the provisions of this Agreement (and, unless otherwise expressly provided therein, of any Transaction Document) shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, legal representatives, successors, and assigns. 11.3 Expenses. Except as set forth in the following sentence, regardless of whether the transactions contemplated hereby are consummated, each party hereto shall pay all of its costs and expenses incurred by it in connection with this Agreement, including the fees and disbursements of its legal counsel and accountants. Notwithstanding the foregoing, up to $2,500 of the costs and expenses incurred by Prime that are associated specifically with the formation and documentation of Newco, including legal fees and expenses for drafting the Organizational Documents, shall be paid or reimbursed to Prime by Newco. 11.4 Invalid Provisions. If any provision of this Agreement is held to be illegal, invalid, or unenforceable under present or future laws, such provision shall be fully severable, this Agreement shall be construed and enforced as if such illegal, invalid, or unenforceable provision had never comprised a part of this Agreement, and the remaining provisions of this Agreement shall remain in full force and effect and shall not be affected by the illegal, invalid, or unenforceable provision or by its severance from this Agreement. 11.5 Waiver. No failure or delay on the part of any party in exercising any right, power, or privilege hereunder or under any of the documents delivered in connection with this Agreement shall operate as a waiver of such right, power, or privilege; nor shall any single or partial exercise of any such right, power, or privilege preclude any other or future exercise thereof or the exercise of any other right, power or privilege. 11.6 Notices. Any notices required or permitted to be given under this Agreement (and, unless otherwise expressly provided therein, under any document delivered pursuant to this Agreement) shall be given in writing and shall be deemed received (a) when delivered personally or by courier service to the relevant party at its address as set forth below or (b) if sent by mail, on the third (3rd) day following the date when deposited in the United States mail, certified or registered mail, postage prepaid, to the relevant party at its address indicated below: Prime: 1301 Capital of Texas Highway Suite C-300 Austin, Texas 78746 Attention: President with a copy to: Mr. Timothy L. LaFrey Akin, Gump, Strauss, Hauer & Feld, L.L.P. 816 Congress Avenue, Suite 1900 Austin, Texas 78701 Seller: Caster Eye Center Medical Group 9100 Wilshire Boulevard, Suite 265E Beverly Hills, California 90212 Attn: Andrew Caster, M.D. with a copy to: Mahoney Coppenrath & Jaffe LLP 2049 Century Park East, Suite 2480 Los Angeles, California 90067-3126 Attn: James E. Mahoney, Esq. Caster: Andrew Caster, M.D. Caster Eye Center Medical Group 9100 Wilshire Boulevard, Suite 265E Beverly Hills, California 90212 with a copy to: Mahoney Coppenrath & Jaffe LLP 2049 Century Park East, Suite 2480 Los Angeles, California 90067-3126 Attn: James E. Mahoney, Esq. Each party may change its address for purposes of this Section by proper notice to the other parties. 11.7 Survival of Representations, Warranties, and Covenants. Regardless of any investigation at any time made by or on behalf of any party hereto or of any information any party may have in respect thereof, all covenants, agreements, representations, and warranties made hereunder or pursuant hereto or in connection with the transactions contemplated hereby shall survive the Closing. 11.8 Further Assurances. At, and from time to time after, the Closing, each party shall, at the request of another party, but without further consideration, execute and deliver such other instruments of conveyance, assignment, assumption, transfer and delivery and take such other action as such party may reasonably request in order more effectively to consummate the transactions contemplated hereby. 11.9 Construction, Knowledge and Materiality. This Agreement and any documents or instruments delivered pursuant hereto or in connection herewith shall be construed without regard to the identity of the person who drafted the various provisions of the same. Each and every provision of this Agreement and such other documents and instruments shall be construed as though all of the parties participated equally in the drafting of the same. Consequently, the parties acknowledge and agree that any rule of construction that a document is to be construed against the drafting party shall not be applicable either to this Agreement or such other documents and instruments. For purposes of this Agreement, whenever there are references to "material" or "materially," such terms shall be deemed to mean an economic impact exceeding $10,000 with respect to the fact or matter being referred to or described. As used herein, "day" or "days" refers to calendar days unless otherwise specified in each instance. When the term "knowledge" is used in this Agreement in reference to (i) Prime, it shall mean such items as are within the actual knowledge of Ken Shifrin, Brad Hummel, Teena Belcik and John Hedrick and (ii) Seller, it shall mean such items as are within the actual knowledge of Caster or any person employed by Seller prior to the Closing Date who becomes an employee of Newco after the Closing Date. For purposes of this Agreement, when the term "affiliate" is used with respect to PMSI or Prime, it shall not include Seller or Caster, and when "affiliate" is used with respect to Seller or Caster, it shall not include PMSI or Prime. 11.10 Other Agreements. Each party hereto agrees that any material breach by it of any of the terms and provisions of another Transaction Document to which it is a party shall also be deemed to have been a material breach by it of this Agreement, for all purposes. 11.11 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Texas. 11.12 Arbitration. Any controversy between the parties regarding this Agreement or any other Transaction Document, any claims arising out of any breach or alleged breach of this Agreement or any other Transaction Document and any claims arising out of the relationship between the parties created hereunder shall be submitted to binding arbitration by all parties involved. The arbitration proceedings shall be conducted by a single arbitrator if the amount in controversy is less than $2,000,000 and three arbitrators if the amount in controversy is more than $2,000,000. Except as otherwise expressly provided in this Section, the arbitration shall be conducted pursuant to the Commercial Arbitration Rules of the American Arbitration Association. The arbitration shall be conducted in Phoenix, Arizona and the arbitrator shall have the right to award actual damages and attorney fees and costs resulting from a breach or default by any party under this Agreement, any other Transaction Document or otherwise, consistent with the provisions of this Agreement, but shall not have the right to award punitive or exemplary damages against either party. 11.13 Counterparts. This Agreement may be executed in several counterparts, each of which shall constitute an original and all of which together shall constitute one and the same instrument. Any party hereto may execute this Agreement by signing any one counterpart. [Signature page follows] S-1 SIGNATURE PAGE TO CONTRIBUTION AGREEMENT IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the day and year first above written. PMSI: Prime Medical Services, Inc. Teena Belcik, Treasurer Prime: Prime Refractive, L.L.C. Teena Belcik, Treasurer Newco: Caster One, L.L.C. Teena Belcik, signing as a manager of Newco and on behalf of Prime, as a member of Newco Andrew Caster, signing as both a manager and as president of Seller on behalf of Seller, as a member of Newco Caster: Andrew Caster, M.D. Seller: Caster Eye Center Medical Group Andrew Caster, M.D., President Exhibit A Limited Liability Company Agreement of Newco Exhibit B Seller's Financial Statements Exhibit C Facility Use Agreement Exhibit D Form of Warrant EX-10.91 4 0004.txt EX 10.91 FACILITY USE AGREEMENT FOR CASTER 1 FACILITY USE AGREEMENT This Facility Use Agreement (hereinafter referred to as the "Agreement") is made and executed as of the close of business on the 1st day of March, 2000 by and among Caster One, L.L.C., a Delaware limited liability company, (hereinafter referred to as "Newco"), Andrew Caster, M.D. (hereinafter referred to as "Provider") and Caster Eye Center Medical Group, a California professional corporation (hereinafter referred to as "Caster PC"). Preliminary Statements: Provider, a licensed medical professional, together with Caster PC provides Refractive Surgery (as hereinafter defined) and related services in the area of Los Angeles County, California. Newco owns certain equipment and assets (none of which include the practice of medicine) used in the performance of Refractive Surgery and related services. Provider and Caster PC desire to use Newco's facilities to render medical services to their patients. Caster PC desires to employ certain employees on behalf of Newco, for the purpose of rendering services at and using the facilities of Newco. Statement of Agreement In consideration of the mutual covenants and agreements herein contained, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and on the terms and subject to the conditions herein set forth, the parties hereto agree as follows: ARTICLE I Certain Defined Terms Unless otherwise defined in Section 1.1 or elsewhere in this Agreement, all capitalized terms used in this Agreement shall have the meanings ascribed to them in that certain Contribution Agreement (the "Contribution Agreement") dated as of March 1, 2000, among Prime Medical Services, Inc., a Delaware corporation, Prime Refractive, L.L.C., a Delaware limited liability company, Newco, Provider and Caster PC. ARTICLE II Relationship of the Parties The relationship under this Agreement between Newco, on the one hand, and Provider and Caster PC, on the other hand, shall be that of independent contractors. The provisions hereof are not intended to create any partnership, joint venture, agency or employment relationship between the parties. Newco acknowledges and agrees that Provider and Caster PC shall retain the exclusive authority to direct the medical, clinical professional, and ethical aspects of their respective medical practices. Newco shall neither exercise control over nor interfere with the physician-patient relationships of Provider or Caster PC, which shall be maintained strictly between Provider, Caster PC and their patients. ARTICLE III Services to be Provided by Newco Section 3.1 General. No party will act in a manner that would prevent the other parties from performing their duties hereunder, and each party will provide such information and assistance to each other party as is reasonably required to enable such other party to perform its services hereunder. Newco shall, and shall use its best efforts to cause its employees to, comply with all applicable federal, state and local laws, rules and regulations in its provision of services hereunder. Section 3.2 Facilities. Newco shall make available to Caster PC and Provider the real property located at 9100 Wilshire Blvd., Suite 265E, Beverly Hills, California 90212, and the improvements, facilities and assets located thereon, including without limitation, the Assets, the Business and personnel, for the use of Caster PC and Provider in the performance of Refractive Surgery and related services (together with any subsequent property, improvements, facilities or assets acquired by Newco in replacement of or in addition to the foregoing, the "Facilities"). Newco agrees to maintain the Facilities in a commercially reasonable manner in light of the intended use of the Facilities. Section 3.3 Newco Management. Newco shall manage and administer the Facilities, which management and administration shall include, without limitation, all administration, accounting, purchasing, payroll, legal services, record keeping, bookkeeping, computer services, information management, printing, postage, duplication services, hiring of personnel, quality assurance programs, billing and collecting from, and contracting with, patients, insurance companies, managed care payors, governmental entities and other third-party payors with respect to all professional, medical and other services provided by Caster PC or Provider, and management and administration of all other aspects of the Business. Notwithstanding any provision of this Agreement to the contrary: (a) Newco shall not engage in the practice of medicine, and Provider shall at all times be responsible for all activities that constitute the practice of medicine; and (b) this Agreement shall not be construed to require Provider, or any other medically trained or licensed medical professionals under the direction or control of Provider, to perform Refractive Surgery at the facilities of, or use the equipment of, Newco, if in Provider's professional medical judgment, such use would be detrimental to Provider's patients. (c) although Caster PC shall pay and provide all required salaries and benefits to all employees, said employees shall, to the extent they work on the Business conducted by Newco, and except as limited by the Transaction Documents, be treated as employees of Newco, and Newco shall, only in accordance with the provisions of Section 4.2 hereof, provide Caster PC with such funds as Caster PC requires to satisfy said payment obligation. Section 3.4 Events Excusing Performance. In the event of strikes, lock-outs, calamities, acts of God, unavailability of supplies or other events over which Newco has no control (hereinafter, with respect to any non-performing party not having control over such event, a "Force Majeure Event"), Newco shall not be liable to Caster PC or Provider for failure to provide any of the Facilities hereunder, and Caster PC and Provider shall not have the right to terminate this Agreement, for so long as such events continue and for a reasonable period of time thereafter; provided, however, that if such events continue and Newco is not able to provide any Facilities hereunder for a period of one hundred and eighty (180) consecutive days or more, Newco, Caster PC or Provider may terminate this Agreement by written notice to the others. Notwithstanding any provision of the Transaction Documents to the contrary, for any portion of such periods following a Force Majeure Event in excess of five (5) business days during which Newco is unable to provide Facilities sufficient to allow Caster to perform Refractive Surgery, then Caster may perform medical services, including Refractive Surgery at such other locations within or without the Restricted Area as he deems appropriate and he shall be entitled to retain all compensation receive therefrom. ARTICLE IV Obligations of Caster PC and Provider Section 4.1 Facility Fee. Subject to modification in the manner prescribed by Section 8.9 of Newco's Limited Liability Company Agreement, the fees payable to Newco by Caster PC and Provider in return for use of the Facilities made available by Newco hereunder (the "Facility Usage Fee") shall be determined on a per procedure basis, and shall be remitted to Newco weekly following the performance of the procedure for which the Facility Usage Fee is due, less any unreimbursed reimbursable expenses that have been incurred under Section 4.2 up to that time. The amount of the Facility Usage Fee with respect to any procedure shall be determined in accordance with the following procedures. (a) As long as Caster PC's standard, undiscounted fee charged to the patient (determined without reference to the fee charged for any single procedure, the "Patient Fee") has at all prior times remained between the amounts of $2,400 per procedure and $2,275 per procedure, the Facility Usage Fee shall equal (i) the amount actually collected for such procedure minus (ii) $400. (b) At all times following any reduction of the Patient Fee to an amount less than $2,275 per procedure, or any increase in the Patient Fee to an amount greater than $2,400 per procedure, the Facility Usage Fee shall equal (i) the amount actually collected for such procedure minus (ii) an amount up to seventeen and 58/100 percent (17.58%) of such Patient Fee; provided, however, that in no event shall the Facility Usage Fee be below the fair market value of the use of the Facilities in the aggregate. (c) Notwithstanding the foregoing provisions of this Section 4.1, or any other contrary provision of any Transaction Document, Provider shall be entitled to perform procedures for free and refund amounts paid for procedures on a limited basis in a manner and to the extent Provider has done so in the past, or as otherwise consented to by Newco. The Facility Usage Fee with respect to such procedures shall be eliminated, as long as the aggregate Facility Usage Fee paid hereunder equals or exceeds the fair market value of the use of the Facilities. Section 4.2 Budgeted Expenses. Caster PC acknowledges that certain of its employees have in the past performed services utilizing the assets acquired by Newco pursuant to the Contribution Agreement (the "Remaining Employees"), and that the continued availability of the Remaining Employees to Newco is critical to the business of Newco. Caster PC hereby agrees to make the Remaining Employees exclusively available to Newco, unless prohibited by law, in accordance with the instructions of a majority of the Managers of Newco, and to incur certain budgeted expenses, including without limitation the expenses of maintaining and administering the existing retirement plan of Caster PC, in connection with the operations of Newco and those operations of Caster PC or Provider for which Newco will reimburse Caster PC or Provider as contemplated in Sections 4.4 and 4.5; provided that such availability and use of the Remaining Employees, and expenses related to Newco's, Caster PC's and Provider's operations, shall be consistent with the practices of Caster PC prior to the Effective Time (as defined in the Contribution Agreement), subject to appropriate adjustment for any growth in the volume of procedures done using the Facilities during the term of this Agreement. Newco agrees that it shall bear the actual, out-of-pocket costs of employing the Remaining Employees, and any other actual, out-of-pocket expenses incurred by Caster PC and related solely to the operations of Newco, but only to the extent (a) such costs or expenses are, individually and collectively, not in excess of amounts reflected in the budget agreed upon pursuant to the other provisions of this Section (collectively, the "Budgeted Costs") or (b) such costs or expenses are specifically and by amount agreed to in writing by any one (1) of the Prime designated managers of Newco. All costs or expenses to be reimbursed by or charged or netted from amounts owed to Newco must be specifically reflected in an annual budget prepared and delivered by Caster PC to Newco, that has been agreed upon in form and substance by a majority of the managers of Newco. Such budgets shall be delivered not less than sixty (60) days prior to the beginning of the period to which the budget applies; provided, however, that the initial budget for the remainder of the year 2000 shall be delivered on the date of this Agreement. Newco shall have the right to audit and inspect all of the records of Caster PC as they relate to Caster PC's costs and expenses pursuant to this Section. Caster PC and Provider shall cooperate and provide access to all relevant books and records in connection with the exercise of such right. Newco must give at least ten (10) days prior written notice to Caster PC of its intent to exercise its auditing rights, and Newco will bear the costs of any such audit, unless the audit reveals that Budgeted Costs were overpaid by Newco by more than five percent (5%), in which case Caster PC will promptly reimburse Newco for all reasonable out-of-pocket costs and expenses incurred by it in connection with such audit. Unless otherwise agreed by the parties involved, such audit shall be conducted during normal business hours at the offices of Caster PC. Any overpayments by Newco for Budgeted Costs shall be paid to Newco by Caster PC, together with interest accrued thereon at the rate of eighteen percent (18%) per annum from the date of overpayment until the date paid by Caster PC. Any underpayments by Newco for Budgeted Costs shall be paid to Caster PC by Newco, together with interest accrued thereon at the rate of eighteen percent (18%) per annum from the date of underpayment until the date paid by Newco. Section 4.3 Compliance With Laws. Caster PC and Provider shall provide professional services to patients in compliance at all times with, and shall otherwise comply with, all ethical standards, laws, rules and regulations applicable to the operations of Caster PC and Provider. Caster PC and Provider shall use reasonable efforts to ensure that Provider and the employees of Caster PC and Provider have all required licenses, credentials, approvals or other certifications to perform his or her duties and services for Caster PC and Provider. In the event that any disciplinary actions or medical malpractice actions are initiated against Provider or any employee of Provider or Caster PC, Caster PC and Provider shall promptly inform Newco of such action and the underlying facts and circumstances. Section 4.4 Caster PC's and Provider's Internal Matters. Caster PC and Provider shall be responsible for matters involving their respective corporate governance, employees and similar internal matters, including, but not limited to, preparation and contents of such reports to regulatory and tax authorities governing Caster PC and Provider that Caster PC or Provider are required by law to provide, distribution of professional fee income among Provider or the shareholders of Caster PC, disposition of Caster PC's and Provider's property and stock and hiring and firing of their employees and licensing. The legal, accounting and other professional services fees incurred by Provider or Caster PC in connection with the internal matters of Caster PC, the distribution of the fee income among Provider or shareholders of Caster PC and the personal accounting of Caster PC and Provider and similar internal and personal matters, shall be borne exclusively by Caster PC and/or Provider, except to the extent included as reimbursable by Newco in the budget prepared pursuant to, or otherwise approved for reimbursement in accordance with, Section 4.2 above. Section 4.5 Personal Expenses. Except as expressly provided above in Section 4.2, Provider agrees that Personal Expenses of Provider shall not be considered expenses of Newco and shall be borne solely by Provider, unless agreed otherwise by the unanimous vote or written consent of the managers of Newco. For purposes of this Section, the term "Personal Expenses" shall mean all liabilities, obligations, costs and expenses of Caster that arise after the Closing Date that are not directly and exclusively related to the provision or operation of the Facilities, the conduct of the Business, or the employees, excluding expenses included as reimbursable by Newco in the budget prepared pursuant to, or otherwise approved for reimbursement in accordance with, Section 4.2 above. Section 4.6 Events Excusing Performance. In the event of a Force Majeure Event that prevents Caster PC's or Provider's performance under this Agreement, Caster PC and/or Provider (as applicable) shall not be liable to Newco for failure to perform any covenants hereunder to the extent such performance is prevented or impeded by such Force Majeure Event, and Newco shall not have the right to terminate this Agreement, for so long as such events continue and for a reasonable period of time thereafter; provided, however, that if such events continue and Caster PC and/or Provider is not able to perform its obligations hereunder for a period of one hundred and eighty (180) consecutive days or more, Newco, Caster PC or Provider may terminate this Agreement by written notice to the others. Notwithstanding any provision of the Transaction Documents to the contrary, for any portion of such periods following a Force Majeure Event in excess of five (5) business days during which Caster PC and/or Caster is unable to perform its obligations hereunder, then Newco may enter into agreements with other physicians regarding use of the Facilities, upon such terms and conditions as a simple majority of Newco's managers may agree, not subject to any specific approval rights in favor of any particular manager or member of Newco, and each of the parties hereto agrees to cast any vote it may have as a manager or member of Newco as necessary to give full effect to this sentence. ARTICLE V Term and Termination This Agreement shall commence on the date hereof and shall expire on the earlier of (a) the 40th anniversary hereof or (b) the expiration or termination of the Restricted Period (as defined in the Contribution Agreement); provided, however, that (y) Prime may elect to have Newco terminate this Agreement at any time following any breach by Provider of the provisions of ARTICLE VIII or ARTICLE IX of the Contribution Agreement (with the further understanding that no breach by Provider of Section 9.3(b) of the Contribution Agreement can be cured) and (z) Provider or Caster PC may elect to terminate this Agreement at any time following any material breach by PMSI or Prime of the provisions of ARTICLE VIII or ARTICLE IX of the Contribution Agreement. ARTICLE VI General Provisions Section 6.1 Collateral Agreements, Amendments, and Waivers. This Agreement (together with the Contribution Agreement and all documents delivered pursuant to the Contribution Agreement) supersedes all prior documents, understandings, and agreements, oral or written, relating to this transaction and constitutes the entire understanding among the parties with respect to the subject matter hereof. Any modification or amendment to, or waiver of, any provision of this Agreement (or any document delivered pursuant to this Agreement unless otherwise expressly provided therein) may be made only by an instrument in writing executed by each party thereto. Section 6.2 Successors and Assigns. No party's rights or obligations under this Agreement may be assigned without the prior written consent of all parties hereto. Any assignment in violation of the foregoing shall be null and void. Subject to the preceding sentences of this Section, the provisions of this Agreement (and, unless otherwise expressly provided therein, of any document delivered pursuant to this Agreement) shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, legal representatives, successors, and assigns. Section 6.3 Invalid Provisions. If any provision of this Agreement is held to be illegal, invalid, or unenforceable under present or future laws, such provision shall be fully severable, this Agreement shall be construed and enforced as if such illegal, invalid, or unenforceable provision had never comprised a part of this Agreement, and the remaining provisions of this Agreement shall remain in full force and effect and shall not be affected by the illegal, invalid, or unenforceable provision or by its severance from this Agreement. Section 6.4 Waiver. No failure or delay on the part of any party in exercising any right, power, or privilege hereunder or under any of the documents delivered in connection with this Agreement shall operate as a waiver of such right, power, or privilege; nor shall any single or partial exercise of any such right, power, or privilege preclude any other or future exercise thereof or the exercise of any other right, power or privilege. Section 6.5 Notices. Unless specifically provided otherwise herein, any notices required or permitted to be given under this Agreement shall be given and deemed received in the manner provided in the Contribution Agreement. Section 6.6 Survival of Representations, Warranties, and Covenants. Regardless of any investigation at any time made by or on behalf of any party hereto or of any information any party may have in respect thereof, all covenants, agreements, representations, and warranties made hereunder or pursuant hereto or in connection with the transactions contemplated hereby shall survive the execution of this Agreement. Section 6.7 Construction. This Agreement and any documents or instruments delivered pursuant hereto or in connection herewith shall be construed without regard to the identity of the person who drafted the various provisions of the same. Each and every provision of this Agreement and such other documents and instruments shall be construed as though all of the parties participated equally in the drafting of the same. Consequently, the parties acknowledge and agree that any rule of construction that a document is to be construed against the drafting party shall not be applicable either to this Agreement or such other documents and instruments. Section 6.8 Other Agreements. Each party hereto agrees that any material breach by it of any of the terms and provisions of another Transaction Document (as defined in the Contribution Agreement) to which it is a party shall also be deemed to have been a material breach by it of this Agreement, for all purposes. The remedy provided in Section 9.7 of the Contribution Agreement, and termination of this Agreement, shall in all events be the exclusive remedy for any and all acts or omissions of Caster that result in a material breach of any of the provisions of ARTICLE VIII or ARTICLE IX thereof, regardless of whether such acts or omissions, in the absence of this sentence, would give rise to a claim under any of the Transaction Documents, including this Agreement. Section 6.9 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Texas. Section 6.10 Arbitration. Any controversy between the parties regarding this Agreement or any other Transaction Document, any claims arising out of any breach or alleged breach of this Agreement or any other Transaction Document, and any claims arising out of the relationship between the parties created hereunder, shall be submitted to binding arbitration by all parties involved in accordance with the terms of the Contribution Agreement. Section 6.11 Counterparts. This Agreement may be executed in several counterparts, each of which shall constitute an original and all of which together shall constitute one and the same instrument. Any party hereto may execute this Agreement by signing any one counterpart. [Signature page follows] S-1 SIGNATURE PAGE TO FACILITY USE AGREEMENT IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the day and year first above written. Newco: Caster One, L.L.C. Teena Belcik, signing as a manager of Newco and on behalf of Prime, as a member of Newco Andrew Caster, signing as both a manager and on behalf of Seller, as a member of Newco Caster: _______________________________________________ Andrew Caster, M.D. Seller: Caster Eye Center Medical Group By: Andrew Caster, M.D., President EX-10.92 5 0005.txt EX 10.92 AMENDED LLC AGREEMENT FOR CASTER FIRST AMENDED AND RESTATED LIMITED LIABILITY COMPANY AGREEMENT OF CASTER ONE, L.L.C. Organized under the Delaware Limited Liability Company Act (the "Act"). This First Amended and Restated Limited Liability Company Agreement of Caster One, L.L.C. (this "Agreement") is intended to amend and replace in its entirety that certain Limited Liability Company Agreement of Caster One, L.L.C. dated as of March 1, 2000 between Prime Refractive, L.L.C., a Delaware limited liability company ("Prime") and Caster Eye Center Medical Group, a California professional corporation ("Caster, Inc.") (the "Original Agreement"). ARTICLE I. NAME AND LOCATION Section 1.1. Name. The name of this limited liability company is Caster One, L.L.C. (the "Company"). Section 1.2. Members. The only members of the Company upon the execution of this Limited Liability Company Agreement (this "Agreement") shall be Prime and Caster, Inc. For purposes of this Agreement, the "Members" shall include such named members and any new members admitted pursuant to the terms of this Agreement, but does not include any person or entity who has ceased to be a member in the Company. Section 1.3. Principal Offices. The principal offices of the Company shall be located at 1301 Capital of Texas Hwy., Suite C-300, Austin, Texas 78746-6550, 9100 Wilshire Blvd. #265E, Beverly Hills, California, 90212, and at such other locations as may be selected by the Members. Section 1.4. Registered Agent and Address. The name of the registered agent and the address of the registered office of the Company as set forth in the Certificate of Formation of the Company are: The Corporation Trust Company 1209 Orange Street Wilmington, Delaware 19801 Section 1.5. Other Offices. Other offices and other facilities for the transaction of business shall be located at such places as the Managers may from time to time determine. Section 1.6 Contribution Agreement. The Company was initially formed with a single member, Andrew Caster, M.D. ("Caster") for the purpose of consummating the transactions contemplated by that certain Contribution Agreement dated effective as of March 1, 2000, by and among Prime Medical Services, Inc., a Delaware corporation ("PMSI"), Prime, Caster, Inc., Caster, and the Company (the "Contribution Agreement"). The parties have executed this Agreement concurrent with the consummation of the transactions contemplated by the Contribution Agreement. This agreement supercedes and replaces any prior membership agreement or other governing or organizational document of the Company. The parties to this Agreement agree that (a) each reference to the Original Agreement contained in the Contribution Agreement and each other Transaction Document (as defined in the Contribution Agreement) shall be deemed a reference instead to this Agreement and (b) this Agreement shall be deemed a Transaction Document for all purposes under the Contribution Agreement and each other Transaction Document. Section 1.7 Certain Defined Terms. Unless otherwise defined in this Section 1.7 of elsewhere in this Agreement, all capitalized terms used in this Agreement shall have the meanings ascribed to them in the Contribution Agreement. The following terms used in this Agreement shall (unless expressly provided herein or unless the context otherwise requires) have the following respective meanings: "Adjusted Capital Account Deficit" shall mean, with respect to any Member, the deficit balance, if any, in a Member's Capital Account as of the end of the Company's fiscal year, after giving economic effect to the following adjustments: (i) credit to such Capital Account for any amounts which a Member is obligated to restore pursuant to any provision of this Agreement or is deemed to be obligated to restore pursuant to the provisions of Regulations ss.ss.1.704-2(g)(1) and 1.704-2(i)(5) and (ii) debit to such Capital Account for the items enumerated in Regulations ss.ss.1.704-1(b)(2)(ii)(d)(4)-(6). The foregoing definition of "Adjusted Capital Account Deficit" is intended to comply with the provisions of Regulations ss.1.704-1(b)(2)(ii)(d) and shall be construed as being consistent therewith. "Capital Account" shall mean, with respect to each Member, the capital account which is maintained as part of the Company's books and records, in accordance with the following: (i) Each Member's Capital Account will be credited with the amount of money contributed by such Member to the capital of the Company, plus the initial Gross Asset Value of any property (other than money) contributed by such Member to the capital of the Company (net of liabilities securing such contributed property that the Company is considered to assume or take subject to under Section 752 of the Code) plus the amount of any Net Income allocated to such Member, and the amount of any items in the nature of income or gain specially allocated to such Member pursuant to Sections 6.3 or 6.4; (ii) Each Member's Capital Account will be debited by the amount of money distributed to such Member by the Company (exclusive of a guaranteed payment within the meaning of ss.707(c) of the Code paid to such Member), plus the Gross Asset Value of any property distributed to such Member by the Company (net of liabilities securing such distributed property that such Member is considered to assume or take subject to under ss.752 of the Code) and decreased further by the amount of any Net Loss allocated to such Member and the amount of any items in the nature of loss or deduction specially allocated to such Member pursuant to Sections 6.3 or 6.4. (iii) The Capital Account of a Member who receives a distribution in liquidation of his Membership Interest that gives rise to an adjustment to the adjusted tax basis of Company property under ss.734 of the Code shall have a corresponding adjustment made to such Member's Capital Account in accordance with the provisions of Regulation ss.1.704-1(b). In the event of any other Distribution (as hereinafter defined) to a Member that gives rise to an adjustment under Code ss. 734, an adjustment shall be made to the Capital Accounts of all of the Members in accordance with Regulation ss. 1.704-1(b)(iv)(m)(4). (iv) In the event the Gross Asset Value of Company assets are adjusted pursuant to the terms of this Agreement, the Capital Accounts of the Members shall be adjusted simultaneously to reflect the aggregate net adjustment as if the Company recognized gain or loss equal to the amount of such aggregate net adjustment and such gain or loss was allocated to the Members pursuant to the appropriate provisions of this Agreement. (v) The foregoing Capital Account definition and the other provisions of this Agreement relating to the maintenance of Capital Accounts are intended to comply with Regulations ss.1.704-1(b)(2)(iv), and shall be interpreted and applied in a manner consistent with such Regulations, with such optional adjustments as the Managers shall determine appropriate in order to provide that the Company's allocations shall meet the "substantial economic effect" test of the applicable Regulations. "Company Minimum Gain" shall have the same meaning as ascribed to the term " partnership minimum gain" set forth in Regulations ss.ss. 1.704-2(b)(2) and 1.704-2(d). "Distribution" shall mean money or property distributed to a Member in its capacity as a Member pursuant to Article V hereof. "Gross Asset Value" means, with respect to any asset of the Company, the asset's adjusted basis for federal income tax purposes; provided, however, that (a) the Gross Asset Value of any asset contributed by a Member to the Company or distributed to a Member by the Company shall be the gross fair market value of such asset (without taking into account ss.7701(g) of the Code), as reasonably determined by the contributing or distributee Member, as the case may be, and the Company or in the case of assets initially contributed the amounts set forth on Schedule A, (b) the Gross Asset Values of all Company assets shall be adjusted to equal their respective gross fair market values (taking into account ss.7701(g) of the Code), as reasonably determined by the Managers upon the termination of the Company for federal income tax purposes pursuant to ss.708(b) of the Code; and (c) the Gross Asset Values of all Company assets may be adjusted in the discretion of the Managers to equal their respective gross fair market value (taking into account ss.7701(g) of the Code), as reasonably determined by the Managers as of (i) the date of the acquisition of an additional interest in the Company by any new or existing Member in exchange for more than a de minimis contribution to the capital of the Company; (ii) upon the distribution by the Company to a retiring or continuing Member of more than a de minimis amount of Company property or money in reduction of such Member's interest in the Company; or (iii) upon the liquidation of the Company within the meaning of Regulations ss.1.704-1(b)(2)(ii)(g); provided, however, that the adjustments made pursuant to clauses "(i)" and "(ii)" above shall be made only if the Managers reasonably determine that such adjustments are necessary or appropriate to reflect the relative economic interests of the Members in the Company. "Member Minimum Gain" shall mean an amount, determined with respect to each Member Non-Recourse Debt, equal to the Company Minimum Gain that would result if such Member Non-Recourse Debt were treated as a Non-Recourse Liability, determined in accordance with Regulations ss.1.704-2(i)(3). "Member Non-Recourse Debt" shall have the same meaning as ascribed to the term "partnership nonrecourse gain" pursuant to Regulations ss.1.704-2(i)(5). "Member Non-Recourse Deductions" shall have the same meaning as ascribed to the term "partner nonrecourse deductions" pursuant to Regulations ss.1.704-2(i)(2). The amount of Member Non-Recourse Deductions with respect to a Member Non-Recourse Debt during a Company taxable year shall equal the excess, if any, of the net increase, if any, in the amount of Member Minimum Gain attributable to a Member Non-Recourse Debt during that taxable year, over the aggregate amount of any Distributions during that taxable year to the Member who bears the economic risk of loss for such Member Non-Recourse Debt, to the extent that such Distributions are from the proceeds of such Member Non-Recourse Debt and are allocable to an increase in Member Minimum Gain attributable to such Member Non-Recourse Debt, determined in accordance with the Regulations ss.1.704-2(i)(2). "Net Income" or "Net Loss" shall mean the taxable income or gain and taxable loss as determined in accordance with the accounting methods followed by the Company for federal income tax purposes, pursuant to Code ss.703(a) (and for purposes of determining Net Income or Net Loss, all items of income, gain, loss or deduction required to be stated separately pursuant to Code ss.703(a)(1) shall be included in Net Income or Net Loss) subject to the following adjustments: (i) Any Company income that is exempt from federal tax, and not otherwise taken into account in computing Net Income or Net Loss, shall be added to such taxable income or loss; (ii) Any Company expenditures which are described in Code ss.705(a)(2)(B) (or deemed to be such expenditures pursuant to Regulations ss.1.704-1(b)(2)(iv)(i)(1)) and not otherwise taken into account in computing Net Income or Net Loss pursuant to this definition shall be subtracted from such taxable income or loss; (iii) Any deductions for depreciation, cost recovery or amortization attributable to any assets of the Company shall be determined by reference to their Gross Asset Value, except that if the Gross Asset Value of an asset differs from its adjusted tax basis for federal income tax purposes at any time during such year or other period, the deductions for depreciation, cost recovery or amortization attributable to such asset from and after the date during such year or period in which such difference first occurs shall bear the same ratio to the Gross Asset Value as of such date as the federal income tax depreciation, amortization or other cost recovery deduction for such year or other period from and after such date bears to the adjusted tax basis as of such date; provided, however, that if the adjusted basis for federal income tax purposes of an asset at the beginning of such fiscal year is zero, such deductions for depreciation, cost recovery, or amortization shall be determined with reference to such beginning Gross Asset Value using any reasonable method selected by the Managers. (iv) Gain or loss, resulting from the Company taxable disposition of any Company property with respect to which gain or loss is recognized for federal income tax purposes, shall be computed by reference to the Gross Asset Value of the disposed property, notwithstanding the fact that the adjusted tax bases of such property may differ from its Gross Asset Value; and (v) Any items of income or loss which are specially allocated pursuant to Sections 6.3 and 6.4 shall not be taken into account in computing the Company's Net Income or Net Loss. "Non-Recourse Deductions" shall have the meaning established by Regulations ss.1.704-2(b)(1). The aggregate of Non-Recourse Deductions for a taxable year of the Company shall equal the excess of the net increase, if any, in the amount of Company Minimum Gain, during that taxable year over the aggregate amount of Distributions during that taxable year of proceeds of a Non-Recourse Liability which are allocable to an increase in Company Minimum Gain, determined pursuant to Regulations ss.1.704-2(d). "Non-Recourse Liability" shall have the meaning established by Regulations ss.1.704-2(b)(3). ARTICLE II. MEMBERSHIP Section 2.1. Members' Interests. The "Membership Interest" of each Member is set forth on Exhibit A. Section 2.2. Admission to Membership. The admission of new Members shall be only by the vote of the Managers pursuant to Section 8.9 hereof. If new Members are admitted, this Agreement shall be amended to reflect each Member's revised Membership Interest. Section 2.3. Property Rights. No Member shall have any right, title, or interest in any of the property or assets of the Company. Section 2.4. Liability of Members. No Member of the Company shall be personally liable for any debts, liabilities, or obligations of the Company, including under a judgment decree, or order of court. Nothing contained in this Section 2.4 shall be construed to limit the liability of Members to each other or the Company under the terms of any provision of the Contribution Agreement or other Transaction Documents. Section 2.5. Transferability of Membership. Except as provided below, Membership Interests in the Company are transferable only with the unanimous written consent of all Members. If such unanimous written consent is not obtained when required, the transferee shall be entitled to receive only the share of profits or other compensation by way of income and the return of contributions to which the transferor Member otherwise would be entitled. Notwithstanding the foregoing, the following shall not be deemed to violate any provision of this Agreement (each, a "Permitted Transfer"): (i) the Membership Interests of Prime may be freely transferred, without consent, to any entity that is then owned and controlled, directly or indirectly, by PMSI (or its successor in interest), (ii) the Membership Interests of any Member may be freely assigned, pledged or otherwise transferred, without consent, to secure any debt, liability or obligation owed to Prime by the Company, any Member or any entity affiliated with the Company, (iii) the Membership Interests of any Member may be freely assigned, pledged or otherwise transferred, without consent, in favor of the Lender(s) under, or by the Lender(s) as a result of the enforcement of any security interest arising pursuant to, those certain Credit Facilities (the "Credit Facilities") of PMSI and/or any of PMSI's subsidiaries, (iv) the pledge by Caster, Inc. (pursuant to Section 10.2 of the Contribution Agreement) of its right to receive distributions from the Company in respect of its Membership Interest, and (v) the Membership Interests of Caster, Inc. may be transferred (A) to a trust or trusts (a "Permitted Trust") for the benefit of Caster and/or members of Caster's immediate family (including an entity owned by a Permitted Trust) but only where Caster either controls the trust or retains during his lifetime the exclusive ability to vote the Membership Interests (pursuant to a written proxy or other instrument reasonably acceptable in form and substance to Prime), (B) to an entity (a "Permitted Entity") that is wholly-owned, directly or indirectly, by Caster and/or members of Caster's immediate family, but only where Caster either controls the entity or retains during his lifetime the exclusive ability to vote the Membership Interests (pursuant to a written proxy or other instrument reasonably acceptable in form and substance to Prime), or (C) from a Permitted Trust or Permitted Entity to Caster. Notwithstanding the foregoing, after the expiration of the six (6) year period immediately following the Closing Date (as such term is defined in the Contribution Agreement), Caster, Inc. shall be entitled to sell all or any portion of its Membership Interest and Caster may sell or cause Caster, Inc. to sell, any portion of the Stock Interest (as hereinafter defined) to one or more ophthalmologists that are primarily engaged in Refractive Surgery and reasonably acceptable to Prime; provided, however, that Prime's refusal to approve of any proposed transferee(s) as required by this sentence shall be deemed to have been reasonable for all purposes if such transferee(s) cannot demonstrate to the reasonable satisfaction of Prime that such transferee(s) would have generated the same annual level of revenue and profitability for the Company following such transfer as did Caster, on average, for the two (2) years immediately preceding such transfer (in each case multiplied by the percentage of Caster, Inc.'s total Membership Interest, or Caster's percentage of outstanding Stock Interest, as the case may be, being conveyed). Caster, Inc. represents and warrants to Prime and the Company that all of its ownership interests (the "Stock Interests") are, as of the date it enters into this Agreement, owned solely by Caster. Any transfer, issuance, sale, conveyance or encumbrance of any Stock Interests, or any interest therein, by Caster or Caster, Inc. shall be subject to the same restrictions on transfer as are set forth above with respect to transfers of Membership Interests. Accordingly, any transfer of any Stock Interests in violation of these restrictions shall, if Caster, Inc. is then the owner of any Membership Interest, be deemed a transfer of Caster, Inc.'s Membership Interest in violation of this Agreement. Similarly, any transfer of any Stock Interests in a transaction described in clauses (ii), (iii) or (v) above as a Permitted Transfer shall be permitted as well. As an express condition to any transfer by Caster, Inc. or any transferee of Caster, Inc., the proposed transferee shall have agreed in writing, in form and substance reasonably satisfactory to Prime, that such proposed transferee will be bound by all of the terms and provisions of this Agreement, the Contribution Agreement and any other Transaction Document which by reasonable implication are applicable to the Membership Interest being transferred and not solely Caster or Caster, Inc. as a selling party under the Contribution Agreement. Notwithstanding any other provisions of this Agreement, if Caster dies or becomes incapacitated, or can no longer manage his affairs, Caster's executor, administrator, conservator, guardian, trustee, personal representative, or the holder of a power of attorney from Caster may exercise all of the rights of Caster, Inc. under this Agreement, including the right to vote, to designate a Manager, and to receive distributions. In the event of Caster's death, the transfer of Stock Interests to Caster's heirs or legatees, whether by the laws of descent and distribution, operation of law or otherwise, or to the beneficiaries of a Permitted Trust, shall be deemed to be a Permitted Transfer. By signing this Agreement in his capacity as an officer of Caster, Inc., Caster is also acknowledging and agreeing to the restrictions on transfer of the Stock Interests as provided herein. Section 2.6. Resignation of Members. A Member may not withdraw from the Company except on the unanimous consent of the remaining Members. The terms of the Member's withdrawal shall be determined by agreement between the remaining Members and the withdrawing Member. ARTICLE III. MEMBERS' MEETINGS Section 3.1. Time and Place of Meeting. All meetings of the Members shall be held at such time and at such place within or without the State of Delaware as shall be determined by the Managers. Section 3.2. Annual Meetings. In the absence of an earlier meeting at such time and place as the Managers shall specify, annual meetings of the Members shall be held at the principal office of the Company on the date which is thirty (30) days after the end of the Company's fiscal year if not a legal holiday, and if a legal holiday, then on the next full business day following, at 10:00 a.m., at which meeting the Members may transact such business as may properly be brought before the meeting. Section 3.3. Special Meetings. Special meetings of the Members may be called at any time by any Member. Business transacted at special meetings shall be confined to the purposes stated in the notice of the meeting. Section 3.4. Notice. Written or printed notice stating the place, day and hour of any Members' meeting, and, in the case of a special meeting, the purpose or purposes for which the meeting is called, shall be delivered not less than ten (10) days nor more than thirty (30) days before the date of the special meeting, either personally or by mail, by or at the direction of the person calling the meeting, to each Member entitled to vote at such meeting. If mailed, such notice shall be deemed to be delivered three (3) days after it is deposited in the United States mail, postage prepaid, to the Member at his address as it appears on the records of the Company at the time of mailing. Section 3.5. Quorum. Members present in person or represented by proxy, holding more than fifty percent (50%) of the total votes which may be cast at any meeting shall constitute a quorum at all meetings of the Members for the transaction of business. If, however, such quorum shall not be present or represented at any meeting of the Members, the Members entitled to vote, present in person or represented by proxy, shall have power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present or represented. When any adjourned meeting is reconvened and a quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally noticed. Once a quorum is constituted, the Members present or represented by proxy at a meeting may continue to transact business until adjournment, notwithstanding the subsequent withdrawal therefrom of such number of Members as to leave less than a quorum. Section 3.6. Voting. Members shall only have the right to vote in instances or with respect to matters where member voting or consent is required by applicable law or to the extent expressly set forth in this Agreement, including but not limited to, Sections 2.5 (transfers of Membership Interests), 7.1(b) (dissolution), 8.1 (changing the number of Managers), 8.11 (compensation of Managers) and 13.1 (amendments to operating agreement, certificate of formation). With respect to any act or transaction that requires the affirmative vote or consent by the Members under applicable law, the affirmative vote or written consent of two of the three Managers (one of whom must, as long as Caster has not delivered the written notice described in Section 9.3(a) of the Contribution Agreement, be the Manager designee of Caster, Inc.) shall also be required in order to approve the act or transaction, in each instance. Subject to the foregoing, when a quorum is present at any meeting, the vote of the Members, whether present or represented by proxy at such meeting, holding more than fifty percent (50%) of the total votes which may be cast at any meeting shall be the act of the Members, unless the vote of a different number is required by the Act, the Certificate of Formation or this Limited Liability Company Agreement. Each Member shall be entitled to one vote for each percentage point represented by their Membership Interest. Fractional percentage point interests shall be entitled to a corresponding fractional vote. The provisions of this Section shall in all events be subordinate to with the provisions of Section 8.9 relating to acts or transactions requiring the written approval of two (2) or more Managers, one of which must be a Manager designated by Caster, Inc. Section 3.7. Proxy. Every proxy must be executed in writing by the Member or by his duly authorized attorney-in-fact, and shall be filed with the Secretary of the Company prior to or at the time of the meeting. No proxy shall be valid after eleven (11) months from the date of its execution unless otherwise provided therein. Each proxy shall be revocable unless expressly provided therein to be irrevocable and unless otherwise made irrevocable by law. Section 3.8. Action by Written Consent. Any action required or permitted to be taken at any meeting of the Members may be taken without a meeting if a consent in writing, setting forth the action so taken, shall be signed by all of the Members entitled to vote with respect to the subject matter thereof, and such consent shall have the same force and effect as a unanimous vote of Members. Section 3.9. Meetings by Conference Telephone. Members may participate in and hold any meeting of Members by telephone (including a conference telephone) conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and such participation in such a meeting shall constitute presence in person at such meeting, except where a person participates in the meeting for the express purpose of objecting to the transaction of any business on the ground that the meeting is not lawfully called or convened. ARTICLE IV. MEMBERSHIP CAPITAL CONTRIBUTIONS Section 4.1. Capital Contributions. Each Member has contributed to the Company the assets set forth in Schedule A, having the agreed fair market values, as set forth on Schedule A, which amount shall be credited to each Member's Capital Account as their initial capital contribution. Except for each Member's initial capital contribution made in connection with the formation of the Company, no capital contributions shall be required of any Member without the unanimous approval of all the Members to raise additional capital, and only then proportionately as to each Member. Section 4.2. Intentionally Omitted. Section 4.3. Deficit Capital Account Balances. Upon liquidation of the Company, no Member with a deficit balance in its Capital Account shall have any obligation to restore such deficit balance, or to make any contribution to the capital of the Company. Section 4.4. Tax Matters Partner. The Managers shall designate one Manager by majority vote to act as the tax matters partner (the "TMP") of the Company (as defined in the Code), and the TMP is hereby authorized and required to represent the Company, or designate another person or firm to represent the Company, (in each case, at the Company's expense) in connection with all examinations of the Company's affairs by tax authorities, including resulting administrative and judicial proceedings, and to expend Company funds for professional services and costs associated therewith. The initial TMP shall be Teena Belcik. The Members agree to cooperate with the TMP and its designee, if any, and to do or refrain from doing any or all things reasonably required by the TMP or its designee, if any, to conduct such proceedings. The Company will reimburse the TMP and any such designee for all expenses incurred in connection with its duties as TMP and any costs associated with any administrative or judicial proceeding with respect to the tax liabilities of the Members. ARTICLE V. DISTRIBUTION TO MEMBERS Section 5.1. Distributions of Available Excess Earnings. At the end of each calendar month, subject only to the qualifications and limitations set forth below, the Company shall, unless provided otherwise in accordance with Section 8.9(b) or Section 8.9(c), distribute its Available Excess Earnings (as hereinafter defined) to its members, to be divided among them in accordance with their Membership Interests. As used herein, "Available Excess Earnings" shall mean and refer to all cash and cash equivalents of the Company that would not be reasonably required in order to (a) satisfy all accounts payable and payment obligations of the Company that will become due in the ordinary course within thirty (30) days of the date of determination (assuming no receipt of additional cash or cash equivalents during such ninety (30) day period) or (b) establish adequate reserves to satisfy liabilities or obligations of the Company that are foreseen and can be reasonably estimated on the date of determination. Distributions in kind shall be made on the basis of agreed value as determined by the Managers. Notwithstanding the foregoing, the Company may not make a distribution to its Members to the extent that, immediately after giving effect to the distribution, all liabilities of the Company, other than liabilities to the Members with respect to their interests and liabilities for which the recourse of creditors is limited to specified property of the Company, exceed the fair value of the Company assets; except that the fair value of property that is subject to liability for which recourse of creditors is limited, shall be included in the Company assets only to the extent that the fair value of the property exceeds that liability. Section 5.2 Distributions to Pay Tax. In the event the distributions, with respect to any fiscal year, to any Member are less than the Income Tax Liability (as hereinafter defined) of such Member for that fiscal year, then, notwithstanding anything to the contrary in this Agreement, within two and one half (2.5) months after the close of such fiscal year distributions shall be made to the Members in proportion to their respective Membership Interests in an aggregate amount equal to the Income Tax Liability (as hereinafter defined). As used in this Agreement, the "Income Tax Liability" shall mean the product of the net income of the Company for such fiscal year multiplied by the highest marginal rate applicable to individuals for federal and California income tax purposes, and giving effect to any federal income tax deduction for California tax. If the Company may not make a distribution pursuant to this Section 5.2 as a result of the application of Section 5.1, the Company may, with the approval of the Managers, make a loan to each Member in an amount equal to the difference between the amount of the Income Tax Liability determined pursuant to the preceding sentence and the amount otherwise distributed to such Member pursuant to Sections 5.1 and 5.2. ARTICLE VI. ALLOCATION OF NET PROFITS AND LOSSES Section 6.1. Allocation of Net Income and Net Loss. Net Income and Net Loss for each fiscal year shall be allocated between the Members in accordance with their respective Membership Interests. Section 6.2. Loss Limitation. Notwithstanding Section 6.1, Net Loss shall not be allocated to any Member to the extent such allocation would cause such Member to have an Adjusted Capital Account Deficit. Any Net Loss that cannot be allocated to a Member by virtue of this Section 6.2 shall be reallocated to other Members. If both Members have an Adjusted Capital Account Deficit, the balance of the Net Loss shall be allocated between the Members in proportion to their Membership Interest. Section 6.3. Special Allocations. The following special allocations shall be made in the following order: (a) Company Minimum Gain Chargeback. Notwithstanding any other provision of this Article 6, if there is a net decrease in Company Minimum Gain during any fiscal year, each Member shall be specially allocated items of Company income and gain for such year (and, if necessary, subsequent years) in proportion to, and to the extent of, an amount equal to such Member's share of the net decease in Company Minimum Gain, determined in accordance with ss.1.704-(2)(g)(2) of the Regulations. This Section 6.3(a) is intended to comply with the minimum gain chargeback requirement of the Regulations and shall be interpreted consistently therewith. (b) Member Minimum Gain Chargeback. Notwithstanding any other provision of this Article 6 except Section 6.3(a), if there is a net decrease in Member Minimum Gain attributable to a Member Nonrecourse Debt during any fiscal year, each Member with a share of the Member Minimum Gain attributable to such Member Nonrecourse Debt, determined in accordance with ss.1.704-2(i)(5) of the Regulations, shall be specially allocated items of Company income and gain for such year (and, if necessary, subsequent years) in proportion to, and to the extent of, an amount equal to such Member's share of the net decease in Member Minimum Gain attributable to such Member Nonrecourse Debt, determined in accordance with ss.1.704-2(i)(5) of the Regulations. This Section 6.3(b) is intended to comply with the Member minimum gain chargeback requirement of the Regulations and shall be interpreted consistently therewith. (c) Qualified Income Offset. In the event any Member unexpectedly receives any adjustments, allocations or distributions described in ss.ss.1.704-1(b)(2)(ii)(d)(4), (5) and (6) of the Regulations, items of Company income and gain shall be specially allocated to each such Member in an amount and manner sufficient to eliminate, to the extent required by the Regulations, the Adjusted Capital Account Deficit of such Member as quickly as possible, provided that an allocation pursuant to this Section 6.3(c) shall be made only if and to the extent that such Member would have an Adjusted Capital Account Deficit after all other allocations provided for in this Article 6 have been tentatively made as if this Section 6.3(c) were not in the Agreement. (d) Nonrecourse Deductions. Any Nonrecourse Deductions for any fiscal year or other period shall be specially allocated among the Members in proportion to their Membership Interests. (e) Member Nonrecourse Deductions. Any Member Nonrecourse Deductions for any fiscal year or other period shall be allocated to the Member who bears the economic risk of loss with respect to the Member Nonrecourse Debt to which such Member Nonrecourse Deductions are attributable in accordance with Regulations ss.1.704-2(i). Section 6.4 Curative Allocations. The "Regulatory Allocations" consist of the allocations to a Member (or its predecessor) under Sections 6.3(a), 6.3(b), 6.3(c), 6.3(d) and 6.3(e) hereof. Notwithstanding any other provisions of this Article 6 (other than the Regulatory Allocations), the Regulatory Allocations shall be taken into account in allocating other items of income, gain, loss and deduction among the Members so that, to the extent possible, the net amount of such allocations of other items and the Regulatory Allocations to each Member shall be equal to the net amount that would have been allocated to each such Member if the Regulatory Allocations had not occurred. For purposes of applying the foregoing sentence (i) no allocations pursuant to this Section 6.4 with respect to allocations pursuant to Section 6.3(a) shall be made prior to the fiscal year during which there is a net decrease in Company Minimum Gain, and then only to the extent necessary to avoid any potential economic distortions caused by such net decease in Company Minimum Gain, (ii) no allocations pursuant to this Section 6.4 shall be made with respect to allocations pursuant to Sections 6.3(b) and 6.3(e) relating to a particular Member Nonrecourse Debt prior to the fiscal year during which there is a net decrease in Member Minimum Gain attributable to such Member Nonrecourse Debt, and then only to the extent necessary to avoid any potential economic distortions used by such net decease in Member Minimum Gain, and (iii) allocations pursuant to this Section 6.4 shall be deferred with respect to allocations pursuant to Section 6.3(e) hereof relating to a particular Member Nonrecourse Debt to the extent the Managers reasonably determine that such allocations are likely to be offset by subsequent allocations pursuant to Section 6.3(b) hereof. The Managers shall have reasonable discretion, with respect to each fiscal year, to (i) apply the provisions of this Section 6.4 in whatever order is likely to minimize the economic distortions that might otherwise result from the Regulatory Allocations, and (ii) divide all allocations pursuant to this Section 6.4 among the Members in a manner that is likely to minimize such economic distortions. Section 6.5 Tax Allocations; Code ss.704(c). In accordance with Code ss.704(c) and the Regulations thereunder, income, gain, loss, and deduction with respect to any property contributed to the capital of Company, or any Company asset which is subject to adjustment in its Gross Asset Value, any such property or asset of the Company shall, solely for tax purposes, be allocated among the Members so as to take account of any variation between the adjusted basis of such property or asset to the Company for federal income tax purposes and its Gross Asset Value. Any elections or other decisions relating to such allocations shall be made by the Managers in any manner that reasonably reflects the intent of this Agreement. Allocations pursuant to this Section 6.5 are solely for purposes of federal, state, and local taxes and shall not affect, or in any way be taken into account in computing, any person's Capital Account or share of Net Income, Net Loss, other items, or Distributions pursuant to any provision of this Agreement. ARTICLE VII. DISSOLUTION AND WINDING UP Section 7.1. Dissolution. Notwithstanding any provision of the Act, the Company shall be dissolved only upon the first of the following to occur: (a) Forty (40) years from the date of filing the Certificate of Formation of the Company; or (b) Written consent of all the then current Members to dissolution. Section 7.2. Winding Up. In the event of dissolution of the Company, the Managers (excluding any Manager holding office pursuant to designation by a Member subject to bankruptcy proceedings) shall wind up the Company's affairs as soon as reasonably practicable. On the winding up of the Company, the Managers shall pay and/or transfer the assets of the Company in the following order: (a) In discharging liabilities (including loans from Members) and the expenses of concluding the Company's affairs; and (b) The balance, if any, shall be distributed to the Members in accordance with the positive balances of the Members Capital Accounts. Upon dissolution and distribution of the Company assets, such distributed assets shall be deemed sold with the resulting Net Income or Net Loss being allocated among the Members and credited or debited to their respective Capital Accounts pursuant to Articles IV and VI. ARTICLE VIII. MANAGERS Section 8.1. Selection of Managers. Management of the Company shall be vested in the Managers. Initially, the Company shall have three (3) Managers, being Brad Hummel and Teena Belcik (as the initial Manager designees of Prime), and Andrew Caster, M.D. (as the initial Manager designee of Caster, Inc.). Thereafter, for so long as there are three (3) Managers, (a) Prime shall be entitled to designate two (2) of the Managers; and (b) Caster, Inc. shall be entitled to designate the remaining one (1) Manager. Notwithstanding the foregoing, a Member shall not be entitled to designate any Manager unless its Membership Interest: (y) has not (other than as allowed under Section 2.5 of this Agreement) been transferred, repurchased, assigned, pledged, hypothecated or in any way alienated; and (z) equals or exceeds thirty percent (30%) of the aggregate Membership Interests (after including in such determination all Membership Interests held by the permitted transferees of such Member); provided, however, that the foregoing limitations shall not apply in the event the parties restructure their relationship pursuant to this Agreement in an effort to comply with any applicable law, rule or regulation that makes such restructuring necessary. The Members may, by unanimous vote of all Members, from time to time, change the number of Managers of the Company and remove or add Managers accordingly. A Manager shall serve as a Manager until his or her resignation or removal pursuant to Section 8.2 or 8.3 of this Article VIII. Managers need not be residents of the State of Delaware or Members of the Company. Section 8.2. Resignations. Each Manager shall have the right to resign at any time upon written notice of such resignation to the Members. Unless otherwise specified in such written notice, the resignation shall take effect upon the receipt thereof, and acceptance of such resignation shall not be necessary to make same effective. The Member who designated a resigning manager shall be entitled to designate the successor thereto without any further action by the Members or other Managers. If any action of the Members is required under applicable law, the Members agree to take such action and any other action as may be necessary from time to time to effectuate the provisions of this Section 8.2. Section 8.3. Removal of Managers. Any Manager may be removed, for or without cause, at any time, but only by the Member who designated such Manager, upon the written notice to all Members. The Member who designated such removed Manager shall be entitled to designate the successor without any further action by the Members or other Managers. If any action of the Members is required under applicable law, the Members agree to take such action and any other action as may be necessary from time to time to effectuate the provisions of this Section 8.3. Section 8.4. General Powers. The business of the Company shall be managed by its Managers, which may, by the vote or written consent in accordance with this Agreement, exercise any and all powers of the Company and do any and all such lawful acts and things as are not by the Act, the Certificate of Formation or this Limited Liability Company Agreement directed or required to be exercised or done by the Members, including, but not limited to, contracting for or incurring on behalf of the Company debts, liabilities and other obligations, without the consent of any other person, except as otherwise provided herein. Section 8.5. Place of Meetings. The Managers of the Company may hold their meetings, both regular and special, either within or without the State of Delaware, and any Manager shall be entitled to attend any meeting by telephone. Section 8.6. Annual Meetings. The annual meeting of the Managers shall be held without further notice immediately following the annual meeting of the Members, and at the same place, unless by unanimous consent of the Managers that such time or place shall be changed. Section 8.7. Regular Meetings. Regular meetings of the Managers may be held without written notice at such time and place as shall from time to time be determined by the Managers. As long as Caster has not delivered the written notice described in Section 9.3(a) of the Contribution Agreement, no meeting of the Managers shall be held without the Manager designee of Caster, Inc. being given at least seven (7) days prior notice. Section 8.8. Special Meetings. Special meetings of the Managers may be called by any Manager on seven (7) days notice to each Manager, with such notice to be given personally, by mail or by telecopy, telegraph or mailgram. Section 8.9. Quorum and Voting. ----------------- (a) At all meetings of the Managers the presence of at least two (2) Managers shall be necessary and sufficient to constitute a quorum for the transaction of business, and the affirmative vote of at least a majority of the Managers present at any meeting at which there is a quorum shall be the act of the Managers, except as may be otherwise specifically provided by the Act, the Contribution Agreement, the Certificate of Formation, this Limited Liability Company Agreement or any other Transaction Document. If a quorum shall not be present at any meeting of Managers, the Managers present there may adjourn the meeting from time to time without notice other than announcement at the meeting, until a quorum shall be present. (b) In addition to the other provision contained in this Agreement requiring the unanimous vote of the Members or the consent of Caster, Inc. or Caster, Inc.'s designated Manager, as long as Caster has not died or become permanently disabled, and no Trigger Event (as defined in the Contribution Agreement) has occurred (subject to Caster's right to withdraw any Termination Notice), the following acts or transactions by, or involving, the Company may not be taken without first obtaining the written consent of (A) Caster, Inc., any person to whom Caster, Inc.'s Membership Interest has been rightfully transferred pursuant to the Section 2.5, or the Manager designee of Caster, Inc., and (B) Prime, any person to whom Prime's Membership Interest has been rightfully transferred pursuant to the Section 2.5, or each of the two (2) Manager designees of Prime; provided, however, that no written consent of any party is required under this subsection to take a particular action if (but only to the extent that) such action is required to be taken pursuant to the express terms and provisions of the Contribution Agreement: i. Disposition, sale, assignment or other transfer by the Company of any interest it owns in the Company, except that such interest may be extinguished without the approval required under this Article. ii. The election or removal of officers, and establishing or changing the compensation for Managers, officers or other employees, (A) in a manner inconsistent with budgets approved by the Managers and (B) with respect to Caster, any licensed physician or any Manager, officer or employee that is affiliated with PMSI or one of its direct or indirect subsudiaries (excluding the Company), regardless of whether such action is consistent with budgets approved by the Managers. iii. Initiating or settling any litigation or regulatory proceeding, or confessing any judgment. iv. Hiring or changing the Company's accountants or legal counsel. v. Waiving, refusing to enforce, amending, restating, superseding or modifying any of the provisions of this Agreement or any Transaction Document. vi. Entering into or terminating agreements with medical doctors with respect to the performance of procedures in the Company's facilities relating to Refractive Surgery or otherwise. vii. Moving the location of the Company's principal place of business. viii. (A) Amending, modifying, canceling, extending, or renewing the Facility Use Agreement or any other agreement to which the Company is a party and relating to Refractive Surgery or Caster's performance of medical services, (B) entering into amending, modifying, canceling, extending, or renewing any other similar agreement with any other person, firm, or entity relating to Refractive Surgery or Caster's performance of medical services, or (C) taking any action which is prohibited by or contrary to the agreements of the parties as expressed in the Transaction Documents. ix. Mergers, consolidations or combinations of the Company with another limited liability company or other entity. x. Filing bankruptcy or seeking relief under any debtor relief law. xi. The admission of any new Member or the issuance of any interest in the Company to any party. xii. The determination of "Available Excess Earnings." xiii. The determination to not make Distributions otherwise required by this Agreement, making any disproportionate distribution to a Member of cash or property in-kind, or, subject to the provisions of Section 8.11, making any distribution of cash or property to any Manager in his or her capacity as a Manager; xiv. Sale, lease or other transfer of all or substantially all of the Company's assets, or any material amount of the Company's assets other than in the ordinary course of the Company's business. xv. Borrowing or incurring any indebtedness in any transacion or related series of transactions in excess of $100,000. xvi. Granting any collateral or security interest in Company property to secure payment or performance of any indebtedness, obligation or guaranty of a type that would require the written consents contemplated by this Section 8.9(b) as a result of clause xv above. xvii. Purchasing or leasing assets or property, or entering into any contract or obligation, which obligates the Company to pay in excess of $100,000 in the aggregate in one or any series of installments. xviii. Causing a material change in the nature of the Company's business or the legal name of the Company. xix. Entering into a transaction or other action with any Manager, officer or Member (or any employee, agent or affiliate thereof) not otherwise described in this Section 8.9 that is not fair and reasonable to the Company or the Members or that would be considered a breach of fiduciary duty. xx. Materially reducing the amount or scope of the insurance coverage described in Schedule 3.10 to the Contribution Agreement, except for the addition of the additional assureds described on Schedule 3.10. The Company covenants to continuously maintain said insurance coverage for so long as Caster, Inc. is a Member. xxi. Taking any other action which, by the terms of this Agreement, requires the approval or consent of not less than sixty-six percent (66%) of the Members. xxii. Settling any actual or threatened claim, litigation, or regulatory proceeding, or confessing any judgment, arising out of or connected with any actual or alleged error, omission, negligence, or willful misconduct of Caster. xxiii. Issuing any new Membership Interests that will reduce the Membership Interests of the existing Members other than on a pro rata basis. xxiv. Taking any action, making any determination, or making any election with respect to a right granted to the Managers pursuant to Section 1.7, Article V or Article VI. xxv. Engaging in any act or transaction not in the ordinary course of the Company's business. (c) Notwithstanding any other provision contained in this Agreement requiring the unanimous vote of the Members or the consent of Caster, Inc. or Caster, Inc.'s designated Manager, as long as Caster has not breached the provisions of ARTICLE VIII or ARTICLE IX of the Contribution Agreement, the following acts or transactions by, or involving, the Company may not be taken without first obtaining the written consent of (A) Caster, Inc., any person to whom Caster, Inc.'s Membership Interest has been rightfully transferred pursuant to the Section 2.5, or the Manager designee of Caster, Inc., and (B) Prime, any person to whom Prime's Membership Interest has been rightfully transferred pursuant to the Section 2.5, or each of the two (2) Manager designees of Prime; provided, however, that no written consent of any party is required under this subsection to take a particular action if (but only to the extent that) such action is required to be taken pursuant to the express terms and provisions of the Contribution Agreement: i. Mergers, consolidations or combinations of the Company with another limited liability company or other entity. ii. Filing bankruptcy or seeking relief under any debtor relief law. iii. Taking any action, making any determination, or making any election with respect to a right granted to the Managers pursuant to Section 1.7, Article V or Article VI. iv. Sale, lease or other transfer of all or substantially all of the Company's assets, or any material amount of the Company's assets other than in the ordinary course of the Company's business. v. Entering into a transaction or other action with any Manager, officer or Member not otherwise described in this Section 8.9 that is not fair and reasonable to the Company or the Members or that would be considered a breach of fiduciary duty. vi. Taking any other action which, by the terms of this Agreement, requires the approval or consent of not less than sixty-six percent (66%) of the Members. vii. Issuing any new Membership Interests that will reduce the Membership Interests of the existing Members other than on a pro rata basis. viii. The determination of "Available Excess Earnings"; provided, that this will not prevent the accumulation and non-distribution by the Company of six (6) times the average monthly Available Excess Earnings (averaged using the preceding six (6) months) after satisfying any obligation to distribute Available Excess Earnings pursuant to Section 5.2 hereof. ix. The determination to not make Distributions otherwise required by this Agreement, making any disproportionate distribution to a Member of cash or property in-kind, or, subject to the provisions of Section 8.11, making any distribution of cash or property to any Manager in his or her capacity as a Manager; x. Engaging in any act or transaction not in the ordinary course of the Company's business. xi. Notwithstanding the provisions of Sections 8.9(b)(vi) and 8.9(b)(ix), waiving, refusing to enforce, amending, restating, superseding or modifying any of the provisions of this Agreement or any Transaction Document (including the Facility Use Agreement) with respect to any matter described in this Section 8.9(c). xii. Unless Caster is no longer exclusively using the Company's facilities in the manner contemplated in Section 9.3(a) of the Contribution Agreement (regardless of whether Section 9.3(a) is then enforceable), materially reducing the amount or scope of the insurance coverage described in Schedule 3.10 to the Contribution Agreement, except for the addition of the additional assureds described on Schedule 3.10. The Company covenants to continuously maintain said insurance coverage for so long as Caster, Inc. is a Member. (d) Any of the above actions taken by the Company without the necessary approval pursuant to Section 8.9(b) or Section 8.9(c) is void ab initio. A Member shall be deemed to have materially breached this Agreement if the Company, acting pursuant to the apparent authority of the Manager designee(s) of such Member, takes any of the above actions without the necessary approval pursuant to Section 8.9(b) or Section 8.9(c). Section 8.10. Committees. The Managers may, by resolution passed by sixty-six percent (66%) of the Managers, designate committees, each committee to consist of two or more Managers (at least one of which must be a Manager designee of Prime and one of which, as long as Caster has not delivered the written notice described in Section 9.3(a) of the Contribution Agreement, must be a Manager designee of Caster, Inc.), which committees shall have such power and authority and shall perform such functions as may be provided in such resolution (subject to applicable law), which in all events shall be consistent with the other provisions of this Agreement and the Transaction Documents and shall not be contrary to the provisions of Section 8.9 of this Agreement. Such committee or committees shall have such name or names as may be designated by the Managers and shall keep regular minutes of their proceedings and report the same to the Managers when required. The foregoing paragraph notwithstanding, the Managers shall establish a Medical Executive Committee, the size and composition of which shall be established by the affirmative vote or written consent of two of the three Managers (one of whom must, as long as Caster has not delivered the written notice described in Section 9.3(a) of the Contribution Agreement, be the Manager designee of Caster, Inc.). Members of the Medical Executive Committee must be licensed physicians, but need not be Members, Managers, or officers of the Company. The Medical Executive Committee shall meet at such time or times as it may, by majority vote of its members, elect and may adopt procedures for the conduct of its meetings. The Medical Executive Committee shall have authority and control over the nonprofessional medical aspects of the Company's business, and shall provide advice to the Managers on decisions relating to equipment purchases, technological obsolescence, quality assurance, credentialing, and such other matters as shall be requested by the Managers. The Medical Executive Committee shall be advisory only and shall not have the authority to bind the Company. The majority of the members of the Medical Executive Committee shall constitute a quorum for the transaction of its business and the affirmative vote of the majority of the members of the Medical Executive Committee shall constitute action validly taken by that body; provided, however, that a quorum shall not be deemed to exist unless, as long as Caster has not delivered the written notice described in Section 9.3(a) of the Contribution Agreement, the Manager designee of Caster, Inc. has been given reasonable prior notice of such meeting and an opportunity to participate in such meeting. Section 8.11. Compensation of Managers. The Members, by unanimous approval, shall have the authority to provide that any one or more of the Managers shall be compensated, and may, by unanimous approval, fix any compensation (which may include expenses) they elect to pay to any one or more of the Managers. Section 8.12. Action by Written Consent. Any action required or permitted to be taken at any meeting of the Managers or of any committee designated by the Managers may be taken without a meeting if written consent, setting forth the action so taken, is signed by all the Managers or of such committee, and such consent shall have the same force and effect as a unanimous vote at a meeting. Section 8.13. Meetings by Conference Telephone. Managers or members of any committee designated by the Managers may participate in and hold any meeting of the Managers or such committee by telephone (including a conference telephone) or similar communications equipment by means of which all persons participating in the meeting can hear each other, and such participation in such a meeting shall constitute presence in person at such meeting, except where a person participates in the meeting for the express purpose of objecting to the transaction of any business on the ground that the meeting is not lawfully called or convened. Section 8.14. Liability of Managers. No Manager of the Company shall be personally liable for any debts, liabilities, or obligations of the Company, including under a judgment, decree, or order of the court, except as expressly provided otherwise in an agreement between the Manager and the Company or another party. Section 8.15. Specific Power of Managers. The Managers shall have the authority to enter into and execute all documents in relation to the formation of the Company including, but not limited to, issuance of the Certificate of Formation and this Limited Liability Company Agreement. ARTICLE IX. NOTICES Section 9.1. Form of Notice. Whenever under the provisions of the Act, the Certificate of Formation or this Limited Liability Company Agreement notice is required to be given to any Manager or Member, and no provision is made as to how such notice shall be given, notice shall not be construed to mean personal notice only, but any such notice may also be given in writing, by mail, postage prepaid, addressed to such Manager or Member at such address as appears on the books of the Company, or by telecopy, telegraph or mailgram. Any notice required or permitted to be given by mail shall be deemed to be given three (3) days after it is deposited, postage prepaid, in the United States mail as aforesaid. Section 9.2. Waiver. Whenever any notice is required to be given to any Manager or Member of the Company under the provision of the Act, the Certificate of Formation or this Limited Liability Company Agreement, a waiver thereof in writing signed by the person or persons entitled to such notice, whether signed before or after the time stated in such waiver, shall be deemed equivalent to the giving of such notice. ARTICLE X. OFFICERS Any Manager may also serve as an officer of the Company. The Managers may designate one or more persons to serve as officers and may designate the titles of all officers. The initial officers of the Company shall be: Ken Shifrin, Chairman of the Board; Brad Hummel, President; Teena Belcik, Vice President, Secretary and Treasurer; Mark Rosenberg, Vice President; and Andrew Caster, M.D., Vice President. The officers of the Company shall have powers commensurate with the corporate powers ordinarily associated their respective titles, as limited, extended or otherwise modified pursuant to any resolution of the Managers, and otherwise consistent with the terms of this Agreement and the Transaction Documents. ARTICLE XI. INDEMNITY Section 11.1. Indemnification. The Company shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative, arbitrative or investigative, any appeal in such an action, suit or proceeding and any inquiry or investigation that could lead to such an action, suit or proceeding (whether or not by or in the right of the Company), by reason of the fact that such person is or was a manager, officer, employee or agent of the Company or is or was serving at the request of the Company as a director, manager, officer, partner, venturer, proprietor, trustee, employee, agent or similar functionary of another corporation, employee benefit plan, other enterprise, or other entity, against all judgments, penalties (including excise and similar taxes), fines, settlements and reasonable expenses (including attorneys' fees and court costs) actually and reasonably incurred by him in connection with such action, suit or proceeding to the fullest extent permitted by any applicable law, and such indemnity shall inure to the benefit of the heirs, executors and administrators of any such person so indemnified pursuant to this Article XI. The right to indemnification under this Article XI shall be a contract right and shall not be deemed exclusive of any other right to which those seeking indemnification may be entitled under any law, bylaw, agreement, vote of members or disinterested managers or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office. Any repeal or amendment of this Article XI by the Managers (pursuant to Section 8.9 hereof) or by changes in applicable law shall, to the extent permitted by applicable law, be prospective only, and shall not adversely affect the indemnification of any person who may be indemnified at the time of such repeal or amendment. Section 11.2. Indemnification Not Exclusive. The rights of indemnification and reimbursement provided for in this Article XI shall not be deemed exclusive of any other rights to which any such Manager, officer, employee or agent may be entitled under the Certificate of Formation, this Limited Liability Company Agreement, agreement or vote of Members, or as a matter of law or otherwise. Section 11.3. Other Indemnification Clauses. Notwithstanding the foregoing, this Article XI shall not be construed to contradict the indemnification provision of the Contribution Agreement. Notwithstanding anything contained herein, this Article XI shall be ineffectual and shall not permit or require indemnification for all, or any, losses, costs, liabilities, claims or expenses arising, directly or indirectly, from any action or omission permitting or requiring indemnification under the Contribution Agreement; and in no event may any indemnity be allowed under this Agreement or pursuant to any provision of the Act for an amount paid or payable pursuant to the indemnification provisions of the Contribution Agreement. ARTICLE XII. MISCELLANEOUS Section 12.1. Fiscal Year. The fiscal year of the Company shall be the calendar year. Section 12.2. Records. At the expense of the Company, the Managers shall maintain records and accounts of all operations of the Company. At a minimum, the Company shall keep at its principal place of business the following records: (a) A current list of the full name and last known business or residence address of each Member and of each holder of an economic interest in the Company set forth in alphabetical order, together with the Capital Contributions and share in Net Profits and Net Losses of each Member and holder of an economic interest; (b) A current list of the full name and business or residence address of each Manager; (c) A copy of the Certificate of Formation and Limited Liability Company Agreement of the Company, and all amendments thereto, together with executed copies of any powers of attorney pursuant to which any of the foregoing were executed; (d) Copies of the Company's federal, state and local income tax or information returns and reports, if any, for the six most recent fiscal years; and (e) Correct and complete books and records of account of the Company. Section 12.3. Seal. The Company may by resolution of the Managers adopt and have a seal, and said seal may be used by causing it or a facsimile thereof to be impressed or affixed or in any manner reproduced. Any officer of the Company shall have authority to affix the seal to any document requiring it. Section 12.4. Agents. Every Manager and Officer is an agent of the Company for the purpose of the business. The act of a Manager or Officer, including the execution in the name of the Company of any instrument for carrying on in the usual way the business of the Company, binds the Company; provided, however, if such act requires the approval of the Members of the Managers, such approval has first been obtained. Section 12.5. Checks. Subject to the provisions of Section 8.9(b)(v), all checks, drafts and orders for the payment of money, notes and other evidences of indebtedness issued in the name of the Company shall be signed by such officer, officers, agent or agents of the Company and in such manner as shall from time to time be determined by resolution of the Managers. In the absence of such determination by the Managers, such instruments shall be signed by the Treasurer or the Secretary and countersigned by the President or a Vice President of the Company, if the Company has such officers. Section 12.6. Deposits. Subject to the provisions of Section 8.9(b)(v), all funds of the Company shall be deposited from time to time to the credit of the Company in such banks, trust companies or other depositories as the Managers may select. Section 12.7. Annual Statement. The Managers shall present at each annual meeting a full and clear statement of the business and condition of the Company. Section 12.8. Financial Statements. As soon as practicable after the end of each fiscal year of the Company, but in no event later than April 15 immediately following the end of such fiscal year, a balance sheet as at the end of such fiscal year, and a profit and loss statement for the period ended, shall be distributed to the Members, along with such tax information (including all information returns) as may be necessary for the preparation of each Member of its federal, state and local income tax returns. The balance sheet and profit and loss statement referred to in the previous sentence may be as shown on the Company's federal income tax return. Section 12.9. Binding Arbitration. Any controversy between the Members regarding this Agreement or any other Transaction Document, any claims arising out of any breach or alleged breach of this Agreement or any other Transaction Document, and any claims arising out of the relationship between the Members created hereunder, shall be submitted to binding arbitration by all Members involved in accordance with the procedures for arbitration contained in the Contribution Agreement. Section 12.10. Authority to Execute Facility Use Agreement. The Members hereby authorize the Managers to execute and deliver to Caster, Inc. the Facility Use Agreement attached to the Contribution Agreement as Exhibit C. Section 12.11. Cross Default; Remedies. Each of the Members agrees that a breach by it (or any entity controlling, controlled by, or under common control with it) of any of the provisions of the Contribution Agreement or any other Transaction Document shall also be deemed to be a breach of this Agreement (subject to any right to cure provided with respect to such breach). The remedies contemplated provided in Section 9.7(a) and (b) of the Contribution Agreement shall in all events be the exclusive remedies for any and all acts or omissions of Caster that result in a material breach of any of the provisions of Article VIII and Article IX thereof, regardless of whether such acts or omissions, in the absence of this sentence, would give rise to a claim under any of the Transaction Documents. Section 12.12 Expenses. Each Member agrees that, notwithstanding the prior practices associated with the Business (as defined in the Contribution Agreement) as conducted prior to the Closing Date, all liabilities, obligations, costs and expenses that arise after the Closing Date and are personal to such Member (or arose from transactions or occurrences that directly benefited such Member in a capacity other than as a Member) shall not be considered expenses of the Company and shall be borne solely by such Member, unless agreed otherwise by the unanimous vote or written consent of the Managers, or unless (and only to the extent) provided otherwise in the Facility Use Agreement. With respect to any such personal expenses that were incurred prior to the Effective Time (as defined in the Contribution Agreement), such expenses shall not be incurred or reimbursed by, or charged to, the Company after the Effective Time. Section 12.13 Consents. To be valid and effective, all consents of the Managers or Members required or permitted by this Agreement shall be in writing and signed by each party giving consent. ARTICLE XIII. AMENDMENTS Section 13.1. Amendments. Except to the extent expressly provided otherwise herein, this Agreement may only be altered, amended or repealed and a new limited liability company agreement may only be adopted by the unanimous vote of the Members at any regular meeting of the Members or at any special meeting of the Members called for that purpose, or by execution of a written consent in accordance with the provisions of Section 3.8. Except to the extent expressly provided otherwise therein, the Certificate of Formation of the Company, and any other corporate governance document of the Company, or any other document which establishes, creates or governs the relations between the Members or the Managers may only be altered, amended or repealed by the unanimous vote of the Members at any regular meeting of the Members or at any special meeting of the Members called for that purpose, or by execution of a written consent in accordance with the provisions of Section 3.8. Section 13.2. When Limited Liability Company Agreement Silent. It is expressly recognized that when the Limited Liability Company Agreement is silent or in conflict with the requirements of the Act as to the manner of performing any Company function, the provisions of the Act shall control. Section 13.3. Integration with Contribution Agreement. To the extent of any inconsistency between the provisions of the Contribution Agreement and this Agreement, the terms and provisions of the Contribution Agreement shall control. Accordingly, no Member or Manager shall be deemed to have breached any fiduciary duty owed to any other Member or the Company as a result of investing in, acquiring or developing any facility, business or operations that are related or similar to, or in direct competition with, the Company's business if such act or transaction is allowed or not prohibited by the provisions of Article VIII of the Contribution Agreement, or the termination of such provisions. [Signature page follows] S-1 SIGNATURE PAGE TO LIMITED LIABILITY COMPANY AGREEMENT IN WITNESS WHEREOF, the undersigned Members hereby adopt this Limited Liability Company Agreement as the Limited Liability Company Agreement of the Company, effective as of the 1st day of March, 2000. Caster Eye Center Medical Group ------------------------------------ Andrew Caster, M.D., President Prime Refractive, L.L.C. Teena Belcik, Treasurer ACKNOWLEDGEMENT AND AGREEMENT The following parties to the Contribution Agreement hereby execute this Signature Page in the space provided below solely to evidence their acknowledgement and agreement that (a) each reference to the Original Agreement contained in the Contribution Agreement and each other Transaction Document shall be deemed a reference instead to this Agreement and (b) this Agreement shall be deemed a Transaction Document for all purposes under the Contribution Agreement and each other Transaction Document. Prime Medical Services, Inc. ----------------------------------- Andrew Caster, M.D., individually and on ______________________________ behalf of Caster One, L.L.C. as Manager Teena Belcik, Treasurer CONSENT OF SPOUSE The undersigned spouse of Caster acknowledges on her own behalf that: I have read the foregoing Agreement and I know its contents. I am aware that by its provisions Caster Eye Center Medical Group grants the Company certain assets that may be community property and may restrict my ability to later transfer my community property interest in such assets, my spouse's interest in Caster Eye Center Medical Group and Caster Eye Center Medical Group's Membership Interest in the Company. I hereby approve of the provisions of the Agreement, including the contribution of my community property interest, if any, in the assets contributed to the Company, and agree that such Membership Interest and Stock Interests and my interest in them are subject to the provisions of the Agreement and that I will take no action at any time to hinder operation of the Agreement on such Membership Interest and Stock Interests or my interest in them. Jacqueline Caster A-1 EXHIBIT A OWNERSHIP INTERESTS Name Contribution Membership Interest Prime Assets with agreed fair market 60% Caster, Inc. Assets with agreed fair market 40% value of $244,325 EX-10.93 6 0006.txt EX 10.93 1ST AD. TO FACILITY USE FOR CASTER FIRST AMENDMENT TO FACILITY USE AGREEMENT THIS FIRST AMENDMENT ("Amendment") TO THE FACILITY USE AGREEMENT is made and entered into as of July __, 2000 (the "Effective Date"), by and among Caster One, L.L.C., a Delaware limited liability company, (hereinafter referred to as "Newco"), Andrew Caster, M.D. (hereinafter referred to as "Provider") and Caster Eye Center Medical Group, a California professional corporation (hereinafter referred to as "Caster PC"). Newco, Provider and Caster PC shall be referred to collectively as the "Parties". RECITALS: WHEREAS, the Parties entered into that certain Facility Use Agreement (the "Agreement"), dated as of March 1, 2000, by and among Newco, Provider and Caster PC, that allows Caster PC and Provider to use Newco's facilities in connection with providing Refractive Surgery and related services; WHEREAS, the Billing Staff of Newco, as defined hereafter, shall assume responsibility of billing and collecting on behalf of Newco and the remittance of payment of the Professional Fee and the unreimbursed reimbursable expenses to Provider and Caster PC; WHEREAS, the Parties concur that the assumption by Newco of its responsibility for billing and collecting, in accordance with the terms of the Agreement, as further clarified by the terms of this Amendment, is in the best interest of the Parties; WHEREAS, the Parties further concur that the Agreement should be amended to provide that Newco shall retain the Facility Usage Fee from amounts collected by it, while remitting the Professional Fee and the unreimbursed reimbursable expenses to Provider and Caster PC; NOW, THEREFORE, for and in consideration of the recitals above and the mutual covenants and conditions contained herein, the parties hereto agree to amend the Agreement as follows: STATEMENT OF AMENDMENT 1. Section 3.3 of the Agreement is amended by the addition, immediately after the first paragraph, of the following two (2) paragraphs: Newco billing staff ("Billing Staff") located in the office at 9100 Wilshire Blvd., Suite 265E, Beverly Hills, California 90212 shall furnish all billing and collecting services to Provider and Caster PC. On a day of the week designated by Provider in consultation with Newco, Provider shall furnish to Billing Staff, in a form satisfactory to Newco, a procedure data sheet (the "Data Sheet") for the week ending upon close of business on the previous day (the "Billing Week"). Such Data Sheet shall enumerate each procedure performed by Provider during the Billing Week; the total fee charged for the procedure, as determined by Provider; the name, address and telephone number of the patient; and any additional information required by Billing Staff for purposes of proper and timely billing for Provider's professional medical services in the performance of Refractive Surgery and related services. Provider and Caster PC hereby designate Newco as their billing agent during the term of the Agreement, and Newco hereby accepts such assignment. Billing Staff shall maintain complete and accurate records of charges billed and amounts collected, and shall furnish Provider with copies of all billing statements issued on Provider's behalf, as well as copies of bank receipts for all payments deposited in an account designated by Newco. When payments are received, Billing Staff shall be responsible for recording and depositing the receipts in Newco's account and making payment to Provider of the agreed upon amounts constituting compensation for Provider's professional services, which shall be calculated as described in Section 4.1(a) or 4.1(b) as the case may be (the "Professional Fee"). The Parties acknowledge and agree that the entire amount of the Professional Fee shall, in each case, represent fair market value for Refractive Surgery and related services performed by Provider and shall include no additional payment for any other purpose. 2. Section 4.1 of the Agreement is hereby restated in its entirety as follows: Section 4.1 Facility Fees. Subject to modification in the manner prescribed by Section 8.9 of Newco's Limited Liability Company Agreement, the fees payable to Newco by Caster PC and Provider in return for use of the Facilities made available by Newco hereunder (the "Facility Usage Fee") shall be determined on a per procedure basis. The Facility Usage Fee shall be remitted by Billing Staff on a weekly basis to an account designated by Newco, less the unreimbursed reimbursable expenses, pursuant to Section 4.2, incurred by Caster PC and Provider during the same time period as the procedures were performed on which the current Facility Usage Fee was based. The amount of the Facility Usage Fee with respect to any procedure shall be determined in accordance with the following: (a) As long as Caster PC's standard, undiscounted fee charged to the patient (determined without reference to the fee charged for any single procedure, the "Patient Fee") has at all prior times remained between the amounts of $2,400 per procedure and $2,275 per procedure, the Facility Usage Fee with respect to any one procedure shall equal (i) the amount actually collected for such procedure minus (ii) $400. (b) At all times following any reduction of the Patient Fee to an amount less than $2,275 per procedure, or any increase in the Patient Fee to an amount greater than $2,400 per procedure, the Facility Usage Fee with respect to any one procedure shall equal (i) the amount actually collected for such procedure minus (ii) an amount up to seventeen and 58/100 percent (17.58%) of such Patient Fee; provided, however, that in no event shall the Facility Usage Fee be below the fair market value of the use of the Facilities in the aggregate. (c) At the conclusion of the Billing Week, Billing Staff shall calculate the total Facility Usage Fee for that week based on the total number of procedures performed and the charge per procedure. The total Facility Usage Fee, less the unreimbursed reimbursable expenses accruing during the Billing Week, shall constitute Newco's Facility Usage Fee for such Billing Week. (d) The differing amounts reflected in subsection (ii) of each of subsections (a) and (b) above represent the range of contemplated Professional Fees for any one procedure. At the conclusion of each Billing Week, the total Professional Fees allocated to Provider per procedure during that week, together with the amount of the unreimbursed reimbursable expenses incurred during the Billing Week, shall be remitted to an account designated by Provider. (e) Notwithstanding the foregoing provisions of this Section 4.1, or any other contrary provision of any Transaction Document, Provider shall be entitled to perform procedures for free and refund amounts paid for procedures on a limited basis in a manner and to the extent Provider has done so in the past, or as otherwise consented to by Newco. The Facility Usage Fee with respect to such procedures shall be eliminated, as long as the aggregate Facility Usage Fee paid hereunder equals or exceeds the fair market value of the use of the Facilities. 3. Full Force and Effect. With the exception of the above, the Agreement shall remain in full force and effect in its original form. 4. Consideration. The Parties acknowledge and agree that the Facility Usage Fee was originally intended, in accordance with the terms of the Agreement, to cover all of the management and administration services provided by Newco, which expressly included billing and collecting services as indicated in the second Recital herein. Accordingly, no additional consideration is required on account of Newco's undertaking, at the present time, the responsibility for billing and collecting services on behalf of Provider and Caster PC, as provided in the Agreement. 5. Miscellaneous. a. Entire Agreement. This Amendment, together with the Agreement; that certain Limited Liability Company Agreement dated as of March 1, 2000 by and among Newco, Prime Refractive, L.L.C., a Delaware limited liability company, and Caster Eye Center Medical Group, a California professional corporation; and that certain contribution agreement (the "Contribution Agreement") dated as of March 1, 2000, by and among Prime Medical Services, Inc., a Delaware corporation, Prime Refractive, L.L.C., a Delaware limited liability company, Newco, Provider and Caster PC, supersedes all previous contracts, agreements and understandings and constitutes the entire agreement of whatsoever kind or nature existing between or among the parties and representing the within subject matter, and no party shall be entitled to benefits other than those specified herein or therein. b. Counterparts. This Amendment may be executed in two or more counterparts, each and all of which shall be deemed an original and all of which together shall constitute but one and the same instrument. c. All capitalized terms not defined herein shall have the same definitions as supplied in the Agreement or the Contribution Agreement. THE PARTIES HERETO have executed this Amendment as of the day and year first above written. [SIGNATURES INTENTIONALLY MOVED TO NEXT PAGE] 5 Newco: Caster One, L.L.C. By: ____________________________________________ Teena Belcik, signing as a manager of Newco and on behalf of Prime, as a member of Newco By: ____________________________________________ Andrew Caster, signing as both a manager and, on behalf of Caster, PC, as a member of Newco Provider: _______________________________________________ Andrew Caster, M.D. Caster PC: Caster Eye Center Medical Group By: Andrew Caster, M.D., President EX-10.94 7 0007.txt EX 10.94 CONTRIBUTION AGREEMENT FOR KANSAS CITY CONTRIBUTION AGREEMENT Among PRIME MEDICAL SERVICES, INC., PRIME RVC, INC., PRIME REFRACTIVE - KANSAS CITY, L.L.C., VISION CORRECTION CENTERS OF KANSAS CITY, P.C., Kansas City Laser Vision Correction Centers, L.L.C., and JEFFREY COUCH, M.D. -------------------- Dated as of September 1, 2000 2 043838.0023 AUSTIN 193137 v8 CONTRIBUTION AGREEMENT This Contribution Agreement (this "Agreement") is entered into to be effective as of September 1, 2000 (the "Effective Time"), among Prime Medical Services, Inc., a Delaware corporation ("PMSI"), Prime RVC, Inc., a Delaware corporation ("Prime"), Vision Correction Centers of Kansas City, P.C., a Missouri professional corporation ("VCC"), Kansas City Laser Vision Correction Centers, L.L.C., a Missouri limited liability company ("KCL"), Jeffrey Couch, M.D., an individual residing in Kansas City, Missouri and the sole shareholder of VCC ("Couch"), and Prime Refractive - Kansas City, L.L.C., a Delaware limited liability company ("Newco"). The parties hereto agree as follows: ARTICLE I Agreement of Purchase and Sale 1.1 Agreement. Upon the basis of the representations and warranties, for the consideration, and subject to the terms and conditions set forth in this Agreement, (a) Prime agrees to purchase from Couch and/or VCC, as of the Effective Time, by payment of $4,530,000 (the "Cash Purchase Price"), an undivided sixty-five percent (65%) interest in (i) all of the Assets (as hereinafter defined) and (ii) the business conducted with the Assets, which business consists of providing space, equipment, non-professional personnel and certain administrative services on a turn-key basis to professional providers of Refractive Surgery (as hereinafter defined), including, without limitation, initially providing such accommodations on an exclusive basis to the Refractive Surgery practices of Couch and KCL in accordance with the terms set forth in this Agreement and that certain agreement related to Couch's use of Newco's offices and equipment (the "Facility Use Agreement") among Couch, KCL, VCC and Newco in the form attached hereto as Exhibit A (collectively, the "Assets Related Business"); (b) Prime agrees to contribute to Newco, as of the Effective Time, the undivided sixty-five percent (65%) interest in the Assets and the Assets Related Business purchased by Prime, and will receive a sixty-five percent (65%) ownership interest in Newco; and (c) VCC agrees to contribute, as of the Effective Time, the remaining undivided thirty-five percent (35%) interest in the Assets and the Assets Related Business to Newco. The parties agree that: (y) immediately prior to the Closing (as hereinafter defined), all of the outstanding membership interests of Newco shall be owned by VCC, and, immediately after the Closing, Prime shall own sixty-five percent (65%) of all of the outstanding membership interests of Newco and VCC shall own thirty-five percent (35%) of all of the outstanding membership interests of Newco; and (z) prior to or at the Closing, Prime and VCC shall have executed the limited liability company agreement, in the form attached hereto as Exhibit B, and any other organizational documents of Newco (collectively, the "Organizational Documents"). 1.2 Closing. The closing of the purchase and sale contemplated by Section 1.1 (the "Closing") shall take place at the offices of Akin, Gump, Strauss, Hauer & Feld, L.L.P., 1900 Frost Bank Plaza, 816 Congress Avenue, Austin, Texas 78701, or at such other location as the parties may agree. The date on which the Closing occurs is hereinafter referred to as the "Closing Date." 1.3 Assets. As used in this Agreement, the term "Assets" shall mean and include all of the items listed on Schedule 1.3(a) attached hereto, and, without duplication, all Permits (as hereinafter defined) for which transfer thereof to Newco is not prohibited under applicable law, all business records (excluding medical records) of Refractive Surgery and the business conducted by VCC and Couch prior to the Closing Date, any and all rights of VCC or Couch under leases (including rights to receive returns of deposits under such leases) or contracts listed on Schedule 1.3(a), the goodwill related to the business conducted by VCC and Couch prior to the Closing Date (excluding the Medical Practice, as hereinafter defined), the name "Vision Correction Centers of Kansas City" and all likenesses thereof, and all of the related business benefiting VCC or Couch prior to the Closing Date (excluding the Medical Practice). Each of VCC and Couch hereby represents and warrants that the Assets include all property and assets, real, personal and mixed, tangible and intangible, including, without limitation, leases and contracts, equipment, instruments, computer software used in connection with the equipment or instruments, Permits, personal property, furniture, business records and other assets that are used primarily in or are materially relied on for the Assets Related Business conducted by VCC and Couch prior to the Closing. Notwithstanding the foregoing, the following shall not be "Assets" and shall be retained by VCC and/or Couch: (a) all of the business of VCC and Couch which, by applicable law, may only be performed by a licensed medical professional, or an entity owned exclusively by licensed medical professionals (the "Medical Practice"); (b) all activities that constitute the practice of medicine; (c) the books of account and record books of VCC and the Business (as hereinafter defined) (complete and accurate copies of which, insofar as they relate to the Assets Related Business during the calendar years 1998, 1999 and 2000, up to and including the Closing Date, shall have been provided to Prime on or before the Closing Date); (d) VCC's and Couch's rights under this Agreement; (e) any asset that (i) is neither used in, nor relied on for, the business conducted by VCC and Couch prior to the Closing (excluding the Medical Practice) and (ii) is set forth on Schedule 1.3(d) attached hereto; (f) all cash, accounts receivable, prepaid expenses, deposits (excluding deposits under leases assumed by Newco pursuant to Section 1.4), inventory, and any notes receivables; but this exclusion shall not in any way limit Couch's obligations under Section 4.8, or any obligation KCL or Couch may have under the Facility Use Agreement; (g) any medical or clinical records (although the parties acknowledge that Newco may from time to time have physical possession of such records); (h) any patents or copyrights that are owned individually by Couch and not used in, nor relied on for, the Assets Related Business. As used in this Agreement, the "Business" shall mean the Assets Related Business and the Medical Practice, collectively. As used in this Agreement, "Refractive Surgery" shall mean, collectively, any current and/or future surgical procedures intended to correct refractive error, including, without limitation, myopia, hyperopia, presbyopia or astigmatism of the eye. Notwithstanding anything in this Agreement to the contrary, "Refractive Surgery" shall not include any specific procedure that, at the time the procedure is to be performed, requires in the exercise of a reasonable ophthalmologist's independent professional judgment as to the individual patient the use of general anesthesia and an operating room approved by the American Association of Ambulatory Surgical Centers or Joint Commission on Accreditation of Healthcare Organizations (or any similar or successor accreditation board or body) with the capability of general anesthesia (provided, however, that if this sentence would exclude from "Refractive Surgery" any surgical procedure included in "Refractive Surgery" at the Effective Time, then the parties to this Agreement will work together to restructure the operating mechanics of their relationship in a manner that allows the operations of the Business to comply with such regulatory change and also preserves the economic benefits of each of the parties, including KCL, VCC and Couch, arising under this Agreement and the other Transaction Documents, as such term is hereinafter defined, giving due consideration to any recoupment of a party's investment hereunder or opportunity therefor). 1.4 Assumed Liabilities. VCC and Couch each agree that, at the Closing, Newco shall assume the following (collectively, the "Assumed Liabilities"): (a) those lease or other contract obligations that are executory in nature and arise after the Effective Time under leases or contracts that are (i) specifically named or described on Schedule 1.3(a) and (ii) denoted on Schedule 1.3(a) as having the related obligations assumed by Newco to the extent described in this Section, (b) those trade payables on open account and accrued expenses (including, without limitation, salary and benefits), owed to unrelated third parties and less than ninety (90) days old, that were, in each case, incurred or accrued in the ordinary course of business after the Effective Time, and (c) those salaries and benefits arising between the Effective Time and the Closing Date and attributable to employees of VCC or Couch that are hired or employed by Newco after the Closing Date. From and after the Closing Date, Newco shall be solely responsible for the Assumed Liabilites. The parties specifically agree that Newco will have no responsibility, liability or obligation whatsoever for (x) those obligations under such leases or contracts which accrued prior to the Effective Time, (y) any breaches or defaults thereunder which occurred or were alleged to have occurred prior to the Closing Date or (z) trade payables not included in the definition of "Assumed Liabilities" above. Subject to the foregoing, the parties will prorate costs and expenses incurred with respect to both pre- and post-Effective Time periods, based on the extent to which the related benefits were used prior to or after the Effective Time. The parties agree to cooperate in good faith to account for such proration and remit amounts that may become due another party based on such pro-ration. VCC and Couch each agree that, except for the Assumed Liabilities, any and all debts, liabilities, and obligations of VCC or Couch, whether known or unknown, absolute, contingent or otherwise (including, but not limited to, federal, state, and local taxes, any sales taxes, use taxes and property taxes, any taxes arising from the transactions contemplated by this Agreement and any liabilities arising from any litigation or civil, criminal or regulatory proceeding involving or related to VCC, Couch or the Business) shall remain the sole responsibility of VCC or Couch (whichever owed such debt, liability or obligation), and each covenants to pay promptly and otherwise fulfill all such debts, liabilities or obligations as and when the same become due (unless contested in good faith). Without limiting the foregoing, each of VCC and Couch specifically acknowledges and agrees that none of PMSI, Prime, any affiliate of PMSI or Prime, and (except for Assumed Liabilities) Newco shall assume any claims, debts, liabilities or obligations whatsoever of VCC or Couch, including, without limitation, those related to or arising out of or under any claim or other action disclosed on Schedule 3.13. 1.5 Payment and Allocation of Purchase Price. Prime agrees to pay the Cash Purchase Price to VCC at the Closing by check, money order or wire transfer of funds. Payment of the Contingent Consideration (as defined in Section 4.6) shall be governed by the terms of Section 4.6. Collectively, the Cash Purchase Price and the Contingent Consideration are referred to collectively in this Agreement as the "Purchase Price." The Cash Purchase Price will be allocated among the Assets, with $568,750 allocated to tangible assets, in accordance with Schedule 1.5 attached hereto, and any Contingent Consideration paid pursuant to Section 4.6 shall be allocated in a manner consistent with the allocation set forth on Schedule 1.5. The parties agree, however, that the allocation set forth on Schedule 1.5 may be changed by Prime after the Closing to give effect to the valuation provided by Prime's external accountants. ARTICLE II Representations and Warranties of PMSI and Prime PMSI and Prime hereby represent and warrant to VCC and Couch, jointly and severally, that each of the following matters is true and correct in all respects as of both the Effective Time and the Closing Date (with the understanding that VCC and Couch are relying materially on such representations and warranties in entering into and performing this Agreement and each of the other contracts, documents, instruments or agreements to be entered into in connection with or as contemplated by this Agreement, all of which, including this Agreement, are collectively referred to as the "Transaction Documents") and which shall survive the Closing: 2.1 Due Organization and Principal Executive Office. Prime is a corporation duly organized, validly existing, and in good standing under the laws of the State of Delaware and has full corporate power and authority to carry on its business as now conducted and as proposed to be conducted. PMSI is a corporation duly organized, validly existing, and in good standing under the laws of the State of Delaware and has full corporate power and authority to carry on its business as now conducted and as proposed to be conducted. Each of PMSI's and Prime's principal executive offices are located at 1301 Capital of Texas Highway, Austin, Texas 78746. 2.2 Due Authorization. Each of PMSI and Prime has full corporate power and authority to enter into and perform this Agreement and each Transaction Document required to be executed by it in connection herewith. With respect to each of PMSI and Prime, this Agreement and each Transaction Document required herein to be executed by it has been duly and validly authorized, executed and delivered by it, and the terms and provisions of this Agreement and each such Transaction Document constitute the valid, binding and enforceable obligations of it. With respect to each of PMSI and Prime, the execution, delivery, and performance of this Agreement and each Transaction Document required herein to be executed by it will not (a) violate any federal, state, county, or local law, rule, or regulation applicable to it or its properties (provided, however, that any representation or warranty by Prime or PMSI with respect to any laws regulating or legislating the provision of healthcare or the practice of medicine shall be limited to the actual knowledge possessed by Prime and PMSI on the Closing Date), (b) violate or conflict with, or permit the cancellation of, any agreement to which it is a party or by which it or its properties are bound, (c) permit the acceleration of the maturity of any indebtedness of, or any indebtedness secured by the property of, it or (d) violate or conflict with any provision of its organizational documents. Except for the filing requirements of PMSI arising under the Securities Exchange Act of 1934, no action, consent, or approval of, or filing with, any federal, state, county, or local governmental authority is required by either of PMSI or Prime in connection with the execution, delivery or performance of this Agreement or any Transaction Document. 2.3 Brokers and Finders. Neither PMSI nor Prime has engaged, or caused to be incurred any liability to, any finder, broker, or sales agent (and neither has paid, or will pay, any finder's fee or similar fee or commission to any person) in connection with the execution, delivery, or performance of this Agreement or the transactions contemplated hereby. 2.4 Claims and Proceedings. Neither PMSI nor Prime is a party to any claim, action, suit, proceeding, or investigation, at law or in equity, before or by any court, municipal or other governmental department, commission, board, agency, or instrumentality, that it reasonably believes would result in a liability or loss that could have a substantially adverse impact on the business operations of PMSI. Neither PMSI nor Prime is a party to any claims, actions, suits, proceedings, or investigations, at law or in equity, before or by any court, municipal or other governmental department, commission, board, agency, or instrumentality which seeks to restrain or prohibit the carrying out of the transactions contemplated by this Agreement or to challenge the validity of such transactions or any part thereof or seeking damages on account thereof; and, to the knowledge of PMSI and Prime, no such claim, action, suit, proceeding or investigation is threatened. 2.5 Investment Representations. Each of PMSI and Prime: -------------------------- (a) Is an "accredited investor," and has not retained or consulted with any "purchaser representative" (as such terms are defined in Rule 501 of Regulation D promulgated under the Securities Act of 1933, as amended (the "Securities Act")) in connection with its execution of this Agreement and the consummation of the transactions contemplated hereby; (b) Has such knowledge and experience in financial and business matters that it is capable of evaluating the merits and risks of an investment in Newco; (c) Will acquire any Newco interests for its own account for investment and not with the view toward resale or redistribution in a manner which would require registration under the Securities Act or the Texas Securities Act, as amended, and it does not presently have any reason to anticipate any change in its circumstances or other particular occasion or event which would cause it to sell its Newco interests, or any part thereof or interest therein, and it has no present intention of dividing the Newco interests with others or reselling or otherwise disposing of the Newco interests or any part thereof or interest therein either currently or after the passage of a fixed or determinable amount of time or upon the occurrence or nonoccurrence of any predetermined event or circumstance; (d) In connection with entering into this Agreement and each Transaction Document to which it is a party, and in making the investment decisions associated therewith, it has neither received nor relied on any representations or warranties from Newco, Couch, VCC, the affiliates of VCC or Couch, or the officers, directors, shareholders, employees, partners, members, agents, consultants, personnel or similarly related parties of VCC or Couch, other than those representations and warranties contained in this Agreement and the other Transaction Documents; (e) Is able to bear the economic risk of an investment in the Newco interests and it has sufficient net worth to sustain a loss of its entire investment without material economic hardship if such a loss should occur; and (f) Acknowledges that the Newco interests have not been registered under the Securities Act, or the securities laws of any of the states of the United States, that an investment in the Newco interests involves a high degree of risk, and that the Newco interests are an illiquid investment. ARTICLE III Representations and Warranties of VCC and Couch VCC and Couch hereby represent and warrant to Prime, jointly and severally, that each of the following matters is true and correct in all respects as of both the Effective Time and the Closing Date (with the understanding that Prime is relying materially on each such representation and warranty in entering into and performing this Agreement), and which shall survive the Closing. Notwithstanding any contrary provision of this Agreement, any representation or warranty by Couch or VCC with respect to any laws regulating or legislating the provision of healthcare or the practice of medicine shall be limited to the actual knowledge possessed by Couch and VCC on the Closing Date. 3.1 Due Organization. VCC is a professional corporation duly organized, validly existing, and in good standing under the laws of the State of Missouri and has full power and authority to carry on its business as now conducted and as proposed to be conducted. KCL is a limited liability company duly organized, validly existing, and in good standing under the laws of the State of Missouri and has full power and authority to carry on its business as now conducted and as proposed to be conducted. Each of VCC and KCL is qualified to do business and is in good standing in every jurisdiction where such qualification is required for the conduct of the Business as conducted on the Closing Date. As of the Closing Date, Couch is the sole holder of all equity ownership interests in each of VCC and KCL, after assuming the conversion, exercise or exchange of any and all rights or securities that are convertible into, or exercisable or exchangeable for, equity ownership interests in VCC or KCL. KCL was formed in connection with the transactions contemplated by this Agreement, and KCL has not conducted any business or engaged in any transactions with any individual or entity prior to the Closing (other than the organizational meeting or consent, and the approval of resolutions authorizing the execution, delivery and performance of this Agreement and any other Transaction Document to which KCL is a party). 3.2 Subsidiaries. VCC does not directly or indirectly have (or possess any options or other rights to acquire) any subsidiaries or any direct or indirect ownership interests in any person, business, corporation, partnership, limited liability company, association, joint venture, trust, or other entity. 3.3 Due Authorization. Each of KCL, VCC and Couch has full power and authority to enter into and perform this Agreement and each Transaction Document required to be executed by KCL, VCC or Couch in connection herewith. The execution, delivery, and performance of this Agreement and each such Transaction Document has been duly authorized by all necessary action of each of KCL (and its managers, officers and members) and VCC (and its directors, officers, and shareholders). This Agreement and each such Transaction Document has been duly and validly executed and delivered by KCL, VCC and Couch and constitutes a valid and binding obligation of KCL, VCC and Couch, enforceable against each of them in accordance with its terms. The execution, delivery, and performance of this Agreement, and each Transaction Document required herein to be executed by Couch, KCL and/or VCC do not (a) violate any federal, state, county, or local law, rule, or regulation applicable to KCL, VCC, Couch, the Business or the Assets, (b) violate or conflict with, or permit the cancellation of, any agreement to which VCC or Couch is a party, or by which VCC, Couch or their properties are bound, or (except as expressly set forth herein or in the other Transaction Documents) result in the creation of any lien, security interest, charge, or encumbrance upon any of such properties, (c) permit the acceleration of the maturity of any indebtedness of VCC or Couch, or any indebtedness secured by the property of VCC or Couch, or (d) violate or conflict with any provision of the organizational documents of KCL or VCC. No action, consent, waiver or approval of, or filing with, any federal, state, county or local governmental authority is required by KCL, VCC or Couch in connection with the execution, delivery, or performance of this Agreement (or any Transaction Document). 3.4 Financial Statements. The unaudited balance sheet and income statement for the Business as of and for each of the years ended December 31, 1998 and 1999, and the unaudited balance sheet and income statement for the Business as of and for the period beginning on January 1, 2000, and ending on August 31, 2000 (the "Balance Sheet Date") are attached hereto as Schedule 3.4 (collectively, the "Financial Statements"). The Financial Statements have been prepared using the accrual basis in accordance with generally accepted accounting principles ("GAAP") consistently applied (except as specifically noted therein or in Schedule 3.4) and fairly present in all material respects the financial position and results of operations of the Business as of the indicated dates and for the indicated periods. Except for Assumed Liabilities and liabilities set forth on Schedule 3.4 attached hereto, as of the Closing Date, neither KCL, VCC nor Couch has any claims, debts, liabilities, or obligations related to the Business or the Assets, whether known or unknown, absolute, contingent or otherwise (including, but not limited to, federal, state, and local taxes, any sales taxes, use taxes and property taxes, any taxes arising from the transactions contemplated by this Agreement and any liabilities arising from any litigation or civil, criminal or regulatory proceeding involving or related to VCC, Couch, the Assets or the Business). Except as set forth in Schedule 3.4 hereto, since the Effective Time there has been no material adverse change in the Assets, the Business or the results of operations of the Business. 3.5 Conduct of Business; Certain Actions. Except as set forth on Schedule 3.5 attached hereto, since the Balance Sheet Date, VCC and Couch have conducted the Business in the ordinary course and consistent with past practices and have not (a) increased the compensation of any employees, agents, contractors, vendors or other parties, except for wage and salary increases made in the ordinary course of business and consistent with the past practices of VCC or Couch, (b) sold any asset (or any group of related assets) in any transaction (or series of related transactions) in which the purchase price or book value for such asset (or group of related assets) exceeded $10,000, (c) suffered or permitted any lien, security interest, claim, charge, or other encumbrance to arise or be granted or created against or upon any of its assets, real or personal, tangible or intangible, (d) amended its organizational documents, (e) made or paid any severance or termination payment to any director, officer, employee, agent, contractor, vendor or consultant, (f) made any change in its method of accounting, (g) made any investment or commitment therefor in any person, business, corporation, association, partnership, limited liability company, joint venture, trust, or other entity, (h) amended, terminated or experienced a termination of any material contract, agreement, lease, franchise, or license to which it is a party, (i) entered into any other material transactions except in the ordinary course of business, (j) changed the standard, undiscounted per procedure fee generally charged to patients, which is $1,500 at the time of Closing, (k) entered into any contract, commitment, agreement, or understanding to do any acts described in the foregoing clauses (a)-(j) of this Section, (l) suffered any material damage, destruction, or loss (whether or not covered by insurance) to any assets, (m) experienced any strike, slowdown, or demand for recognition by a labor organization by or with respect to any of its employees, (n) experienced or effected any shutdown, slow-down, or cessation of any operations conducted by, or constituting part of, the Business, or (o) changed or suspended its procedures for collecting accounts receivable and paying the accounts payable of the Business. 3.6 Assets; Licenses, Permits, etc. The Assets include all property and assets, real, personal and mixed, tangible and intangible, including, without limitation, leases and contracts, equipment, instruments, computer software used in connection with the equipment or instruments, Permits, personal property, furniture, business records and other assets that are used primarily in or are materially relied on for the Assets Related Business conducted by VCC and Couch prior to the Closing. Except as set forth on Schedule 3.6(a), VCC has good and marketable title to all of the Assets, free and clear of all liens, security interests, claims, rights of another, and encumbrances of any kind whatsoever. The Assets are in good operating condition and repair, subject to ordinary wear and tear, taking into account the respective ages of the properties involved and are all that are necessary for the Assets Related Business conducted by VCC and Couch prior to the Closing. Attached hereto as Schedule 3.6(b) is a list and description of all federal, state, county, and local governmental licenses, certificates, certificates of need, permits, waivers, filings and orders held or applied for by VCC or Couch and used or relied on (or to be used or relied on) in connection with the Assets or the Business ("Permits"). VCC and Couch have complied in all material respects, and VCC and Couch are in compliance in all material respects, with the terms and conditions of any such Permits. No additional Permit is required from any federal, state, county, or local governmental agency or body thereof in connection with the conduct of the Business. No claim has been made by any governmental authority (and, to the knowledge of VCC and Couch, no such claim has been threatened) to the effect that a Permit not possessed by VCC or Couch is necessary in respect of the Business. Except as specifically noted on Schedule 3.6(b), no Permit is or will be adversely affected by the consummation of the transactions contemplated by this Agreement. 3.7 Environmental Issues. (a) For purposes of this Agreement, the term "environmental laws" shall mean all laws and regulations relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport, or handling, or the emission, discharge, or release, of any pollutant, contaminant, chemical, or industrial toxic or hazardous substance or waste, and any order related thereto. (b) VCC and Couch have complied in all material respects with and obtained all authorizations and made all filings required by all applicable environmental laws. The properties occupied or used by VCC or Couch have not been contaminated with any hazardous wastes, hazardous substances, or other hazardous or toxic materials in violation of any applicable environmental law, the violation of which could have a material adverse impact on the Business. (c) Neither VCC nor Couch has received any notice from the United States Environmental Protection Agency that it is a potentially responsible party under the Comprehensive Environmental Response, Compensation and Liability Act ("Superfund Notice"), any citation from any federal, state or local governmental authority for non-compliance with its requirements with respect to air, water or environmental pollution, or the improper storage, use or discharge of any hazardous waste, other waste or other substance or other material pertaining to the Business ("Citations") or any written notice from any private party alleging any such non-compliance; and there are no pending or unresolved Superfund Notices, Citations or written notices from private parties alleging any such non-compliance. 3.8 Intellectual Property Rights. There are no patents, trademarks, trade names, or copyrights, and no applications therefor, owned by or registered in the name of VCC or Couch or in which VCC or Couch has any right, license, or interest other than those disclosed on Schedule 3.8. Neither VCC nor Couch is a party to any license agreement, either as licensor or licensee, with respect to any patents, trademarks, trade names, or copyrights other than those disclosed on Schedule 3.8. Neither VCC nor Couch has received any notice that it is infringing any patent, trademark, trade name, or copyright of others. 3.9 Compliance with Laws. To the knowledge of VCC and Couch, VCC and Couch have complied in all material respects, and VCC and Couch are in compliance in all material respects, with all federal, state, county, and local laws, rules, regulations and ordinances currently in effect and relating to the Business. No claim has been made or threatened by any governmental authority against VCC or Couch to the effect that any aspect of the Business fails to comply in any respect with any law, rule, regulation, or ordinance. 3.10 Insurance. Attached hereto as Schedule 3.10 is a list of all policies of fire, liability, business interruption, and other forms of insurance (including, without limitation, professional liability insurance) and all fidelity bonds held by or applicable to VCC or the Business at any time within the past three (3) years, which schedule sets forth in respect of each such policy the policy name, policy number, carrier, term, type of coverage, deductible amount or self-insured retention amount, limits of coverage, annual premium and claims asserted thereunder (regardless of whether resolved or whether benefits were paid). To the knowledge of VCC and Couch, no event directly relating to VCC or the Business has occurred which will result in a retroactive upward adjustment of premiums under any such policies or which is likely to result in any prospective upward adjustment in such premiums. There have been no material changes in the type of insurance coverage maintained by VCC or Couch with respect to the Business during the past three (3) years, including without limitation any change which has resulted in any period during which VCC or the Business had no insurance coverage. Excluding insurance policies which have expired and been replaced, no insurance policy relating to the Business has been canceled within the last three (3) years and no threat has been made to cancel any insurance policy relating to the Business within such period. 3.11 Employee Benefit Matters. Except as set forth on Schedule 3.11, neither VCC nor Couch maintains or contributes or is required to contribute to any "employee welfare benefit plan" (as defined in section 3(1) of the Employee Retirement Income Security Act of 1974 (and any sections of the Code amended by it) and all regulations promulgated thereunder, as the same have from time to time been amended ("ERISA")) or any "employee pension benefit plan" (as defined in ERISA). Neither VCC nor Couch presently maintains or has ever maintained, or had any obligation of any nature to contribute to, a "defined benefit plan" within the meaning of the Code. 3.12 Contracts and Agreements. Attached hereto as Schedule 3.12 is a list of all written or oral contracts, commitments, leases, and other agreements (including, without limitation, all promissory notes, loan agreements, and other evidences of indebtedness, mortgages, deeds of trust, security agreements, pledge agreements, service agreements, and similar agreements and instruments and all confidentiality agreements) relating to the Business and to which VCC or Couch is a party or by which VCC or Couch or any of the Assets are bound, pursuant to which the obligations thereunder of any party thereto are, or are contemplated as being, in respect of any such individual contracts, commitments, leases, or other agreements during any year during the term thereof, $25,000 or greater, or which are otherwise material to the Business (collectively the "Contracts" and individually, a "Contract"). Neither VCC nor Couch is, and, to the best knowledge of VCC and Couch, no other party thereto is, in default (and no event has occurred which, with the passage of time or the giving of notice, or both, would constitute a default) under any Contract. Neither VCC nor Couch has waived any material right under any Contract, and no consents or approvals (other than those obtained in writing and delivered to Prime prior to Closing) are required under any Contract in connection with the consummation of the transactions contemplated hereby. Neither VCC nor Couch has guaranteed any obligation of any other person or entity insofar as it relates to the Business. 3.13 Claims and Proceedings. Attached hereto as Schedule 3.13 is a list and description of all claims, actions, suits, proceedings, and investigations pending or, to the knowledge of VCC and Couch, threatened against VCC or Couch, at law or in equity, or before or by any court, municipal or other governmental department, commission, board, agency, or instrumentality. Except as set forth on Schedule 3.13 attached hereto, none of such claims, actions, suits, proceedings, or investigations will result in any liability or loss to VCC or the Business which (individually or in the aggregate) is material, and VCC and Couch have not been, and VCC and Couch are not now, subject to any order, judgment, decree, stipulation, or consent of any court, governmental body, or agency. No inquiry, action, or proceeding has been asserted, instituted, or threatened against VCC or Couch to restrain or prohibit the carrying out of the transactions contemplated by this Agreement or to challenge the validity of such transactions or any part thereof or seeking damages on account thereof. 3.14 Taxes. All federal, foreign, state, county, and local income, gross receipts, excise, property, franchise, license, sales, use, withholding, and other tax (collectively, "Taxes") returns, reports, and declarations of estimated tax (collectively, "Returns") which were required to be filed by VCC (or Couch with respect to the Business) on or before the date hereof have been filed within the time (including any applicable extensions) and in the manner provided by law, and all such Returns are true and correct in all material respects and accurately reflect the Tax liabilities of VCC (or Couch with respect to the Business). VCC has provided Prime with true and complete copies of all returns filed for and during the taxable years 1997, 1998 and 1999. All Taxes, assessments, penalties, and interest which have become due pursuant to such Returns have been paid or adequately accrued in the Financial Statements. The provisions for Taxes reflected on the balance sheet contained in the Financial Statements are adequate to cover all of VCC's (and Couch's with respect to the Business) estimated Tax liabilities for the respective periods then ended and all prior periods. As of the Closing Date, VCC (and Couch with respect to the Business) will not owe any Taxes for any period prior to the Closing which are not reflected on the Financial Statements, except for Taxes attributable to the operations of the Business between the Balance Sheet Date and the Closing Date. Neither VCC nor Couch has executed any presently effective waiver or extension of any statute of limitations against assessments and collection of Taxes. There are no pending or threatened claims, assessments, notices, proposals to assess, deficiencies, or audits (collectively, "Tax Actions") against VCC or Couch with respect to any Taxes owed or allegedly owed in respect of the Business. There are no tax liens on any of the assets of VCC or the Assets. Proper and accurate amounts have been withheld and remitted by VCC and Couch from and in respect of all persons from whom either of them is required by applicable law to withhold for all periods in compliance with the tax withholding provisions of all applicable laws and regulations. Neither VCC nor Couch is a party to any tax sharing agreement. 3.15 Personnel. Attached hereto as Schedule 3.15 is a list of names and current annual rates of compensation of the officers, employees or agents of VCC or the Business who are necessary for the operation of the Business or who utilize (or are necessary for the utilization of) the Assets (collectively, the "Employees"). Except as set forth on Schedule 3.15, there are no bonus, profit sharing, percentage compensation, company automobile, club membership, and other like benefits, if any, paid or payable by VCC or the Business to any Employees that are not fully and specifically reflected in the Financial Statements. Schedule 3.15 attached hereto also contains a brief description of all material terms of employment agreements and confidentiality agreements to which VCC (or Couch with respect to the Business) is a party and all severance benefits which any director, officer, Employee or sales representative of VCC (or Couch with respect to the Business) is or may be entitled to receive. VCC has delivered to Prime accurate and complete copies of all such employment agreements, confidentiality agreements, and all other agreements, plans, and other instruments. There is no pending or threatened (i) labor dispute or union organization campaign relating to the Business, (ii) claims against VCC or Couch by any employees of VCC (or Couch with respect to the Business), or (iii) terminations, resignations or retirements of any employees of VCC (or Couch with respect to the Business). None of the employees of VCC (or Couch with respect to the Business) are represented by any labor union or organization. There is no unfair labor practice claim against VCC (or Couch with respect to the Business) before the National Labor Relations Board or any strike, labor dispute, work slowdown, or work stoppage pending or threatened against or involving VCC (or Couch with respect to the Business). 3.16 Business Relations. Neither VCC nor Couch has any reason to believe and has not been notified that any supplier or customer of the Business will cease or refuse to do business with the Business in the same manner as previously conducted with the Business as a result of or within one (1) year after the consummation of the transactions contemplated hereby, to the extent such cessation or refusal might affect the Assets or the Business. Neither VCC nor Couch has received any notice of any disruption (including delayed deliveries or allocations by suppliers) in the availability of the materials or products used in the Business. 3.17 Agents. VCC (and Couch with respect to the Business) has not designated or appointed any person (other than VCC's employees, officers and directors) or other entity to act for it or on its behalf pursuant to any power of attorney or any agency which is presently in effect. 3.18 Indebtedness To and From Directors, Officers, Shareholders and Employees. No director, officer, shareholder, employee or affiliate of VCC or Couch has any indebtedness owed to it from VCC or Couch, excluding indebtedness for travel advances or similar advances for expenses incurred on behalf of and in the ordinary course of the Business and consistent with past practices associated with the Business. As of the Effective Time and the Closing Date all amounts due VCC or Couch from any of their (as applicable) directors, officers, employees or affiliates (or any of their family members) shall have been repaid in full. 3.19 Commission Sales Contracts. Except as disclosed in Schedule 3.19 attached hereto, neither VCC nor Couch has an employment relationship with any individual, corporation, partnership, or other entity related to the Business whose compensation from VCC or Couch is in whole or in part determined on a commission basis. 3.20 Certain Consents. Except as set forth on Schedule 3.20 attached hereto, there are no consents, waivers, or approvals required to be executed and/or obtained by VCC or Couch from third parties (including, without limitation, the spouse, if any, of Couch) in connection with the execution, delivery, and performance of this Agreement or any other Transaction Documents"). 3.21 Brokers. Neither VCC nor Couch has engaged, or caused any liability to be incurred to, any finder, broker, or sales agent (and neither has paid, nor will pay, any finders fee or similar fee or commission to any person) in connection with the execution, delivery, or performance of this Agreement or the transactions contemplated hereby. 3.22 Interest in Competitors, Suppliers, and Customers. Except as set forth on Schedule 3.22 attached hereto, neither VCC nor any affiliate of VCC (including, without limitation, Couch), and to the knowledge of VCC and Couch, no director, officer, employee or affiliate of VCC or any affiliate of any director, officer, employee or affiliate of VCC, has any ownership interest in any competitor, customer or supplier of the Business (other than the ownership of securities of a publicly held entity of which it owns less than five percent (5%) of any class of outstanding securities) or any property used in the operation of the Business. 3.23 Warranties. Except as set forth on Schedule 3.23, there have not been made any warranties or guarantees to third parties with respect to any products sold or services rendered in connection with the Business. Except as set forth on Schedule 3.23 attached hereto, no claims for breach of product or service warranties have ever been made with respect to products sold or services rendered in connection with the Business. 3.25 Investment Representations. Each of VCC and Couch: -------------------------- (a) Is an "accredited investor," and has not retained or consulted with any "purchaser representative" (as such terms are defined in Rule 501 of Regulation D promulgated under the Securities Act of 1933, as amended (the "Securities Act")) in connection with its execution of this Agreement and the consummation of the transactions contemplated hereby; (b) Has such knowledge and experience in financial and business matters that it is capable of evaluating the merits and risks of an investment in Newco; (c) Will acquire any Newco interests for its own account for investment and not with the view toward resale or redistribution in a manner which would require registration under the Securities Act, the securities laws of Missouri and Kansas, as amended, or the securities laws of any other state, and it does not presently have any reason to anticipate any change in its circumstances or other particular occasion or event which would cause it to sell its Newco interests, or any part thereof or interest therein, and it has no present intention of dividing the Newco interests with others or reselling or otherwise disposing of the Newco interests or any part thereof or interest therein either currently or after the passage of a fixed or determinable amount of time or upon the occurrence or nonoccurrence of any predetermined event or circumstance; (d) In connection with entering into this Agreement and each of the other Transaction Documents to which it is a party, and in making the investment decisions associated therewith, it has neither received nor relied on any representations or warranties from Newco, PMSI, Prime, the affiliates of PMSI or Prime, or the officers, directors, shareholders, employees, partners, members, agents, consultants, personnel or similarly related parties of PMSI or Prime, other than those representations and warranties contained in this Agreement and the other Transaction Documents; (e) Is able to bear the economic risk of an investment in the Newco interests and it has sufficient net worth to sustain a loss of its entire investment without material economic hardship if such a loss should occur; and (f) Acknowledges that the Newco interests have not been registered under the Securities Act, or the securities laws of any of the states of the United States, that an investment in the Newco interests involves a high degree of risk, and that the Newco interests are an illiquid investment. ARTICLE IV Covenants 4.1 Use of Name. Except to the extent allowed under the limited license contained in the Facility Use Agreement, each of KCL, VCC and Couch agrees that, following the Closing Date, it will cease using the name "Vision Correction Centers of Kansas City, P.C.," "Kansas City Laser Vision Correction Centers, L.L.C." or any words or phrases which are deceptively similar to such names. 4.2 Cooperation Relating to Financial Statements. Each of KCL, VCC and Couch agrees to cooperate with Prime, at Prime's expense, in the preparation of any financial statements of KCL or VCC which Prime or its affiliates may be required by any applicable law to prepare. 4.3 Action by Owners; Restrictions on Transfer. (a) Action by Owner. Couch agrees to vote any interest he owns in KCL or VCC, and to take such other actions as may be necessary in his capacity as the sole director and sole shareholder of VCC and the sole manager and sole member of KCL, to authorize and direct KCL and VCC to perform all of their respective obligations under this Agreement and under the Organizational Documents and other Transaction Documents to which either of them is a party. (b) VCC Restrictions on Transfer. Except as provided in subsection (d) of this Section, VCC and Couch each agree that, until such time as neither of them owns any direct or indirect ownership interest in Newco, neither of them will, without obtaining the prior written consent of Prime, which consent may be withheld in Prime's sole and absolute discretion, (i) authorize the issuance of any additional capital stock or other ownership interest in VCC or (ii) transfer, assign, pledge, hypothecate, or in any way alienate any capital stock of VCC, or any interest therein, whether voluntarily or by operation of law, or by gift or otherwise, without the prior written consent of Prime. Any purported transfer in violation of this Section shall be void ab initio without any action by any party, and shall not operate to transfer any interest or title to the purported transferee. (c) KCL Restrictions on Transfer. Except as provided in subsection (d) of this Section, KCL and Couch each agree that, until such time as Couch and all entities controlled by Couch do not own any direct or indirect ownership interest in Newco, neither of KCL or Couch will, without obtaining the prior written consent of Prime, which consent may be withheld in Prime's sole and absolute discretion, take any of the following actions if such action could result in a non-licensed physician owning any interest in KCL, or Couch owning less than 51% of all of the voting stock or other ownership interests in KCL: (i) authorize the issuance of any additional membership or other ownership interest in KCL or (ii) transfer, assign, pledge, hypothecate, or in any way alienate any membership interest of KCL, or any interest therein, whether voluntarily or by operation of law, or by gift or otherwise. KCL and Couch further agree that only licensed physicians will be permitted to acquire an interest in KCL (unless prohibited by the foregoing sentence or otherwise allowed pursuant to subsection (d) of this Section). Any purported transfer in violation of this Section shall be void ab initio without any action by any party, and shall not operate to transfer any interest or title to the purported transferee. Furthermore, KCL and Couch agree that prior to selling or transferring any interest in KCL to any licensed physician in a transaction allowed under this Section, KCL and Couch will require as a condition to such sale or transfer that the licensed physician sign an agreement naming Newco as a beneficiary and containing restrictive covenants substantially similar to those contained in Article VIII of this Agreement (excluding the provisions of Section 8.2(b), Section 8.2(c) and the last paragraph of Section 8.3); provided, however, that the exclusivity and non-compete terms of such agreement shall terminate one year after such licensed physician no longer owns an interest in KCL and no longer uses Newco's premises and equipment. Despite Couch's limited ability to transfer ownership interests in KCL to other licensed physicians, Couch hereby represents and warrants to Prime as of the Effective Time and the Closing Date that Couch is not currently committed to, and does not currently have, any intention to transfer any ownership interests in KCL. Couch further represents and warrants to Prime as of the Effective Time and the Closing Date that he currently intends to devote all his business time and attention toward personally performing for the foreseeable future not less than the volume of procedures that he was performing immediately prior to the Closing. Prime acknowledges that KCL is entitled to hire physicians, subject to the conditions above relating to transfers of ownership interests in KCL. Furthermore, licensed physicians employed by KCL will also, subject to Couch's approval, be allowed to perform procedures using Newco's premises and facilities pursuant to the Facility Use Agreement. Couch and KCL acknowledge and agree that Newco shall not be responsible for paying any salaries, benefits, professional fees or other remuneration to any physician employee of KCL or VCC. (d) Notwithstanding the foregoing or any contrary provision of this Agreement, after the expiration of ten years following the Closing Date, Couch is entitled to transfer his interest in VCC or in KCL to any person or entity upon obtaining Prime's consent, which consent cannot be unreasonably withheld. (e) Each of KCL, VCC and Couch covenant that all evidences of ownership in KCL or VCC, including, without limitation, all stock certificates, shall bear the following legend: "THE INTERESTS REPRESENTED HEREBY AND THE SALE, ASSIGNMENT, TRANSFER, PLEDGE OR OTHER DISPOSITION THEREOF ARE SUBJECT TO CERTAIN RESTRICTIONS CONTAINED IN A CONTRIBUTION AGREEMENT AMONG THE COMPANY AND THE WITHIN NAMED PARTIES, AND ANY AMENDMENT THERETO. A COPY OF THE CONTRIBUTION AGREEMENT AND ALL APPLICABLE AMENDMENTS THERETO WILL BE FURNISHED BY THE COMPANY TO THE HOLDER HEREOF WITHOUT CHARGE UPON WRITTEN REQUEST TO THE COMPANY AT ITS PRINCIPAL PLACE OF BUSINESS OR REGISTERED OFFICE." 4.4 Public Statements and Press Releases. The parties hereto covenant and agree that, except as provided for hereinbelow, each will not from and after the date hereof make, issue or release any public announcement, press release, statement or acknowledgment of the existence of, or reveal publicly the terms, conditions and status of, the transactions provided for herein, without the prior written consent of the other parties hereto as to the content and time of release of and the media in which such statements or announcement is to be made, provided, however, that the following shall not be a breach of this Section: (a) filings and disclosures required by the Securities and Exchange Commission, and (b) announcements, statements, acknowledgments or revelations which either party is required by law to make, issue or release as long as such party shall have given, to the extent reasonably possible, not less than two (2) calendar days prior notice to the other parties hereto, and shall have attempted, to the extent reasonably possible, to clear such announcement, statement, acknowledgment or revelation with the other parties hereto. Each party hereto agrees that it will not unreasonably withhold any such consent or clearance. The provisions of this Section shall not limit or restrict any party's communications with its personal consultants or advisors, including, without limitation, its attorneys, accountants and financial advisors. 4.5 Guaranty of PMSI. PMSI hereby unconditionally and irrevocably guarantees each of the payment and performance obligations of Prime hereunder and under each of the Transaction Documents. Without limiting the foregoing, PMSI agrees that if Prime shall default in any obligation to pay to KCL, VCC or Couch any amount then due and payable by Prime to KCL, VCC or Couch under Article I, Article VI or Article VII hereunder, PMSI shall immediately pay such amount to KCL, VCC or Couch. PMSI hereby agrees not to require KCL, VCC or Couch to proceed against Prime or any other person or to pursue any other remedy before proceeding against PMSI under this guaranty. 4.6 Contingent Consideration. In further consideration of the purchase of sixty-five percent (65%) of the Assets and the Assets Related Business, Prime agrees to the following provisions related to the payment to VCC of certain additional consideration if the requirements of this Section are satisfied, and only in accordance with the provisions below. Any amounts payable pursuant to this Section are hereinafter referred to as "Contingent Consideration" and are provided in addition to payment of the Cash Purchase Price pursuant to Section 1.1. No payment of any portion of the Cash Purchase Price shall reduce amounts payable under this Section. (a) Within sixty days of each of the first three annual anniversaries of the Closing Date (each, a "Calculation Date"), Newco shall calculate the Actual Net Income (as hereinafter defined) for Newco for the twelve consecutive calendar months ending on the respective Calculation Date (each such twelve month period is hereinafter referred to as a "Calculation Period). As used herein, "Actual Net Income" for any Calculation Period shall mean the net income for Newco during that Calculation Period, calculated using the same methodology and principles reflected in the calculation of "Base Net Income" shown on Schedule 4.6 attached hereto. The parties acknowledge and agree that the manner of calculation set forth on Schedule 4.6 attached hereto reflects the agreed upon means of calculating the Base Net Income reflected therein, as well as the Actual Net Income for any Calculation Period (subject, however, to exclusions/additions described below in subsection (d)). Within each such sixty day period, Prime shall deliver to Couch, via certified or registered U.S. Mail, a statement (the "Calculation Statement") showing calculation of the Actual Net Income for the respective Calculation Period and the basis on which it was calculated in reasonable detail. If Couch shall fail to receive a Calculation Statement within such sixty-day period, then Couch shall promptly notify Prime in writing that the Calculation Statement has not been received, and Prime shall have an additional five days following its receipt of such notice from Couch, within which Prime may deliver the respective Calculation Statement without having been in default under this subsection (a). If Prime fails to deliver the respective Calculation Statement within such additional five-day period, and payment of the Contingent Consideration would have been otherwise required for the respective Calculation Period, Prime agrees to pay interest at PMSI's overnight funds investment rate on the amount of the Contingent Consideration, charged from the first day following such addition five-day period until the day on which the respective Calculation Statement is delivered. Couch shall have thirty days following his receipt of a Calculation Statement during which Newco and Prime agree to provide to Couch reasonable access to Newco's books and records. If Couch shall fail to deliver an Objection Notice (as hereinafter defined) within such thirty-day period, then such failure shall constitute Couch's acceptance of the respective Calculation Statement, which shall thereupon become conclusive and binding on all parties hereto, and shall not be subject to further review, challenge, or adjustment. During such thirty-day period, Couch may deliver to Prime, via certified or registered U.S. Mail, a written notice of objection to the respective Calculation Statement (an "Objection Notice"), which Objection Notice shall set forth in reasonable detail Couch's calculation of the Contingent Consideration calculated therein, and Couch's basis for objection, in which case the parties shall meet and in good faith attempt to resolve any disagreement within thirty (30) days after Prime's receipt of the Objection Notice. If the parties are unable to resolve such disagreement within such time period, the disagreement shall be referred to a "Big Five" accounting firm selected by mutual agreement of Couch and Prime, or if the parties cannot agree on such selection, then a "Big Five" accounting firm selected by lot, excluding those that have provided services to Couch or Prime within the preceding twenty-four months (the "Settlement Accountants"). The Settlement Accountants shall be directed to use their best efforts to reach a determination of the correct Actual Net Income for the respective Calculation Period within forty-five days after such referral, and their determination shall be final and binding on the parties hereto, and shall not be subject to further review, challenge or adjustment. The costs and expenses of the services of the Settlement Accountants (the "Audit Costs") shall be allocated to and borne by Prime if the Contingent Consideration is payable based on the Actual Net Income calculation of the Settlement Accountants, or Couch if the Contingent Consideration is not payable based on the Actual Net Income calculation of the Settlement Accountants. (b) If the Actual Net Income for any Calculation Period finally determined pursuant to subsection (a) is equal to or greater than the corresponding "Target Amount" set forth below, Prime shall in each instance, within five business days of the final determination of that Actual Net Income, pay in cash to VCC the amount of $200,000: Calculation Period Target Amount 9/1/00 to 8/31/01 115% of Base Net Income 9/1/01 to 8/31/02 132% of Base Net Income 9/1/02 to 8/31/03 152% of Base Net Income If Prime fails to timely pay any amount required to be paid by Prime pursuant to this subsection (b), then Prime agrees to pay interest at the rate of 10% per annum on the amount required to have been paid, charged from the last date on which such payment could have been timely made until the date on which such payment is actually paid. (c) The parties agree that each calculation of Actual Net Income and related payment of Contingent Consideration (if required) shall be made independent of other calculations of Actual Net Income. For example, and solely for purposes of illustration, if the finally determined Actual Net Income for the Calculation Period beginning on September 1, 2001 and ending on August 31, 2002 amounted to 120% of Base Net Income, and the finally determined Actual Net Income for the Calculation Period beginning on September 1, 2002 and ending on August 31, 2003 amounted to 160% of Base Net Income, Prime would not be obligated to pay any amount in respect of the Calculation Period ended August 31, 2002, but would be obligated to pay $200,000 to VCC in respect of the Calculation Period ended August 31, 2003. The parties agree that Prime shall never be obligated to pay more than $600,000 pursuant to this Section (excluding interest, if any, pursuant to subsection (a) related to the untimely delivery of a Calculation Statement). (d) The parties agree that, notwithstanding any provision of this Agreement to the contrary, the revenues, income, costs, and expenses (including, without limitation, startup and transaction costs, legal and accounting costs and fees, and applicable financing costs) resulting from or attributable to the acquisition, development and/or operation of any new locations by Newco or Newco's subsidiaries shall be included in the calculation of the Actual Net Income for each Calculation Period pursuant to subsection (a). The provisions of this subsection (d) shall not be construed to require any party, including Newco, to develop or acquire any new location. 4.7 Key-Man Life Insurance. The parties agree that Newco shall maintain a key-man life insurance policy and a disability policy (the "Policies") on Couch, each naming Newco as the exclusive beneficiary thereunder and each in a policy amount equal to or exceeding $7,700,000. Such Policies shall be maintained by Newco until Couch no longer materially participates in the Assets Related Business as reasonably determined by the Managers. 4.8 Working Capital Line. Couch hereby agrees to loan amounts to Newco, from time to time, during the first four (4) months immediately following the Closing Date, not to exceed $200,000 in the aggregate, upon request by Prime, to cover any actual deficit in working capital that Newco may experience. The parties agree that amounts borrowed will not accrue interest but must be repaid by Newco prior to Newco's distribution of any of its earnings to Prime. 4.9 Reimbursement of Development Costs. Prime agrees to reimburse Couch for up to $30,900 for amounts paid by Couch to the following vendors in connection with the planning and initial development of a second location: (a) Eye Designs, (b) WRS Architects, Inc., and (c) Universal Construction Company, Inc./Saladino Mechanical Company. Prime agrees that such reimbursements must be paid in cash on or before five days following the Closing. Prime, Couch and VCC agree to cooperate to seek the return of equipment deposits paid to Topcon and Visx in the aggregate amount of $34,780, but if return of the deposits is not possible, then Prime agrees to reimburse VCC or Couch for the $34,780 within five days of the date on which it becomes clear that the deposits will not be returned. Couch and VCC agree to promptly pay to Prime any refunds received with respect to amounts reimbursed pursuant to this Section. Couch and VCC further agree that, upon receiving reimbursements from Prime, Prime shall be exclusively entitled to seek the return of and/or direct the application or use of any credits, deposits or refunds related to amounts reimbursed pursuant to this Section, and Couch and VCC agree to execute any assignment or take any other action reasonably necessary to accomplish or enable the foregoing. 4.10 Tag Along Rights. In the event Prime elects to transfer after the Closing Date all or any portion of its membership interest in Newco to any transferee not affiliated with Prime, Prime will provide VCC with 30 days prior written notice setting forth the terms and conditions of the proposed transfer. VCC shall have 10 days following its receipt of such notice within which VCC may elect in writing to include, as a condition to Prime's transfer, all or any portion of its interest in the proposed transfer on the same terms and conditions; provided that if Prime is transferring only a portion of its interest, VCC shall only be entitled to include in the transfer the same proportion of its interest. VCC shall not be entitled to delay the closing of any proposed transfer by Prime, and VCC shall forfeit all rights with respect to a proposed transfer in the event of such a delay. VCC's rights under this Section are specific to transfers by Prime or any transferee of Prime that is affiliated with Prime, but shall not apply to transfers by any transferee not affiliated with Prime, even if such transferee assumes Prime's rights and obligations under this Agreement. 4.11 Covenant to Obtain Consents. Each of KCL, VCC and Couch covenants and agrees to exercise good faith, diligent efforts to obtain each of the consents listed on Schedule 3.20 within thirty days following the Closing Date. ARTICLE V Conditions to Closing 5.1 Prime's Conditions to Closing. Prime's obligation to consummate the transactions contemplated in this Agreement is subject to the satisfaction, prior to or at the Closing, of each of the following conditions, any one or more of which may be waived by Prime in writing. Upon failure of any of the following conditions, Prime may terminate this Agreement: (a) each of KCL, VCC and Couch shall have executed and delivered each of the Transaction Documents to which it is a party (including, without limitation, the Limited Liability Company Agreement of Newco attached hereto as Exhibit B), and shall have performed or complied in all respects with its agreements and covenants required by this Agreement or any other Transaction Document to have been performed or complied with by it prior to or at the Closing; (b) since the Effective Time, except as set forth on Schedule 3.4 hereto, there shall not have been any material adverse change in the condition (financial or otherwise) of VCC, the Assets or the Business (including, without limitation, any material change in the amount of working capital reasonably necessary to operate the Assets Related Business during any one-month period); (c) each of the representations and warranties made by VCC or Couch in this Agreement or any other Transaction Document shall be true, correct and not misleading in any material respect; and (d) each of KCL, VCC and Couch shall have delivered such good standing certificates, officer certificates, and similar documents and certificates as counsel for Prime may have reasonably requested. 5.2 Couch's and VCC's Conditions to Closing. Each of Couch's, KCL's and VCC's obligation to consummate the transactions contemplated in this Agreement is subject to the satisfaction, prior to or at the Closing, of each of the following conditions, any one or more of which may be waived by KCL, VCC and Couch in writing. Upon failure of any of the following conditions, KCL, VCC and Couch may terminate this Agreement: (a) Prime shall have executed and delivered each of the Transaction Documents to which it is a party (including, without limitation, the Limited Liability Company Agreement of Newco attached hereto as Exhibit B), and shall have performed or complied in all respects with its agreements and covenants required by this Agreement or any other Transaction Document to have been performed or complied with by it prior to or at the Closing; (b) each of the representations and warranties made by Prime in this Agreement or any other Transaction Document shall be true, correct and not misleading in any material respect; and (c) Prime shall have delivered such good standing certificates, officer certificates, and similar documents and certificates as counsel for VCC and Couch may have reasonably requested. ARTICLE VI Indemnification of Prime 6.1 Indemnification of Prime. Each of KCL, VCC and Couch agrees to indemnify and hold harmless Prime, each parent company, subsidiary and/or affiliate of Prime (including, without limitation, Newco) and each parent company, subsidiary, affiliate, shareholder, member, partner (or other owner), officer, director, manager, agent, employee and representative of any of the foregoing (collectively, the "Prime Indemnified Parties") from and against any and all damages, losses, claims, liabilities, demands, charges, suits, penalties, costs, and expenses (including court costs and attorneys' fees and expenses incurred in investigating and preparing for any litigation or proceeding) (collectively, "Indemnified Costs"), including, without limitation, Indemnified Costs arising in connection with the commencement or assertion of any action, proceeding, demand, or claim by a third party (collectively, a "Third-Party Action"), which any of the Prime Indemnified Parties may sustain, arising out of or related to (a) any breach or default by KCL, VCC or Couch of any of the representations, warranties, covenants or agreements contained in this Agreement or any Transaction Document, (b) any claim, debt, obligation or liability of KCL, VCC or Couch (excluding the Assumed Liabilities), (c) any actual or alleged actions or omissions by VCC, Couch, or any of VCC's directors, officers, shareholders, agents, employees, representatives, subsidiaries and/or affiliates occurring prior to the Closing Date (regardless of whether such Indemnified Costs are asserted at any time before or after the Closing Date), and (d) any actual or alleged actions or omissions by KCL, VCC or Couch occurring after the Closing that either were not made by VCC or Couch in its capacity as a director, officer or shareholder of Newco (as applicable), or, if made by VCC or Couch in such a capacity, constituted a breach of any fiduciary or other duty owed by VCC or Couch under applicable law or any Transaction Document. For purposes of this Section, any decrease in the value of a Prime Indemnified Party's ownership interest (if any) in Newco, as a result of the acts, omissions or circumstances described in clauses (a) through (d) of this Section, shall be deemed an Indemnified Cost, and such Prime Indemnified Party shall be entitled to indemnification hereunder in an amount equal to such decrease in value; provided further that, notwithstanding any provision of this Agreement or any other Transaction Document to the contrary, none of KCL, VCC or Couch may, and each hereby agrees not to, seek contribution, indemnification or reimbursement from Newco for any amount KCL, VCC or Couch is required to pay pursuant to this Article, regardless of whether KCL, VCC or Couch is entitled to contribution, indemnification or reimbursement under any Transaction Document, the organizational documents of Newco or applicable law. The parties agree that indemnification may not be sought under this ARTICLE or ARTICLE VII on the basis that the structure of the transactions contemplated by this Agreement violate any federal, state, county, or local laws, rules, regulations or ordinances regulating or legislating the provision of healthcare or the practice of medicine. The parties also agree that recourse under this ARTICLE or ARTICLE VII shall not be the sole recourse of the parties against one another for a breach of the provisions of this Agreement or any other Transaction Document. 6.2 Defense of Third-Party Claims. A Prime Indemnified Party shall give prompt written notice to Couch, of the commencement or assertion of any Third Party Action in respect of which such Prime Indemnified Party shall seek indemnification hereunder. Any failure to so notify Couch shall not relieve KCL, VCC or Couch from any liability that they may have to such Prime Indemnified Party under this Article except to the extent that the failure to give such notice materially and adversely prejudices Couch. Couch shall have the right to assume control of the defense of, settle, or otherwise dispose of such Third-Party Action on such terms as it deems appropriate; provided, however, that: (a) The Prime Indemnified Party shall be entitled, at his, her, or its own expense, to participate in the defense of such Third-Party Action; (b) Couch shall obtain the prior written approval of the Prime Indemnified Party, which approval shall not be unreasonably withheld, before entering into or making any settlement, compromise, admission, or acknowledgment of the validity of such Third-Party Action or any liability in respect thereof if, pursuant to or as a result of such settlement, compromise, admission, or acknowledgment, injunctive or other equitable relief would be imposed against the Prime Indemnified Party; (c) Couch shall not consent to the entry of any judgment or enter into any settlement that does not include as an unconditional term thereof the execution and delivery of a release from all liability in respect of such Third-Party Action by each claimant or plaintiff to, and in favor of, each Prime Indemnified Party; (d) Couch shall not be entitled to control (but shall be entitled to participate at its own expense in the defense of), and the Prime Indemnified Party shall be entitled to have sole control over, the defense or settlement, compromise, admission, or acknowledgment of any Third-Party Action as to which Couch fails to assume the defense within thirty (30) days; provided, however, that the Prime Indemnified Party shall make no settlement, compromise, admission, or acknowledgment which would give rise to liability on the part of Couch, without the prior written consent of Couch; (e) Couch shall make payments of all amounts required to be made pursuant to the foregoing provisions of this Article to or for the account of the Prime Indemnified Party from time to time promptly upon receipt of bills or invoices relating thereto or when otherwise due and payable, provided that the Prime Indemnified Party has agreed in writing to reimburse Couch for the full amount of such payments if the Prime Indemnified Party is ultimately determined not to be entitled to such indemnification; and (f) The parties hereto shall extend reasonable cooperation in connection with the defense of any Third-Party Action pursuant to this Article and, in connection therewith, shall furnish such records, information, and testimony and attend such conferences, discovery proceedings, hearings, trials, and appeals as may be reasonably requested. ARTICLE VII Indemnification of KCL, VCC and Couch 7.1 Indemnification of KCL, VCC and Couch. Prime agrees to indemnify and hold harmless KCL, VCC, Couch, each parent company, subsidiary and/or affiliate of KCL, VCC (including, without limitation, Newco) and each parent company, subsidiary, affiliate, shareholder, member, partner (or other owner), officer, director, manager, agent, employee and representative of any of the foregoing (collectively, the "Couch Indemnified Parties"), from and against any and all Indemnified Costs, including, without limitation, Indemnified Costs arising in connection with the commencement or assertion of any Third Party Action, which any of the Couch Indemnified Parties may sustain, arising out of any breach or default by Prime of any of the representations, warranties, covenants or agreements contained in this Agreement or any Transaction Document. The parties agree that indemnification may not be sought under this ARTICLE or ARTICLE VI on the basis that the structure of the transactions contemplated by this Agreement violate any federal, state, county, or local laws, rules, regulations or ordinances regulating or legislating the provision of healthcare or the practice of medicine. The parties also agree that recourse under this ARTICLE and ARTICLE VI shall not be the sole recourse of the parties against one another for a breach of the provisions of this Agreement or any other Transaction Document. 7.2 Defense of Third-Party Claims. A Couch Indemnified Party shall give prompt written notice to Prime of the commencement or assertion of any Third-Party Action in respect of which such Couch Indemnified Party shall seek indemnification hereunder. Any failure so to notify Prime shall not relieve Prime from any liability that it may have to such Couch Indemnified Party under this Article except to the extent that the failure to give such notice materially and adversely prejudices Prime. Prime shall have the right to assume control of the defense of, settle, or otherwise dispose of such Third-Party Action on such terms as it deems appropriate; provided, however, that: (a) The Couch Indemnified Party shall be entitled, at his or its own expense, to participate in the defense of such Third-Party Action; (b) Prime shall obtain the prior written approval of the Couch Indemnified Party, which approval shall not be unreasonably withheld, before entering into or making any settlement, compromise, admission, or acknowledgment of the validity of such Third-Party Action or any liability in respect thereof if, pursuant to or as a result of such settlement, compromise, admission, or acknowledgment, injunctive or other equitable relief would be imposed against the Couch Indemnified Party; (c) Prime shall not consent to the entry of any judgment or enter into any settlement that does not include as an unconditional term thereof the execution and delivery of a release from all liability in respect of such Third-Party Action by each claimant or plaintiff to, and in favor of, each Couch Indemnified Party; and (d) Prime shall not be entitled to control (but shall be entitled to participate at its own expense in the defense of), and the Couch Indemnified Party shall be entitled to have sole control over, the defense or settlement, compromise, admission, or acknowledgment of any Third-Party Action as to which Prime fails to assume the defense within thirty (30) days; provided, however, that the Couch Indemnified Party shall make no settlement, compromise, admission, or acknowledgment which would give rise to liability on the part of Prime without the prior written consent of Prime. (e) Prime shall make payments of all amounts required to be made pursuant to the foregoing provisions of this Article to or for the account of the Couch Indemnified Party from time to time promptly upon receipt of bills or invoices relating thereto or when otherwise due and payable, provided that the Couch Indemnified Party has agreed in writing to reimburse Prime for the full amount of such payments if the Couch Indemnified Party is ultimately determined not to be entitled to such indemnification. (f) The parties hereto shall extend reasonable cooperation in connection with the defense of any Third-Party Action pursuant to this Article and, in connection therewith, shall furnish such records, information, and testimony and attend such conferences, discovery proceedings, hearings, trials, and appeals as may be reasonably requested. ARTICLE VIII Restrictive Covenants 8.1 Confidentiality Agreement. Each of KCL, VCC and Couch agrees that it has been and may continue to be, through its relationship with Prime and Newco, exposed to confidential information and trade secrets pertaining to, or arising from, the business of Prime and/or each of Prime's present or future affiliates (which includes, without limitation, Prime, PMSI and each present or future affiliate or subsidiary of PMSI) (individually and collectively, "Discloser"), that such information and trade secrets are unique and valuable and that Discloser would suffer irreparable injury if this information or trade secrets were divulged to those in competition with Discloser. Therefore, each of KCL, VCC and Couch agrees to keep in strict secrecy and confidence, both during and after the period during which Prime owns any interest in Newco, any and all information concerning Discloser which it acquires, or to which it has access through its relationship with Discloser, that has not been publicly disclosed by Discloser or that is not a matter of common knowledge among Discloser's competitors (collectively, "Proprietary Information"). The Proprietary Information covered by this Agreement shall include, but shall not be limited to, information relating to any inventions, processes, software, formulae, plans, devices, compilations of information, technical data, mailing lists, management strategies, business distribution methods, names of suppliers (of both goods and services) and customers, names of employees and terms of employment, arrangements entered into with suppliers and customers, including, but not limited to, proposed expansion plans of Discloser, marketing and other business and pricing strategies, and trade secrets of Discloser. Notwithstanding the foregoing, "Proprietary Information" shall exclude confidential information and trade secrets pertaining solely to or arising solely from the conduct of the Business prior to the Closing Date. Except with prior written approval of Discloser, each of KCL, VCC and Couch agrees that it will not: (i) directly or indirectly, disclose any Proprietary Information to any person except authorized personnel of Discloser or (ii) use Proprietary Information in any way, except as expressly contemplated otherwise in the Transaction Documents. Within forty-eight (48) hours of the time at which Couch and all entities controlled by Couch no longer directly or indirectly own any voting equity interests in Newco, whether the result of voluntary or involuntary disposition, each of KCL, VCC and Couch will deliver to Prime (without retaining copies thereof) all documents, records or other memorializations including copies of documents and any notes which it has prepared, that contain Proprietary Information or relate to Discloser's business, all other tangible Proprietary Information in its possession or control, and all of Discloser's credit cards, keys, equipment, vehicles, supplies and other materials that are in possession or under its control. The provisions of this Section shall not limit or restrict any party's communications with its personal consultants or advisors, including, without limitation, its attorneys, accountants and financial advisors. 8.2 Exclusive Use. (a) Couch hereby agrees that, during the period of time (the "Restricted Period") beginning on the Closing Date and ending on the later of (i) the ten-year anniversary of the Closing Date or (ii) the expiration of two years following the first time at which Couch and all entities controlled by Couch no longer own any direct or indirect interest in Newco; Couch will perform, and will direct all other full-time, medically trained or licensed medical professionals under his or KCL's direction or control to perform, all services related to Refractive Surgery only at the premises of, and using the equipment of, Newco. (b) Couch also agrees that, except as expressly otherwise provided below in this subsection (b), for a period of ten (10) years immediately following the Effective Time, Couch shall devote Couch's full business time and attention (in amounts generally consistent with the practices of Couch prior to the Closing Date) to rendering professional ophthalmic and medical services within the following area (collectively, the "Restricted Area"): within the Missouri counties of Clay, Jackson, Cass and Platte, the Kansas counties of Wyandotte, Leavenworth and Johnson, or within a forty mile radius of any other location developed or established by Newco on or before the end of the Restricted Period (as hereinafter defined); provided, however, that Couch may decrease the amount of business time and attention devoted to rendering professional ophthalmic and medical services within the Restricted Area to the extent such decrease does not materially decrease the average monthly volume of Refractive Surgery procedures done using Newco's premises and equipment below the average monthly volume that existed during the six months immediately preceding the Closing Date. (c) Notwithstanding the provisions of this Section, the death or Disability of Couch shall not be the basis of any breach or default of the provisions of this Section, but in the case of Disability, performance shall be excused only for so long as the Disability exists. As used in this Agreement, Disability shall mean Couch's having a mental or physical incapacity that reasonably prevents Couch's resumption of the normal performance of his medical practice. 8.3 Noncompetition. Each of KCL, VCC, Couch, PMSI and Prime, as a material inducement to the others to enter into this Agreement, hereby agrees that, at all times during the Restricted Period, such party will not directly or indirectly, either through any kind of ownership (other than ownership of securities of a publicly held corporation of which it owns less than five percent (5%) of any class of outstanding securities), or as a principal, shareholder, agent, employer, advisor, consultant, co-partner or in any individual or representative capacity whatever, either for its own benefit or for the benefit of any other person, corporation or other entity, without the prior written consent of each other party hereto, commit any of the following acts, which acts shall be considered violations of this covenant not to compete: (a) Except through Newco or its subsidiaries, directly or indirectly engage in, or provide, anywhere within the Restricted Area, any services (other than services included in the practice of medicine) related to (i) the operating of premises used to provide Refractive Surgery, (ii) the manufacture, maintenance, refurbishing, repair, sale, or leasing of any equipment related to or necessary for the operating of premises used to provide Refractive Surgery, or (iii) providing any management services, training or consulting services related to any of the activities described in (i) or (ii); (b) Except through Newco or its subsidiaries, directly or indirectly provide, anywhere within the Restricted Area, (i) premises, equipment and non-physician personnel for the performance of Refractive Surgery by physicians, (ii) the marketing, scheduling and management of Refractive Surgery (but excluding, with respect to Couch, KCL or VCC, marketing, scheduling and management of patients for treatment by Couch, KCL or VCC), (iii) the credentialing and scheduling of physicians to perform Refractive Surgery and (iv) the billing, collecting or accounting for the use of any such premises, equipment or non-physician personnel. (c) Directly or indirectly request or advise any person, firm, physician, corporation or other entity having a business relationship with Newco or any of its subsidiaries, Prime, or any affiliate or related entity of any of them, to withdraw, curtail, or cancel its business with such person or entity; or (d) Directly or indirectly hire any employee of Newco or any of its subsidiaries, Prime, or any affiliate or related entity of any of them, or induce or attempt to influence any employee of Newco or any of its subsidiaries, Prime or any such affiliate or related entity to terminate his or her employment with such person or entity. 8.4 Practice of Medicine. Notwithstanding any provision of this Agreement or any other Transaction Document to the contrary, the provisions of this Article shall not be construed to require Couch to perform Refractive Surgery at the premises of, or use the equipment of, Newco, if in the professional medical judgment of a reasonable ophthalmologist practicing Refractive Surgery, such use would be detrimental to Couch's patients. Provided further, that this Agreement shall not apply to any Refractive Surgery or related services that are to be paid for, or reimbursed by, Medicare, Medicaid, Champus, or any other state or federal health care program, or in any instance where the operation of this Agreement would constitute a violation of applicable law. 8.5 Restrictions Reasonable. Each party hereto has reviewed and carefully considered the provisions of this Article and, having done so, agrees that the restrictions applicable to it as set forth herein (a) are fair and reasonable with respect to time, geographic area and scope, (b) are not unduly burdensome to it, and (c) are reasonably required for the protection of the interests of the other parties hereto for whose benefit such restrictions were agreed upon. 8.6 Remedies. (a) General. Each party agrees that a violation on its part of any applicable covenant contained in this Article will cause the other parties hereto for whose benefit such restrictions were agreed upon irreparable damage for which remedies at law may be insufficient, and for that reason, it agrees that the other parties shall be entitled as a matter of right to equitable remedies, including specific performance and injunctive relief, therefor. The right to specific performance and injunctive relief shall be cumulative and in addition to whatever other remedies, at law or in equity, that the other parties may have, including, specifically, recovery of liquidated damages as provided below and any other additional damages. (b) Liquidated Damages. Because of the difficulty of measuring economic losses to the other parties as a result of a material breach of any provision of this Article or Article VIII, KCL, VCC and Couch agree that, in the event of such a breach by any of them, they shall, jointly and severally, be obligated to pay to Prime as liquidated damages (which damages are in addition to all other remedies provided for in this Agreement, or available to Prime or another party pursuant to arbitration hereunder) an amount determined by multiplying the Purchase Price by a fraction, the numerator of which is the difference between one hundred twenty (120) and the number of entire consecutive months passed after the Effective Time and prior to such breach, and the denominator of which is the number one hundred twenty (120). (c) Before any remedy may be sought by any party under this Agreement with respect to a breach of the provisions of this Article or Article VIII, the breaching party shall be given thirty days following delivery of notice by the party asserting the breach (identifying such material breach) within which the breaching party may cure such material breach. ARTICLE X Post Closing Agreements 9.1 Transition of Business. Each of KCL, VCC and Couch agrees to cooperate fully with Prime and Newco in transitioning the Assets Related Business existing prior to the Closing, including the relationships maintained by VCC and Couch with respect to the Assets Related Business, to Newco after the Closing; and, each of KCL, VCC and Couch agrees not to take any action or make any disclosure, including disclosures related to the transactions contemplated by this Agreement, which might alter or impair any relationship with any customer, or other service recipient, person or entity which did business with VCC prior to the Closing. Each of KCL, VCC, Couch and Newco agrees to cooperate after the Closing to account for procedures done between the Effective Time and the Closing and to allocate amounts received in respect thereof pursuant to the terms of the Facility Use Agreement. 9.2 Right of Set Off. Each of VCC and Couch agrees that Newco shall have rights of offset against distributions to it in respect of any direct or indirect ownership interest any of them may have in Newco at any time following the Closing, for any and all debts, obligations or liabilities that KCL, VCC or Couch may have to Prime, PMSI or any affiliate or subsidiary of PMSI, including, without limitation, any liability arising out of or relating to any obligations arising under Section 6.1 of this Agreement, or other obligations owed under this Agreement or any other Transaction Document. Each of VCC and Couch hereby authorizes and directs Newco to, and hereby agrees that Newco is entitled to, withhold and pay such offset amounts to Prime and to take all other actions necessary to make such payment. Newco hereby agrees to promptly remit any and all such offset amounts to Prime upon request. Without limiting or adversely affecting the rights of Prime under this Section, and in order to secure full and prompt payment of the obligations of KCL, VCC and Couch under this Agreement and each other Transaction Document, each of VCC and Couch hereby grants to Prime a continuing security interest in and to distributions either of them may be entitled to receive at any time after the Closing in respect of any direct or indirect ownership interest held by either of them in Newco. In connection with the grant of a security interest contained in this Section, each of VCC and Couch agrees (i) to execute all documents, agreements, instruments and certificates, and to take such other actions, as are reasonably necessary in order to fully evidence and perfect such security interest, and (ii) that it will not, without obtaining the express prior written consent of Prime in each instance, grant or assign to any person or entity rights of any nature in the distributions covered by the security interest granted in this Section, irrespective of whether such rights are to be senior or subordinate to the rights granted under this Section; provided, however, that clause (ii) shall not prohibit Permitted Transfers (as such term is defined in the Organizational Documents) of its ownership interest in Newco, as long as the transferee (A) executes a certificate acknowledging that such distributions with respect to the ownership interest transferred remain subject to the offset rights and security interest granted under this Section as though such transferee and it were one and the same person and (B) executes and consents to the filing of all documents, agreements, instruments and certificates, and takes such other actions, as are necessary in order to fully evidence and perfect such security interest. Each of VCC and Couch acknowledges and agrees that the rights and obligations contained in this Section shall remain attached to membership interests of Newco conveyed by it, regardless of whether the conveyance was permitted pursuant to the Organizational Documents and/or consented to by Prime. In addition, Prime may require any such transferee to execute an acknowledgment recognizing the applicability of the rights and obligations contained in this Section to the membership interest transferred. 9.3 Ratification by Newco. Each of Prime, VCC and Couch agrees that by executing this Agreement it is deemed to be voting any ownership interests or management vote it may have in Newco (whether now or at any time after the Closing) to authorize Newco to enter into and perform this Agreement and each of the Transaction Documents to which Newco is a party, including, without limitation, the Facility Use Agreement. Each of Prime, VCC and Couch agrees to execute such resolutions and written consents, and take such other actions, in their capacities as owners of Newco, as any party shall reasonably require after the Closing to have Newco ratify and adopt this Agreement, notwithstanding the time of creation of Newco or the time of execution of the Organizational Documents. 9.4 Post-Closing Capital Contributions. Without in any way limiting or qualifying the representation and warranty with respect to cash required to be included in the Assets pursuant to Section 1.3, all parties to this Agreement acknowledge and agree that no member of Newco, nor any other party, has any obligation after the Closing to make a capital contribution to Newco. 9.5 Legend. On and after the Closing, each certificate or document representing ownership of any of Newco's ownership interests, and each certificate or document that may be issued and delivered by Newco upon transfer of any such certificate, shall contain a legend conspicuously noted in substantially the following form: THE INTERESTS REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AND THEY MAY NOT BE SOLD OR TRANSFERRED EXCEPT PURSUANT TO AN EXEMPTION FROM, OR OTHERWISE IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF SUCH ACT. IN ADDITION, SUCH INTERESTS MAY BE TRANSFERRED ONLY IN COMPLIANCE WITH CERTAIN CONDITIONS SPECIFIED IN (I) A CERTAIN CONTRIBUTION AGREEMENT DATED EFFECTIVE AS OF SEPTEMBER 1, 2000, AND (II) THE COMPANY'S LIMITED LIABILITY COMPANY AGREEMENT, COMPLETE AND CORRECT COPIES OF WHICH ARE AVAILABLE FOR INSPECTION AT THE PRINCIPAL OFFICE OF THE COMPANY AND WILL BE FURNISHED TO THE HOLDER HEREOF UPON WRITTEN REQUEST AND WITHOUT CHARGE. ARTICLE X Miscellaneous 10.1 Collateral Agreements, Amendments, and Waivers. This Agreement (together with the documents delivered pursuant hereto) supersedes all prior documents, understandings, and agreements, oral or written, relating to this transaction and constitutes the entire understanding among the parties with respect to the subject matter hereof. Any modification or amendment to, or waiver of, any provision of this Agreement (or any document delivered pursuant to this Agreement unless otherwise expressly provided therein) may be made only by an instrument in writing executed by each party thereto. 10.2 Successors and Assigns. No party's rights or obligations under this Agreement may be assigned without the prior written consent of all parties hereto, except that Prime may assign its rights and obligations hereunder to any entity, more than fifty percent (50%) of the voting equity ownership interests of which is at the time owned, directly or indirectly, by PMSI. Any assignment in violation of the foregoing shall be null and void. Subject to the preceding sentences of this Section, the provisions of this Agreement (and, unless otherwise expressly provided therein, of any document delivered pursuant to this Agreement) shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, legal representatives, successors, and assigns. Notwithstanding any contrary provision of this Agreement or any other Transaction Document, all of the parties agree that PMSI shall be free to effect a transfer, assignment or encumbrance of the ownership interests or assets of any of its direct or indirect subsidiaries other than Newco and Newco's direct or indirect subsidiaries (an "Upstream Transfer"), and that no Upstream Transfer shall give rise to or be subject to any rights or approval requirements that are applicable to a direct transfer of the membership interests or assets of Newco under this Agreement or any other Transaction Document. 10.3 Expenses. Except as set forth in the following sentence, regardless of whether the transactions contemplated hereby are consummated, each party hereto shall pay all of its costs and expenses incurred by it in connection with this Agreement, including the fees and disbursements of its legal counsel and accountants. Notwithstanding the foregoing, up to $3,000 of the costs and expenses incurred by Prime that are associated specifically with the formation and documentation of Newco, including legal fees and expenses for drafting the Organizational Documents, shall be paid or reimbursed to Prime by Newco. 10.4 Invalid Provisions. If any provision of this Agreement is held to be illegal, invalid, or unenforceable under present or future laws, such provision shall be fully severable, this Agreement shall be construed and enforced as if such illegal, invalid, or unenforceable provision had never comprised a part of this Agreement, and the remaining provisions of this Agreement shall remain in full force and effect and shall not be affected by the illegal, invalid, or unenforceable provision or by its severance from this Agreement. 10.5 Waiver. No failure or delay on the part of any party in exercising any right, power, or privilege hereunder or under any of the documents delivered in connection with this Agreement shall operate as a waiver of such right, power, or privilege; nor shall any single or partial exercise of any such right, power, or privilege preclude any other or future exercise thereof or the exercise of any other right, power or privilege. 10.6 Notices. Any notices required or permitted to be given under this Agreement (and, unless otherwise expressly provided therein, under any document delivered pursuant to this Agreement) shall be given in writing and shall be deemed received (a) when delivered personally or by courier service to the relevant party at its address as set forth below or (b) if sent by mail, on the third (3rd) day following the date when deposited in the United States mail, certified or registered mail, postage prepaid, to the relevant party at its address indicated below: PMSI & Prime: 1301 Capital of Texas Highway Suite C-300 Austin, Texas 78746 Attention: President Facsimile: (512) 314-4398 with a copy to: Mr. Timothy L. LaFrey Akin, Gump, Strauss, Hauer & Feld, L.L.P. 816 Congress Avenue, Suite 1900 Austin, Texas 78701 Facsimile: (512) 703-1111 VCC or KCL: Vision Correction Centers of Kansas City, P.C. or Kansas City Laser Vision Correction Centers, L.L.C. 5844 N.W. Barry Road Kansas City, Missouri 64154 Attn: Jeffrey Couch, M.D. Facsimile: (816) 584-9999 Couch: Jeffrey Couch, M.D. 5844 N.W. Barry Road Kansas City, Missouri 64154 Facsimile: (816) 584-9999 with a copy to: Matthew Cavitch Bogatin Law Firm 1661 International Place Drive, Suite 300 Memphis, Tennessee 38120 Facsimile: (901) 767-2803 Each party may change its address for purposes of this Section by proper notice to the other parties. 10.7 Survival of Representations, Warranties, and Covenants. Regardless of any investigation at any time made by or on behalf of any party hereto or of any information any party may have in respect thereof, all covenants, agreements, representations, and warranties made hereunder or pursuant hereto or in connection with the transactions contemplated hereby shall survive the Closing. 10.8 Further Assurances. At, and from time to time after, the Closing, each party shall, at the request of another party, but without further consideration, execute and deliver such other instruments of conveyance, assignment, assumption, transfer and delivery and take such other action as such party may reasonably request in order more effectively to consummate the transactions contemplated hereby. 10.9 Construction, Knowledge and Materiality. This Agreement and any documents or instruments delivered pursuant hereto or in connection herewith shall be construed without regard to the identity of the person who drafted the various provisions of the same. Each and every provision of this Agreement and such other documents and instruments shall be construed as though all of the parties participated equally in the drafting of the same. Consequently, the parties acknowledge and agree that any rule of construction that a document is to be construed against the drafting party shall not be applicable either to this Agreement or such other documents and instruments. For purposes of this Agreement, whenever there are references to "material" or "materially," such terms shall be deemed to mean an economic impact exceeding $10,000 with respect to the fact or matter being referred to or described. As used herein, "day" or "days" refers to calendar days unless otherwise specified in each instance. When the term "knowledge" is used in this Agreement in reference to (i) Prime, it shall mean such items as are within the actual knowledge of Ken Shifrin, Brad Hummel, Teena Belcik and John Hedrick and (ii) VCC, it shall mean such items as are within the actual knowledge of Couch and any employee of VCC who becomes an employee of Newco after the Closing. For purposes of this Agreement, when the term "affiliate" is used with respect to PMSI or Prime, it shall not include KCL, VCC or Couch, and when "affiliate" is used with respect to KCL, VCC or Couch, it shall not include PMSI or Prime. 10.10 Other Agreements. Each party hereto agrees that any material breach by it of any of the terms and provisions of another Transaction Document to which it is a party shall also be deemed to have been for all purposes a material breach by it of this Agreement, and that any material breach by it of the terms and provisions of this Agreement shall also be deemed for all purposes to have been a material breach by it of all other Transaction Documents to which it is a party. 10.11 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Missouri. 10.12 Arbitration. Any controversy between the parties regarding this Agreement or any other Transaction Document, any claims arising out of any breach or alleged breach of this Agreement or any other Transaction Document and any claims arising out of the relationship between the parties created hereunder shall be submitted to binding arbitration by all parties involved. The arbitration proceedings shall be conducted by a single arbitrator pursuant to the Commercial Arbitration Rules of the American Arbitration Association (subject to the express provisions of this Section). The arbitration shall be conducted in Austin, Texas. The arbitrator shall not have the right to award punitive or exemplary damages against either party. 10.13 Counterparts. This Agreement may be executed in several counterparts, each of which shall constitute an original and all of which together shall constitute one and the same instrument. Any party hereto may execute this Agreement by signing any one counterpart. [Signature page follows] S-1 SIGNATURE PAGE TO CONTRIBUTION AGREEMENT IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the day and year first above written. PMSI: Prime Medical Services, Inc. ------------------------------------ Cheryl Williams, Senior Vice President Prime: Prime RVC, Inc. ------------------------------------ Cheryl Williams, Senior Vice President Couch: ____________________________________ Jeffrey Couch, M.D. VCC: Vision Correction Centers of Kansas City, P.C. ------------------------------------ Jeffrey Couch, M.D., President KCL: Kansas City Laser Vision Correction Centers, L.L.C. ------------------------------------ Jeffrey Couch, M.D., President Newco: Prime Refractive - Kansas City, L.L.C. ------------------------------------ Jeffrey Couch, M.D., as manager of Newco and individually as a member of Newco ------------------------------------ Cheryl Williams, as manager of Newco and on behalf of Prime as a member of Newco EX-10.95 8 0008.txt EX 10.95 L.L.C. AGREEMENT FOR KANSAS CITY LIMITED LIABILITY COMPANY AGREEMENT OF PRIME REFRACTIVE - KANSAS CITY, L.L.C. Organized under the Delaware Limited Liability Company Act (the "Act"). ARTICLE I. NAME AND LOCATION Section 1.1. Name. The name of this limited liability company is Prime Refractive - Kansas City, L.L.C. (the "Company"). Section 1.2. Members. The only members of the Company upon the execution of this Limited Liability Company Agreement (this "Agreement") shall be Vision Correction Centers of Kansas City, P.C., a Missouri professional corporation ("VCC"), and Prime RVC, Inc., a Delaware corporation ("Prime"). For purposes of this Agreement, the "Members" shall include such named members and any new members admitted pursuant to the terms of this Agreement, but does not include any person or entity who has ceased to be a member in the Company. Section 1.3. Principal Offices. The principal office of the Company shall be located at 1301 Capital of Texas Hwy., Suite C-300, Austin, Texas 78746-6550 and or at such other locations as may be selected by the Members. Section 1.4. Registered Agent and Address. The name of the registered agent and the address of the registered office of the Company as set forth in the Certificate of Formation of the Company are: The Corporation Trust Company 1209 Orange Street Wilmington, Delaware 19801 Section 1.5. Other Offices. Other offices and other locations for the transaction of business shall be located at such places as the Managers may from time to time determine. Section 1.6 Contribution Agreement. The Company was initially formed with a single member, VCC, for the purpose of consummating the transactions contemplated by that certain Contribution Agreement dated effective as of September 1, 2000, by and among Prime Medical Services, Inc., a Delaware corporation ("PMSI"), Prime, VCC, Jeffrey Couch, M.D. ("Couch"), Kansas City Laser Vision Correction Centers, L.L.C., a Missouri limited liability company ("KCL"), and the Company (the "Contribution Agreement"). The parties have executed this Agreement concurrent with the consummation of the transactions contemplated by the Contribution Agreement. This agreement supercedes and replaces any prior membership agreement or other governing or organizational document of the Company other than the Certificate of Formation. ARTICLE II. MEMBERSHIP Section 2.1. Members' Interests. The "Membership Interest" of each Member is set forth on Exhibit A. Section 2.2. Admission to Membership. The admission of new Members shall be only by the vote of the Managers pursuant to Section 8.9 hereof. If new Members are admitted, this Agreement shall be amended to reflect each Member's revised Membership Interest. Section 2.3. Property Rights. No Member shall have any right, title, or interest in any of the property or assets of the Company. Section 2.4. Liability of Members. No Member of the Company shall be personally liable for any debts, liabilities, or obligations of the Company, including under a judgment decree, or order of court, except as expressly provided otherwise in an agreement between the Member and the Company or another party. Section 2.5. Transferability of Membership. Except as provided below, Membership Interests in the Company are transferable only with the unanimous written consent of all Members. If such unanimous written consent is not obtained when required, the transferee shall be entitled to receive only the share of profits and the return of contributions and distributions of Available Excess Earnings to which the transferor Member otherwise would be entitled. Notwithstanding the foregoing, the following shall not be deemed to violate any provision of this Agreement (each, a "Permitted Transfer"): (i) the Membership Interests of any Member may be freely transferred, without consent, to any entity that is then owned or controlled, directly or indirectly, by PMSI (or its successor in interest), (ii) the Membership Interests of any Member may be freely assigned, pledged or otherwise transferred, without consent, to secure any debt, liability or obligation owed to Prime by the Company, any Member or any entity affiliated with the Company, (iii) the Membership Interests of any Member may be freely assigned, pledged or otherwise transferred, without consent, in favor of the Lender(s) under, or by the Lender(s) as a result of the enforcement of any security interest arising pursuant to, those certain Credit Facilities (the "Credit Facilities") of PMSI and/or any of PMSI's subsidiaries, (iv) the pledge by VCC of its right to receive distributions from the Company in respect of his Membership Interest, (v) the Membership Interests of Prime and VCC can be transferred pursuant to Section 4.10 of the Contribution Agreement, (vi) the transfer by VCC, after the expiration of ten years following the Closing Date (as defined in the Contribution Agreement), of its Membership Interests to any person or entity upon obtaining the consent of Prime, not to be unreasonably withheld, and (vii) the Membership Interests of VCC may be transferred (A) to Couch or Couch's estate, any testamentary trust, or any heir, (B) to a trust or trusts (a "Permitted Trust") for the benefit of Couch and/or members of Couch's immediate family (including an entity owned by a Permitted Trust) but only where Couch either controls the trust or retains during his lifetime the exclusive ability to vote the Membership Interests (pursuant to a written proxy or other instrument reasonably acceptable in form and substance to Prime), (C) to an entity (a "Permitted Entity") that is wholly-owned, directly or indirectly, by Couch and/or members of Couch's immediate family, but only where Couch either controls the entity or retains during his lifetime the exclusive ability to vote the Membership Interests (pursuant to a written proxy or other instrument reasonably acceptable in form and substance to Prime), or (D) from a Permitted Trust or Permitted Entity to Couch. As an express condition to any transfer by any Member or any transferee of any Member, the proposed transferee shall have agreed in writing, in form and substance reasonably satisfactory to the non-transferring Members, that such proposed transferee will be bound by all of the terms and provisions of this Agreement, the Contribution Agreement (including Restrictive Covenants found in Article IX thereto) and any other Transaction Document (as defined in the Contribution Agreement) which by reasonable implication are applicable to the Membership Interest being transferred and not solely the transferring Member as a party to the Contribution Agreement. Section 2.6. Withdrawal of Members. Without limiting a Member's ability to complete a Permitted Transfer, a Member may not withdraw as a Member from the Company except on the unanimous consent of the remaining Members. The terms of the Member's withdrawal shall be determined by agreement between the remaining Members and the withdrawing Member. ARTICLE III. MEMBERS' MEETINGS Section 3.1. Time and Place of Meeting. All meetings of the Members shall be held at such time and at such place within or without the State of Delaware as shall be determined by the Managers. Section 3.2. Annual Meetings. In the absence of an earlier meeting at such time and place as the Managers shall specify, annual meetings of the Members shall be held at the principal office of the Company on the date which is thirty (30) days after the end of the Company's fiscal year if not a legal holiday, and if a legal holiday, then on the next full business day following, at 10:00 a.m., at which meeting the Members may transact such business as may properly be brought before the meeting. Section 3.3. Special Meetings. Special meetings of the Members may be called at any time by any Member. Business transacted at special meetings shall be confined to the purposes stated in the notice of the meeting. Section 3.4. Notice. Written or printed notice stating the place, day and hour of any Members' meeting, and, in the case of a special meeting, the purpose or purposes for which the meeting is called, shall be delivered not less than ten (10) days nor more than thirty (30) days before the date of the special meeting, either personally or by mail, by or at the direction of the person calling the meeting, to each Member entitled to vote at such meeting. If mailed, such notice shall be deemed to be delivered three (3) days after it is deposited in the United States mail, postage prepaid, to the Member at such Member's address as it appears on the records of the Company at the time of mailing. Section 3.5. Quorum. Members present in person or represented by proxy, holding more than fifty percent (50%) of the total votes which may be cast at any meeting shall constitute a quorum at all meetings of the Members for the transaction of business. If, however, such quorum shall not be present or represented at any meeting of the Members, the Members entitled to vote, present in person or represented by proxy, shall have power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present or represented. When any adjourned meeting is reconvened and a quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally noticed. Once a quorum is constituted, the Members present or represented by proxy at a meeting may continue to transact business until adjournment, notwithstanding the subsequent withdrawal therefrom of such number of Members as to leave less than a quorum. Section 3.6. Voting. Members shall be required to vote in instances or with respect to matters where member voting is required by applicable law or to the extent expressly set forth in this Agreement. With respect to any act or transaction that requires a vote by the Members under applicable law, the affirmative vote or written consent of two of the three Managers shall be required in order to approve the act or transaction, in each instance. Subject to the foregoing, when a quorum is present at any meeting, the vote of the Members, whether present or represented by proxy at such meeting, holding more than fifty percent (50%) of the total votes which may be cast at any meeting shall be the act of the Members, unless the vote of a different number is required by the Act, the Certificate of Formation or this Limited Liability Company Agreement. Each Member shall be entitled to one vote for each percentage point represented by their Membership Interest. Fractional percentage point interests shall be entitled to a corresponding fractional vote. The provisions of this Section shall not interfere with the provisions of Section 8.9 relating to acts or transactions requiring the written approval of two (2) or more Managers, one of which must be a Manager designated by VCC. Section 3.7. Proxy. Every proxy must be executed in writing by the Member or by his duly authorized attorney-in-fact, and shall be filed with the Secretary of the Company prior to or at the time of the meeting. No proxy shall be valid after eleven (11) months from the date of its execution unless otherwise provided therein. Each proxy shall be revocable unless expressly provided therein to be irrevocable and unless otherwise made irrevocable by law. Section 3.8. Action by Written Consent. Subject to the provisions of Section 8.9, any action required or permitted to be taken at any meeting of the Members may be taken without a meeting if a consent in writing, setting forth the action so taken, shall be signed by all of the Members entitled to vote with respect to the subject matter thereof, and such consent shall have the same force and effect as a unanimous vote of Members. Section 3.9. Meetings by Conference Telephone. Members may participate in and hold meetings of Members by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation in such a meeting shall constitute presence in person at such meeting, except where a person participates in the meeting for the express purpose of objecting to the transaction of any business on the ground that the meeting is not lawfully called or convened. ARTICLE IV. MEMBERSHIP CAPITAL CONTRIBUTIONS Section 4.1. Capital Contributions. Each Member has contributed to the Company the assets set forth in Schedule A. Schedule A sets forth the fair market value of the assets contributed to the Company by each Member, which amount shall be credited to each Member's Capital Account as their initial capital contribution. Capital Accounts shall be maintained in accordance with Treasury Regulations 1.704-1(b) and -2 and shall be interpreted and applied in a manner consistent therewith. The Managers shall have the power to amend this Agreement as may be reasonably necessary to comply with such regulations. Except for each Member's initial capital contribution made in connection with the formation of the Company, and except as provided in the Contribution Agreement, no capital contributions shall be required of any Member without the unanimous approval of all the Members to raise additional capital, and only then proportionately as to each Member. Section 4.2. Deficit Capital Account Balances. Upon liquidation of the Company, no Member with a deficit balance in his Capital Account shall have any obligation to restore such deficit balance, or to make any contribution to the capital of the Company. Section 4.3. Tax Matters Partner. The Managers shall designate one Manager by majority vote to act as the tax matters partner (the "TMP") of the Company (as defined in the Code), and the TMP is hereby authorized and required to represent the Company, or designate another person or firm to represent the Company, (in each case, at the Company's expense) in connection with all examinations of the Company's affairs by tax authorities, including resulting administrative and judicial proceedings, and to expend Company funds for professional services and costs associated therewith. The initial TMP shall be Teena Belcik. The Members agree to cooperate with the TMP and its designee, if any, and to do or refrain from doing any or all things reasonably required by the TMP or its designee, if any, to conduct such proceedings. The Company will reimburse the TMP and any such designee for all expenses incurred in connection with its duties as TMP and any costs associated with any administrative or judicial proceeding with respect to the tax liabilities of the Members. ARTICLE V. DISTRIBUTION TO MEMBERS At the end of each calendar quarter, subject only to the qualifications and limitations set forth below, the Company shall, unless provided otherwise in accordance with Section 8.9(b) or Section 8.9(c), distribute its Available Excess Earnings (as hereinafter defined) to its members, to be divided among them in accordance with their Membership Interests as set forth on Exhibit A hereto. As used herein, "Available Excess Earnings" shall mean and refer to all cash and cash equivalents of the Company that would not be reasonably required in order to (a) satisfy all accounts payable and payment obligations of the Company that will become due in the ordinary course within thirty (30) days of the date of determination (assuming no receipt of additional cash or cash equivalents during such ninety (30) day period) or (b) establish adequate reserves to satisfy liabilities or obligations of the Company that are foreseen and can be reasonably estimated on the date of determination. Distributions in kind shall be made on the basis of agreed value as determined by the Managers. Notwithstanding the foregoing, the Company may not make a distribution to its Members in respect of their Membership Interests to the extent that, immediately after giving effect to the distribution, all liabilities of the Company, other than liabilities to the Members with respect to their interests and liabilities for which the recourse of creditors is limited to specified property of the Company, exceed the fair value of the Company assets; except that the fair value of property that is subject to liability for which recourse of creditors is limited, shall be included in the Company assets only to the extent that the fair value of the property exceeds that liability. Furthermore, to the extent that the Company possesses the cash flow necessary to pay its liabilities in the ordinary course consistent with past practices, the Company agrees to make quarterly estimates of its taxable income for the current tax year and also quarterly estimates of the tax liability of each Member based on each Member's then current proportionate interest in the Company and assuming that all Members pay income taxes on the Company's taxable earnings at a rate equal to the highest effective federal individual tax rate in effect from time to time. If the distributions of the Company's earnings to its Members pursuant to the first paragraph of this Article do not, on a calendar year basis, exceed the estimated tax liability of the Members for the current quarter and all prior quarters in the current calendar year, then the Company shall, if not prohibited by law, distribute to the Members the additional amounts necessary to cause all distributions for the current calendar year to equal or exceed the Members' estimated tax liabilities for the calendar year to date; provided, however, that the provisions of this Section shall not under any circumstances be construed to require that any Member contribute additional amounts to the Company or that the Company incur any indebtedness. ARTICLE VI. ALLOCATION OF NET PROFITS AND LOSSES For accounting and income tax purposes, all items of income, gain, loss, deduction and credit of the Company for any fiscal year shall be allocated between the Members in accordance with their respective Membership Interests as set forth on Exhibit A hereto, except as may be otherwise required by the Internal Revenue Code of 1986, as amended, and the Treasury Regulations promulgated thereunder, in which case, the Members agree to restructure their relationship in a manner that preserves their respective economic benefits intended under the Contribution Agreement and other Transaction Documents. ARTICLE VII. DISSOLUTION AND WINDING UP Section 7.1. Dissolution. Notwithstanding any provision of the Act, the Company shall be dissolved only upon the first of the following to occur: (a) Forty (40) years from the date of filing the Certificate of Formation of the Company; or (b) Written consent of all the then current Members to dissolution. (c) The bankruptcy of a Member, unless there is at least one remaining Member and such Member or, if more than one remaining Member, all remaining Members agree to continue the Company and its business. (d) The sale of all or substantially all of the assets of the Company. Section 7.2. Winding Up. In the event of dissolution of the Company, the Managers (excluding any Manager holding office pursuant to designation by a Member subject to bankruptcy proceedings) shall wind up the Company's affairs as soon as reasonably practicable. On the winding up of the Company, the Managers shall pay and/or transfer the assets of the Company in the following order: (a) In discharging liabilities (including loans from Members) and the expenses of concluding the Company's affairs; and (b) The balance, if any, shall be distributed to the Members in accordance with the positive balances of the Members Capital Accounts. Upon dissolution and distribution of the Company assets, such distributed assets shall be deemed sold with the resulting net income or net loss being allocated among the Members and credited or debited to their respective Capital Accounts pursuant to Articles IV and VI. ARTICLE VIII. MANAGERS Section 8.1. Selection of Managers. Management of the Company shall be vested in the Managers. Initially, the Company shall have three (3) Managers, being Brad Hummel and Cheryl Williams (as the initial Manager designees of Prime), and Jeffrey Couch, M.D. (as the initial Manager designee of VCC). Thereafter, for so long as there are three (3) Managers, (a) Prime shall be entitled to designate two (2) of the Managers; and (b) VCC shall be entitled to designate the remaining one (1) Manager. Notwithstanding the foregoing, a Member shall not be entitled to designate any Manager unless its Membership Interest: (y) has not (other than as allowed under Section 2.5 of this Agreement) been transferred, repurchased, assigned, pledged, hypothecated or in any way alienated; and (z) equals or exceeds thirty-five percent (35%) of all outstanding Membership Interests (after including in such determination all Membership Interests held by the Permitted Transferees of such Member) (the "Required Percent"). Subject to Section 8.3 of this Agreement, the Members may, by unanimous vote or written consent of all Members, from time to time, change the number of Managers of the Company and remove or add Managers accordingly. A Manager shall serve as a Manager until his or her resignation or removal pursuant to Section 8.2 or 8.3 of this Article VIII. Managers need not be residents of the State of Delaware or Members of the Company. Section 8.2. Resignations. Each Manager shall have the right to resign at any time upon written notice of such resignation to the Members. Unless otherwise specified in such written notice, the resignation shall take effect upon the receipt thereof, and acceptance of such resignation shall not be necessary to make same effective. The Member who designated a resigning manager shall be entitled to designate the successor thereto without any further action by the Members or other Managers. If any action of the Members is required under applicable law, the Members agree to take such action and any other action as may be necessary from time to time to effectuate the provisions of this Section 8.2. Section 8.3. Removal of Managers. Any Manager may be removed, for or without cause, at any time, but only by the Member who designated such Manager, upon the written notice to all Members. The Member who designated such removed Manager shall be entitled to designate the successor without any further action by the Members or other Managers. If any action of the Members is required under applicable law, the Members agree to take such action and any other action as may be necessary from time to time to effectuate the provisions of this Section 8.3. Section 8.4. General Powers. Subject to the provisions of Section 8.9, the business of the Company shall be managed by its Managers, which may, by the vote or written consent in accordance with this Agreement, exercise any and all powers of the Company and do any and all such lawful acts and things as are not by the Act, the Certificate of Formation or this Limited Liability Company Agreement directed or required to be exercised or done by the Members, including, but not limited to, contracting for or incurring on behalf of the Company debts, liabilities and other obligations, without the consent of any other person, except as otherwise provided herein. Section 8.5. Place of Meetings. The Managers of the Company may hold their meetings, both regular and special, either within or without the State of Delaware. Section 8.6. Annual Meetings. The annual meeting of the Managers shall be held without further notice immediately following the annual meeting of the Members, and at the same place, unless by unanimous consent of the Managers that such time or place shall be changed. Section 8.7. Regular Meetings. Regular meetings of the Managers may be held without written notice at such time and place as shall from time to time be determined by the Managers. Section 8.8. Special Meetings. Special meetings of the Managers may be called by any Manager on seven (7) days notice to each Manager, with such notice to be given personally, by mail or by telecopy. Section 8.9. Quorum and Voting. ----------------- (a) At all meetings of the Managers the presence of at least two (2) Managers shall be necessary and sufficient to constitute a quorum for the transaction of business, and the affirmative vote of at least a majority of the Managers present at any meeting at which there is a quorum shall be the act of the Managers, except as may be otherwise specifically provided by the Act, the Contribution Agreement, the Certificate of Formation or this Agreement. If a quorum shall not be present at any meeting of Managers, the Managers present there may adjourn the meeting from time to time without notice other than announcement at the meeting, until a quorum shall be present. (b) In addition to the other provision contained in this Agreement requiring the unanimous vote of the Members or the consent of VCC or VCC's designated Manager, as long as none of Couch, KCL and VCC is in material breach of this Agreement, the Contribution Agreement or any other Transaction Document (subject to any applicable right to cure), the following acts or transactions by, or involving, the Company shall require the prior written consent of two (2) or more Managers, one of which must be the Manager designee of VCC; provided, however, that no written consent of any party is required under this subsection to take a particular action if (but only to the extent that) such action is required to be taken pursuant to the express terms and provisions of the Contribution Agreement or any Transaction Document, provided further, that the provisions of this Section shall terminate automatically VCC's Membership Interest dropping below the Required Percent: (i) Purchase by the Company of any interest in the Company, irrespective of the source of such interest. (ii) Disposition, sale, assignment or other transfer by the Company of any interest it owns in the Company, except that such interest may be extinguished without the approval required under this Article. (iii) Issuance of any interest in the Company to any party. (iv) The Company's entering into a materially different line of business. (v) Entering into, amending or modifying a transaction or other action with any Manager, officer or Member, or any employee, agent or affiliate thereof, including, without limitation, any compensation arrangement or any arrangement for the reimbursement of overhead or other similar expenses. (vi) Taking any other action which, by the terms of this Agreement or applicable law, requires the approval or consent of not less than sixty-six percent (66%) of the Members. (vii) Any amendment to the Company's Certificate of Formation or this Agreement. (viii) Mergers, consolidations or combinations of the Company with another limited liability company or other entity. (ix) Filing bankruptcy or seeking relief under any debtor relief law. (x) Sale, lease or other transfer of all or substantially all of the Company's assets, other than in the ordinary course of the Company's business. (xi) Waiving, refusing to enforce, amending, restating, superseding or modifying any of the provisions of this Agreement. (xii) Election or removal of the Manager, if any, designated by VCC pursuant to this Article. (c) Any of the above actions taken by the Company without the necessary approval pursuant to Section 8.9(b) is void ab initio. Section 8.10. Committees. The Managers may, by resolution passed by sixty-six percent (66%) of the Managers, designate committees, each committee to consist of two or more Managers (at least one of which must be a Manager designee of Prime and one of which, must be a Manager designee of VCC), which committees shall have such power and authority and shall perform such functions as may be provided in such resolution. Such committee or committees shall have such name or names as may be designated by the Managers and shall keep regular minutes of their proceedings and report the same to the Managers when required. The foregoing paragraph notwithstanding, the Managers shall establish a Medical Executive Committee, the size and composition of which shall be established by the affirmative vote or written consent of two of the three Managers. Members of the Medical Executive Committee must be licensed physicians, but need not be Members, Managers, or officers of the Company. The Medical Executive Committee shall meet at such time or times as it may, by majority vote of its members, elect and may adopt procedures for the conduct of its meetings. The Medical Executive Committee shall provide advice to the Managers on decisions relating to equipment purchases, technological obsolescence, quality assurance, credentialing, and such other matters as shall be requested by the Managers. The majority of the members of the Medical Executive Committee shall constitute a quorum for the transaction of its business and the affirmative vote of the majority of the members of the Medical Executive Committee shall constitute action validly taken by that body. Except as expressly provided in the following sentence, the Medical Executive Committee shall not have the authority to bind the Company with respect to any matter. In order to ensure the quality of services provided by the Company, no physician or optometrist shall be allowed to use the premises or equipment of the Company unless the Medical Executive Committee has approved of the physician in writing, in its sole discretion. Section 8.11. Compensation of Managers. The Members, by unanimous approval, shall have the authority to provide that any one or more of the Managers shall be compensated, and may, by unanimous approval, fix any compensation (which may include expenses) they elect to pay to any one or more of the Managers. Section 8.12. Action by Written Consent. Any action required or permitted to be taken at any meeting of the Managers or of any committee designated by the Managers may be taken without a meeting if written consent, setting forth the action so taken, is signed by all the Managers or of such committee, and such consent shall have the same force and effect as a unanimous vote at a meeting. Section 8.13. Meetings by Conference Telephone. Managers or members of any committee designated by the Managers may participate in and hold a meeting of the Managers or such committee by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation in such a meeting shall constitute presence in person at such meeting, except where a person participates in the meeting for the express purpose of objecting to the transaction of any business on the ground that the meeting is not lawfully called or convened. Section 8.14. Liability of Managers. No Manager of the Company shall be personally liable for any debts, liabilities, or obligations of the Company, including under a judgment, decree, or order of the court. Section 8.15. Specific Power of Managers. The Managers shall have the authority to enter into and execute all documents in relation to the formation of the Company including, but not limited to, issuance of the Certificate of Formation and this Limited Liability Company Agreement. ARTICLE IX. NOTICES Section 9.1. Form of Notice. Whenever under the provisions of the Act, the Certificate of Formation or this Limited Liability Company Agreement notice is required to be given to any Manager or Member, and no provision is made as to how such notice shall be given, notice shall be given in writing and shall be deemed received (a) when delivered personally or by courier service to the relevant party at its address as set forth below or (b) if sent by mail, on the third (3rd) day following the date when deposited in the United States mail, certified or registered mail, postage prepaid, to the relevant party at its address indicated below: Prime: 1301 Capital of Texas Highway Suite C-300 Austin, Texas 78746 Attention: President Facsimile: (512) 314-4398 with a copy to: Mr. Timothy L. LaFrey Akin, Gump, Strauss, Hauer & Feld, L.L.P. 816 Congress Avenue, Suite 1900 Austin, Texas 78701 Facsimile: (512) 703-1111 VCC: Vision Correction Centers of Kansas City,P.C 5844 N.W. Barry Road Kansas City, Missouri 64154 Attn: Jeffrey Couch, M.D. Facsimile: (816) 584-9999 with a copy to: Matthew Cavitch Bogatin Law Firm 1661 International Place Drive, Suite 300 Memphis, Tennessee 38120 Facsimile: (901) 767-2803 Each party may change its address for purposes of this Section by proper notice to the other parties. Section 9.2. Waiver. Whenever any notice is required to be given to any Manager or Member of the Company under the provision of the Act, the Certificate of Formation or this Limited Liability Company Agreement, a waiver thereof in writing signed by the person or persons entitled to such notice, whether signed before or after the time stated in such waiver, shall be deemed equivalent to the giving of such notice. ARTICLE X. OFFICERS Any Manager may also serve as an officer of the Company. The Managers may designate one or more persons to serve as officers and may designate the titles of all officers. The initial officers of the Company shall be: Ken Shifrin, Chairman of the Board; Brad Hummel, President; Cheryl Williams, Vice President; Teena Belcik, Vice President, Secretary and Treasurer; and Jeffrey Couch, M.D., Vice President. The officers of the Company shall have powers commensurate with the corporate powers ordinarily designated with respect to such offices and as otherwise established by the Managers. ARTICLE XI. INDEMNITY Section 11.1. Indemnification. The Company shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative, arbitrative or investigative, any appeal in such an action, suit or proceeding and any inquiry or investigation that could lead to such an action, suit or proceeding (whether or not by or in the right of the Company), solely by reason of the fact that such person is or was a member, manager, officer, employee or agent of the Company or is or was serving at the request of the Company as a director, manager, officer, partner, venturer, proprietor, trustee, employee, agent or similar functionary of another corporation, employee benefit plan, other enterprise, or other entity, against all judgments, penalties (including excise and similar taxes), fines, settlements and reasonable expenses (including attorneys' fees and court costs) actually and reasonably incurred by him in connection with such action, suit or proceeding to the fullest extent permitted by any applicable law, and such indemnity shall inure to the benefit of the heirs, executors and administrators of any such person so indemnified pursuant to this Article XI. The right to indemnification under this Article XI shall be a contract right and shall not be deemed exclusive of any other right to which those seeking indemnification may be entitled under any law, bylaw, agreement, vote of members or disinterested managers or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office. Any repeal or amendment of this Article XI by the Managers (pursuant to Section 8.9 hereof) or by changes in applicable law shall, to the extent permitted by applicable law, be prospective only, and shall not adversely affect the indemnification of any person who may be indemnified at the time of such repeal or amendment. Furthermore, subject only to a Manager's indemnification obligations (if any) under the Contribution Agreement, and any applicable statutory limitations, the Members hereby agree that the Company may not bring any action, suit or proceeding against any Manager except for intentional misconduct by such Manager. Section 11.2. Indemnification Not Exclusive. The rights of indemnification and reimbursement provided for in this Article XI shall not be deemed exclusive of any other rights to which any such Manager, officer, employee or agent may be entitled under the Certificate of Formation, this Limited Liability Company Agreement, agreement or vote of Members, or as a matter of law or otherwise. Section 11.3. Other Indemnification Clauses. Notwithstanding the foregoing, this Article XI shall not be construed to contradict the indemnification provision of the Contribution Agreement. Notwithstanding anything contained herein, this Article XI shall be ineffectual and shall not permit or require indemnification for all, or any, losses, costs, liabilities, claims or expenses arising, directly or indirectly, from any action or omission permitting or requiring indemnification under the Contribution Agreement; and in no event may any indemnity be allowed under this Agreement or pursuant to any provision of the Act for an amount paid or payable pursuant to the indemnification provisions of the Contribution Agreement. ARTICLE XII. MISCELLANEOUS Section 12.1. Fiscal Year. The fiscal year of the Company shall be the calendar year. Section 12.2. Records. At the expense of the Company, the Managers shall maintain records and accounts of all operations of the Company. At a minimum, the Company shall keep at its principal place of business the following records: (a) A current list of the full name, last known mailing address and Membership Interest of each Member; (b) A current list of the full name and business or residence address of each Manager; (c) A copy of the Certificate of Formation and Limited Liability Company Agreement of the Company, and all amendments thereto, together with executed copies of any powers of attorney pursuant to which any of the foregoing were executed; (d) Copies of the Company's federal, state and local income tax or information returns and reports, if any, for the six most recent tax years; and (e) Correct and complete books and records of account of the Company. Section 12.3. Seal. The Company may by resolution of the Managers adopt and have a seal, and said seal may be used by causing it or a facsimile thereof to be impressed or affixed or in any manner reproduced. Any officer of the Company shall have authority to affix the seal to any document requiring it. Section 12.4. Agents. Every Manager and Officer is an agent of the Company for the purpose of the business. The act of a Manager or Officer, including the execution in the name of the Company of any instrument for carrying on in the usual way the business of the Company, binds the Company; provided, however, if such act requires the approval of the Members of the Managers, such approval has first been obtained. Section 12.5. Checks. All checks, drafts and orders for the payment of money, notes and other evidences of indebtedness issued in the name of the Company shall be signed by such officer, officers, agent or agents of the Company and in such manner as shall from time to time be determined by resolution of the Managers. In the absence of such determination by the Managers, such instruments shall be signed by the Treasurer or the Secretary and countersigned by the President or a Vice President of the Company, if the Company has such officers. Section 12.6. Deposits. All funds of the Company shall be deposited from time to time to the credit of the Company in such banks, trust companies or other depositories as the Managers may select. Section 12.7. Annual Statement. The Managers shall present at each annual meeting a full and clear statement of the business and condition of the Company. Section 12.8. Financial Statements. As soon as practicable after the end of each fiscal year of the Company, a balance sheet as at the end of such fiscal year, and a profit and loss statement for the period ended, shall be distributed to the Members, along with such tax information (including all information returns) as may be necessary for the preparation of each Member of its federal, state and local income tax returns. The balance sheet and profit and loss statement referred to in the previous sentence may be as shown on the Company's federal income tax return. Section 12.9. Binding Arbitration. Any controversy between the Members regarding this Agreement or any other Transaction Document, any claims arising out of any breach or alleged breach of this Agreement or any other Transaction Document, and any claims arising out of the relationship between the Members created hereunder, shall be submitted to binding arbitration by all Members involved in accordance with the procedures for arbitration contained in the Contribution Agreement. Section 12.10. Counterparts. This Agreement may be executed in several counterparts, each of which shall constitute an original and all of which together shall constitute one and the same instrument. Any party hereto may execute this Agreement by signing any one counterpart. ARTICLE XIII. AMENDMENTS Section 13.1. Amendments. Except to the extent expressly provided otherwise herein, this Agreement may only be altered, amended or repealed and a new limited liability company agreement may only be adopted only in accordance with the provisions of Section 8.9 by the Members at any regular meeting of the Members or at any special meeting of the Members called for that purpose, or by execution of a written consent in accordance with the provisions of Section 3.8. Section 13.2. When Limited Liability Company Agreement Silent. It is expressly recognized that when the Limited Liability Company Agreement is silent or in conflict with the requirements of the Act as to the manner of performing any Company function, the provisions of the Act shall control. Section 13.3. Integration with Contribution Agreement. To the extent of any inconsistency between the provisions of the Contribution Agreement and this Agreement, the terms and provisions of the Contribution Agreement shall control. Accordingly, no Member or Manager shall be deemed to have breached any fiduciary duty owed to any other Member or the Company as a result of investing in, acquiring or developing any office location, business or operations that are related or similar to, or in direct competition with, the Company's business if such act or transaction is allowed or not prohibited by the provisions of Article VIII of the Contribution Agreement, or the termination of such provisions. [Signature page follows] S-1 SIGNATURE PAGE TO LIMITED LIABILITY COMPANY AGREEMENT IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of September 1, 2000. Vision Correction Centers of Kansas City, P.C. Jeffrey Couch, M.D., President Prime RVC, Inc. Cheryl Williams, Senior Vice President A-1 EXHIBIT A OWNERSHIP INTERESTS Name Contribution Agreed Value Membership Interest Prime Assets and $4,530,000 65% other property VCC Assets and $2,439,230 35% other property EX-10.96 9 0009.txt EX 10.96 FACILITY USE AGREEMENT FOR KANSAS CITY FACILITY USE AGREEMENT This Facility Use Agreement (hereinafter referred to as the "Agreement") is made and executed as of the close of business on the 1st day of September, 2000 by and among Vision Correction Centers of Kansas City, P.C., a Missouri professional corporation, (hereinafter referred to as "VCC"), Kansas City Laser Vision Correction Centers, L.L.C., a Missouri limited liability company ("KCL"), Jeffrey Couch, M.D. (hereinafter referred to as "Provider") and Prime Refractive - Kansas City, a Delaware limited liability company (hereinafter referred to as "Prime"). Preliminary Statements: Provider, a licensed medical professional, together with VCC and KCL provides Refractive Surgery (as hereinafter defined) and related services in the area of Kansas City, Missouri. Prime owns certain equipment and assets (none of which include the practice of medicine) used in the performance of Refractive Surgery and related services. Provider, KCL and VCC desire to use Prime's facilities to render medical services to their patients. Statement of Agreement In consideration of the mutual covenants and agreements herein contained, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and on the terms and subject to the conditions herein set forth, the parties hereto agree as follows: ARTICLE I Certain Defined Terms Unless otherwise defined in Section 1.1 or elsewhere in this Agreement, all capitalized terms used in this Agreement shall have the meanings ascribed to them in that certain Contribution Agreement (the "Contribution Agreement") dated as of September 1, 2000, among Prime Medical Services, Inc., a Delaware corporation, Prime RVC, Inc., a Delaware corporation, Prime, Provider, KCL and VCC. ARTICLE II Relationship of the Parties The relationship under this Agreement between Prime, on the one hand, and Provider, KCL and VCC, on the other hand, shall be that of independent contractors. The provisions hereof are not intended to create any partnership, joint venture, agency or employment relationship between the parties. Prime acknowledges and agrees that Provider, KCL and VCC shall retain the exclusive authority to direct the medical, clinical professional, and ethical aspects of their respective medical practices. Prime shall neither exercise control over nor interfere with the physician-patient relationships of Provider, KCL or VCC, which shall be maintained strictly between Provider, KCL, VCC and their respective patients. ARTICLE III Services to be Provided by Prime Section 3.1 General. No party will act in a manner that would prevent the other parties from performing their duties hereunder, and each party will provide such information and assistance to each other party as is reasonably required to enable such other party to perform its services hereunder. Prime shall, and shall use its best efforts to cause its employees to, comply with all applicable federal, state and local laws, rules and regulations in its provision of services hereunder. Section 3.2 Facilities. Prime shall make available to KCL, VCC and Provider the real property located at 5844 N.W. Barry Road, Kansas City, Missouri 64154, and the improvements, facilities and assets located thereon, including without limitation, the Assets, the Assets Related Business and personnel, for the use of KCL, VCC and Provider in the performance of Refractive Surgery and related services (together with any future locations, property, improvements, facilities or assets acquired or established by Prime in replacement of or in addition to the foregoing, the "Facilities"). Prime agrees to maintain the Facilities in a commercially reasonable manner in light of the intended use of the Facilities. Prime agrees that licensed physician employees of KCL shall be entitled to use the Facilities (subject to any applicable requirements contained in any other agreement to which KCL and Prime are both parties). Prime, KCL, VCC and Provider agree that Prime may make the Facilities available to any other licensed physician, but only after Provider has, in Provider's sole discretion, approved each such licensed physician to use the Facilities (regardless of location). Section 3.3 Management. The parties intend and agree that KCL, VCC and Provider shall continue to manage and administer all aspects of their individual practices, unless and only to the extent Prime specifically undertakes a certain aspect of such management and administration in connection with its provision of the Facilities or as otherwise expressly provided in this Agreement. Such management and administration shall include, without limitation, all administration, accounting, purchasing, payroll, legal services, record keeping, bookkeeping, computer services, information management, printing, postage, duplication services, provision of non-professional personnel, quality assurance programs, and billing and collecting from, and contracting with, patients, insurance companies, managed care payors, governmental entities and other third-party payors with respect to all professional, medical and other services provided by KCL, VCC or Provider. Notwithstanding any provision of this Agreement to the contrary: (a) Prime shall not engage in the practice of medicine, and Provider shall at all times be responsible for all activities that constitute the practice of medicine; (b) this Agreement shall not be construed to require Provider, or any other medically trained or licensed medical professionals under the direction or control of Provider, to perform Refractive Surgery at the facilities of, or use the equipment of, Prime, if in the professional medical judgment of a reasonable ophthalmologist practicing LASIK surgery, such use would be detrimental to Provider's patients; and (c) none of KCL, VCC and Provider shall be required to hire or retain any third party to manage any aspect of its practice. Section 3.4 Events Excusing Performance. In the event of strikes, lock-outs, calamities, acts of God, unavailability of supplies or other events over which the parties have no control (hereinafter, a "Force Majeure Event"), Prime shall not be liable to KCL, VCC or Provider for failure to provide any of the Facilities hereunder, and KCL, VCC and Provider shall not have the right to terminate this Agreement, for so long as such events continue and for a reasonable period of time thereafter; provided, however, that if such events continue and Prime is not able to provide any Facilities hereunder for a period of one hundred and eighty (180) consecutive days or more, Prime, KCL, VCC or Provider may terminate this Agreement by written notice to the others. Notwithstanding any provision of the Transaction Documents to the contrary, for any portion of such periods following a Force Majeure Event in excess of five (5) business days during which Prime is unable to provide Facilities sufficient to allow Provider to perform Refractive Surgery, then Provider, KCL and VCC may perform medical services, including Refractive Surgery at such other locations within or without the Restricted Area as Provider deems appropriate and Provider shall be entitled to retain all compensation receive therefrom, until Prime is again able to provide the Facilities. Section 3.5 Limitation on Use of Facilities by VCC. Provider, VCC and KCL acknowledge and agree that Prime is only making the Facilities and related services available to VCC until such time as KCL has obtained all licenses, certifications and other qualifications necessary to engage in the practice of Refractive Surgery. Provider, VCC and KCL further agree that Prime may, in its sole discretion, restrict use of the Facility and related services by VCC to only Provider (as an employee of VCC), and may also cease to make the Facilities and related services available to VCC after the expiration of ninety days following the date of this Agreement, in either case without causing a default under any provision of this Agreement or the Contribution Agreement. Prime shall not have any responsibility to assist in the transfer or procurement by KCL of any such licenses, certifications or other qualifications. ARTICLE IV Obligations of KCL, VCC and Provider Section 4.1 Facility Fee. The fees payable to Prime by VCC, KCL and Provider in return for use of the Facilities made available by Prime hereunder (the "Facility Usage Fee") shall be determined on a per procedure basis and remitted to Prime by its billing staff (the "Billing Staff") pursuant to the billing agent appointment procedures provided in Section 4.2. The amount of the Facility Usage Fee with respect to any procedure shall initially be $1,150. The Facility Usage Fee shall be subsequently increased or decreased any time the Patient Fee (as hereinafter defined) is increased or decreased, in each case in equal proportion to the increase or decrease in the Patient Fee; provided, however, that the Patient Fee cannot be changed without the unanimous consent of the managers of Prime. As used herein, "Patient Fee" shall mean the standard, undiscounted fee generally being charged to patients, determined without reference to the fee charged for any single procedure. Notwithstanding the foregoing provisions of this Section 4.1, or any other contrary provision of any Transaction Documents, Provider shall be entitled to perform procedures for free, discount procedures and refund amounts paid for procedures on a limited basis in a manner and to the extent Provider has done so in the past, or as otherwise consented to by Prime in each instance. The Facility Usage Fee with respect to such procedures shall be proportionately reduced, as long as the aggregate Facility Usage Fee paid hereunder equals or exceeds the fair market value of the use of the Facilities. Section 4.2 Billing Agent Appointment. With respect to all procedures done using the Facilities, the Billing Staff shall furnish all billing and collecting services to Provider, KCL and VCC in the name of Provider, KCL or VCC, as applicable. Provider, KCL and VCC shall periodically furnish to the Billing Staff, in a form satisfactory to Prime, information concerning procedures performed by Provider, KCL and VCC, including, without limitation, the total fee charged for the procedure, any discount applicable to the procedure, the name, address and telephone number of the patient, and any additional information required by the Billing Staff for purposes of proper and timely billing for Provider's professional medical services in the performance of Refractive Surgery and related services. Provider, KCL and VCC hereby designate Prime as their billing agent during the term of this Agreement, and Prime hereby accepts such assignment. The Billing Staff shall maintain complete and accurate records of charges billed and amounts collected, and shall furnish Provider with copies of all billing statements issued on Provider's behalf, as well as copies of bank receipts for all payments deposited in an account designated by Prime. When payments are received, the Billing Staff shall be responsible for recording and depositing the receipts in Prime's account and making semi-monthly payment to Provider, KCL and VCC (as applicable) of the difference between the Patient Fee and the Facility Usage Fees, on a per procedure basis, which difference constitutes compensation for Provider's, KCL's or VCC's professional services, as applicable (the "Professional Fees"). The parties to this Agreement acknowledge and agree that the entire amount of the Professional Fees shall, in each case, represent the agreed upon fair market value for Refractive Surgery and related services performed by Provider, KCL or VCC and shall include no additional payment for any other purpose. Section 4.3 Compliance With Laws. KCL, VCC and Provider shall provide professional services to patients in compliance at all times with, and shall otherwise comply with, all ethical standards, laws, rules and regulations applicable to the operations of KCL, VCC and Provider. KCL, VCC and Provider shall use reasonable efforts to ensure that Provider and the employees of KCL, VCC and Provider have all required licenses, credentials, approvals or other certifications to perform his or her duties and services for KCL, VCC and Provider. In the event that any disciplinary actions or medical malpractice actions are initiated against Provider or any employee of Provider, KCL or VCC, such party shall promptly inform Prime of such action and the underlying facts and circumstances. Section 4.4 KCL's, VCC's and Provider's Internal Matters. KCL, VCC and Provider shall be responsible for matters involving their respective corporate governance, employees and similar internal matters, including, but not limited to, preparation and contents of such reports to regulatory and tax authorities governing KCL, VCC and Provider that such party is required by law to provide, distribution of professional fee income among Provider or the shareholders of KCL or VCC, disposition of KCL's, VCC's and Provider's property and stock and hiring and firing of their employees and licensing. The legal, accounting and other professional services fees incurred by Provider, KCL or VCC in connection with the internal matters of KCL and VCC, the distribution of the fee income among Provider or shareholders of KCL or VCC and the personal accounting of KCL, VCC and Provider and similar internal and personal matters, shall be borne exclusively by KCL, VCC and/or Provider (as applicable). ARTICLE V Term and Termination This Agreement shall commence on the date hereof and shall expire on the earlier of (a) the 40th anniversary hereof or (b) the expiration or termination of the Restricted Period; provided, however, that PMSI may elect to have Prime terminate this Agreement at any time following any breach by Provider of the provisions of ARTICLE VIII of the Contribution Agreement. ARTICLE VI General Provisions Section 6.1 Collateral Agreements, Amendments, and Waivers. This Agreement (together with the Contribution Agreement and all Transaction Documents) supersedes all prior documents, understandings, and agreements, oral or written, relating to this transaction and constitutes the entire understanding among the parties with respect to the subject matter hereof. Any modification or amendment to, or waiver of, any provision of this Agreement (or any document delivered pursuant to this Agreement unless otherwise expressly provided therein) may be made only by an instrument in writing executed by each party thereto. Section 6.2 Successors and Assigns. No party's rights or obligations under this Agreement may be assigned without the prior written consent of all parties hereto. Any assignment in violation of the foregoing shall be null and void. Subject to the preceding sentences of this Section, the provisions of this Agreement (and, unless otherwise expressly provided therein, of any document delivered pursuant to this Agreement) shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, legal representatives, successors, and assigns. Section 6.3 Invalid Provisions. If any provision of this Agreement is held to be illegal, invalid, or unenforceable under present or future laws, such provision shall be fully severable, this Agreement shall be construed and enforced as if such illegal, invalid, or unenforceable provision had never comprised a part of this Agreement, and the remaining provisions of this Agreement shall remain in full force and effect and shall not be affected by the illegal, invalid, or unenforceable provision or by its severance from this Agreement. In the event any provision of this Agreement is severed, the parties to this Agreement agree to negotiate in good faith to preserve the intended economic results of this Agreement. Section 6.4 Waiver. No failure or delay on the part of any party in exercising any right, power, or privilege hereunder or under any of the documents delivered in connection with this Agreement shall operate as a waiver of such right, power, or privilege; nor shall any single or partial exercise of any such right, power, or privilege preclude any other or future exercise thereof or the exercise of any other right, power or privilege. Section 6.5 Notices. Unless specifically provided otherwise herein, any notices required or permitted to be given under this Agreement shall be given and deemed received in the manner provided in the Contribution Agreement. Section 6.6 Construction. This Agreement and any documents or instruments delivered pursuant hereto or in connection herewith shall be construed without regard to the identity of the person who drafted the various provisions of the same. Each and every provision of this Agreement and such other documents and instruments shall be construed as though all of the parties participated equally in the drafting of the same. Consequently, the parties acknowledge and agree that any rule of construction that a document is to be construed against the drafting party shall not be applicable either to this Agreement or such other documents and instruments. Section 6.7 Other Agreements. Each party hereto agrees that any material breach by it of any of the terms and provisions of another Transaction Document (as defined in the Contribution Agreement) to which it is a party shall also be deemed to have been a material breach by it of this Agreement, for all purposes. Section 6.8 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Missouri. Section 6.9 Arbitration. Any controversy between the parties regarding this Agreement or any other Transaction Document, any claims arising out of any breach or alleged breach of this Agreement or any other Transaction Document, and any claims arising out of the relationship between the parties created hereunder, shall be submitted to binding arbitration by all parties involved in accordance with the terms of the Contribution Agreement. Section 6.10 Counterparts. This Agreement may be executed in several counterparts, each of which shall constitute an original and all of which together shall constitute one and the same instrument. Any party hereto may execute this Agreement by signing any one counterpart. [Signature page follows] S-1 SIGNATURE PAGE TO FACILITY USE AGREEMENT IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the day and year first above written. Prime: Prime Refractive - Kansas City, L.L.C. Cheryl Williams, Vice President Jeffrey Couch, Vice President Provider: _______________________________________________ Jeffrey Couch, M.D. VCC: Vision Correction Centers of Kansas City, P.C. By: Jeffrey Couch, M.D., President KCL: Kansas City Laser Vision Correction Centers, L.L.C. By: Jeffrey Couch, M.D., Manager EX-10.97 10 0010.txt EX 10.97 L.L.C. AGREEMENT FOR HORIZON LIMITED LIABILITY COMPANY AGREEMENT OF HORIZON VISION CENTERS, L.L.C. Organized under the Delaware Limited Liability Company Act (the "Act"). ARTICLE I. NAME AND LOCATION Section 1.1. Name. The name of this limited liability company is Horizon Vision Centers, L.L.C. (the "Company"). Section 1.2. Members. The members of the Company upon the execution of this Limited Liability Company Agreement (this "Agreement") shall be Prime RVC, Inc., a Delaware corporation ("Prime"), and those certain persons, other than Prime, listed on Exhibit A attached hereto ("Other Members"). For purposes of this Agreement, the "Members" shall include such named members and any new members admitted pursuant to the terms of this Agreement, but does not include any person or entity who has ceased to be a member in the Company. Section 1.3. Principal Office. The principal office of the Company shall be located in 1301 Capital of Texas Hwy., Suite C-300, Austin, Texas 78746-6550, or such other location as may be selected by the Members. Section 1.4. Registered Agent and Address. The name of the registered agent and the address of the registered office of the Company as set forth in the Certificate of Formation of the Company are: The Corporation Trust Company 1209 Orange Street Wilmington, Delaware 19801 Section 1.5. Other Offices. Other offices and other facilities for the transaction of business shall be located at such places as the Managers may from time to time determine. ARTICLE II. MEMBERSHIP Section 2.1. Members' Interests. The "Membership Interest" of each Member is set forth on Exhibit A. Section 2.2. Admission to Membership. The admission of new Members shall be only by the vote of the Managers pursuant to Section 8.9 hereof. If new Members are admitted, this Agreement shall be amended to reflect each Member's revised Membership Interest. Section 2.3. Property Rights. No Member shall have any right, title, or interest in any of the property or assets of the Company. Section 2.4. Liability of Members. No Member of the Company shall be personally liable for any debts, liabilities, or obligations of the Company, including under a judgment decree, or order of court except or expressly provided otherwise in an agreement between the Member and the Company or another party. Section 2.5. Transferability of Membership. Except as expressly provided in this Agreement, Membership Interests in the Company are transferable only with the unanimous written consent of all Members. If such unanimous written consent is not obtained when required, the transferee shall be entitled to receive only the share of profits or other compensation by way of income and the return of contributions and distributions of available earnings to which the transferor Member otherwise would be entitled. Notwithstanding the foregoing, (i) the Membership Interests of any Member may be freely transferred, without consent, to any entity that is then owned or controlled, directly or indirectly, by Prime Medical Services, Inc., a Delaware corporation ("PMSI") or its successor in interest, (ii) the Membership Interests of any Member may be freely assigned, pledged or otherwise transferred, without consent, to secure any debt, liability or obligation owed to Prime by the Company, any Member or any entity affiliated with the Company, (iii) the Membership Interests of any Member may be freely assigned, pledged or otherwise transferred, without consent, in favor of the Lender(s) under, or by the Lender(s) as a result of the enforcement of any security interest arising pursuant to, those certain Credit Facilities (the "Credit Facilities") of PMSI, and/or any of PMSI's subsidiaries, and (iv) the pledge by Other Members of its right to receive distributions from the Company in respect of its Membership Interest shall not be deemed to violate any provision of this Agreement. Section 2.6 Special Options to Sell or Acquire Remaining Membership Interests. (a) Prohibition on Sale. Other than those permitted transfers specifically set forth in Section 2.5, each Other Member agrees that it will not transfer, assign, pledge, hypothecate, or in any way alienate any of its Membership Interests, or any interest therein, whether voluntarily or by operation of law, or by gift or otherwise, except in accordance with the provisions of this Section or Section 2.7, or except pursuant to those certain Assignment and Security Agreements by and between Prime/BDR Acquisition, L.L.C., a Delaware limited liability company ("BDR") or one of its affiliates and each Other Member (the "Security Agreement"). Any purported transfer in violation of this Section or Section 2.7 shall be void and ineffectual, and shall not operate to transfer any interest or title to the purported transferee. Each Other Member agrees that the Company may, and the Company agrees to, issue stop-transfer orders, or take any other necessary action, to ensure that the foregoing provisions of this Section and Section 2.7 are given full effect. (b) Option to Sell. Upon (i) the death, retirement (only if such Other Member is David P. Bates III and Jane A. Bates (collectively, "Bates"), or is a physician and only as defined below), cessation of employment with the Company (only if such Other Member is Bates), bankruptcy, insolvency, disability (only if such Other Member is Bates, or is a physician and only as defined below) or incompetency of an Other Member, (ii) any other involuntary transfer of any Membership Interest of the Company now or hereafter owned by an Other Member, or any interest therein (including, without limitation, transfers of interests upon divorce or death of a spouse of an Other Member, but excluding any transfers governed by Section 2.7), (iii) relocation of an Other Member's primary residence (other than that of Bates) outside of a two hundred (200) mile radius of the center or facility at which such Other Member primarily renders services, or (iv) if such Other Member is a physician or other practicing licensed professional, the performance by an Other Member, during any one-month period, of greater than thirty (30%) of his or her professional medical activities outside of a two hundred (200) mile radius of the center or facility primarily utilized by such Other Member on the date of this Agreement; such Other Member's executor, administrator, trustee, custodian, receiver or other legal or personal representative (the "Representative"), or such Other Member, in the case of retirement or departure, shall give written notice of that fact to the Company. In such event, the Representative or such Other Member shall have a period of sixty (60) days (the "Put Period") following the date of such death, retirement, bankruptcy, insolvency, disability, incompetency or relocation of primary residence or practice, as the case may be, within which time it may require that the Company purchase (subject to the remaining provisions of this subsection) all of such Other Member's Membership Interests, upon the terms and conditions hereinafter set forth, by giving notice of such election in writing to the Company. The Company may, in its sole discretion, offer all or a portion of such Membership Interests to the Other Members (other than the selling Other Member), on a pro rata basis in relation to each eligible Other Member's percentage ownership of the Company, but any agreement by the eligible Other Members to purchase all or a portion of such Membership Interests shall not limit the Company's obligation to purchase within the time frame set forth in this Section. If the Company has offered all of such Membership Interests to the Other Members (other than the selling Other Member), and the eligible Other Members have not committed to purchase all of such Membership Interests within five (5) days from the date of offer, then the Company may, in its sole discretion, offer all or a portion of the remaining Membership Interests to Prime, in which event Prime must participate in such purchase upon the same terms and conditions as the Company. For purposes of this Agreement, (x) "disability" shall apply only if the Other Member is a physician and shall mean any condition which in the reasonable judgment of Prime, would impair such Other Member's ability to materially perform his or her routine duties for a period of six (6) months or more, (y) "retirement" shall apply only if such Other Member is a physician and shall mean the cessation of the routine practice of medicine (provided that any physician who transfers his or her entire practice to a licensed medical professional meeting the Company's then current credentialing program shall not be deemed to have retired for purposes of this subsection), and (z) "incompetent" shall mean a state of legal incompetence as declared by a court of valid jurisdiction. (c) Option to Buy. In the event that the option described in Section 2.6(b) arises and the Representative or Other Member, as the case may be, fails to make the election described in Section 2.6(b) within the Put Period, Prime shall at all times thereafter have the option to purchase all or any portion of such Other Member's Membership Interests, upon the terms and conditions hereinafter set forth, by giving written notice of such election in writing to such other Member's Representative or such Other Member, as the case may be. In addition, Prime may, in its sole discretion, transfer its purchase right granted under this subsection (or all or part of the Membership Interests acquired pursuant to an exercise of its purchase right granted under this subsection) to the Company or any of the physician Members of the Company. (d) Purchase Price. The purchase price to be paid pursuant to this Section shall be paid in immediately available funds at the closing of the transfer of Membership Interests pursuant to this Section. If the parties do not otherwise agree within thirty (30) days of the day on which the option to purchase or sell hereunder is exercised, then Prime shall, at its own expense, select an appraiser to value the Membership Interests being transferred. If the Other Member or its Representative does not agree with the value determined by the appraiser of Prime, such Other Member or its Representative may, at its own expense, select its own appraiser to value the Membership Interests being transferred. If the two appraisers cannot agree on the value of the Membership Interests being transferred, the two appraisers shall mutually select a third appraiser to value the Membership Interests being transferred, and any valuation determined by such third appraiser shall be final, binding and conclusive. The cost of any third appraiser shall be borne by such Other Member. (e) The closing of any purchase and sale of Membership Interests pursuant to this Section shall take place at the principal office of Prime or such other place designated by Prime and the selling Other Member, on the thirtieth day (or if such thirtieth day is not a business day, the next business day following the thirtieth day) following the delivery of notice under either Section 2.6(b) or Section 2.6(c). At such closing, the selling Other Member shall execute all documents and take such other actions as may be reasonably necessary to deliver to Prime such Membership Interests, and any certificates representing same, free and clear of all liens, claims, encumbrances or restrictions of any kind or nature whatsoever, except those imposed under the applicable Security Agreement. Section 2.7 Right of First Refusal. ---------------------- (a) If there is no option outstanding under Section 2.6 to sell or buy all or any portion of the Membership Interest held by a Selling Other Member (as hereinafter defined) (except in connection with a sale by a physician of all of his or her practice upon retirement), and any Other Member intends to voluntarily transfer any portion of its Membership Interests to any person or entity other than Prime (a "Selling Other Member"), then the Selling Other Member shall give written notice to Prime stating (i) the intention to transfer such Membership Interests, (ii) the amount of Membership Interests to be transferred, (iii) the name, business and residence address of the proposed transferee, (iv) the nature and amount of the consideration, and (v) the other terms of the proposed sale. (b) Prime shall have, and may exercise within sixty (60) days after receipt of the notice of intent to transfer, an option to purchase all or any portion of the Membership Interests owned by the Selling Other Member, at the per unit price and upon the other terms stated in the notice of intent to transfer. Prime may elect to exercise its option under this Section by delivering notice thereof to the Selling Other Member. If Prime elects not to purchase all or any portion of such Membership Interests prior to the expiration of said sixty (60) day period, the Selling Other Member shall have thirty (30) days to complete the sale and purchase contemplated in the notice of intent to transfer, and after such thirty (30) day period, the provisions of this Section shall apply fully to any such Membership Interests not transferred. The purchase price pursuant to this Section shall be paid in immediately available funds at the closing of the transfer pursuant to this Section. (c) Each Other Member and Prime acknowledge and agree that it would be impractical to exercise an option to purchase arising pursuant to this Section whenever the proposed consideration to be received by the Selling Other Member is other than cash, cash equivalents or an obligation to pay cash by a person whose credit worthiness and financial status is such that performance of the payment obligation would be reasonably assured. Therefore, the parties agree that no transfer shall be permitted and no option shall arise pursuant to this Section whenever the consideration to be received from the proposed transferee is other than cash, cash equivalents or an obligation to pay cash by a person whose credit worthiness and financial status is such that performance of the payment obligation would be reasonably assured. (d) The closing of any purchase and sale of Membership Interests pursuant to this Section shall take place at the principal office of Prime or such other place designated by Prime and the Selling Other Member, on the thirtieth day (or if such thirtieth day is not a business day, the next business day following the thirtieth day) following the delivery of notice of Prime's election to purchase pursuant to Section 2.7(b). At such closing, the Selling Other Member shall execute all documents and take such other actions as may be reasonably necessary to deliver to Prime such Membership Interests, and any certificates representing same, free and clear of all liens, claims, encumbrances or restrictions of any kind or nature whatsoever, except those imposed under the Security Agreement. Section 2.8 Legend. Any certificate or document representing a Member's ownership of any Membership Interests, and each certificate or document that may be issued and delivered by the Company upon transfer of such certificate, shall contain a legend conspicuously noted in substantially the following form: THE INTERESTS REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AND THEY MAY NOT BE SOLD OR TRANSFERRED EXCEPT PURSUANT TO AN EXEMPTION FROM, OR OTHERWISE IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF SUCH ACT. IN ADDITION, INTERSTS MAY BE TRANSFERRED ONLY IN COMPLIANCE WITH CERTAIN CONDITIONS SPECIFIED IN A CERTAIN STOCK PURCHASE AGREEMENT DATED EFFECTIVE AS OF SEPTEMBER 1, 1999, AND IN THE LIMITED LIABILITY COMPANY AGREEMENT OF THE COMPANY, A COMPLETE AND CORRECT COPY OF EACH OF WHICH IS AVAILABLE FOR INSPECTION AT THE PRINCIPAL OFFICE OF THE COMPANY AND WILL BE FURNISHED TO THE HOLDER HEREOF UPON WRITTEN REQUEST AND WITHOUT CHARGE. Section 2.9. Withdrawal of Members. A Member may not withdraw from the Company except on the unanimous consent of the remaining Members. The terms of the Members withdrawal shall be determined by agreement between the remaining Members and the withdrawing Member. ARTICLE III. MEMBERS' MEETINGS Section 3.1. Time and Place of Meeting. All meetings of the Members shall be held at such time and at such place within or without the State of Delaware as shall be determined by the Managers. Section 3.2. Annual Meetings. In the absence of an earlier meeting at such time and place as the Managers shall specify, annual meetings of the Members shall be held at the principal office of the Company during the fifth or sixth month following the conclusion of the Company's fiscal year on such a date which is not a legal holiday or weekend, and at such time as shall be designated by the Managers, and if not designated by the Managers, then as designated by the President, at which meeting the Members may transact such business as may properly be brought before the meeting. Section 3.3. Special Meetings. Special meetings of the Members may be called at any time by any Member. Business transacted at special meetings shall be confined to the purposes stated in the notice of the meeting which may provide, however, for the transaction of other matters as may be properly brought before the special meeting. Section 3.4. Notice. Written or printed notice stating the place, day and hour of any Members' meeting, and, in the case of a special meeting, the purpose or purposes for which the meeting is called, shall be delivered not less than ten (10) days nor more than sixty (60) days before the date of the meeting, either personally or by mail, by or at the direction of the person calling the meeting, to each Member entitled to vote at such meeting. If mailed, such notice shall be deemed to be delivered three (3) days after it is deposited in the United States mail, postage prepaid, to the Member at such Member's address as it appears on the records of the Company at the time of mailing. Section 3.5. Quorum. Members present in person or represented by proxy, holding more than fifty percent (50%) of the total votes which may be cast at any meeting shall constitute a quorum at all meetings of the Members for the transaction of business. If, however, such quorum shall not be present or represented at any meeting of the Members, the Members entitled to vote, present in person or represented by proxy, shall have power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present or represented. When any adjourned meeting is reconvened and a quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally noticed. Except with respect to the matters listed below which require the approval by at least eighty percent (80%) of the total votes, the Members present at a duly called or held meeting at which a quorum is present may continue to do business until adjournment, notwithstanding the withdrawal of enough Members to leave less than a quorum, if any action taken (other than adjournment) is approved by at least a majority of the votes required to constitute a quorum. Section 3.6. Voting. Members shall only be required to vote in instances or with respect to matters where member voting is required by applicable law or to the extent expressly contemplated in this Agreement. With respect to any act or transaction that requires a vote by the Members under applicable law, the affirmative vote or written consent of not less than three (3) of the Managers shall also be required in order to approve the act or transaction, in each instance. Subject to the foregoing, when a quorum is present at any meeting, the vote of the Members, whether present or represented by proxy at such meeting, holding more than fifty percent (50%) of the total votes which may be cast at any meeting shall be the act of the Members, unless the vote of a different number is required by the Act, the Certificate of Formation or this Limited Liability Company Agreement. Each Member shall be entitled to one vote for each percentage point represented by their Membership Interest. Fractional percentage point interests shall be entitled to a corresponding fractional vote. Notwithstanding the foregoing, the following acts and transactions shall require the affirmative vote of not less than eighty percent (80%) of the total votes of the Members, represented in person or by proxy: (a) Unless pursuant to any contractual agreement to which the Company is a party on the date of adoption of this Agreement, any issuance of any Membership Interest of the Company (or rights to acquire Membership Interest, through conversion, exchange, exercise of options or otherwise); (b) Unless pursuant to any contractual agreement to which the Company is a party on the date of this Agreement, any redemption of any Membership Interest by the Company; (c) The sale of all or substantially all of the assets of the Company; (d) Any merger or reorganization of or by the Company; (e) Liquidation or dissolution of the Company; and (f) Any amendment to this Agreement or the Company's Certificate of Formation. Section 3.7. Proxy. Every proxy must be executed in writing by the Member or by his duly authorized attorney-in-fact, and shall be filed with the Secretary of the Company prior to or at the time of the meeting. No proxy shall be valid after eleven (11) months from the date of its execution unless otherwise provided therein. Each proxy shall be revocable unless expressly provided therein to be irrevocable and unless otherwise made irrevocable by law. Section 3.8. Action by Written Consent. Any action required or permitted to be taken at any meeting of the Members may be taken without a meeting if a consent in writing, setting forth the action so taken, shall be signed by all of the Members entitled to vote with respect to the subject matter thereof, and such consent shall have the same force and effect as a unanimous vote of Members. Section 3.9. Meetings by Conference Telephone. Members may participate in and hold meetings of Members by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation in such a meeting shall constitute presence in person at such meeting, except where a person participates in the meeting for the express purpose of objecting to the transaction of any business on the ground that the meeting is not lawfully called or convened. ARTICLE IV. MEMBERSHIP CAPITAL CONTRIBUTIONS Section 4.1. Capital Contributions. Capital Accounts shall be maintained in accordance with Treasury Regulations 1.704-1(b) and -2 and shall be interpreted and applied in a manner consistent therewith. The Managers shall have the power to amend this Agreement as may be reasonably necessary to comply with such regulations. Except for each Member's initial capital contribution made in connection with the formation of the Company, no capital contributions shall be required of any Member without the approval of all the Members to raise additional capital, and only then proportionately as to each Member. Section 4.2. Deficit Capital Account Balances. Upon liquidation of the Company, no Member with a deficit balance in his Capital Account shall have any obligation to restore such deficit balance, or to make any contribution to the capital of the Company. Section 4.3. Tax Matters Partner. The Members shall designate one Member by majority vote to act as the tax matters partner (the "TMP") of the Company (as defined in the Code), and the TMP is hereby authorized and required to represent the Company, or designate another person or firm to represent the Company, (in each case, at the Company's expense) in connection with all examinations of the Company's affairs by tax authorities, including resulting administrative and judicial proceedings, and to expend Company funds for professional services and costs associated therewith. The initial TMP shall be Prime RVC, Inc.. The Members agree to cooperate with the TMP and its designee, if any, and to do or refrain from doing any or all things reasonably required by the TMP or its designee, if any, to conduct such proceedings. The Company will reimburse the TMP and any such designee for all expenses incurred in connection with its duties as TMP and any costs associated with any administrative or judicial proceeding with respect to the tax liabilities of the Members. ARTICLE V. DISTRIBUTION TO MEMBERS Section 5.1 Distributions. At the end of each calendar quarter, subject only to the qualifications and limitations set forth below, the Company shall distribute its available excess earnings to its members, to be divided among them in accordance with their Membership Interests. Distributions in kind shall be made on the basis of agreed value as determined by the Members. Notwithstanding the foregoing, the Company may not make a distribution to its Members to the extent that, immediately after giving effect to the distribution, all liabilities of the Company, other than liabilities to the Members with respect to their interests and liabilities for which the recourse of creditors is limited to specified property of the Company, exceed the fair value of the Company assets; except that the fair value of property that is subject to liability for which recourse of creditors is limited, shall be included in the Company assets only to the extent that the fair value of the property exceeds that liability. Section 5.2 Right of Set Off. Each of the Other Members and the Company each agrees that Prime shall have rights of offset against distributions to an Other Member in respect of any Membership Interests or any other ownership interest such Other Member may have in the Company, for any and all debts, obligations or liabilities that such Other Member may have to Prime, including, without limitation, any liability arising out of or relating to any obligation arising under such Other Member's or the Company's indemnity obligations under those certain Stock Purchase Agreements by and between each Other Member, BDR, and Horizon Vision Centers, Inc., a Delaware corporation (each, a "Stock Purchase Agreement") or any Transaction Document (as defined in the applicable Stock Purchase Agreement). Each Other Member hereby authorizes the Company, and appoints the Company as its attorney in fact, to pay such offset amounts to Prime and to take all other actions necessary in connection with such payment. The Company agrees to promptly remit any and all such offset amounts to Prime upon request. ARTICLE VI. ALLOCATION OF NET PROFITS AND LOSSES FOR TAX PURPOSES For accounting and income tax purposes, all items of income, gain, loss, deduction, and credit of the Company for any taxable year shall be allocated among the Members in accordance with their respective Membership Interests, except as agreed by the Members or as may be otherwise required by the Internal Revenue Code of 1986, as amended. ARTICLE VII. DISSOLUTION AND WINDING UP Section 7.1. Dissolution. Notwithstanding any provision of the Act, the Company shall be dissolved only upon the first of the following to occur: (a) Forty (40) years from the date of filing the Certificate of Formation of the Company; (b) Written consent of all the then current Members to dissolution; (c) The bankruptcy of a Member, unless there is at least one remaining Member and such Member or, if more than one remaining Member, all remaining Members agree to continue the Company and its business; or (d) The sale of all or substantially all of the assets of the Company. Section 7.2. Winding Up. Unless the Company is continued pursuant to Section 7.1(c) of this Article VII., in the event of dissolution of the Company, the Managers (excluding any Manager(s) holding office pursuant to designation by a Member subject to bankruptcy proceedings) shall wind up the Company's affairs as soon as reasonably practicable. On the winding up of the Company, the Managers shall pay and/or transfer the assets of the Company in the following order: (a) In discharging liabilities (including loans from Members) and the expenses of concluding the Company's affairs; and (b) The balance, if any, shall be divided between the Members in accordance with the Members' Membership Interests. ARTICLE VIII. MANAGERS Section 8.1. Selection of Managers. Management of the Company shall be vested in the Managers. Initially, the Company shall have five (5) Managers, being Kenneth S. Shifrin ("Shifrin"), Brad A. Hummel ("Hummel"), Teena Belcik ("Belcik"), Mark R. Mandel, M.D. ("Mandel"), and Stephen G. Turner, M.D. ("Turner"). A Manager shall serve as a Manager until his or her resignation or removal pursuant to Section 8.2 or 8.3. Managers need not be residents of the State of Delaware or Members of the Company. Section 8.2. Resignations. Each Manager shall have the right to resign at any time upon written notice of such resignation to the Members. Unless otherwise specified in such written notice, the resignation shall take effect upon the receipt thereof, and acceptance of such resignation shall not be necessary to make same effective. Section 8.3 Voting Agreement. Each of the parties hereto agrees that it will vote all of the Membership Interests owned by it in accordance with the terms of this Section 8.3. Any additional Membership Interests or other ownership interests of the Company, or the voting rights related thereto, whether presently existing or created in the future, that may be owned, held, or subsequently acquired in any manner, legally or beneficially, directly or indirectly, of record or otherwise, by the parties at any time after the execution of this Agreement, whether issued incident to any interest split, dividend, increase in capitalization, recapitalization, merger, consolidation, exchange, reorganization, or other transaction, shall be subject to the terms of this Section (all such Membership Interests presently held or controlled, together with such additional interests, the "Subject Interests"). At each election of Managers of the Company, the parties and any transferee or assignee of any Subject Interests from the parties (the "Transferee") shall, in accordance with the procedure set forth below, vote the Subject Interests as necessary to elect five (5) persons, designated in accordance with the procedures below, as Managers of the Company. Three (3) of the Managers (the "Prime Designees") shall be designated in writing by Prime or its Transferee. The remaining two (2) Managers (the "Other Member Designees") shall be jointly designated in writing by the Other Members holding a majority of the aggregate Membership Interests held by all Other Members. Shifrin, Hummel and Belcik shall be the initial Prime Designees; Mandel and Turner shall be the initial Other Member Designees. For purposes of this Section, the Prime Designees and the Other Member Designees are sometimes referred to individually as a "Designated Manager" and collectively as "Designated Managers." During the term of this Agreement, the parties shall, in accordance with the procedure set forth below, (i) vote their Subject Interests and use their best efforts in any event to ensure that the number of Managers which shall constitute all of the Managers of the Company shall remain at five (5), (ii) vote their Subject Interests in favor of the removal of a Designated Manager if Prime or a majority in interest of the Other Members (whichever designated the respective Manager) instruct in writing that such Designated Manager shall be removed from office and (iii) upon any removal of a Designated Manager pursuant to (ii) above, vote their Subject Interests in favor of the election of a replacement Manager designated in writing by Prime or a majority in interest of the Other Members (whichever designated the respective Manager). None of the parties to this Agreement shall approve or authorize the removal of any Designated Manager unless Prime or a majority in interest of the Other Members (whichever designated the respective Manager) shall have authorized in writing such Designated Manager's removal. To the extent that any party or parties entitled to designate a Manager pursuant to this Section fail to designate a replacement Designated Manager under this Section, the position vacated shall remain vacant until such time as a new Manager is designated and elected pursuant to the terms hereof. Upon delivery of any written notice designating or removing one or more Manager pursuant to this Section, the parties hereto and any Transferee shall either (i) sign a written consent, prepared for execution by the Members of the Company in accordance with this Agreement, which consent elects or removes the Manager(s) designated in writing to be elected or removed in accordance with this Section or (ii) at any annual or special Members meeting at which Manager(s) are to be elected or removed, vote in favor of the election or removal of the Manager(s) designated in writing to be elected or removed in accordance with this Section. If necessary to fix the total number of Managers at five (5), the parties hereto shall either (i) sign such written consents prepared for execution by the Members of the Company in accordance with this Agreement or (ii) at any annual or special Members meeting, vote in favor of such motions; which consents or motions propose to fix the total number of Manager at five (5). Each of the parties hereto agrees to take such actions, and execute such documents, agreements or instruments (including, without limitation, consents amending this Agreement), as may be necessary, due to changes in the law or otherwise, to ensure that the provisions of this Section 8.3 are given full effect. Section 8.4. General Powers. The business of the Company shall be managed by its Managers, which may, by the vote or written consent in accordance with this Agreement, exercise any and all powers of the Company and do any and all such lawful acts and things as are not by the Act, the Certificate of Formation or this Limited Liability Company Agreement directed or required to be exercised or done by the Members, including, but not limited to, contracting for or incurring on behalf of the Company debts, liabilities and other obligations, without the consent of any other person, except as otherwise provided herein. Section 8.5. Place of Meetings. The Managers of the Company may hold their meetings, both regular and special, either within or without the State of Delaware. Section 8.6. Annual Meetings. The annual meeting of the Managers shall be held without further notice immediately following the annual meeting of the Members, and at the same place, unless by unanimous consent of the Managers that such time or place shall be changed. Section 8.7. Regular Meetings. Regular meetings of the Managers may be held upon at least ten (10) days notice, but no more frequently than once each month, at such time and place as shall from time to time be determined by the Managers. No regular meeting or any action taken thereat shall be held void or invalid if such notice is not given to any Manager that (i) was in attendance at a meeting of the Managers which fixed the time, date and place of such regular meeting of the Managers; or (ii) waives notice of the regular meeting; or (iii) attends the regular meeting in person or by telephone conference call; or (iv) executes a consent to action taken at the meeting after having received the minutes of such regular meeting. Section 8.8. Special Meetings. Special meetings of the Managers may be called by any Manager on seven (7) days notice to each Manager, with such notice to be given personally, by mail or by telecopy, telegraph or mailgram. Section 8.9. Quorum and Voting. At all meetings of the Managers the presence of at least a majority of the number of Managers shall be necessary and sufficient to constitute a quorum for the transaction of business, and the affirmative vote of at least a majority of the Managers present at any meeting at which there is a quorum shall be the act of the Managers, except as may be otherwise specifically provided by the Act, the Certificate of Formation or this Agreement. If a quorum shall not be present at any meeting of Managers, the Managers present there may adjourn the meeting from time to time without notice other than announcement at the meeting, until a quorum shall be present. Section 8.10. Committees. The Managers may, by resolution passed by eighty percent (80%) of the Managers, designate committees, each committee to consist of two or more Managers (at least one of which must be a Manager designee of Prime and one of which must be a Manager designee of Other Members), which committees shall have such power and authority and shall perform such functions as may be provided in such resolution. Such committee or committees shall have such name or names as may be designated by the Managers and shall keep regular minutes of their proceedings and report the same to the Managers when required. 8.11 Expenses and Compensation. ------------------------- (a) The Managers shall be allowed and paid all reasonable and necessary expenses incurred in attending any meeting of the Managers. In determining whether specific items of expense are reasonable in amount, the Managers may from time to time establish policies as the type of airline travel and hotel accommodations for which reimbursement of expenses will be paid by the Company. (b) The Managers may fix the compensation of Managers for services to the Company as Managers, as members of a committee, or in any other capacity. Provided, however, that Managers shall not receive compensation for their services as Managers except as authorized and approved at a meeting of the Members at which at least two-third (2/3) of the total votes shall be in attendance, and only with the affirmative vote and approval at such meeting of at least a majority of the Members. Section 8.12. Action by Written Consent. Any action required or permitted to be taken at any meeting of the Managers or of any committee designated by the Managers may be taken without a meeting if written consent, setting forth the action so taken, is signed by all the Managers or of such committee, and such consent shall have the same force and effect as a unanimous vote at a meeting. Section 8.13. Meetings by Conference Telephone. Managers or members of any committee designated by the Managers may participate in and hold a meeting of the Managers or such committee by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation in such a meeting shall constitute presence in person at such meeting, except where a person participates in the meeting for the express purpose of objecting to the transaction of any business on the ground that the meeting is not lawfully called or convened. Section 8.14. Liability of Managers. No Manager of the Company shall be personally liable for any debts, liabilities, or obligations of the Company, including under a judgment, decree, or order of the court. Section 8.15. Specific Power of Managers. The Managers shall have the authority to enter into and execute all documents in relation to the formation of the Company including, but not limited to, issuance of the Certificate of Formation and this Limited Liability Company Agreement. ARTICLE IX. NOTICES Section 9.1. Form of Notice. Whenever under the provisions of the Act, the Certificate of Formation or this Limited Liability Company Agreement notice is required to be given to any Manager or Member, and no provision is made as to how such notice shall be given, notice shall not be construed to mean personal notice only, but any such notice may also be given in writing, by mail, postage prepaid, addressed to such Manager or Member at such address as appears on the books of the Company, or by telecopy, telegraph or mailgram. Any notice required or permitted to be given by mail shall be deemed to be given three (3) days after it is deposited, postage prepaid, in the United States mail as aforesaid. Section 9.2. Waiver. Whenever any notice is required to be given to any Manager or Member of the Company under the provision of the Act, the Certificate of Formation or this Limited Liability Company Agreement, a waiver thereof in writing signed by the person or persons entitled to such notice, whether signed before or after the time stated in such waiver, shall be deemed equivalent to the giving of such notice. ARTICLE X. OFFICERS Any Manager may also serve as an officer of the Company. The Managers may designate one or more persons who are not Managers of the Company to serve as officers and may designate the titles of all officers. The initial officers of the Company shall be: Ken Shifrin, Chairman of the Board; David P. Bates, President; Teena Belcik, Vice President and Treasurer; Cheryl Williams, Vice President, Secretary and Chief Financial Officer; and Brad Hummel, Vice President. Unless otherwise provided in a resolution of the Members or Managers the officers of the Company shall have the powers designated with respect to such offices under the Delaware Limited Liability Company Act, and any successor statute, as amended from time-to-time. ARTICLE XI. INDEMNITY Section 11.1. Indemnification. The Company shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative, arbitrative or investigative, any appeal in such an action, suit or proceeding and any inquiry or investigation that could lead to such an action, suit or proceeding (whether or not by or in the right of the Company), by reason of the fact that such person is or was a manager, officer, employee or agent of the Company or is or was serving at the request of the Company as a director, manager, officer, partner, venturer, proprietor, trustee, employee, agent or similar functionary of another company, employee benefit plan, other enterprise, or other entity, against all judgments, penalties (including excise and similar taxes), fines, settlements and reasonable expenses (including attorneys' fees and court costs) actually and reasonably incurred by him in connection with such action, suit or proceeding to the fullest extent permitted by any applicable law, and such indemnity shall inure to the benefit of the heirs, executors and administrators of any such person so indemnified pursuant to this Article XI. The right to indemnification under this Article XI shall be a contract right and shall not be deemed exclusive of any other right to which those seeking indemnification may be entitled under any law, bylaw, agreement, vote of members or disinterested managers or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office. Any repeal or amendment of this Article XI by the Managers (pursuant to Section 8.9 hereof) or by changes in applicable law shall, to the extent permitted by applicable law, be prospective only, and shall not adversely affect the indemnification of any person who may be indemnified at the time of such repeal or amendment. Section 11.2. Indemnification Not Exclusive. The rights of indemnification and reimbursement provided for in this Article XI shall not be deemed exclusive of any other rights to which any such Manager, officer, employee or agent may be entitled under the Certificate of Formation, this Limited Liability Company Agreement, agreement or vote of Members, or as a matter of law or otherwise. Section 11.3. Other Indemnification Clauses. Notwithstanding the foregoing, this Article XI shall not be construed to contradict the indemnification provisions of those certain Stock Purchase Agreements and related transaction documents, dated as of September 1, 1999 (the "Transaction Documents"), by and between Prime/BDR Acquisition, LLC, a Delaware limited liability company and certain of the shareholders of Horizon Vision Centers, Inc., a Nevada corporation, nor any contractual agreement between the parties thereto. Notwithstanding anything contained herein, this Article XI shall be ineffectual and shall not permit or require indemnification for all, or any, losses, costs, liabilities, claims or expenses arising, directly or indirectly, from any action or omission permitting or requiring indemnification under the Transaction Documents nor any other contractual agreement between the parties thereto; and in no event may any indemnity be allowed under this Agreement or pursuant to any provision of the Act for an amount paid or payable pursuant to the indemnification provisions of the Transaction Documents. ARTICLE XII. MISCELLANEOUS Section 12.1. Fiscal Year. The fiscal year of the Company shall be the calendar year. Section 12.2. Records. At the expense of the Company, the Managers shall maintain records and accounts of all operations of the Company. At a minimum, the Company shall keep at its principal place of business the following records: (a) A current list of the name and last known mailing address and Membership Interest of each Member; (b) A current list of the full name and business or residence address of each Manager; (c) A copy of the Certificate of Formation and Limited Liability Company Agreement of the Company, and all amendments thereto, together with executed copies of any powers of attorney; (d) Copies of the Federal, state, and local income tax returns and reports for the Company's six most recent tax years; and (e) Correct and complete books and records of account of the Company maintained using the accrual method of accounting. Section 12.3. Seal. The Company may by resolution of the Managers adopt and have a seal, and said seal may be used by causing it or a facsimile thereof to be impressed or affixed or in any manner reproduced. Any officer of the Company shall have authority to affix the seal to any document requiring it. Section 12.4. Agents. Every Manager and Officer is an agent of the Company for the purpose of the business. The act of a Manager or Officer, including the execution in the name of the Company of any instrument for carrying on in the usual way the business of the Company, binds the Company. Section 12.5. Checks. All checks, drafts and orders for the payment of money, notes and other evidences of indebtedness issued in the name of the Company shall be signed by such officer, officers, agent or agents of the Company and in such manner as shall from time to time be determined by resolution of the Managers. In the absence of such determination by the Mangers, such instruments shall be signed by the Treasurer or the Secretary and countersigned by the President or a Vice President of the Company, if the Company has such officers. Section 12.6. Deposits. All funds of the Company shall be deposited from time to time to the credit of the Company in such banks, trust companies or other depositories as the Managers may select. Section 12.7. Annual Statement. The Managers shall present at each annual meeting a full and clear statement of the business and condition of the Company. Section 12.8. Financial Statements. As soon as practicable after the end of each fiscal year of the Company, a balance sheet as at the end of such fiscal year, and a profit and loss statement for the period ended, shall be distributed to the Members, along with such tax information (including all information returns) as may be necessary for the preparation of each Member of its Federal, state and local income tax returns. The balance sheet and profit and loss statement referred to in the previous sentence may be as shown on the Company's federal income tax return. Section 12.9. Binding Arbitration. Any controversy between the parties regarding this Agreement and any claims arising out of this Agreement or its breach shall be submitted to arbitration by either party. The arbitration proceedings shall be conducted by a single arbitrator pursuant to the Commercial Arbitration Rules of the American Arbitration Association. The arbitration shall be conducted in Dallas, Texas and the arbitrator shall have the right to award actual damages and attorney fees and costs, but shall not have the right to award punitive, exemplary or consequential damages against either party. Section 12.10. Counterparts. This Agreement may be executed in several counterparts, each of which shall constitute an original and all of which together shall constitute one and the same instrument. Any party hereto may execute this Agreement by signing any one counterpart. ARTICLE XIII. AMENDMENTS Section 13.1. Amendments. This Agreement may be altered, amended or repealed and a new limited liability company agreement may be adopted, only in accordance with the provisions of Section 8.9, but otherwise at any regular meeting or at any special meeting called for that purpose, or by execution of a written consent in accordance with the provisions of Section 3.8. Section 13.2. When Limited Liability Company Agreement Silent. It is expressly recognized that when the Limited Liability Company Agreement is silent or in conflict with the requirements of the Act as to the manner of performing any Company function, the provisions of the Act shall control. Signature Page Follows S-3 049999.0999 AUSTIN 181503 v9 SIGNATURE PAGE TO LIMITED LIABILITY COMPANY AGREEMENT IN WITNESS WHEREOF, the undersigned Members hereby adopt this Limited Liability Company Agreement as the Limited Liability Company Agreement of the Company, effective as of the 1st day of April, 2000. PRIME: PRIME RVC, INC. By: Printed Name: Title: OTHER MEMBERS: David P. Bates III Jane A. Bates JOHN ROBERT GRIFFIN, M.D. FAMILY REVOCABLE TRUST DATED FEBRUARY 8, 1991 By: John Robert Griffin, M.D., Trustee Christian K. Kim, M.D. TRUST AGREEMENT DATED APRIL 12, 1989 By: Mark R. Mandel, M.D., Trustee D. Brent Reed, M.D. Carellyn S. Reed Bradley J. Sandler, M.D. SEVERIN FAMILY TRUST By: Sanford L. Severin, M.D., Trustee STEPHEN AND ANDREA TURNER FAMILY TRUST By: Stephen G. Turner, M.D., Trustee Stephen Wilmarth, M.D. Robin J. Wagner MEDICAL VISION TECHNOLOGY PROFIT SHARING PLAN, FOR THE BENEFIT OF STEPHEN WILMARTH, M.D. By: ________________________________ Stephen Wilmarth, M.D., Trustee A-1 049999.0999 AUSTIN 181503 v10 EXHIBIT A OWNERSHIP INTERESTS Name Ownership Percentage Prime RVC, Inc. 60.00% TOTAL 100.00% ======== EX-10.98 11 0011.txt EX 10.98 NON-COMPETITION AGREEMENT FOR HORIZON NON-COMPETITION AGREEMENT This Non-Competition Agreement (this "Agreement") is entered into as of April 1, 2000 (the "Effective Date"), by Horizon Vision Centers, L.L.C., a Delaware limited liability company ("Horizon"), for the benefit of Prime RVC, Inc., a Delaware corporation ("Prime RVC") and each of Prime RVC's affiliates (Prime RVC and all of its affiliates are referred to herein individually as a "Beneficiary" and collectively as "Beneficiaries"). RECITALS: WHEREAS, concurrently with the execution and delivery of this Agreement, Prime RVC and certain equity holders of Horizon are consummating that certain Limited Liability Company Agreement of Horizon, dated effective as of April 1, 2000 (the "LLC Agreement"). WHEREAS, Horizon will receive material, valuable benefits as a result of the consummation of the transactions contemplated by the LLC Agreement. WHEREAS, the parties acknowledge and agree that Prime RVC would not enter into the LLC Agreement unless Horizon entered into this Agreement. WHEREAS, in order to induce Prime RVC to enter into the LLC Agreement, Horizon has agreed to certain restrictions on the activities of Horizon and its Affiliates (as hereinafter defined), which restrictions Horizon deems reasonable and appropriate. NOW THEREFORE, in consideration of the premises and mutual covenants contained herein and for other good, valuable and binding consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound hereby, agree as follows: AGREEMENTS: 1. Confidentiality Agreement. Horizon agrees that it has been and may continue to be, through its relationship with Prime RVC, exposed to confidential information and trade secrets pertaining to, or arising from, the business of Prime RVC and/or each of Prime RVC's present or future affiliates (individually and collectively, "Discloser"), that such information and trade secrets are unique and valuable and that Discloser would suffer irreparable injury if this information or trade secrets were divulged to those in competition with Discloser. Therefore, Horizon agrees to keep in strict secrecy and confidence, both during and after the period during which Prime RVC owns any interest in Horizon, any and all information concerning Discloser which Horizon acquires, or to which Horizon has access through its relationship with Discloser, that has not been publicly disclosed by Discloser or that is not a matter of common knowledge by Discloser's competitors (collectively, "Proprietary Information"). The Proprietary Information covered by this Agreement shall include, but shall not be limited to, information relating to any inventions, processes, software, formulae, plans, devices, compilations of information, technical data, mailing lists, management strategies, business distribution methods, names of suppliers (of both goods and services) and customers, names of employees and terms of employment, arrangements entered into with suppliers and customers, including, but not limited to, proposed expansion plans of Discloser, marketing and other business and pricing strategies, and trade secrets of Discloser. Except with prior written approval of Discloser, Horizon will not: (i) directly or indirectly, disclose any Proprietary Information to any person except authorized personnel of Discloser or (ii) use Proprietary Information in any way. Within forty-eight (48) hours of the time at which Prime RVC's and its affiliates' aggregate voting equity interests in Horizon constitute less than fifty percent (50%) of the outstanding voting equity interests of Horizon, whether the disposition resulting in such ownership is voluntary or involuntary, Horizon will deliver to Prime RVC (without retaining copies thereof) all documents, records or other memorializations including copies of documents and any notes which Horizon has prepared, that contain Proprietary Information or relate to Discloser's business, all other tangible Proprietary Information in Horizon's possession or control, and all of Discloser's credit cards, keys, equipment, vehicles, supplies and other materials that are in possession or under Horizon's control. 2. Agreement by Horizon. Horizon hereby agrees that, until the fifth (5th) anniversary of the date of this Agreement, Horizon will not directly or indirectly, either through any kind of ownership (other than ownership of securities of a publicly held corporation of which it owns less than five percent (5%) of any class of outstanding securities), or as a principal, shareholder, agent, employer, employee, advisor, consultant, co-partner or in any individual or representative capacity whatever, either for its own benefit or for the benefit of any other person, corporation or other entity, without the prior written consent of Prime RVC, commit any of the following acts, which acts shall be considered violations of this covenant not to compete: (a) Except through Horizon, engage in or provide any services that are provided by Horizon, directly or indirectly, anywhere within a two hundred (200) mile radius of any center or facility at any time operated by Horizon or any of Horizon's affiliates, including, without limitation, any services related to, (i) the operating of laser refractive surgical centers, (ii) the manufacture, maintenance, refurbishing, repair, sale, or leasing of any equipment related to or necessary for the operating of laser refractive surgical centers, or (iii) providing any management services, training or consulting services related to any of the activities described in (i) or (ii); (b) Directly or indirectly request or advise any person, firm, physician, corporation or other entity having a business relationship with Prime RVC, or any affiliate or related entity of Prime RVC, to withdraw, curtail, or cancel its business with Prime RVC or such affiliate or related entity; or (c) Directly or indirectly hire any employee of Prime RVC, or any affiliate or related entity of Prime RVC, or induce or attempt to influence any employee of Prime RVC or any such affiliate or related entity to terminate his or her employment with Prime RVC or any such affiliate or related entity. 3. Agreement. Horizon has reviewed and carefully considered the provisions of this ARTICLE and, having done so, agrees that the restrictions applicable to it as set forth herein (a) are fair and reasonable with respect to time, geographic area and scope, (b) are not unduly burdensome to it, and (c) are reasonably required for the protection of the interests of the other parties hereto for whose benefit such restrictions were agreed upon. 4. Remedies. Horizon agrees that a violation on its part of any applicable covenant contained in this Agreement will cause the other parties hereto for whose benefit such restrictions were agreed upon irreparable damage for which remedies at law may be insufficient, and for that reason, Horizon agrees that the other parties shall be entitled as a matter of right to equitable remedies, including specific performance and injunctive relief, therefor. The right to specific performance and injunctive relief shall be cumulative and in addition to whatever other remedies, at law or in equity, that the other parties may have, including, specifically, recovery of additional damages. 5. Affiliates. For purposes of this Agreement, an "Affiliate" of Horizon means any corporation, partnership or other entity that, at the date hereof or at any time during the term hereof, is controlled by, or under common control with, Horizon. "Control" (and its derivatives), in this context, means the possession of, directly or indirectly, the power to direct or cause the direction of the management of the applicable corporation, partnership or other entity either through the ownership of voting securities (or other equity interests) or by contract. 6. Control of Affiliates' Actions. Horizon will timely exercise all of its rights and powers to cause each of its Affiliates to comply with the terms of this Agreement. 7. Indemnity. Horizon agrees to indemnify, defend and hold each Beneficiary harmless from and against any and all loss, damage, cost and expense (including attorneys' fees) that may result from any breach or threatened breach of this Agreement by Horizon or any Affiliate of Horizon. 8. Miscellaneous. (a) Amendments. This Agreement may be modified or amended only by an instrument in writing executed by Horizon and Prime RVC. (b) Headings. The headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. (c) Governing Law. This Agreement shall be construed and enforced in accordance with the internal laws of the State of Texas, and not the conflicts of law provisions thereof. (d) Parties Bound. This Agreement shall be binding upon and be enforceable against Horizon and Horizon's Affiliates, and their respective successors and representatives. This Agreement shall inure to the benefit of each Beneficiary and their respective successors, representatives and assigns. (e) Invalid Provisions. If any provision of this Agreement (including, without limitation, any provision relating to the activities covered by, or time period of, the covenants contained in Section 2 of this Agreement) is held to be illegal, invalid or unenforceable under present or future laws effective during the term hereof, such provision shall be fully severable; this Agreement shall be construed and enforced as if such illegal, invalid or unenforceable provision had never comprised a part hereof; and the remaining provisions shall remain in full force and effect and shall not be affected by the illegal, invalid or unenforceable provision or by its severance herefrom. Furthermore, in lieu of such illegal, invalid or unenforceable provision, there shall be added automatically as a part of this Agreement a provision as similar in terms to such illegal, invalid or unenforceable provision as may be possible and be legal, valid and enforceable. (f) Construction. This Agreement shall be construed without regard to the identity of the person who drafted the various provisions of this Agreement. Each and every provision of this Agreement shall be construed as though all of the parties participated equally in the drafting of this Agreement. Consequently, Horizon acknowledges and agrees that any rule of construction that a document is to be construed against the drafting party shall not be applicable to this Agreement. [Signature page follows] S-1 SIGNATURE PAGE TO NON-COMPETITION AGREEMENT EXECUTED to be effective as of the date first above written. HORIZON: Horizon Vision Centers, L.L.C. Signature: Printed Name: Title: EX-10.99 12 0012.txt EX 10.99 1ST AD. TO ASSIGN. AND SEC. AGMT.-HORIZON FIRST AMENDMENT TO ASSIGNMENT AND SECURITY AGREEMENT THIS FIRST AMENDMENT TO ASSIGNMENT AND SECURITY AGREEMENT (this "Agreement") is made and entered into as of the 1st day of April, 2000, by and between Prime Medical Operating, Inc., a Delaware corporation ("PMOI"), Prime RVC, Inc., a Delaware corporation ("Prime RVC"), as assignee of Prime/BDR Acquisition, L.L.C., a Delaware limited liability company ("Prime BDR") (PMOI and Prime RVC are referred to herein, jointly and severally, as "Secured Party") and David P. Bates and Jane A. Bates (collectively referred to as the "Debtor"). Unless otherwise defined herein, capitalized terms used herein shall have the meanings ascribed to them in that certain Assignment and Security Agreement, dated effective as of September 1, 1999, among PMOI and Prime RVC as assignee of Prime BDR (the "Assignment and Security Agreement"). Preliminary Statements Debtor and Secured Party have executed and delivered that certain Stock Purchase Agreement dated as of September 1, 1999 (the "Stock Purchase Agreement"), pursuant to which Secured Party purchased from Debtor certain shares of the $0.01 par value common stock of Horizon Vision Center, Inc, a Nevada corporation (the "Existing Center"). Debtor pledged the collateral to secure certain obligations and liabilities that Debtor may now or hereafter have to Secured Party, including, without limitation, any indemnity obligations arising under the Stock Purchase Agreement. The shareholders of the Existing Center, including Debtor, have determined that it is in their best interests that they, together with Prime RVC, organize and own Horizon Vision Centers, L.L.C., a Delaware limited liability company (the "New Center") for the purpose of operating new vision centers that will provide refractive surgery and related services in the Northern and Central California area. In connection with the formation of the New Center, Debtor has agreed to pledge all of its ownership interest in the New Center as additional collateral pursuant to the terms and conditions of the Assignment and Security Agreement. Statement of Agreement NOW, THEREFORE, in consideration of the premises and mutual covenants contained herein and for other good, valuable and binding consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound hereby, agree as follows: Section 1. Amendments, Additions and Deletions to Agreement. ------------------------------------------------ a. The parties to this Agreement hereby agree to amend Section 1.1(a) of the Assignment and Security Agreement to read in its entirety as follows: (a) Shares. From and after the date of this Agreement, (i) all shares of the common stock of Horizon Vision Centers, Inc., a Nevada corporation, and all membership interests of Horizon Vision Centers, L.L.C., a Delaware limited liability company, owned or acquired in any manner by Debtor (collectively, the "Shares"), (ii) any replacements, substitutions, or exchanges of the certificates representing the Shares, and (iii) any and all options, rescission rights, registration rights, conversion rights, subscription rights, contractual or quasi-contractual rights, warrants, redemption rights, redemption proceeds, calls, preemptive rights and all other rights and benefits pertaining to the Shares; Section 2. Effect on Existing Agreements. This Agreement is incorporated into the Assignment and Security Agreement by reference. Other than as provided in this Agreement, the Assignment and Security Agreement has not been modified or amended and is in full force and effect. Equity Holder hereby affirms that it remains a party to the Assignment and Security Agreement (as amended by this Agreement) after the execution of this Agreement. This Agreement may be executed in a number of identical counterparts which, taken together, shall constitute collectively one and the same agreement. [Signature page follows] S-1 043838.0009 AUSTIN 189916 v1 SIGNATURE PAGE TO FIRST AMENDMENT TO ASSIGNMENT AND SECURITY AGREEMENT IN WITNESS WHEREOF, the parties hereto have duly executed this Amendment as of the day and year first above written. DEBTOR: David P. Bates, III Jane A. Bates SECURED PARTY: PRIME MEDICAL OPERATING, INC. By:_________________________________ Teena Belcik, Treasurer PRIME/BDR ACQUISITION, L.L.C. By:_________________________________ Teena Belcik, Treasurer PRIME RVC, INC. By:_________________________________ Teena Belcik, Treasurer EX-10.100 13 0013.txt EX 10.100 SPECIMEN OF CONSENT-HORIZON CONSENT AND AGREEMENT This Consent and Agreement (this "Agreement") is entered into as of the 1st day of April, 2000, by the undersigned shareholder ("Equity Holder") of Horizon Vision Centers, Inc., a Nevada corporation (the "Existing Center"), for the benefit of the Existing Center, Horizon Vision Centers, L.L.C., a Delaware limited liability company (the "New Center"), Prime RVC, Inc., a Delaware corporation ("Prime RVC") and the parent companies and affiliates of each of the Existing Center, the New Center and Prime RVC. As used in this Agreement, "Equity Holder" shall, in the case of a shareholder of the Existing Center that is not an individual physician, refer also to the individual physician affiliated with such shareholder of the Existing Center, both of whom are parties to this Agreement. Preliminary Statements Equity Holder desires to acknowledge and consent to the assignment by Prime BDR to Prime RVC of any and all rights that Prime BDR may have pursuant to all contracts or agreements executed by Equity Holder in connection with Equity Holder's prior sale of stock of the Existing Center to Prime BDR, including, without limitation, the related stock purchase agreement, assignment and security agreement, and financing statement, as applicable (collectively, the "Acquisition Documents"). Equity Holder desires to acknowledge and consent, in its respective capacities as a shareholder, member and (as applicable) officer of the Existing Center and the New Center, to the assignment by the Existing Center to the New Center of certain assets and the assumption by the New Center of certain obligations related to those assets. The shareholders of the Existing Center, including Equity Holder, have determined that it is in their best interests that they, together with Prime RVC, organize and own the New Center for the purpose of operating new vision centers that will provide refractive surgery and related services in the Northern and Central California area. In order to operate the New Center, the parties to this Agreement deem it necessary to amend that certain Stock Purchase Agreement, dated effective as of September 1, 1999, among Equity Holder, Prime/BDR Acquisition, L.L.C., a Delaware limited liability company ("Prime BDR") and the Existing Center (the "Stock Purchase Agreement"), to allow Equity Holder and other physicians to use the Refractive Surgery Services of the New Center. Statement of Agreement NOW, THEREFORE, in consideration of the premises and mutual covenants contained herein and for other good, valuable and binding consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound hereby, agree as follows: Section 1. [This Section intentionally left blank] Section 2. Amendments to Stock Purchase Agreement. The parties to this Agreement hereby agree to amend Section 8.2(a) of the Stock Purchase Agreement to read in its entirety as follows: (a) Except through the Company, engage in or provide any services that are provided by the Company, directly or indirectly, anywhere within a two hundred (200) mile radius of any center or facility at any time operated by the Company or any of the Company's affiliates, including, without limitation, any services related to, (i) the operating of laser refractive surgical centers, (ii) the manufacture, maintenance, refurbishing, repair, sale, or leasing of any equipment related to or necessary for the operating of laser refractive surgical centers, or (iii) providing any management services, training or consulting services related to any of the activities described in (i) or (ii); Section 3. Consent to Assignment. Notwithstanding any provisions of the Acquisition Documents to the contrary, Equity Holder hereby consents, in its respective capacities as a shareholder, member and (as applicable) officer of the Existing Center and the New Center, to: (a) the assignment by Prime BDR to Prime RVC of the Acquisition Documents, and any and all rights that Prime BDR might have arising under or related to the Acquisition Documents; (b) the New Center's execution and delivery of the Non-Competition Agreement attached as Exhibit A to this Agreement; (c) the Existing Center's and New Center's execution, delivery and performance of the Assignment and Assumption Agreement attached as Exhibit B to this Agreement. Equity Holder hereby ratifies any action taken by the Existing Center or the New Center prior to the date of this Agreement to the extent such action would have been properly authorized pursuant to this Agreement. Equity Holder hereby agrees to take such other actions, including the execution and delivery of such other documents or instruments, as may reasonably be requested by another party to this Agreement in order to fully carry out the intent of the provisions of this Agreement. Section 4. Effect on Existing Agreements. This Agreement is hereby incorporated into the Exclusive Use Agreement and the Stock Purchase Agreement by reference. Other than as provided in this Agreement, neither the Exclusive Use Agreement nor the Stock Purchase Agreement has been modified or amended and each is in full force and effect. Equity Holder hereby affirms that it is or remains a party to the Exclusive Use Agreement and the Stock Purchase Agreement (each as amended by this Agreement) after the execution of this Agreement. This Agreement may be executed in a number of identical counterparts which, taken together, shall constitute collectively one and the same agreement. [Signature page to follow] S-1 043838.0009 AUSTIN 189946 v1 SIGNATURE PAGE TO CONSENT AND AGREEMENT IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the day and year first above written. EQUITY HOLDER: Signature: David P. Bates III Signature: Jane A. Bates EXISTING CENTER: Horizon Vision Centers, Inc. Teena Belcik, Treasurer NEW CENTER: Horizon Vision Centers, L.L.C. Teena Belcik, Treasurer PRIME BDR: Prime/BDR Acquisition, L.L.C. Teena Belcik, Treasurer PRIME RVC: Prime RVC, Inc. Teena Belcik, Treasurer EX-10.101 14 0014.txt EX 10.101 CONTRIBUTION AGREEMENT - MANN BERKELEY CONTRIBUTION AGREEMENT AMONG PRIME MBC, L.L.C., MBC HOLDING COMPANY, L.L.C., MANN BERKELEY EYE CENTER, P.A., PAUL MICHAEL MANN, M.D., RALPH G. BERKELEY, M.D., MICHAEL B. CAPLAN, M.D., MARK F. MICHELETTI AND PRIME RVC, INC. DATED March 1, 2000 3 043838.0000 AUSTIN 161222 v11 043838.0000 AUSTIN 161222 v11 CONTRIBUTION AGREEMENT This Contribution Agreement (this "Agreement") is entered into to be effective as of March 1, 2000 (the "Effective Time"), among Prime RVC, Inc., a Delaware corporation ("Prime"), Prime MBC, L.L.C., a Delaware limited liability company ("Newco"), MBC Holding Company, L.L.C., a Texas limited liability company ("Target Center"), Mann Berkeley Eye Center, P.A., a Texas professional association ("MBEC"), Paul Michael Mann, M.D. ("Mann"), Ralph G. Berkeley, M.D. ("Berkeley"), Michael B. Caplan, M.D. ("Caplan") and Mark F. Micheletti ("Micheletti"). Target Center, Mann, Berkeley, Caplan and Micheletti are also sometimes referred to collectively herein as the "Sellers" and individually as a "Seller". Mann, Berkeley and Caplan are also sometimes referred to collectively herein as the "Physicians" and individually as the "Physician". The parties hereto agree as follows: ARTICLE I AGREEMENT OF PURCHASE AND SALE 1.1 Agreement. Upon the basis of the representations and warranties, for the consideration, and subject to the terms and conditions set forth in this Agreement, (a) Prime agrees to purchase, as of the Effective Time, from Target Center, an undivided sixty percent (60%) interest in (i) the Assets (as hereinafter defined) and (ii) the business conducted using the Assets, excluding the practice of medicine in all cases (the "Business"), for $3,765,000 in cash (the "Purchase Price"), together with warrants, in substantially the form attached hereto as Exhibit A (the "Warrants"), entitling Target Center to purchase 27,000 shares of $0.01 par value common stock of Prime Medical Services, Inc., a Delaware corporation ("PMSI"); (b) Prime agrees to contribute to Newco, as of the Effective Time, the undivided sixty percent (60%) interest in the Assets and Business purchased by Prime, and will receive a sixty percent (60%) ownership interest in Newco; (c) Target Center agrees to contribute, as of the Effective Time, the remaining undivided forty percent (40%) interest in the Assets and Business to Newco. The Purchase Price will be allocated to the Assets in accordance with Schedule 1.1 attached hereto. The parties agree that: (y) immediately prior to the Closing, all of the outstanding membership interests of Newco shall be owned by Target Center, and, immediately after the Closing, Prime shall own sixty percent (60%) of all of the outstanding membership interests of Newco, and Target Center shall own forty percent (40%) of all of the outstanding membership interests of Newco; and (z) prior to the Effective Time, Prime and Target Center shall have executed the limited liability company agreement, in the form attached hereto as Exhibit B, and any other organizational documents of Newco; The organizational documents of Newco are hereinafter collectively referred to as the "Organizational Documents". 1.2 Closing. The closing of the transactions contemplated by Section 1.1 (the "Closing") shall take place at the offices of Akin, Gump, Strauss, Hauer & Feld, L.L.P., 1900 Frost Bank Plaza, 816 Congress Avenue, Austin, Texas 78701, or at such other location as the parties may agree. The date on which the Closing occurs is hereinafter referred to as the "Closing Date". 1.3 Assets. The term "Assets" shall mean the items listed on Schedule 1.3 attached hereto, all Permits (as hereinafter defined), all business records of Refractive Surgery (as hereinafter defined) and the Business, Working Capital (as defined in Section 3.17) of at least $25,000, all contract rights of Target Center under leases (including rights to receive returns of deposits under such leases) or contracts listed on Schedule 1.3 and all of the business and goodwill of Refractive Surgery and the Business. Each of the Sellers hereby represents and warrants that the Assets include all of the equipment, instruments, computer software used in connection with the equipment, Permits, personal property, furniture, business records and other assets of Target Center that are used primarily in or are materially relied on for the conduct of Refractive Surgery and the Business by the Target Center. Notwithstanding any provision contained herein to the contrary, the term "Assets" and "Business" shall only refer to those assets or business utilized in or related to the operations of Target Center in Austin, Texas. As used in this Agreement, "Refractive Surgery" shall mean, collectively, any current and/or future surgical procedures intended to correct refractive error, including, without limitation, myopia, hyperopia, presbyopia or astigmatism of the eye. Notwithstanding anything in this Agreement to the contrary, "Refractive Surgery" shall not include any specific procedure that, at the time the procedure is to be performed, is required in the exercise of a physician's independent professional judgment as to the individual patient, to be performed in an operating room approved by the American Association of Ambulatory Surgical Centers or Joint Commission on Accreditation of Healthcare Organizations (or any similar or successor accreditation board or body) with the capability of general anesthesia, in each instance within either an ambulatory surgical center or acute care hospital that is, in either case, licensed by the State of Texas (provided, however, that this sentence shall not in the future exclude from "Refractive Surgery" any surgical procedure that was included in the definition of "Refractive Surgery" at the Effective Time, and if any applicable future regulatory change occurs that would result in such a reclassification, the parties to this Agreement will work together to restructure the operating mechanics of their relationship in a manner that allows the operations of the Business to comply with such regulatory change and also preserves the economic benefits of the parties arising under this Agreement and the other Transaction Documents). Notwithstanding the foregoing, the following shall not be "Assets" and shall be retained by Target Center: (a) all activities that constitute the practice of medicine; (b) the books of account and record books of Target Center (complete and accurate copies of which, insofar as they relate to the Business during the calendar years 1998 and 1999, shall be provided to Prime on or before the Closing Date); (c) Target Center's rights under this Agreement; and (d) assets that are neither used in, nor relied on for, the conduct of Refractive Surgery. 1.4 Assumed Liabilities. At the Closing, Newco shall only assume those trade payables on open account incurred in the ordinary course of Target Center's business since February 1, 2000 from unrelated parties. Such limited assumption shall be pursuant to that certain general conveyance, assignment and transfer of assets and assumption of liabilities, attached hereto as Exhibit C (the "Assignment and Assumption Agreement") to be executed by Newco, Prime and Target Center at the Closing, effective as of the Effective Time. With respect to any lease or other contract obligations reflected on Schedule 1.4, it is agreed that Newco will only be assuming obligations thereunder which accrue after the Effective Time, and will have no responsibility whatsoever for any breaches or defaults which occurred prior to the Closing Date, or for obligations accruing prior to the Effective Time. Except for those liabilities and obligations specifically assumed by Newco as provided above, any and all debts, liabilities, and obligations of Target Center, whether known or unknown, absolute, contingent or otherwise (including, but not limited to, federal, state, and local taxes, any sales taxes, use taxes and property taxes, any taxes arising from the transactions contemplated by this Agreement and any liabilities arising from any litigation or civil, criminal or regulatory proceeding involving or related to Target Center or its business) shall remain the sole responsibility of Target Center and Target Center covenants to pay promptly all such debts and liabilities and to fulfill all such obligations as and when the same become due. Notwithstanding any provision of this Agreement, Newco and Prime do not assume any debts, obligations or liabilities of Target Center whatsoever, except for those trade payables described in the first sentence of this Section. 1.5 Payment of Purchase Price. The Purchase Price shall be paid in immediately available funds at the Closing. ARTICLE II Representations and Warranties of Prime Prime represents and warrants to the Sellers that each of the following matters is true and correct in all respects as of the Closing (with the understanding that the Sellers are relying materially on such representations and warranties in entering into and performing this Agreement): 2.1 Due Organization and Principal Executive Office. Prime is a corporation duly organized, validly existing, and in good standing under the laws of the State of Delaware and has full corporate power and authority to carry on its business as now conducted and as proposed to be conducted. Prime is a wholly-owned subsidiary of PMSI. Prime's principal executive offices are located at 1301 Capital of Texas Highway, Austin, Texas 78746. 2.2 Due Authorization. Prime has full corporate power and authority to enter into and perform this Agreement and each other agreement, instrument and document required to be executed by Prime in connection herewith. This Agreement and each other agreement, instrument, and document required herein to be executed by Prime have been duly and validly authorized, executed and delivered by Prime and constitute the valid and binding obligations of Prime enforceable against it in accordance with its terms. The execution, delivery, and performance of this Agreement and each other agreement, instrument, and document required herein to be executed by Prime will not (a) violate any federal, state, county, or local law, rule, or regulation applicable to Prime or its properties, (b) violate or conflict with, or permit the cancellation of, any agreement to which Prime is a party or by which it or its properties are bound, (c) permit the acceleration of the maturity of any indebtedness of, or any indebtedness secured by the property of, Prime or (d) violate or conflict with any provision of the organizational documents of Prime. No action, consent, or approval of, or filing with, any federal, state, county, or local governmental authority is required by Prime in connection with the execution, delivery or performance of this Agreement (or any agreement, instrument or other document executed in connection herewith by Prime). 2.3 Brokers and Finders. Prime has not engaged, or caused to be incurred any liability to, any finder, broker, or sales agent (and has not paid, and will not pay, any finder's fee or similar fee or commission to any person) in connection with the execution, delivery, or performance of this Agreement or the transactions contemplated hereby. 2.4 Claims and Proceedings. Prime is not a party to any claims, actions, suits, proceedings, or investigations, at law or in equity, before or by any court, municipal or other governmental department, commission, board, agency, or instrumentality which seeks to restrain or prohibit the carrying out of the transactions contemplated by this Agreement or to challenge the validity of such transactions or any part thereof or seeking damages on account thereof; and, to the knowledge of Prime, no such claim, action, suit, proceeding or investigation is threatened. 2.5 Investment Representations. Prime: -------------------------- (a) Is an "accredited investor," and has not retained or consulted with any "purchaser representative" (as such terms are defined in Rule 501 of Regulation D promulgated under the Securities Act of 1933, as amended (the "Securities Act")) in connection with its execution of this Agreement and the consummation of the transactions contemplated hereby; (b) Has such knowledge and experience in financial and business matters that it is capable of evaluating the merits and risks of an investment in Newco; (c) Will acquire any Newco interests for its own account for investment and not with the view toward resale or redistribution in a manner which would require registration under the Securities Act, the Texas Securities Act, as amended, or the securities laws of any other state, and it does not presently have any reason to anticipate any change in its circumstances or other particular occasion or event which would cause it to sell its Newco interests, or any part thereof or interest therein, and it has no present intention of dividing the Newco interests with others or reselling or otherwise disposing of the Newco interests or any part thereof or interest therein either currently or after the passage of a fixed or determinable amount of time or upon the occurrence or nonoccurrence of any predetermined event or circumstance; (d) In connection with entering into this Agreement and the Transaction Documents to which it is a party, and in making the investment decisions associated therewith, it has neither received nor relied on any representations or warranties from Newco, the Sellers, the affiliates of the foregoing or the officers, directors, shareholders, employees, partners, members, agents, consultants, personnel or similarly related parties of any of the foregoing, other than those representations and warranties contained in this Agreement; (e) Is able to bear the economic risk of an investment in the Newco interests and it has sufficient net worth to sustain a loss of its entire investment without material economic hardship if such a loss should occur; and (f) Acknowledges that the Newco interests have not been registered under the Securities Act, or the securities laws of any of the states of the United States, that an investment in the Newco interests involves a high degree of risk, and that the Newco interests are an illiquid investment. 2.6 Securities Laws Compliance. Prime shall remain responsible for assuring that Newco complies with all securities laws, both state and federal, and that Newco makes all necessary disclosures as required by such securities laws. ARTICLE III Representations and Warranties of Sellers The Sellers each, jointly and severally, hereby represent and warrant to Prime that each of the following matters is true and correct in all respects as of the Closing Date (with the understanding that Prime is relying materially on each such representation and warranty in entering into and performing this Agreement), which representations and warranties shall also be deemed made as of the Effective Time and which shall survive the Closing: 3.1 Due Organization. Target Center is a limited liability company duly organized, validly existing, and in good standing under the laws of the State of Texas and has full power and authority to carry on its business as now conducted and as proposed to be conducted. Mann, Berkeley, Caplan and Micheletti are the only owners of Target Center, and their respective ownership interests are set forth on Schedule 3.1. No other person or entity has any right to acquire any ownership interest in Target Center. Complete and correct copies of the Articles of Organization, the Regulations, all managers' resolutions and all members' resolutions of Target Center, and all amendments thereto, have been delivered to Prime. Target Center is qualified to do business and is in good standing in the states set forth on Schedule 3.1 attached hereto, which states represent every jurisdiction where such qualification is required for the conduct of Target Center's business as conducted on the Closing Date. 3.2 Subsidiaries. Target Center does not directly or indirectly have (or possess any options or other rights to acquire) any subsidiaries or any direct or indirect ownership interests in any person, business, corporation, partnership, limited liability company, association, joint venture, trust, or other entity. 3.3 Due Authorization. Each Seller has full power and authority to enter into and perform this Agreement and each other agreement, instrument, and document required to be executed by such Seller in connection herewith. The execution, delivery, and performance of this Agreement and such other agreements, instruments, and documents have been duly authorized by all necessary action of Target Center, its managers and its members. This Agreement has been duly and validly executed and delivered by the Sellers and constitutes a valid and binding obligation of the Sellers enforceable against them in accordance with its terms. The execution, delivery, and performance of this Agreement, and each other agreement, instrument and document required herein to be executed by the Sellers does not (a) violate any federal, state, county, or local law, rule, or regulation applicable to the Sellers, the Sellers' business or the Assets, (b) violate or conflict with, or permit the cancellation of, any agreement to which any of the Sellers is a party, or by which any Seller or its properties are bound, or result in the creation of any lien, security interest, charge, or encumbrance upon any of such properties, (c) permit the acceleration of the maturity of any indebtedness of, or any indebtedness secured by the property of, Target Center, or (d) violate or conflict with any provision of the Articles of Organization or Regulations of Target Center. No action, consent, waiver or approval of, or filing with, any federal, state, county or local governmental authority is required by any of the Sellers in connection with the execution, delivery, or performance of this Agreement (or any agreement or other document executed in connection herewith). 3.4 Financial Statements. The unaudited balance sheet and income statement of Target Center as of and for each of the years ended December 31, 1998 and 1999, and the unaudited balance sheet and income statement of Target Center as of and for the month ended January 31, 2000 (collectively, the "Financial Statements") are attached hereto as Exhibit D. The Financial Statements have been prepared in accordance with generally accepted accounting principles consistently applied ("GAAP") (except as specifically noted therein or in Schedule 3.4) and fairly present the financial position and results of operations of Target Center as of the indicated dates and for the indicated periods. Except as disclosed in Schedule 3.4 and except to the extent specifically and fully reflected in the Financial Statements (including the notes thereto), Target Center has no liabilities of a type that would be required to be reflected as such in the Financial Statements (including the notes thereto) other than current liabilities on open account incurred in the ordinary course of business consistent with past practices. Except as set forth in Schedule 3.4 hereto, since January 1, 1999, there has been no material adverse change in the financial position, assets, results of operations, or business of Target Center. 3.5 Conduct of Business; Certain Actions. Except as set forth on Schedule 3.5 attached hereto, since January 1, 1999, Target Center has conducted its Business and operations of the Business in the ordinary course and consistent with its past practices and has not, with respect to or in a manner affecting the Business (a) purchased or retired any indebtedness from any Seller, purchased, retired, or redeemed any membership interest from any Seller, or engaged in any other transaction that involves or requires distributions of money or other assets from Target Center to any Seller if such other transaction is not done in the ordinary course of business and is not consistent with past practices of Target Center, (b) increased the compensation of any of the Sellers or of any officers, employees, agents, contractors, vendors or other parties, except for wage and salary increases made in the ordinary course of business and consistent with the past practices of Target Center, (c) made capital expenditures exceeding $2,000 individually or $5,000 in the aggregate, (d) sold any asset (or any group of related assets) in any transaction (or series of related transactions) in which the purchase price or book value for such asset (or group of related assets) exceeded $2,000, (e) discharged or satisfied any lien or encumbrance or paid any obligation or liability, absolute or contingent, other than current liabilities incurred and paid in the ordinary course of business, (f) made or guaranteed any loans or advances to any party whatsoever, (g) suffered or permitted any lien, security interest, claim, charge, or other encumbrance to arise or be granted or created against or upon any of its assets, real or personal, tangible or intangible, (h) canceled, waived, or released any of Target Center's debts, rights, or claims against third parties, (i) amended its Articles of Organization or Regulations, (j) made or paid any severance or termination payment to any employee or consultant, (k) made any change in its method of accounting, (l) made any investment or commitment therefor in any person, business, corporation, association, partnership, limited liability company, joint venture, trust, or other entity, (m) made, entered into, amended, or terminated any written employment contract, created, made, amended, or terminated any bonus, stock option, pension, retirement, profit sharing, or other employee benefit plan or arrangement, or withdrawn from any "multi-employer plan" (as defined in the Internal Revenue Code of 1986, as amended (the "Code")) so as to create any liability under ERISA (as hereinafter defined) to any person or entity, (n) amended, terminated or experienced a termination of any material contract, agreement, lease, franchise, or license to which it is a party, (o) made any distributions, in cash or in kind, to the Sellers, its owners, or to any person or entity related to or affiliated therewith, in any capacity, except such distributions as are made in the ordinary course of Target Center's business consistent with past practices, (p) entered into any other material transactions except in the ordinary course of business, (q) entered into any contract, commitment, agreement, or understanding to do any acts described in the foregoing clauses (a)-(p) of this Section, (r) suffered any material damage, destruction, or loss (whether or not covered by insurance) to any assets, (s) experienced any strike, slowdown, or demand for recognition by a labor organization by or with respect to any of its employees, or (t) experienced or effected any shutdown, slow-down, or cessation of any operations conducted by, or constituting part of, Target Center. 3.6 Ownership of Assets; Licenses, Permits, etc. Target Center has good and marketable title to all of the Assets listed on Schedule 1.3 free and clear of all liens, security interests, claims and encumbrances of any kind whatsoever, except for those encumbrances specifically set forth on Schedule 3.6. The Assets include all property and assets, real, personal and mixed, tangible and intangible, including leases and other contracts, which are required for, or used in connection with, the operation of Target Center as currently conducted. The Assets are in good operating condition and repair, subject to ordinary wear and tear, taking into account the respective ages of the properties involved and are adequate for the conduct of Target Center's business. Attached hereto as Schedule 3.6 is a list and description of all federal, state, county, and local governmental licenses, certificates, certificates of need, permits, waivers, filings and orders held or applied for by Target Center and used or relied on (or to be used or relied on) in connection with the Assets or the Business ("Permits"). Target Center has complied in all material respects, and Target Center is in compliance in all material respects, with the terms and conditions of any such Permits. To the best knowledge of Sellers, no additional Permit is required from any federal, state, county, or local governmental agency or body thereof in connection with the conduct of the business of Target Center. No claim has been made by any governmental authority (and, to the knowledge of the Sellers, no such claim has been threatened) to the effect that a Permit not possessed by Target Center is necessary in respect of the business conducted by Target Center. All of the Permits noted on the attached Schedule 3.6 are freely assignable to Prime and Newco. 3.7 Environmental Issues. -------------------- (a) For purposes of this Agreement, the term "environmental laws" shall mean all laws and regulations relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport, or handling, or the emission, discharge, or release, of any pollutant, contaminant, chemical, or industrial toxic or hazardous substance or waste, and any order related thereto, affecting the Assets or the Business. (b) Target Center has complied in all material respects with and obtained all authorizations and made all filings required by all applicable environmental laws. During Target Center's operation and ownership of the properties occupied or used by Target Center, such properties, to the best knowledge of Sellers, have not been contaminated with any hazardous wastes, hazardous substances, or other hazardous or toxic materials in violation of any applicable environmental law, the violation of which could have a material adverse impact on the business or financial position of Target Center. (c) Target Center has not received any notice from the United States Environmental Protection Agency that it is a potentially responsible party under the Comprehensive Environmental Response, Compensation and Liability Act ("Superfund Notice"), any citation from any federal, state or local governmental authority for non-compliance with its requirements with respect to air, water or environmental pollution, or the improper storage, use or discharge of any hazardous waste, other waste or other substance or other material pertaining to its business ("Citations") or any written notice from any private party alleging any such non-compliance; and there are no pending or unresolved Superfund Notices, Citations or written notices from private parties alleging any such non-compliance. 3.8 Intellectual Property Rights. There are no patents, trademarks, trade names, or copyrights, and no applications therefor, owned by or registered in the name of Target Center or in which Target Center has the sole right, license, or interest. Target Center is not a party to any license agreement, either as licensor or licensee, with respect to any patents, trademarks, trade names, or copyrights. Target Center has not received any notice that it is infringing any patent, trademark, trade name, or copyright of others. Target Center and its affiliates may continue to use any such intellectual property, as permitted by this Agreement, and any such intellectual property is irrevocably licensed for use royalty free by Target Center and its affiliates to Newco. 3.9 Compliance with Laws. With respect to the Assets and the Business, Target Center has complied in all material respects, and Target Center is in compliance in all material respects, with all federal, state, county, and local laws, rules, regulations and ordinances currently in effect. No claim has been made or threatened by any governmental authority against Target Center to the effect that the business conducted by Target Center fails to comply in any respect with any law, rule, regulation, or ordinance. 3.10 Insurance. Attached hereto as Schedule 3.10 is a list of all policies of fire, liability, business interruption, and other forms of insurance (including, without limitation, professional liability insurance) and all fidelity bonds held by or applicable to Target Center at any time within the past three (3) years, which schedule sets forth in respect of each such policy the policy name, policy number, carrier, term, type of coverage, deductible amount or self-insured retention amount, limits of coverage, and annual premium. To the knowledge of Sellers, no event directly relating to Target Center has occurred which will result in a retroactive upward adjustment of premiums under any such policies or which is likely to result in any prospective upward adjustment in such premiums. There have been no material changes in the type of insurance coverage maintained by Target Center during the past three (3) years, including without limitation any change which has resulted in any period during which Target Center had no insurance coverage. Excluding insurance policies which have expired and been replaced, no insurance policy of Target Center has been canceled within the last three (3) years and no threat has been made to cancel any insurance policy of Target Center within such period. 3.11 Employee Benefit Matters. Except as set forth on Schedule 3.11, Target Center does not maintain nor does it contribute nor is it required to contribute to any "employee welfare benefit plan" (as defined in section 3(1) of the Employee Retirement Income Security Act of 1974 (and any sections of the Code amended by it) and all regulations promulgated thereunder, as the same have from time to time been amended ("ERISA")) or any "employee pension benefit plan" (as defined in ERISA). Target Center does not presently maintain and has never maintained, or had any obligation of any nature to contribute to, a "defined benefit plan" within the meaning of the Code. 3.12 Contracts and Agreements. Attached hereto as Schedule 3.12 is a list of all written or oral contracts, commitments, leases, and other agreements (including, without limitation, all promissory notes, loan agreements, and other evidences of indebtedness, mortgages, deeds of trust, security agreements, pledge agreements, service agreements, and similar agreements and instruments and all confidentiality agreements) that relate to or affect the Assets or the Business, to which Target Center is a party or by which Target Center or its properties are bound, pursuant to which the obligations thereunder of any party thereto are, or are contemplated as being, in respect of any such individual contracts, commitments, leases, or other agreements during any year during the term thereof, $25,000 or greater, or which are otherwise material to the business of Target Center (collectively the "Contracts" and individually, a "Contract"). Target Center is not and, to the best knowledge of Sellers, no other party thereto is in default (and no event has occurred which, with the passage of time or the giving of notice, or both, would constitute a default by Target Center or, to the best knowledge of Sellers, by any other party thereto) under any Contract. Target Center has not waived any material right under any Contract, and no consents or approvals (other than those obtained in writing and delivered to Prime prior to Closing) are required under any Contract in connection with the sale of the Assets or the consummation of the transactions contemplated hereby. Target Center has not guaranteed any obligation of any other person or entity. 3.13 Claims and Proceedings. Attached hereto as Schedule 3.13 is a list and description of all claims, actions, suits, proceedings, and investigations pending or, to the knowledge of the Sellers, threatened against Target Center that affect or relate to the Assets or the Business, at law or in equity, or before or by any court, municipal or other governmental department, commission, board, agency, or instrumentality. Except as set forth on Schedule 3.13 attached hereto, none of such claims, actions, suits, proceedings, or investigations will result in any liability or loss to Target Center which (individually or in the aggregate) is material, and Target Center has not been, and Target Center is not now, subject to any order, judgment, decree, stipulation, or consent of any court, governmental body, or agency. No inquiry, action, or proceeding has been asserted, instituted, or threatened against Target Center to restrain or prohibit the carrying out of the transactions contemplated by this Agreement or to challenge the validity of such transactions or any part thereof or seeking damages on account thereof. 3.14 Taxes. All federal, foreign, state, county, and local income, gross receipts, excise, property, franchise, license, sales, use, withholding, and other tax (collectively, "Taxes") returns, reports, and declarations of estimated tax (collectively, "Returns") which were required to be filed by Target Center on or before the date hereof have been filed within the time (including any applicable extensions) and in the manner provided by law, and all such Returns are true and correct in all material respects and accurately reflect the Tax liabilities of Target Center. All Taxes, assessments, penalties, and interest which have become due pursuant to such Returns have been paid or adequately accrued in the Financial Statements. The provisions for Taxes reflected on the balance sheet contained in the Financial Statements are adequate to cover all of Target Center's estimated Tax liabilities for the respective periods then ended and all prior periods. As of the Closing Date, Target Center will not owe any Taxes for any period prior to the Closing which are not reflected on the Financial Statements, except for Taxes attributable to the operations of Target Center between the Effective Time and the Closing Date. Target Center has not executed any presently effective waiver or extension of any statute of limitations against assessments and collection of Taxes. There are no pending or threatened claims, assessments, notices, proposals to assess, deficiencies, or audits (collectively, "Tax Actions") against Target Center with respect to any Taxes owed or allegedly owed by Target Center. There are no tax liens on any of the assets of Target Center. Proper and accurate amounts have been withheld and remitted by Target Center from and in respect of all persons from whom it is required by applicable law to withhold for all periods in compliance with the tax withholding provisions of all applicable laws and regulations. Target Center is not a party to any tax sharing agreement. 3.15 Personnel. Attached hereto as Schedule 3.15 is a list of names and current annual rates of compensation of the officers, employees or agents of Target Center who have been employed in the operation of the Business or who utilize (or are necessary for the utilization of) the Assets (the "Employees"). Except as set forth on Schedule 3.15, there are no bonus, profit sharing, percentage compensation, company automobile, club membership, and other like benefits, if any, paid or payable by Target Center to any Employees from January 1, 1999 through the Closing Date. Schedule 3.15 attached hereto also contains a brief description of all material terms of employment agreements and confidentiality agreements to which Target Center is a party and all severance benefits which any director, Employee or sales representative of Target Center is or may be entitled to receive. Target Center has delivered to Prime accurate and complete copies of all such employment agreements, confidentiality agreements, and all other agreements, plans, and other instruments to which Target Center is a party and under which its employees are entitled to receive benefits of any nature. Sellers have no knowledge of any pending or threatened (i) labor dispute or union organization campaign relating to Target Center, (ii) claims against Target Center or the Sellers by any employees of Target Center (other than those certain Workers' Compensation claims specifically described on Schedule 3.13), or (iii) terminations, resignations or retirements of any employees of Target Center. None of the employees of Target Center are represented by any labor union or organization. There is no unfair labor practice claim against Target Center before the National Labor Relations Board or any strike, labor dispute, work slowdown, or work stoppage pending or threatened against or involving Target Center. 3.16 Business Relations. The total number of Refractive Surgery procedures performed at the Target Center, the number of Refractive Surgery procedures performed by each Physician at the Target Center, and the number of Refractive Surgery procedures performed by others at the Target Center, in each case for calendar years 1998 and 1999, are as set forth on Schedule 3.16. Sellers have no reason to believe and have not been notified that any supplier or customer of Target Center will cease or refuse to do business with Target Center or Newco in the same manner as previously conducted with Target Center as a result of or within one (1) year after the consummation of the transactions contemplated hereby, to the extent such cessation or refusal might affect the Assets or the Business. Target Center has not received any notice of any disruption (including delayed deliveries or allocations by suppliers) in the availability of the materials or products used by Target Center. 3.17 Working Capital. Except as set forth on Schedule 3.17 attached hereto, all of the accounts, notes, and loans receivable (the "Accounts Receivable") reflected in the Financial Statements, or arising since January 31, 2000, arose from transactions occurring in the ordinary course of Target Center's business as previously conducted, are bona fide and represent amounts validly due, subject to offsets or defenses. Except for accounts payable and other accrued expenses incurred in the ordinary course of Target Center's business since January 31, 2000 and consistent with past practices of Target Center, there are no material liabilities of Target Center other than those reflected in the Financial Statements. Adequate provision has been made for uncollectible Accounts Receivable. Through the Closing Date, Target Center has collected its Accounts Receivable and has paid or performed all liabilities and obligations of Target Center in the ordinary course, consistent with past practices. As of the Closing Date, the amount of Working Capital (as hereinafter defined) of Target Center included in the Assets shall not be less than $25,000. For purposes of this Agreement, "Working Capital" means the difference between (i) cash, cash equivalents, prepaid expenses and Accounts Receivable less than sixty (60) days old and (ii) accounts payable and other liabilities and payment obligations due in the following twelve (12) months, all as determined in accordance with GAAP. 3.18 Agents. Except as set forth on Schedule 3.18 attached hereto, Target Center has not designated or appointed any person (other than Target Center's employees, officers and directors) or other entity to act for it or on its behalf pursuant to any power of attorney or any agency which is presently in effect. 3.19 Indebtedness To and From Members, Managers and Employees. Target Center does not owe any indebtedness to any of the Sellers or any of its officers, managers or employees or have indebtedness owed to it from any of the Sellers or any of its officers, managers or employees, excluding indebtedness for travel advances or similar advances for expenses incurred on behalf of and in the ordinary course of business of Target Center and consistent with Target Center's past practices. As of the Effective Time and the Closing Date all amounts due Target Center from any of the Sellers or any officer, manager or employee of Target Center (or any of their family members) shall have been repaid in full. 3.20 Commission Sales Contracts. Except as disclosed in Schedule 3.20 attached hereto, Target Center does not employ or have any relationship, related to or arising out of the Assets or the Business, with any individual, corporation, partnership, or other entity whose compensation from Target Center is in whole or in part determined on a commission basis. 3.21 Certain Consents. Except as set forth on Schedule 3.21 attached hereto, there are no consents, waivers, or approvals required to be executed and/or obtained by any Sellers from third parties (including, without limitation, the spouses of any Seller) in connection with the execution, delivery, and performance of this Agreement or any of the other contracts, documents, instruments or agreements to be entered into in connection with or as contemplated by this Agreement (all of which are collectively referred to as the "Transaction Documents"). 3.22 Brokers. No Seller has engaged, or caused any liability to be incurred to, any finder, broker, or sales agent (or has paid, or will pay, any finders fee or similar fee or commission to any person) in connection with the execution, delivery, or performance of this Agreement or the transactions contemplated hereby. 3.23 Interest in Competitors, Suppliers, and Customers. Except as set forth on Schedule 3.23 attached hereto, no Seller or any affiliate of any Seller, and to the knowledge of Sellers no officer, manager or employee of Target Center or any affiliate of any officer, manager or employee of Target Center, has any ownership interest in any competitor, customer or supplier of Target Center or any property used in the operation of the business of Target Center. 3.24 Warranties. Except as set forth on Schedule 3.24, Target Center has not made any warranties or guarantees to third parties with respect to any products sold or services rendered by it, other than implied warranties. Except as set forth on Schedule 3.24 attached hereto, no claims for breach of product or service warranties have been made against Target Center. 3.25 No Defaults. No Seller is aware of any breach or default by any other Seller of any of the representations, warranties, covenants or agreements contained herein. 3.26 Investment Representations. Each Seller: -------------------------- (a) Is an "accredited investor," and has not retained or consulted with any "purchaser representative" (as such terms are defined in Rule 501 of Regulation D promulgated under the Securities Act in connection with its execution of this Agreement and the consummation of the transactions contemplated hereby; (b) Has such knowledge and experience in financial and business matters that it is capable of evaluating the merits and risks of an investment by Target Center in Newco; (c) Will acquire its direct or indirect Newco interests for its own account for investment and not with the view toward resale or redistribution in a manner which would require registration under the Securities Act, the Texas Securities Act, as amended, or the securities laws of any other state, and Sellers do not presently have any reason to anticipate any change in their respective circumstances or other particular occasion or event which would cause such Seller to sell its Newco interests, or any part thereof or interest therein, and Sellers have no present intention of dividing the Newco interests with others or reselling or otherwise disposing of the Newco interests or any part thereof or interest therein either currently or after the passage of a fixed or determinable amount of time or upon the occurrence or nonoccurrence of any predetermined event or circumstance; (d) In connection with entering into this Agreement and the Transaction Documents to which each Seller is a party, and in making the investment decisions associated therewith, Sellers have neither received nor relied on any representations or warranties from Newco, Prime, PMSI, the affiliates of the foregoing or the officers, directors, shareholders, employees, partners, members, agents, consultants, personnel or similarly related parties of any of the foregoing, other than those representations and warranties contained in this Agreement; (e) Is able to bear the economic risk of an investment in the Newco interests and it has sufficient net worth to sustain a loss of its entire investment without material economic hardship if such a loss should occur; and (f) Acknowledges that the Newco interests have not been registered under the Securities Act, or the securities laws of any of the states of the United States, that an investment in the Newco interests involves a high degree of risk, and that the Newco interests are an illiquid investment. ARTICLE IV Covenants 4.1 Name Change. For so long as (i) any of the Sellers remain obligated under this Agreement, including, without limitation, obligations arising under Section 8.6, or, (ii) the Management Agreement has not been terminated (other than a termination by Newco for cause as described therein), Newco may operate within the Restricted Areas (as hereinafter defined) under the name "Mann Berkeley Caplan Laser Center of Austin," or names similar thereto. At all times, Sellers shall own such name and it shall remain their exclusive property. The Sellers hereby grant to Newco, Prime, and PMSI the irrevocable, royalty free license to use such name in connection with the business of Newco, in connection with the business of Prime and PMSI as such business relates to the business of Newco, and in connection with any Retained Business (as hereinafter defined) as to which the PMSI Option (as hereinafter defined) is exercised. At, or within thirty (30) days after, the Closing Date, the Sellers shall no longer use such name or any name deceptively similar to such name in the Restricted Areas (as defined in Section 8.4)(provided, however, the use of such name or deceptively similar name by Newco shall not be deemed a violation by Sellers of this covenant). Sellers and their affiliates may continue to use the name, or parts thereof, outside the Restricted Areas. 4.2 Cooperation Relating to Financial Statements. Sellers agree to cooperate with Prime in its preparation of any financial statements of Target Center and Newco which Prime or its affiliates may be required by any applicable law to prepare. 4.3 Member and Manager Action. The Sellers each agree to vote their interests in Target Center, and to take such actions as may be necessary in their capacity as managers of Target Center, to authorize and direct Target Center to perform all of its obligations under this Agreement and under the Organizational Documents and Transaction Documents to which it is a party. Furthermore, Sellers each agree that, until such time as none of the Sellers owns any ownership interest in Newco, none of them will, without obtaining the prior written consent of Prime (and then only as allowed pursuant to the Transfer Restriction Agreement described in Section 4.5 below), (i) authorize the issuance of any additional membership interest in Target Center to any third party, or (ii) transfer, assign, or otherwise dispose of any membership interest of Target Center owned or controlled by any of the Sellers. 4.4 Capital Contributions. The parties agree that no party shall be required to make any capital contribution to Newco following the Closing, including, without limitation, for purposes of providing working capital; provided, however, that this sentence shall not affect any party's obligations under Article VI with respect to any breach of the representations or warranties made by that party under this Agreement. 4.5 Ownership Interest Transfer Restriction Agreement. Each of the Sellers agrees that it, and its spouse(if any), will execute, on or prior to the Closing, the Membership Interest Transfer Restriction Agreement, in substantially the form attached hereto as Exhibit E (the "Transfer Restriction Agreement"), that imposes certain limitations and conditions on the sale, transfer, assignment or other disposition of any interest that is directly or indirectly owned or controlled by such party in Target Center or the subsidiaries or affiliates of Target Center. 4.6 Insurance. Newco agrees to maintain, for five (5) years after the Closing Date, a prior acts insurance policy providing insurance coverage for Newco and for Refractive Surgery procedures performed prior to the Closing Date at the Austin, Texas facility of Target Center, of the same scope, in the same or greater amounts and subject to the same or smaller deductibles as the Target Center's insurance in effect immediately prior to the Closing Date. 4.7 Management Agreement. Newco and MBEC shall execute, on or prior to the Closing, the Management Agreement, in substantially the same form as attached hereto as Exhibit F (the "Management Agreement"). 4.8 Other Parties. Without the express written consent of Sellers, Prime (through its control of Newco) will not allow LASIK Investors, L.L.C., a Delaware limited liability company ("LASIK") or Barnet Dulaney Eye Center, P.L.L.C., an Arizona professional limited liability company ("BDEC"), or any of the current (as of the Effective Date) or any former owners of either LASIK or BDEC to become involved in or exercise any control or influence over Newco, nor will Prime sell, convey or otherwise transfer, all, or any portion, of its ownership interest in Newco to LASIK, BDEC, or any current or former owners of either LASIK or BDEC. If LASIK or BDEC, or any of their affiliates, merge with Prime in a merger wherein Prime is not the surviving entity, or otherwise acquire greater than fifty percent (50%) of the voting equity securities of Prime, Sellers and Target Center shall have the right (but not the obligation) to terminate this Agreement, and MBEC shall have the right (but not the obligation) to terminate the Management Agreement, within six (6) months of the effective date of such merger or acquisition of control by giving thirty (30) days prior written notice to Prime (or Prime's successor) of such termination. Nothing herein shall be construed as to prohibit or restrict any current (as of the Effective Date) or former physician owner of LASIK or BDEC from serving on the Board of Directors of PMSI, and fully participating as a board member. ARTICLE V Conditions to Closing 5.1 Prime's Closing Obligations. At the Closing, Prime shall (each of which is a condition to the obligations of each Seller to Close): (a) pay the Purchase Price to Target Center; (b) ensure that the Warrants are delivered to Target Center; (c) ensure that the Incidental Registration Rights Agreement, in substantially the same form as attached hereto as Exhibit G (the "Rights Agreement"), is executed and delivered to Target Center; (d) execute and deliver the Assignment and Assumption Agreement and the Organizational Documents to which it is a party; and (e) deliver such good standing certificates, officer certificates, and similar documents and certificates as counsel for Target Center may reasonably require. 5.2 Sellers Closing Obligations. At the Closing, each Seller shall (each of which is a condition to the obligations of Prime to Close): (a) execute and deliver each Transaction Document required to be executed by it pursuant to this Agreement; (b) cause MBEC to execute and deliver the Management Agreement; and (c) deliver such good standing certificates, officer certificates, and similar documents and certificates as counsel for Prime may reasonably require. 5.3 Newco's Closing Obligations. At the Closing, Newco shall execute and deliver the Assignment and Assumption Agreement, the Management Agreement and such good standing certificates, officer certificates, and similar documents and certificates as counsel for Prime or any of the Sellers may reasonably require. ARTICLE VI Indemnification of Prime and Newco 6.1 Indemnification of Prime and Newco. The Sellers and MBEC, each jointly and severally, agree to indemnify and hold harmless Prime, each subsidiary and/or affiliate of Prime (including, without limitation, PMSI), and, following the Closing, Newco, and each officer, director, and employee of Prime and each subsidiary and affiliate of Prime, and affiliate of Prime and, following the Closing, Newco (collectively, the "Prime Indemnified Parties"), from and against any and all damages, losses, claims, liabilities, demands, charges, suits, penalties, costs, and expenses (including court costs and attorneys' fees and expenses incurred in investigating and preparing for any litigation or proceeding) (collectively, "Indemnified Costs") in connection with the commencement or assertion of any action, proceeding, demand, or claim by a third party (collectively, a "third-party action") which any of the Prime Indemnified Parties may sustain, arising out of (a) any breach or default by any Seller of any of the representations, warranties, covenants or agreements contained in this Agreement or any Transaction Document (including, without limitation, the Organizational Documents and the Management Agreement), (b) any obligation or liability of Target Center not assumed by Newco pursuant to the Assignment and Assumption Agreement, or (c) any obligations or liabilities with respect to any claims arising out of actions or omissions by any Seller prior to Closing, or actions or omissions by any Seller after Closing that are not related to the business or management of Newco, or actions or omissions by any Seller that are a breach of a fiduciary duty. With respect to indemnification for Indemnified Costs arising solely out of the breach, default, action or omission of a Physician or Micheletti, the Prime Indemnified Parties shall not seek indemnification under this Section from any Physician or Micheletti who did not cause, allow or contribute to such breach, default, action or omission that gave rise to the Indemnified Costs; provided, however, in all such cases the Prime Indemnified Parties will be able to seek indemnity jointly and severally from MBEC and Target Center, in addition to the Physician or Micheletti whose breach, default, action or omission gave rise to the Indemnified Costs. For all indemnity obligations arising pursuant to this Section, the Prime Indemnified Parties will demand payment first from MBEC and Target Center, but if MBEC and Target Center fail or refuse to pay such indemnity obligation, then the Prime Indemnified Parties may seek indemnity from the Physicians or Micheletti, as any of them may be liable under the provisions of this Section. 6.2 Defense of Third-Party Claims. A Prime Indemnified Party shall give prompt written notice to Sellers of the commencement or assertion of any third party action in respect of which such Prime Indemnified Party shall seek indemnification hereunder. Any failure so to notify Sellers shall not relieve Sellers from any liability that they may have to such Prime Indemnified Party under this ARTICLE unless the failure to give such notice materially and adversely prejudices Sellers. Sellers shall have the right to assume control of the defense of, settle, or otherwise dispose of such third-party action on such terms as it deems appropriate; provided, however, that: (a) The Prime Indemnified Party shall be entitled, at his, her, or its own expense, to participate in the defense of such third-party action; (b) Sellers shall obtain the prior written approval of the Prime Indemnified Party, which approval shall not be unreasonably withheld, before entering into or making any settlement, compromise, admission, or acknowledgment of the validity of such third-party action or any liability in respect thereof if, pursuant to or as a result of such settlement, compromise, admission, or acknowledgment, injunctive or other equitable relief would be imposed against the Prime Indemnified Party; (c) Sellers shall not consent to the entry of any judgment or enter into any settlement that does not include as an unconditional term thereof the execution and delivery of a release from all liability in respect of such third-party action by each claimant or plaintiff to, and in favor of, each Prime Indemnified Party; and (d) Sellers shall not be entitled to control (but shall be entitled to participate at their own expense in the defense of), and the Prime Indemnified Party shall be entitled to have sole control over, the defense or settlement, compromise, admission, or acknowledgment of any third-party action as to which Sellers fail to assume the defense within thirty (30) days; provided, however, that the Prime Indemnified Party shall make no settlement, compromise, admission, or acknowledgment which would give rise to liability (other than liability to Prime Indemnified Parties under this Agreement) on the part of Sellers or Target Center, without the prior written consent of Sellers. (e) Sellers shall make payments of all amounts required to be made pursuant to the foregoing provisions of this ARTICLE to or for the account of the Prime Indemnified Party from time to time promptly upon receipt of bills or invoices relating thereto or when otherwise due and payable, provided that the Prime Indemnified Party has agreed in writing to reimburse Sellers for the full amount of such payments if the Prime Indemnified Party is ultimately determined not to be entitled to such indemnification. (f) The parties hereto shall extend reasonable cooperation in connection with the defense of any third-party action pursuant to this ARTICLE and, in connection therewith, shall furnish such records, information, and testimony and attend such conferences, discovery proceedings, hearings, trials, and appeals as may be reasonably requested. 6.3 Security. Without limiting or adversely affecting the rights of Prime under Section 8.11, and in order to secure full and prompt payment of the obligations of each of the Sellers under this ARTICLE, Target Center hereby grants to Prime a continuing security interest in and to distributions it may be entitled to receive at any time after the Closing in respect of any ownership interest held by it in Newco. In connection with the grant of a security interest contained in this Section, each Seller agrees (i) to execute all documents, agreements, instruments and certificates, and to take such other actions, as are necessary in order to cause Target Center to fully evidence and perfect such security interest, and (ii) that it, for a period of five (5) years after the Closing, will not, without obtaining the express prior written consent of Prime in each instance, grant or assign to any person or entity rights of any nature in the distributions covered by the security interest granted in this Section, irrespective of whether such rights are to be senior or subordinate to the rights granted under this Section. ARTICLE VII Indemnification of Sellers 7.1 Indemnification of Sellers. Prime agrees to indemnify and hold harmless Sellers and Newco (collectively, the "Seller Indemnified Parties") from and against any and all Indemnified Costs in connection with the commencement or assertion of any third party action which any of Seller Indemnified Parties may sustain, arising out of any breach or default by Prime of any of the representations, warranties, covenants or agreements contained in this Agreement or any Transaction Document (including, without limitation, the Organizational Documents). 7.2 Defense of Third-Party Claims. A Seller Indemnified Party shall give prompt written notice to Prime of the commencement or assertion of any third party action in respect of which such Seller Indemnified Party shall seek indemnification hereunder. Any failure so to notify Prime shall not relieve Prime from any liability that it may have to such Seller Indemnified Party under this ARTICLE unless the failure to give such notice materially and adversely prejudices Prime. Prime shall have the right to assume control of the defense of, settle, or otherwise dispose of such third-party action on such terms as it deems appropriate; provided, however, that: (a) The Seller Indemnified Party shall be entitled, at his or its own expense, to participate in the defense of such third-party action; (b) Prime shall obtain the prior written approval of the Seller Indemnified Party, which approval shall not be unreasonably withheld, before entering into or making any settlement, compromise, admission, or acknowledgment of the validity of such third-party action or any liability in respect thereof if, pursuant to or as a result of such settlement, compromise, admission, or acknowledgment, injunctive or other equitable relief would be imposed against the Seller Indemnified Party; (c) Prime shall not consent to the entry of any judgment or enter into any settlement that does not include as an unconditional term thereof the execution and delivery of a release from all liability in respect of such third-party action by each claimant or plaintiff to, and in favor of, each Seller Indemnified Party; and (d) Prime shall not be entitled to control (but shall be entitled to participate at its own expense in the defense of), and the Seller Indemnified Party shall be entitled to have sole control over, the defense or settlement, compromise, admission, or acknowledgment of any third-party action as to which Prime fails to assume the defense within thirty (30) days; provided, however, that the Seller Indemnified Party shall make no settlement, compromise, admission, or acknowledgment which would give rise to liability (other than liability to Seller Indemnified Parties under this Agreement) on the part of Prime without the prior written consent of Prime. (e) Prime shall make payments of all amounts required to be made pursuant to the foregoing provisions of this ARTICLE to or for the account of the Seller Indemnified Party from time to time promptly upon receipt of bills or invoices relating thereto or when otherwise due and payable, provided that the Seller Indemnified Party has agreed in writing to reimburse Prime for the full amount of such payments if the Seller Indemnified Party is ultimately determined not to be entitled to such indemnification. (f) The parties hereto shall extend reasonable cooperation in connection with the defense of any third-party action pursuant to this ARTICLE and, in connection therewith, shall furnish such records, information, and testimony and attend such conferences, discovery proceedings, hearings, trials, and appeals as may be reasonably requested. ARTICLE VIII Post Closing Agreements 8.1 Transition of Business. Each Seller agrees to cooperate fully with Prime and Newco in transitioning the business conducted, and business relationships maintained by, Target Center prior to the Closing, to Newco after the Closing; and each Seller agrees not to take any action or make any disclosure which a reasonable person would expect to adversely alter or impair any relationship with any customer, or other service recipient, person or entity which did business with Target Center prior to the Closing. Each Seller agrees to promptly remit to Newco any payments received by Target Center or any Seller for services provided by Target Center after the Effective Time or by Newco after the Closing. Furthermore, Sellers agree to deposit any such payments received directly to a deposit account designated and controlled by Newco or to take such other action as may be requested by Prime to implement and maintain a system for remitting payments due Newco which come into the possession or control of Target Center or any Seller. 8.2 Ratification by Newco. Prime and Target Center agree that by executing this Agreement they are deemed to be voting their ownership interests in Newco to authorize Newco to enter into and perform this Agreement and each of the Transaction Documents to which it is a party. Prime and Target Center agree to execute such resolutions and written consents, and take such other actions, in their capacities as members of Newco, as any party shall reasonably require after the Closing to have Newco ratify and adopt this Agreement, notwithstanding the official date of Newco's creation. 8.3 Confidentiality Agreement. Each Seller acknowledges that through its relationship with Newco, it will be exposed to Proprietary Information (as defined below) of Newco and/or each of Newco's present or future affiliates (which includes, without limitation, Prime, PMSI and each of their present or future affiliates, but excludes, for purposes of this Section, each Seller) (the party owning such Proprietary Information is referred to as the "Discloser"), that such Proprietary Information is unique and valuable and that such Discloser would suffer irreparable injury if its Proprietary Information were divulged to those in competition with Discloser. "Proprietary Information" shall be all information concerning Discloser which a party acquires, or to which it has access through its relationship with Discloser or Newco that has not been publicly disclosed by Discloser or that is not a matter of common knowledge among Discloser's competitors, including, but not limited to, information relating to any inventions, processes, software, formulae, plans, devices, compilations of information, technical data, mailing lists, management strategies, business distribution methods, names of suppliers (of both goods and services) and customers, names of employees and terms of employment, arrangements entered into with suppliers and customers, including, but not limited to, proposed expansion plans of Discloser, marketing and other business and pricing strategies, and trade secrets of Discloser. Except with prior written approval of Discloser, each Seller agrees that it will not, at any time after the Closing: (i) directly or indirectly, disclose any Proprietary Information to any person except its owners, directors, managers, officers, employees, agents and consultants who need to know such Proprietary Information in connection with such party's relationship with Newco nor (ii) use Proprietary Information in any way, except for the purposes of Newco. Within forty-eight (48) hours of termination of its ownership (directly, or indirectly through Target Center) interest in Newco, as applicable, whether voluntary or involuntary, each Seller will deliver to the appropriate Discloser (without retaining copies thereof) all documents, records or other memorializations including copies of documents and any notes which it has prepared that contain Proprietary Information, all other tangible Proprietary Information in its possession or control and all of Discloser's credit cards, keys, equipment, vehicles, supplies and other materials that are in its possession or under its control. Notwithstanding any other provision of this Section, to the extent any Proprietary Information is owned exclusively by Newco, Newco hereby grants an irrevocable, royalty free license to Prime, PMSI, each of Prime's or PMSI's present or future affiliates, and each Seller and their present or future affiliates, to use and disseminate such Proprietary Information. 8.4 Seller Non-Competition Agreement. As a material inducement to Prime to enter into this Agreement, each Seller hereby agrees that, until the earlier of the termination of the Management Agreement (other than a termination by Newco for cause as described therein) or five (5) years after the Closing Date, each Seller will not directly or indirectly, either through any kind of ownership (other than ownership of securities of a publicly held corporation of which it owns less than one percent (1%) of any class of outstanding securities), or as a principal, shareholder, agent, employer, advisor, consultant, co-partner or in any individual or representative capacity whatever, either for its own benefit or for the benefit of any other person, corporation or other entity, without the prior written consent of Newco and Prime, commit any of the following acts, which acts shall be considered violations of this covenant not to compete: (a) Directly or indirectly, within the "Restricted Areas" (as hereinafter defined) engage in, or provide any services related to, (i) the operating of Refractive Surgery centers, (ii) the manufacture, maintenance, refurbishing, repair, sale, or leasing of any equipment related to or necessary for the operating of Refractive Surgery centers, or (iii) providing any management services, training or consulting services related to any of the activities described in (i) or (ii); (b) Directly or indirectly provide Refractive Surgery services, including without limitation, Refractive Surgery patient services, Refractive Surgery management services, Refractive Surgery marketing services, or similar services, anywhere within the Restricted Areas. (c) Directly or indirectly request or advise any person, firm, physician, corporation or other entity having a business relationship with Newco, Prime or any affiliate or related entity of either of them, to withdraw, curtail, or cancel its business with Newco, Prime or such affiliate or related entity, including, without limitation, marketing efforts and activities outside the Restricted Areas whose targeted audience includes (in whole or in part) any potential any potential Refractive Surgery customers inside the Restricted Areas; or (d) Directly or indirectly hire any employee of Newco, Prime or any affiliate or related entity of either of them, or induce or attempt to influence any employee of Newco, Prime or any such affiliate or related entity to terminate his or her employment with Newco, Prime or any such affiliate or related entity. No employees, contract physicians or staff of MBEC shall be considered to be working for an "affiliate" of Newco. For purposes hereof, the "Restricted Areas" are anywhere within forty (40) miles of (i) Target Center's location at 2600 Via Fortuna, Suite 400, Austin, Texas 78746. The covenants in this Section 8.4 shall terminate if Newco terminates the Management Agreement (other than a termination by Newco for cause as described therein). 8.5 Prime Non-Competition Agreement. As a material inducement to Seller to enter into this Agreement, Prime hereby agrees that, until five (5) years after the Closing Date, neither Prime nor any of its affiliates will directly or indirectly, either through any kind of ownership (other than ownership of securities of a publicly held corporation of which it owns less than one percent (1%) of any class of outstanding securities), or as a principal, shareholder, agent, employer, advisor, consultant, co-partner or in any individual or representative capacity whatever, either for its own benefit or for the benefit of any other person, corporation or other entity, without the prior written consent of Newco and Seller, directly or indirectly hire any employee of Newco, Seller or any affiliate or related entity of either of them, or induce or attempt to influence any employee of Newco, Seller or any such affiliate or related entity to terminate his or her employment with Newco, Seller or any such affiliate or related entity. 8.6 Exclusive Use. Except as expressly otherwise provided below, during the term of this Agreement, each Physician hereby agrees that, without the prior written consent of both Newco and Prime, each Physician will perform, and will direct all other medically trained or licensed medical professionals under the direction or control of Physician to perform, all services related to Refractive Surgery for patients residing or domiciled within the Austin, Texas metropolitan area only at the facilities of, and using the equipment of, Newco. Mann and Caplan each agree, until the expiration of the fifth (5th) anniversary of the Closing Date, to manage and operate Newco, and perform Refractive Surgery, in a manner consistent with the management and operation of, and their respective performance of Refractive Surgery at, Target Center in 1999. Berkeley agrees, until the expiration of the second (2nd) anniversary of the Closing Date, to manage and operate Newco, and perform Refractive Surgery, in a manner consistent with the management and operation of, and his performance of Refractive Surgery at, Target Center in 1999. Each Physician agrees, for so long as he remains obligated under the immediately preceding two (2) sentences of this paragraph, to perform Refractive Surgery, or cause Refractive Surgery to be performed by a physician employed by or affiliated with MBEC, at the facilities of Newco on at least forty-two (42) separate days in the aggregate during each calendar year, including a minimum of three (3) days each month, subject to patient volume. Each Physician agrees, for so long as he remains obligated under this paragraph of Section 8.6, to devote sufficient business time and attention, and to use his best efforts, to create and maintain sufficient patient volume to satisfy his obligations under this Section 8.6. For so long as the Management Agreement is in effect, MBEC shall compensate the Physicians for all procedures performed at the facilities of Newco pursuant to this Agreement. The obligations under this Section shall not apply to any Refractive Surgery to be paid for, or reimbursed by, Medicare, Medicaid, Champus, or any other state or federal health care program, or in any other instance where the operation of this Agreement would constitute a violation of applicable law. 8.7 Right of First Refusal. Each Seller and MBEC represent and warrant to Prime and PMSI that as of the Effective Time it does not operate, manage, or have any direct or indirect ownership interest in, any entity that owns, operates, or manages any Refractive Surgery center (currently existing or proposed), other than as set forth on Schedule 8.7 which, together with any Refractive Surgery center, business or operation developed or acquired after the Effective Time as permitted under the terms of this Agreement, shall be referred to herein as the "Retained Businesses." Sellers and MBEC shall give Prime prompt written notice of establishing or acquiring any Refractive Surgery center after the Effective Time for so long as the Management Agreement, or any extension thereof, is in force (this obligation will not terminate, however, upon a termination of the Management Agreement, or any extension thereof, by Newco for cause as described therein, but shall continue to the benefit of Prime). Sellers and MBEC agree that PMSI is hereby granted a right of first refusal (the "PMSI Option") pursuant to which PMSI or one of its direct or indirect subsidiaries may, in its sole discretion and for so long as the Management Agreement, or any extension thereof, is in force (the PMSI Option will not terminate, however, upon a termination of the Management Agreement, or any extension thereof, by Newco for cause as described therein, but shall continue to the benefit of PMSI), and without any obligation to do so, acquire from Sellers, MBEC, or the Retained Businesses, as the case may be, at the price offered by (and upon the same terms applicable to) any third party offer, all or a portion of the ownership interest, business or assets of a Retained Business then held by Sellers, the Retained Business or MBEC, prior to any sale, conveyance, encumbrance or other transfer of the Retained Business, or any assets thereof or interest therein, in whole or in part, to any third party (including without limitation any interest dilution that occurs due to the issuance of any new ownership or other interests in a Retained Business). The foregoing right of first refusal shall not apply to any sale or transfer of a minority ownership interest to a physician or a current full time employee of MBEC, provided that no such permitted transfer shall be allowed if it results in the Sellers, or any of them, owning in the aggregate less than 51% of the outstanding ownership interests (both as to voting rights and rights to income and distributions) of the Retained Business in question. If the Sellers, or any of them, own in the aggregate less than 51% of the outstanding ownership interests (both as to voting rights and rights to income and distributions) of a particular Retained Business, then no transfers shall be permitted that are subject to PMSI's right of first refusal. All parties hereto acknowledge and agree that it would be impractical to exercise an option to purchase arising pursuant to this Section 8.7 whenever the proposed consideration to be received by the Sellers or MBEC is other than cash, cash equivalents or stock of publicly traded companies. Therefore, the parties agree that no transfer shall be permitted whenever the consideration to be received from the proposed transferee is other than cash, cash equivalents or stock of publicly traded companies. Upon receiving any such third party offer, Sellers or MBEC shall give prompt written notice thereof to PMSI. Following its receipt of such notice, PMSI shall have thirty (30) days to exercise the PMSI Option, and Sellers and MBEC agree that Sellers and MBEC may not take any action with respect to the third party offer until PMSI has either provided written notice of its intent not to exercise the PMSI Option, or the thirty (30) day period has expired without any election by PMSI to exercise the PMSI Option. The closing of any purchase and sale pursuant to an exercise of the PMSI Option shall occur within 30 business days following such exercise, and the purchase price shall be paid in identical form as shall have been set forth in the notice of third party offer. In connection with any exercise of the PMSI Option by PMSI, Sellers and MBEC shall deliver all agreements, documents, instruments and certificates, and take such other action, as may be reasonably necessary in order to consummate the purchase and sale contemplated in this Section, and PMSI or its designated purchasing subsidiary shall receive the acquired interest free and clear of any liens, claims or encumbrances. The parties agree that any acquisition pursuant to exercise of the PMSI Option shall be accomplished through an asset purchase, unless the parties otherwise agree. 8.8 Compliance with Applicable Law. In accordance with Texas Business & Commerce Code Section 15.50 (the "Applicable Statutory Provision"), this Agreement hereby provides for the following: (a) each Physician shall not hereby be denied access to any list of his patients whom he has seen or treated; (b) each Physician shall not hereby be denied access to medical records of his patients upon authorization of the patient, and any copies of such medical records obtained or possessed by Prime or Newco shall be provided to the Physician for a reasonable fee as established by the Texas State Board of Medical Examiners under Section 5.08(o), Medical Practice Act (Article 4495b, Vernon's Texas Civil Statutes); (c) access to any such list of patients or to any such patients' medical records referred to in (a) or (b) above, shall not require such list or records to be provided in a format different than that by which such records are maintained, except by the mutual consent of Newco and the applicable Physician; (d) each Physician shall be entitled to buy out his performance of obligations arising under Section 8.6 of this Agreement (but only such obligations as is necessary in order for this Agreement to comply with the Applicable Statutory Provision) for One Half of the Purchase Price, less any amounts paid pursuant to Section 8.10 hereof; provided, however, that in order for such buy out to be effective, the Physician must also convey his entire equity interest in Newco to Prime, unencumbered; and (e) the Physician shall not hereby be prohibited from providing continuing care and treatment to a specific patient or patients during the course of an acute illness. Each Physician agrees that the buy out amount set forth in this Section 8.8 is a reasonable price and represents a fair value for his performance of his obligations hereunder. Physicians and Prime have each elected to utilize such reasonable price in lieu of arbitration pursuant to the Applicable Statutory Provision. 8.9 Agreement. Each Seller has reviewed and carefully considered the provisions of Sections 8.3, 8.4, 8.6, 8.7 and 8.8 and, having done so, agrees that the restrictions applicable to it as set forth therein (a) are fair and reasonable with respect to time, geographic area and scope, (b) are not unduly burdensome to them, and (c) are reasonably required for the protection of the interests of the other parties hereto for whose benefit such restrictions were agreed upon. 8.10 Remedies. Each Seller agrees that a violation on its part of any applicable covenant contained in Sections 8.3, 8.4, 8.6 or 8.7 will cause the other parties hereto for whose benefit such restrictions were agreed upon irreparable damage for which remedies at law may be insufficient, and for that reason, Seller agrees that the other parties shall be entitled as a matter of right to equitable remedies, including specific performance and injunctive relief, therefor. The right to specific performance and injunctive relief shall be cumulative and in addition to whatever other remedies, at law or in equity, that the other parties may have, including, specifically, recovery of liquidated damages pursuant to this Section and any other additional damages. Without limiting the indemnity provisions of Articles VI or VII of this Agreement, the parties hereto agree that in the event a claim for damages resulting from a breach of warranty or failure of a representation under Article II or Article III of this Agreement is made against a party to this Agreement, the party alleged to have breached this Agreement shall be provided, if possible, with a reasonable opportunity to cure any breach of a warranty under this Agreement. No remedy shall be afforded to any party to this Agreement for any failure of a representation or warranty under this Article that is not material (as defined in Section 9.9). 8.11 Right of Offset. Each Seller agrees that Newco shall have rights of offset against distributions to each Seller in respect of any ownership interest such Seller may have in Newco at any time following the Closing, for any and all debts, obligations or liabilities that such Seller may have to Prime or PMSI, including, without limitation, any liability arising out of or relating to such Seller's indemnity obligations under this Agreement or any Transaction Document. Each Seller hereby authorizes and directs Newco, and appoints Newco as its attorney in fact, to withhold and pay such offset amounts to Prime and to take all other actions necessary to make such payment. Newco hereby agrees to promptly remit any and all such offset amounts to Prime upon request. 8.12 Termination. This Agreement, including, but not limited to, the obligations contained in this Article VIII (but excluding Article VI and Article VII), shall terminate upon the termination of the Management Agreement (other than a termination by Newco for cause as described therein); provided that in no event shall the provisions of Article VI and Article VII terminate. ARTICLE IX Miscellaneous 9.1 Collateral Agreements, Amendments, and Waivers. This Agreement (together with the documents delivered pursuant hereto) supersedes all prior documents, understandings, and agreements, oral or written, relating to this transaction and constitutes the entire understanding among the parties with respect to the subject matter hereof. Any modification or amendment to, or waiver of, any provision of this Agreement (or any document delivered pursuant to this Agreement unless otherwise expressly provided therein) may be made only by an instrument in writing executed by each party thereto. 9.2 Successors and Assigns. No party's rights or obligations under this Agreement may be assigned without the prior written consent of all parties hereto, except that Prime may assign its rights and obligations hereunder to any entity, more than fifty percent (50%) of the voting equity ownership interests of which is at the time owned, directly or indirectly, by PMSI. Any assignment in violation of the foregoing shall be null and void. Subject to the preceding sentences of this Section, the provisions of this Agreement (and, unless otherwise expressly provided therein, of any document delivered pursuant to this Agreement) shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, legal representatives, successors, and assigns. 9.3 Expenses. Except as set forth in the following sentence, regardless of whether the transactions contemplated hereby are consummated, each party hereto shall pay all of its costs and expenses incurred by it in connection with this Agreement, including the fees and disbursements of its legal counsel and accountants. The costs and expenses incurred by Prime associated specifically with the formation and documentation of Newco, including legal fees and expenses for drafting the Organizational Documents, shall be paid or reimbursed to Prime by Newco, but not to exceed $2,000 in any event. 9.4 Invalid Provisions. If any provision of this Agreement is held to be illegal, invalid, or unenforceable under present or future laws, such provision shall be fully severable, this Agreement shall be construed and enforced as if such illegal, invalid, or unenforceable provision had never comprised a part of this Agreement, and the remaining provisions of this Agreement shall remain in full force and effect and shall not be affected by the illegal, invalid, or unenforceable provision or by its severance from this Agreement. 9.5 Waiver. No failure or delay on the part of any party in exercising any right, power, or privilege hereunder or under any of the documents delivered in connection with this Agreement shall operate as a waiver of such right, power, or privilege; nor shall any single or partial exercise of any such right, power, or privilege preclude any other or future exercise thereof or the exercise of any other right, power or privilege. 9.6 Notices. Any notices required or permitted to be given under this Agreement (and, unless otherwise expressly provided therein, under any document delivered pursuant to this Agreement) shall be given in writing and shall be deemed received (a) when delivered personally or by courier service to the relevant party at its address as set forth below or (b) if sent by mail, on the third day following the date when deposited in the United States mail, certified or registered mail, postage prepaid, to the relevant party at its address indicated below: Prime: Prime RVC, Inc. 1301 Capital of Texas Highway Suite C-300 Austin, Texas 78746 Attention: President with a copy to: Mr. Timothy L. LaFrey Akin, Gump, Strauss, Hauer & Feld, L.L.P. 816 Congress Avenue, Suite 1900 Austin, Texas 78701 Sellers: Mann Berkeley Eye Center with a copy to: Donald R. Looper Looper, Reed, Mark & McGraw 1300 Post Oak Blvd. Suite 2000 Houston, Texas 77056 Each party may change its address for purposes of this Section by proper notice to the other parties. 9.7 Survival of Representations, Warranties, and Covenants. Regardless of any investigation at any time made by or on behalf of any party hereto or of any information any party may have in respect thereof, all covenants, agreements, representations, and warranties made hereunder or pursuant hereto or in connection with the transactions contemplated hereby shall survive the Closing. 9.8 Further Assurances. At, and from time to time after, the Closing, each party shall, at the request of another party, but without further consideration, execute and deliver such other instruments of conveyance, assignment, assumption, transfer and delivery and take such other action as such party may reasonably request in order more effectively to consummate the transactions contemplated hereby. 9.9 Construction, Knowledge and Materiality. This Agreement and any documents or instruments delivered pursuant hereto or in connection herewith shall be construed without regard to the identity of the person who drafted the various provisions of the same. Each and every provision of this Agreement and such other documents and instruments shall be construed as though all of the parties participated equally in the drafting of the same. Consequently, the parties acknowledge and agree that any rule of construction that a document is to be construed against the drafting party shall not be applicable either to this Agreement or such other documents and instruments. For purposes of this Agreement, whenever there are references to "material" or "materially," such terms shall be deemed to mean an economic impact exceeding $5,000 with respect to the fact or matter being referred to or described. As used herein, "day" or "days" refers to calendar days unless otherwise specified in each instance. When the term "knowledge" is used in this Agreement in reference to (i) Prime, it shall mean such items as are within the actual knowledge of Ken Shifrin, Joe Jenkins, Cheryl Williams and John Hedrick and (ii) Target Center, it shall mean such items as are within the actual knowledge of any Seller or any managerial employee of Target Center who becomes an employee of Newco after the Closing. 9.10 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Texas. 9.11 Arbitration. Any controversy between the parties regarding this Agreement and any claims arising out of this Agreement or its breach shall be submitted to arbitration by either party. The arbitration proceedings shall be conducted by a single arbitrator pursuant to the Commercial Arbitration Rules of the American Arbitration Association. The arbitration shall be conducted in Dallas, Texas and the arbitrator shall have the right to award actual damages and attorney fees and costs, but shall not have the right to award punitive, exemplary or consequential damages against either party. 9.12 Counterparts. This Agreement may be executed in several counterparts, each of which shall constitute an original and all of which together shall constitute one and the same instrument. Any party hereto may execute this Agreement by signing any one counterpart. 9.13 Post Effective Time Adjustments. The parties acknowledge and agree that Target Center has, prior to the Closing Date, been receiving revenues, making disbursements and incurring payables and receivables pursuant to the operations of Target Center in the ordinary course, including without limitation paying payroll, payroll taxes, trade vendors and other expenses. Target Center will promptly account for all such activity and the parties agree that Newco or Target Center, as applicable, will reimburse the other for any net amounts due with respect to such post Effective Time activity. S-1 SIGNATURE PAGE TO CONTRIBUTION AGREEMENT IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the day and year first above written. PRIME: PRIME RVC, INC. By: __________________________________ Printed Name: _________________________ Title: ________________________________ NEWCO: PRIME MBC, L.L.C. By: __________________________________ Printed Name: _________________________ Title: ________________________________ TARGET CENTER: MBC HOLDING COMPANY, L.L.C. By: __________________________________ Printed Name: _________________________ Title: ________________________________ ====================================== ====================================== MBEC: MANN BERKELEY EYE CENTER, P.A. By: __________________________________ Printed Name: _________________________ Title: ________________________________ TABLE OF EXHIBITS Exhibit A Form of Warrant Exhibit B Limited Liability Company Organizational Documents of Newco Exhibit C Form of Assignment and Assumption Agreement Exhibit D Financial Statements of Target Center Exhibit E Form of Transfer Restriction Agreement Exhibit F Form of Management Agreement Exhibit G Form of Incidental Registration Rights Agreement EX-10.102 15 0015.txt EX 10.102 MEMBER INTEREST - MANN BERKELEY MEMBERSHIP INTEREST TRANSFER RESTRICTION AGREEMENT This Membership Interest Transfer Restriction Agreement (this "Agreement") is entered into effective as of the 1st day of March, 2000, by and among MBC Holding Company, L.L.C., a Texas limited liability company (the "Company"), Prime RVC, Inc., a Delaware corporation ("Prime"), Paul Michael Mann, M.D. ("Mann"), Ralph G. Berkeley, M.D. ("Berkeley"), Michael B. Caplan, M.D. ("Caplan"), and Mark F. Micheletti ("Micheletti"). Mann, Berkeley, Caplan and Micheletti, together with any subsequent Members in the Company who hereafter execute this Agreement, are collectively referred to herein as the "Members". R E C I T A L S: WHEREAS, Mann, Berkeley, Caplan and Micheletti own all the issued and outstanding membership interests of the Company (all such membership interests, together with any hereafter acquired, are hereinafter referred to as the "Membership Interests"); and WHEREAS, this Agreement is a "Transaction Document," as defined in that certain Contribution Agreement (the "Contribution Agreement") dated effective March 1, 2000, by and among Prime, Prime MBC, L.L.C., a Texas limited liability company, the Company, Mann Berkeley Eye Center, P.A., a Texas professional association, Mann, Berkeley, Caplan and Micheletti. WHEREAS, the Members, the Company and Prime desire to enter into this Agreement to control the distribution of ownership interests in the Company and to promote the harmonious management of the Company's affairs. NOW, THEREFORE, in consideration of the foregoing, the mutual covenants and agreements contained herein, and for other valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: ARTICLE I PERMITTED TRANSFERS; RESTRICTIONS AGAINST TRANSFER As used in this Agreement, "Permitted Transfers" shall mean any transfer of all or any part of any Member's Membership Interest to (i) the members of the immediate family of the Member or a trust or trusts for the benefit of members of the immediate family of the Member, provided that after any such transfer the Member retains the sole express right to vote, or direct the votes of, the Membership Interest, (ii) any other Member, provided that after any transfer pursuant to this subsection (ii) is consummated, Mann, Berkeley and Caplan (or trusts that hold Membership Interests as a result of Permitted Transfers subsection (i) above) must collectively own in the aggregate at least fifty-one percent (51%) of the total outstanding Membership Interests of the Company, or (iii) Prime. Any Member transferring all or a portion of its Membership Interest pursuant to a Permitted Transfer shall give written notice of the Permitted Transfer (containing the same information as required for notice under Section 2.1.1) to Prime and the other Members fifteen (15) days prior to the effective date of the Permitted Transfer. Except for a Permitted Transfer, or as otherwise provided in this Agreement, a Member shall not transfer, assign, pledge, hypothecate, or in any way alienate any Membership Interest, or any interest therein, whether voluntarily or by operation of law, or by gift or otherwise, without the prior written consent of the Company, the other Members and Prime, which consent may be withheld in their sole and absolute discretion. Any purported transfer in violation of any provision of this Agreement shall be void and ineffectual, shall not operate to transfer any interest or title to the purported transferee, and shall give the Company, the other Members and Prime options to purchase such Membership Interest in the manner and on the conditions hereinafter provided. As used in this Agreement, "Option Members" shall mean all Members of the Company except the Member who, prior to the proposed transfer or the incident resulting in the proposed transfer of all or a portion of a Membership Interest, owned such interest. ARTICLE II OPTIONS 2.1 OPTION UPON VOLUNTARY TRANSFER. 2.1.1Notice of Intention to Transfer. If a Member intends to voluntarily transfer any of its Membership Interest, other than pursuant to a Permitted Transfer, to any person other than the Company, and does not obtain the written consents required in ARTICLE I hereof, the Member shall give written notice to the other Members and Prime stating (i) the intention to transfer a Membership Interest, (ii) the amount of Membership Interest to be transferred, (iii) the name, business and residence address of the proposed transferee, (iv) the nature and amount of the consideration, and (v) the other terms of the proposed sale. 2.1.2Option to Purchase. The Option Members shall have, and may exercise within 30 days after receipt of the notice of intent to transfer, an option to purchase all or any portion of the Membership Interest the transferring Member intends to transfer, for the price and upon the other terms stated in the notice of intent to transfer. If the Option Members fail, within such 30-day period, to exercise their purchase option (by delivery of written notice) with respect to the entire Membership Interest being transferred, the Option Members shall be deemed to have elected not to exercise their purchase option with respect to such unpurchased Membership Interest. Upon any notice of non-exercise (or deemed non-exercise) by the Option Members, Prime shall have, and may exercise within 30 days of receipt of notice of such non-exercise (or deemed non-exercise), an option to purchase all of such remaining Membership Interest upon the same terms and conditions. 2.1.3Death Before Closing. If a Member who proposed to transfer a Membership Interest dies prior to the closing of the sale and purchase contemplated by this Section 2.1, the Membership Interest of such deceased Member shall be the subject of sale and purchase under Section 2.3. 2.1.4Allowable Consideration. All parties hereto acknowledge and agree that it would be impractical to exercise an option to purchase arising pursuant to this Section 2.1 whenever the proposed consideration to be received by the transferring Member is other than cash or cash equivalents. Therefore, the parties agree that no transfer shall be permitted and no option shall arise pursuant to this Section 2.1 whenever the consideration to be received from the proposed transferee is other than cash or cash equivalents. 2.2 OPTION UPON CERTAIN INVOLUNTARY TRANSFERS. 2 2.1Exercise Event and Notice. The filing of a voluntary or involuntary petition of bankruptcy by or on behalf of a Member, an assignment by a Member of any of its Membership Interest, or of any right or interest therein, for the benefit of creditors, or the voluntary transfer, transfer by law or any other transfer, of any Membership Interest, or of any right or interest therein (other than transfers governed by ARTICLE I or Sections 2.1, 2.3 or 2.4 or ARTICLE VII hereof), shall give the other Members and Prime the option to purchase the Membership Interest of such bankrupt Member or such transferred Membership Interest as provided herein. Upon the filing of a voluntary or involuntary petition of bankruptcy by or on behalf of a Member or an assignment by Member of any of its Membership Interest, or of any right or interest therein, for the benefit of creditors, the Member or its personal representative shall promptly give written notice of such occurrence to the other Members and Prime. In the event of a transfer of Membership Interest, as described above, the Member transferring such Membership Interest shall promptly give written notice of such transfer to the other Members and Prime. 2.2.2Option to Purchase. The Option Members shall have, and may exercise within 30 days after receipt of the notice of the applicable exercise event, an option to purchase all or any portion of the Membership Interest the bankrupt or transferring Member intends to transfer, for the price and upon the other terms hereinafter provided. If the Option Members fail, within such 30-day period, to exercise their purchase option (by delivery of written notice) with respect to the entire Membership Interest being transferred, the Option Members shall be deemed to have elected not to exercise their purchase option with respect to such unpurchased Membership Interest. Upon any notice of non-exercise (or deemed non-exercise) by the Option Members, Prime shall have, and may exercise within 30 days of receipt of notice of such non-exercise (or deemed non-exercise), an option to purchase all of such remaining Membership Interest for the price and upon the other terms hereinafter provided. 2.3 PURCHASE AND SALE OF MEMBERSHIP INTEREST UPON DEATH. 2.3.1Notice of Death. Upon the death of the Member, the representative of the estate of the deceased Member shall promptly give written notice of the death to the other Members and Prime. 2.3.2Option to Purchase. The Option Members shall have, and may exercise within 30 days after receipt of the notice of death, an option to purchase all or any portion of the Membership Interest of the deceased Member, for the price and upon the other terms hereinafter provided. If the Option Members fail, within such 30-day period, to exercise their purchase option (by delivery of written notice) with respect to the entirety of such Membership Interest, the Option Members shall be deemed to have elected not to exercise their purchase option with respect to such unpurchased Membership Interest. Upon any notice of non-exercise (or deemed non-exercise) by the Option Members, Prime shall have, and may exercise within 30 days of receipt of notice of such non-exercise (or deemed non-exercise), an option to purchase all of such remaining Membership Interest for the price and upon the other terms hereinafter provided. 2.4 OPTION UPON DEATH OF A MEMBER'S SPOUSE, TERMINATION OF MARITAL RELATIONSHIP OR PARTITION OF COMMUNITY PROPERTY. 2.4.1Death of Member's Spouse. Each Member and each Member's spouse agree that in the event the spouse of a Member predeceases such Member and such Member does not succeed by the spouse's last will and testament or by operation of law to any interest (including, without limitation, a community property interest) of the spouse in the Membership Interest, such Member shall have, and may exercise within 60 days after the death of the spouse, an option to purchase all or any portion of the spouse's interest for the price and upon the other terms hereinafter provided. If the Member fails, within such 60-day period, to exercise his purchase option (by delivery of written notice) with respect to the entirety of such spouse's interest, that Member shall be deemed to have elected not to exercise his purchase option with respect to such spouse's interest. Upon any notice of non-exercise (or deemed non-exercise) by the Member, the Option Members shall then have, and may exercise within 30 days after receipt of such non-exercise (or deemed non-exercise), an option to purchase all or any portion of the deceased spouse's interest, for the price and upon the other terms hereinafter provided. If the Option Members fail, within such 30-day period, to exercise their purchase option (by delivery of written notice) with respect to the entirety of such deceased spouse's interest, the Option Members shall be deemed to have elected not to exercise their purchase option with respect to such unpurchased deceased spouse's interest. Upon any notice of non-exercise (or deemed non-exercise) by the Option Members, Prime shall have, and may exercise within 30 days of receipt of notice of such non-exercise (or deemed non-exercise), an option to purchase all of such remaining portion of the deceased spouse's interest for the price and upon the other terms hereinafter provided. 2.4.2Termination of Marital Relationship or Partition of Community Property. In the event a divorce, annulment or other proceeding for termination of the marital relationship is filed by or against a Member, or upon the initiation of any voluntary or involuntary attempt to partition the community property estate between a Member and such Member's spouse for any reason, the Member shall promptly give written notice to the other Members and Prime, of such event. The Member shall have, and may exercise within 60 days of giving of such notice, an option to purchase all or any portion of the departing spouse's interest in such Membership Interest (including without limitation any community property interest, for purposes of this Section), for the price and upon the other terms hereinafter provided. If the Member fails, within such 60-day period, to exercise his purchase option (by delivery of written notice) with respect to the entirety of such spouse's interest, that Member shall be deemed to have elected not to exercise his purchase option with respect to such spouse's interest. Upon any notice of non-exercise (or deemed non-exercise) by the Member, the Option Members shall then have, and may exercise within 30 days after receipt of such non-exercise (or deemed non-exercise), an option to purchase all or any portion of the departing spouse's interest, for the price and upon the other terms hereinafter provided. If the Option Members fail, within such 30-day period, to exercise their purchase option (by delivery of written notice) with respect to the entirety of such departing spouse's interest, the Option Members shall be deemed to have elected not to exercise their purchase option with respect to such unpurchased departing spouse's interest. Upon any notice of non-exercise (or deemed non-exercise) by the Option Members, Prime shall have, and may exercise within 30 days of receipt of notice of such non-exercise (or deemed non-exercise), an option to purchase all of such remaining portion of the departing spouse's interest for the price and upon the other terms hereinafter provided. 2.5 ALTERNATE NOTICES. The failure of any person, whether a party to this Agreement or otherwise, to give notice of the occurrence of an Exercise Event (as defined in Section 4.3) as contemplated herein shall not operate to prevent the creation of any option which would otherwise arise pursuant to this ARTICLE II. Any party to this Agreement who has actual knowledge of the occurrence of an Exercise Event may give the required written notice of the occurrence of an Exercise Event, and upon the giving of such written notice the options shall be created and become exercisable to the same extent as if such notice was given by the party initially contemplated above. For instance, and purely by way of example, in the event of the death of a Member, another Member having actual knowledge of the Member's death may give the notice initially contemplated to be given by a representative of the estate of the deceased Member pursuant to Section 2.3.1 above, whereupon the Option Members' option described in Section 2.3.2 would arise and become exercisable to the same extent as if the notice had been given by the representative of the estate of the deceased Member. 2.6 OPPORTUNITY TO CURE. Before Prime may exercise any option to purchase a Membership Interest pursuant to Sections 2.2, 2.3 or 2.4, Prime shall deliver written notice of its intent to exercise its right ("Cure Notice") to the Option Members, who shall have ten days from the date of receipt of such Cure Notice to exercise their rights and purchase such Membership Interest, upon such terms as are otherwise provided herein. If each of the Option Members do not exercise their rights within ten days after receipt of the Cure Notice, then Prime may exercise its options under this Article II. ARTICLE III EXERCISE OF OPTIONS; EFFECT OF NON-EXERCISE 3.1 MANNER OF EXERCISE OF OPTIONS. All options granted in, or arising pursuant to, ARTICLE II shall be exercised by a written notice to that effect delivered within the time provided for the exercise of the option. 3.2 COMPLETE EXERCISE OF OPTIONS. Notwithstanding anything herein to the contrary, the holders of options granted in, or arising pursuant to, ARTICLE II must, either alone or in the aggregate, exercise the options in such a manner as to purchase all of the Membership Interest (or interest therein) subject to such options, and failure to do so shall cause a forfeiture of the options. 3.3 MULTIPLE OPTION HOLDERS. In cases where an option is held by more than one Option Member, each purchasing Option Member shall be entitled to purchase his or her proportionate share of the Membership Interest subject to the option. An Option Member's proportionate share shall equal the total amount of Membership Interests subject to the option multiplied by a fraction the numerator of which is the amount of Membership Interests held by such Option Member and the denominator of which shall be the amount of Membership Interests held by all Option Members electing to exercise the option. 3.4 EFFECT OF NON-EXERCISE OF OPTIONS. If the holders of options granted or arising pursuant to this Agreement do not exercise their options, or such options are forfeited, as provided herein, the person or persons acquiring the Membership Interests (or interest therein) that were the subject of the options shall execute a counterpart of this Agreement and become a party hereto and shall hold such Membership Interests subject to all the terms and conditions provided herein, and any transfer of such Membership Interests (or interest therein) shall only be made in accordance with the terms and conditions provided herein. In the event the person or persons acquiring the Membership Interests (or interest therein) fail to execute a counterpart of this Agreement and become a party hereto, such transfer shall be void and ineffectual, and shall not operate to transfer any interest or title to the purported transferee and such Membership Interests shall thereafter be subject to cancellation and extinguishment by the Company, without consideration therefor. In addition, in the event of a voluntary transfer subject to the provisions of Section 2.1, upon the lapse or forfeiture of the options arising pursuant to that Section, the Member proposing the transfer shall have the right to effectuate the transfer of Membership Interests in accordance with the terms stated in the notice of intent to transfer, and the transferee of such Membership Interests shall execute and become a party to this Agreement and shall hold such Membership Interests subject to all of its terms and conditions. Provided further, however, any such transfer of Membership Interests shall be void and ineffectual, and shall not operate to transfer any interest or title to the purported transferee, if (i) the transfer is not upon the terms or is not to the transferee stated in the notice of intent to transfer, or (ii) the transfer is not closed within 10 days of receipt of written notice of the election not to exercise, or the forfeiture of, all applicable options. ARTICLE IV PURCHASE PRICE 4.1 PURCHASE PRICE. The purchase price of the Membership Interests to be purchased pursuant to options granted, held or exercised pursuant to Sections 2.2, 2.3 and 2.4 hereof, shall be the amount calculated in accordance with Section 4.2 hereof. 4.2 CALCULATION OF PURCHASE PRICE. When determined in accordance with this Section 4.2, the purchase price for the Membership Interest or any portion thereof or spouse's interest therein shall be equal to the Appraised Value of the Membership Interest as of the Valuation Date (as defined in Section 4.3 hereof), reduced when necessary to reflect the purchase of less than a one hundred percent (100%) interest in each of the Membership Interests to be transferred (for example: reduced by one-half when a spouse's interest is only an undivided one-half community property interest in each of the Membership Interests of a Member spouse). For purposes of this Agreement, the "Appraised Value" of a Membership Interest shall be (i) based on the overall value of the Company as a going concern, expressed in a per Membership Interest unit amount without consideration to whether the Membership Interest, or interest therein, being transferred constitutes a controlling or minority interest in the Company, and (ii) determined by a certified business appraiser, selected by the Company, that is a member of either the American Society of Appraisers or the Institute of Business Appraisers; but if a Member or Prime disagrees with such determination that Member or Prime may, at its expense, have another certified business appraiser that is a member of one or both of the above named professional organizations determine the value, and if the two appraisers cannot agree upon a value, they shall mutually select a third certified business appraiser (that meets the above described membership requirements) who shall, together with the first two appraisers, determine the value of the Membership Interest by majority vote. The expense of such third appraiser shall also be paid by the Member or Prime, as the case may be, who disagrees with the value determination of the Company's original appraiser, unless the appraised value ultimately determined is more than ten percent (10%) greater than the value determined by the Company's original appraiser. 4.3 CERTAIN DEFINITIONS. As used herein, the term "Valuation Date" shall mean and refer to the end of the fiscal year of the Company immediately preceding the Exercise Event, unless the purchasing party elects to use the alternate valuation date, in which event the Valuation Date shall be the end of the month immediately preceding the Exercise Event. As used herein, the term "Exercise Event" shall mean and refer to the event or circumstance described in ARTICLE II of this Agreement, as a result of which the Company, a Member, or Prime, as the case may be in the first instance, becomes entitled to exercise a purchase option hereunder. ARTICLE V PAYMENT OF THE PURCHASE PRICE 5.1 PAYMENT. Except as otherwise provided in this Agreement, including Section 2.1, the purchase price for a Membership Interest to be purchased from a selling party shall either: (i) be paid in cash; or (ii) at the option of the purchasing party, up to seventy percent (70%) of the purchase price may be deferred with the remainder paid in cash at the closing. 5.2 PROMISSORY NOTE. If the purchasing party elects to defer part of the purchase price by the execution and delivery of a promissory note, the deferred portion of the price shall be evidenced by the promissory note of the purchasing party to the order of the selling party payable in sixty (60) equal monthly installments of principal and interest on or before the first day of each month beginning the month next following the date of closing. The interest rate for such installment promissory note shall be equal to the prime or base rate on corporate loans at large U.S. money center commercial banks as published in the "Money Rates" column of the Wall Street Journal on the date of exercise of the option to purchase (or, if such option is not exercised on a date on which such rate is published, the next following date on which such rate is published). In no event shall the interest rate exceed the maximum legal interest rate then prevailing for such obligations in the state of Texas. The note shall be secured by a first lien security interest in the Membership Interest transferred and the purchasing party shall deliver certificates evidencing the Membership Interest to the selling party and take such further action as is reasonably necessary to perfect the security interest. ARTICLE VI THE CLOSING Unless otherwise agreed by the parties, the closing of the sale and purchase of a Membership Interest shall take place at the principal offices of the Company within sixty (60) days after the exercise of any option provided by this Agreement. Each party hereto (including the spouses of the Members) shall bear its own transaction costs, including legal and accounting fees, if any, attributable to any transfer of a Membership Interest, or any interest therein, pursuant to this Agreement. Upon the closing, the selling party shall deliver its Membership Interest to the purchaser free and clear of all liens and encumbrances, and shall deliver to the Company its resignation and that of all of its nominees, if any, as officers and directors of the Company and any of the Company's subsidiaries. The selling party shall deliver to the purchasing party at closing, all appropriate documents of transfer, including without limitation bills of sale, assignments or other instruments of conveyance. As a condition to any closing of the sale and purchase of a Membership Interest (or any interest therein) pursuant to this Agreement: (i) the selling party shall be indemnified by the purchasing party (in a form reasonably satisfactory to the selling party) for all the Company's liabilities, whether fixed or contingent, to lenders and others, incurred prior to the closing of the transaction, (ii) the purchasing party and/or the Company shall cause the release of any personal guaranties by the selling party that the selling party may have granted to the Company's lenders or other creditors or which may have otherwise been provided by the selling party for the benefit of the Company, and (iii) if the selling party is a creditor of the Company, the purchasing party shall unconditionally guarantee the debt of the Company to the selling party and execute such documents and instruments of guarantee as may be necessary in connection therewith. Furthermore, and as a condition to closing, in the event the selling party owes any amounts to the Company at the time of closing, such indebtedness shall be paid in full by the selling party at or prior to the closing, or may be deducted from and offset against the purchase price by the purchasing party, in the purchasing party's sole discretion. In the event of a failure to close as a result of the non-satisfaction of the conditions to closing set forth herein, this Agreement shall remain in full force and effect and all Membership Interests shall remain subject to the restrictions contained herein and, in addition, the parties hereto shall be entitled to such other remedies as may be available in the event the failure to close constitutes a breach hereof. ARTICLE VII LEGEND ON CERTIFICATES All Membership Interests now or hereafter owned by the Members, or their permitted transferees, shall be subject to the provisions of this Agreement, and any certificates representing same shall bear the following legend: "THE MEMBERSHIP INTEREST REPRESENTED HEREBY AND THE SALE, ASSIGNMENT, TRANSFER, PLEDGE OR OTHER DISPOSITION THEREOF ARE SUBJECT TO CERTAIN RESTRICTIONS CONTAINED IN A MEMBERSHIP INTEREST TRANSFER RESTRICTION AGREEMENT AMONG THE COMPANY AND THE WITHIN NAMED MEMBER, AND ANY AMENDMENT THERETO. THE AGREEMENT LIMITS THE USE OF THIS MEMBERSHIP INTEREST AS COLLATERAL FOR ANY LOAN WHETHER BY PLEDGE, HYPOTHECATION OR OTHERWISE. A COPY OF THE MEMBERSHIP INTERES TRANSFER RESTRICTION AGREEMENT AND ALL APPLICABLE AMENDMENTS THERETO WILL BE FURNISHED BY THE COMPANY TO THE HOLDER HEREOF WITHOUT CHARGE UPON WRITTEN REQUEST TO THE COMPANY AT ITS PRINCIPAL PLACE OF BUSINESS OR REGISTERED OFFICE." ARTICLE VIII TERMINATION OF AGREEMENT This Agreement and all restrictions on Membership Interest transfer created hereby shall terminate on the occurrence of any of the following events: (a) The bankruptcy or dissolution of the Company. (b) The ownership by one person of all of the Membership Interests of the Company which are then subject to this Agreement. (c) The execution of a written instrument by the Company, all of the Members who then own Membership Interests subject to this Agreement, and Prime which terminates the same. (d) The date twenty-one (21) years after the death of the last survivor of all individuals who are parties to this Agreement. ARTICLE IX GENERAL PROVISIONS 9.1 REMEDIES FOR BREACH. The Membership Interests are unique chattels, and each party to this Agreement shall have the remedies which are available to him, her or it for the violation of any of the terms of this Agreement, including, but not limited to, the equitable remedy of specific performance. 9.2 BINDING EFFECT. This Agreement is binding upon and inures to the benefit of the Company, its successors and permitted assigns, to the Members and their respective heirs, personal representatives, successors and permitted assigns, and to Prime, its successors and permitted assigns. This Agreement may not be assigned, in whole or in part, by any party hereto without the express written consent of all parties hereto. 9.3 PRIOR AGREEMENTS. This Agreement supersedes all prior written and oral agreements between the parties regarding the subject matter hereof. 9.4 GOVERNING LAWS. This Agreement is executed under, and in conformity with, the laws of the State of Texas and shall be governed thereby. If any provision of this Agreement shall be determined to be invalid or unenforceable or prohibited by the laws of the State of Texas, this Agreement shall be considered divisible as to such provisions and such provisions shall be inoperative and shall not be a part of the consideration moving from any party to another party. The remaining provisions shall be valid and binding upon the parties and be of like effect as though such invalid, unenforceable or prohibited provisions were not included herein. 9.5 AMENDMENT. This Agreement may be amended in whole or in part only by the written consent of all the parties. Such amendment shall be effective as of the date then determined by the parties and shall supersede any provisions herein contained which are in conflict. 9.6 CAPTIONS AND GENDER. The captions and titles herein are for convenience only and are not intended to include or conclusively define the subject matter of the text. All pronouns and references thereto shall refer to the masculine, feminine, and neuter genders, singular or plural, as the identification of the persons, entities, and companies may require. The term "person" as used in this Agreement shall include natural persons, companies, partnerships, trusts, estates and any other form of entity. 9.7 NOTICES. All notices required to be given hereunder shall be deemed to be duly given by personally delivering such notice or by mailing it by certified mail, to the Company, to the Members, and to Prime at the following addresses (which may be changed by giving written notice of such change to all other parties hereto): To the Company: MBC Holding Company, L.L.C. 1200 Binz, Suite 1000 Houston, Texas 77004 To Mann: Paul Michael Mann, M.D. 1200 Binz, Suite 1000 Houston, Texas 77004 To Berkeley: Ralph G. Berkeley, M.D. 1200 Binz, Suite 1000 Houston, Texas 77004 To Caplan: Michael B. Caplan, M.D. 1200 Binz, Suite 1000 Houston, Texas 77004 To Micheletti: Mark F. Micheletti 1200 Binz, Suite 1000 Houston, Texas 77004 To Prime: Prime RVC, Inc. Attention: President 1301 Capital of Texas Highway Austin, Texas 78746 9.8 BINDING EFFECT OF THIS AGREEMENT ON ADDITIONAL MEMBERSHIP INTEREST ACQUIRED BY A MEMBER. In the event a Member acquires, contracts to acquire, or receives any Membership Interests of the Company which are not subject to this Agreement at the time of acquisition, such additional Membership Interests of the Member shall be automatically subject to this Agreement and any certificates representing such Membership Interests shall bear the legend prescribed herein and this Agreement shall be amended, if necessary, to reflect the acquisition of such Membership Interests by the Member. 9.9 EXECUTION OF DOCUMENTS. Whenever Membership Interests are to be purchased by the Company, a Member, or Prime pursuant to this Agreement, the transferor shall do all things and execute and deliver all documents and make all transfers as may be necessary to consummate such purchase. In the event that the transferor refuses to abide by the terms and conditions specified herein, the purchaser(s) may tender payment for such Membership Interest by mailing payment to the transferor's attention at the address of the Company's registered office on file at the office of the Texas Secretary of State. After payment is tendered accordingly, the Company shall be entitled to cancel such Membership Interest on its books, and reissue such Membership Interest to the purchaser(s) or, if the purchaser is the Company, the Company may hold such Membership Interest as treasury stock or cancel such Membership Interest. 9.10 ACTIONS BY THE COMPANY. Any decision by the Company to exercise any purchase option, give any notice or otherwise enforce any provisions of this Agreement, shall be made by a majority vote of Members who are not then in breach of this Agreement and whose Membership Interests are not then the subject of any option or requirement of notice of an Exercise Event. [Signature pages follow] S-2 SIGNATURE PAGE TO MEMBERSHIP INTEREST TRANSFER RESTRICTION AGREEMENT EXECUTED as of the date first mentioned above. COMPANY: MBC Holding Company, L.L.C. By: Printed Name:__________________ Title: MANN: Paul Michael Mann, M.D. BERKELEY: Ralph G. Berkeley, M.D. CAPLAN: Michael B. Caplan, M.D. MICHELETTI: Mark F. Micheletti PRIME: Prime RVC, Inc. By: Printed Name: Title: SPOUSAL CONSENTS The undersigned spouse of Paul Michael Mann, M.D. hereunto subscribes her name in evidence of her agreement and consent to the disposition made of any interest she may have, including any community property interests, in the membership interest of MBC Holding Company, L.L.C., referred to in the foregoing Agreement, and to all other provisions of such Agreement. Signature: Printed Name: The undersigned spouse of Ralph G. Berkeley, M.D. hereunto subscribes her name in evidence of her agreement and consent to the disposition made of any interest she may have, including any community property interests, in the membership interest of MBC Holding Company, L.L.C., referred to in the foregoing Agreement, and to all other provisions of such Agreement. Signature: Printed Name: The undersigned spouse of Michael B. Caplan, M.D. hereunto subscribes her name in evidence of her agreement and consent to the disposition made of any interest she may have, including any community property interests, in the membership interest of MBC Holding Company, L.L.C., referred to in the foregoing Agreement, and to all other provisions of such Agreement. Signature: Printed Name: The undersigned spouse of Mark F. Micheletti hereunto subscribes her name in evidence of her agreement and consent to the disposition made of any interest she may have, including any community property interests, in the membership interest of MBC Holding Company, L.L.C., referred to in the foregoing Agreement, and to all other provisions of such Agreement. Signature: Printed Name: EX-10.103 16 0016.txt EX 10.103 L.L.C. AGREEMENT - MANN BERKELEY LIMITED LIABILITY COMPANY AGREEMENT OF PRIME MBC, L.L.C. Organized under the Delaware Limited Liability Company Act (the "Act"). ARTICLE I. NAME AND LOCATION Section 1.1. Name. The name of this limited liability company is Prime MBC, L.L.C. (the "Company"). Section 1.2. Members. The only members of the Company upon the execution of this Limited Liability Company Agreement (this "Agreement") shall be Prime RVC, Inc, a Delaware corporation ("Prime"), and MBC Holding Company, L.L.C., a Texas limited liability company ("MBC"). For purposes of this Agreement, the "Members" shall include such named members and any new members admitted pursuant to the terms of this Agreement, but does not include any person or entity who has ceased to be a member in the Company. Section 1.3. Principal Office. The principal office of the Company shall be located in 1301 Capital of Texas Hwy., Suite C-300, Austin, Texas 78746-6550, or such other location as may be selected by the Members. Section 1.4. Registered Agent and Address. The name of the registered agent and the address of the registered office of the Company as set forth in the Certificate of Formation of the Company are: The Corporation Trust Company 1209 Orange Street Wilmington, Delaware 19801 Section 1.5. Other Offices. Other offices and other facilities for the transaction of business shall be located at such places as the Managers may from time to time determine. Section 1.6 Contribution Agreement. The Company was initially formed with a single member, MBC, for the purpose of consummating the transactions contemplated by that certain Contribution Agreement dated effective March 1, 2000, by and among Prime, MBC, the Company, Mann Berkeley Eye Center, P.A., a Texas professional association, Paul Michael Mann, M.D., Ralph G. Berkeley, M.D., Michael B. Caplan, M.D., and Mark F. Micheletti (the "Contribution Agreement"). The parties have executed this Agreement upon consummation of the transactions contemplated by the Contribution Agreement. This agreement supercedes and replaces any prior membership agreement or other governing or organizational document of the Company. ARTICLE II. MEMBERSHIP Section 2.1. Members' Interests. The "Membership Interest" of each Member is set forth on Exhibit A. Section 2.2. Admission to Membership. The admission of new Members shall be only by the vote of the Managers pursuant to Section 8.9 hereof. If new Members are admitted, this Agreement shall be amended to reflect each Member's revised Membership Interest. Section 2.3. Property Rights. No Member shall have any right, title, or interest in any of the property or assets of the Company. Section 2.4. Liability of Members. No Member of the Company shall be personally liable for any debts, liabilities, or obligations of the Company, including under a judgment decree, or order of court. Section 2.5. Transferability of Membership. Except as provided below, Membership Interests in the Company are transferable only with the unanimous written consent of all Members. If such unanimous written consent is not obtained when required, the transferee shall be entitled to receive only the share of profits or other compensation by way of income and the return of contributions to which the transferor Member otherwise would be entitled. Notwithstanding the foregoing, the following shall not be deemed to violate any provision of this Agreement: (i) the Membership Interests of Prime may be freely transferred, without consent, to any entity that is then owned or controlled, directly or indirectly, by Prime Medical Services, Inc., a Delaware corporation ("PMSI")(or its successor in interest), (ii) the Membership Interests of any Member may be freely assigned, pledged or otherwise transferred, without consent, to secure any debt, liability or obligation owed to Prime by the Company, any Member or any entity affiliated with the Company, (iii) the Membership Interests of any Member may be freely assigned, pledged or otherwise transferred, without consent, in favor of the Lender(s) under, or by the Lender(s) as a result of the enforcement of any security interest arising pursuant to, those certain Credit Facilities (the "Credit Facilities") of PMSI and/or any of PMSI's subsidiaries, and (iv) the pledge by MBC (pursuant to Section 6.3 of the Contribution Agreement) of its right to receive distributions from the Company in respect of its Membership Interest. Section 2.6. Resignation of Members. A Member may not withdraw from the Company except on the unanimous consent of the remaining Members. The terms of the Members withdrawal shall be determined by agreement between the remaining Members and the withdrawing Member. ARTICLE III. MEMBERS' MEETINGS Section 3.1. Time and Place of Meeting. All meetings of the Members shall be held at such time and at such place within or without the State of Delaware as shall be determined by the Managers. Section 3.2. Annual Meetings. In the absence of an earlier meeting at such time and place as the Managers shall specify, annual meetings of the Members shall be held at the principal office of the Company on the date which is thirty (30) days after the end of the Company's fiscal year if not a legal holiday, and if a legal holiday, then on the next full business day following, at 10:00 a.m., at which meeting the Members may transact such business as may properly be brought before the meeting. Section 3.3. Special Meetings. Special meetings of the Members may be called at any time by any Member. Business transacted at special meetings shall be confined to the purposes stated in the notice of the meeting. Section 3.4. Notice. Written or printed notice stating the place, day and hour of any Members' meeting, and, in the case of a special meeting, the purpose or purposes for which the meeting is called, shall be delivered not less than ten (10) days nor more than thirty (30) days before the date of the special meeting, either personally or by mail, by or at the direction of the person calling the meeting, to each Member entitled to vote at such meeting. If mailed, such notice shall be deemed to be delivered three (3) days after it is deposited in the United States mail, postage prepaid, to the Member at his address as it appears on the records of the Company at the time of mailing. Section 3.5. Quorum. Members present in person or represented by proxy, holding more than fifty percent (50%) of the total votes which may be cast at any meeting shall constitute a quorum at all meetings of the Members for the transaction of business. If, however, such quorum shall not be present or represented at any meeting of the Members, the Members entitled to vote, present in person or represented by proxy, shall have power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present or represented. When any adjourned meeting is reconvened and a quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally noticed. Once a quorum is constituted, the Members present or represented by proxy at a meeting may continue to transact business until adjournment, notwithstanding the subsequent withdrawal therefrom of such number of Members as to leave less than a quorum. Section 3.6. Voting. Members shall only be required to vote in instances or with respect to matters where member voting is required by applicable law or to the extent expressly contemplated in Section 8.1. With respect to any act or transaction that requires a vote by the Members under applicable law, the affirmative vote of not less than three (3) of the Managers shall also be required in order to approve the act or transaction, in each instance. Subject to the foregoing, when a quorum is present at any meeting, the vote of the Members, whether present or represented by proxy at such meeting, holding more than fifty percent (50%) of the total votes which may be cast at any meeting shall be the act of the Members, unless the vote of a different number is required by the Act, the Certificate of Formation or this Limited Liability Company Agreement. Each Member shall be entitled to one vote for each percentage point represented by their Membership Interest. Fractional percentage point interests shall be entitled to a corresponding fractional vote. The provisions of this Section shall not interfere with the provisions of Section 8.9 relating to acts or transactions requiring the written approval of three (3) or more Managers. Section 3.7. Proxy. Every proxy must be executed in writing by the Member or by his duly authorized attorney-in-fact, and shall be filed with the Secretary of the Company prior to or at the time of the meeting. No proxy shall be valid after eleven (11) months from the date of its execution unless otherwise provided therein. Each proxy shall be revocable unless expressly provided therein to be irrevocable and unless otherwise made irrevocable by law. Section 3.8. Action by Written Consent. Any action required or permitted to be taken at any meeting of the Members may be taken without a meeting if a consent in writing, setting forth the action so taken, shall be signed by all of the Members entitled to vote with respect to the subject matter thereof, and such consent shall have the same force and effect as a unanimous vote of Members. Section 3.9. Meetings by Conference Telephone. Members may participate in and hold meetings of Members by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation in such a meeting shall constitute presence in person at such meeting, except where a person participates in the meeting for the express purpose of objecting to the transaction of any business on the ground that the meeting is not lawfully called or convened. ARTICLE IV. MEMBERSHIP CAPITAL CONTRIBUTIONS Except for each Member's initial capital contribution made in connection with the formation of the Company, no capital contributions shall be required of any Member without the approval of all the Members to raise additional capital, and only then proportionately as to each Member. ARTICLE V. DISTRIBUTION TO MEMBERS At the end of each calendar quarter, subject only to the qualifications and limitations set forth below, the Company shall distribute its available excess earnings to its members, to be divided among them in accordance with their Membership Interests. Distributions in kind shall be made on the basis of agreed value as determined by the Members. Notwithstanding the foregoing, the Company may not make a distribution to its Members to the extent that, immediately after giving effect to the distribution, all liabilities of the Company, other than liabilities to the Members with respect to their interests and liabilities for which the recourse of creditors is limited to specified property of the Company, exceed the fair value of the Company assets; except that the fair value of property that is subject to liability for which recourse of creditors is limited, shall be included in the Company assets only to the extent that the fair value of the property exceeds that liability. ARTICLE VI. ALLOCATION OF NET PROFITS AND LOSSES FOR TAX PURPOSES For accounting and income tax purposes, all items of income, gain, loss, deduction, and credit of the Company for any taxable year shall be allocated among the Members in accordance with their respective Membership Interests, except as may be otherwise required by the Internal Revenue Code of 1986, as amended. ARTICLE VII. DISSOLUTION AND WINDING UP Section 7.1. Dissolution. Notwithstanding any provision of the Act, the Company shall be dissolved only upon the first of the following to occur: (a) Forty (40) years from the date of filing the Certificate of Formation of the Company; (b) Written consent of all the then current Members to dissolution; (c) The bankruptcy of a Member, unless there is at least one remaining Member and such Member or, if more than one remaining Member, all remaining Members agree to continue the Company and its business. Section 7.2. Winding Up. Unless the Company is continued pursuant to Section 7.1(c) of this Article VII., in the event of dissolution of the Company, the Managers (excluding any Manager(s) holding office pursuant to designation by a Member subject to bankruptcy proceedings) shall wind up the Company's affairs as soon as reasonably practicable. On the winding up of the Company, the Managers shall pay and/or transfer the assets of the Company in the following order: (a) In discharging liabilities (including loans from Members) and the expenses of concluding the Company's affairs; and (b) The balance, if any, shall be divided between the Members in accordance with the Members' Membership Interests. ARTICLE VIII. MANAGERS Section 8.1. Selection of Managers. Management of the Company shall be vested in the Managers. Initially, the Company shall have five (5) Managers, being Ken Shifrin, Cheryl Williams, Brad Hummel (as the initial Manager designees of Prime), Paul Michael Mann, M.D. and Ralph G. Berkeley, M.D., (as the initial Manager designees of MBC). Thereafter, for so long as there are five (5) Managers, (a) Prime shall be entitled to designate three (3) of the Managers; and (b) MBC shall be entitled to designate the remaining two (2) of the Managers. Notwithstanding the foregoing, a Member shall not be entitled to designate any Manager unless its Membership Interest: (x) has not (other than as allowed under Section 2.5 of this Agreement) been transferred, repurchased, assigned, pledged, hypothecated or in any way alienated; and (y) equals or exceeds forty percent (40%) of the aggregate Membership Interests. The Members may, by unanimous vote of all Members, from time to time, change the number of Managers of the Company and remove or add Managers accordingly. A Manager shall serve as a Manager until their resignation or removal pursuant to Section 8.2 or 8.3 of this Article VIII. Managers need not be residents of the State of Delaware or Members of the Company. Section 8.2. Resignations. Each Manager shall have the right to resign at any time upon written notice of such resignation to the Members. Unless otherwise specified in such written notice, the resignation shall take effect upon the receipt thereof, and acceptance of such resignation shall not be necessary to make same effective. The Member who designated a resigning manager shall be entitled to designate the successor thereto and all Members agree to take such action as may be necessary to cause the election of all such successor Managers. Section 8.3. Removal of Managers. Any Manager may be removed, for or without cause, at any time, but only by the Member who designated such Manager, upon the written notice to all Members. The Member who designated such removed Manager shall be entitled to designate the successor thereto and all Members agree to take such action as may be necessary to cause the election of all such successor Managers. Section 8.4. General Powers. The business of the Company shall be managed by its Managers, which may, by the vote or written consent in accordance with this Agreement, exercise any and all powers of the Company and do any and all such lawful acts and things as are not by the Act, the Certificate of Formation or this Limited Liability Company Agreement directed or required to be exercised or done by the Members, including, but not limited to, contracting for or incurring on behalf of the Company debts, liabilities and other obligations, without the consent of any other person, except as otherwise provided herein. Section 8.5. Place of Meetings. The Managers of the Company may hold their meetings, both regular and special, either within or without the State of Delaware. Section 8.6. Annual Meetings. The annual meeting of the Managers shall be held without further notice immediately following the annual meeting of the Members, and at the same place, unless by unanimous consent of the Managers that such time or place shall be changed. Section 8.7. Regular Meetings. Regular meetings of the Managers may be held without notice at such time and place as shall from time to time be determined by the Managers. Section 8.8. Special Meetings. Special meetings of the Mangers may be called by any Manager on seven (7) days notice to each Manager, with such notice to be given personally, by mail or by telecopy, telegraph or mailgram. Section 8.9. Quorum and Voting. At all meetings of the Managers the presence of at least three (3) Managers shall be necessary and sufficient to constitute a quorum for the transaction of business, and the affirmative vote of at least a majority of the Managers present at any meeting at which there is a quorum shall be the act of the Managers, except as may be otherwise specifically provided by the Act, the Contribution Agreement, the Certificate of Formation or this Agreement. If a quorum shall not be present at any meeting of Managers, the Managers present there may adjourn the meeting from time to time without notice other than announcement at the meeting, until a quorum shall be present. Notwithstanding any other Member or Manager voting or quorum provisions contained in this Agreement, the following acts or transactions by, or involving, the Company shall require the prior written approval of three (3) or more Managers (unless and to the extent a particular act or transaction is expressly required of the Company pursuant to the terms and provisions of the Contribution Agreement or any Transaction Document): (a) Any amendment to the Company's Certificate of Formation or this Agreement. (b) Mergers, consolidations or combinations of the Company with another limited liability company or other entity. (c) Purchase by the Company of any interest in the Company, irrespective of the source of such interest. (d) Disposition, sale, assignment or other transfer by the Company of any interest it owns in the Company, except that such interest may be extinguished without the approval required under this Article. (e) Issuance of any interest in the Company to any party. (f) Dissolving, liquidating, or filing bankruptcy or seeking relief under any debtor relief law. (g) Election or removal of officers, and establishing or changing the compensation for Managers, officers or other employees. (h) Not making any cash distributions to its Members that are required by this Agreement to be made, or making any distributions to its Members of cash or property that are prohibited under this Agreement. (i) Sale, lease or other transfer of all or substantially all of the Company's assets, or any assets other than in the ordinary course of the Company's business. (j) Initiating or settling any litigation or regulatory proceeding, or confessing any judgment. (k) Hiring or changing the Company's accountants or legal counsel. (l) Opening or closing bank or other depository accounts, and establishing or changing the signature withdrawal authority with respect to any such accounts. (m) Borrowing or incurring any indebtedness, other than open accounts payable to unaffiliated third parties, or granting any collateral or security (by way of guaranty or otherwise) for any indebtedness or obligation. (n) Engaging in any act or transaction not in the ordinary course of the Company's business. (o) Purchasing or leasing assets or property, or entering into any contract or obligation, which obligates the Company to pay in excess of $10,000 in the aggregate in one or any series of installments. (p) Doing any business other than the conduct of the Business (as defined in the Contribution Agreement) or causing a change in the nature of the business or the legal name of the Company. (q) Entering into a transaction or other action with any Manager, officer or Member. (r) Waiving, refusing to enforce, amending, restating, superseding or modifying any of the provisions of this Agreement or any Transaction Document. (s) Taking any other action which, by the terms of this Agreement, requires the approval or consent of not less than seventy-five percent (75%) of the Members. Any of the above stated actions taken by the Company without the necessary manager approval is void ab initio. Section 8.10. Committees. The Managers may, by resolution passed by eighty percent (80%) of the Managers, designate committees, each committee to consist of two or more Managers (at least one of which must be a Manager designee of Prime and one of which must be a Manager designee of MBC), which committees shall have such power and authority and shall perform such functions as may be provided in such resolution. Such committee or committees shall have such name or names as may be designated by the Managers and shall keep regular minutes of their proceedings and report the same to the Managers when required. The foregoing paragraph notwithstanding, the Managers shall establish a Medical Executive Committee, the size and composition of which shall be established by resolution passed by the affirmative vote of not less than eighty percent (80%) of the Managers. Members of the Medical Executive Committee must be licensed physicians, but need not be Members, Managers, or officers of the Company. The Medical Executive Committee shall meet at such time or times as it may, by majority vote of its members, elect and may adopt procedures for the conduct of its meetings. The Medical Executive Committee shall have authority and control over the medical aspects of the Company's business, and shall provide advice to the Managers on decisions relating to equipment purchases, technological obsolescence, quality assurance, credentialing, and such other matters as shall be requested by the Managers. The Medical Executive Committee shall have the authority to bind the Company only with respect to the medical aspects of the Company's business. Unless otherwise established by a resolution adopted by at least a majority of the members of the Medical Executive Committee, the majority of the members of the Medical Executive Committee shall constitute a quorum of the transaction of its business and the affirmative vote of the majority of the members of the Medical Executive Committee shall constitute action validly taken by that body. Section 8.11. Compensation of Managers. The Members, by unanimous approval, shall have the authority to provide that any one or more of the Managers shall not be compensated, and may, by unanimous approval, fix any compensation (which may include expenses) they elect to pay to any one or more of the Managers. Section 8.12. Action by Written Consent. Any action required or permitted to be taken at any meeting of the Managers or of any committee designated by the Managers may be taken without a meeting if written consent, setting forth the action so taken, is signed by all the Managers or of such committee, and such consent shall have the same force and effect as a unanimous vote at a meeting. Section 8.13. Meetings by Conference Telephone. Managers or members of any committee designated by the Managers may participate in and hold a meeting of the Managers or such committee by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation in such a meeting shall constitute presence in person at such meeting, except where a person participates in the meeting for the express purpose of objecting to the transaction of any business on the ground that the meeting is not lawfully called or convened. Section 8.14. Liability of Managers. No Manager of the Company shall be personally liable for any debts, liabilities, or obligations of the Company, including under a judgment, decree, or order of the court. Section 8.15. Specific Power of Managers. The Managers shall have the authority to enter into and execute all documents in relation to the formation of the Company including, but not limited to, issuance of the Certificate of Formation and this Limited Liability Company Agreement. ARTICLE IX. NOTICES Section 9.1. Form of Notice. Whenever under the provisions of the Act, the Certificate of Formation or this Limited Liability Company Agreement notice is required to be given to any Manager or Member, and no provision is made as to how such notice shall be given, notice shall not be construed to mean personal notice only, but any such notice may also be given in writing, by mail, postage prepaid, addressed to such Manager or Member at such address as appears on the books of the Company, or by telecopy, telegraph or mailgram. Any notice required or permitted to be given by mail shall be deemed to be given three (3) days after it is deposited, postage prepaid, in the United States mail as aforesaid. Section 9.2. Waiver. Whenever any notice is required to be given to any Manager or Member of the Company under the provision of the Act, the Certificate of Formation or this Limited Liability Company Agreement, a waiver thereof in writing signed by the person or persons entitled to such notice, whether signed before or after the time stated in such waiver, shall be deemed equivalent to the giving of such notice. ARTICLE X. OFFICERS Any Manager may also serve as an officer of the Company. The Managers may designate one or more persons who are not Managers of the Company to serve as officers and may designate the titles of all officers. The initial officers of the Company shall be: Ken Shifrin, Chairman of the Board; Brad Hummel, President; Teena Belcik, Vice President, Secretary and Chief Financial Officer; and Mark Micheletti, Vice President. Unless otherwise provided in a resolution of the Members or Managers the officers of the Company shall have the powers designated with respect to such offices under the Delaware Limited Liability Company Act, and any successor statute, as amended from time-to-time. ARTICLE XI. INDEMNITY Section 11.1. Indemnification. The Company shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative, arbitrative or investigative, any appeal in such an action, suit or proceeding and any inquiry or investigation that could lead to such an action, suit or proceeding (whether or not by or in the right of the Company), by reason of the fact that such person is or was a manager, officer, employee or agent of the Company or is or was serving at the request of the Company as a director, manager, officer, partner, venturer, proprietor, trustee, employee, agent or similar functionary of another corporation, employee benefit plan, other enterprise, or other entity, against all judgments, penalties (including excise and similar taxes), fines, settlements and reasonable expenses (including attorneys' fees and court costs) actually and reasonably incurred by him in connection with such action, suit or proceeding to the fullest extent permitted by any applicable law, and such indemnity shall inure to the benefit of the heirs, executors and administrators of any such person so indemnified pursuant to this Article XI. The right to indemnification under this Article XI shall be a contract right and shall not be deemed exclusive of any other right to which those seeking indemnification may be entitled under any law, bylaw, agreement, vote of members or disinterested managers or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office. Any repeal or amendment of this Article XI by the Managers (pursuant to Section 8.9 hereof) or by changes in applicable law shall, to the extent permitted by applicable law, be prospective only, and shall not adversely affect the indemnification of any person who may be indemnified at the time of such repeal or amendment. Section 11.2. Indemnification Not Exclusive. The rights of indemnification and reimbursement provided for in this Article XI shall not be deemed exclusive of any other rights to which any such Manager, officer, employee or agent may be entitled under the Certificate of Formation, this Limited Liability Company Agreement, agreement or vote of Members, or as a matter of law or otherwise. Section 11.3. Other Indemnification Clauses. Notwithstanding the foregoing, this Article XI shall not be construed to contradict the indemnification provisions of the Contribution Agreement. Notwithstanding anything contained herein, this Article XI shall be ineffectual and shall not permit or require indemnification for all, or any, losses, costs, liabilities, claims or expenses arising, directly or indirectly, from any action or omission permitting or requiring indemnification under the Contribution Agreement; and in no event may any indemnity be allowed under this Agreement or pursuant to any provision of the Act for an amount paid or payable pursuant to the indemnification provisions of the Contribution Agreement. ARTICLE XII. MISCELLANEOUS Section 12.1. Fiscal Year. The fiscal year of the Company shall be fixed by resolution of the Managers. Section 12.2. Records. At the expense of the Company, the Managers shall maintain records and accounts of all operations of the Company. At a minimum, the Company shall keep at its principal place of business the following records: (a) A current list of the name and last known mailing address of each Member; (b) A current list of each Member's Membership Interest; (c) A copy of the Certificate of Formation and Limited Liability Company Agreement of the Company, and all amendments thereto, together with executed copies of any powers of attorney; (d) Copies of the Federal, state, and local income tax returns and reports for the Company's six most recent tax years; and (e) Correct and complete books and records of account of the Company. Section 12.3. Seal. The Company may by resolution of the Managers adopt and have a seal, and said seal may be used by causing it or a facsimile thereof to be impressed or affixed or in any manner reproduced. Any officer of the Company shall have authority to affix the seal to any document requiring it. Section 12.4. Agents. Every Manager and Officer is an agent of the Company for the purpose of the business. The act of a Manager or Officer, including the execution in the name of the Company of any instrument for carrying on in the usual way the business of the Company, binds the Company. Section 12.5. Checks. All checks, drafts and orders for the payment of money, notes and other evidences of indebtedness issued in the name of the Company shall be signed by such officer, officers, agent or agents of the Company and in such manner as shall from time to time be determined by resolution of the Managers. In the absence of such determination by the Mangers, such instruments shall be signed by the Treasurer or the Secretary and countersigned by the President or a Vice President of the Company, if the Company has such officers. Section 12.6. Deposits. All funds of the Company shall be deposited from time to time to the credit of the Company in such banks, trust companies or other depositories as the Managers may select. Section 12.7. Annual Statement. The Managers shall present at each annual meeting a full and clear statement of the business and condition of the Company. Section 12.8. Financial Statements. As soon as practicable after the end of each fiscal year of the Company, a balance sheet as at the end of such fiscal year, and a profit and loss statement for the period ended, shall be distributed to the Members, along with such tax information (including all information returns) as may be necessary for the preparation of each Member of its Federal, state and local income tax returns. The balance sheet and profit and loss statement referred to in the previous sentence may be as shown on the Company's federal income tax return. Section 12.9. Binding Arbitration. Any controversy between the parties regarding this Agreement and any claims arising out of this Agreement or its breach shall be submitted to arbitration by either party. The arbitration proceedings shall be conducted by a single arbitrator pursuant to the Commercial Arbitration Rules of the American Arbitration Association. The arbitration shall be conducted in Dallas, Texas and the arbitrator shall have the right to award actual damages and attorney fees and costs, but shall not have the right to award punitive, exemplary or consequential damages against either party. ARTICLE XIII. AMENDMENTS Section 13.1. Amendments. This Agreement may be altered, amended or repealed and a new limited liability company agreement may be adopted, only in accordance with the provisions of Section 8.9, but otherwise at any regular meeting or at any special meeting called for that purpose, or by execution of a written consent in accordance with the provisions of Section 3.8. Section 13.2. When Limited Liability Company Agreement Silent. It is expressly recognized that when the Limited Liability Company Agreement is silent or in conflict with the requirements of the Act as to the manner of performing any Company function, the provisions of the Act shall control. [Signature page follows] S-1 SIGNATURE PAGE TO LIMITED LIABILITY COMPANY AGREEMENT IN WITNESS WHEREOF, the undersigned Members hereby adopt this Limited Liability Company Agreement as the Limited Liability Company Agreement of the Company, effective as of the 1st day of March, 2000. MBC Holding Company, L.L.C. By: Printed Name: Title: Prime RVC, Inc. By: Printed Name: Title: A-1 EXHIBIT A OWNERSHIP INTERESTS Name Ownership Percentage Prime 60% MBC 40% EX-10.104 17 0017.txt EX 10.104 MANAGEMENT AGREEMENT FOR MANN BERKELEY REFRACTIVE LASER CENTER MANAGEMENT AGREEMENT THIS REFRACTIVE LASER CENTER MANAGEMENT AGREEMENT ("Management Agreement") is made and entered into as of March 1, 2000 (the "Effective Date"), by and between Prime MBC, L.L.C., a Delaware limited liability company (the "Center Company") and Mann Berkeley Eye Center, P.A., a Texas professional association ("MBEC"). The Center Company and MBEC are collectively referred to herein as the "Parties". Recitals WHEREAS, Prime RVC, Inc., a Delaware corporation ("Prime"), acquired an ownership interest in Center Company (the "Purchase") pursuant to that certain Contribution Agreement dated as of March 1, 2000 (the "Contribution Agreement") by and among Prime, the Center Company, MBEC, MBC Holding Company, L.L.C., a Texas limited liability company ("Target Center"), Paul Michael Mann, M.D., Ralph G. Berkeley, M.D., Michael B. Caplan, M.D. and Mark F. Micheletti; and WHEREAS, pursuant to the Contribution Agreement the Center Company owns and operates a refractive laser center in Austin, Texas (the "Center") which was previously owned by Target Center and managed by MBEC; and WHEREAS, in connection with, and pursuant to, the Purchase, MBEC has agreed to continue to provide management and marketing services to, and bear the same type of expenses and employ all employees on behalf of, Center Company, consistent with MBEC's past practices in connection with Target Center (subject to appropriate adjustment for any growth of Center Company or increase in patient volume at the Center during the term of this Management Agreement); WHEREAS, the Center Company desires to engage and delegate daily administrative and operational responsibility for the Center to MBEC, pursuant to specified terms, conditions, and controls; and WHEREAS, MBEC desires to provide such management services pursuant to the terms and conditions set forth herein; NOW, THEREFORE, the Parties hereby mutually agree as follows: AGREEMENT 1. Appointment. The Center Company hereby appoints MBEC as contract manager for the Center ("Appointment") and MBEC hereby accepts such Appointment, upon the provisions and conditions set forth in this Management Agreement. MBEC hereby agrees and acknowledges that its execution and performance of this Management Agreement is a material inducement to the execution and performance by Prime of the Contribution Agreement. Accordingly, Prime is a third party beneficiary of this Agreement. 2. Term and Renewal. The initial term of this Management Agreement shall commence upon the Effective Date and shall continue thereafter for a period of five (5) years (the "Initial Term"). Thereafter, the term of this Management Agreement shall automatically renew for successive five (5) year terms, unless terminated by either party by giving written notice of termination at least 180 days prior to the end of the Initial Term or any renewal term, or unless terminated for cause as set forth in Section 3. The Initial Term and all renewals thereof shall be referred to herein as the "Term." 3. Termination. During the Term, this Management Agreement may be terminated only upon the occurrence of any of the following events ("Events of Termination"), which shall be deemed a termination for cause: (a) By MBEC upon the failure by Center Company to make payments due hereunder (other than a payment being disputed by Center Company in good faith), or the failure by Center Company to allow MBEC to collect a Management Fee (as hereinafter defined) pursuant to a Fee Report (as hereinafter defined) approved, or deemed approved, by Center Company, which failure remains uncured for a period of ten (10) days after written notice, or by a non-breaching Party in the event of a failure by any other Party to perform a material obligation hereunder, which failure remains uncured for a period of thirty (30) days following written notice thereof by the non-breaching Party; (b) By the Center Company upon a final judicial determination having been made, not subject to further appeal, that MBEC was grossly negligent in performance of its obligations hereunder or committed a fraud upon the Center Company; (c) By the Center Company in the event any officer or director of MBEC or any affiliate thereof is convicted on a charge constituting a felony involving moral turpitude under the laws of the State of Texas; (d) By the Center Company in the event of the involuntary transfer or assignment of a majority of the voting securities of MBEC to a person or entity other than an affiliate of MBEC; (e) By the Center Company in the event MBEC makes an assignment for the benefit of creditors, files a voluntary petition in bankruptcy, is adjudicated a bankrupt or insolvent, or has ordered against it an order for any relief in any bankruptcy or insolvency proceeding; (f) By the Center Company in the event MBEC files a petition or answer seeking any reorganization, arrangement, composition, readjustment, liquidation, dissolution, or similar relief under any statute, law, or regulation or fails to contest the material allegations of a petition filed against it in a proceeding of such nature; (g) By the Center Company in the event MBEC seeks, consents to, or acquiesces in the appointment of a trustee, receiver, or liquidator of MBEC or all or any substantial part of its properties; (h) By the Center Company in the event of any proceeding against MBEC seeking reorganization, arrangement, composition, readjustment, liquidation, dissolution, or similar relief under any statute, law, or regulation not having been dismissed within one hundred twenty (120) days after the commencement thereof; (i) By the Center Company in the event of the appointment of a trustee, receiver, or liquidator for MBEC or all or any substantial part of its properties without the consent or acquiescence of MBEC, and such appointment not being vacated or stayed within 90 days after the appointment, or, if stayed, the appointment not having been vacated within 90 days after the expiration of any such stay; or (j) By a non-breaching Party in the event of a default of a material obligation by any other Party under any Transaction Document (as defined in the Contribution Agreement), which default remains uncured for a period of thirty (30) days after written notice of such default, provided it is possible to cure such default within thirty (30) days. Solely for the purposes of a termination for cause pursuant to this Section, "material" shall mean an economic impact exceeding $5,000, disregarding any amount calculated as related legal fees or legal costs. 4. Center Governance and Control. The overall control, policy development, and quality assurance of and for the Center is vested in the Center Company. In performance of its duties hereunder, MBEC shall provide monthly written reports to Center Company's Board of Managers (the "Board") on the Center's development, operations, and financial performance ("Monthly Reports") and, as needed, shall supplement such reports with additional data and/or meetings with Board members. 5. Duties of MBEC. All compensation for services provided by MBEC to Center Company pursuant to this Management Agreement is included in the Management Fee, and MBEC shall have no right to any other payment, reimbursement or offset, other than the Management Fee, for services provided or costs incurred pursuant to this Management Agreement. Accordingly, MBEC shall have no right to bind Center Company or incur any obligations or expenses on Center Company's behalf. MBEC shall bear all costs and expenses incurred in the business, operation and management of Center Company and the Center, with the exception of the office lease for the Center, certain equipment maintenance (as paid by Target Center immediately prior to the Purchase), and real estate and franchise taxes, which costs shall be borne by Center Company. MBEC acknowledges and agrees that Center Company has no employees, and that all employees providing services for Center Company shall be employed by, and all employee salaries and benefits (if applicable) shall be the obligation of, MBEC. MBEC shall, subject to the oversight of the Board, have the general responsibility and authority to implement all facets of total management services to and for the Center, in accordance with Board policies, including, but not limited to, the following: (a) Strategic Planning. MBEC shall assist the Board in identifying, assessing, and reviewing annual and long-range strategies, goals, and objectives for the Center and shall implement approved plans. (b) Budgets, Forecasts, and Approved Expenditures. MBEC shall develop annual forecasts and recommended annual capital and operating budgets for the Center, inclusive of items of revenues and expense customarily associated with operations of this type ("Budgets"), and shall present these to the Board for review and approval. Thereafter, MBEC shall have responsibility for implementing approved Budgets and for measuring and assessing the Center's performance against same in the Monthly Reports. (c) Policies and Procedures. MBEC shall assist the Board in developing policies and procedures consistent with the Center's quality assurance standards and with requirements, if any, of licensing and other regulatory groups, third party payors, and accreditation bodies which may have authority or influence on delivery of refractive laser patient care. MBEC shall have responsibility for implementation and administration of policies and procedures approved by the Board, in accordance with all applicable regulation. (d) Licenses and Permits. MBEC shall apply for, renew, and exercise best efforts to obtain and maintain any and all licenses, certifications, and permits as are required for the operation of the Center and payment for services provided therein. (e) Accreditation. MBEC shall exercise best efforts to assure that the Center's policies, procedures, and practices meet standards of any groups from which the Center may seek accreditation. MBEC shall coordinate timely preparation of applications for and completion of surveys related to any such accreditation. (f) Insurance and Risk Management. MBEC shall evaluate and obtain insurance policies pertinent to property, casualty, professional liability, and such other risks as are encountered in operations of the Center's type. MBEC shall pay for accepted policies when due, maintain such policies in full force and effect, and shall coordinate steps to assure any claims are processed and/or defended appropriately. (g) Participation Agreements and Third Party Contracting. MBEC shall assure all required forms, applications, and fees are conveyed timely by the Center to continue its participation in any appropriate third party payment programs approved by the Board. Additionally, MBEC shall identify and negotiate appropriate managed care contracts on behalf of the Center consistent with approved policies. (h) Professional Staff. MBEC shall coordinate the process of assuring that application and credentialing processes are completed for appropriately licensed clinical professionals seeking staff membership at the Center. MBEC further shall coordinate documentation of such individuals' training and continuing education related to refractive laser procedures. (i) Employee Matters. MBEC shall provide its employees to Center Company in accordance with Board instructions, current operational needs, and applicable regulations. (j) Billing and Collections. MBEC shall identify systems and procedures for the timely billing and collection of patient charges and/or facility fees, as applicable, associated with the Center's services. MBEC shall cause Board-approved billing and collections systems to be implemented. (k) Banking and Financial Records. MBEC shall assure segregated bank accounts are maintained with a financial institution selected by Center Company and Prime, whose authorized signatory shall be determined by the Board, for deposit of Center Company funds. All cash flow and funds of Center Company received by, or in the possession of, MBEC, shall be promptly deposited by MBEC in such accounts. MBEC shall maintain books of records and accounts for Center Company in conformance with generally accepted accounting principles, consistently applied. MBEC shall submit monthly financial statements to the Board by the 10th day of the following month and will be responsible for the timely preparation of the annual reports by January 31 of the following year. Neither MBEC nor any of its officers, directors, or employees shall have any signatory authority over any bank account or other financial account of the Center or the Center Company, except to disburse the Management Fee pursuant to an accepted (or deemed accepted) Fee Report. MBEC shall have no right of offset with respect to any Center Company funds or Center funds. (l) Procurement. MBEC shall negotiate arrangements for the cost-effective purchasing of equipment and supplies necessary to carry out the Center's operations in conformance with its quality assurance standards and those of applicable regulatory and accreditation bodies, and MBEC shall provide all necessary equipment and supplies. (m) Marketing. Upon request of the Board, MBEC shall recommend and/or evaluate feasibility of potential promotional programs for Center services and implement any such Board-approved programs. The foregoing notwithstanding, MBEC shall continue to provide to Center Company, at a minimum, the same amount and quality of marketing services, materials and programs as MBEC provided to Target Center immediately prior to the Purchase; provided this shall not require MBEC to increase its marketing efforts to accommodate increases in the general population of the Austin metropolitan area that occur after the Effective Date. (n) Utilization Review and Outcomes Assessment. MBEC shall coordinate the formation and activities of such clinical review groups as the Board shall determine are required to help assure services provided at the Center are medically appropriate and rendered in a fashion associated with sound clinical practice and outcomes. 6. Standards of Performance. At all times when performing its duties hereunder, MBEC shall act in good faith, promptly, with due diligence, professionally, and in a manner which will ensure that the Center is operated to provide a high standard of health care on a fiscally prudent basis. Such performance shall conform to accepted business practice within the health care industry generally in Texas and to standards prescribed by entities accrediting facilities providing treatments such as those of the Center. MBEC shall provide the services required under this Agreement in a manner consistent with the levels of service and standards of quality provided to Target Center by MBEC for all periods prior to the date of this Agreement (subject to appropriate adjustment for any growth of Center Company or increase in patient volume at the Center during the term of this Management Agreement). MBEC shall refrain from entering into any arrangement on behalf of the Center with any party related to MBEC, unless such arrangement is made with the prior knowledge and written approval of the Board. 7. Management Fees. --------------- (a) Overall Fee. In consideration for its services hereunder, MBEC shall receive a fee ("Management Fee"), payable on a calendar quarterly basis, equal to five percent (5%) of net collections annually. As used herein, "net collections" shall mean all facility fees actually collected by or for Center Company for procedures performed at the Center during the applicable calendar quarter, less all contractual allowances and discounts. (b) Fee Reports; Payment. On or before each January 15, April 15, July 15 and October 15, during the term of this Agreement, MBEC shall deliver to the Board a report (including reasonable details and supporting documentation) (the "Fee Report") calculating net collections and the Management Fee due for the immediately preceding calendar quarter. Center Company shall have fifteen (15) days from receipt of the Fee Report to accept the Fee Report or to object in writing to any item contained in the Fee Report. MBEC agrees to cooperate fully and promptly with requests from the Board for clarification or additional supporting documentation related to a Fee Report or the contents thereof. MBEC acknowledges and agrees that it shall require a majority of Prime's designees to the Board to accept or object in writing to a Fee Report for purposes of this Agreement. If Center Company neither accepts the Fee Report nor objects in writing to the Fee Report within fifteen (15) days of its receipt, the Fee Report shall be deemed to be accepted. Upon the acceptance (or deemed acceptance) of the Fee Report by the Board, MBEC shall be authorized to transfer to itself the Management Fee then due. 8. Audit by Center Company. Center Company and Prime shall have the right to audit and inspect all of the records of Target Center and the records of MBEC as it relates to MBEC's services and Management Fees hereunder and as it relates to patient volumes and demographics for purposes of determining compliance with the Contribution Agreement, and shall not extend to any other general financial records of MBEC. MBEC shall cooperate and provide access, and shall cause Target Center to cooperate and provide access, to its relevant books and records in connection with the exercise of such right. In the event of an exercise of a Party's audit rights under this Section in connection with an objection to the Fee Report or the Management Fee, MBEC shall cause a report to be prepared by an independent certified public accountant selected by Center Company and approved by Prime, said report to be prepared for and addressed to the Center Company and Prime, in a form reasonably acceptable to Center Company and Prime, substantiating MBEC's calculation of net collections and the Management Fee. The auditing party must give at least ten (10) days prior written notice to MBEC of its intent to exercise its auditing rights. Unless otherwise agreed by the Parties involved, such audit shall be conducted during normal business hours at the offices of the Party being audited. Any overpayments by Center Company shall be credited, together with interest accrued thereon at the rate of eighteen percent (18%) per annum from the date paid until the date actually due, toward subsequent payment obligations of Center Company. The auditing Party shall bear all costs and expenses of the audit unless the audit reveals that any Management Fee due hereunder was overpaid by more than five percent (5%), in which case the auditing Party will promptly be reimbursed for all reasonable out-of-pocket costs and expenses incurred by it in connection with such audit. 9. Access to Center; Facility Fees. Center Company agrees to provide MBEC with access, on a non-exclusive basis, to the Center for use in the examination, counseling and performance of Refractive Surgery (as defined in the Contribution Agreement). MBEC shall be responsible for reserving such access with Center Company at least five (5) business days in advance. Center Company may, at its sole discretion, provide access to the Center to other physicians for the performance of Refractive Surgery, subject to the approval by MBEC, in its reasonable discretion, of the credentials of such physicians. MBEC agrees to pay Center Company a facility fee of $720 per Refractive Surgery procedure, and an exam and testing fee of $50 per Refractive Surgery procedure, both, payable monthly, during the Term of this Agreement. In the event that global patient charges for Refractive Surgery services are increased or reduced (provided the global patient charges are not reduced below $1,200), the facility fee shall automatically be adjusted so that the facility fee shall remain at 40% of the global patient charge; provided that in no event shall the facility fee be reduced below $600, without the written consent of at least 60% of the Board. In the event that global patient charges for Refractive Surgery services are reduced (in accordance with the immediately preceding sentence) below $1,200, the facility fee shall automatically be adjusted so that the facility fee shall be 50% of the global patient charge. The parties acknowledge and agree that as of the Effective Date, the global patient charges charged by MBEC are $1,895 per Refractive Surgery procedure. 10. Indemnifications; Materiality. Each Party hereby agrees to indemnify and hold the other Party harmless against all claims, liabilities, expenses, and losses of any kind, including reasonable attorney fees, asserted against the other Party arising from performance of its obligations hereunder, except if due to the willful or negligent acts of the other Party made in bad faith or in express breach of any provision hereunder. In addition to, and in no way limiting, the foregoing indemnity obligations, MBEC shall indemnify and hold harmless Center Company and the Center against all claims, liabilities, expenses, and losses of any kind, including reasonable attorney fees, asserted by or on behalf of any employee, former employee, agent or independent contractor of MBEC, or their estate. Notwithstanding the foregoing, this Section 10 shall not be construed to contradict the indemnification provisions of the Contribution Agreement. Notwithstanding anything contained herein, the indemnification provisions of this Section 10 shall be ineffectual and shall not permit or require indemnification for all, or any, losses, costs, liabilities, claims or expenses arising, directly or indirectly, from any action or omission permitting or requiring indemnification under the Contribution Agreement; and in no event may any indemnity be allowed under this Agreement for amounts paid or payable pursuant to the indemnification provisions of the Contribution Agreement. For purposes of this Agreement, whenever there are references to "material" or "materially," such terms shall be deemed to mean an economic impact exceeding $5,000 with respect to the fact or matter being described. 11. Notices. All notices required hereunder shall be deemed given properly when made in writing and delivered by U.S. Postal Service or courier, or by postage prepaid, as set forth below or as the Parties hereafter may designate in accordance with this Paragraph. (a) As to the Center Company: Prime MBC, L.L.C. 1301 Capital of Texas Hwy., Suite C-300 Austin, Texas 78746 Attention: Chairman (b) As to MBEC: Mann Berkeley Eye Center, P.A. 1200 Binz, Suite 1000 Houston, Texas 77004 Attention: President 12. Assignment and Succession. This Management Agreement may not be assigned by MBEC to any affiliate thereof or to any other entity without the prior written consent of the Center Company. 13. Waiver. No express or implied consent or waiver by either Party to any breach or default of the other Party with respect to this Management Agreement shall be deemed a consent or waiver to or of any other breach or default hereunder. 14. Severability. If any provision of this Management Agreement or the application thereof to any person or circumstance shall be invalid or unenforceable to any extent, the remainder of this Management Agreement and the application of such provisions to other persons or circumstances shall not be affected thereby and shall be enforced to the greatest extent permitted by law. 15. Governing Laws. This Management Agreement and the obligations of the Parties hereunder shall be interpreted, construed, and enforced in accordance with the laws of the State of Texas. 16. Arbitration. Any controversy between the parties regarding this Agreement and any claims arising out of this Agreement or its breach shall be submitted to arbitration by either party. The arbitration proceedings shall be conducted by a single arbitrator pursuant to the Commercial Arbitration Rules of the American Arbitration Association. The arbitration shall be conducted in Dallas, Texas and the arbitrator shall have the right to award actual damages and attorney fees and costs, but shall not have the right to award punitive, exemplary or consequential damages against either party. 17. Entire Agreement and Amendment. This Management Agreement contains the entire agreement between the Parties. No variations, modifications, or changes shall be binding upon either Party unless set forth in a document duly executed by the Parties. [Signature page follows] S-1 SIGNATURE PAGE TO REFRACTIVE LASER CENTER MANAGEMENT AGREEMENT This Management Agreement accepted by signatures and as of the dates set forth below. PRIME MBC, L.L.C. By: __________________________________ Printed Name: _________________________ Title _________________________________ MANN BERKELEY EYE CENTER, P. A. By: __________________________________ Printed Name: _________________________ Title _________________________________ EX-10.105 18 0018.txt EX 10.105 INCID.REG.RIGHTS-MANN BERKELEY INCIDENTAL REGISTRATION RIGHTS AGREEMENT THIS INCIDENTAL REGISTRATION RIGHTS AGREEMENT (this "Agreement"), dated as of March 1, 2000 (the "Effective Date"), by and among Prime Medical Services, Inc., a Texas corporation (the "Company") and MBC Holding Company, L.L.C., a Texas limited liability company (the "Holder"). WHEREAS, the Company has issued a Warrant Certificate, dated as of the Effective Date (the "Warrant"), pursuant to which the Company has issued to the Holder, a Warrant to purchase shares of the Company's common stock, $0.01 par value (interchangeably, "Stock" or "Common Stock"). WHEREAS, in order to induce the Holder to purchase the Common Stock, the parties hereto have agreed to enter into this Agreement pursuant to which the Company has agreed to grant registration rights with respect to the Common Stock. NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties agree as follows: 1. Registration Rights. ------------------- 1.1 Incidental Registration Rights. If the Company at any time proposes to register any of its Common Stock under the Securities Act for sale to the public, whether for its own account or for the account of other security holders or both (except with respect to registration statements on Form S-4 or another form not available for registering the Stock for sale to the public), it will give written notice to the Holder of its intention so to do, which notice shall include a list of the jurisdictions in which the Company intends to attempt to qualify the Stock under the applicable state securities laws. Upon the written request of the Holder, given within 10 days after receipt of any such notice, to register any of its or their Stock (including Stock which the holder has the right to acquire upon the exercise of the Warrant), the Company will, subject to the limitations and conditions contained herein, use its best efforts to cause the Stock as to which registration shall have been so requested (which shall also be referred to as the "Covered Shares") to be included in the securities to be covered by the registration statement proposed to be filed by the Company, all to the extent requisite to permit the sale or other disposition by the Holder; provided, however, that: (a) The Holder shall have the right to request inclusion of its Stock (and have such Stock included) in two registration statements that are declared effective by the Commission; (b) If, at any time after giving such written notice of its intention to register any securities and prior to the effective date of the registration statement filed in connection with such registration, the Company shall determine for any reason not to register such securities, the Company may, at its election, give written notice of such determination to the Holder, if a request as hereinabove provided has been made, and thereupon the Company shall be relieved of its obligation to register any Common Stock in connection with such registration; and (c) If such registration involves an underwritten offering, the Holder, if the Holder has requested to be included in the Company's registration, must sell its Common Stock to the underwriters selected by the Company on the same terms and conditions as apply to the Company (except as otherwise set forth herein). The number of Covered Shares to be included in such an offering may be reduced if and to the extent that the managing underwriter, if any, shall be of the opinion that such inclusion would adversely affect the marketing of the securities to be sold by the Company therein. Notwithstanding anything to the contrary contained in this Section 1.1, in the event that there is an underwritten public offering of securities of the Company pursuant to a registration covering Stock and the Holder does not elect to sell its Stock to the underwriters of the Company's securities in connection with such offering, the Holder shall refrain from selling such Stock during the period of distribution of the Company's securities by such underwriters, the period in which the underwriting syndicate participates in the after market and during any lock-up period requested by such underwriters; provided, however, that the Holder shall, in any event, be entitled to sell its Stock commencing on the 180th day after the effective date of such registration statement. 1.2 Registration Procedures. If and whenever the Company is required by the provisions of Section 1 hereof to effect the registration of any of the Covered Shares under the Securities Act, the Company will, as expeditiously as possible: (a) prepare and file with the Commission a registration statement (which, in the case of an underwritten public offering pursuant to Section 1.1 hereof, shall be on Form S-1, SB-2 or other form of general applicability satisfactory to the managing underwriter) with respect to such securities and use its best efforts to cause such registration statement to become and remain effective for the period of the distribution contemplated thereby (determined as hereinafter provided); (b) prepare and file with the Commission such amendments and supplements to such registration statement and the prospectus in connection therewith as may be necessary to keep such registration statement effective for the period of distribution and as may be necessary to comply with the provisions of the Securities Act with respect to the disposition of all Common Stock covered by such registration statement in accordance with the sellers intended method of disposition set forth in such registration statement for such period; (c) furnish to the Holder, as applicable, and each underwriter such number of copies of the registration statement and the prospectus included therein (including each preliminary prospectus) as they may reasonably request in order to facilitate the public sale or other disposition of the Covered Shares covered by such registration statement; (d) use its best efforts to register or qualify the Covered Shares covered by such registration statement under the securities or blue sky laws of such jurisdictions as the Holder or, in the case of an underwritten public offering, the managing underwriter, shall reasonably request (provided that the Company will not be required to (1) qualify generally to do business in any jurisdiction where it would not otherwise be required to qualify but for this subsection, (2) subject itself to taxation in any such jurisdiction or (3) consent to general service of process in any such jurisdiction); (e) promptly notify the Holder under such registration statement and each underwriter, at any time when a prospectus relating thereto is required to be delivered under the Securities Act when it becomes aware of the happening of any event as a result of which the prospectus contained in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements contained therein not misleading in light of the circumstances then existing; (f) use its best efforts (if the offering is underwritten) to furnish, at the request of the Holder on the date that the Covered Shares are delivered to the underwriters for sale pursuant to such registration: (1) an opinion dated such date of counsel representing the Company for the purposes of such registration, addressed to the underwriters and in customary form and covering such matters as are customarily covered by opinions of counsel in similar registrations and as may be required in the underwriting agreement relating thereto, as may reasonably be requested by the underwriters or by the Holder, as applicable; and (2) a comfort letter dated such date from the independent public accountants retained by the Company, addressed to the underwriters, in customary form and covering such matters as are customarily covered by such comfort letters in similar registrations and as may be required in the underwriting agreement relating thereto, as such underwriters or the Holder, as applicable, may reasonably request; and (g) make available for inspection by the Holder, any underwriter participating in any distribution pursuant to such registration statement, and any attorney, accountant, or other agent retained by the Holder, or underwriter, all financial and other records, pertinent corporate documents, and properties of the Company, and cause the Company's officers, directors, and employees to supply all information reasonably requested by any such seller, underwriter, attorney, accountant, or agent in connection with such registration statement. For purposes of paragraphs (i) and (ii) above, the period of distribution of Covered Shares in an underwritten public offering shall be deemed to extend until each underwriter has completed the distribution of all securities purchased by it, and the period of distribution of Covered Shares in any other registration shall be deemed to extend until the earlier of the sale of all Covered Shares or 180 days after the effective date thereof. In connection with each registration hereunder, the Holder will furnish to the Company in writing such information with respect to itself and the proposed distribution by it as shall be requested by the Company in order to assure compliance with federal and applicable state securities laws. In connection with each registration covering an underwritten public offering, the Company agrees to enter into a written agreement with the managing underwriter selected in the manner herein provided in such form and containing such provisions as are customary in the securities business for such an arrangement between major underwriters and companies of the Company's size and investment stature; provided that such agreement shall not contain any such provision applicable to the Company that is inconsistent with the provisions hereof and, further, provided that the time and place of the closing under such agreement shall be as mutually agreed upon between the Company and such managing underwriter. The Company will not be obligated to include any shares of Stock owned by the Holder upon the Holder's request that a proposed registration include such Stock if the Company delivers to the Holder the opinion of the Company's counsel to the effect that the requested registration is not required to permit the proposed disposition or any resale of such Stock without restrictions on transfer under the Securities Act, which opinion may be furnished to and relied upon by any broker through which the Holder intends to sell shares of Stock. 1.3 Conditions to Obligation to Register Shares. The Company's obligations under this Section 1 shall be subject to the following limitations and conditions: (a) Information. The Company shall have received from the Holder all such information as the Company may reasonably request from the Holder concerning itself and its methods of distribution of the shares of Stock to enable the Company to include in the registration statement all material facts required to be disclosed therein. (b) Notice Requirements. Any request by the Holder pursuant to this Agreement for registration of the offering, sale and delivery of shares of Stock shall provide that the Holder (i) has a present intention to sell such shares; (ii) agrees to execute all consents, powers of attorneys and other documents required in order to cause such registration statement to become effective; (iii) agrees, if the offering is at the market, to give the Company written notice of the first bona fide offering of such shares and to use the prospectus forming a part of such registration statement only for a period of 90 days after the effective date of the registration statement unless the offering is pursuant to a continuous registration pursuant to Rule 415 promulgated under the Securities Act; (iv) subject to adverse events regarding the selling price of the shares, agrees to utilize the proposed method of distribution of the shares; and (v) agrees to promptly notify the Company and each underwriter, if any, with regard to any registration statement, at any time when it becomes aware of the happening of any event as a result of which any prospectus contained in such registration statement that has been provided to the Holder includes an untrue statement of a material fact regarding the Holder or omits to state a material fact regarding the Holder required to be stated therein or necessary to make the statements contained therein regarding the Holder not misleading in light of the circumstances then existing. 1.4 Distribution Arrangements. The Holder agrees that, in disposing of the shares of Stock owned by it in the registered public offering, it will comply with Rules 10b-2, 10b-6 and 10b-7 and any other applicable rules promulgated by the Securities and Exchange Commission under the Securities Exchange Act of 1934 (the "1934 Act"). 1.5 Expenses. All expenses incurred by the Company in complying with a registration covering Stock, including, without limitation, all registration, qualification, and filing fees, blue sky fees and expenses, printing expenses, fees and disbursements of legal counsel and independent public accountants for the Company, the reasonable fees and expenses of one law firm serving as legal counsel for the Holder, fees of the National Association of Securities Dealers, Inc., transfer taxes, escrow fees, fees of transfer agents and registrars, and costs of insurance, but excluding any Selling Expenses, are herein called "Registration Expenses." All underwriting discounts, and selling commissions applicable to the sale of Covered Shares are herein called "Selling Expenses." The Company shall pay all Registration Expenses in connection with any registration statement filed pursuant to this Section 1. All Selling Expenses in connection with any registration statement filed pursuant to this Section 1 shall be borne by the Holder, or by such persons other than the Company (except to the extent the Company shall be a seller), as they may agree. 1.6 Miscellaneous. ------------- 1.6.1 Registration Rights are Exclusive. The Holder understands that it has certain registration rights pursuant to this Agreement with respect to its shares of Stock, but other than as specifically set forth in this Agreement, the Company has not covenanted and is not obligated to finish a registration statement under the Securities Act covering any shares of Stock, to file a notification under Regulation A promulgated under the Securities Act with respect to shares of Stock, or to take any other action that would make available an exemption from registration. 1.6.2 No Requirement. In no event shall the Company be required to amend any registration statement filed pursuant to this Agreement after it has become effective or to amend or supplement any prospectus to permit the continued disposition of shares of Common Stock registered under any registration statement in either case beyond the period initially contemplated therein. 1.7 Indemnification. In the event of a registration of any of the Covered Shares under the Securities Act, the Company shall indemnify and hold harmless the Holder thereunder, and each underwriter and each associate, if any, of the Holder, as applicable, or underwriter, against any losses, claims, damages, or liabilities, joint or several, to which the Holder, or underwriter or associate thereof may become subject under the Securities Act or otherwise, insofar as such losses, claims, damages, or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in any registration statement under which such Covered Shares were registered under the Securities Act, any preliminary prospectus or final prospectus contained therein, or any amendment or supplement thereof, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, or any violation by the Company of any rule or regulation promulgated under the Securities Act applicable to the Company and relating to action or inaction by the Company in connection with any such registration, and shall reimburse the Holder, each underwriter and/or associate thereof for any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability, or action; provided, however, that the Company will not be liable in any such case if and to the extent that any such loss, claim, damage, or liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in conformity with information furnished by the Holder, each underwriter and/or associate thereof in writing specifically for use in such registration statement or prospectus. In the event of a registration of any of the Covered Shares under the Securities Act, the Holder will indemnify and hold harmless the Company and its affiliates, if any, and each underwriter and each associate of any underwriter against all losses, claims, damages or liabilities, joint or several, to which the Company or such underwriter or associate may become subject under the Securities Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in the registration statement under which such Covered Shares were registered under the Securities Act, any preliminary prospectus or final prospectus contained therein, or any amendment or supplement thereof, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and will reimburse the Company, each underwriter and/or associate thereof for any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that the Holder will be liable hereunder in any such case if and only to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in reliance upon and in conformity with information pertaining to the Holder as such, furnished in writing to the Company by the Holder specifically for use in such registration statement or prospectus; and provided further, however, that the liability of each of the Holder hereunder shall be limited to the proportion of any such loss, claim, damage, liability or expense that is equal to the proportion that the public offering price of shares sold by the Holder under such registration statement bears to the total public offering price of all securities sold thereunder, but not to exceed the proceeds received by the Holder, from the sale of Common Stock covered by such registration statement. Promptly after receipt by an indemnified party hereunder of notice of the commencement of any action, such indemnified party shall, if a claim in respect thereof is to be made against the indemnifying party hereunder, notify the indemnifying party in writing thereof, but the omission so to notify the indemnifying party shall not relieve it from any liability it may have to any indemnified party other than under this Section 1.7. In case any such action shall be brought against any indemnified party and it shall notify the indemnifying party of the commencement thereof, the indemnifying party shall be entitled to participate in and, to the extent it shall wish, to assume and undertake the defense thereof with counsel reasonably satisfactory to such indemnified party, and, after notice from the indemnifying party to such indemnified party of its election so to assume and undertake the defense thereof, the indemnifying party shall not be liable to such indemnified party under this Section 1.7 for any legal expenses subsequently incurred by such indemnified party in connection with the defense thereof other than reasonable costs of investigation and of liaison with counsel so elected; provided, however that, if the defendants in any such action include both the indemnified party and the indemnifying party and if the interests of the indemnified party reasonably may be deemed to conflict with the interests of the indemnifying party, the indemnified party shall have the right to select separate counsel and to assume its defense and otherwise to participate in the defense of such action, with the expenses and fees of such separate counsel and other expenses related to such participation to be reimbursed by the indemnifying party as incurred. The indemnifying party will not be subject to any settlement made without its consent, which consent shall not be unreasonably withheld. The indemnifying party will pay to the indemnified party all sums due hereunder within 10 days of a final non-appealable judgment or pursuant to the terms of a settlement agreement. 1.8 Limitation on Subsequent Registration Rights. From and after the date of this Agreement, without the prior written consent of Holder, the Company shall not enter into any agreement with any holder or prospective holder of any securities of the Company (nor shall the Company, in the absence of any such prior agreement, permit any such holder or prospective holder) to include such securities in any registration contemplated by this Agreement other than "piggyback" registration rights with terms which are less favorable than those granted in this Agreement. [Signature page follows] S-1 SIGNATURE PAGE TO INCIDENTAL REGISTRATION RIGHTS AGREEMENT IN WITNESS WHEREOF, the Company and the Holder have caused this Agreement to be signed and delivered by its duly authorized officer or representative as of the Effective Date. PRIME MEDICAL SERVICES, INC. By: _____________________________ Printed Name: _____________________ Title: ____________________________ MBC HOLDING COMPANY, L.L.C. By: _____________________________ Printed Name: _____________________ Title: ____________________________ EX-10.106 19 0019.txt EX 10.106 CONTRIBUTION AGREEMENT - NYLM CONTRIBUTION AGREEMENT Among PRIME MEDICAL SERVICES, INC., PRIME RVC, INC., NEW YORK LASER MANAGEMENT, L.L.C., KEN MOADEL, M.D., and KEN MOADEL, M.D., P.C. d/b/a NEW YORK EYE SPECIALISTS -------------------- Dated as of April 1, 2000 37 043838.0019 AUSTIN 176405 v6 CONTRIBUTION AGREEMENT This Contribution Agreement (this "Agreement") is entered into to be effective as of April 1, 2000 (the "Effective Time"), among Prime Medical Services, Inc., a Delaware corporation ("PMSI"), Prime RVC, Inc., a Delaware corporation ("Prime"), Ken Moadel, M.D., P.C. d/b/a New York Eye Specialists, a New York professional corporation ("PC"), New York Laser Management, L.L.C., a Delaware limited liability company ("Newco") and Ken Moadel, M.D., an individual residing in New York, New York and the sole shareholder of PC ("Moadel"). The parties hereto agree as follows: ARTICLE I Agreement of Purchase and Sale 1.1 Agreement. Upon the basis of the representations and warranties, for the consideration, and subject to the terms and conditions set forth in this Agreement, (a) Prime agrees to purchase from Moadel, as of the Effective Time, by payment of $8,871,619 (the "Purchase Price"), an undivided sixty-five percent (65%) interest in (i) all of the Assets (as hereinafter defined) and (ii) the business conducted with the Assets, which business consists of providing space, equipment, non-professional personnel and certain administrative services on a turn-key basis to professional providers of Refractive Surgery (as hereinafter defined), including, without limitation, initially providing such accommodations on an exclusive basis to the Refractive Surgery practice of Moadel and PC in accordance with the terms set forth in this Agreement and that certain office and equipment use agreement (the "Office and Equipment Use Agreement") among Newco, Moadel and PC in the form attached hereto as Exhibit A (collectively, the "Assets Related Business"); (b) Prime agrees to contribute to Newco, as of the Effective Time, the undivided sixty-five percent (65%) interest in the Assets and the Assets Related Business purchased by Prime, and will receive a sixty-five percent (65%) ownership interest in Newco; and (c) Moadel agrees to contribute, as of the Effective Time, the remaining undivided thirty-five percent (35%) interest in the Assets and the Assets Related Business to Newco. The parties agree that: (y) immediately prior to the Closing (as hereinafter defined), all of the outstanding membership interests of Newco shall be owned by Moadel, and, immediately after the Closing, Prime shall own sixty-five percent (65%) of all of the outstanding membership interests of Newco and Moadel shall own thirty-five percent (35%) of all of the outstanding membership interests of Newco; and (z) prior to or at the Closing, Prime and Moadel shall have executed the limited liability company agreement, in the form attached hereto as Exhibit B, and any other organizational documents of Newco (collectively, the "Organizational Documents"). 1.2 Closing. The closing of the purchase and sale contemplated by Section 1.1 (the "Closing") shall take place at the offices of Akin, Gump, Strauss, Hauer & Feld, L.L.P., 1900 Frost Bank Plaza, 816 Congress Avenue, Austin, Texas 78701, or at such other location as the parties may agree. The date on which the Closing occurs is hereinafter referred to as the "Closing Date." 1.3 Assets. As used in this Agreement, the term "Assets" shall mean and include all of the items listed on Schedule 1.3(a) attached hereto, and, without duplication, all Permits (as hereinafter defined) for which transfer to Newco is not prohibited under applicable law, all business records (excluding medical records) of Refractive Surgery and the business conducted by PC and Moadel prior to the Closing Date, cash of at least $325,000 (for purposes of satisfying Assumed Liabilities after the Closing), any and all rights of PC or Moadel under leases (including rights to receive returns of deposits under such leases) or contracts listed on Schedule 1.3(a), the goodwill related to the business conducted by PC and Moadel prior to the Closing Date (excluding the Refractive Surgery Business, as hereinafter defined), the name "New York Eye Specialists" and all likenesses thereof, and all of the related business benefiting PC or Moadel prior to the Closing Date (excluding the Refractive Surgery business). Each of PC and Moadel hereby represents and warrants that the Assets include all property and assets, real, personal and mixed, tangible and intangible, including, without limitation, leases and contracts, equipment, instruments, computer software used in connection with the equipment or instruments, Permits, personal property, furniture, business records and other assets that are used primarily in or are materially relied on for the Assets Related Business conducted by PC and Moadel prior to the Closing. Notwithstanding the foregoing, the following shall not be "Assets" and shall be retained by PC and/or Moadel: (a) all of the business of PC and Moadel which, by applicable law, may only be performed by a licensed medical professional, or an entity owned exclusively by licensed medical professionals (the "Refractive Surgery Business"); (b) all activities that constitute the practice of medicine; (c) the books of account and record books of PC and the Business (complete and accurate copies of which, insofar as they relate to the Assets Related Business during the calendar years 1998, 1999 and 2000, up to and including the Closing Date, shall have been provided to Prime on or before the Closing Date); (d) PC's and Moadel's rights under this Agreement; (e) any asset that (i) is neither used in, nor relied on for, the business conducted by PC and Moadel prior to the Closing (excluding the Refractive Surgery Business and the practice of medicine) and (ii) is set forth on Schedule 1.3(d) attached hereto; (f) all cash and accounts receivable, but this exclusion shall not in any way limit the requirement that the Assets include cash of $325,000 or any obligation Moadel or PC may have under the Office and Equipment Use Agreement; and (g) any medical or clinical records (although the parties acknowledge that Newco may from time to time have physical possession of such records). As used in this Agreement, the "Business" shall mean the Assets Related Business and the Refractive Surgery Business, collectively. As used in this Agreement, "Refractive Surgery" shall mean, collectively, any current and/or future surgical procedures intended to correct refractive error, including, without limitation, myopia, hyperopia, presbyopia or astigmatism of the eye. Notwithstanding anything in this Agreement to the contrary, "Refractive Surgery" shall not include any specific procedure that, at the time the procedure is to be performed, is required in the exercise of a physician's independent professional judgment as to the individual patient to be performed in an operating room approved by the American Association of Ambulatory Surgical Centers or Joint Commission on Accreditation of Healthcare Organizations (or any similar or successor accreditation board or body) with the capability of general anesthesia, in each instance within either an ambulatory surgical center or acute care hospital that is, in either case, licensed pursuant to Article 28 of the New York Public Health Law (provided, however, that if this sentence would exclude from "Refractive Surgery" any surgical procedure included in "Refractive Surgery" at the Effective Time, then the parties to this Agreement will work together to restructure the operating mechanics of their relationship in a manner that allows the operations of the Business to comply with such regulatory change and also preserves the economic benefits of each of the parties, including PC and Moadel, arising under this Agreement and the other Transaction Documents, as such term is hereinafter defined, giving due consideration to any recoupment of a party's investment hereunder or opportunity therefor). 1.4 Assumed Liabilities. PC and Moadel each agree that, at the Closing, Newco shall assume the following (collectively, the "Assumed Liabilities"): (a) those lease or other contract obligations that are executory in nature and arise after the Effective Time under leases or contracts that are (i) specifically named or described on Schedule 1.3(a) and (ii) denoted on Schedule 1.3(a) as having the related obligations assumed by Newco to the extent described in this Section, (b) those lease or other contract obligations that are executory in nature and arise after the Effective Time under those certain agreements between VISX, Incorporated and Moadel that are (i) specifically named or described on Schedule 3.12 and (ii) denoted on Schedule 3.12 as having the related obligations assumed by Newco to the extent described in this Section (collectively, the "VISX Agreements"), (c) those trade payables on open account owed to unrelated third parties and accrued expenses less than ninety (90) days old (including, without limitation, salary and benefits) that were, in each case, incurred or accrued in the ordinary course of business after the Effective Time, and (d) those salaries and benefits arising between the Effective Time and the Closing Date and attributable to employees of Moadel or Seller that are hired or employed by Newco on or after the Closing Date. From and after the Closing Date, Newco shall be solely responsible for the Assumed Liabilites. The parties specifically agree that Newco will have no responsibility, liability or obligation whatsoever for (x) those obligations under such leases or contracts which accrued prior to the Effective Time, (y) any breaches or defaults thereunder which occurred or were alleged to have occurred prior to the Closing Date or (z) trade payables not included in the definition of "Assumed Liabilities" above. PC and Moadel each agree that, except for the Assumed Liabilities, any and all debts, liabilities, and obligations of PC or Moadel, whether known or unknown, absolute, contingent or otherwise (including, but not limited to, federal, state, and local taxes, any sales taxes, use taxes and property taxes, any taxes arising from the transactions contemplated by this Agreement and any liabilities arising from any litigation or civil, criminal or regulatory proceeding involving or related to PC, Moadel or the Business) shall remain the sole responsibility of PC or Moadel (whichever owed such debt, liability or obligation), and each covenants to pay promptly and otherwise fulfill all such debts, liabilities or obligations as and when the same become due (unless contested in good faith). Without limiting the foregoing, each of PC and Moadel specifically acknowledges and agrees that none of PMSI, Prime, any affiliate of PMSI or Prime, and (except for Assumed Liabilities) Newco shall assume any claims, debts, liabilities or obligations whatsoever of PC or Moadel, including, without limitation, those related to or arising out of or under any claim or other action disclosed on Schedule 3.13. 1.5 Payment and Allocation of Purchase Price. Prime agrees to pay the Purchase Price to PC at the Closing by check, money order or wire transfer of funds, at PC's option. The Purchase Price will be allocated among the Assets in accordance with Schedule 1.5 attached hereto. ARTICLE II Representations and Warranties of PMSI and Prime PMSI and Prime hereby represent and warrant to Moadel and PC, jointly and severally, that each of the following matters is true and correct in all respects as of both the Effective Time and the Closing Date (with the understanding that Moadel and PC are relying materially on such representations and warranties in entering into and performing this Agreement and each of the other contracts, documents, instruments or agreements to be entered into in connection with or as contemplated by this Agreement, all of which, including this Agreement, are collectively referred to as the "Transaction Documents") and which shall survive the Closing: 2.1 Due Organization and Principal Executive Office. Prime is a corporation duly organized, validly existing, and in good standing under the laws of the State of Delaware and has full corporate power and authority to carry on its business as now conducted and as proposed to be conducted. PMSI is a corporation duly organized, validly existing, and in good standing under the laws of the State of Delaware and has full corporate power and authority to carry on its business as now conducted and as proposed to be conducted. Each of PMSI's and Prime's principal executive offices are located at 1301 Capital of Texas Highway, Austin, Texas 78746. 2.2 Due Authorization. Each of PMSI and Prime has full corporate power and authority to enter into and perform this Agreement and each Transaction Document required to be executed by it in connection herewith. With respect to each of PMSI and Prime, this Agreement and each Transaction Document required herein to be executed by it has been duly and validly authorized, executed and delivered by it, and the terms and provisions of this Agreement and each such Transaction Document constitute the valid, binding and enforceable obligations of it. With respect to each of PMSI and Prime, the execution, delivery, and performance of this Agreement and each Transaction Document required herein to be executed by it will not (a) violate any federal, state, county, or local law, rule, or regulation applicable to it or its properties (provided, however, that any representation or warranty by Prime or PMSI with respect to any laws regulating or legislating the provision of healthcare or the practice of medicine shall be limited to the actual knowledge possessed by Prime and PMSI on the Closing Date), (b) violate or conflict with, or permit the cancellation of, any agreement to which it is a party or by which it or its properties are bound, (c) permit the acceleration of the maturity of any indebtedness of, or any indebtedness secured by the property of, it or (d) violate or conflict with any provision of its organizational documents. Except for the filing requirements of PMSI arising under the Securities and Exchange Act of 1934, no action, consent, or approval of, or filing with, any federal, state, county, or local governmental authority is required by either of PMSI or Prime in connection with the execution, delivery or performance of this Agreement or any Transaction Document. 2.3 Brokers and Finders. Neither PMSI nor Prime has engaged, or caused to be incurred any liability to, any finder, broker, or sales agent (and neither has paid, or will pay, any finder's fee or similar fee or commission to any person) in connection with the execution, delivery, or performance of this Agreement or the transactions contemplated hereby. 2.4 Claims and Proceedings. Neither PMSI nor Prime is a party to any claims, actions, suits, proceedings, or investigations, at law or in equity, before or by any court, municipal or other governmental department, commission, board, agency, or instrumentality which seeks to restrain or prohibit the carrying out of the transactions contemplated by this Agreement or to challenge the validity of such transactions or any part thereof or seeking damages on account thereof; and, to the knowledge of PMSI and Prime, no such claim, action, suit, proceeding or investigation is threatened. 2.5 Investment Representations. Each of PMSI and Prime: -------------------------- (a) Is an "accredited investor," and has not retained or consulted with any "purchaser representative" (as such terms are defined in Rule 501 of Regulation D promulgated under the Securities Act of 1933, as amended (the "Securities Act")) in connection with its execution of this Agreement and the consummation of the transactions contemplated hereby; (b) Has such knowledge and experience in financial and business matters that it is capable of evaluating the merits and risks of an investment in Newco; (c) Will acquire any Newco interests for its own account for investment and not with the view toward resale or redistribution in a manner which would require registration under the Securities Act, the Texas Securities Act, as amended, and it does not presently have any reason to anticipate any change in its circumstances or other particular occasion or event which would cause it to sell its Newco interests, or any part thereof or interest therein, and it has no present intention of dividing the Newco interests with others or reselling or otherwise disposing of the Newco interests or any part thereof or interest therein either currently or after the passage of a fixed or determinable amount of time or upon the occurrence or nonoccurrence of any predetermined event or circumstance; (d) In connection with entering into this Agreement and each of the other contracts, documents, instruments or agreements to be entered into in connection with or as contemplated by this Agreement (all of which are collectively referred to as the "Transaction Documents") to which it is a party, and in making the investment decisions associated therewith, it has neither received nor relied on any representations or warranties from Newco, Moadel, PC, the affiliates of Moadel or PC, or the officers, directors, shareholders, employees, partners, members, agents, consultants, personnel or similarly related parties of Moadel or PC, other than those representations and warranties contained in this Agreement and the other Transaction Documents; (e) Is able to bear the economic risk of an investment in the Newco interests and it has sufficient net worth to sustain a loss of its entire investment without material economic hardship if such a loss should occur; and (f) Acknowledges that the Newco interests have not been registered under the Securities Act, or the securities laws of any of the states of the United States, that an investment in the Newco interests involves a high degree of risk, and that the Newco interests are an illiquid investment. ARTICLE III Representations and Warranties of PC and Moadel Moadel and PC hereby represent and warrant to Prime, jointly and severally, that each of the following matters is true and correct in all respects as of both the Effective Time and the Closing Date (with the understanding that Prime is relying materially on each such representation and warranty in entering into and performing this Agreement), and which shall survive the Closing. 3.1 Due Organization. PC is a professional corporation duly organized, validly existing, and in good standing under the laws of the State of New York and has full power and authority to carry on its business as now conducted and as proposed to be conducted. PC is qualified to do business and is in good standing in every jurisdiction where such qualification is required for the conduct of the Business as conducted on the Closing Date. As of the Closing Date, Moadel is the sole holder of all equity ownership interests in PC, after assuming the conversion, exercise or exchange of any and all rights or securities that are convertible into, or exercisable or exchangeable for, equity ownership interests in PC. 3.2 Subsidiaries. PC does not directly or indirectly have (or possess any options or other rights to acquire) any subsidiaries or any direct or indirect ownership interests in any person, business, corporation, partnership, limited liability company, association, joint venture, trust, or other entity. 3.3 Due Authorization. Each of PC and Moadel has full power and authority to enter into and perform this Agreement and each Transaction Document required to be executed by PC or Moadel in connection herewith. The execution, delivery, and performance of this Agreement and each such Transaction Document has been duly authorized by all necessary action of PC, its directors, its officers and its shareholders. This Agreement and each such Transaction Document has been duly and validly executed and delivered by PC and Moadel and constitutes a valid and binding obligation of PC and Moadel, enforceable against each of them in accordance with its terms. Except as set forth on Schedule 3.3, the execution, delivery, and performance of this Agreement, and each Transaction Document required herein to be executed by Moadel and/or PC do not (a) violate any federal, state, county, or local law, rule, or regulation applicable to PC, Moadel, the Business or the Assets, (b) violate or conflict with, or permit the cancellation of, any agreement to which PC or Moadel is a party, or by which PC, Moadel or their properties are bound, or (except as expressly set forth herein or in the other Transaction Documents) result in the creation of any lien, security interest, charge, or encumbrance upon any of such properties, (c) permit the acceleration of the maturity of any indebtedness of Moadel or PC, or any indebtedness secured by the property of Moadel or PC, or (d) violate or conflict with any provision of the organizational documents of PC. No action, consent, waiver or approval of, or filing with, any federal, state, county or local governmental authority is required by Moadel or PC in connection with the execution, delivery, or performance of this Agreement (or any Transaction Document). 3.4 Financial Statements. The unaudited balance sheet and income statement for the Business as of and for the year ended December 31, 1999, and the unaudited balance sheet and income statement for the Business as of and for the period beginning on April 1, 1999, and ending on March 31, 2000 (the "Balance Sheet Date") are attached hereto as Exhibit C (collectively, the "Financial Statements"). The Financial Statements have been prepared in accordance with generally accepted accounting principles ("GAAP") consistently applied (except as specifically noted therein or in Schedule 3.4) and fairly present in all material respects the financial position and results of operations of the Business as of the indicated dates and for the indicated periods. Except for Assumed Liabilities and liabilities set forth on Schedule 3.4 attached hereto, as of the Closing Date, neither PC nor Moadel has any claims, debts, liabilities, or obligations related to the Business or the Assets, whether known or unknown, absolute, contingent or otherwise (including, but not limited to, federal, state, and local taxes, any sales taxes, use taxes and property taxes, any taxes arising from the transactions contemplated by this Agreement and any liabilities arising from any litigation or civil, criminal or regulatory proceeding involving or related to PC, Moadel, the Assets or the Business). Except as set forth in Schedule 3.4 hereto, since the Effective Time there has been no material adverse change in the Assets, the Business or the results of operations of the Business. 3.5 Conduct of Business; Certain Actions. Except as set forth on Schedule 3.5 attached hereto, since the Balance Sheet Date, PC and Moadel have conducted the Business in the ordinary course and consistent with past practices and have not (a) increased the compensation of any employees, agents, contractors, vendors or other parties, except for wage and salary increases made in the ordinary course of business and consistent with the past practices of PC or Moadel, (b) sold any asset (or any group of related assets) in any transaction (or series of related transactions) in which the purchase price or book value for such asset (or group of related assets) exceeded $10,000, (c) suffered or permitted any lien, security interest, claim, charge, or other encumbrance to arise or be granted or created against or upon any of its assets, real or personal, tangible or intangible, (d) amended its organizational documents, (e) made or paid any severance or termination payment to any director, officer, employee, agent, contractor, vendor or consultant, (f) made any change in its method of accounting, (g) made any investment or commitment therefor in any person, business, corporation, association, partnership, limited liability company, joint venture, trust, or other entity, (h) amended, terminated or experienced a termination of any material contract, agreement, lease, franchise, or license to which it is a party, (i) entered into any other material transactions except in the ordinary course of business, (j) changed the standard, undiscounted per procedure fee generally charged to patients, which is $2,250 at the time of Closing, (k) entered into any contract, commitment, agreement, or understanding to do any acts described in the foregoing clauses (a)-(j) of this Section, (l) suffered any material damage, destruction, or loss (whether or not covered by insurance) to any assets, (m) experienced any strike, slowdown, or demand for recognition by a labor organization by or with respect to any of its employees, (n) experienced or effected any shutdown, slow-down, or cessation of any operations conducted by, or constituting part of, it, or (o) changed or suspended its procedures for collecting accounts receivable and paying its accounts payable. 3.6 Assets; Licenses, Permits, etc. The Assets include all property and assets, real, personal and mixed, tangible and intangible, including, without limitation, leases and contracts, equipment, instruments, computer software used in connection with the equipment or instruments, Permits, personal property, furniture, business records and other assets that are used primarily in or are materially relied on for the Assets Related Business conducted by PC and Moadel prior to the Closing. Except as set forth on Schedule 3.6(a), PC has good and marketable title to all of the Assets, free and clear of all liens, security interests, claims, rights of another, and encumbrances of any kind whatsoever. The Assets are in good operating condition and repair, subject to ordinary wear and tear, taking into account the respective ages of the properties involved and are all that are necessary for the Assets Related Business conducted by PC and Moadel prior to the Closing. Attached hereto as Schedule 3.6(b) is a list and description of all federal, state, county, and local governmental licenses, certificates, certificates of need, permits, waivers, filings and orders held or applied for by PC or Moadel and used or relied on (or to be used or relied on) in connection with the Assets or the Business ("Permits"). PC and Moadel have complied in all material respects, and PC and Moadel are in compliance in all material respects, with the terms and conditions of any such Permits. No additional Permit is required from any federal, state, county, or local governmental agency or body thereof in connection with the conduct of the Business. No claim has been made by any governmental authority (and, to the knowledge of Moadel and PC, no such claim has been threatened) to the effect that a Permit not possessed by PC or Moadel is necessary in respect of the Business. Except as specifically noted on Schedule 3.6(b), no Permit is or will be adversely affected by the consummation of the transactions contemplated by this Agreement. 3.7 Environmental Issues. (a) For purposes of this Agreement, the term "environmental laws" shall mean all laws and regulations relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport, or handling, or the emission, discharge, or release, of any pollutant, contaminant, chemical, or industrial toxic or hazardous substance or waste, and any order related thereto. (b) PC and Moadel have complied in all material respects with and obtained all authorizations and made all filings required by all applicable environmental laws. The properties occupied or used by PC or Moadel have not been contaminated with any hazardous wastes, hazardous substances, or other hazardous or toxic materials in violation of any applicable environmental law, the violation of which could have a material adverse impact on the Business. (c) Neither PC nor Moadel has received any notice from the United States Environmental Protection Agency that it is a potentially responsible party under the Comprehensive Environmental Response, Compensation and Liability Act ("Superfund Notice"), any citation from any federal, state or local governmental authority for non-compliance with its requirements with respect to air, water or environmental pollution, or the improper storage, use or discharge of any hazardous waste, other waste or other substance or other material pertaining to the Business ("Citations") or any written notice from any private party alleging any such non-compliance; and there are no pending or unresolved Superfund Notices, Citations or written notices from private parties alleging any such non-compliance. 3.8 Intellectual Property Rights. There are no patents, trademarks, trade names, or copyrights, and no applications therefor, owned by or registered in the name of PC or Moadel or in which PC or Moadel has any right, license, or interest other than those disclosed on Schedule 3.8. Neither PC nor Moadel is a party to any license agreement, either as licensor or licensee, with respect to any patents, trademarks, trade names, or copyrights other than those disclosed on Schedule 3.8. Neither PC nor Moadel has received any notice that it is infringing any patent, trademark, trade name, or copyright of others. 3.9 Compliance with Laws. To the knowledge of PC and Moadel, PC and Moadel have complied in all material respects, and PC and Moadel are in compliance in all material respects, with all federal, state, county, and local laws, rules, regulations and ordinances currently in effect and relating to the Business. No claim has been made or threatened by any governmental authority against PC or Moadel to the effect that any aspect of the Business fails to comply in any respect with any law, rule, regulation, or ordinance. 3.10 Insurance. Attached hereto as Schedule 3.10 is a list of all policies of fire, liability, business interruption, and other forms of insurance (including, without limitation, professional liability insurance) and all fidelity bonds held by or applicable to PC or the Business at any time within the past three (3) years, which schedule sets forth in respect of each such policy the policy name, policy number, carrier, term, type of coverage, deductible amount or self-insured retention amount, limits of coverage, annual premium and claims asserted thereunder (regardless of whether resolved or whether benefits were paid). To the knowledge of PC and Moadel, no event directly relating to PC or the Business has occurred which will result in a retroactive upward adjustment of premiums under any such policies or which is likely to result in any prospective upward adjustment in such premiums. There have been no material changes in the type of insurance coverage maintained by PC or Moadel with respect to the Business during the past three (3) years, including without limitation any change which has resulted in any period during which PC or the Business had no insurance coverage. Excluding insurance policies which have expired and been replaced, no insurance policy relating to the Business has been canceled within the last three (3) years and no threat has been made to cancel any insurance policy relating to the Business within such period. 3.11 Employee Benefit Matters. Except as set forth on Schedule 3.11, neither PC nor Moadel maintains or contributes or is required to contribute to any "employee welfare benefit plan" (as defined in section 3(1) of the Employee Retirement Income Security Act of 1974 (and any sections of the Code amended by it) and all regulations promulgated thereunder, as the same have from time to time been amended ("ERISA")) or any "employee pension benefit plan" (as defined in ERISA). Neither PC nor Moadel presently maintains or has ever maintained, or had any obligation of any nature to contribute to, a "defined benefit plan" within the meaning of the Code. 3.12 Contracts and Agreements. Attached hereto as Schedule 3.12 is a list of all written or oral contracts, commitments, leases, and other agreements (including, without limitation, all promissory notes, loan agreements, and other evidences of indebtedness, mortgages, deeds of trust, security agreements, pledge agreements, service agreements, and similar agreements and instruments and all confidentiality agreements) relating to the Business and to which PC or Moadel is a party or by which PC or Moadel or any of the Assets are bound, pursuant to which the obligations thereunder of any party thereto are, or are contemplated as being, in respect of any such individual contracts, commitments, leases, or other agreements during any year during the term thereof, $25,000 or greater, or which are otherwise material to the Business (collectively the "Contracts" and individually, a "Contract"). Neither PC nor Moadel is, and, to the best knowledge of PC and Moadel, no other party thereto is, in default (and no event has occurred which, with the passage of time or the giving of notice, or both, would constitute a default) under any Contract. Neither PC nor Moadel has waived any material right under any Contract, and no consents or approvals (other than those obtained in writing and delivered to Prime prior to Closing) are required under any Contract in connection with the consummation of the transactions contemplated hereby. Neither PC nor Moadel has guaranteed any obligation of any other person or entity insofar as it relates to the Business. 3.13 Claims and Proceedings. Attached hereto as Schedule 3.13 is a list and description of all claims, actions, suits, proceedings, and investigations pending or, to the knowledge of PC and Moadel, threatened against PC or Moadel, at law or in equity, or before or by any court, municipal or other governmental department, commission, board, agency, or instrumentality. Except as set forth on Schedule 3.13 attached hereto, none of such claims, actions, suits, proceedings, or investigations will result in any liability or loss to PC or the Business which (individually or in the aggregate) is material, and PC and Moadel have not been, and PC and Moadel are not now, subject to any order, judgment, decree, stipulation, or consent of any court, governmental body, or agency. No inquiry, action, or proceeding has been asserted, instituted, or threatened against PC or Moadel to restrain or prohibit the carrying out of the transactions contemplated by this Agreement or to challenge the validity of such transactions or any part thereof or seeking damages on account thereof. 3.14 Taxes. All federal, foreign, state, county, and local income, gross receipts, excise, property, franchise, license, sales, use, withholding, and other tax (collectively, "Taxes") returns, reports, and declarations of estimated tax (collectively, "Returns") which were required to be filed by PC (or Moadel with respect to the Business) on or before the date hereof have been filed within the time (including any applicable extensions) and in the manner provided by law, and all such Returns are true and correct in all material respects and accurately reflect the Tax liabilities of PC (or Moadel with respect to the Business). PC has provided Prime with true and complete copies of all returns filed for and during any tax period throughout PC's existence. All Taxes, assessments, penalties, and interest which have become due pursuant to such Returns have been paid or adequately accrued in the Financial Statements. The provisions for Taxes reflected on the balance sheet contained in the Financial Statements are adequate to cover all of PC's (and Moadel's with respect to the Business) estimated Tax liabilities for the respective periods then ended and all prior periods. As of the Closing Date, PC (and Moadel with respect to the Business) will not owe any Taxes for any period prior to the Closing which are not reflected on the Financial Statements, except for Taxes attributable to the operations of of the Business between the Balance Sheet Date and the Closing Date. Neither PC nor Moadel has executed any presently effective waiver or extension of any statute of limitations against assessments and collection of Taxes. There are no pending or threatened claims, assessments, notices, proposals to assess, deficiencies, or audits (collectively, "Tax Actions") against PC or Moadel with respect to any Taxes owed or allegedly owed in respect of the Business. There are no tax liens on any of the assets of PC or the Assets. Proper and accurate amounts have been withheld and remitted by PC and Moadel from and in respect of all persons from whom either of them is required by applicable law to withhold for all periods in compliance with the tax withholding provisions of all applicable laws and regulations. Neither PC nor Moadel is a party to any tax sharing agreement. 3.15 Personnel. Attached hereto as Schedule 3.15 is a list of names and current annual rates of compensation of the officers, employees or agents of PC or the Business who are necessary for the operation of the Business or who utilize (or are necessary for the utilization of) the Assets (collectively, the "Employees"). Except as set forth on Schedule 3.15, there are no bonus, profit sharing, percentage compensation, company automobile, club membership, and other like benefits, if any, paid or payable by PC or the Business to any Employees that are not fully and specifically reflected in the Financial Statements. Schedule 3.15 attached hereto also contains a brief description of all material terms of employment agreements and confidentiality agreements to which PC (or Moadel with respect to the Business) is a party and all severance benefits which any director, officer, Employee or sales representative of PC (or Moadel with respect to the Business) is or may be entitled to receive. PC has delivered to Prime accurate and complete copies of all such employment agreements, confidentiality agreements, and all other agreements, plans, and other instruments. There is no pending or threatened (i) labor dispute or union organization campaign relating to the Business, (ii) claims against PC or Moadel by any employees of PC (or Moadel with respect to the Business), or (iii) terminations, resignations or retirements of any employees of PC (or Moadel with respect to the Business). None of the employees of PC (or Moadel with respect to the Business) are represented by any labor union or organization. There is no unfair labor practice claim against PC (or Moadel with respect to the Business) before the National Labor Relations Board or any strike, labor dispute, work slowdown, or work stoppage pending or threatened against or involving PC (or Moadel with respect to the Business). 3.16 Business Relations. Neither PC nor Moadel has any reason to believe and has not been notified that any supplier or customer of the Business will cease or refuse to do business with the Business in the same manner as previously conducted with the Business as a result of or within one (1) year after the consummation of the transactions contemplated hereby, to the extent such cessation or refusal might affect the Assets or the Business. Neither PC nor Moadel has received any notice of any disruption (including delayed deliveries or allocations by suppliers) in the availability of the materials or products used in the Business. 3.17 This section intentionally omitted. 3.18 Agents. Except as set forth on Schedule 3.18 attached hereto, PC (and Moadel with respect to the Business) has not designated or appointed any person (other than PC's employees, officers and directors) or other entity to act for it or on its behalf pursuant to any power of attorney or any agency which is presently in effect. 3.19 Indebtedness To and From Directors, Officers, Shareholders and Employees. No director, officer, shareholder, employee or affiliate of PC or Moadel has any indebtedness owed to it from Moadel or PC, excluding indebtedness for travel advances or similar advances for expenses incurred on behalf of and in the ordinary course of the Business and consistent with past practices associated with the Business. As of the Effective Time and the Closing Date all amounts due PC or Moadel from any of their (as applicable) directors, officers, employees or affiliates (or any of their family members) shall have been repaid in full. 3.20 Commission Sales Contracts. Except as disclosed in Schedule 3.20 attached hereto, neither PC nor Moadel has an employment relationship with any individual, corporation, partnership, or other entity related to the Business whose compensation from PC or Moadel is in whole or in part determined on a commission basis. 3.21 Certain Consents. Except as set forth on Schedule 3.21 attached hereto, there are no consents, waivers, or approvals required to be executed and/or obtained by PC or Moadel from third parties (including, without limitation, the spouse, if any, of Moadel) in connection with the execution, delivery, and performance of this Agreement or any other Transaction Documents"). 3.22 Brokers. Except for a certain fee or commission payable by Moadel to Nexus Health Capital, neither PC nor Moadel has engaged, or caused any liability to be incurred to, any finder, broker, or sales agent (and neither has paid, nor will pay, any finders fee or similar fee or commission to any person) in connection with the execution, delivery, or performance of this Agreement or the transactions contemplated hereby. Moadel and PC acknowledge and agree that the fee or commission payable to Nexus Health Capital is not an Assumed Liability, and none of PMSI, Prime or Newco shall have any obligation or liability whatsoever with respect to such fee or commission. 3.23 Interest in Competitors, Suppliers, and Customers. Except as set forth on Schedule 3.23 attached hereto, neither PC nor any affiliate of PC (including, without limitation, Moadel), and to the knowledge of PC and Moadel, no director, officer, employee or affiliate of PC or any affiliate of any director, officer, employee or affiliate of PC, has any ownership interest in any competitor, customer or supplier of the Business (other than the ownership of securities of a publicly held entity of which it owns less than five percent (5%) of any class of outstanding securities) or any property used in the operation of the Business. 3.24 Warranties. Except as set forth on Schedule 3.24, there have not been made any warranties or guarantees to third parties with respect to any products sold or services rendered in connection with the Business. Except as set forth on Schedule 3.24 attached hereto, no claims for breach of product or service warranties have ever been made with respect to products sold or services rendered in connection with the Business. 3.25 Investment Representations. Each of PC and Moadel: -------------------------- (a) Is an "accredited investor," and has not retained or consulted with any "purchaser representative" (as such terms are defined in Rule 501 of Regulation D promulgated under the Securities Act of 1933, as amended (the "Securities Act")) in connection with its execution of this Agreement and the consummation of the transactions contemplated hereby; (b) Has such knowledge and experience in financial and business matters that it is capable of evaluating the merits and risks of an investment in Newco; (c) Will acquire any Newco interests for its own account for investment and not with the view toward resale or redistribution in a manner which would require registration under the Securities Act, the Texas Securities Act, as amended, or the securities laws of any other state, and it does not presently have any reason to anticipate any change in its circumstances or other particular occasion or event which would cause it to sell its Newco interests, or any part thereof or interest therein, and it has no present intention of dividing the Newco interests with others or reselling or otherwise disposing of the Newco interests or any part thereof or interest therein either currently or after the passage of a fixed or determinable amount of time or upon the occurrence or nonoccurrence of any predetermined event or circumstance; (d) In connection with entering into this Agreement and each of the other contracts, documents, instruments or agreements to be entered into in connection with or as contemplated by this Agreement (all of which are collectively referred to as the "Transaction Documents") to which it is a party, and in making the investment decisions associated therewith, it has neither received nor relied on any representations or warranties from Newco, PMSI, Prime, the affiliates of PMSI or Prime, or the officers, directors, shareholders, employees, partners, members, agents, consultants, personnel or similarly related parties of PMSI or Prime, other than those representations and warranties contained in this Agreement and the other Transaction Documents; (e) Is able to bear the economic risk of an investment in the Newco interests and it has sufficient net worth to sustain a loss of its entire investment without material economic hardship if such a loss should occur; and (f) Acknowledges that the Newco interests have not been registered under the Securities Act, or the securities laws of any of the states of the United States, that an investment in the Newco interests involves a high degree of risk, and that the Newco interests are an illiquid investment. ARTICLE IV Covenants 4.1 Use of Name. Except to the extent allowed under the limited license contained in the Office and Equipment Use Agreement, each of Moadel and PC agrees that, following the Closing Date, it will cease using the name "New York Eye Specialists" or any words or phrases which are deceptively similar to such name. 4.2 Cooperation Relating to Financial Statements. Each of PC and Moadel agrees to cooperate with Prime, at PC's expense, in the preparation of any financial statements of PC which Prime or its affiliates may be required by any applicable law to prepare. 4.3 Action by Owners. Moadel agrees to vote any interest it owns in PC, and to take such other actions as may be necessary in his capacity as the sole director and sole shareholder of PC, to authorize and direct PC to perform all of its obligations under this Agreement and under the Organizational Documents and other Transaction Documents to which PC is a party. Furthermore, Moadel and PC each agree that, until such time as neither of them owns any direct or indirect ownership interest in Newco, neither of them will, without obtaining the prior written consent of Prime, which consent may be withheld in Prime's sole and absolute discretion, (i) authorize the issuance of any additional capital stock or other ownership interest in PC or (ii) transfer, assign, pledge, hypothecate, or in any way alienate any capital stock of PC, or any interest therein, whether voluntarily or by operation of law, or by gift or otherwise, without the prior written consent of Prime. Any purported transfer in violation of this Section shall be void ab initio without any action by any party, and shall not operate to transfer any interest or title to the purported transferee. All evidences of ownership in PC, including, without limitation, all stock certificates, shall bear the following legend: "THE INTERESTS REPRESENTED HEREBY AND THE SALE, ASSIGNMENT, TRANSFER, PLEDGE OR OTHER DISPOSITION THEREOF ARE SUBJECT TO CERTAIN RESTRICTIONS CONTAINED IN A CONTRIBUTION AGREEMENT AMONG THE COMPANY AND THE WITHIN NAMED PARTIES, AND ANY AMENDMENT THERETO. THE CONTRIBUTION AGREEMENT LIMITS THE USE OF THE INTERESTS REPRESENTED HEREBY AS COLLATERAL FOR ANY LOAN WHETHER BY PLEDGE, HYPOTHECATION OR OTHERWISE. A COPY OF THE CONTRIBUTION AGREEMENT AND ALL APPLICABLE AMENDMENTS THERETO WILL BE FURNISHED BY THE COMPANY TO THE HOLDER HEREOF WITHOUT CHARGE UPON WRITTEN REQUEST TO THE COMPANY AT ITS PRINCIPAL PLACE OF BUSINESS OR REGISTERED OFFICE." 4.4 Public Statements and Press Releases. The parties hereto covenant and agree that, except as provided for hereinbelow, each will not from and after the date hereof make, issue or release any public announcement, press release, statement or acknowledgment of the existence of, or reveal publicly the terms, conditions and status of, the transactions provided for herein, without the prior written consent of the other parties hereto as to the content and time of release of and the media in which such statements or announcement is to be made, provided, however, that the following shall not be a breach of this Section: (a) filings and disclosures required by the Securities and Exchange Commission, and (b) announcements, statements, acknowledgments or revelations which either party is required by law to make, issue or release as long as such party shall have given, to the extent reasonably possible, not less than two (2) calendar days prior notice to the other parties hereto, and shall have attempted, to the extent reasonably possible, to clear such announcement, statement, acknowledgment or revelation with the other parties hereto. Each party hereto agrees that it will not unreasonably withhold any such consent or clearance. The provisions of this Section shall not limit or restrict any party's communications with its personal consultants or advisors, including, without limitation, its attorneys, accountants and financial advisors. 4.5 Guaranty of PMSI. PMSI hereby unconditionally and irrevocably guarantees each of the payment and performance obligations of Prime hereunder and under each of the Transaction Documents. Without limiting the foregoing, PMSI agrees that if Prime shall default in any obligation to pay to PC or Moadel any amount then due and payable by Prime to PC or Moadel under Article I, Article VI or Article VII hereunder, PMSI shall immediately pay such amount to PC or Moadel. PMSI hereby agrees not to require PC or Moadel to proceed against Prime or any other person or to pursue any other remedy before proceeding against PMSI under this guaranty. 4.6 Earnout. In further consideration of the purchase of sixty-five percent (65%) of the Assets Related Business, Prime agrees to pay Moadel the amount (if any) specified below, in accordance with the provisions below. Any amounts payable pursuant to this Section are in addition to payment of the Purchase Price pursuant to Section 1.1, and no amount of the Purchase Price shall reduce amounts payable under this Section. (a) The net income for Newco shall be calculated for the twelve consecutive calendar months ending on the one-year anniversary of the Closing Date, using the same methodology and principles reflected in the calculation of Base Net Income (as hereinafter defined) shown on Schedule 4.6 attached hereto (the "First Anniversary Net Income"). If the First Anniversary Net Income exceeds Base Net Income by at least twenty percent (20%), Prime agrees to pay Moadel an amount equal to the result obtained by (A) dividing the Purchase Price by five (5) and (B) multiplying such quotient by 9.75% (the "First Anniversary Earnout"). (b) The net income for Newco shall be calculated for the twelve consecutive calendar months ending on the two-year anniversary of the Closing Date, using the same methodology and principles reflected in the calculation of Base Net Income shown on Schedule 4.6 attached hereto (the "Second Anniversary Net Income"). To the extent that any one of the following requirements are met, Prime agrees to pay Moadel the respective amount determined as follows (the "Second Anniversary Earnout," and together with the First Anniversary Earnout, the "Earnout Payments"), with the understanding that a Second Anniversary Earnout, if any, will only be paid with respect to one of the following three alternatives, even if the requirements for more than one of the alternatives are satisfied: (i) If Second Anniversary Net Income exceeds First Anniversary Net Income by at least twenty percent (20%) and a First Anniversary Earnout was due and payable in accordance with Section 4.6(a), then Prime agrees to pay to Moadel an amount equal to the result obtained by (A) dividing the Purchase Price by five (5) and (B) multiplying such quotient by 22.75%. (ii) If (a) Second Anniversary Net Income exceeds First Anniversary Net Income by less than twenty percent (20%), (b) Second Anniversary Net Income exceeds Base Net Income (as hereinafter defined) by at least forty percent (40%), and (c) a First Anniversary Earnout was due and payable in accordance with Section 4.6(a), then Prime agrees to pay to Moadel an amount equal to the result obtained by (A) dividing the Purchase Price by five (5) and (B) multiplying such quotient by 22.75%. (iii) If Second Anniversary Net Income exceeds Base Net Income by at least forty percent (40%) and a First Anniversary Earnout was not due and payable in accordance with Section 4.6(a), then Prime agrees to pay to Moadel an amount equal to the result obtained by (A) dividing the Purchase Price by five (5) and (B) multiplying such quotient by 32.50%. (c) As used in this Agreement, Base Net Income shall mean the amount of $2,464,383, resulting from the calculations contained in Schedule 4.6 attached hereto and representing the estimated recurring net income from the Assets Related Business (on a stand alone basis) for the twelve (12) consecutive calendar months ending March 31, 2000, based on information available at the date of calculation and assuming all of the representations and warranties of PC and Moadel contained in this Agreement are true, complete and not misleading. The parties acknowledge and agree that the manner of calculation set forth on Schedule 4.6 attached hereto reflects the agreed upon means of calculating Base Net Income (subject to exclusions/additions described below in subsection (d)). (d) The parties agree that, notwithstanding any provision of this Agreement to the contrary, (i) the revenues, income, costs, and expenses (including, without limitation, startup and transaction costs, legal and accounting costs and fees, and applicable financing costs) resulting from or attributable to the acquisition and/or operation of any Existing Locations by Newco or Newco's subsidiaries shall be excluded from the calculation of the Earnout Payments and (ii) the revenues, income, costs, and expenses (including, without limitation, startup and transaction costs, legal and accounting costs and fees, and applicable financing costs), resulting from or attributable to the development and/or operation of any New Locations by Newco or Newco's subsidiaries shall be included in the calculation of the Earnout Payments. To the extent possible, the operating results from New Locations shall be incorporated into the calculation of the Earnout Payments in a manner consistent with the treatment on Schedule 4.6 of the operating results of PC existing immediately prior to the Effective Time, with appropriate departures to incorporate, among other items, non-recurring costs such as startup costs. The provisions of this subsection (d) shall not be construed to require any party, including Newco, to develop or acquire any Target Location. (e) Prime shall calculate the First Anniversary Earnout within ninety (90) days of the end of the one-year anniversary of the Closing Date and shall calculate the Second Anniversary Earnout within ninety (90) days of the end of the two-year anniversary of the Closing Date. Within the applicable ninety (90) day period, Prime shall deliver to PC, via certified or registered U.S. Mail, a statement (the "Calculation Statement") showing calculation of the applicable Earnout Payment and the basis on which it was calculated in reasonable detail. If PC shall fail to receive a Calculation Statement within either ninety (90) day period, then PC shall promptly notify Prime in writing that the Calculation Statement has not been received, and Prime shall have an additional five (5) days following its receipt of such notice from PC, within which Prime may deliver the Calculation Statement without having been in default under this subsection (d). If Prime fails to deliver the Calculation Statement within such additional five (5) day period, and an Earnout Payment is required, Prime agrees to pay interest at PMSI's overnight funds investment rate on the amount of the Earnout Payment, charged from the first day following such addition five (5) day period until the day on which the Calculation Statement is delivered. PC shall have thirty (30) days following its receipt of a Calculation Statement during which Newco and Prime agree to provide to Moadel and PC reasonable access to Newco's books and records. If PC shall fail to deliver an Objection Notice (as hereinafter defined) within such thirty (30) day period, then such failure shall constitute PC's acceptance of the respective Calculation Statement, which shall thereupon become conclusive and binding on all parties hereto, and shall not be subject to further review, challenge, or adjustment. During such thirty (30) day period, PC may deliver to Prime, via certified or registered U.S. Mail, a written notice of objection to the respective Calculation Statement (an "Objection Notice"), which Objection Notice shall set forth in reasonable detail PC's calculation of the Earnout Payment calculated therein, and PC's basis for objection, in which case the parties shall meet and in good faith attempt to resolve any disagreement within thirty (30) days after Prime's receipt of the Objection Notice. If the parties are unable to resolve such disagreement within such time period, the disagreement shall be referred to a "Big Five" accounting firm selected by mutual agreement of PC and Prime, or if the parties cannot agree on such selection, then a "Big Five" accounting firm selected by lot, excluding those that have provided services to PC or Prime within the preceding twenty-four (24) months (the "Settlement Accountants"). The Settlement Accountants shall be directed to use their best efforts to reach a determination of the correct Earnout Payment (the "Audit Amount") within forty-five (45) days after such referral, and the Audit Amount shall be final and binding on the parties hereto, and shall not be subject to further review, challenge or adjustment. The costs and expenses of the services of the Settlement Accountants (the "Audit Costs") shall be allocated to and borne by each of Prime and Moadel pursuant to the following calculation. First, the Settlement Accountants shall calculate, for each of Prime and Moadel, the difference between such party's estimate of the Earnout Payment and the Audit Amount (for either party, expressed only as a positive number, the "Difference"). Next, each of Prime's and Moadel's share of the Audit Costs shall be determined by multiplying the Audit Costs by a fraction, the numerator of which shall be such party's Difference, and the denominator of which shall be the sum of the Differences of both parties. Notwithstanding the foregoing, if the Audit Amount exceeds Moadel's estimate, then Prime shall bear all Audit Costs, and if the Audit Amount is lower than Prime's estimate, then Moadel shall bear all Audit Costs. Prime shall pay any applicable Earnout Payment in cash to PC within fifteen (15) days following the conclusive determination of the amount of such Earnout Payment pursuant to this paragraph. With respect to any Earnout Payment that is being contested by the parties, Prime agrees to pay in cash to PC Prime's estimate of the required Earnout Payment (as shown in the respective Calculation Statement) within fifteen (15) days following Prime's receipt of the respective Objection Notice. 4.7 Right of First Refusal. For so long as Moadel: (i) owns not less than thirty percent (30%) of all of the outstanding membership interests of Newco, or such lesser percentage as may result solely from the issuance by Newco of any new membership interests of Newco, whether as part of an acquisition by Newco or otherwise (whatever percentage may from time to time apply, the "Required Percent") and (ii) is performing the majority of his Refractive Surgery procedures at one of Newco's locations within the Restricted Area, PMSI, Prime or any affiliate thereof owning a membership interest in Newco (a "Prime Entity") shall be subject to the right of first refusal (the "Right of Refusal") specified as follows: (a) If at any time, a Prime Entity proposes to transfer all or a portion of its outstanding membership interests of Newco to one or more third parties pursuant to an agreement with such third parties (a "Transfer"), then the Prime Entity shall give Moadel written notice of its intention to make the Transfer (the "Transfer Notice") which shall include all of the material terms of the intended Transfer. (b) Moadel shall have an option for a period of twenty (20) days from the Prime Entity's delivery of the Transfer Notice to elect to purchase the membership interests described in the Transfer Notice upon substantially the same terms and conditions as set forth in the Transfer Notice. Acceptance of this Right of Refusal shall be in writing addressed to PMSI at the address provided for notice herein. If Moadel elects not to purchase the membership interests pursuant to this Section (or fails to respond during the 20-day period), the selling Prime Entity shall be free to consummate the Transfer to a third party only upon substantially the same terms and conditions as set forth in the Transfer Notice, but if Transfer has not been consummated prior to the expiration of six (6) months following Moadel's election not to purchase, all of the provisions of this Section shall again apply to any Transfer of such membership interests. (c) The provisions of this Section shall apply to successive proposed Transfers, and application of the provisions of this Section to any particular Transfer shall not affect application of the provisions of this Section to subsequent Transfers; provided, however, that any proposed transfer by a Prime Entity to an affiliate or subsidiary of PMSI shall not be considered a "Transfer" for purposes of this Section 4.7. 4.8 Key-Man Life Insurance. The parties agree that Newco shall maintain a key-man life insurance policy and a disability policy (the "Policies") on Moadel, each in a policy amount equal to or exceeding $10,000,000. Such Policies shall be maintained by Newco until Moadel no longer materially participates in the Assets Related Business as reasonably determined by the Managers. Prime agrees that it shall pay or reimburse Newco for any portion of the related premiums owing to coverages exceeding $10,000,000, and, with respect to such disability policy, any portion of the related premium in excess of $10,000. 4.9 VISX Agreements. Moadel and PC each hereby agree to take any and all actions that may at any time after the Closing be necessary, including, without limitation, executing any document, instrument or agreement, in order to confer to Newco all benefits, economic or otherwise, arising under the VISX Agreements or any contract or agreement, whether written or oral, that replaces, supplements or amends any of the VISX Agreements. ARTICLE V Conditions to Closing 5.1 Prime's Conditions to Closing. Prime's obligation to consummate the transactions contemplated in this Agreement is subject to the satisfaction, prior to or at the Closing, of each of the following conditions, any one or more of which may be waived by Prime in writing. Upon failure of any of the following conditions, Prime may terminate this Agreement: (a) each of Moadel and PC shall have executed and delivered each of the Transaction Documents to which it is a party (including, without limitation, the Limited Liability Company Agreement of Newco attached hereto as Exhibit B), and shall have performed or complied in all respects with its agreements and covenants required by this Agreement or any other Transaction Document to have been performed or complied with by it prior to or at the Closing; (b) as of the Closing Date, the amount of cash included in the Assets and conveyed by Prime and PC to Newco shall be at least $325,000; (c) since the Effective Time, except as set forth on Schedule 3.4 hereto, there shall not have been any material adverse change in the condition (financial or otherwise) of the PC, the Assets or the Business (including, without limitation, any material change in the amount of Working Capital reasonably necessary to operate the Assets Related Business during any one-month period); (d) each of the representations and warranties made by Moadel or PC in this Agreement or any other Transaction Document shall be true, correct and not misleading in any material respect; and (e) each of Moadel and PC shall have delivered such good standing certificates, officer certificates, and similar documents and certificates as counsel for Prime may have reasonably requested. 5.2 Moadel's and PC's Conditions to Closing. Each of Moadel's and PC's obligation to consummate the transactions contemplated in this Agreement is subject to the satisfaction, prior to or at the Closing, of each of the following conditions, any one or more of which may be waived by Moadel and PC in writing. Upon failure of any of the following conditions, Moadel or PC may terminate this Agreement: (a) Prime shall have executed and delivered each of the Transaction Documents to which it is a party (including, without limitation, the Limited Liability Company Agreement of Newco attached hereto as Exhibit B), and shall have performed or complied in all respects with its agreements and covenants required by this Agreement or any other Transaction Document to have been performed or complied with by it prior to or at the Closing; (b) each of the representations and warranties made by Prime in this Agreement or any other Transaction Document shall be true, correct and not misleading in any material respect; and (c) Prime shall have delivered such good standing certificates, officer certificates, and similar documents and certificates as counsel for Moadel and PC may have reasonably requested. ARTICLE VI Indemnification of Prime 6.1 Indemnification of Prime. Each of Moadel and PC agrees to indemnify and hold harmless Prime, each parent company, subsidiary and/or affiliate of Prime (including, without limitation, Newco) and each parent company, subsidiary, affiliate, shareholder, member, partner (or other owner), officer, director, manager, agent, employee and representative of any of the foregoing (collectively, the "Prime Indemnified Parties") from and against any and all damages, losses, claims, liabilities, demands, charges, suits, penalties, costs, and expenses (including court costs and attorneys' fees and expenses incurred in investigating and preparing for any litigation or proceeding) (collectively, "Indemnified Costs"), including, without limitation, Indemnified Costs arising in connection with the commencement or assertion of any action, proceeding, demand, or claim by a third party (collectively, a "Third-Party Action"), which any of the Prime Indemnified Parties may sustain, arising out of or related to (a) any breach or default by Moadel or PC of any of the representations, warranties, covenants or agreements contained in this Agreement or any Transaction Document, (b) any claim, debt, obligation or liability of Moadel or PC, (c) any actual or alleged actions or omissions by Moadel, PC, or any of PC's directors, officers, shareholders, agents, employees, representatives, subsidiaries and/or affiliates occurring prior to the Closing Date (regardless of whether such Indemnified Costs are asserted at any time before or after the Closing Date), and (d) any actual or alleged actions or omissions by Moadel or PC occurring after the Closing that either were not made by Moadel or PC in its capacity as a director, officer or shareholder of Newco (as applicable), or, if made by Moadel or PC in such a capacity, constituted a breach of any fiduciary or other duty owed by Moadel or PC under applicable law or any Transaction Document. For purposes of this Section, any decrease in the value of a Prime Indemnified Party's ownership interest (if any) in Newco, as a result of the acts, omissions or circumstances described in clauses (a) through (d) of this Section, shall be deemed an Indemnified Cost, and such Prime Indemnified Party shall be entitled to indemnification hereunder in an amount equal to such decrease in value; provided further that, notwithstanding any provision of this Agreement or any other Transaction Document to the contrary, neither Moadel nor PC may, and each hereby agrees not to, seek contribution, indemnification or reimbursement from Newco for any amount Moadel or PC is required to pay pursuant to this Article, regardless of whether Moadel or PC is entitled to contribution, indemnification or reimbursement under any Transaction Document, the organizational documents of Newco or applicable law. The parties agree that indemnification may not be sought under this ARTICLE or ARTICLE VII on the basis that the structure of the transactions contemplated by this Agreement violate any federal, state, county, or local laws, rules, regulations or ordinances regulating or legislating the provision of healthcare or the practice of medicine. The parties also agree that recourse under this ARTICLE or ARTICLE VII shall not be the sole recourse of the parties against one another for a breach of the provisions of this Agreement or any other Transaction Document. 6.2 Defense of Third-Party Claims. A Prime Indemnified Party shall give prompt written notice to Moadel, of the commencement or assertion of any Third Party Action in respect of which such Prime Indemnified Party shall seek indemnification hereunder. Any failure to so notify Moadel shall not relieve Moadel or PC from any liability that either may have to such Prime Indemnified Party under this Article except to the extent that the failure to give such notice materially and adversely prejudices Moadel. Moadel shall have the right to assume control of the defense of, settle, or otherwise dispose of such Third-Party Action on such terms as it deems appropriate; provided, however, that: (a) The Prime Indemnified Party shall be entitled, at his, her, or its own expense, to participate in the defense of such Third-Party Action; (b) Moadel shall obtain the prior written approval of the Prime Indemnified Party, which approval shall not be unreasonably withheld, before entering into or making any settlement, compromise, admission, or acknowledgment of the validity of such Third-Party Action or any liability in respect thereof if, pursuant to or as a result of such settlement, compromise, admission, or acknowledgment, injunctive or other equitable relief would be imposed against the Prime Indemnified Party; (c) Moadel shall not consent to the entry of any judgment or enter into any settlement that does not include as an unconditional term thereof the execution and delivery of a release from all liability in respect of such Third-Party Action by each claimant or plaintiff to, and in favor of, each Prime Indemnified Party; (d) Moadel shall not be entitled to control (but shall be entitled to participate at its own expense in the defense of), and the Prime Indemnified Party shall be entitled to have sole control over, the defense or settlement, compromise, admission, or acknowledgment of any Third-Party Action as to which Moadel fails to assume the defense within thirty (30) days; provided, however, that the Prime Indemnified Party shall make no settlement, compromise, admission, or acknowledgment which would give rise to liability on the part of Moadel, without the prior written consent of Moadel; (e) Moadel shall make payments of all amounts required to be made pursuant to the foregoing provisions of this Article to or for the account of the Prime Indemnified Party from time to time promptly upon receipt of bills or invoices relating thereto or when otherwise due and payable, provided that the Prime Indemnified Party has agreed in writing to reimburse Moadel for the full amount of such payments if the Prime Indemnified Party is ultimately determined not to be entitled to such indemnification; and (f) The parties hereto shall extend reasonable cooperation in connection with the defense of any Third-Party Action pursuant to this Article and, in connection therewith, shall furnish such records, information, and testimony and attend such conferences, discovery proceedings, hearings, trials, and appeals as may be reasonably requested. ARTICLE VII Indemnification of Moadel and PC 7.1 Indemnification of Moadel and PC. Prime agrees to indemnify and hold harmless Moadel, PC, each parent company, subsidiary and/or affiliate of PC (including, without limitation, Newco) and each parent company, subsidiary, affiliate, shareholder, member, partner (or other owner), officer, director, manager, agent, employee and representative of any of the foregoing (collectively, the "PC Indemnified Parties"), from and against any and all Indemnified Costs, including, without limitation, Indemnified Costs arising in connection with the commencement or assertion of any Third Party Action, which any of the PC Indemnified Parties may sustain, arising out of any breach or default by Prime of any of the representations, warranties, covenants or agreements contained in this Agreement or any Transaction Document. The parties agree that indemnification may not be sought under this ARTICLE or ARTICLE VI on the basis that the structure of the transactions contemplated by this Agreement violate any federal, state, county, or local laws, rules, regulations or ordinances regulating or legislating the provision of healthcare or the practice of medicine. The parties also agree that recourse under this ARTICLE and ARTICLE VI shall not be the sole recourse of the parties against one another for a breach of the provisions of this Agreement or any other Transaction Document. 7.2 Defense of Third-Party Claims. A PC Indemnified Party shall give prompt written notice to Prime of the commencement or assertion of any Third-Party Action in respect of which such PC Indemnified Party shall seek indemnification hereunder. Any failure so to notify Prime shall not relieve Prime from any liability that it may have to such PC Indemnified Party under this Article except to the extent that the failure to give such notice materially and adversely prejudices Prime. Prime shall have the right to assume control of the defense of, settle, or otherwise dispose of such Third-Party Action on such terms as it deems appropriate; provided, however, that: (a) The PC Indemnified Party shall be entitled, at his or its own expense, to participate in the defense of such Third-Party Action; (b) Prime shall obtain the prior written approval of the PC Indemnified Party, which approval shall not be unreasonably withheld, before entering into or making any settlement, compromise, admission, or acknowledgment of the validity of such Third-Party Action or any liability in respect thereof if, pursuant to or as a result of such settlement, compromise, admission, or acknowledgment, injunctive or other equitable relief would be imposed against the PC Indemnified Party; (c) Prime shall not consent to the entry of any judgment or enter into any settlement that does not include as an unconditional term thereof the execution and delivery of a release from all liability in respect of such Third-Party Action by each claimant or plaintiff to, and in favor of, each PC Indemnified Party; and (d) Prime shall not be entitled to control (but shall be entitled to participate at its own expense in the defense of), and the PC Indemnified Party shall be entitled to have sole control over, the defense or settlement, compromise, admission, or acknowledgment of any Third-Party Action as to which Prime fails to assume the defense within thirty (30) days; provided, however, that the PC Indemnified Party shall make no settlement, compromise, admission, or acknowledgment which would give rise to liability on the part of Prime without the prior written consent of Prime. (e) Prime shall make payments of all amounts required to be made pursuant to the foregoing provisions of this Article to or for the account of the PC Indemnified Party from time to time promptly upon receipt of bills or invoices relating thereto or when otherwise due and payable, provided that the PC Indemnified Party has agreed in writing to reimburse Prime for the full amount of such payments if the PC Indemnified Party is ultimately determined not to be entitled to such indemnification. (f) The parties hereto shall extend reasonable cooperation in connection with the defense of any Third-Party Action pursuant to this Article and, in connection therewith, shall furnish such records, information, and testimony and attend such conferences, discovery proceedings, hearings, trials, and appeals as may be reasonably requested. ARTICLE VIII Covenants Regarding Future Acquisitions and Developments 8.1 Restrictions on Acquisitions and Development. -------------------------------------------- (a) De Novo Development. Except as expressly provided below, each of PMSI, Prime, PC and Moadel agrees that, following the Closing Date, it will not, without obtaining the prior written consent of the other parties to this Agreement, directly or indirectly through any affiliate, except through Newco or one of its subsidiaries, develop or establish any office or premises (which does not include the acquisition of an existing office or premises, as to which Section 8.1(b) shall apply) that may be used by medical professionals (either directly or through practice entities) to perform Refractive Surgery (a "New Location"), anywhere within the Manhattan Borough of New York City or within five (5) miles of any Target Location (as hereinafter defined) that has been developed or acquired by Newco after the Closing Date (collectively, the "Restricted Area"). The parties acknowledge that Newco's development of any New Location requires the approval of Moadel (or his manager designee) pursuant to the terms of the Limited Liability Company Agreement of Newco. (b) Acquisitions. Except as expressly provided below, each of PMSI, Prime, PC and Moadel agrees that, following the Closing Date, it will not, without obtaining the prior written consent of the other parties to this Agreement, directly or indirectly through any affiliate, except through Newco or one of its subsidiaries, acquire any existing office or premises that is used to a substantial extent by medical professionals (either directly or through practice entities) to perform Refractive Surgery (an "Existing Location"), anywhere within the Restricted Area. The parties acknowledge that Newco's development of any New Location requires the approval of Moadel (or his manager designee) pursuant to the terms of the Limited Liability Company Agreement of Newco. 8.2 Additional Qualifications, Limitations. In addition to the qualifications and limitations set forth elsewhere in this Article, the following shall apply: (a) Notwithstanding the provisions of Section 8.1, any party shall be free to independently develop or acquire all or any portion of any New Location or Existing Location ("Target Locations") that is located entirely outside of the Restricted Area. (b) No provision of this Article shall be construed to require any party to this Agreement to acquire or develop any Target Location and in no event shall Newco's acquisitions or development result in PMSI's owning, directly or indirectly, less than fifty-one percent (51%) of the total voting equity interests in a Target Location without the prior written consent of PMSI, but neither Moadel nor PC shall be in breach of this subsection (b) if an acquisition or development described herein is inadvertently consummated under the direction of Newco's managers; (c) Notwithstanding the provisions of Section 8.1, any party shall be free to independently acquire all or any portion of the non-Refractive Surgery assets and business of any Target Location, regardless of whether it is in the Restricted Area, to the extent those assets and business are not significantly used by such Target Location for the conduct of Refractive Surgery or any business substantially the same as the Assets Related Business; (d) Notwithstanding the provisions of Section 8.1, any party shall be free to independently acquire or (with respect to PMSI or Prime) merge with any Existing Business if, with respect to such Existing Business, (i) the prior twelve months' revenues that arose from Refractive Surgery in the Restricted Area comprise not more than ten percent (10%) of the total prior twelve months' revenues that arose from Refractive Surgery or (ii) the number of Refractive Surgery procedures done during the prior twelve months within the Restricted Area comprise not more than ten percent (10%) of the total number of Refractive Surgery procedures done during the prior twelve months. 8.3 Exceptions. Notwithstanding the provisions of Section 8.1, the following acquisitions or developments of Target Locations located or to be located within the Restricted Area are permitted: (a) The direct or indirect acquisition or development of a Target Location by either PMSI or Moadel independently if either (i) Newco is financially unable to acquire or develop such Target Location using its own financial resources (without requiring a guarantee or any other financial or credit assistance from Prime, PMSI, any subsidiary or affiliate of Prime or PMSI, or any Member of Newco) or (ii) with respect only to developments of New Locations, the other party was financially unable or elected not to contribute to Newco its proportionate share of the costs necessary fund the establishment and maintenance of such New Location, in each case, on or before the date reasonably specified pursuant to the affirmative vote or written consent of two of the three managers of Newco; (b) The direct or indirect acquisition or development of a Target Location by any party independently if any manager of Newco that was not designated by such party or its affiliates pursuant to Newco's Limited Liability Company Agreement has previously voted against the acquisition or development of such Target Location; provided, however, that the exception contained in this subsection (b) shall not apply to any Target Location that is located within one (1) mile from the location of the Newco premises; provided further, that no party shall instruct its designee to vote in favor of the acquisition or development of a Target Location to avoid the application of this subsection (b) if such party does not actually intend that Newco acquire or develop such Target Location, and the other party may seek damages pursuant to Section 11.12 of this Agreement for any such attempt to manipulate the provisions of this subsection (b); (c) The direct or indirect acquisition or development of a Target Location by PMSI, Prime or either of their affiliates if either Moadel or PC has previously terminated or materially breached any provision of this Agreement, the Limited Liability Company Agreement of Newco, the Office and Equipment Use Agreement or any Credit Document; or (d) The direct or indirect acquisition or development of a Target Location by Moadel, PC or either of their affiliates if either PMSI or Prime has previously terminated or breached any provision of this Agreement, the Limited Liability Company Agreement of Newco, the Office and Equipment Use Agreement or any Credit Document. 8.4 Credit Facilities. (a) Acquisition Capital Line of Credit. PMSI, Newco, Moadel and PC (as applicable) each agree to execute, on or before the Closing Date (i) the Loan Agreement in substantially the form attached hereto as Exhibit D1 (the "Loan Agreement"), which provides for a term loan facility, in the maximum principal amount of $10,000,000 (the "Acquisition Line"), pursuant to which Newco shall be entitled, subject to the conditions and limitations contained in the Loan Agreement, to borrow funds, from time to time, in order to finance up to one hundred percent (100%) of the purchase price of an Existing Location being acquired (not developed) by Newco and (ii) the Assignment and Security Agreement in substantially the form attached hereto as Exhibit D2, securing Newco's obligations under the Loan Agreement. In connection with the Acquisition Line, Newco agrees to execute, and all parties hereto agree to vote their interests in Newco, if any, and to take such other action as may be necessary, to cause any entity through which Newco acquires or develops a Target Location (regardless of whether funded using the Acquisition Line) to execute, on or before each closing date of a Target Location acquisition or the commencement of development, a Promissory Note in substantially the form attached hereto as Exhibit D3 and an Assignment and Security Agreement in substantially the form attached hereto as Exhibit D4. In addition, if Newco is to obtain, through development or acquisition, directly or indirectly, a one hundred percent (100%) interest in any Target Location, Newco, then all parties hereto shall cause such Target Location to execute a security agreement, acceptable in form and substance to PMSI, granting to PMSI the highest available priority security interest in all of the assets of such Target Location. (b) Notwithstanding anything herein to the contrary, PMSI's obligations to make each extension of credit pursuant to subsection (a) above are subject entirely and in all respects to PMSI's obtaining prior written approval from the bank syndication under its outstanding borrowing facilities. Each of the parties to this Agreement acknowledges and agrees that the assignment and security agreements, and security agreements, executed pursuant to this Section will be assignable, and that PMSI intends to make a collateral assignment for the benefit of one or more of its lenders. In addition, each of the parties to this Agreement agrees to take such action (including voting their interests in any entity) which may be necessary to ensure the filing and perfection of security interests required to be granted pursuant to this Section. (c) Each of the PCs acknowledges and agrees that none of Prime, PMSI or any affiliate of either of them may be required to (i) except as expressly set forth in this Article VIII, extend any financing, credit facilities, guarantees or other credit enhancements to any PC or Newco or (ii) issue any of its capital stock (or rights to acquire its capital stock) in connection with the acquisition or development of a Target Location (provided, however, that Prime, PMSI or such affiliate may elect to issue its capital stock in connection with the acquisition or development of a Target Location by Newco or any of its subsidiaries, and any such issuance shall be treated for all purposes as a loan by PMSI to Newco pursuant to the Acquisition Line, in an amount equal to the fair market value of the capital stock issued on the date of issuance which, in the case of PMSI, shall equal the average of the NASDAQ closing "bid" prices for the ten (10) trading days immediately preceding the closing of the related acquisition or development). (d) Each of PC and Newco acknowledges and agrees that Newco shall not distribute (or allow to be distributed) to its members, with respect to their respective membership interests, any cash or other property of Newco if, at the time of the proposed distribution, any amounts (whether principal or interest) are outstanding under the Credit Documents (as hereinafter defined); provided, however that this sentence shall not limit Newco's obligation to make Tax Distributions (as defined in Newco's Limited Liability Company Agreement) in the manner and to the extent contemplated in Newco's Limited Liability Company Agreement. Furthermore, each of the PC and Newco agrees that Newco, after making distributions to its members for tax purposes in the manner described in Newco's Limited Liability Company Agreement, shall pay all available cash flow to PMSI in payment of Newco's outstanding obligations, if any, under the Acquisition Line, irrespective of whether such payments exceed the minimum required payments under the Acquisition Line. For purposes of allocating such payments among any two or more of such outstanding obligations, such payments shall be allocated pro rata, based upon the respective balances of such obligations, unless (i) a greater portion of the payment is required to be paid toward a given obligation in order to prevent a default with respect to that obligation (but only to the extent necessary to prevent such a default) or (ii) majority of the managers of Newco elect to allocate the payments in a different manner (provided that Moadel's manager designee must have voted with the majority). (e) All of the loan agreements, promissory notes, guarantees, security agreements, assignment and security agreements and other agreements, documents or instruments required to be executed by any party pursuant to this Section are hereinafter collectively referred to as the "Credit Documents." 8.5 Automatic Termination. This entire Article shall terminate and become null and void automatically: (a) If, subject to the right to cure provided in Section 9.7 of this Agreement, any party to this Agreement: (i) becomes insolvent, or makes a transfer in fraud of creditors, or makes an assignment for the benefit of creditors, or admits in writing its inability to pay its debts as they become due; (ii) generally is not paying its debts as such debts become due, and one of the other parties, in good faith, determines that such event or condition could frustrate the operation of this Article or otherwise inhibit the delinquent party's ability to perform its obligations under this Agreement or any Transaction Document; (iii) has a receiver, trustee or custodian appointed for, or take possession of, all or substantially all of the assets of such party, either in a proceeding brought by such party or in a proceeding brought against such party; (iv) files a petition for relief under the United States Bankruptcy Code or any other present or future federal or state insolvency, bankruptcy or similar laws (all of the foregoing hereinafter collectively called "Applicable Bankruptcy Law"), or an involuntary petition for relief is filed against such party under any Applicable Bankruptcy Law, or an order for relief naming such party is entered under any Applicable Bankruptcy Law, or any composition, rearrangement, extension, reorganization or other relief of debtors now or hereafter existing is requested or consented to by such party; (v) fails to have discharged within a period of thirty (30) days any attachment, sequestration or similar writ levied upon, or any claim against or affecting, any property of such party; or (vi) fails to pay within thirty (30) days any final money judgment against such party (the events described in this Section are hereinafter referred to as "Bankruptcy Events"); (b) If, at any time after the Closing, Moadel and any entity owned or controlled by Moadel, collectively own less than the Required Percent of the total outstanding membership interests of Newco (after assuming the conversion, exchange or exercise of any and all securities or rights convertible into, or exchangeable or exercisable for, ownership interests of Newco), unless and only to the extent a simple majority of Newco's managers consent in writing to the transaction(s) that caused the decrease in Moadel's and such other entities' percentage ownership of Newco; or (c) upon the expiration of the six (6) year period immediately following the Closing Date. Nothing in this Section 8.5 shall be construed as to terminate any obligation of Newco, PC or Moadel under the Acquisition Line and the related Credit Documents. ARTICLE IX Restrictive Covenants 9.1 Confidentiality Agreement. Each of Moadel and PC agrees that it has been and may continue to be, through its relationship with Prime and Newco, exposed to confidential information and trade secrets pertaining to, or arising from, the business of Prime and/or each of Prime's present or future affiliates (which includes, without limitation, Prime, PMSI and each present or future affiliate or subsidiary of PMSI) (individually and collectively, "Discloser"), that such information and trade secrets are unique and valuable and that Discloser would suffer irreparable injury if this information or trade secrets were divulged to those in competition with Discloser. Therefore, each of Moadel and PC agrees to keep in strict secrecy and confidence, both during and after the period during which Prime owns any interest in Newco, any and all information concerning Discloser which it acquires, or to which it has access through its relationship with Discloser, that has not been publicly disclosed by Discloser or that is not a matter of common knowledge among Discloser's competitors (collectively, "Proprietary Information"). The Proprietary Information covered by this Agreement shall include, but shall not be limited to, information relating to any inventions, processes, software, formulae, plans, devices, compilations of information, technical data, mailing lists, management strategies, business distribution methods, names of suppliers (of both goods and services) and customers, names of employees and terms of employment, arrangements entered into with suppliers and customers, including, but not limited to, proposed expansion plans of Discloser, marketing and other business and pricing strategies, and trade secrets of Discloser. Notwithstanding the foregoing, "Proprietary Information" shall exclude confidential information and trade secrets pertaining solely to or arising solely from the conduct of the Business prior to the Closing Date. Except with prior written approval of Discloser, each of Moadel and PC agrees that it will not: (i) directly or indirectly, disclose any Proprietary Information to any person except authorized personnel of Discloser or (ii) use Proprietary Information in any way, except as expressly contemplated otherwise in the Transaction Documents. Within forty-eight (48) hours of the time at which Moadel and PC no longer own any voting equity interests in Newco, whether the result of voluntary or involuntary disposition, each of Moadel and PC will deliver to Prime (without retaining copies thereof) all documents, records or other memorializations including copies of documents and any notes which it has prepared, that contain Proprietary Information or relate to Discloser's business, all other tangible Proprietary Information in its possession or control, and all of Discloser's credit cards, keys, equipment, vehicles, supplies and other materials that are in possession or under its control. The provisions of this Section shall not limit or restrict any party's communications with its personal consultants or advisors, including, without limitation, its attorneys, accountants and financial advisors. 9.2 Exclusive Use. Except as expressly otherwise provided below, Moadel hereby agrees that, during the period of time (the "Restricted Period") beginning on the Closing Date and ending on the later of (a) the six-year anniversary of the Closing Date or (b) the first time at which Moadel and his affiliates no longer own any direct or indirect interest in Newco, he will perform, and will direct all other full-time, medically trained or licensed medical professionals under his direction or control to perform, all services related to Refractive Surgery only at the premises of, and using the equipment of, Newco. Furthermore, Moadel agrees that, for a period of six (6) years immediately following the Effective Time, Moadel shall devote Moadel's full business time and attention (in amounts generally consistent with the practices of Moadel prior to the Closing Date) to rendering professional ophthalmic and medical services in (i) Restricted Area or the immediate vicinity thereof or (ii) or such area or areas in which Newco may in the future provide premises and equipment for Refractive Surgery including, without limitation, new premises being developed in Stamford and Greenwich, Connecticut (each, an "Other Location"). Furthermore, Moadel and PC agree that, as a condition to using Newco's premises and equipment, each medical professional employed by Moadel or PC that performs or intends to perform a majority of his or her Refractive Surgery procedures (or related medical services) using Newco's premises and equipment, whether in the Restricted Area or an Other Location, to sign an exclusive use agreement containing substantially similar provisions to those contained in this Section 9.2 and naming Newco as a beneficiary, except that the term shall end upon such employee's cessation of the use of Newco's premises and equipment (unless such employee is also an equity holder in Newco in which case a different term shall apply in accordance with applicable provisions of Newco's Limited Liability Company Agreement). Without limiting the provisions of the first sentence of this Section, the parties agree that the following activities by Moadel shall not (as long as they do not interfere with Moadel's devotion of his full business time and attention in the manner described above) be a violation of the second sentence of this Section: the devotion of a reasonable amount of time to charitable and community activities; and, the management of personal investments that are passive in nature, including, without limitation, Moadel's passive investment in Infinity Laser Centers, Inc. ("Infinity"), provided that Moadel cannot, despite any disclosure in any schedule to this Agreement, serve as a director, officer, employee, consultant or in any other similar capacity with respect to Infinity. Notwithstanding the provisions of this Section, the death or Disability of Moadel shall not be the basis of any breach or default of the provisions of this Section, but in the case of Disability performance shall be excused only for so long as the Disability exists. As used in this Agreement, Disability shall mean any incapacity or disability of Moadel giving rise to benefits under the disability insurance policy acquired by Newco pursuant to Section 4.8 hereof, or if no such policy is in effect, Moadel's having a mental or physical incapacity that reasonably prevents Moadel's resumption of the normal performance of his medical practice. 9.3 Noncompetition. Except for the passive ownership by Moadel of an equity ownership interest in Infinity (which Moadel agrees may not be increased through a purchase of additional stock in Infinity by Moadel or his affiliates, despite any disclosure on any schedule to this Agreement), each of PC and Moadel, as a material inducement to PMSI and Prime to enter into this Agreement, hereby agrees that, at all times up until the expiration of two (2) full years immediately following the end of the Restricted Period, such party will not directly or indirectly, either through any kind of ownership (other than ownership of securities of a publicly held corporation of which it owns less than five percent (5%) of any class of outstanding securities), or as a principal, shareholder, agent, employer, advisor, consultant, co-partner or in any individual or representative capacity whatever, either for its own benefit or for the benefit of any other person, corporation or other entity, without the prior written consent of each other party hereto, commit any of the following acts, which acts shall be considered violations of this covenant not to compete: (a) Except through Newco or its subsidiaries, directly or indirectly engage in, or provide, anywhere within the Restricted Area or within a five (5) mile radius of any Other Location existing on or before the end of the Restricted Period, any services (other than services included in the practice of medicine) related to (i) the operating of premises used to provide Refractive Surgery, (ii) the manufacture, maintenance, refurbishing, repair, sale, or leasing of any equipment related to or necessary for the operating of premises used to provide Refractive Surgery, or (iii) providing any management services, training or consulting services related to any of the activities described in (i) or (ii); (b) Except through Newco or its subsidiaries, directly or indirectly provide, anywhere within the Restricted Area, (i) premises, equipment and non-physician personnel for the performance of Refractive Surgery by physicians, (ii) the marketing, scheduling and management of Refractive Surgery (but excluding, with respect to Moadel, marketing, scheduling and management of patients for treatment by Moadel), (iii) the credentialing and scheduling of physicians to perform Refractive Surgery and (iv) the billing, collecting or accounting for the use of any such premises, equipment or non-physician personnel. (c) Directly or indirectly request or advise any person, firm, physician, corporation or other entity having a business relationship with Newco or any of its subsidiaries, Prime, or any affiliate or related entity of any of them, to withdraw, curtail, or cancel its business with such person or entity; or (d) Directly or indirectly hire any employee of Newco or any of its subsidiaries, Prime, or any affiliate or related entity of any of them, or induce or attempt to influence any employee of Newco or any of its subsidiaries, Prime or any such affiliate or related entity to terminate his or her employment with such person or entity. Furthermore, Moadel and PC agree that, as a condition to using Newco's premises and equipment, each full-time medical professional employed by Moadel or PC that performs or intends to perform a majority of his or her Refractive Surgery procedures (or related medical services) using Newco's premises and equipment, whether in the Restricted Area or an Other Location, to sign a non-compete agreement containing substantially similar provisions to those contained in this Section 9.3 and naming Newco as a beneficiary, except that, as long as such employee is not an equity owner in Newco (in which case the terms and provisions of the Newco's Limited Liability Agreement relating to transfers of Newco interests shall govern) (i) the term of the non-compete agreement shall end one year after such employee ceases its use of Newco's offices and equipment, and (ii) it shall not be necessary to include a provision requiring that such employee devote his or her full business time and attention to rendering professional opthalmic and medical services for any period of time or in any location. Each of PMSI and Prime hereby agrees that, at all times up until the expiration of two (2) full years immediately following the end of the Restricted Period, such party will not directly or indirectly, either for its own benefit or for the benefit of any other person, corporation or other entity, without the prior written consent of Moadel, hire any employee of Newco or any of its subsidiaries, or induce or attempt to influence any employee of Newco or any of its subsidiaries to terminate his or her employment with such person or entity 9.4 Practice of Medicine. Notwithstanding any provision of this Agreement or any other Transaction Document to the contrary, the provisions of this Article shall not be construed to require Moadel to perform Refractive Surgery at the premises of, or use the equipment of, Newco, if in the professional medical judgment of a reasonable ophthalmologist practicing Refractive Surgery, such use would be detrimental to Moadel's patients. Provided further, that this Agreement shall not apply to any Refractive Surgery or related services that are to be paid for, or reimbursed by, Medicare, Medicaid, Champus, or any other state or federal health care program, or in any instance where the operation of this Agreement would constitute a violation of applicable law. 9.5 Compliance with Applicable Law. In accordance with Texas Business & Commerce Code Section 15.50 (the "Applicable Statutory Provision"), this Agreement hereby provides for the following: (a) Moadel shall not hereby be denied access to any list of Moadel's patients whom Moadel has seen or treated; (b) Moadel shall not hereby be denied access to medical records of Moadel's patients upon authorization of the patient, and any copies of such medical records obtained or possessed by any of PMSI, Prime, PC or Newco shall be provided to Moadel for a reasonable fee as established by the Texas State Board of Medical Examiners under Section 5.08(o), Medical Practice Act (Article 4495b, Vernon's Texas Civil Statutes); (c) access to any such list of patients or to any such patients' medical records referred to in (i) or (ii) above, shall not require such list or records to be provided in a format different than that by which such records are maintained, except by the mutual consent of Newco and Moadel; (d) Moadel shall be entitled to buy out his performance of obligations arising under Sections 9.2 and 9.3 of this Agreement (but only such obligations as is necessary in order for this Agreement to comply with the Applicable Statutory Provision) for an amount equal to the Purchase Price, less any amounts paid pursuant to Section 9.7 hereof; provided, however, that in order for such buy out to be effective, Moadel must also convey or cause to be conveyed, free of any encumbrance, any equity interest in Newco held by either Moadel or PC; and (e) Moadel shall not hereby be prohibited from providing continuing care and treatment to a specific patient or patients during the course of an acute illness. Moadel agrees that the buy out amount set forth in this Section is a reasonable price and represents a fair value for his performance of Moadel's obligations hereunder. Moadel and Prime have each elected to utilize such reasonable price in lieu of arbitration pursuant to the Applicable Statutory Provision. 9.6 Restrictions Reasonable. Each party hereto has reviewed and carefully considered the provisions of this Article and, having done so, agrees that the restrictions applicable to it as set forth herein (a) are fair and reasonable with respect to time, geographic area and scope, (b) are not unduly burdensome to it, and (c) are reasonably required for the protection of the interests of the other parties hereto for whose benefit such restrictions were agreed upon. 9.7 Remedies. (a) General. Each party agrees that a violation on its part of any applicable covenant contained in this Article or in Article VIII will cause the other parties hereto for whose benefit such restrictions were agreed upon irreparable damage for which remedies at law may be insufficient, and for that reason, it agrees that the other parties shall be entitled as a matter of right to equitable remedies, including specific performance and injunctive relief, therefor. The right to specific performance and injunctive relief shall be cumulative and in addition to whatever other remedies, at law or in equity, that the other parties may have, including, specifically, recovery of liquidated damages as provided below and any other additional damages. (b) Liquidated Damages. Because of the difficulty of measuring economic losses to the other parties as a result of a material breach of any provision of this Article or Article VIII, each of Moadel and PC agrees that, in the event of such a breach by it, it shall be obligated to pay to Prime as liquidated damages (which damages are in addition to all other remedies provided for in this Agreement, or available to Prime or another party pursuant to arbitration hereunder) an amount determined by multiplying the Purchase Price by a fraction, the numerator of which is the difference between sixty (60) and the number of entire consecutive months passed after the Effective Time and prior to such breach, and the denominator of which is the number sixty (60). (c) Before any remedy may be sought by any party under this Agreement with respect to a breach of the provisions of this Article or Article VIII, the breaching party shall be given thirty days following delivery of notice by the party asserting the breach (identifying such material breach) within which the breaching party may cure such material breach. ARTICLE X Post Closing Agreements 10.1 Transition of Business. Each of Moadel and PC agrees to cooperate fully with Prime and Newco in transitioning the Assets Related Business existing prior to the Closing, including the relationships maintained by Moadel and PC with respect to the Assets Related Business, to Newco after the Closing; and, each of Moadel and PC agrees not to take any action or make any disclosure, including disclosures related to the transactions contemplated by this Agreement, which might alter or impair any relationship with any customer, or other service recipient, person or entity which did business with PC prior to the Closing. Each of Moadel and PC agrees to promptly remit to Newco any payments required to have been made under the Office and Equipment Use Agreement. Newco agrees that it shall, as of the Effective Time, employ each of the individuals listed on Schedule 3.15 attached hereto. 10.2 Right of Set Off. Each of Moadel and PC agrees that Newco shall have rights of offset against distributions to it in respect of any ownership interest either of them may have in Newco at any time following the Closing, for any and all debts, obligations or liabilities that either of them may have to Prime, PMSI or any affiliate or subsidiary of PMSI, including, without limitation, any liability arising out of or relating to its obligations under Section 6.1 of this Agreement, or other obligations owed under this Agreement or any other Transaction Document. Each of Moadel and PC hereby authorizes and directs Newco to, and hereby agrees that Newco is entitled to, withhold and pay such offset amounts to Prime and to take all other actions necessary to make such payment. Newco hereby agrees to promptly remit any and all such offset amounts to Prime upon request. Without limiting or adversely affecting the rights of Prime under this Section, and in order to secure full and prompt payment of the obligations of Moadel and PC under this Agreement and each other Transaction Document, each of Moadel and PC hereby grants to Prime a continuing security interest in and to distributions either of them may be entitled to receive at any time after the Closing in respect of any ownership interest held by either of them in Newco. In connection with the grant of a security interest contained in this Section, each of Moadel and PC agrees (i) to execute all documents, agreements, instruments and certificates, and to take such other actions, as are reasonably necessary in order to fully evidence and perfect such security interest, and (ii) except as expressly contemplated otherwise in Newco's Limited Liability Company Agreement, that it, for a period of five (5) years after the Closing, will not, without obtaining the express prior written consent of Prime in each instance, grant or assign to any person or entity rights of any nature in the distributions covered by the security interest granted in this Section, irrespective of whether such rights are to be senior or subordinate to the rights granted under this Section; provided, however, that clause (ii) shall not prohibit Permitted Transfers (as such term is defined in the Organizational Documents) of its ownership interest in Newco, as long as the transferee (A) executes a certificate acknowledging that such distributions with respect to the ownership interest transferred remain subject to the offset rights and security interest granted under this Section as though such transferee and it were one and the same person and (B) executes and consents to the filing of all documents, agreements, instruments and certificates, and takes such other actions, as are necessary in order to fully evidence and perfect such security interest. Each of Moadel and PC acknowledges and agrees that the rights and obligations contained in this Section shall remain attached to membership interests of Newco conveyed by it, regardless of whether the conveyance was permitted pursuant to the Organizational Documents and/or consented to by Prime. In addition, Prime may require any such transferee to execute an acknowledgment recognizing the applicability of the rights and obligations contained in this Section to the membership interest transferred. 10.3 Ratification by Newco. Each of Prime, Moadel and PC agrees that by executing this Agreement it is deemed to be voting any ownership interests or management vote it may have in Newco (whether now or at any time after the Closing) to authorize Newco to enter into and perform this Agreement and each of the Transaction Documents to which Newco is a party, including, without limitation, the Office and Equipment Use Agreement. Each of Prime, Moadel and PC agrees to execute such resolutions and written consents, and take such other actions, in their capacities as owners of Newco, as any party shall reasonably require after the Closing to have Newco ratify and adopt this Agreement, notwithstanding the time of creation of Newco or the time of execution of the Organizational Documents. 10.4 Post-Closing Capital Contributions. Without in any way limiting or qualifying the representation and warranty with respect to Working Capital contained in Section 3.17, all parties to this Agreement acknowledge and agree that no member of Newco, nor any other party, has any obligation after the Closing to make a capital contribution to Newco. 10.5 Legend. On and after the Closing, each certificate or document representing Moadel's or PC's ownership of any of Newco's ownership interests, and each certificate or document that may be issued and delivered by Newco upon transfer of any such certificate, shall contain a legend conspicuously noted in substantially the following form: THE INTERESTS REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AND THEY MAY NOT BE SOLD OR TRANSFERRED EXCEPT PURSUANT TO AN EXEMPTION FROM, OR OTHERWISE IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF SUCH ACT. IN ADDITION, SUCH INTERESTS MAY BE TRANSFERRED ONLY IN COMPLIANCE WITH CERTAIN CONDITIONS SPECIFIED IN (I) A CERTAIN CONTRIBUTION AGREEMENT DATED EFFECTIVE AS OF APRIL 1, 2000, AND (II) THE COMPANY'S LIMITED LIABILITY COMPANY AGREEMENT, COMPLETE AND CORRECT COPIES OF WHICH ARE AVAILABLE FOR INSPECTION AT THE PRINCIPAL OFFICE OF THE COMPANY AND WILL BE FURNISHED TO THE HOLDER HEREOF UPON WRITTEN REQUEST AND WITHOUT CHARGE. ARTICLE X Miscellaneous 11.1 Collateral Agreements, Amendments, and Waivers. This Agreement (together with the documents delivered pursuant hereto) supersedes all prior documents, understandings, and agreements, oral or written, relating to this transaction and constitutes the entire understanding among the parties with respect to the subject matter hereof. Any modification or amendment to, or waiver of, any provision of this Agreement (or any document delivered pursuant to this Agreement unless otherwise expressly provided therein) may be made only by an instrument in writing executed by each party thereto. 11.2 Successors and Assigns. No party's rights or obligations under this Agreement may be assigned without the prior written consent of all parties hereto, except that Prime may assign its rights and obligations hereunder to any entity, more than fifty percent (50%) of the voting equity ownership interests of which is at the time owned, directly or indirectly, by PMSI. Any assignment in violation of the foregoing shall be null and void. Subject to the preceding sentences of this Section, the provisions of this Agreement (and, unless otherwise expressly provided therein, of any document delivered pursuant to this Agreement) shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, legal representatives, successors, and assigns. Notwithstanding any contrary provision of this Agreement or any other Transaction Document, all of the parties agree that PMSI shall be free to effect a transfer, assignment or encumbrance of the ownership interests or assets of any of its direct or indirect subsidiaries other than Newco and Newco's direct or indirect subsidiaries (an "Upstream Transfer"), and that no Upstream Transfer shall give rise to or be subject to any rights or approval requirements that are applicable to a direct transfer of the membership interests or assets of Newco under this Agreement or any other Transaction Document. 11.3 Expenses. Except as set forth in the following sentence, regardless of whether the transactions contemplated hereby are consummated, each party hereto shall pay all of its costs and expenses incurred by it in connection with this Agreement, including the fees and disbursements of its legal counsel and accountants. Notwithstanding the foregoing, up to $6,500 of the costs and expenses incurred by Prime that are associated specifically with the formation and documentation of Newco, including legal fees and expenses for drafting the Organizational Documents, shall be paid or reimbursed to Prime by Newco. 11.4 Invalid Provisions. If any provision of this Agreement is held to be illegal, invalid, or unenforceable under present or future laws, such provision shall be fully severable, this Agreement shall be construed and enforced as if such illegal, invalid, or unenforceable provision had never comprised a part of this Agreement, and the remaining provisions of this Agreement shall remain in full force and effect and shall not be affected by the illegal, invalid, or unenforceable provision or by its severance from this Agreement. 11.5 Waiver. No failure or delay on the part of any party in exercising any right, power, or privilege hereunder or under any of the documents delivered in connection with this Agreement shall operate as a waiver of such right, power, or privilege; nor shall any single or partial exercise of any such right, power, or privilege preclude any other or future exercise thereof or the exercise of any other right, power or privilege. 11.6 Notices. Any notices required or permitted to be given under this Agreement (and, unless otherwise expressly provided therein, under any document delivered pursuant to this Agreement) shall be given in writing and shall be deemed received (a) when delivered personally or by courier service to the relevant party at its address as set forth below or (b) if sent by mail, on the third (3rd) day following the date when deposited in the United States mail, certified or registered mail, postage prepaid, to the relevant party at its address indicated below: Prime: 1301 Capital of Texas Highway Suite C-300 Austin, Texas 78746 Attention: President Facsimile: (512) 314-4398 with a copy to: Mr. Timothy L. LaFrey Akin, Gump, Strauss, Hauer & Feld, L.L.P. 816 Congress Avenue, Suite 1900 Austin, Texas 78701 Facsimile: (512) 703-1111 PC: New York Eye Specialists 16 East 53rd Street, 5th Floor New York, New York 10022 Attn: Ken Moadel, M.D. Facsimile: (212) 752-4730 Moadel: Ken Moadel, M.D. New York Eye Specialists 16 East 53rd Street, 5th Floor New York, New York 10022 Facsimile: (212) 752-4730 with a copy to: Mr. Timothy Kahler Parker Chapin, LLP The Chrysler Building 405 Lexington Avenue, 8th Floor New York, NY 10174 Facsimile: (212) 704-6288 Each party may change its address for purposes of this Section by proper notice to the other parties. 11.7 Survival of Representations, Warranties, and Covenants. Regardless of any investigation at any time made by or on behalf of any party hereto or of any information any party may have in respect thereof, all covenants, agreements, representations, and warranties made hereunder or pursuant hereto or in connection with the transactions contemplated hereby shall survive the Closing. 11.8 Further Assurances. At, and from time to time after, the Closing, each party shall, at the request of another party, but without further consideration, execute and deliver such other instruments of conveyance, assignment, assumption, transfer and delivery and take such other action as such party may reasonably request in order more effectively to consummate the transactions contemplated hereby. 11.9 Construction, Knowledge and Materiality. This Agreement and any documents or instruments delivered pursuant hereto or in connection herewith shall be construed without regard to the identity of the person who drafted the various provisions of the same. Each and every provision of this Agreement and such other documents and instruments shall be construed as though all of the parties participated equally in the drafting of the same. Consequently, the parties acknowledge and agree that any rule of construction that a document is to be construed against the drafting party shall not be applicable either to this Agreement or such other documents and instruments. For purposes of this Agreement, whenever there are references to "material" or "materially," such terms shall be deemed to mean an economic impact exceeding $10,000 with respect to the fact or matter being referred to or described. As used herein, "day" or "days" refers to calendar days unless otherwise specified in each instance. When the term "knowledge" is used in this Agreement in reference to (i) Prime, it shall mean such items as are within the actual knowledge of Ken Shifrin, Brad Hummel, Teena Belcik and John Hedrick and (ii) PC, it shall mean such items as are within the actual knowledge of Moadel and any employee of PC who becomes an employee of Newco after the Closing. For purposes of this Agreement, when the term "affiliate" is used with respect to PMSI or Prime, it shall not include PC or Moadel, and when "affiliate" is used with respect to PC or Moadel, it shall not include PMSI or Prime. 11.10 Other Agreements. Each party hereto agrees that any material breach by it of any of the terms and provisions of another Transaction Document to which it is a party shall also be deemed to have been for all purposes a material breach by it of this Agreement, and that any material breach by it of the terms and provisions of this Agreement shall also be deemed for all purposes to have been a material breach by it of all other Transaction Documents (excluding the Credit Documents) to which it is a party. 11.11 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Texas. 11.12 Arbitration. Any controversy between the parties regarding this Agreement or any other Transaction Document, any claims arising out of any breach or alleged breach of this Agreement or any other Transaction Document and any claims arising out of the relationship between the parties created hereunder shall be submitted to binding arbitration by all parties involved. In any arbitration proceeding pursuant to this Section, the prevailing party in such proceeding shall be entitled to recover its costs and reasonable attorneys' fees in addition to any other relief granted. The arbitration proceedings shall be conducted by a single arbitrator pursuant to the Commercial Arbitration Rules of the American Arbitration Association (subject to the express provisions of this Section). The arbitration shall be conducted in Austin, Texas, but the arbitrator shall not have the right to award punitive or exemplary damages against either party. 11.13 Counterparts. This Agreement may be executed in several counterparts, each of which shall constitute an original and all of which together shall constitute one and the same instrument. Any party hereto may execute this Agreement by signing any one counterpart. [Signature page follows] S-2 SIGNATURE PAGE TO CONTRIBUTION AGREEMENT IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the day and year first above written. PMSI: Prime Medical Services, Inc. ----------------------------------------------- Teena Belcik, Treasurer Prime: Prime RVC, Inc. ----------------------------------------------- Teena Belcik, Treasurer Moadel: _______________________________________________ Ken Moadel, M.D. PC: Ken Moadel,M.D.,P.C. d/b/a New York Eye Specialists ----------------------------------------------- Ken Moadel, M.D., President Newco: New York Laser Management, L.L.C. ----------------------------------------------- Ken Moadel, M.D., as manager and as member ----------------------------------------------- Teena Belcik, as manager and on behalf of Prime as a member of Newco CONSENT OF SPOUSE The undersigned spouse of Ken Moadel, M.D. acknowledges on her own behalf that: I have read the foregoing Agreement and I know its contents. I am aware that by its provisions PC and my spouse grant Newco certain assets that may include community property, and that this Agreement further restricts my ability to later transfer any community property interest I may have in such assets or in my spouse's ownership interest in PC. I hereby approve of the provisions of the Agreement, including the contribution of my community property interest, if any, in the assets contributed to Newco by PC and my spouse, upon the terms and conditions described herein, and I further agree that any ownership interest in Newco, or any community property interest I may have therein, is subject to the provisions of Newco's Limited Liability Company Agreement restricting transfer thereof. I agree that I will take no action at any time to hinder operation of this Agreement or Newco's Limited Liability Company Agreement with respect to any ownership interest in Newco, or any interest therein. Signature: ___________________________ Printed Name: ________________________ 043838.0000 AUSTIN 176405 v4 EXHIBITS Exhibit A Office and Equipment Use Agreement Exhibit B Limited Liability Company Agreement For Newco Exhibit C Financial Statements Exhibit D Credit Documents EX-10.107 20 0020.txt EX 10.107 L.L.C. AGREEMENT-NYLM LIMITED LIABILITY COMPANY AGREEMENT OF NEW YORK LASER MANAGEMENT, L.L.C. Organized under the Delaware Limited Liability Company Act (the "Act"). ARTICLE I. NAME AND LOCATION Section 1.1. Name. The name of this limited liability company is New York Laser Management, L.L.C. (the "Company"). Section 1.2. Members. The only members of the Company upon the execution of this Limited Liability Company Agreement (this "Agreement") shall be Ken Moadel, M.D. ("Moadel"), and Prime RVC, Inc., a Delaware corporation ("Prime"). For purposes of this Agreement, the "Members" shall include such named members and any new members admitted pursuant to the terms of this Agreement, but does not include any person or entity who has ceased to be a member in the Company. Section 1.3. Principal Offices. The principal office of the Company shall be located at 1301 Capital of Texas Hwy., Suite C-300, Austin, Texas 78746-6550 and or at such other locations as may be selected by the Members. Section 1.4. Registered Agent and Address. The name of the registered agent and the address of the registered office of the Company as set forth in the Certificate of Formation of the Company are: The Corporation Trust Company 1209 Orange Street Wilmington, Delaware 19801 Section 1.5. Other Offices. Other offices and other locations for the transaction of business shall be located at such places as the Managers may from time to time determine. Section 1.6 Contribution Agreement. The Company was initially formed with a single member, Moadel, for the purpose of consummating the transactions contemplated by that certain Contribution Agreement dated effective as of April 1, 2000, by and among Prime Medical Services, Inc., a Delaware corporation ("PMSI"), Prime, P.C. d/b/a New York Eye Specialists, a New York professional corporation, Moadel, and the Company (the "Contribution Agreement"). The parties have executed this Agreement concurrent with the consummation of the transactions contemplated by the Contribution Agreement. This agreement supercedes and replaces any prior membership agreement or other governing or organizational document of the Company other than the Certificate of Formation. ARTICLE II. MEMBERSHIP Section 2.1. Members' Interests. The "Membership Interest" of each Member is set forth on Exhibit A. Section 2.2. Admission to Membership. The admission of new Members shall be only by the vote of the Managers pursuant to Section 8.9 hereof. If new Members are admitted, this Agreement shall be amended to reflect each Member's revised Membership Interest. Section 2.3. Property Rights. No Member shall have any right, title, or interest in any of the property or assets of the Company. Section 2.4. Liability of Members. No Member of the Company shall be personally liable for any debts, liabilities, or obligations of the Company, including under a judgment decree, or order of court, except as expressly provided otherwise in an agreement between the Member and the Company or another party. Section 2.5. Transferability of Membership. Except as provided below, Membership Interests in the Company are transferable only with the unanimous written consent of all Members. If such unanimous written consent is not obtained when required, the transferee shall be entitled to receive only the share of profits or other compensation by way of income and the return of contributions and distributions of available earnings to which the transferor Member otherwise would be entitled. Notwithstanding the foregoing, the following shall not be deemed to violate any provision of this Agreement (each, a "Permitted Transfer"): (i) the Membership Interests of Prime may be freely transferred, without consent, to any entity that is then owned or controlled, directly or indirectly, by PMSI (or its successor in interest), (ii) the Membership Interests of Prime (or any affiliate of Prime that is a Permitted Transferee of such Membership Interests) may be transferred pursuant to and in accordance with Section 4.7 of the Contribution Agreement, (iii) the Membership Interests of any Member may be freely assigned, pledged or otherwise transferred, without consent, to secure any debt, liability or obligation owed to Prime by the Company, any Member or any entity affiliated with the Company, (iv) the Membership Interests of any Member may be freely assigned, pledged or otherwise transferred, without consent, in favor of the Lender(s) under, or by the Lender(s) as a result of the enforcement of any security interest arising pursuant to, those certain Credit Facilities (the "Credit Facilities") of PMSI and/or any of PMSI's subsidiaries, (v) the pledge by Moadel of his right to receive distributions from the Company in respect of his Membership Interest, and (vi) the Membership Interests of Moadel may be transferred (A) to a trust or trusts (a "Permitted Trust") for the benefit of Moadel and/or members of Moadel's immediate family (including an entity owned by a Permitted Trust) but only where Moadel either controls the trust or retains during his lifetime the exclusive ability to vote the Membership Interests (pursuant to a written proxy or other instrument reasonably acceptable in form and substance to Prime), (B) to an entity (a "Permitted Entity") that is wholly-owned, directly or indirectly, by Moadel and/or members of Moadel's immediate family, but only where Moadel either controls the entity or retains during his lifetime the exclusive ability to vote the Membership Interests (pursuant to a written proxy or other instrument reasonably acceptable in form and substance to Prime), or (C) from a Permitted Trust or Permitted Entity to Moadel. In addition, after the expiration of the four (4) year period (the "Toll Period") immediately following the Closing Date (as such term is defined in the Contribution Agreement), Moadel shall be entitled to give a two (2) year notice of his intent to sell all or any portion of his Membership Interest at the expiration of the two (2) year notification period to one or more New York licensed ophthalmologists that are primarily engaged in Refractive Surgery and reasonably acceptable to Prime (and such transfer shall be a "Permitted Transfer"). Notwithstanding the foregoing, the Toll Period and the two (2) year notice requirements shall not apply if (a) the physician transferee of the Membership Interest being transferred by Moadel will own less than five percent (5%) of the total outstanding Membership Interests of the Company after the transfer, (b) the physician transferee is reasonably acceptable to Prime, and (c) the physician transferee executes both an exclusive use agreement and a non-compete agreement containing terms and provisions substantially similar to those contained in Section 9.2 and Section 9.3 of the Contribution Agreement, except that (i) the term of the non-compete agreement shall end one year after such transferee ceases its use of Newco's offices and equipment, and if such cessation of use occurs within three years of such transferee's receipt of the equity interest, then such transferee must forfeit the equity interest for no consideration and (ii) it shall not be necessary to include a provision requiring such physician to transferee devote his or her full business time and attention to rendering professional opthalmic and medical services for any period of time or in any location following such cessation of use by such physician transferee. If the recipient of the Membership Interest being transferred by Moadel will own more than five percent (5%) of the total outstanding Membership Interests of the Company (after the transfer), then, as a condition to any such transfer, the physician transferee must execute both an exclusive use agreement and a non-compete agreement containing terms and provisions substantially similar to those contained in Section 9.2 and Section 9.3 of the Contribution Agreement. As an express condition to any transfer by any Member or any transferee of any Member, the proposed transferee shall have agreed in writing, in form and substance reasonably satisfactory to the non-transferring Members, that such proposed transferee will be bound by all of the terms and provisions of this Agreement, the Contribution Agreement (including Restrictive Covenants found in Article IX thereto) and any other Transaction Document (as defined in the Contribution Agreement) which by reasonable implication are applicable to the Membership Interest being transferred and not solely the transferring Member as a party to the Contribution Agreement. Notwithstanding any other provisions of this Agreement, if Moadel dies or becomes incapacitated and can no longer manage his affairs, Moadel's executor, administrator, conservator, guardian, trustee, personal representative, or the holder of a power of attorney from Moadel may exercise all of the rights of Moadel under this Agreement, including the right to vote, to designate a Manager, and to receive distributions. In the event of Moadel's death, Moadel's Membership Interest shall transfer to, and this Agreement shall be binding upon (to the extent such provisions may be reasonably applied to a Member who is not a licensed ophthalmologist) and inure to the benefit of, Moadel's heirs or legatees, including, if applicable, to the beneficiaries of a Permitted Trust, whether by the laws of descent and distribution, operation of law or otherwise, each of whom shall be a Permitted Transferee of Moadel's Membership Interest. Section 2.6. Withdrawal of Members. Except in the case of Moadel's death or permanent disability (as such term is defined in the Contribution Agreement), and without limiting a Member's ability to complete a Permitted Transfer, a Member may not withdraw as a Member from the Company except on the unanimous consent of the remaining Members. The terms of the Member's withdrawal shall be determined by agreement between the remaining Members and the withdrawing Member. ARTICLE III. MEMBERS' MEETINGS Section 3.1. Time and Place of Meeting. All meetings of the Members shall be held at such time and at such place within or without the State of Delaware as shall be determined by the Managers. Section 3.2. Annual Meetings. In the absence of an earlier meeting at such time and place as the Managers shall specify, annual meetings of the Members shall be held at the principal office of the Company on the date which is thirty (30) days after the end of the Company's fiscal year if not a legal holiday, and if a legal holiday, then on the next full business day following, at 10:00 a.m., at which meeting the Members may transact such business as may properly be brought before the meeting. Section 3.3. Special Meetings. Special meetings of the Members may be called at any time by any Member. Business transacted at special meetings shall be confined to the purposes stated in the notice of the meeting. Section 3.4. Notice. Written or printed notice stating the place, day and hour of any Members' meeting, and, in the case of a special meeting, the purpose or purposes for which the meeting is called, shall be delivered not less than ten (10) days nor more than thirty (30) days before the date of the special meeting, either personally or by mail, by or at the direction of the person calling the meeting, to each Member entitled to vote at such meeting. If mailed, such notice shall be deemed to be delivered three (3) days after it is deposited in the United States mail, postage prepaid, to the Member at such Member's address as it appears on the records of the Company at the time of mailing. Section 3.5. Quorum. Members present in person or represented by proxy, holding more than fifty percent (50%) of the total votes which may be cast at any meeting shall constitute a quorum at all meetings of the Members for the transaction of business. If, however, such quorum shall not be present or represented at any meeting of the Members, the Members entitled to vote, present in person or represented by proxy, shall have power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present or represented. When any adjourned meeting is reconvened and a quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally noticed. Once a quorum is constituted, the Members present or represented by proxy at a meeting may continue to transact business until adjournment, notwithstanding the subsequent withdrawal therefrom of such number of Members as to leave less than a quorum. Section 3.6. Voting. Members shall be required to vote in instances or with respect to matters where member voting is required by applicable law or to the extent expressly set forth in this Agreement. With respect to any act or transaction that requires a vote by the Members under applicable law, the affirmative vote or written consent of two of the three Managers shall be required in order to approve the act or transaction, in each instance. Subject to the foregoing, when a quorum is present at any meeting, the vote of the Members, whether present or represented by proxy at such meeting, holding more than fifty percent (50%) of the total votes which may be cast at any meeting shall be the act of the Members, unless the vote of a different number is required by the Act, the Certificate of Formation or this Limited Liability Company Agreement. Each Member shall be entitled to one vote for each percentage point represented by their Membership Interest. Fractional percentage point interests shall be entitled to a corresponding fractional vote. The provisions of this Section shall not interfere with the provisions of Section 8.9 relating to acts or transactions requiring the written approval of two (2) or more Managers, one of which must be a Manager designated by Moadel. Section 3.7. Proxy. Every proxy must be executed in writing by the Member or by his duly authorized attorney-in-fact, and shall be filed with the Secretary of the Company prior to or at the time of the meeting. No proxy shall be valid after eleven (11) months from the date of its execution unless otherwise provided therein. Each proxy shall be revocable unless expressly provided therein to be irrevocable and unless otherwise made irrevocable by law. Section 3.8. Action by Written Consent. Subject to the provisions of Section 8.9, any action required or permitted to be taken at any meeting of the Members may be taken without a meeting if a consent in writing, setting forth the action so taken, shall be signed by all of the Members entitled to vote with respect to the subject matter thereof, and such consent shall have the same force and effect as a unanimous vote of Members. Section 3.9. Meetings by Conference Telephone. Members may participate in and hold meetings of Members by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation in such a meeting shall constitute presence in person at such meeting, except where a person participates in the meeting for the express purpose of objecting to the transaction of any business on the ground that the meeting is not lawfully called or convened. ARTICLE IV. MEMBERSHIP CAPITAL CONTRIBUTIONS Section 4.1. Capital Contributions. Each Member has contributed to the Company the assets set forth in Schedule A. Schedule A sets forth the fair market value of the assets contributed to the Company by each Member, which amount shall be credited to each Member's Capital Account as their initial capital contribution. Capital Accounts shall be maintained in accordance with Treasury Regulations 1.704-1(b) and -2 and shall be interpreted and applied in a manner consistent therewith. The Managers shall have the power to amend this Agreement as may be reasonably necessary to comply with such regulations. Except for each Member's initial capital contribution made in connection with the formation of the Company, and except as provided in the Contribution Agreement, no capital contributions shall be required of any Member without the unanimous approval of all the Members to raise additional capital, and only then proportionately as to each Member. Section 4.2. Deficit Capital Account Balances. Upon liquidation of the Company, no Member with a deficit balance in his Capital Account shall have any obligation to restore such deficit balance, or to make any contribution to the capital of the Company. Section 4.3. Tax Matters Partner. The Managers shall designate one Manager by majority vote to act as the tax matters partner (the "TMP") of the Company (as defined in the Code), and the TMP is hereby authorized and required to represent the Company, or designate another person or firm to represent the Company, (in each case, at the Company's expense) in connection with all examinations of the Company's affairs by tax authorities, including resulting administrative and judicial proceedings, and to expend Company funds for professional services and costs associated therewith. The initial TMP shall be Teena Belcik. The Members agree to cooperate with the TMP and its designee, if any, and to do or refrain from doing any or all things reasonably required by the TMP or its designee, if any, to conduct such proceedings. The Company will reimburse the TMP and any such designee for all expenses incurred in connection with its duties as TMP and any costs associated with any administrative or judicial proceeding with respect to the tax liabilities of the Members. ARTICLE V. DISTRIBUTION TO MEMBERS At the end of each calendar quarter, subject only to the qualifications and limitations set forth below, the Company shall, unless provided otherwise in accordance with Section 8.9(b) or Section 8.9(c), distribute its Available Excess Earnings (as hereinafter defined) to its members, to be divided among them in accordance with their Membership Interests as set forth on Exhibit A hereto. As used herein, "Available Excess Earnings" shall mean and refer to all cash and cash equivalents of the Company that would not be reasonably required in order to (a) satisfy all accounts payable and payment obligations of the Company that will become due in the ordinary course within thirty (30) days of the date of determination (assuming no receipt of additional cash or cash equivalents during such ninety (30) day period) or (b) establish adequate reserves to satisfy liabilities or obligations of the Company that are foreseen and can be reasonably estimated on the date of determination. Distributions in kind shall be made on the basis of agreed value as determined by the Managers pursuant to Section 8.9(b)(xvii). Notwithstanding the foregoing, the Company may not make a distribution to its Members in respect of their Membership Interests to the extent that, immediately after giving effect to the distribution, all liabilities of the Company, other than liabilities to the Members with respect to their interests and liabilities for which the recourse of creditors is limited to specified property of the Company, exceed the fair value of the Company assets; except that the fair value of property that is subject to liability for which recourse of creditors is limited, shall be included in the Company assets only to the extent that the fair value of the property exceeds that liability. Notwithstanding the foregoing the Company may not make distributions to its Members in respect of their Membership Interests, other than required Quarterly Tax Distributions (as hereinafter defined), if amounts are owed under the Acquisition Line (as defined in the Contribution Agreement). As long as no party other than PMSI or Prime is in default under the Contribution Agreement or any other Transaction Document, then, to the extent that (but only to the extent that) the Company possesses the cash flow necessary (in the reasonable discretion of a majority of its managers) to pay its liabilities in the ordinary course consistent with past practices, the Company agrees to make quarterly estimates of its taxable income for the current tax year and, if not prohibited by law, distribute quarterly (the "Quarterly Tax Distributions") an amount that would cover the federal and state income taxes required to be paid by its members with respect such taxable income, based on each member's then current proportionate interest in the Company, assuming that all members pay income taxes on the Company's taxable earnings at a rate equal to the highest effective individual tax rate in effect from time to time; provided, further, that the Company shall determine its actual taxable income at the end of each taxable year and (A) if the Quarterly Tax Distributions in a given year should have been higher based on the amount of actual taxable income for that year, promptly distribute the amounts necessary to eliminate such deficiency or (B) if the Quarterly Tax Distributions in a given year should have been lower based on the amount of actual taxable income for that year, and amounts are owed under the Acquisition Line, withhold dollar for dollar from the first following Quarterly Tax Distribution, and then against subsequent Quarterly Tax Distributions in a like manner, the amounts necessary to eliminate such surplus. ARTICLE VI. ALLOCATION OF NET PROFITS AND LOSSES For accounting and income tax purposes, all items of income, gain, loss, deduction and credit of the Company for any fiscal year shall be allocated between the Members in accordance with their respective Membership Interests as set forth on Exhibit A hereto, except as may be otherwise required by the Internal Revenue Code of 1986, as amended, and the Treasury Regulations promulgated thereunder, in which case, the Members agree to restructure their relationship in a manner that preserves their respective economic benefits intended under the Contribution Agreement and other Transaction Documents. ARTICLE VII. DISSOLUTION AND WINDING UP Section 7.1. Dissolution. Notwithstanding any provision of the Act, the Company shall be dissolved only upon the first of the following to occur: (a) Forty (40) years from the date of filing the Certificate of Formation of the Company; or (b) Written consent of all the then current Members to dissolution. (c) The bankruptcy of a Member, unless there is at least one remaining Member and such Member or, if more than one remaining Member, all remaining Members agree to continue the Company and its business. (d) The sale of all or substantially all of the assets of the Company. Section 7.2. Winding Up. In the event of dissolution of the Company, the Managers (excluding any Manager holding office pursuant to designation by a Member subject to bankruptcy proceedings) shall wind up the Company's affairs as soon as reasonably practicable. On the winding up of the Company, the Managers shall pay and/or transfer the assets of the Company in the following order: (a) In discharging liabilities (including loans from Members) and the expenses of concluding the Company's affairs; and (b) The balance, if any, shall be distributed to the Members in accordance with the positive balances of the Members Capital Accounts. Upon dissolution and distribution of the Company assets, such distributed assets shall be deemed sold with the resulting net income or net loss being allocated among the Members and credited or debited to their respective Capital Accounts pursuant to Articles IV and VI. ARTICLE VIII. MANAGERS Section 8.1. Selection of Managers. Management of the Company shall be vested in the Managers. Initially, the Company shall have three (3) Managers, being Brad Hummel and Teena Belcik (as the initial Manager designees of Prime), and Ken Moadel, M.D. (as the initial Manager designee of Moadel). Thereafter, for so long as there are three (3) Managers, (a) Prime shall be entitled to designate two (2) of the Managers; and (b) Moadel shall be entitled to designate the remaining one (1) Manager. Notwithstanding the foregoing, a Member shall not be entitled to designate any Manager unless its Membership Interest: (y) has not (other than as allowed under Section 2.5 of this Agreement) been transferred, repurchased, assigned, pledged, hypothecated or in any way alienated; and (z) equals or exceeds the Required Percent (as defined in the Contribution Agreement) of the aggregate Membership Interests (after including in such determination all Membership Interests held by the Permitted Transferees of such Member); provided, however, that the foregoing limitations shall not apply in the event the parties restructure their relationship pursuant to this Agreement in an effort to comply with any applicable law, rule or regulation that makes such restructuring necessary. Subject to Section 8.3 of this Agreement, the Members may, by unanimous vote of all Members, from time to time, change the number of Managers of the Company and remove or add Managers accordingly. A Manager shall serve as a Manager until his or her resignation or removal pursuant to Section 8.2 or 8.3 of this Article VIII. Managers need not be residents of the State of Delaware or Members of the Company. Section 8.2. Resignations. Each Manager shall have the right to resign at any time upon written notice of such resignation to the Members. Unless otherwise specified in such written notice, the resignation shall take effect upon the receipt thereof, and acceptance of such resignation shall not be necessary to make same effective. The Member who designated a resigning manager shall be entitled to designate the successor thereto without any further action by the Members or other Managers. If any action of the Members is required under applicable law, the Members agree to take such action and any other action as may be necessary from time to time to effectuate the provisions of this Section 8.2. Section 8.3. Removal of Managers. Any Manager may be removed, for or without cause, at any time, but only by the Member who designated such Manager, upon the written notice to all Members. The Member who designated such removed Manager shall be entitled to designate the successor without any further action by the Members or other Managers. If any action of the Members is required under applicable law, the Members agree to take such action and any other action as may be necessary from time to time to effectuate the provisions of this Section 8.3. Section 8.4. General Powers. Subject to the provisions of Section 8.9, the business of the Company shall be managed by its Managers, which may, by the vote or written consent in accordance with this Agreement, exercise any and all powers of the Company and do any and all such lawful acts and things as are not by the Act, the Certificate of Formation or this Limited Liability Company Agreement directed or required to be exercised or done by the Members, including, but not limited to, contracting for or incurring on behalf of the Company debts, liabilities and other obligations, without the consent of any other person, except as otherwise provided herein. Section 8.5. Place of Meetings. The Managers of the Company may hold their meetings, both regular and special, either within or without the State of Delaware. Section 8.6. Annual Meetings. The annual meeting of the Managers shall be held without further notice immediately following the annual meeting of the Members, and at the same place, unless by unanimous consent of the Managers that such time or place shall be changed. Section 8.7. Regular Meetings. Regular meetings of the Managers may be held without written notice at such time and place as shall from time to time be determined by the Managers. Section 8.8. Special Meetings. Special meetings of the Managers may be called by any Manager on seven (7) days notice to each Manager, with such notice to be given personally, by mail or by telecopy. Section 8.9. Quorum and Voting. (a) At all meetings of the Managers the presence of at least two (2) Managers shall be necessary and sufficient to constitute a quorum for the transaction of business, and the affirmative vote of at least a majority of the Managers present at any meeting at which there is a quorum shall be the act of the Managers, except as may be otherwise specifically provided by the Act, the Contribution Agreement, the Certificate of Formation or this Agreement. If a quorum shall not be present at any meeting of Managers, the Managers present there may adjourn the meeting from time to time without notice other than announcement at the meeting, until a quorum shall be present. (b) In addition to the other provision contained in this Agreement requiring the unanimous vote of the Members or the consent of Moadel or Moadel's designated Manager, as long as Moadel is not in material breach of this Agreement, the Contribution Agreement or any other Transaction Document (subject to any applicable right to cure), the following acts or transactions by, or involving, the Company shall require the prior written consent of two (2) or more Managers, one of which must be the Manager designee of Moadel; provided, however, that no written consent of any party is required under this subsection to take a particular action if (but only to the extent that) such action is required to be taken pursuant to the express terms and provisions of the Contribution Agreement or any Transaction Document, provided further, that the provisions of this Section shall terminate automatically upon Moadel's Membership Interest dropping below the Required Percent of all outstanding Membership Interests: i. Purchase by the Company of any interest in the Company, irrespective of the source of such interest. ii. Disposition, sale, assignment or other transfer by the Company of any interest it owns in the Company, except that such interest may be extinguished without the approval required under this Article. iii. Issuance of any interest in the Company to any party. iv. Hiring or changing the Company's accountants or legal counsel. v. The Company's entering into a materially different line of business. vi. Entering into a transaction or other action with any Manager, officer or Member, or affiliate thereof. vii. Taking any other action which, by the terms of this Agreement or applicable law, requires the approval or consent of not less than sixty-six percent (66%) of the Members. viii. Any amendment to the Company's Certificate of Formation or this Agreement. ix. Mergers, consolidations or combinations of the Company with another limited liability company or other entity. x. Filing bankruptcy or seeking relief under any debtor relief law. xi. Sale, lease or other transfer of all or substantially all of the Company's assets, or any material amount of the Company's assets other than in the ordinary course of the Company's business. xii. Electing or deciding upon the type of equipment to be acquired by Newco, but only to the extent such equipment is used in or materially relied on for the conduct of Refractive Surgery. xiii. Waiving, refusing to enforce, amending, restating, superseding or modifying any of the provisions of this Agreement or any Transaction Document. xiv. Election or removal of the Manager, if any, designated by Moadel pursuant to this Article. xv. Not making any cash distributions to its Members that are required by this Agreement to be made, or making any distributions to its Members of cash or property that are prohibited under this Agreement. xvi. The acquisition or development of any Target Location (as defined in the Contribution Agreement). xvii. The determination to make, and the value of, any in kind distributions made pursuant to Article V. xviii. The granting by Newco of any license or permit to use the name "New York Eye Specialists" or any other trade name or trademark associated with Newco's business. (c) Any of the above actions taken by the Company without the necessary approval pursuant to Section 8.9(b) is void ab initio. Section 8.10. Committees. The Managers may, by resolution passed by sixty-six percent (66%) of the Managers, designate committees, each committee to consist of two or more Managers (at least one of which must be a Manager designee of Prime and one of which, must be a Manager designee of Moadel), which committees shall have such power and authority and shall perform such functions as may be provided in such resolution. Such committee or committees shall have such name or names as may be designated by the Managers and shall keep regular minutes of their proceedings and report the same to the Managers when required. The foregoing paragraph notwithstanding, the Managers shall establish a Medical Executive Committee, the size and composition of which shall be established by the affirmative vote or written consent of two of the three Managers (one of whom must, as long as Moadel has not delivered the written notice described in Section 9.3(a) of the Contribution Agreement, be the Manager designee of Moadel). Members of the Medical Executive Committee must be licensed physicians, but need not be Members, Managers, or officers of the Company. The Medical Executive Committee shall meet at such time or times as it may, by majority vote of its members, elect and may adopt procedures for the conduct of its meetings. The Medical Executive Committee shall have authority and control over all nonprofessional medical aspects of the Company's business, and shall provide advice to the Managers on decisions relating to equipment purchases, technological obsolescence, quality assurance, credentialing, and such other matters as shall be requested by the Managers. The Medical Executive Committee shall have the authority to bind the Company only with respect to the medical aspects of the Company's business. The majority of the members of the Medical Executive Committee shall constitute a quorum for the transaction of its business and the affirmative vote of the majority of the members of the Medical Executive Committee shall constitute action validly taken by that body. Section 8.11. Compensation of Managers. The Members, by unanimous approval, shall have the authority to provide that any one or more of the Managers shall be compensated, and may, by unanimous approval, fix any compensation (which may include expenses) they elect to pay to any one or more of the Managers. Section 8.12. Action by Written Consent. Any action required or permitted to be taken at any meeting of the Managers or of any committee designated by the Managers may be taken without a meeting if written consent, setting forth the action so taken, is signed by all the Managers or of such committee, and such consent shall have the same force and effect as a unanimous vote at a meeting. Section 8.13. Meetings by Conference Telephone. Managers or members of any committee designated by the Managers may participate in and hold a meeting of the Managers or such committee by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation in such a meeting shall constitute presence in person at such meeting, except where a person participates in the meeting for the express purpose of objecting to the transaction of any business on the ground that the meeting is not lawfully called or convened. Section 8.14. Liability of Managers. No Manager of the Company shall be personally liable for any debts, liabilities, or obligations of the Company, including under a judgment, decree, or order of the court. Section 8.15. Specific Power of Managers. The Managers shall have the authority to enter into and execute all documents in relation to the formation of the Company including, but not limited to, issuance of the Certificate of Formation and this Limited Liability Company Agreement. ARTICLE IX. NOTICES Section 9.1. Form of Notice. Whenever under the provisions of the Act, the Certificate of Formation or this Limited Liability Company Agreement notice is required to be given to any Manager or Member, and no provision is made as to how such notice shall be given, notice shall be given in writing and shall be deemed received (a) when delivered personally or by courier service to the relevant party at its address as set forth below or (b) if sent by mail, on the third (3rd) day following the date when deposited in the United States mail, certified or registered mail, postage prepaid, to the relevant party at its address indicated below: Prime: 1301 Capital of Texas Highway Suite C-300 Austin, Texas 78746 Attention: President Facsimile: (512) 314-4398 with a copy to: Mr. Timothy L. LaFrey Akin, Gump, Strauss, Hauer & Feld, L.L.P. 816 Congress Avenue, Suite 1900 Austin, Texas 78701 Facsimile: (512) 703-1111 Moadel: Ken Moadel, M.D. New York Eye Specialists 16 East 53rd Street, 5th Floor New York, New York 10022 Facsimile: (212) 752-4730 with a copy to: Mr. Timothy Kahler Parker Chapin, LLP The Chrysler Building 405 Lexington Avenue, 8th Floor New York, NY 10174 Facsimile: (212) 704-6288 Each party may change its address for purposes of this Section by proper notice to the other parties. Section 9.2. Waiver. Whenever any notice is required to be given to any Manager or Member of the Company under the provision of the Act, the Certificate of Formation or this Limited Liability Company Agreement, a waiver thereof in writing signed by the person or persons entitled to such notice, whether signed before or after the time stated in such waiver, shall be deemed equivalent to the giving of such notice. ARTICLE X. OFFICERS Any Manager may also serve as an officer of the Company. The Managers may designate one or more persons to serve as officers and may designate the titles of all officers. The initial officers of the Company shall be: Ken Shifrin, Chairman of the Board; Brad Hummel, President; Teena Belcik, Vice President, Secretary and Treasurer; and Ken Moadel, M.D., Vice President. The officers of the Company shall have powers commensurate with the corporate powers ordinarily designated with respect to such offices and as otherwise established by the Managers. ARTICLE XI. INDEMNITY Section 11.1. Indemnification. The Company shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative, arbitrative or investigative, any appeal in such an action, suit or proceeding and any inquiry or investigation that could lead to such an action, suit or proceeding (whether or not by or in the right of the Company), by reason of the fact that such person is or was a manager, officer, employee or agent of the Company or is or was serving at the request of the Company as a director, manager, officer, partner, venturer, proprietor, trustee, employee, agent or similar functionary of another corporation, employee benefit plan, other enterprise, or other entity, against all judgments, penalties (including excise and similar taxes), fines, settlements and reasonable expenses (including attorneys' fees and court costs) actually and reasonably incurred by him in connection with such action, suit or proceeding to the fullest extent permitted by any applicable law, and such indemnity shall inure to the benefit of the heirs, executors and administrators of any such person so indemnified pursuant to this Article XI. The right to indemnification under this Article XI shall be a contract right and shall not be deemed exclusive of any other right to which those seeking indemnification may be entitled under any law, bylaw, agreement, vote of members or disinterested managers or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office. Any repeal or amendment of this Article XI by the Managers (pursuant to Section 8.9 hereof) or by changes in applicable law shall, to the extent permitted by applicable law, be prospective only, and shall not adversely affect the indemnification of any person who may be indemnified at the time of such repeal or amendment. Furthermore, subject only to a Manager's indemnification obligations (if any) under the Contribution Agreement, and any applicable statutory limitations, Newco agrees that it shall not bring any action, suit or proceeding against any Manager except for intentional misconduct by such Manager. Section 11.2. Indemnification Not Exclusive. The rights of indemnification and reimbursement provided for in this Article XI shall not be deemed exclusive of any other rights to which any such Manager, officer, employee or agent may be entitled under the Certificate of Formation, this Limited Liability Company Agreement, agreement or vote of Members, or as a matter of law or otherwise. Section 11.3. Other Indemnification Clauses. Notwithstanding the foregoing, this Article XI shall not be construed to contradict the indemnification provision of the Contribution Agreement. Notwithstanding anything contained herein, this Article XI shall be ineffectual and shall not permit or require indemnification for all, or any, losses, costs, liabilities, claims or expenses arising, directly or indirectly, from any action or omission permitting or requiring indemnification under the Contribution Agreement; and in no event may any indemnity be allowed under this Agreement or pursuant to any provision of the Act for an amount paid or payable pursuant to the indemnification provisions of the Contribution Agreement. ARTICLE XII. MISCELLANEOUS Section 12.1. Fiscal Year. The fiscal year of the Company shall be the calendar year. Section 12.2. Records. At the expense of the Company, the Managers shall maintain records and accounts of all operations of the Company. At a minimum, the Company shall keep at its principal place of business the following records: (a) A current list of the full name, last known mailing address and Membership Interest of each Member; (b) A current list of the full name and business or residence address of each Manager; (c) A copy of the Certificate of Formation and Limited Liability Company Agreement of the Company, and all amendments thereto, together with executed copies of any powers of attorney pursuant to which any of the foregoing were executed; (d) Copies of the Company's federal, state and local income tax or information returns and reports, if any, for the six most recent tax years; and (e) Correct and complete books and records of account of the Company. Section 12.3. Seal. The Company may by resolution of the Managers adopt and have a seal, and said seal may be used by causing it or a facsimile thereof to be impressed or affixed or in any manner reproduced. Any officer of the Company shall have authority to affix the seal to any document requiring it. Section 12.4. Agents. Every Manager and Officer is an agent of the Company for the purpose of the business. The act of a Manager or Officer, including the execution in the name of the Company of any instrument for carrying on in the usual way the business of the Company, binds the Company; provided, however, if such act requires the approval of the Members of the Managers, such approval has first been obtained. Section 12.5. Checks. All checks, drafts and orders for the payment of money, notes and other evidences of indebtedness issued in the name of the Company shall be signed by such officer, officers, agent or agents of the Company and in such manner as shall from time to time be determined by resolution of the Managers. In the absence of such determination by the Managers, such instruments shall be signed by the Treasurer or the Secretary and countersigned by the President or a Vice President of the Company, if the Company has such officers. Section 12.6. Deposits. Subject to the provisions of Section 8.9(b)(v), all funds of the Company shall be deposited from time to time to the credit of the Company in such banks, trust companies or other depositories as the Managers may select. Section 12.7. Annual Statement. The Managers shall present at each annual meeting a full and clear statement of the business and condition of the Company. Section 12.8. Financial Statements. As soon as practicable after the end of each fiscal year of the Company, a balance sheet as at the end of such fiscal year, and a profit and loss statement for the period ended, shall be distributed to the Members, along with such tax information (including all information returns) as may be necessary for the preparation of each Member of its federal, state and local income tax returns. The balance sheet and profit and loss statement referred to in the previous sentence may be as shown on the Company's federal income tax return. Section 12.9. Binding Arbitration. Any controversy between the Members regarding this Agreement or any other Transaction Document, any claims arising out of any breach or alleged breach of this Agreement or any other Transaction Document, and any claims arising out of the relationship between the Members created hereunder, shall be submitted to binding arbitration by all Members involved in accordance with the procedures for arbitration contained in the Contribution Agreement. Section 12.10. Counterparts. This Agreement may be executed in several counterparts, each of which shall constitute an original and all of which together shall constitute one and the same instrument. Any party hereto may execute this Agreement by signing any one counterpart. ARTICLE XIII. AMENDMENTS Section 13.1. Amendments. Except to the extent expressly provided otherwise herein, this Agreement may only be altered, amended or repealed and a new limited liability company agreement may only be adopted only in accordance with the provisions of Section 8.9 by the Members at any regular meeting of the Members or at any special meeting of the Members called for that purpose, or by execution of a written consent in accordance with the provisions of Section 3.8. Section 13.2. When Limited Liability Company Agreement Silent. It is expressly recognized that when the Limited Liability Company Agreement is silent or in conflict with the requirements of the Act as to the manner of performing any Company function, the provisions of the Act shall control. Section 13.3. Integration with Contribution Agreement. To the extent of any inconsistency between the provisions of the Contribution Agreement and this Agreement, the terms and provisions of the Contribution Agreement shall control. Accordingly, no Member or Manager shall be deemed to have breached any fiduciary duty owed to any other Member or the Company as a result of investing in, acquiring or developing any office location, business or operations that are related or similar to, or in direct competition with, the Company's business if such act or transaction is allowed or not prohibited by the provisions of Article VIII of the Contribution Agreement, or the termination of such provisions. [Signature page follows] S-1 SIGNATURE PAGE TO LIMITED LIABILITY COMPANY AGREEMENT IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the day and year first above written. ------------------------------------ Ken Moadel, M.D. Prime RVC, Inc. Teena Belcik, Treasurer A-1 EXHIBIT A OWNERSHIP INTERESTS Name Contribution Agreed Value Membership Interest Prime Assets and 65% 65% other property Moadel Assets and 35% 35% other property EX-10.108 21 0021.txt EX 10.108 EQUIP. USE AGREEMENT-NYLM OFFICE AND EQUIPMENT USE AGREEMENT This Office and Equipment Use Agreement (hereinafter referred to as the "Agreement") is made and executed as of the close of business on the 1st day of April, 2000 by and among New York Laser Management, L.L.C., a Delaware limited liability company, (hereinafter referred to as "Newco"), Ken Moadel, M.D. (hereinafter referred to as "Provider") and Ken Moadel, M.D., P.C., a New York professional corporation (hereinafter referred to as "Moadel PC"). Preliminary Statements: Provider, a licensed medical professional, together with Moadel PC provides Refractive Surgery and related services in the area of the Borough of Manhattan, New York City, New York. Newco owns certain equipment and assets (none of which include the practice of medicine or the operation of a health care facility) used in the performance of Refractive Surgery (as hereinafter defined) and related services. Provider and Moadel PC desire to use Newco's space, equipment, non-professional personnel and certain administrative services on a turn-key basis as their professional offices in connection with Provider's and Moadel PC's provision of medical services. Moadel PC desires to employ certain employees, for the purpose of rendering services at the offices and using the equipment of Newco. Statement of Agreement In consideration of the mutual covenants and agreements herein contained, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and on the terms and subject to the conditions herein set forth, the parties hereto agree as follows: ARTICLE I Relationship of the Parties The relationship under this Agreement between Newco, on the one hand, and Provider and Moadel PC, on the other hand, shall be that of independent contractors. The provisions hereof are not intended to create any partnership, joint venture, agency or employment relationship between the parties. Newco acknowledges and agrees that Provider and Moadel PC shall retain the exclusive authority to direct the medical, clinical professional, and ethical aspects of their respective medical practices. Newco shall neither exercise control over nor interfere with the physician-patient relationships of Provider or Moadel PC, which shall be maintained strictly between Provider, Moadel PC and their patients. ARTICLE II Services to be Provided by Newco Section 2.1 General. Moadel PC and Provider will not act in a manner that would prevent Newco from performing its duties hereunder, and will provide such information and assistance to Newco as is reasonably required by Newco to perform its services hereunder. Newco shall, and shall use its best efforts to cause its employees to, comply with all applicable federal, state and local laws, rules and regulations in its provision of services hereunder. Section 2.2 Offices and Equipment. Newco shall make available to Moadel PC and Provider the real property located at 16 East 53rd Street, 5th Floor, New York, New York 10022, and the improvements, equipment and assets located thereon (together with any subsequent property, improvements, equipment or assets acquired by Newco in replacement of or in addition to the foregoing, the "Premises"), for the use of Moadel PC and Provider in the performance of Refractive Surgery and related services. Newco agrees to maintain the Premises in a commercially reasonable manner in light of the intended use of the Premises. Section 2.3 Practice Management. The parties intend and agree that Moadel PC and Provider shall continue to manage and administer all aspects of their practices, unless and only to the extent Newco specifically undertakes a certain aspect of such management and administration. Such management and administration shall include, without limitation, all administration, accounting, purchasing, payroll, legal services, record keeping, bookkeeping, computer services, information management, printing, postage, duplication services, provision of non-professional personnel, quality assurance programs, and billing and collecting from, and contracting with, patients, insurance companies, managed care payors, governmental entities and other third-party payors with respect to all professional, medical and other services provided by Moadel PC or Provider. In connection with the management of the practice, Newco hereby grants a non-exclusive license to Provider and Moadel PC to use the name "New York Eye Specialists" in the following limited instances: (a) preparation and dissemination of advertising and promotional materials, as long as such use is not in connection with, or for the promotion of, any activity that would constitute a violation of any obligation owed to Newco, Newco's members, or the affiliates of Newco's members, (b) billing for procedures or services that involve the use of the Premises, and (c) any other use that is consistent with the express provisions of this Agreement. The foregoing license and use of such name shall be terminated upon delivery of notice to Provider by Newco terminating same. Notwithstanding any provision of this Agreement to the contrary: (a) Newco shall not engage in the practice of medicine, and Provider shall at all times be responsible for all activities that constitute the practice of medicine; (b) this Agreement shall not be construed to require Provider, or any other medically trained or licensed medical professionals under the direction or control of Provider, to perform Refractive Surgery at or using the Premises if in the professional medical judgment of a reasonable ophthalmologist practicing Refractive Surgery, such use would be detrimental to Provider's patients; and (c) Provider and Moadel PC shall have the final authority over their respective personal budgets, professional policies and procedures, professional hiring, firing and staffing, and clinical practices. Section 2.4 Events Excusing Performance. In the event of strikes, lock-outs, calamities, acts of God, unavailability of supplies or other events over which Newco has no control, Newco shall not be liable to Moadel PC or Provider for failure to provide any of the Premises hereunder, and Moadel PC and Provider shall not have the right to terminate this Agreement, for so long as such events continue and for a reasonable period of time thereafter; provided, however, that if such events continue and Newco is not able to provide any Premises hereunder for a period of one hundred and eighty (180) consecutive days or more, Newco, Moadel PC or Provider may terminate this Agreement by written notice to the others. ARTICLE III Obligations of Moadel PC and Provider Section 3.1 Premises Fee. The fees payable to Newco by Moadel PC and Provider in return for use of the Premises and related services made available by Newco hereunder (the "Premises Usage Fee") shall be determined on a per procedure basis, and shall be remitted to Newco promptly following the performance of the procedure for which the Premises Usage Fee is due. The amount of the undiscounted Premises Usage Fee with respect to any procedure shall be comprised of a fee for medical supplies and equipment in the amount of $92.50 and a fee for all other use of the Premises and related services in the amount of $1,850. Newco may from time to time discount the Premises Usage Fee based on circumstances related to specific types of procedures, but the parties intend that the aggregate Premises Usage Fees shall equal the fair market value of the use of the Premises and related services provided by Newco hereunder. Notwithstanding the foregoing provisions of this Section, Newco agrees to waive all Premises Usage Fees charged for any retreatment procedure for which Provider receives no professional fee or other direct monetary benefit and which is given on a limited basis consistent with Provider's usual and customary practices and procedures existing prior to the date of this Agreement. In addition, any manager of Newco may from time to time require that all managers of Newco examine whether the fair market value of the use of the Premises and related services has decreased by more than $86 since it was last agreed to pursuant to this Agreement or by the unanimous vote or consent of Newco's managers. In such an examination, the managers of Newco must act in good faith, but each manager shall be entitled to specify the change in fair market value, if any at all, in his or her sole discretion. If such an examination results in a unanimous determination by Newco's managers that the fair market value has changed by more than $86 since it was last agreed to, Newco shall promptly change the Premises Usage Fee to reflect, dollar for dollar, such change in fair market value. Notwithstanding the foregoing, Newco may elect, by the affirmative vote of a simple majority of its managers, to terminate this Agreement without liability anytime the Premises Usage Fee drops to less than $1,300. Each party agrees to act in good faith in any renegotiation of the Premises Usage Fee. Provider and Moadel PC each agree that the Premises Usage Fee shall not be reduced for any professional fees paid to Provider or any medical professional employed by or acting under the direction of Provider or Moadel PC. Section 3.2 Compliance With Laws. Moadel PC and Provider shall provide professional services to patients in compliance at all times with, and shall otherwise comply with, all ethical standards, laws, rules and regulations applicable to the operations of Moadel PC and Provider. Moadel PC and Provider shall ensure that Provider and the employees of Moadel PC and Provider have all required licenses, credentials, approvals or other certifications to perform his or her duties and services for Moadel PC and Provider. In the event that any disciplinary actions or medical malpractice actions are initiated against Provider or any employee of Provider or Moadel PC, Moadel PC and Provider shall promptly inform Newco of such action and the underlying facts and circumstances. Moadel PC and Provider shall carry out a program to monitor the quality of medical care practiced by Provider and Moadel PC. Section 3.3 Moadel PC's and Provider's Internal Matters. Moadel PC and Provider shall be responsible for matters involving their respective corporate governance, employees and similar internal matters, including, but not limited to, preparation and contents of such reports to regulatory and tax authorities governing Moadel PC and Provider that Moadel PC or Provider are required by law to provide, distribution of professional fee income among Provider or the shareholders of Moadel PC, disposition of Moadel PC's and Provider's property and hiring and firing of their employees and licensing. The legal, accounting and other professional services fees incurred by Provider or Moadel PC in connection with the internal matters of Moadel PC, the distribution of the fee income among Provider or shareholders of Moadel PC and the personal accounting of Moadel PC and Provider and similar internal and personal matters, shall be borne exclusively by Moadel PC and/or Provider. Section 3.4 Personal Expenses. Except as expressly provided above in Section 3.2, Provider agrees that, notwithstanding the prior practices associated with the business of Moadel PC and Provider related to Refractive Surgery as conducted prior to the date of this Agreement, all liabilities, obligations, costs and expenses that arise after the date of this Agreement and are personal to Provider (or arose from transactions or occurrences that directly benefited Provider in a capacity other than as a member of Newco) shall not be considered expenses of Newco and shall be borne solely by Provider, unless agreed otherwise by the unanimous vote or written consent of the managers of Newco. With respect to any such personal expenses that were incurred prior to the date of this Agreement, such expenses shall not be incurred or reimbursed by, or charged or netted from amounts owed to, Newco after the date of this Agreement. ARTICLE IV Term and Termination This Agreement shall commence on the date hereof and shall expire on the earlier of (a) the 40th anniversary of the date of this Agreement or (b) the expiration of two (2) full years following the later of (i) the six-year anniversary of the date of this Agreement or (ii) the first time at which Provider and his affiliates do not own any direct or indirect ownership interest in Newco. ARTICLE V General Provisions Section 5.1 Amendments and Waivers. Any modification or amendment to, or waiver of, any provision of this Agreement (or any document delivered pursuant to this Agreement unless otherwise expressly provided therein) may be made only by an instrument in writing executed by each party thereto. Section 5.2 Successors and Assigns. No party's rights or obligations under this Agreement may be assigned without the prior written consent of all parties hereto. Any assignment in violation of the foregoing shall be null and void. Subject to the preceding sentences of this Section, the provisions of this Agreement (and, unless otherwise expressly provided therein, of any document delivered pursuant to this Agreement) shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, legal representatives, successors, and assigns. Section 5.3 Invalid Provisions. If any provision of this Agreement is held to be illegal, invalid, or unenforceable under present or future laws, such provision shall be fully severable, this Agreement shall be construed and enforced as if such illegal, invalid, or unenforceable provision had never comprised a part of this Agreement, and the remaining provisions of this Agreement shall remain in full force and effect and shall not be affected by the illegal, invalid, or unenforceable provision or by its severance from this Agreement. Section 5.4 Waiver. No failure or delay on the part of any party in exercising any right, power, or privilege hereunder or under any of the documents delivered in connection with this Agreement shall operate as a waiver of such right, power, or privilege; nor shall any single or partial exercise of any such right, power, or privilege preclude any other or future exercise thereof or the exercise of any other right, power or privilege. Section 5.5 Notices. Any notices required or permitted to be given under this Agreement shall be given in writing and shall be deemed received (a) when delivered personally or by courier service to the relevant party at its address as set forth below or (b) if sent by mail, on the third (3rd) day following the date when deposited in the United States mail, certified or registered mail, postage prepaid, to the relevant party at its address indicated below: Newco: 1301 Capital of Texas Highway Suite C-300 Austin, Texas 78746 Attention: President Facsimile: (512) 314-4398 with a copy to: Mr. Timothy L. LaFrey Akin, Gump, Strauss, Hauer & Feld, L.L.P. 816 Congress Avenue, Suite 1900 Austin, Texas 78701 Facsimile: (512) 703-1111 Moadel PC: New York Eye Specialists 16 East 53rd Street, 5th Floor New York, New York 10022 Attn: Ken Moadel, M.D. Facsimile: (212) 752-4730 Provider: Ken Moadel, M.D. New York Eye Specialists 16 East 53rd Street, 5th Floor New York, New York 10022 Facsimile: (212) 752-4730 with a copy to: Mr. Timothy Kahler Parker Chapin, LLP The Chrysler Building 405 Lexington Avenue, 8th Floor New York, NY 10174 Facsimile: (212) 704-6288 Each party may change its address for purposes of this Section by proper notice to the other parties. Section 5.6 Survival of Representations, Warranties, and Covenants. Regardless of any investigation at any time made by or on behalf of any party hereto or of any information any party may have in respect thereof, all covenants, agreements, representations, and warranties made hereunder or pursuant hereto or in connection with the transactions contemplated hereby shall survive the execution of this Agreement. Section 5.7 Construction. This Agreement and any documents or instruments delivered pursuant hereto or in connection herewith shall be construed without regard to the identity of the person who drafted the various provisions of the same. Each and every provision of this Agreement and such other documents and instruments shall be construed as though all of the parties participated equally in the drafting of the same. Consequently, the parties acknowledge and agree that any rule of construction that a document is to be construed against the drafting party shall not be applicable either to this Agreement or such other documents and instruments. Section 5.8 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Texas. Section 5.9 Arbitration. Any controversy between the parties regarding this Agreement, any claims arising out of any breach or alleged breach of this Agreement and any claims arising out of the relationship between the parties created hereunder shall be submitted to binding arbitration by all parties involved. In any arbitration proceeding pursuant to this Section, the prevailing party in such proceeding shall be entitled to recover its costs and reasonable attorneys' fees in addition to any other relief granted. The arbitration proceedings shall be conducted by a single arbitrator pursuant to the Commercial Arbitration Rules of the American Arbitration Association (subject to the express provisions of this Section). The arbitration shall be conducted in Austin, Texas, but the arbitrator shall not have the right to award punitive or exemplary damages against either party. Section 5.10 Counterparts. This Agreement may be executed in several counterparts, each of which shall constitute an original and all of which together shall constitute one and the same instrument. Any party hereto may execute this Agreement by signing any one counterpart. [Signature page follows] S-1 SIGNATURE PAGE TO OFFICE AND EQUIPMENT USE AGREEMENT IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the day and year first above written. Newco: New York Laser Management, L.L.C. Teena Belcik, signing as a manager of Newco and on behalf of Prime, as a member of Newco Ken Moadel, signing as both a manager and a member of Newco Moadel: _______________________________________________ Ken Moadel, M.D. Moadel PC: Ken Moadel, M.D., P.C. By: Ken Moadel, M.D., President EX-10.109 22 0022.txt EX 10.109 LOAN AGREEMENT-NYLM LOAN AGREEMENT This Loan Agreement (this "Agreement") is entered into as of the 1 day of April, 2000, by and between Prime Medical Services, Inc., a Delaware corporation and New York Laser Management, L.L.C., a Delaware limited liability company. Definitions: EFFECTIVE DATE: April 1, 2000 BORROWER: New York Laser Management, L.L.C., a Delaware limited liability company BORROWER'S ADDRESS: 1301 Capital of Texas Highway, Suite C-300, Austin, Texas 78746 LENDER: Prime Medical Services, Inc., a Delaware corporation LENDER'S ADDRESS: 1301 Capital of Texas Highway, Suite C-300, Austin, Texas 78746 NOTES: Acquisition Line Notes: Promissory Notes in the aggregate maximum original principal amount not to exceed $10,000,000 (the "Acquisition Line Maximum Principal Amount"), executed by Borrower and payable to the order of Lender as provided therein (the "Acquisition Line Notes" or "Notes"). SECURITY AGREEMENTS: All documents, agreements and instruments hereinafter or herewith executed by Borrower, Ken Moadel, M.D., P.C., a New York professional corporation ("Moadel PC"), Ken Moadel, M.D. ("Moadel"), or any Target Location securing this Agreement or the obligations under any of the Notes. LOAN DOCUMENTS: This Agreement, the Acquisition Line Notes, the Security Agreements, and all other documents, agreements, and instruments now or hereafter existing, evidencing, securing, or otherwise relating to this Agreement and any transactions contemplated by this Agreement, as any of the foregoing items may be modified or supplemented from time to time. INDEBTEDNESS: All present and future indebtedness, obligations and liabilities of Borrower to Lender, all present and future indebtedness, obligations and liabilities of any Target Location to Lender, and all renewals, extensions and modifications of either of the foregoing, arising pursuant to any of the Loan Documents and all interest accruing thereon, and all other fees, costs, expenses, charges and attorneys' fees payable, and covenants performable, under any of the Loan Documents (including without limitation this Agreement). DEFINED TERMS: Terms not otherwise defined herein shall have the meaning provided in that certain Contribution Agreement dated effective April 1, 2000, by and among Lender, Prime RVC, Inc., a Delaware corporation ("Prime"), Moadel PC, Borrower, and Moadel (the "Contribution Agreement"). For the purposes hereof the terms "Target Locations" and "Target Location" shall have the meaning set forth in the Contribution Agreement, but shall include, upon the acquisition of a Target Location by Borrower or any subsidiary or affiliate of Borrower, the subsidiary or affiliate utilized to make such acquisition. AGREEMENT: Borrower has requested from Lender the credit accommodations described below, and Lender has agreed to provide such credit accommodations on the terms and conditions contained herein. Therefore, for good and valuable consideration, the receipt and sufficiency of which Lender and Borrower acknowledge, Lender and Borrower hereby agree as follows: ARTICLE I THE ACQUISITION LINE LOANS 1.1 The Acquisition Line. Subject to the terms of the Contribution Agreement and the terms, conditions, representations and warranties hereinafter set forth, Lender agrees to lend Borrower from time to time, the amounts necessary to acquire or develop Target Locations, in an aggregate amount not to exceed the Acquisition Line Maximum Principal Amount (collectively, the "Acquisition Line Loans"). 1.2 Acquisition Line Loans. Each Acquisition Line Loan will finance up to 100% of the purchase price (or acquisition cost) of a Target Location being acquired (or developed) by Borrower. The parties acknowledge that the grant of any Acquisition Line Loan does not create any obligation on the part of Lender to extend further Acquisition Line Loans. Additionally, each Acquisition Line Loan is subject in all respects to Lender obtaining prior written approval from the bank syndication under its or its parent company's outstanding borrowing facilities and the execution and delivery of such guarantees by Borrower as may be required by such bank syndication. Pursuant to the Contribution Agreement, each Acquisition Line Loan must be (a) evidenced by a separate Acquisition Line Note executed by Borrower, (b) secured by all of Moadel's ownership interest in Borrower as evidenced by an Assignment and Security Agreement executed by Moadel, and (c) accompanied by Assignment and Security Agreements executed by Borrower. In addition, if Borrower is acquiring, directly or indirectly, a one hundred percent (100%) interest in a Target Location (hereinafter referred to as a "100% Target Location"), Borrower shall cause such Target Location to execute a security agreement, acceptable in form and substance to Lender, granting to Lender or one of Lender's subsidiaries the highest available priority security interest in all of the assets of such Target Location. 1.3 Interest and Repayment. Borrower and Target Location shall pay the unpaid principal amount under each Acquisition Line Note in accordance with the terms of this Section 1.3 and the respective Acquisition Line Note. Payments of interest and principal on each Acquisition Line Note shall be due and payable quarterly over a seven (7) year term. Under no circumstances shall any Acquisition Line Note bear interest at a rate less than fifteen percent (15%). ARTICLE II CONDITIONS PRECEDENT TO ACQUISITION LINE LOANS In addition to the conditions precedent stated elsewhere herein, Lender shall not be obligated to make any Acquisition Line Loan unless: (a) the representations and warranties contained in Article III are true and correct in all material respects on and as of the date of such Acquisition Line Loan, as though made on and as of such date with such changes therein; (b) on the date of the Acquisition Line Loan, no Event of Default, and no event which, with the lapse of time or notice or both, could become an Event of Default, has occurred and is continuing; (c) there shall have been no material adverse change, as determined by Lender in its reasonable judgment, in the financial condition or business of Borrower; (d) there has been no breach or threatened breach by Borrower under the Contribution Agreement or any other Transaction Document (as such term is defined in the Contribution Agreement); (e) Borrower executes the respective Acquisition Line Note and Borrower executes an Assignment and Security Agreement in the form attached as Exhibit D4 to the Contribution Agreement, and otherwise in form and substance acceptable to Lender wherein Lender is granted a first lien perfected security interest in all of Borrower's or Borrower's subsidiaries' ownership interest in the Target Location and related acquisition documents; (f) Moadel shall have previously granted to Lender a first lien perfected security interest in all of Moadel's ownership interest in Borrower through the execution and delivery of the Assignment and Security Agreement in the form attached as Exhibit D2 to the Contribution Agreement and Moadel shall be in compliance with all of its obligations thereunder; (g) if Borrower is using a Acquisition Line Loan to acquire, directly or indirectly, a 100% Target Location, Borrower shall cause such Target Location to execute a security agreement, acceptable in form and substance to Lender, granting to Lender or one of Lender's subsidiaries the highest available priority security interest in all of the assets of such Target Location; and (h) Lender shall have received such other approvals, opinions, documents, certificates or evidences as Lender may reasonably request (in form and substance reasonably satisfactory to Lender). Each request for a Acquisition Line Loan shall be deemed a representation by Borrower that the conditions of this Section 2 have been met. ARTICLE III BORROWER'S REPRESENTATIONS AND WARRANTIES Borrower represents and warrants to Lender as follows: 3.1 Good Standing. Borrower is a duly formed limited liability company, duly organized and in good standing, under the laws of Delaware and has the power to own its property and to carry on its business in each jurisdiction in which Borrower operates. 3.2 Authority and Compliance. Borrower has full power and authority to enter into this Agreement, to make the borrowing hereunder, to execute and deliver the Loan Documents and to incur the indebtedness described in this Agreement, all of which has been duly authorized by all proper and necessary action of its managers and members. No further consent or approval of any public authority is required as a condition to the validity of any Loan Document, and Borrower is in compliance with all laws and regulatory requirements to which it is subject. 3.3 Binding Agreement. This Agreement and other Loan Documents when issued and delivered pursuant hereto for value received will constitute, valid and legally binding obligations of Borrower in accordance with their terms. 3.4 Litigation. There are no proceedings pending or, to the knowledge of Borrower, threatened before any court or administrative agency which will or may have a material adverse effect on the financial condition or operations of Borrower or any subsidiary, except as disclosed to Lender in writing prior to the date of this Agreement. To the knowledge of Borrower, there are no proceedings pending or threatened against any Target Location. 3.5 No Conflicting Agreements. There are no provisions of Borrower's organizational documents and no provisions of any existing agreement, mortgage, indenture or contract binding on Borrower or affecting its property, which would conflict with or in any way prevent the execution, delivery, or carrying out of the terms of the Loan Documents. 3.6 Ownership of Assets. Borrower will at all times maintain its tangible property, real and personal, in good order and repair taking into consideration reasonable wear and tear. 3.7 Taxes. All income taxes and other taxes due and payable through the date of this Agreement have been paid prior to becoming delinquent. ARTICLE IV BORROWER'S AFFIRMATIVE COVENANTS So long as Borrower may borrow under this Agreement and until payment in full of all Acquisition Line Notes, and performance of all other obligations of Borrower and Target Locations hereunder or thereunder, Borrower covenants and agrees to do the following: 4.1 Financial Statements. -------------------- (a) Maintain, and cause each Target Location to maintain, a system of accounting satisfactory to Lender and in accordance with generally accepted accounting principles consistently applied, and will permit Lender's officers or authorized representatives to visit and inspect Borrower's or Target Location's books of account and other records at such reasonable times and as often as Lender may desire during office hours and after reasonable notice to Borrower, and pay the reasonable fees and disbursements of any accountants or other agents of Lender selected by Lender for the foregoing purposes. Unless written notice of another location is given to Lender, Borrower's books and records will be located at Borrower's Address. (b) Furnish to Lender year end financial statements, of Borrower and each Target Location, to include balance sheet, operating statement and surplus reconciliation, together with an officer's certificate of compliance with this Agreement including computations of all quantitative covenants, within 90 days after the end of each annual accounting period. (c) Furnish to Lender quarterly financial statements, of Borrower and each Target Location, to include balance sheet and profit and loss statement, together with an officer's certificate of compliance with this Agreement including computations of all quantitative covenants, within 45 days of the end of each such accounting period. (d) With each balance sheet delivered under subsections (b) or (c) of this Section 4.1, an aging of all Accounts Receivable. (e) Promptly provide Lender with such additional information, reports or statements respecting the business operations and financial condition of Borrower or any Target Location, as Lender may reasonably request from time to time. 4.2 Insurance. Maintain, and cause each Target Location to maintain, insurance with responsible insurance companies on such of its respective properties, in such amounts and against such risks as is customarily maintained by similar businesses operating in the same vicinity, specifically to include a policy of fire and extended coverage insurance covering all assets, and liability insurance, all to be with such companies and in such amounts satisfactory to Lender and to contain a mortgage clause naming Lender as its interest may appear. Evidence of such insurance will be supplied to Lender. 4.3 Existence and Compliance. Maintain, and cause each Target Location to maintain, its organizational existence in good standing and comply with all laws, regulations and governmental requirements applicable to it or to any of its property, business operations and transactions. Borrower further agrees to provide Lender with copies of all instruments filed with the Delaware Secretary of State amending and/or renewing Borrower's certificate of formation. 4.4 Adverse Conditions or Events. Promptly advise Lender in writing of any condition, event or act which comes to its attention that would or might materially affect Borrower's or any Target Location's financial condition, Lender's rights under this Agreement or any of the Loan Documents, and of any litigation filed against Borrower or to its knowledge against any Target Location. 4.5 Taxes. Pay all taxes as they become due and payable. ----- 4.6 Maintenance. Maintain, and cause each Target Location to maintain, all of its respective tangible property in good condition and repair, reasonable wear and tear excepted, and make all necessary replacements thereof, and preserve and maintain all licenses, privileges, franchises, certificates and the like necessary for the operation of its business. 4.7 Application of Earnings. Except as expressly contemplated in the Contribution Agreement, pay all available funds toward repayment of any Acquisition Line Notes, regardless of whether payment of such amounts exceeds the minimum required payments under the Acquisition Line Notes. ARTICLE V BORROWER'S NEGATIVE COVENANTS So long as Borrower may borrow under this Agreement and until payment in full of all Acquisition Line Notes, and performance of all other obligations of Borrower or Target Location hereunder or thereunder, Borrower will not, and will cause each of the Target Locations to not, without the prior written consent of Lender: 5.1 Transfer of Assets. Enter into any merger or consolidation, or sell, lease, assign, or otherwise dispose of or transfer any assets except in the normal course of its business. 5.2 Change in Ownership or Structure. Dissolve or liquidate; become a party to any merger or consolidation; reorganize as a professional corporation; acquire by purchase, lease or otherwise all or substantially all of the assets or capital stock of any corporation or other entity; or sell, transfer, lease, or otherwise dispose of all or any substantial part of its respective property or assets or business. 5.3 Liens. From and after the date hereof grant, suffer, or permit liens on or security interests in its respective assets, or fail to promptly pay all lawful claims, whether for labor, materials, or otherwise, except for purchase money security interests arising in the ordinary course of its respective business. 5.4 Loans. Make any loans, advances or investments to or in any joint venture, corporation or other entity, except for the purchase of obligations of Lender or U.S. Government obligations or the purchase of federally-insured certificates of deposit. 5.5 Borrowings. Except for borrowing or incurring open accounts payable to unaffiliated third parties in the ordinary course of business, create, incur, assume, or liable in any manner for any indebtedness (for borrowed money, deferred payment for the purchase of assets, lease payments, as surety or guarantor of the debt of another, or otherwise) other than to Lender in excess of $10,000 without Lender's prior written consent. 5.6 Violate Other Covenants. Violate or fail to comply with any covenants or agreements regarding other debt which will or would with the passage of time or upon demand cause the maturity of any other debt to be accelerated. 5.7 Equity Redemptions or Restructurings. Apply any of its property or assets to the purchase, retirement or redemption of any of its equity interests or in any way amend its capital structure. 5.8 Character of Business. Change the general character of business as conducted at the date hereof, or engage in any type of business not reasonably related to its business as presently and normally conducted. ARTICLE VI EVENTS OF DEFAULT; NOTICE; ACCELERATION 6.1 Events of Default. If one or more of the following events of default shall occur and continue after thirty (30) days' written notice to Borrower, all outstanding principal plus unpaid interest of each Acquisition Line Note, and any other indebtedness of Borrower to Lender, shall automatically be due and payable immediately and Lender shall have no further obligation to fund under this Agreement. (a) There shall be any breach or default shall be made in the payment of any installment of principal or interest upon any Acquisition Line Note, when due and payable, whether at maturity or otherwise; or (b) There shall be any breach or default (other than by Lender or Prime) under any Loan Document, the Contribution Agreement, or any other Transaction Document, or any other certificate, agreement or document contemplated hereby or thereby; or (c) Any representation or warranty of Borrower contained herein or in any financial statement, certificate, report or opinion submitted to Lender in connection with any Acquisition Line Loan, or by Borrower pursuant to the requirements of this Agreement, shall prove to have been incorrect or misleading in any material respect when made; or (d) Any judgment against Borrower or any attachment or other levy against the property of Borrower with respect to a claim materially affecting Borrower's financial status remains unpaid, unstayed on appeal, undischarged, not bonded or not dismissed for a period of thirty (30) days; or (e) The bankruptcy, death, or dissolution of any guarantor of the Indebtedness; or (f) Borrower makes an assignment for the benefit of creditors, admits in writing its inability to pay its debts generally as they become due, files a petition in bankruptcy, is adjudicated insolvent or bankrupt, petitions or applies to any tribunal for any receiver or any trustee of Borrower or any substantial part of their respective property, commences any action relating to Borrower under any reorganization, arrangement, readjustment of debt, dissolution or liquidation law or statute of any jurisdiction, whether now or hereafter in effect, or if there is commenced against Borrower any such action, or Borrower by any act indicates its consent to or approval of any trustee for Borrower or any substantial part of its property, or suffers any such receivership or trustee to continue undischarged. 6.2 Lender's Remedies. Upon the occurrence of an Event of Default, Lender, without notice of any kind, except for any notice required under this Agreement or any other Loan Document, may, at Lender's option: (i) terminate its obligation to fund any Acquisition Line Loan hereunder; (ii) declare the Indebtedness, in whole or in part, immediately due and payable; and/or (iii) exercise any other rights and remedies available to Lender under this Agreement, any other Loan Document, or applicable laws; except that upon the occurrence of an Event of Default described in subsection 6.1(f), all the Indebtedness shall automatically be immediately due and payable, and Lender's obligation to fund any Acquisition Line Loan hereunder shall automatically terminate, without notice of any kind (including without limitation notice of intent to accelerate and notice of acceleration) to Borrower or to any Target Location, guarantor, or to any surety or endorser of any of the Notes, or to any other person. Borrower, each Target Location, and each guarantor, surety, and endorser of any of the Notes, and any and all other parties liable for the Indebtedness or any part thereof, waive demand, notice of intent to demand, presentment for payment, notice of nonpayment, protest, notice of protest, grace, notice of dishonor, notice of intent to accelerate maturity, notice of acceleration of maturity, and diligence in collection. 6.3 Right of Set-Off. Borrower hereby authorizes Lender, to the maximum extent permitted under and in accordance with applicable laws, at any time after the occurrence of an Event of Default which continues uncured, to set-off and apply any and all deposits, funds or assets at any time held and any and all other indebtedness at any time owing by Lender to or for the credit or the account of Borrower against any and all Indebtedness, whether or not Lender exercises any other right or remedy hereunder and whether or not such Indebtedness are then matured. ARTICLE VII GENERAL TERMS AND CONDITIONS 7.1 Notices. All notices, demands, requests, approvals and other communications required or permitted hereunder shall be in writing and shall be deemed to have been given when (a) presented personally, or (b) three (3) days after deposited in a regularly maintained mail receptacle of the United States Postal Service, postage prepaid, certified, return receipt requested, or (c) upon receipt of confirmation after sending by facsimile transmission, addressed to Borrower or Lender, as the case may be, at the respective addresses or facsimile number for notice set forth on the first page of this Agreement, or such other address or facsimile number as Borrower or Lender may from time to time designate by written notice to the other. 7.2 Entire Agreement and Modifications. The Loan Documents, together with the Contribution Agreement and any other Transaction Documents, constitute the entire understanding and agreement between the undersigned with respect to the transactions arising in connection with the Acquisition Line Loans, and supersede all prior written or oral understandings and agreements between the undersigned in connection therewith. No provision of this Agreement or the other Loan Documents may be modified, waived, or terminated except by instrument in writing executed by the party against whom a modification, waiver, or termination is sought to be enforced, and, in the case of Lender, executed by a Vice President or higher level officer of Lender. 7.3 Severability. In case any of the provisions of this Agreement shall for any reason be held to be invalid, illegal, or unenforceable, such invalidity, illegality, or unenforceability shall not affect any other provision hereof, and this Agreement shall be construed as if such invalid, illegal, or unenforceable provision had never been contained herein. 7.4 Cumulative Rights and No Waiver. Lender shall have all of the rights and remedies granted in the Loan Documents and available at law or in equity, and these same rights and remedies shall be cumulative and may be pursued separately, successively, or concurrently against Borrower, at the sole discretion of Lender. Lender's delay in exercising any right shall not operate as a waiver thereof, nor shall any single or partial exercise by Lender of any right preclude any other or future exercise thereof or the exercise of any other right. Any of Borrower's covenants and agreements may be waived by Lender but only in writing signed by an authorized officer of Vice President level or higher of Lender or any subsequent owner or holder of any of the Notes. Except as otherwise expressly provided in this Agreement and in any Note, Borrower expressly waives any presentment, demand, protest, notice of default, notice of intent to accelerate, notice of acceleration, notice of intent to demand payment, or other notice of any kind. No notice to or demand on Borrower in any case shall, of itself, entitle Borrower to any other or further notice or demand in similar or other circumstances. No delay or omission by Lender in exercising any power or right hereunder shall impair any such right or power or be construed as a waiver thereof, or the exercise of any other right or power hereunder. 7.5 Form and Substance. All documents, certificates, insurance policies, and other items required under this Agreement to be executed and/or delivered to Lender shall be in form and substance reasonably satisfactory to Lender. 7.6 Limitation on Interest: Maximum Rate. Lender and Borrower intend to contract in strict compliance with applicable usury law from time to time in effect. To effectuate this intention, Lender and Borrower stipulate and agree that none of the terms and provisions of any Note and any other agreement among such parties, whether now existing or arising hereafter, shall ever be construed as a contract to pay interest for the use, forbearance or detention of money in excess of the Maximum Rate. If, from any possible construction of any document, interest would otherwise be payable to Lender in excess of the Maximum Rate, any such construction shall be subject to the provisions of this Section and such document shall be automatically reformed and the interest payable to Lender shall be automatically reduced to the Maximum Rate permitted under applicable law, without the necessity of the execution of any amendment or new document. Neither Borrower, endorsers or other persons now or hereafter becoming liable for payment of any portion of the principal or interest of any Note shall ever be liable for any unearned interest on the principal amount or shall ever be required to pay interest thereon in excess of the Maximum Rate that may be lawfully charged under applicable law from time to time in effect. Lender and any subsequent holder of any Note expressly disavow any intention to charge or collect unearned or excessive interest or finance charges in the event the maturity of any Note, is accelerated. If the maturity of any Note is accelerated for any reason, whether as a result of a default under any Note, or by voluntary prepayment, or otherwise, any amounts constituting interest, or adjudicated as constituting interest, which are then unearned and have previously been collected by Lender or any subsequent holder of any Note shall be applied to reduce the principal balance thereof then outstanding, or if such amounts exceed the unpaid balance of principal, the excess shall be refunded to Borrower (and Target Location, as applicable). In the event Lender or any subsequent holder of any Note ever receives, collects or applies as interest any amounts constituting interest or adjudicated as constituting interest which would otherwise increase the interest to an amount in excess of the amount permitted under applicable law, such amount which would be excessive interest shall be applied to the reduction of the unpaid principal balance of such Note, and, if the principal balances of such Note is paid in full, any remaining excess shall be paid to Borrower (and Target Location, as applicable). In determining whether or not the interest paid or payable under the specific contingencies exceeds the Maximum Rate allowed by applicable law, Borrower and Lender shall, to the maximum extent permitted under applicable law, (i) characterize any non-principal payment as an expense, fee or premium, rather than as interest; (ii) exclude voluntary prepayments and the effect thereof; (iii) amortize, prorate, allocate and spread, in equal parts, the total amount of interest throughout the entire contemplated term of the applicable Note (as it may be renewed and extended) so that the interest rate is uniform throughout the entire term of such Note. The terms and provisions of this section shall control and supersede every other provision of all existing and future agreements between Lender and Borrower (and Target Location, as applicable). As used in this Agreement, "Maximum Rate" means the maximum non-usurious interest rate that at any time or from time to time may be contracted for, taken, reserved, charged or received on the unpaid principal or accrued past due interest under applicable law and may be greater than the applicable rate, the parties hereby stipulating and agreeing that Lender may contract for, take, reserve, charge or receive interest up to the Maximum Rate without penalty under any applicable law; and "applicable law" means the laws of the State of Texas or the laws of the United States of America, whichever laws allow the greater interest, as such laws now exist or may be changed or amended or come into effect in the future. In the event applicable law provides for an interest ceiling under Chapter One of Title 79, Texas Revised Civil Statutes Annotated, as amended, that ceiling shall be the indicated rate ceiling, subject to any right Lender may have in the future to change the method of determining the Maximum Rate. 7.7 Third Party Beneficiary. Borrower acknowledges that the bank syndication under the senior credit facility of Prime Medical Services, Inc. (as hereinafter supplemented, modified, or replaced) is a third party beneficiary to this Agreement. Except for the preceding sentence, this Agreement is for the sole benefit of Lender and Borrower and is not for the benefit of any third party. 7.8 Borrower In Control. In no event shall Lender's rights and interests under the Loan Documents be construed to give Lender the right to, or be deemed to indicate that Lender is in control of the business, management or properties of Borrower or any Target Location or has power over the daily management functions and operating decisions made by Borrower or any Target Location. 7.9 Use of Financial and Other Information. Borrower agrees that Lender shall be permitted to investigate and verify the accuracy of any and all information furnished to Lender in connection with the Loan Documents, including without limitation financial statements, and to disclose such information, or provide copies of such information, to representatives appointed by Lender, including independent accountants, agents, attorneys, asset investigators, appraisers and any other persons deemed necessary by Lender to such investigation. 7.10 Collateral Assignment of Loan Documents. Lender shall have the right to collaterally assign all of its rights under this Agreement and the other Loan Documents to the third party beneficiaries described in Section 7.7. Lender shall have the right to disclose in confidence such financial information regarding Borrower as may be necessary to complete any such assignment or attempted assignment, including without limitation, all financial statements, projections, internal memoranda, audits, reports, payment history, appraisals and any and all other information and documentation in Lender's files relating to Borrower. This authorization shall be irrevocable in favor of Lender, and Borrower waives any claims against Lender or the party receiving information from Lender regarding disclosure of information in Lender's files, and further waive any alleged damages which may result from such disclosure. Borrower acknowledges that Lender intends to make a collateral assignment of its rights under this Agreement and the Loan Documents for the benefit of one or more of its or its parent company's lenders and will not be authorized to amend or modify this Agreement or the Loan Documents, or grant waivers of any of its rights thereunder without the prior written consent of some or all of such lenders. 7.11 Further Assurances. Borrower agrees to execute and deliver, and cause each Target Location to execute and deliver, to Lender, promptly upon request from Lender, such other and further documents as may be reasonably necessary or appropriate to consummate the transactions contemplated herein. 7.12 Number and Gender. Whenever used herein, the singular number shall include the plural and the plural the singular, and the use of any gender shall be applicable to all genders. The duties, covenants, obligations, and warranties of Borrower in this Agreement shall be joint and several obligations of Borrower and of each Borrower if more than one. 7.13 Captions. The captions, headings, and arrangements used in this Agreement are for convenience only and do not in any way affect, limit, amplify, or modify the terms and provisions hereof. 7.14 Continuing Agreement. This is a continuing agreement and all rights, powers, and remedies of Lender under this Agreement and the other Loan Documents shall continue in full force and effect until each Note is paid in full as the same becomes due and payable and all other Indebtedness is paid and discharged, until Lender has no further obligation to advance moneys to Borrower under this Agreement, and until Lender, upon request of Borrower, has executed a written termination statement. Furthermore, the parties contemplate that there may be times when no Indebtedness is owing, but notwithstanding such occurrence, this Agreement (and all other Loan Documents) shall remain valid and shall be in full force and effect as to subsequent Indebtedness and Advances, provided that Lender has not executed a written termination statement. 7.15 Applicable Law. This Agreement and the Loan Documents shall be governed by and construed in accordance with the laws of the State of Texas and the laws of the United States applicable to transactions within such state. 7.16 Counterparts. This Agreement may be executed in several counterparts, each of which shall constitute an original and all of which together shall constitute one and the same instrument. Any party hereto may execute this Agreement by signing any one counterpart. 7.17 NO ORAL AGREEMENTS. THE WRITTEN LOAN AGREEMENT REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. [SIGNATURE PAGE FOLLOWS] S-1 SIGNATURE PAGE TO LOAN AGREEMENT IN WITNESS WHEREOF, the undersigned has executed this consent as of the date first above written. BORROWER: New York Laser Management, L.L.C. -------------------------------- Ken Moadel, M.D., Manager LENDER: Prime Medical Services, Inc. -------------------------------- Teena Belcik, Treasurer EX-10.110 23 0023.txt EX 10.110 ASSIGNMENT AND SECURITY AGREEMENT-NYLM ASSIGNMENT AND SECURITY AGREEMENT THIS ASSIGNMENT AND SECURITY AGREEMENT (this "Agreement") is made and entered into as of the 1st day of April, 2000, by and between Prime Medical Services, Inc., a Delaware corporation (the "Secured Party") and Ken Moadel, M.D. ("Moadel"). RECITALS: A. Moadel and Secured Party have executed and delivered that certain Contribution Agreement dated effective April 1, 2000, between and among Moadel, Ken Moadel, M.D., P.C., a New York professional corporation, Secured Party, New York Laser Management, L.L.C., a Delaware limited liability company (the "Debtor") and Prime RVC, Inc., a Delaware corporation ("Prime") (the "Contribution Agreement"), and Debtor and Secured Party have executed and delivered that certain Loan Agreement, dated April 1, 2000 (the "Loan Agreement"), pursuant to which Secured Party agrees to make certain loans to Debtor on the terms and subject to the conditions provided therein. B. Secured Party has requested that Moadel pledge the Collateral (as defined below) to secure certain obligations and liabilities that Debtor may now or hereafter have to Secured Party, including, without limitation, any obligations arising under loans made pursuant to the Loan Agreement. C. Moadel desires to enter into this Agreement as a material inducement to Secured Party's extension of credit under the Loan Agreement. AGREEMENT: NOW, THEREFORE, in consideration of the foregoing and the covenants and agreements hereinafter set forth, and other good and valuable consideration, the receipt and sufficiency of which Moadel acknowledges, Moadel and Secured Party agree as follows: ARTICLE I COLLATERAL AND SECURED OBLIGATIONS 1.1 Grant of Security Interest. Moadel hereby assigns, transfers, and pledges to Secured Party, and Moadel hereby grants to Secured Party a security interest in, the following described collateral (collectively, the "Collateral"): (a) Interest in Subsidiary. All ownership interests of Moadel in Debtor, whether now existing or hereafter acquired and including, without limitation, that certain thirty-five percent (35%) membership interest in Debtor; (b) Accounts. All accounts and rights now or hereafter attributable to any of the Collateral described in (a) above, and all rights of Moadel now or hereafter arising under any agreement pertaining to the Collateral described in (a) above, including without limitation all distributions, proceeds, fees, dividends, preferences, payments or other benefits of whatever nature which Moadel is now or may hereafter become entitled to receive with respect to any Collateral described in (a) above; (c) Additional Property. "Collateral" shall also include the following property (collectively, the "Additional Property") which Moadel becomes entitled to receive or shall receive as a result of its ownership of any other Collateral: (i) any stock or other ownership certificate, including without limitation, any certificate representing a stock dividend or any certificate in connection with any recapitalization, reclassification, merger, consolidation, conversion, sale of assets, combination, stock split, reverse stock split, or spin-off; (ii) any option, warrant, subscription or right, whether as an addition to or in substitution of any other Collateral; (iii) any dividends or distributions of any kind whatsoever, whether distributable in cash, stock or other property; (iv) any interest, premium or principal payments; and (v) any conversion or redemption proceeds; and (d) Proceeds. All proceeds (cash and non-cash) arising out of the sale, exchange, collection or other disposition of all or any portion of the Collateral described in (a), (b) or (c) above, including without limitation proceeds in the form of stock, accounts, chattel paper, instruments, documents, goods, inventory and equipment. The security interest in the Collateral hereby granted by Moadel to Secured Party may sometimes be referred to in this Agreement as the "Security Interest". 1.2 Obligations. This Agreement and the Security Interest shall secure full and punctual payment and performance of the following indebtedness, duties and obligations (collectively, the "Obligations"): (a) All liabilities and obligations of Debtor to Secured Party (including, without limitation, any principal, interest, fees and other amounts, and any other obligations) under and pursuant to the Loan Agreement and each promissory note (collectively, the "Note") issued pursuant to the Loan Agreement; and (b) All liabilities and obligations of Debtor to Secured Party, Prime, or any Prime Indemnified Party (as defined in the Contribution Agreement) under and pursuant to the Contribution Agreement or this Agreement. ARTICLE II MOADEL'S REPRESENTATIONS AND WARRANTIES WITH RESPECT TO COLLATERAL Moadel hereby represents and warrants to Secured Party as follows: 2.1 Ownership of Collateral. Moadel has good and marketable title to the Collateral free and clear of any liens, security interests, shareholders agreement, calls, charge, or encumbrance, except for this Security Interest. No financing statement or other instrument similar in effect covering all or any part of the Collateral is on file in any recording office, except as may have been filed in favor of Secured Party relating to this Agreement. 2.2 Power & Authority. Moadel has the lawful right, power, and authority to grant the Security Interest in the Collateral. This Agreement, together with all filings and other actions necessary or desirable to perfect and protect such security interest, which have been duly taken, create a valid and perfected first priority security interest in the Collateral securing the payment and performance of the Obligations. 2.3 No Agreements. The Interests are not subject to any right of redemption, or any call or put options, voting trust, proxy, shareholders agreement, right of first refusal, or any other document or agreement which would in any way impair or adversely affect this Security Interest or the rights of Secured Party under this Agreement. 2.4 Securities. Any certificates evidencing securities pledged as Collateral are valid and genuine and have not been altered. All securities pledged as Collateral have been duly authorized and validly issued, are fully paid and non-assessable, and were not issued in violation of the preemptive rights of any party or of any agreement by which Moadel or the issuer thereof is bound. Except as expressly provided otherwise in the Contribution Agreement or any Transaction Document (as therein defined), no restrictions or conditions exist with respect to the transfer or voting of any securities pledged as Collateral. ARTICLE III MOADEL'S OTHER REPRESENTATIONS AND WARRANTIES 3.1 Solvency of Moadel. As of the date hereof, (i) Moadel is solvent; (ii) the fair saleable value of Moadel's assets exceeds its liabilities (both fixed and contingent); (iii) Moadel has sufficient capital to satisfy all of Moadel's obligations as they become due; (iv) no receiver, trustee, or custodian has been appointed for, or taken possession of, all or substantially all of the assets of Moadel, either in a proceeding brought by Moadel or in a proceeding brought against Moadel; (v) Moadel is not the subject of a petition for relief under the United States Bankruptcy Code or any similar federal or state insolvency law, including without limitation a petition filed by Moadel or a petition filed by a third party seeking relief against Moadel; and (vi) Moadel has no intention of filing a petition for relief under the United States Bankruptcy Code or any similar federal or state insolvency law, or of seeking any other form of creditor relief. 3.2 Authority and Compliance. Moadel has full power and authority to enter into this Agreement. Moadel has full power and authority to enter into and perform its obligations under each Other Agreement. No further consent or approval is required as a condition to the validity of this Agreement or any Other Agreement. Moadel is in compliance with all applicable laws, ordinances, statutes, orders, regulations, judgments, writs, or decrees of any governmental entity to which it is subject. 3.3 Binding Agreement. This Agreement and each Other Agreement constitute valid and legally binding obligations of Moadel, in accordance with their terms, subject to the applicable bankruptcy, insolvency, reorganization, moratorium, and similar laws affecting creditors' rights generally. 3.4 Litigation. There are no proceedings pending or, to the knowledge of Moadel, threatened before any court or administrative agency which will or may have a material adverse effect on the financial condition of Moadel or upon Moadel's ability to perform its obligations under this Agreement or any Other Agreement. 3.5 No Conflicting Agreements. There are no provisions of any existing agreement, mortgage, indenture or contract binding on Moadel or affecting its property, which would conflict with or in any way prevent the execution, delivery, or carrying out of the terms of this Agreement or any Other Agreement. 3.6 Ownership of Assets. Moadel has good and full title to the Collateral, and the Collateral is owned free and clear of liens, charges, claims, security interests, and other encumbrances. 3.7 Taxes. Moadel has filed all tax returns required to be filed by Moadel. ARTICLE IV MOADEL'S COVENANTS WITH RESPECT TO COLLATERAL Moadel covenants and agrees that from the date hereof and until the payment and performance in full of the Obligations unless Secured Party otherwise consents in writing: 4.1 Delivery of Instruments and/or Certificates. Contemporaneously herewith, Moadel covenants and agrees to deliver to Secured Party any certificates, documents, or instruments representing or evidencing the Collateral, with Moadel's endorsement thereon and/or accompanied by proper instruments of transfer and assignment duly executed in blank. 4.2 Further Assurances. Moadel will contemporaneously with the execution hereof and from time to time thereafter at its expense promptly execute and deliver all further instruments and documents and take all further action necessary or appropriate or that Secured Party may request in order (i) to perfect and protect the security interest created or purported to be created hereby and the first priority of such security interest, (ii) to enable Secured Party to exercise and enforce its rights and remedies hereunder in respect of the Collateral, and (iii) to otherwise effect the purposes of this Agreement, including without limitation: (A) executing and filing any financing or continuation statements, or any amendments thereto; (B) obtaining written confirmation from the issuer of any securities pledged as Collateral of the pledge of such securities, in form and substance satisfactory to Secured Party; (C) cooperating with Secured Party in registering the pledge of any securities pledged as Collateral with the issuer of such securities; (D) delivering notice of Secured Party's security interest in any securities pledged as Collateral to any securities or financial intermediary, clearing corporation or other party required by Secured Party, in form and substance satisfactory to Secured Party; and (E) obtaining written confirmation of the pledge of any securities constituting Collateral from any securities or financial intermediary, clearing corporation or other party required by Secured Party, in form and substance satisfactory to Secured Party. 4.3 Additional Property. All Additional Property, as defined in Section 1.1(c) above, received by Moadel shall be received in trust for the benefit of Secured Party. All Additional Property and all certificates or other written instruments or documents evidencing and/or representing the Additional Property that is received by Moadel, together with such instruments of transfer as Secured Party may request, shall immediately be delivered to or deposited with Secured Party and held by Secured Party as Collateral under the terms of this Agreement. If the Additional Property received by Moadel and delivered to Secured Party pursuant to this Section shall be shares of stock or other securities, such shares of stock or other securities shall be duly endorsed in blank or accompanied by proper instruments of transfer and assignment duly executed in blank with, if requested by Secured Party, signatures guaranteed by a member or member organization in good standing of an authorized Securities Transfer Agents Medallion Program, all in form and substance satisfactory to Secured Party. Secured Party shall be deemed to have possession of any Collateral in transit to Secured Party or its agent. 4.4 Sale, Transfer, Encumbrance. Moadel will not sell, transfer, mortgage, or otherwise encumber any Collateral or impair the value thereof in any manner without Secured Party's prior written consent, including without limitation by purchase, lease, barter, trade, payment deferral, or the creation, assumption or guarantee of indebtedness or other lending of credit. Secured Party's written consent to any sale, mortgage, transfer, or encumbrance shall not be construed to be a waiver of this provision in respect to any subsequent proposed sale, mortgage, transfer, or encumbrance. 4.5 Liens. Neither Moadel nor any person acting on Moadel's behalf has, or shall have any right, power, or authority to and shall not create, incur, or permit to be placed or imposed, upon the Collateral, any lien of any type or nature whatsoever, other than the liens in favor of Secured Party. 4.6 Matters or Occurrences Affecting Collateral or this Agreement. Moadel will promptly notify Secured Party of any and all matters or occurrences that may have a material adverse effect on the status or value of the Collateral or this Agreement, including without limitation the occurrence of an Event of Default, or an event which, with giving of notice or lapse of time, or both, would constitute an Event of Default. 4.7 Agreements Pertaining to Collateral. Moadel will not transfer any voting rights pertaining to the Collateral to any person or entity. 4.8 Dilution of Ownership. As to any securities pledged as Collateral, Moadel will not consent to or approve of the issuance of (i) any additional interests or shares of any class of securities of such issuer, (ii) any instrument convertible voluntarily by the holder thereof or automatically upon the occurrence or non-occurrence of any event or condition into, or exchangeable for, any such securities, or (iii) any warrants, options, contracts or other commitments entitling any third party to purchase or otherwise acquire any such securities. 4.9 Restrictions on Securities. Moadel will not enter into any agreement creating, or otherwise permit to exist, any restriction or condition upon the transfer, voting or control of any securities pledged as Collateral, except as consented to in writing by Secured Party. As to any securities pledged as collateral, Moadel will not consent to or approve of any stock split, reverse stock split, stock dividend, reclassification, or other similar act or transaction regarding the Interests unless consented to in writing by Secured Party. ARTICLE V MOADEL'S AFFIRMATIVE COVENANTS Until payment and performance of all Obligations, Moadel covenants and agrees that it shall promptly advise Secured Party in writing of any litigation filed against Moadel and of any condition, event or act which comes to its attention that would or might have a material adverse effect on Moadel's financial condition. ARTICLE VI NEGATIVE COVENANTS Until payment and performance of all Obligations, Moadel covenants and agrees that Moadel will not, without the prior written consent of Secured Party grant, suffer, or permit liens on, or security interests in, the Collateral. ARTICLE VII DEFAULT AND REMEDIES 7.1 Events of Default. An Event of Default (herein so called) shall exist if any one or more of the following events shall occur: (a) The failure of Debtor to pay any amount required to be paid under the Loan Agreement or any Note (including, without limitation, principal, interest and fees due thereunder) within ten (10) calendar days after such amount is due; (b) The failure of Debtor to pay any Obligation described in Section 1.2(b) within ten (10) calendar days after such amount is due (and, if applicable under the terms of any contractual agreement creating or governing such Obligation, after the expiration of any cure period expressly required); (c) Moadel's breach of a covenant in this Agreement; (d) Any representation or warranty made by Moadel in this Agreement shall be false or materially misleading, as determined in the reasonable discretion of Secured Party; (e) Any event of default shall occur under the terms of the Loan Agreement and shall not be cured within the time expressly provided for with respect thereto in the Loan Agreement; (f) If Debtor, or any other party obligated to pay any portion of the Obligations: (i) becomes insolvent, or makes a transfer in fraud of creditors, or makes an assignment for the benefit of creditors, or admits in writing its inability to pay its debts as they become due; (ii) generally is not paying its debts as such debts become due and Secured Party, in good faith, determines that such event or condition could lead to a material impairment of the Collateral, or any part thereof, or of any other payment security for any of the Obligations; (iii) has a receiver, trustee or custodian appointed for, or take possession of, all or substantially all of the assets of such party or any of the Collateral, either in a proceeding brought by such party or in a proceeding brought against such party and such appointment is not discharged or such possession is not terminated within sixty (60) days after the effective date thereof or such party consents to or acquiesces in such appointment or possession; (iv) files a petition for relief under the United States Bankruptcy Code or any other present or future federal or state insolvency, bankruptcy or similar laws (all of the foregoing hereinafter collectively called "Applicable Bankruptcy Law") or an involuntary petition for relief is filed against such party under any Applicable Bankruptcy Law and such involuntary petition is not dismissed within sixty (60) days after the filing thereof, or an order for relief naming such party is entered under any Applicable Bankruptcy Law, or any composition, rearrangement, extension, reorganization or other relief of debtors now or hereafter existing is requested or consented to by such party; (v) fails to have discharged within a period of sixty (60) days any attachment, sequestration or similar writ levied upon, or any claim against or affecting, any property of such party; or (vi) fails to pay within ninety (90) days any final money judgment against such party; or (g) The issuer of any securities constituting Collateral files a petition for relief under any Applicable Bankruptcy Law, an involuntary petition for relief is filed against any such issuer under any Applicable Bankruptcy Law and such involuntary petition is not dismissed within thirty (30) days after the filing thereof, or an order for relief naming any such issuer is entered under any Applicable Bankruptcy Law. 7.2 Secured Party's Remedies. Upon the occurrence of an Event of Default: (a) Secured Party may declare the Obligations in whole or part immediately due and may enforce payment and performance of the same and exercise any rights under the Texas UCC, rights and remedies of Secured Party under this Agreement, or otherwise. (b) Secured Party may, at Secured Party's option and at the expense of Moadel, either in Secured Party's own right or in the name of Moadel and in the same manner and to the same extent that Moadel might reasonably so act if this Agreement had not been made: (i) do all things requisite, convenient, or necessary to enforce the performance and observance of all rights, remedies and privileges of Moadel arising from the Collateral, or any part thereof, including without limitation compromising, waiving, excusing, or in any manner releasing or discharging any obligation of any party to or arising from the Collateral; (ii) take possession of the books, papers, chattel paper, documents of title, and accounts of Moadel, wherever located, relating to the Collateral; (iii) sue or otherwise collect and receive money attributable to the Collateral; and (iv) exercise any other lawfully available powers or remedies, and do all other things which Secured Party deems requisite, convenient or necessary or which the Secured Party deems proper to protect the Security Interest. (b) Secured Party may foreclose this Agreement in the manner now or hereafter provided or permitted by law and may upon such reasonable notification prior thereto as may be required by applicable law (Moadel hereby agreeing that ten days' notice is commercially reasonable), sell, assign, transfer, or otherwise dispose of the Collateral at public or private sale, in whole or in part, and Secured Party may, in its own name or as Moadel's attorney-in-fact effectively assign and transfer the Collateral, or any part thereof, absolutely, and execute and deliver all necessary assignments, conveyances, bills of sale, and other instruments with power to substitute one or more persons or corporations with like power. Any such foreclosure sale, assignment, transfer, or other disposition shall, to the extent permitted by law, be a perpetual bar, both at law and in equity, against Moadel and all persons and corporations lawfully claiming by or through or under Moadel. Any such foreclosure sale may be adjourned from time to time. Upon any sale, Secured Party may bid for and purchase the Collateral, or any part thereof, and upon compliance with the terms of sale may hold, retain, possess and dispose of the Collateral, in its absolute right without further accountability. Secured Party shall have the right to be credited on the amount of its bid a corresponding amount of the Obligations as of the date of such sale. (c) If, in the opinion of Secured Party, there is any question that a public sale or distribution of any Collateral will violate any state or federal securities law, Secured Party (i) may offer and sell securities privately to purchasers who will agree to take them for investment purposes and not with a view to distribution and who will agree to imposition of restrictive legends on the certificates representing the security, or (ii) may sell such securities in any type of offering which complies with, or is exempt from the registration requirements of, the Securities Act of 1933, and no sale so made in good faith by Secured Party shall be deemed to be not "commercially reasonable" because so made. (d) Not in limitation of any other provision of this Agreement, Secured Party shall have all rights and remedies of a secured party under the Texas UCC. 7.3 Application of Proceeds. Secured Party may apply the proceeds of any foreclosure sale hereunder or from any other permitted disposition of the Collateral or any part thereof as follows: (a) first, to the payment of all reasonable costs and expenses of any foreclosure and collection hereunder and all proceedings in connection therewith, including reasonable attorneys' fees; (b) then, to the reimbursement of Secured Party for all disbursements made by Secured Party for taxes, assessments or liens superior to the Security Interest and which Secured Party shall deem expedient to pay; (c) then, to the reimbursement of Secured Party of any other disbursements made by Secured Party in accordance with the terms hereof or under the Contribution Agreement, the Loan Agreement or any Note; (d) then, to or among the amounts of fees, interest and principal then owing and unpaid in respect of the Obligations, in such priority as Secured Party may determine in its discretion; and (e) the remainder of such proceeds, if any, shall be paid to Moadel. If such proceeds shall be insufficient to discharge the entire Obligations, Secured Party shall have any other available legal recourse against Moadel under, or for the performance of, the Contribution Agreement, the Loan Agreement and any Note, for the deficiency, together with interest thereon at the maximum rate permitted under applicable law. 7.4 Enforcement of Obligations. Nothing in this Agreement or in any other document or agreement shall affect or impair the unconditional and absolute right of Secured Party to enforce the Obligations as and when the same shall become due. ARTICLE VIII RIGHTS OF SECURED PARTY 8.1 Subrogation. Upon the occurrence of an Event of Default, Secured Party, at its election, may subrogate to all of the interest, rights and remedies of Moadel, in respect to any of the Collateral or agreements pertaining thereto. 8.2 Secured Party Appointed Attorney-in-Fact. Moadel hereby appoints Secured Party as attorney-in-fact of Moadel, with full authority in the place and stead of Moadel and in the name of Moadel, Secured Party or otherwise, from time to time on Secured Party's discretion and upon the occurrence of an Event of Default, to take any action and to execute any instrument which Secured Party may deem necessary or advisable to accomplish the purposes of this Agreement, including without limitation: (a) to ask, demand, collect, sue for, recover, compound, receive and give acquittance and receipts for moneys due and to become due under or in respect of any of the Collateral; (b) to receive, endorse, and collect any drafts or other instruments, documents and chattel paper, in connection with clause (a) of this Section 8.2; (c) to file any claims or take any action or institute any proceeding which Secured Party may deem necessary or desirable for the collection of any of the Collateral or otherwise to enforce the rights of Secured Party against any of the Collateral; and (d) to assign and transfer the Collateral, or any part thereof, absolutely and to execute and deliver endorsements, assignments, conveyances, bills of sale and other instruments with power to substitute one or more persons or corporation with like power. 8.3 Performance by Secured Party. If Moadel fails to perform any agreement contained herein, Secured Party may itself perform, or cause the performance of, such agreement, and the reasonable expenses of Secured Party incurred in connection therewith shall be payable by Moadel under Section 8.8. In no event, however, shall Secured Party have any obligation or duties whatsoever to perform any covenant or agreement of Moadel contained herein, and any such performance by Secured Party shall be wholly discretionary with Secured Party. 8.4 Duties of Secured Party. The powers conferred upon Secured Party hereunder are solely to protect its interest in the Collateral and shall not impose any duty upon it to exercise any such powers. Except for the safe custody of any Collateral in its possession and the accounting for money actually received by it hereunder, Secured Party shall have no duty as to any Collateral or as to the taking of any necessary steps to preserve rights against prior parties or any other rights pertaining to any Collateral. 8.5 No Liability of Secured Party. Neither the acceptance of this Agreement by Secured Party, nor the exercise of any rights hereunder by Secured Party, shall be construed in any way as an assumption by Secured Party of any obligations, responsibilities, or duties of Moadel arising in connection with the Collateral assigned hereunder or otherwise bind Secured Party to the performance of any obligations respecting the Collateral, it being expressly understood that Secured Party shall not be obligated to perform, observe, or discharge any obligation, responsibility, duty, or liability of Moadel in respect of any of the Collateral, including without limitation appearing in or defending any action, expending any money or incurring any expense in connection therewith. TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, MOADEL SHALL AND DOES AGREE TO INDEMNIFY, PROTECT, DEFEND AND HOLD HARMLESS SECURED PARTY AND ITS SUBSIDIARIES, AND EACH OF THEIR OFFICERS, DIRECTORS, REPRESENTATIVES, AGENTS, EMPLOYEES, LENDERS, SUCCESSORS AND ASSIGNS, FROM AND AGAINST ALL LIABILITIES, CLAIMS, DAMAGES, LOSSES, FINES, PENALTIES, CAUSES OF ACTIONS, SUITS, JUDGMENTS AND EXPENSES (INCLUDING COURT COSTS, ATTORNEY'S FEES AND COST OF INVESTIGATION) OF ANY NATURE, KIND OR DESCRIPTION OF ANY PERSON OR ENTITY, DIRECTLY OR INDIRECTLY, ARISING OUT OF, CAUSED BY OR RESULTING FROM (IN WHOLE OR IN PART), ANY ACT OR OMISSION OF SECURED PARTY, OR ANYONE ACTING ON BEHALF OF SECURED PARTY, IN CONNECTION WITH THE COLLATERAL, INCLUDING WITHOUT LIMITATION ANY MARKET FLUCTUATIONS IN THE COLLATERAL AS A RESULT OF SECURED PARTY'S SALE OF, OR FAILURE TO SELL, THE INTERESTS AT ANY PARTICULAR TIME WHEN IT HAS THE RIGHT TO DO SO. THE FOREGOING INDEMNITY SHALL SURVIVE THE EXPIRATION OR EARLIER TERMINATION OF THIS AGREEMENT. 8.6 Right of Secured Party to Defend Action Affecting Security. Secured Party may, at the expense of Moadel, appear in and defend any action or proceeding at law or in equity purporting to affect Secured Party's Security Interest under this Agreement. 8.7 Right of Secured Party to Prevent or Remedy Default. If Moadel shall fail to perform any of the covenants, conditions and agreements required to be performed and observed by Moadel under any Other Agreement, or in respect of the Collateral (subject to any applicable default cure period), Secured Party (a) may but shall not be obligated to take any action Secured Party deems necessary or desirable to prevent or remedy any such default by Moadel or otherwise to protect the Security Interest, and (b) shall have the absolute and immediate right to take possession of the Collateral or any part thereof (to the extent Secured Party has not previously taken possession) to such extent and as often as the Secured Party, in its sole discretion, deems necessary or desirable in order to prevent or to cure any such default by Moadel, or otherwise to protect the security of this Agreement. Secured Party may advance or expend such sums of money for the account of Moadel as Secured Party in its sole discretion deems necessary for any such purpose. 8.8 Secured Party's Expenses. All reasonable advances, costs, expenses, charges and attorneys' fees which Secured Party may make, pay or incur under any provision of this Agreement for the protection of its security or for the enforcement of any of its rights hereunder, including, without limitation, in foreclosure proceedings commenced and subsequently abandoned. 8.9. Remedies. No right or remedy herein reserved to Secured Party is intended to be exclusive of any other right or remedy, but each and every such remedy shall be cumulative, not in lieu of, but in addition to any other rights or remedies given under this Agreement and all other security documents. Any and all of Secured Party's rights and remedies may be exercised from time to time and as often as such exercise as deemed necessary or desirable by Secured Party. 8.10 Moadel's Waivers. Moadel waives notice of the creation, advance, increase, existence, extension, or renewal of, and of any indulgence with respect to, the Obligations; waives notice of intent to accelerate, notice of acceleration, notice of intent to demand, presentment, demand, notice of dishonor, and protest; waives notice of the amount of the Obligations outstanding at any time, notice of any change in financial condition of any person liable for the Obligations or any part thereof, notice of any Event of Default, and all other notices respecting the Obligations; and agrees that maturity of the Obligations and any part thereof may be accelerated, extended, or renewed one or more times by Secured Party in its discretion, without notice to Debtor. 8.11 Other Parties and Other Collateral. No renewal or extension of or any other indulgence with respect to the Obligations or any part thereof, no release of any security, no release of any person (including any maker, endorser, guarantor, or surety) liable on the Obligations, no delay in enforcement of payment, and no delay or admission or lack of diligence or care in exercising any right or power with respect to the Obligations or any security therefor or guaranty thereof or under this Agreement shall in other manner impair or affect the rights of Secured Party under the law, under this Agreement, or under any other document or agreement pertaining to the other security for the Obligations, before foreclosing upon the Collateral for the purpose of paying the Obligations. Moadel waives any right to the benefit of or to require or control application of any other security or proceeds thereof, and Moadel agrees that Secured Party shall have no duty or obligation to Moadel to apply to the Obligations any such other security or proceeds thereof. ARTICLE IX MISCELLANEOUS 9.1 Terms Commercially Reasonable. The terms of this Agreement shall be deemed commercially reasonable within the meaning of the Texas UCC. 9.2 Notices. Any notices or demands required or permitted to be given hereunder shall be deemed sufficiently given if in writing and personally delivered or mailed (with all postage and charges prepaid), addressed to Secured Party or to Moadel their respective addresses set forth below, or at such other address as the above parties may from time to time designate by written notice to the other given in accordance with this Section 9.2. Any such notice, if personally delivered or transmitted by telex or telegram, shall be deemed to have been given on the date so delivered or transmitted or, if mailed, be deemed to have been given on the day after such notice is placed in the United States mail in accordance with this Section 9.2. Secured Party: 1301 Capital of Texas Hwy., Suite C-300 Austin, Travis County, Texas 78746 Attn: President with copy to: Timothy L. LaFrey, Esq. Akin, Gump, Strauss, Hauer & Feld, L.L.P. 1900 Frost Bank Plaza 816 Congress Avenue Austin, Texas 78701 Moadel: Ken Moadel, M.D. 16 East 53rd Street, 5th Floor New York, New York 10022 9.3 Parties Bound. Secured Party's rights under this Agreement and the Security Interest shall inure to the benefits of its successors and assigns, and in the event of any assignment or transfer of any of the Obligations or the Collateral, Secured Party thereafter shall be fully discharged from any responsibility with respect to the Collateral so assigned or transferred, but Secured Party shall retain all rights and powers hereby given with respect to any of the Obligations or Collateral not so assigned or transferred. All representations, warranties, and agreements of Moadel if more than one are joint and several, and all shall be binding upon the personal representatives, heirs, successors, and assigns of Moadel. 9.4 Waiver. No delay of Secured Party in exercising any power or right shall operate as a waiver thereof; nor shall any single or partial exercise of any power or right preclude other or further exercise thereof or the exercise of any other power or right. No waiver by Secured Party of any right hereunder of any default by Moadel shall be binding upon Secured Party unless in writing, and no failure by Secured Party to exercise any power or right hereunder or waiver of any default by Moadel shall operate as a waiver of any other or further exercise of such right or power of any further default. 9.5 Agreement Continuing. This Agreement shall constitute a continuing agreement, applying to all future as well as existing transactions, whether or not of the character contemplated at the date of this Agreement, and if all transactions between Secured Party and Moadel shall be closed at any time, shall be equally applicable to any new transactions thereafter. 9.6 Definitions. Unless the context indicated otherwise, definitions in the Texas Business and Commerce Code ("Texas UCC") apply to words and phrases in this Agreement; if Texas UCC definitions conflict, Chapter 9 definitions apply. 9.7 Miscellaneous. In this Agreement, whenever the context so requires, the neuter gender includes the masculine and feminine, and the singular number includes the plural and vice versa. The headings of paragraphs herein are inserted only for convenience and shall in no way define, describe or limit the scope of intent of any provisions of this Agreement. No change, amendment, modification, cancellation, or discharge of any provision of this Agreement shall be valid unless consented to in writing by Secured Party. 9.8 Assignment of Secured Party's Interest. Secured Party shall have the right to assign all or any portion of its rights in this Agreement without approval or consent. Moadel acknowledges that Secured Party intends to make a collateral assignment of its rights under this Agreement for the benefit of one or more of its lenders. Moadel may not assign this Agreement or any of its rights or obligations hereunder without the express prior written consent of Secured Party in each instance. 9.9 Applicable Laws. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS AND THE APPLICABLE LAWS OF THE UNITED STATES OF AMERICA. 9.10 ENTIRE AGREEMENT. THIS AGREEMENT, THE LOAN AGREEMENT, THE NOTE AND THE CONTRIBUTION AGREEMENT (AND THE OTHER AGREEMENTS CONTEMPLATED THEREIN) REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. 9.11 Counterparts. This Agreement may be executed in several counterparts, each of which shall constitute an original and all of which together shall constitute one and the same instrument. Any party hereto may execute this Agreement by signing any one counterpart. [Signature page follows] S-1 SIGNATURE PAGE TO ASSIGNMENT AND SECURITY AGREEMENT IN WITNESS WHEREOF, the undersigned has executed this consent as of the date first above written. SECURED PARTY: Prime Medical Services, Inc. ------------------------------------ Teena Belcik, Treasurer MOADEL: -------------------------------- Ken Moadel, M.D. EX-10.111 24 0024.txt EX 10.111 L.L.C. AGREEMENT-PRIME REFRACTIVE MGT. LIMITED LIABILITY COMPANY AGREEMENT OF PRIME REFRACTIVE MANAGEMENT, L.L.C. Organized under the Delaware Limited Liability Company Act (the "Act"). ARTICLE I NAME AND LOCATION Section 1.1. Name. The name of this limited liability company is Prime Refractive Management, L.L.C. (the "Company"). Section 1.2. Members. The only member of the Company upon the execution of this Limited Liability Company Agreement (this "Agreement") shall be Prime RVC, Inc., a Delaware corporation ("Prime"). For purposes of this Agreement, the "Members" shall include such named members and any new members admitted pursuant to the terms of this Agreement, but does not include any person or entity who has ceased to be a member in the Company. Section 1.3. Principal Office. The principal office of the Company shall be located in 1301 Capital of Texas Hwy., Suite C-300, Austin, Texas 78746-6550, or such other location as may be selected by the Members. Section 1.4. Registered Agent and Address. The name of the registered agent and the address of the registered office of the Company as set forth in the Certificate of Formation of the Company are: The Corporation Trust Company 1209 Orange Street Wilmington, Delaware 19801 Section 1.5. Other Offices. Other offices and other facilities for the transaction of business shall be located at such places as the Managers may from time to time determine. ARTICLE II MEMBERSHIP Section 2.1. Members' Interests. The "Membership Interest" of each Member is set forth on Exhibit A. Section 2.2. Admission to Membership. Subject to Prime's right to transfer its Membership Interest pursuant to Section 2.5 below, the admission of new Members shall be only by the unanimous vote of the Members. If new members are admitted, this Agreement shall be amended to reflect each Member's revised Membership Interest. Section 2.3. Property Rights. No Member shall have any right, title, or interest in any of the property or assets of the Company. Section 2.4. Liability of Members. No Member of the Company shall be personally liable for any debts, liabilities, or obligations of the Company, including under a judgment decree, or order of court. Section 2.5. Transferability of Membership. Except as provided below, Membership Interests in the Company are transferable only with the unanimous written consent of all Members. If such unanimous written consent is not obtained when required, the transferee shall be entitled to receive only the share of profits or other compensation by way of income and the return of contributions to which the transferor Member otherwise would be entitled (giving full effect to any contractual qualifications or restrictions on the transferor Member's right to receive distributions from the Company). Notwithstanding the foregoing, (i) the Membership Interests of Prime may be freely transferred, without consent, to any entity that is then owned or controlled, directly or indirectly, by Prime Medical Services, Inc., a Delaware corporation ("PMSI"), or its successor in interest, (ii) the Membership Interests of any Member may be freely assigned, pledged or otherwise transferred, without consent, to secure any debt, liability or obligation owed to Prime by the Company, any Member or any entity affiliated with the Company, and (iii) the Membership Interests of any Member may be freely assigned, pledged or otherwise transferred, without consent, in favor of the lender(s) under, or by the lender(s) as a result of the enforcement of any security interest arising pursuant to, that certain Senior Credit Facility of PMSI. Section 2.6. Resignation of Members. A Member may not withdraw from the Company except on the unanimous consent of the remaining Members. The terms of the Member's withdrawal shall be determined by agreement between the remaining Members and the withdrawing Member. ARTICLE III MEMBERS' MEETINGS Section 3.1. Time and Place of Meeting. All meetings of the Members shall be held at such time and at such place within or without the State of Delaware as shall be determined by the Managers. Section 3.2. Annual Meetings. In the absence of an earlier meeting at such time and place as the Managers shall specify, annual meetings of the Members shall be held at the principal office of the Company on the date which is thirty (30) days after the end of the Company's fiscal year if not a legal holiday, and if a legal holiday, then on the next full business day following, at 10:00 a.m., at which meeting the Members may transact such business as may properly be brought before the meeting. Section 3.3. Special Meetings. Special meetings of the Members may be called at any time by any Member. Business transacted at special meetings shall be confined to the purposes stated in the notice of the meeting. Section 3.4. Notice. Written or printed notice stating the place, day and hour of any Members' meeting, and, in the case of a special meeting, the purpose or purposes for which the meeting is called, shall be delivered not less than ten (10) days nor more than thirty (30) days before the date of the special meeting, either personally or by mail, by or at the direction of the person calling the meeting, to each Member entitled to vote at such meeting. If mailed, such notice shall be deemed to be delivered three (3) days after it is deposited in the United States mail, postage prepaid, to the Member at his address as it appears on the records of the Company at the time of mailing. Section 3.5. Quorum. Members present in person or represented by proxy, holding more than fifty percent (50%) of the total votes which may be cast at any meeting shall constitute a quorum at all meetings of the Members for the transaction of business. If, however, such quorum shall not be present or represented at any meeting of the Members, the Members entitled to vote, present in person or represented by proxy, shall have power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present or represented. When any adjourned meeting is reconvened and a quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally noticed. Once a quorum is constituted, the Members present or represented by proxy at a meeting may continue to transact business until adjournment, notwithstanding the subsequent withdrawal therefrom of such number of Members as to leave less than a quorum. Section 3.6. Voting. When a quorum is present at any meeting, the vote of the Members, whether present or represented by proxy at such meeting, holding more than fifty percent (50%) of the total votes which may be cast at any meeting shall be the act of the Members, unless the vote of a different number is required by the Act, the Certificate of Formation or this Agreement. Each Member shall be entitled to one vote for each percentage point represented by their Membership Interest. Fractional percentage point interests shall be entitled to a corresponding fractional vote. Section 3.7. Proxy. Every proxy must be executed in writing by the Member or by his duly authorized attorney-in-fact, and shall be filed with the Secretary of the Company prior to or at the time of the meeting. No proxy shall be valid after eleven (11) months from the date of its execution unless otherwise provided therein. Each proxy shall be revocable unless expressly provided therein to be irrevocable and unless otherwise made irrevocable by law. Section 3.8. Action by Written Consent. Any action required or permitted to be taken at any meeting of the Members may be taken without a meeting if a consent in writing, setting forth the action so taken, shall be signed by all of the Members entitled to vote with respect to the subject matter thereof, and such consent shall have the same force and effect as a unanimous vote of Members. Section 3.9. Meetings by Conference Telephone. Members may participate in and hold meetings of Members by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation in such a meeting shall constitute presence in person at such meeting, except where a person participates in the meeting for the express purpose of objecting to the transaction of any business on the ground that the meeting is not lawfully called or convened. ARTICLE IV MEMBERSHIP CAPITAL CONTRIBUTIONS Except for each Member's initial capital contribution made in connection with the formation of the Company, no capital contributions shall be required of any Member without the approval of all the Members to raise additional capital, and only then proportionately as to each Member. ARTICLE V DISTRIBUTION TO MEMBERS The Managers shall determine, in their sole discretion, the amount and timing of all distributions from the Company. Distributions shall be divided among the Members in accordance with their Membership Interests. Distributions in kind shall be made on the basis of agreed value as determined by the Members. In no event may the Company make a distribution to its Members if, immediately after giving effect to the distribution, all liabilities of the Company, other than liabilities to the Members with respect to their interests and liabilities for which the recourse of creditors is limited to specified property of the Company, exceed the fair value of the Company's assets; except that the fair value of property that is subject to liability for which recourse of creditors is limited, shall be included in the Company assets only to the extent that the fair value of the property exceeds that liability. Except as contemplated in this Article V, no distributions of cash or other assets of the Company shall be made to the Members in their capacity as owners of the Company. ARTICLE VI ALLOCATION OF NET PROFITS AND LOSSES FOR TAX PURPOSES For accounting and income tax purposes, all items of income, gain, loss, deduction, and credit of the Company for any taxable year shall be allocated among the Members in accordance with their respective Membership Interests, except as may be otherwise required by the Internal Revenue Code of 1986, as amended. ARTICLE VII DISSOLUTION AND WINDING UP Section 7.1. Dissolution. Notwithstanding any provision of the Act, the Company shall be dissolved only upon the first of the following to occur: (a) Forty (40) years from the date of filing the Certificate of Formation of the Company; (b) Written consent of all the then current Members to dissolution; or (c) The bankruptcy of a Member, unless there is at least one remaining Member and such Member or, if more than one remaining Member, all remaining Members agree to continue the Company and its business. Section 7.2. Winding Up. Unless the Company is continued pursuant to Section 7.1(c) of this Article VII., in the event of dissolution of the Company, the Managers (excluding any Manager(s) holding office pursuant to designation by a Member subject to bankruptcy proceedings) shall wind up the Company's affairs as soon as reasonably practicable. On the winding up of the Company, the Managers shall pay and/or transfer the assets of the Company in the following order: (a) In discharging liabilities (including loans from Members) and the expenses of concluding the Company's affairs; and (b) The balance, if any, shall be divided between the Members in accordance with the Members' Membership Interests. ARTICLE VIII MANAGERS Section 8.1. Selection of Managers. Management of the Company shall be vested in the Managers. Initially, the Company shall have three (3) Managers, being Kenneth S. Shifrin, Brad A. Hummel, and Cheryl L. Williams. The Members may, by unanimous vote of all Members, from time to time, change the number of Managers of the Company and, subject to the foregoing provisions of this Section, remove or add Managers accordingly. A Manager shall serve as a Manager until their resignation or removal pursuant to Section 8.2 or 8.3. Managers need not be residents of the State of Delaware or Members of the Company. Section 8.2. Resignations. Each Manager shall have the right to resign at any time upon written notice of such resignation to the Members. Unless otherwise specified in such written notice, the resignation shall take effect upon the receipt thereof, and acceptance of such resignation shall not be necessary to make same effective. Section 8.3. Removal of Managers. Any Manager may be removed, for or without cause, though his term may not have expired, by the vote of more than fifty percent (50%) of the Membership Interests of the Members. Section 8.4. General Powers. The business of the Company shall be managed by its Managers, which may, by the vote or written consent in accordance with this Agreement, exercise any and all powers of the Company and do any and all such lawful acts and things as are not by the Act, the Certificate of Formation or this Agreement directed or required to be exercised or done by the Members, including, but not limited to, contracting for or incurring on behalf of the Company debts, liabilities and other obligations, without the consent of any other person, except as otherwise provided herein. Section 8.5. Place of Meetings. The Managers of the Company may hold their meetings, both regular and special, either inside or outside the State of Delaware Section 8.6. Annual Meetings. The annual meeting of the Managers shall be held without further notice immediately following the annual meeting of the Members, and at the same place, unless by unanimous consent of the Managers that such time or place shall be changed. Section 8.7. Regular Meetings. Regular meetings of the Managers may be held without notice at such time and place as shall from time to time be determined by the Managers. Section 8.8. Special Meetings. Special meetings of the Managers may be called by any Manager on seven (7) days notice to each Manager, with such notice to be given personally, by mail or by telecopy, telegraph or mailgram. Section 8.9. Quorum and Voting. At all meetings of the Managers the presence of at least a majority of the number of Managers shall be necessary and sufficient to constitute a quorum for the transaction of business, and the affirmative vote of at least a majority of the Managers present at any meeting at which there is a quorum shall be the act of the Managers, except as may be otherwise specifically provided by the Act, the Certificate of Formation or this Agreement. If a quorum shall not be present at any meeting of Managers, the Managers present there may adjourn the meeting from time to time without notice other than announcement at the meeting, until a quorum shall be present. Section 8.10. Committees. The Managers may, by resolution passed by a majority of the Managers, designate committees, each committee to consist of two or more Managers, which committees shall have such power and authority and shall perform such functions as may be provided in such resolution. Such committee or committees shall have such name or names as may be designated by the Managers and shall keep regular minutes of their proceedings and report the same to the Managers when required. Section 8.11. Compensation of Managers. The Members shall have the authority to fix the compensation of Managers and such compensation may include expenses. Section 8.12. Action by Written Consent. Any action required or permitted to be taken at any meeting of the Managers or of any committee designated by the Managers may be taken without a meeting if written consent, setting forth the action so taken, is signed by all the Managers or of such committee, and such consent shall have the same force and effect as a unanimous vote at a meeting. Section 8.13. Meetings by Conference Telephone. Managers or members of any committee designated by the Managers may participate in and hold a meeting of the Managers or such committee by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation in such a meeting shall constitute presence in person at such meeting, except where a person participates in the meeting for the express purpose of objecting to the transaction of any business on the ground that the meeting is not lawfully called or convened. Section 8.14. Liability of Managers. No Manager of the Company shall be personally liable for any debts, liabilities, or obligations of the Company, including under a judgment, decree, or order of the court. Section 8.15. Specific Power of Managers. The Managers shall have the authority to enter into and execute all documents in relation to the formation of the Company including, but not limited to, issuance of the Certificate of Formation and this Agreement. ARTICLE IX NOTICES Section 9.1. Form of Notice. Whenever under the provisions of the Act, the Certificate of Formation or this Agreement notice is required to be given to any Manager or Member, and no provision is made as to how such notice shall be given, notice shall not be construed to mean personal notice only, but any such notice may also be given in writing, by mail, postage prepaid, addressed to such Manager or Member at such address as appears on the books of the Company, or by telecopy, telegraph or mailgram. Any notice required or permitted to be given by mail shall be deemed to be given three (3) days after it is deposited, postage prepaid, in the United States mail as aforesaid. Section 9.2. Waiver. Whenever any notice is required to be given to any Manager or Member of the Company under the provision of the Act, the Certificate of Formation or this Agreement, a waiver thereof in writing signed by the person or persons entitled to such notice, whether signed before or after the time stated in such waiver, shall be deemed equivalent to the giving of such notice. ARTICLE X OFFICERS Any Manager may also serve as an officer of the Company. The Managers may designate one or more persons who are not Managers of the Company to serve as officers and may designate the titles of all officers. The initial officers of the Company shall be: Kenneth S. Shifrin, Chairman of the Board; Joe Jenkins, M.D., President; Cheryl Williams, Vice President, Secretary and Chief Financial Officer; and Teena Belcik, Treasurer. Unless otherwise provided in a resolution of the Members or Managers the officers of the Company shall have the powers designated with respect to such offices under the Delaware Limited Liability Company Act, and any successor statute, as amended from time-to-time. ARTICLE XI INDEMNITY Section 11.1. Indemnification. The Company shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative, arbitrative or investigative, any appeal in such an action, suit or proceeding and any inquiry or investigation that could lead to such an action, suit or proceeding (whether or not by or in the right of the Company), by reason of the fact that such person is or was a manager, officer, employee or agent of the Company or is or was serving at the request of the Company as a director, manager, officer, partner, venturer, proprietor, trustee, employee, agent or similar functionary of another corporation, employee benefit plan, other enterprise, or other entity, against all judgments, penalties (including excise and similar taxes), fines, settlements and reasonable expenses (including attorneys' fees and court costs) actually and reasonably incurred by him in connection with such action, suit or proceeding to the fullest extent permitted by any applicable law, and such indemnity shall inure to the benefit of the heirs, executors and administrators of any such person so indemnified pursuant to this Article XI. The right to indemnification under this Article XI shall be a contract right and shall not be deemed exclusive of any other right to which those seeking indemnification may be entitled under any law, bylaw, agreement, vote of members or disinterested managers or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office. Any repeal or amendment of this Article XI by the Members of the Company or by changes in applicable law shall, to the extent permitted by applicable law, be prospective only, and shall not adversely affect the indemnification of any person who may be indemnified at the time of such repeal or amendment. Section 11.2. Indemnification Not Exclusive. The rights of indemnification and reimbursement provided for in this Article XI shall not be deemed exclusive of any other rights to which any such Manager, officer, employee or agent may be entitled under the Certificate of Formation, this Agreement or vote of Members, or as a matter of law or otherwise. ARTICLE XII MISCELLANEOUS Section 12.1. Fiscal Year. The fiscal year of the Company shall be fixed by resolution of the Managers. Section 12.2. Records. At the expense of the Company, the Managers shall maintain records and accounts of all operations of the Company. At a minimum, the Company shall keep at its principal place of business the following records: (a) A current list of the name and last known mailing address of each Member; (b) A current list of each Member's Membership Interest; (c) A copy of the Certificate of Formation and the Agreement of the Company, and all amendments thereto, together with executed copies of any powers of attorney; (d) Copies of the Federal, state, and local income tax returns and reports for the Company's six most recent tax years; and (e) Correct and complete books and records of account of the Company. Section 12.3. Seal. The Company may by resolution of the Managers adopt and have a seal, and said seal may be used by causing it or a facsimile thereof to be impressed or affixed or in any manner reproduced. Any officer of the Company shall have authority to affix the seal to any document requiring it. Section 12.4. Agents. Every Manager and Officer is an agent of the Company for the purpose of the business. The act of a Manager or Officer, including the execution in the name of the Company of any instrument for carrying on in the usual way the business of the Company, binds the Company. Section 12.5. Checks. All checks, drafts and orders for the payment of money, notes and other evidences of indebtedness issued in the name of the Company shall be signed by such officer, officers, agent or agents of the Company and in such manner as shall from time to time be determined by resolution of the Managers. In the absence of such determination by the Mangers, such instruments shall be signed by the Treasurer or the Secretary and countersigned by the President or a Vice President of the Company, if the Company has such officers. Section 12.6. Deposits. All funds of the Company shall be deposited from time to time to the credit of the Company in such banks, trust companies or other depositories as the Managers may select. Section 12.7. Annual Statement. The Managers shall present at each annual meeting, and, when called for by vote of the Members, at any special meeting of the Members, a full and clear statement of the business and condition of the Company. Section 12.8. Financial Statements. As soon as practicable after the end of each fiscal year of the Company, a balance sheet as at the end of such fiscal year, and a profit and loss statement for the period ended, shall be distributed to the Members, along with such tax information (including all information returns) as may be necessary for the preparation of each Member of its Federal, state and local income tax returns. The balance sheet and profit and loss statement referred to in the previous sentence may be as shown on the Company's federal income tax return. Section 12.9. Counterparts. This Agreement may be executed in several counterparts, each of which shall constitute an original and all of which together shall constitute one and the same instrument. Any party hereto may execute this Agreement by signing any one counterpart. ARTICLE XIII AMENDMENTS Section 13.1. Amendments. This Agreement may be altered, amended or repealed and new Agreements may be adopted, only in accordance with the provisions of Section 8.9, but otherwise at any regular meeting or at any special meeting called for that purpose, or by execution of a written consent in accordance with the provisions of Section 3.8. Section 13.2. When Agreement Silent. It is expressly recognized that when the Agreement is silent or in conflict with the requirements of the Act as to the manner of performing any Company function, the provisions of the Act shall control. [SIGNATURE PAGE FOLLOWS] 043838.0012 AUSTIN 151819 v3 S-1 SIGNATURE PAGE TO LIMITED LIABILITY COMPANY AGREEMENT OF PRIME REFRACTIVE MANAGEMENT, L.L.C. IN WITNESS WHEREOF, the undersigned Member hereby adopt this Agreement as the Agreement of the Company, effective as of the 31st day of January, 2000. PRIME RVC, INC. Cheryl L. Williams Vice President and Chief Financial Officer A-1 043838.0012 AUSTIN 151819 v3 EXHIBIT A OWNERSHIP INTERESTS Name Ownership Percentage Prime RVC, Inc. 100% EX-10.112 25 0025.txt EX 10.112 CERT. OF INC.- PRIME RVC DELAWARE CERTIFICATE OF INCORPORATION OF PRIME RVC, INC. THE UNDERSIGNED, acting as the incorporator of a corporation under and in accordance with the General Corporation Law of the State of Delaware, hereby adopts the following Certificate of Incorporation for such corporation: Article I The name of the corporation is Prime RVC, Inc. Article II The purpose for which the Corporation is organized is the transaction of any or all lawful acts and activities for which corporations may be incorporated under the General Corporation Law of the State of Delaware. Article III The aggregate number of shares of capital stock that the Corporation shall have authority to issue is ten thousand (10,000), par value $ $0.01 per share. All of such shares shall be common stock of the corporation. Unless specifically provided otherwise herein, the holders of such shares shall be entitled to one vote for each share held in any stockholder vote in which any of such holders is entitled to participate. The board of directors may determine the powers, designations, preferences and relative, participating, optional or other special rights, including voting rights, and the qualifications, limitations or restrictions thereof, of each class of capital stock and of each series within any such class and may increase or decrease the number of shares within each such class or series; provided, however, that the board of directors may not decrease the number of shares within a class or series to less than the number of shares within such class or series that are then issued and may not increase the number of shares within a series above the total number of authorized shares of the applicable class for which the powers, designations, preferences and rights have not otherwise been set forth herein. Article IV The street address of the initial registered office of the corporation is 1209 Orange Street, Wilmington, New Castle County, Delaware 19801, and the name of its initial registered agent at such address is The Corporation Trust Company. Article V The name and address of the incorporator is as follows: Name Address Timothy L. LaFrey Akin, Gump, Strauss, Hauer & Feld L.L.P. 816 Congress, Suite 1900 Austin, Texas 78701 Article VI The powers of the incorporator shall terminate upon the filing of this Certificate of Incorporation, and the following persons shall thereupon serve as directors of the Corporation until the first annual meeting of stockholders or until their successors are duly elected and qualified: Name Address Kenneth S. Shifrin 1301 Capital of Texas Highway, Suite C-300 Austin, Texas 78746 Brad A. Hummel 1301 Capital of Texas Highway, Suite C-300 Austin, Texas 78746 Cheryl Williams 1301 Capital of Texas Highway, Suite C-300 Austin, Texas 78746 Article VII To the fullest extent permitted by the General Corporation Law of the State of Delaware, as the same exists or may hereafter be amended, a director of the Corporation shall not be liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director. Any repeal or amendment of this Article VII by the stockholders of the Corporation or by changes in applicable law shall, to the extent permitted by applicable law, be prospective only, and shall not adversely affect any limitation on the personal liability of any director of the Corporation at the time of such repeal or amendment. Article VIII The Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative, arbitrative or investigative, any appeal in such an action, suit or proceeding and any inquiry or investigation that could lead to such an action, suit or proceeding (whether or not by or in the right of the Corporation), by reason of the fact that such person is or was a director, officer, employee or agent of the Corporation or is or was serving at the request of the Corporation as a director, officer, partner, venturer, proprietor, trustee, employee, agent or similar functionary of another Corporation, partnership, joint venture, sole proprietorship, trust, nonprofit entity, employee benefit plan or other enterprise, against all judgments, penalties (including excise and similar taxes), fines, settlements and expenses (including attorneys' fees and court costs) actually and reasonably incurred by such person in connection with such action, suit or proceeding to the fullest extent permitted by any applicable law, and such indemnity shall inure to the benefit of the heirs, executors and administrators of any such person so indemnified pursuant to this Article VIII. The right to indemnification under this Article VIII shall be a contract right and shall include, with respect to directors and officers, the right to be paid by the Corporation the expenses incurred in defending any such proceeding in advance of its disposition; provided, however, that, if the General Corporation Law of the State of Delaware requires, the payment of such expenses incurred by a director or officer in advance of the final disposition of a proceeding shall be made only upon delivery to the Corporation of an undertaking, by or on behalf of such director or officer, to repay all amounts so advanced if it shall ultimately be determined that such director or officer is not entitled to be indemnified under this Article VIII or otherwise. The Corporation may, by action of its board of directors, pay such expenses incurred by employees and agents of the Corporation upon such terms as the board of directors deems appropriate. The indemnification and advancement of expenses provided by, or granted pursuant to, this Article VIII shall not be deemed exclusive of any other right to which those seeking indemnification may be entitled under any law, bylaw, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in such person's official capacity and as to action in another capacity while holding such office. Any repeal or amendment of this Article VIII by the stockholders of the Corporation or by changes in applicable law shall, to the extent permitted by applicable law, be prospective only, and not adversely affect the indemnification of any person who may be indemnified at the time of such repeal or amendment. Article IX No contract or other transaction between the Corporation and any other Corporation and no other acts of the Corporation with relation to any other Corporation shall, in the absence of fraud, in any way be invalidated or otherwise affected by the fact that any one or more of the directors or officers of the Corporation are pecuniary or otherwise interested in, or are directors or officers of, such other Corporation. Any director or officer of the Corporation individually, or any firm or association of which any director or officer may be a member, may be a party to, or may be pecuniarily or otherwise interested in, any contract or transaction of the Corporation, provided that the fact that such person individually or as a member of such firm or association is such a party or is so interested shall be disclosed or shall have been known to the board of directors or a majority of such members thereof as shall be present at any meeting of the board of directors at which action upon any such contract or transaction shall be taken; and any director of the Corporation who is also a director or officer of such other Corporation or who is such a party or so interested may be counted in determining the existence of a quorum at any meeting of the board of directors during which any such contract or transaction shall be authorized and may vote thereat to authorize any such contract or transaction, with like force and effect as if such person were not such a director or officer of such other Corporation or not so interested. Any director of the Corporation may vote upon any contract or any other transaction between the Corporation and any subsidiary or affiliated corporation without regard to the fact that such person is also a director or officer of such subsidiary or affiliated corporation. Any contract, transaction or act of the Corporation or of the directors that shall be ratified at any annual meeting of the stockholders of the Corporation, or at any special meeting of the stockholders of the corporation, or at any special meeting called for such purpose, shall, insofar as permitted by law, be as valid and as binding as though ratified by every stockholder of the Corporation; provided, however, that any failure of the stockholders to approve or ratify any such contract, transaction or act, when and if submitted, shall not be deemed in any way to invalidate the same or deprive the Corporation, its directors, officers or employees, of its or their right to proceed with such contract, transaction or act. Subject to any express agreement that may from time to time be in effect, any stockholder, director or officer of the Corporation may carry on and conduct in such person's own right and for such person's own personal account, or as a partner in any partnership, or as a joint venturer in any joint venture, or as an officer, director or stockholder of any Corporation, or as a participant in any syndicate, pool, trust or association, any business that competes with the business of the Corporation and shall be free in all such capacities to make investments in any kind of property in which the Corporation may make investments. Article X Election of directors need not be by written ballot. Any director or the entire board of directors may be removed, with or without cause, by the holders of a majority of the shares then entitled to vote at an election of directors, except as otherwise provided by law. In furtherance and not in limitation of the powers conferred by statute, the board of directors of the Corporation is expressly authorized to adopt the original bylaws of the Corporation, to amend or repeal the bylaws or to adopt new bylaws, subject to any limitations that may be contained in such bylaws. [Signature page follows] S-1 043838.0012 AUSTIN 151829 v2 SIGNATURE PAGE TO CERTIFICATE OF INCORPORATION IN WITNESS WHEREOF, the incorporator of the Corporation hereto has caused this Certificate of Incorporation to be duly executed as of January 14, 2000. - -------------------------------------------------------------------------------- Timothy L. LaFrey, Incorporator EX-10.113 26 0026.txt EX 10.113 BYLAWS - PRIME RVC BYLAWS OF PRIME RVC, INC. a Delaware corporation (the "Company") (Adopted as of January 31, 2000) BYLAWS OF PRIME RVC, INC. Article I OFFICES Section 1.1 Registered Office. The registered office of the Company within the State of Delaware shall be located at either (i) the principal place of business of the Company in the State of Delaware or (ii) the office of the corporation or individual acting as the Company's registered agent in Delaware. Section 1.2 Additional Offices. The Company may, in addition to its registered office in the State of Delaware, have such other offices and places of business, both within and without the State of Delaware, as the Board of Directors of the Company (the "Board") may from time to time determine or as the business and affairs of the Company may require. Article II STOCKHOLDERS MEETINGS Section 2.1 Annual Meetings. Annual meetings of stockholders shall be held at a place and time on any weekday that is not a holiday and that is not more than 120 days after the end of the fiscal year of the Company as shall be designated by the Board and stated in the notice of the meeting, at which the stockholders shall elect the directors of the Company and transact such other business as may properly be brought before the meeting. Section 2.2 Special Meetings. Special meetings of the stockholders, for any purpose or purposes, unless otherwise prescribed by law or by the certificate of incorporation, (i) may be called by the chairman of the board or the president and (ii) shall be called by the president or secretary at the request in writing of a majority of the Board or stockholders owning capital stock of the Company representing a majority of the votes of all capital stock of the Company entitled to vote thereat. Such request of the Board or the stockholders shall state the purpose or purposes of the proposed meeting. Section 2.3 Notices. Written notice of each stockholders meeting stating the place, date and hour of the meeting shall be given to each stockholder entitled to vote thereat by or at the direction of the officer calling such meeting not less than ten nor more than sixty days before the date of the meeting. If said notice is for a stockholders meeting other than an annual meeting, it shall in addition state the purpose or purposes for which said meeting is called, and the business transacted at such meeting shall be limited to the matters so stated in said notice and any matters reasonably related thereto. Section 2.4 Quorum. The presence at a stockholders meeting of the holders, present in person or represented by proxy, of capital stock of the Company representing a majority of the votes of all capital stock of the Company entitled to vote thereat shall constitute a quorum at such meeting for the transaction of business except as otherwise provided by law, the certificate of incorporation or these Bylaws. If a quorum shall not be present or represented at any meeting of the stockholders, a majority of the stockholders entitled to vote thereat, present in person or represented by proxy, shall have power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present or represented. At such reconvened meeting at which a quorum shall be present or represented, any business may be transacted that might have been transacted at the meeting as originally notified. If the adjournment is for more than thirty days, or if after the adjournment a new record date is fixed for the reconvened meeting, a notice of said meeting shall be given to each stockholder entitled to vote at said meeting. The stockholders present at a duly convened meeting may continue to transact business until adjournment, notwithstanding the withdrawal of enough stockholders to leave less than a quorum. Section 2.5 Voting of Shares. ---------------- Section 2.5.1 Voting Lists. The officer or agent who has charge of the stock ledger of the Company shall prepare, at least ten days and no more than sixty days before every meeting of stockholders, a complete list of the stockholders entitled to vote thereat arranged in alphabetical order and showing the address and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any such stockholder, for any purpose germane to the meeting, during ordinary business hours for a period of at least ten (10) days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. The original stock transfer books shall be prima facie evidence as to who are the stockholders entitled to examine such list or transfer books or to vote at any meeting of stockholders. Failure to comply with the requirements of this section shall not affect the validity of any action taken at said meeting. Section 2.5.2 Votes Per Share. Unless otherwise provided in the certificate of incorporation, each stockholder shall be entitled to one vote in person or by proxy at every stockholders meeting for each share of capital stock held by such stockholder. Section 2.5.3 Proxies. Every stockholder entitled to vote at a meeting or to express consent or dissent without a meeting or a stockholder's duly authorized attorney-in-fact may authorize another person or persons to act for him by proxy. Each proxy shall be in writing, executed by the stockholder giving the proxy or by his duly authorized attorney. No proxy shall be voted on or after three years from its date, unless the proxy provides for a longer period. Unless and until voted, every proxy shall be revocable at the pleasure of the person who executed it, or his legal representatives or assigns, except in those cases where an irrevocable proxy permitted by statute has been given. Section 2.5.4 Required Vote. When a quorum is present at any meeting, the vote of the holders, present in person or represented by proxy, of capital stock of the Company representing a majority of the votes of all capital stock of the Company entitled to vote thereat shall decide any question brought before such meeting, unless the question is one upon which, by express provision of law or the certificate of incorporation or these Bylaws, a different vote is required, in which case such express provision shall govern and control the decision of such question. Section 2.5.5 Consents in Lieu of Meeting. Any action required to be or that may be taken at any meeting of stockholders may be taken without a meeting, without prior notice and without a vote, if a consent in writing, setting forth the action so taken, shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. Prompt, written notice of the action taken by means of any such consent which is other than unanimous shall be given to those stockholders who have not consented in writing. Article III DIRECTORS Section 3.1 Powers. The business of the Company shall be managed by or under the direction of the Board, which may exercise all such powers of the Company and do all such lawful acts and things as are not by law, the certificate of incorporation or these Bylaws directed or required to be exercised or done by the stockholders. Directors need not be stockholders or residents of the State of Delaware. Section 3.2 Number. The number of directors constituting the Board shall never be less than one and shall be determined by resolution of the Board. Section 3.3 Election. Directors shall be elected by the stockholders by plurality vote at an annual stockholders meeting as provided in the certificate of incorporation, except as hereinafter provided, and each director shall hold office until such director's successor has been duly elected and qualified or until such director's earlier resignation or removal. Section 3.4 Vacancies. Vacancies and newly-created directorships resulting from any increase in the authorized number of directors may be filled by a majority of the directors then in office, though less than a quorum, or by a sole remaining director, and the directors so chosen shall hold office until their successors are duly elected and qualified. If there are no directors in office, then an election of directors may be held in the manner provided by law. If, at the time of filling any vacancy or any newly-created directorship, the directors then in office shall constitute less than a majority of the whole Board (as constituted immediately prior to any such increase), the Court of Chancery may, upon application of any stockholder or stockholders holding at least ten percent of the total number of the shares at the time outstanding having the right to vote for such directors, summarily order an election to be held to fill any such vacancies or newly-created directorships, or to replace the directors chosen by the directors then in office. No decrease in the size of the Board shall serve to shorten the term of an incumbent director. Section 3.5 Removal. Unless otherwise restricted by law, the certificate of incorporation or these Bylaws, any director or the entire Board may be removed, with or without cause, by a majority vote of the shares entitled to vote at an election of directors, if notice of the intention to act upon such matter shall have been given in the notice calling such meeting. Section 3.6 Compensation. Unless otherwise restricted by the certificate of incorporation or these Bylaws, the Board shall have the authority to fix the compensation of directors. The directors may be reimbursed their expenses, if any, of attendance at each meeting of the Board and may be paid either a fixed sum for attendance at each meeting of the Board or a stated salary as director. No such payment shall preclude any director from serving the Company in any other capacity and receiving compensation therefor. Members of committees of the Board may be allowed like compensation for attending committee meetings. Article IV BOARD MEETINGS Section 4.1 Annual Meetings. The Board shall meet as soon as practicable after the adjournment of each annual stockholders meeting at the place of the stockholders meeting. No notice to the directors shall be necessary to legally convene this meeting, provided a quorum is present. Section 4.2 Regular Meetings. Regularly scheduled, periodic meetings of the Board may be held without notice at such times and places as shall from time to time be determined by resolution of the Board and communicated to all directors. Section 4.3 Special Meetings. Special meetings of the Board (i) may be called by the chairman of the board or president and (ii) shall be called by the president or secretary on the written request of two directors or the sole director, as the case may be. Notice of each special meeting of the Board shall be given, either personally or as hereinafter provided, to each director at least 24 hours before the meeting if such notice is delivered personally or by means of telephone, telegram, telex or facsimile transmission and delivery; two days before the meeting if such notice is delivered by a recognized express delivery service; and three days before the meeting if such notice is delivered through the United States mail. Any and all business that may be transacted at a regular meeting of the Board may be transacted at a special meeting. Except as may be otherwise expressly provided by law, the certificate of incorporation or these Bylaws, neither the business to be transacted at, nor the purpose of, any special meeting need be specified in the notice or waiver of notice of such meeting. Section 4.4 Quorum; Required Vote. A majority of the directors shall constitute a quorum for the transaction of business at any meeting of the Board, and the act of a majority of the directors present at any meeting at which there is a quorum shall be the act of the Board, except as may be otherwise specifically provided by law, the certificate of incorporation or these Bylaws. If a quorum shall not be present at any meeting, a majority of the directors present may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum is present. Section 4.5 Consent In Lieu of Meeting. Unless otherwise restricted by the certificate of incorporation or these Bylaws, any action required or permitted to be taken at any meeting of the Board or any committee thereof may be taken without a meeting, if all members of the Board or committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board or committee. Article V COMMITTEES OF DIRECTORS Section 5.1 Establishment; Standing Committees. The Board may by resolution establish, name or dissolve one or more committees, each committee to consist of one or more of the directors. Each committee shall keep regular minutes of its meetings and report the same to the Board when required. There may exist the following standing committees, which committees may have the following powers and authority: Section 5.1.1 Finance Committee. The Finance Committee, if any, shall from time to time meet to review the Company's consolidated operating and financial affairs, both with respect to the Company and all of its subsidiaries, and to report its findings and recommendations to the Board for final action. The Finance Committee shall not be empowered to approve any corporate action of whatever kind or nature, and the recommendations of the Finance Committee shall not be binding on the Board, except when, pursuant to the provisions of Section 5.2 hereof, such power and authority have been specifically delegated to such committee by the Board by resolution. In addition to the foregoing, the specific duties of the Finance Committee shall be determined by the Board by resolution. Section 5.1.2 Audit Committee. The Audit Committee, if any, shall from time to time, but no less than two times per year, meet to review and monitor the financial and cost accounting practices and procedures of the Company and all of its subsidiaries and to report its findings and recommendations to the Board for final action. The Audit Committee shall not be empowered to approve any corporate action of whatever kind or nature, and the recommendations of the Audit Committee shall not be binding on the Board, except when, pursuant to the provisions of Section 5.2 hereof, such power and authority have been specifically delegated to such committee by the Board by resolution. In addition to the foregoing, the specific duties of the Audit Committee shall be determined by the Board by resolution. Section 5.1.3 Compensation Committee. The Compensation Committee, if any, shall from time to time meet to review the various compensation plans, policies and practices of the Company and all of its subsidiaries and to report its findings and recommendations to the Board for final action. The Compensation Committee shall not be empowered to approve any corporate action of whatever kind or nature, and the recommendations of the Compensation Committee shall not be binding on the Board, except when, pursuant to the provisions of Section 5.2 hereof, such power and authority have been specifically delegated to such committee by the Board by resolution. In addition to the foregoing, the specific duties of the Compensation Committee shall be determined by the Board by resolution. Section 5.2 Available Powers. Any committee established pursuant to Section 5.1 hereof, including the Finance Committee, the Audit Committee and the Compensation Committee, but only to the extent provided in the resolution of the Board establishing such committee or otherwise delegating specific power and authority to such committee and as limited by law, the certificate of incorporation and these Bylaws, shall have and may exercise all of the powers and authority of the Board in the management of the business and affairs of the Company, and may authorize the seal of the Company to be affixed to all papers that may require it. Without limiting the foregoing, such committee may, but only to the extent authorized in the resolution or resolutions providing for the issuance of shares of stock adopted by the Board as provided in Section 151(a) of the General Corporation Law of the State of Delaware, fix any of the preferences or rights of such shares relating to dividends, redemption, dissolution, any distribution of assets of the Company or the conversion into, or the exchange of such shares for, shares of any other class or classes or any other series of the same or any other class or classes of stock of the Company. Section 5.3 Unavailable Powers. No committee of the Board shall have the power or authority to (1) approve or adopt, or recommend to the stockholders, any action or matter expressly required by the General Corporation Law of the State of Delaware to be submitted to stockholders for approval or (2) adopt, amend or repeal any provision in these Bylaws. Section 5.4 Alternate Members. The Board may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of such committee. In the absence or disqualification of a member of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not the member or members constitute a quorum, may unanimously appoint another member of the Board to act at the meeting in the place of any such absent or disqualified member. Section 5.5 Procedures. Time, place and notice, if any, of meetings of a committee shall be determined by such committee. At meetings of a committee, a majority of the number of members designated by the Board shall constitute a quorum for the transaction of business. The act of a majority of the members present at any meeting at which a quorum is present shall be the act of the committee, except as otherwise specifically provided by law, the certificate of incorporation or these Bylaws. If a quorum is not present at a meeting of a committee, the members present may adjourn the meeting from time to time, without notice other than an announcement at the meeting, until a quorum is present. Article VI OFFICERS Section 6.1 Elected Officers. The Board shall elect a chairman of the Board, a president, a treasurer and a secretary (collectively, the "Required Officers") having the respective duties enumerated below and may elect such other officers having the titles and duties set forth below that are not reserved for the Required Officers or such other titles and duties as the Board may by resolution from time to time establish: Section 6.1.1 Chairman of the Board. The chairman of the board, or in his or her absence, the president, shall preside when present at all meetings of the stockholders and the Board. The chairman of the board shall advise and counsel the president and other officers and shall exercise such powers and perform such duties as shall be assigned to or required of the chairman from time to time by the Board or these Bylaws. The chairman of the board may execute bonds, mortgages and other contracts requiring a seal under the seal of the Company, except where required or permitted by law to be otherwise signed and executed and except where the signing and execution thereof shall be expressly delegated by the Board to some other officer or agent of the Company. The chairman of the board may delegate all or any of his or her powers or duties to the president, if and to the extent deemed by the chairman of the board to be desirable or appropriate. Section 6.1.2 President. The president shall be the chief executive officer of the Company, shall have general and active management of the business of the Company and shall see that all orders and resolutions of the Board are carried into effect. In the absence of the chairman of the board or in the event of his or her inability or refusal to act, the president shall perform the duties and exercise the powers of the chairman of the board. Section 6.1.3 Vice Presidents. In the absence of the president or in the event of the president's inability or refusal to act, the vice president (or in the event there be more than one vice president, the vice presidents in the order designated by the Board, or in the absence of any designation, then in the order of their election or appointment) shall perform the duties of the president, and when so acting, shall have all the powers of and be subject to all the restrictions upon the president. The vice presidents shall perform such other duties and have such other powers as the Board may from time to time prescribe. Section 6.1.4 Secretary. The secretary shall attend all meetings of the stockholders, the Board and (as required) committees of the Board and shall record all the proceedings of such meetings in books to be kept for that purpose. The secretary shall give, or cause to be given, notice of all meetings of the stockholders and special meetings of the Board and shall perform such other duties as may be prescribed by the Board or the president. The secretary shall have custody of the corporate seal of the Company and the secretary, or an assistant secretary, shall have authority to affix the same to any instrument requiring it, and when so affixed, it may be attested by his or her signature or by the signature of such assistant secretary. The Board may give general authority to any other officer to affix the seal of the Company and to attest the affixing thereof by his or her signature. Section 6.1.5 Assistant Secretaries. The assistant secretary, or if there be more than one, the assistant secretaries in the order determined by the Board (or if there be no such determination, then in the order of their election or appointment) shall, in the absence of the secretary or in the event of his or her inability or refusal to act, perform the duties and exercise the powers of the secretary and shall perform such other duties and have such other powers as the Board may from time to time prescribe. Section 6.1.6 Treasurer. Unless the Board by resolution otherwise provides, the treasurer shall be the chief accounting and financial officer of the Company. The treasurer shall have the custody of the corporate funds and securities, shall keep full and accurate accounts of receipts and disbursements in books belonging to the Company and shall deposit all moneys and other valuable effects in the name and to the credit of the Company in such depositories as may be designated by the Board. The treasurer shall disburse the funds of the Company as may be ordered by the Board, taking proper vouchers for such disbursements, and shall render to the president and the Board, at its regular meetings, or when the Board so requires, an account of all his or her transactions as treasurer and of the financial condition of the Company. Section 6.1.7 Assistant Treasurers. The assistant treasurer, or if there shall be more than one, the assistant treasurers in the order determined by the Board (or if there be no such determination, then in the order of their election or appointment) shall, in the absence of the treasurer or in the event of his or her inability or refusal to act, perform the duties and exercise the powers of the treasurer and shall perform such other duties and have such other powers as the Board may from time to time prescribe. Section 6.1.8 Divisional Officers. Each division of the Company, if any, may have a president, secretary, treasurer or controller and one or more vice presidents, assistant secretaries, assistant treasurers and other assistant officers. Any number of such offices may be held by the same person. Such divisional officers will be appointed by, report to and serve at the pleasure of the Board and such other officers that the Board may place in authority over them. The officers of each division shall have such authority with respect to the business and affairs of that division as may be granted from time to time by the Board, and in the regular course of business of such division may sign contracts and other documents in the name of the division where so authorized; provided that in no case and under no circumstances shall an officer of one division have authority to bind any other division of the Company except as necessary in the pursuit of the normal and usual business of the division of which he or she is an officer. Section 6.2 Election. All elected officers shall serve until their successors are duly elected and qualified or until their earlier death, resignation or removal from office. Section 6.3 Appointed Officers. The Board may also appoint or delegate the power to appoint such other officers, assistant officers and agents, and may also remove such officers and agents or delegate the power to remove same, as it shall from time to time deem necessary, and the titles and duties of such appointed officers may be as described in Section 6.1 hereof for elected officers; provided that the officers and any officer possessing authority over or responsibility for any functions of the Board shall be elected officers. Section 6.4 Multiple Officeholders; Stockholder and Director Officers. Any number of offices may be held by the same person, unless the certificate of incorporation or these Bylaws otherwise provide. Officers need not be stockholders or residents of the State of Delaware. Officers, such as the chairman of the board, possessing authority over or responsibility for any function of the Board must be directors. Section 6.5 Compensation; Vacancies. The compensation of elected officers shall be set by the Board. The Board shall also fill any vacancy in an elected office. The compensation of appointed officers and the filling of vacancies in appointed offices may be delegated by the Board to the same extent as permitted by these Bylaws for the initial filling of such offices. Section 6.6 Additional Powers and Duties. In addition to the foregoing especially enumerated powers and duties, the several elected and appointed officers of the Company shall perform such other duties and exercise such further powers as may be provided by law, the certificate of incorporation or these Bylaws or as the Board may from time to time determine or as may be assigned to them by any competent committee or superior officer. Section 6.7 Removal. Any officer may be removed, either with or without cause, by a majority of the directors at the time in office, at any regular or special meeting of the Board. Article VII SHARE CERTIFICATES Section 7.1 Entitlement to Certificates. Every holder of the capital stock of the Company, unless and to the extent the Board by resolution provides that any or all classes or series of stock shall be uncertificated, shall be entitled to have a certificate, in such form as is approved by the Board and conforms with applicable law, certifying the number of shares owned by such holder. Section 7.2 Multiple Classes of Stock. If the Company shall be authorized to issue more than one class of capital stock or more than one series of any class, a statement of the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualification, limitations or restrictions of such preferences and/or rights shall, unless the Board shall by resolution provide that such class or series of stock shall be uncertificated, be set forth in full or summarized on the face or back of the certificate that the Company shall issue to represent such class or series of stock; provided that, to the extent allowed by law, in lieu of such statement, the face or back of such certificate may state that the Company will furnish a copy of such statement without charge to each requesting stockholder. Section 7.3 Signatures. Each certificate representing capital stock of the Company shall be signed by or in the name of the Company by (1) the chairman of the board, the president or a vice president; and (2) the treasurer, an assistant treasurer, the secretary or an assistant secretary of the Company. The signatures of the officers of the Company may be facsimiles. In case any officer who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to hold such office before such certificate is issued, it may be issued by the Company with the same effect as if he or she held such office on the date of issue. Section 7.4 Issuance and Payment. Subject to the provisions of law, the certificate of incorporation or these Bylaws, shares may be issued for such consideration and to such persons as the Board may determine from time to time. Shares may not be issued until the full amount of the consideration has been paid, unless upon the face or back of each certificate issued to represent any partly paid shares of capital stock there shall have been set forth the total amount of the consideration to be paid therefor and the amount paid thereon up to and including the time said certificate is issued. Section 7.5 Lost Certificates. The Board may direct a new certificate or certificates to be issued in place of any certificate or certificates theretofore issued by the Company alleged to have been lost, stolen or destroyed upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost, stolen or destroyed. When authorizing such issue of a new certificate or certificates, the Board may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed certificate or certificates, or such owner's legal representative, to advertise the same in such manner as it shall require and/or to give the Company a bond in such sum as it may direct as indemnity against any claim that may be made against the Company with respect to the certificate alleged to have been lost, stolen or destroyed. Section 7.6 Transfer of Stock. Upon surrender to the Company or its transfer agent, if any, of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignation or authority to transfer and of the payment of all taxes applicable to the transfer of said shares, the Company shall be obligated to issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction upon its books; provided, however, that the Company shall not be so obligated unless such transfer was made in compliance with applicable state and federal securities laws. Section 7.7 Registered Stockholders. The Company shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends, vote and be held liable for calls and assessments and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any person other than such registered owner, whether or not it shall have express or other notice thereof, except as otherwise provided by law. Article VIII INDEMNIFICATION Section 8.1 General. The Company shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Company), by reason of the fact that the person is or was a director, officer, employee or agent of the Company, or is or was serving at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by the person in connection with such action, suit or proceeding if the person acted in good faith and in a manner the person reasonably believed to be in or not opposed to the best interests of the Company, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his or her conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which the person reasonably believed to be in or not opposed to the best interests of the Company, and, with respect to any criminal action or proceeding, have reasonable cause to believe that his or her conduct was unlawful. Section 8.2 Actions by or in the Right of the Company. The Company shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the Company to procure a judgment in its favor by reason of the fact that the person is or was a director, officer, employee or agent of the Company, or is or was serving at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture or trust or other enterprise, against expenses (including attorneys' fees) actually and reasonably incurred by the person in connection with the defense or settlement of such action or suit if the person acted in good faith and in a manner the person reasonably believed to be in or not opposed to the best interests of the Company and except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the Company unless and only to the extent that the Court of Chancery or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court shall deem proper. Section 8.3 Indemnification Against Expenses. To the extent that a present or former director or officer of the Company has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in Sections 8.1 and 8.2 hereof, or in defense of any claim, issue or matter therein, such person shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by such person in connection therewith. Section 8.4 Board Determinations. Any indemnification under Sections 8.1 and 8.2 hereof (unless ordered by a court) shall be made by the Company only as authorized in the specific case upon a determination that indemnification of the present or former director, officer, employee or agent is proper in the circumstances because the person has met the applicable standard of conduct set forth in Sections 8.1 and 8.2 hereof. Such determination shall be made, with respect to a person who is a director or officer at the time of such determination, (1) by a majority vote of the directors who were not parties to such action, suit or proceeding, even though less than a quorum, or (2) by a committee of such directors designated by majority vote of such directors, even though less than a quorum, or (3) if there are no such disinterested directors or if such directors so direct, by independent legal counsel in a written opinion, or (4) by the stockholders. Section 8.5 Advancement of Expenses. Expenses including attorneys' fees incurred by an officer or director in defending a civil or criminal action, suit or proceeding may be paid by the Company in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of such director or officer to repay such amount if it shall ultimately be determined that such person is not entitled to be indemnified by the Company as authorized by law or in this section. Such expenses incurred by former directors and officers or other employees and agents may be so paid upon such terms and conditions, if any, as the Company deems appropriate. Section 8.6 Nonexclusive. The indemnification and advancement of expenses provided by, or granted pursuant to, this section shall not be deemed exclusive of any other rights to which any director, officer, employee or agent of the Company seeking indemnification or advancement of expenses may be entitled under any other bylaw, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in such person's official capacity and as to action in another capacity while holding such office, and shall, unless otherwise provided when authorized or ratified, continue as to a person who has ceased to be a director, officer, employee or agent of the Company and shall inure to the benefit of the heirs, executors and administrators of such a person. Section 8.7 Insurance. The Company may purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the Company, or is or was serving at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against any liability asserted against such person and incurred by such person in any such capacity or arising out of such person's status as such, whether or not the Company would have the power to indemnify such person against such liability under the provisions of applicable statutes, the certificate of incorporation or this section. Section 8.8 Certain Definitions. For purposes of this Section 8, (a) references to "the Company" shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger that, if its separate existence had continued, would have had power and authority to indemnify its directors, officers and employees or agents, so that any person who is or was a director, officer, employee or agent of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, shall stand in the same position under the provisions of this section with respect to the resulting or surviving corporation as such person would have with respect to such constituent corporation if its separate existence had continued; (b) references to "fines" shall include any excise taxes assessed on a person with respect to an employee benefit plan; and (c) references to "serving at the request of the Company" shall include any service as a director, officer, employee or agent of the Company that imposes duties on, or involves services by, such director, officer, employee or agent with respect to any employee benefit plan, its participants, or beneficiaries; and a person who acted in good faith and in a manner such person reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner "not opposed to the best interests of the Company" as referred to in this section. Section 8.9 Change in Governing Law. In the event of any amendment or addition to Section 145 of the General Corporation Law of the State of Delaware or the addition of any other section to such law that limits indemnification rights thereunder, the Company shall, to the extent permitted by the General Corporation Law of the State of Delaware, indemnify to the fullest extent authorized or permitted hereunder, any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (including an action by or in the right of the Company), by reason of the fact that he or she is or was a director, officer, employee or agent of the Company, or is or was serving at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him or her in connection with such action, suit or proceeding. Article IX INTERESTED DIRECTORS, OFFICERS AND STOCKHOLDERS Section 9.1 Validity. Any contract or other transaction between the Company and any of its directors, officers or stockholders (or any corporation or firm in which any of them are directly or indirectly interested) shall be valid for all purposes notwithstanding the presence of such director, officer or stockholder at the meeting authorizing such contract or transaction, or his or her participation or vote in such meeting or authorization. Section 9.2 Disclosure; Approval. The foregoing shall, however, apply only if the material facts of the relationship or the interests of each such director, officer or stockholder are known or disclosed: (A) to the Board and it nevertheless in good faith authorizes or ratifies the contract or transaction by a majority of the directors present, each such interested director to be counted in determining whether a quorum is present but not in calculating the majority necessary to carry the vote; or (B) to the stockholders and they nevertheless in good faith authorize or ratify the contract or transaction by a majority of the shares present, each such interested person to be counted for quorum and voting purposes. Section 9.3 Nonexclusive. This provision shall not be construed to invalidate any contract or transaction that would be valid in the absence of this provision. Article X MISCELLANEOUS Section 10.1 Place of Meetings. All stockholders, directors and committee meetings shall be held at such place or places, within or without the State of Delaware, as shall be designated from time to time by the Board or such committee and stated in the notices thereof. If no such place is so designated, said meetings shall be held at the principal business office of the Company. Section 10.2 Fixing Record Dates. ------------------- (a) In order that the Company may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, the Board may fix, in advance, a record date, which shall not precede the date upon which the resolution fixing the record date is adopted by the Board, and which record date shall not be more than sixty nor less than ten days prior to any such action. If no record date is fixed by the Board, the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day notice is given or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board may fix a new record date for the adjourned meeting. (b) In order that the Company may determine the stockholders entitled to consent to corporate action in writing without a meeting, the Board may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board, and which date shall not be more than ten days after the date upon which the resolution fixing the record date is adopted by the Board. If no record date has been fixed by the Board, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting, when no prior action by the Board is otherwise required, shall be the first date on which a signed written consent setting forth the action taken or proposed to be taken is delivered to the Company by delivery to its registered office in the State of Delaware, its principal place of business, or an officer or agent of the Company having custody of the book in which proceedings of meetings of stockholders are recorded. Delivery made to the Company's registered office shall be by hand or by certified or registered mail, return receipt requested. If no record date has been fixed by the Board and prior action by the Board is required, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting shall be at the close of business on the day on which the Board adopts the resolution taking such prior action. (c) In order that the Company may determine the stockholders entitled to receive payment of any dividend or other distribution or allotment of any rights or the stockholders entitled to exercise any rights in respect of any change, conversion or exchange of stock, or for the purpose of any other lawful action, the Board may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted, and which record date shall be not more than sixty days prior to such action. If no record date is fixed, the record date for determining stockholders for any such purpose shall be at the close of business on the day on which the Board adopts the resolution relating thereto. Section 10.3 Means of Giving Notice. Whenever under applicable law, the certificate of incorporation or these Bylaws, notice is required to be given to any director or stockholder, such notice may be given in writing and delivered personally, through the United States mail, by a recognized express delivery service (such as Federal Express) or by means of telegram, telex or facsimile transmission, addressed to such director or stockholder at his or her address or telex or facsimile transmission number, as the case may be, appearing on the records of the Company, with postage and fees thereon prepaid. Such notice shall be deemed to be given at the time when the same shall be deposited in the United States mail or with an express delivery service or when transmitted, as the case may be. Notice of any meeting of the Board may be given to a director by telephone and shall be deemed to be given when actually received by the director. Section 10.4 Waiver of Notice. Whenever any notice is required to be given under applicable law, the certificate of incorporation or these Bylaws, a written waiver of such notice, signed before or after the date of such meeting by the person or persons entitled to said notice, shall be deemed equivalent to such required notice. All such waivers shall be filed with the corporate records. Attendance at a meeting shall constitute a waiver of notice of such meeting, except where a person attends for the express purpose of objecting to the transaction of any business on the ground that the meeting is not lawfully called or convened. Section 10.5 Attendance via Communications Equipment. Unless otherwise restricted by applicable law, the certificate of incorporation or these Bylaws, members of the Board, any committee thereof or the stockholders may hold a meeting by means of conference telephone or other communications equipment by means of which all persons participating in the meeting can effectively communicate with each other. Such participation in a meeting shall constitute presence in person at the meeting, except where a person participates in the meeting for the express purpose of objecting to the transaction of any business on the ground that the meeting is not lawfully called or convened. Section 10.6 Dividends. Dividends on the capital stock of the Company, paid in cash, property or securities of the Company and as may be limited by applicable law and applicable provisions of the certificate of incorporation (if any), may be declared by the Board at any regular or special meeting. Section 10.7 Reserves. Before payment of any dividend, there may be set aside out of any funds of the Company available for dividends such sum or sums as the Board from time to time, in its absolute discretion, determines proper as a reserve or reserves to meet contingencies, for equalizing dividends, for repairing or maintaining any property of the Company or for such other purpose as the Board shall determine to be in the best interest of the Company; and the Board may modify or abolish any such reserve in the manner in which it was created. Section 10.8 Reports to Stockholders. The Board shall present at each annual meeting of stockholders, and at any special meeting of stockholders when called for by vote of the stockholders, a statement of the business and condition of the Company. Section 10.9 Contracts and Negotiable Instruments. Except as otherwise provided by applicable law or these Bylaws, any contract or other instrument relative to the business of the Company may be executed and delivered in the name of the Company and on its behalf by the chairman of the board or the president; and the Board may authorize any other officer or agent of the Company to enter into any contract or execute and deliver any contract in the name and on behalf of the Company, and such authority may be general or confined to specific instances as the Board may by resolution determine. All bills, notes, checks or other instruments for the payment of money shall be signed or countersigned by such officer, officers, agent or agents and in such manner as are permitted by these Bylaws and/or as, from time to time, may be prescribed by resolution (whether general or special) of the Board. Unless authorized so to do by these Bylaws or by the Board, no officer, agent or employee shall have any power or authority to bind the Company by any contract or engagement, or to pledge its credit, or to render it liable pecuniarily for any purpose or to any amount. Section 10.10 Fiscal Year. The fiscal year of the Company shall be fixed by resolution of the Board. Section 10.11 Seal. The seal of the Company shall be in such form as shall from time to time be adopted by the Board. The seal may be used by causing it or a facsimile thereof to be impressed, affixed or otherwise reproduced. Section 10.12 Books and Records. The Company shall keep correct and complete books and records of account and shall keep minutes of the proceedings of its stockholders, Board and committees and shall keep at its registered office or principal place of business, or at the office of its transfer agent or registrar, a record of its stockholders, giving the names and addresses of all stockholders and the number and class of the shares held by each. Section 10.13 Resignation. Any director, committee member, officer or agent may resign by giving written notice to the chairman of the board, the president or the secretary. The resignation shall take effect at the time specified therein, or immediately if no time is specified. Unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. Section 10.14 Surety Bonds. Such officers and agents of the Company (if any) as the president or the Board may direct, from time to time, shall be bonded for the faithful performance of their duties and for the restoration to the Company, in case of their death, resignation, retirement, disqualification or removal from office, of all books, papers, vouchers, money and other property of whatever kind in their possession or under their control belonging to the Company, in such amounts and by such surety companies as the president or the Board may determine. The premiums on such bonds shall be paid by the Company and the bonds so furnished shall be in the custody of the Secretary. Section 10.15 Proxies in Respect of Securities of Other Corporations. The chairman of the board, the president, any vice president or the secretary may from time to time appoint an attorney or attorneys or an agent or agents for the Company to exercise, in the name and on behalf of the Company, the powers and rights that the Company may have as the holder of stock or other securities in any other corporation to vote or consent in respect of such stock or other securities, and the chairman of the board, the president, any vice president or the secretary may instruct the person or persons so appointed as to the manner of exercising such powers and rights; and the chairman of the board, the president, any vice president or the secretary may execute or cause to be executed, in the name and on behalf of the Company and under its corporate seal or otherwise, all such written proxies or other instruments as he or she may deem necessary or proper in order that the Company may exercise such powers and rights. Section 10.16 Amendments. These Bylaws may be altered, amended, repealed or replaced by the stockholders, or by the Board when such power is conferred upon the Board by the certificate of incorporation, at any annual stockholders meeting or annual or regular meeting of the Board, or at any special meeting of the stockholders or of the Board if notice of such alteration, amendment, repeal or replacement is contained in the notice of such special meeting. If the power to adopt, amend, repeal or replace these Bylaws is conferred upon the Board by the certificate of incorporation, the power of the stockholders to so adopt, amend, repeal or replace these Bylaws shall not be divested or limited thereby. CERTIFICATE I certify that I am a duly elected and acting Vice President - Finance and Chief Financial Officer of Prime RVC, Inc. and that the foregoing Bylaws constitute the Bylaws of the Corporation. These Bylaws were duly adopted by Unanimous Written Consent of the Board of Directors in Lieu of Organization Meeting dated as of January 31, 2000. DATED AS OF: January 31, 2000. By: ______________________________________ Cheryl L. Williams Vice President - Finance and Chief Financial Officer EX-10.114 27 0027.txt EX 10.114 INTERCO. AGREEMENT-PRIME RVC INTERCOMPANY AGREEMENT This Intercompany Agreement (this "Agreement"), dated as of April 1, 2000 (the "Effective Date"), is by and between Prime Medical Operating, Inc., a Delaware corporation ("PMOI"), Prime RVC, Inc., a Delaware corporation ("Prime RVC"), Prime Refractive Management, L.L.C., a Delaware limited liability company ("Prime Management"), and Prime/BDR Acquisition, L.L.C., a Delaware limited liability company ("Prime BDR"). Preliminary Statements All of the parties to this Agreement are wholly or partially owned, direct or indirect subsidiaries of Prime Medical Services, Inc., a Delaware corporation ("PMSI"). PMSI desires to restructure its direct or indirect ownership of certain of the parties to this Agreement pursuant to (a) a transfer by Prime BDR to PMOI of all of Prime BDR's ownership interest in Horizon, Inc., a Nevada corporation ("Horizon"), and (b) a transfer by PMOI to Prime RVC of all of PMOI's ownership interest in Prime/BDEC Acquisition, L.L.C., a Delaware limited liability company ("Prime BDEC") and all of PMOI's ownership interest in Horizon (collectively, the "Transfers"). In connection with the Transfers, the parties mutually desire to (a) terminate that certain loan agreement, dated as of September 1, 1999, between PMOI and Prime BDR (the "Loan Agreement"), (b) cancel any and all promissory notes or other evidences of indebtedness arising solely under the Loan Agreement, (c) terminate any and all security agreements, financing statements and similar agreements that are related solely to the Loan Agreement, (d) after completing the foregoing, have Prime BDR assign to Prime RVC all of Prime BDR's contract rights arising under contracts entered into in connection with Prime BDR's acquisition of an interest in Horizon (the "Horizon Contracts"), in return for Prime RVC's assumption of all liabilities and obligations of Prime BDR under the Horizon Contracts, (e) after completing the foregoing, dissolve Prime BDR, and distribute all of its assets, if any, to Prime RVC, (f) have Prime Management cancel that certain Promissory Note, dated March 1, 2000, originally executed by Prime Refractive, L.L.C., a Delaware limited liability company, and subsequently assumed by Prime RVC, in the principal amount of $5,828,724 (the "Promissory Note"), so that Prime RVC shall thereupon be released from any obligation under the Promissory Note. Statement of Agreement NOW, THEREFORE, in consideration of the premises and mutual covenants contained herein and for other good, valuable and binding consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound hereby, agree as follows: ARTICLE I. ASSIGNMENTS Section 1.1 Horizon Interest. Prime BDR hereby conveys, transfers and assigns to PMOI, and PMOI hereby acquires from Prime BDR, all right, title and interest in and to any and all rights of ownership (or rights to acquire ownership) of Horizon (the "Horizon Interest"), such that on the Effective Date, immediately prior to the transfers described in Section 1.3, PMOI shall own sole, exclusive and unencumbered title to sixty percent (60%) of Horizon's outstanding capital stock (after giving effect to any and all rights or securities exercisable or exchangeable for, or convertible into, ownership interests of Horizon). Section 1.2 Prime BDEC Interest. As allowed by Section 2.5(i) of Prime BDEC's Limited Liability Company Agreement, PMOI hereby conveys, transfers and assigns to Prime RVC, and Prime RVC hereby acquires from PMOI, all right, title and interest in and to any and all rights of ownership (or rights to acquire ownership) of Prime BDEC, such that after the Effective Date, Prime RVC shall own sole, exclusive and unencumbered title to sixty percent (60%) of Prime BDEC (after giving effect to any and all rights or securities exercisable or exchangeable for, or convertible into, ownership interests of Prime BDEC). Section 1.3 Subsequent Transfer of Horizon Interest. Immediately upon its receipt of the Horizon Interest pursuant to Section 1.1, PMOI hereby conveys, transfers and assigns to Prime RVC, and Prime RVC hereby acquires from PMOI, all right, title and interest in and to the Horizon Interest. Section 1.4 Horizon Contracts. Prime BDR hereby assigns to Prime RVC all of Prime BDR's right, title and interest in and to each of the Horizon Contracts, and any rights arising thereunder (including, without limitation, rights to indemnification). Prime RVC hereby assumes all of Prime BDR's obligations and liabilities arising under the Horizon Contracts. ARTICLE II. AGREEMENTS RELATED TO FINANCIAL RELATIONSHIPS Section 2.1 Termination of Loan Agreement. Prime BDR, PMOI and (as applicable) Prime RVC hereby terminate the Loan Agreement, cancel any and all promissory notes or other evidences of indebtedness arising under the Loan Agreement, and terminate any and all security agreements, financing statements and similar agreements between or by Prime BDR, Prime RVC and/or PMOI that are related to the Loan Agreement. Section 2.2 Cancellation of Promissory Note. Prime Management hereby cancels the Promissory Note and releases Prime RVC from all obligations thereunder, regardless of whether such obligations were owed on or before the Effective Date. ARTICLE III. DISSOLUTION OF pRIME BDR AND DISTRIBUTION OF ASSETS PMOI, in its capacity as the sole member of Prime BDR, hereby consents to the dissolution of Prime BDR and the distribution of its assets upon dissolution, if any, to Prime RVC. PMOI further authorizes and directs the managers of Prime BDR to execute such documents and take such other actions as may be necessary to give full effect to the provisions of this ARTICLE. ARTICLE IV. MISCELLANEOUS This Agreement shall be binding upon, and shall inure to the benefit of, the parties hereto and their respective heirs, executors, administrators, successors and permitted assigns. This Agreement may be executed in multiple counterparts, each of which shall be an original, but all of which shall constitute one and the same instrument. There are no third-party beneficiaries to this Agreement. This Agreement may not be modified, altered or amended except by a writing signed by all of the parties hereto. [Signature page follows] S-1 SIGNATURE PAGE TO INTERCOMPANY AGREEMENT IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered on the day and year first above written. PMOI: PRIME MEDICAL OPERATING, INC. Teena Belcik, Treasurer PRIME RVC: PRIME RVC, INC. Teena Belcik, Treasurer PRIME MANAGEMENT: PRIME REFRACTIVE MANAGEMENT, L.L.C. Teena Belcik, Treasurer PRIME BDR: PRIME/BDR ACQUISITION, L.L.C. Teena Belcik, signing as a manager of Prime BDR, and on behalf of PMOI as sole member of Prime BDR EX-10.115 28 0028.txt EX 10.115 1ST RESTATED L.L.C.-PRIME/BDEC FIRST AMENDED AND RESTATED LIMITED LIABILITY COMPANY AGREEMENT OF PRIME/BDEC ACQUISITION, L.L.C. Organized under the Delaware Limited Liability Company Act (the "Act"). This First Amended and Restated Limited Liability Company Agreement (this "Agreement") is intended to amend and replace in its entirety that certain Limited Liability Company Agreement of Prime/BDEC Acquisition, L.L.C. dated as of September 1, 1999 between Prime RVC, Inc., a Delaware corporation (as successor in interest to Prime Medical Operating, Inc., a Delaware corporation) ("Prime") and Barnet Dulaney Eye Center, P.L.L.C., an Arizona professional limited liability company ("BDEC") (the "Original Agreement"). The parties to this Agreement acknowledge and agree that the amendments effected by this Agreement do not imply or constitute an agreement by the parties to amend any other agreement to which any of them are parties, and any amendment or modification or any such other agreement must be done strictly in accordance with the terms of that other agreement. This Agreement is to be construed without reference to the Original Agreement. ARTICLE I. NAME AND LOCATION Section 1.1. Name. The name of this limited liability company is Prime/BDEC Acquisition, L.L.C. (the "Company"). Section 1.2. Members. The only members of the Company upon the execution of this Limited Liability Company Agreement (this "Agreement") shall be Prime and BDEC. For purposes of this Agreement, the "Members" shall include such named members and any new members admitted pursuant to the terms of this Agreement, but does not include any person or entity who has ceased to be a member in the Company. Section 1.3. Principal Office. The principal office of the Company shall be located in 1301 Capital of Texas Hwy., Suite C-300, Austin, Texas 78746-6550, or such other location as may be selected by the Members. Section 1.4. Registered Agent and Address. The name of the registered agent and the address of the registered office of the Company as set forth in the Certificate of Formation of the Company are: The Corporation Trust Company 1209 Orange Street Wilmington, Delaware 19801 Section 1.5. Other Offices. Other offices and other facilities for the transaction of business shall be located at such places as the Managers may from time to time determine. Section 1.6 Contribution Agreement. The Company was initially formed with a single member, BDEC, for the purpose of consummating the transactions contemplated by that certain Contribution Agreement dated effective September 1, 1999, by and among Prime, Prime Medical Services, Inc., a Delaware corporation ("PMSI"), BDEC, the Company, Prime/BDR Acquisition, L.L.C., a Delaware limited liability company, LASIK Investors, L.L.C., a Delaware limited liability company, David D. Dulaney, M.D., Ronald W. Barnet, M.D., and Mark Rosenberg (the "Contribution Agreement"). The parties have executed this Agreement upon consummation of the transactions contemplated by the Contribution Agreement. This agreement supercedes and replaces any prior membership agreement or other governing or organizational document of the Company. ARTICLE II. MEMBERSHIP Section 2.1. Members' Interests. The "Membership Interest" of each Member is set forth on Exhibit A. Section 2.2. Admission to Membership. The admission of new Members shall be only by the vote of the Managers pursuant to Section 8.9 hereof. If new Members are admitted, this Agreement shall be amended to reflect each Member's revised Membership Interest. Section 2.3. Property Rights. No Member shall have any right, title, or interest in any of the property or assets of the Company. Section 2.4. Liability of Members. No Member of the Company shall be personally liable for any debts, liabilities, or obligations of the Company, including under a judgment decree, or order of court. Section 2.5. Transferability of Membership. Except as provided below, Membership Interests in the Company are transferable only with the unanimous written consent of all Members. If such unanimous written consent is not obtained when required, the transferee shall be entitled to receive only the share of profits or other compensation by way of income and the return of contributions to which the transferor Member otherwise would be entitled. Notwithstanding the foregoing, (i) the Membership Interests of Prime may be freely transferred, without consent, to any entity that is then owned or controlled, directly or indirectly, by Prime Medical Services, Inc., a Delaware corporation (or its successor in interest), (ii) the Membership Interests of any Member may be freely assigned, pledged or otherwise transferred, without consent, to secure any debt, liability or obligation owed to Prime by the Company, any Member or any entity affiliated with the Company, (iii) the Membership Interests of any Member may be freely assigned, pledged or otherwise transferred, without consent, in favor of the Lender(s) under, or by the Lender(s) as a result of the enforcement of any security interest arising pursuant to, that certain Senior Credit Facility (the "Credit Facility") of PMSI, and (iv) the pledge by BDEC (pursuant to Section 6.3 of the Contribution Agreement) of its right to receive distributions from the Company in respect of its Membership Interest shall not be deemed to violate any provision of this Agreement. Section 2.6. Resignation of Members. A Member may not withdraw from the Company except on the unanimous consent of the remaining Members. The terms of the Members withdrawal shall be determined by agreement between the remaining Members and the withdrawing Member. ARTICLE III. MEMBERS' MEETINGS Section 3.1. Time and Place of Meeting. All meetings of the Members shall be held at such time and at such place within or without the State of Delaware as shall be determined by the Managers. Section 3.2. Annual Meetings. In the absence of an earlier meeting at such time and place as the Managers shall specify, annual meetings of the Members shall be held at the principal office of the Company on the date which is thirty (30) days after the end of the Company's fiscal year if not a legal holiday, and if a legal holiday, then on the next full business day following, at 10:00 a.m., at which meeting the Members may transact such business as may properly be brought before the meeting. Section 3.3. Special Meetings. Special meetings of the Members may be called at any time by any Member. Business transacted at special meetings shall be confined to the purposes stated in the notice of the meeting. Section 3.4. Notice. Written or printed notice stating the place, day and hour of any Members' meeting, and, in the case of a special meeting, the purpose or purposes for which the meeting is called, shall be delivered not less than ten (10) days nor more than thirty (30) days before the date of the special meeting, either personally or by mail, by or at the direction of the person calling the meeting, to each Member entitled to vote at such meeting. If mailed, such notice shall be deemed to be delivered three (3) days after it is deposited in the United States mail, postage prepaid, to the Member at his address as it appears on the records of the Company at the time of mailing. Section 3.5. Quorum. Members present in person or represented by proxy, holding more than fifty percent (50%) of the total votes which may be cast at any meeting shall constitute a quorum at all meetings of the Members for the transaction of business. If, however, such quorum shall not be present or represented at any meeting of the Members, the Members entitled to vote, present in person or represented by proxy, shall have power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present or represented. When any adjourned meeting is reconvened and a quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally noticed. Once a quorum is constituted, the Members present or represented by proxy at a meeting may continue to transact business until adjournment, notwithstanding the subsequent withdrawal therefrom of such number of Members as to leave less than a quorum. Section 3.6. Voting. Members shall only be required to vote in instances or with respect to matters where member voting is required by applicable law or to the extent expressly contemplated in Section 8.1. With respect to any act or transaction that requires a vote by the Members under applicable law, the affirmative vote of not less than four (4) of the Managers shall also be required in order to approve the act or transaction, in each instance. Subject to the foregoing, when a quorum is present at any meeting, the vote of the Members, whether present or represented by proxy at such meeting, holding more than fifty percent (50%) of the total votes which may be cast at any meeting shall be the act of the Members, unless the vote of a different number is required by the Act, the Certificate of Formation or this Limited Liability Company Agreement. Each Member shall be entitled to one vote for each percentage point represented by their Membership Interest. Fractional percentage point interests shall be entitled to a corresponding fractional vote. The provisions of this Section shall not interfere with the provisions of Section 8.9 relating to acts or transactions requiring the written approval of four (4) or more Managers. Each Member acknowledges and agrees that, in the event of any exercise of the Repurchase Option, as defined in the Contribution Agreement, each Member will vote its entire Membership Interest in favor of transferring the Company's assets pursuant to the Repurchase Option. Section 3.7. Proxy. Every proxy must be executed in writing by the Member or by his duly authorized attorney-in-fact, and shall be filed with the Secretary of the Company prior to or at the time of the meeting. No proxy shall be valid after eleven (11) months from the date of its execution unless otherwise provided therein. Each proxy shall be revocable unless expressly provided therein to be irrevocable and unless otherwise made irrevocable by law. Section 3.8. Action by Written Consent. Any action required or permitted to be taken at any meeting of the Members may be taken without a meeting if a consent in writing, setting forth the action so taken, shall be signed by all of the Members entitled to vote with respect to the subject matter thereof, and such consent shall have the same force and effect as a unanimous vote of Members. Section 3.9. Meetings by Conference Telephone. Members may participate in and hold meetings of Members by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation in such a meeting shall constitute presence in person at such meeting, except where a person participates in the meeting for the express purpose of objecting to the transaction of any business on the ground that the meeting is not lawfully called or convened. ARTICLE IV. MEMBERSHIP CAPITAL CONTRIBUTIONS Except for each Member's initial capital contribution made in connection with the formation of the Company, no capital contributions shall be required of any Member without the approval of all the Members to raise additional capital, and only then proportionately as to each Member. ARTICLE V. DISTRIBUTION TO MEMBERS At the end of each calendar quarter, subject only to the qualifications and limitations set forth below, the Company shall distribute its available excess earnings to its members, to be divided among them in accordance with their Membership Interests. Distributions in kind shall be made on the basis of agreed value as determined by the Members. Notwithstanding the foregoing, the Company may not make a distribution to its Members to the extent that, immediately after giving effect to the distribution, all liabilities of the Company, other than liabilities to the Members with respect to their interests and liabilities for which the recourse of creditors is limited to specified property of the Company, exceed the fair value of the Company assets; except that the fair value of property that is subject to liability for which recourse of creditors is limited, shall be included in the Company assets only to the extent that the fair value of the property exceeds that liability. ARTICLE VI. ALLOCATION OF NET PROFITS AND LOSSES FOR TAX PURPOSES For accounting and income tax purposes, all items of income, gain, loss, deduction, and credit of the Company for any taxable year shall be allocated among the Members in accordance with their respective Membership Interests, except as may be otherwise required by the Internal Revenue Code of 1986, as amended. ARTICLE VII. DISSOLUTION AND WINDING UP Section 7.1. Dissolution. Notwithstanding any provision of the Act, the Company shall be dissolved only upon the first of the following to occur: (a) Forty (40) years from the date of filing the Certificate of Formation of the Company; (b) Written consent of all the then current Members to dissolution; (c) The bankruptcy of a Member, unless there is at least one remaining Member and such Member or, if more than one remaining Member, all remaining Members agree to continue the Company and its business. Section 7.2. Winding Up. Unless the Company is continued pursuant to Section 7.1(c) of this Article VII., in the event of dissolution of the Company, the Managers (excluding any Manager(s) holding office pursuant to designation by a Member subject to bankruptcy proceedings) shall wind up the Company's affairs as soon as reasonably practicable. On the winding up of the Company, the Managers shall pay and/or transfer the assets of the Company in the following order: (a) In discharging liabilities (including loans from Members) and the expenses of concluding the Company's affairs; and (b) The balance, if any, shall be divided between the Members in accordance with the Members' Membership Interests. ARTICLE VIII. MANAGERS Section 8.1. Selection of Managers. Management of the Company shall be vested in the Managers. The Company shall have five (5) Managers, being Ken Shifrin, Teena Belcik, Brad Hummel (as the initial Manager designees of Prime), David D. Dulaney, M.D. and Ronald W. Barnet, M.D., (as the initial Manager designees of BDEC). Thereafter, for so long as there are five (5) Managers, (a) Prime shall be entitled to designate three (3) of the Managers; and (b) BDEC shall be entitled to designate the remaining two (2) of the Managers. Notwithstanding the foregoing, a Member shall not be entitled to designate any Manager unless its Membership Interest: (x) has not (other than as allowed under Section 2.5 of this Agreement) been transferred, repurchased, assigned, pledged, hypothecated or in any way alienated; and (y) equals or exceeds forty percent (40%) of the aggregate Membership Interests. The Members may, by unanimous vote of all Members, from time to time, change the number of Managers of the Company and remove or add Managers accordingly. A Manager shall serve as a Manager until their resignation or removal pursuant to Section 8.2 or 8.3 of this Article VIII. Managers need not be residents of the State of Delaware or Members of the Company. Section 8.2. Resignations. Each Manager shall have the right to resign at any time upon written notice of such resignation to the Members. Unless otherwise specified in such written notice, the resignation shall take effect upon the receipt thereof, and acceptance of such resignation shall not be necessary to make same effective. The Member who designated a resigning manager shall be entitled to designate the successor thereto and all Members agree to take such action as may be necessary to cause the election of all such successor Managers. Section 8.3. Removal of Managers. Any Manager may be removed, for or without cause, at any time, but only by the Member who designated such Manager, upon the written notice to all Members. The Member who designated such removed Manager shall be entitled to designate the successor thereto and all Members agree to take such action as may be necessary to cause the election of all such successor Managers. Section 8.4. General Powers. The business of the Company shall be managed by its Managers, which may, by the vote or written consent in accordance with this Agreement, exercise any and all powers of the Company and do any and all such lawful acts and things as are not by the Act, the Certificate of Formation or this Limited Liability Company Agreement directed or required to be exercised or done by the Members, including, but not limited to, contracting for or incurring on behalf of the Company debts, liabilities and other obligations, without the consent of any other person, except as otherwise provided herein. Section 8.5. Place of Meetings. The Managers of the Company may hold their meetings, both regular and special, either within or without the State of Delaware. Section 8.6. Annual Meetings. The annual meeting of the Managers shall be held without further notice immediately following the annual meeting of the Members, and at the same place, unless by unanimous consent of the Managers that such time or place shall be changed. Section 8.7. Regular Meetings. Regular meetings of the Managers may be held without notice at such time and place as shall from time to time be determined by the Managers. Section 8.8. Special Meetings. Special meetings of the Mangers may be called by any Manager on seven (7) days notice to each Manager, with such notice to be given personally, by mail or by telecopy, telegraph or mailgram. Section 8.9. Quorum and Voting. At all meetings of the Managers the presence of at least four (4) Managers shall be necessary and sufficient to constitute a quorum for the transaction of business, and the affirmative vote of at least a majority of the Managers present at any meeting at which there is a quorum shall be the act of the Managers, except as may be otherwise specifically provided by the Act, the Contribution Agreement, the Certificate of Formation or this Agreement. If a quorum shall not be present at any meeting of Managers, the Managers present there may adjourn the meeting from time to time without notice other than announcement at the meeting, until a quorum shall be present. Notwithstanding any other Member or Manager voting or quorum provisions contained in this Agreement, the following acts or transactions by, or involving, the Company shall require the prior written approval of four (4) Managers (unless and to the extent a particular act or transaction is expressly required of the Company pursuant to the terms and provisions of the Contribution Agreement or any Transaction Document): (a) Any amendment to the Company's Certificate of Formation or this Agreement. (b) Mergers, consolidations or combinations of the Company with another limited liability company or other entity. (c) Purchase by the Company of any interest in the Company, irrespective of the source of such interest. (d) Disposition, sale, assignment or other transfer by the Company of any interest it owns in the Company, except that such interest may be extinguished without the approval required under this Article. (e) Issuance of any interest in the Company to any party. (f) Dissolving, liquidating, or filing bankruptcy or seeking relief under any debtor relief law. (g) Establishing or changing the compensation for officers or employees of the Company who are also officers, employees, attorneys or consultants to Prime or any affiliate, parent company or subsidiary of Prime. (h) Sale, lease or other transfer of all or substantially all of the Company's assets, or any assets other than in the ordinary course of the Company's business. (i) Engaging in any act or transaction not in the ordinary course of the Company's business. (j) Doing any business other than the conduct of the Business (as defined in the Contribution Agreement) or causing a change in the nature of the business or the legal name of the Company. (k) Entering into a transaction or other action with any Manager, officer or Member, or any affiliate of any of the foregoing. (l) Waiving, refusing to enforce, amending, restating, superseding or modifying any of the provisions of this Agreement. (m) Taking any other action which, by the terms of this Agreement, requires the approval or consent of not less than seventy-five percent (75%) of the Members. (n) Except as expressly set forth in the Collocation Agreement or Section 9.12 of the Contribution Agreement, allocating to the Company any costs or expenses that are paid or incurred by any Member or its affiliates (excluding the Company), or paid by the Company but reimbursable by any Member or its affiliates (excluding the Company), in each instance. (o) With respect to the business and operations of Newco II conducted or to be conducted at or near the location of 4800 N. 22nd St., Phoenix, Arizona, waiving, amending, supplementing or modifying any of the professional fees. (p) With respect to the business and operations of Newco II conducted or to be conducted at any other future office or business locations (including without limitation, the office located at 555 E. River Road, Tucson, Arizona), adopting any professional fees. Any of the above stated actions taken by the Company without the necessary manager approval is void ab initio. Section 8.10. Committees. The Managers may, by resolution passed by eighty percent (80%) of the Managers, designate committees, each committee to consist of two or more Managers (at least one of which must be a Manager designee of Prime and one of which must be a Manager designee of BDEC), which committees shall have such power and authority and shall perform such functions as may be provided in such resolution. Such committee or committees shall have such name or names as may be designated by the Managers and shall keep regular minutes of their proceedings and report the same to the Managers when required. Section 8.11. Compensation of Managers. The Members, by unanimous approval, shall have the authority to provide that any one or more of the Managers shall not be compensated, and may, by unanimous approval, fix any compensation (which may include expenses) they elect to pay to any one or more of the Managers. Section 8.12. Action by Written Consent. Any action required or permitted to be taken at any meeting of the Managers or of any committee designated by the Managers may be taken without a meeting if written consent, setting forth the action so taken, is signed by all the Managers or of such committee, and such consent shall have the same force and effect as a unanimous vote at a meeting. Section 8.13. Meetings by Conference Telephone. Managers or members of any committee designated by the Managers may participate in and hold a meeting of the Managers or such committee by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation in such a meeting shall constitute presence in person at such meeting, except where a person participates in the meeting for the express purpose of objecting to the transaction of any business on the ground that the meeting is not lawfully called or convened. Section 8.14. Liability of Managers. No Manager of the Company shall be personally liable for any debts, liabilities, or obligations of the Company, including under a judgment, decree, or order of the court. Section 8.15. Specific Power of Managers. The Managers shall have the authority to enter into and execute all documents in relation to the formation of the Company including, but not limited to, issuance of the Certificate of Formation and this Limited Liability Company Agreement. ARTICLE IX. NOTICES Section 9.1. Form of Notice. Whenever under the provisions of the Act, the Certificate of Formation or this Limited Liability Company Agreement notice is required to be given to any Manager or Member, and no provision is made as to how such notice shall be given, notice shall not be construed to mean personal notice only, but any such notice may also be given in writing, by mail, postage prepaid, addressed to such Manager or Member at such address as appears on the books of the Company, or by telecopy, telegraph or mailgram. Any notice required or permitted to be given by mail shall be deemed to be given three (3) days after it is deposited, postage prepaid, in the United States mail as aforesaid. Section 9.2. Waiver. Whenever any notice is required to be given to any Manager or Member of the Company under the provision of the Act, the Certificate of Formation or this Limited Liability Company Agreement, a waiver thereof in writing signed by the person or persons entitled to such notice, whether signed before or after the time stated in such waiver, shall be deemed equivalent to the giving of such notice. ARTICLE X. OFFICERS Any Manager may also serve as an officer of the Company. The Managers may designate one or more persons who are not Managers of the Company to serve as officers and may designate the titles of all officers. The initial officers of the Company shall be: Ken Shifrin, Chairman of the Board; Joe Jenkins, M.D., President; Cheryl Williams, Vice President, Secretary and Chief Financial Officer; and Mark Rosenberg, Vice President. Unless otherwise provided in a resolution of the Members or Managers the officers of the Company shall have the powers designated with respect to such offices under the Delaware Limited Liability Company Act, and any successor statute, as amended from time-to-time. ARTICLE XI. INDEMNITY Section 11.1. Indemnification. The Company shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative, arbitrative or investigative, any appeal in such an action, suit or proceeding and any inquiry or investigation that could lead to such an action, suit or proceeding (whether or not by or in the right of the Company), by reason of the fact that such person is or was a manager, officer, employee or agent of the Company or is or was serving at the request of the Company as a director, manager, officer, partner, venturer, proprietor, trustee, employee, agent or similar functionary of another corporation, employee benefit plan, other enterprise, or other entity, against all judgments, penalties (including excise and similar taxes), fines, settlements and reasonable expenses (including attorneys' fees and court costs) actually and reasonably incurred by him in connection with such action, suit or proceeding to the fullest extent permitted by any applicable law, and such indemnity shall inure to the benefit of the heirs, executors and administrators of any such person so indemnified pursuant to this Article XI. The right to indemnification under this Article XI shall be a contract right and shall not be deemed exclusive of any other right to which those seeking indemnification may be entitled under any law, bylaw, agreement, vote of members or disinterested managers or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office. Any repeal or amendment of this Article XI by the Managers (pursuant to Section 8.9 hereof) or by changes in applicable law shall, to the extent permitted by applicable law, be prospective only, and shall not adversely affect the indemnification of any person who may be indemnified at the time of such repeal or amendment. Section 11.2. Indemnification Not Exclusive. The rights of indemnification and reimbursement provided for in this Article XI shall not be deemed exclusive of any other rights to which any such Manager, officer, employee or agent may be entitled under the Certificate of Formation, this Limited Liability Company Agreement, agreement or vote of Members, or as a matter of law or otherwise. Section 11.3. Other Indemnification Clauses. Notwithstanding the foregoing, this Article XI shall not be construed to contradict the indemnification provision of the Contribution Agreement. Notwithstanding anything contained herein, this Article XI shall be ineffectual and shall not permit or require indemnification for all, or any, losses, costs, liabilities, claims or expenses arising, directly or indirectly, from any action or omission permitting or requiring indemnification under the Contribution Agreement; and in no event may any indemnity be allowed under this Agreement or pursuant to any provision of the Act for an amount paid or payable pursuant to the indemnification provisions of the Contribution Agreement. ARTICLE XII. MISCELLANEOUS Section 12.1. Fiscal Year. The fiscal year of the Company shall be fixed by resolution of the Managers. Section 12.2. Records. At the expense of the Company, the Managers shall maintain records and accounts of all operations of the Company. At a minimum, the Company shall keep at its principal place of business the following records: (a) A current list of the name and last known mailing address of each Member; (b) A current list of each Member's Membership Interest; (c) A copy of the Certificate of Formation and Limited Liability Company Agreement of the Company, and all amendments thereto, together with executed copies of any powers of attorney; (d) Copies of the Federal, state, and local income tax returns and reports for the Company's six most recent tax years; and (e) Correct and complete books and records of account of the Company. Section 12.3. Seal. The Company may by resolution of the Managers adopt and have a seal, and said seal may be used by causing it or a facsimile thereof to be impressed or affixed or in any manner reproduced. Any officer of the Company shall have authority to affix the seal to any document requiring it. Section 12.4. Agents. Every Manager and Officer is an agent of the Company for the purpose of the business. The act of a Manager or Officer, including the execution in the name of the Company of any instrument for carrying on in the usual way the business of the Company, binds the Company. Section 12.5. Checks. All checks, drafts and orders for the payment of money, notes and other evidences of indebtedness issued in the name of the Company shall be signed by such officer, officers, agent or agents of the Company and in such manner as shall from time to time be determined by resolution of the Managers. In the absence of such determination by the Mangers, such instruments shall be signed by the Treasurer or the Secretary and countersigned by the President or a Vice President of the Company, if the Company has such officers. Section 12.6. Deposits. All funds of the Company shall be deposited from time to time to the credit of the Company in such banks, trust companies or other depositories as the Managers may select. Section 12.7. Annual Statement. The Managers shall present at each annual meeting a full and clear statement of the business and condition of the Company. Section 12.8. Financial Statements. As soon as practicable after the end of each fiscal year of the Company, a balance sheet as at the end of such fiscal year, and a profit and loss statement for the period ended, shall be distributed to the Members, along with such tax information (including all information returns) as may be necessary for the preparation of each Member of its Federal, state and local income tax returns. The balance sheet and profit and loss statement referred to in the previous sentence may be as shown on the Company's federal income tax return. Section 12.9. Binding Arbitration. Any controversy between the parties regarding this Agreement and any claims arising out of this Agreement or its breach shall be submitted to arbitration by either party. The arbitration proceedings shall be conducted by a single arbitrator pursuant to the Commercial Arbitration Rules of the American Arbitration Association. The arbitration shall be conducted in Dallas, Texas and the arbitrator shall have the right to award actual damages and attorney fees and costs, but shall not have the right to award punitive, exemplary or consequential damages against either party. ARTICLE XIII. AMENDMENTS Section 13.1. Amendments. This Agreement may be altered, amended or repealed and a new limited liability company agreement may be adopted, only with the unanimous approval of all members at a properly called meeting, or with the written consent of all Members. Section 13.2. When Limited Liability Company Agreement Silent. It is expressly recognized that when the Limited Liability Company Agreement is silent or in conflict with the requirements of the Act as to the manner of performing any Company function, the provisions of the Act shall control. [Signature page follows] S-1 SIGNATURE PAGE TO FIRST AMENDED AND RESTATED LIMITED LIABILITY COMPANY AGREEMENT IN WITNESS WHEREOF, the undersigned Members hereby adopt this Limited Liability Company Agreement as the Limited Liability Company Agreement of the Company, effective as of the ____ day of _____________________, ___________. Barnet Dulaney Eye Center, P.L.L.C. By: Ronald W. Barnet, M.D., manager By: David D. Dulaney, M.D., manager Prime RVC, Inc. Teena Belcik, Treasurer A-1 EXHIBIT A OWNERSHIP INTERESTS Name Ownership Percentage Prime 60% BDEC 40% EX-10.116 29 0029.txt EX 10.116 CONSENT AND WAIVER-BDEC CONSENT AND LIMITED WAIVER THIS CONSENT AND LIMITED WAIVER (this "Consent") is dated effective as of March 31, 2000, by David D. Dulany, M.D. ("Dulaney"), Ronald W. Barnet, M.D. ("Barnet"), Mark Rosenberg ("Rosenberg"), Barnet Dulaney Eye Center, P.L.L.C., an Arizona professional limited liability company ("BDEC"), LASIK Investors, L.L.C., a Delaware limited liability company ("LASIK"), Prime Refractive, L.L.C., a Delaware limited liability company ("Prime Refractive"), Prime/BDR Acquisition, L.L.C., a Delaware limited liability company ("Prime BDR"), and Prime/BDEC Acquisition, L.L.C., a Delaware limited liability company ("Prime BDEC" and together with all of the foregoing parties, the "Consenting Parties") for the benefit of Prime Medical Services, Inc., a Delaware corporation ("PMSI") and each subsidiary and affiliate of PMSI. WHEREAS, the Consenting Parties, PMSI, Prime Medical Operating, Inc., a Delaware corporation, and Prime Refractive Management, L.L.C., a Delaware limited liability company are parties to that certain Contribution Agreement (the "Contribution Agreement") dated as of September 1, 1999, as amended pursuant to that certain First Amendment to Contribution Agreement dated as of January 31, 2000; WHEREAS, pursuant to Article VIII of the Contribution Agreement, PMSI is prohibited from acquiring another center engaged in Refractive Surgery (as defined in the Contribution Agreement) unless an exception enumerated in Article VIII applies to such acquisition; and WHEREAS, the Consenting Parties desire to consent to, and waive any claims they may have as a result of, the acquisition by PMSI (through one or more of its subsidiaries or affiliates) of certain assets from Ken Moadel, M.D. (and certain entities owned or controlled by Ken Moadel, M.D.) and the establishment of a Refractive Surgery joint venture with Ken Moadel, M.D. that will engage in business activities similar to those engaged in by Prime BDEC, including without limitation, the provision of services related to Refractive Surgery (the "Moadel Acquisition"). NOW, THEREFORE, in consideration of the agreements herein contained, the parties hereto agree as follows: 1. Consent and Limited Waiver. Each of the Consenting Parties, on its own behalf and on behalf of its affiliates, hereby consents to the Moadel Acquisition on whatever terms and conditions agreed to by PMSI and waives any present or future claim it may have or claim to have as a result of the Moadel Acquisition. Each of the Consenting Parties agrees that this Consent shall be effective as of the date first written above, notwithstanding the actual date of execution. 2. Miscellaneous. The parties hereto agree that, except as expressly waived by this Consent, none of the rights, interests and obligations existing and to exist under the Contribution Agreement are hereby released, diminished or impaired, and the Contribution Agreement, and the exhibits thereto, shall remain in full force and effect. This Consent shall be governed by and construed in accordance with the laws of the State of Texas. [Signature page follows] S-3 SIGNATURE PAGE TO CONSENT AND LIMITED WAIVER IN WTNESS WHEREOF, the parties hereto have executed this Consent effective as of the date first written above. BDEC: Barnet Dulaney Eye CENTER, P.L.L.C. By: David D. Dulaney, M.D., manager LASIK: LASIK INVESTORS, L.L.C. By: Ronald W. Barnet, M.D., manager By: David D. Dulaney, M.D., manager PRIME BDR: PRIME/BDR ACQUISITION, L.L.C. Ronald W. Barnet, M.D., signing as a manager of Prime BDR,and on behalf of LASIK as a member of Prime BDR David D. Dulaney, M.D., signing as a manager of Prime BDR, and on behalf of LASIK as a member of Prime BDR Teena Belcik, signing as a manager of Prime BDR, and on behalf of PMOI as a member of Prime BDR PRIME BDEC: PRIME/BDEC ACQUISITION, L.L.C. Ronald W. Barnet, M.D., signing as a manager of Prime BDEC, and on behalf of LASIK as a member of Prime BDEC David D. Dulaney, M.D., signing as a manager of Prime BDEC, and on behalf of LASIK as a member of Prime BDEC Teena Belcik, signing as a manager of Prime BDEC, and on behalf of PMOI as a member of Prime BDEC PRIME REFRACTIVE: PRIME REFRACTIVE, L.L.C. Ronald W. Barnet, M.D., signing as a manager of Prime Refractive, and on behalf of LASIK as a member of Prime Refractive David D. Dulaney, M.D., signing as a manager of Prime Refractive, and on behalf of LASIK as a member of Prime Refractive Teena Belcik, signing as a manager of Prime Refractive, and on behalf of PMOI as a member of Prime Refractive DULANEY: David D. Dulaney, M.D. BARNET: Ronald W. Barnet, M.D. ROSENBERG: Mark Rosenberg EX-10.117 30 0030.txt EX 10.117 2ND AD. TO CONTR. AGT.-BDEC ASSIGNMENT AGREEMENT AND SECOND AMENDMENT TO CONTRIBUTION AGREEMENT This Assignment Agreement and Second Amendment to Contribution Agreement (this "Agreement"), dated as of April 1, 2000 (the "Effective Date"), is by and between Prime Medical Services, Inc. a Delaware corporation ("PMSI"), Prime Medical Operating, Inc., a Delaware corporation ("PMOI"), Prime RVC, Inc., a Delaware corporation ("Prime RVC"), Prime Refractive Management, L.L.C., a Delaware limited liability company ("Prime Management"), Barnet Dulaney Eye Center, P.L.L.C., an Arizona professional limited liability company ("BDEC"), LASIK Investors, L.L.C., a Delaware limited liability company ("LASIK"), Prime/BDR Acquisition, L.L.C., a Delaware limited liability company ("Prime BDR"), Prime/BDEC Acquisition, L.L.C., a Delaware limited liability company ("Prime BDEC"), Prime Refractive, L.L.C., a Delaware limited liability company ("Prime Refractive"), David D. Dulaney, M.D. ("Dulaney"), Ronald W. Barnet, M.D. ("Barnet"), and Mark Rosenberg ("Rosenberg"). All of the foregoing parties other than Prime RVC are hereinafter referred to as the "Existing Parties". Preliminary Statements LASIK and Prime BDR are each a party to that certain Contribution Agreement, dated as of September 1, 1999, among PMSI, PMOI, Prime Management, BDEC, LASIK, Prime BDR, Prime BDEC, Prime Refractive, Dulaney, Barnet, and Rosenberg, as amended by that certain First Amendment to Contribution Agreement dated as of January 31, 2000 (the "Contribution Agreement"). The parties to this Agreement desire that LASIK transfer to PMOI all of LASIK's ownership in Prime BDR, including, without limitation, that certain forty percent (40%) membership interest received by LASIK in connection with the consummation of the transactions contemplated by the Contribution Agreement (the "Prime BDR Interest"). The parties to this Agreement desire that Prime Refractive transfer to Prime RVC all of Prime Refractive's ownership in Caster One, L.L.C., a Delaware limited liability company and partially owned subsidiary of Prime Refractive ("Caster One"), including, without limitation, that certain sixty percent (60%) membership interest owned Prime Refractive (collectively the "Caster Interest" and, together with the Prime BDR Interest, the "Transferred Interests"). In partial consideration of the assignment of the Transferred Interests, PMSI desires to issue certain Warrants described herein. The Existing Parties also desire that, effective upon transfer of the Transferred Interests, Prime RVC shall assume all obligations for any and all amounts owed by Prime Refractive to Prime Management under that certain Promissory Note executed by Prime Refractive and dated March 1, 2000 in the principal amount of $5,828,724 (the "Promissory Note"), and Prime Refractive shall thereupon be released from any obligation under the Promissory Note. Statement of Agreement NOW, THEREFORE, in consideration of the premises and mutual covenants contained herein and for other good, valuable and binding consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound hereby, agree as follows: ARTICLE I. ASSIGNMENT OF INTEREST Section 1.1 Assignment and Grant of Warrants. -------------------------------- (a) Prime BDR Interest. LASIK hereby conveys, transfers and assigns to PMOI, and PMOI hereby acquires from LASIK all right, title and interest in and to the Prime BDR Interest, such that on the Effective Date, LASIK shall not own (i) any ownership or other interest in Prime BDR or (ii) any rights or securities exercisable or exchangeable for, or convertible into, ownership or other interests in Prime BDR. (b) Caster One Interest. As allowed by Section 2.5(i) of Caster One's Limited Liability Company Agreement, Prime Refractive hereby conveys, transfers and assigns to Prime RVC, and Prime RVC hereby acquires from Prime Refractive all right, title and interest in and to the Caster Interest, such that on the Effective Date, Prime Refractive shall not own (i) any ownership or other interest in Caster One or (ii) any rights or securities exercisable or exchangeable for, or convertible into, ownership or other interests in Caster One. (c) Warrants. In partial consideration of the assignment of the Transferred Interests, PMSI agrees to deliver warrants to LASIK (or any combination of the principals of LASIK provided in written instructions delivered to PMSI within 5 days of the execution of this Agreement), such warrants to be in substantially the form attached hereto as Exhibit K (the "Warrants"). The Warrants delivered in partial consideration of the transfer of the Prime BDR Interest shall entitle the holder(s) thereof to purchase, upon the terms and conditions contained in the Warrants, a collective total of 81,263 shares of $0.01 par value common stock of PMSI, at a per share purchase price of $10.38. The Warrants delivered in partial consideration of the transfer of the Caster Interest shall entitle the holder(s) thereof to purchase, upon the terms and conditions contained in the Warrants, a collective total of 43,715 shares of $0.01 par value common stock of PMSI, at a per share purchase price of $8.25. ARTICLE II. AMENDMENT Section 2.1 Amendments to Contribution Agreement. ------------------------------------ (a) The Existing Parties hereby agree to amend Section 4.3(a) of the Contribution Agreement to replace the reference to "Loan Agreement" with a reference instead to "Development Facility". (b) The Existing Parties hereby agree to amend Section 4.3(e) of the Contribution Agreement to replace the two references to "Loan Agreement or Development Facility" with references instead to "Development Facility", and to delete the reference to "(as applicable)". (c) The Existing Parties hereby agree to amend Section 4.3(f) of the Contribution Agreement to read in its entirety as follows: (a) The parties agree that all of the loan agreements, promissory notes, guarantees, security agreements, assignment and security agreements and other agreements, documents or instruments executed by any party in connection with the Development Facility are hereinafter collectively referred to as the "Credit Documents." (d) The Existing Parties hereby agree to amend Section 8.2(c) of the Contribution Agreement to replace the reference to "Exhibit A" with a reference instead to "Exhibit K". (e) The Existing Parties hereby agree to amend the TABLE OF EXHIBITS to the Contribution Agreement to add at the bottom: Exhibit K Form of Target Center Warrants (f) The Existing Parties hereby agree to amend the Contribution Agreement to add as Exhibit K, immediately following Exhibit J, the Form of Target Center Warrant attached to this Agreement as Exhibit K. Section 2.2 Assumption of Promissory Note. Prime RVC hereby assumes, as of the Effective Date, all of the obligations arising under the Promissory Note, and Prime Management agrees that Prime Refractive is hereby released from any and all obligations it may have under the Promissory Note, regardless of whether such obligations are past due. Notwithstanding the foregoing, the parties agree that all amounts previously paid under the Promissory Note are non-refundable, and each party to this agreement agrees that it will not take any action to recover any such amount. Prime Management further agrees that it shall irrevocably cancel the Promissory Note following the assumption thereof by Prime RVC. The existence of and amounts advanced under the Promissory Note shall not reduce the maximum principal amount of the Development Facility from $29,165,000. ARTICLE III. REPRESENTATIONS Section 3.1 All Parties. Each party to this Agreement hereby represents and warrants that (a) as of the date of this Agreement, it has full and lawful power and authority to execute and deliver this Agreement and to consummate and perform the transactions contemplated in this Agreement, (b) assuming due execution and delivery by the other parties hereto, this Agreement is enforceable against it, and constitutes its valid and legally binding obligation, (c) except as provided herein, it is not required to obtain any consent from or approval or action of, or make any filing with or give notice to, any person, public authority or entity, in connection with the execution and delivery of this Agreement, and (d) by virtue of its direct or indirect partial ownership of or involvement with Prime BDR and Caster One, it has personal and detailed knowledge of the operations and assets of Prime BDR and Caster One, and it has neither requested nor relied on any additional information from any other party to this Agreement (or any agent or representative of any other party to this Agreement). Section 3.2 Representations of LASIK. LASIK hereby represents and warrants to the parties to this Agreement that the Prime BDR Interest is hereby conveyed to PMOI free and clear of any and all liens, claims, encumbrances and restrictions of any kind whatsoever (other than those expressly set forth in the Contribution Agreement or the Limited Liability Company Agreement of Prime BDR). Section 3.3 Representations of Prime Refractive. Prime Refractive hereby represents and warrants to the parties to this Agreement that the Caster Interest is hereby conveyed to Prime RVC free and clear of any and all liens, claims, encumbrances and restrictions of any kind whatsoever (other than those expressly set forth in the contribution agreement governing Prime Refractive's acquisition of the Caster Interest or in the Limited Liability Company Agreement of Caster One). ARTICLE IV. Resignations and ENTIRE INTEREST Each of Barnet, Dulaney and Rosenberg hereby resigns from any and all positions or titles which he may hold or claim to hold with Prime BDR, Caster One or any entity in which either of the foregoing owns an equity ownership interest. Each of Barnet, Dulaney, Rosenberg and LASIK acknowledges and agrees that he or it does not now have any right to purchase or otherwise acquire, at any time subsequent to the Effective Date, any direct or indirect ownership interests in Prime BDR or Caster One. ARTICLE V. GENERAL Section 5.1 Subsequent Amendment of Prime BDR Governance Documents. The parties hereby agree that Prime RVC and PMOI may, at any time on or after the Effective Date, (a) amend, supplement or replace entirely the Certificate of Formation, Limited Liability Company Agreement or any other organizational document of Prime BDR, in any manner they desire and (b) subject to applicable law, dissolve Prime BDR and distribute its assets in any manner they desire. Section 5.2 Transaction Document. This Agreement shall be considered a "Transaction Document" under the Contribution Agreement. Section 5.3 No Assumption of Liabilities. Except as expressly provided in Section 2.3 above, none of PMSI, PMOI, Prime RVC or Prime Management hereby assumes any debt, obligation or liability of any other party to this Agreement. Section 5.4 Ratification by Members of Prime Refractive. Each party to this Agreement agrees that by executing this Agreement, it is deemed to be voting its ownership interest (if any) in Prime Refractive to authorize Prime Refractive to enter into and perform this Agreement and any other document or agreement to which Prime Refractive is a party and that is contemplated by or executed in connection with this Agreement. Each such party hereby consents (in all capacities for which it is entitled to or required to give consent) to the transfer of the Transferred Interests, and further agrees to execute such resolutions and written consents, and take such other actions, in their capacities as members of Prime Refractive, as any other party hereto shall reasonably require after the date of this Agreement in order to have Prime Refractive ratify and adopt this Agreement. Section 5.5 Ratification by Members of LASIK. Each party to this Agreement agrees that by executing this Agreement, it is deemed to be voting its ownership interest (if any) in LASIK to authorize LASIK to enter into and perform this Agreement and any other document or agreement to which LASIK is a party and that is contemplated by or executed in connection with this Agreement. Each such party hereby consents (in all capacities for which it is entitled to or required to give consent) to the transfer of the Transferred Interests, and further agrees to execute such resolutions and written consents, and take such other actions, in their capacities as members of LASIK, as any other party hereto shall reasonably require after the date of this Agreement in order to have LASIK ratify and adopt this Agreement. Section 5.6 Ratification by Members of Prime BDR. Each party to this Agreement agrees that by executing this Agreement, it is deemed to be voting its ownership interest (if any) in Prime BDR to authorize Prime BDR to enter into and perform this Agreement and any other document or agreement to which Prime BDR is a party and that is contemplated by or executed in connection with this Agreement. Each such party hereby consents (in all capacities for which it is entitled to or required to give consent) to the transfer of the Transferred Interests, and further agrees to execute such resolutions and written consents, and take such other actions, in their capacities as members of Prime BDR, as any other party hereto shall reasonably require after the date of this Agreement in order to have Prime BDR ratify and adopt this Agreement. Section 5.7 Effect on Existing Agreements. ----------------------------- (a) Contribution Agreement. This Agreement is incorporated into the Contribution Agreement by reference. Other than as provided in this Agreement and that certain First Amendment to Contribution Agreement dated January 31, 2000 among of the Existing Parties, the Contribution Agreement (including Exhibits and Schedules) has not been modified or amended and is in full force and effect. Each of the Existing Parties hereby affirms that it remains a party to the Contribution Agreement (as amended by this Agreement) after the execution of this Agreement. The Contribution Agreement may be restated as amended hereby for the convenience of the parties hereto. (b) Financing Documents. The parties to this Agreement hereby terminate that certain Assignment and Security Agreement (the "Security Agreement") dated as of September 1, 1999 originally between PMOI and LASIK, securing LASIK's obligations under the Loan Agreement (as such term is defined in the Contribution Agreement prior to the effect of the amendments contained in this Agreement). PMOI and Prime RVC agree to promptly file with the appropriate offices a release of all financing statements securing only those obligations of Prime BDR under the Loan Agreement. Notwithstanding the foregoing provisions of this subsection, the parties to this Agreement acknowledge that the Security Agreement and such financing statements have been collaterally assigned to one or more lenders of PMSI, and that the consent of such lenders will be required in order to fully effect the termination and releases described in this subsection. PMOI and Prime RVC hereby agree to exercise all reasonable efforts to promptly have such lenders provide the consents necessary to effect the provisions of this subsection. Section 5.8 Cooperation and Further Assurance. From time to time, as and when reasonably requested by another party after the date of this Agreement, each party hereto agrees to (at the expense of the requesting party) execute and deliver, or cause to be executed and delivered, all such documents, instruments and consents, and to use reasonable efforts to take all such other actions, as may be reasonably requested or necessary to carry out the intent and purposes of this Agreement and vest in Prime RVC good title to, possession of and control of the Transferred Interests. Without limiting the foregoing, the parties agree that the last paragraph of Section 9.3 of the Contribution Agreement as it relates to LASIK's disposition of the Prime BDR Interest hereunder shall only deal with the return of Proprietary Information, credit cards, keys, equipment, supplies and other materials that are specific only to Prime BDR, and shall not (as a result of the disposition of the Prime BDR Interest hereunder) require the return of Proprietary Information and such items that relate both to Prime BDR and either of Prime Refractive or Prime BDEC. Section 5.9 GOVERNING LAW AND CONSTRUCTION. THIS AGREEMENT IS PERFORMABLE IN TRAVIS COUNTY, TEXAS, AND IS GOVERNED BY THE LAWS OF TEXAS. Section 5.10 ARBITRATION. ANY CONTROVERSY BETWEEN THE PARTIES REGARDING THIS AGREEMENT AND ANY CLAIMS ARISING OUT OF THIS AGREEMENT OR A BREACH HEREUNDER SHALL BE SUBMITTED TO ARBITRATION BY THE PARTIES IN ACCORDANCE WITH AND GOVERNED BY SECTION 10.11 OF THE CONTRIBUTION AGREEMENT. Section 5.11 Severability. If any provision of this Agreement is rendered or declared illegal or unenforceable by reason of any existing or subsequently enacted statute, rule or regulation, or by order of or judgment of a court, any and all other terms and provisions hereof shall remain in full force and effect as stated and set forth herein. Furthermore, in lieu of such illegal or unenforceable provision, there shall be added automatically as part of this Agreement, a provision as similar in effect to the result intended by such illegal or unenforceable provision as may be possible and still be legal and enforceable. Section 5.12 Miscellaneous. This Agreement shall be binding upon, and shall inure to the benefit of, the parties hereto and their respective heirs, executors, administrators, successors and permitted assigns. This Agreement may be executed in multiple counterparts, each of which shall be an original, but all of which shall constitute one and the same instrument. This Agreement has been negotiated by the parties and their respective counsel and will be fairly interpreted in accordance with its terms and without any strict construction in favor of or against any party. When the context requires, the gender of all words used herein shall include the masculine, feminine and neuter and the number of all words shall include the singular and plural. The captions in this Agreement are for convenience of reference only and shall not limit or otherwise affect any of the terms or provisions hereof. There are no third-party beneficiaries to this Agreement. This Agreement may not be modified, altered or amended except by a writing signed by all of the parties hereto. No waiver of any provisions hereof shall be effective unless contained in a writing signed by the person to be bound thereby. [Signature page follows] S-4 SIGNATURE PAGE TO ASSIGNMENT AGREEMENT AND SECOND AMENDMENT TO CONTRIBUTION AGREEMENT IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered on the day and year first above written. PMSI: PRIME MEDICAL SERVICES, INC. Teena Belcik, Treasurer PMOI: PRIME MEDICAL OPERATING, INC. Teena Belcik, Treasurer PRIME RVC: PRIME RVC, INC. Teena Belcik, Treasurer PRIME MANAGEMENT: PRIME REFRACTIVE MANAGEMENT, L.L.C. Teena Belcik, Treasurer BDEC: Barnet Dulaney Eye CENTER, P.L.L.C. By: David D. Dulaney, M.D., manager LASIK: LASIK INVESTORS, L.L.C. By: Ronald W. Barnet, M.D., manager By: David D. Dulaney, M.D., manager PRIME BDR: PRIME/BDR ACQUISITION, L.L.C. Ronald W. Barnet, M.D., signing as a manager of Prime BDR, and on behalf of LASIK as a member of Prime BDR David D. Dulaney, M.D., signing as a manager of Prime BDR, and on behalf of LASIK as a member of Prime BDR Teena Belcik, signing as a manager of Prime BDR, and on behalf of PMOI as a member of Prime BDR PRIME BDEC: PRIME/BDEC ACQUISITION, L.L.C. Ronald W. Barnet, M.D., signing as a manager of Prime BDEC, and on behalf of LASIK as a member of Prime BDEC David D. Dulaney, M.D., signing as a manager of Prime BDEC, and on behalf of LASIK as a member of Prime BDEC Teena Belcik, signing as a manager of Prime BDEC, and on behalf of PMOI as a member of Prime BDEC PRIME REFRACTIVE: PRIME REFRACTIVE, L.L.C. Ronald W. Barnet, M.D., signing as a manager of Prime Refractive, and on behalf of LASIK as a member of Prime Refractive David D. Dulaney, M.D., signing as a manager of Prime Refractive, and on behalf of LASIK as a member of Prime Refractive Teena Belcik, signing as a manager of Prime Refractive, and on behalf of PMOI as a member of Prime Refractive DULANEY: David D. Dulaney, M.D. BARNET: Ronald W. Barnet, M.D. ROSENBERG: Mark Rosenberg EX-10.118 31 0031.txt EX 10.118 STOCK PURCHASE AGREEMENT-IMT STOCK PURCHASE AGREEMENT This Stock Purchase Agreement (this "Agreement") is made and entered into as of the close of business on December 31, 2000, (the "Effective Date") by and between Prime Medical Services, Inc., a Delaware corporation ("Seller") and Innovative Medical Technologies, Inc., an exempted company incorporated in the Cayman Islands with limited liability ("Purchaser"). Preliminary Statements Seller owns all of the outstanding capital stock of Prostatherapies, Inc., a Delaware corporation (the "Company") and desires to sell such capital stock to Purchaser subject to the terms and conditions set forth in this Agreement. Purchasers desires to acquire all of such capital stock subject to the terms and conditions set forth in this Agreement. Statement of Agreement For and in consideration of the mutual promises and covenants contained in this Agreement, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: Section 1 Sale of Stock. As of the Effective Date, subject to the terms and conditions of this Agreement, and in reliance on the representations and warranties of Seller, Seller hereby transfers to Purchaser all of the outstanding shares of the Company's capital stock (the "Shares"). Purchaser, in exchange for the Shares, will pay to Seller the amount of $950,000 as the purchase price (the "Purchase Price"). The Purchase Price shall be tendered by Purchaser's delivery on or before the Closing (as hereinafter defined) of (a) a promissory note duly executed by Purchaser in the principal amount of $950,000, in the form attached hereto as Exhibit A (the "Promissory Note"), and (b) a stock certificate evidencing the issuance hereby to Seller of shares of Purchaser's common stock amounting to 0.1% of Purchaser's total shares of outstanding capital stock (including any additional shares received solely as a result of the ownership of such shares, the "Share Consideration"). At any time after the Effective Date Purchaser shall have the right, in its sole discretion, to redeem the shares constituting the Share Consideration by delivery to Seller of either (1) $100 cash or (2) securities of equivalent value of any entity which, by merger, consolidation or otherwise, acquires substantially all of the assets or business of Purchaser ("Substitute Securities"). If such redemption right is exercised using Substitute Securities, the redemption rights shall survive and be again exercisable with respect to such Substitute Securities. Any such redemption shall be deemed effective immediately upon tender of such consideration, and, upon such tender, Purchaser shall be entitled to reflect cancellation of such shares in it stock record books without any action on the part of Seller. The parties agree that neither Purchaser nor Seller does, as a result of this Agreement, any documents, instruments or certificates contemplated by or executed in connection with this Agreement (collectively, including this Agreement, the "Transaction Documents"), or the consummation of any of the transactions contemplated by this Agreement or any Transaction Document, assume any debts, liabilities or obligations of the Company or any Subsidiary (as hereinafter defined). Subject only to the conditions to closing described in the following sentence of this paragraph, the closing of the transactions contemplated by this Agreement (the "Closing") shall take place within 30 calendar days of the Effective Date on a date mutually agreed upon by the parties. The date on which the Closing takes place is referred to in this Agreement as the "Closing Date"). Notwithstanding the foregoing: (A) Seller may elect, in its sole discretion, to terminate this Agreement without any obligation hereunder if: (i) Purchaser fails to execute and deliver, at or prior to the Closing, the Promissory Note, a Mutual Non-Competition Agreement in form and substance satisfactory to both Seller and Purchaser (the "Non-Compete"), and an Assignment and Security Agreement securing Purchaser's obligations under the Promissory Note, in form and substance satisfactory to Seller (the "Security Agreement"); (ii) any of the representations or warranties made by Purchaser in this Agreement or any other Transaction Document, shall, in any material respect, be untrue, incorrect or misleading; (iii) there has, after the Effective Date, been a material change in the condition or nature of the Company's and the Subsidiaries' businesses that, in the aggregate, could reasonably be believed to materially increase the value of the Shares; (iv) Purchaser has not delivered to Seller, at or prior to the Closing, such good standing certificates, certificates of existence, officer's certificates and resignations as Seller may reasonably request; and (B) Purchaser may elect, in its sole discretion, to terminate this Agreement without any obligation hereunder if: (i) Seller fails to execute and deliver, at or prior to the Closing, the Non-Compete and one or more stock certificates representing the Shares, accompanied by blank stock power(s) in a form provided by Purchaser; (ii) any of the representations or warranties made by Seller in this Agreement or any other Transaction Document (as hereinafter defined), shall, in any material respect, be untrue, incorrect or misleading; (iii) there has, after the Effective Date, been a material change in the condition or nature of the Company's and the Subsidiaries' businesses that, in the aggregate, could reasonably be believed to materially decrease the value of the Shares; (iv) Seller has not delivered to Purchaser, at or prior to the Closing, such good standing certificates, certificates of existence, and officer's certificates as Purchaser may reasonably request. Section 2 Representations and Warranties of Seller. Purchaser acknowledges and agrees that Purchaser's sole remedy for any breach by Seller of a representation or warranty set forth in this Section shall be to seek indemnification pursuant to the express provisions of Section 4 and Section 6(f) of this Agreement. Seller hereby represents and warrants to Purchaser that (with the understanding that such representations and warranties are deemed to be made as of both the Effective Date and the Closing): (a) Organization and Standing; Authority. The Company is a corporation duly organized, validly existing and in good standing under the Laws (as hereinafter defined) of the State of Delaware and has the corporate power and authority to conduct its business as now conducted. Seller is a corporation duly organized, validly existing and in good standing under the Laws of the State of Delaware and has the corporate power and authority to conduct its business as now conducted and to enter into and perform this Agreement. The execution, delivery and performance by Seller of this Agreement and any other Transaction Documents to which Seller is a party have been duly authorized by all necessary corporate action of Seller, its officers, directors and shareholders and the Transaction Documents have been duly executed and delivered by Seller and are enforceable against Seller in accordance with their terms, except (i) as limited by applicable bankruptcy, insolvency, reorganization, moratorium, and other Laws of general application affecting enforcement of creditors' rights generally, (ii) as limited by Laws relating to the availability of specific performance, injunctive relief, or other equitable remedies, and (iii) to the extent any indemnification provisions may be limited by applicable federal or state securities Laws. (b) Subsidiaries. The Company owns the interests described below in the following entities (each, a "Subsidiary"): (i) California I Prostatherapy Limited Partnership. The Company owns a 5.875% limited partnership interest and a 20% general partnership interest in California I Prostatherapy Limited Partnership, a California limited partnership. (ii) Texas I Prostatherapy Limited Partnership. The Company owns a 33.5% limited partnership interest and a 20% general partnership interest in Texas I Prostatherapy Limited Partnership, a Texas limited partnership. (iii) North Carolina Prostatherapy Limited Partnership I. The Company owns a 6.75% limited partnership interest and a 20% general partnership interest in North Carolina Prostatherapy Limited Partnership I, a North Carolina limited partnership. Except as disclosed in writing to Purchaser or as set forth in the partnership agreements of each of the Subsidiaries (the "Subsidiary Organizational Documents"), there are no rights or options to acquire any ownership interest in or from a Subsidiary, nor are there any rights or options to acquire any securities that are exercisable or exchangeable for, or convertible into, ownership interests of a Subsidiary. (c) Capitalization. The Company has an authorized capitalization consisting of 1,000 shares of common stock, of which 100 shares are issued and outstanding. All of such issued and outstanding shares of common stock are owned entirely by Seller. There are no other rights or options to acquire any capital stock of or from the Company, nor are there any rights or options to acquire any securities that are exercisable or exchangeable for, or convertible into, capital stock of the Company. All such outstanding shares have been duly authorized and validly issued and are fully paid and nonassessable. (d) Conflicting Agreements and Other Matters. The execution, delivery and performance by Seller of this Agreement and the other Transaction Documents and compliance by Seller with the terms and provisions thereof and the sale of the Shares by Seller, does not violate any provision of any Law, or conflict with or result in a breach of, the Certificate of Incorporation or bylaws of the Company or the Certificate of Incorporation or bylaws of Seller. Seller does not have any knowledge of any pending or threatened adverse activities by or of any of the Subsidiaries. Furthermore, Seller does not have any knowledge that any Subsidiary, or any limited partner of any Subsidiary, is not in compliance with any restrictions on outside activities applicable to such party pursuant to the respective Subsidiary's partnership agreement. (e) Consents, Etc. Assuming the correctness of the representations by Purchaser in Section 3, no authorization, consent, approval, license, qualification or exemption from, nor any filing, declaration or registration with, any court, any federal or state governmental agency or regulatory authority or any securities exchange or any other Person, other than authorizations, consents, approvals, licenses or qualifications to do business in the states as a foreign corporation and required pursuant to state "blue sky" laws is required in connection with the execution, delivery or performance by Seller of this Agreement or the other Transaction Documents on or prior to the date hereof or the transfer of the Shares (except such as have been obtained on or prior to the date hereof and are, and will be on the Closing Date, in full force and effect). (f) Proceedings, Litigation, Etc. Seller has no knowledge of any laws, rules, regulations, ordinances, orders, writs, judgments, decrees, determinations or awards ("Laws") promulgated by any federal, state, county, or local judicial or governmental authority ("Governmental Authority") which (i) are applicable to the Company, the Subsidiaries or their respective businesses and (ii) when complied with by the Company and/or such Subsidiary would, in the aggregate, materially and adversely affect the business or operations of the Company and the Subsidiaries as conducted on the Effective Date. None of Seller, the Company nor any Subsidiary is in violation of any Law of any Governmental Authority (or subject to or party to any order of any Governmental Authority arising out of any action, suit or proceeding under any Law) which could affect the ability of the parties hereto to consummate the transactions contemplated hereby. There is no pending (or, to the knowledge of Seller, threatened), action, suit, proceeding at law or in equity, arbitration or administrative or other proceeding by or before (or, to the knowledge of Seller, any investigation by) any Governmental Authority against or affecting the Company. (g) Disclosure of Liens, Liabilities and other Obligations. Seller has (i) disclosed in writing to Purchaser all liabilities and obligations of the Company and the Subsidiaries that are individually in excess of $25,000; (ii) provided Purchaser with true and complete copies or descriptions of all agreements, arrangements or understandings pursuant to which the Company or any Subsidiary may or will have executory obligations after the Closing Date; (iii) disclosed to Purchaser in writing all liens or encumbrances that related to the Company's or any Subsidiary's assets. (h) Ownership of Assets. Except as otherwise disclosed in writing to Purchaser on or before the Closing Date, the Company and each Subsidiary owns unencumbered title to all of the assets and properties, tangible or intangible, real or personal, that are used in the conduct of its respective business. (i) Existing Agreement. Seller represents that an officer of Urologix has orally indicated to Seller that Urologix would continue to honor the existing terms of a certain contract pursuant to which EDAP/Technomed has, prior to the Closing, provided certain supplies and equipment to Seller in connection with the business of Seller. Purchaser agrees that Seller does not represent or warrant that the terms and provisions of such contract will, as written, remain enforceable after the Closing. Section 3 Representations of Purchaser. Seller acknowledges and agrees that Seller's sole remedy for any breach by Purchaser of a representation or warranty set forth in this Section shall be to seek indemnification pursuant to the express provisions of Section 4 and Section 6(f) of this Agreement. The Purchaser represents and warrants to Seller as follows (with the understanding that such representations and warranties are deemed to be made as of both the Effective Date and the Closing): (a) Organization and Standing; Authority. Purchaser is an exempted company incorporated in the Cayman Islands with limited liability, is duly organized, validly existing and in good standing under the Laws of the Cayman Islands and has the corporate power and authority to conduct its business as now conducted and to enter into and perform any Transaction Document to which it is a party. The execution, delivery and performance by Purchaser and/or Ronald Sorensen, M.D. ("Sorensen") of this Agreement and/or any other Transaction Document, have been duly authorized by all necessary corporate or other action of Purchaser and Sorensen, including any necessary action by the officers, directors and shareholders of any of the foregoing. The Transaction Documents have been duly executed and delivered by each of Purchaser and/or Sorensen and are enforceable against each of them in accordance with their terms. Sorensen owns all of the outstanding equity or other ownership interests in Purchaser (after giving effect to any rights or options that are exercisable or exchangeable for, or convertible into, any equity or other ownership interests of Purchaser). (b) Purchase Entirely for Own Account. This Agreement is made with Purchaser in reliance upon Purchaser's express representation to Seller that the Shares will be acquired for investment for such Purchaser's own account, not as a nominee or agent, and not with a view to the resale or distribution of any part thereof, and that Purchaser has no present intention of selling, granting any participation in, or otherwise distributing the Shares. The Purchaser further represents that it does not have any contract, undertaking, agreement or arrangement with any person to sell, transfer or grant participation to such person or to any third person, with respect to any of the Shares. (c) Authority. The execution, delivery and performance by Purchaser of this Agreement and the other Transaction Documents have been duly authorized by all necessary action on behalf of Purchaser, and this Agreement and the other Transaction Documents to which Purchaser is a party have been duly executed and delivered by Purchaser. This Agreement and the other Transaction Documents constitute valid and binding obligations of Purchaser, enforceable in accordance with their respective terms, except (i) as limited by applicable bankruptcy, insolvency, reorganization, moratorium, and other Laws of general application affecting enforcement of creditors' rights generally, (ii) as limited by Laws relating to the availability of specific performance, injunctive relief, or other equitable remedies, and (iii) to the extent any indemnification provisions may be limited by applicable federal or state securities Laws. The execution and delivery of this Agreement and performance of the transactions contemplated by this Agreement and compliance with its provisions by Purchaser will not violate any provision of Law and will not conflict with or result in any breach of any of the terms, conditions or provisions of, or constitute a default under, its articles of incorporation or bylaws. (d) Restricted Securities. Purchaser understands that the Shares it is purchasing are "restricted securities" under the federal securities Laws because they are being acquired from Seller in a transaction not involving a public offering and that under such Laws the Shares may be resold without registration under the Securities Act of 1933, as amended (the "Securities Act") and applicable state securities Laws only in certain limited circumstances. In this regard, Purchaser represents that it is familiar with Rule 144, as promulgated under the Securities Act, and understands the resale limitations imposed thereby and by the Securities Act. (e) Disclosure of Information. Purchaser has received and reviewed all the information it considers necessary or appropriate for deciding whether to purchase the Shares. Purchaser further represents that it is relying solely on its own expertise and that of its consultants, and not on any representation of Seller not expressly contained in this Agreement. The Purchaser has had an opportunity to ask questions and receive answers from Seller regarding the Company, its business and the acquisition of the Shares. (f) Investment Experience. Purchaser is an "accredited investor," and has not retained or consulted with any "purchaser representative" (as such terms are defined in Rule 501 of Regulation D promulgated under the Securities Act) in connection with its execution of this Agreement and the consummation of the transactions contemplated hereby. Purchaser is an investor in securities of companies and acknowledges that it is able to fend for itself, can bear the economic risk of its investment, and has such knowledge and experience in financial or business matters that it is capable of evaluating the merits and risks of the investment in the Shares. Section 4 Indemnification. --------------- (a) Indemnification of Purchaser. Seller (and its successors and assigns) hereby agrees to indemnify and hold harmless Purchaser, the Company, each parent company, subsidiary and/or affiliate of either of the foregoing (including, without limitation, each Subsidiary) and each shareholder, member, partner (or other owner), officer, director, manager, agent, employee, representative or similarly situated party of any of the foregoing (collectively, the "Purchaser Indemnified Parties") from and against any and all damages, losses, claims, liabilities, demands, charges, suits, penalties, costs, and expenses (including court costs and attorneys' fees and expenses incurred in investigating and preparing for any litigation, investigation, compliance action or proceeding but excluding such items as have been disclosed to the other party in writing prior to the Closing Date) (collectively, "Indemnifiable Costs"), including, without limitation, Indemnifiable Costs arising in connection with the commencement or assertion of any action, investigation, proceeding, demand, or claim by a third party, which includes, without limitation, any Governmental Authority (collectively, a "Third-Party Action"), which any of the Purchaser Indemnified Parties may sustain, arising out of or related to (i) any breach or default by Seller of any of the representations, warranties, covenants or agreements of Seller contained in this Agreement or any Transaction Document, (ii) any actual or alleged actions or omissions by Seller or any affiliate of Seller (other than the Company and the Subsidiaries), regardless of whether occurring or existing before, on, or after the Closing Date, (iii) any actual or alleged actions or omissions by the Company, or any of the Company's directors, officers, shareholders, agents, employees, representatives, subsidiaries and/or affiliates occurring prior to the Closing Date (regardless of whether such Indemnifiable Costs are asserted at any time before or after the Closing Date), or (iv) any claim that the structure of the Company's or the Subsidiaries' businesses or business relationships violates any Laws of any Governmental Authority regulating or legislating the provision of or billing for healthcare or the practice of medicine, but only to the extent such claim or alleged claim specifically relates to acts occurring or circumstances existing prior to the Closing Date. Notwithstanding the foregoing, (A) no Purchaser Indemnified Party shall be entitled to assert any claim for indemnification under this Section unless and until such time as all claims of such Purchaser Indemnified Party, individually and not in combination with other Purchaser Indemnified Parties, exceed $50,000 in the aggregate, after which time all claims of such Purchaser Indemnified Party in excess of $50,000 in the aggregate may be asserted, and (B) Seller's obligations under this Section shall not exceed the amount of the Purchase Price. (b) Indemnification of Seller. Purchaser hereby agrees to indemnify and hold harmless Seller, each parent company, subsidiary and/or affiliate of Seller, and each shareholder, member, partner (or other owner), officer, director, manager, agent, employee, representative or similarly situated party of any of the foregoing (collectively, the "Seller Indemnified Parties") from and against any and all Indemnifiable Costs, including, without limitation, Indemnifiable Costs arising in connection with the commencement or assertion of any Third-Party Action, which any of the Seller Indemnified Parties may sustain, arising out of or related to (i) any breach or default by Purchaser of any of the representations, warranties, covenants or agreements of Purchaser contained in this Agreement or any Transaction Document, (ii) any actual or alleged actions or omissions by Purchaser or any affiliate of Purchaser (other than the Company and the Subsidiaries), regardless of whether occurring or existing before, on, or after the Closing Date, (iii) any actual or alleged actions or omissions by the Company, or any of the Company's directors, officers, shareholders, agents, employees, representatives, subsidiaries and/or affiliates occurring after the Closing Date, or (iv) any claim that the structure of the Company's or the Subsidiaries' businesses or business relationships violates any Laws of any Governmental Authority regulating or legislating the provision of or billing for healthcare or the practice of medicine, but only to the extent such claim or alleged claim specifically relates to acts occurring or circumstances existing after the Closing Date that differ in one or more material respects from acts occurring or circumstances existing immediately prior to the Closing Date. Notwithstanding the foregoing, (A) no Seller Indemnified Party shall be entitled to assert any claim for indemnification under this Section unless and until such time as all claims of such Seller Indemnified Party, individually and not in combination with other Seller Indemnified Parties, exceed $50,000 in the aggregate, after which time all claims of such Seller Indemnified Party in excess of $50,000 in the aggregate may be asserted, and (B) Purchaser's obligations under this Section shall not exceed the amount of the Purchase Price. (c) Defense of Third-Party Claims. A party entitled to indemnification under this Section shall give prompt written notice to the indemnifying party of the commencement or assertion of any Third-Party Action in respect of which such indemnified party shall seek indemnification hereunder. Any failure to so notify the indemnifying party shall not relieve the indemnifying party from any liability that it may have to the indemnified party under this Section except to the extent that the failure to give such notice materially and adversely prejudices indemnifying party. The indemnifying party shall have the right to assume control of the defense of, settle, or otherwise dispose of such Third-Party Action on such terms as it deems appropriate; provided, however, that: (i) The indemnified party shall be entitled, at his, her, or its own expense, to participate in the defense of such Third-Party Action; (ii) The indemnifying party shall obtain the prior written approval of the indemnified party, which approval shall not be unreasonably withheld, before entering into or making any settlement, compromise, admission, or acknowledgment of the validity of such Third-Party Action or any liability in respect thereof if, pursuant to or as a result of such settlement, compromise, admission, or acknowledgment, injunctive or other equitable relief would be imposed against the indemnified party; (iii) The indemnifying party shall not consent to the entry of any consent order, decree or judgment or enter into any settlement that does not (except as agreed to in writing by the indemnified party) include as an unconditional term thereof the execution and delivery of a release from all liability in respect of such Third-Party Action by each claimant or plaintiff to, and in favor of, each indemnified party; (iv) The indemnifying party shall not be entitled to control (but shall be entitled to participate at its own expense in the defense of), and the indemnified party shall be entitled to have sole control over, the defense or settlement, compromise, admission, or acknowledgment of any Third-Party Action as to which the indemnifying party fails to assume the defense within thirty (30) days; provided, however, that the indemnified party shall make no settlement, compromise, admission, or acknowledgment which would give rise to liability on the part of the indemnifying party, without the prior written consent of the indemnifying party; (v) The indemnifying party shall make payments of all amounts required to be made pursuant to the foregoing provisions of this Section to or for the account of the indemnified party from time to time promptly upon receipt of bills or invoices relating thereto or when otherwise due and payable, provided that the indemnified party has agreed in writing to reimburse the indemnifying party for the full amount of such payments if the indemnified party is ultimately determined not to be entitled to such indemnification; and (vi) The parties hereto shall extend reasonable cooperation in connection with the defense of any Third-Party Action pursuant to this Section and, in connection therewith, shall furnish such records, information, and testimony and attend such conferences, discovery proceedings, hearings, trials, and appeals as may be reasonably requested. (d) No Rights of Offset Against Promissory Note. Purchaser agrees that, notwithstanding any contrary provision in the Promissory Note, Purchaser is not entitled to and will not attempt to offset any Indemnifiable Costs that may be or become owed pursuant to this Section against amounts that Purchaser owes Seller pursuant to the Promissory Note, unless and only to the extent that (i) Purchaser and Seller have agreed that Purchaser is entitled to receive such Indemnifiable Costs pursuant to this Section or (ii) Purchaser has been finally determined to be entitled to the Indemnifiable Costs in accordance with the provisions of Section 6(f) of this Agreement relating to binding arbitration. (e) Costs of Voluntary Restructuring After the Closing Excluded. Purchaser agrees that any and all costs, expenses and charges associated with any voluntary restructuring of the Company's and/or the Subsidiaries' businesses (or the Company's and/or the Subsidiaries' business relationships) after the Closing cannot be Indemnifiable Costs, and Purchaser agrees that no Purchaser Indemnified Party will be permitted to seek any reimbursement for any such costs, expenses or charges. Section 5 Post-Closing Covenants. ---------------------- (a) Public Statements and Press Releases. The parties hereto covenant and agree that, except as provided for hereinbelow, each will not from and after the date hereof make, issue or release any public announcement, press release, statement or acknowledgment of the existence of, or reveal publicly the terms, conditions and status of, the transactions provided for herein, without the prior written consent of the other parties hereto as to the content and time of release of and the media in which such statements or announcement is to be made, provided, however, that the following shall not be a breach of this Section: (a) filings and disclosures required by the Securities and Exchange Commission, and (b) announcements, statements, acknowledgments or revelations which either party is required by Law to make, issue or release as long as such party shall have given, to the extent reasonably possible, not less than two (2) calendar days prior notice to the other parties hereto, and shall have attempted, to the extent reasonably possible, to clear such announcement, statement, acknowledgment or revelation with the other parties hereto. Each party hereto agrees that it will not unreasonably withhold any such consent or clearance. The provisions of this Section shall not limit or restrict any party's communications with its personal consultants or advisors, including, without limitation, its attorneys, accountants and financial advisors. (b) Transition of Business. Seller agrees to provide all good faith efforts and cooperation in order to assist Purchaser and the Company in transitioning the management of the Company's business after the Closing, including the relationships maintained by the Company's management with respect to the Company's business and employees existing immediately prior to the Closing. Seller agrees to not take any action or make any disclosure, including disclosures related to the transactions contemplated by this Agreement, which might alter or impair any relationship with any Subsidiary partner, customer, or other person or entity which did business with the Company prior to the Closing. Section 6 Miscellaneous. ------------- (a) Survival of Representations and Warranties. Except as otherwise provided herein, all agreements, covenants, representations and warranties contained herein shall survive the execution and delivery of this Agreement and the closing of the transactions contemplated herein; provided, however, that the representations and warranties contained in Section 2 and in Section 3 of this Agreement (and any indemnification obligations that may arise out of a breach of such representations and warranties) shall only survive for a period of one year following the Closing Date. (b) Expenses. Regardless of whether the transactions contemplated hereby are consummated, each party hereto shall pay all of its costs and expenses incurred by it in connection with the negotiation and preparation of this Agreement and the Transaction Documents, including the fees and disbursements of its legal counsel and accountants. (c) Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. Signatures delivered by telecopy shall be considered for all purposes to be the same as original signatures. (d) Severability. If any provision of this Agreement is held by final judgment of a court of competent jurisdiction to be invalid, illegal or unenforceable, such invalid, illegal or unenforceable provision shall be severed from the remainder of this Agreement, and the remainder of this Agreement shall be enforced. In addition, the invalid, illegal or unenforceable provision shall be deemed to be automatically modified, and, as so modified, to be included in this Agreement, such modification being made to the minimum extent necessary to render the provision valid, legal and enforceable. (e) Governing Law. This Agreement shall be governed by and construed in accordance with the Laws of the State of Texas. (f) Arbitration. Any controversy between the parties regarding this Agreement and any claims arising out of this Agreement or its breach shall be submitted to binding arbitration by either party. The arbitration proceedings shall be conducted by a single arbitrator pursuant to the Commercial Arbitration Rules of the American Arbitration Association. The arbitration shall be conducted in Atlanta, Georgia and the arbitrator shall have the right to award actual damages and attorney fees and costs, but shall not have the right to award punitive, exemplary or consequential damages against either party. Notwithstanding the foregoing, (i) any party may seek equitable relief in a court of law rather than pursuant to arbitration under this Section and (ii) Seller may pursue any enforcement of or any action arising out of the Security Agreement in a court of law. (g) Further Assurances. Each party of this Agreement hereby covenants and agrees, without the necessity of any further consideration, to execute and deliver any and all such further documents and take any and all such other actions as may be necessary to appropriately carry out the intent and purposes of this Agreement and to consummate the transactions contemplated. Each party will use its good faith efforts to carry out and comply with the provisions of this Agreement. (h) Successors and Assigns. Neither party may assign any of its rights or obligations under this Agreement without first obtaining the written consent of the other party in each instance. The provisions of this Agreement shall be binding upon, and inure to the benefit of, the permitted respective successors, assigns, heirs, executors and administrators of the parties hereto. (i) Collateral Agreements, Amendments and Waivers. This Agreement (together with the documents delivered pursuant hereto) supersedes all prior documents, understandings, and agreements, oral or written, relating to this transaction and constitutes the entire understanding among the parties with respect to the subject matter hereof. Any modification or amendment to, or waiver of, any provision of this Agreement (or any document delivered pursuant to this Agreement unless otherwise expressly provided therein) may be made only by an instrument in writing executed by each party thereto. No failure or delay on the part of any party in exercising any right, power, or privilege hereunder or under any of the Transaction Documents shall operate as a waiver of such right, power, or privilege; nor shall any single or partial exercise of any such right, power, or privilege preclude any other or future exercise thereof or the exercise of any other right, power or privilege. (j) Notices. Any notices required or permitted to be given under this Agreement (and, unless otherwise expressly provided therein, under any Transaction Document) shall be given in writing and shall be deemed received (a) when delivered personally or by courier service to the relevant party at its address as set forth below or (b) if sent by mail, on the third (3rd) day following the date when deposited in the United States mail, certified or registered mail, postage prepaid, to the relevant party at its address indicated below: Seller: Prime Medical Services, Inc. 1301 Capital of Texas Highway, Suite C-300 Austin, Texas 78746 Attention: President Facsimile: (512) 314-4398 with a copy to: Mr. Timothy L. LaFrey Akin, Gump, Strauss, Hauer & Feld, L.L.P. 816 Congress Avenue, Suite 1900 Austin, Texas 78701 Facsimile: (512) 703-1111 Purchaser: Innovative Medical Technologies, Inc. c/o Daedalus Consulting Group P.O. Box 2932 Spokane, Washington 99220 Attn: Ronald Sorensen, M.D. Facsimile: (509) 623-1023 with copies to: Mr. John A. Riherd, Esq. Riherd & Sherman, P.S. 1212 N. Washington, Suite 210 Spokane, Washington 99201 Facsimile: (509) 324-3364 and: Mr. Jeffrey Slopen, Esq. Wilson, Walker, Hochberg & Slopen 443 Ouelette Ave., Suite 300 Windsor, Ontario, CANADA N94 6R4 Each party may change its address for purposes of this Section by proper notice to the other parties. (k) Construction, Knowledge and Materiality. This Agreement and any other Transaction Document shall be construed without regard to the identity of the person who drafted the various provisions of the same. Each and every provision of this Agreement and the other Transaction Documents shall be construed as though all of the parties participated equally in the drafting of the same. Consequently, the parties acknowledge and agree that any rule of construction that a document is to be construed against the drafting party shall not be applicable either to this Agreement or any other Transaction Document. For purposes of this Agreement, whenever there are references to "material" or "materially," such terms shall be deemed to mean an economic impact exceeding $50,000 with respect to the fact or matter being referred to or described. As used herein, "day" or "days" refers to calendar days unless otherwise specified in each instance. When the term "knowledge" is used in this Agreement in reference to (i) Seller, it shall mean such items as are within the actual knowledge of Ken Shifrin, Brad Hummel, Joseph Jenkins, M.D., Teena Belcik and Cheryl Williams, without any obligation to investigate and (ii) Purchaser, it shall mean such items as are within the actual knowledge of Sorensen or Bill Jonz without any obligation to investigate. [Signature pages follow.] S-1 SIGNATURE PAGE TO STOCK PURCHASE AGREEMENT IN WITNESS WHEREOF, Seller and Purchaser have executed this Stock Purchase Agreement as of the day and year first above written. SELLER: Prime Medical Services, Inc., a Delaware corporation By: Cheryl Williams, Senior Vice President and Chief Financial Officer PURCHASER: Innovative Medical Technologies, Inc., an exempted company incorporated in the Cayman Islands with limited liability By: Ronald Sorensen, M.D., President A-1 EXHIBIT A FORM OF PROMISSORY NOTE EX-10.119 32 0032.txt EX 10.119 MUTUAL NON-COMPETE-IMT MUTUAL NON-COMPETITION AGREEMENT This Mutual Non-Competition Agreement (this "Agreement") is entered into as of the close of business December 31, 2000 (the "Effective Date"), between Prime Medical Services, Inc., a Delaware corporation ("PMSI"), Prostatherapies, Inc., a Delaware corporation ("Prostatherapies"), Innovative Medical Technologies, Inc., an exempted company incorporated in the Cayman Islands with limited liability ("IMT"), and Ronald Sorensen, M.D. ("Sorensen"). Preliminary Statements Concurrently with the execution and delivery of this Agreement, PMSI and IMP are consummating that certain Stock Purchase Agreement (the "Purchase Agreement"), dated effective as of the close of business December 31, 2000. The parties to this Agreement (each, a "Party") acknowledge and agree that this Agreement is ancillary to the Purchase Agreement and all other Transaction Documents (as defined in the Purchase Agreement). Each Party will receive material, valuable benefits as a result of the consummation of the transactions contemplated by the Transaction Documents. Each Party acknowledges and agrees that the other unaffiliated Parties would not enter into, or consent to their applicable subsidiaries and affiliates entering into, any of the Transaction Documents unless such Party entered into this Agreement. In order to induce each of the other Parties to consummate the transactions contemplated by the Purchase Agreement, each Party has agreed to certain restrictions on the activities of it and its Affiliates (as hereinafter defined), which restrictions each Party deems reasonable and appropriate. Statement of Agreement NOW THEREFORE, in consideration of the premises and mutual covenants contained herein and for other good, valuable and binding consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties, intending to be legally bound hereby, agree as follows: 1. Non-Competition Agreement of PMSI. As a material inducement to Prostatherapies, IMT and Sorensen agreeing to enter into the Transaction Documents, PMSI hereby agrees that, until the expiration of five (5) years after the Effective Date, PMSI will not directly or indirectly, either through any kind of ownership (other than ownership of securities of a publicly held entity of which it owns less than five percent (5%) of any class of outstanding securities), or as a principal, shareholder, agent, employer, advisor, consultant, co-partner or in any individual or representative capacity whatever, either for its own benefit or for the benefit of any other person, corporation or other entity, without the prior written consent of Sorensen, commit any of the following acts, which acts shall be considered violations of this covenant not to compete: (a) Directly or indirectly, anywhere within the United States of America, engage in or provide, any services related to (i) the operating of centers or facilities that provide minimally invasive thermotherapy treatment of benign prostatic hyperplasia through thermal ablation ("Prostatherapy"), or (ii) providing any management services, training or consulting services related to any of the activities described in (i); (b) Directly or indirectly provide, anywhere within the United States of America, (i) facilities, equipment and non-physician personnel for the performance by physicians of Prostatherapy, (ii) the marketing, scheduling and management of Prostatherapy procedures, (iii) the credentialing and scheduling of physicians to perform Prostatherapy procedures and (iv) the billing, collecting or accounting for the use of any such facilities, equipment or non-physician personnel; (c) Directly or indirectly request or advise any person, firm, physician, corporation or other entity having a business relationship with Prostatherapies, IMT, Sorensen, or any affiliate, subsidiary or related entity of any of the foregoing, to withdraw, curtail, or cancel its business with such person or entity; or (d) Directly or indirectly hire any employee of Prostatherapies, IMT, Sorensen, or any affiliate, subsidiary or related entity of any of the foregoing, or induce or attempt to influence any employee of Prostatherapies, IMT, Sorensen, or any such affiliate, subsidiary or related entity to terminate its employment with such person or entity. Furthermore, to the extent legally permissible, PMSI agrees that, during the term of this Agreement, PMSI will (a) refer requests for Prostatherapy procedures only to Prostatherapies for performance at the facilities of, and using the equipment of, Prostatherapies; and (b) refer inquiries from those interested in the development of and/or participation in Prostatherapy services to Prostatherapies. 2. Non-Competition Agreement of Prostatherapies, IMT and Sorensen. As a material inducement to PMSI agreeing to enter into the Transaction Documents, each of Prostatherapies, IMT and Sorensen hereby agrees that, until the expiration of five (5) years after the Effective Date, such Party will not directly or indirectly, either through any kind of ownership (other than ownership of securities of a publicly held entity of which it owns less than five percent (5%) of any class of outstanding securities), or as a principal, shareholder, agent, employer, advisor, consultant, co-partner or in any individual or representative capacity whatever, either for its own benefit or for the benefit of any other person, corporation or other entity, without the prior written consent of PMSI, commit any of the following acts, which acts shall be considered violations of this covenant not to compete: (a) Directly or indirectly, anywhere within the United States of America, engage in or provide, any services related to (i) the operating of centers or facilities that provide treatments for urinary tract stones ("Lithotripsy"), (ii) the manufacture, maintenance, refurbishing, repair, sale, or leasing of any equipment related to or necessary for the operating of centers or facilities that provide Lithotripsy, or (iii) providing any management services, training or consulting services related to any of the activities described in (i) or (ii); (b) Directly or indirectly provide, anywhere within the United States of America, (i) facilities, equipment and non-physician personnel for the performance by physicians of Lithotripsy, (ii) the marketing, scheduling and management of Lithotripsy procedures, (iii) the credentialing and scheduling of physicians to perform Lithotripsy procedures and (iv) the billing, collecting or accounting for the use of any such facilities, equipment or non-physician personnel; (c) Directly or indirectly request or advise any person, firm, physician, corporation or other entity having a business relationship with PMSI, or any affiliate, subsidiary or related entity of PMSI, to withdraw, curtail, or cancel its business with such person or entity; or (d) Directly or indirectly hire any employee of PMSI, or any affiliate, subsidiary or related entity of PMSI, or induce or attempt to influence any employee of PMSI, or any such affiliate, subsidiary or related entity to terminate its employment with such person or entity. As partial consideration for the covenants of PMSI set forth in this Agreement, Sorensen and/or IMT agrees to deliver to PMSI, concurrently with the execution and delivery of this Agreement, a promissory note in the amount of $150,000, in the form attached hereto as Exhibit A. 3. Agreement. Each Party has reviewed and carefully considered the provisions of Sections 1 and 2 of this Agreement and, having done so, agrees that the restrictions applicable to it as set forth therein (a) are fair and reasonable with respect to time, geographic area and scope, (b) are not unduly burdensome to it, and (c) are reasonably required for the protection of the interests of the other Parties for whose benefit such restrictions were agreed upon. 4. Remedies. Each Party agrees that a violation on its part of any applicable covenant contained in Sections 1 or 2 of this Agreement will cause the other Parties, for whose benefit such restrictions were agreed upon, irreparable damage for which remedies at law may be insufficient, and for that reason, it agrees that any of the other Parties shall be entitled as a matter of right to equitable remedies, including specific performance and injunctive relief, therefor. The right to specific performance and injunctive relief shall be cumulative and in addition to whatever other remedies, at law or in equity, that the other Parties may have, including, specifically, recovery of additional damages. 5. Affiliates. For purposes of this Agreement, an "Affiliate" of a Party means any person married to, or any minor child of, such Party and any corporation, partnership or other entity that, at the date hereof or at any time during the term hereof, is controlled by, or under common control with, such Party. "Control" (and its derivatives), in this context, means the possession of, directly or indirectly, the power to direct or cause the direction of the management of the applicable corporation, partnership or other entity either through the ownership of voting securities (or other equity interests), by contract, or by ownership of a membership of a nonstock corporation or other entity enabling a Party to elect one or more members of the governing board of that nonstock corporation or other entity. 6. Control of Affiliates' Actions. Each Party will timely exercise all of its rights and powers to cause each of its Affiliates to comply with the terms of this Agreement. 7. Indemnity. Each Party agrees to indemnify, defend and hold each other Party harmless from and against any and all loss, damage, cost and expense (including attorneys' fees) that may result from any breach or threatened breach of this Agreement by it or any of its Affiliates. 8. Miscellaneous. (a) Amendments. This Agreement may be modified or amended only by an instrument in writing executed by all Parties. (b) Headings. The headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. (c) Governing Law. This Agreement shall be construed and enforced in accordance with the internal laws of the State of Texas, and not the conflicts of law provisions thereof. (d) Parties Bound. This Agreement shall be binding upon and be enforceable against each Party and each Party's Affiliates, and their respective successors and representatives. This Agreement shall inure to the benefit of each Party and such Party's respective successors, representatives and assigns. (e) Invalid Provisions. If any provision of this Agreement (including, without limitation, any provision relating to the activities covered by, or time period of, the covenants contained in Section 1 or Section 2 of this Agreement) is held to be illegal, invalid or unenforceable under present or future laws effective during the term hereof, such provision shall be fully severable; this Agreement shall be construed and enforced as if such illegal, invalid or unenforceable provision had never comprised a part hereof; and the remaining provisions shall remain in full force and effect and shall not be affected by the illegal, invalid or unenforceable provision or by its severance herefrom. Furthermore, in lieu of such illegal, invalid or unenforceable provision, there shall be added automatically as a part of this Agreement a provision as similar in terms to such illegal, invalid or unenforceable provision as may be possible and be legal, valid and enforceable. (f) Construction. This Agreement shall be construed without regard to the identity of the person who drafted the various provisions of this Agreement. Each and every provision of this Agreement shall be construed as though all of the Parties participated equally in the drafting of this Agreement. Consequently, each Party acknowledges and agrees that any rule of construction that a document is to be construed against the drafting party shall not be applicable to this Agreement. (g) Other Agreements. Each Party agrees that any material breach by it of any of the terms and provisions of the Purchase Agreement, or any other Transaction Document to which it is a party, shall also be deemed to have been a material breach by it of this Agreement, for all purposes. (h) Defined Terms. Any capitalized terms not otherwise defined in this Agreement shall have the same meaning as set forth in the Purchase Agreement. [Signature page follows] S-1 SIGNATURE PAGE TO MUTUAL NON-COMPETITION AGREEMENT EXECUTED to be effective as of the date first above written. PMSI: Prime Medical Services, Inc. By: Cheryl Williams, Senior Vice President and Chief Financial Officer Prostatherapies: Prostatherapies, Inc. By: Ronald Sorensen, M.D., President IMT: Innovative Medical Technologies, Inc. By: Ronald Sorensen, M.D., President SORENSEN: Ronald Sorensen, M.D. A-1 EXHIBIT A FORM OF PROMISSORY NOTE EX-10.120 33 0033.txt EX 10.120 ASSIGNMENT AND SECURITY AGREEMENT-IMT ASSIGNMENT AND SECURITY AGREEMENT THIS ASSIGNMENT AND SECURITY AGREEMENT (this "Agreement") is entered into effective as of the close of business December 31, 2000, by and between Prime Medical Services, Inc., a Delaware corporation (the "Secured Party"), and Innovative Medical Technologies, Inc., an exempted company incorporated in the Cayman Islands with limited liability (the "Debtor"). RECITALS: A. Debtor executed and delivered those certain Promissory Notes dated December 31, 2000 (collectively, as amended, supplemented, or modified, and including any replacements thereof or substitutions therefore, the "Notes") in the original principal amounts of Nine Hundred Fifty Thousand Dollars ($950,000) and One Hundred Fifty Thousand Dollars ($150,000) payable to the order of Secured Party. B. One of the Notes was issued pursuant to a Stock Purchase Agreement (the "Stock Purchase Agreement"), between Debtor and Secured Party under which Secured Party acquired all of the outstanding capital stock of Prostatherapies, Inc., a Delaware corporation ("Prostatherapies"). C. The other of the Notes was issued pursuant to a certain Mutual Non-Competition Agreement (the "Non-Compete Agreement") by and between Debtor, Prostatherapies, Secured Party and Ronald Sorensen, M.D. D. Debtor and Prostatherapies each have received, and will continue to receive, valuable consideration as a result of the transactions evidenced by, or related to, the Stock Purchase Agreement, the Notes, the Non-Compete Agreement and this Agreement (all of which are collectively referred to as the "Transaction Documents"). E. Debtor has agreed to pledge the Collateral (as defined below) to secure certain obligations and liabilities, including without limitation (i) Debtor's obligations under the Notes, (ii) Debtor's and Prostatherapies' performance of the covenants and agreements set forth in the Non-Compete Agreement, (iii) Debtor's performance of the covenants and agreements set forth in the Stock Purchase Agreement, and (iv) Debtor's performance of the covenants more fully set forth herein. Agreement: Now, Therefore, in consideration of the foregoing and the covenants and agreements hereinafter set forth, and other good and valuable consideration, the receipt and sufficiency of which Debtor acknowledges, Debtor and Secured Party agree as follows: Article I Collateral and Secured Obligations 1.1 Grant of Security Interest. Debtor hereby assigns, transfers, and pledges to Secured Party, and Debtor hereby grants to Secured Party a continuing first priority security interest in and lien (the "Security Interest") upon, the following described collateral, whether now owned or hereafter acquired, and wherever located (collectively, the "Collateral"): (a) Shares of Prostatherapies. All issued and outstanding shares of capital stock (of all classes) of Prostatherapies, including without limitation those shares evidenced by any stock certificates described in the Stock Purchase Agreement, and any replacements, substitutions, or exchanges of such certificates; and any additional shares of capital stock of Prostatherapies subsequently delivered or issued to Debtor (the above described stock is sometimes collectively referred to as the "Prostatherapies Shares"); and any options, rescission rights, registration rights, conversion rights, subscription rights, contractual or quasi-contractual rights, warrants, redemption rights, redemption proceeds, calls, preemptive rights and all other rights and benefits pertaining to the Prostatherapies Shares; (b) Accounts. All accounts and rights now or hereafter attributable to any of the Collateral described in (a) above, and all rights of Debtor now or hereafter arising under any agreement pertaining to the Collateral described in (a) above, including without limitation all distributions, proceeds, fees, dividends, preferences, payments or other benefits of whatever nature which Debtor is now or may hereafter become entitled to receive with respect to any Collateral described in (a) above; (c) Additional Property. "Collateral" shall also include the following property (collectively, the "Additional Property") which Debtor becomes entitled to receive or shall receive in connection with any other Collateral: (i) any stock certificate, including without limitation, any certificate representing a stock dividend or any certificate in connection with any recapitalization, reclassification, merger, consolidation, conversion, sale of assets, combination of shares, stock split, reverse stock split or spin-off; (ii) any option, warrant, subscription or right, whether as an addition to or in substitution of any other Collateral; (iii) any dividends or distributions of any kind whatsoever, whether distributable in cash, stock or other property; (iv) any interest, premium or principal payments; and (v) any conversion or redemption proceeds; and (d) Proceeds. All proceeds (cash and non-cash) arising out of the sale, exchange, collection or other disposition of all or any portion of the Collateral described in (a), (b) or (c) above, including without limitation proceeds in the form of stock, accounts, chattel paper, instruments, documents, goods, inventory and equipment. 1.2 Obligations. This Agreement and the Security Interest shall secure full and punctual payment and performance of the following indebtedness, duties and obligations (collectively, the "Obligations"): (a) All covenants, obligations, and liabilities of Debtor and Prostatherapies under each of the Transaction Documents; (b) All principal, interest, fees and other amounts payable to the Secured Party pursuant to the Notes, including all future advances, extensions, renewals, modifications, increases, or substitutions thereof whether or not provided for in the Transaction Documents; (c) All liabilities and obligations of Debtor to Secured Party under and pursuant to this Agreement and/or any other contract or agreement between Secured Party and Debtor; and (d) All sums expended or advanced by Secured Party pursuant to any term or provision of this Agreement (i) to collect and/or enforce the Obligations, (ii) to maintain, protect and preserve the Collateral, and (iii) all other sums now or hereafter loaned or advanced by Secured Party to Debtor, or expended by Secured Party for the account of Debtor or otherwise owing by Debtor to Secured Party, in respect to the Obligations. 1.3 Voting Rights. As long as no Event of Default (as hereinafter defined) shall have occurred hereunder, any voting rights incident to any stock or other securities pledged as Collateral may be exercised by Debtor; provided, however, that Debtor will not exercise, or cause to be exercised, any such voting rights, without the prior written consent of Secured Party, if the direct or indirect effect of such vote will result in an Event of Default hereunder. ARTICLE II DEBTOR'S REPRESENTATIONS AND WARRANTIES WITH RESPECT TO COLLATERAL Debtor hereby represents and warrants to Secured Party as follows: 2.1 Ownership of Collateral. Debtor has good and marketable title to the Collateral free and clear of any liens, security interests, shareholders agreement, calls, charge, or encumbrance, except for this Security Interest. No financing statement or other instrument similar in effect covering all or any part of the Collateral is on file in any recording office, except as may have been filed in favor of Secured Party relating to this Agreement. 2.2 Power and Authority. Debtor has the lawful right, power, and authority to grant the Security Interest in the Collateral. This Agreement, together with all filings and other actions necessary or desirable to perfect and protect such security interest, which have been duly taken, create a valid and perfected first priority security interest in the Collateral securing the payment and performance of the Obligations. 2.3 No Agreements. The Prostatherapies Shares are not subject to any right of redemption by Prostatherapies or Debtor, or any call or put options, voting trust, proxy, shareholders agreement, right of first refusal or any provision of the respective articles of incorporation or bylaws of Prostatherapies or any other document or agreement which would in any way impair or adversely affect this Security Interest or the rights of Secured Party under this Agreement. 2.4 Solvency of Debtor and the Subsidiaries. As of the date hereof, and after giving effect to the Notes and the other Transaction Documents, and the completion of all other transactions contemplated by Debtor and Prostatherapies at the time of the closing of the transaction contemplated by the Transaction Documents, (i) Debtor and Prostatherapies is and will be solvent, (ii) the fair saleable value of Debtor's assets exceeds and will continue to exceed Debtor's liabilities (both fixed and contingent), and (iii) Debtor has and will have sufficient capital to carry on Debtor's businesses and all businesses in which Debtor is about to engage. 2.5 Securities. Any certificates evidencing securities pledged as Collateral are valid and genuine and have not been altered. All securities pledged as Collateral have been duly authorized and validly issued, are fully paid and non-assessable, and were not issued in violation of the preemptive rights of any party or of any agreement by which Debtor or the issuer thereof is bound. No restrictions or conditions exist with respect to the transfer or voting of any securities pledged as Collateral. 2.6 Ownership of Prostatherapies Shares. Debtor is, as of the date hereof, the legal and beneficial owner of the Prostatherapies Shares. ARTICLE III DEBTOR'S OTHER REPRESENTATIONS AND WARRANTIES 3.1 Good Standing - Debtor. Debtor is a duly formed corporation, duly organized and in good standing under the laws of the Cayman Islands, qualified to do business in and in good standing in each state or country in which such qualification is necessary for the conduct of its business, and has the power to own its property and to carry on its business in each jurisdiction in which Debtor operates. 3.2 Authority and Compliance. Debtor has full power and authority to enter into this Agreement and to enter into and perform its obligations under the Notes, this Agreement and the other Transaction Documents, all of which have been duly authorized by all proper and necessary corporate action. Debtor is in compliance with all applicable laws, ordinances, statutes, orders, regulations, judgments, writs, or decrees of any Governmental Entity ("Laws") to which it is subject. "Governmental Entity" means any government (or any political subdivision or jurisdiction thereof), court, bureau, agency, or other governmental authority having jurisdiction over Debtor, any subsidiary, or any of its or their respective businesses, operations, assets, or properties. 3.3 Binding Agreement. The Notes, this Agreement, and the other Transaction Documents, constitute valid and legally binding obligations of Debtor, in accordance with their terms, subject to the applicable bankruptcy, insolvency, reorganization, moratorium, and similar laws affecting creditors' rights generally. 3.4 No Conflicting Agreements. There are no charter, bylaw or stock provisions of Debtor and no provisions of any existing agreement, mortgage, indenture or contract binding on Debtor or affecting its property, which would conflict with or in any way prevent the execution, delivery, or carrying out of the terms of the Notes, this Agreement, or the other Transaction Documents. 3.5 Ownership of Assets. Debtor has good and full title to the Collateral, and the Collateral is owned free and clear of liens, charges, claims, security interests, and other encumbrances. ARTICLE IV DEBTOR'S COVENANTS WITH RESPECT TO COLLATERAL Debtor covenants and agrees that from the date hereof and until the payment and performance in full of the Obligations unless Secured Party otherwise consents in writing: 4.1 Delivery of Instruments and/or Certificates. Contemporaneously herewith, Debtor covenants and agrees to deliver to Secured Party any certificates, documents, or instruments representing or evidencing the Collateral, with Debtor's endorsement thereon and/or accompanied by property instruments of transfer and assignment duly executed in blank with, if requested by Secured Party, signatures guaranteed by a member or member organization in good standing of an authorized Securities Transfer Agents Medallion Program, all in form and substance satisfactory to Secured Party. 4.2 Further Assurances. Debtor will contemporaneously with the execution hereof and from time to time thereafter at its expense promptly execute and deliver all further instruments and documents and take all further action necessary or appropriate or that Secured Party may request in order (i) to perfect and protect the security interest created or purported to be created hereby and the priority of such security interest, (ii) to enable Secured Party to exercise and enforce its rights and remedies hereunder in respect of the Collateral, and (iii) to otherwise effect the purposes of this Agreement, including without limitation: (A) executing and filing any financing or continuation statements, or any amendments thereto; (B) obtaining written confirmation from the issuer of any securities pledged as Collateral of the pledge of such securities, in form and substance satisfactory to Secured Party; (C) cooperating with Secured Party in registering the pledge of any securities pledged as Collateral with the issuer of such securities; (D) delivering notice of Secured Party's security interest in any securities pledged as Collateral to any securities or financial intermediary, clearing corporation or other party required by Secured Party, in form and substance satisfactory to Secured Party; and (E) obtaining written confirmation of the pledge of any securities constituting Collateral from any securities or financial intermediary, clearing corporation or other party required by Secured Party, in form and substance satisfactory to Secured Party. 4.3 Additional Property. All Additional Property received by Debtor shall be received in trust for the benefit of Secured Party. All Additional Property and all certificates or other written instruments or documents evidencing and/or representing the Additional Property that is received by Debtor, together with such instruments of transfer as Secured Party may request, shall immediately be delivered to or deposited with Secured Party and held by Secured Party as Collateral under the terms of this Agreement. If the Additional Property received by Debtor and delivered to Secured Party pursuant to this Section shall be shares of stock or other securities, such shares of stock or other securities shall be duly endorsed in blank or accompanied by proper instruments of transfer and assignment duly executed in blank with, if requested by Secured Party, signatures guaranteed by a member or member organization in good standing of an authorized Securities Transfer Agents Medallion Program, all in form and substance satisfactory to Secured Party. Secured Party shall be deemed to have possession of any Collateral in transit to Secured Party or its agent. 4.4 Sale, Transfer, Encumbrance. Debtor will not sell, transfer, mortgage, or otherwise encumber any Collateral or impair the value thereof in any manner without Secured Party's prior written consent, including without limitation by purchase, lease, barter, trade, payment deferral, or the creation, assumption or guarantee of indebtedness or other lending of credit. Secured Party's written consent to any sale, mortgage, transfer, or encumbrance shall not be construed to be a waiver of this provision in respect to any subsequent proposed sale, mortgage, transfer, or encumbrance. 4.5 Liens. Neither Debtor nor any person acting on Debtor's behalf has, or shall have any right, power, or authority to and shall not create, incur, or permit to be placed or imposed, upon the Collateral, any lien of any type or nature whatsoever, other than the liens in favor of Secured Party. 4.6 Matters or Occurrences Affecting Collateral or this Agreement. Debtor will promptly notify Secured Party of any and all matters or occurrences that may have a material adverse effect on the status or value of the Collateral or this Agreement, including without limitation the occurrence of an Event of Default, or an event which, with giving of notice or lapse of time, or both, would constitute an Event of Default. 4.7 Agreements Pertaining to Collateral. Debtor will not enter into any type of contract or agreement pertaining to any of the Collateral or in any way transfer any voting rights pertaining to the Collateral to any person or entity. 4.8 Dilution of Ownership. Except for issuance of shares pursuant to incentive stock option grants made by an issuer pursuant to its incentive stock option plan (not to exceed 20% in the aggregate of such issuer's outstanding capital stock on a fully diluted basis), Debtor will not, as to any securities pledged as Collateral, consent to or approve of, and will prohibit, the issuance of (i) any additional shares of any class of securities of such issuer, (ii) any instrument convertible voluntarily by the holder thereof or automatically upon the occurrence or non-occurrence of any event or condition into, or exchangeable for, any such securities, or (iii) any warrants, options, contracts or other commitments entitling any third party to purchase or otherwise acquire any such securities. 4.9 Restrictions on Securities. Debtor will not enter into any agreement creating, or otherwise permit to exist, any restriction or condition upon the transfer, voting or control of any securities pledged as Collateral, except as consented to in writing by Secured Party. As to any securities pledged as collateral, Debtor will not consent to or approve of any stock split, reverse stock split, stock dividend, reclassification, or other similar act or transaction regarding such capital stock unless all other shares of such capital stock which constitute Collateral hereunder are included in such act or transaction and effected thereby in all respects the same as any other shares, or class of shares, of such capital stock. 4.10 Transfer of Prostatherapies Assets. Debtor covenants and agrees not to create any new subsidiary by transfer of, or otherwise convey or transfer to any subsidiary, or to itself, any assets, rights or properties belonging to Prostatherapies. For purposes of this Agreement, the term "subsidiary" means any corporation, limited liability company, partnership or other entity that, directly or indirectly, is owned or controlled by Debtor; it being agreed that, without limitation, Debtor shall conclusively be deemed to have control for purposes of this definition if it, directly or indirectly, owns or has the right to vote twenty percent (20%) or more of the voting ownership interests, however designated, of any corporation, limited liability company, partnership or other entity. ARTICLE V DEBTOR'S AFFIRMATIVE COVENANTS Until payment and performance of all Obligations, Debtor covenants and agrees as follows: 5.1 Existence and Compliance. Debtor and each subsidiary shall maintain its corporate existence in good standing and comply with all Laws applicable to it or to any of its property, business operations and transactions. Debtor and each subsidiary shall qualify as a foreign corporation in all jurisdictions wherein any property now or hereafter owned or any business now or hereafter transacted by Debtor or such subsidiary makes such qualifications necessary. 5.2 Adverse Conditions or Events. Debtor and the subsidiaries shall promptly advise Secured Party in writing of any litigation filed against Debtor or any subsidiary and of any condition, event or act which comes to its attention that would or might have a material adverse effect on Debtor's or any subsidiary's financial condition or on Debtor's ability to perform the Obligations or any subsidiary's ability to perform under its guaranty agreement executed in favor of Secured Party with respect to the Obligations. 5.3 Dividend Rights. Secured Party shall have the sole right to receive, hold and apply as Collateral any dividends or other distributions with respect to the Collateral, or any part thereof, in cash or in kind. All dividend and other distributions which are received by Debtor contrary to the provisions the preceding sentence shall be received in trust for the benefit of Secured Party, shall be segregated from other funds of Debtor, and shall be forthwith paid over to Secured Party in the exact form received (properly endorsed or assigned if requested by Secured Party), to be held by Secured Party as Collateral, or, in Secured Party's sole discretion, to be applied against payment of any Obligation. ARTICLE VI NEGATIVE COVENANTS Until payment and performance of all principal, interest and any other amounts due under the Notes, or any renewals, replacements, or modifications thereof, Debtor covenants and agrees that Debtor and each of its subsidiaries will not, without the prior written consent of Secured Party: 6.1 Transfer of Assets. Enter into any merger or consolidation, or sell, lease, assign, or otherwise dispose of or transfer any assets having a book value or fair market value of greater than Ten Thousand Dollars ($10,000) except in the normal course of its business. 6.2 Change in Ownership or Structure. Dissolve or liquidate; become a party to any merger or consolidation; reorganize; acquire by purchase, lease or otherwise all or substantially all of the assets or capital stock of any corporation or other entity; or sell, transfer, lease, or otherwise dispose of all or any substantial part of its property or assets or business. 6.3 Liens. Knowingly grant, suffer, or permit liens on or security interests in Prostatherapies' assets, or fail to promptly pay all lawful claims, whether for labor, materials, or otherwise, except for purchase money security interests arising in the ordinary course of business. 6.4 Dividends. Declare any dividends on any shares of any class of its capital stock, or apply any of its property or assets to the purchase, redemption or other retirement of any shares of any class of capital stock or in any way amend its capital structure. 6.5 Character of Business. Change the general character of business as conducted at the date hereof, or engage in any type of business not reasonably related to its business as presently and normally conducted. ARTICLE VII DEFAULT AND REMEDIES 7.1 Events of Default. An Event of Default (herein so called) shall exist if any one or more of the following events shall occur: (a) The failure of Debtor to pay any Obligation within fifteen (15) calendar days after such payment is due, including, without limitation, principal and/or interest payments on the Notes; (b) Excluding payment defaults which are addressed in subsection (a) above, any breach by Debtor, Prostatherapies or any of the affiliates of Debtor who are parties thereto, of any covenant, term or condition in this Agreement or any other Transaction Documents, or any other failure to perform any of their respective obligations under this Agreement, or any other Transaction Documents; provided that Debtor shall first have fifteen days following delivery of written notice by Secured Party describing the breach with reasonable specificity, within which period Debtor may cure such breach to the reasonable satisfaction of Secured Party; (c) If Debtor or Prostatherapies: (i) becomes insolvent, or makes a transfer in fraud of creditors, or makes an assignment for the benefit of creditors, or admits in writing its inability to pay its debts as they become due; (ii) generally is not paying its debts as such debts become due and Secured Party, in good faith, determines that such event or condition could lead to a material impairment of the Collateral, or any part thereof, or of any other payment security for any of the Obligations; (iii) has a receiver, trustee or custodian appointed for, or take possession of, all or any substantial portion of the assets of such party or any of the Collateral, either in a proceeding brought by such party or in a proceeding brought against such party and such appointment is not discharged or such possession is not terminated within thirty (30) days after the effective date thereof or such party consents to or acquiesces in such appointment or possession; (iv) files a petition for relief under the United States Bankruptcy Code or any other present or future federal or state insolvency, bankruptcy or similar laws (all of the foregoing hereinafter collectively called "Applicable Bankruptcy Law") or an involuntary petition for relief is filed against such party under any Applicable Bankruptcy Law and such involuntary petition is not dismissed within thirty (30) days after the filing thereof, or an order for relief naming such party is entered under any Applicable Bankruptcy Law, or any composition, rearrangement, extension, reorganization or other relief of debtors now or hereafter existing is requested or consented to by such party; (v) fails to have discharged within a period of ten (10) days any attachment, sequestration or similar writ levied upon, any claim against or affecting, any property of such party; or (vi) fails to pay within ninety (90) days any final money judgment against such party; or (d) The issuer of any securities constituting Collateral files a petition for relief under any Applicable Bankruptcy Law, an involuntary petition for relief is filed against any such issuer under any Applicable Bankruptcy Law and such involuntary petition is not dismissed within thirty (30) days after the filing thereof, or an order for relief naming any such issuer is entered under any Applicable Bankruptcy Law. 7.2 Secured Party's Remedies. Upon the occurrence of an Event of Default: (a) Secured Party may declare the Obligations in whole or part immediately due and may enforce payment and performance of the same and exercise any rights under the Texas UCC, rights and remedies of Secured Party under this Agreement, or otherwise. (b) Secured Party may, at Secured Party's option and at the expense of Debtor, either in Secured Party's own right or in the name of Debtor and in the same manner and to the same extent that Debtor might reasonably so act if this Agreement had not been made: (i) do all things requisite, convenient, or necessary to enforce the performance and observance of all rights, remedies and privileges of Debtor arising from the Collateral, or any part thereof, including without limitation compromising, waiving, excusing, or in any manner releasing or discharging any obligation of any party to or arising from the Collateral; (ii) take possession of the books, papers, chattel paper, documents of title, and accounts of Debtor, wherever located, relating to the Collateral; (iii) sue or otherwise collect and receive money attributable to the Collateral; and (iv) exercise any other lawfully available powers or remedies, and do all other things which Secured Party deems requisite, convenient or necessary or which the Secured Party deems proper to protect the Security Interest. (c) Secured Party may foreclose this Agreement in the manner now or hereafter provided or permitted by law and may upon such reasonable notification prior thereto as may be required by applicable law (Debtor hereby agreeing that ten days' notice is commercially reasonable), sell, assign, transfer, or otherwise dispose of the Collateral at public or private sale, in whole or in part, and Secured Party may, in its own name or as Debtor's attorney-in-fact effectively assign and transfer the Collateral, or any part thereof, absolutely, and execute and deliver all necessary assignments, conveyances, bills of sale, and other instruments with power to substitute one or more persons or corporations with like power. Any such foreclosure sale, assignment, transfer, or other disposition shall, to the extent permitted by law, be a perpetual bar, both at law and in equity, against Debtor and all persons and corporations lawfully claiming by or through or under Debtor. Any such foreclosure sale may be adjourned from time to time. Upon any sale, Secured Party may bid for and purchase the Collateral, or any part thereof, and upon compliance with the terms of sale may hold, retain, possess and dispose of the Collateral, in its absolute right without further accountability. Secured Party shall have the right to be credited on the amount of its bid a corresponding amount of the Obligations as of the date of such sale. (d) If, in the opinion of Secured Party, there is any question that a public sale or distribution of any Collateral will violate any state or federal securities law, Secured Party (i) may offer and sell securities privately to purchasers who will agree to take them for investment purposes and not with a view to distribution and who will agree to imposition of restrictive legends on the certificates representing the security, or (ii) may sell such securities in an intrastate offering under Section 3(a)(11) of the Securities Act of 1933, and no sale so made in good faith by Secured Party shall be deemed to be not "commercially reasonable" because so made. (e) Not in limitation of any other provision of this Agreement, Secured Party shall have all rights and remedies of a secured party under the Texas UCC. 7.3 Application of Proceeds. Secured Party may apply the proceeds of any foreclosure sale hereunder or from any other permitted disposition of the Collateral or any part thereof as follows: (a) first, to the payment of all reasonable costs and expenses of any foreclosure and collection hereunder and all proceedings in connection therewith, including reasonable attorneys' fees; (b) then, to the reimbursement of Secured Party for all disbursements made by Secured Party for taxes, assessments or liens superior to the Security Interest and which Secured Party shall deem expedient to pay; (c) then, to the reimbursement of Secured Party of any other disbursements made by Secured Party in accordance with the terms hereof; (d) then, to or among the amounts of fees, interest and principal then owing and unpaid in respect of the Obligations, in such priority as Secured Party may determine in its discretion; and (e) the remainder of such proceeds, if any, shall be paid to Debtor. If such proceeds shall be insufficient to discharge the entire Obligations, Secured Party shall have any other available legal recourse against Debtor and all other persons obligated under, or for the performance of, the Notes, this Agreement, and the other Transaction Documents, for the deficiency, together with interest thereon at the maximum non-usurious rate per annum. 7.4 Enforcement of Obligations. Nothing in this Agreement or in any other agreement shall affect or impair the unconditional and absolute right of the Secured Party to enforce the Obligations as and when the same shall become due in accordance with the terms of the Notes or other governing document, agreement, or instrument. 7.5 Voting Rights. Upon the occurrence of an Event of Default, Debtor will not exercise any voting rights with respect to securities pledged as Collateral. Debtor hereby irrevocably appoints Secured Party as Debtor's attorney-in-fact (such power of attorney being coupled with an interest) and proxy to exercise any voting rights with respect to Debtor's securities pledged as Collateral upon the occurrence of an Event of Default. ARTICLE VIII RIGHTS OF SECURED PARTY 8.1 Subrogation. Upon the occurrence of an Event of Default, Secured Party, at its election, may subrogate to all of the interest, rights and remedies of the Debtor, in respect to any of the Collateral or agreements pertaining thereto. 8.2 Secured Party Appointed Attorney-in-Fact. Debtor hereby appoints Secured Party as attorney-in-fact of Debtor, with full authority in the place and stead of Debtor and in the name of Debtor, Secured Party or otherwise, from time to time on Secured Party's discretion and upon the occurrence of an Event of Default, to take any action and to execute any instrument which Secured Party may deem necessary or advisable to accomplish the purposes of this Agreement, including without limitation: (a) to ask, demand, collect, sue for, recover, compound, receive and give acquittance and receipts for moneys due and to become due under or in respect of any of the Collateral; (b) to receive, endorse, and collect any drafts or other instruments, documents and chattel paper, in connection with clause (a) of this Section; (c) to file any claims or take any action or institute any proceeding which Secured Party may deem necessary or desirable for the collection of any of the Collateral or otherwise to enforce the rights of Secured Party against any of the Collateral; and (d) to assign and transfer the Collateral, or any part thereof, absolutely and to execute and deliver endorsements, assignments, conveyances, bills of sale and other instruments with power to substitute one or more persons or corporation with like power. 8.3 Performance by Secured Party. If Debtor fails to perform any agreement contained herein, Secured Party may itself perform, or cause the performance of, such agreement, and the reasonable expenses of Secured Party incurred in connection therewith shall be payable by Debtor. In no event, however, shall Secured Party have any obligation or duties whatsoever to perform any covenant or agreement of Debtor contained herein, and any such performance by Secured Party shall be wholly discretionary with Secured Party. 8.4 Duties of Secured Party. The powers conferred upon Secured Party hereunder are solely to protect its interest in the Collateral and shall not impose any duty upon it to exercise any such powers. Except for the safe custody of any Collateral in its possession and the accounting for money actually received by it hereunder, Secured Party shall have no duty as to any Collateral or as to the taking of any necessary steps to preserve rights against prior parties or any other rights pertaining to any Collateral. Without limiting the generality of the foregoing, Secured Party shall not have any obligation, duty or responsibility to do any of the following: (a) ascertain any maturities, calls, conversions, exchanges, offers, tenders or similar matters relating to the Collateral or informing Debtor with respect to any such matters; (b) fix, preserve or exercise any right, privilege or option (whether conversion, redemption or otherwise) with respect to the Collateral; (c) collect any amounts payable in respect of the Collateral; (d) sell all or any portion of the Collateral to avoid market loss; (e) sell all or any portion of the Collateral; or (f) hold the Collateral for or on behalf of any party other than Debtor. 8.5 No Liability of Secured Party. Neither the acceptance of this Agreement by Secured Party, nor the exercise of any rights hereunder by Secured Party, shall be construed in any way as an assumption by Secured Party of any obligations, responsibilities, or duties of Debtor arising in connection with the Collateral assigned hereunder or otherwise bind Secured Party to the performance of any obligations respecting the Collateral, it being expressly understood that Secured Party shall not be obligated to perform, observe, or discharge any obligation, responsibility, duty, or liability of Debtor in respect of any of the Collateral, including without limitation appearing in or defending any action, expending any money or incurring any expense in connection therewith. 8.6 Right of Secured Party to Defend Action Affecting Security. Secured Party may, at the expense of Debtor, appear in and defend any action or proceeding at law or in equity purporting to affect Secured Party's Security Interest under this Agreement. 8.7 Right of Secured Party to Prevent or Remedy Default. If Debtor shall fail to perform any of the covenants, conditions and agreements required to be performed and observed by Debtor under the Notes, or any other instruments secured hereby, or in respect of the Collateral (subject to any applicable default cure period), Secured Party (a) may but shall not be obligated to take any action Secured Party deems necessary or desirable to prevent or remedy any such default by Debtor or otherwise to protect the Security Interest, and (b) shall have the absolute and immediate right to take possession of the Collateral or any part thereof (to the extent Secured Party has not previously taken possession) to such extent and as often as the Secured Party, in its sole discretion, deems necessary or desirable in order to prevent or to cure any such default by Debtor, or otherwise to protect the security of this Agreement. Secured Party may advance or expend such sums of money for the account of Debtor as Secured Party in its sole discretion deems necessary for any such purpose. 8.8 Secured Party's Expenses. All reasonable advances, costs, expenses, charges and attorneys' fees which Secured Party may make, pay or incur under any provision of this Agreement for the protection of its security or for the enforcement of any of its rights hereunder, or in foreclosure proceedings commenced and subsequently abandoned, or in any dispute or litigation in which Secured Party or the holder of any of the Obligations may become involved by reason of or arising out of the Notes, or the Collateral shall be a part of the Obligations and shall be paid by Debtor to Secured Party, upon demand, and shall bear interest until paid at the rate otherwise chargeable on the Notes, but not to exceed the maximum rate of interest permitted by applicable law, from the date of such payment until repaid by Debtor. 8.9. Convertible Collateral. Secured Party may present for conversion any Collateral which is convertible into any other instrument or investment security or a combination thereof with cash, but Secured Party shall not have any duty to present for conversion any Collateral unless it shall have received from Debtor detailed written instructions to that effect at a time reasonably far in advance of the final conversion date to make such conversion possible. 8.10 Remedies. No right or remedy herein reserved to Secured Party is intended to be exclusive of any other right or remedy, but each and every such remedy shall be cumulative, not in lieu of, but in addition to any other rights or remedies given under this Agreement and all other Transaction Documents. Any and all of Secured Party's rights and remedies may be exercised from time to time and as often as such exercise as deemed necessary or desirable by Secured Party. 8.11 Debtor's Waivers. Debtor waives notice of the creation, advance, increase, existence, extension, or renewal of, and of any indulgence with respect to, the Obligations; waives notice of intent to accelerate, notice of acceleration, notice of intent to demand, presentment, demand, notice of dishonor, and protest; waives notice of the amount of the Obligations outstanding at any time, notice of any change in financial condition of any person liable for the Obligations or any part thereof, notice of any Event of Default, and all other notices respecting the Obligations; and agrees that maturity of the Obligations and any part thereof may be accelerated, extended, or renewed one or more times by Secured Party in its discretion, without notice to Debtor. 8.12 Other Parties and Other Collateral. No renewal or extension of or any other indulgence with respect to the Obligations or any part thereof, no release of any security, no release of any person (including any maker, endorser, guarantor, or surety) liable on the Obligations, no delay in enforcement of payment, and no delay or admission or lack of diligence or care in exercising any right or power with respect to the Obligations or any security therefor or guaranty thereof or under this Agreement shall in other manner impair or affect the rights of Secured Party under the law, under this Agreement, or under any other agreement pertaining to the other security for the Obligations, before foreclosing upon the Collateral for the purpose of paying the Obligations. Debtor waives any right to the benefit of or to require or control application of any other security or proceeds thereof, and Debtor agrees that Secured Party shall have no duty or obligation to Debtor to apply to the Obligations any such other security or proceeds thereof. ARTICLE IX MISCELLANEOUS 9.1 Terms Commercially Reasonable. The terms of this Agreement shall be deemed commercially reasonable within the meaning of the Texas UCC. 9.2 Notices. Any notices or demands required or permitted to be given hereunder shall be deemed sufficiently given if in writing and personally delivered or mailed (with all postage and charges prepaid), addressed to Secured Party or to Debtor their respective addresses set forth below, or at such other address as the above parties may from time to time designate by written notice to the other given in accordance with this Section. Any such notice, if personally delivered or transmitted by telecopy, shall be deemed to have been given on the date so delivered or transmitted or, if mailed, be deemed to have been given on the day after such notice is placed in the United States mail in accordance with this Section. Secured Party: Prime Medical Services, Inc. 1301 Capital of Texas Highway, Suite C-300 Austin, Travis County, Texas 78746 Attn: President Facsimile: (512) 314-4398 with a copy to: Timothy L. LaFrey, Esq. Akin, Gump, Strauss, Hauer & Feld, L.L.P. 1900 Frost Bank Plaza 816 Congress Avenue Austin, Texas 78701 Facsimile: (512) 703-1111 Debtor: Innovative Medical Technologies, Inc. c/o Daedalus Consulting Group P.O. Box 2932 Spokane, Washington 99220 Attn: Ronald Sorensen, M.D. Facsimile: (509) 623-1023 with a copy to: John A. Riherd, Esq. Riherd & Sherman, PF 1212 N. Washington, Suite 210 Spokane, Washington 99201 Facsimile: (509) 324-3364 9.3 Parties Bound. Secured Party's rights under this Agreement and the Security Interest shall inure to the benefits of its successors and assigns, and in the event of any assignment or transfer of any of the Obligations or the Collateral, Secured Party thereafter shall be fully discharged from any responsibility with respect to the Collateral so assigned or transferred, but Secured Party shall retain all rights and powers hereby given with respect to any of the Obligations or Collateral not so assigned or transferred. All representations, warranties, and agreements of Debtor if more than one are joint and several, and all shall be binding upon the personal representatives, heirs, successors, and assigns of Debtor. 9.4 Waiver. No delay of Secured Party in exercising any power or right shall operate as a waiver thereof; nor shall any single or partial exercise of any power or right preclude other or further exercise thereof or the exercise of any other power or right. No waiver by Secured Party of any right hereunder of any default by Debtor shall be binding upon Secured Party unless in writing, and no failure by Secured Party to exercise any power or right hereunder or waiver of any default by Debtor shall operate as a waiver of any other or further exercise of such right or power of any further default. 9.5 Agreement Continuing. This Agreement shall constitute a continuing agreement, applying to all future as well as existing transactions, whether or not of the character contemplated at the date of this Agreement, and if all transactions between Secured Party and Debtor shall be closed at any time, shall be equally applicable to any new transactions thereafter. Provisions of this Agreement, unless by their terms exclusive, shall be in addition to other agreements between the parties. 9.6 Definitions. Unless the context indicated otherwise, definitions in the Texas Business and Commerce Code ("Texas UCC") apply to words and phrases in this Agreement; if Texas UCC definitions conflict, Chapter 9 definitions apply. 9.7 Miscellaneous. In this Agreement, whenever the context so requires, the neuter gender includes the masculine and feminine, and the singular number includes the plural and vice versa. The headings of paragraphs herein are inserted only for convenience and shall in no way define, describe or limit the scope of intent of any provisions of this Agreement. No change, amendment, modification, cancellation, or discharge of any provision of this Agreement shall be valid unless consented to in writing by Secured Party. 9.8 Assignment of Secured Party's Interest. Secured Party shall have the right to assign all or any portion of its rights in this Agreement without approval or consent. Debtor may not assign this Agreement or any of its rights or obligations hereunder without the express prior written consent of Secured Party in each instance. 9.9 Applicable Laws. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS AND THE APPLICABLE LAWS OF THE UNITED STATES OF AMERICA. 9.10 ENTIRE AGREEMENT. THE NOTES, THIS AGREEMENT, AND THE OTHER TRANSACTION DOCUMENTS, REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. [Signature page follows] S-1 SIGNATURE PAGE TO ASSIGNMENT AND SECURITY AGREEMENT EXECUTED as of the close of business December 31, 2000. DEBTOR: INNOVATIVE MEDICAL TECHNOLOGIES, INC. By: Ronald Sorensen, M.D., President SECURED PARTY: PRIME MEDICAL SERVICES, INC. By: Cheryl Williams, Senior Vice President and Chief Financial Officer EX-10.121 34 0034.txt EX 10.121 PROMISSORY NOTE-IMT PROMISSORY NOTE Austin, Texas December 31, 2000 PROMISE TO PAY: For value received, the undersigned Borrower (whether one or more) promises to pay to the order of Lender the Principal Amount, together with interest on the unpaid balance of such amount, in lawful money of the United States of America, in accordance with all the terms, conditions, and covenants of this Note and the Loan Documents identified below. BORROWER: Innovative Medical Technologies, Inc., an exempted company incorporated in the Cayman Islands with limited liability BORROWER'S ADDRESS FOR NOTICE: Innovative Medical Technologies, Inc. c/o Daedalus Consulting Group P.O. Box 2932 Spokane, Washington 99220 Facsimile: (509) 324-3364 Attention: President LENDER: Prime Medical Services, Inc., a Delaware corporation LENDER'S ADDRESS FOR PAYMENT: Prime Medical Services, Inc. 1301 Capital of Texas Highway, Suite C-300, Austin, Texas 78746 Facsimile: (512) 328-8510 Attention: Chief Financial Officer PRINCIPAL AMOUNT: Nine Hundred Fifty Thousand Dollars ($950,000) INTEREST RATE: Initially 10.5%, to be reset on the first business day of each calendar quarter beginning on April 2, 2001 to equal 1.5% plus the prime rate of interest as quoted on such date in the "Money Rates" section of the Wall Street Journal, Southwest Edition PAYMENT TERMS: Interest shall begin accruing on the date of this Note, but there shall be no payments due under this Note until April 1, 2001. On February 28, 2001 all accrued interest outstanding under this Note shall be capitalized and treated as principal hereunder. On April 1, 2001, Borrower shall pay all interest that accrued hereunder from and including March 1, 2001 to March 31, 2001. On each of May 1, 2001 and June 1, 2001, Borrower shall pay all interest that has accrued hereunder. Beginning July 1, 2001, and continuing regularly and monthly thereafter on or before the first day of each calendar month, until December 31, 2003 (the "Maturity Date"), interest and principal on the unpaid balance of this Note is due and payable in monthly installments calculated on the basis of a ten year amortization period from the date of this Note, using the interest rate in effect at the time the calculation is made. Borrower acknowledges and agrees that Lender shall periodically recalculate the payment amounts for periods after July 1, 2001 to reflect the effect of changes in the applicable interest rate. Notwithstanding the amortization period used to calculate payment amounts hereunder, on the Maturity Date, the entire outstanding principal balance and all accrued interest hereunder shall become immediately payable in full. Interest will be calculated on the unpaid principal balance (giving effect to the capitalization of the first two month's interest described above). Each payment will be credited first to the accrued interest and then to the reduction of principal. SECURITY AGREEMENT: Borrower's obligations under this Note are secured pursuant to a certain Assignment and Security Agreement dated as of the close of business on December 31, 2000, executed by Borrower and Lender (as amended, the "Security Agreement"). 1. INTEREST PROVISIONS: (a) Rate: The principal balance of this Note from time to time remaining unpaid prior to maturity shall bear interest at the Interest Rate per annum stated above. (b) Maximum Lawful Interest: The term "Maximum Lawful Rate" means the maximum rate of interest and the term "Maximum Lawful Amount" means the maximum amount of interest that is permissible under applicable state or federal law for the type of loan evidenced by this Note and the other Loan Documents. If the Maximum Lawful Rate is increased by statute or other governmental action subsequent to the date of this Note, then the new Maximum Lawful Rate shall be applicable to this Note from the effective date thereof, unless otherwise prohibited by applicable law. (c) Spreading of Interest: Because of the possibility of irregular periodic balances of principal or premature --------------------- payment, the total interest that will accrue under this Note cannot be determined in advance. Lender does not intend to contract for, charge, or receive more than the Maximum Lawful Rate or Maximum Lawful Amount permitted by applicable state or federal law, and to prevent such an occurrence Lender and Borrower agree that all amounts of interest, whenever contracted for, charged, or received by Lender, with respect to the loan of money evidenced by this Note, shall be spread, prorated, or allocated over the full period of time this Note is unpaid, including the period of any renewal or extension of this Note. If demand for payment of this Note is made by Lender prior to the full stated term, the total amount of interest contracted for, charged, or received to the time of such demand shall be spread, prorated, or allocated along with any interest thereafter accruing over the full period of time that this Note thereafter remains unpaid for the purpose of determining if such interest exceeds the Maximum Lawful Amount. (d) Excess Interest: At maturity (whether by acceleration or otherwise) or on earlier final payment of this Note, Lender shall compute the total amount of interest that has been contracted for, charged, or received by Lender or payable by Borrower under this Note and compare such amount to the Maximum Lawful Amount that could have been contracted for, charged, or received by Lender. If such computation reflects that the total amount of interest that has been contracted for, charged, or received by Lender or payable by Borrower exceeds the Maximum Lawful Amount, then Lender shall apply such excess to the reduction of the principal balance and not to the payment of interest; or if such excess interest exceeds the unpaid principal balance, such excess shall be refunded to Borrower. This provision concerning the crediting or refund of excess interest shall control and take precedence over all other agreements between Borrower and Lender so that under no circumstances shall the total interest contracted for, charged, or received by Lender exceed the Maximum Lawful Amount. (e) Interest After Default: At Lender's option, the unpaid principal balance shall bear interest after maturity (whether by acceleration or otherwise) at the "Default Interest Rate." The Default Interest Rate shall be, at Lender's option, (i) the Maximum Lawful Rate, if such Maximum Lawful Rate is established by applicable law; or (ii) the Interest Rate stated on the first page of this Note plus five (5) percentage points, if no Maximum Lawful Rate is established by applicable law; or (iii) eighteen percent (18%) per annum; or (iv) such lesser rate of interest as Lender in its sole discretion may choose to charge; but never more than the Maximum Lawful Rate or at a rate that would cause the total interest contracted for, charged, or received by Lender to exceed the Maximum Lawful Amount. (f) Daily Computation of Interest: To the extent permitted by applicable law, Lender at its option will calculate the per diem interest rate or amount based on the actual number of days in the year (365 or 366, as the case may be), and charge that per diem interest rate or amount each day. In no event shall Lender compute the interest in a manner that would cause Lender to contract for, charge, or receive interest that would exceed the Maximum Lawful Rate or the Maximum Lawful Amount 2. DEFAULT PROVISIONS: (a) EVENTS OF DEFAULT AND ACCELERATION OF MATURITY: LENDER MAY, WITHOUT NOTICE OR DEMAND, (except as otherwise required by statute), ACCELERATE THE MATURITY OF THIS NOTE AND DECLARE THE ENTIRE UNPAID PRINCIPAL BALANCE AND ALL ACCRUED INTEREST AT ONCE DUE AND PAYABLE IF: (i) Borrower fails to fulfill any payment obligation arising under the terms of this Note or any of the Loan Documents (which includes, without limitation, any installment of principal, interest, or any other sum required to be paid hereunder) within fifteen (15) calendar days of the date on which such payment is due; or (ii) There is a breach or default by Borrower under this Note or any of the Loan Documents. (b) WAIVER BY BORROWER: EXCEPT AS PROVIDED IN ANY OTHER LOAN DOCUMENT, BORROWER AND ALL OTHER PARTIES LIABLE FOR THIS NOTE WAIVE, DEMAND, NOTICE OF INTENT TO DEMAND, PRESENTMENT FOR PAYMENT, NOTICE OF NONPAYMENT, PROTEST, NOTICE OF PROTEST, GRACE, NOTICE OF DISHONOR, NOTICE OF INTENT TO ACCELERATE MATURITY, NOTICE OF ACCELERATION OF MATURITY, AND DILIGENCE IN COLLECTION. EACH MAKER, SURETY, ENDORSER, AND GUARANTOR OF THIS NOTE WAIVES AND AGREES TO ONE OR MORE EXTENSIONS FOR ANY PERIOD OR PERIODS OF TIME, AND ANY PARTIAL PAYMENTS, BEFORE OR AFTER MATURITY, WITHOUT PREJUDICE TO THE HOLDER OF THIS NOTE. EACH MAKER, SURETY, ENDORSER, AND GUARANTOR WAIVES NOTICE OF ANY AND ALL RENEWALS, EXTENSIONS, REARRANGEMENTS, AND MODIFICATIONS OF THIS NOTE. (c) Non-Waiver by Lender: Any previous extension of time, forbearance, failure to pursue some remedy, acceptance of late payments, or acceptance of partial payment by Lender, before or after maturity, does not constitute a waiver by Lender of its subsequent right to strictly enforce the collection of this Note according to its terms. (d) Other Remedies Not Required: Lender shall not be required to first file suit, exhaust all remedies, or enforce its rights against any security in order to enforce payment of this Note. (e) Joint and Several Liability: Each Borrower who signs this Note, and all of the other parties liable for the payment of this Note, such as guarantors, endorsers, and sureties, are jointly and severally liable for the payment of this Note. (f) Attorney's Fees: If Lender requires the services of an attorney to enforce the payment of this Note or the performance of the other Loan Documents, or if this Note is collected through any lawsuit, probate, bankruptcy, or other judicial proceeding, Borrower agrees to pay Lender an amount equal to its reasonable attorney's fees and other collection costs. This provision shall be limited by any applicable statutory restrictions relating to the collection of attorney's fees. 3. MISCELLANEOUS PROVISIONS: (a) Subsequent Holder: All references to Lender in this Note shall also refer to any subsequent owner or holder of this Note by transfer, assignment, endorsement, or otherwise. (b) Transfer: Borrower acknowledges and agrees that Lender may transfer this Note or partial interests in the Note to one or more transferees or participants. Borrower authorizes Lender to disseminate to any such transferee or participant or prospective transferee or participant any information it has pertaining to the loan evidenced by this Note, including, without limitation, credit information on Borrower and any guarantor of this Note. (c) Other Parties Liable: All promises, waivers, agreements, and conditions applicable to Borrower shall likewise be applicable to and binding upon any other parties primarily or secondarily liable for the payment of this Note, including all guarantors, endorsers, and sureties. (d) Successors and Assigns: The provisions of this Note shall be binding upon and for the benefit of the successors, assigns, heirs, executors, and administrators of Lender and Borrower. (e) No Duty or Special Relationship: Borrower acknowledges that Lender has no duty of good faith to Borrower, and Borrower acknowledges that no fiduciary, trust, or other special relationship exists between Lender and Borrower. (f) Modifications: Any modifications agreed to by Lender relating to the release of liability of any of the parties primarily or secondarily liable for the payment of this Note, or relating to the release, substitution, or subordination of all or part of the security for this Note, shall in no way constitute a release of liability with respect to the other parties or security not covered by such modification. (g) Entire Agreement: Borrower warrants and represents that the Loan Documents constitute the entire agreement between Borrower and Lender with respect to the loan evidenced by this Note and agrees that no modification, amendment, or additional agreement with respect to such loan or the advancement of funds thereunder will be valid and enforceable unless made in writing signed by both Borrower and Lender. (h) Borrower's Address for Notice: All notices required to be sent by Lender to Borrower shall be sent by U.S. Mail, postage prepaid, to Borrower's Address for Notice stated on the first page of this Note, until Lender shall receive written notification from Borrower of a new address for notice. (i) Lender's Address for Payment: All sums payable by Borrower to Lender shall be paid at Lender's Address for Payment stated on the first page of this Note, or at such other address as Lender shall designate from time to time. (j) Business Use: Borrower warrants and represents to Lender that the proceeds of this Note will be used solely for business or commercial purposes, and in no way will the proceeds be used for personal, family, or household purposes. (k) Chapter 15 Not Applicable: It is understood that Chapter 15 of the Texas Credit Code relating to certain revolving credit loan accounts and tri-party accounts is not applicable to this Note. (l) APPLICABLE LAW: THIS NOTE HAS BEEN EXECUTED AND DELIVERED IN TEXAS AND SHALL BE CONSTRUED IN ACCORDANCE WITH THE APPLICABLE LAWS OF THE STATE OF TEXAS AND THE LAWS OF THE UNITED STATES OF AMERICA APPLICABLE TO TRANSACTIONS IN TEXAS. 4. LOAN DOCUMENTS: (a) This Note. (b) The Security Agreement. (c) That certain Stock Purchase Agreement, dated effective as of the close of business on December 31, 2000, between and among Borrower and Lender (the "Purchase Agreement") and each other Transaction Document (as such term is defined in the Purchase Agreement). [Signature page follows] S-1 EXECUTION PAGE TO PROMISSORY NOTE EXECUTED as of this 31st day of December, 2000. BORROWER: INNOVATIVE MEDICAL TECHNOLOGIES, INC., an exempted company incorporated in the Cayman Islands with limited liability By: ________________________________________ Ronald Sorensen, M.D., President EX-10.122 35 0035.txt EX 10.122 PROMISSORY NOTE - IMT PROMISSORY NOTE Austin, Texas December 31, 2000 PROMISE TO PAY: For value received, the undersigned Borrower (whether one or more) promises to pay to the order of Lender the Principal Amount, together with interest on the unpaid balance of such amount, in lawful money of the United States of America, in accordance with all the terms, conditions, and covenants of this Note and the Loan Documents identified below. BORROWER: Innovative Medical Technologies, Inc., an exempted company incorporated in the Cayman Islands with limited liability BORROWER'S ADDRESS FOR NOTICE: Innovative Medical Technologies, Inc. c/o Daedalus Consulting Group P.O. Box 2932 Spokane, Washington 99220 Facsimile: (509) 324-3364 Attention: President LENDER: Prime Medical Services, Inc., a Delaware corporation LENDER'S ADDRESS FOR PAYMENT: Prime Medical Services, Inc. 1301 Capital of Texas Highway, Suite C-300, Austin, Texas 78746 Facsimile: (512) 328-8510 Attention: Chief Financial Officer PRINCIPAL AMOUNT: One Hundred Fifty Thousand Dollars ($150,000) INTEREST RATE: Initially 10.5%, to be reset on the first business day of each calendar quarter beginning on April 2, 2001 to equal 1.5% plus the prime rate of interest as quoted on such date in the "Money Rates" section of the Wall Street Journal, Southwest Edition PAYMENT TERMS: Interest shall begin accruing on the date of this Note, but there shall be no payments due under this Note until April 1, 2001. On February 28, 2001 all accrued interest outstanding under this Note shall be capitalized and treated as principal hereunder. On April 1, 2001, Borrower shall pay all interest that accrued hereunder from and including March 1, 2001 to March 31, 2001. On each of May 1, 2001 and June 1, 2001, Borrower shall pay all interest that has accrued hereunder. Beginning July 1, 2001, and continuing regularly and monthly thereafter on or before the first day of each calendar month, until December 31, 2003 (the "Maturity Date"), interest and principal on the unpaid balance of this Note is due and payable in monthly installments calculated on the basis of a ten year amortization period from the date of this Note, using the interest rate in effect at the time the calculation is made. Borrower acknowledges and agrees that Lender shall periodically recalculate the payment amounts for periods after July 1, 2001 to reflect the effect of changes in the applicable interest rate. Notwithstanding the amortization period used to calculate payment amounts hereunder, on the Maturity Date, the entire outstanding principal balance and all accrued interest hereunder shall become immediately payable in full. Interest will be calculated on the unpaid principal balance (giving effect to the capitalization of the first two month's interest described above). Each payment will be credited first to the accrued interest and then to the reduction of principal. SECURITY AGREEMENT: Borrower's obligations under this Note are secured pursuant to a certain Assignment and Security Agreement dated as of the close of business on December 31, 2000, executed by Borrower and Lender (as amended, the "Security Agreement"). 1. INTEREST PROVISIONS: (a) Rate: The principal balance of this Note from time to time remaining unpaid prior to maturity shall bear interest at the Interest Rate per annum stated above. (b) Maximum Lawful Interest: The term "Maximum Lawful Rate" means the maximum rate of interest and the term "Maximum Lawful Amount" means the maximum amount of interest that is permissible under applicable state or federal law for the type of loan evidenced by this Note and the other Loan Documents. If the Maximum Lawful Rate is increased by statute or other governmental action subsequent to the date of this Note, then the new Maximum Lawful Rate shall be applicable to this Note from the effective date thereof, unless otherwise prohibited by applicable law. (c) Spreading of Interest: Because of the possibility of irregular periodic balances of principal or premature payment, the total interest that will accrue under this Note cannot be determined in advance. Lender does not intend to contract for, charge, or receive more than the Maximum Lawful Rate or Maximum Lawful Amount permitted by applicable state or federal law, and to prevent such an occurrence Lender and Borrower agree that all amounts of interest, whenever contracted for, charged, or received by Lender, with respect to the loan of money evidenced by this Note, shall be spread, prorated, or allocated over the full period of time this Note is unpaid, including the period of any renewal or extension of this Note. If demand for payment of this Note is made by Lender prior to the full stated term, the total amount of interest contracted for, charged, or received to the time of such demand shall be spread, prorated, or allocated along with any interest thereafter accruing over the full period of time that this Note thereafter remains unpaid for the purpose of determining if such interest exceeds the Maximum Lawful Amount. (d) Excess Interest: At maturity (whether by acceleration or otherwise) or on earlier final payment of this Note, Lender shall compute the total amount of interest that has been contracted for, charged, or received by Lender or payable by Borrower under this Note and compare such amount to the Maximum Lawful Amount that could have been contracted for, charged, or received by Lender. If such computation reflects that the total amount of interest that has been contracted for, charged, or received by Lender or payable by Borrower exceeds the Maximum Lawful Amount, then Lender shall apply such excess to the reduction of the principal balance and not to the payment of interest; or if such excess interest exceeds the unpaid principal balance, such excess shall be refunded to Borrower. This provision concerning the crediting or refund of excess interest shall control and take precedence over all other agreements between Borrower and Lender so that under no circumstances shall the total interest contracted for, charged, or received by Lender exceed the Maximum Lawful Amount. (e) Interest After Default: At Lender's option, the unpaid principal balance shall bear interest after maturity (whether by acceleration or otherwise) at the "Default Interest Rate." The Default Interest Rate shall be, at Lender's option, (i) the Maximum Lawful Rate, if such Maximum Lawful Rate is established by applicable law; or (ii) the Interest Rate stated on the first page of this Note plus five (5) percentage points, if no Maximum Lawful Rate is established by applicable law; or (iii) eighteen percent (18%) per annum; or (iv) such lesser rate of interest as Lender in its sole discretion may choose to charge; but never more than the Maximum Lawful Rate or at a rate that would cause the total interest contracted for, charged, or received by Lender to exceed the Maximum Lawful Amount. (f) Daily Computation of Interest: To the extent permitted by applicable law, Lender at its option will calculate the per diem interest rate or amount based on the actual number of days in the year (365 or 366, as the case may be), and charge that per diem interest rate or amount each day. In no event shall Lender compute the interest in a manner that would cause Lender to contract for, charge, or receive interest that would exceed the Maximum Lawful Rate or the Maximum Lawful Amount 2. DEFAULT PROVISIONS: (a) EVENTS OF DEFAULT AND ACCELERATION OF MATURITY: LENDER MAY, WITHOUT NOTICE OR DEMAND, (except as otherwise required by statute), ACCELERATE THE MATURITY OF THIS NOTE AND DECLARE THE ENTIRE UNPAID PRINCIPAL BALANCE AND ALL ACCRUED INTEREST AT ONCE DUE AND PAYABLE IF: (i) Borrower fails to fulfill any payment obligation arising under the terms of this Note or any of the Loan Documents (which includes, without limitation, any installment of principal, interest, or any other sum required to be paid hereunder) within fifteen (15) calendar days of the date on which such payment is due; or (ii) There is a breach or default by Borrower under this Note or any of the Loan Documents. (b) WAIVER BY BORROWER: EXCEPT AS PROVIDED IN ANY OTHER LOAN DOCUMENT, BORROWER AND ALL OTHER PARTIES LIABLE FOR THIS NOTE WAIVE, DEMAND, NOTICE OF INTENT TO DEMAND, PRESENTMENT FOR PAYMENT, NOTICE OF NONPAYMENT, PROTEST, NOTICE OF PROTEST, GRACE, NOTICE OF DISHONOR, NOTICE OF INTENT TO ACCELERATE MATURITY, NOTICE OF ACCELERATION OF MATURITY, AND DILIGENCE IN COLLECTION. EACH MAKER, SURETY, ENDORSER, AND GUARANTOR OF THIS NOTE WAIVES AND AGREES TO ONE OR MORE EXTENSIONS FOR ANY PERIOD OR PERIODS OF TIME, AND ANY PARTIAL PAYMENTS, BEFORE OR AFTER MATURITY, WITHOUT PREJUDICE TO THE HOLDER OF THIS NOTE. EACH MAKER, SURETY, ENDORSER, AND GUARANTOR WAIVES NOTICE OF ANY AND ALL RENEWALS, EXTENSIONS, REARRANGEMENTS, AND MODIFICATIONS OF THIS NOTE. (c) Non-Waiver by Lender: Any previous extension of time, forbearance, failure to pursue some remedy, acceptance of late payments, or acceptance of partial payment by Lender, before or after maturity, does not constitute a waiver by Lender of its subsequent right to strictly enforce the collection of this Note according to its terms. (d) Other Remedies Not Required: Lender shall not be required to first file suit, exhaust all remedies, or enforce its rights against any security in order to enforce payment of this Note. (e) Joint and Several Liability: Each Borrower who signs this Note, and all of the other parties liable for the payment of this Note, such as guarantors, endorsers, and sureties, are jointly and severally liable for the payment of this Note. (f) Attorney's Fees: If Lender requires the services of an attorney to enforce the payment of this Note or the performance of the other Loan Documents, or if this Note is collected through any lawsuit, probate, bankruptcy, or other judicial proceeding, Borrower agrees to pay Lender an amount equal to its reasonable attorney's fees and other collection costs. This provision shall be limited by any applicable statutory restrictions relating to the collection of attorney's fees. 3. MISCELLANEOUS PROVISIONS: (a) Subsequent Holder: All references to Lender in this Note shall also refer to any subsequent owner or holder of this Note by transfer, assignment, endorsement, or otherwise. (b) Transfer: Borrower acknowledges and agrees that Lender may transfer this Note or partial interests in the Note to one or more transferees or participants. Borrower authorizes Lender to disseminate to any such transferee or participant or prospective transferee or participant any information it has pertaining to the loan evidenced by this Note, including, without limitation, credit information on Borrower and any guarantor of this Note. (c) Other Parties Liable: All promises, waivers, agreements, and conditions applicable to Borrower shall likewise be applicable to and binding upon any other parties primarily or secondarily liable for the payment of this Note, including all guarantors, endorsers, and sureties. (d) Successors and Assigns: The provisions of this Note shall be binding upon and for the benefit of the successors, assigns, heirs, executors, and administrators of Lender and Borrower. (e) No Duty or Special Relationship: Borrower acknowledges that Lender has no duty of good faith to Borrower, and Borrower acknowledges that no fiduciary, trust, or other special relationship exists between Lender and Borrower. (f) Modifications: Any modifications agreed to by Lender relating to the release of liability of any of the parties primarily or secondarily liable for the payment of this Note, or relating to the release, substitution, or subordination of all or part of the security for this Note, shall in no way constitute a release of liability with respect to the other parties or security not covered by such modification. (g) Entire Agreement: Borrower warrants and represents that the Loan Documents constitute the entire agreement between Borrower and Lender with respect to the loan evidenced by this Note and agrees that no modification, amendment, or additional agreement with respect to such loan or the advancement of funds thereunder will be valid and enforceable unless made in writing signed by both Borrower and Lender. (h) Borrower's Address for Notice: All notices required to be sent by Lender to Borrower shall be sent by U.S. Mail, postage prepaid, to Borrower's Address for Notice stated on the first page of this Note, until Lender shall receive written notification from Borrower of a new address for notice. (i) Lender's Address for Payment: All sums payable by Borrower to Lender shall be paid at Lender's Address for Payment stated on the first page of this Note, or at such other address as Lender shall designate from time to time. (j) Business Use: Borrower warrants and represents to Lender that the proceeds of this Note will be used solely for business or commercial purposes, and in no way will the proceeds be used for personal, family, or household purposes. (k) Chapter 15 Not Applicable: It is understood that Chapter 15 of the Texas Credit Code relating to certain revolving credit loan accounts and tri-party accounts is not applicable to this Note. (l) APPLICABLE LAW: THIS NOTE HAS BEEN EXECUTED AND DELIVERED IN TEXAS AND SHALL BE CONSTRUED IN ACCORDANCE WITH THE APPLICABLE LAWS OF THE STATE OF TEXAS AND THE LAWS OF THE UNITED STATES OF AMERICA APPLICABLE TO TRANSACTIONS IN TEXAS. 4. LOAN DOCUMENTS: (a) This Note. (b) The Security Agreement. (c) That certain Mutual Non-Competition Agreement, dated effective as of the close of business on December 31, 2000, between and among Borrower, Lender and Prostatherapies, Inc., a Delaware corporation (the "Non-Competition Agreement") and each other Transaction Document (as such term is defined in the Non-Competition Agreement). [Signature page follows] S-1 EXECUTION PAGE TO PROMISSORY NOTE EXECUTED as of this 31st day of December, 2000. BORROWER: INNOVATIVE MEDICAL TECHNOLOGIES, INC., an exempted company incorporated in the Cayman Islands with limited liability By: ________________________________________ Ronald Sorensen, M.D., President EX-10.123 36 0036.txt EX 10.123 EMPLOYEMENT AGREEMENT- SHIFRIN EXECUTIVE EMPLOYMENT AGREEMENT This Employment Agreement (this "Agreement") is by and between Prime Medical Services, Inc., a Delaware corporation ("Employer") and Kenneth S. Shifrin, an individual ("Executive"), and shall be effective as of November 1, 2000 (the "Effective Date"). Preliminary Statements Executive desires to be employed by Employer upon the terms and conditions stated herein, and Employer desires to employ Executive provided that, in so doing, it can protect its confidential information, business, accounts, patronage and goodwill. Employer and Executive have specifically determined that the terms of this Agreement are fair and reasonable. Statement of Agreement NOW, THEREFORE, in consideration of the premises and mutual covenants contained herein, and for other good, valuable and binding consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound hereby, agree as follows: ARTICLE I. Term; Termination; Prior Agreements. Section 1.1 Term. Employer hereby hires Executive and Executive accepts such employment for a term of two years commencing on the Effective Date. Section 1.2 Termination Upon Expiration. Unless earlier terminated by Employer or Executive in accordance with the terms of this Agreement, and subject to any extension of the term of this Agreement pursuant to the last sentence of Section 1.5, this Agreement shall terminate automatically upon the expiration of the two-year term described in Section 1.1. Section 1.3 Termination Upon Death or Permanent Disability. This Agreement shall be automatically terminated on the death of Executive or on the permanent disability of Executive if Executive is no longer able to perform in all material respects the usual and customary duties of Executive's employment hereunder. For purposes hereof, any condition which in reasonable likelihood is expected to impair Executive's ability to materially perform Executive's duties hereunder for a period of three months or more shall be considered to be permanent. Section 1.4 Termination for Cause. If this Agreement has not been previously terminated, and no party has previously given notice of termination pursuant to Section 1.5, Section 1.6 or Section 1.7, then Employer may terminate this Agreement "for cause" if: (a) In connection with the business of Employer, Executive is convicted of an offense constituting a felony or involving moral turpitude; or (b) in a material and substantial way, (i) Executive (A) violates any written policy of Employer, (B) violates any provision of this Agreement, (C) fails to follow reasonable written instructions or directions from the Board of Directors of Employer (the "Board"), or (D) fails to use good-faith efforts to perform the services required pursuant to this Agreement; and (ii) Executive fails to materially cure such violation or failure within fifteen days after receiving written notice from the Board clearly specifying the act or circumstances that gave rise to such violation or failure. A notice of termination pursuant to this Section shall be in writing and shall state the alleged reason for termination. Executive, within not less than fifteen nor more than thirty days after such notice, shall be given the opportunity to appear before the Board, or a committee thereof, to rebut or dispute the alleged reason for termination. If the Board or committee determines, by a majority of the disinterested directors, after having given Executive the opportunity to rebut or dispute the allegations, that such reason is indeed valid, Employer may immediately terminate Executive's employment under this Agreement for cause. Immediately upon giving the notice contemplated by this paragraph, Employer may elect, during the pendency of such inquiry, to relieve Executive of Executive's regular duties. Section 1.5 Termination for Good Reason. Any termination by Executive of this Agreement pursuant to this Section shall be deemed a termination by Executive for "good reason". Executive may terminate this Agreement for good reason any time after a Change of Control in accordance with any of the following (with the further agreement that any election by Executive to not terminate this Agreement pursuant to this Section following a particular Change of Control shall not prevent the application of this Section to a subsequent Change of Control): (a) Executive may terminate this Agreement for any or no reason upon six months prior written notice, which notice cannot be given before the consummation of such Change of Control or after the expiration of the term of this Agreement pursuant to Section 1.1; (b) Executive may terminate this Agreement upon thirty days prior written notice if Executive's base salary, as provided hereunder, is diminished; (c) Executive may terminate this Agreement upon thirty days prior written notice if Employer requires that Executive move to a city other than Austin; (d) Executive may terminate this Agreement upon thirty days prior written notice if the Board or any or any other person authorized to act by the Board (for purposes of this Agreement, any such authorized person is referred to as an "Authorized Board Designee") materially and unreasonably interferes with Executive's ability to fulfill Executive's job duties; or (e) Executive may terminate this Agreement upon thirty days prior written notice if Executive is reassigned to a position with diminished responsibilities, or Executive's job responsibilities are materially narrowed or diminished. Without limiting the provisions of Section 1.8 hereof, Executive agrees that Employer can relieve Executive of Executive's duties hereunder prior to the end of the applicable notice period provided for in this Section, and in such event, Executive shall not thereafter be entitled to any of the benefits or salary described in Article III hereof. If Employer does not relieve Executive of Executive's duties during any applicable notice period under this Section, and the applicable notice period extends beyond the expiration of the term of this Agreement pursuant to Section 1.2, then the terms and provisions of this Agreement shall govern Executive's employment by Employer until the end of such notice period, and the term of this Agreement shall be deemed automatically extended until the end of such notice period. Section 1.6 Termination of Agreement by Employer Without Cause. Employer has the right to terminate this Agreement, other than "for cause," on 30 days prior written notice. Any termination of this Agreement by Employer other than pursuant to the express terms of Section 1.2, Section 1.3 or Section 1.4 shall be deemed a termination pursuant to this Section, irrespective of whether the notice required under this Section is properly given. Section 1.7 Termination of Agreement by Executive Without Good Reason. Executive may terminate Executive's employment, other than for "good reason," upon 30 days prior written notice stating that this Agreement is terminated other than for "good reason". Executive agrees that Employer can relieve Executive of Executive's duties hereunder prior to the end of such 30 day notice period, and in such event, Executive shall not thereafter be entitled to any of the benefits or salary described in Article III hereof. Section 1.8 Executive's Rights Upon Termination. Upon termination of this Agreement, Executive shall be entitled to the following: (a) If this Agreement is terminated pursuant to Section 1.2, Section 1.3, Section 1.4, or Section 1.7 then Employer shall pay Executive or Executive's representative, as the case may be, Executive's then-current base salary (excluding any bonuses and non-cash benefits) through the effective date of termination (which, in the case of Section 1.7, shall follow any portion of the applicable notice period during which Executive has not been relieved of Executive's duties hereunder), and Employer shall have no further obligations hereunder. (b) If Employer terminates this Agreement without cause pursuant to Section 1.6 or otherwise, or Executive terminates this Agreement pursuant to Section 1.5, then, in addition to receiving Executive's then current base salary through the effective date of termination, Executive (i) shall receive within 15 days of the effective date of termination a lump-sum payment equal to the greater of (A) Executive's then current annualized base salary multiplied by two, or (B) $600,000, and (ii) unless the termination was by Executive pursuant to Section 1.5(a), shall be released from the provisions of Section 4.2, notwithstanding that the provisions of such Section would otherwise survive termination of this Agreement pursuant to Section 1.9. Furthermore, if this Agreement is terminated after a Change of Control, and Executive holds any rights or options exercisable or exchangeable for, or convertible into, a class of capital stock of Employer that is not or will not be publicly traded on the NASDAQ or another national exchange after such termination or Change of Control, then Employer agrees to buy from Executive all such rights and options that have an exercise price below the per share price assigned to the capital stock in the Change of Control, or if no price was assigned, the per share market price on the date of the Change of Control (whichever price is applicable, the "Market Price"). The purchase price for each such right or option shall be determined by multiplying the number of shares of capital stock that may be acquired using such right or option by the difference between the exercise price stated in such right or option and the Market Price. Executive and Employer agree that the effective date of any termination pursuant to Section 1.5 shall be the earlier of the end of the applicable notice period or the date on which Employer relieves Executive of Executive's duties hereunder. Executive and Employer agree that the effective date of any termination pursuant to Section 1.6 hereof shall be only upon the expiration of the 30 day notice period described in Section 1.6, regardless of whether Employer earlier relieves Executive of Executive's duties hereunder. Section 1.9 Survival; No Effect on Deferred Compensation Arrangements. Any termination of this Agreement and Executive's employment as a result thereof shall not release either Employer or Executive from their respective obligations to the date of termination nor from the provisions of this Agreement which, by necessary or reasonable implication, are intended to apply after termination of this Agreement, including, without limitation, the provisions of Article IV. Furthermore, neither the termination of this Agreement nor the termination of Executive's employment under this Agreement shall affect, limit, or modify in any manner the existence or enforceability of any written agreement between Executive and Employer related to or providing for deferred compensation of Executive (or any similar written arrangement). Section 1.10 Termination of Existing Agreements. Any previous employment agreement between Executive on the one hand and Employer or any of Employer's Affiliates (as hereinafter defined) on the other hand is hereby terminated. Section 1.11 "Change of Control." As used in this Agreement, "Change of Control" shall mean the occurrence of any of the following: (a) Any person, entity or "group" within the meaning of ss. 13(d) or 14(d) of the of the Securities and Exchange Act of 1934 (the "Exchange Act") becomes the beneficial owner (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of more than 50% of the combined voting power of the then outstanding voting securities entitled to vote generally in the election of the Board; (b) a merger, reorganization or consolidation whereby Employer's equity holders existing immediately prior to such merger, reorganization or consolidation do not, immediately after consummation of such reorganization, merger or consolidation, own more than 50% of the combined voting power of the surviving entity's then outstanding voting securities entitled to vote generally in the election of directors; (c) the sale of all or substantially all of Employer's assets to an entity in which Employer, any subsidiary of Employer, or Employer's equity holders existing immediately prior to such sale beneficially own less than 50% of the combined voting power of such acquiring entity's then outstanding voting securities entitled to vote generally in the election of directors; or (d) any change in the identity of directors constituting a majority of the Board within a twenty-four month period unless the change was approved by a majority of the Incumbent Directors, where "Incumbent Director" means a member of the Board at the beginning of the period in question, including any director who was not a member of the Board at the beginning of such period but was elected or nominated to the Board by, or on the recommendation of or with the approval of, at least two-thirds of the directors who then qualified as Incumbent Directors. ARTICLE II. Duties of Executive Subject to the approvals by and the ultimate supervision of the Board, Executive during the term hereof shall serve as the Chairman of the Board. Subject to the control of the Board, Executive shall have the responsibilities commensurate with Executive's title and as otherwise provided in Employer's bylaws and other governing documents, but in any event, construed in a manner generally consistent with the responsibilities of Executive that existed immediately prior to the Effective Date. During the period of employment hereunder, Executive shall devote to the business of Employer substantially the same amount of Executive's time and efforts that Executive devoted to the business of Employer prior to the Effective Date; provided, however, that this Section shall not be construed as preventing Executive from investing Executive's personal assets in business ventures that do not compete with Employer or Employer's Affiliates (as hereinafter defined) or are not otherwise prohibited by this Agreement, and spending reasonable amounts of personal time in the management thereof. Employer acknowledges that Executive owns a material ownership interest in American Physicians Service Group, Inc., a Texas corporation ("APS"), and that Executive serves as both a director and officer of APS. Employer agrees that Executive may continue to serve APS in such capacities and devote Executive's time and efforts to such service in a manner generally consistent with the time and efforts devoted by Executive prior to the Effective Date. Consistent with the foregoing, Executive shall use Executive's best efforts to promote the interests of Employer and Employer's Affiliates, and to preserve their goodwill with respect to their employees, customers, suppliers and other persons having business relations with Employer. Executive agrees to accept and hold all such offices and/or directorships with Employer and Employer's Affiliates as to which Executive may, from time to time, be elected. For purposes of this Agreement, Employer's subsidiaries, parent companies and other affiliates are collectively referred to as "Affiliates." ARTICLE III. Salary; Expense Reimbursements Section 3.1 Salary. As compensation for Executive's service under and during the term of this Agreement (or until terminated pursuant to the provisions hereof) Employer shall pay Executive a salary of $25,000 per calendar month (prorated for partial months), payable in accordance with the regular payroll practices of Employer, as in effect from time to time. Such salary shall be subject to withholding for the prescribed federal income tax, social security and other items as required by law and for other items consistent with Employer's policy with respect to health insurance and other benefit plans for similarly situated employees of Employer in which Executive may elect to participate. Section 3.2 Other Benefits. During the term of this Agreement, Executive also shall be entitled to the same amount of paid vacation per year as was available to Executive and other senior management executives of Employer under the policy of Employer in effect on the Effective Date. Executive will not be paid for unused vacation, and unused vacation cannot be carried forward to subsequent years. Without limiting the foregoing, Executive shall also receive such paid sick leave, insurance and other fringe benefits as are generally made available to other personnel of Employer in comparable positions, with comparable service credit and with comparable duties and responsibilities. Any benefits in excess of those granted other salaried employees of Employer shall be subject to the prior approval of the Board. Notwithstanding the foregoing, (a) Executive shall be entitled to participate in Employer's annual Executive Incentive Compensation Pool which is allocated to participants based on individual and company wide goal attainment, as determined in the sole discretion of the Board, and (b) Executive shall be eligible for participation in Employer's Stock Option Plan (if any), but all option grants thereunder shall be subject to the sole discretion of the Board. Section 3.3 Bonuses. In the discretion of the Board, and without implying any obligation on Employer ever to award a bonus to Executive, Executive may from time to time be awarded a cash bonus or bonuses for services rendered to Employer during the term of Executive's employment under this Agreement. If and to the extent a bonus is ever considered for Executive, it is expected that any such bonus will be based not only on Executive's individual performance and Executive's relative position, service tenure and responsibilities with Employer, but also on the performance and profitability of the entire business of Employer. Section 3.4 Expenses. Employer shall reimburse all reasonable out-of-pocket travel and business expenses incurred by Executive in connection with the performance of Executive's duties pursuant to this Agreement. Executive shall provide Employer with documentation of Executive's expenses, in a form acceptable to Employer and which satisfies applicable federal income tax reporting and record keeping requirements. Section 3.5 Location of Employment. The parties acknowledge and agree that Executive's employment duties hereunder are performable in Austin, Texas, subject to business travel commensurate with Executive's duties hereunder and as otherwise requested by Employer. ARTICLE IV. Executive's Restrictive Covenants Section 4.1 Confidentiality Agreement. Executive acknowledges that Executive has been and will continue to be exposed to confidential information and trade secrets ("Proprietary Information") pertaining to, or arising from, the business of Employer and/or Employer's Affiliates, that such Proprietary Information is unique and valuable and that Employer and/or Employer's Affiliates would suffer irreparable injury if this information were divulged to those in competition with Employer or Employer's Affiliates. Therefore, Executive agrees to keep in strict secrecy and confidence, both during and after the period of Executive's employment, any and all information which Executive acquires, or to which Executive has access, during Executive's employment by Employer, that has not been publicly disclosed by Employer or Employer's Affiliates, that is not a matter of common knowledge by their respective competitors or that is not required to be disclosed through legal process. The Proprietary Information covered by this Agreement shall include, but shall not be limited to, information relating to any inventions, processes, software, formulae, plans, devices, compilations of information, technical data, mailing lists, management strategies, business distribution methods, names of suppliers (of both goods and services) and customers, names of employees and terms of employment, arrangements entered into with suppliers and customers, including, but not limited to, proposed expansion plans of Employer, marketing and other business and pricing strategies, and trade secrets of Employer and/or Employer's Affiliates. Except with prior approval of the Board or any Authorized Board Designee, Executive will not, either during or after Executive's employment hereunder: (a) directly or indirectly disclose any Proprietary Information to any person except authorized personnel of Employer; nor, (b) use Proprietary Information in any manner other than in furtherance of the business of Employer. Upon termination of employment, whether voluntary or involuntary, within forty-eight hours of termination, Executive will deliver to Employer (without retaining copies thereof) all documents, records or other memorializations including copies of documents and any notes which Executive has prepared, that contain Proprietary Information or relate to Employer's or Employer's Affiliates' business, all other tangible Proprietary Information in Executive's possession or control, and all of Employer's and the Affiliates' credit cards, keys, equipment, vehicles, supplies and other materials that are in possession or under Executive's control. Section 4.2 Nonsolicitation Agreement. During Executive's employment hereunder and for a period of two years after Executive ceases to be employed by Employer, Executive shall not, directly or indirectly, for Executive's own account or otherwise (i) solicit business from, divert business from, or attempt to convert to other methods of using the same or similar products or services as provided by Employer or Employer's Affiliates, any client, account or location of Employer or Employer's Affiliates with which Executive has had any contact as a result of Executive's employment hereunder; or (ii) solicit for employment or employ any employee or former employee of Employer or Employer's Affiliates. Section 4.3 Remedies. Executive understands and acknowledges damages at law alone will be an insufficient remedy for Employer and Employer will suffer irreparable injury if Executive violates the terms of this Agreement. Accordingly, Employer, upon application to a court of competent jurisdiction, shall be entitled to injunctive relief to enforce the provisions of this Agreement in the event of any breach, or threatened breach, of its terms. Executive hereby waives any requirement that Employer post bond or other security prior to obtaining such injunctive relief. Injunctive relief may be sought in addition to any other available rights or remedies at law. Employer shall additionally be entitled to reasonable attorneys' fees incurred in enforcing the provisions of this Agreement. ARTICLE V. Miscellaneous Section 5.1 Assignment. No party to this Agreement may assign this Agreement or any or all of its rights or obligations hereunder without first obtaining the written consent of all other parties hereto. Any assignment in violation of the foregoing shall be null and void. Subject to the preceding sentences of this Section, the terms and conditions of this Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective heirs, legal representatives, successors and permitted assigns. This Agreement shall not be deemed to confer upon any person not a party to this Agreement any rights or remedies hereunder. The provisions of this Section do not preclude the sale, transfer or assignment of the ownership interests of any entity that is a party to this Agreement, although such a sale, transfer or assignment may be expressly prohibited or conditioned pursuant to other provisions of this Agreement. Section 5.2 Amendments. This Agreement cannot be modified or amended except by a written agreement executed by all parties hereto. Section 5.3 Waiver of Provisions; Remedies Cumulative. Any waiver of any term or condition of this Agreement must be in writing, and signed by all of the parties hereto. The waiver of any term or condition hereof shall not be construed as either a continuing waiver with respect to the term or condition waived, or a waiver of any other term or condition hereof. No party hereto shall by any act (except by written instrument pursuant to this Section), delay, indulgence, omission or otherwise be deemed to have waived any right, power, privilege or remedy hereunder or to have acquiesced in any default in or breach of any of the terms and conditions hereof. No failure to exercise, nor any delay in exercising, on the part of any party hereto, any right, power, privilege or remedy hereunder shall operate as a waiver thereof. No single or partial exercise of any right, power, privilege or remedy hereunder shall preclude any other or further exercise thereof or the exercise of any other right, power, privilege or remedy. No remedy set forth in this Agreement or otherwise conferred upon or reserved to any party shall be considered exclusive of any other remedy available to any party, but the same shall be distinct, separate and cumulative and may be exercised from time to time as often as occasion may arise or as may be deemed expedient. Section 5.4 Further Assurances. At and from time to time after the Closing, each party shall, at the request of another party hereto, but without further consideration, execute and deliver such other instruments and take such other actions as the requesting party may reasonably request in order to more effectively evidence or consummate the transactions or activities contemplated hereunder. Section 5.5 Entire Agreement. This Agreement and the agreements contemplated hereby or executed in connection herewith (a) constitute the entire agreement of the parties hereto regarding the subject matter hereof, and (b) supersede all prior agreements (including, without limitation, that certain Executive Employment Agreement dated September 1, 2000) and understandings, both written and oral, among the parties hereto, or any of them, with respect to the subject matter hereof. Section 5.6 Severability; Illegality. In the event any state or federal laws or regulations, now existing or enacted or promulgated after the date hereof, are interpreted by judicial decision, a regulatory agency or legal counsel in such a manner as to indicate that any provision hereof may be illegal, invalid or unenforceable, such provision shall be fully severable and this Agreement shall be construed and enforced as if such illegal, invalid or unenforceable provision never comprised a part hereof; and the remaining provisions hereof shall remain in full force and effect and shall not be affected by the illegal, invalid or unenforceable provision or by its severance herefrom. Furthermore, in lieu of such illegal, invalid or unenforceable provision, there shall be added automatically as part of this Agreement a provision that (a) preserves the underlying economic and financial arrangements between the parties hereto without substantial economic detriment to any particular party and (b) is as similar in effect to such illegal, invalid or unenforceable provision as may be possible and be legal, valid and enforceable. No party to this Agreement shall claim or assert illegality as a defense to the enforcement of this Agreement or any provision hereof; instead, any such purported illegality shall be resolved pursuant to the terms of this Section. Section 5.7 GOVERNING LAW. THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HERETO SHALL BE GOVERNED BY AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE SUBSTANTIVE LAWS (BUT NOT THE RULES GOVERNING CONFLICTS OF LAWS) OF THE STATE OF TEXAS. Section 5.8 Language Construction. This Agreement shall be construed, in all cases, according to its fair meaning, and without regard to the identity of the person who drafted the various provisions contained herein. The parties acknowledge that each party and its counsel have reviewed and revised this Agreement and that the normal rule of construction to the effect that any ambiguities are to be resolved against the drafting party shall not be employed in the interpretation hereof. As used in this Agreement, "day" or "days" refers to calendar days unless otherwise expressly stated in each instance. The captions in this Agreement are for convenience of reference only and shall not limit or otherwise affect any of the terms or provisions hereof. When the context requires, the gender of all words used herein shall include the masculine, feminine and neuter and the number of all words shall include the singular and plural. Use of the words "herein", "hereof", "hereto", "hereunder" and the like in this Agreement shall be construed as references to this Agreement as a whole and not to any particular Article, Section or provision of this Agreement, unless otherwise expressly noted. Section 5.9 Notice. Whenever this Agreement requires or permits any notice, request, or demand from one party to another, the notice, request, or demand must be in writing to be effective and shall be deemed to be delivered and received (a) if personally delivered or if delivered by facsimile or courier service, when actually received by the party to whom notice is sent or (b) if delivered by mail (whether actually received or not), at the close of business on the third business day next following the day when placed in the mail, postage prepaid, certified or registered, addressed to the appropriate party or parties, at the address of such party set forth below (or at such other address as such party may designate by written notice to all other parties in accordance herewith): If to Employer: Prime Medical Services, Inc. 1301 Capital of Texas Hwy, Suite C-300 Austin, TX 78746 Attention: Board of Directors Facsimile Transmission: (512) 314-4503 If to Executive: Kenneth S. Shifrin 15801 Chateau Ave. Austin, TX 78734 Facsimile Transmission: (512) 266-7821 Section 5.10 CHOICE OF FORUM; ATTORNEYS' FEES. THE PARTIES HERETO AGREE THAT THIS AGREEMENT IS PERFORMABLE IN WHOLE AND IN PART IN TRAVIS COUNTY, TEXAS, AND SHOULD ANY SUIT, ACTION OR PROCEEDING ARISING OUT OF THIS AGREEMENT BE INSTITUTED BY ANY PARTY HERETO (OTHER THAN A SUIT, ACTION OR PROCEEDING TO ENFORCE OR REALIZE UPON ANY FINAL COURT JUDGMENT ARISING OUT OF THIS AGREEMENT), SUCH SUIT, ACTION OR PROCEEDING SHALL BE INSTITUTED ONLY IN A STATE OR FEDERAL COURT IN TRAVIS COUNTY, TEXAS. EACH OF THE PARTIES HERETO CONSENTS TO THE IN PERSONAM JURISDICTION OF ANY STATE OR FEDERAL COURT IN TRAVIS COUNTY, TEXAS AND WAIVES ANY OBJECTION TO THE VENUE OF ANY SUCH SUIT, ACTION OR PROCEEDING. THE PARTIES HERETO RECOGNIZE THAT COURTS OUTSIDE TRAVIS COUNTY, TEXAS MAY ALSO HAVE JURISDICTION OVER SUITS, ACTIONS OR PROCEEDINGS ARISING OUT OF THIS AGREEMENT, AND IN THE EVENT THAT ANY PARTY HERETO SHALL INSTITUTE A PROCEEDING INVOLVING THIS AGREEMENT IN A JURISDICTION OUTSIDE TRAVIS COUNTY, TEXAS, THE PARTY INSTITUTING SUCH PROCEEDING SHALL INDEMNIFY ANY OTHER PARTY HERETO FOR ANY LOSSES AND EXPENSES THAT MAY RESULT FROM THE BREACH OF THE FOREGOING COVENANT TO INSTITUTE SUCH PROCEEDING ONLY IN A STATE OR FEDERAL COURT IN TRAVIS COUNTY, TEXAS, INCLUDING WITHOUT LIMITATION ANY ADDITIONAL EXPENSES INCURRED AS A RESULT OF LITIGATING IN ANOTHER JURISDICTION, SUCH AS REASONABLE FEES AND EXPENSES OF LOCAL COUNSEL AND TRAVEL AND LODGING EXPENSES FOR PARTIES, WITNESSES, EXPERTS AND SUPPORT PERSONNEL. THE PREVAILING PARTY IN ANY ACTION TO ENFORCE OR DEFEND RIGHTS UNDER THIS AGREEMENT SHALL BE ENTITLED TO RECOVER ITS COSTS AND REASONABLE ATTORNEYS' FEES IN ADDITION TO ANY OTHER RELIEF GRANTED. Section 5.11 Counterparts. This Agreement may be executed in multiple counterparts, each of which shall be deemed an original, and all of which together shall constitute one and the same instrument. [Signature page follows] S-1 SIGNATURE PAGE TO EXECUTIVE EMPLOYMENT AGREEMENT EXECUTED by Employer and Executive to be effective for all purposes as of the Effective Date provided above. EMPLOYER: PRIME MEDICAL SERVICES, INC. By: Printed Name: Title: EXECUTIVE: Printed Name: Kenneth S. Shifrin EX-10.124 37 0037.txt EX 10.124 EMPLOYEMENT AGREEMENT- HUMMEL EXECUTIVE EMPLOYMENT AGREEMENT This Employment Agreement (this "Agreement") is by and between Prime Medical Services, Inc., a Delaware corporation ("Employer") and Brad A. Hummel, an individual ("Executive"), and shall be effective as of November 1, 2000 (the "Effective Date"). Preliminary Statements Executive desires to be employed by Employer upon the terms and conditions stated herein, and Employer desires to employ Executive provided that, in so doing, it can protect its confidential information, business, accounts, patronage and goodwill. Employer and Executive have specifically determined that the terms of this Agreement are fair and reasonable. Statement of Agreement NOW, THEREFORE, in consideration of the premises and mutual covenants contained herein, and for other good, valuable and binding consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound hereby, agree as follows: ARTICLE I. Term; Termination; Prior Agreements. Section 1.1 Term. Employer hereby hires Executive and Executive accepts such employment for a term of two years commencing on the Effective Date. Section 1.2 Termination Upon Expiration. Unless earlier terminated by Employer or Executive in accordance with the terms of this Agreement, and subject to any extension of the term of this Agreement pursuant to the last sentence of Section 1.5, this Agreement shall terminate automatically upon the expiration of the two-year term described in Section 1.1. Section 1.3 Termination Upon Death or Permanent Disability. This Agreement shall be automatically terminated on the death of Executive or on the permanent disability of Executive if Executive is no longer able to perform in all material respects the usual and customary duties of Executive's employment hereunder. For purposes hereof, any condition which in reasonable likelihood is expected to impair Executive's ability to materially perform Executive's duties hereunder for a period of three months or more shall be considered to be permanent. Section 1.4 Termination for Cause. If this Agreement has not been previously terminated, and no party has previously given notice of termination pursuant to Section 1.5, Section 1.6 or Section 1.7, then Employer may terminate this Agreement "for cause" if: (a) In connection with the business of Employer, Executive is convicted of an offense constituting a felony or involving moral turpitude; or (b) in a material and substantial way, (i) Executive (A) violates any written policy of Employer, (B) violates any provision of this Agreement, (C) fails to follow reasonable written instructions or directions from the Board of Directors of Employer (the "Board"), or any other person authorized by the Board to instruct or supervise Executive (for purposes of this Agreement, any such authorized person is referred to as an "Authorized Board Designee"), or (D) fails to use good-faith efforts to perform the services required pursuant to this Agreement; and (ii) Executive fails to materially cure such violation or failure within fifteen days after receiving written notice from the Board clearly specifying the act or circumstances that gave rise to such violation or failure. A notice of termination pursuant to this Section shall be in writing and shall state the alleged reason for termination. Executive, within not less than fifteen nor more than thirty days after such notice, shall be given the opportunity to appear before the Board, or a committee thereof, to rebut or dispute the alleged reason for termination. If the Board or committee determines, by a majority of the disinterested directors, after having given Executive the opportunity to rebut or dispute the allegations, that such reason is indeed valid, Employer may immediately terminate Executive's employment under this Agreement for cause. Immediately upon giving the notice contemplated by this paragraph, Employer may elect, during the pendency of such inquiry, to relieve Executive of Executive's regular duties. Section 1.5 Termination for Good Reason. Any termination by Executive of this Agreement pursuant to this Section shall be deemed a termination by Executive for "good reason". Executive may terminate this Agreement for good reason any time after a Change of Control in accordance with any of the following (with the further agreement that any election by Executive to not terminate this Agreement pursuant to this Section following a particular Change of Control shall not prevent the application of this Section to a subsequent Change of Control): (a) Executive may terminate this Agreement upon thirty days prior written notice if Executive's base salary, as provided hereunder, is diminished; (b) Executive may terminate this Agreement upon thirty days prior written notice if Employer requires that Executive move to a city other than Austin; (c) Executive may terminate this Agreement upon thirty days prior written notice if the Board or any Authorized Board Designee materially and unreasonably interferes with Executive's ability to fulfill Executive's job duties; or (d) Executive may terminate this Agreement upon thirty days prior written notice if Executive is reassigned to a position with diminished responsibilities, or Executive's job responsibilities are materially narrowed or diminished. Without limiting the provisions of Section 1.8 hereof, Executive agrees that Employer can relieve Executive of Executive's duties hereunder prior to the end of the applicable notice period provided for in this Section, and in such event, Executive shall not thereafter be entitled to any of the benefits or salary described in Article III hereof. If Employer does not relieve Executive of Executive's duties during any applicable notice period under this Section, and the applicable notice period extends beyond the expiration of the term of this Agreement pursuant to Section 1.2, then the terms and provisions of this Agreement shall govern Executive's employment by Employer until the end of such notice period, and the term of this Agreement shall be deemed automatically extended until the end of such notice period. Section 1.6 Termination of Agreement by Employer Without Cause. Employer has the right to terminate this Agreement, other than "for cause," on 30 days prior written notice. Any termination of this Agreement by Employer other than pursuant to the express terms of Section 1.2, Section 1.3 or Section 1.4 shall be deemed a termination pursuant to this Section, irrespective of whether the notice required under this Section is properly given. Section 1.7 Termination of Agreement by Executive Without Good Reason. Executive may terminate Executive's employment, other than for "good reason," upon 30 days prior written notice stating that this Agreement is terminated other than for "good reason". Executive agrees that Employer can relieve Executive of Executive's duties hereunder prior to the end of such 30 day notice period, and in such event, Executive shall not thereafter be entitled to any of the benefits or salary described in Article III hereof. Section 1.8 Executive's Rights Upon Termination. Upon termination of this Agreement, Executive shall be entitled to the following: (a) If this Agreement is terminated pursuant to Section 1.2, Section 1.3, Section 1.4, or Section 1.7 then Employer shall pay Executive or Executive's representative, as the case may be, Executive's then-current base salary (excluding any bonuses and non-cash benefits) through the effective date of termination (which, in the case of Section 1.7, shall follow any portion of the applicable notice period during which Executive has not been relieved of Executive's duties hereunder), and Employer shall have no further obligations hereunder. (b) If Employer terminates this Agreement without cause pursuant to Section 1.6 or otherwise, or Executive terminates this Agreement pursuant to Section 1.5, then, in addition to receiving Executive's then current base salary through the effective date of termination, Executive (i) shall receive within 15 days of the effective date of termination a lump-sum payment equal to the greater of (A) Executive's then current annualized base salary multiplied by two, or (B) $600,000, and (ii) shall be released from the provisions of Section 4.2, notwithstanding that the provisions of such Section would otherwise survive termination of this Agreement pursuant to Section 1.9. Executive and Employer agree that the effective date of any termination pursuant to Section 1.5 shall be the earlier of the end of the applicable notice period or the date on which Employer relieves Executive of Executive's duties hereunder. Executive and Employer agree that the effective date of any termination pursuant to Section 1.6 hereof shall be only upon the expiration of the 30 day notice period described in Section 1.6, regardless of whether Employer earlier relieves Executive of Executive's duties hereunder. Section 1.9 Survival. Any termination of this Agreement and Executive's employment as a result thereof shall not release either Employer or Executive from their respective obligations to the date of termination nor from the provisions of this Agreement which, by necessary or reasonable implication, are intended to apply after termination of this Agreement, including, without limitation, the provisions of Article IV. Section 1.10 Termination of Existing Agreements. Any previous employment agreement between Executive on the one hand and Employer or any of Employer's Affiliates (as hereinafter defined) on the other hand is hereby terminated. Section 1.11 "Change of Control." As used in this Agreement, "Change of Control" shall mean the occurrence of any of the following: (a) Any person, entity or "group" within the meaning of ss. 13(d) or 14(d) of the of the Securities and Exchange Act of 1934 (the "Exchange Act") becomes the beneficial owner (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of more than 50% of the combined voting power of the then outstanding voting securities entitled to vote generally in the election of the Board; (b) a merger, reorganization or consolidation whereby Employer's equity holders existing immediately prior to such merger, reorganization or consolidation do not, immediately after consummation of such reorganization, merger or consolidation, own more than 50% of the combined voting power of the surviving entity's then outstanding voting securities entitled to vote generally in the election of directors; (c) the sale of all or substantially all of Employer's assets to an entity in which Employer, any subsidiary of Employer, or Employer's equity holders existing immediately prior to such sale beneficially own less than 50% of the combined voting power of such acquiring entity's then outstanding voting securities entitled to vote generally in the election of directors; or (d) any change in the identity of directors constituting a majority of the Board within a twenty-four month period unless the change was approved by a majority of the Incumbent Directors, where "Incumbent Director" means a member of the Board at the beginning of the period in question, including any director who was not a member of the Board at the beginning of such period but was elected or nominated to the Board by, or on the recommendation of or with the approval of, at least two-thirds of the directors who then qualified as Incumbent Directors. ARTICLE II. Duties of Executive Subject to the approvals by and the ultimate supervision of the Board and each Authorized Board Designee, Executive during the term hereof shall serve as the President and Chief Executive Officer. Subject to the control of the Board and any Authorized Board Designee, Executive shall have the responsibilities commensurate with Executive's title and as otherwise provided in Employer's bylaws and other governing documents, but in any event, construed in a manner generally consistent with the responsibilities of Executive that existed immediately prior to the Effective Date. During the period of employment hereunder, Executive shall devote substantially Executive's entire time and best efforts to the business of Employer for the profit, benefit and advantage of Employer, and shall perform such other services as shall be designated, from time to time, by the Board or any Authorized Board Designee; provided, however, that this Section shall not be construed as preventing Executive from investing Executive's personal assets in business ventures that do not compete with Employer or Employer's Affiliates (as hereinafter defined) or are not otherwise prohibited by this Agreement, and spending reasonable amounts of personal time in the management thereof. Executive shall use Executive's best efforts to promote the interests of Employer and Employer's Affiliates, and to preserve their goodwill with respect to their employees, customers, suppliers and other persons having business relations with Employer. Executive agrees to accept and hold all such offices and/or directorships with Employer and Employer's Affiliates as to which Executive may, from time to time, be elected. For purposes of this Agreement, Employer's subsidiaries, parent companies and other affiliates are collectively referred to as "Affiliates." ARTICLE III. Salary; Expense Reimbursements Section 3.1 Salary. As compensation for Executive's service under and during the term of this Agreement (or until terminated pursuant to the provisions hereof) Employer shall pay Executive a salary of $25,000 per calendar month (prorated for partial months), payable in accordance with the regular payroll practices of Employer, as in effect from time to time. Such salary shall be subject to withholding for the prescribed federal income tax, social security and other items as required by law and for other items consistent with Employer's policy with respect to health insurance and other benefit plans for similarly situated employees of Employer in which Executive may elect to participate. Section 3.2 Other Benefits. During the term of this Agreement, Executive also shall be entitled to the same amount of paid vacation per year as was available to Executive and other senior management executives of Employer under the policy of Employer in effect on the Effective Date. Executive will not be paid for unused vacation, and unused vacation cannot be carried forward to subsequent years. Without limiting the foregoing, Executive shall also receive such paid sick leave, insurance and other fringe benefits as are generally made available to other personnel of Employer in comparable positions, with comparable service credit and with comparable duties and responsibilities. Any benefits in excess of those granted other salaried employees of Employer shall be subject to the prior approval of the Board. Notwithstanding the foregoing, (a) Executive shall be entitled to participate in Employer's annual Executive Incentive Compensation Pool which is allocated to participants based on individual and company wide goal attainment, as determined in the sole discretion of the Board, and (b) Executive shall be eligible for participation in Employer's Stock Option Plan (if any), but all option grants thereunder shall be subject to the sole discretion of the Board. Section 3.3 Bonuses. In the discretion of the Board, and without implying any obligation on Employer ever to award a bonus to Executive, Executive may from time to time be awarded a cash bonus or bonuses for services rendered to Employer during the term of Executive's employment under this Agreement. If and to the extent a bonus is ever considered for Executive, it is expected that any such bonus will be based not only on Executive's individual performance and Executive's relative position, service tenure and responsibilities with Employer, but also on the performance and profitability of the entire business of Employer. Section 3.4 Expenses. Employer shall reimburse all reasonable out-of-pocket travel and business expenses incurred by Executive in connection with the performance of Executive's duties pursuant to this Agreement. Executive shall provide Employer with documentation of Executive's expenses, in a form acceptable to Employer and which satisfies applicable federal income tax reporting and record keeping requirements. Section 3.5 Location of Employment. The parties acknowledge and agree that Executive's employment duties hereunder are performable in Austin, Texas, subject to business travel commensurate with Executive's duties hereunder and as otherwise requested by Employer. ARTICLE IV. Executive's Restrictive Covenants Section 4.1 Confidentiality Agreement. Executive acknowledges that Executive has been and will continue to be exposed to confidential information and trade secrets ("Proprietary Information") pertaining to, or arising from, the business of Employer and/or Employer's Affiliates, that such Proprietary Information is unique and valuable and that Employer and/or Employer's Affiliates would suffer irreparable injury if this information were divulged to those in competition with Employer or Employer's Affiliates. Therefore, Executive agrees to keep in strict secrecy and confidence, both during and after the period of Executive's employment, any and all information which Executive acquires, or to which Executive has access, during Executive's employment by Employer, that has not been publicly disclosed by Employer or Employer's Affiliates, that is not a matter of common knowledge by their respective competitors or that is not required to be disclosed through legal process. The Proprietary Information covered by this Agreement shall include, but shall not be limited to, information relating to any inventions, processes, software, formulae, plans, devices, compilations of information, technical data, mailing lists, management strategies, business distribution methods, names of suppliers (of both goods and services) and customers, names of employees and terms of employment, arrangements entered into with suppliers and customers, including, but not limited to, proposed expansion plans of Employer, marketing and other business and pricing strategies, and trade secrets of Employer and/or Employer's Affiliates. Except with prior approval of the Board or any Authorized Board Designee, Executive will not, either during or after Executive's employment hereunder: (a) directly or indirectly disclose any Proprietary Information to any person except authorized personnel of Employer; nor, (b) use Proprietary Information in any manner other than in furtherance of the business of Employer. Upon termination of employment, whether voluntary or involuntary, within forty-eight hours of termination, Executive will deliver to Employer (without retaining copies thereof) all documents, records or other memorializations including copies of documents and any notes which Executive has prepared, that contain Proprietary Information or relate to Employer's or Employer's Affiliates' business, all other tangible Proprietary Information in Executive's possession or control, and all of Employer's and the Affiliates' credit cards, keys, equipment, vehicles, supplies and other materials that are in possession or under Executive's control. Section 4.2 Nonsolicitation Agreement. During Executive's employment hereunder and for a period of two years after Executive ceases to be employed by Employer, Executive shall not, directly or indirectly, for Executive's own account or otherwise (i) solicit business from, divert business from, or attempt to convert to other methods of using the same or similar products or services as provided by Employer or Employer's Affiliates, any client, account or location of Employer or Employer's Affiliates with which Executive has had any contact as a result of Executive's employment hereunder; or (ii) solicit for employment or employ any employee or former employee of Employer or Employer's Affiliates. Section 4.3 Remedies. Executive understands and acknowledges damages at law alone will be an insufficient remedy for Employer and Employer will suffer irreparable injury if Executive violates the terms of this Agreement. Accordingly, Employer, upon application to a court of competent jurisdiction, shall be entitled to injunctive relief to enforce the provisions of this Agreement in the event of any breach, or threatened breach, of its terms. Executive hereby waives any requirement that Employer post bond or other security prior to obtaining such injunctive relief. Injunctive relief may be sought in addition to any other available rights or remedies at law. Employer shall additionally be entitled to reasonable attorneys' fees incurred in enforcing the provisions of this Agreement. ARTICLE V. Miscellaneous Section 5.1 Assignment. No party to this Agreement may assign this Agreement or any or all of its rights or obligations hereunder without first obtaining the written consent of all other parties hereto. Any assignment in violation of the foregoing shall be null and void. Subject to the preceding sentences of this Section, the terms and conditions of this Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective heirs, legal representatives, successors and permitted assigns. This Agreement shall not be deemed to confer upon any person not a party to this Agreement any rights or remedies hereunder. The provisions of this Section do not preclude the sale, transfer or assignment of the ownership interests of any entity that is a party to this Agreement, although such a sale, transfer or assignment may be expressly prohibited or conditioned pursuant to other provisions of this Agreement. Section 5.2 Amendments. This Agreement cannot be modified or amended except by a written agreement executed by all parties hereto. Section 5.3 Waiver of Provisions; Remedies Cumulative. Any waiver of any term or condition of this Agreement must be in writing, and signed by all of the parties hereto. The waiver of any term or condition hereof shall not be construed as either a continuing waiver with respect to the term or condition waived, or a waiver of any other term or condition hereof. No party hereto shall by any act (except by written instrument pursuant to this Section), delay, indulgence, omission or otherwise be deemed to have waived any right, power, privilege or remedy hereunder or to have acquiesced in any default in or breach of any of the terms and conditions hereof. No failure to exercise, nor any delay in exercising, on the part of any party hereto, any right, power, privilege or remedy hereunder shall operate as a waiver thereof. No single or partial exercise of any right, power, privilege or remedy hereunder shall preclude any other or further exercise thereof or the exercise of any other right, power, privilege or remedy. No remedy set forth in this Agreement or otherwise conferred upon or reserved to any party shall be considered exclusive of any other remedy available to any party, but the same shall be distinct, separate and cumulative and may be exercised from time to time as often as occasion may arise or as may be deemed expedient. Section 5.4 Further Assurances. At and from time to time after the Closing, each party shall, at the request of another party hereto, but without further consideration, execute and deliver such other instruments and take such other actions as the requesting party may reasonably request in order to more effectively evidence or consummate the transactions or activities contemplated hereunder. Section 5.5 Entire Agreement. This Agreement and the agreements contemplated hereby or executed in connection herewith (a) constitute the entire agreement of the parties hereto regarding the subject matter hereof, and (b) supersede all prior agreements (including, without limitation, that certain Executive Employment Agreement dated September 1, 2000) and understandings, both written and oral, among the parties hereto, or any of them, with respect to the subject matter hereof. Section 5.6 Severability; Illegality. In the event any state or federal laws or regulations, now existing or enacted or promulgated after the date hereof, are interpreted by judicial decision, a regulatory agency or legal counsel in such a manner as to indicate that any provision hereof may be illegal, invalid or unenforceable, such provision shall be fully severable and this Agreement shall be construed and enforced as if such illegal, invalid or unenforceable provision never comprised a part hereof; and the remaining provisions hereof shall remain in full force and effect and shall not be affected by the illegal, invalid or unenforceable provision or by its severance herefrom. Furthermore, in lieu of such illegal, invalid or unenforceable provision, there shall be added automatically as part of this Agreement a provision that (a) preserves the underlying economic and financial arrangements between the parties hereto without substantial economic detriment to any particular party and (b) is as similar in effect to such illegal, invalid or unenforceable provision as may be possible and be legal, valid and enforceable. No party to this Agreement shall claim or assert illegality as a defense to the enforcement of this Agreement or any provision hereof; instead, any such purported illegality shall be resolved pursuant to the terms of this Section. Section 5.7 GOVERNING LAW. THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HERETO SHALL BE GOVERNED BY AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE SUBSTANTIVE LAWS (BUT NOT THE RULES GOVERNING CONFLICTS OF LAWS) OF THE STATE OF TEXAS. Section 5.8 Language Construction. This Agreement shall be construed, in all cases, according to its fair meaning, and without regard to the identity of the person who drafted the various provisions contained herein. The parties acknowledge that each party and its counsel have reviewed and revised this Agreement and that the normal rule of construction to the effect that any ambiguities are to be resolved against the drafting party shall not be employed in the interpretation hereof. As used in this Agreement, "day" or "days" refers to calendar days unless otherwise expressly stated in each instance. The captions in this Agreement are for convenience of reference only and shall not limit or otherwise affect any of the terms or provisions hereof. When the context requires, the gender of all words used herein shall include the masculine, feminine and neuter and the number of all words shall include the singular and plural. Use of the words "herein", "hereof", "hereto", "hereunder" and the like in this Agreement shall be construed as references to this Agreement as a whole and not to any particular Article, Section or provision of this Agreement, unless otherwise expressly noted. Section 5.9 Notice. Whenever this Agreement requires or permits any notice, request, or demand from one party to another, the notice, request, or demand must be in writing to be effective and shall be deemed to be delivered and received (a) if personally delivered or if delivered by facsimile or courier service, when actually received by the party to whom notice is sent or (b) if delivered by mail (whether actually received or not), at the close of business on the third business day next following the day when placed in the mail, postage prepaid, certified or registered, addressed to the appropriate party or parties, at the address of such party set forth below (or at such other address as such party may designate by written notice to all other parties in accordance herewith): If to Employer: Prime Medical Services, Inc. 1301 Capital of Texas Hwy, Suite C-300 Austin, TX 78746 Attention: Board of Directors Facsimile Transmission: (512) 314-4503 If to Executive: Brad A. Hummel 9446 Hathaway St. Dallas, TX 75220 Facsimile Transmission: (214) 891-9761 Section 5.10 CHOICE OF FORUM; ATTORNEYS' FEES. THE PARTIES HERETO AGREE THAT THIS AGREEMENT IS PERFORMABLE IN WHOLE AND IN PART IN TRAVIS COUNTY, TEXAS, AND SHOULD ANY SUIT, ACTION OR PROCEEDING ARISING OUT OF THIS AGREEMENT BE INSTITUTED BY ANY PARTY HERETO (OTHER THAN A SUIT, ACTION OR PROCEEDING TO ENFORCE OR REALIZE UPON ANY FINAL COURT JUDGMENT ARISING OUT OF THIS AGREEMENT), SUCH SUIT, ACTION OR PROCEEDING SHALL BE INSTITUTED ONLY IN A STATE OR FEDERAL COURT IN TRAVIS COUNTY, TEXAS. EACH OF THE PARTIES HERETO CONSENTS TO THE IN PERSONAM JURISDICTION OF ANY STATE OR FEDERAL COURT IN TRAVIS COUNTY, TEXAS AND WAIVES ANY OBJECTION TO THE VENUE OF ANY SUCH SUIT, ACTION OR PROCEEDING. THE PARTIES HERETO RECOGNIZE THAT COURTS OUTSIDE TRAVIS COUNTY, TEXAS MAY ALSO HAVE JURISDICTION OVER SUITS, ACTIONS OR PROCEEDINGS ARISING OUT OF THIS AGREEMENT, AND IN THE EVENT THAT ANY PARTY HERETO SHALL INSTITUTE A PROCEEDING INVOLVING THIS AGREEMENT IN A JURISDICTION OUTSIDE TRAVIS COUNTY, TEXAS, THE PARTY INSTITUTING SUCH PROCEEDING SHALL INDEMNIFY ANY OTHER PARTY HERETO FOR ANY LOSSES AND EXPENSES THAT MAY RESULT FROM THE BREACH OF THE FOREGOING COVENANT TO INSTITUTE SUCH PROCEEDING ONLY IN A STATE OR FEDERAL COURT IN TRAVIS COUNTY, TEXAS, INCLUDING WITHOUT LIMITATION ANY ADDITIONAL EXPENSES INCURRED AS A RESULT OF LITIGATING IN ANOTHER JURISDICTION, SUCH AS REASONABLE FEES AND EXPENSES OF LOCAL COUNSEL AND TRAVEL AND LODGING EXPENSES FOR PARTIES, WITNESSES, EXPERTS AND SUPPORT PERSONNEL. THE PREVAILING PARTY IN ANY ACTION TO ENFORCE OR DEFEND RIGHTS UNDER THIS AGREEMENT SHALL BE ENTITLED TO RECOVER ITS COSTS AND REASONABLE ATTORNEYS' FEES IN ADDITION TO ANY OTHER RELIEF GRANTED. Section 5.11 Counterparts. This Agreement may be executed in multiple counterparts, each of which shall be deemed an original, and all of which together shall constitute one and the same instrument. [Signature page follows] S-1 SIGNATURE PAGE TO EXECUTIVE EMPLOYMENT AGREEMENT EXECUTED by Employer and Executive to be effective for all purposes as of the Effective Date provided above. EMPLOYER: PRIME MEDICAL SERVICES, INC. Kenneth S. Shifrin, Chairman of the Board EXECUTIVE: Printed Name: Brad A. Hummel EX-10.125 38 0038.txt EX 10.125 EMPLOYEMENT AGREEMENT- WILLIAMS EXECUTIVE EMPLOYMENT AGREEMENT This Employment Agreement (this "Agreement") is by and between Prime Medical Services, Inc., a Delaware corporation ("Employer") and Cheryl Williams, an individual ("Executive"), and shall be effective as of September 1, 2000 (the "Effective Date"). Preliminary Statements Executive desires to be employed by Employer upon the terms and conditions stated herein, and Employer desires to employ Executive provided that, in so doing, it can protect its confidential information, business, accounts, patronage and goodwill. Employer and Executive have specifically determined that the terms of this Agreement are fair and reasonable. Statement of Agreement NOW, THEREFORE, in consideration of the premises and mutual covenants contained herein, and for other good, valuable and binding consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound hereby, agree as follows: ARTICLE I. Term; Termination; Prior Agreements. Section 1.1 Term. Employer hereby hires Executive and Executive accepts such employment for a term of one year commencing on the Effective Date. Section 1.2 Termination Upon Expiration. Unless earlier terminated by Employer or Executive in accordance with the terms of this Agreement, and subject to any extension of the term of this Agreement pursuant to the last sentence of Section 1.5, this Agreement shall terminate automatically upon the expiration of the one-year term described in Section 1.1. Section 1.3 Termination Upon Death or Permanent Disability. This Agreement shall be automatically terminated on the death of Executive or on the permanent disability of Executive if Executive is no longer able to perform in all material respects the usual and customary duties of Executive's employment hereunder. For purposes hereof, any condition which in reasonable likelihood is expected to impair Executive's ability to materially perform Executive's duties hereunder for a period of three months or more shall be considered to be permanent. Section 1.4 Termination for Cause. If this Agreement has not been previously terminated, and no party has previously given notice of termination pursuant to Section 1.5, Section 1.6 or Section 1.7, then Employer may terminate this Agreement "for cause" if: (a) In connection with the business of Employer, Executive is convicted of an offense constituting a felony or involving moral turpitude; or (b) in a material and substantial way, (i) Executive (A) violates any written policy of Employer, (B) violates any provision of this Agreement, (C) fails to follow reasonable written instructions or directions from the Board of Directors of Employer (the "Board"), or any other person authorized by the Board to instruct or supervise Executive (for purposes of this Agreement, any such authorized person is referred to as an "Authorized Board Designee"), or (D) fails to use good-faith efforts to perform the services required pursuant to this Agreement; and (ii) Executive fails to materially cure such violation or failure within fifteen days after receiving written notice from the Board clearly specifying the act or circumstances that gave rise to such violation or failure. A notice of termination pursuant to this Section shall be in writing and shall state the alleged reason for termination. Executive, within not less than fifteen nor more than thirty days after such notice, shall be given the opportunity to appear before the Board, or a committee thereof, to rebut or dispute the alleged reason for termination. If the Board or committee determines, by a majority of the disinterested directors, after having given Executive the opportunity to rebut or dispute the allegations, that such reason is indeed valid, Employer may immediately terminate Executive's employment under this Agreement for cause. Immediately upon giving the notice contemplated by this paragraph, Employer may elect, during the pendency of such inquiry, to relieve Executive of Executive's regular duties. Section 1.5 Termination for Good Reason. Any termination by Executive of this Agreement pursuant to this Section shall be deemed a termination by Executive for "good reason". Executive may terminate this Agreement for good reason any time after a Change of Control in accordance with any of the following (with the further agreement that any election by Executive to not terminate this Agreement pursuant to this Section following a particular Change of Control shall not prevent the application of this Section to a subsequent Change of Control): (a) Executive may terminate this Agreement for any or no reason upon six months prior written notice, which notice cannot be given before the consummation of such Change of Control or after the expiration of the term of this Agreement pursuant to Section 1.1; (b) Executive may terminate this Agreement upon thirty days prior written notice if Executive's base salary, as provided hereunder, is diminished; (c) Executive may terminate this Agreement upon thirty days prior written notice if Employer requires that Executive move to a city other than Austin; (d) Executive may terminate this Agreement upon thirty days prior written notice if the Board or any Authorized Board Designee materially and unreasonably interferes with Executive's ability to fulfill Executive's job duties; or (e) Executive may terminate this Agreement upon thirty days prior written notice if Executive is reassigned to a position with diminished responsibilities, or Executive's job responsibilities are materially narrowed or diminished. Without limiting the provisions of Section 1.8 hereof, Executive agrees that Employer can relieve Executive of Executive's duties hereunder prior to the end of the applicable notice period provided for in this Section, and in such event, Executive shall not thereafter be entitled to any of the benefits or salary described in Article III hereof. If Employer does not relieve Executive of Executive's duties during any applicable notice period under this Section, and the applicable notice period extends beyond the expiration of the term of this Agreement pursuant to Section 1.2, then the terms and provisions of this Agreement shall govern Executive's employment by Employer until the end of such notice period, and the term of this Agreement shall be deemed automatically extended until the end of such notice period. Section 1.6 Termination of Agreement by Employer Without Cause. Employer has the right to terminate this Agreement, other than "for cause," on 30 days prior written notice. Any termination of this Agreement by Employer other than pursuant to the express terms of Section 1.2, Section 1.3 or Section 1.4 shall be deemed a termination pursuant to this Section, irrespective of whether the notice required under this Section is properly given. Section 1.7 Termination of Agreement by Executive Without Good Reason. Executive may terminate Executive's employment, other than for "good reason," upon 30 days prior written notice stating that this Agreement is terminated other than for "good reason". Executive agrees that Employer can relieve Executive of Executive's duties hereunder prior to the end of such 30 day notice period, and in such event, Executive shall not thereafter be entitled to any of the benefits or salary described in Article III hereof. Section 1.8 Executive's Rights Upon Termination. Upon termination of this Agreement, Executive shall be entitled to the following: (a) If this Agreement is terminated pursuant to Section 1.2, Section 1.3, Section 1.4, or Section 1.7 then Employer shall pay Executive or Executive's representative, as the case may be, Executive's then-current base salary (excluding any bonuses and non-cash benefits) through the effective date of termination (which, in the case of Section 1.7, shall follow any portion of the applicable notice period during which Executive has not been relieved of Executive's duties hereunder), and Employer shall have no further obligations hereunder. (b) If Employer terminates this Agreement without cause pursuant to Section 1.6 or otherwise, or Executive terminates this Agreement pursuant to Section 1.5, then, in addition to receiving Executive's then current base salary through the effective date of termination, Executive (i) shall receive within 15 days of the effective date of termination a lump-sum payment equal to to the greater of (A) Executive's then current annualized base salary, or (B) $150,000, and (ii) unless the termination was by Executive pursuant to Section 1.5(a), shall be released from the provisions of Section 4.2, notwithstanding that the provisions of such Section would otherwise survive termination of this Agreement pursuant to Section 1.9. Executive and Employer agree that the effective date of any termination pursuant to Section 1.5 shall be the earlier of the end of the applicable notice period or the date on which Employer relieves Executive of Executive's duties hereunder. Executive and Employer agree that the effective date of any termination pursuant to Section 1.6 hereof shall be only upon the expiration of the 30 day notice period described in Section 1.6, regardless of whether Employer earlier relieves Executive of Executive's duties hereunder. Section 1.9 Survival; No Effect on Deferred Compensation Arrangements. Any termination of this Agreement and Executive's employment as a result thereof shall not release either Employer or Executive from their respective obligations to the date of termination nor from the provisions of this Agreement which, by necessary or reasonable implication, are intended to apply after termination of this Agreement, including, without limitation, the provisions of Article IV. Furthermore, neither the termination of this Agreement nor the termination of Executive's employment under this Agreement shall affect, limit, or modify in any manner the existence or enforceability of any written agreement between Executive and Employer related to or providing for deferred compensation of Executive (or any similar written arrangement). Section 1.10 Termination of Existing Agreements. Any previous employment agreement between Executive on the one hand and Employer or any of Employer's Affiliates (as hereinafter defined) on the other hand is hereby terminated. Section 1.11 "Change of Control." As used in this Agreement, "Change of Control" shall mean the occurrence of any of the following: (a) Any person, entity or "group" within the meaning of ss. 13(d) or 14(d) of the of the Securities and Exchange Act of 1934 (the "Exchange Act") becomes the beneficial owner (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of more than 50% of the combined voting power of the then outstanding voting securities entitled to vote generally in the election of the Board; (b) a merger, reorganization or consolidation whereby Employer's equity holders existing immediately prior to such merger, reorganization or consolidation do not, immediately after consummation of such reorganization, merger or consolidation, own more than 50% of the combined voting power of the surviving entity's then outstanding voting securities entitled to vote generally in the election of directors; (c) the sale of all or substantially all of Employer's assets to an entity in which Employer, any subsidiary of Employer, or Employer's equity holders existing immediately prior to such sale beneficially own less than 50% of the combined voting power of such acquiring entity's then outstanding voting securities entitled to vote generally in the election of directors; or (d) any change in the identity of directors constituting a majority of the Board within a twenty-four month period unless the change was approved by a majority of the Incumbent Directors, where "Incumbent Director" means a member of the Board at the beginning of the period in question, including any director who was not a member of the Board at the beginning of such period but was elected or nominated to the Board by, or on the recommendation of or with the approval of, at least two-thirds of the directors who then qualified as Incumbent Directors. ARTICLE II. Duties of Executive Subject to the approvals by and the ultimate supervision of the Board and each Authorized Board Designee, Executive during the term hereof shall serve as the Chief Financial Officer. Subject to the control of the Board and any Authorized Board Designee, Executive shall have the responsibilities commensurate with Executive's title and as otherwise provided in Employer's bylaws and other governing documents, but in any event, construed in a manner generally consistent with the responsibilities of Executive that existed immediately prior to the Effective Date. During the period of employment hereunder, Executive shall devote substantially Executive's entire time and best efforts to the business of Employer for the profit, benefit and advantage of Employer, and shall perform such other services as shall be designated, from time to time, by the Board or any Authorized Board Designee; provided, however, that this Section shall not be construed as preventing Executive from investing Executive's personal assets in business ventures that do not compete with Employer or Employer's Affiliates (as hereinafter defined) or are not otherwise prohibited by this Agreement, and spending reasonable amounts of personal time in the management thereof. Executive shall use Executive's best efforts to promote the interests of Employer and Employer's Affiliates, and to preserve their goodwill with respect to their employees, customers, suppliers and other persons having business relations with Employer. Executive agrees to accept and hold all such offices and/or directorships with Employer and Employer's Affiliates as to which Executive may, from time to time, be elected. For purposes of this Agreement, Employer's subsidiaries, parent companies and other affiliates are collectively referred to as "Affiliates." ARTICLE III. Salary; Expense Reimbursements Section 3.1 Salary. As compensation for Executive's service under and during the term of this Agreement (or until terminated pursuant to the provisions hereof) Employer shall pay Executive a salary of $12,500 per calendar month (prorated for partial months), payable in accordance with the regular payroll practices of Employer, as in effect from time to time. Such salary shall be subject to withholding for the prescribed federal income tax, social security and other items as required by law and for other items consistent with Employer's policy with respect to health insurance and other benefit plans for similarly situated employees of Employer in which Executive may elect to participate. Section 3.2 Other Benefits. During the term of this Agreement, Executive also shall be entitled to the same amount of paid vacation per year as was available to Executive and other senior management executives of Employer under the policy of Employer in effect on the Effective Date. Executive will not be paid for unused vacation, and unused vacation cannot be carried forward to subsequent years. Without limiting the foregoing, Executive shall also receive such paid sick leave, insurance and other fringe benefits as are generally made available to other personnel of Employer in comparable positions, with comparable service credit and with comparable duties and responsibilities. Any benefits in excess of those granted other salaried employees of Employer shall be subject to the prior approval of the Board. Notwithstanding the foregoing, (a) Executive shall be entitled to participate in Employer's annual Executive Incentive Compensation Pool which is allocated to participants based on individual and company wide goal attainment, as determined in the sole discretion of the Board, and (b) Executive shall be eligible for participation in Employer's Stock Option Plan (if any), but all option grants thereunder shall be subject to the sole discretion of the Board. Section 3.3 Bonuses. In the discretion of the Board, and without implying any obligation on Employer ever to award a bonus to Executive, Executive may from time to time be awarded a cash bonus or bonuses for services rendered to Employer during the term of Executive's employment under this Agreement. If and to the extent a bonus is ever considered for Executive, it is expected that any such bonus will be based not only on Executive's individual performance and Executive's relative position, service tenure and responsibilities with Employer, but also on the performance and profitability of the entire business of Employer. Section 3.4 Expenses. Employer shall reimburse all reasonable out-of-pocket travel and business expenses incurred by Executive in connection with the performance of Executive's duties pursuant to this Agreement. Executive shall provide Employer with documentation of Executive's expenses, in a form acceptable to Employer and which satisfies applicable federal income tax reporting and record keeping requirements. Section 3.5 Location of Employment. The parties acknowledge and agree that Executive's employment duties hereunder are performable in Austin, Texas, subject to business travel commensurate with Executive's duties hereunder and as otherwise requested by Employer. ARTICLE IV. Executive's Restrictive Covenants Section 4.1 Confidentiality Agreement. Executive acknowledges that Executive has been and will continue to be exposed to confidential information and trade secrets ("Proprietary Information") pertaining to, or arising from, the business of Employer and/or Employer's Affiliates, that such Proprietary Information is unique and valuable and that Employer and/or Employer's Affiliates would suffer irreparable injury if this information were divulged to those in competition with Employer or Employer's Affiliates. Therefore, Executive agrees to keep in strict secrecy and confidence, both during and after the period of Executive's employment, any and all information which Executive acquires, or to which Executive has access, during Executive's employment by Employer, that has not been publicly disclosed by Employer or Employer's Affiliates, that is not a matter of common knowledge by their respective competitors or that is not required to be disclosed through legal process. The Proprietary Information covered by this Agreement shall include, but shall not be limited to, information relating to any inventions, processes, software, formulae, plans, devices, compilations of information, technical data, mailing lists, management strategies, business distribution methods, names of suppliers (of both goods and services) and customers, names of employees and terms of employment, arrangements entered into with suppliers and customers, including, but not limited to, proposed expansion plans of Employer, marketing and other business and pricing strategies, and trade secrets of Employer and/or Employer's Affiliates. Except with prior approval of the Board or any Authorized Board Designee, Executive will not, either during or after Executive's employment hereunder: (a) directly or indirectly disclose any Proprietary Information to any person except authorized personnel of Employer; nor, (b) use Proprietary Information in any manner other than in furtherance of the business of Employer. Upon termination of employment, whether voluntary or involuntary, within forty-eight hours of termination, Executive will deliver to Employer (without retaining copies thereof) all documents, records or other memorializations including copies of documents and any notes which Executive has prepared, that contain Proprietary Information or relate to Employer's or Employer's Affiliates' business, all other tangible Proprietary Information in Executive's possession or control, and all of Employer's and the Affiliates' credit cards, keys, equipment, vehicles, supplies and other materials that are in possession or under Executive's control. Section 4.2 Nonsolicitation Agreement. During Executive's employment hereunder and for a period of one year after Executive ceases to be employed by Employer, Executive shall not, directly or indirectly, for Executive's own account or otherwise (i) solicit business from, divert business from, or attempt to convert to other methods of using the same or similar products or services as provided by Employer or Employer's Affiliates, any client, account or location of Employer or Employer's Affiliates with which Executive has had any contact as a result of Executive's employment hereunder; or (ii) solicit for employment or employ any employee or former employee of Employer or Employer's Affiliates. Section 4.3 Remedies. Executive understands and acknowledges damages at law alone will be an insufficient remedy for Employer and Employer will suffer irreparable injury if Executive violates the terms of this Agreement. Accordingly, Employer, upon application to a court of competent jurisdiction, shall be entitled to injunctive relief to enforce the provisions of this Agreement in the event of any breach, or threatened breach, of its terms. Executive hereby waives any requirement that Employer post bond or other security prior to obtaining such injunctive relief. Injunctive relief may be sought in addition to any other available rights or remedies at law. Employer shall additionally be entitled to reasonable attorneys' fees incurred in enforcing the provisions of this Agreement. ARTICLE V. Miscellaneous Section 5.1 Assignment. No party to this Agreement may assign this Agreement or any or all of its rights or obligations hereunder without first obtaining the written consent of all other parties hereto. Any assignment in violation of the foregoing shall be null and void. Subject to the preceding sentences of this Section, the terms and conditions of this Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective heirs, legal representatives, successors and permitted assigns. This Agreement shall not be deemed to confer upon any person not a party to this Agreement any rights or remedies hereunder. The provisions of this Section do not preclude the sale, transfer or assignment of the ownership interests of any entity that is a party to this Agreement, although such a sale, transfer or assignment may be expressly prohibited or conditioned pursuant to other provisions of this Agreement. Section 5.2 Amendments. This Agreement cannot be modified or amended except by a written agreement executed by all parties hereto. Section 5.3 Waiver of Provisions; Remedies Cumulative. Any waiver of any term or condition of this Agreement must be in writing, and signed by all of the parties hereto. The waiver of any term or condition hereof shall not be construed as either a continuing waiver with respect to the term or condition waived, or a waiver of any other term or condition hereof. No party hereto shall by any act (except by written instrument pursuant to this Section), delay, indulgence, omission or otherwise be deemed to have waived any right, power, privilege or remedy hereunder or to have acquiesced in any default in or breach of any of the terms and conditions hereof. No failure to exercise, nor any delay in exercising, on the part of any party hereto, any right, power, privilege or remedy hereunder shall operate as a waiver thereof. No single or partial exercise of any right, power, privilege or remedy hereunder shall preclude any other or further exercise thereof or the exercise of any other right, power, privilege or remedy. No remedy set forth in this Agreement or otherwise conferred upon or reserved to any party shall be considered exclusive of any other remedy available to any party, but the same shall be distinct, separate and cumulative and may be exercised from time to time as often as occasion may arise or as may be deemed expedient. Section 5.4 Further Assurances. At and from time to time after the Closing, each party shall, at the request of another party hereto, but without further consideration, execute and deliver such other instruments and take such other actions as the requesting party may reasonably request in order to more effectively evidence or consummate the transactions or activities contemplated hereunder. Section 5.5 Entire Agreement. This Agreement and the agreements contemplated hereby or executed in connection herewith (a) constitute the entire agreement of the parties hereto regarding the subject matter hereof, and (b) supersede all prior agreements and understandings, both written and oral, among the parties hereto, or any of them, with respect to the subject matter hereof. Section 5.6 Severability; Illegality. In the event any state or federal laws or regulations, now existing or enacted or promulgated after the date hereof, are interpreted by judicial decision, a regulatory agency or legal counsel in such a manner as to indicate that any provision hereof may be illegal, invalid or unenforceable, such provision shall be fully severable and this Agreement shall be construed and enforced as if such illegal, invalid or unenforceable provision never comprised a part hereof; and the remaining provisions hereof shall remain in full force and effect and shall not be affected by the illegal, invalid or unenforceable provision or by its severance herefrom. Furthermore, in lieu of such illegal, invalid or unenforceable provision, there shall be added automatically as part of this Agreement a provision that (a) preserves the underlying economic and financial arrangements between the parties hereto without substantial economic detriment to any particular party and (b) is as similar in effect to such illegal, invalid or unenforceable provision as may be possible and be legal, valid and enforceable. No party to this Agreement shall claim or assert illegality as a defense to the enforcement of this Agreement or any provision hereof; instead, any such purported illegality shall be resolved pursuant to the terms of this Section. Section 5.7 GOVERNING LAW. THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HERETO SHALL BE GOVERNED BY AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE SUBSTANTIVE LAWS (BUT NOT THE RULES GOVERNING CONFLICTS OF LAWS) OF THE STATE OF TEXAS. Section 5.8 Language Construction. This Agreement shall be construed, in all cases, according to its fair meaning, and without regard to the identity of the person who drafted the various provisions contained herein. The parties acknowledge that each party and its counsel have reviewed and revised this Agreement and that the normal rule of construction to the effect that any ambiguities are to be resolved against the drafting party shall not be employed in the interpretation hereof. As used in this Agreement, "day" or "days" refers to calendar days unless otherwise expressly stated in each instance. The captions in this Agreement are for convenience of reference only and shall not limit or otherwise affect any of the terms or provisions hereof. When the context requires, the gender of all words used herein shall include the masculine, feminine and neuter and the number of all words shall include the singular and plural. Use of the words "herein", "hereof", "hereto", "hereunder" and the like in this Agreement shall be construed as references to this Agreement as a whole and not to any particular Article, Section or provision of this Agreement, unless otherwise expressly noted. Section 5.9 Notice. Whenever this Agreement requires or permits any notice, request, or demand from one party to another, the notice, request, or demand must be in writing to be effective and shall be deemed to be delivered and received (a) if personally delivered or if delivered by facsimile or courier service, when actually received by the party to whom notice is sent or (b) if delivered by mail (whether actually received or not), at the close of business on the third business day next following the day when placed in the mail, postage prepaid, certified or registered, addressed to the appropriate party or parties, at the address of such party set forth below (or at such other address as such party may designate by written notice to all other parties in accordance herewith): If to Employer: Prime Medical Services, Inc. 1301 Capital of Texas Hwy, Suite C-300 Austin, TX 78746 Attention: Board of Directors Facsimile Transmission: (512) 314-4503 If to Executive: Cheryl Williams 13922 Lone Rider Trail Austin, TX 78736 Facsimile Transmission: (512) 263-1411 Section 5.10 CHOICE OF FORUM; ATTORNEYS' FEES. THE PARTIES HERETO AGREE THAT THIS AGREEMENT IS PERFORMABLE IN WHOLE AND IN PART IN TRAVIS COUNTY, TEXAS, AND SHOULD ANY SUIT, ACTION OR PROCEEDING ARISING OUT OF THIS AGREEMENT BE INSTITUTED BY ANY PARTY HERETO (OTHER THAN A SUIT, ACTION OR PROCEEDING TO ENFORCE OR REALIZE UPON ANY FINAL COURT JUDGMENT ARISING OUT OF THIS AGREEMENT), SUCH SUIT, ACTION OR PROCEEDING SHALL BE INSTITUTED ONLY IN A STATE OR FEDERAL COURT IN TRAVIS COUNTY, TEXAS. EACH OF THE PARTIES HERETO CONSENTS TO THE IN PERSONAM JURISDICTION OF ANY STATE OR FEDERAL COURT IN TRAVIS COUNTY, TEXAS AND WAIVES ANY OBJECTION TO THE VENUE OF ANY SUCH SUIT, ACTION OR PROCEEDING. THE PARTIES HERETO RECOGNIZE THAT COURTS OUTSIDE TRAVIS COUNTY, TEXAS MAY ALSO HAVE JURISDICTION OVER SUITS, ACTIONS OR PROCEEDINGS ARISING OUT OF THIS AGREEMENT, AND IN THE EVENT THAT ANY PARTY HERETO SHALL INSTITUTE A PROCEEDING INVOLVING THIS AGREEMENT IN A JURISDICTION OUTSIDE TRAVIS COUNTY, TEXAS, THE PARTY INSTITUTING SUCH PROCEEDING SHALL INDEMNIFY ANY OTHER PARTY HERETO FOR ANY LOSSES AND EXPENSES THAT MAY RESULT FROM THE BREACH OF THE FOREGOING COVENANT TO INSTITUTE SUCH PROCEEDING ONLY IN A STATE OR FEDERAL COURT IN TRAVIS COUNTY, TEXAS, INCLUDING WITHOUT LIMITATION ANY ADDITIONAL EXPENSES INCURRED AS A RESULT OF LITIGATING IN ANOTHER JURISDICTION, SUCH AS REASONABLE FEES AND EXPENSES OF LOCAL COUNSEL AND TRAVEL AND LODGING EXPENSES FOR PARTIES, WITNESSES, EXPERTS AND SUPPORT PERSONNEL. THE PREVAILING PARTY IN ANY ACTION TO ENFORCE OR DEFEND RIGHTS UNDER THIS AGREEMENT SHALL BE ENTITLED TO RECOVER ITS COSTS AND REASONABLE ATTORNEYS' FEES IN ADDITION TO ANY OTHER RELIEF GRANTED. Section 5.11 Counterparts. This Agreement may be executed in multiple counterparts, each of which shall be deemed an original, and all of which together shall constitute one and the same instrument. [Signature page follows] S-1 SIGNATURE PAGE TO EXECUTIVE EMPLOYMENT AGREEMENT EXECUTED by Employer and Executive to be effective for all purposes as of the Effective Date provided above. EMPLOYER: PRIME MEDICAL SERVICES, INC. Brad A. Hummel, President and Chief Executive Officer EXECUTIVE: Printed Name: Cheryl Williams EX-10.126 39 0039.txt EX 10.126 SEVERANCE AGREEMENT- JENKINS NON-COMPETITION, RELEASE AND SEVERANCE AGREEMENT This Non-Competition, Release and Severance Agreement (this "Agreement"), dated as of December 29, 2000, is by and between Prime Medical Services, Inc., a Delaware corporation (the "Company"), and Joseph Jenkins, M.D., an individual ("Employee"). PRELIMINARY STATEMENTS WHEREAS, the Company has employed Employee as an executive officer of the Company, most recently pursuant to a certain written Employment Agreement (as amended to date, the "Employment Agreement"); and WHEREAS, the Company and Employee have agreed to terminate the employment relationship and the Employment Agreement, for each to provide certain releases of liability to the other (the "Releases") and for Employee to be paid certain fees in consideration for entering into and performing this Agreement. STATEMENT OF AGREEMENT NOW, THEREFORE, in consideration of the premises and mutual covenants contained herein and for other good, valuable and binding consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound hereby, agree as follows: I. SEVERANCE OF RELATIONSHIP Employee hereby resigns from any and all offices, positions, and responsibilities with the Company and any of the Company's subsidiaries and affiliates (collectively, including the Company and any future subsidiaries and affiliates of the Company created, acquired or otherwise existing during the term hereof, the "Affiliated Entities"), including, but not limited to, Employee's position as Vice Chairman of the Company and all positions as agent, employee, director or officer of any Affiliated Entity, which Employee may hold or claim to hold, and the Company accepts such resignation. Notwithstanding the foregoing, Employee does not resign his position as a member of the Company's Board of Directors, though Employee and the Company agree that Employee has no contractual right or obligation to remain on such Board and may resign, or be removed or replaced, in accordance with the Company's organizational documents. Employee and the Company further acknowledge and agree that Employee's relationship with each of the Affiliated Entities is hereby terminated for all purposes. The parties agree that the Employment Agreement is hereby terminated in all respects and that no further payments to Employee shall be due thereunder. Employee agrees, however, subject to his reasonable availability, to assist the Company in completing an orderly transition of Employee's responsibilities and duties following termination of employment, including, without limitation, (a) assisting the Company with any litigation or similar proceedings involving the Company or an Affiliated Entity, (b) promptly making any introductions requested by the Company or any of its officers to any individual (or the principals, representatives or agents of any entity) that Employee dealt with in marketing or developing business opportunities for the Company, any Affiliated Entity or the products and services of either of the foregoing. Employee agrees to undertake the responsibilities described in the preceding sentence in good faith with the best interests of the Company in mind. The parties agree that, except as may otherwise be agreed upon in writing between them, the foregoing transitional support by Employee will, except with respect to litigation or similar proceedings, require no more than ninety (90) days after the date hereof to complete. With respect to litigation and similar proceedings, Employee agrees to assist the Company with respect to the South Carolina II litigation, the Graves/Ash litigation, the Driber litigation and any future litigation in which the Employee's knowledge of relevant facts and circumstances can reasonably be expected to be helpful to the Company, subject to Employee's reasonable availability. The Company agrees to pay or reimburse Employee's reasonable travel, lodging and other out-of-pocket expenses incurred in assisting the Company in these transitional and litigation related services; provided the Company must approve all such expenses that exceed $1,000 in advance of their incurrence. As used herein, the term "reasonable availability" contemplates that the Employee's time, energy, and attention will be substantially reduced ninety (90) days after the date hereof, and that his availability thereafter will be influenced by his pursuit of other business or personal activities, making his availability by telephone, facsimile or other electronic means more necessary. The parties acknowledge and agree that the Company has certain indemnity obligations to Employee under and pursuant to a certain Indemnity Agreement dated June 12, 1996, which shall survive this Agreement as part of the Surviving Contracts (as hereinafter defined). Furthermore, for so long as Employee remains a member of the Board of Directors of the Company, he will be entitled to compensation and expense reimbursement as is accorded all non-employee members of the Company's Board pursuant to the Company's policy as in effective from time to time. As necessary to assist Employee in fulfilling these responsibilities, the Company agrees to make available Confidential Information (as defined below) that has not been previously been made available to Employee. II. SEVERANCE PAY AND RESTRICTIVE COVENANTS 2.1 Severance Pay. As partial consideration for the covenants and agreements by Employee contained herein, the Company agrees to pay Employee $500,000 (the "Severance Pay"). The Severance Pay shall be paid in equal quarterly installments over the four (4) calendar years beginning January 1, 2001. Payments shall be made on or before the forty-fifth (45th) day of each calendar quarter and, accordingly, the first installment shall be payable on February 15, 2001. The parties acknowledge and agree that the Severance Pay is not compensation in the form of wages or salary and, accordingly, the Company shall have no obligation whatsoever to withhold taxes or other amounts from any installment of the Severance Pay. Employee agrees to pay all taxes and other levies of any kind that may be due with respect to the Severance Pay and to indemnify and hold the Company harmless with respect thereto. Furthermore, Employee acknowledges and agrees that he shall not be entitled to any fringe benefits of any kind from the Company or any of the other Affiliated Entities. Employee acknowledges that Employee's execution of this Agreement serves as a material inducement to the Company's payment of the Severance Pay, and Employee agrees that the Company will be entitled to cease paying any further installments of Severance Pay upon any breach (or any other act in contravention of) this Agreement by Employee which is not cured within fifteen (15) days after the Company provides written notice thereof, by certified mail, to Employee, which notice references specific facts constituting such breach or other act in contravention of this Agreement. This right of non-payment shall be in addition to any other remedies, including, without limitation, injunctive or other equitable remedies, which the Company may have available on account of such breach. In the event the Company fails to pay any installment of Severance Pay which is then due and owing under the terms of this Agreement, and such default remains uncured for fifteen (15) days' after written notice, by certified mail, from Employee, then Employee, in addition to whatever other remedies may be available to him, shall be entitled to accelerate and declare the entire remaining balance of Severance Pay provided hereunder then due and owing in full, together with interest thereon at the rate of ten percent (10%) per annum, or the maximum lawful rate of non-usurious interest, whichever is less, from the date any such amounts are due until paid. 2.2 Work Product. Employee agrees that all management or marketing materials, marketing strategies, studies or techniques, computer software, inventions, processes and techniques, and intellectual property, including improvements thereto and derivatives thereof (collectively the "Work Product") made, developed or conceived by Employee during any period of employment with any Affiliated Entity and which relate to any of the Company's current business activities, or by any Affiliated Entity, either by agents or employees of that Affiliated Entity or in cooperation with others (including Employee), during Employee's association with that Affiliated Entity, shall be deemed to be works-made-for-hire and Employee shall have no rights whatsoever therein; provided further, that if any judicial body should determine otherwise, Employee hereby transfers any and all of Employee's rights in or to such Work Product to the Company. If, and to the extent, requested from time-to-time by the Company, Employee agrees to execute such documents of title, transfer and conveyance as may be requested by the Company to evidence the sole and exclusive ownership by the Affiliated Entities of any and all Work Product. 2.3 Non-Disparagement Covenant. Employee hereby covenants and agrees that Employee shall, at all times hereafter, refrain from making or implying any derogatory or negative references, statements or allusions concerning any of the Affiliated Entities, their officers, agents and employees, or their respective businesses or business activities; provided, the foregoing is not intended to prevent Employee from (i) giving truthful responses to requests for information made via subpoena, in trial or through other judicial or regulatory process, or (ii) being candid and frank in meetings of the Company's Board of Directors or its committees, so long as Employee is a member thereof. 2.4 Non-disclosure of Confidential Information. For purposes of this Agreement, the term "Confidential Information" includes, without limitation, any and all documents and information pertaining to any Affiliated Entity's technologies, products or services in development, the identity of its clients and suppliers, the identity of key client or supplier personnel with whom any Affiliated Entity interacts to conduct business, innovations, computer programs and data, ideas, plans, strategies, trade secrets (including, without limitation, all forms of business, scientific, economic and engineering information that any Affiliated Entity takes reasonable steps to keep secret, that derives value from not being known to the public, and that is not readily ascertainable by the public through proper means), proprietary information, advertising strategies, sales methods and systems, sales and profit figures, accounting methods and information, customer and client information, customer and client lists, legal affairs, finances, personnel records and data, personnel policies, and any other documents or information of any Affiliated Entity, the unauthorized use or disclosure of which may tend to harm the interests of that Affiliated Entity. Employee recognizes and acknowledges that Employee had in the past, currently has, and in the future may possibly have, access to Confidential Information and that such information is valuable, special and unique. Employee agrees that Employee will not disclose Confidential Information to any person, firm, company, association or other entity for any purpose or reason whatsoever, unless (i) such information becomes available to or known by the public generally through no fault of Employee or (ii) disclosure is required by law or the order of any governmental authority under color of law, including subpoena, provided, that prior to disclosing any information pursuant to this clause (ii), Employee shall, if possible, give prior written notice thereof to the Company, and provide the Company with the opportunity to contest such disclosure. Employee agrees to return to the Company (concurrently with its execution of this Agreement) all tangible Confidential Information and physical or personal property of any Affiliated Entity, including, without limitation, all reports, files, memoranda and records, door and file keys, cardkey passes, computer access codes and software; provided that unless otherwise requested in writing by the Company, Employee may retain any of such items as are necessary for Employee to fulfill his transitional responsibilities hereunder or his duties as a director of the Company. 2.5 Non-Competition and Non-Solicitation. Employee hereby agrees that, until January 1, 2005, Employee will not, directly or indirectly, either through any kind of ownership (other than ownership of securities of the Company or of another publicly held entity of which it owns less than five percent (5%) of any class of outstanding securities), or as a principal, shareholder, agent, employer, employee, advisor, consultant, partner or in any individual or representative capacity whatsoever, whether for his own benefit or for the benefit of any other person, corporation or other entity, commit any of the following acts, which acts shall be considered violations of this covenant not to compete: (a) Directly or indirectly, anywhere within the United States of America, engage in or provide, any competitive services related to any of the businesses in which any of the Affiliated Entities is engaged as of the date hereof (collectively, and including, without limitation, urinary tract or biliary lithotripsy ("Lithotripsy"), lithotripsy database collection and management, organizing, directing or otherwise leveraging the purchasing power or purchasing efforts of the physician investors in the Affiliated Entities, transurethral microwave thermotherapy ("TUMT"), manufacturing, installation, refurbishment and repair of major medical equipment for mobile medical services providers, and refractive vision correction, the "Prohibited Activities"), or provide any management services or consulting services related to any Prohibited Activities; (b) Directly or indirectly provide, anywhere with the United States of America, (i) facilities, equipment and non-physician personnel for the performance by physicians of Lithotripsy, TUMT or refractive vision correction, or any of the other Prohibited Activities described in clause (a) above, (ii) the marketing, scheduling or management of Lithotripsy, TUMT or refractive vision correction, (iii) the scheduling of physicians to perform Lithotripsy, TUMT or refractive vision correction procedures, or (iv) the billing, collecting or accounting for the use of any such facilities, equipment or non-physician personnel; (c) Directly or indirectly request or advise any person, firm, physician, corporation or other entity having a business relationship with any of the Affiliated Entities to withdraw, curtail or cancel its business with any Affiliated Entity; or (d) Directly or indirectly hire any employee of any Affiliated Entity, or induce or attempt to influence any employee of any Affiliated Entity to terminate its employment with such entity; however, this restriction shall not apply to any person at a time when such person has (i) not been in the employ of any Affiliated Entity for a period of at least six (6) months or (ii) been terminated as an employee of an Affiliated Entity and is not then employed with any other Affiliated Entity. Notwithstanding the foregoing, nothing contained in subsections (a) or (b) or this Section 2.5 is intended to prohibit Employee from (i) working for the American Lithotripsy Society, whether in a volunteer or compensated capacity, or (ii) training urologists in the use of Lithotripsy or TUMT; provided, however, in each case Employee must remain in compliance with the other provisions of this Agreement. Employee acknowledges and recognizes that the enforcement of any of the non-competition, non-solicitation or other provisions in this Agreement will not materially interfere with his ability to pursue a proper livelihood, and that Employee is capable of pursuing a career to earn a proper livelihood. Employee recognizes and agrees that the enforcement of this Agreement is necessary to insure the preservation and continuity of the business and goodwill of the Affiliated Entities, and that due to the nature of the Affiliated Entities' business and the specialized training and knowledge that Employee received, and the Severance Pay provided for herein, the non-competition and other restrictions set forth in this Agreement are reasonable as to activities, time and geographic area. 2.6 Waiver Requests. Employee shall be entitled to request a waiver of any of the provisions of Section 2.5 orally, provided such oral request is made through direct communication (in person or telephonically, but not via voice mail or other recorded message) to the Chairman or chief executive officer of the Company, or if such titles are held by one person, then such person or the next most senior officer of the Company; provided any waiver granted in response to such request must be in writing to be binding on the Company. Alternatively, Employee may request a waiver in writing, but such request must be by receipted overnight mail service or mailed (with all postage and charges prepaid) certified or registered mail, return receipt requested, addressed to the Company at its principal executive office address to the attention of one of the two officers of the Company to which oral waiver requests may be made. Complying oral or written waiver requests (other than those related to Biliary Lithotripsy Services, as provided below) shall be accepted or denied within five (5) days after actual receipt of the request by one of the two officers of the Company described above. The Company shall respond to written requests in writing by mail or overnight delivery and requests shall be deemed timely if postmarked or deposited with the overnight delivery service within the five (5) day period. If the Company fails to timely respond to a proper waiver request made in compliance with this Section 2.6, then such request shall be deemed accepted. Furthermore, notwithstanding the preceding paragraph, if Employee desires a waiver to engage in any activities involving the use of lithotripters to disintegrate biliary stones ("Biliary Lithotripsy Services"), Employee hereby agrees to request such waiver in writing in accordance with the preceding paragraph, and the Company shall accept or deny the request within thirty (30) days and otherwise in accordance with the preceding paragraph. III. RELEASE BY EMPLOYEE 3.1 Released Parties. The parties being released by Employee by virtue of this Agreement, all of whom are collectively referred to herein as the "Company Released Parties," are the Affiliated Entities, their principals, shareholders, partners, members, directors, officers, agents, employees, spouses, children, servants, insurers, employee welfare benefit plans, pension and/or deferred compensation plans, administrators and other fiduciaries, parent companies, affiliated entities, subsidiaries, successors and assigns, and each of them, individually and collectively. 3.2 Release by Employee. Employee hereby releases and discharges the Company Released Parties (the "Release by Employee"), individually and collectively, of and from any and all claims, causes of action, suits, debts, contracts, agreements, promises, liability, demands, damages, and other expenses of any nature whatsoever, at law or in equity, known or unknown, fixed or contingent, contemplated or uncontemplated, whether asserted or assertable, arising out of any matter whatsoever which has occurred from the beginning of time up through and including the date hereof. Without limiting the generality of the foregoing, Employee hereby acknowledges and agrees that the Release by Employee is intended to waive and discharge any and all actions, claims, demands and causes of action arising out of or in any way related to the Employment Agreement or Employee's employment by, or service as an officer or director of, any Affiliated Entity. However, the foregoing provisions do not, and should not be construed so as to, alter, amend or negate the enforceability of this Agreement, any stock options previously granted to Employee by the Company, that certain Indemnity Agreement between the Company and Employee, or any partnership, purchase or similar agreement pursuant to which Employee acquired any ownership interests in any of the subsidiaries or affiliates of the Company (collectively, the "Surviving Contracts"). 3.3 Construction. The Release by Employee is intended to be and should be construed as a general, complete and final waiver and release of all claims. The Release by Employee is being made and executed by Employee individually and on behalf of Employee's heirs, successors, assigns, agents, all persons subrogated to Employee's rights or to whom Employee's rights are secondary or derivative, and all other persons on behalf of whom Employee is authorized to act. IV. RELEASE BY THE COMPANY 4.1 Release by the Company. The Company hereby releases and discharges Employee (the "Release by the Company") of and from any and all claims, causes of action, suits, debts, contracts, agreements, promises, liability, demands, damages, and other expenses of any nature whatsoever, at law or in equity, know or unknown, fixed or contingent, contemplated or uncontemplated, whether asserted or assertable, arising out of any matter whatsoever which has occurred from the beginning of time up through and including the date hereof. Without limiting the generality of the foregoing, the Company hereby acknowledges and agrees that the Release by the Company is intended to waive and discharge any and all actions, claims, demands and causes of action arising out of or in any way related to the Employment Agreement or Employee's employment by, or service as an officer or director of, any Affiliated Entity. However, the foregoing provisions do not, and should not be construed so as to, alter, amend or negate the enforceability of this Agreement or the rights of any Affiliated Entity under the Surviving Contracts. 4.2 Construction. The Release by the Company is intended to be and should be construed as a general, complete and final waiver and release of all claims. The Release by the Company is being made and executed by the Company on its own behalf and on behalf of its successors, assigns, affiliates, agents, all persons subrogated to the Company's rights or to whom the Company's rights are secondary or derivative, and all other persons on behalf of whom the Company is authorized to act. V. MISCELLANEOUS PROVISIONS 5.1 Acknowledgments and Integration. Employee hereby warrants, represents, acknowledges and agrees that Employee has fully and completely read this Agreement and has had adequate opportunity to consider and seek counsel regarding its terms and effect, that this Agreement, including the Releases contained herein, is being executed voluntarily, with full knowledge and understanding of its terms and effects, and that there are no agreements, statements or representations except those expressly set forth herein which constitute a part hereof. This Agreement, including the Releases contained herein, shall not be subject to attack on the grounds that any factual or legal assumptions leading to its execution were wrong or invalid in any respect. 5.2 No Admissions. It is expressly understood and agreed that neither this Agreement, the Releases contained herein, nor the furnishing of consideration for this Agreement or such Releases, shall be deemed or construed at any time for any purpose as an admission by anyone of wrongdoing or liability of any kind, all such wrongdoing and liability being expressly denied. 5.3 Knowledge of Claims. Each of the Company and Employee expressly warrants and stipulates that it intends for the Releases contained herein to release any and all claims that each may now have against the other, regardless of whether such claims have been asserted and regardless of whether such claims arise out of or are related in any way to any facts in existence on or before the date of this Agreement. 5.4 Governing Law and Construction. This Agreement is performable in Travis County, Texas, and is governed by the laws of Texas. The parties agree that Travis County, Texas, is proper venue for all actions related to this Agreement, including, without limitation, actions related to construction, validity, enforcement and performance. This Agreement may not be modified, altered or amended except in writing duly signed by each of the parties hereto. If any provision of this Agreement is rendered or declared illegal or unenforceable by reason of any existing or subsequently enacted statute, rule or regulation, or by order of or judgment of a court, any and all other terms and provisions hereof shall remain in full force and effect as stated and set forth herein. 5.5 Binding Nature. All of the covenants and agreements contained herein shall extend to and be binding upon the heirs, executors, administrators, successors and assigns of the parties hereto. 5.6 Remedies. Each party agrees that a violation on its part of any applicable covenant contained in this Agreement will cause the other party irreparable damage for which remedies at law may be insufficient and, for that reason, it agrees that the other party shall be entitled as a matter of right to equitable remedies, including specific performance and injunctive relief, therefor, without any requirement of posting bond or other form of surety. The right to specific performance and injunctive relief shall be cumulative and in addition to whatever other remedies, at law or in equity, that the parties may have, including, specifically, recovery of additional damages. In addition, the prevailing party in an action to enforce any provision of this Agreement shall be entitled to recover reimbursement of reasonable legal fees and costs of counsel incurred in connection therewith. [Signature page follows] S-1 SIGNATURE PAGE FOR NON-COMPETITION, RELEASE AND SEVERANCE AGREEMENT BETWEEN PRIME MEDICAL SERVICES, INC. AND JOSEPH JENKINS, M.D. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered on the day and year first above written. COMPANY: PRIME MEDICAL SERVICES, INC. By: Print Name: Title: EMPLOYEE: Joseph Jenkins, M.D. EX-10.127 40 0040.txt EX 10.127 CONFIDENTIAL MEMORANDUM-ARIZONA I FAYETTEVILLE LITHOTRIPTERS LIMITED PARTNERSHIP - ARIZONA I A Limited Partnership Formed Under the Laws of Arizona CONFIDENTIAL PRIVATE PLACEMENT MEMORANDUM up to $441,040 in Cash 80 Units of Limited Partnership Interest at $5,513 in Cash per Unit - -------------------------------------------------------------------------------- THIS MEMORANDUM IS FURNISHED PURSUANT TO A CONFIDENTIALITY AGREEMENT BETWEEN THE PARTNERSHIP AND THE INVESTOR WHOSE NAME APPEARS ABOVE. THE CONFIDENTIALITY AGREEMENT PROHIBITS THE DISCLOSURE OF THE CONFIDENTIAL MATERIAL CONTAINED IN THIS MEMORANDUM, EXCEPT TO THE EXTENT SUCH INVESTOR DEEMS IT NECESSARY TO SHARE SUCH INFORMATION WITH HIS LEGAL, ACCOUNTING OR OTHER FINANCIAL ADVISORS, WHO LIKEWISE SHALL BE BOUND BY THE SAME CONFIDENTIALITY RESTRICTIONS SET FORTH IN THE CONFIDENTIALITY AGREEMENT. MEDTECH INVESTMENTS, INC. Exclusive Sales Agent 2008 Litho Place Fayetteville, North Carolina 28304 1-800-682-7971 The Date of this Memorandum is June 23, 2000 FAYETTEVILLE LITHOTRIPTERS LIMITED PARTNERSHIP - ARIZONA I up to $441,040 in Cash up to 80 Units of Limited Partnership Interest at $5,513 in Cash per Unit Fayetteville Lithotripters Limited Partnership - Arizona I, an Arizona 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 80 Units (the "Units") of limited partnership interest in the Partnership, at a price per Unit of $5,513 in cash. See "Terms of the Offering." Each Unit will represent an initial 0.25% economic interest in the Partnership. See "Risk Factors - Other Investment Risks - - Dilution of Limited Partners' Interest." The Partnership currently owns and operates two Lithostar(TM) second generation extracorporeal shock-wave lithotripters for the lithotripsy of kidney stones. Each Lithostar(TM) is installed in a self-propelled Coach (the Coaches with the installed Lithostars(TM) are referred to herein as the "Existing Lithotripsy Systems") enabling the Partnership to provide lithotripsy services at various locations throughout Arizona and parts of New Mexico (the "Service Area"). The Partnership intends to use the proceeds of this Offering to (i) pay the costs of this Offering; (ii) finance a portion of the cost of purchasing two new Storz Modulith(R) SLX-T transportable lithotripters and a new Coach and new mobile van to transport the lithotripters (collectively, the "New Lithotripsy Systems"); and (iii) to make distributions to persons who were Partners of the Partnership prior to the commencement of the Offering. The Partnership anticipates that the New Lithotripsy Systems will replace the Existing Lithotripsy Systems, and that the Existing Lithotripsy Systems will be sold or discarded. See "Sources and Applications of Funds." The Existing Lithotripsy Systems and the New Lithotripsy Systems are, collectively, referred to as the "Lithotripsy Systems." The cash purchase price is due at subscription; however, prospective Investors who meet certain requirements may be able fund a portion of their Unit purchase price with the proceeds of certain third-party financing. See "Terms of the Offering - Limited Partner Loans." The Offering will terminate on August 15, 2000 (or earlier upon the sale of all 80 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) $5,513 $ 75 $5,438 Total Maximum(4) $441,040 $ 6,000 $435,040 (See Footnotes on Back of Cover Page) See Glossary for capitalized terms used herein and not otherwise defined. (1) The Units will be sold on a "best-efforts" any or all basis by MedTech Investments, Inc., a broker-dealer registered with the Securities and Exchange Commission, a member of the National Association of Securities Dealers, Inc. and an Affiliate of the General Partner (the "Sales Agent"). The Partnership will pay the Sales Agent a $75 commission for each Unit sold and will reimburse the Sales Agent for its Offering costs (not to exceed $5,000). The Partnership has agreed to indemnify the Sales Agent against certain liabilities, including liabilities under the Securities Act of 1933 (the "Securities Act"). See "Plan of Distribution." (2) Net Cash Proceeds do not reflect deduction of expenses payable by the Partnership. See "Sources and Applications of Funds." The price per Unit ($5,513) is payable in cash upon subscription; provided, that prospective Investors who meet certain requirements may be able to personally borrow funds from a third-party financial institution in order to pay a portion of their cash purchase price per Unit. For the convenience of Investors, the Partnership has arranged for financing of a portion of the Units' purchase price with First-Citizens Bank & Trust Company, which is headquartered in Raleigh, North Carolina, and has approximately 370 offices throughout the southeastern United States (the "Bank"). Therefore, in lieu of paying the entire purchase price in cash at subscription, prospective Investors may execute and deliver to the Sales Agent together with their subscription packets, at least $2,500 cash and a Limited Partner Note payable to the Bank in a maximum principal amount of up to $3,013 per Unit to be purchased, a Loan and Security Agreement, Security Agreement and two Uniform Commercial Code Financing Statements ("UCC-1s") (collectively, the "Loan Documents"). See "Terms of the Offering - Limited Partner Loans" and the forms of the Limited Partner Note, the Loan and Security Agreement and Security Agreement attached to the Form of Bank Commitment as Exhibits A, B and C, respectively, which is attached hereto as Appendix C and the UCC's attached as part of the Subscription Packet. (3) Each Investor may purchase no less than one Unit. The General Partner, however, reserves the right to sell less than one Unit as an additional investment, and to reject in whole or in part any subscription. (4) Offering Proceeds will first be used by the Partnership to pay offering costs and expenses (up to $35,000) and the remainder of the proceeds will be used to finance the New Lithotripsy Systems and 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 Partnership seeks by this Offering to sell up to 80 Units for an aggregate of up to $441,040 in cash ($435,040 net of Sales Agent's commissions). All subscription funds and Loan Documents will be held in an interest bearing escrow account with the Bank until the acceptance of the Investor's subscription (and approval by the Bank if the Investor is financing a portion of the Unit purchase price through a Limited Partner Loan), rejection of the Investor's subscription or termination of this Offering. The Partnership has set no minimum number of Units to be sold in this Offering. Accordingly, upon the receipt and acceptance of an Investor's subscription by the Partnership as provided herein, such Investor will be admitted to the Partnership as a Limited Partner, provided that acceptance of subscriptions by an Investor that elects to finance a portion of his 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 August 15, 2000, unless it is sooner terminated by the General Partner, or unless extended for an additional period not to exceed 180 days. See "Terms of the Offering." [The remainder of this page is left intentionally blank.] 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..................................................12 THE PARTNERSHIP............................................................15 TERMS OF THE OFFERING......................................................16 The Units and Subscription Price........................................16 Acceptance of Subscriptions.............................................16 Limited Partner Loans...................................................17 Subscription Period; Closing............................................19 Offering Exemption......................................................19 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 Existing Lithotripsy Systems........................................23 Acquisition of the New Lithotripsy Systems..............................24 Acquisition of Additional Assets........................................26 Hospital Contracts......................................................26 Operation of the Lithotripsy Systems....................................27 Management..............................................................28 Employees...............................................................28 FINANCIAL CONDITION OF THE PARTNERSHIP.....................................29 MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE RESULTS OF OPERATIONS..........34 Four Months Ended April 30, 2000 and April 30, 1999.....................34 Year Ended December 31, 1999 and December 31, 1998......................34 Year Ended December 31, 1998 and December 31, 1997......................34 SOURCES AND APPLICATIONS OF FUNDS..........................................36 THE GENERAL PARTNER........................................................37 COMPENSATION AND REIMBURSEMENT TO THE GENERAL PARTNER AND ITS AFFILIATES...38 CONFLICTS OF INTEREST......................................................40 FIDUCIARY RESPONSIBILITY OF THE GENERAL PARTNER............................41 COMPETITION................................................................42 Affiliated Competition..................................................42 Other Competition.......................................................42 REGULATION.................................................................43 Federal Regulation......................................................43 State Regulation........................................................52 PRIOR ACTIVITIES...........................................................53 SUMMARY OF THE PARTNERSHIP AGREEMENT.......................................54 Nature of Limited Partnership Interest..................................55 Profits, Losses and Distributions.......................................55 Management of the Partnership...........................................56 Powers of the General Partner...........................................57 Rights and Liabilities of the Limited Partners..........................57 Restrictions on Transfer of Partnership Interests.......................58 Dissolution and Liquidation.............................................58 Optional Purchase of Limited Partner Interests..........................59 Dilution Offerings......................................................59 Arbitration.............................................................60 Power of Attorney.......................................................60 Reports to Limited Partners.............................................60 Records.................................................................61 LEGAL MATTERS..............................................................61 ADDITIONAL INFORMATION.....................................................61 GLOSSARY...................................................................61 APPENDICES Appendix A AGREEMENT OF LIMITED PARTNERSHIP OF FAYETTEVILLE LITHOTRIPTERS LIMITED PARTNERSHIP - ARIZONA I Appendix B FORM OF LOAN COMMITMENT (WITH EXHIBITS) Appendix C FORM OF OPINION OF WOMBLE CARLYLE SANDRIDGE & RICE, PLLC Appendix D NOTES TO FINANCIAL STATEMENTS RISK FACTORS Prior to subscribing for Units, Investors should carefully examine this entire Memorandum, including the Appendices hereto, and should give particular consideration to the general risks attendant to speculative investments and investments in partnerships generally, and to the other special operating, tax and other investment risks set forth below. Operating Risks General Risks of Operations. The Partnership was formed under the laws of the State of Arizona on August 23, 1988 and commenced operations in 1990. Although the General Partner and its personnel have significant experience in managing lithotripsy enterprises, whether the Partnership can continue to effectively operate and expand its business cannot be accurately predicted. The benefits of an investment in the Partnership also depend on many factors over which the Partnership has no control, including competition, technological innovations rendering the Lithotripsy Systems less competitive or obsolete, and other matters. The Partnership may be adversely affected by various changing local factors such as an increase in local unemployment, a change in general economic conditions, changes in interest rates and availability of financing, and other matters that may render the operation of the Lithotripsy Systems difficult or unattractive. Other factors that may adversely affect the operation of the Lithotripsy Systems are unforeseen increased operating expenses, energy shortages and costs attributable thereto, uninsured losses and the capabilities of the Partnership's management personnel. Uncertainties Related to Changing Healthcare Environment. The healthcare industry has experienced substantial changes in recent years. Managed care is becoming a major factor in the delivery of lithotripsy services, and the General Partner anticipates that managed care programs, including capitation plans, will continue to play an increasing role in the delivery of lithotripsy services and that competition for these services may shift from individual practitioners to health maintenance organizations and other significant providers of managed care. No assurance can be given that the changing healthcare environment will not have a material adverse effect on the Partnership. Lack of Diversification. The Partnership's fundamental purpose will be to continue to operate the Existing Lithotripsy Systems and then to operate the New Lithotripsy Systems. Because the Partnership is dependent on only one line of business, it will have greater risks from unexpected service interruptions, equipment breakdowns, technological developments, kidney stone treatment medical breakthroughs, economic problems and similar matters than would be the case with a more diversified business. Impact of Insurance Reimbursement. The Partnership's revenues are expected to continue to be derived from the fees paid by Contract Hospitals under contract with the Partnership. The Partnership does not plan to directly bill or collect for services from patients or their third-party payors, though it may do so in the future in the General Partner's discretion. Payments received from Contract Hospitals may be subject to renegotiation depending on the reimbursement they receive. Such reimbursement may be reduced for several reasons, including the introduction of an outpatient prospective payment system regarding Medicare patients, which in turn could lower reimbursement available from private health insurers. The increasing influence of health maintenance organizations and other managed care companies has resulted in pressure to reduce the reimbursement available for lithotripsy procedures. Some of the General Partner's Affiliates have recently experienced declining revenues based on these managed care pressures in other health care markets. Additionally, the Health Care Financing Administration ("HCFA"), the federal agency which administers the Medicare program, has issued rules which reduce the reimbursement available for lithotripsy procedures provided at hospitals to $2,265. See "Regulation - Federal Regulation." In some cases reimbursement rates payable to the General Partner and other Affiliates from commercial third party payors are less than the proposed HCFA rate. Because of the competitive pressures from managed care companies as well as threatened reductions in Medicare reimbursement, the General Partner anticipates that reimbursement available for lithotripsy procedures may continue to decrease. Such decreases would have a material adverse effect on Partnership revenues. Regarding the professional fees paid to physicians who treat patients on the Lithotripsy Systems, the General Partner anticipates that similar competitive pressures may result in lower reimbursement paid to physicians, both by private insurers and by government programs such as Medicare. See "Regulation." Reliability and Efficacy of the Partnership's Lithotripters. The Partnership currently owns and operates two Lithostars(TM). 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 Johannes Gutenberg 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, any downtime periods necessitated for maintenance or repairs of the Partnership's Existing Lithotripsy Systems 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 Lithostars(TM) were upfitted with the new tube system in 1996. Based upon a detailed follow-up study of 86,000 renal and 51,000 ureteral stones treated on the Lithostar(TM) in all of the General Partner's affiliated partnerships using both the original and newer shock-head systems, the General Partner notes an 86% total success rate with an overall retreatment rate of 15%. This retreatment rate included stones of all sizes and locations, including staghorn calculi which at times required multiple treatments. Based upon this study and the General Partner's experience in doing well in excess of 128,000 cases over the past ten and one-half years in its affiliated limited partnerships, the General Partner is of the opinion that the Lithostar(TM) is generally an effective and sound alternative for the treatment of renal stones. However, the Partnership's Lithostars(TM) are older models, and the General Partner believes that these machines need to be replaced in order to retain the Partnership's current level of efficiency and respond to competitive pressures. The Partnership anticipates purchasing two new Storz Modulith(R) SLX-T model extracorporeal shock wave lithotripters with the proceeds of this Offering and Partnership debt financing. See "Business Activities - Acquisition of the New Lithotripsy Systems." The General Partner believes the Modulith(R) SLX-T offers several advantages over the Lithostar(TM). In particular, the General Partner believes that the Modulith(R) SLX-T provides clearer imaging than the Lithostar(TM). In addition, because the Modulith(R) SLX-T is transportable, it can be moved from site to site more quickly, and the Modulith(R) SLX-T offers more flexibility since it can be used in a Coach or in hospital procedure rooms. The Modulith(R) SLX-T received FDA premarket approval on March 27, 1997. Although the General Partner and its Affiliates have limited but positive direct experience with the use of the Modulith(R) SLX-T, any downtime periods necessitated by maintenance and repairs of the New Lithotripsy Systems will adversely affect Company revenues. Preliminary reports from abroad and "word of mouth" anecdotal evidence indicate that the Modulith(R) SLX-T is as effective as most of the "portable" lithotripters in the market. The General Partner is aware that early data from abroad concerning one precursor to the Modulith(R) SLX-T reflected a high retreatment rate, and that an Affiliate of the General Partner experienced electrical and mechanical problems using another precursor, the Modulith(R) SLX. However, the General Partner's and its Affiliates' limited experience with the transportable Modulith(R) SLX-T has shown acceptable retreatment rates. A high retreatment rate may adversely affect the Partnership. Investors should note that some studies indicate that lithotripsy may cause high blood pressure and tissue damage. The Partnership questions the reliability of these studies and believes lithotripsy has become a widely accepted method for the treatment of renal stones. Technological Obsolescence. The history of lithotripsy of kidney stones as an accepted treatment procedure is relatively recent, with the first clinical trials being conducted in West Germany beginning in 1980 and the first premarket approval for a renal lithotripter in the United States being granted by the FDA in December 1984. Today, lithotripsy is the treatment procedure of choice for kidney stone disease, having replaced other treatment methods. Published reports indicate that certain researchers are attempting to improve a laser technology to more easily eradicate kidney stones, and pharmaceutical companies and researchers have attempted to develop a safe drug that can be used to dissolve kidney stones in all cases. The General Partner cannot predict the outcome of ongoing research in these areas, and any one or more developments could reduce or eliminate lithotripsy as an acceptable procedure or treatment method of choice for the treatment of kidney stones. Partnership Limited Resources and Risks of Leverage. The proceeds of this Offering cannot be accurately determined until the Closing has occurred and the number of Units sold has been calculated. In any event, such proceeds will not be sufficient to fund all anticipated expenses, and the Partnership will have to supplement Partnership funds with the proceeds of debt financing. See "Business Activities - Acquisition of the New Lithotripsy Systems" and "Sources and Application of Funds." Although the General Partner maintains good relationships with certain commercial lending institutions, it has not obtained a loan commitment from any party in any amount on behalf of the Partnership and whether one would timely be forthcoming on terms acceptable to the Partnership cannot be assured. The General Partner and/or its Affiliates may, but are under no obligation to, make loans to the Partnership, and there is no assurance that they would be willing or able to do so at the time, in amounts and on terms required by the Partnership. While the General Partner does not anticipate that it would cause the Partnership to incur indebtedness unless cash generated from Partnership operations were at the time expected to enable repayment of such loan in accordance with its terms, lower than anticipated revenues and/or greater than anticipated expenses could result in the Partnership's failure to make payments of principal or interest when due under such a loan and the Partnership's equity being reduced or eliminated. In such event, the Limited Partners could lose their entire investment. Acquisition of Additional Assets. If in the future the General Partner determines that it is in the best interest of the Partnership to acquire for the treatment of renal stones one or more fixed base or mobile lithotripsy systems (or any other renal stone treatment equipment) in addition to the New Lithotripsy Systems, the General Partner has the authority (with the prior written consent of a majority in interest of the Limited Partners) 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." Other than the New Lithotripsy Systems, which the Partnership intends to purchase with the proceeds of the Offering and Partnership debt financing, the General Partner does not anticipate acquiring additional Partnership assets unless projected Partnership Cash Flow or proceeds from a Dilution Offering are sufficient to finance such acquisitions. In any event, no Limited Partner would be personally liable on any additional Partnership indebtedness without such Partner's prior written consent. There is no assurance that financing would be available to the Partnership to acquire additional assets or to fund any additional working capital requirements. Any such borrowing by the Partnership will serve to increase the risks to the Partnership associated with leverage as provided above. Competition. Many fixed-site and mobile lithotripters are currently operating in and around the Service Area which will be in direct competition with the Partnership's Lithotripsy Systems. Affiliates of the General Partner operate near the Service Area. The competing lithotripsy service providers generally have existing contracts with hospitals and other facilities. Except as provided by law, neither the General Partner nor its Affiliates are prohibited from engaging in any business or arrangement that may compete with the Partnership. See "Prior Activities," "Conflicts of Interest" and "Competition." There is no assurance that other parties will not, in the future, operate fixed-base or mobile lithotripters in and around the Service Area. To the General Partner's knowledge, no manufacturers are restricted from selling their lithotripters to other parties in the Service Area. Furthermore, the Partnership competes with facilities and individual medical practitioners who offer conventional treatment (e.g., surgery) for kidney stones. Managed care companies generally contract either directly with hospitals or specified providers for lithotripsy services for beneficiaries of their plans. It is not uncommon for managed care companies to have contracts already in place with hospitals or specified providers, and the Partnership will not be able to provide services to beneficiaries of those plans unless it convinces either the managed care companies or the hospitals to switch to the Partnership's services. Limited Partner Restrictions. The Partnership Agreement severely restricts the Limited Partners' ability to own interests in competing equipment or ventures. The enforceability of these noncompetition agreements is generally a matter of state law. No assurance can be given that one or more Limited Partners may not successfully compete with the Partnership. See "Competition." Government Regulation. All facets of the healthcare industry are highly regulated and will become more so in the future. The ability of the Partnership to operate legally and remain profitable may be adversely affected by changes in governmental regulations, including expected changes in reimbursement, Medicare and Medicaid certification requirements, federal and state fraud and abuse laws, including the federal Anti-Kickback Statute, the federal False Claims Act, federal and state self-referral laws, state restrictions on fee splitting and other governmental regulation. See "Regulation." These laws and regulations may adversely affect the economic viability of the Partnership. The laws are broad in scope, and interpretations by courts have been limited. Violations of these laws would subject the General Partner and all Limited Partners to governmental scrutiny and/or felony prosecution and punishment in the form of large monetary fines, loss of licensure, imprisonment and exclusion from Medicare and Medicaid. Certain provisions of Medicare and Medicaid law limit provider ownership and control over the various health care services to which physicians may make Medicare and Medicaid referrals. The primary laws involved are the "Stark II" federal statute prohibiting financial relationships between physicians and certain entities to which they refer patients, and the Anti-Kickback Statute which prohibits compensation in exchange for or to induce referrals. Regarding Stark II, HCFA published proposed Stark II regulations in 1998. Under the proposed regulations, physician Limited Partner referrals of Medicare and Medicaid patients to Contract Hospitals for lithotripsy services would be prohibited. If HCFA adopts the proposed Stark II regulations as final, or if a reviewing court were to interpret the Stark II statute using the proposed regulations as interpretive authority, then the Partnership and its physician Limited Partners would likely be found in violation of Stark II. In such instance, the Partnership and/or its physician Limited Partners may be required to refund any amounts collected from Medicare and Medicaid patients in violation of the statute, and they may be subject to civil monetary penalties and/or exclusion from the Medicare and Medicaid programs. The Anti-Kickback Statute prohibits paying or receiving any remuneration in exchange for making a referral for healthcare services which may be paid for by Medicare, Medicaid or TRICARE (formerly known as CHAMPUS). The law has been broadly interpreted to include any payments which may induce or influence a physician to refer patients. One of the federal agencies that enforces the Anti-Kickback Statute has issued several "safe harbors" which, if complied with, mean the payment or transaction will be deemed not to violate the law. This Offering does not comply with any "safe harbor." There is limited guidance from reviewing courts regarding the application of the broad language of the Anti-Kickback Statute to joint ventures similar to the one described in this Offering. In order to prove violations of the Anti-Kickback law, the government must establish that one or more parties offered, solicited or paid remuneration to induce or reward referrals. The government has said that in certain situations the mere offering of an opportunity to invest in a venture would constitute illegal remuneration in violation of the Anti-Kickback Statute. Although the General Partner believes the structure and purpose of the Partnership are in compliance with the Anti-Kickback Statute, no assurances can be given that government officials or a reviewing court would agree. Violation of the Anti-Kickback Statute could subject the Partnership, the General Partner and the physician Limited Partners to criminal penalties, imprisonment, fines and/or exclusion from the Medicare and Medicaid programs. The federal False Claims Act and similar laws generally prohibit an individual or entity from knowingly and willfully presenting a claim (or causing a claim to be presented) for payment from Medicare, Medicaid or other third party payors that is false and fraudulent. In recent cases, False Claims Act violations have been based on allegations that Stark II or the Anti-Kickback Statute have been violated. In addition to Stark 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. Additionally, state laws require physicians in Arizona and New Mexico to give their patients written notice when they refer the patients to health care facilities in which the physicians have an ownership interest. Various licensure requirements also must be met in order for the Partnership to provide mobile lithotripsy services in Arizona and New Mexico. The General Partner will continue to cause the Partnership to seek to comply with such requirements. See "Regulation - State Regulation." Contract Terms and Termination. The Partnership provides lithotripsy services to nine Contract Hospitals pursuant to five separate Hospital Contracts. Most, but not all, of the Hospital Contracts grant the Partnership the exclusive right to provide lithotripsy services at the particular Contract Hospitals. Two of the Hospital Contracts provide for automatic renewal on a year-to-year basis. Four of the Hospital Contracts are terminable without cause at any time upon 90 days or less written notice by either party. The remaining Hospital Contracts are terminable without cause at the end of the initial term or any renewal period upon 60 to 90 days prior written notice. 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 fees payable to the Partnership by Contract Hospitals will not decline or that terminations will not occur. The resulting impact of such events would have a material adverse effect on Partnership operations. It is expected that most new lithotripsy service contracts, if any, would have one-year terms and be automatically renewed unless either party elects to cancel prior to the end of the term. In addition, 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. In addition, competing vendors may attempt to cause certain Contract Hospitals to contract with them instead of the Partnership. The loss of Contract Hospitals to competition would adversely affect Partnership revenues and such effect could be material. Thus, there is no assurance that Partnership operations as carried on as of the date of this Memorandum or contemplated in the future will continue as herein described or contemplated, and the cancellation of 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." Tax Risks Investors should note that the General Partner anticipates no significant tax benefits associated with the operation of the Lithotripsy Systems or the Partnership. No ruling will be sought from the Service on the federal income tax consequences of any of the matters discussed in this Memorandum or any other tax issues affecting the Partnership or the Limited Partners. The Partnership is relying upon an opinion of its Counsel with respect to certain material United States federal income tax issues. Counsel's opinion is not binding on the Service as to any issue, however, and there is no assurance that any deductions, or the period in which deductions may be claimed, will not be challenged by the Service. Each Investor should carefully review the following risk factors and consult his own tax advisor with respect to the federal, state and local income tax consequences of an investment in the Partnership. THE TAX RISKS SET FORTH IN THIS SECTION ARE NOT INTENDED TO BE AN EXHAUSTIVE LIST OF THE GENERAL OR SPECIFIC TAX RISKS RELATING TO THE PURCHASE OF UNITS IN THE PARTNERSHIP. EACH INVESTOR IS DIRECTED TO THE FULL OPINION OF COUNSEL (APPENDIX C TO THE MEMORANDUM). IT IS STRONGLY RECOMMENDED THAT EACH INVESTOR INDEPENDENTLY CONSULT HIS PERSONAL TAX COUNSEL CONCERNING THE TAX CONSEQUENCES ASSOCIATED WITH HIS OWNERSHIP OF AN INTEREST IN THE PARTNERSHIP. THE CONCLUSIONS REACHED IN THE OPINION ARE RENDERED WITHOUT ASSURANCE THAT SUCH CONCLUSIONS HAVE BEEN OR WILL BE ACCEPTED BY THE SERVICE OR THE COURTS. THIS MEMORANDUM AND THE OPINION DO NOT DISCUSS, NOR WILL COUNSEL BE RENDERING AN OPINION REGARDING, THE ESTATE AND GIFT TAX OR STATE AND LOCAL INCOME TAX CONSEQUENCES OF AN INVESTMENT IN THE PARTNERSHIP. FURTHERMORE, INVESTORS SHOULD NOTE THAT THE ANTICIPATED FEDERAL INCOME TAX CONSEQUENCES OF AN INVESTMENT IN THE PARTNERSHIP MAY BE ADVERSELY AFFECTED BY FUTURE CHANGES IN THE FEDERAL INCOME TAX LAWS, WHETHER BY FUTURE ACTS OF CONGRESS OR FUTURE ADMINISTRATIVE AND JUDICIAL INTERPRETATIONS OF APPLICABLE FEDERAL INCOME TAX LAWS. ANY OF THE FOREGOING MAY BE GIVEN RETROACTIVE EFFECT. Possible Legislative or Other Actions Effecting Tax Consequences. The federal income tax treatment of an investment in an equipment/service oriented limited partnership such as the Partnership may be modified by legislative, judicial or administrative action at any time, and any such action may retroactively affect investments and commitments previously made. The rules dealing with federal income taxation of limited partnerships are constantly under review by the Service, resulting in revisions of its regulations and revised interpretations of established concepts. In evaluating an investment in the Partnership, each Investor should consult with his personal tax advisor with respect to possible legislative, judicial and administrative developments. Disqualification of Employee Benefit Plans. Purchase of Units in the Partnership may cause certain Limited Partners, certain hospitals and out-patient centers, the Partnership, and employees of the foregoing to be treated under Section 414(m) of the Code as being employed in the aggregate by a single employer or "affiliated service group" for purposes of minimum coverage, participation and other employee benefit plan requirements imposed by the Code. In contrast, an employer not affiliated under Section 414(m) need only consider its own employees in determining whether its employee benefit plans satisfy Code requirements. Aggregation of employees could cause the disqualification of the retirement plans of certain Limited Partners and related entities. Aggregation could also require the value of the vested retirement benefit of a highly compensated employee who is a participant in a disqualified plan to be included in his gross income, regardless of whether the employee is a Limited Partner. These rules may adversely affect Investors who are currently involved in a medical practice joint venture, regardless of their purchase of Units in the Partnership. The General Partner and legal counsel to the Partnership have been informally advised by officials of the Service that the Service would not likely attempt to apply the affiliated service group rules to the Partnership, nor has the Service applied these rules to similar arrangements in the past. Informal discussions with the Service, however, are not binding on the Service, and there can be no guarantee that the Service will not apply the affiliated service group rules to the Partnership. INVESTORS ARE URGED TO CONSULT WITH THEIR OWN TAX ADVISORS REGARDING THE APPLICABILITY OF THE AFFILIATED SERVICE GROUP RULES DESCRIBED HEREIN TO THE EMPLOYEE BENEFIT PLANS MAINTAINED BY THEM OR THEIR MEDICAL PRACTICES. Partnership Allocations. The Partnership Agreement contains certain allocations of profits and losses that could be reallocated by the Service if it were determined that the allocations did not have "substantial economic effect." On December 31, 1985, the Regulations dealing with the propriety of partnership allocations were finalized. As a general rule, allocations of profits and losses must have "substantial economic effect." Based upon current law, Counsel is of the opinion that, if the question were litigated, it is more probable than not that the allocation of profits and losses set forth in the Partnership Agreement would be sustained for federal income tax purposes. This opinion is subject to certain assumptions and qualifications. Investors are cautioned that the foregoing opinion is based in part upon final regulations which have not been extensively commented upon or construed by the courts. Income in Excess of Distributions. The Partnership Agreement provides that in each year annual Distributions may be made to the Partners. Excluded from the definition of cash available for distribution is the amount of funds necessary to discharge Partnership debts and to maintain certain cash reserves deemed necessary by the General Partner. If Partnership Cash Flow is insufficient to fund expenses and maintain adequate reserves, a Limited Partner could be subject to income taxes payable out of personal funds to the extent of the Partnership's income, if any, attributed to him without receiving from the Partnership sufficient Distributions to pay the Limited Partner's tax with respect to such income. Effect of Classification as Corporation. The Partnership has not and will not seek a ruling from the Service concerning the tax status of the Partnership. It is the opinion of Counsel that the Partnership will be treated as a partnership for federal income tax purposes and not as an association taxable as a corporation unless the Partnership so elects. The Partnership has not and will not make an election to be classified as other than a partnership for federal income tax purposes. Although the Partnership intends to rely on the legal opinion of Counsel, the service will not be bound thereby. Moreover, there can be no assurance that legislative or administrative changes or court decisions may not in the future result in the Partnership being treated as an association taxable as a corporation, with a resulting greater tax burden associated with the purchase of Units. The General Partner, in order to comply with applicable tax law, will keep the Partnership's books and records and otherwise compute Profits and Losses based on the accrual method, and not the cash basis method, of accounting pursuant to Section 448 of the Code. The accrual method of accounting generally records income and expenses when they are accrued or economically incurred. Passive Income and Losses. The General Partner expects that the Partnership will continue to realize taxable income and not taxable losses during the foreseeable future. Nevertheless, if it instead realizes taxable losses, the use of such losses by the Limited Partners will generally be limited by Code Section 469. Code Section 469 provides limitations for the use of taxable losses attributable to "passive activities." Code Section 469 operates generally to prohibit passive losses from being used against income from active activities. The passive activity rules are extremely complex and Investors are urged to consult their own tax advisors as to their applicability, particularly as they relate to the ability to deduct any losses from the Partnership against other income of the Investor. THE PASSIVE ACTIVITY LOSS RULES WILL AFFECT EACH INVESTOR DIFFERENTLY, DEPENDING ON HIS OR HER OWN TAX SITUATION. EACH INVESTOR SHOULD CONSULT WITH HIS OR HER OWN TAX ADVISOR TO DETERMINE THE EFFECT OF THESE RULES ON THE INVESTOR IN LIGHT OF THE INVESTOR'S INDIVIDUAL FACTS AND CIRCUMSTANCES. Depreciation. It is expected that the Partnership will use the Modified Accelerated Cost Recovery System ("MACRS") to depreciate the cost of any newly acquired equipment (including the New Lithotripsy Systems) or improvements. It is anticipated that any additions or improvements to the Lithotripsy Systems will also be depreciated over a five year term using the 200% declining balance method of depreciation, switching to the straight-line method to maximize the depreciation allowance. If purchases or improvements are made after the beginning of any year, only a fraction of the depreciation deduction may be claimed in that year. As under prior law, the 1986 Act provides that the full amount of depreciation on personal property (such as the Lithotripsy Systems) is recaptured upon disposition (i.e., is taxed as ordinary income) to the extent gain is realized on the disposition. Investors should note that the 1986 Act repealed the investment tax credit for all personal property. Partnership Elections. The Code permits partnerships to make elections for the purpose of adjusting the basis of partnership property on the distribution of property by a partnership to a partner and on the transfer of an interest in a partnership by sale or exchange or on the death of a partner. The general effect of such elections is that transferees of Partnership Interests will be treated, for the purposes of depreciation and gain, as though they had a direct interest in the Partnership's assets, and the difference between their adjusted bases for their Partnership Interests and their allocable portion of the Partnership's bases for its assets will be allocated to such assets based upon the fair market value of the assets at the times of transfers of the Partnership Interests. Any such election, once made, cannot be revoked without the consent of the Service. Under the terms of the Partnership Agreement, the General Partner, in its discretion, may make the requisite election necessary to effect such adjustment in basis. Sale of Partnership Units. Gain realized on the sale of Units by a Limited Partner who is not a "dealer" in Units or in limited partnership interests will be taxed as capital gain, except that the portion of the sales price attributable to inventory items and unrealized receivables will be taxed as ordinary income. "Unrealized receivables" of the Partnership include the Limited Partner's share of the ordinary income that the Partnership would realize as a result of the recapture of depreciation (as described above) if the Partnership had sold Partnership depreciable property immediately before the Limited Partner sold his 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, 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 to the Partnership which would give Counsel reasonable cause to question the General Partner's determination. On audit the Service may challenge such payments and contend that the amount paid for the services exceeds the reasonable value of those services. Because of the factual nature of the question of the reasonableness of any particular fee, Counsel to the Partnership cannot express an opinion as to the outcome of the reasonableness of the amount of any fee should the issue be litigated. Syndication Expenses. Section 709 of the Code prohibits a partnership from deducting or amortizing costs that are incurred to promote the sale of partnership interests (i.e., syndication expenses). The Regulations provide definitions for syndication expenses that must be capitalized. Syndication expenses include brokerage fees, registration fees, legal fees for securities advice, accounting fees for preparation of representations to be included in the offering materials, and printing costs of the offering materials. The Partnership intends to treat the entire amount payable to the Sales Agent as a sales commission for selling the Units, as well as certain other fees and expenses allocable to the preparation of this Memorandum and to the offering of the Units in the Partnership, as nondeductible, nonamortizable syndication expenses. Investors will economically bear their respective proportionate share of syndication expenses as these costs likely will be paid out of proceeds from this Offering. These costs will be borne irrespective of their amount, timing and ability of the Partnership to deduct these costs for tax purposes. Management Fee to General Partner. The Partnership pays the General Partner a monthly management fee equal to the greater of $8,000 or 7.5% of Partnership Cash Flow per month. The management fee is paid to the General Partner for the time and attention 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 and operating partnerships and other ventures throughout the United States that are similar to the Partnership. The General Partner will continue to devote such time to the Partnership's business and affairs as it deems necessary and appropriate in the exercise of reasonable judgment. The participation by any Limited Partner in the management or control of the Partnership's affairs could render him generally liable for the liabilities of the Partnership that could not be satisfied by assets of the Partnership. See the Form of Legal Opinion of Womble Carlyle Sandridge & Rice, a Professional Limited Liability Company, attached hereto as Appendix C. Limited Partners' Obligation to Return Certain Distributions. Except as provided by other applicable law and provided that a Limited Partner does not participate in the management or control of the Partnership, he or she will not be liable for the liabilities of the Partnership in excess of his investment, his ratable share of undistributed profits, and any distributions received from the Partnership if, after giving effect to such distributions, all liabilities of the Partnership, other than liabilities to Partners on account of their Partnership Interests, exceed the fair value of the Partnership's assets. Dilution of Limited Partners' Interests. The General Partner has the authority under the Partnership Agreement to cause the Partnership to periodically offer and sell additional limited partnership interests (a "Dilution Offering"). Partnership interests offered in a Dilution Offering must be sold in a manner and according to terms in the best interest of the Partnership, as prescribed in the sole discretion of the General Partner. Upon the sale of interests in the Partnership in a Dilution Offering, the Percentage Interests of the Partners will be proportionately diluted. See "Summary of the Partnership Agreement - Dilution Offerings." Liability Under Limited Partner Loan. Investors personally borrowing funds to finance a portion of their Unit purchase price with the proceeds of a Limited Partner Loan will be directly obligated to the Bank as provided in the Loan Documents. A default under the Limited Partner Loan could result in the foreclosure of the Investor's right to receive any Partnership Distributions as well as the loss of other personal assets unrelated to his Partnership Interest. Prospective Investors should review carefully all the provisions contained in the Loan Commitment and the terms of the Limited Partner Note and Loan and Security Agreement with their counsel and financial advisors. Neither the Partnership nor the General Partner endorses or recommends to the prospective Investors the desirability of obtaining financing from the Bank nor does the summary of the Loan Documents provided herein constitute legal advice. A Limited Partner's liability under a Limited Partner Note continues regardless of whether the Limited Partner remains a limited partner in the Partnership. As a consequence, such liability cannot be avoided by claims, defenses or set-offs the Limited Partner may have against the Partnership, the General Partner or their Affiliates. In addition to the suitability requirements discussed below, any prospective Investor applying for a Limited Partner Loan to fund a portion of his Unit purchase must be approved by the Bank for purposes of his delivery of the Limited Partner Note. The Bank has established its own criteria for approving the creditworthiness of a prospective Investor and has not established objective minimum suitability standards. Instead, the Bank is empowered to accept or reject prospective Investors. Long-term Investment. The General Partner anticipates that the Partnership will continue to operate the Lithotripsy Systems for an indefinite period of time and that the Partnership will not liquidate prior to its intended termination. Accordingly, Investors should consider their investment in the Partnership as a long-term investment of indefinite duration. Limited Transferability and Illiquidity of Units. Transferability of Units is severely restricted by the Partnership Agreement and the Subscription Agreement, and the consent of the General Partner is necessary for any transfer. No public market for the Units exists and none is expected to develop. Moreover, the Units generally may not be transferred unless the General Partner is furnished with an opinion of counsel, satisfactory to the General Partner, to the effect that such assignment or transfer may be effected without registration under the Securities Act and any state securities laws applicable to the transfer. The Partnership will be under no obligation to register the Units or otherwise take any action that would enable the assignment or transfer of a Unit to be in compliance with applicable federal and state securities laws. Thus, a Limited Partner may not be able to liquidate an investment in the Partnership in the event of an emergency, and the Units may not be readily accepted as collateral for loans. Moreover, a sale of a Unit by a Limited Partner may cause adverse tax consequences to the selling Limited Partner. Accordingly, the purchase of Units must be considered a long-term and illiquid investment. Arbitrary Offering Price. The offering price of the Units has been determined by the General Partner based upon valuation of the Partnership conducted by an independent third party based on various assumptions that may or may not occur. A copy of this valuation will be made available on request. The offering price of the Units is not, however, necessarily indicative of their value, if any, and no assurance can be given that the Units, if and when transferable, could be sold for the offering price or for any amount. Limitation of General Partner's Liability and Indemnification. The Partnership Agreement provides that the General Partner will not be liable to the Partnership or to any Partner for errors in judgment or other acts or omissions in connection with the Partnership as long as the General Partner, in good faith, determined such course of conduct was in the best interest of the Partnership, and such course of conduct did not constitute willful misconduct or gross negligence. Therefore, the Limited Partners may have a more limited right of action against the General Partner in the event of its misfeasance or malfeasance than they would have absent the limitations in the Partnership Agreement. The Partnership will indemnify the General Partner against losses sustained by the General Partner in connection with the Partnership, unless such losses came as a result of the General Partner's gross negligence or willful misconduct. In the opinion of the SEC, indemnification for liabilities arising out of the Securities Act is contrary to public policy and therefore is unenforceable. Insurance. Prime maintains active policies of insurance for the benefit of itself and certain affiliated entities covering employee crime, workers' compensation, business and commercial automobile operations, professional liability, inland marine, business interruption, real property and commercial liability risks. These policies include the Partnership, and the General Partner believes that coverage limits of these policies are within acceptable norms for the extent and nature of the risks covered. The Partnership is responsible for its share of premium costs. There are certain types of losses, however, that are either uninsurable or are not economically insurable. For instance, contractual liability is generally not covered under Prime's policies. Should such losses occur with respect to Partnership operations, or should losses exceed insurance coverage limits, the Partnership could suffer a loss of the capital invested in its Lithotripsy Systems and any anticipated profits from such investment. Optional Purchase of Limited Partner Interests. As provided in the Partnership Agreement, the General Partner, and then the Limited Partners, have the option 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 of an interest in a competing venture. A Limited Partner whose Limited Partner Interest is sold, as provided above, or who ceases to be a Limited Partner of the Partnership for any reason, will be further restricted from having a direct or indirect ownership in a competing venture (including the lease or sublease of competing technology) within the Partnership's Service Area for two years after the disposition of his Partnership Interest. Limited Partners, except in certain circumstances set forth in the Partnership Agreement, are also absolutely prohibited from disclosing Partnership trade secrets and confidential information. The option purchase price for the Partnership Interest is equal to the Partner's share of the Partnership's book value, if any, as reflected by such Partner's Capital Account (unadjusted for any appreciation in Partnership assets and as reduced by depreciation deductions claimed by the Partnership for tax purposes). Because losses, depreciation, deductions and distributions reduce capital accounts, and because appreciation in assets is not reflected in capital accounts, the option purchase price may be nominal in amount. See the Partnership Agreement attached hereto as Appendix A and "Summary of the Partnership Agreement - Optional Purchase of Limited Partner Interests." THE PARTNERSHIP Fayetteville Lithotripters Limited Partnership - Arizona I, an Arizona limited partnership (the "Partnership") was organized and created under the Arizona Uniform Limited Partnership Act (the "Act") on August 23, 1988. 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 an 18.6% interest in the Partnership in its capacity as the general partner and the existing limited partners (the "Initial Limited Partners") currently hold the remaining 81.4% interest in the Partnership as limited partners (including a 15.81% limited partner interest held by the General Partner). In the event that all 80 Units offered hereby are sold, the General Partner will hold approximately a 14.88% general partner interest in the Partnership, the Initial Limited Partners will hold approximately a 65.12% limited partner interest in the Partnership and the Investors who purchase the Units offered hereby (the "New Limited Partners") will hold an aggregate 20% interest in the Partnership. The Percentage Interests of the General Partner and Initial Limited Partners (aggregate) will decrease by approximately 0.0465% and 0.2035%, respectively, for each Unit sold. All Partners will have their Partnership Interests further reduced in the event of additional dilution offerings. See "Summary of the Partnership Agreement - Dilution Offerings." The principal address of the Partnership and the General Partner is 1301 Capital of Texas Highway, Suite C-300, Austin, Texas 78746. The telephone number of the Partnership and the General Partner is (512) 328-2892. TERMS OF THE OFFERING The Units and Subscription Price Fayetteville Lithotripters Limited Partnership - Arizona I, an Arizona limited partnership, hereby offers an aggregate of 80 Units of limited partner interest in the Partnership (the "Units"). Each Unit represents an initial 0.25% economic interest in the Partnership. See "Risk Factors - Other Investment Risks - Dilution of Limited Partners' Interests." Each Investor may purchase not less than one Unit. The General Partner may, however, in its sole discretion, sell less than one Unit as an additional investment and reject in whole or in part any subscription. The price for each Unit is $5,513 in cash payable at subscription; however, certain qualified Investors may personally borrow funds from a third-party financial institution to pay a part of the cash purchase price. For the convenience of Investors, the Partnership has arranged for financing a portion of the purchase price with the Bank. See "Terms of the Offering - Limited Partner Loans." The Proceeds of the Offering will first be used by the Partnership to pay offering costs and expenses, and the remainder of the proceeds will be used (i) to finance a portion of the cost of purchasing two Storz Modulith(R) SLX-T transportable lithotripters (estimated at $412,000 each), one new Coach (estimated at $350,000) and one new mobile van (estimated at $80,000), as well as pay applicable state sales or use taxes on the New Lithotripsy Systems (estimated at $62,700); and (ii) to make distributions to persons who were Partners of the Partnership prior to commencement of the Offering. See "Sources and Applications of Funds." The proceeds of this Offering cannot be calculated until the number of Units sold has been determined at the Closing. In any event, the proceeds of the Offering will be insufficient to fund the all of the costs described above, and it is anticipated that the Partnership will use the proceeds of debt financing to fund such costs. There is no assurance, however, that debt financing will be available for such purposes. See "Risk Factors - Operating Risks - Partnership Limited Resources and Risks of Leverage." Acceptance of Subscriptions To enable the Bank and the General Partner to make credit and investor decisions, respectively, each prospective Investor must complete and deliver to the General Partner a Purchaser Financial Statement in the form included in the Subscription Packet accompanying this Memorandum, or a substitute financial statement containing the same information as provided therein, and pages one and two of the prospective Investor's most recently filed Form 1040 U.S. Individual Income Tax Return. An Investor that pays the full amount of his 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. See "Terms of the Offering - Limited Partner Loans." If the financing Investor is otherwise acceptable to the Partnership, after receipt of the Bank's approval, the Partnership will inform the Escrow Agent that it has accepted the Investor's subscription and the Escrow Agent will release the Loan Documents to the Bank and the Bank will pay the proceeds from the Limited Partner Loan to the Partnership. The Investor will become a Limited Partner in the Partnership at the time the Bank releases the proceeds of his or her Limited Partner Note to the Partnership. Subscriptions may be rejected in whole or in part by the Partnership and need not be accepted in the order received. To the extent the Partnership reduces an Investor's subscription as provided above, the Investor's cash Unit purchase price, or the principal amount of his Limited Partner Note, as the case may be, will be proportionately refunded and reduced. Notice of acceptance of an Investor's subscription to purchase Units and his Percentage Interest in the Partnership will be furnished promptly after acceptance of the Investor's Subscription. Limited Partner Loans The purchase price for the Units is payable in cash. The prospective Investor may pay for the Units with personal funds alone or in part with such funds, together with either loan proceeds personally borrowed by the Investor under a Limited Partner Loan or other loan. Financing under the Limited Partner Loans was arranged by the Partnership with the Bank as provided in the Loan Commitment, attached hereto as Appendix B. Prospective Investors should review carefully all the provisions contained in the Loan Commitment and the terms of the Limited Partner Note and Loan and Security Agreement with their counsel and financial advisors. Neither the Partnership nor the General Partner endorses or recommends to the prospective Investors the desirability of obtaining financing from the Bank nor does the summary of the Loan Documents provided herein constitute legal advice. If the prospective Investor wishes to finance a portion of the purchase price of his Units as provided herein, he or she must deliver to the Sales Agent upon submission of his Subscription Packet an executed Limited Partner Note payable to the Bank and Note Addendum, the form of which are attached as Exhibit A to the Loan Commitment, a Loan and Security Agreement, the form of which is attached as Exhibit B to the Loan Commitment, a Security Agreement, the form of which is attached as Exhibit C to the Loan Commitment and two UCC-1's, the form of which are attached to the Subscription Packet (collectively, the "Loan Documents"). In no event may the maximum amount borrowed per Unit exceed $3,013. The Limited Partner Note is repayable in twelve (12) predetermined installments in the respective amounts set forth in the Loan Commitment. The installments are payable on each January 15th, April 15th, June 15th and September 15th commencing on September 15, 2000 (assuming the Closing occurs prior to May 31, 2000), with a thirteenth (13th) and final installment in an amount equal to the principal balance then owed on the Limited Partner Note and all accrued, unpaid interest thereon due and payable on the third anniversary of the first installment date. Interest accrues at the Bank's "Prime Rate," as the same may change from time to time. The Prime Rate refers to that rate of interest established by the Bank and identified as such in literature published and circulated within the Bank's offices. Such term is used as a means of identifying a rate of interest index and not as a representation by the Bank that such rate is necessarily the lowest or most favorable rate of interest offered to borrowers of the Bank generally. A prospective Investor will have no claim or right of action based on such premise. See the form of the Limited Partner Note attached as Exhibit A to the Loan Commitment which is attached hereto as Appendix B. The Limited Partner Note will be secured by the cash flow distributions payable with respect to the prospective Investor's Partnership Interest as provided in the Loan and Security Agreement and the Security Agreement and as evidenced by the UCC-1s. By executing the Loan and Security Agreement, the prospective Investor requests the Bank to extend the Loan Commitment to him if he is approved for a Limited Partner Loan. The Loan and Security Agreement also authorizes (i) the Bank to pay the proceeds of the Limited Partner Note directly to the Partnership; and (ii) the Partnership to remit funds directly to the Bank out of the prospective Investor's share of any Distributions represented by the prospective Investor's percentage Partnership Interest to fund installment payments due on the prospective Investor's Limited Partner Note. See the form of the Loan and Security Agreement attached as Exhibit B to the Loan Commitment which is attached hereto as Appendix B. If the prospective Investor is approved by the Bank and is acceptable to the General Partner, the Escrow Agent will, upon acceptance of the Investor's subscription by the General Partner, release the Loan Documents to the Bank and the Bank will pay the proceeds of the Limited Partner Note to the Partnership to fund a portion of the Investor's Unit purchase. The prospective Investor will have substantial exposure under the Limited Partner Note. Regardless of the results of Partnership operations, a prospective Investor will remain liable to the Bank under his Limited Partner Note according to its terms. The Bank can accelerate the entire principal amount of the Limited Partner Note in the event the Bank in good faith believes the prospect of timely payment or performance by the prospective Investor is impaired or the Bank otherwise in good faith deems itself or its collateral insecure and upon certain other events, including, but not limited to, nonpayment of any installment. The Bank may also request additional collateral in the event it deems the Limited Partner Note insufficiently secured. A Limited Partner's liability under a Limited Partner Note also continues regardless of whether the Limited Partner remains a limited partner in the Partnership. A Limited Partner's liability under a Limited Partner Note is directly with the Bank. As a consequence, such liability cannot be avoided by claims, defenses or set-offs the Limited Partner may have against the Partnership, the General Partner or their Affiliates. In addition to the suitability requirements discussed below, the prospective Investor must be approved by the Bank for purposes of his delivery of the Limited Partner Note. The Bank has established its own criteria for approving the creditworthiness of a prospective Investor and has not established objective minimum suitability standards. Instead, the Bank is empowered to accept or reject prospective Investors. See "Risk Factors - Other Investment Risks - Liability Under Limited Partner Loans." Subscription Period; Closing The subscription period will commence on the date hereof and will terminate at 5:00 p.m., Eastern time, on August 15, 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 Arizona and New Mexico 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 that meet the qualifications for investment in the Partnership and who wish to subscribe for Units may do so by following the instructions contained in the Subscription Packet accompanying this Memorandum. All information provided by Investors will be kept confidential and not disclosed except to the Partnership, the General Partner, the Bank and their respective counsel and Affiliates and, if required, to governmental and regulatory authorities. Restrictions on Transfer of Units The Units have not been registered under the Securities Act or under any state securities laws and holders of Units have no right to require the registration of such Units or to require the Partnership to disclose publicly information concerning the Partnership. Units can be transferred only in accordance with the provisions of, and upon satisfaction of, the conditions set forth in the Partnership Agreement. Among other things, the Partnership Agreement provides that no assignment of Units may be made if such assignment could not be effected without registration under the Securities Act or state securities laws. Moreover, the assignment generally must be made to an individual approved by the General Partner who meets the suitability requirements described in this Memorandum. Assignors of Units will be required to execute certain documents, in form and substance satisfactory to the General Partner, instructing it to effect the assignment. Assignees of Units may also, in the discretion of the General Partner, be required to pay all costs and expenses of the Partnership with respect to the assignment. Any assignment of Units or the right to receive Partnership Distributions in respect of Units will not release the assignor from any liabilities connected with the assigned Units, including liabilities under any Limited Partner Loan. Such event may constitute a default under a Limited Partner Note. An assignee, whether by sale or otherwise, will acquire only the rights of the assignor in the profits and capital of the Partnership and not the rights of a Limited Partner, unless such assignee becomes a substituted Limited Partner. An assignee may not become a substituted Limited Partner without (i) either the written consent of the assignor and the General Partner, or the consent of all of the Limited Partners (except the assignor Limited Partner) and the General Partner; (ii) the submission of certain documents; and (iii) the payment of expenses incurred by the Partnership in effecting the substitution. An assignee, regardless of whether he becomes a substituted Limited Partner, will be subject to and bound by all the terms and conditions of the Partnership Agreement with respect to the assigned Units. See "Summary of the Partnership Agreement - Restrictions on Transfer of Partnership Interests." PLAN OF DISTRIBUTION Subscriptions for Units will be solicited by MedTech Investments, Inc., the Sales Agent, which is an Affiliate of the General Partner. The Sales Agent has entered into a Sales Agency Agreement with the Partnership pursuant to which the Sales Agent has agreed to act as exclusive agent for the placement of the Units on a "best efforts" any or all basis. The Sales Agent is not obligated to purchase any Units. The Sales Agent is a North Carolina Corporation that was formed on December 23, 1987, and became a member of the National Association of Securities Dealers on March 15, 1988. The Sales Agent will be engaged in other similar offerings on behalf of the General Partner and its Affiliates during the pendency of this offering and in the future. The Sales Agent is a wholly owned subsidiary of Prime, which also owns all the stock of the General Partner. Investors should note the material relationship between the Sales Agent and the General Partner, and are advised that the relationship creates conflicts in the Sales Agent's performance of its due diligence responsibilities under the Federal securities laws. As compensation for its services, the Sales Agent will receive a commission equal to $75 for each Unit sold. No other commissions will be paid in connection with this Offering. Subject to the conditions as provided above, the Sales Agent may be reimbursed by the Partnership for its out-of-pocket expenses associated with the sale of the Units in an amount not to exceed $5,000. The Partnership has agreed to indemnify the Sales Agent against certain liabilities, including liabilities under the Securities Act. The Partnership will not pay the fees of any purchaser representative, financial advisor, attorney, accountant or other agent retained by an Investor in connection with his 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 August 15, 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 80 Units for a maximum of an aggregate of $441,040 in cash ($435,040 net of Sales Agent Commissions). The Partnership has set no minimum number of Units to be sold in this Offering. The subscription funds, and Loan documents, if any, received from each Investor will be held in escrow (which, in the case of cash subscription funds, shall be held in an interest bearing escrow account with the Bank) until either the Investor's subscription is accepted by the Partnership (and approved by the Bank in the case of financed purchases of Units), the Partnership rejects the subscription or the Offering is terminated. Upon the receipt and acceptance of an Investor's subscription, which, if the Investor intends to finance a portion of the Unit purchase price with a Limited Partner Loan, will be conditioned upon the Bank's approval of the Loan, the Investor will be admitted to the Partnership as a Limited Partner. Upon admission as a Limited Partner, the Investor's subscription funds will be released from escrow to the Partnership, and the Loan Documents, if any, will be released to the Bank which will pay the proceeds from the Limited Partner Note to the Partnership. In the event a subscription is not accepted, all subscription funds (without interest), the Loan Documents and other subscription documents held in escrow will be promptly returned to the rejected Investor. The Offering will terminate on August 15, 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 Lithotripsy Systems and operate them at various locations in Arizona and parts of New Mexico; (ii) improve the provision of health-care in the Partnership's Service Area by taking advantage of both the technological innovations inherent in the Lithotripsy Systems and the Partnership's quality assurance and outcome analysis programs; and (iii) make cash distributions to its Partners from revenues generated by the operation of the Lithotripsy Systems. The Partnership has contracted with 11 hospitals and medical centers to provide lithotripsy services to their patients. Treatment Methods for Kidney Stone Disease Urolithiasis, or kidney stone disease, affects an estimated 600,000 persons per year in the United States. The exact cause of kidney stone formation is unclear, although it has been attributed to diet, climate, metabolism and certain medications. Approximately 75% of all urinary stones pass spontaneously, usually within one to two weeks, and require little or no clinical or surgical intervention. All other kidney stones, however, require some form of medical or surgical treatment. A number of methods are currently used to treat kidney stones. These methods include drug therapy, cystoscopic procedures, endoscopic procedures, laser procedures, open surgery, percutaneous lithotripsy and extracorporeal shock wave lithotripsy. The type of treatment a urologist chooses depends on a number of factors such as the size of the stone, its location in the urinary system and whether the stone is contributing to other urinary complications such as blockage or infection. The extracorporeal shock wave lithotripter, introduced in the United States from West Germany in 1984, has dramatically changed the course of kidney stone disease treatment. The General Partner estimates that currently up to 95% of all kidney stones that require treatment can be treated by lithotripsy. Lithotripsy involves the use of shock waves to disintegrate kidney stones noninvasively. The Existing Lithotripsy Systems The Partnership currently owns two Lithostars(TM) which were acquired new in 1990 and 1996. The Partnership plans to sell or discard the Lithostars(TM) when the Partnership purchases the New Lithotripsy Systems. See "Business Activities - Acquisition of the New Lithotripsy Systems." However, the Partnership will continue to use the Lithostars(TM) until the New Lithotripsy Systems are purchased. In addition, if the Partnership is unable to obtain the necessary financing to purchase the New Lithotripsy Systems, the Partnership will continue to use the Existing Lithotripsy Systems unless or until it is able to purchase the New Lithotripsy Systems. The Lithostar(TM) was developed as a cooperative venture between Siemens and the Urological Clinic at Johannes Gutenberg University in Mainz, West Germany. As a part of this venture, a Lithostar(TM) prototype was installed in March 1986 at the Urological Clinic at the University of Mainz with successful results. On November 18, 1987 the Lithostar(TM) was unanimously recommended for approval by the FDA's advisory panel of experts for urology devices. On September 30, 1988 the Lithostar(TM) received FDA premarket approval for use in the United States for renal lithotripsy. On April 18, 1989, the FDA approved the Lithostar(TM) for mobile lithotripsy. On July 1, 1996, the FDA approved a new higher intensity shock-head system for the Lithostar(TM) which has since been installed in the Partnership's Lithostars(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 in its affiliated lithotripsy ventures, the General Partner believes that most patients can be treated with the Lithostar(TM) without anesthesia of any kind. The General Partner also believes that Lithostars(TM) upfitted with the higher intensity shock-head system experience somewhat shorter treatment durations. Based upon its experience with over 30 Lithostars(TM) in other limited partnerships sponsored by the General Partner and its Affiliates, the General Partner has found that the Lithostar(TM) can fragment most kidney stones without anesthesia, cystoscopy or the insertion of ureteral catheters, and the General Partner believes that overall the Lithostar(TM) has been an effective alternative for the treatment of patients. However, the Partnership's Lithostars(TM) are older models, and the General Partner believes these machines will need to be replaced in order to maintain efficiency and respond to competitive pressures. See "Business Activities - Acquisition of the New Lithotripsy Systems." If the Partnership is unable to obtain financing to purchase the New Lithotripsy Systems, the Partnership will continue to use the Existing Lithotripsy Systems, which could result in increased downtime and weaken the Partnership's ability to compete in the current market. The Partnership's two Coaches were acquired by the Partnership in 1990 and 1996, respectively. The Coaches have been completely upfitted for the Lithostars(TM) and their 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. Acquisition of the New Lithotripsy Systems It is anticipated that in August the Partnership will purchase two new Storz Modulith(R) SLX-T model extracorporeal shock-wave lithotripters (up to $412,000 each) and a new Coach (up to $350,000) and a new Ford 5400 Series Van (up to $80,000) to transport the newly acquired Modulith(R) SLX-T lithotripters with the proceeds of this Offering and the proceeds of Partnership debt financing. The Offering proceeds cannot be accurately determined until the Closing has occurred and the number of Units sold have been calculated. In any event, such proceeds will not be sufficient to fund all anticipated expenses. The Partnership does not, however, have a commitment from any lender, and there is no assurance that a loan on terms acceptable to the Partnership will be forthcoming. See "Risk Factors - Operating Risks - Partnership Limited Resources and Risks of Leverage" and "Sources and Applications of Funds." The portion of the proceeds of this Offering reserved for the purchase of the New Lithotripsy Systems will be held in a Capital Reserve until the purchases are made. See "Sources and Applications of Funds." The General Partner believes the Modulith(R) SLX-T offers several advantages over the Lithostar(TM). In particular, the General Partner believes that the Modulith(R) SLX-T provides clearer imaging than the Lithostar(TM). In addition, the Modulith(R) SLX-T is a transportable model, and thus can be moved from site to site more easily and more quickly. The Modulith(R) SLX-T also can be used either in an upfitted Coach or moved into a hospital procedure room, providing increased flexibility in performing lithotripsy services. The Modulith(R) SLX-T received FDA premarket approval on March 27, 1997. The General Partner and its Affiliates have limited, but positive, direct experience with the use of the Modulith(R) SLX-T lithotripter. Preliminary reports from abroad and "word of mouth" anecdotal evidence indicates that the Modulith(R) SLX-T is as effective as most of the "portable" lithotripters in the market. See "Risk Factors - Operating Risks - Reliability and Efficacy of the Partnership's Lithotripters." The Modulith(R) SLX-T was specially adapted for the treatment of urological stones. In addition to the efficient fragmentation of all types of urinary tract stones, the Modulith(R) SLX-T is suitable for performing a range of urological examinations including cystoscopy and ureterorenoscopy. The Modulith(R) SLX-T consists of a cylindrical pressure wave generator, an OEC 9800 C-arm x-ray system unit and a patient table. The Modulith(R) SLX-T generates pressure waves electromagnetically from the cylindrical energy source and parabolic reflector. The pressure wave generator operates without an acoustic lens, thus avoiding such disadvantages as energy dissipation and aperture limitations. The pressure at the focal point can be varied by means of the energy control in nine steps from 10 Mpa to 100 Mpa. The energy source is fitted with an axial and lateral air-bag. When expanded during fluoroscopy, these air-bags ensure optimal X-ray image quality for monitoring purposes. The pressure wave coupling is dry (water cushion is used). The shock-wave may be released at fixed frequencies of 1 Hz, 1.5 Hz or 2 Hz, or may be triggered using the ECG and/or respiration. The Modulith(R) SLX-T localizes stones using an OEC 9800 C-arm X-ray system. The X-ray system employs an image intensifier, cassette film, digital spot imaging capability and two high resolution 16" monitors capable of displaying stored digital images. The patient table can be moved electronically in all three dimensions, and a floating function allows for quick patient positioning. The table is X-ray transparent and allows visualization of the entire urinary tract. The table includes a patient cradle which provides comfortable and secure support in the prone, supine and lateral positions. The General Partner does not anticipate any delays in delivery of the new Modulith(R) SLX-T lithotripters after they are ordered by the Partnership. Storz will provide the Partnership with technical support to facilitate installation and testing of the Modulith(R) SLX-T. The Modulith(R) SLX-T comes with an eighteen month limited warranty during which time all maintenance, repairs, shock tubes, glassware and capacitors are provided free of charge. The General Partner anticipates that upon the expiration of the warranty, the Partnership will either pay for maintenance service on each Modulith(R) SLX-T on an as needed basis, or enter into an annual maintenance agreements with a third-party service provider. The General Partner estimates that expenditures for maintenance of each Modulith(R) SLX-T will be approximately $40,000 per year. The Partnership plans to purchase from AK Associates, L.L.C., an Affiliate of the General Partner, a Coach which will be used to transport one of the Modulith(R) SLX-T lithotripters from site to site. The Coach will be upfitted to house a lithotripter and allow full operations at the host site. The self-contained coach configuration requires only that a site provide a level parking surface, a water inlet connection, a drain outlet connection, an electric receptacle and a telephone connection. The General Partner will pay for maintenance on an as-needed basis and estimates that expenditures for maintenance and repair of the Coach will be approximately $15,000 per year. See "Compensation and Reimbursement to the General Partner and its Affiliates" and "Conflicts of Interest." The Partnership also plans to acquire from AK Associates a Ford 5400 Series van customized to include a 14' cargo box to house the remaining Modulith(R) SLX-T lithotripter while it is transported from site to site. The floor of the van is loading dock height so the lithotripter can be easily loaded on and off the van at each treatment facility. The van is also upfitted with a lift gate with a load capacity of 3,000 pounds for easy loading of the lithotripter from street level. The van has been modified for securing the lithotripter and its accessories during transport and for heating the cargo box during the winter to prevent freezing of the lithotripter and its components. The Partnership will either purchase the manufacturer's service contract for the van or pay for service on an as needed basis. The General Partner estimates that expenditures for maintenance and repair of the van will be approximately $6,000 per year. Acquisition of Additional Assets If in the future the General Partner determines that it is in the best interest of the Partnership to acquire (i) one or more fixed base or mobile lithotripsy systems in addition to the New Lithotripsy Systems; or (ii) other assets related to the provision of lithotripsy services, the General Partner may (with the consent of a majority in interest of the Limited Partners) establish reserves or borrow funds on behalf of the Partnership to acquire such assets, and may use Partnership assets and revenues to secure and repay such borrowings. The acquisition of such assets likely would result in higher operating costs for the Partnership. The General Partner does not anticipate acquiring additional Partnership assets unless projected Partnership Cash Flow or proceeds from a Dilution Offering are sufficient to finance such acquisitions. No Limited Partner would be personally liable on any Partnership indebtedness without such Limited Partner's written consent. There is no assurance that additional financing would be available to the Partnership to acquire additional assets or to fund any additional working capital requirements. Any additional borrowing by the Partnership will serve to increase the risks to the Partnership associated with leverage. See "Risk Factors - Operating Risks - Partnership Limited Resources and Risks of Leverage." Hospital Contracts The Partnership has entered into five Hospital Contracts with nine Contract Hospitals to operate the Lithotripsy Systems at the Contract Hospitals. The Contract Hospitals are: Desert Samaritan Hospital Flagstaff Medical Center Good Samaritan Hospital Marcus J. Lawrence Medical Center Maryvale Hospital St. Joseph's Hospital St. Mary's Hospital Thunderbird Samaritan Hospital Triad of Arizona (L.P.), Inc., d/b/a Paradise Valley Hospital Generally, the Hospital Contracts grant the Partnership the exclusive right to deliver lithotripsy services to the relevant Contract Hospital. Several contracts also provide that, without the prior consent of such Contract Hospital, the Partnership may not provide lithotripsy services to any other health care facility within a short radius of the Contract Hospital. The Hospital Contracts require the Partnership to make a lithotripter available at the facilities as agreed to by the Contract Hospital and the Partnership. The Partnership generally also provides a technician and certain ancillary services such as scheduling necessary for the lithotripsy procedure. The Contract Hospitals generally pay the Partnership a fee for each lithotripsy procedure performed at that health care facility. Two of the Hospital Contracts provide for automatic renewal on a year-to-year basis. Four of the Hospital Contracts are terminable without cause at any time by any party on short notice, generally 90 days or less. The remaining Hospital Contracts may be terminated without cause upon 90 days or less written notice by either party prior to any renewal date. The General Partner believes it has a good relationship with the Contract Hospitals. There is no assurance, however, that one or more of the Hospital Contracts will not terminate in the future. See "Risk Factors - Operating Risks - - Contract Terms and Termination." The Partnership is attempting to negotiate similar agreements to the existing Hospital Contracts with additional treatment centers in the Service Area. There can be no assurance that the Partnership will be able to enter into any new agreements. Reimbursement Agreements. Prime and its Affiliates have negotiated third-party reimbursement agreements with certain national and local payors. The national agreements apply to all the lithotripsy companies with which Prime is affiliated. Although the Partnership currently provides services under the Hospital Contracts on a wholesale basis (i.e. the Partnership only bills the Contract Hospital), the Partnership may be able to take advantage of these reimbursement agreements in the future in the event it contracts with a treatment facility on a retail basis (i.e. the Partnership would bill patients and third party payors directly). Some of the national and local payors have agreed to pay a fixed price for the lithotripsy services. Generally, the agreements may be terminated by either party on 90 days' notice. The national and local reimbursement agreements that have been negotiated or renegotiated in the past two to four years almost entirely provide for lower reimbursement rates for lithotripsy services than the older agreements. Operation of the Lithotripsy Systems It is anticipated that the Partnership will continue to provide services under the Hospital Contracts and similar arrangements. See "Business Activities - Hospital Contracts" and "Risk Factors - Operating Risks - Contract Terms and Termination." Qualified physicians who make appropriate arrangements with Contract Hospitals receiving lithotripsy services pursuant to the Hospital Contracts and other lithotripsy service agreements may treat their own patients using the Lithotripsy Systems after they have received any necessary training required by the rules of such Contract Hospital. The Partnership may also make arrangements to make the Lithotripsy Systems available to qualified physicians (including, but not limited to, qualified physician Limited Partnership) desiring to treat their own patients after they have received any necessary training. The General Partner will endeavor to the best of its abilities to require that physicians using the General Partner's Lithotripsy Systems comply with the Partnership's quality assurance and outcome analysis programs in order to maintain the highest quality of patient care. In addition, the Partnership reserves the right to request that (i) physicians (or members of their practice groups) treat only their own patients with the Lithotripsy Systems; and (ii) physician Limited Partners disclose to their patients in writing their financial interest in the Company prior to treatment, if it determines that such practices are advisable under applicable law. See "Regulation." The treating qualified physician will be solely responsible for billing and collecting on his own behalf the professional service component of the treatment procedure. Owning an interest in the Partnership is not a condition to using the Lithotripsy Systems. Thus, local qualified physicians who are not Limited Partners will be given the same opportunity to treat their patients using the Lithotripsy Systems as provided above. Management The Partnership has entered into a management agreement (the "Management Agreement") with the General Partner whereby the General Partner is obligated to supervise and coordinate the management and administration of the operation of the Lithotripsy Systems on behalf of the Partnership in exchange for a monthly management fee equal to the greater of 7.5% of Partnership Cash Flow per month or $8,000 per month. See "Compensation and Reimbursement to the General Partner and its Affiliates." The General Partner's services under the Management Agreement include arranging for the training of physicians in the proper use of the lithotripsy equipment, monitoring technological developments in renal lithotripsy and advising the Partnership of these developments, arranging education programs for qualified physicians who use the lithotripsy equipment and providing advertising, billing, accounts collection, equipment maintenance, medical supply inventory and other incidental services necessary for the efficient operation of the Lithotripsy Systems. Costs incurred by the General Partner in performing its duties under the Management Agreement are the responsibility of the Partnership. The General Partner's engagement under the Management Agreement is as an independent contractor and neither the Partnership nor its Limited Partners have any authority or control over the method or manner in which the General Partner performs its duties under the Management Agreement. The Management Agreement is in the first 5-year renewal term and will be up for a second renewal for an additional five-year term in 2004. Thereafter, it will be automatically renewed for an additional term unless terminated by the Partnership or the General Partner. Employees The Partnership employs as full time employees two registered technicians and two registered nurses. The Partnership anticipates hiring additional employees to staff the New Lithotripsy Systems. FINANCIAL CONDITION OF THE PARTNERSHIP Set forth on the following pages are the Partnership's internally prepared accrual based (i) Income Statements for the years ended December 31, 1995, December 31, 1996, December 31, 1997, December 31, 1998 and December 31, 1999 and the four months ended April 30, 1999 and April 30, 2000; (ii) Balance Sheets as of December 31, 1995, December 31, 1996, December 31, 1997, December 31, 1998 and December 31, 1999 and as of April 30, 1999 and April 30, 2000; (iii) Cash Flow Statements for the years ended December 31, 1995, December 31, 1996, December 31, 1997, December 31, 1998 and December 31, 1999 and the four months ended April 30, 1999 and April 30, 2000; and (iv) Statements of Partner's Equity for the years ended December 31, 1995, December 31, 1996, December 31, 1997, December 31, 1998 and December 31, 1999 and the four months ended April 30, 1999 and April 30, 2000. Past financial performance is not necessarily indicative of future performance. There is no assurance that the Partnership will be able to maintain its current revenues or earnings. [The remainder of this page is intentionally left blank.] MANAGEMENT'S DISCUSSION ANDANALYSIS OF THE RESULTS OF OPERATIONS Four Months Ended April 30, 2000 and April 30, 1999 Revenues. Total revenues decreased $200,644 (19%) for the four months ended April 30, 2000 compared to the same period in 1999 primarily due to an 18% decrease in the number of procedures performed and a 1% decrease in net revenue per case. Operating Expenses. Operating expenses decreased by $58,231 (12%) for the four months ended April 30, 2000 compared to the same period in 1999 primarily due to a decrease of $46,773 in equipment maintenance and repairs due to changing from fixed cost service contracts on the lithotripters to a service call basis with a stop loss insurance arrangement and a decrease in other operating expenses due to the temporary rental of a lithotripter and coach in 1999 which was not incurred in 2000. Other Income (Expense). Total other income (expense) experienced a net increase of $1,346 due to a decrease of $1,296 in interest income and a decrease of $2,642 in interest expense due to paying off bank debt in 1999. Year Ended December 31, 1999 and December 31, 1998 Revenues. Total revenues increased $200,664 (6%) for the year ended December 31, 1999 compared to the same period in 1998 primarily due to a 1% decrease in the number of procedures performed and an 8% increase in net revenue per case. Operating Expenses. Operating expenses decreased by $38,383 (3%) for the year ended December 31, 1999 compared to the same period in 1998 primarily due to a decrease of $155,035 in depreciation expense due to some of the equipment being fully depreciated in 1999, an increase of $26,046 in management fees due to the increase in partnership cash flow, an increase of $42,635 in other operating expenses primarily due to the rental of a lithotripter and coach while one of the coaches was being refurbished and an increase of $20,236 in employee compensation and benefits primarily due to an increase in incentive compensation paid. Other Income (Expense). Total other income (expense) experienced a net increase of $41,790 due to an increase of $9,406 in interest income and a decrease of $22,384 in interest expense due to paying off bank debt in 1999. Year Ended December 31, 1998 and December 31, 1997 Revenues. Total revenues increased $139,998 (5%) for the year ended December 31, 1998 compared to the same period in 1997 due to a 4% increase in the number of procedures performed and a 1% increase in net revenue per case. Operating Expenses. Operating expenses decreased by $123,991 (8%) for the year ended December 31, 1998 compared to the same period in 1997 primarily due to a decrease of $53,571 in equipment maintenance and repairs primarily due to renegotiated maintenance contracts, a decrease of $48,300 in overhead allocation due to lower overhead costs incurred and a decrease of $31,344 in other operating expenses primarily due to a reversal of a prior year expense accrual. Other Income (Expense). Total other income (expense) experienced a net increase of $30,986 due to a $5,525 decrease in interest income and a decrease of $36,511 in interest expense due to paying down the bank debt. SOURCES AND APPLICATIONS OF FUNDS The following table sets forth the funds expected to be available to the Partnership from this Offering if all 80 Units are sold and other sources and their anticipated and estimated uses. Sources of Funds Sale of 80 Units Offering Proceeds(1) $441,040 ( 100.00%) ------- -------- TOTAL SOURCES $441,040 (100.00%) ======= ======= Application of Funds Capital Reserve(2) $406,040 ( 94.37%) Syndication Costs(3) $ 35,000 ( 5.63%) -------- --------- TOTAL APPLICATIONS $441,040 (100.00%) ======= ======= Notes to Sources and Applications of Funds Table (1) Assumes all 80 Units are purchased by qualified Investors. (2) It is anticipated that after the Closing of this Offering the Partnership will purchase two new Storz Modulith(R) SLX-T transportable lithotripters at an estimated cost of $412,000 each and a new Coach at an estimated cost of $350,000 and a mobile van at an estimated cost of $80,000 to house the lithotripters. See "Business Activities - Acquisition of the New Lithotripsy Systems." The Capital Reserve represents proceeds of the Offering that will be used to pay a portion of such costs and make distributions to persons who were Partners of the Partnership prior to the commence of the Offering. The proceeds of this Offering cannot be accurately determined until the Closing has occurred and the number of Units sold has been calculated. In any event, such proceeds will not be sufficient to fund all anticipated expenses. The remainder of such costs will be financed through Partnership borrowings. There is no assurance that debt financing will be available on acceptable terms for such purposes. In the view of risks associated with leverage, a desire to conserve Partnership resources and the absence of commitments for new hospital contracts, it is not expected that the Partnership will acquire the New Lithotripsy Systems unless at least a minimum number of Units are sold in this Offering and sufficient business opportunities with new treatment centers are anticipated by the General Partner to be available. See "Risk Factors - Operating Risks - Partnership Limited Resources and Risks of Leverage." (3) Includes $6,000 in commissions payable to the Sales Agent, reimbursement of $5,000 to the Sales Agent for out-of-pocket expenses incurred in selling the Units and $24,000 in legal and accounting costs associated with the preparation of this Memorandum. THE GENERAL PARTNER General. The General Partner of the Partnership is Lithotripters, Inc., a North Carolina corporation formed in November 1987 for the purpose of sponsoring medical service limited partnerships in the United States (the "General Partner"). On April 26, 1996, the General Partner became a wholly-owned subsidiary of Prime. The principal executive office of the General Partner is located at 1301 Capital of Texas Highway, Suite C-300, Austin, Texas 78746, (512) 328-2892. The General Partner also has an office at 2008 Litho Place, Fayetteville, North Carolina 28304. The General Partner's assets are illiquid in nature. The primary assets of the General Partner are equity interests in other medical ventures. The General Partner also has substantial potential financial exposure as a guarantor of certain Prime indebtedness. Further information regarding the financial condition of the General Partner will be made available to Investors upon request. Management. The following table sets forth the names and respective positions of the individuals serving as executive officers and directors of the General Partner, many of whom were shareholders of the General Partner prior to its acquisition by Prime and/or are current shareholders and/or management personnel of Prime. Name Office Joseph Jenkins, M.D. President, Chief Executive Officer and Director Kenneth S. Shifrin Director Cheryl Williams Vice President and Director David Vela, M.D. Vice President Stan Johnson Vice President Philip J. Gallina Secretary and Treasurer James Clark Assistant Secretary Supervision of the day-to-day management and administration of the Partnership will be the responsibility of the General Partner in its capacity as the management agent. The General Partner itself is managed by a three-member Board of Directors composed of Mr. Shifrin, Ms. Williams and Dr. Jenkins. Set forth below are the names and descriptions of the background of the key executive officers and directors of the General Partner. Joseph Jenkins, M.D. was recently appointed the Vice Chairman of the Board of Directors of Prime and previously served as President and Chief Executive Officer of Prime from April 1996 until June 2000. From May 1990 until December 1991, Dr. Jenkins was a Vice President of the General Partner and previously practiced urology in Washington, North Carolina. Dr. Jenkins has been President of the General Partner since 1992 and was recently elected to its Board of Directors. Dr. Jenkins is a board certified urologist and is a founding member, a past-president and currently a Director of the American Lithotripsy Society. Kenneth S. Shifrin has been Chairman of the Board and a Director of Prime since October 1989 and was recently elected a Director of the General Partner following Prime's acquisition of all of the General Partner's stock. Mr. Shifrin also has served in various capacities with American Physicians Service Group, Inc. ("APS") since February 1985, and is currently Chairman of the Board and Chief Executive Officer of APS. Cheryl Williams is a Vice President and Director of the General Partner and has been Chief Financial Officer, Vice President-Finance and Secretary of Prime since October 1989. Ms. Williams was Controller of Fairchild Aircraft Corporation from August 1988 to October 1989. From 1985 to 1988, Ms. Williams served as the Chief Financial Officer of APS Systems, Inc., a wholly-owned subsidiary of APS. Stan Johnson was recently appointed a Vice President of the General Partner and has been a Vice President of Prime and President of Sun Medical Technologies, Inc. ("Sun") (an affiliate of the General Partner) since November 1995. Mr. Johnson was the Chief Financial Officer of Sun from 1990 to 1995. David Vela, M.D. was recently appointed a Vice President of the General Partner. Dr. Vela received his medical degree in 1984. Dr. Vela developed and operated various outpatient centers throughout the United States from 1986 to 1995 and has served as Regional Vice President of Prime for the Central Region since February 1997. Philip J. Gallina recently became the Secretary and Treasurer of the General Partner, having previously served as a Vice President since 1989. Mr. Gallina is a Certified Public Accountant licensed in the state of Pennsylvania. From 1980 through February 1989, Mr. Gallina served as Plant Controller for the Westinghouse Motor Control and Enclosed Control Product Lines. Mr. Gallina is also a Director, the Vice President, the Treasurer and the Secretary of MedTech Investments, Inc., the Sales Agent. James D. Clark recently became Assistant Secretary of the General Partner. Mr. Clark has served as Tax Manager of Prime since January 1998 and is a Certified Public Accountant in Texas. Prior to joining Prime, Mr. Clark was Controller for ERISA Administrative Services, Inc. COMPENSATION AND REIMBURSEMENT TO THEGENERAL PARTNER AND ITS AFFILIATES The following summary describes the types and, where determinable, the estimated amounts of reimbursements, compensation and other benefits the General Partner and its Affiliates will receive in connection with the continued operation and management of the Partnership and the Lithotripsy Systems. None of such fees, compensation and other benefits has been determined at arm's length. Except for the items set forth below, the General Partner does not expect to receive any distribution, fee, compensation or other remuneration from the Partnership. See "Business Activities - Management" and "Plan of Distribution." 1. Management Fee. Pursuant to the Management Agreement, the General Partner has contracted with the Partnership to supervise the management and administration of the day-to-day operations of the Partnership's lithotripsy business for a monthly fee equal to the greater of $8,000 or 7.5% of Partnership Cash Flow per month. All costs incurred by the General Partner in performing its duties under the Management Agreement are the responsibility of, and are paid directly or reimbursed by, the Partnership. The General Partner is the management agent for various affiliated lithotripsy ventures. As a consequence, many of the General Partner's employees provide various management and administrative services for numerous ventures, including the Partnership. In order to properly allocate the costs of the General Partner's employees and other overhead expenses among the entities for which they provide services, such costs are divided among all the ventures based upon the relative number of patients treated by each. The General Partner believes that the sharing of personnel and overhead costs among various entities results in significant costs savings for the Partnership. The management fee for any given month is payable on or before the 30th day of the next succeeding month. The Management Agreement is in its first five-year renewal term which expires in 2004. The Management Agreement will be automatically renewed for up to two 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 Lithotripsy Systems, and the Partnership will pay or reimburse to the General Partner all expenses related to this Offering. No other fees or compensation will be payable to the General Partner or its Affiliates for managing the Partnership other than the management fee payable to the General Partner as provided in the Management Agreement. The Partnership may, however, contract with the General Partner or its Affiliates to render other services or provide materials to the Partnership provided that the compensation is at the then prevailing rate for the type of services and/or materials provided. 2. Partnership Distributions. In its capacity as general partner of the Partnership, the General Partner is entitled to its distributable share (18.6%, 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 15.81% (before dilution) limited partner interest in the Partnership, and is entitled to Distributions on account of such interest. See "Summary of the Partnership Agreement - Profits, Losses and Distributions" and the Partnership Agreement attached as Appendix A. 3. Sales Commissions. The Sales Agent, a wholly-owned subsidiary of Prime, has entered into a Sales Agency Agreement with the Partnership pursuant to which the Sales Agent has agreed to sell the Units on a "best efforts" any or all basis. As compensation for its services, the Sales Agent will receive a commission equal to $75 for each Unit sold (up to an aggregate of $6,000). If this Offering is successful, the Sales Agent will also be reimbursed by the Partnership for its out-of-pocket expenses associated with its sale of the Units in an amount not to exceed $5,000. See "Plan of Distribution" and "Conflicts of Interest." 4. New Coaches and Mobile Van. It is anticipated that the Company will also use a portion of the Offering proceeds and/or debt financing to acquire a new Coach and a new Ford 5400 Series van which will house the two new lithotripters from AK Associates, L.L.C., an Affiliate of the General Partner, at a cost of approximately $350,000 for the Coach and $80,000 for the van. See "Business Activities - Acquisition of the New Lithotripsy Systems." 5. Loans. The General Partner or its Affiliates will also receive interest on loans, if any, made by them to the Partnership. See "Conflicts of Interest." Neither the General Partner nor any of its Affiliates are, however, obligated to make loans to the Partnership. While the General Partner does not anticipate that it would cause the Partnership to incur indebtedness unless cash generated from Partnership operations were at the time expected to enable repayment of such loan in accordance with its terms, lower than anticipated revenues and/or greater than anticipated expenses could result in the Partnership's failure to make payments of principal or interest when due under such a loan and the Partnership's equity being reduced or eliminated. In such event, the Limited Partners could lose their entire investment. CONFLICTS OF INTEREST The operation of the Partnership involves numerous conflicts of interest between the Partnership and the General Partner and its Affiliates. Because the Partnership is operated by the General Partner, such conflicts are not resolved through arm's length negotiations, but through the exercise of the judgment of the General Partner consistent with its fiduciary responsibility to the Limited Partners and the Partnership's investment objectives and policies. The General Partner, its Affiliates and employees of the General Partner will in good faith continue to attempt to resolve potential conflicts of interest with the Partnership, and the General Partner will act in a manner that it believes to be in or not opposed to the best interests of the Partnership. The General Partner and its Affiliates will receive management fees and broker-dealer sales commissions in connection with the business operations of the Partnership and the sale of the Units that will be paid regardless of whether any sums hereinafter are distributed to Limited Partners. None of such fees, compensation and benefits has been determined by arm's length negotiations. In addition, the Partnership may contract with the General Partner or its Affiliates to render other services or provide materials to the Partnership provided that the compensation is at the then prevailing rate for the type of services and/or materials provided. The General Partner will also receive interest on loans, if any, it makes to the Partnership. See "Compensation and Reimbursement to the General Partner and its Affiliates." It is anticipated that the Partnership will purchase a new Coach and a new mobile van from AK Associates, L.L.C., an Affiliate of the General Partner to transport the new Modulith(R) SLX-T lithotripters. See "Compensation and Reimbursement to the General Partner and its Affiliates" and "Business Activities - Acquisition of the New Lithotripsy Systems." The General Partner and its Affiliates will devote as much of their time to the business of the Partnership as in their judgment is reasonably required. Principals of the General Partner may have conflicts of interest in allocating management time, services and functions among their various existing and future business activities in which they are or may become involved. See "Competition" and "Prior Activities." The General Partner believes it and its Affiliates, together, have sufficient resources to be capable of fully discharging their responsibilities to the Partnership. The General Partner and its Affiliates may engage for their own account, or for the account of others, in other business ventures, related to medical services or otherwise, and neither the Partnership nor the holders of any of the Units shall be entitled to any interest therein. See the Partnership Agreement attached hereto as Appendix A. The General Partner, its Affiliates (including affiliated limited partnerships) and employees of the General Partner engage in medical service activities for their own accounts. See "Prior Activities." The General Partner may serve as a general partner of other limited partnerships that are similar to the Partnership and does not intend to devote its entire financial, personnel and other resources to the Partnership. Except as provided by law, none of such entities or their respective Affiliates is prohibited from engaging in any business or arrangement that may be in competition with the Partnership. The General Partner and its Affiliates are, however, obligated to act in a fiduciary manner with respect to the management of the Partnership and any other medical venture in which they have management responsibilities. Affiliates of the General Partner currently provide lithotripsy services in Texas, New Mexico, Colorado, Utah, Nevada and California. 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 Many fixed-site and mobile extracorporeal shock-wave lithotripsy services are currently operating in and around the Service Area. The following discussion identifies the existing services in and near the Service Area, to the best knowledge of the General Partner. Affiliated Competition The Partnership faces competition from lithotripters placed in service in the Service Area, and, to a lesser extent, from lithotripters located near the Service Area and in adjacent states, including lithotripters owned by the General Partner and other entities affiliated with the General Partner. The General Partner's Affiliates provide lithotripsy services in Texas, New Mexico, Colorado, Utah, Nevada and California. Other Competition The General Partner is aware of several competing lithotripsy services in Tucson, Arizona. A lithotripter operates at University Medical Center. In addition, a Storz Modulith(R) SLX-T provides services at Tucson Medical Center, Northwest Hospital and possibly additional hospitals and ambulatory surgery centers. In Phoenix and northern Arizona, the General Partner believes that two physician-owned lithotripsy services operate at up to 20 hospitals in competition with the Partnership. In New Mexico, the General Partner is aware of at least one physician-owned lithotripsy service that serves approximately 10 facilities throughout New Mexico. In addition, a fixed site lithotripter is located at the University of New Mexico School of Medicine and the Veterans Administration Hospital. There may be other hospitals, ambulatory surgery centers or other health care facilities where extracorporeal shock-wave lithotripsy services are provided in Arizona and New Mexico. Although the General Partner anticipates that the Partnership will continue to operate primarily in the Service Area, the actual itinerary for the Lithotripsy Systems is expected to be influenced by the number of patients in particular areas and arrangements with various hospitals and health care centers including the Contract Hospitals. See "Business Activities - Operation of the Lithotripsy System." Other hospitals in and near the Service Area may operate lithotripters which are not extracorporeal shock-wave lithotripters but rather use lasers or are electrohydraulic lithotripters. The General Partner believes these machines have a competitive disadvantage because such machines are capable of treating stones only in the ureter. The General Partner believes the Lithotripsy Systems can be used on stones in locations other than the ureter. See "Business Activities - Treatment Methods for Kidney Stone Disease." The health care market in the Service Area is heavily influenced by managed care companies such as health maintenance organizations. Managed care companies generally contract either directly with hospitals or specified providers for lithotripsy services for beneficiaries of their plans. It is not uncommon for managed care companies to have contracts already in place with hospitals or specified providers, and the Partnership will not be able to provide services to beneficiaries of those plans unless it convinces either the managed care companies or the hospitals to switch to the Partnership's services. No assurances can be given that new competing lithotripsy clinics will not open in the future or that innovations in lithotripters or other treatments of kidney stone disease will not make the Partnership's Lithotripsy Systems competitively obsolete. See "Risk Factors - Operating Risks - - Technological Obsolescence." In addition, the General Partner and its Affiliates are not restricted from engaging in lithotripsy ventures unassociated with the Partnership which may compete with the Partnership. No manufacturer of the Lithotripsy Systems is under any obligation to the General Partner or the Partnership to refrain from selling its lithotripters to urologists, hospitals or other persons for use in the Service Area or elsewhere. In addition, the availability of lower-priced lithotripters in the United States could dramatically increase the number of lithotripters in the United States, increase competition for lithotripsy procedures and create downward pressure on the prices the Partnership can charge for its services. Many potential competitors of the Partnership, including hospitals and medical centers, have financial resources, staffs and facilities substantially greater than those of the Partnership and of the General Partner. REGULATION Federal Regulation The Partnership, the General Partner and the Limited Partners are subject to regulation at the federal, state and local level. An adverse review or determination by certain regulatory organizations (federal, state or private) may result in the Partnership, the General Partner and the Limited Partners being subject to imprisonment, loss of reimbursement, fines or exclusion from participation in Medicare or Medicaid. Adverse reviews of the Partnership's operations at any of the various regulatory levels may adversely affect the operations and profitability of the Partnership. Reimbursement. The Partnership charges Contract Hospitals a fee for use of the Lithotripsy Systems. The Partnership does not directly bill or collect from any patients for lithotripsy services provided using its Lithotripsy Systems, though it retains the discretion to do so and may do so in the future. The amount of the fee charged to Contract Hospitals is likely to depend on the amount that governmental and commercial third party payors are willing to reimburse hospitals for lithotripsy procedures. The primary governmental third party payor is Medicare. Medicare reimbursement policies are statutorily created and are regulated by the federal government. The General Partner expects that the level of reimbursement under Medicare for lithotripsy procedures may continue to decline. As required by the Balanced Budget Act of 1997, the Health Care Financing Administration ("HCFA"), the federal agency that administers the Medicare program, has established a prospective payment system for outpatient procedures. One of the goals of the prospective payment system is to lower medical costs paid by the Medicare program. HCFA has issued regulations which reduce the reimbursement rate currently paid for lithotripsy procedures performed on Medicare patients at hospitals to a base rate of $2,265. The base rate includes anesthesia and sedation, equipment and supplies necessary for the procedure, but does not include the treating physician's professional fee. The base rate is subject to adjustment for various hospital-specific factors. The $2,265 reimbursement rate is scheduled to be implemented on July 1, 2000. In some cases, reimbursement rates payable to some Affiliates of the General Partner from commercial third party payors are less than the new HCFA rate. The Partnership retains the discretion to make the Lithotripsy Systems available at ambulatory surgery centers ("ASCs"). Medicare does not currently reimburse for lithotripsy procedures provided at ASCs. However, HCFA issued proposed rules in 1998 which would authorize Medicare reimbursement for lithotripsy procedures provided at ASCs. While the proposed rules had a target effective date of October 1, 1998, the effective date has been postponed indefinitely for reasons unrelated to lithotripsy coverage. The proposed rules assign a Medicare reimbursement rate of $2,107 if the lithotripsy procedure is performed at an ASC. Whether these proposed rules will become effective to authorize Medicare reimbursement at ASCs and, if they do become effective, what the reimbursement rate will be, is unknown to the General Partner. The Medicare program has historically influenced the setting of reimbursement standards by commercial insurers. Therefore, reduced rates of Medicare reimbursement for lithotripsy services may result in reduced payments by commercial insurers for the same services. As was discussed previously, competitive pressure from health maintenance organizations and other managed care companies has in some circumstances already resulted in decreasing reimbursement rates from commercial insurers. See "Risk Factors - Operating Risks - Impact of Insurance Reimbursement." No assurances can be given that HCFA will not seek to reduce its proposed reimbursement rates even more to avoid paying more than commercial insurers. As a result, hospitals may seek to lower the fees paid to the Partnership for the use of the Lithotripsy Systems. The General Partner anticipates that reimbursement for lithotripsy procedures, and therefore overall Partnership revenues, may continue to decline. The physician service (Part B) Medicare reimbursement for renal lithotripsy is determined using Resource Based-Relative Value Scales ("RB-RVS"). The system includes limitations on future physician reimbursement increases tied to annual expenditure targets legislated annually by Congress or set based upon recommendation of the Secretary of the U.S. Department of Health and Human Services. Medicare has in the past, with regard to other Part B services such as cataract implant surgery, imposed significant reductions in reimbursement based upon changes in technology. HCFA has produced a lengthy report whose conclusion is that professional fees for lithotripsy are overvalued. Thus, potential future decreases in reimbursement must be considered probable. Medicaid programs 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 Arizona Health Care Cost Containment System ("AHCCCS") (the name of the Medicaid program in Arizona) and the Medicaid programs in Nevada and New Mexico currently provide reimbursement for lithotripsy services. The federal Personal Responsibility and Work Opportunity Reconciliation Act of 1996 requires state health plans, such as AHCCCS and the Nevada and New Mexico 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 AHCCCS or the Medicaid programs in Nevada or New Mexico 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) ("Stark II"). Lithotripsy services were not specifically identified as a designated health service by this legislation, but the prohibition includes any service which is provided to an individual who is registered as an inpatient or outpatient of a hospital under proposed regulations discussed below. Lithotripsy services provided by the Partnership to Medicare and Medicaid patients are billed by the contracting hospital in its name and under its Medicare and Medicaid program provider numbers. Accordingly, these lithotripsy services would likely be considered inpatient or outpatient services under Stark II. Following the passage of the Stark II legislation effective January 1, 1995, the General Partner determined that the statute would not apply to the type of lithotripsy services to be provided by the Partnership. Stark II applies only to ownership interests directly or indirectly in the entity that "furnishes" the designated health care service. The physician-investors and the Partnership will not have an ownership interest in any Contract Hospitals which offer the lithotripsy services to the patients on an inpatient or outpatient basis. See 42 U.S.C. ss. 1395nn(a)(1)(A). Thus, by referring a patient to a hospital offering the service, the physician-investors will not be making a referral to an entity in which they maintain an ownership interest for purposes of the application of Stark II. This interpretation adopted by the General Partner was consistent with the informal view of the General Counsel's Office of the U.S. Department of Health and Human Services. Based upon this reasonable interpretation of Stark II, by referring a patient to a hospital furnishing the outpatient lithotripsy services "under arrangements" with the Partnership, a physician investor in the Partnership is not making a referral to an entity (the hospital) in which he or she has an ownership interest. In 1998, HCFA published proposed regulations interpreting the Stark II statute (the "Proposed Stark II Regulations"). The Proposed Stark II Regulations and HCFA's accompanying commentary would apply the physician referral prohibitions of Stark II to the Partnership's contracts for provision of the Lithotripsy System. Under the Proposed Stark II Regulations, physician Limited Partner referrals of Medicare and Medicaid patients to Contract Hospitals would be prohibited because the Partnership is regarded as an entity that "furnishes" inpatient and outpatient hospital services. The General Partner cannot predict when final regulations will be issued or the substance of the final regulations, but the interpretive provisions of the Proposed Stark II Regulations may be viewed as HCFA's interim position until final regulations are issued. If the Proposed Stark II Regulations are adopted as final (or, in the meantime, if a reviewing court adopted their reasoning as the proper interpretations of the Stark II statute), then the Partnership's operations would not be in compliance with Stark 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 Stark II Regulations that physician overutilization of lithotripsy is unlikely and specifically solicits comments on whether there should be a regulatory exception for lithotripsy. HCFA has received a substantial volume of comments in support of a regulatory exception for lithotripsy. HCFA representatives have informally acknowledged in published commentary that some form of regulatory relief for lithotripsy is under consideration and may be forthcoming; however, no assurance can be made that such will be the case. The General Partner will continue to 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. HCFA's adoption of the current Proposed Stark II Regulations as final or a reviewing court's interpretation of the Stark II statute in reliance on the Proposed Stark II Regulations and in a manner adverse to the Partnership operations would mean that the Partnership and its physician Limited Partners would likely be found in violation of Stark 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 Stark II self-referral prohibition. One (H.R. 2650) was introduced by Representative Stark, the other (H.R. 2651) by House Ways and Means health subcommittee chair Representative Bill Thomas. The Stark bill would modify, and the Thomas bill would repeal, the general prohibition on physician compensation arrangements with entities to which they refer patients. However, neither bill, nor any other bill currently pending in Congress, would substantively modify the regulation of referrals of physicians with ownership interests. Thus, neither bill would affect the Partnership's analysis of the potential impact of Stark II on this Offering discussed above. Fraud and Abuse. The provisions of the federal Social Security Act addressing illegal remuneration (the "Anti-Kickback Statute") prohibit providers and others from soliciting, receiving, offering or paying, directly or indirectly, any remuneration in return for either making a referral for a Medicare, Medicaid or TRICARE covered service or ordering, arranging for or recommending any such covered service. Violations of the Anti-Kickback Statute may be punished by a fine of up to $25,000 or imprisonment for up to five (5) years, or both. In addition, violations may be punished by substantial civil penalties and/or exclusion from the Medicare and Medicaid programs. Regarding exclusion, the Office of Inspector General ("OIG") of the Department of Health and Human Services may exclude a provider from participation in the Medicare program for a 5-year period upon a finding that the Anti-Kickback Statute has been violated. After OIG establishes a factual basis for excluding a provider from the program, the burden of proof shifts to the provider to prove the Anti-Kickback Statute has not been violated. The Limited Partners are to receive cash Distributions from the Partnership. Since some of the Limited Partners are physicians or others in a position to refer and perform lithotripsy services using Partnership equipment and personnel, such Distributions could come under scrutiny under the Anti-Kickback Statute. The Third Circuit United States Court of Appeals has held that the Anti-Kickback Statute is violated if one purpose (as opposed to the primary or sole purpose) of a payment to a provider is to induce referrals. United States v. Greber, 760 F.2d 68 (1985). The Greber case was followed by the United States Court of Appeals for the Ninth Circuit, United States v. Kats, 871 F.2d 105 (9th Cir. 1989), and cited favorably by the First Circuit in United States v. Bay State Ambulance and Hospital Rental Service, Inc., 874 F.2d 20 (1st Cir. 1989). The OIG has indicated that it is giving increased scrutiny to health care joint ventures involving physicians and other referral sources. In 1989, it published a Special Fraud Alert that outlined questionable features of "suspect" joint ventures, including some features which may be common to the Partnership. While OIG Special Fraud Alerts do not constitute law, they are informative because they reflect the general views of the OIG as a health care fraud and abuse investigator and enforcer. The OIG has published regulations which protect certain transactions from scrutiny under the Anti-Kickback Statute (the "Safe Harbor" regulations). A Safe Harbor, if complied with fully, will exempt such activity from prosecution under the Anti-Kickback Statute. However, the preamble to the Safe Harbor regulations states that the failure of a particular business arrangement to comply with the regulations does not determine whether or not the arrangement violates the Anti-Kickback Statute because the regulations do not themselves make any particular conduct illegal. This Offering and the business of the Partnership do not comply with any Safe Harbor. In the commentary introducing the Safe Harbor regulations, the OIG recognized the beneficial effect that business investments in small entities may have on the health care industry. The OIG promulgated a Safe Harbor for investment interests, including limited partnership ownership interests, in small entities which are held by persons in a position to make referrals to the entities so long as eight criteria are met. This Offering does not meet all eight criteria; however, this Offering does meet some of the criteria. Specifically, the terms on which Limited Partnership interests are offered to physicians who treat their patients on the Lithotripsy System are not related to the previous or expected volume of referrals or amount of business generated by the physicians; there is no requirement that any physician make referrals or be in a position to make referrals as a condition for remaining an investor; there is no cross-referral arrangement involved with the business of the Partnership; the Partnership does not loan funds or guarantee loans for physicians who refer patients for treatment on the Lithotripsy Systems; and the Distributions to physicians who are Limited Partners are directly proportional to the amount of their capital investment. In order to qualify for Safe Harbor protection, all eight criteria must be met. The General Partner can give no assurance that compliance with some, but not all, of the criteria of the Safe Harbor would prevent the OIG from finding a potential violation of the Anti-Kickback Statute by virtue of this Offering. A Safe Harbor has been adopted which protects equipment leasing arrangements. It requires that the aggregate rental charge be set in advance, be consistent with fair market value in arms-length transactions and not be determined in a manner that takes into account the volume or value of any referrals or business otherwise generated between the parties. To the best knowledge of the General Partner, the Hospital Contracts entered into by the Partnership do not require that the aggregate rental charge be set in advance and contain other terms which cause the Hospital Contracts not to comply with the Safe Harbor's requirements. When it issued this Safe Harbor, the OIG commented on per-use charges for equipment rentals. It stated that such arrangements must be examined on a case-by-case basis and may be abusive in certain situations. According to the OIG, payments on a per-use basis do not necessarily violate the Anti-Kickback Statute, but such payments are not provided Safe Harbor protection. The General Partner cannot give any assurances that the Partnership's Hospital Contracts which involve a per-use payment to the Partnership by Contract Hospitals would not be deemed to violate the Anti-Kickback Statute. In November 1999, the OIG issued a Safe Harbor protecting certain physician investment interests in ASCs. The commentary accompanying the new Safe Harbor specifically distinguished physician ownership in ASCs from physician ownership in other facilities, including lithotripsy facilities, end-stage renal disease facilities, comprehensive outpatient rehabilitation facilities and others. The OIG concluded that ASCs benefit from favorable public policy considerations relating to reducing Medicare costs (including through the impending prospective payment system discussed above); other facilities, including lithotripsy facilities, do not share the same policy considerations or reimbursement structures. Therefore, the Safe Harbor status given to certain physician investments in ASCs cannot be viewed as an indication that physician investments in other facilities, including lithotripsy facilities, would not be deemed to violate the Anti-Kickback Statute. Although a separate Safe Harbor was not adopted, HCFA noted in its commentary when the Safe Harbor regulations were issued in 1991 that additional protection may be merited for situations where a physician sees a patient in his or her own office, makes a referral to an entity in which he or she has an ownership interest and performs the service for which the referral is made. In such cases, Medicare makes a payment to the facility for the service it furnishes, which may result in a profit distribution to the physician. HCFA noted that, with respect to the physician's professional fee, such a referral is simply a referral to oneself, and that in such situations, both the professional service fee and the profit distribution from the associated facility fee that are generated from the referral may warrant protection. HCFA stated that its primary concern regarding the above referral situation was the investing physician's ability to profit from any diagnostic testing that is generated from the services he or she performs. The General Partner believes the potential for overutilization posed by referrals for diagnostic services is not present to the same degree with therapeutic services such as lithotripsy where the necessity for the treatment can be objectively determined; i.e., a renal stone can be definitely determined before treatment. The applicability of the Anti-Kickback Statute to physician investments in health care businesses to which they refer patients and which do not qualify for a Safe Harbor has not been the focus of many court decisions, and therefore, judicial guidance is limited. In the only case in which the OIG has attempted to exercise the civil exclusion remedy in the context of a physician-owned joint venture, The Hanlester Network, et al. v. Shalala, the Ninth Circuit for the United States Court of Appeals (the "Court") held that the Anti-Kickback Statute is violated when a person or entity (a) knows that the statute prohibits offering or paying remuneration to induce referrals and (b) engages in prohibited conduct with the specific intent to violate the law. Although the Court upheld a lower court ruling that the joint venture in question violated the Anti-Kickback Statute vicariously through the knowing and willful actions of one of its agents, who was acting outside the parameters of the joint venture's offering documents, the Court concluded there was not sufficient evidence indicating that a return on investment to physicians or other investors in the joint venture could on its own constitute an "offer or payment" of remuneration to make referrals. The Court also stated that since profit distributions in Hanlester were made based on each investor's ownership share and not on the volume of referrals, the fact that large referrals by investors would result in potentially high investment returns did not, standing alone, cause a violation of the Anti-Kickback Statute. The Health Insurance Portability and Accountability Act of 1996 directed the OIG to respond to requests for advisory opinions regarding the effect of the Anti-Kickback Statute on proposed business transactions. The General Partner has not requested the OIG to review this Offering and, to the best knowledge of the General Partner, the OIG has not been asked by anyone to review offerings of this type. Federal regulatory authorities could take the position in future advisory opinions that business transactions similar to this Offering are a means to illegally influence the referral patterns of the prospective physician Limited Partners. Because there is no legal precedent interpreting circumstances identical to these facts, it is not possible to predict how this issue would be resolved if litigated. Whenever an offering of ownership interests is made available to persons with the potential to refer patients for services, there is a possibility that the OIG, HCFA or other government agencies or officials may question whether the ownership interests are being provided in return for or to induce referrals by the new owners. Remuneration, which government officials have said can include the provision of an opportunity to invest in a facility to which a person refers patients for services, may be challenged by the government as constituting a violation of the Anti-Kickback Statute. Whether the offering of ownership interests to investors who may refer patients to the Partnership might constitute a violation of this law must be determined in each case based upon the specific facts involved. The various mechanisms in place to avoid providing a financial benefit to prospective Limited Partners for any referrals of patients (including the requirement that all distributions of earnings to Limited Partners be made in proportion to their investment interest), the Partnership's utilization review and quality assurance programs, the fact that lithotripsy is a therapeutic treatment the need of which can be objectively determined, and the existence in the General Partner's view of valid business reasons to engage in this transaction, form the basis in part of the General Partner's belief that this Offering is appropriate. The General Partner of the Partnership intends for all business activities and operations of the Partnership to conform in all respects with all applicable anti-kickback statutes (federal or state). The General Partner does not believe that the Partnership's 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 TRICARE. A prospective Limited Partner with questions concerning these matters should seek advice from his or her own independent counsel. False Claims Statutes. Federal laws governing reimbursement for medical services generally prohibit an individual or entity from knowingly and willfully presenting a claim (or causing a claim to be presented) for payment from Medicare, Medicaid or other third party payors that is false or fraudulent. The standard for "knowing and willful" includes conduct that amounts to a reckless disregard for whether accurate information is presented by claims processors. Penalties under these statutes include substantial civil and criminal fines, exclusion from the Medicare program and imprisonment. One of the most prominent of these laws is the federal False Claims Act, which may be enforced by the federal government directly, or by a qui tam private plaintiff on the government's behalf. Under the federal False Claims Act, both the government and the private plaintiff, if successful, are permitted to recover substantial monetary penalties and judgments, as well as an amount equal to three times actual damages. In recent cases, some private plaintiffs have taken the position that violations of the Anti-Kickback Statute (discussed above) and Stark II (discussed above) should also be prosecuted as violations of the federal False Claims Act. The Partnership cannot assure that the government, or a reviewing court, would not take the position that billing errors, employee misconduct or violations of other federal statutes, should they occur, are violations of the federal False Claims Act or similar statutes. Some federal courts have recently taken the position that qui tam lawsuits by private plaintiffs are unconstitutional. Most notably, a panel of judges on the Fifth Circuit Court of Appeals took this position in a decision issued in November 1999. That decision is being reviewed by all the judges on the Fifth Circuit. The panel's decision was a minority view; most courts have concluded that qui tam lawsuits are constitutional. In another case, the U.S. Supreme Court may review this issue. Unless and until the Supreme Court decides the issue, prospective Limited Partners should consider the ramifications of the False Claims Act issues discussed in the preceding paragraph. New Legislation. Two bills currently pending in Congress which would amend or repeal the compensation provisions of the Stark 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 Stark II and the Anti-Kickback laws discussed above. ALS Fraud and Abuse Compliance Guidelines. On March 24, 2000, the American Lithotripsy Society ("ALS") ( a voluntary membership organization made up of physicians, health care management personnel, treatment centers and medical suppliers) published Fraud and Abuste Compliance Guidelines for Physician - Owned Lithotripsy Ventures (the "ALS Guidelines"). The ALS Guidelines are aimed at assisting ALS members in recognizing and avoiding certain practices which the ALS believes are unethical or illegal. The ALS Guidelines acknowledge that they are neither authoritative, nor constitute legal advice. Moreover, the ALS Guidelines stipulate that the laws upon which they are based (all of which are discussed in this "Regulation" section) are open to alternative interpretations. Because of the various reasons set forth in this Memorandum, the Partnership believes the Offering and its operations are appropriate under such laws; however, no assurance can be given that the activities of the Partnership would be viewed by regulatory authorities as complying with these laws or the ALS Guidelines. FTC Investigation. Issues relating to physician-owned health care facilities have been investigated by the Federal Trade Commission ("FTC"), which investigated two lithotripsy limited partnerships affiliated with the General Partner, to determine whether they posed an unreasonable threat to competition in the health care field. The affiliated limited partnerships were advised in 1996 that the FTC's investigation was terminated without any formal action taken by the FTC or any restrictions being placed on the activities of the limited partnerships. However, the General Partner cannot assure that the FTC will not investigate issues arising from physician-owned health care facilities in the future with respect to the General Partner or any Affiliate, including the Partnership. Ethical Considerations. The American Medical Association's Code of Medical Ethics states that physicians should not refer patients to facilities in which they have an ownership interest unless such physician directly provides care or services to such patient at the facility. Because physician investors will be providing lithotripsy services, the General Partner believes that an investment by a physician will not be in violation of the American Medical Association's Code of Medical Ethics. In the event that the American Medical Association changes its ethical code to preclude such referrals by physicians and such ethical requirements are applied to facilities or services which, at the time of adoption, are owned in whole or in part by referring physicians, the Partnership and the interests of the Limited Partners may be adversely affected. State Regulation Arizona. Arizona's certificate of need ("CON") law was repealed as of 1985. Therefore, no CON is necessary to acquire a lithotripter or initiate mobile lithotripsy services in Arizona. Arizona does require that health care institutions be licensed. However, to the best knowledge of the General Partner, the Partnership's Lithotripsy Systems do not require licensure as a health care institution because lithotripsy services would be provided to patients under the authority of the host hospital's license. The x-ray services associated with the lithotripters must be licensed by the Arizona Radiation Regulatory Agency, and radiologic technologists must be certified in Arizona. Under Arizona law, it is unprofessional conduct for a physician to refer patients to facilities in which the physician has a financial relationship without giving written notice of such financial relationship to the patient at the time of referral. The Arizona Board of Medical Examiners has created a form that must be used for this purpose. The Partnership will require that its Limited Partners comply with this requirement. New Mexico. New Mexico's CON law expired in 1983. Therefore, no CON is necessary to acquire a lithotripter or initiate lithotripsy services in New Mexico. To the best knowledge of the General Partner, no licensure will be required for the Lithotripsy Systems. The services are regulated under the Contract Hospitals' licensure. The lithotripter must be registered with the radiation licensing and registration office of the New Mexico Department of Environment. Radiologic technologists must be certified and licensed by the state. It is an unprofessional practice for New Mexico physicians to engage in "fee splitting." "Fee splitting" includes paying or accepting any unearned consideration for referring patients "irrespective of any membership, proprietary interest or co-ownership in or with any person" to whom the patients are referred. N.M. Stat. ss. 61-6-15. The General Partner has been informally advised by the general counsel of the New Mexico Board of Medical Examiners that a physician-investor's receipt of profits in proportion to the physician's equity interest in the Partnership would not constitute "fee splitting" under the statute. However, the general counsel's opinion is not binding on the Board of Medical Examiners. The General Partner cannot make any assurance that the prohibition on fee splitting will not be interpreted (by the Board of Medical Examiners or by a reviewing court) in a fashion adverse to the Partnership and its physician-investors. The Board of Medical Examiners' general counsel also advised that physician Limited Partners should provide their patients with written disclosure of their ownership interests. Although written disclosure is not required by any statute or regulation, the Partnership will require physician Limited Partners to provide written disclosure so as to comply with the general counsel's recommendation. The Partnership will continue to seek to comply with all applicable statutory and regulatory requirements. Further regulations may be imposed in Arizona and New Mexico at any time in the future. Predictions as to the form or content of such potential regulations would be highly speculative. They could apply to the operation of the Lithotripsy Systems or to the physicians who invest in the Partnership. Such restrictive regulations could materially adversely affect the ability of the Partnership to conduct its business. THE GENERAL PARTNER AND THE PARTNERSHIP BELIEVE LITHOTRIPSY SERVICES WILL CONTINUE TO BE SUBJECT TO INTENSE GOVERNMENTAL REGULATION AT THE FEDERAL AND STATE LEVELS AND, THEREFORE, CANNOT PREDICT THE SCOPE AND EFFECT THEREOF. PROSPECTIVE LIMITED PARTNERS SHOULD CONSULT WITH THEIR LEGAL COUNSEL AS TO THE IMPLICATIONS OF FEDERAL AND STATE LAWS AND PROFESSIONAL ETHICAL CODES DEALING WITH PHYSICIAN OWNERSHIP OF MEDICAL EQUIPMENT AND FACILITIES BEFORE PURCHASING UNITS. PRIOR ACTIVITIES Prime, the sole shareholder of the General Partner, is the largest and fastest growing provider of lithotripsy services in the United States, providing lithotripsy services at over 450 hospitals and surgery centers in 31 states, as well as delivering non-medical services related to the operation of the lithotripters, including scheduling, staffing, training, quality assurance, maintenance, regulatory compliance and contracting with payors, hospitals and surgery centers, while medical care is rendered by urologists utilizing the lithotripters. Prime has an economic interest in 59 mobile and six fixed site lithotripters, all but two of which are operated by Prime or the General Partner and its Affiliates. Prime began providing lithotripsy services with an acquisition in 1992 and has grown rapidly since that time through acquisitions and de novo development. In April 1996, Prime acquired the General Partner. The General Partner operates over 30 lithotripters serving approximately 200 locations in 19 states. The acquisition of the General Partner provided Prime with complementary geographic coverage as well as additional expertise in forming and managing lithotripsy operations. Prime and the General Partner's lithotripters together performed approximately 38,000 lithotripsy procedures in 1999. Approximately 2,300 urologists utilized Prime and the General Partner's lithotripters in 1999, representing approximately 30% of the estimated 7,700 active urologists in the United States. Prime manages the operations of approximately 63 of its 65 lithotripters. All of its lithotripters are operated in connection with hospitals or surgery centers. Prime operates its lithotripters as the general partner of a limited partnership or through a subsidiary, as is the case with the General Partner affiliated partnerships. Prime provides a full range of management and other non-medical support services to the lithotripsy operations, while medical care is provided by urologists utilizing the facilities and certain medical support services are provided by the hospital or surgery center. Urologists are investors in 50 of its 65 operations. Prime's lithotripters range in age from one to twelve years. Of its 65 lithotripters, 59 are mobile units mounted in tractor-trailers or self-contained coaches serving locations in 31 states. Prime also operates six fixed site lithotripters in four states. All of Prime's fixed lithotripsy units are located and operated in conjunction with a hospital or surgery center. Most of these locations are in major metropolitan markets where the population can support such an operation. Fixed site lithotripters generally cannot be economically justified in other locations. Prime and the General Partner believe that they maintain the most comprehensive quality outcomes database and information system in the lithotripsy services industry. Prime has detailed information on over 160,000 procedures covering patient demographic information and medical condition prior to treatment, the clinical and technical parameters of the procedure and resulting outcomes. Information is collected before, during and up to three months after the procedure through internal data collection by doctors, nurses and technicians and through patient questionnaires. For numerous reasons, including differences in financial structure, program size, economic conditions and distribution policies, the success of the General Partner's Affiliates in the lithotripsy field should not be considered as indicative of the operating results obtainable by the Partnership. SUMMARY OF THE PARTNERSHIP AGREEMENT The Partnership Agreement sets forth the powers and purposes of the Partnership and the respective rights and obligations of the General Partner and the Limited Partners. The following is only a summary of certain provisions of the Partnership Agreement, and does not purport to be a complete statement of the various rights and obligations set forth therein. A complete copy of the Partnership Agreement is set forth as Appendix A to this Memorandum, and Investors are urged to read the Partnership Agreement in its entirety and to review it with their counsel and advisors. Nature of Limited Partnership Interest The Investors will acquire their interests in the Partnership in the form of Units. For each Unit purchased, a cash payment of $5,513 is required. The entire Unit purchase price is due in cash upon subscription; however, certain qualified Investors may finance a portion of the purchase price through either individually borrowed funds or 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 certain Distributions received from the Partnership as provided by the Act. See "Risk Factors - Other Investment Risks - Limited Partners' Obligation to Return Certain Distributions." See also Form of Legal Opinion of Womble Carlyle Sandridge & Rice, PLLC attached hereto as Appendix C. Profits, Losses and Distributions The following is a Summary of certain provisions of the Partnership Agreement relating to the allocation and distribution of the Profits, Losses, Partnership Cash Flow, Partnership Refinancing Proceeds, Partnership Sales Proceeds, and cash upon dissolution of the Partnership. Because an understanding of the defined financial terms is essential to an evaluation of the information presented below, Investors should carefully review the definitions of the terms appearing in the Glossary. 1. Allocations of Profits and Losses. (a) General. Generally, Profits and Losses, if any, for each Year of the Partnership will be allocated proportionately among the Partners based on their respective Percentage Interests in the Partnership; provided that New Limited Partners will be allocated only Profits and Losses that accrue after the date of their admission to the Partnership as Limited Partners. (b) Allocations. Net gains and net losses from Capital Transactions (a part of Profits and Losses), if any, shall be allocated first. Each Partner will receive his pro rata share of Profits and Losses based upon the number of days such Partner was a member of the Partnership during the Year of the Partnership. Notwithstanding the foregoing, the Partnership's "allocable cash basis items," as that term is used in Section 706(d)(2)(B) of the Code, will be allocated as required by Section 706(d)(2) of the Code and the treasury regulations promulgated thereunder. (c) Qualified Income Offset. If any Limited Partner unexpectedly receives an adjustment, allocation or distribution as described in Treasury Regulation Section 1.704-1(b)(2)(ii)(d)(4) through (6) that causes such Limited Partner to have a deficit Capital Account balance, such Limited Partner will be allocated items of income and gain in an amount and manner sufficient to eliminate such deficit balance as quickly as possible. This provision is intended to be a "qualified income offset" as defined in Regulation Section 1.704-1(b)(2)(ii)(d). 2. Distributions. (a) Non-liquidation Distributions. Partnership Cash Flow for each Year of the Partnership, to the extent available, will be distributed within 60 days after the end of each Year of the Partnership, or earlier in the discretion of the General Partner, proportionately among the Partners based on their respective Percentage Interests in the Partnership at the time of distribution. Partnership Sales Proceeds and Partnership Refinancing Proceeds will be distributed within 60 days of the Capital Transaction giving rise to such proceeds, or earlier in the discretion of the General Partner, proportionately among the Partners based on their respective Percentage Interests in the Partnership as of the date of the Capital Transaction giving rise to such proceeds. The New Limited Partners have no rights to receive any distributions in the future that are made out of the Initial Limited Partners' and General Partner's accrued but undistributed Partnership Cash Flow as of the date the New Limited Partners are admitted to the Partnership. New Limited Partners will be entitled only to Partnership Cash Flow that accrues after the date of their admission to the Partnership as Limited Partners (b) Distribution Upon Dissolution. Upon the dissolution and termination of the Partnership, the General Partner or, if there is none, a representative of the Limited Partners, will liquidate the assets of the Partnership. The proceeds of such liquidation will be applied and distributed in the following order of priority: (a) first, to the payment of the debts and liabilities of the Partnership, and the expenses of liquidation; (b) second, to the creation of any reserves which the General Partner or the representative of the Limited Partners may deem reasonably necessary for the payment of any contingent or unforeseen liabilities or obligations of the Partnership or of the General Partner arising out of or in connection with the business and operation of the Partnership; and (c) third, the balance, if any, will be distributed to the Partners in accordance with the Partners' positive capital account balances. Any General Partner with a negative capital account following the distribution of liquidation proceeds or the liquidation of its interest must contribute to the Partnership an amount equal to such negative capital account on or before the end of the Partnership's taxable year (or, if later, within ninety days after the date of liquidation). Any capital so contributed shall be (i) distributed to those Partners with positive capital accounts until such capital accounts are reduced to zero; and/or (ii) used to discharge recourse liabilities. Management of the Partnership The General Partner has the sole right to manage the business of the Partnership and at all times is required to exercise its responsibilities in a fiduciary capacity. Except as otherwise provided in the Partnership Agreement, the consent of the Limited Partners is not required for any sale or refinancing of the Lithotripsy Systems or the purchase of other new assets by the Partnership. The General Partner will oversee the day-to-day affairs of the Partnership pursuant to the Management Agreement. See "Business Activities - Management." Under the Partnership Agreement, if the General Partner is adjudged by a court of competent jurisdiction to be liable to the Limited Partners or the Partnership for acts of gross negligence or willful misconduct in the performance of its duties under the terms of the Partnership Agreement, the General Partner may be removed and another substituted with the consent of all of the Limited Partners. The General Partner may transfer all or a portion of its Partnership Interest only if, in the opinion of the Partnership's accountant, the new general partner has sufficient net worth and meets other requirements to assure that the Partnership will continue to be treated as a partnership for Federal tax purposes. Both the admission of any new shareholder and the withdrawal of any shareholder from the General Partner may be done without the approval of the Limited Partners. Powers of the General Partner The General Partner may, in its sole discretion, borrow money, acquire, encumber, hold title to, pledge, sell, release or otherwise dispose of, all or any part of the Partnership's assets, when and upon such terms as it determines to be in the best interest of the Partnership, employ such persons as it deems necessary for the operation of the Partnership and deposit, withdraw, invest, pay, retain (including the establishment of reserves) and distribute the Partnership's funds. The General Partner, however, is expressly prohibited from, among other things: (i) possessing Partnership assets or assigning the rights of the Partnership in Partnership assets, including the Lithotripsy Systems, for other than Partnership purposes; (ii) admitting Limited Partners except as provided in the Partnership Agreement; (iii) performing any act (other than an act required by the Partnership Agreement or any act taken in good faith reliance upon legal 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 possible to carry on the ordinary business of the Partnership. Rights and Liabilities of the Limited Partners The Limited Partners do not have any right to participate in the management of the business of the Partnership and will not transact business for the Partnership. Limited Partners are not required to make any capital contributions to the Partnership except amounts agreed by them to be paid, or pay or be personally liable for, any expense, liability or obligation of the Partnership, except to the extent (i) his or her Capital Contribution and liability under a Limited Partner Loan, if any; (ii) his or her proportionate share of the undistributed profits of the Partnership; and (iii) the amount of certain Distributions received from the Partnership as provided by the Act. See "Risk Factors - Other Investment Risks - Limited Partners Obligations to Return Certain Distributions." The Limited Partners may not participate in or own an interest in any competing lithotripsy venture, except with the approval of the General Partner. The General Partner may elect to treat participation or ownership by a Limited Partner in a competing venture as an event of default, and such Limited Partner may be required to sell his Partnership Interest. See "Optional Purchase of Limited Partner Interests" below. Restrictions on Transfer of Partnership Interests After acquisition of Units by Investors, no Partnership Interest nor any Units may be transferred without the prior written consent of the General Partner, which approval may be withheld only if the General Partner reasonably determines that the transfer is not in the best interests of the Partnership, and subject to the satisfaction of certain other conditions set forth in the Partnership Agreement. The Partnership Agreement contains additional limitations on transfer, including provisions prohibiting transfer that would cause the termination of the Partnership, would violate federal or state securities laws, would prevent the Partnership from being entitled to use any method of depreciation which the Partnership might otherwise be entitled to use, or would adversely affect the status of the Partnership as a partnership for Federal income tax purposes. In addition, the Partnership Agreement prohibits the holding or transfer of a Partnership interest by or to a "tax exempt entity" (as defined in Code Section 168(h)) which would affect the method or manner in which the Partnership may depreciate Partnership assets. No transferee of the Units will automatically become a Limited Partner. Admission of a transferee to the Partnership as a Limited Partner requires the fulfillment of other obligations enumerated in the Partnership Agreement, including either the approval of all the Limited Partners (except the assignor Limited Partner) and the General Partner, or the approval of the assignor Limited Partner and the General Partner. Any transferee of a Partnership Interest who has not been admitted to the Partnership as a Partner shall not be entitled to any of the rights, powers or privileges of his transferor except the right to receive and be credited or debited with his proportionate share of Partnership income, gains, profits, losses, deductions, credits or distributions. A transferor Limited Partner will not be released from his or her personal liability under the Limited Partner Loans, unless otherwise specifically agreed by the Bank. Dissolution and Liquidation The Partnership will dissolve and terminate for any of the following reasons: 1. The sale, exchange or disposition of all or substantially all of the property of the Partnership without making provision for the replacement thereof; 2. The expiration of its term on December 31, 2040; 3. The bankruptcy or occurrence of certain other events with respect to the General Partner; 4. The election to dissolve the Partnership made by the General Partner and a Majority in Interest of the Limited Partners; or 5. Any other reason which under the laws of the State of Arizona 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 to purchase all the interest of a Limited Partner in the Partnership upon the occurrence with respect to the Limited Partner of (i) death, (ii) bankruptcy or insolvency, (iii) incompetency, or (iv) direct or indirect ownership of an interest in a competing venture. Upon the occurrence of one or more of the preceding events, the withdrawing Limited Partner, or his or her personal representative, will have a brief period within which to sell his or her entire Partnership Interest to a purchaser approved of by the General Partner. If the withdrawing Limited Partner is unable to sell his or her Partnership Interest as provided above, the General Partner will then have the first option to purchase such Partnership Interest and thereafter, the remaining Limited Partners will have the option to purchase any of the Partnership Interest not purchased by the General Partner. If the General Partner or Limited Partners elect to exercise their respective options, the option purchase price will be equal to the withdrawing Limited Partner's share of the Partnership's book value, if any, as reflected by such Limited Partner's capital account in the Partnership (unadjusted for any appreciation in Partnership assets and as reduced by depreciation deductions claimed by the Partnership for tax purposes). The withdrawing Limited Partner will not be released from his obligations under any Limited Partner Loan unless so agreed by the Bank. Furthermore, sale of his or her Limited Partnership Interest may constitute an event of default under any outstanding Limited Partner Loan incurred by the selling Limited Partner. See "Terms of the Offering - Limited Partner Loans." There can be no assurance that the option purchase price will represent the fair market value of a Limited Partner's interest in the Partnership. Because Partnership losses, depreciation deductions and Distributions reduce capital accounts, and because appreciation in Partnership assets is not reflected in capital accounts, it is the opinion of the General Partner that the option purchase price will be nominal in amount. Dilution Offerings The General Partner has the authority to periodically offer and sell additional limited partnership interests in the Partnership through Dilution Offerings to investors (including Existing Limited Partners) who meet certain suitability standards determined by the General Partner ("Qualified Investors"). The primary purpose of Dilution Offerings would be (i) to raise additional capital for any legitimate Partnership purpose including purchasing the New Lithotripsy Systems; and (ii) to assure the highest quality of patient care by admitting Qualified Investors to the Partnership who will be dedicated and motivated as owners to follow the Partnership's treatment protocol, and comply with its quality assurance and outcome analysis programs. Any sale of limited partnership interests in a Dilution Offering will result in the proportionate dilution of the Partnership Percentage Interests of the existing Partners; i.e., the interests of the General Partner and of the Limited Partners in Partnership allocations, cash distributions and voting rights will be proportionately reduced as a result of a successful Dilution Offering. The Limited Partner interests offered in a Dilution Offering will be sold in the manner and according to terms in the best interest of the Partnership, as prescribed in the sole discretion of the General Partner. Any additional limited partnership interests offered in a Dilution Offering will be sold for a price no lower than their fair market value as determined by the General Partner, in its sole discretion, at the time of this Offering. Arbitration The Partnership Agreement provides that disputes arising thereunder shall be resolved by submission to arbitration in Phoenix, Arizona in accordance with the then prevailing commercial arbitration rules of the American Arbitration Association. Power of Attorney Each Investor, by executing the Subscription Agreement, irrevocably appoints Dr. Joseph Jenkins to act as attorney-in-fact to execute the Partnership Agreement, any amendments thereto and any certificate of limited partnership filed by the General Partner. The Partnership Agreement, in turn, contains provisions by which each Limited Partner irrevocably appoints Dr. Joseph Jenkins, to act as his or her attorney-in-fact to make, execute, swear to and file any documents necessary to the conduct of the Partnership's business, such as deeds of conveyance of real or personal property as well as any amendment to the Partnership Agreement or to any certificate of limited partnership which accurately reflects actions properly taken by the Partners. Reports to Limited Partners Within 90 days after the end of each Year of the Partnership, the General Partner will send to each person who was a Limited Partner at any time during such year such tax information, including, without limitation, Federal Tax Schedule K-1, as will be reasonably necessary for the preparation by such person of his federal income tax return, and such other financial information as may be required by the Act. Records Proper and complete records and books of account will be kept by the General Partner in which will be entered fully and accurately all transactions and other matters relative to the Partnership's business as are usually entered into records and books of account maintained by persons engaged in business of a like character. The Partnership books and records will be kept according to the method of accounting determined by the General Partner. The Partnership's fiscal year will be the calendar year. The books and records will be located at the office of the General Partner, and will be open to the reasonable inspection and examination of the Limited Partners or their duly authorized representatives during normal business hours. LEGAL MATTERS Certain legal matters in connection with the Units offered hereby will be passed upon for the Partnership by Womble Carlyle Sandridge & Rice, a Professional Limited Liability Company, of Winston-Salem, North Carolina. See "Conflicts of Interest." On the Closing Date, Womble Carlyle Sandridge & Rice, a Professional Limited Liability Company will render an opinion, the form of which is attached as Appendix C to this Memorandum, with respect to certain federal income tax consequences of an investment in Units. See "Tax Aspects of the Offering." ADDITIONAL INFORMATION The Company 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 Company. 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 Arizona Uniform Limited Partnership Act, as in effect on the date hereof. Affiliate. An Affiliate is (i) any person, partnership corporation, association or other legal entity ("person") directly or indirectly controlling, controlled by or under common control with another person; (ii) any person owning or controlling 10% or more of the outstanding voting interests of such other person; (iii) any officer, director or partner of such person; and (iv) if such other person is an officer, director or partner, any entity for which such person acts in such capacity. AK Associates. AK Associates, L.L.C., a subsidiary of Prime. It is anticipated that the Partnership will purchase two Coaches and a mobile van from AK Associates. Bank. First-Citizens Bank & Trust Company. ---- Capital Account. The Partnership capital account of a Partner as computed pursuant to Article XII of the Partnership Agreement. Capital Contributions. All capital contributions made by a Partner or his predecessor in interest which shall include, without limitation, contributions made pursuant to Article VII of the Partnership Agreement. Capital Transaction. Any transaction which, were it to generate proceeds, would produce Partnership Sales Proceeds or Partnership Refinancing Proceeds. Closing Date. 5:00 p.m., Eastern Time, on August 15, 2000 (or earlier) in the discretion of the General Partner. The Closing Date may be extended for a period of up to 180 days in the discretion of the General Partner. Coach. A self-propelled mobile vehicle, which houses a lithotripter. Code. The Internal Revenue Code of 1986, or corresponding provisions of subsequent, superseding revenue laws. Contract Hospitals. The nine hospitals, medical centers and ambulatory surgery centers to which the Partnership provides lithotripsy services pursuant to five separate Hospital Contracts. Counsel. Counsel to the Partnership, Womble Carlyle Sandridge & Rice, a Professional Limited Liability Company, P.O. Drawer 84, Winston-Salem, North Carolina 27102. Dilution Offering. The issuance, offering and sale by the Partnership of additional partnership interests in the future. Distributions. Cash or other property, from any source, distributed to Partners. Escrow Agent. First-Citizens Bank & Trust Company. Existing Lithotripsy System. The two Coaches with the installed and operational Lithostars(TM)currently owned and operated by the Partnership. 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 five separate lithotripsy services agreements the Partnership has entered into with the Contract Hospitals. Initial Limited Partners. The Individuals who were Limited Partners prior to the commencement of this Offering. Investors. Potential purchasers of Units. 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 $3,013 per Unit, the proceeds of which will be paid directly to the Partnership. The form of the Limited Partner Note (including the Note Addendum attached thereto) is attached as Exhibit A to the Form of Bank Commitment which is attached hereto as Appendix B. Limited Partners. The Limited Partners are those Investors in the Units admitted to the Partnership and any person admitted as a substitute Limited Partner in accordance with the provisions of the Partnership Agreement. Lithostar(TM). The Lithostar(TM)model extracorporeal shock wave lithotripters manufactured by Siemens and currently owned by the Partnership. Lithotripsy Systems. The Existing Lithotripsy Systems and the New Lithotripsy Systems, collectively. Loan and Security Agreement. The agreement to be executed in conjunction with the Limited Partner Note by an Investor who finances a portion of the Unit purchase price through a Limited Partner Loan. The form of the Loan and Security Agreement is attached as Exhibit B to the Form of Bank Commitment which is attached hereto as Appendix B. Loan Documents. The Form of Bank Commitment, the Limited Partner Note, the Loan and Security Agreement, the Security Agreement and UCC-1, collectively. Loss. The net loss (including capital losses and excluding Net Gains from Capital Transactions) of the Partnership for each year as determined by the Partnership for federal income tax purposes. Memorandum. This Confidential Private Placement Memorandum, including all Appendices hereto, and any amendment or supplement hereto. Modulith(R) SLX-T. The new Storz Modulith(R) SLX-T transportable lithotripter. The Partnership will purchase two of these lithotripters with the proceeds of this Offering and Partnership debt financing. Net Gains from Capital Transactions. The gains realized by the Partnership as a result of or upon any sale, exchange, condemnation or other disposition of the capital assets of the Partnership (which assets shall include Code Section 1231 assets) or as a result of or upon the damage or destruction of such capital assets. New Limited Partner. Any Investor admitted to the Partnership as a Limited Partner. New Lithotripsy Systems. The two Storz Modulith(R) SLX-T together with the Coach and the van which will be purchased with the proceeds of the Offering and other financing and which will be owned and operated by the Partnership. Nonrecourse Deductions. A deduction as set forth in Treasury Regulations Section 1.704-2(b)(1). The amount of Nonrecourse Deductions for a given Year equals the excess, if any, of the net increase, if any, in the amount of Partnership Minimum Gain during such Year over the aggregate amount of any Distributions during such Year of proceeds of a Nonrecourse Liability that are allocable to an increase in Partnership Minimum Gain, determined according to the provisions of Treasury Regulations Section 1.704-2(h). Nonrecourse Liability. Any Partnership liability (or portion thereof) for which no Partner bears the "economic risk of loss," within the meaning of Treasury Regulations Section 1.704-2(i). Offering. The offering of Units pursuant to this Memorandum. 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 - Arizona I, an Arizona limited partnership. Partnership Agreement. The Partnership's Agreement of Limited Partnership, a copy of which is attached hereto as Appendix A, as the same may be amended from time to time. Partnership Cash Flow. For the applicable period the excess, if any, of (A) the sum of (i) all gross receipts from any source for such period, other than from Partnership loans, Capital Transactions and Capital Contributions; and (ii) any funds released by the Partnership from previously established reserves, over (B) the sum of (i) all cash expenses paid by the Partnership for such period; (ii) the amount of all payments of principal on loans to the Partnership; (iii) capital expenditures of the Partnership; and (iv) such reasonable reserves as the General Partner shall deem necessary or prudent to set aside for future repairs, improvements, or equipment replacement or additions, or to meet working capital requirements or foreseen or unforeseen future liabilities and contingencies of the Partnership; provided, however, that the amounts referred to in (B) (i), (ii) and (iii) above shall be taken into account only to the extent not funded by Capital Contributions, loans or paid out of previously established reserves. Such term shall also include all other funds deemed available for distribution and designated as "Partnership Cash Flow" by the General Partner. Partnership Interest. The interest of a Partner in the Partnership as defined by the Act and the Partnership Agreement. Partnership Minimum Gain. Gain as defined in Treasury Regulations Section 1.704-2(d). Partnership Refinancing Proceeds. The cash realized from the refinancing of Partnership assets after retirement of any secured loans and less (i) payment of all expenses relating to the transaction; and (ii) establishment of such reasonable reserves as the General Partner shall deem necessary or prudent to set aside for future repairs, improvements, or equipment replacement or additions, or to meet working capital requirements or foreseen or unforeseen future liabilities or contingencies of the Partnership. Partnership Sales Proceeds. The cash realized from the sale, exchange, casualty or other disposition of all or a portion of Partnership assets after the retirement of all secured loans and less (i) the payment of all expenses related to the transaction; and (ii) establishment of such reasonable reserves as the General Partner shall deem necessary or prudent to set aside for future repairs, improvements, or equipment replacement or additions, or to meet working capital requirements or foreseen or unforeseen future liabilities or contingencies of the Partnership. Percentage Interest. The interest of each Partner in the Partnership, to be determined in the case of each Investor by reference to the percentage opposite his or her name set forth in Schedule A to the Partnership Agreement. Each Unit sold pursuant to this offering represents an initial 0.25% economic interest. The Percentage Interest will be set forth in Schedule A to the Partnership Agreement or any other document or agreement, as a percentage or a fraction or on any numerical basis deemed appropriate by the General Partner. Prime. Prime Medical Services, Inc. a publicly held Delaware corporation and parent of the General Partner, AK Associates and the Sales Agent. Prime Rate. The rate of interest periodically established by the Bank and identified as such in literature published and circulated within the Bank's offices. 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 Bank Commitment which is attached hereto as Appendix B. Service. The Internal Revenue Service. ------- Service Area. Arizona and parts of New Mexico and Nevada. ------------ Siemens. Siemens Medical Systems, Inc. and its Affiliates. ------- Storz. Karl Storz Lithotripsy-America, Inc. and its Affiliates. Subscription Agreement. The Subscription Agreement, included in the Subscription Packet accompanying this Memorandum, to be executed by the 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 80 equal units of limited partner interest in the Partnership offered pursuant to this Memorandum for a price per Unit of $5,513 in cash. Year of the Partnership. An annual accounting period ending on December 31 of each year during the term of the Partnership. EX-10.128 41 0041.txt EX 10.128 1ST SUPPLEMENT TO MEMORANDUM - ARIZONA I FIRST SUPPLEMENT DATED AUGUST 14, 2000 TO THE CONFIDENTIAL PRIVATE PLACEMENT MEMORANDUM DATED JUNE 23, 2000 Fayetteville Lithotripters Limited Partnership - Arizona I Fayetteville Lithotripters Limited Partnership - Arizona I, an Arizona limited partnership (the "Partnership"), by this First Supplement hereby amends and supplements its Confidential Private Placement Memorandum of June 23, 2000 (the "Memorandum"). Capitalized terms used herein and not otherwise defined have the meanings provided in the Memorandum. Persons who have subscribed for or are considering an investment in the Units offered by the Memorandum should carefully review this First Supplement. Extension of the Offering Pursuant to the authority given to the General Partner in the Memorandum, the General Partner hereby elects to extend the Closing Date to February 9, 2000 (or such earlier date as the General Partner may, in its sole discretion, otherwise elect). Questions concerning this First Supplement should be directed to James Brady or Phil Gallina at 1-800-682-7971, Extension 3. EX-10.129 42 0042.txt EX 10.129 2ND SUPPLEMENT TO MEMORANDUM - ARIZONA I SECOND SUPPLEMENT DATED FEBRUARY 6, 2001 TO THE CONFIDENTIAL PLACEMENT MEMORANDUM DATED JUNE 23, 2000 Fayetteville Lithotripters Limited Partnership-Arizona I Fayetteville Lithotripters Limited Partnership-Arizona I, an Arizona limited partnership (the "Partnership"), by this Second Supplement hereby amends and supplements its Confidential Private Placement Memorandum dated June 23, 2000, as amended (the "Memorandum"). Capitalized terms used herein and not otherwise defined have the meanings provided in the Memorandum. Persons who have subscribed for or are considering an investment in the Units offered by the Memorandum should carefully review this Second Supplement. Extension of the Offering The termination date of the offering is February 11, 2001. In order to provide potential new subscribers the time and opportunity to thoughtfully review the information contained in this Second Supplement, the General Partner hereby extends the offering termination date until April 30, 2001. The offering termination date is likewise extended for existing subscribers that follow the steps to reaffirm their subscriptions as outlined herein. Stark II Final Regulations As set forth in the Memorandum, on January 9, 1998, the Health Care Financing Administration ("HCFA") published proposed regulations designed to interpret and clarify the application of certain legislation prohibiting physician self-referral of Medicare and Medicaid patients for specifically enumerated designated health services, including inpatient and outpatient hospital services ("Stark II"). As these regulations were simply proposed and subject to future modification or repeal, the legal status of the Partnership's method of operations remained unaffected by proposed regulations while the issuance of final Stark II regulations was awaited. On January 4, 2001 HCFA issued the first of two rules intended to implement the final Stark II regulations (the "Final Regulations"). The first rule ("Phase I") implements the Final Regulations pertaining to (i) Stark II's general prohibition against physician self-referrals to entities in which they have a financial relationship, (ii) the general exceptions applicable to both the ownership and compensation arrangement prohibitions, (iii) certain new regulatory exceptions, and (iv) the definitions that are used throughout Stark II. HCFA intends to publish a second final rule ("Phase II") shortly which will address the remainder of the Stark II statute and its application to the Medicaid program, as well as certain proposals for new exceptions not included in the proposed Stark II regulations, but suggested in the public comments thereto. Phase I will become effective on January 4, 2002. HCFA has delayed the effective date of Phase I to allow individuals and entities engaged in business arrangements impacted by Phase I time to restructure those arrangements to comply with the provisions in Phase I. Consequently, as discussed below, the Partnership will have time to take the steps required to ensure Stark II compliance. Currently, Medicare and Medicaid only reimburse for lithotripsy if the service is provided through a hospital. The lithotripsy services provided by the Partnership to Medicare/Medicaid hospital outpatients are provided "under arrangements" with hospitals, with the treatment being billed under the hospital's provider billing number. Prior to the release of Phase I, the existence of ambiguities and the lack of definitions for certain terms in the Stark II statute, as well as the uncertainty as to the contents of the Final Regulations, gave rise to alternative interpretations of the Stark II statute. One alternative interpretation led to a reasonable conclusion that Stark II did not apply to the operations of the Partnership. See "Regulation-Self-Referral Restrictions" in the Memorandum. As related in the Memorandum, HCFA acknowledged in its commentary to the proposed Stark II regulations that physician overutilization of lithotripsy is unlikely and specifically solicited comments on whether there should be a regulatory exception to Stark II specifically for lithotripsy services. See "Regulation-Self-Referral Restrictions" in the Memorandum. Upon consideration of numerous public comments received on the proposed regulations and upon review of the Stark II legislative history, HCFA concludes in its commentary to the Final Regulations that it did not have the authority to exclude lithotripsy as an inpatient or outpatient hospital service covered by Stark II. Consequently, the Partnership's practice of providing lithotripsy services "under arrangements" to hospitals for treatment of Medicare and Medicaid patients must comply with the provisions of the Final Regulations. Although the General Partner is disappointed that the Final Regulations do not provide a specific Stark II exception for lithotripsy services, it is pleased that the regulations provided needed clarity and certain opportunities for the Partnership to operate in compliance with Stark II. HCFA asserts in Phase I that its express purpose in the Final Regulations is to interpret the prohibitions of Stark II narrowly while interpreting its exceptions broadly. HCFA also notes its desire to permit physician-owned lithotripsy ventures to continue if such ventures are structured such that no direct or indirect compensation arrangement is created, or the arrangement fits within a compensation arrangement exception to the Stark II statute. The Final Regulations accomplish HCFA's stated purpose and desire by: (i) clarifying that physician-owned lithotripsy vendors providing services "under arrangements" with hospitals are either structured such that they are not compensation arrangements, as defined in the Final Regulations, or that they need only qualify under a compensation exception, and not an ownership interest exception as well; (ii) broadening certain existing Stark II statutory exceptions by redefining certain standards to allow "per use" lithotripsy payments, as long as such payments are at fair market value; and (iii) adding two new Stark II regulatory exceptions that are potentially available for Partnership operations. In order for the Partnership to comply with Stark II as modified by the Final Regulations, the Partnership's financial relationships with its Contract Hospitals must either fall outside the definition of a compensation arrangement, or comply with a Stark II compensation arrangement exception. The General Partner, along with the Partnership's legal counsel, have worked to establish a compliance program that is in the process of implementation. As noted above, due to the Final Regulations delayed effective date, the Partnership has until January 4, 2002 to take reasonable steps to review the Partnership's operations under the Final Regulations. Specifically, the Partnership intends to work with all its Contract Hospitals to review and modify, if necessary, its lithotripsy service contracts so that they satisfy the standards set forth in the new Final Regulations. To the extent financial arrangements with Contract Hospitals meet the definition of indirect compensation under the Final Regulations, then the Partnership intends to see that such agreements fit within the new indirect compensation arrangement exception. Indirect compensation arrangements have several important elements, including the presence of an intervening entity, such as the Partnership, that directly links referring physician owners with the entity providing the designated health service (e.g., the Hospital). In order to comply with the indirect compensation exception, the Partnership's hospital contracts must meet each of the following standards: o The compensation received directly by the Partnership from the Contract Hospitals must be fair market value for the items or services provided under the arrangement and must not take into account the value or volume of referrals or other business generated by the referring physician for the Contract Hospital; o The compensation arrangement between the Partnership and the Contract Hospitals must be set out in writing, signed by the parties, and specify the services covered by the arrangement; and o The compensation arrangement must not violate the Anti-Kickback Statute or any laws or regulations governing billing or claims submission. In regard to the Partnership's operations, the indirect compensation arrangement exception may be used with respect to any or all payments made by Contract Hospitals to the Partnership, including payments for the use of the lithotripter, as well as the personal services of a technician and/or nurse. It is important to note that the Final Regulations allow per use payments for lithotripsy services, as long as they reflect fair market value. The General Partner believes that the Partnership's current Hospital Contracts can be modified to the extent necessary to satisfy the requirements of the indirect compensation arrangement exception, and that accordingly, the Partnership will be able to operate in compliance with Stark II. To succeed with its compliance plan, the General Partner must obtain the Contract Hospitals' cooperation in making any necessary revisions to their lithotripsy service agreements consistent with the indirect compensation arrangement exception. Expired hospital contracts, such as the Samaritan Health System contract discussed below, must be reaffirmed in writing signed by the parties in compliance with the indirect compensation exception. Whereas the Partnership believes that its financial relationships with Contract Hospitals have always met the fair market value standard, the Final Regulations clearly shifts the burden to the contracting parties that rely on the indirect compensation exception to prove the standard is met. The Partnership intends to engage an independent valuation expert or pursue other commercially reasonable methodologies to assist it in meeting that burden of proof. The General Partner believes it will successfully implement its above described compliance plan, however, there can be no assurance that such will be the case. Contract Hospitals may not cooperate with the Partnership. Further, reliable fair market value assessments regarding Contract Hospital payments to the Partnership may be difficult to obtain. If the Partnership is unable to successfully implement its plan to comply with the indirect compensation arrangement exception (to the extent a Stark II exception is needed), then the General Partner intends to explore and implement any other available options that would allow the Partnership to comply with Stark II, as well as all other material health care statutes and regulations. Such alternative options may include contracting with ambulatory surgery centers ("ASCs") rather than hospitals, since lithotripsy services at ASCs are not covered by Stark II. The Medicare and Medicaid programs, however, do not reimburse for lithotripsy services at ASCs at this time. It is anticipated that ASCs will receive reimbursement for treatment of Medicare and Medicaid patients in the near future, but there can be no assurance that such will be the case. It should be noted that there can be no assurances that compliance action taken by the Partnership under any potential alternative can be carried out in a manner that does not have a material adverse effect on the Partnership. Hospital Contracts The Partnership's Hospital Contract with Samaritan Health System expired on June 30, 2000. The Samaritan Health System Hospital Contract covers lithotripsy services provided by the Partnership at the following hospitals: Desert Samaritan Regional Medical Center; Good Samaritan Regional Medical Center; Thunderbird Samaritan Regional Medical Center and Maryvale Hospital. The Partnership continues to provide services at these facilities under the provisions of the original agreement on a month-to-month basis. The General Partner is currently negotiating a renewal of the Hospital Contract with Samaritan Health System. No assurance can be given that the General Partner will be successful in procuring such renewal. The inability of the Partnership to renew this important contract would have a material adverse impact on the Partnership. The General Partner Pursuant to his recent retirement, effective December 31, 2000, Dr. Joseph Jenkins resigned as Director, and as President and Chief Executive Officer of the General Partner. Dr. Jenkins' position on the Board of Directors will be assumed by Brad Hummel. Mr. Hummel will also succeed Dr. Jenkins as President and Chief Executive Officer of the General Partner. Set forth below is a brief description of Mr. Hummel's background. Brad Hummel was elected President and Chief Executive Officer of Prime in May 2000, and previously served as Chief Operating Officer of Prime from October 1999 until May 2000. Effective January 1, 2001, Mr. Hummel was appointed a Director of the General Partner and was elected as President and Chief Executive Officer of the General Partner. From 1984 to 1999, Mr. Hummel served in various operating capacities at Diagnostic Health Services, and served as its Chief Executive Officer from ____________ until _______________. Investor Election Options Each Investor who has already delivered executed subscription materials to the Sales Agent must make an election to either (i) withdraw from the Offering, or (ii) reaffirm his or her subscription in view of the information provided in this Second Supplement. Instructions on how to make this election are set forth below under "Reaffirmation Statement" and in Appendix A attached hereto. Investors should note that the failure to timely make any election, as provided herein, by April 27, 2001 will be deemed an election to withdraw one's subscription in the Partnership. If an Investor elects to withdraw or is deemed to withdraw, the General Partner, Sales Agent and/or Escrow Agent (as applicable) will immediately return to such Investor all executed subscription documents, subscription funds (plus interest) held in escrow, as well as all executed Loan Documents, if any. If an Investor affirmatively elects to reaffirm his or her subscription, then his or her subscription funds will remain in escrow and his or her Loan Documents, if any, will be retained by the Sales Agent until his or her subscription is accepted or rejected by the Partnership or the termination of the Offering, whichever occurs first. The Reaffirmation Statement Attached to this Second Supplement as Appendix A is a Reaffirmation Statement that is to be utilized by each subscribing Investor to evidence his or her election to either (i) withdraw from the Offering and have returned his or her subscription funds (plus interest) and Loan Documents, if any, or (ii) reaffirm his or her subscription. The Reaffirmation Statement is self-explanatory. Each Investor should mark the box evidencing his or her election, and then sign, date and return the Election Ballot to the Sales Agent in the enclosed, self-addressed stamped envelope by April 27, 2001. Any subscribing Investor who does not timely return his or her Reaffirmation Statement by April 27, 2001 will be deemed to have withdrawn his or her subscription in the Partnership. Any questions you may have regarding this Second Supplement or the Reaffirmation Statement should be directed to Stan Johnson at 1-520-906-4730 or Jay Abbes at 1-800-248-0620. FAYETTEVILLE LITHOTRIPTERS LIMITED PARTNERSHIP - ARIZONA I AN ARIZONA LIMITED PARTNERSHIP REAFFIRMATION STATEMENT Capitalized terms used herein are defined in the Glossary appearing in the Partnership's Confidential Private Placement Memorandum of June 23, 2000, as amended, (the "Memorandum") and accompanying Second Supplement thereto. The undersigned hereby acknowledges receipt of the Memorandum and the Second Supplement. After careful review of the Memorandum and Second Supplement, by completion and execution of this Reaffirmation Statement the undersigned wishes to evidence his or her election either to withdraw from the Offering or to reaffirm his or her subscription. Please check only one of the boxes set forth below to evidence your desired election: ? I wish to withdraw from the Offering and desire to have my subscription funds (plus interest) and Loan Documents, if any, returned to me. ? I wish to reaffirm my subscription and waive any withdrawal rights associated with the information provided in the Second Supplement. This _______ day of ____________________, 2001. SIGNATURE FOR ENTITIES SIGNATURE FOR INDIVIDUALS - ---------------------------------- ---------------------------------- Print or Type Name of Subscriber Signature of Subscriber By:_______________________________ _________________________________ Print or Type Name as set forth in _______________________________ Subscription Agreement Print or Type Name and Title EX-10.130 43 0043.txt EX 10.130 CONFIDENTIAL MEMORANDUM - FLORIDA I Name of Prospective Investor Memorandum Number FLORIDA LITHOTRIPTERS LIMITED PARTNERSHIP I A Limited Partnership Formed Under the Laws of Florida CONFIDENTIAL PRIVATE PLACEMENT MEMORANDUM Sale by Lithotripters, Inc. of 10 Units of Limited Partnership Interest at $7,006 in Cash per Unit THIS MEMORANDUM IS FURNISHED PURSUANT TO A CONFIDENTIALITY AGREEMENT BETWEEN THE PARTNERSHIP AND THE INVESTOR WHOSE NAME APPEARS ABOVE. THE CONFIDENTIALITY AGREEMENT PROHIBITS THE DISCLOSURE OF THE CONFIDENTIAL MATERIAL CONTAINED IN THIS MEMORANDUM, EXCEPT TO THE EXTENT SUCH INVESTOR DEEMS IT NECESSARY TO SHARE SUCH INFORMATION WITH HIS LEGAL, ACCOUNTING OR OTHER FINANCIAL ADVISORS, WHO LIKEWISE SHALL BE BOUND BY THE SAME CONFIDENTIALITY RESTRICTIONS SET FORTH IN THE CONFIDENTIALITY AGREEMENT. MEDTECH INVESTMENTS, INC. Exclusive Sales Agent 2008 Litho Place Fayetteville, North Carolina 28304 1-800-682-7971 The Date of this Memorandum is February 25, 2000 FLORIDA LITHOTRIPTERS LIMITED PARTNERSHIP I Sale by Lithotripters, Inc. of 10 Units of Limited Partnership Interest at $7,006 in Cash per Unit Lithotripters, Inc. ("Litho" or the "General Partner"), a North Carolina corporation, and the general partner of Florida Lithotripters Limited Partnership I, a Florida limited partnership (the "Partnership"), hereby offers for sale and assignment on the terms set forth herein, a maximum of 10 units (the "Units") of limited partnership interest in the Partnership held by Litho. Each Unit represents a 0.50% economic interest in the Partnership, and the Units are offered for assignment at a price of $7,006 per Unit. See "Terms of the Offering." The Partnership owns and operates three Lithostar(TM) second generation extracorporeal shock-waves lithotripters for the lithotripsy of kidney stones. Each Lithostar(TM) is installed in a self-propelled Coach (collectively, each Coach with an installed Lithostar(TM) is referred to herein as the "Mobile Lithotripsy System") enabling the Partnership to provide lithotripsy services at various locations in northern and central Florida (the "Service Area"). The cash purchase price is due at subscription; however, prospective Investors that meet certain requirements may be able to personally borrow funds from a third party bank in order to pay a portion of their Unit purchase price. See "Terms of the Offering - Limited Partner Loans." The Offering will terminate on March 31, 2000 (or earlier upon the sale of all 10 Units as provided herein), unless extended at the discretion of Litho for a period not to exceed 180 days. Because the Units offered for sale are owned by the General Partner, the General Partner and not the Partnership will receive the proceeds from the sale of the Units. ------------------------------ 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 there is substantial current and anticipated competition in the Service Area and that the health care industry is undergoing significant government regulatory reforms. See "Risk Factors" and "Terms of the Offering - Suitability Standards." ------------------------------ See Glossary for capitalized terms used herein and not otherwise defined. TABLE OF CONTENTS Page APPENDICES --------- Appendix A AGREEMENT OF LIMITED PARTNERSHIP OF FLORIDA LITHOTRIPTERS LIMITED PARTNERSHIP I Appendix B FORM OF LOAN COMMITMENT (WITH EXHIBITS) Appendix C FORM OF OPINION OF WOMBLE CARLYLE SANDRIDGE & RICE, A PROFESSIONAL LIMITED LIABILITY COMPANY Appendix D NOTES TO FINANCIAL STATEMENTS 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. General Risks of Operations. Although Litho 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 Systems less competitive or obsolete, and other matters. The Partnership may be adversely affected by various changing local factors such as an increase in local unemployment, a change in general economic conditions, changes in interest rates and availability of financing, and other matters that may render the operation of the Mobile Lithotripsy Systems difficult or unattractive. Other factors that may adversely affect the operation of the Mobile Lithotripsy Systems are unforeseen increased operating expenses, energy shortages and costs attributable thereto, uninsured losses and the capabilities of the Partnership's management personnel. Uncertainties Related to Changing Healthcare Environment. The healthcare industry has experienced substantial changes in recent years. Managed care is becoming a major factor in the delivery of lithotripsy services, and selection of lithotripsy service providers may be shifting from individual practitioners to health maintenance organizations and commercial insurers. There is no assurance 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 Systems. Because the Part-ner-ship is dependent on only one line of business, 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 price the Partnership is able to charge its patients for the lithotripsy of kidney stones is significantly dependent upon the amount of reimbursement private health care insurers would allow for this procedure. Most of the Partnership's patients pay for services directly from private payment sources, primarily from third-party insurers such as Blue Cross/Blue Shield and other commercial insurers. Coverage and payment levels for these private payment sources vary depending upon the patient's individual insurance policy. The increasing influence of health maintenance organizations and other managed care companies has resulted in pressure to reduce the reimbursement available for lithotripsy procedures. Litho 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 $2,235. See "Regulation - Federal Regulation." In some cases reimbursement rates payable to Affiliates of Litho by commercial insurers are less than the proposed HCFA rate. Because of the competitive pressures from managed care companies as well as threatened reductions in Medicare reimbursement, Litho anticipates that reimbursement available for the lithotripsy procedure may continue to decrease. Such decreases could have a material adverse effect on Partnership revenues. Regarding the professional fees paid to physicians who treat patients using the Mobile Lithotripsy Systems, Litho anticipates that similar competitive pressures may result in lower reimbursement paid to physicians, both by private insurers and by government programs such as Medicare. Reliability and Efficacy of the Lithotripter. 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 Johannes Gutenberg University of Mainz, West Germany. Litho estimates that more than 400 Lithostar(TM) systems are currently operating in over twenty countries, and Litho and its Affiliates operate over 30 Lithostars(TM) in other ventures. In Litho'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 Systems will adversely affect Partnership revenues. The Partnership's three Lithostars(TM) have been in operation since they were acquired in 1991, 1991 and 1995, respectively, and have not required service other than routine maintenance and upgrades. In 1996, the FDA approved a new higher intensity shock--head system for the Lithostar(TM), which Litho believes has shortened procedure times. Each of the Partnership's Lithostars(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 Litho's affiliated partnerships using both the original and newer shock-head systems, Litho 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 Litho's experience in doing well in excess of 150,000 cases over the past ten and one-half years in its affiliated limited partnerships, Litho 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. Litho 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. Litho cannot predict the outcome of ongoing research in these areas, and any one or more developments could reduce or eliminate lithotripsy as an acceptable procedure or treatment method of choice for the treatment of kidney stones. In addition, manufacturers have developed and begun selling a new generation of transportable lithotripters which are smaller and more mobile than the Mobile Lithotripsy Systems. Also, the newer transportable lithotripters cost a fraction of what the Partnership paid for the Mobile Lithotripsy Systems when they were acquired. Physicians in some market areas have indicated a preference for the newer transportable lithotripters. Partnership Limited Resources and Risks of Leverage. In the event of unanticipated expenses, it may be necessary to supplement Partnership funds with the proceeds of debt financing. Although Litho 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. Litho 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 Litho 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 Litho determines that it is in the best interest of the Partnership to acquire an additional Lithostar(TM) or any other assets related to the provision of lithotripsy services, Litho has the authority (without obtaining the Limited Partners' consent) to borrow additional funds on behalf of the Partnership to accomplish such goals, and may use Partnership assets and revenues to secure and repay such borrowings. The acquisition of additional assets may substantially increase the Partnership's monthly obligations and result in greater personnel requirements. See "Risk Factors - Operating Risks - Partnership Limited Resources and Risks of Leverage." In any event, no Limited Partner would be personally liable on any additional Partnership indebtedness without such Partner's prior written consent. There is no assurance that financing would be available to the Partnership to acquire additional assets or to fund any additional working capital requirements. Any such borrowing by the Partnership will serve to increase the risks to the Partnership associated with leverage as provided above. Competition. Several competing lithotripters are currently operating in and near the Service Area in competition with the Mobile Lithotripsy Systems. 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 Litho'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 Litho nor its Affiliates are prohibited from engaging in any business or arrangement that may compete with the Partnership. 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. Limited Partner Restrictions. The Partnership Agreement severely restricts the Limited Partners' ability to directly or indirectly own or lease interests in competing equipment or ventures, other than interests held by Litho or its Affiliates. 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 "Summary of the Partnership Agreement - Noncompetition Agreement and Confidential Information." Government Regulation. All facets of the healthcare industry are highly regulated and will become more so in the future. The ability of the Partnership to operate legally and be profitable may be adversely affected by changes in governmental regulations, including expected changes in reimbursement, Medicare and Medicaid certification requirements, federal and state fraud and abuse laws, including the federal Anti-Kickback Statute, the federal False Claims Act, federal and state self-referral laws, state restrictions on fee splitting and other governmental regulation. See "Regulation". These laws and regulations may adversely affect the economic viability of the Partnership. The laws are broad in scope, and interpretations by courts have been limited. Violations of these laws would subject Litho and all Limited Partners to governmental scrutiny and/or felony prosecution and punishment in the form of large monetary fines, loss of licensure, imprisonment and exclusion from Medicare and Medicaid. Certain provisions of Medicare and Medicaid law limit provider ownership and control over the various health care services to which physicians may make Medicare and Medicaid referrals. The primary laws involved are the "Stark II" federal statute prohibiting financial relationships between physicians and certain entities to which they refer patients, and the Anti-Kickback Statute which prohibits compensation in exchange for or to induce referrals. Regarding Stark II, in January, 1998, HCFA published proposed Stark II regulations. Under the proposed regulations, physician Limited Partner referrals of Medicare and Medicaid patients to contracting hospitals for lithotripsy services would be prohibited. If HCFA adopts the proposed Stark II regulations as final, or if a reviewing court were to interpret the Stark II statute using the proposed regulations as interpretive authority, then the Partnership and its physician Limited Partners would likely be found in violation of Stark II. In such instance, the Partnership and/or its physician Limited Partners may be required to refund any amounts collected from 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. See "Regulation-Federal Regulation". 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 Litho 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, Litho and the physician Limited Partners to criminal penalties, imprisonment, fines and/or exclusion from the Medicare and Medicaid programs. See "Regulation - Federal Regulation". 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 Stark II or the Anti-Kickback Statute have been violated. In addition to Stark II, the Anti-Kickback Statute and the False Claims Act, an unfavorable interpretation of other existing laws, or enactment of future laws or regulations, could potentially adversely affect the operation of the Partnership. If this occurs, Litho is obligated either to purchase or cause the sale of the Partnership Interests of all of the Limited Partners or to dissolve the Partnership. See "Summary of the Partnership Agreement - Optional Purchase of Limited Partner Interests." State laws will affect the operation of the Partnership as well. To the best knowledge of Litho, no certificate of need or facility licensure requirement applies to the Partnership's Mobile Lithotripsy Systems. Physicians Limited Partners must give written notice to patients whom they refer for services on the Mobile Lithotripsy Systems explaining their ownership interest. The Partnership has been endeavoring to comply and will continue to seek to comply with all applicable statutory and regulatory requirements. See "Regulation - State Regulation." Contract Terms and Termination. The Partnership provides lithotripsy services to 20 Contract Hospitals in the Service Area pursuant to 20 separate Hospital Contracts. Twelve of the Hospital Contracts grant the Partnership the exclusive right to provide lithotripsy services at the particular Contract Hospital. Each 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, in some cases 30, 90 or 120 days prior written notice by either party prior to any renewal date. The Florida Surgical Center Contract is terminable at any time upon 30 days notice. It is expected that any new lithotripsy service contracts would have one-year terms and be automatically renewed unless either party elects to cancel prior to the end of the term. In addition, most 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. Litho believes it has a good relationship with the Contract Hospitals and does not anticipate significant Hospital Contract 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. Litho anticipates that some Contract Hospitals may attempt to negotiate rate reductions as a condition to renewal. 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 - Operating Risks -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." Investors should note that Litho anticipates no significant tax benefits associated with the operation of the Mobile Lithotripsy Systems or the Partnership. No ruling will be sought from the Service on the United States federal income tax consequences of any of the matters discussed in this Memorandum or any other tax issues affecting the Partnership or the Limited Partners. Litho 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 IN-DE-PEN-DENT-LY 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 LITHO AS AN ECONOMIC INVESTMENT AND THAT LITHO 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 LITHO 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 part-ner-ship such as the Part-ner-ship 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 Part-ner-ship, 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. Litho and Counsel have been informally advised by officials of the Service that the Service would not likely attempt to apply the affiliated service group rules to the Partnership, nor has the Service applied these rules to similar arrangements in the past. Informal discussions with the Service, however, are not binding on the Service, and there can be no guarantee that the Service will not apply the affiliated service group rules to the Partnership. INVESTORS ARE URGED TO CONSULT WITH THEIR OWN TAX ADVISORS REGARDING THE APPLICABILITY OF THE AFFILIATED SERVICE GROUP RULES DESCRIBED HEREIN TO THE EMPLOYEE BENEFIT PLANS MAINTAINED BY THEM OR THEIR MEDICAL PRACTICES. Partnership Allocations. The Part-ner-ship 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 part-ner-ship 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 Part-ner-ship 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 Litho. If Partnership cash flow declines, a Limited Partner could be subject to income taxes payable out of personal funds to the extent of the Part-ner-ship's income, if any, attributed to him without receiving from the Part-ner-ship sufficient Distributions to pay the Limited Partner's tax with respect to such income. Accrual Tax Accounting. Litho, 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. Litho 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. The Part-ner-ship uses 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 Systems will also be depreciated over a five year term using the 200% declining balance method of depreciation, switching to the straight-line method to maximize the depreciation allowance. If purchases or improvements are made after the beginning of any year, only a fraction of the depreciation deduction may be claimed in that year. As under prior law, the 1986 Act provides that the full amount of depreciation on personal property (such as the Mobile Lithotripsy Systems) is recaptured upon disposition (i.e., is taxed as ordinary income) to the extent gain is realized on the disposition. Investors should note that the 1986 Act repealed the investment tax credit for all personal property. Part-ner-ship Elections. The Code permits part-ner-ships to make elections for the purpose of adjusting the basis of part-ner-ship property on the distribution of property by a part-ner-ship to a partner and on the transfer of an interest in a part-ner-ship by sale or exchange or on the death of a partner. The general effect of such elections is that transferees of Part-ner-ship 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 Part-ner-ship'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 Part-ner-ship Agreement, Litho, in its discretion, may make the requisite election necessary to effect such adjustment in basis and has done so. Thus, Investors will be treated, for 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 on the fair market value of the assets at the Closing. Sale of Partnership Units. Gain realized on the sale of Units by a Limited Partner who is not a "dealer" in Units or in limited part-ner-ship 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 Part-ner-ship include the Limited Partner's share of the ordinary income that the Part-ner-ship would realize as a result of the recapture of depreciation (as described above) if the Part-ner-ship 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. Management Fee to General Partner. The Partnership pays Litho 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 Litho 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 Litho 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. Ownership of Limited Partner Interests by Litho. Litho currently owns a 6.05% limited partner interest in the Partnership. Of that ownership, Litho is offering to sell herein up to a 5.0% limited partner interest in the Partnership. To the extent that Litho continues to hold a limited partner interest in the Partnership following the closing of this Offering, Litho may be able to influence the outcome of matters voted on by the Limited Partners. Litho also owns a 20% general partner interest in the Partnership. Conflicts of Interest. The activities of the Part-ner-ship involve numerous existing and potential conflicts of interest between the Part-ner-ship, Litho and its Affiliates. See Compensation and Reimbursement to Litho and its Affiliates," "The General Partner," "Competition" and "Conflicts of Interest." No Participation in Management. Litho has full authority to supervise the business and affairs of the Part-ner-ship 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. Litho, its employees and its Affiliates are not required to devote their full time to the Part-ner-ship'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. Litho will continue to devote such time to the Partnership's business and affairs as it deems necessary and appropriate in the exercise of reasonable judgment. The participation by any Limited Partner in the management or control of the Partnership's affairs could render him generally liable for the liabilities of the Partnership that could not be satisfied by assets of the Partnership. See the Form of Legal Opinion of Womble Carlyle Sandridge & Rice, a Professional Limited Liability Company, attached hereto as Appendix C. Limited Partners' Obligation to Return Certain Distributions. Except as provided by other applicable law and provided that a Limited Partner does not participate in the management of the Partnership, he will not be liable for the liabilities of the Partnership in excess of his investment, his Guaranty, his ratable share of undistributed profits, and any distributions received from the Partnership if, after such distributions, the remaining assets of the Partnership are not sufficient to pay its outstanding liabilities. However, under North Carolina law, to the extent that cash distributed to a Limited Partner constitutes the return of all or a portion of such Limited Partner's capital contribution as provided by the Act, although such distribution was rightfully made, such Limited Partner will be liable to the Partnership for a period of one year following the receipt of such distribution for any sum not in excess of such return of capital necessary to discharge the Partnership' s liabilities to creditors who extended credit to the Partnership during the period the contribution was held by the Partnership. Furthermore, if a Limited Partner receives a return of all or a portion of such Limited Partner's capital contribution in violation of the Partnership Agreement or the Act, such Limited Partner will be liable to the Partnership for a period of six years for the amount of such contribution wrongfully returned to the Limited Partner. Liability Under Limited Partner Loan. Investors personally borrowing funds to finance a portion of their Unit purchase price with the proceeds of a Limited Partner Loan will be directly obligated to the Bank as provided in the Loan Documents. A default under the Limited Partner Loan could result in the foreclosure of the Investor's right to receive any Partnership Distributions as well as the loss of other personal assets unrelated to his Partnership Interest. Prospective Investors should review carefully all the provisions contained in the Loan Commitment and the terms of the Limited Partner Note and Loan and Security Agreement with their counsel and financial advisors. Neither the Partnership nor Litho 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, Litho 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 . Litho 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 Assignment Agreement, and the consent of Litho 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 Litho is furnished with an opinion of counsel, satisfactory to Litho, 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. Offering Price. The offering price of the Units has been determined by Litho 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 Litho 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 Litho, 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 Litho in the event of its misfeasance or malfeasance than they would have absent the limitations in the Partnership Agreement. The Partnership will indemnify Litho and its Affiliates against losses sustained by Litho and its Affiliates in connection with the Partnership, unless such losses are a result of the gross negligence or willful misconduct of Litho or its Affiliates. 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 Litho 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, Litho and the Limited Partners have, under certain circumstances, the option to purchase all the interest of a Limited Partner who (i) dies; (ii) becomes insolvent; or (iii) owns an interest in a competing venture. In such a case, 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 Litho 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." Florida Lithotripters Limited Partnership I, a Florida limited partnership (the "Partnership") was organized and created under the Florida Revised Uniform Limited Partnership Act (the "Act") on May 9, 1991 and commenced business in August 1991. 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"). Litho 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 6.05% limited partner interest held by Litho). The principal address of the Partnership is 1301 Capital of Texas Highway, Suite C-3000, Austin, Texas 78746. The telephone number of the Partnership and Litho is (800) 682-7971. Lithotripters, Inc. ("Litho" or the "General Partner"), a North Carolina corporation, and the general partner of Florida Lithotripters Limited Partnership I, a Florida limited partnership (the "Partnership"), hereby offers for sale and assignment on the terms set forth herein, a maximum of 10 units (the "Units") of limited partnership interest in the Partnership issued to and held by Litho. Each Unit represents and initial 0.50% economic interest in the Partnership, and the Units are offered for assignment at a price of $7,006 per Unit. Litho owns the Units, therefore Litho (not the Partnership) will receive any proceeds from the sale of Units. A prospective assignee who pays his purchase price with a check upon submission of his completed Assignment Packet, and whose assignment materials are received and accepted by Litho, will become a Limited Partner in the Partnership. Acceptance of the assignment by Litho is conditioned on the satisfaction of the suitability standards for an investor in the Partnership as set forth below. Upon admission as a Limited Partner, the prospective assignee' s cash funds (plus interest) will be released from escrow to Litho. If a prospective assignee finances a portion of his purchase price with the proceeds of a Limited Partner Note, Litho's decision to sell and assign the Partnership Interest to such prospective assignee will be further conditioned upon the Bank's approval of the prospective assignee's Loan Documents and the funding of the loan contemplated thereby. If the prospective assignee is acceptable to Litho, after receipt of the Bank's approval of his Loan Documents, Litho will inform the Escrow Agent that it will assign the Partnership Interest to the prospective assignee, and the Escrow Agent will release the cash and Loan Documents, if any, to Litho and the Bank, respectively, and the Bank will pay the proceeds from the Limited Partner Loan to Litho. The prospective assignee will then be assigned the Partnership Interest and become a Limited Partner in the Partnership at the time the Bank releases the proceeds of his Limited Partner Loan to Litho. In the event an application is not accepted, all cash funds (without interest) and Loan Documents, if any, held in escrow will be returned to the rejected applicant. Notice of acceptance of the assignment materials and admission of a prospective assignee as a Limited Partner in the Partnership will be furnished promptly after the Closing Date (as defined below). Upon the Closing Date, the accepted Investors will be entitled to distributions as Limited Partners beginning on the Closing Date. Applications for the sale and assignment of Units will be solicited by MedTech Investments, Inc., a North Carolina corporation and an Affiliate of Litho and the Partnership (the "Sales Agent"). The Sales Agent has entered into a Sales Agency Agreement with Litho pursuant to which the Sales Agent has agreed to act as exclusive agent for the assignment of the Partnership Interests. The purchase price for the Units is payable in cash. The prospective Investor may pay for the Units with personal funds alone or in part with such funds together with loan proceeds personally borrowed by the Investor. of a Limited Partner Loan. Financing under the Limited Partner Loans was arranged by the Partnership with the Bank as provided in the form of 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 Assignment Packet an executed Limited Partner Note payable to the Bank and Note Addendum, the form of which are attached as Exhibit A to the form of 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 under the Limited Partner Loans exceed $4,506 per Unit; i.e., $2,500 per Unit may not be borrowed and must come from an Investors personal funds. 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 June 15, 2000 (assuming the Closing occurs before April 15, 2000), with a thirteenth (13th) and final installment in an amount equal to the principal balance then owed on the Limited Partner Note and all accrued, unpaid interest thereon due and payable on the third anniversary of the first installment date. Interest accrues at the Bank's "Prime Rate," as the same may change from time to time. The Prime Rate refers to that rate of interest established by the Bank and identified as such in literature published and circulated within the Bank's offices. Such term is used as a means of identifying a rate of interest index and not as a representation by the Bank that such rate is necessarily the lowest or most favorable rate of interest offered to borrowers of the Bank generally. A prospective Investor will have no claim or right of action based on such premise. See the form of the Limited Partner Note attached as Exhibit A to the form of 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 Litho upon the closing of the Offering 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 form of Loan Commitment which is attached hereto as Appendix B. If the prospective Investor is approved by the Bank and is acceptable to Litho, the Escrow Agent will, upon acceptance of the Investor's Assignment Packet by Litho, release the Loan Documents to the Bank and the Bank will pay the proceeds of the Limited Partner Note to Litho. 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 faith deems itself or its collateral insecure and upon certain other events, including, but not limited to, nonpayment of any installment. The Bank may also request additional collateral in the event it deems the Limited Partner Note insufficiently secured. A Limited Partner's liability under a Limited Partner Note also continues regardless of whether the Limited Partner remains a limited partner in the Partnership. A Limited Partner's liability under a Limited Partner Note is directly with the Bank. As a consequence, such liability cannot be avoided by claims, defenses or set-offs the Limited Partner may have against the Partnership, Litho 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 estab-lished 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." The subscription period will commence on the date hereof and will terminate at 5:00 p.m., Eastern time, on March 31, 2000 (the "Closing Date"), unless sooner terminated by Litho or unless extended for an additional period up to 180 days. See "Plan of Distribution." 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(1) thereof, as amended, and an exemption from state registration provided by Section 517.061(3) of the Florida Securities and Investor Protection Act. The suitability standards set forth below have been established in order to comply with the terms of these offering exemptions. 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. Investors must also be at least 21 years old and otherwise duly qualified to acquire and hold partnership interests. Litho 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 foregoing 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 meet the qualifications for investment in the Partnership and who wish to purchase Units may do so by following the instructions included in the Assignment Packet accompanying this Memorandum. All information provided by Investors will be kept confidential and not disclosed except to the Partnership, Litho, the Bank and their respective counsel and Affiliates and, if required, to governmental and regulatory authorities. 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 Litho 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 Litho, instructing it to effect the assignment. Assignees of Units may also, in the discretion of Litho, 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 Litho, or the consent of all of the Limited Partners (except the assignor Limited Partner) and Litho, (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." Unit purchase offers will be solicited by MedTech Investments, Inc., the Sales Agent, which is an Affiliate of Litho. The Sales Agent has entered into a Sales Agency Agreement with Litho pursuant to which the Sales Agent has agreed to act as exclusive agent for the 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 Litho 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 controls Litho. Investors should note the material relationship between the Sales Agent and Litho, and are advised that the relationship potentially creates conflicts in the Sales Agent's performance of its due diligence responsibilities under the Federal securities laws. Litho has agreed to indemnify the Sales Agent against certain liabilities, including liabilities under the Securities Act. Litho 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 offering period will commence on the date hereof and will terminate at 5:00 p.m., Eastern time, on March 31, 2000 (or earlier, in the discretion of Litho), unless extended at the discretion of Litho for an additional period not to exceed 180 days. The purchase price 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 assignment offer is accepted by Litho (and approved by the Bank in the case of financed purchases of Units), Litho (or, if applicable, the Bank) rejects the subscription or the Offering is terminated. Upon the receipt and acceptance of an Investor's subscription by Litho (and, if applicable, the Bank), the Investor will be admitted to the Partnership as a Limited Partner. In connection with his admission as a Limited Partner, the Investor's purchase price funds will be released from escrow to Litho, and the Loan Documents, if any, will be released to the Bank which will pay the proceeds from the Limited Partner Note to Litho. In the event an assignment offer is not accepted, all purchase price funds (without interest), the Loan Documents and other subscription documents held in escrow will be promptly returned to the rejected Investor. An assignment offer may be rejected in part, in which case a portion of the purchase price funds (without interest) and any Limited Partner Note will be returned to the Investor. The Offering will terminate on March 31, 2000, unless it is sooner terminated by Litho, or unless extended for an additional period not to exceed 180 days. See "Terms of the Offering - Subscription Period; Closing." The Partnership was formed to (i) acquire the Mobile Lithotripsy Systems and operate them in northern and central Florida, (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 Systems. The Partnership owns and operates three Mobile Lithotripsy Systems in the Service Area and has contracted with the 20 Contract Hospitals to provide lithotripsy services. 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. Ap-proxi-mately 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. Litho 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) was developed as a cooperative venture between Siemens and the Urological Clinic at Johannes Gutenberg University in Mainz, West Germany. As a part of this venture, a Lithostar(TM) prototype was installed in March 1986 at the Urological Clinic at the University of Mainz with successful results. On November 18, 1987 the Lithostar(TM) was unanimously recommended for approval by the FDA's advisory panel of experts for urology devices. On September 30, 1988 the Lithostar(TM) received FDA premarket approval for use in the United States for renal lithotripsy. On April 18, 1989, the FDA approved the Lithostar(TM) for mobile lithotripsy. On July 1, 1996, the FDA approved a new higher intensity shock-head system for the Lithostar(TM) which has since been installed in each of the Partnership's Lithostars(TM). Currently, Litho 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 Lithostars(TM) owned and operated by the Partnership were new when acquired by the Partnership in 1991, 1991 and 1995, respectively. See "The Partnership." 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, Litho has found that the Lithostar(TM) can fragment most kidney stones without anesthesia, cystoscopy or the insertion of ureteral catheters. Litho further believes that Lithostars(TM) upfitted with the higher intensity shock-head system experience somewhat shorter treatment durations. Because of Litho's belief in the superior imaging of the Lithostar(TM), Litho 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. See "Risk Factors - Operating Risks - Technological Obsolescence." The Coaches, which house the Lithostars(TM), were acquired by the Partnership in 991, 1991 and 1995, respectively. Each Coach has been completely upfitted for the Lithostar(TM) and its clinical operations. Service for the Coaches is obtained on an as-needed basis. One of the Coaches purchased in 1991 was refurbished in late 1999. It is anticipated that the other 1991 Coach will be refurbished within the next two years. Litho estimates that expenditures for maintenance and repair have been incurred at a rate of approximately $15,000 per year per Unit. As the Coaches age, higher annual expenditures may be required to maintain them. If in the future Litho determines that it is in the best interest of the Partnership to acquire (i) an additional Lithostar(TM) or (ii) any other assets related to the provision of lithotripsy services, Litho may, without the consent of the Limited Partners, 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. See "Risk Factors - Operating Risks - Acquisition of Additional Assets." Any additional borrowing by the Partnership will serve to increase the risks associated with leverage. See "Risk Factors - Operating Risks - Partnership Limited Resource and Risks of Leverage" and "Risk Factors - Operating Risks - Acquisition of Additional Assets." The Partnership has entered into 20 Hospital Contracts to provide lithotripsy services at 20 hospitals ("Contract Hospitals") in northern and central Florida. All the Florida Hospital Contracts are in renewal terms. The Contract Hospitals are: Atlantic Surgery Center, Inc., Daytona Baptist Hospital, Pensacola Bay Medical Center, Panama City Citrus Memorial Hospital, Inverness Citrus Urology Center, Lecanto Emerald Coast Surgery Center, Ft. Walton Beach Florida Surgical Center, Gainesville Gulf Coast Hospital, Panama City Jackson County Hospital, Marianna Leesburg Regional Medical Center, Inc., Leesburg Memorial Hospital - Ormond Beach, Ormond Beach Monroe Regional Medical Center, Ocala North Florida Regional Medical Center, Gainesville Northwest Florida Surgery Center, Panama City Seven Rivers Community Hospital, Crystal River Southeastern Urological Surgery Center, Tallahassee Tallahassee Memorial Regional Hospital, Tallahassee University Medical Center, Jacksonville Waterman Medical Center West Volusia Memorial Hospital, Deland Twelve 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. All 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. Most of the Hospital Contracts have initial terms of one year and automatically renew for successive one-year terms. Each of the Hospital Contracts with renewal terms are terminable upon 60 days or, in some cases, 30, 90 or 120 days prior written notice prior to any renewal date. The Florida Surgical Center contract is terminable at any time upon 30 days notice. 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" and "Risk Factors - Operating Risks - Government Regulation." Litho 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 their agreements with the Partnership in the future. See "Risk Factors - Operating Risks - Contract Terms and Termination." Litho has negotiated third-party reimbursement agreements with certain national or local payors. The national agreements are negotiated by Litho and apply to all the lithotripsy partnerships with which Litho is affiliated. Litho has also negotiated third-party reimbursement agreements with local payors in the Service Area. Some of the national and local reimbursement agreements assign a fixed price for the lithotripsy services. For others, Litho has agreed to accepted a specified percentage discount from the normal charges as payment in full; these discounts range from nine to twenty-five percent off normal charges. Generally the agreements may be terminated by either party on ninety 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. In addition, hospitals may negotiate reimbursement agreements with payors which service providers, including lithotripsy providers, must honor; these may result in lower reimbursement for lithotripsy services. 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 Systems after they have received any necessary training required by the rules of such Contract Hospital. The Partnership may also make arrangements to make the Mobile Lithotripsy Systems available to qualified physicians (including but not limited to qualified physician Limited Partners) desiring to treat their own patients after they have received any necessary training. In addition, Litho reserves the right to request that physicians (or members of their practice groups) treat only their own patients with the Mobile Lithotripsy Systems 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 Systems. Thus, local qualified physicians that are not Limited Partners will be given the same opportunity to treat their patients using a Mobile Lithotripsy Systems as provided above. The Partnership has entered into a management agreement (the "Management Agreement") with Litho whereby Litho is obligated to supervise and coordinate the management and administration of the operation of the Mobile Lithotripsy Systems on behalf of the Partnership in exchange for a monthly management fee equal to the greater of 7.5% of Partnership Cash Flow per month or $8,000 per month. See "Compensation and Reimbursement to the General Partner and its Affiliates." Litho'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 Systems. Costs incurred by Litho in performing its duties under the Management Agreement are the responsibility of the Partnership. Litho'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 Litho performs its duties under the Management Agreement. The Management Agreement is in the second five-year renewal term. Thereafter, it will be automatically renewed for one additional term unless terminated by the Partnership or Litho. The General Partner and Management Agent will endeavor to the best of their abilities to require that physicians using a Partnership lithotripter comply with the Partnership's quality assurance and outcome analysis programs in order to maintain the highest quality of patient care. The Partnership employs as full time employees a total of six registered technicians and six 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. 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. Litho was founded by William R. Jordan, M.D. and became a wholly owned subsidiary of Prime Medical Services, Inc. ("Prime") in 1996. See "Conflicts of Interest" and "Prior Activities." The principal executive office of Litho is 2008 Litho Place, Fayetteville, North Carolina 29304. The following table sets forth the names and respective positions of the individuals serving as executive officers and directors of Litho, many of whom were a shareholders of Litho prior to its acquisition by Prime and/or are current shareholders and/or management personnel of Prime. Name Office Joseph Jenkins, M.D. President, Chief Executive Officer and Director Kenneth S. Shifrin Director W. Alan Terry Vice President Cheryl Williams Vice President and Director Stan Johnson Vice President David Vela, M.D. Vice President Philip J. Gallina Secretary and Treasurer James D. Clark Assistant Secretary Supervision of the day-to-day management and administration of the Partnership is the responsibility of Litho. Litho itself is managed by a three-member Board of Directors composed of Dr. Jenkins, Mr. Shifrin and Ms. Williams. Litho is a wholly-owned subsidiary of Prime. Descriptions of the background of the executive officers and directors of Litho appear below. Joseph Jenkins, M.D. has been President and Chief Executive Officer of Prime since April 1996. From May 1990 until December 1991, Dr. Jenkins was a Vice President of Litho and previously practiced urology in Washington, North Carolina. Dr. Jenkins has been President of Litho since 1992 and was recently elected to its Board of Directors. He also serves as the Chief Executive Officer of Litho. Dr. Jenkins is a board certified urologist and is a founding member, past-president and currently a Director of the American Lithotripsy Society. Kenneth S. Shifrin has been Chairman of the Board and a Director of Prime since October 1989 and was recently elected a Director of Litho following Prime's acquisition of all of Litho's stock. Mr. Shifrin also has served in various capacities with American Physicians Service Group, Inc. ("APS") since February 1985, and is currently Chairman of the Board and Chief Executive Officer of APS. W. Alan Terry was recently appointed a Vice President of Litho and served as Chief Financial Officer of Litho from 1991 to 1998. In August, 1986, Mr. Terry joined The May Department Stores Company at their corporate headquarters in St. Louis, where he held several financial management positions until October, 1987, when he was transferred to one of May's largest divisions, Caldor, Inc., as Vice President of Finance. He remained in that capacity until June, 1990, when he became Chief Operating Officer for Litho and served in that capacity until April 1996. Cheryl Williams is a Director and Vice President of Litho. Ms. Williams has been Chief Financial Officer, Vice President-Finance and Secretary of Prime since October 1989. Ms. Williams was Controller of Fairchild Aircraft Corporation from August 1988 to October 1989. From 1985 to 1988, Ms. Williams served as the Chief Financial Officer of APS Systems, Inc. Stan Johnson was recently appointed a Vice President of Litho. Mr. Johnson has been a Vice President of Prime and President of Sun Medical Technologies, Inc., an Affiliate of Litho ("Sun") since November 1995. Mr. Johnson was the Chief Financial Officer of Sun from 1990 to 1995. David Vela, M.D. was recently appointed a Vice President of Litho. Dr. Vela received his medical degree in 1984. Dr. Vela 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. Philip J. Gallina recently became the Secretary and Treasurer of Litho, having previously served as a Vice President since 1989. Mr. Gallina is a Certified Public Accountant licensed in the state of Pennsylvania. From 1980 through February 1989, Mr. Gallina served as Plant Controller for the Westinghouse Motor Control and Enclosed Control Product Lines. Mr. Gallina is also a Director, the Vice President, the Treasurer and the Secretary of MedTech Investments, Inc., the Sales Agent. James D. Clark recently became Assistant Secretary of Litho. Mr. Clark has served as Tax Manager of Prime since January 1998 and is a Certified Public Accountant in Texas. Prior to joining Prime, Mr. Clark was Controller for ERISA Administrative Services, Inc. The following summary describes the types and, where determinable, the estimated amounts of reimbursements, compensation and other benefits Litho and its Affiliates will receive in connection with the continued operation and management of the Part-ner-ship and the Mobile Lithotripsy Systems. None of such fees, compensation and other benefits has been determined at arm's length. Except for the items set forth below, Litho does not expect to receive any distribution, fee, compensation or other remuneration from the Part-ner-ship. See "Business Activities - Management" and "Plan of Distribution." 1. Management Fee. Pursuant to the Management Agreement, Litho 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 Litho in performing its duties under the Management Agreement are the responsibility of, and are paid directly or reimbursed by, the Partnership. Litho is the management agent for various affiliated lithotripsy ventures. As a consequence, many of Litho's employees provide various management and administrative services for numerous ventures, including the Partnership. In order to properly allocate the costs of Litho'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. Litho 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 Litho. Litho is reimbursed by the Partnership for all of its out-of-pocket costs associated with the operation of the Partnership and the Mobile Lithotripsy Systems. No other fees or compensation will be payable to Litho or its Affiliates for managing the Partnership other than the management fee payable to Litho as provided in the Management Agreement. The Partnership may, however, contract with Litho 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, Litho is entitled its distributable share (20%) of Partnership Cash Flow, Partnership Sales Proceeds and Partnership Refinancing Proceeds as provided by the Partnership Agreement. Litho also owns an aggregate 6.05% (prior to this Offering) limited partner interest in the Partnership. Litho 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. See "Sources and Applications of Funds." 3. Rental of Loaner Coach. In the event any of the Mobile Lithotripsy Systems experiences significant down time for maintenance or repairs, it is anticipated that Litho would cause the Partnership to contract with Litho 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. 4. Loans. Litho or its Affiliates will also receive interest on loans, if any, made by them to the Partnership. See "Conflicts of Interest." Neither Litho nor any of its Affiliates are, however, obligated to make loans to the Partnership. While Litho 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. The operation of the Partnership involves numerous conflicts of interest between the Part-ner-ship and Litho and its Affiliates. Because the Part-ner-ship is operated by Litho, such conflicts are not resolved through arm's length negotiations, but through the exercise of the judgment of Litho consistent with its fiduciary responsibility to the Limited Partners and the Part-ner-ship's investment objectives and policies. Litho, its Affiliates and employees will in good faith continue to attempt to resolve potential conflicts of interest with the Partnership, and Litho will act in a manner that it believes to be in or not opposed to the best interests of the Partnership. Litho will receive management fees in connection with the business operations of the Part-ner-ship regardless of whether any sums hereafter are distributed to Limited Partners. Such fees, compensation and benefits have not been determined by arm's length negotiations. In addition, the Partnership may contract with Litho 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. Litho will also receive interest on loans, if any, it makes to the Partnership. See "Compensation and Reimbursement to the General Partner and its Affiliates." Litho and its Affiliates will devote as much of their time to the business of the Part-ner-ship as in their judgment is reasonably required. Principals of Litho 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." Litho believes it and its Affiliates, together, have sufficient resources to be capable of fully discharging Litho's and its Affiliates' responsibilities to the Part-ner-ship. Litho 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 Part-ner-ship nor the holders of any of the Units shall be entitled to any interest therein. Litho, its Affiliates (including affiliated limited partnerships) and employees engage in medical service activities for their own accounts. See "Prior Activities." Litho 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. Litho 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 Litho. Because of the Sales Agent's affiliation with Litho, there are potential conflicts of interest with respect to the Sales Agent's performance of its due diligence responsibilities under the federal securities laws. See "Plan of Distribution." The interests of the Investors 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 Litho-- were retained by Litho, and have in the past performed and are expected in the future to perform similar services for Litho and Prime. Litho, as General Partner, is accountable to the Part-ner-ship as a fiduciary and consequently must exercise good faith in handling Part-ner-ship affairs. This is a rapidly developing and changing area of the law and Limited Partners who have questions concerning the duties of Litho should consult with their counsel. Under the Partnership Agreement, Litho and its Affiliates have no liability to the Part-ner-ship or to any Partner for any loss suffered by the Partnership that arises out of any action or inaction of Litho or its Affiliates if Litho or its Affiliates, in good faith, determined that such course of conduct was in the best interest of the Part-ner-ship and such course of conduct did not constitute gross negligence or willful misconduct of Litho 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. Litho 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 Part-ner-ship, provided that the same were not the result of gross negligence or willful misconduct on the part of Litho or its Affiliates. Insofar as indemnification for liabilities under the Securities Act may be permitted to persons controlling the Part-ner-ship pursuant to the foregoing provisions, the Part-ner-ship 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. Several competing fixed-site and mobile extracorporeal shock-wave lithotripters are currently operating near 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 Litho. At least two Contract Hospitals own or operate competing lithotripsy services. Tallahassee Memorial Hospital operates a fixed-base Dornier HM-3 and Pensacola Baptist Hospital has a partial ownership position in a mobile lithotripsy service that competes with the Partnership's Mobile Lithotripsy Systems. Competitive lithotripsy services are available in Pensacola at Sacred Heart Hospital and West Florida Regional Medical Center, and at hospitals other than the Contract Hospitals in Gainesville and Jacksonville. A competing mobile lithotripsy service operates in Ocala. There is no assurance that the list of competitors identified above is complete. There may be other existing or planned fixed-base or mobile lithotripsy services in or near the Service Area which directly compete with the Partnership's Mobile Lithotripsy Systems, but Litho is not familiar with these other competitors or potential competitors. It is possible that some of the Partnership' s competitors are physician-owned or include physicians among their owners. Litho 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 "Proposed Activities - Treatment Methods of Kidney Stone Disease." Their services may adversely affect the Partnership's revenues. 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. Litho believes these machines have a competitive disadvantage because such machines are capable of treating stones only in the ureter. Litho believes the Mobile Lithotripsy Systems can be used on stones in locations other than the ureter. See "Proposed Activities - Treatment Methods for Kidney Stone Disease." The health care 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 for lithotripsy services for beneficiaries of their plans. It is not uncommon for managed care companies to have contracts already in place with hospitals or specified providers, and the Partnership will not be able to provide services to beneficiaries of those plans unless it convinces either the managed care companies or the hospitals to switch to the Partnership's services. No assurances can be given that new competing lithotripsy operations will not commence operations in the future or that innovations in lithotripters or other treatment methods for kidney stone disease will not make the Mobile Lithotripsy Systems competitively obsolete. See "Risk Factors - Operating Risk - Technological Obsolescence." In addition, Litho and its Affiliates are not prohibited from engaging in lithotripsy ventures unassociated with the Partnership that may compete with the Partnership. The manufacturers of the Mobile Lithotripsy Systems are under no obligation to Litho or the Partnership to refrain from selling their 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 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 Litho. The Partnership, Litho 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, Litho 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 seeks reimbursement for its equipment and services from health care facilities whose patients 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 federal agency that administers the Medicare program, to establish a prospective payment system for outpatient procedures. One of the goals of the prospective payment system was to lower medical costs paid by the Medicare program. HCFA issued proposed regulations in September, 1998 which would reduce the reimbursement rate currently paid for lithotripsy procedures performed on Medicare patients at hospitals to a base rate of $2,235. The base rate includes anesthesia and sedation, equipment and supplies necessary for the procedure, but does not include the treating physician's professional fee. The base rate is subject to adjustment for various hospital-specific factors. Litho believes the reduced reimbursement rate will be implemented in the latter half of the year 2000. In some cases, reimbursement rates payable to Litho and its Affiliates by commercial insurers are less than the proposed HCFA rate. Litho retains the discretion to make the Mobile Lithotripsy Systems available at ambulatory surgery centers ("ASCs"). Medicare does not currently reimburse for lithotripsy procedures provided at ASCs. However, HCFA issued proposed rules in June, 1998 which would authorize Medicare reimbursement for lithotripsy procedures provided at ASCs. While the proposed rules had a target effective date of October 1, 1998, the effective date has been postponed indefinitely for reasons unrelated to lithotripsy coverage. The June, 1998 proposed rules assign a Medicare reimbursement rate of $2,107 if the lithotripsy procedure is performed at an ASC. Whether these proposed rules will become effective to authorize Medicare reimbursement at ASCs and, if they do become effective, what the reimbursement rate will be, is unknown to Litho. The Medicare program has historically influenced the setting of reimbursement standards by commercial insurers. Therefore, reduced rates of Medicare reimbursement for lithotripsy services may result in reduced payments by commercial insurers for the same services. As was discussed previously, competitive pressure from health maintenance organizations and other managed care companies has in some circumstances already resulted in decreasing reimbursement rates from commercial insurers. See "Risk Factors - Impact of Insurance Reimbursement." No assurances can be given that HCFA will not seek to reduce its proposed reimbursement rates even more to avoid paying more than commercial insurers. As a result, hospitals may seek to lower the fees paid to the Partnership for the use of the Mobile Lithotripsy Systems. Litho 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 program in Florida is jointly sponsored by the federal and state governments to reimburse service providers for medical services provided to Medicaid recipients, who are primarily the indigent. The Florida Medicaid program currently provides reimbursement for lithotripsy services. The federal Personal Responsibility and Work Opportunity Reconciliation Act of 1996 requires state health plans, such as the Florida Medicaid program, to limit Medicaid coverage for certain otherwise eligible persons. Litho 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. Litho does not know whether the Florida Medicaid program has taken or will in the future 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) ("Stark II"). Lithotripsy services were not specifically identified as a designated health service by this legislation, but the prohibition includes any service which is provided to an individual who is registered as an inpatient or outpatient of a hospital under proposed regulations discussed below. Lithotripsy services provided by the Partnership to Medicare and Medicaid patients are billed by the contracting hospital in its name and under its Medicare and Medicaid program provider numbers. Accordingly, these lithotripsy services would likely be considered inpatient or outpatient services under Stark II. Following the passage of the Stark II legislation effective January 1, 1995, Litho determined that the statute would not apply to the type of lithotripsy services to be provided by the Partnership. Stark 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 Stark II. This interpretation adopted by Litho was consistent with the informal view of the General Counsel's Office of the U.S. Department of Health and Human Services. Based upon this reasonable interpretation of Stark II, by referring a patient to a hospital furnishing the outpatient lithotripsy services "under arrangements" with the Partnership, a physician investor in the Partnership is not making a referral to an entity (the hospital) in which he or she has an ownership interest. On January 9, 1998, HCFA published proposed regulations interpreting the Stark II statute (the "Proposed Stark II Regulations"). The Proposed Stark II Regulations and HCFA's accompanying commentary would apply the physician referral prohibitions of Stark II to the Partnership's contracts for provision of the Mobile Lithotripsy Systems. Under the Proposed Stark 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. Litho cannot predict when final regulations will be issued or the substance of the final regulations, but the interpretive provisions of the Proposed Stark II Regulations may be viewed as HCFA's interim position until final regulations are issued. If the Proposed Stark II Regulations are adopted as final (or, in the meantime, if a reviewing court adopted their reasoning as the proper interpretations of the Stark II statute), then the Partnership's operations would not be in compliance with Stark 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 Stark II Regulations that physician overutilization of lithotripsy is unlikely and specifically solicits comments on whether there should be a regulatory exception for lithotripsy. HCFA has received a substantial volume of comments in support of a regulatory exception for lithotripsy. HCFA representatives have informally acknowledged in published commentary that some form of regulatory relief for lithotripsy is under consideration and may be forthcoming; however, no assurances can be made that such will be the case. Litho 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, Litho will continue to carefully review the Proposed Stark II Regulations and accompanying HCFA commentary, and explore other alternative plans of operations that would allow the Partnership to operate in compliance with Stark II and its final regulations. HCFA's adoption of the current Proposed Stark II Regulations as final or a reviewing court's interpretation of the Stark II statute in reliance on the Proposed Stark II Regulations and in a manner adverse to the Partnership operations would mean that the Partnership and its physician Limited Partners would likely be found in violation of Stark II. In such circumstance, it is possible the Partnership may be given the opportunity to restructure its operations to bring them into compliance. In the event Litho is unable to devise a plan pursuant to which the Partnership may operate in compliance with Stark II and its final regulations, Litho is obligated under the Partnership Agreement either (i) to purchase the Partnership Interests of all the Limited Partners at the lesser of fair market value or their Capital Account values (including in certain cases the assumption of their Guaranties) or (ii) to dissolve and liquidate the Partnership. See "Summary of the Partnership Agreement - Optional Purchase of Limited Partner Interests." The Partnership and/or the physician Limited Partners may not be permitted the opportunity to restructure operations and thereby avoid an obligation to refund any amounts collected from Medicare and Medicaid patients in violation of the statute. Further, under these circumstances the Partnership and physician Limited Partners may be assessed with substantial civil monetary penalties and/or exclusion from providing services reimbursed by Medicare and Medicaid. Two bills are currently pending in Congress which would modify the reach of the Stark II self-referral prohibition. One (H.R. 2650) was introduced by Representative Stark, the other (H.R. 2651) by House Ways and Means health subcommittee chair Representative Bill Thomas. The Stark bill would modify, and the Thomas bill would repeal, the ban on physicians who have compensation arrangements with entities to which they refer patients. However, neither bill, nor any other bill currently pending in Congress, would substantively modify the regulation of referrals of physicians with ownership interests. Thus, neither bill would affect the Partnership's analysis of the potential impact of Stark II on this Offering discussed above. Fraud and Abuse. The provisions of the federal Social Security Act addressing illegal remuneration (the "Anti-Kickback Statute") prohibit providers and others from soliciting, receiving, offering or paying, directly or indirectly, any remuneration in return for either making a referral for a Medicare, Medicaid or CHAMPUS covered service or ordering, arranging for or recommending any such covered service. Violations of the Anti-Kickback Statute may be punished by a fine of up to $25,000 or imprisonment for up to five (5) years, or both. In addition, violations may be punished by substantial civil penalties and/or exclusion from the Medicare and Medicaid programs. Regarding exclusion, the Office of Inspector General ("OIG") of the Department of Health and Human Services may exclude a provider from participation in the Medicare program for a 5-year period upon a finding that the Anti-Kickback Statute has been violated. After OIG establishes a factual basis for excluding a provider from the program, the burden of proof shifts to the provider to prove the Anti-Kickback Statute has not been violated. The Limited Partners are to receive cash Distributions from the Partnership. Since it is anticipated that some of the Limited Partners will be physicians or others in a position to refer and perform lithotripsy services using Partnership equipment and personnel, such Distributions could come under scrutiny under the Anti-Kickback Statute. The Third Circuit United States Court of Appeals has held that the Anti-Kickback Statute is violated if one purpose (as opposed to the primary or sole purpose) of a payment to a provider is to induce referrals. United States v. Greber, 760 F.2d 68 (1985). The Greber case was followed by the United States Court of Appeals for the Ninth Circuit, United States v. Kats, 871 F.2d 105 (9th Cir. 1989), and cited favorably by the First Circuit in United States v. Bay State Ambulance and Hospital Rental Service, Inc., 874 F.2d 20 (1 st Cir. 1989). The OIG has indicated that it is giving increased scrutiny to health care 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 health care fraud and abuse investigator and enforcer. The OIG has published regulations which protect certain transactions from scrutiny under the Anti-Kickback Statute (the "Safe Harbor" regulations). A Safe Harbor, if complied with fully, will exempt such activity from prosecution under the Anti-Kickback Statute. However, the preamble to the Safe Harbor regulations states that the failure of a particular business arrangement to comply with the regulations does not determine whether or not the arrangement violates the Anti-Kickback Statute because the regulations do not themselves make any particular conduct illegal. This Offering and the business of the Partnership do not comply with any Safe Harbor. In the commentary introducing the Safe Harbor regulations, the OIG recognized the beneficial effect that business investments in small entities may have on the health care industry. The OIG promulgated a Safe Harbor for investment interests, including limited partnership ownership interests, in small entities which are held by persons in a position to make referrals to the entities so long as eight criteria are met. This Offering does not meet all eight criteria; however, this Offering does meet some of the criteria. Specifically, the terms on which Limited Partnership interests are offered to physicians who treat their patients on the Mobile Lithotripsy Systems are not related to the previous or expected volume of referrals or amount of business generated by the physicians; there is no requirement that any physician make referrals or be in a position to make referrals as a condition for remaining an investor; there is no cross-referral arrangement involved with the business of the Partnership; the Partnership does not loan funds or guarantee loans for physicians who refer patients for treatment on the Mobile Lithotripsy Systems; and the Distributions to physicians who are Limited Partners are directly proportional to the amount of their capital investment. In order to qualify for Safe Harbor protection, all eight criteria must be met. Litho can give no assurance that compliance with some, but not all, of the criteria of the Safe Harbor would prevent the OIG from finding a potential violation of the Anti-Kickback Statute by virtue of this Offering. In November 1999, the OIG issued a Safe Harbor protecting certain physician investment interests in ASCs. The commentary accompanying the new Safe Harbor specifically distinguished physician ownership in ASCs from physician ownership in other facilities, including lithotripsy facilities, end-stage renal disease facilities, comprehensive outpatient rehabilitation facilities and others. The OIG concluded that ASCs benefit from favorable public policy considerations relating to reducing Medicare costs (including through the impending prospective payment system discussed above); other facilities, including lithotripsy facilities, do not share the same policy considerations or reimbursement structures. Therefore, the Safe Harbor status given to certain physician investments in ASCs cannot be viewed as an indication that physician investments in other facilities, including lithotripsy facilities, would not be deemed to violate the Anti-Kickback Statute. Although a separate Safe Harbor was not adopted, HCFA noted in its commentary when the Safe Harbor regulations were issued in 1991 that additional protection may be merited for situations where a physician sees a patient in his or her own office, makes a referral to an entity in which he or she has an ownership interest and performs the service for which the referral is made. In such cases, Medicare makes a payment to the facility for the service it furnishes, which may result in a profit distribution to the physician. HCFA noted that, with respect to the physician' s professional fee, such a referral is simply a referral to oneself, and that in such situations, both the professional service fee and the profit distribution from the associated facility fee that are generated from the referral may warrant protection. HCFA stated that its primary concern regarding the above referral situation was the investing physician's ability to profit from any diagnostic testing that is generated from the services he or she performs. Litho believes the potential for overutilization posed by referrals for diagnostic services is not present to the same degree with therapeutic services such as lithotripsy where the necessity for the treatment can be objectively determined; i.e., a renal stone can be definitely determined before treatment. The applicability of the Anti-Kickback Statute to physician investments in health care businesses to which they refer patients and which do not qualify for a Safe Harbor has not been the focus of many court decisions, and therefore, judicial guidance is limited. In the only case in which the OIG has attempted to exercise the civil exclusion remedy in the context of a physician-owned joint venture, The Hanlester Network, et al. v. Shalala, the Ninth Circuit for the United States Court of Appeals (the "Court") held that the Anti-Kickback Statute is violated when a person or entity (a) knows that the statute prohibits offering or paying remuneration to induce referrals and (b) engages in prohibited conduct with the specific intent to violate the law. Although the Court upheld a lower court ruling that the joint venture in question violated the Anti-Kickback Statute vicariously through the knowing and willful actions of one of its agents, who was acting outside the parameters of the joint venture' s offering documents, the Court concluded there was not sufficient evidence indicating that a return on investment to physicians or other investors in the joint venture could on its own constitute an "offer or payment" of remuneration to make referrals. The Court also stated that since profit distributions in Hanlester were made based on each investor's ownership share and not on the volume of referrals, the fact that large referrals by investors would result in potentially high investment returns did not, standing alone, cause a violation of the Anti-Kickback Statute. The Health Insurance Portability and Accountability Act of 1996 directed the OIG to respond to requests for advisory opinions regarding the effect of the Anti-Kickback Statute on proposed business transactions. Litho has not requested the OIG to review this Offering and, to the best knowledge of Litho, the OIG has not been asked by anyone to review offerings of this type. Federal regulatory authorities could take the position in future advisory opinions that business transactions similar to this Offering are a means to illegally influence the referral patterns of the prospective physician Limited Partners. Because there is no legal precedent interpreting circumstances identical to these facts, it is not possible to predict how this issue would be resolved if litigated. Whenever an offering of ownership interests is made available to persons with the potential to refer patients for services, there is a possibility that the OIG, HCFA or other government agencies or officials may question whether the ownership interests are being provided in return for or to induce referrals by the new owners. Remuneration, which government officials have said can include the provision of an opportunity to invest in a facility to which a person refers patients for services, may be challenged by the government as constituting a violation of the Anti-Kickback Statute. The risk of such a challenge may be increased in connection with this Offering because the proceeds of any Unit sales made for the account of Litho will not provide capital for the Partnership which would be a typical justification for sales to new investors. Whether the offering of ownership interests to investors who may refer patients to the Partnership might constitute a violation of this law must be determined in each case based upon the specific facts involved. The various mechanisms in place to avoid providing a financial benefit to prospective Limited Partners for any referrals of patients (including the requirement that all distributions of earnings to Limited Partners be made in proportion to their investment interest), the Partnership's utilization review and quality assurance programs, the fact that lithotripsy is a therapeutic treatment the need of which can be objectively determined, and the existence in Litho's view of valid business reasons to engage in this transaction, form the basis in part of Litho's belief that this Offering is appropriate. Litho and the Partnership intend for all business activities and operations of the Partnership to conform in all respects with all applicable anti-kickback statutes (federal or state). Litho 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, Litho, officers and directors of Litho, and each Limited Partner could be subject, individually, to substantial monetary liability, felony prison sentences and/or exclusion from participation in Medicare, Medicaid and CHAMPUS. A prospective Limited Partner with questions concerning these matters should seek advice from his or her own independent counsel. False Claims Statutes. Federal laws governing reimbursement for medical services generally prohibit an individual or entity from knowingly and willfully presenting a claim (or causing a claim to be presented) for payment from Medicare, Medicaid or other third party payors that is false or fraudulent. The standard for "knowing and willful" includes conduct that amounts to a reckless disregard for whether accurate information is presented by claims processors. Penalties under these statutes include substantial civil and criminal fines, exclusion from the Medicare program and imprisonment. One of the most prominent of these laws is the federal False Claims Act, which may be enforced by the federal government directly, or by a qui tam private plaintiff on the government's behalf. Under the federal False Claims Act, both the government and the private plaintiff, if successful, are permitted to recover substantial monetary penalties and judgments, as well as an amount equal to three times actual damages. In recent cases, some qui tam plaintiffs have taken the position that violations of the Anti-Kickback Statute (discussed above) and Stark II (discussed above) should also be prosecuted as violations of the federal False Claims Act. The Partnership cannot assure that the government, or a reviewing court, would not take the position that billing errors, employee misconduct or violations of other federal statutes, should they occur, are violations of the federal False Claims Act or similar statutes. Some federal courts have recently taken the position that qui tam lawsuits by private plaintiffs are unconstitutional. Most notably, a panel of judges on the Fifth Circuit Court of Appeals took this position in a decision issued in November 1999. That decision is being reviewed by all the judges on the Fifth Circuit. The panel's decision was a minority view; most courts have concluded that qui tam lawsuits are constitutional. In another case, the U.S. Supreme Court may review this issue. Unless and until the Supreme Court decides the issue, prospective Limited Partners should consider the ramifications of the False Claims Act issues discussed in the preceding paragraph. New Legislation. Two bills currently pending in Congress which would amend or repeal the compensation provisions of the Stark II law were discussed above in the disclosures related to self-referral restrictions. Litho 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 Stark II and the Anti-Kickback laws discussed above. In the event that legislation is enacted which, in the opinion of Litho, would adversely affect the operation of the Partnership's business, Litho 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 Litho, to determine whether they posed an unreasonable threat to competition in the health care field. Litho 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, Litho cannot assure that the FTC will not investigate issues arising from physician-owned health care facilities in the future with respect to Litho 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, Litho 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. To the best knowledge of Litho, neither a certificate of need nor any licensure as a healthcare facility is required for mobile lithotripsy services in Florida. However, each hospital at which the service is provided must inform the Department of Health and Rehabilitative Services ("Department") that such hospital will be serviced by the lithotripter and must request a letter from the Department stating that the service is not reviewable. If services are provided at a hospital or ambulatory surgery center, the hospital or surgery center will be required to comply with Florida's administrative regulations regarding physical plant areas for placement of the equipment. The x-ray attached to the lithotripter must be registered with the Department's Office of Radiation Control, and radiologic technologists are licensed through the Department's Radiologic Technology Program. These requirements have not to date prevented the Partnership from operating in Florida, and Litho does not anticipate that compliance with these requirements will materially adversely affect the Partnership's operations in the future. Florida requires physicians with financial interests in health care entities to provide notice of these financial interests to their patients in writing prior to referring the patients to such entities. The disclosure form must inform the patients of the existence of the financial relationship and of the patients' right to obtain services at a location of their choice. The disclosure form must also be posted in a conspicuous place in the physician's office. The Partnership will require its physician Limited Partners who refer patients to the Partnership to comply with these requirements. The Patient Self-Referral Act of 1992 prohibits allopathic and osteopathic physicians from referring a patient for health care items or services to an entity in which the physician is an investor. However, there is a specific exception which permits urologists to make referrals for lithotripsy services without violating the law. Thus, referrals by physician Limited Partners for services provided on the Mobile Lithotripsy Systems will not result in a violation of the law. Various Florida statutes applicable to allopathic and osteopathic physicians prohibit the payment or receipt of remuneration for referrals of patients to providers of health care goods and services. Violations of these statutes are grounds for disciplinary action by the respective licensing board or potential criminal action. These statutes extend the prohibition in the federal Anti-Kickback Statute (discussed above) to conduct with respect to all health services, not just for those for which reimbursement may be provided under the Medicare and Medicaid programs. See the discussion above for the reasons supporting Litho's belief that this Offering and the Partnership's business do not violate the federal Anti-Kickback Statute; the same reasons support Litho's belief that the Florida statutes are not violated. To the best knowledge of Litho, the Partnership does not engage in any payment practices prohibited by Florida law. In at least one reported matter, the Florida Board of Medicine issued a declaratory ruling discussing the application of one of these statutes to an arrangement in which a physician wished to become an investor in a limited partnership which operated a healthcare facility. The Board of Medicine concluded the proposed arrangement did not violate result in prohibited remuneration because the returns offered to the limited partners were based on their investments and were not based on referrals to or from the facility. The Partnership has been endeavoring to comply and will continue to seek to comply with all applicable statutory and regulatory requirements. Further regulations may be imposed in Florida 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 Systems 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. LITHO 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. Prime, the indirect sole shareholder of Litho, 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 61 mobile and seven fixed site lithotripters, all but two of which are operated by Prime, Litho and their 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 63 lithotripters and development of five lithotripters. Prime lithotripters 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 lithotripters in 1998, representing approximately 30% of the estimated 7,700 active urologists in the United States. Prime manages the operations of 63 of its 68 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. 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 49 of its 68 operations. Prime's lithotripters range in age from one to twelve years. Of its 68 lithotripters, 61 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 Litho 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, equipment, economic conditions and distribution policies, the success of Litho's Affiliates in the lithotripsy field should not be considered as indicative of the operating results obtainable by 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, 1997, December 31, 1998 and December 31, 1999; (ii) Balance Sheets as of December 31, 1997, December 31, 1998 and December 31, 1999; (iii) Cash Flow Statements for the years ended December 31, 1997, December 31, 1998 and December 31, 1999; and (iv) Statements of Partner's Equity for the years ended December 31, 1997, December 31, 1998 and December 31, 1999. Past financial performance is not necessarily indicative of future performance. There is no assurance that the Partnership will be able to maintain its current revenues or earnings. Revenues. Total revenues decreased $885,986 (19%) for the year ended December 31, 1999 compared to the same period in 1998 primarily due to a 0% decrease in the number of procedures performed, a decrease in net revenue per case and an increase in the estimate of the beginning of year allowance for contractual adjustments due to the availability of improved information. Operating Expenses. Operating expenses increased by $8,519 (0%) for the year ended December 31, 1999 compared to the same period in 1998. Other Income (Expense). Total other income (expense), net increased by $1,565 (7%) due to a decrease of $8,001 in interest income and a decrease of $9,566 in interest expense due to paying off the bank debt in 1998. Revenues. Total revenues decreased $800,563 (15%) for the year ended December 31, 1998 compared to the same period in 1997 related to a 17% increase in the number of procedures performed, a decrease in net revenue per case and an increase in the estimate of the beginning of year allowance for contractual adjustments due to the availability of improved information. Operating Expenses. Operating expenses decreased by $135,202 (6%) for the year ended December 31, 1998 compared to the same period in 1997, primarily due to a decrease of $111,262 in other expenses. Other Income (Expense). Total other income (expense), net increased by $25,405 due to a $441 decrease in interest income and a decrease of $25,846 in interest expense due to paying down the bank debt. The Partnership Agreement sets forth the powers and purposes of the Partnership and the respective rights and obligations of the Litho 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. The Investors will acquire their interests in the Partnership in the form of Units. Each Unit costs $7,006. The entire Unit purchase price is due in cash upon submission of the Assignment Packet; 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 Unit purchase price 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 certain Distributions 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 Womble Carlyle Sandridge & Rice, a Professional Limited Liability Company, attached hereto as Appendix C. 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 a portion of the Partnership's Profits and Losses based on their varying Percentage Interests during the year. The Profits and Losses shall be apportioned on the basis of the number in such year each New Limited Partner was a holder of the Units transferred without regard to the specific income and losses of the Partnership before or after the transfer. (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 Litho, 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 Litho, 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 Litho'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, Litho 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 Litho 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 Litho 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. Litho, in its capacity as 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. Litho will continue oversee the day-to-day affairs of the Partnership pursuant to the Management Agreement. See "Business Activities - Management." Under the Partnership Agreement, if Litho 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, Litho may be removed and another substituted with the consent of all of the Limited Partners. Litho 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 Litho may be done without the approval of the Limited Partners. 1. General. Litho 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. Litho, 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. Litho 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. Litho has made a an election pursuant to Code Section 754. See "Risk Factors- Tax Risks- Partnership Elections." (ii) Tax Matters Partner. The Partnership Agreement designates Litho 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, Litho 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, Litho shall oversee the Partnership tax affairs in the manner which, in its best judgment, are in the interests of the Partners. Moreover, Litho 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. 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) his or her obligation to return certain Distributions made to them as provided by the Act. See "Risk Factors - Other Investment Risks - Limited Partners' Obligation to Return Certain Distributions." After acquisition of Units by Investors, no Partnership Interest nor any Units may be transferred without the prior written consent of Litho, which approval may be granted or denied in the sole discretion of Litho, 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 Litho, or the approval of the assignor Limited Partner and Litho. 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. 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 Litho; 4. The election to dissolve the Partnership made by Litho and a Majority in Interest of the Limited Partners; or 5. Any other reason which under the laws of the State of Florida 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, Litho 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. As provided in the Partnership Agreement, the General Partner has the option (which it may assign to the Partnership in its sole discretion) to purchase all of the interest of a Limited Partner who (i) dies, (ii) becomes the subject of a domestic proceeding, or (iii) acquires direct or indirect ownership of an interest in a competing venture (including the lease or sublease of competing technology). The option purchase price is an amount equal to the Limited Partner's share of the Partnership's book value, if any, as reflected by the Limited Partner's capital account in the Partnership (unadjusted for any appreciation in Partnership assets or amounts due and payable to the Partnership as account receivables, and as reduced by depreciation deductions claimed by the Partnership for tax purposes). Because losses, depreciation deductions and Distributions reduce capital accounts, and because appreciation in assets is not reflected in capital accounts, it is the opinion of the General Partner that the capital account value option purchase price may be nominal in amount. See the form of Partnership Agreement attached hereto as Appendix B and "Summary of the Partnership Agreement - Optional Purchase of Limited Partner Interests." The Partnership Agreement provides that disputes arising thereunder shall be resolved by submission to arbitration in Gainesville, Florida. Each Investor, by executing the Subscription Agreement, irrevocably appoints Dr. Joseph Jenkins to act as attorneys-in-fact to execute the Partnership Agreement, any amendments thereto and any certificate of limited partnership filed by Litho. The Partnership Agreement, in turn, contains provisions by which each Limited Partner irrevocably appoints Dr. Joseph Jenkins, to act as his or her attorney-in-fact to make, execute, swear to and file any documents necessary to the conduct of the Partnership's business, such as deeds of conveyance of real or personal property as well as any amendment to the Partnership Agreement or to any certificate of limited partnership which accurately reflects actions properly taken by the Partners. Within 90 days after the end of each Year of the Partnership, Litho 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. Proper and complete records and books of account are kept by Litho 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 Litho, and are open to the reasonable inspection and examination of the Limited Partners or their duly authorized representatives during normal business hours. On the Closing Date, it is expected that Womble Carlyle Sandridge & Rice, 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." 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. Certain terms in this Memorandum shall have the following meanings: Act. The Act means the Florida Revised Uniform Limited Partnership Act, as in effect on the date hereof. Affiliate. An Affiliate is (i) any person, partnership, corporation, association or other legal entity ("person") directly or indirectly controlling, controlled by or under common control with another person, (ii) any person owning or controlling 10% or more of the outstanding voting interests of such other person, (iii) any officer, director or partner of such person and (iv) if such other person is an officer, director or partner, any entity for which such person acts in such capacity. 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 March 31, 2000 (or earlier) in the discretion of Litho. The Closing Date may be extended for a period of up to 180 days in the discretion of Litho. Coach. One of the Partnership's three self-propelled mobile vehicles 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 20 hospitals and medical centers to which the Partnership provides lithotripsy services pursuant to five separate Hospital Contracts. Counsel. Womble Carlyle Sandridge & Rice, a Professional Limited Liability Company, P.O. Drawer 84, Winston-Salem, North Carolina 27102. 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 Litho 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. Hospital Contracts. The 20 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 $4,506 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. Litho. Lithotripters, Inc., a North Carolina corporation, and a wholly owned subsidiary of Prime Medical Services, Inc. Litho is the General Partner of the Partnership. Lithostar(TM). The Lithostar(TM)model extracorporeal shock wave lithotripter manufactured by Siemens which the Partnership owns and operates. 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 Systems. The three Coaches with the installed and operational Lithostars(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. Litho and the Limited Partners, collectively, when no distinction is required by the context in which the term is used herein. Partnership. Florida Lithotripters Limited Partnership I, a Florida 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 Litho 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 Litho. 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 re-financing 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 Litho 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 Litho 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 1% 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 Litho. Prime. Prime Medical Services, Inc. a publicly held Delaware corporation and parent of Litho 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 Litho. 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. Northern and central Florida. Litho has sole discretion to expand the Service Area. 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 10 equal limited partner interests in the Partnership offered by Litho pursuant to this Memorandum for a price per Unit of $7,006 in cash. Year of the Partnership. An annual accounting period ending on December 31 of each year during the term of the Partnership. EX-10.131 44 0044.txt EX 10.131 1ST SUPPLEMENT TO MEMORANDUM - FLORIDA I FIRST SUPPLEMENT DATED MARCH 31, 2000 TO THE CONFIDENTIAL PRIVATE PLACEMENT MEMORANDUM DATED FEBRUARY 25, 2000 FLORIDA LITHOTRIPTERS LIMITED PARTNERSHIP I Lithotripters, Inc., a North Carolina corporation ("Litho"), by this First Supplement hereby amends and supplements its Confidential Private Placement Memorandum dated February 25, 2000 (the "Memorandum"). Capitalized terms used herein are defined in the Glossary appearing in the Memorandum. Persons who have subscribed for or are considering an investment in the Units offered by the Memorandum should carefully review this First Supplement. Extension of the Offering Pursuant to the authority given to Litho in the Memorandum, it hereby elects to extend the offering termination date to April 14, 2000 (or earlier in the discretion of Litho, upon the sale of all Units as provided in the Memorandum). EX-10.132 45 0045.txt EX 10.132 2ND SUPPLEMENT TO MEMORANDUM - FLORIDA I SECOND SUPPLEMENT DATED APRIL 14, 2000 TO THE CONFIDENTIAL PRIVATE PLACEMENT MEMORANDUM DATED FEBRUARY 25, 2000 FLORIDA LITHOTRIPTERS LIMITED PARTNERSHIP I Lithotripters, Inc., a North Carolina corporation ("Litho"), by this Second Supplement hereby amends and supplements its Confidential Private Placement Memorandum dated February 25, 2000, as amended and supplemented (the "Memorandum"). Capitalized terms used herein are defined in the Glossary appearing in the Memorandum. Persons who have subscribed for or are considering an investment in the Units offered by the Memorandum should carefully review this Second Supplement. Extension of the Offering Pursuant to the authority given to Litho in the Memorandum, it hereby elects to extend the offering termination date to May 2, 2000 (or earlier in the discretion of Litho, upon the sale of all Units as provided in the Memorandum). EX-10.133 46 0046.txt EX 10.133 3RD SUPPLEMENT TO MEMORANDUM -FLORIDA I THIRD SUPPLEMENT TO THE CONFIDENTIAL PRIVATE PLACEMENT MEMORANDUM AND CONSENT April 19, 2000 FLORIDA LITHOTRIPTERS LIMITED PARTNERSHIP I 2008 Litho Place Fayetteville, North Carolina 28304 Florida Lithotripters Limited Partnership I, a Florida limited partnership (the "Partnership"), hereby supplements its Confidential Private Placement Memorandum of February 25, 2000 (the "Memorandum"). Capitalized terms used herein are defined in the Glossary appearing in the Memorandum. All persons who have subscribed for or are considering an investment in the Units offered by the Memorandum should carefully review this Supplement and Consent. Competition and Revaluation of Units Recently, seven Limited Partners in the Tallahassee market acquired an interest in a competing lithotripsy business. The General Panner believes that the increase in competition in the Tallahassee market in connection with the former Limited Partners' new venture will adversely affect Partnership revenues on an annual basis by approximately $600,000. The General Partner was aware of the potential competition prior to the inception of the Offering and the loss of revenue in the Tallahassee market was factored into the valuation of the Units. The General Partner intends to enforce the noncompete provisions of the Limited Partnership Agreement and buy out the competing Limited Partners. Reaffirmation and Consent Attached to this Supplement as Appendix A is a Reaffirmation and Consent that is to be utilized by each subscribing Investor to evidence his election to either (i) withdraw from the Offering and have returned his subscription funds (plus interest) and Loan Documents, if any, or (ii) reaffirm his subscription. The Reaffirmation and Consent is self-explanatory. Each Investor should mark the boxes evidencing his election, and then return the Reaffirmation and Consent to MedTech Investments, Inc. Questions concerning this Supplement and Consent should be directed to MedTech Investments, Inc., 2008 Litho Place, Fayetteville, North Carolina 28304. MedTech's telephone number is (800) 682-7971. FLORIDA LITHOTRIPTERS LIMITED PARTNERSHIP I A FLORIDA LIMITED PARTNERSHIP REAFFIRMATION AND CONSENT Capitalized terms used herein are defined in the Glossary appearing in the Confidential Private Placement Meanorandum of February 25, 2000, and accompanying supplements (the "Memorandum"). 1. The undersigned hereby acknowledges receipt of the Supplement and Consent dated April 19, 2000. After careful review of the Supplement and Consent, by completion and execution of this Reaffirmation and Consent, the undersigned wishes to evidence his election either to withdraw from the Offering or to reaffirm his subscriptmn. Please check only one of the boxes set forth below to evIdence your desired election: ___ I wish to withdraw from the Offering and desire to have my subscription funds (plus interest) and Loan Documents, if any, returned to me. ___ I wish to reaffirm my subscription and waive any withdrawal fights associated with the Supplement and Consent and the information provided therein. This _____ day of April, 2000. ---------------------------- Signature of Subscriber ---------------------------- Print or Type Name Since the Closing Date is scheduled for May 2, 2000, please fax this completed form to: (919) 323-9857 -------------- EX-10.134 47 0047.txt EX 10.134 4TH SUPPLEMENT TO MEMORANDUM - FLORIDA I FOURTH SUPPLEMENT TO THE CONFIDENTIAL PRIVATE PLACEMENT MEMORANDUM May 2, 2000 FLORIDA LITHOTRIPTERS LIMITED PARTNERSHIP I 2008 Litho Place Fayetteville, North Carolina 28304 Florida Lithotripters Limited Partnership I, a Florida limited partnership (the "Partnership"), hereby supplements its Confidential Private Placement Memorandum of February 25, 2000, as supplemented (collectively, the "Memorandum"). Capitalized terms used herein are defined in the Glossary appearing in the Memorandum. All persons who have subscribed for or are considering an investment in the Units offered by the Memorandum should carefully review this Supplement. Extension of the Offering Pursuant to the authority reserved by the General Partner in the Memorandum, the General Partner hereby elects to extend the Closing Date to May 15, 2000 (or such earlier date as the General Partner may, in its sole discretion, otherwise elect). Questions concerning this Supplement should be directed to MedTech Investments, Inc., 2008 Litho Place, Fayetteville, North Carolina 28304. MedTech's telephone number is (800) 682-7971. EX-10.135 48 0048.txt EX 10.135 CONFIDENTIAL MEMORANDUM - INDIANA I Name of Prospective Investor Memorandum Number - -------------------------------------------------------------------------------- INDIANA LITHOTRIPTERS LIMITED PARTNERSHIP I A Limited Partnership Formed Under the Laws of Indiana CONFIDENTIAL PRIVATE PLACEMENT MEMORANDUM up to $279,075 in Cash 25 Units of Limited Partnership Interest at $11,163 in Cash per Unit - -------------------------------------------------------------------------------- THIS MEMORANDUM IS FURNISHED PURSUANT TO A CONFIDENTIALITY AGREEMENT BETWEEN THE PARTNERSHIP AND THE INVESTOR WHOSE NAME APPEARS ABOVE. THE CONFIDENTIALITY AGREEMENT PROHIBITS THE DISCLOSURE OF THE CONFIDENTIAL MATERIAL CONTAINED IN THIS MEMORANDUM, EXCEPT TO THE EXTENT SUCH INVESTOR DEEMS IT NECESSARY TO SHARE SUCH INFORMATION WITH HIS LEGAL, ACCOUNTING OR OTHER FINANCIAL ADVISORS, WHO LIKEWISE SHALL BE BOUND BY THE SAME CONFIDENTIALITY RESTRICTIONS SET FORTH IN THE CONFIDENTIALITY AGREEMENT. MEDTECH INVESTMENTS, INC. Exclusive Sales Agent 2008 Litho Place Fayetteville, North Carolina 28304 1-800-682-7971 WINSTON #910642 v 2 vii WINSTON #910642 v 2 The Date of this Memorandum is June 28, 2000 INDIANA LITHOTRIPTERS LIMITED PARTNERSHIP I up to $279,075 in Cash up to 25 Units of Limited Partnership Interest at $11,163 in Cash per Unit Indiana Lithotripters Limited Partnership I, an Indiana limited partnership (the "Partnership") operated by its General Partner, Lithotripters, Inc., a North Carolina corporation (the "General Partner"), hereby offers on the terms set forth herein up to 25 units of limited partnership interest in the Partnership (the "Units"), at a price per Unit of $11,163 in cash. See "Terms of the Offering." Each Unit will represent an initial 1% economic interest in the Partnership. See "Risk Factors - Other Investment Risks - Dilution of Limited Partners' Interest." The Partnership currently operates a Lithostar(TM) second generation extracorporeal shock-wave lithotripter for the lithotripsy of kidney stones. The Lithostar(TM) is installed in a self-propelled Calumet Coach (the Coach with the installed Lithostar(TM) is referred to herein as the "Existing Lithotripsy System") enabling the Partnership to provide lithotripsy services at various locations primarily in southern Indiana and within a 100-mile radius of Louisville, Kentucky (the "Service Area"). The Partnership intends to use the proceeds of this Offering to (i) pay the costs of this Offering, (ii) finance a portion of the cost of purchasing a new transportable lithotripter and a new mobile truck to transport the new lithotripter (the "New Lithotripsy System"), and (iii) finance the costs of upgrading the imaging system of the Partnership's Existing Lithotripsy System. See "Sources and Applications of Funds" and "Business Activities - Acquisition of New Lithotripsy System." The Existing Lithotripsy System and the New Lithotripsy System are, collectively, referred to herein as the "Lithotripsy Systems." The cash purchase price is due at subscription; however, prospective Investors who meet certain requirements may be able fund a portion of their Unit purchase price with the proceeds of certain third-party financing. See "Terms of the Offering - Limited Partner Loans." The Offering will terminate on August 9, 2000 (or earlier upon the sale of all 25 Units as provided herein), unless extended at the discretion of the General Partner for a period not to exceed 180 days. Purchase of Units involves risks and is suitable only for persons of substantial means who have no need for liquidity in this investment. Among other factors, prospective investors should note that the health care industry is undergoing significant government regulatory reforms and that the Partnership faces substantial competition in the Service Area. See "Risk Factors" and "Terms of the Offering - Suitability Standards." ------------------------------ Cash Selling Net Cash Offering Price Commissions(1) Proceeds(2) -------------- ----------- -------- Per Unit(3) $ 11,163 $ 150 $ 11,013 Total Maximum(4) $279,075 $ 3,750 $275,325 (See Footnotes on Back of Cover Page) See Glossary for capitalized terms used herein and not otherwise defined. (1) The Units will be sold on a "best-efforts" any or all basis by MedTech Investments, Inc., a broker-dealer registered with the Securities and Exchange Commission, a member of the National Association of Securities Dealers, Inc. and an Affiliate of the General Partner (the "Sales Agent"). The Partnership will pay the Sales Agent a $150 commission for each Unit sold and will reimburse the Sales Agent for its Offering costs (not to exceed $5,000). The Partnership has agreed to indemnify the Sales Agent against certain liabilities, including liabilities under the Securities Act of 1933 (the "Securities Act"). See "Plan of Distribution." (2) Net Cash Proceeds do not reflect deduction of expenses payable by the Partnership. See "Sources and Applications of Funds." The price per Unit ($11,163) is payable in cash upon subscription; provided, that prospective Investors who meet certain requirements may be able to personally borrow funds from a third-party financial institution in order to pay a portion of their cash purchase price per Unit. For the convenience of Investors, the Partnership has arranged for financing of a portion of the Units' purchase price with First-Citizens Bank & Trust Company, which is headquartered in Raleigh, North Carolina, and has approximately 370 offices throughout the southeastern United States (the "Bank"). Therefore, in lieu of paying the entire purchase price in cash at subscription, prospective Investors may execute and deliver to the Sales Agent together with their Subscription Packets, at least $2,500 cash and a Limited Partner Note payable to the Bank in a maximum principal amount of up to $8,663 per Unit to be purchased, a Loan and Security Agreement, Security Agreement and two Uniform Commercial Code Financing Statements ("UCC-1s") (collectively, the "Loan Documents"). See "Terms of the Offering - Limited Partner Loans" and the forms of the Limited Partner Note, the Loan and Security Agreement and Security Agreement attached to the form of Limited Partner Loan Commitment as Exhibits A, B and C, respectively, which is attached hereto as Appendix B and the UCC-1's attached as part of the Subscription Packet. (3) Each Investor may purchase no less than one Unit. The General Partner, however, reserves the right to sell less than one Unit as an additional investment, and to reject in whole or in part any subscription. (4) Offering Proceeds will first be used by the Partnership to pay offering costs and expenses (up to $33,750) and the remainder of the proceeds will be used to finance (i) a portion of the cost of the New Lithotripsy System and (ii) the costs of an imaging upgrade to the Partnership's Existing Lithotripsy System. See "Sources and Applications of Funds" and "Business Activities - Acquisition of New Lithotripsy System." The Partnership seeks by this Offering to sell up to 25 Units for an aggregate of up to $279,075 in cash ($275,325 net of Sales Agent's commissions). All subscription funds and Loan Documents will be held in an interest bearing escrow account with the Bank until the acceptance of the Investor's subscription (and approval by the Bank if the Investor is financing a portion of the Unit purchase price through a Limited Partner Loan), rejection of the Investor's subscription or termination of this Offering. The Partnership has set no minimum number of Units to be sold in this Offering. Accordingly, upon the receipt and acceptance of an Investor's subscription by the Partnership as provided herein, such Investor will be admitted to the Partnership as a Limited Partner, provided that acceptance of subscriptions by an Investor that elects to finance a portion of his Unit purchase price is conditioned upon approval by the Bank of his Limited Partner Loan. Upon admission as a Limited Partner, the Investor's subscription funds will be released to the Partnership and the Loan Documents, if any, will be released to the Bank. In the event a subscription is rejected, all subscription funds (without interest), the Loan Documents, if any, and other subscription documents held in escrow will be promptly returned to the rejected Investor. The Offering will terminate on August 9, 2000, unless it is sooner terminated by the General Partner, or unless extended for an additional period not to exceed 180 days. See "Terms of the Offering." [The remainder of this page is left intentionally blank.] - -------------------------------------------------------------------------------- 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......................................................17 The Units and Subscription Price........................................17 Acceptance of Subscriptions.............................................17 Limited Partner Loans...................................................18 Subscription Period; Closing............................................20 Offering Exemption......................................................20 Suitability Standards...................................................20 How to Invest...........................................................21 Restrictions on Transfer of Units.......................................21 PLAN OF DISTRIBUTION.......................................................22 BUSINESS ACTIVITIES........................................................23 General.................................................................23 Treatment Methods for Kidney Stone Disease..............................23 The Existing Lithotripsy System.........................................24 Upgrade to Existing Lithotripsy System..................................25 Acquisition of New Lithotripsy System...................................25 Acquisition of Additional Assets........................................28 Hospital Contracts......................................................29 Operation of the Lithotripsy Systems....................................30 Management..............................................................30 Employees...............................................................31 FINANCIAL CONDITION OF THE PARTNERSHIP.....................................31 MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE RESULTS OF OPERATIONS.....................................................35 SOURCES AND APPLICATIONS OF FUNDS..........................................37 THE GENERAL PARTNER........................................................38 COMPENSATION AND REIMBURSEMENT TO THE GENERAL PARTNER AND ITS AFFILIATES................................................39 CONFLICTS OF INTEREST......................................................41 FIDUCIARY RESPONSIBILITY OF THE GENERAL PARTNER............................43 COMPETITION................................................................43 Affiliated Competition..................................................43 Other Competition.......................................................44 REGULATION.................................................................45 Federal Regulation......................................................45 State Regulation........................................................54 PRIOR ACTIVITIES...........................................................55 SUMMARY OF THE PARTNERSHIP AGREEMENT.......................................56 Nature of Limited Partnership Interest..................................57 Profits, Losses and Distributions.......................................57 Management of the Partnership...........................................58 Powers of the General Partner...........................................59 Rights and Liabilities of the Limited Partners..........................59 Restrictions on Transfer of Partnership Interests.......................60 Noncompetition Agreement and Protection of Confidential Information.....60 Dissolution and Liquidation.............................................61 Optional Purchase of Limited Partner Interests..........................62 Dilution Offerings......................................................62 Arbitration.............................................................63 Power of Attorney.......................................................63 Reports to Limited Partners.............................................63 Records.................................................................63 LEGAL MATTERS..............................................................63 ADDITIONAL INFORMATION.....................................................64 GLOSSARY...................................................................64 APPENDICES Appendix A AGREEMENT OF LIMITED PARTNERSHIP OF INDIANA LITHOTRIPTERS LIMITED PARTNERSHIP I Appendix B FORM OF LIMITED PARTNER LOAN COMMITMENT (WITH EXHIBITS) Appendix C FORM OF OPINION OF WOMBLE CARLYLE SANDRIDGE & RICE, PLLC Appendix D NOTES TO FINANCIAL STATEMENTS WINSTON #910642 v 2 31 WINSTON #910642 v 2 RISK FACTORS Prior to subscribing for Units, Investors should carefully examine this entire Memorandum, including the Appendices hereto, and should give particular consideration to the general risks attendant to speculative investments and investments in partnerships generally, and to the other special operating, tax and other investment risks set forth below. Operating Risks General Risks of Operations. The Partnership was formed under the laws of the State of Indiana on November 13, 1990 and commenced operations in May, 1991. Although the General Partner and its personnel have significant experience in managing lithotripsy enterprises, whether the Partnership can continue to effectively operate its business cannot be accurately predicted. The benefits of an investment in the Partnership also depend on many factors over which the Partnership has no control, including competition, technological innovations rendering the Lithotripsy Systems less competitive or obsolete, and other matters. The Partnership may be adversely affected by various changing local factors such as an increase in local unemployment, a change in general economic conditions, changes in interest rates and availability of financing, and other matters that may render the operation of the Lithotripsy Systems difficult or unattractive. Other factors that may adversely affect the operation of the Lithotripsy Systems are unforeseen increased operating expenses, energy shortages and costs attributable thereto, uninsured losses and the capabilities of the Partnership's management personnel. Uncertainties Related to Changing Healthcare Environment. The healthcare industry has experienced substantial changes in recent years. Managed care is becoming a major factor in the delivery of lithotripsy services, and the General Partner anticipates that managed care programs, including capitation plans, will continue to play an increasing role in the delivery of lithotripsy services and that competition for these services may shift from individual practitioners to health maintenance organizations and other significant providers of managed care. No assurance can be given that the changing healthcare environment will not have a material adverse effect on the Partnership. Lack of Diversification. The Partnership's fundamental purpose will be to operate the Lithotripsy Systems. Because the Partnership is dependent on only one line of business, it will have greater risks from unexpected service interruptions, equipment breakdowns, technological developments, kidney stone treatment medical breakthroughs, economic problems and similar matters than would be the case with a more diversified business. Impact of Insurance Reimbursement. The Partnership's revenues are expected to continue to be derived from the fees paid by Contract Hospitals and other health care facilities under contracts with the Partnership, as well as fees directly billed or collected for services from patients or their third-party payors. Payments received from Contract Hospitals and other health care facilities may be subject to renegotiation depending on the reimbursement such parties receive. Such reimbursement may be reduced for several reasons, including the introduction of an outpatient prospective payment system regarding Medicare patients, which in turn could lower reimbursement available from private health insurers. The increasing influence of health maintenance organizations and other managed care companies has resulted in pressure to reduce the reimbursement available for lithotripsy procedures. Additionally, the Health Care Financing Administration ("HCFA"), the federal agency which administers the Medicare program, has issued rules which reduce the reimbursement available for lithotripsy procedures provided at hospitals to $2,265. See "Regulation - Federal Regulation." In some cases reimbursement rates payable to the Partnership and the General Partner's Affiliates from commercial third-party payors are already less than the proposed HCFA rate. Because of the competitive pressures from managed care companies as well as threatened reductions in Medicare reimbursement, the General Partner anticipates that reimbursement available for lithotripsy procedures may continue to decrease. Such decreases would have a material adverse effect on Partnership revenues. Regarding the professional fees paid to physicians who treat patients on the Lithotripsy Systems, the General Partner anticipates that similar competitive pressures may result in lower reimbursement paid to physicians, both by private insurers and by government programs such as Medicare. See "Regulation." Reliability and Efficacy of the Partnership's Lithotripters. The Partnership currently operates a Lithostar(TM) extracorporeal shock wave lithotripter. The Lithostar(TM) has approximately an eleven-year United States operating history, having received premarket approval from the FDA for renal lithotripsy on September 30, 1988. This approval followed a period of clinical testing beginning in February 1987 at four test sites in the United States, which was preceded by substantial clinical testing of the Lithostar(TM) at the Urological Clinic of the Johannes Gutenberg University of Mainz, West Germany. The General Partner estimates that more than 400 Lithostar(TM) systems are currently operating in over twenty countries, and the General Partner and its Affiliates operate over 30 Lithostars(TM) in this and other ventures. In the General Partner's opinion, the Lithostar(TM) has proven to be reliable and dependable medical equipment; however, any downtime periods necessitated for maintenance or repairs of the Existing Lithotripsy System will adversely affect Partnership revenues. In 1996, the FDA approved a new higher intensity shock-head system for the Lithostar(TM), which the General Partner believes has shortened procedure times. The Lithostar(TM) operated by the Partnership was upfitted with the new shock-head system in 1996. Based upon a detailed follow-up study of 86,000 renal and 51,000 ureteral stones treated on the Lithostar(TM) in all of the General Partner's affiliated partnerships using both the original and newer shock-head systems, the General Partner notes an 86% total success rate with an overall retreatment rate of 15%. This retreatment rate included stones of all sizes and locations, including staghorn calculi which at times required multiple treatments. Based upon this study and the General Partner's experience in doing well in excess of 128,000 cases over the past ten and one-half years in its affiliated limited partnerships, the General Partner is of the opinion that the Lithostar(TM) is generally an effective and sound alternative for the treatment of renal stones. The Lithostar(TM) used by the Partnership is an older model, and the General Partner believes that the Partnership must acquire a new transportable lithotripter in order to maintain the Partnership's current level of efficiency and respond to competitive pressures. The Partnership anticipates purchasing one new transportable extracorporeal shock wave lithotripter with the proceeds of this Offering and Partnership debt financing. See "Business Activities - Acquisition of New Lithotripsy System." The General Partner believes a new transportable lithotripter offers an advantage over the Partnership's Existing Lithotripsy System because it can be moved from site to site more quickly, and can be used in hospital procedure rooms at treatment facilities with limited pad space. Pursuant to the terms of the Partnership Agreement, the Partnership's acquisition of a New Lithotripsy System is subject to the prior approval of a Majority in Interest of the Limited Partners. In the event the requisite consent of the Limited Partners is received, the General Partner will select from three available models the unit which offers the best combination of value and efficacy for the Partnership. The General Partner will consult with the Partnership's Physician Advisory Board prior to selecting the model of lithotripter to be acquired. The models currently under consideration as of the date of this Memorandum are (i) the Storz Modulith(R) SLX-T ("Modulith(R) SLX-T"), (ii) the Medirex Tripter X-1 Compact ("Compact"), and (iii) the Siemens Modularis(TM) Uro Plus ("Modularis(TM)"). The Modulith(R) SLX-T received FDA premarket approval on March 27, 1997. Preliminary reports from abroad and "word of mouth" anecdotal evidence indicate that the Modulith(R) SLX-T is as effective as most of the "portable" lithotripters in the market. The General Partner is aware that early data from abroad concerning one precursor to the Modulith(R) SLX-T reflected a high retreatment rate, and that an Affiliate of the General Partner experienced electrical and mechanical problems using another precursor, the Modulith(R) SLX. However, the General Partner and its Affiliates' experience with the transportable Modulith(R) SLX-T has shown acceptable retreatment rates. A high retreatment rate may adversely affect the Partnership. The General Partner and its Affiliates currently operate 11 Modulith(R) SLX-T lithotripters throughout the United States. The Compact and the Modularis(TM) received FDA premarket approval in 1996 and 1998, respectively. The General Partner and its Affiliates have limited direct experience with the use of the Compact and no direct experience with the Modularis(TM). Downtime periods necessitated by maintenance and repairs of any unit selected from the three models of lithotripters under consideration will adversely affect Partnership revenues. Investors should note that some studies indicate that lithotripsy may cause high blood pressure and tissue damage. The Partnership questions the reliability of these studies and believes lithotripsy has become a widely accepted method for the treatment of renal stones. Technological Obsolescence. The history of lithotripsy of kidney stones as an accepted treatment procedure is relatively recent, with the first clinical trials being conducted in West Germany beginning in 1980 and the first premarket approval for a renal lithotripter in the United States being granted by the FDA in December 1984. Today, lithotripsy is the treatment procedure of choice for kidney stone disease, having replaced other treatment methods. Published reports indicate that certain researchers are attempting to improve a laser technology to more easily eradicate kidney stones, and pharmaceutical companies and researchers have attempted to develop a safe drug that can be used to dissolve kidney stones in all cases. The General Partner cannot predict the outcome of ongoing research in these areas, and any one or more developments could reduce or eliminate lithotripsy as an acceptable procedure or treatment method of choice for the treatment of kidney stones. In addition, the availability of lower-priced transportable lithotripters in the United States has dramatically increased the number of lithotripters in the country, increased competition for lithotripsy procedures and created downward pressure on the prices the Partnership can charge for its services. Partnership Limited Resources and Risks of Leverage. The proceeds of this Offering cannot be accurately determined until the Closing has occurred and the number of Units sold has been calculated. In any event, such proceeds will not be sufficient to fund all anticipated expenses, and the Partnership will have to supplement Partnership funds with the proceeds of debt financing. See "Business Activities - Acquisition of the New Lithotripsy System" and "Sources and Application of Funds." Although the General Partner maintains good relationships with certain commercial lending institutions, it has not obtained a loan commitment from any party in any amount on behalf of the Partnership and whether one would timely be forthcoming on terms acceptable to the Partnership cannot be assured. The General Partner and/or its Affiliates may, but are under no obligation to, make loans to the Partnership, and there is no assurance that they would be willing or able to do so at the time, in amounts and on terms required by the Partnership. While the General Partner does not anticipate that it would cause the Partnership to incur indebtedness unless cash generated from Partnership operations were at the time expected to enable repayment of such loan in accordance with its terms, lower than anticipated revenues and/or greater than anticipated expenses could result in the Partnership's failure to make payments of principal or interest when due under such a loan and the Partnership's equity being reduced or eliminated. In such event, the Limited Partners could lose their entire investment. Acquisition of Additional Assets. Subject to certain limitations set forth in the Partnership Agreement, if in the future the General Partner determines that it is in the best interest of the Partnership to acquire (i) one or more fixed base or mobile lithotripsy systems in addition to the Existing Lithotripsy System; or (ii) any other assets related to the provision of lithotripsy services, the General Partner has the authority to establish reserves or borrow additional funds on behalf of the Partnership to accomplish such goals, and may use Partnership assets and revenues to secure and repay such borrowings. The prior written approval of a Majority in Interest of the Limited Partners is required for the acquisition of the New Lithotripsy System and any additional lithotripsy systems. See the Partnership Agreement attached hereto as Appendix A. The acquisition of additional assets may substantially increase the Partnership's monthly obligations and result in greater personnel requirements. See "Risk Factors - Operating Risks - Partnership Limited Resources and Risks of Leverage." Other than the New Lithotripsy System, which the Partnership intends to purchase with a portion of the proceeds of the Offering and Partnership debt financing, the General Partner does not anticipate acquiring additional Partnership assets unless projected Partnership Cash Flow or proceeds from a Dilution Offering are sufficient to finance such acquisitions. In any event, no Limited Partner would be personally liable on any additional Partnership indebtedness without such Partner's prior written consent. There is no assurance that financing would be available to the Partnership to acquire additional assets or to fund any additional working capital requirements. Any such borrowing by the Partnership will serve to increase the risks to the Partnership associated with leverage as provided above. Competition. Many fixed-site and mobile lithotripters are currently operating in and around the Service Area which will be in direct competition with the Partnership's Lithotripsy Systems. Affiliates of the General Partner operate in and near the Service Area. The competing lithotripsy service providers, including the General Partner's Affiliates, generally have existing contracts with hospitals and other facilities. Except as otherwise provided in the Partnership Agreement or by law, neither the General Partner nor its Affiliates are prohibited from engaging in any business or arrangement that may compete with the Partnership. See "Prior Activities," "Conflicts of Interest" and "Competition." There is no assurance that other parties will not, in the future, operate fixed-base or mobile lithotripters in and around the Service Area. To the General Partner's knowledge, no manufacturers are restricted from selling their lithotripters to other parties in the Service Area. Furthermore, the Partnership competes with facilities and individual medical practitioners who offer conventional treatment (e.g., surgery) for kidney stones. Managed care companies generally contract either directly with hospitals or specified providers for lithotripsy services for beneficiaries of their plans. It is not uncommon for managed care companies to have contracts already in place with hospitals or specified providers, and the Partnership will not be able to provide services to beneficiaries of those plans unless it convinces either the managed care companies or the hospitals to switch to the Partnership's services. Limited Partner Restrictions. The Partnership Agreement severely restricts the Limited Partners' ability to own interests in competing equipment or ventures. The enforceability of these noncompetition agreements is generally a matter of state law. No assurance can be given that one or more Limited Partners may not successfully compete with the Partnership. See "Competition." Government Regulation. All facets of the healthcare industry are highly regulated and will become more so in the future. The ability of the Partnership to operate legally and remain profitable may be adversely affected by changes in governmental regulations, including expected changes in reimbursement, Medicare and Medicaid certification requirements, federal and state fraud and abuse laws, including the federal Anti-Kickback Statute, the federal False Claims Act, federal and state self-referral laws, state restrictions on fee splitting and other governmental regulation. See "Regulation." These laws and regulations may adversely affect the economic viability of the Partnership. The laws are broad in scope, and interpretations by courts have been limited. Violations of these laws would subject the General Partner and all Limited Partners to governmental scrutiny and/or felony prosecution and punishment in the form of large monetary fines, loss of licensure, imprisonment and exclusion from Medicare and Medicaid. Certain provisions of Medicare and Medicaid law limit provider ownership and control over the various health care services to which physicians may make Medicare and Medicaid referrals. The primary laws involved are the "Stark II" federal statute prohibiting financial relationships between physicians and certain entities to which they refer patients, and the Anti-Kickback Statute which prohibits compensation in exchange for or to induce referrals. Regarding Stark II, HCFA published proposed Stark II regulations in 1998. Under the proposed regulations, physician Limited Partner referrals of Medicare and Medicaid patients to Contract Hospitals for lithotripsy services would be prohibited. If HCFA adopts the proposed Stark II regulations as final, or if a reviewing court were to interpret the Stark II statute using the proposed regulations as interpretive authority, then the Partnership and its physician Limited Partners would likely be found in violation of Stark II. In such instance, the Partnership and/or its physician Limited Partners may be required to refund any amounts collected from Medicare and Medicaid patients in violation of the statute, and they may be subject to civil monetary penalties and/or exclusion from the Medicare and Medicaid programs. The Anti-Kickback Statute prohibits paying or receiving any remuneration in exchange for making a referral for healthcare services which may be paid for by Medicare, Medicaid or TRICARE (formerly known as CHAMPUS). The law has been broadly interpreted to include any payments which may induce or influence a physician to refer patients. One of the federal agencies that enforces the Anti-Kickback Statute has issued several "safe harbors" which, if complied with, mean the payment or transaction will be deemed not to violate the law. This Offering does not comply with any "safe harbor." There is limited guidance from reviewing courts regarding the application of the broad language of the Anti-Kickback Statute to joint ventures similar to the one described in this Offering. In order to prove violations of the Anti-Kickback law, the government must establish that one or more parties offered, solicited or paid remuneration to induce or reward referrals. The government has said that in certain situations the mere offering of an opportunity to invest in a venture would constitute illegal remuneration in violation of the Anti-Kickback Statute. Although the General Partner believes the structure and purpose of the Partnership are in compliance with the Anti-Kickback Statute, no assurances can be given that government officials or a reviewing court would agree. Violation of the Anti-Kickback Statute could subject the Partnership, the General Partner and the physician Limited Partners to criminal penalties, imprisonment, fines and/or exclusion from the Medicare and Medicaid programs. The federal False Claims Act and similar laws generally prohibit an individual or entity from knowingly and willfully presenting a claim (or causing a claim to be presented) for payment from Medicare, Medicaid or other third party payors that is false and fraudulent. In recent cases, False Claims Act violations have been based on allegations that Stark II or the Anti-Kickback Statute have been violated. In addition to Stark II, the Anti-Kickback Statute and the False Claims Act, an unfavorable interpretation of other existing laws, or enactment of future laws or regulations, could potentially adversely affect the operation of the Partnership. To the best knowledge of the General Partner, no certificate of need ("CON") will be required to operate in Indiana or on a wholesale basis in Kentucky. In Kentucky, the Partnership will lease the Lithotripsy Systems to hospitals and other treatment centers, which will in turn be responsible for providing the lithotripsy services and for billing. Various licensure requirements must be met for the Partnership to provide mobile lithotripsy services in Indiana and Kentucky. The General Partner will continue to seek to comply with such requirements. See "Regulation - State Regulation". Contract Terms and Termination. The Partnership provides lithotripsy services to four Contract Hospitals pursuant to four separate Hospital Contracts. The Contract Hospitals generally pay the Partnership a fee for each lithotripsy procedure performed at the health care facility; however, the Partnership does directly bill and collect for services from some patients or their third-party payors. Three of the Hospital Contracts grant the Partnership the exclusive right to provide lithotripsy services at the particular Contract Hospitals. All of the Hospital Contracts provide for automatic renewal on a year-to-year basis. Two of the Hospital Contracts are terminable without cause at any time upon 60 days written notice by either party, and two Hospital Contracts are terminable without cause at the end of the initial term or any renewal period upon 60 days prior written notice. The Partnership also leases the Existing Lithotripsy System to an Affiliate of the General Partner for the purpose of providing lithotripsy services at a hospital located in Louisville, Kentucky. See "Competition." The General Partner believes it has a good relationship with the Contract Hospitals and does not anticipate any terminations. There is no assurance, however, that fees payable to the Partnership by Contract Hospitals will not decline or that terminations will not occur. The resulting impact of such events would have a material adverse effect on Partnership operations. It is expected that most new lithotripsy service contracts, if any, would have one-year terms and be automatically renewed unless either party elects to cancel prior to the end of the term. In addition, all of the existing contracts have, and any new contracts are expected to have, provisions permitting termination in the event certain laws or regulations are enacted or applied to the contracting parties' business arrangements in a manner deemed materially detrimental to either party. See "Government Regulation" above. In addition, competing vendors may attempt to cause certain Contract Hospitals to contract with them instead of the Partnership. The loss of Contract Hospitals to competition would adversely affect Partnership revenues and such effect could be material. Thus, there is no assurance that Partnership operations as carried on as of the date of this Memorandum or contemplated in the future will continue as herein described or contemplated, and the cancellation of any service contract or the Partnership's inability to secure new ones could have a material negative impact on the financial condition and results of the Partnership. See "Business Activities - Hospital Contracts" and "Risk Factors - Competition." Loss on Dissolution and Termination. Upon the dissolution and termination of the Partnership, the proceeds realized from the liquidation of its assets, if any, will be distributed to its Partners only after satisfaction of the claims of all creditors. Accordingly, the ability of a Limited Partner to recover all or any portion of his investment under such circumstances will depend on the amount of funds so realized and the claims to be satisfied therefrom. See "Summary of the Partnership Agreement - Optional Purchase of Limited Partner Interests." Tax Risks Investors should note that the General Partner anticipates no significant tax benefits associated with the operation of the Lithotripsy Systems or the Partnership. No ruling will be sought from the Service on the federal income tax consequences of any of the matters discussed in this Memorandum or any other tax issues affecting the Partnership or the Limited Partners. The Partnership is relying upon an opinion of Counsel with respect to certain material United States federal income tax issues. Counsel's opinion is not binding on the Service as to any issue, however, and there is no assurance that any deductions, or the period in which deductions may be claimed, will not be challenged by the Service. Each Investor should carefully review the following risk factors and consult his own tax advisor with respect to the federal, state and local income tax consequences of an investment in the Partnership. THE TAX RISKS SET FORTH IN THIS SECTION ARE NOT INTENDED TO BE AN EXHAUSTIVE LIST OF THE GENERAL OR SPECIFIC TAX RISKS RELATING TO THE PURCHASE OF UNITS IN THE PARTNERSHIP. EACH INVESTOR IS DIRECTED TO THE FULL OPINION OF COUNSEL (APPENDIX C TO THE MEMORANDUM). IT IS STRONGLY RECOMMENDED THAT EACH INVESTOR INDEPENDENTLY CONSULT HIS PERSONAL TAX COUNSEL CONCERNING THE TAX CONSEQUENCES ASSOCIATED WITH HIS OWNERSHIP OF AN INTEREST IN THE PARTNERSHIP. THE CONCLUSIONS REACHED IN THE OPINION ARE RENDERED WITHOUT ASSURANCE THAT SUCH CONCLUSIONS HAVE BEEN OR WILL BE ACCEPTED BY THE SERVICE OR THE COURTS. THIS MEMORANDUM AND THE OPINION DO NOT DISCUSS, NOR WILL COUNSEL BE RENDERING AN OPINION REGARDING, THE ESTATE AND GIFT TAX OR STATE AND LOCAL INCOME TAX CONSEQUENCES OF AN INVESTMENT IN THE PARTNERSHIP. FURTHERMORE, INVESTORS SHOULD NOTE THAT THE ANTICIPATED FEDERAL INCOME TAX CONSEQUENCES OF AN INVESTMENT IN THE PARTNERSHIP MAY BE ADVERSELY AFFECTED BY FUTURE CHANGES IN THE FEDERAL INCOME TAX LAWS, WHETHER BY FUTURE ACTS OF CONGRESS OR FUTURE ADMINISTRATIVE AND JUDICIAL INTERPRETATIONS OF APPLICABLE FEDERAL INCOME TAX LAWS. ANY OF THE FOREGOING MAY BE GIVEN RETROACTIVE EFFECT. Possible Legislative or Other Actions Effecting Tax Consequences. The federal income tax treatment of an investment in an equipment/service oriented limited partnership such as the Partnership may be modified by legislative, judicial or administrative action at any time, and any such action may retroactively affect investments and commitments previously made. The rules dealing with federal income taxation of limited partnerships are constantly under review by the Service, resulting in revisions of its regulations and revised interpretations of established concepts. In evaluating an investment in the Partnership, each Investor should consult with his personal tax advisor with respect to possible legislative, judicial and administrative developments. Disqualification of Employee Benefit Plans. Purchase of Units in the Partnership may cause certain Limited Partners, certain hospitals and out-patient centers, the Partnership, and employees of the foregoing to be treated under Section 414(m) of the Code as being employed in the aggregate by a single employer or "affiliated service group" for purposes of minimum coverage, participation and other employee benefit plan requirements imposed by the Code. In contrast, an employer not affiliated under Section 414(m) need only consider its own employees in determining whether its employee benefit plans satisfy Code requirements. Aggregation of employees could cause the disqualification of the retirement plans of certain Limited Partners and related entities. Aggregation could also require the value of the vested retirement benefit of a highly compensated employee who is a participant in a disqualified plan to be included in his gross income, regardless of whether the employee is a Limited Partner. These rules may adversely affect Investors who are currently involved in a medical practice joint venture, regardless of their purchase of Units in the Partnership. The General Partner and Counsel have been informally advised by officials of the Service that the Service would not likely attempt to apply the affiliated service group rules to the Partnership, nor has the Service applied these rules to similar arrangements in the past. Informal discussions with the Service, however, are not binding on the Service, and there can be no guarantee that the Service will not apply the affiliated service group rules to the Partnership. INVESTORS ARE URGED TO CONSULT WITH THEIR OWN TAX ADVISORS REGARDING THE APPLICABILITY OF THE AFFILIATED SERVICE GROUP RULES DESCRIBED HEREIN TO THE EMPLOYEE BENEFIT PLANS MAINTAINED BY THEM OR THEIR MEDICAL PRACTICES. Partnership Allocations. The Partnership Agreement contains certain allocations of profits and losses that could be reallocated by the Service if it were determined that the allocations did not have "substantial economic effect." On December 31, 1985, the Regulations dealing with the propriety of partnership allocations were finalized. As a general rule, allocations of profits and losses must have "substantial economic effect." Based upon current law, Counsel is of the opinion that, if the question were litigated, it is more probable than not that the allocation of profits and losses set forth in the Partnership Agreement would be sustained for federal income tax purposes. This opinion is subject to certain assumptions and qualifications. Investors are cautioned that the foregoing opinion is based in part upon final regulations which have not been extensively commented upon or construed by the courts. Income in Excess of Distributions. The Partnership Agreement provides that in each year annual Distributions may be made to the Partners. Excluded from the definition of cash available for distribution is the amount of funds necessary to discharge Partnership debts and to maintain certain cash reserves deemed necessary by the General Partner. If Partnership Cash Flow is insufficient to fund expenses and maintain adequate reserves, a Limited Partner could be subject to income taxes payable out of personal funds to the extent of the Partnership's income, if any, attributed to him without receiving from the Partnership sufficient Distributions to pay the Limited Partner's tax with respect to such income. Effect of Classification as Corporation. The Partnership has not and will not seek a ruling from the Service concerning the tax status of the Partnership. It is the opinion of Counsel that the Partnership will be treated as a partnership for federal income tax purposes and not as an association taxable as a corporation unless the Partnership so elects. The Partnership has not and will not make an election to be classified as other than a partnership for federal income tax purposes. Although the Partnership intends to rely on the legal opinion of Counsel, the service will not be bound thereby. Moreover, there can be no assurance that legislative or administrative changes or court decisions may not in the future result in the Partnership being treated as an association taxable as a corporation, with a resulting greater tax burden associated with the purchase of Units. The General Partner, in order to comply with applicable tax law, will keep the Partnership's books and records and otherwise compute Profits and Losses based on the accrual method, and not the cash basis method, of accounting pursuant to Section 448 of the Code. The accrual method of accounting generally records income and expenses when they are accrued or economically incurred. Passive Income and Losses. The General Partner expects that the Partnership will continue to realize taxable income and not taxable losses during the foreseeable future. Nevertheless, if it instead realizes taxable losses, the use of such losses by the Limited Partners will generally be limited by Code Section 469. Code Section 469 provides limitations for the use of taxable losses attributable to "passive activities." Code Section 469 operates generally to prohibit passive losses from being used against income from active activities. The passive activity rules are extremely complex and Investors are urged to consult their own tax advisors as to their applicability, particularly as they relate to the ability to deduct any losses from the Partnership against other income of the Investor. THE PASSIVE ACTIVITY LOSS RULES WILL AFFECT EACH INVESTOR DIFFERENTLY, DEPENDING ON HIS OR HER OWN TAX SITUATION. EACH INVESTOR SHOULD CONSULT WITH HIS OR HER OWN TAX ADVISOR TO DETERMINE THE EFFECT OF THESE RULES ON THE INVESTOR IN LIGHT OF THE INVESTOR'S INDIVIDUAL FACTS AND CIRCUMSTANCES. Depreciation. As in the case of its existing equipment, the Partnership will use the Modified Accelerated Cost Recovery System ("MACRS") to depreciate the cost of any newly acquired equipment (including the New Lithotripsy System) or improvements. Any additions or improvements to the Lithotripsy Systems will also be depreciated over a five year term using the 200% declining balance method of depreciation, switching to the straight-line method to maximize the depreciation allowance. If purchases or improvements are made after the beginning of any year, only a fraction of the depreciation deduction may be claimed in that year. As under prior law, the 1986 Act provides that the full amount of depreciation on personal property (such as the Lithotripsy Systems) is recaptured upon disposition (i.e., is taxed as ordinary income) to the extent gain is realized on the disposition. Investors should note that the 1986 Act repealed the investment tax credit for all personal property. Partnership Elections. The Code permits partnerships to make elections for the purpose of adjusting the basis of partnership property on the distribution of property by a partnership to a partner and on the transfer of an interest in a partnership by sale or exchange or on the death of a partner. The general effect of such elections is that transferees of Partnership Interests will be treated, for the purposes of depreciation and gain, as though they had a direct interest in the Partnership's assets, and the difference between their adjusted bases for their Partnership Interests and their allocable portion of the Partnership's bases for its assets will be allocated to such assets based upon the fair market value of the assets at the times of transfers of the Partnership Interests. Any such election, once made, cannot be revoked without the consent of the Service. Under the terms of the Partnership Agreement, the General Partner, in its discretion, may make the requisite election necessary to effect such adjustment in basis. Sale of Partnership Units. Gain realized on the sale of Units by a Limited Partner who is not a "dealer" in Units or in limited partnership interests will be taxed as capital gain, except that the portion of the sales price attributable to inventory items and unrealized receivables will be taxed as ordinary income. "Unrealized receivables" of the Partnership include the Limited Partner's share of the ordinary income that the Partnership would realize as a result of the recapture of depreciation (as described above) if the Partnership had sold Partnership depreciable property immediately before the Limited Partner sold his Partnership Interest. Investors should note that the IRS Restructuring and Reform Act of 1998 generally imposes a maximum tax rate of 20% on net long-term capital gains. To the extent the Partnership has income attributable to depreciation recapture incurred on the sale of a capital asset, such income will be taxed at a maximum rate of 25%. The Revenue Reconciliation Act of 1993 imposed a maximum potential individual income tax rate of 39.6% on ordinary income. Tax Treatment Of Certain Fees and Expenses Paid By The Partnership. Under the Code, a partnership expenditure will, as a general rule, fall into one of the following categories: (1) deductible expenses -- expenditures such as interest, taxes, and ordinary and necessary business expenses which the partnership is entitled to deduct in full when paid or incurred; (2) amortizable expenses -- expenditures which the partnership is entitled to amortize (i.e., deduct ratably) over a fixed period of time; (3) capital expenditures -- expenditures which must be added to the amortization or depreciation base of partnership property (or partnership loans) and deducted over a period of time as the property (or partnership loan) is amortized or depreciated; (4) organization expenses -- expenditures related to the organization of the partnership, which under Section 709 of the Code are amortized over a 60-month period, provided an election to do so is made; (5) syndication expenses -- expenditures paid or incurred in promoting the sale of interests in the partnership, which under Section 709 of the Code must be capitalized but may be neither depreciated, amortized, nor otherwise deducted; (6) partnership distributions -- payments to partners representing distributions of partnership funds, which may be neither capitalized, amortized nor deducted; (7) start-up expenses -- expenditures incurred by a partnership during an initial period, which under Section 195 of the Code may be amortized over a 60-month period; and (8) guaranteed payments to partners -- payments to partners for services or use of capital which are deductible or treated in the other categories of expenditures listed above, provided they meet the applicable requirements. Several amendments to the Code enacted by the Tax Reform Act of 1984 alter established tax accounting principles. One or more of these amendments may affect the federal income tax treatment of fees and expenses, particularly fees paid or incurred by a partnership for services. In particular, Code Section 461(h) now provides that an expense or fee paid to a service provider may not be accrued for federal income tax purposes prior to the time "economic performance" occurs. "Economic performance" occurs as (and no sooner than) the service provider provides the required services. All expenditures of the Partnership must constitute ordinary and necessary business expenses in order to be deducted by the Partnership when paid or incurred, unless the deduction of any such item is otherwise expressly permitted by the Code (e.g., taxes). Expenditures must also be reasonable in amount. The Service could challenge a fee deducted by the Partnership on the ground that such fee is a capital expenditure, which must either be amortized over an extended period or indefinitely deferred, rather than deducted as an ordinary and necessary business expense. The Service could also challenge the deduction of any fee on the basis that the amount of such fee exceeds the reasonable value of the services performed, the goods acquired or the other benefits to the Partnership. Under Section 482 of the Code, the Service has broad discretion to reallocate income, deductions, credits or allowances between entities with common ownership or control if it is determined that such reallocation is necessary to prevent the evasion of taxes or to reflect the income of such entities. The Partnership and the General Partner are entities to which Section 482 applies and it is possible that the Service could contend that certain items should be reallocated in a manner that would change the Partnership's proposed tax treatment of such items. The General Partner believes the payments to it and its Affiliates are customary and reasonable payments for the services rendered by them to the Partnership; however, these fees were not determined by arm's length negotiations. Nothing has come to the attention of Counsel which would give Counsel reasonable cause to question the General Partner's determination. On audit the Service may challenge such payments and contend that the amount paid for the services exceeds the reasonable value of those services. Because of the factual nature of the question of the reasonableness of any particular fee, Counsel cannot express an opinion as to the outcome of the reasonableness of the amount of any fee should the issue be litigated. Syndication Expenses. Section 709 of the Code prohibits a partnership from deducting or amortizing costs that are incurred to promote the sale of partnership interests (i.e., syndication expenses). The Regulations provide definitions for syndication expenses that must be capitalized. Syndication expenses include brokerage fees, registration fees, legal fees for securities advice, accounting fees for preparation of representations to be included in the offering materials, and printing costs of the offering materials. The Partnership intends to treat the entire amount payable to the Sales Agent as a sales commission for selling the Units, as well as certain other fees and expenses allocable to the preparation of this Memorandum and to the offering of the Units in the Partnership, as nondeductible, nonamortizable syndication expenses. Investors will economically bear their respective proportionate share of syndication expenses as these costs likely will be paid out of proceeds from this Offering. These costs will be borne irrespective of their amount, timing and ability of the Partnership to deduct these costs for tax purposes. Management Fee to General Partner. The Partnership pays the General Partner, in its capacity as the Partnership's management agent, a monthly management fee equal to the greater of $8,000 or 7.5% of Partnership Cash Flow per month. The management fee is paid to the General Partner for the time and attention devoted by it for supervising and coordinating the management and administration of the Partnership's day-to-day operations pursuant to the terms of the Management Agreement. The Partnership will continue to deduct the management fee in full in the year paid. Assuming the management fee to be paid to the General Partner is ordinary, necessary and reasonable in relation to the services provided, Counsel is of the opinion that the Partnership may deduct the management fee in full in the year paid. State and Local Taxation. Each Investor should consult his own attorney or tax advisor regarding the effect of state and other local taxes on his personal situation. Other Investment Risks Conflicts of Interest. The activities of the Partnership involve numerous existing and potential conflicts of interest between the Partnership, the General Partner and their Affiliates. See "Compensation and Reimbursement to the General Partner and its Affiliates," "The General Partner," "Competition" and "Conflicts of Interest." No Participation in Management. The General Partner has full authority to supervise the business and affairs of the Partnership pursuant to the Partnership Agreement and the Management Agreement. The Limited Partners generally have very limited right to participate in the management, control or conduct of the Partnership's business and affairs. See "Summary of the Partnership Agreement." The General Partner, its employees and its Affiliates are not required to devote their full time to the Partnership's affairs and intend to continue devoting substantial time and effort to organizing and operating partnerships and other ventures throughout the United States that are similar to the Partnership. The General Partner will continue to devote such time to the Partnership's business and affairs as it deems necessary and appropriate in the exercise of reasonable judgment. The participation by any Limited Partner in the management or control of the Partnership's affairs could render him generally liable for the liabilities of the Partnership that could not be satisfied by assets of the Partnership. See the form of Opinion of Counsel, attached hereto as Appendix C. Limited Partners' Obligation to Return Certain Distributions. Except as provided by other applicable law and provided that a Limited Partner does not participate in the management or control of the Partnership, he will not be liable for the liabilities of the Partnership in excess of his investment, his ratable share of undistributed profits, and any distributions received from the Partnership to the extent that, after giving effect to such distributions, all liabilities of the Partnership, other than liabilities attributable to Partners on account of their Partnership Interests, would exceed the fair value of the Partnership's assets. However, under Indiana law, to the extent that cash distributed to a Limited Partner constitutes the return of all or a portion of such Limited Partner's capital contribution as provided by the Act, although such distribution was rightfully made, such Limited Partner will be liable to the Partnership for a period of one year following the receipt of such distribution for any sum not in excess of such return of capital necessary to discharge the Partnership's liabilities to creditors who extended credit to the Partnership during the period the contribution was held by the Partnership. Furthermore, if a Limited Partner receives a return of all or a portion of such Limited Partner's capital contribution in violation of the Partnership Agreement or the Act, such Limited Partner will be liable to the Partnership for a period of six years for the amount of such contribution wrongfully returned to the Limited Partner. Dilution of Limited Partners' Interests. The General Partner has the authority under the Partnership Agreement to cause the Partnership to periodically offer and sell additional limited partnership interests to local investors who are not Limited Partners (a "Dilution Offering"). Partnership interests offered in a Dilution Offering must be sold in a manner and according to terms in the best interest of the Partnership, as prescribed in the sole discretion of the General Partner. Upon the sale of interests in the Partnership in a Dilution Offering, the Percentage Interests of the Partners will be proportionately diluted. See "Summary of the Partnership Agreement - Dilution Offerings." Liability Under Limited Partner Loan. Investors personally borrowing funds to finance a portion of their Unit purchase price with the proceeds of a Limited Partner Loan will be directly obligated to the Bank as provided in the Loan Documents. A default under the Limited Partner Loan could result in the foreclosure of the Investor's right to receive any Partnership Distributions as well as the loss of other personal assets unrelated to his Partnership Interest. Prospective Investors should review carefully all the provisions contained in the Loan Commitment and the terms of the Limited Partner Note and Loan and Security Agreement with their counsel and financial advisors. Neither the Partnership nor the General Partner endorses or recommends to the prospective Investors the desirability of obtaining financing from the Bank nor does the summary of the Loan Documents provided herein constitute legal advice. A Limited Partner's liability under a Limited Partner Note continues regardless of whether the Limited Partner remains a limited partner in the Partnership. As a consequence, such liability cannot be avoided by claims, defenses or set-offs the Limited Partner may have against the Partnership, the General Partner or their Affiliates. In addition to the suitability requirements discussed below, any prospective Investor applying for a Limited Partner Loan to fund a portion of his Unit purchase must be approved by the Bank for purposes of his delivery of the Limited Partner Note. The Bank has established its own criteria for approving the creditworthiness of a prospective Investor and has not established objective minimum suitability standards. Instead, the Bank is empowered to accept or reject prospective Investors. Long-term Investment. The General Partner anticipates that the Partnership will continue to operate the Lithotripsy Systems for an indefinite period of time and that the Partnership will not liquidate prior to its intended termination. Accordingly, Investors should consider their investment in the Partnership as a long-term investment of indefinite duration. Limited Transferability and Illiquidity of Units. Transferability of Units is severely restricted by the Partnership Agreement and the Subscription Agreement, and the consent of the General Partner is necessary for any transfer. No public market for the Units exists and none is expected to develop. Moreover, the Units generally may not be transferred unless the General Partner is furnished with an opinion of counsel, satisfactory to the General Partner, to the effect that such assignment or transfer may be effected without registration under the Securities Act and any state securities laws applicable to the transfer. The Partnership will be under no obligation to register the Units or otherwise take any action that would enable the assignment or transfer of a Unit to be in compliance with applicable federal and state securities laws. Thus, a Limited Partner may not be able to liquidate an investment in the Partnership in the event of an emergency, and the Units may not be readily accepted as collateral for loans. Moreover, a sale of a Unit by a Limited Partner may cause adverse tax consequences to the selling Limited Partner, as well as potentially effect a default under any outstanding Limited Partner Loan. Accordingly, the purchase of Units must be considered a long-term and illiquid investment. Arbitrary Offering Price. The offering price of the Units has been determined by the General Partner based upon a valuation of the Partnership conducted by an independent third-party valuation firm, and based on various assumptions that may or may not occur. A copy of this valuation will be made available on request. The offering price of the Units is not, however, necessarily indicative of their value, if any, and no assurance can be given that the Units, if and when transferable, could be sold for the offering price or for any amount. Limitation of General Partner's Liability and Indemnification. The Partnership Agreement provides that the General Partner will not be liable to the Partnership or to any Partner for errors in judgment or other acts or omissions in connection with the Partnership as long as the General Partner, in good faith, determined such course of conduct was in the best interest of the Partnership, and such course of conduct did not constitute willful misconduct or gross negligence. Therefore, the Limited Partners may have a more limited right of action against the General Partner in the event of its misfeasance or malfeasance than they would have absent the limitations in the Partnership Agreement. The Partnership will indemnify the General Partner against losses sustained by the General Partner in connection with the Partnership, unless such losses came as a result of the General Partner's gross negligence or willful misconduct. In the opinion of the SEC, indemnification for liabilities arising out of the Securities Act is contrary to public policy and therefore is unenforceable. Insurance. Prime Medical Services, Inc. ("Prime"), the sole shareholder of the General Partner, maintains active policies of insurance for the benefit of itself and certain affiliated entities covering employee crime, workers' compensation, business and commercial automobile operations, professional liability, inland marine, business interruption, real property and commercial liability risks. These policies include the Partnership, and the General Partner believes that coverage limits of these policies are within acceptable norms for the extent and nature of the risks covered. The Partnership is responsible for its share of premium costs. There are certain types of losses, however, that are either uninsurable or are not economically insurable. For instance, contractual liability is generally not covered under Prime's policies. Should such losses occur with respect to Partnership operations, or should losses exceed insurance coverage limits, the Partnership could suffer a loss of the capital invested in the Partnership and any anticipated profits from such investment. Optional Purchase of Limited Partner Interests. As provided in the Partnership Agreement, the General Partner has the option to purchase all the interest of a Limited Partner who (i) dies; (ii) becomes insolvent; or (iii) acquires a direct or indirect ownership of an interest in a competing venture. The General Partner, in its sole discretion, may elect to assign its purchase option rights to the Partnership. A Limited Partner whose Limited Partner Interest is sold, as provided above, or who ceases to be a Limited Partner of the Partnership for any reason, will be further restricted from having a direct or indirect ownership in a competing venture (including the lease or sublease of competing technology) within a certain restricted market area for two years after the disposition of his Partnership Interest. Limited Partners, except in certain circumstances set forth in the Partnership Agreement, are also absolutely prohibited from disclosing Partnership trade secrets and confidential information. The option purchase price for the Partnership Interest is equal to the Partner's share of the Partnership's book value, if any, as reflected by such Partner's Capital Account (unadjusted for any appreciation in Partnership assets and as reduced by depreciation deductions claimed by the Partnership for tax purposes). Because losses, depreciation, deductions and distributions reduce capital accounts, and because appreciation in assets is not reflected in capital accounts, the option purchase price may be nominal in amount. See the Partnership Agreement attached hereto as Appendix A and "Summary of the Partnership Agreement - Optional Purchase of Limited Partner Interests." THE PARTNERSHIP Indiana Lithotripters Limited Partnership I, an Indiana limited partnership (the "Partnership") was organized and created under the Indiana Revised Uniform Limited Partnership Act (the "Act") on November 13, 1990. The general partner of the Partnership is Lithotripters, Inc., a North Carolina corporation (the "General Partner"), and a wholly owned subsidiary of Prime. The General Partner currently holds approximately a 25.82% interest in the Partnership in its capacity as the general partner and the existing limited partners (the "Initial Limited Partners") currently hold the remaining 74.18% interest in the Partnership as limited partners (including an 8.65% limited partner interest held by the General Partner). In the event that all 25 Units offered hereby are sold, the General Partner will hold approximately a 19.365% general partner interest in the Partnership, the Initial Limited Partners will hold a 55.635% limited partner interest in the Partnership and the Investors who purchase the Units offered hereby (the "New Limited Partners") will hold an aggregate 25% interest in the Partnership. The Percentage Interests of the General Partner and Initial Limited Partners (aggregate) will decrease by approximately .26% and .74%, respectively, for each Unit sold. All Partners will have their Partnership Interests further reduced in the event of additional dilution offerings. See "Summary of the Partnership Agreement - Dilution Offerings." The principal address of the Partnership and the General Partner is 1301 Capital of Texas Highway, Suite C-300, Austin, Texas 78746. The telephone number of the Partnership and the General Partner is (888) 252-6575. TERMS OF THE OFFERING The Units and Subscription Price Indiana Lithotripters Limited Partnership I, an Indiana limited partnership, hereby offers an aggregate of 25 Units of limited partnership interest in the Partnership (the "Units"). Each Unit represents an initial 1% economic interest in the Partnership. See "Risk Factors - Other Investment Risks - Dilution of Limited Partners' Interests." Each Investor may purchase not less than one Unit. The General Partner may, however, in its sole discretion, sell less than one Unit as an additional investment and reject in whole or in part any subscription. The price for each Unit is $11,163 in cash payable at subscription; however, certain qualified Investors may personally borrow funds from a third-party financial institution to pay a portion of the cash purchase price. For the convenience of Investors, the Partnership has arranged for financing a portion of the purchase price with the Bank. See "Terms of the Offering - Limited Partner Loans." The Proceeds of the Offering will first be used by the Partnership to pay offering costs and expenses, and the remainder of the proceeds, if any, will be used to finance a portion of the cost of (i) purchasing a new transportable lithotripter (estimated at $425,000), and a new mobile truck (estimated at $80,000), as well as pay applicable state sales or use taxes on the New Lithotripsy System (estimated at $25,250), and (ii) upgrading the imaging system of the Partnership's Existing Lithotripsy System (estimated at $56,500). See "Sources and Applications of Funds." The Partnership's acquisition of the New Lithotripsy System is subject to the prior approval of a Majority in Interest of the Limited Partners. See the Partnership Agreement, attached hereto as Appendix A. The proceeds of this Offering cannot be calculated until the number of Units sold has been determined at the Closing. In the event the proceeds of the Offering will be insufficient to fund all of the costs described above (a certainty in the case the acquisition of New Lithotripsy System is approved), it is anticipated that the Partnership will also use Partnership Cash Flow, reserves and/or the proceeds of debt financing to fund such costs. There is no assurance, however, that debt financing will be available for such purposes. See "Risk Factors - Operating Risks - Partnership Limited Resources and Risks of Leverage" and "Business Activities - Acquisition of New Lithotripsy System." As of the date of this Memorandum, the requisite approval of the Initial Limited Partners is being solicited by the General Partner. In the event the purchase of the New Lithotripsy System is not approved and Offering proceeds remain after funding the Offering costs and the upgrade, such proceeds will be kept in Partnership reserves and/or distributed to the Initial Limited Partners. Acceptance of Subscriptions To enable the Bank and the General Partner to make credit and investor decisions, respectively, each prospective Investor must complete and deliver to the General Partner a Purchaser Financial Statement in the form included in the Subscription Packet accompanying this Memorandum, or a substitute financial statement containing the same information as provided therein, and pages one and two of the prospective Investor's most recently filed Form 1040 U.S. Individual Income Tax Return. An Investor that pays the full amount of his Unit purchase price with a check at subscription and whose subscription is received and accepted by the Partnership, will become a Limited Partner in the Partnership, and his subscription funds will be released from escrow to the Partnership. Acceptance by the General Partner of a subscription of an Investor that elects to finance a portion of the Unit purchase price with the proceeds of a Limited Partner Loan is conditioned upon the Bank's approval of such loan. See "Terms of the Offering - Limited Partner Loans." If the financing Investor is otherwise acceptable to the Partnership, after receipt of the Bank's approval, the Partnership will inform the Escrow Agent that it has accepted the Investor's subscription and the Escrow Agent will release the Loan Documents to the Bank and the Bank will pay the proceeds from the Limited Partner Loan to the Partnership. The Investor will become a Limited Partner in the Partnership at the time the Bank releases the proceeds of his Limited Partner Loan to the Partnership. Subscriptions may be rejected in whole or in part by the Partnership and need not be accepted in the order received. To the extent the Partnership reduces an Investor's subscription as provided above, the Investor's cash Unit purchase price, or the principal amount of his Limited Partner Note, as the case may be, will be proportionately refunded and reduced. Notice of acceptance of an Investor's subscription to purchase Units and his Percentage Interest in the Partnership will be furnished promptly after acceptance of the Investor's Subscription. Limited Partner Loans The purchase price for the Units is payable in cash. The prospective Investor may pay for the Units with personal funds alone or in part with such funds, together with either loan proceeds personally borrowed by the Investor under a Limited Partner Loan or other loan. Financing under the Limited Partner Loans was arranged by the Partnership with the Bank as provided in the Limited Partner Loan Commitment, attached hereto as Appendix B. Prospective Investors should review carefully all the provisions contained in the Limited Partner Loan Commitment and the terms of the Limited Partner Note and Loan and Security Agreement with their counsel and financial advisors. Neither the Partnership nor the General Partner endorses or recommends to the prospective Investors the desirability of obtaining financing from the Bank nor does the summary of the Loan Documents provided herein constitute legal advice. If the prospective Investor wishes to finance a portion of the purchase price of his Units as provided herein, he must deliver to the Sales Agent upon submission of his Subscription Packet an executed Limited Partner Note payable to the Bank and Note Addendum, the form of which are attached as Exhibit A to the Limited Partner Loan Commitment, a Loan and Security Agreement, the form of which is attached as Exhibit B to the Limited Partner Loan Commitment, a Security Agreement, the form of which is attached as Exhibit C to the Limited Partner Loan Commitment and two UCC-1's, the form of which are attached to the Subscription Packet (collectively, the "Loan Documents"). In no event may the maximum amount borrowed per Unit exceed $8,663. The Limited Partner Note is repayable in twelve (12) predetermined installments in the respective amounts set forth in the Limited Partner Loan Commitment. The installments are payable on each January 15th, April 15th, June 15th and September 15th commencing on January 15, 2001 (assuming the Closing occurs prior to August 31, 2000), with a thirteenth (13th) and final installment in an amount equal to the principal balance then owed on the Limited Partner Note and all accrued, unpaid interest thereon due and payable on the third anniversary of the first installment date. Interest accrues at the Bank's "Prime Rate," as the same may change from time to time. The Prime Rate refers to that rate of interest established by the Bank and identified as such in literature published and circulated within the Bank's offices. Such term is used as a means of identifying a rate of interest index and not as a representation by the Bank that such rate is necessarily the lowest or most favorable rate of interest offered to borrowers of the Bank generally. A prospective Investor will have no claim or right of action based on such premise. Under the terms of the Limited Partner Loan, the Bank may extend the maturity date for the Limited Partner Note and increase installment payments thereunder in the event interest rates substantially increase. See the form of the Limited Partner Note attached as Exhibit A to the Limited Partner Loan Commitment which is attached hereto as Appendix B. The Limited Partner Note will be secured by the cash flow distributions payable with respect to the prospective Investor's Partnership Interest as provided in the Loan and Security Agreement and the Security Agreement and as evidenced by the UCC-1s. By executing the Loan and Security Agreement, the prospective Investor requests the Bank to extend the Limited Partner Loan Commitment to him if he is approved for a Limited Partner Loan. The Loan and Security Agreement also authorizes (i) the Bank to pay the proceeds of the Limited Partner Note directly to the Partnership; and (ii) the Partnership to remit funds directly to the Bank out of the prospective Investor's share of any Distributions represented by the prospective Investor's percentage Partnership Interest to fund installment payments due on the prospective Investor's Limited Partner Note. In the event the Distributions are insufficient for full payment of any installment due under the Limited Partner Note, the Limited Partner himself shall be liable for the timely payment of any remaining sums due under the Limited Partner Note. See the form of the Loan and Security Agreement attached as Exhibit B to the Limited Partner Loan Commitment which is attached hereto as Appendix B. If the prospective Investor is approved by the Bank and is acceptable to the General Partner, the Escrow Agent will, upon acceptance of the Investor's subscription by the General Partner, release the Loan Documents to the Bank and the Bank will pay the proceeds of the Limited Partner Note to the Partnership to fund a portion of the Investor's Unit purchase. The prospective Investor will have substantial exposure under the Limited Partner Note. Regardless of the results of Partnership operations, a prospective Investor will remain liable to the Bank under his Limited Partner Note according to its terms. The Bank can accelerate the entire principal amount of the Limited Partner Note in the event the Bank in good faith believes the prospect of timely payment or performance by the prospective Investor is impaired or the Bank otherwise in good faith deems itself or its collateral insecure and upon certain other events, including, but not limited to, nonpayment of any installment. The Bank may also request additional collateral in the event it deems the Limited Partner Note insufficiently secured. A Limited Partner's liability under a Limited Partner Note also continues regardless of whether the Limited Partner remains a limited partner in the Partnership. A Limited Partner's liability under a Limited Partner Note is directly with the Bank. As a consequence, such liability cannot be avoided by claims, defenses or set-offs the Limited Partner may have against the Partnership, the General Partner or their Affiliates. In addition to the suitability requirements discussed below, the prospective Investor must be approved by the Bank for purposes of his delivery of the Limited Partner Note. The Bank has established its own criteria for approving the creditworthiness of a prospective Investor and has not established objective minimum suitability standards. Instead, the Bank is empowered to accept or reject prospective Investors. See "Risk Factors - Other Investment Risks - Liability Under Limited Partner Loan." Subscription Period; Closing The subscription period will commence on the date hereof and will terminate at 5:00 p.m., Eastern time, on August 9, 2000 (the "Closing Date"), unless sooner terminated by the General Partner or unless extended for an additional period up to 180 days. See "Plan of Distribution." Offering Exemption The Units are being offered and will be sold in reliance on an exemption from the registration requirements of the Securities Act of 1933, as amended, provided by Section 4(2) thereof and Rule 506 of Regulation D promulgated thereunder, as amended, and an exemption from state registration provided by the National Securities Markets Improvement Act of 1996. The suitability standards set forth below have been established in order to comply with the terms of these offering exemptions. Suitability Standards In addition to the suitability requirements discussed below, each Investor wishing to obtain a Limited Partner Loan must be approved by the Bank. The Bank has established its own criteria for approving the credit-worthiness of Investors and has not established objective minimum suitability standards. The Bank has sole discretion to accept or reject any Investor. An investment in the Partnership involves a high degree of financial risk and is suitable only for persons of substantial financial means who have no need for liquidity in their investments and who can afford to lose all of their investment. See "Risk Factors - Other Investment Risks - Limited Transferability and Illiquidity of Units." An Investor should not purchase a Unit if the Investor does not have resources sufficient to bear the loss of the entire amount of the purchase price, including any portion financed. The General Partner anticipates selling Units only to individual investors; however, the General Partner reserves the right to sell Units to entities. Because of the risks involved, the General Partner anticipates selling the Units only to Investors residing in Indiana and Kentucky who it reasonably believes meet the definition of "accredited investor" as that term is defined in Rule 501 under the Securities Act, but reserves the right to sell up to 35 Investors who are nonaccredited investors. Certain institutions and the following individuals are "accredited investors": (1) An individual whose net worth (or joint net worth with his or her spouse) exceeds $1,000,000 at the time of subscription; (2) An individual who has had an individual income in excess of $200,000 in each of the two most recent fiscal years and who reasonably expects an individual income in excess of $200,000 in the current year; or (3) An individual who has had with his or her spouse a joint income in excess of $300,000 in each of the two most recent fiscal years and who reasonably expects a joint income in excess of $300,000 in the current year. Individual Investors must also be at least 21 years old and otherwise duly qualified to acquire and hold partnership interests. The General Partner reserves the right to refuse to sell Units to any person, subject to federal and applicable state securities laws. Each Investor must make an independent judgment, in consultation with his own counsel, accountant, investment advisor or business advisor, as to whether an investment in the Units is advisable. The fact that an Investor meets the Partnership's suitability standards should in no way be taken as an indication that an investment in the Units is advisable for that Investor. It is anticipated that suitability standards comparable to those set forth above will be imposed by the Partnership in connection with resales, if any, of the Units. Transferability of Units is severely restricted by the Partnership Agreement and the Subscription Agreement. See "Summary of the Partnership Agreement - Restrictions on Transfer of Partnership Interests." Investors who wish to subscribe for Units must represent to the Partnership that they meet the foregoing standards by completing and delivering to the Sales Agent a Purchaser Questionnaire in the form included in the Subscription Packet. Each Purchaser Representative, if any, acting on behalf of an Investor in connection with this Offering must complete and deliver to the Sales Agent a Purchaser Representative Questionnaire (a copy of which is available upon request to the General Partner). How to Invest Investors that meet the qualifications for investment in the Partnership and who wish to subscribe for Units may do so by following the instructions contained in the Subscription Packet accompanying this Memorandum. All information provided by Investors will be kept confidential and not disclosed except to the Partnership, the General Partner, the Bank and their respective counsel and Affiliates and, if required, to governmental and regulatory authorities. Restrictions on Transfer of Units The Units have not been registered under the Securities Act or under any state securities laws and holders of Units have no right to require the registration of such Units or to require the Partnership to disclose publicly information concerning the Partnership. Units can be transferred only in accordance with the provisions of, and upon satisfaction of, the conditions set forth in the Partnership Agreement. Among other things, the Partnership Agreement provides that no assignment of Units may be made if such assignment could not be effected without registration under the Securities Act or state securities laws. Moreover, the assignment generally must be made to an individual approved by the General Partner who meets the suitability requirements described in this Memorandum. Assignors of Units will be required to execute certain documents, in form and substance satisfactory to the General Partner, instructing it to effect the assignment. Assignees of Units may also, in the discretion of the General Partner, be required to pay all costs and expenses of the Partnership with respect to the assignment. Any assignment of Units or the right to receive Partnership Distributions in respect of Units will not release the assignor from any liabilities connected with the assigned Units, including liabilities under any Limited Partner Loan. Such event may constitute a default under a Limited Partner Note. An assignee, whether by sale or otherwise, will acquire only the rights of the assignor in the profits and capital of the Partnership and not the rights of a Limited Partner, unless such assignee becomes a substituted Limited Partner. An assignee may not become a substituted Limited Partner without (i) either the written consent of the assignor and the General Partner, or the consent of all of the Limited Partners (except the assignor Limited Partner) and the General Partner; (ii) the submission of certain documents; and (iii) the payment of expenses incurred by the Partnership in effecting the substitution. An assignee, regardless of whether he becomes a substituted Limited Partner, will be subject to and bound by all the terms and conditions of the Partnership Agreement with respect to the assigned Units. See "Summary of the Partnership Agreement - Restrictions on Transfer of Partnership Interests." PLAN OF DISTRIBUTION Subscriptions for Units will be solicited by MedTech Investments, Inc., the Sales Agent, which is an Affiliate of the General Partner. The Sales Agent has entered into a Sales Agency Agreement with the Partnership pursuant to which the Sales Agent has agreed to act as exclusive agent for the placement of the Units on a "best efforts" any or all basis. The Sales Agent is not obligated to purchase any Units. The Sales Agent is a North Carolina Corporation that was formed on December 23, 1987, and became a member of the National Association of Securities Dealers on March 15, 1988. The Sales Agent will be engaged in other similar Offerings on behalf of the General Partner and its Affiliates during the pendency of this offering and in the future. The Sales Agent is a wholly owned subsidiary of Prime, which also owns all the stock of the General Partner. Investors should note the material relationship between the Sales Agent and the General Partner, and are advised that the relationship creates conflicts in the Sales Agent's performance of its due diligence responsibilities under the federal securities laws. As compensation for its services, the Sales Agent will receive a commission equal to $150 for each Unit sold. No other commissions will be paid in connection with this Offering. Subject to the conditions as provided above, the Sales Agent may be reimbursed by the Partnership for its out-of-pocket expenses associated with the sale of the Units in an amount not to exceed $5,000. The Partnership has agreed to indemnify the Sales Agent against certain liabilities, including liabilities under the Securities Act. The Partnership will not pay the fees of any purchaser representative, financial advisor, attorney, accountant or other agent retained by an Investor in connection with his decision to purchase Units. The subscription period will commence on the date hereof and will terminate at 5:00 p.m., Eastern time, on August 9, 2000, (or earlier, in the discretion of the General Partner), unless extended at the discretion of the General Partner for an additional period not to exceed 180 days. See "Terms of the Offering - Subscription Period; Closing." The Partnership seeks by this Offering to sell a maximum of 25 Units for a maximum of an aggregate of $279,075 in cash ($275,325 net of Sales Agent Commissions). The Partnership has set no minimum number of Units to be sold in this Offering. The subscription funds, and Loan documents, if any, received from each Investor will be held in escrow (which, in the case of cash subscription funds, shall be held in an interest bearing escrow account with the Bank) until either the Investor's subscription is accepted by the Partnership (and approved by the Bank in the case of financed purchases of Units), the Partnership rejects the subscription or the Offering is terminated. Upon the receipt and acceptance of an Investor's subscription, which, if the Investor intends to finance a portion of the Unit purchase price with a Limited Partner Loan, will be conditioned upon the Bank's approval of such loan, the Investor will be admitted to the Partnership as a Limited Partner. Upon admission as a Limited Partner, the Investor's subscription funds will be released from escrow to the Partnership, and the Loan Documents, if any, will be released to the Bank which will pay the proceeds from the Limited Partner Note to the Partnership. In the event a subscription is not accepted, all subscription funds (without interest), the Loan Documents and other subscription documents held in escrow will be promptly returned to the rejected Investor. A subscription may be rejected in part, in which case a portion of the cash subscription funds (without interest) and any Limited Partner Note will be returned to the Investor. BUSINESS ACTIVITIES General The Partnership was formed to (i) acquire one or more Lithotripsy Systems and operate them at various locations in the Service Area; (ii) improve the provision of health-care in the Partnership's Service Area by taking advantage of both the technological innovations inherent in the Lithotripsy Systems and the Partnership's quality assurance and outcome analysis programs; and (iii) make cash distributions to its Partners from revenues generated by the operation of the Lithotripsy Systems. The Partnership has contracted with four hospitals and medical centers to provide lithotripsy services to their patients. Treatment Methods for Kidney Stone Disease Urolithiasis, or kidney stone disease, affects an estimated 600,000 persons per year in the United States. The exact cause of kidney stone formation is unclear, although it has been attributed to diet, climate, metabolism and certain medications. Approximately 75% of all urinary stones pass spontaneously, usually within one to two weeks, and require little or no clinical or surgical intervention. All other kidney stones, however, require some form of medical or surgical treatment. A number of methods are currently used to treat kidney stones. These methods include drug therapy, cystoscopic procedures, endoscopic procedures, laser procedures, open surgery, percutaneous lithotripsy and extracorporeal shock wave lithotripsy. The type of treatment a urologist chooses depends on a number of factors such as the size of the stone, its location in the urinary system and whether the stone is contributing to other urinary complications such as blockage or infection. The extracorporeal shock wave lithotripter, introduced in the United States from West Germany in 1984, has dramatically changed the course of kidney stone disease treatment. The General Partner estimates that currently up to 95% of all kidney stones that require treatment can be treated by lithotripsy. Lithotripsy involves the use of shock waves to disintegrate kidney stones noninvasively. The Existing Lithotripsy System The Partnership currently operates a Lithostar(TM) which was acquired new and placed in service in May 1991. The Lithostar(TM) was developed as a cooperative venture between Siemens and the Urological Clinic at Johannes Gutenberg University in Mainz, West Germany. As a part of this venture, a Lithostar(TM) prototype was installed in March 1986 at the Urological Clinic at the University of Mainz with successful results. On November 18, 1987 the Lithostar(TM) was unanimously recommended for approval by the FDA's advisory panel of experts for urology devices. On September 30, 1988 the Lithostar(TM) received FDA premarket approval for use in the United States for renal lithotripsy. On April 18, 1989, the FDA approved the Lithostar(TM) for mobile lithotripsy. On July 1, 1996, the FDA approved a new higher intensity shock-head system for the Lithostar(TM) which has since been installed in the Lithostar(TM) used by the Partnership. Currently, the General Partner estimates that more than 400 Lithostar(TM) systems are performing lithotripsy procedures in over 20 countries throughout the world. All components of the Lithostar(TM) are manufactured by Siemens, a diversified multinational company. The Lithostar(TM) was designed with a view towards substantially improving early lithotripsy technology. See "Business Activities - Treatment Methods for Kidney Stone Disease." Technological improvements incorporated into the Lithostar(TM) include an improved work station, a shock-wave component that has eliminated the need for both water bath treatment and disposable electrodes, and an excellent stone localization and imaging system. Based upon its experience in its affiliated lithotripsy ventures, the General Partner believes that most patients can be treated with the Lithostar(TM) without anesthesia of any kind. The General Partner also believes that Lithostars(TM) upfitted with the higher intensity shock-head system experience somewhat shorter treatment durations. Based upon its experience with over 30 Lithostars(TM) in this and other limited partnerships sponsored by the General Partner and its Affiliates, the General Partner has found that the Lithostar(TM) can fragment most kidney stones without anesthesia, cystoscopy or the insertion of ureteral catheters, and the General Partner believes that overall the Lithostar(TM) has been an effective alternative for the treatment of patients. The Coach housing the Lithostar(TM) was manufactured by Calumet Coach Company and was placed in service in May 1991. The Coach has been completely upfitted for the Lithostar(TM) and its clinical operations. The engine on the Calumet Coach was replaced in June 1994 and the cabin was refurbished in December 1998. Service for the Coach is obtained on an as-needed basis. The General Partner estimates that expenditures for maintenance and repair of the Coach have been incurred at a rate of approximately $15,000 per year. Upgrade to Existing Lithotripsy System During the past year, an upgrade to the Lithostar(TM)'s imaging system has become available and the General Partner, through its limited direct experience with its Affiliates, believes that such an upgrade significantly enhances the imaging capabilities of the Lithostar(TM), and thus the overall efficiency of the lithotripter. Upon the successful closing of the Offering, the Partnership will contract with Servicetrends, Inc., a lithotripsy maintenance provider, to replace the lithotripter's image intensifiers, install new digital x-ray cameras and pickup tubes and replace associated power supplies. In addition, Servicetrends may also replace existing computer monitors. The estimated cost of the imaging upgrade is $56,500. The General Partner does not anticipate that the upgrade will require any downtime for the Existing Lithotripsy System. Acquisition of New Lithotripsy System Pursuant to the terms of the Partnership Agreement, the Partnership's acquisition of the New Lithotripsy System is subject to the prior approval of a Majority in Interest of the Initial Limited Partners. As of the date of this Memorandum, the requisite approval of the Initial Limited Partners is being solicited by the General Partner. Assuming the General Partner receives the necessary approval, it is anticipated that after the successful Closing of this Offering, the Partnership will purchase a new transportable lithotripter (up to $425,000) and a new mobile truck to transport the new lithotripter from site to site (up to $80,000) with a portion of the proceeds of this Offering and the proceeds of Partnership debt financing. The Offering proceeds cannot be accurately determined until the Closing has occurred and the number of Units sold have been calculated. In any event, such proceeds will not be sufficient to fund all anticipated expenses. In the view of risks associated with leverage and a desire to conserve Partnership resources, it is not expected that the Partnership will acquire the New Lithotripsy System unless sufficient business opportunities with treatment centers are anticipated by the General Partner to be available. See "Risk Factors - Operating Risks - Partnership Limited Resources and Risks of Leverage" and "Sources and Applications of Funds." The portion of the proceeds of the Offering, if any, reserved for the purchase of the New Lithotripsy System will be held in the Company's capital reserves until the purchase of the New Lithotripsy System is made. During the time period in which the Offering proceeds are held in the reserves, they will be subject to the potential claims of Partnership creditors. Although the General Partner maintains good relationships with certain commercial lending institutions, the Partnership has not obtained a loan commitment from any party in any amount and whether one would timely be forthcoming on terms acceptable to the Partnership cannot be assured. In the event the requisite consent of the Limited Partners is received, the General Partner will select from three available models the unit which offers the best combination of value and efficacy for the Partnership. The General Partner will consult with the Partnership's Physician Advisory Board prior to selecting the model of lithotripter to be acquired. The models currently under consideration as of the date of this Memorandum are (i) the Storz Modulith(R) SLX-T ("Modulith(R) SLX-T"), (ii) the Medirex Tripter X-1 Compact ("Compact"), and (iii) the Siemens Modularis(TM) Uro Plus ("Modularis(TM)"). The General Partner believes a new transportable lithotripter will allow the Partnership to take advantage of additional treatment opportunities because such a unit can be moved from site to site more easily and more quickly, and can be moved into a hospital procedure room, providing increased flexibility in performing lithotripsy services at sites having limited pad space. Modulith(R) SLX-T. The Modulith(R) SLX-T is manufactured by Karl Storz Lithotripsy-America, Inc., and received FDA premarket approval on March 27, 1997. The General Partner and its Affiliates currently operate 11 Modulith(R) SLX-T lithotripters throughout the United States and have had positive, direct experience with the use of the Modulith(R) SLX-T lithotripter. Preliminary reports from abroad and "word of mouth" anecdotal evidence indicates that the Modulith(R) SLX-T is as effective as most of the "portable" lithotripters in the market. See "Risk Factors - Operating Risks - Reliability and Efficacy of the Partnership's Lithotripters." The Modulith(R) SLX-T was specially adapted for the treatment of urological stones. In addition to the efficient fragmentation of all types of urinary tract stones, the Modulith(R) SLX-T is suitable for performing a range of urological examinations including cystoscopy and ureteroscopy. The Modulith(R) SLX-T consists of a cylindrical pressure wave generator, an OEC 9800 C-arm x-ray system unit and a patient table. The Modulith(R) SLX-T generates pressure waves electromagnetically from the cylindrical energy source and parabolic reflector. The pressure wave generator operates without an acoustic lens, thus avoiding such disadvantages as energy dissipation and aperture limitations. The pressure at the focal point can be varied by means of the energy control in nine steps from 10 Mpa to 100 Mpa. The energy source is fitted with an axial and lateral air-bag. When expanded during fluoroscopy, these air-bags ensure optimal X-ray image quality for monitoring purposes. The pressure wave coupling is dry (water cushion is used). The shock-wave may be released at fixed frequencies of 1 Hz, 1.5 Hz or 2 Hz, or may be triggered using the ECG and/or respiration. The Modulith(R) SLX-T localizes stones using an OEC 9800 C-arm X-ray system. The X-ray system employs an image intensifier, cassette film, digital spot imaging capability and two high resolution 16" monitors capable of displaying stored digital images. The patient table can be moved electronically in all three dimensions, and a floating function allows for quick patient positioning. The table is X-ray transparent and allows visualization of the entire urinary tract. The table includes a patient cradle which provides comfortable and secure support in the prone, supine and lateral positions. Storz has agreed to provide the Partnership with a Modulith(R) SLX-T lithotripter together with accessories for an estimated purchase price of $425,000 (excluding state sales tax), which price reflects approximately a 19% discount ($100,000) from Storz's current list price of $525,000. Storz provides technical support to facilitate installation and testing of the Modulith(R) SLX-T. The Modulith(R) SLX-T comes with an eighteen month limited warranty during which time all maintenance, repairs, shock tubes, glassware and capacitors are provided free of charge. The Storz Maintenance Contract in future years covers the same items listed above and is quoted currently at an annual price of $40,000. Compact. The Compact is manufactured by Medirex Systems Corp. ("Medirex"). Medirex has agreed to provide the Partnership with a Compact lithotripter together with accessories for a total purchase price of approximately $395,000 (excluding state sales tax), which price reflects approximately an 11% discount ($50,000) from the current list price of $445,000. The Compact received FDA premarket approval in 1996. The General Partner and its Affiliates have limited direct experience with the use of the Compact lithotripter. Medirex is affiliated with the Direx group of companies, which have been pioneers in the development of transportable lithotripsy technology. The Compact was particularly designed for the treatment of urological stones. In addition to the efficient fragmentation of all types of urinary tract stones, the Compact is suitable for performing a range of simple urological procedures. The Compact consists of a spark gap generator, a Digiscope RX2 fluoroscopic image intensifier and a patient table. The operating technology is known as electrohydraulic technology, and the Compact generates pressure waves by the use of an electrode inside a metal reflector. The Compact localizes stones using a Digiscope RX2 fluoroscopic image intensifier, which is collapsible for easy transport. The U-arm laterally rotates into over- and under-table positions to allow display of the entire ureter without repositioning the patient, and the pressure generator can be rotated out of the X-ray path. The patient table can be moved electronically by remote control in all three dimensions and is capable of supporting heavy patients. The table also folds down at both ends to improve transportability. Medirex provides a blank patient database with the Compact for discretionary use and ownership by the purchaser. Medirex provides technical support to facilitate installation and testing of the Compact. The Compact has an eighteen month limited warranty during which time all maintenance, repairs, shock tubes, glassware and capacitors are provided free of charge. The Medirex maintenance contract in future years covers the same items listed above and is currently quoted at an annual price of $35,000. Any expenses for maintenance and repairs not covered by the warranty are the obligations of the purchaser. Modularis(TM). The Modularis(TM) is manufactured by Siemens Medical Systems, Inc. ("Siemens"). Siemens has agreed to provide the Partnership with a Modularis(TM) with accessories for a total purchase price of approximately $425,000 (excluding state sales tax), which price reflects approximately a 33% discount ($210,000) from the current list price of $635,000. The Modularis(TM) received FDA premarket approval in October 1998. The General Partner and its Affiliates have no direct experience with the use of the Modularis(TM) lithotripter. The Modularis(TM), like the other models under consideration, was particularly designed for the treatment of urological stones. In addition to the efficient fragmentation of all types of urinary tract stones, the Modularis(TM) is suitable to performing a wide range of urological procedures, including, laparoscopy, endourology and moderate ambulatory interventions. The Modularis(TM) unit consists of a shock wave System C electromagnetic generator component, a mobile C-arm fluoroscopic imaging system component and a fully functional endourology patient table. In addition, the Modularis(TM) can be configured to include a dual echo ultrasound system. The operating technology is electromagnetic shock waves and the Modularis(TM) localizes stones using a counterbalanced isocentric C-arm for fluoroscopy, radiography and intervention monitoring. The C-arm allows unrestricted movement within a 190(degree) orbital rotation. Due to the modular configuration of the Modularis(TM), the ESWL component can be removed from the x-ray path. The patient table can be moved electronically by remote control in all dimensions via footswitch or keypad, and is capable of supporting heavy patients. The tabletop, head and foot are extendable and the patient table is equipped with a side cut-out/insert to accommodate the shock wave head. The table top is radiolucent in the diagnostic area. Siemens provides technical support to facilitate installation and testing of the Modularis(TM). The Modularis(TM) has a twelve month limited warranty during which time all maintenance, repairs, shock tubes, glassware and capacitors are provided free of charge. The Siemens maintenance contract in future years covers the same items listed above and is currently quoted at an annual price of $50,000. The General Partner anticipates that upon the expiration of the warranty on the new lithotripter selected, the Partnership would either pay for maintenance service on the unit on an as needed basis, or enter into an annual maintenance agreement with a third-party service provider. The Partnership also plans to acquire from AK Associates, L.L.C., an Affiliate of the General Partner, a Ford 400 Series truck customized to include a 14' cargo box to house the new lithotripter while it is transported from site to site. The floor of the truck is loading dock height so the lithotripter can be easily loaded on and off the truck at each treatment facility. The truck is also upfitted with a lift gate with a load capacity of 3,000 pounds for easy loading of the lithotripter from street level. The truck has been modified for securing the lithotripter and its accessories during transport and for heating the cargo box during the winter to prevent freezing of the new lithotripter and its components. The Partnership will either purchase the manufacturer's service contract for the truck or pay for service on an as needed basis. The General Partner estimates that expenditures for maintenance and repair of the truck will be approximately $6,000 per year. Acquisition of Additional Assets Subject to certain limitations, if in the future the General Partner determines that it is in the best interest of the Partnership to acquire (i) one or more fixed base or mobile lithotripsy systems in addition to the Lithotripsy Systems, or (ii) any other assets related to the provision of lithotripsy services, the General Partner has the authority to establish reserves or borrow funds on behalf of the Partnership to acquire such assets, and may use Partnership assets and revenues to secure and repay such borrowings. The Partnership's acquisition of the New Lithotripsy System, and any additional lithotripsy systems, is subject to the prior approval of a Majority in Interest of the Limited Partners. See the Partnership Agreement attached hereto as Appendix A. The acquisition of such assets likely would result in higher operating costs for the Partnership. The General Partner does not anticipate acquiring additional Partnership assets unless projected Partnership Cash Flow or proceeds from a Dilution Offering are sufficient to finance such acquisitions. No Limited Partner would be personally liable on any Partnership indebtedness without such Limited Partner's written consent. There is no assurance that additional financing would be available to the Partnership to acquire additional assets or to fund any additional working capital requirements. Any additional borrowing by the Partnership will serve to increase the risks to the Partnership associated with leverage. See "Risk Factors - Operating Risks - Partnership Limited Resources and Risks of Leverage." Hospital Contracts The Partnership has entered into four Hospital Contracts with four Contract Hospitals to operate the Lithotripsy Systems at the Contract Hospitals. The Contract Hospitals are: Dearborn County Hospital, Lawrenceburg, IN Floyd Memorial Hospital, New Albany, IN King's Daughters' Hospital, Madison, IN St. Francis Hospital, Beech Grove, IN Three of the Hospital Contracts grant the Partnership the exclusive right to deliver lithotripsy services to the relevant Contract Hospital. The Hospital Contracts require the Partnership to make a lithotripter available at the facilities as agreed to by the Contract Hospital and the Partnership. The Partnership generally also provides a technician, nurse and certain ancillary services such as scheduling necessary for the lithotripsy procedures. The Contract Hospitals generally pay the Partnership a fee for each lithotripsy procedure performed at that health care facility; however, the Partnership does directly bill and collect for services from some patients or their third-party payors. All of the Hospital Contracts provide for automatic renewal on a year-to-year basis. Two of the Hospital Contracts are terminable without cause at any time by either party on 60 days notice, and two Hospital Contracts may be terminated without cause upon 60 days or less written notice by either party prior to any renewal date. The Partnership also leases the Existing Lithotripsy System to Prime Lithotripter Operations, Inc. d/b/a Tennessee Valley Lithotripter ("TVL"), an Affiliate of the General Partner. TVL pays the Partnership a per procedure rental fee and uses the Existing Lithotripsy System to provide lithotripsy services at Suburban Hospital in Louisville, Kentucky. See "Conflicts of Interest." The General Partner believes it has a good relationship with the Contract Hospitals. There is no assurance, however, that one or more of the Hospital Contracts will not terminate in the future. See "Risk Factors - Operating Risks - Contract Terms and Termination." The Partnership is attempting to negotiate similar agreements to the existing Hospital Contracts with additional treatment centers in the Service Area. There can be no assurance that the Partnership will be able to enter into any new agreements. Reimbursement Agreements. Prime and the General Partner have negotiated third-party reimbursement agreements with certain national and local commercial third-party payors. The national agreements are negotiated by Prime and the General Partner apply to all the lithotripsy partnerships which are Affiliates of the General Partner, including the Partnership, to the extent such entities directly bill and collect from patients or their third-party payors. Some of the national and local payors have agreed to pay a fixed price for lithotripsy services. For the most part, the agreements may be terminated by either party on 60 to 120 days' notice. The national and local reimbursement agreements that have been negotiated or renegotiated in the past two to four years almost entirely provide for lower reimbursement rates for lithotripsy services than the older agreements. Operation of the Lithotripsy Systems It is anticipated that the Partnership will continue to provide services under the Hospital Contracts and similar arrangements. See "Business Activities - Hospital Contracts" and "Risk Factors - Operating Risks - Contract Terms and Termination." Qualified physicians who make appropriate arrangements with Contract Hospitals receiving lithotripsy services pursuant to the Hospital Contracts and other lithotripsy service agreements may treat their own patients using the Lithotripsy Systems after they have received any necessary training required by the rules of such Contract Hospital. The Partnership may also make arrangements to make the Lithotripsy Systems available to qualified physicians (including, but not limited to, qualified physician Limited Partners) desiring to treat their own patients after they have received any necessary training. The General Partner will endeavor to the best of its abilities to require that physicians using the General Partner's Lithotripsy Systems comply with the Partnership's quality assurance and outcome analysis programs in order to maintain the highest quality of patient care. In addition, the Partnership reserves the right to request that (i) physicians (or members of their practice groups) treat only their own patients with the Lithotripsy Systems; and (ii) physician Limited Partners disclose to their patients in writing their financial interest in the Company prior to treatment, if it determines that such practices are advisable under applicable law. The former practice is required under Kentucky law. See "Regulation." The treating qualified physician will be solely responsible for billing and collecting on his own behalf the professional service component of the treatment procedure. Owning an interest in the Partnership is not a condition to using the Lithotripsy Systems. Thus, local qualified physicians who are not Limited Partners will be given the same opportunity to treat their patients using the Lithotripsy Systems as provided above. Management The Partnership has entered into a management agreement (the "Management Agreement") with the General Partner whereby the General Partner is obligated to supervise and coordinate the management and administration of the operation of the Lithotripsy Systems on behalf of the Partnership in exchange for a monthly management fee equal to the greater of 7.5% of Partnership Cash Flow per month or $8,000 per month. See "Compensation and Reimbursement to the General Partner and its Affiliates." The General Partner's services under the Management Agreement include arranging for the training of physicians in the proper use of the lithotripsy equipment, monitoring technological developments in renal lithotripsy and advising the Partnership of these developments, arranging education programs for qualified physicians who use the lithotripsy equipment and providing advertising, billing, accounts collection, equipment maintenance, medical supply inventory and other incidental services necessary for the efficient operation of the Lithotripsy Systems. Costs incurred by the General Partner in performing its duties under the Management Agreement are the responsibility of the Partnership. The General Partner's engagement under the Management Agreement is as an independent contractor and neither the Partnership nor its Limited Partners have any authority or control over the method or manner in which the General Partner performs its duties under the Management Agreement. The Management Agreement is in the last year of its first 5-year renewal term and will be automatically renewed for two additional five-year terms unless terminated by the Partnership or the General Partner. The General Partner has also appointed a Physician Advisory Board made up of representative local physicians. The General Partner consults with the Physician Advisory Board from time to time, as needed, on matters including the Partnership's Quality Assurance Program, utilization review, outcome analysis, patient scheduling and certain Partnership expenditures. Employees The Partnership employs as full time employees two registered technicians and two registered nurses. The Partnership anticipates that an additional technician will be hired for staffing the New Lithotripsy System. Prime provides group medical, dental, long-term disability, accidental death and dismemberment and life insurance benefits. The Partnership also provides paid holidays, sick leave, and vacation benefits and other miscellaneous benefits including bereavement, military reserves, jury duty and educational assistance benefits. FINANCIAL CONDITION OF THE PARTNERSHIP Set forth on the following pages are the Partnership's internally prepared accrual based (i) Income Statements for the four-month periods ended April 30, 2000 and April 30, 1999, and the years ended December 31, 1997, December 31, 1998 and December 31, 1999; (ii) Balance Sheets as of April 30, 2000, April 30, 1999, December 31, 1997, December 31, 1998 and December 31, 1999; (iii) Cash Flow Statements for the four-month periods ended April 30, 2000 and April 30, 1999, and the years ended December 31, 1997, December 31, 1998 and December 31, 1999; and (iv) Statements of Partner's Equity for the four-month periods ended April 30, 2000 and April 30, 1999, and the years ended December 31, 1997, December 31, 1998 and December 31, 1999. Past financial performance is not necessarily indicative of future performance. There is no assurance that the Partnership will be able to maintain its current revenues or earnings. [The remainder of this page is intentionally left blank] INDIANA LITHOTRIPTERS LIMITED PARTNERSHIP I INCOME STATEMENTS* - ------------------------------------- ------------------------------------------ Four Months Ended April 30, Years Ended December 31, 2000 1999 1999 1998 1997 - ----- -------------- -------------- -------------- -------------- -------------- - ----------------------------------------- Revenues $379,553 $813,634 $1,870,242 $2,161,840 $2,369,077 - ----------------------------------------- - ----------------------------------------- Operating Expenses: - ----------------------------------------- Employee compensation and benefits 82,897 96,602 255,999 231,446 230,442 - ----------------------------------------- Equipment maintenance and repairs 11,155 37,144 119,321 122,946 141,086 - ----------------------------------------- Depreciation and amortization 67,191 67,026 201,334 194,044 190,883 - ----------------------------------------- Management fees 44,501 33,514 108,680 129,301 117,751 - ----------------------------------------- Overhead fees 11,096 24,674 72,552 55,337 81,270 Other operating expenses 20,870 25,723 73,954 139,049 123,803 - ----- -------------- -------------- -------------- -------------- -------------- Total operating expenses 237,710 284,683 831,840 872,123 885,235 - ----------------------------------------- - ----------------------------------------- Operating income 141,843 528,951 1,038,402 1,289,716 1,483,842 - ----------------------------------------- - ----------------------------------------- Other income (expense): - ----------------------------------------- Interest and other income 3,695 2,878 8,329 15,477 15,953 Interest Expense 0 0 0 (13) 0 - ----------------------------------------- -------------- -------------- -------------- -------------- -------------- Total other income (expense) 3,695 2,878 8,329 15,464 15,953 -------------- -------------- -------------- -------------- -------------- - ----------------------------------------- Net income $145,538 $531,829 $1,046,731 $1,305,181 $1,499,795 ===== ============== ============== ============== ============== ============== *See notes to financial statements, attached hereto as Appendix D. INDIANA LITHOTRIPTERS LIMITED PARTNERSHIP I BALANCE SHEETS* - -------------- --------------- ---------------- ---------------- --------------- April 30, 2000 April 30, 1999 December 31, December 31, December 31, 1999 1998 1997 - -------------- --------------- ---------------- ---------------- --------------- ASSETS - ------------------------------------ - ------------------------------------ Cash $167,672 $158,107 $376,462 $544,324 $701,364 - ------------------------------------ Accounts receivable, net 397,821 790,741 663,118 579,188 466,550 Other current assets 86,187 13,997 66,026 12,378 8,462 - -------------- --------------- ---------------- ---------------- --------------- Total current assets 651,680 962,845 1,105,606 1,135,890 1,176,376 - ------------------------------------ - ------------------------------------ Equipment 1,942,432 1,933,030 1,942,432 1,882,655 1,882,655 Accumulated depreciation (1,758,835) (1,557,336) (1,691,644) (1,490,310) (1,296,266) - -------------- --------------- ---------------- ---------------- --------------- 183,597 375,694 250,788 392,345 586,389 - ------------------------------------ - ------------------------------------ Other assets 0 0 0 0 0 - ------------------------------------ - -------------- --------------- ---------------- ---------------- --------------- Total assets $835,277 $1,338,539 $1,356,394 $1,528,235 $1,762,765 ============== =============== ================ ================ =============== - ------------------------------------ LIABILITIES - ------------------------------------ Accounts payable $50,510 $21,741 $47,607 $45,602 $68,262 - ------------------------------------ Accrued expenses 11,416 41,297 22,384 73,961 41,012 Distributions payable 0 0 335,000 465,000 650,000 - -------------- --------------- ---------------- ---------------- --------------- Total current liabilities 61,926 63,038 404,991 584,563 759,274 - ------------------------------------ - ------------------------------------ PARTNERS' EQUITY - ------------------------------------ Capital contributions (64,244) 64,244 64,244 64,244 64,244 - ------------------------------------ Purchase of partners' interests (104,034) 0 0 0 0 Distributions paid (12,848,004) (11,789,448) (12,628,448) (11,589,448) (10,224,448) Accumulated earnings 13,661,145 13,000,705 13,515,607 12,468,876 11,163,695 - -------------- --------------- ---------------- ---------------- --------------- Total partners' equity 773,351 1,275,501 951,403 943,672 1,003,491 ==================================== Total liabilities and partners' equity $835,277 $1,338,539 $1,356,394 $1,528,235 $1,762,765 ============== =============== ================ ================ =============== *See notes to financial statements, attached hereto as Appendix D. INDIANA LITHOTRIPTERS LIMITED PARTNERSHIP I STATEMENTS OF CASH FLOWS* - ---- -------------------------------- ------------------------------------------ Four Months Ended April 30, Years Ended December 31, 2000 1999 1999 1998 1997 ---------------- --------------- -------------- ------------- ------------- Cash flows from Operating Activities: Net income $145,538 $531,829 $1,046,731 $1,305,181 $1,499,795 - ------------------------------------------ Adjustments to reconcile net income To cash provided by operating Activities: - ------------------------------------------ Depreciation and amortization 67,191 67,026 201,334 194,044 190,883 - ------------------------------------------ - ------------------------------------------ Change in operating assets and - ------------------------------------------ Accounts receivable 265,297 (211,553) (83,930) (112,638) (32,689) - ------------------------------------------ Other current assets (20,161) (1,619) (53,648) (3,916) 2,893 - ------------------------------------------ Accounts payable 2,903 (23,861) 2,005 (22,660) 46,825 Accrued expenses (10,968) (32,664) (51,577) 32,949 20,777 - ---- ---------------- --------------- -------------- ------------- ------------- Net cash provided by operating activities 449,800 329,158 1,060,915 1,392,960 1,728,484 - ---- ---------------- --------------- -------------- ------------- ------------- - ------------------------------------------ Cash flows from Investing Activities: Purchase of equipment, furniture & fixtures 0 (50,375) (59,777) 0 0 - ---- ---------------- --------------- -------------- ------------- ------------- Net Cash (used in) investing activities 0 (50,375) (59,777) 0 0 - ---- ---------------- --------------- -------------- ------------- ------------- - ------------------------------------------ Cash flows from Financing Activities: - ------------------------------------------ Purchase of partners' interests (104,034) 0 0 0 0 Distributions to partners (554,556) (665,000) (1,169,000) (1,550,000) (1,850,000) - ---- ---------------- --------------- -------------- ------------- ------------- Net cash (used in) financing activities (658,590) (665,000) (1,169,000) (1,550,000) (1,850,000) - ---- ---------------- --------------- -------------- ------------- ------------- Net increase (decrease) in cash during the period (208,790) (386,217) (167,862) (157,040) (121,516) - ---- ---------------- --------------- -------------- ------------- ------------- Cash, beginning of period 376,462 544,324 544,324 701,364 822,880 - ---- ---------------- --------------- -------------- ------------- ------------- - ------------------------------------------ Cash, end of period $167,672 $158,107 $376,462 $544,324 $701,364 - ---- ---------------- --------------- -------------- ------------- ------------- *See notes to financial statements, attached hereto as Appendix D. INDIANA LITHOTRIPTERS LIMITED PARTNERSHIP I STATEMENTS OF PARTNERS' EQUITY* - ---- ----------------------------- --------------------------------------------- Period ended April 30 Years ended December 31, ========================================== 2000 1999 1999 1998 1997 - ---- -------------- -------------- -------------- --------------- -------------- -------------- -------------- -------------- --------------- -------------- Beginning partners' equity $951,403 $943,672 $943,672 $1,003,491 $1,253,696 - ------------------------------------------ - ------------------------------------------ - ------------------------------------------ Net income 145,538 531,829 1,046,731 1,305,181 1,499,795 - ------------------------------------------ - ------------------------------------------ Purchase of partners' interests (104,034) 0 0 0 0 - ------------------------------------------ Distributions to partners (219,556) (200,000) (1,039,000) (1,365,000) (1,750,000) - ---- -------------- -------------- -------------- --------------- -------------- - -------------- -------------- -------------- --------------- -------------- - ------------------------------------------ - ------------------------------------------ Ending partners' equity $773,351 $1,275,501 $951,403 $943,672 $1,003,491 - ------------------- -------------- -------------- --------------- -------------- *See notes to financial statements attached hereto as Appendix D. MANAGEMENT'S DISCUSSION ANDANALYSIS OF THE RESULTS OF OPERATIONS Four Months Ended April 30, 2000 and April 30, 1999 Revenues. Total revenues decreased $434,081 (53%) for the four months ended April 30, 2000 compared to the same period in 1999 due to a 61% decrease in the number of procedures performed and partially offset by an increase in the revenue per procedure. Operating Expenses. Operating expenses decreased by $46,973 (17%) for the four months ended April 30, 2000 compared to the same period in 1999. This decrease is due primarily to a decrease of $25,989 in equipment maintenance and repairs due to changing from fixed cost service contracts on the lithotripter to a service call basis with a stop loss insurance arrangement and a decrease of $13,705 in employee compensation and benefits due to a decrease in incentive compensation based on lower income. Other Income (Expense). Total other income (expense), net increased by $817 (28%) due to an increase in interest income. Year Ended December 31, 1999 and December 31, 1998 Revenues. Total revenues decreased $291,598 (13%) for the year ended December 31, 1999 compared to the same period in 1998 due to a 3% decrease in the number of procedures performed and an increase in the estimate of the beginning of year allowance for contractual adjustments due to the availability of improved information. Operating Expenses. Operating expenses decreased by $40,283 (5%) for the year ended December 31, 1999 compared to the same period in 1998, primarily due to a decrease in other operating expenses due to nonrecurring equipment rental charges of $42,978 incurred in 1998 while the Coach was being refurbished. Other Income (Expense). Total other income (expense), net decreased by $7,135 (46%) due to the decrease in interest income. Year Ended December 31, 1998 and December 31, 1997 Revenues. Total revenues decreased $207,237 (9%) for the year ended December 31, 1998 compared to the same period in 1997 due to a 14% decrease in the number of procedures performed, which resulted from a 24% decline in procedures at hospitals with contracts during both years and partially offset by the Partnership providing service to TVL, and a 6% increase in revenue per case. Operating Expenses. Operating expenses decreased by $13,112 (1%) for the year ended December 31, 1998 compared to the same period in 1997, due to a decrease of $25,933 in overhead allocation related to the decline in overhead costs incurred by the General Partner, and a $18,140 decline in equipment maintenance and repair, which declined due to the renegotiation of the equipment service contract. These declines were partially offset by an increase of other operating expenses of $15,246, which was due to the rental of a loaner unit from the General Partner while the Partnership's Coach was refurbished in late 1998, and an increase in management fees of $11,550, which was due to higher collections in 1998. Other Income (Expense). Total other income (expense), net decreased by $476 (3%) due to the decrease in interest income. [The remainder of this page is intentionally left blank] SOURCES AND APPLICATIONS OF FUNDS The following table sets forth the funds expected to be available to the Partnership from this Offering if all 25 Units are sold and their anticipated and estimated uses. - ----------------------------- -------------------------------------------------- Sources of Funds Sale of 25 Units Offering Proceeds(1) $279,075 ( 100%) ------- ----- TOTAL SOURCES $279,075 ( 100%) ======= ==== Application of Funds Syndication Costs(2) $33,750 (12%) Capital Reserve(3) $245,325 (88%) ------- --- TOTAL APPLICATIONS $279,075 ( 100%) ======= ==== - ----------------------------- -------------------- ----------------------------- Notes to Sources and Applications of Funds Table (1) Assumes all 25 Units are purchased by qualified Investors. (2) Includes $3,750 in commissions payable to the Sales Agent, reimbursement of $5,000 to the Sales Agent for out-of-pocket expenses incurred in selling the Units and $25,000 in legal and accounting costs associated with the preparation of this Memorandum. (3) It is anticipated that upon receiving the requisite prior approval of the Limited Partners, and after the successful Closing of this Offering, the Partnership will purchase (i) a new transportable lithotripter (estimated cost of $425,000), (ii) a new mobile truck (estimated cost of $80,000), and (iii) pay applicable state sales taxes on the New Lithotripsy System (estimated at $25,250). In addition, the Partnership will pay the expenses associated with upgrading its Lithostar(TM) at an estimated cost of $56,500. See "Business Activities - Acquisition of the New Lithotripsy System" and " - Upgrade of the Existing Lithotripsy System." The Capital Reserve represents proceeds of the Offering that will be used to pay a portion of such costs. The proceeds of this Offering cannot be accurately determined until the Closing has occurred and the number of Units sold has been calculated. In the event such proceeds will not be sufficient to fund all anticipated expenses (a certainty in the case the acquisition of the New Lithotripsy System is approved), the remainder of such costs will be financed through Partnership Cash Flow, reserves and/or borrowings. In the view of risks associated with leverage and a desire to conserve Partnership resources, it is not expected that the Partnership will acquire the New Lithotripsy System unless sufficient business opportunities with treatment centers are anticipated by the General Partner to be available. See "Risk Factors - Company Limited Resources and Risks of Leverage." During the time period in which the Offering Proceeds are held in the Partnership's reserves, they will be subject to the potential claims of the Partnership's creditors. Although the General Partner maintains good relationships with certain commercial lending institutions, the Partnership has not obtained a loan commitment from any party in any amount and whether one would timely be forthcoming on terms acceptable to the Partnership cannot be assured. THE GENERAL PARTNER General. The General Partner of the Partnership is Lithotripters, Inc., a North Carolina corporation formed in November 1987 for the purpose of sponsoring medical service limited partnerships in the United States (the "General Partner"). On April 26, 1996, the General Partner became a wholly-owned subsidiary of Prime. The principal executive office of the General Partner is located at 1301 Capital of Texas Highway, Suite C-300, Austin, Texas 78746, (888) 252-6575. The General Partner's assets are illiquid in nature. The primary assets of the General Partner are equity interests in other medical ventures. The General Partner also has substantial potential financial exposure as a guarantor of certain Prime indebtedness. Further information regarding the financial condition of the General Partner will be made available to Investors upon request. Management. The following table sets forth the names and respective positions of the individuals serving as executive officers and directors of the General Partner, many of whom were shareholders of the General Partner prior to its acquisition by Prime and/or are current shareholders and/or management personnel of Prime. Name Office Joseph Jenkins, M.D. President, Chief Executive Officer and Director Kenneth S. Shifrin Director Cheryl Williams Vice President and Director David Vela, M.D. Vice President Stan Johnson Vice President Philip J. Gallina Secretary and Treasurer James Clark Assistant Secretary Supervision of the day-to-day management and administration of the Partnership will be the responsibility of the General Partner in its capacity as the management agent. The General Partner itself is managed by a three-member Board of Directors composed of Mr. Shifrin, Ms. Williams and Dr. Jenkins. Set forth below are the names and descriptions of the background of the key executive officers and directors of the General Partner. Joseph Jenkins, M.D. was recently elected Vice Chairman of the Board of Directors of Prime and served as the President and Chief Executive Officer of Prime from April 1996 until June 2000. From May 1990 until December 1991, Dr. Jenkins was a Vice President of the General Partner and previously practiced urology in Washington, North Carolina. Dr. Jenkins has been President of the General Partner since 1992 and is a member of its Board of Directors. Dr. Jenkins is a board certified urologist and is a founding member, a past-president and currently a Director of the American Lithotripsy Society. Kenneth S. Shifrin has been Chairman of the Board and a Director of Prime since October 1989 and was elected a Director of the General Partner following Prime's acquisition of all of the General Partner's stock. Mr. Shifrin also has served in various capacities with American Physicians Service Group, Inc. ("APS") since February 1985, and is currently Chairman of the Board and Chief Executive Officer of APS. Cheryl Williams is a Vice President and Director of the General Partner and has been Chief Financial Officer, Vice President-Finance and Secretary of Prime since October 1989. Ms. Williams was Controller of Fairchild Aircraft Corporation from August 1988 to October 1989. From 1985 to 1988, Ms. Williams served as the Chief Financial Officer of APS Systems, Inc., a wholly-owned subsidiary of APS. Stan Johnson is a Vice President of the General Partner and President of Sun Medical Technologies, Inc. ("Sun") (an affiliate of the General Partner) since November 1995. Mr. Johnson was the Chief Financial Officer of Sun from 1990 to 1995. Mr. Johnson was also recently appointed a Group Vice President of Prime. David Vela, M.D. is a Vice President of the General Partner. Dr. Vela received his medical degree in 1984. Dr. Vela developed and operated various outpatient centers throughout the United States from 1986 to 1995 and was recently appointed a Group Vice President of Prime. Philip J. Gallina is the Secretary and Treasurer of the General Partner, having previously served as a Vice President since 1989. Mr. Gallina is a Certified Public Accountant licensed in the state of Pennsylvania. From 1980 through February 1989, Mr. Gallina served as Plant Controller for the Westinghouse Motor Control and Enclosed Control Product Lines. Mr. Gallina is also a Director, the Vice President, the Treasurer and the Secretary of MedTech Investments, Inc., the Sales Agent. James D. Clark is Assistant Secretary of the General Partner. Mr. Clark has served as Tax Manager of Prime since January 1998 and is a Certified Public Accountant in Texas. Prior to joining Prime, Mr. Clark was Controller for ERISA Administrative Services, Inc. COMPENSATION AND REIMBURSEMENT TO THEGENERAL PARTNER AND ITS AFFILIATES The following summary describes the types and, where determinable, the estimated amounts of reimbursements, compensation and other benefits the General Partner and its Affiliates will receive in connection with the continued operation and management of the Partnership and the Lithotripsy Systems. None of such fees, compensation and other benefits has been determined at arm's length. Except for the items set forth below, the General Partner does not expect to receive any distribution, fee, compensation or other remuneration from the Partnership. See "Business Activities - Management" and "Plan of Distribution." 1. Management Fee. Pursuant to the Management Agreement, the General Partner has contracted with the Partnership to supervise the management and administration of the day-to-day operations of the Partnership's lithotripsy business for a monthly fee equal to the greater of $8,000 or 7.5% of Partnership Cash Flow per month. All costs incurred by the General Partner in performing its duties under the Management Agreement are the responsibility of, and are paid directly or reimbursed by, the Partnership. The General Partner is the management agent for various affiliated lithotripsy ventures. As a consequence, many of the General Partner's employees provide various management and administrative services for numerous ventures, including the Partnership. In order to properly allocate the costs of the General Partner's employees and other overhead expenses among the entities for which they provide services, such costs are divided among all the ventures based upon the relative number of patients treated by each. The General Partner believes that the sharing of personnel and overhead costs among various entities results in significant costs savings for the Partnership. The management fee for any given month is payable on or before the 30th day of the next succeeding month. The Management Agreement is in the last year of its first five-year renewal term. The Management Agreement will be automatically renewed for up to two additional successive five-year terms unless it is earlier terminated by the Partnership or the General Partner. The General Partner is reimbursed by the Partnership for all of its out-of-pocket costs associated with the operation of the Partnership and the Lithotripsy Systems (excluding the costs of employing one or more local physicians to supervise the management and administration of the Lithotripsy Systems), and the Partnership will pay or reimburse to the General Partner all expenses related to this Offering. No other fees or compensation will be payable to the General Partner or its Affiliates for managing the Partnership other than the management fee payable to the General Partner as provided in the Management Agreement. The Partnership may, however, contract with the General Partner or its Affiliates to render other services or provide materials to the Partnership provided that the compensation is at the then prevailing rate for the type of services and/or materials provided. 2. Partnership Distributions. In its capacity as general partner of the Partnership, the General Partner is entitled to its distributable share (approximately 25.82%, before dilution) of Partnership Cash Flow, Partnership Sales Proceeds and Partnership Refinancing Proceeds as provided by the Partnership Agreement. The General Partner also owns approximately an 8.65% (before dilution) limited partner interest in the Partnership and is entitled to Distributions on account of such interest. See "Summary of the Partnership Agreement - Profits, Losses and Distributions" and the Partnership Agreement attached as Appendix A. The General Partner will also receive its proportionate share of any Offering proceeds distributed to the Initial Limited Partners. See "Sources and Applications of Funds." 3. Sales Commissions. The Sales Agent, a wholly-owned subsidiary of Prime, has entered into a Sales Agency Agreement with the Partnership pursuant to which the Sales Agent has agreed to sell the Units on a "best efforts" any or all basis. As compensation for its services, the Sales Agent will receive a commission equal to $150 for each Unit sold (up to an aggregate of $3,750). If this Offering is successful, the Sales Agent will also be reimbursed by the Partnership for its out-of-pocket expenses associated with its sale of the Units in an amount not to exceed $5,000. See "Plan of Distribution" and "Conflicts of Interest." 4. New Truck. It is anticipated that the Company will also use a portion of the Offering proceeds and/or debt financing to acquire a new mobile truck to transport the new lithotripter from AK Associates, L.L.C., an Affiliate of the General Partner, at a cost of approximately $80,000. See "Business Activities - Acquisition of the New Lithotripsy System." 5. Loans. The General Partner or its Affiliates will also receive interest on loans, if any, made by them to the Partnership. See "Conflicts of Interest." Neither the General Partner nor any of its Affiliates are, however, obligated to make loans to the Partnership. While the General Partner does not anticipate that it would cause the Partnership to incur indebtedness unless cash generated from Partnership operations were at the time expected to enable repayment of such loan in accordance with its terms, lower than anticipated revenues and/or greater than anticipated expenses could result in the Partnership's failure to make payments of principal or interest when due under such a loan and the Partnership's equity being reduced or eliminated. In such event, the Limited Partners could lose their entire investment. See "Risk Factors - Operating Risks - Partnership Limited Resources and Risks of Leverage." CONFLICTS OF INTEREST The operation of the Partnership involves numerous conflicts of interest between the Partnership and the General Partner and its Affiliates. Because the Partnership is operated by the General Partner, such conflicts are not resolved through arm's length negotiations, but through the exercise of the judgment of the General Partner consistent with its fiduciary responsibility to the Limited Partners and the Partnership's investment objectives and policies. The General Partner, its Affiliates and employees of the General Partner will in good faith continue to attempt to resolve potential conflicts of interest with the Partnership, and the General Partner will act in a manner that it believes to be in or not opposed to the best interests of the Partnership. The General Partner and its Affiliates will receive management fees and broker-dealer sales commissions in connection with the business operations of the Partnership and the sale of the Units that will be paid regardless of whether any sums hereinafter are distributed to Limited Partners. None of such fees, compensation and benefits has been determined by arm's length negotiations. In addition, the Partnership may contract with the General Partner or its Affiliates to render other services or provide materials to the Partnership provided that the compensation is at the then prevailing rate for the type of services and/or materials provided. The General Partner will also receive interest on loans, if any, it makes to the Partnership. See "Compensation and Reimbursement to the General Partner and its Affiliates." It is anticipated that the Partnership will purchase a new mobile truck from AK Associates, L.L.C., an Affiliate of the General Partner to transport the new lithotripter. See "Compensation and Reimbursement to the General Partner and its Affiliates" and "Business Activities - Acquisition of the New Lithotripsy System." The General Partner and its Affiliates will devote as much of their time to the business of the Partnership as in their judgment is reasonably required. Principals of the General Partner may have conflicts of interest in allocating management time, services and functions among their various existing and future business activities in which they are or may become involved. See "Competition" and "Prior Activities." The General Partner believes it and its Affiliates, together, have sufficient resources to be capable of fully discharging their responsibilities to the Partnership. The General Partner and its Affiliates may engage for their own account, or for the account of others, in other business ventures, related to medical services or otherwise, and neither the Partnership nor the holders of any of the Units shall be entitled to any interest therein. See the Partnership Agreement attached hereto as Appendix A. The General Partner, its Affiliates (including affiliated limited partnerships) and employees of the General Partner engage in medical service activities for their own accounts. See "Prior Activities." The General Partner may serve as a general partner of other limited partnerships that are similar to the Partnership and does not intend to devote its entire financial, personnel and other resources to the Partnership. Except as set forth in the Partnership Agreement or as provided by law, none of such entities or their respective Affiliates is prohibited from engaging in any business or arrangement that may be in competition with the Partnership. The General Partner and its Affiliates are also obligated to act in a fiduciary manner with respect to the management of the Partnership and any other medical venture in which they have management responsibilities. The General Partner has several Affiliates which provide lithotripsy services in or near the Service Area. TVL provides mobile lithotripsy services in the Service Area at a hospital in Louisville, Kentucky pursuant to a rental agreement with the Partnership. Western Kentucky Lithotripters Limited Partnership uses a Dornier HM-3 and Modulith(R) SLX-T to provide mobile lithotripsy services to treatment centers near the Service Area in the following Kentucky counties: Christian County, Daviess County, Henderson County, Hopkins County, McCracken County and Warren County. Kentucky I Lithotripsy, LLC uses a Dornier HM-3 to provide mobile lithotripsy services in central and eastern Kentucky, and TVL also operates several Dornier HM-3 lithotripters in Tennessee. See "Competition-Affiliated Competition." Because other ventures controlled by the General Partner or its Affiliates operate in or near the Service Area, an issue may arise as to whether a particular lithotripsy service opportunity belongs to the Partnership or to another Affiliate. In the event an issue arises as to whether a particular lithotripsy service opportunity in or near the Service Area belongs to the Partnership, the General Partner or another Affiliate, the General Partner will in good faith attempt to resolve the issue in a manner that it believes to be in or not opposed to the best interest of the Partnership. Notwithstanding the foregoing, no assurance can be given that one or more limited partners or members of such Affiliates or the Limited Partners themselves, may not challenge the decision of the General Partner on fiduciary grounds. See "Competition" and "Prior Activities." The General Partner is planning other limited partnership offerings that would operate lithotripsy businesses in other states. See "Competition." The General Partner through its ownership of limited partner interest in the Partnership is able to influence any vote on matters requiring Limited Partner approval. See "Summary of the Partnership Agreement." The Sales Agent is MedTech Investments, Inc., which is an Affiliate of the General Partner. Because of the Sales Agent's affiliation with the General Partner, there are conflicts in the Sales Agent's performance of its due diligence responsibilities under the federal securities laws. See "Plan of Distribution." The interests of the Limited Partners have not been separately represented by independent counsel in the formulation of the transactions described herein. The attorneys and accountants who have performed and will perform services for the Partnership were retained by the General Partner, and have in the past performed and are expected in the future to perform similar services for the General Partner, and Prime. FIDUCIARY RESPONSIBILITY OF THE GENERAL PARTNER The General Partner is accountable to the Partnership as a fiduciary and consequently must exercise good faith in handling Partnership affairs. This is a rapidly developing and changing area of the law and Investors who have questions concerning the duties of the General Partner should consult with their counsel. Under the Partnership Agreement, the General Partner and its Affiliates have no liability to the Partnership or to any Partner for any loss suffered by the Partnership that arises out of any action or inaction of the General Partner or its Affiliates if the General Partner or its Affiliates, in good faith, determined that such course of conduct was in the best interest of the Partnership and such course of conduct did not constitute gross negligence or willful misconduct of the General Partner or its Affiliates. Accordingly, Limited Partners have a more limited right of action than they otherwise would absent the limitations set forth in the Partnership Agreement. The General Partner and its Affiliates will be indemnified by the Partnership against any losses, judgments, liabilities, expenses and amounts paid in settlement of any claims sustained by them in connection with the Partnership, provided that the same were not the result of gross negligence or willful misconduct on the part of the General Partner or its Affiliates. Insofar as indemnification for liabilities under the Securities Act may be permitted to persons controlling the Partnership pursuant to the foregoing provisions, the Partnership has been informed that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act and therefore is unenforceable. COMPETITION Many fixed-site and mobile extracorporeal shock-wave lithotripsy services are currently operating in and around the Service Area. The following discussion identifies the existing services in and near the Service Area, to the best knowledge of the General Partner. Affiliated Competition The Partnership faces competition from lithotripters placed in service in Indiana and Kentucky, including lithotripters owned by other enterprises affiliated with the General Partner. The General Partner has several Affiliates which currently provide and will continue to provide lithotripsy services in or near the Service Area. Prime Lithotripter Operations, Inc. d/b/a Tennessee Valley Lithotripter ("TVL") rents the Existing Lithotripsy System from the Partnership to provide services at Suburban Hospital in Louisville, Kentucky. Western Kentucky Lithotripters Limited Partnership uses a Dornier HM-3 and Modulith(R) SLX-T to provide mobile lithotripsy services to treatment centers near the Service Area in the following Kentucky counties: Christian County, Daviess County, Henderson County, Hopkins County, McCracken County and Warren County. Kentucky I Lithotripsy, LLC operates a Dornier HM-3 in central and eastern Kentucky, and TVL also operates several Dornier HM-3 lithotripters in Tennessee. See "Conflicts of Interest." Other Competition Besides lithotripsy services provided by the General Partner's Affiliates, various hospitals and other facilities in the Service Area have access to lithotripters which are in direct competition with the Partnership. The General Partner is aware of two fixed-site lithotripters operating in Louisville, Kentucky: a Dornier HM-4 at Suburban Hospital, and a Lithostar(TM) at Alliant Medical Pavillion. In addition, the General Partner is aware of a physician-owned venture (consisting in part of former Limited Partners) providing transportable lithotripsy services in Indianapolis, Indiana using a Healthtronics Lithotron. There may be other existing fixed-base or mobile lithotripsy services in the Service Area which will directly compete with the Partnership's Lithotripsy Systems, but the General Partner is not familiar with these other competitors. The General Partner is generally unfamiliar with the cost of the lithotripsy procedures offered by the Partnership's competitors. Although the General Partner anticipates that the Partnership will continue to operate primarily in the Service Area, the actual itinerary for the Lithotripsy Systems is expected to be influenced by the number of patients in particular areas and arrangements with various hospitals and health care centers including the Contract Hospitals. See "Business Activities - Operation of the Lithotripsy Systems." Other hospitals in and near the Service Area may operate lithotripters which are not extracorporeal shock-wave lithotripters but rather use lasers or are electrohydraulic lithotripters. The General Partner believes these machines have a competitive disadvantage because such machines are capable of treating stones only in the ureter. The General Partner believes the Lithotripsy Systems can be used on stones in locations other than the ureter. See "Business Activities - Treatment Methods for Kidney Stone Disease." The health care market in the Service Area is heavily influenced by managed care companies such as health maintenance organizations. Managed care companies generally contract either directly with hospitals or specified providers for lithotripsy services for beneficiaries of their plans. It is not uncommon for managed care companies to have contracts already in place with hospitals or specified providers, and the Partnership will not be able to provide services to beneficiaries of those plans unless it convinces either the managed care companies or the hospitals to switch to the Partnership's services. No assurance can be given that new competing lithotripsy clinics will not open in the future or that innovations in lithotripters or other treatments of kidney stone disease will not make the Partnership's Lithotripsy Systems competitively obsolete. See "Risk Factors - Operating Risks - - Technological Obsolescence." In addition, except within the State of Indiana, the General Partner and its Affiliates are not restricted from engaging in lithotripsy ventures associated with the Partnership which may compete with the Partnership. See the Partnership Agreement, attached hereto as Appendix A. No manufacturer of the Lithotripsy Systems is under any obligation to the General Partner or the Partnership to refrain from selling its lithotripters to urologists, hospitals or other persons for use in the Service Area or elsewhere. In addition, the availability of lower-priced lithotripters in the United States has dramatically increased the number of lithotripters in the United States, increased competition for lithotripsy procedures and created downward pressure on the prices the Partnership can charge for its services. Many potential competitors of the Partnership, including hospitals and medical centers, have financial resources, staffs and facilities substantially greater than those of the Partnership and of the General Partner. REGULATION Federal Regulation The Partnership, the General Partner and the Limited Partners are subject to regulation at the federal, state and local level. An adverse review or determination by certain regulatory organizations (federal, state or private) may result in the Partnership, the General Partner and the Limited Partners being subject to imprisonment, loss of reimbursement, fines or exclusion from participation in Medicare or Medicaid. Adverse reviews of the Partnership's operations at any of the various regulatory levels may adversely affect the operations and profitability of the Partnership. Reimbursement. The Partnership either charges Contract Hospitals a fee for use of the Existing Lithotripsy System or directly bills and collects from patients a fee for lithotripsy services provided using its Existing Lithotripsy System. The amount of the fee charged to Contract Hospitals and patients is dependent on the amount that governmental and commercial third party payors are willing to reimburse hospitals and patients for lithotripsy procedures. The primary governmental third party payor is Medicare. Medicare reimbursement policies are statutorily created and are regulated by the federal government. The General Partner expects that the level of reimbursement under Medicare for lithotripsy procedures may continue to decline. As required by the Balanced Budget Act of 1997, the Health Care Financing Administration ("HCFA"), the federal agency that administers the Medicare program, has established a prospective payment system for outpatient procedures. One of the goals of the prospective payment system is to lower medical costs paid by the Medicare program. HCFA has issued regulations which reduce the reimbursement rate currently paid for lithotripsy procedures performed on Medicare patients at hospitals to a base rate of $2,265. The base rate includes anesthesia and sedation, equipment and supplies necessary for the procedure, but does not include the treating physician's professional fee. The base rate is subject to adjustment for various hospital-specific factors. The $2,265 reimbursement rate is scheduled to be implemented on July 1, 2000. In some cases, reimbursement rates payable to the Partnership and some Affiliates of the General Partner from commercial third-party payors are less than the new HCFA rate. The Partnership does not currently provide services at any ambulatory surgery center, however the General Partner retains the discretion to make the Lithotripsy Systems available at ambulatory surgery centers ("ASCs") in the future. Medicare does not currently reimburse for lithotripsy procedures provided at ASCs. However, HCFA issued proposed rules in 1998 which would authorize Medicare reimbursement for lithotripsy procedures provided at ASCs. While the proposed rules had a target effective date of October 1, 1998, the effective date has been postponed indefinitely for reasons unrelated to lithotripsy coverage. The proposed rules assign a Medicare reimbursement rate of $2,107 if the lithotripsy procedure is performed at an ASC. Whether these proposed rules will become effective to authorize Medicare reimbursement at ASCs and, if they do become effective, what the reimbursement rate will be, is unknown to the General Partner. The Medicare program has historically influenced the setting of reimbursement standards by commercial insurers. Therefore, reduced rates of Medicare reimbursement for lithotripsy services may result in reduced payments by commercial insurers for the same services. As was discussed previously, competitive pressure from health maintenance organizations and other managed care companies has in some circumstances already resulted in decreasing reimbursement rates from commercial insurers. See "Risk Factors - Operating Risks - Impact of Insurance Reimbursement." No assurances can be given that HCFA will not seek to reduce its proposed reimbursement rates even more to avoid paying more than commercial insurers. As a result, hospitals may seek to lower the fees paid to the Partnership for the use of the Lithotripsy Systems. The General Partner anticipates that reimbursement for lithotripsy procedures, and therefore overall Partnership revenues, may continue to decline. The physician service (Part B) Medicare reimbursement for renal lithotripsy is determined using Resource Based-Relative Value Scales ("RB-RVS"). The system includes limitations on future physician reimbursement increases tied to annual expenditure targets legislated annually by Congress or set based upon recommendation of the Secretary of the U.S. Department of Health and Human Services. Medicare has in the past, with regard to other Part B services such as cataract implant surgery, imposed significant reductions in reimbursement based upon changes in technology. HCFA has produced a lengthy report whose conclusion is that professional fees for lithotripsy are overvalued. Thus, potential future decreases in reimbursement must be considered probable. The Medicaid programs in Indiana and Kentucky are jointly sponsored by the federal and state governments to reimburse service providers for medical services provided to Medicaid recipients, who are primarily the indigent. The Medicaid programs in Indiana and Kentucky currently provide reimbursement for lithotripsy services. The federal Personal Responsibility and Work Opportunity Reconciliation Act of 1996 requires state Medicaid health plans to limit Medicaid coverage for certain otherwise eligible persons. The General Partner does not believe this legislation will have a significant impact on the Partnership's revenues. In addition, federal regulations permit state health plans to limit the provision of services based upon such criteria as medical necessity or other criteria identified in utilization or medical review procedures. The General Partner is unable to predict whether the Medicaid programs in Indiana and Kentucky will take such steps. Self-Referral Restrictions. Health care entities which seek reimbursement for services covered by Medicare or Medicaid are subject to federal regulation restricting referrals by certain physicians or their family members. Congress has passed legislation prohibiting physician self-referral of patients for "designated health services", which include inpatient and outpatient hospital services (42 U.S.C. ss. 1395nn) ("Stark II"). Lithotripsy services were not specifically identified as a designated health service by this legislation, but the prohibition includes any service which is provided to an individual who is registered as an inpatient or outpatient of a hospital under proposed regulations discussed below. Lithotripsy services provided by the Partnership to Medicare and Medicaid patients are billed by the contracting hospital in its name and under its Medicare and Medicaid program provider numbers. Accordingly, these lithotripsy services would likely be considered inpatient or outpatient services under Stark II. Following the passage of the Stark II legislation effective January 1, 1995, the General Partner determined that the statute would not apply to the type of lithotripsy services provided by the Partnership. Stark II applies only to ownership interests directly or indirectly in the entity that "furnishes" the designated health care service. The physician-investors and the Partnership do not and will not have an ownership interest in any Contract Hospitals which offer the lithotripsy services to the patients on an inpatient or outpatient basis. See 42 U.S.C. ss. 1395nn(a)(1)(A). Thus, by referring a patient to a hospital offering the service, the physician-investors will not be making a referral to an entity in which they maintain an ownership interest for purposes of the application of Stark II. This interpretation adopted by the General Partner was consistent with the informal view of the General Counsel's Office of the U.S. Department of Health and Human Services. Based upon this reasonable interpretation of Stark II, by referring a patient to a hospital furnishing the outpatient lithotripsy services "under arrangements" with the Partnership, a physician investor in the Partnership is not making a referral to an entity (the hospital) in which he or she has an ownership interest. In 1998, HCFA published proposed regulations interpreting the Stark II statute (the "Proposed Stark II Regulations"). The Proposed Stark II Regulations and HCFA's accompanying commentary would apply the physician referral prohibitions of Stark II to the Partnership's contracts for provision of the Lithotripsy System. Under the Proposed Stark II Regulations, physician Limited Partner referrals of Medicare and Medicaid patients to Contract Hospitals would be prohibited because the Partnership is regarded as an entity that "furnishes" inpatient and outpatient hospital services. The General Partner cannot predict when final regulations will be issued or the substance of the final regulations, but the interpretive provisions of the Proposed Stark II Regulations may be viewed as HCFA's interim position until final regulations are issued. If the Proposed Stark II Regulations are adopted as final (or, in the meantime, if a reviewing court adopted their reasoning as the proper interpretations of the Stark II statute), then the Partnership's operations would not be in compliance with Stark 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 Stark II Regulations that physician overutilization of lithotripsy is unlikely and specifically solicits comments on whether there should be a regulatory exception for lithotripsy. HCFA has received a substantial volume of comments in support of a regulatory exception for lithotripsy. HCFA representatives have informally acknowledged in published commentary that some form of regulatory relief for lithotripsy is under consideration and may be forthcoming; however, no assurance can be made that such will be the case. The General Partner will continue to carefully review the Proposed Stark II Regulations and accompanying HCFA commentary, and explore other alternative plans of operations that would allow the Partnership to operate in compliance with Stark II and its final regulations. HCFA's adoption of the current Proposed Stark II Regulations as final or a reviewing court's interpretation of the Stark II statute in reliance on the Proposed Stark II Regulations and in a manner adverse to the Partnership operations would mean that the Partnership and its physician Limited Partners would likely be found in violation of Stark 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 Stark II self-referral prohibition. One (H.R. 2650) was introduced by Representative Stark, the other (H.R. 2651) by House Ways and Means health subcommittee chair Representative Bill Thomas. The Stark bill would modify, and the Thomas bill would repeal, the general prohibition on physician compensation arrangements with entities to which they refer patients. However, neither bill, nor any other bill currently pending in Congress, would substantively modify the regulation of referrals of physicians with ownership interests. Thus, neither bill would affect the Partnership's analysis of the potential impact of Stark II on this Offering discussed above. Fraud and Abuse. The provisions of the federal Social Security Act addressing illegal remuneration (the "Anti-Kickback Statute") prohibit providers and others from soliciting, receiving, offering or paying, directly or indirectly, any remuneration in return for either making a referral for a Medicare, Medicaid or TRICARE (formerly known as CHAMPUS) covered service or ordering, arranging for or recommending any such covered service. Violations of the Anti-Kickback Statute may be punished by a fine of up to $25,000 or imprisonment for up to five (5) years, or both. In addition, violations may be punished by substantial civil penalties and/or exclusion from the Medicare and Medicaid programs. Regarding exclusion, the Office of Inspector General ("OIG") of the Department of Health and Human Services may exclude a provider from participation in the Medicare program for a 5-year period upon a finding that the Anti-Kickback Statute has been violated. After OIG establishes a factual basis for excluding a provider from the program, the burden of proof shifts to the provider to prove the Anti-Kickback Statute has not been violated. The Limited Partners are to receive cash Distributions from the Partnership. Since some of the Limited Partners are physicians or others in a position to refer and perform lithotripsy services using Partnership equipment and personnel, such Distributions could come under scrutiny under the Anti-Kickback Statute. The Third Circuit United States Court of Appeals has held that the Anti-Kickback Statute is violated if one purpose (as opposed to the primary or sole purpose) of a payment to a provider is to induce referrals. United States v. Greber, 760 F.2d 68 (1985). The Greber case was followed by the United States Court of Appeals for the Ninth Circuit, United States v. Kats, 871 F.2d 105 (9th Cir. 1989), and cited favorably by the First Circuit in United States v. Bay State Ambulance and Hospital Rental Service, Inc., 874 F.2d 20 (1st Cir. 1989). The OIG has indicated that it is giving increased scrutiny to health care joint ventures involving physicians and other referral sources. In 1989, it published a Special Fraud Alert that outlined questionable features of "suspect" joint ventures, including some features which may be common to the Partnership. While OIG Special Fraud Alerts do not constitute law, they are informative because they reflect the general views of the OIG as a health care fraud and abuse investigator and enforcer. The OIG has published regulations which protect certain transactions from scrutiny under the Anti-Kickback Statute (the "Safe Harbor" regulations). A Safe Harbor, if complied with fully, will exempt such activity from prosecution under the Anti-Kickback Statute. However, the preamble to the Safe Harbor regulations states that the failure of a particular business arrangement to comply with the regulations does not determine whether or not the arrangement violates the Anti-Kickback Statute because the regulations do not themselves make any particular conduct illegal. This Offering and the business of the Partnership do not comply with any Safe Harbor. In the commentary introducing the Safe Harbor regulations, the OIG recognized the beneficial effect that business investments in small entities may have on the health care industry. The OIG promulgated a Safe Harbor for investment interests, including limited partnership ownership interests, in small entities which are held by persons in a position to make referrals to the entities so long as eight criteria are met. This Offering does not meet all eight criteria; however, this Offering does meet some of the criteria. Specifically, the terms on which limited partnership interests are offered to physicians who treat their patients on the Lithotripsy Systems are not related to the previous or expected volume of referrals or amount of business generated by the physicians; there is no requirement that any physician make referrals or be in a position to make referrals as a condition for remaining an investor; there is no cross-referral arrangement involved with the business of the Partnership; the Partnership does not loan funds or guarantee loans for physicians who refer patients for treatment on the Lithotripsy Systems; and the Distributions to physicians who are Limited Partners are directly proportional to the amount of their capital investment. In order to qualify for Safe Harbor protection, all eight criteria must be met. The General Partner can give no assurance that compliance with some, but not all, of the criteria of the Safe Harbor would prevent the OIG from finding a potential violation of the Anti-Kickback Statute by virtue of this Offering. A Safe Harbor has been adopted which protects equipment leasing arrangements. It requires that the aggregate rental charge be set in advance, be consistent with fair market value in arms-length transactions and not be determined in a manner that takes into account the volume or value of any referrals or business otherwise generated between the parties. To the best knowledge of the General Partner, the Hospital Contracts entered into by the Partnership do not require that the aggregate rental charge be set in advance and contain other terms which cause the Hospital Contracts not to comply with the Safe Harbor's requirements. When it issued this Safe Harbor, the OIG commented on per-use charges for equipment rentals. It stated that such arrangements must be examined on a case-by-case basis and may be abusive in certain situations. According to the OIG, payments on a per-use basis do not necessarily violate the Anti-Kickback Statute, but such payments are not provided Safe Harbor protection. The General Partner cannot give any assurances that the Partnership's Hospital Contracts which involve a per-use payment to the Partnership by Contract Hospitals would not be deemed to violate the Anti-Kickback Statute. In November 1999, the OIG issued a Safe Harbor protecting certain physician investment interests in ASCs. The commentary accompanying the new Safe Harbor specifically distinguished physician ownership in ASCs from physician ownership in other facilities, including lithotripsy facilities, end-stage renal disease facilities, comprehensive outpatient rehabilitation facilities and others. The OIG concluded that ASCs benefit from favorable public policy considerations relating to reducing Medicare costs (including through the impending prospective payment system discussed above); other facilities, including lithotripsy facilities, do not share the same policy considerations or reimbursement structures. Therefore, the Safe Harbor status given to certain physician investments in ASCs cannot be viewed as an indication that physician investments in other facilities, including lithotripsy facilities, would not be deemed to violate the Anti-Kickback Statute. Although a separate Safe Harbor was not adopted, HCFA noted in its commentary when the Safe Harbor regulations were issued in 1991 that additional protection may be merited for situations where a physician sees a patient in his or her own office, makes a referral to an entity in which he or she has an ownership interest and performs the service for which the referral is made. In such cases, Medicare makes a payment to the facility for the service it furnishes, which may result in a profit distribution to the physician. HCFA noted that, with respect to the physician's professional fee, such a referral is simply a referral to oneself, and that in such situations, both the professional service fee and the profit distribution from the associated facility fee that are generated from the referral may warrant protection. HCFA stated that its primary concern regarding the above referral situation was the investing physician's ability to profit from any diagnostic testing that is generated from the services he or she performs. The General Partner believes the potential for overutilization posed by referrals for diagnostic services is not present to the same degree with therapeutic services such as lithotripsy where the necessity for the treatment can be objectively determined; i.e., a renal stone can be definitely determined before treatment. The applicability of the Anti-Kickback Statute to physician investments in health care businesses to which they refer patients and which do not qualify for a Safe Harbor has not been the focus of many court decisions, and therefore, judicial guidance is limited. In the only case in which the OIG has attempted to exercise the civil exclusion remedy in the context of a physician-owned joint venture, The Hanlester Network, et al. v. Shalala, the Ninth Circuit for the United States Court of Appeals (the "Court") held that the Anti-Kickback Statute is violated when a person or entity (a) knows that the statute prohibits offering or paying remuneration to induce referrals and (b) engages in prohibited conduct with the specific intent to violate the law. Although the Court upheld a lower court ruling that the joint venture in question violated the Anti-Kickback Statute vicariously through the knowing and willful actions of one of its agents, who was acting outside the parameters of the joint venture's offering documents, the Court concluded there was not sufficient evidence indicating that a return on investment to physicians or other investors in the joint venture could on its own constitute an "offer or payment" of remuneration to make referrals. The Court also stated that since profit distributions in Hanlester were made based on each investor's ownership share and not on the volume of referrals, the fact that large referrals by investors would result in potentially high investment returns did not, standing alone, cause a violation of the Anti-Kickback Statute. The Health Insurance Portability and Accountability Act of 1996 directed the OIG to respond to requests for advisory opinions regarding the effect of the Anti-Kickback Statute on proposed business transactions. The General Partner has not requested the OIG to review this Offering and, to the best knowledge of the General Partner, the OIG has not been asked by anyone to review offerings of this type. Federal regulatory authorities could take the position in future advisory opinions that business transactions similar to this Offering are a means to illegally influence the referral patterns of the prospective physician Limited Partners. Because there is no legal precedent interpreting circumstances identical to these facts, it is not possible to predict how this issue would be resolved if litigated. Whenever an offering of ownership interests is made available to persons with the potential to refer patients for services, there is a possibility that the OIG, HCFA or other government agencies or officials may question whether the ownership interests are being provided in return for or to induce referrals by the new owners. Remuneration, which government officials have said can include the provision of an opportunity to invest in a facility to which a person refers patients for services, may be challenged by the government as constituting a violation of the Anti-Kickback Statute. Whether the offering of ownership interests to investors who may refer patients to the Partnership might constitute a violation of this law must be determined in each case based upon the specific facts involved. The various mechanisms in place to avoid providing a financial benefit to prospective Limited Partners for any referrals of patients (including the requirement that all distributions of earnings to Limited Partners be made in proportion to their investment interest), the Partnership's utilization review and quality assurance programs, the fact that lithotripsy is a therapeutic treatment the need of which can be objectively determined, and the existence in the General Partner's view of valid business reasons to engage in this transaction, form the basis in part of the General Partner's belief that this Offering is appropriate. The General Partner of the Partnership intends for all business activities and operations of the Partnership to conform in all respects with all applicable anti-kickback statutes (federal or state). The General Partner does not believe that the Partnership's operations violate the Anti-Kickback Statute. No assurance can be given, however, that the activities of the Partnership will not be reviewed and challenged by regulatory authorities empowered to do so, or that if challenged, the Partnership will prevail. If the activities of the Partnership were determined to violate these provisions, the Partnership, the General Partner, officers and directors of the General Partner, and each Limited Partner could be subject, individually, to substantial monetary liability, felony prison sentences and/or exclusion from participation in Medicare, Medicaid and TRICARE. A prospective Investor with questions concerning these matters should seek advice from his own independent counsel. False Claims Statutes. Federal laws governing reimbursement for medical services generally prohibit an individual or entity from knowingly and willfully presenting a claim (or causing a claim to be presented) for payment from Medicare, Medicaid or other third party payors that is false or fraudulent. The standard for "knowing and willful" includes conduct that amounts to a reckless disregard for whether accurate information is presented by claims processors. Penalties under these statutes include substantial civil and criminal fines, exclusion from the Medicare program and imprisonment. One of the most prominent of these laws is the federal False Claims Act, which may be enforced by the federal government directly, or by a qui tam private plaintiff on the government's behalf. Under the federal False Claims Act, both the government and the private plaintiff, if successful, are permitted to recover substantial monetary penalties and judgments, as well as an amount equal to three times actual damages. In recent cases, some private plaintiffs have taken the position that violations of the Anti-Kickback Statute (discussed above) and Stark II (discussed above) should also be prosecuted as violations of the federal False Claims Act. The Partnership cannot assure that the government, or a reviewing court, would not take the position that billing errors, employee misconduct or violations of other federal statutes, should they occur, are violations of the federal False Claims Act or similar statutes. Some federal courts have recently taken the position that qui tam lawsuits by private plaintiffs are unconstitutional. Most notably, a panel of judges on the Fifth Circuit Court of Appeals took this position in a decision issued in November 1999. That decision is being reviewed by all the judges on the Fifth Circuit. The panel's decision was a minority view; most courts have concluded that qui tam lawsuits are constitutional. In another case, the U.S. Supreme Court ruled on May 22, 2000 that private plaintiffs have standing to bring suits under the False Claims Act. It is unknown how this decision by the U.S. Supreme Court will affect the case which is pending in the Fifth Circuit. However, because the Supreme Court's decision will allow private plaintiffs to continue to bring suit under the False Claims Act, prospective Limited Partners should consider the ramifications of the False Claims Act issues discussed in the preceding paragraph. New Legislation. Two bills currently pending in Congress which would amend or repeal the compensation provisions of the Stark 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 Stark II and the Anti-Kickback laws discussed above. ALS Fraud and Abuse Compliance Guidelines. On March 24, 2000, the American Lithotripsy Society ("ALS") ( a voluntary membership organization made up of physicians, health care management personnel, treatment centers and medical suppliers) published Fraud and Abuste Compliance Guidelines for Physician - Owned Lithotripsy Ventures (the "ALS Guidelines"). The ALS Guidelines are aimed at assisting ALS members in recognizing and avoiding certain practices which the ALS believes are unethical or illegal. The ALS Guidelines acknowledge that they are neither authoritative, nor constitute legal advice. Moreover, the ALS Guidelines stipulate that the laws upon which they are based (all of which are discussed in this "Regulation" section) are open to alternative interpretations. Because of the various reasons set forth in this Memorandum, the Partnership believes the Offering and its operations are appropriate under such laws; however, no assurance can be given that the activities of the Partnership would be viewed by regulatory authorities as complying with these laws or the ALS Guidelines. FTC Investigation. Issues relating to physician-owned health care facilities have been investigated by the Federal Trade Commission ("FTC"), which investigated two lithotripsy limited partnerships affiliated with the General Partner, to determine whether they posed an unreasonable threat to competition in the health care field. The affiliated limited partnerships were advised in 1996 that the FTC's investigation was terminated without any formal action taken by the FTC or any restrictions being placed on the activities of the limited partnerships. However, the General Partner cannot assure that the FTC will not investigate issues arising from physician-owned health care facilities in the future with respect to the General Partner or any Affiliate, including the Partnership. Ethical Considerations. The American Medical Association's Code of Medical Ethics states that physicians should not refer patients to facilities in which they have an ownership interest unless such physician directly provides care or services to such patient at the facility. Because physician investors will be providing lithotripsy services, the General Partner believes that an investment by a physician will not be in violation of the American Medical Association's Code of Medical Ethics. In the event that the American Medical Association changes its ethical code to preclude such referrals by physicians and such ethical requirements are applied to facilities or services which, at the time of adoption, are owned in whole or in part by referring physicians, the Partnership and the interests of the Limited Partners may be adversely affected. State Regulation Indiana. Indiana's certificate of need ("CON") law was repealed in 1998. Therefore, a CON is not necessary to acquire or operate either the Partnership's Lithostar(TM) or the transportable unit in Indiana. To the best knowledge of the General Partner, the services provided by the Partnership will not require licensure as a hospital or other health care facility. Indiana requires that lithotripters be registered and inspected, and that radiologic technologists be licensed. The General Partner will continue to comply with these requirements. Regarding physician referrals, a Medical Licensing Board of Indiana regulation prohibits the receipt of compensation for referral of a patient, except in association with an approved referral program. The Indiana Medicaid statute prohibits the receipt of a fee or charge for referring a patient for the furnishing of items or services. As the Partnership will not compensate any physician for referrals (rather, all payments to physicians are based on their equity interests in the Partnership), the General Partner believes these laws will not be violated. The General Partner is not aware of any other regulatory issues related to the provision of lithotripsy services in Indiana. Kentucky. Kentucky requires a certificate of need ("CON") to establish a health facility, to make a substantial change in a health service, or to purchase any capital equipment which costs more than $1,655,678. The General Partner has sought and received a written opinion from the Certificate of Need Office of the Kentucky Cabinet for Health Services that no CON is necessary for mobile lithotripsy services similar to those discussed in this Offering so long as the hospital establishes and provides the service; the General Partner has confirmed this opinion is the same for transportable lithotripters. To ensure that the hospital establishes and provides the service, contracting hospitals will lease the Lithotripsy Systems and pay the Partnership for the use of the equipment; the Partnership will not bill for the services itself. To the best knowledge of the General Partner, the Partnership's mobile Lithostar(TM) must be licensed as a mobile health service by the Division of Licensing and Regulation. Licensure requires a survey of the Existing Lithotripsy System and approval of the policies and procedures related to the Existing Lithotripsy System. The General Partner does not believe the licensure requirement will prevent the Partnership from operating as planned in Kentucky. The General Partner has sought and received a written determination from the Division of Licensing and Regulation that transportable lithotripters need not be licensed as a mobile health service. Regarding physician referrals, Kentucky law incorporates the American Medical Association's Code of Medical Ethics (discussed above) in requiring physicians to provide services at entities in which they have an ownership interest and to which they refer patients. Therefore, all physician Limited Partners who make referrals to the Partnership's Lithotripsy Systems must provide services on the lithotripter. Kentucky law prohibits physicians from receiving any compensation in exchange for referrals of Medicare or Medicaid patients. As the Partnership will not compensate any physician for referrals (rather, all payments to physicians are based on their equity interests in the Partnership), the General Partner believes this law will not be violated. The law also provides that any conduct which violates the federal Stark II and Anti-Kickback laws (discussed above) shall be deemed to violate Kentucky law. Violations are punishable by criminal penalties, repayment of Medicaid reimbursements which were in violation of the law and exclusion from the Kentucky Medicaid program. Kentucky requires registration of x-ray machines and certification of radiologic technologists. The Partnership will seek to comply with this and all other regulatory requirements in order to operate the Lithostar(TM) or transportable unit. Further regulations may be imposed in Indiana or Kentucky at any time in the future. Predictions as to the form or content of such potential regulations would be highly speculative. They could apply to the operation of the Lithostar(TM) or transportable unit or to the physicians who invest in the Partnership. Such restrictive regulations could adversely affect the ability of the Partnership to conduct its business. THE GENERAL PARTNER AND THE PARTNERSHIP BELIEVE LITHOTRIPSY SERVICES WILL CONTINUE TO BE SUBJECT TO INTENSE GOVERNMENTAL REGULATION AT THE FEDERAL AND STATE LEVELS AND, THEREFORE, CANNOT PREDICT THE SCOPE AND EFFECT THEREOF. PROSPECTIVE LIMITED PARTNERS SHOULD CONSULT WITH THEIR LEGAL COUNSEL AS TO THE IMPLICATIONS OF FEDERAL AND STATE LAWS AND PROFESSIONAL ETHICAL CODES DEALING WITH PHYSICIAN OWNERSHIP OF MEDICAL EQUIPMENT AND FACILITIES BEFORE PURCHASING UNITS. PRIOR ACTIVITIES Prime, the sole shareholder of the General Partner, is the largest and fastest growing provider of lithotripsy services in the United States, providing lithotripsy services at over 450 hospitals and surgery centers in 31 states, as well as delivering non-medical services related to the operation of the lithotripters, including scheduling, staffing, training, quality assurance, maintenance, regulatory compliance and contracting with payors, hospitals and surgery centers, while medical care is rendered by urologists utilizing the lithotripters. Prime has an economic interest in 59 mobile and six fixed site lithotripters, all but two of which are operated by Prime or the General Partner and its Affiliates. Prime began providing lithotripsy services with an acquisition in 1992 and has grown rapidly since that time through acquisitions and de novo development. In April 1996, Prime acquired the General Partner. The General Partner operates over 30 lithotripters serving approximately 200 locations in 19 states. The acquisition of the General Partner provided Prime with complementary geographic coverage as well as additional expertise in forming and managing lithotripsy operations. Prime and the General Partner's lithotripters together performed approximately 38,000 lithotripsy procedures in 1999. Approximately 2,300 urologists utilized Prime and the General Partner's lithotripters in 1999, representing approximately 30% of the estimated 7,700 active urologists in the United States. Prime manages the operations of approximately 63 of its 65 lithotripters. All of its lithotripters are operated in connection with hospitals or surgery centers. Prime operates its lithotripters as the general partner of a limited partnership or through a subsidiary, as is the case with the General Partner affiliated partnerships. Prime provides a full range of management and other non-medical support services to the lithotripsy operations, while medical care is provided by urologists utilizing the facilities and certain medical support services are provided by the hospital or surgery center. Urologists are investors in 50 of its 65 operations. Prime's lithotripters range in age from one to twelve years. Of its 65 lithotripters, 59 are mobile units mounted in tractor-trailers or self-contained coaches serving locations in 31 states. Prime also operates six fixed site lithotripters in four states. All of Prime's fixed lithotripsy units are located and operated in conjunction with a hospital or surgery center. Most of these locations are in major metropolitan markets where the population can support such an operation. Fixed site lithotripters generally cannot be economically justified in other locations. Prime and the General Partner believe that they maintain the most comprehensive quality outcomes database and information system in the lithotripsy services industry. Prime has detailed information on over 160,000 procedures covering patient demographic information and medical condition prior to treatment, the clinical and technical parameters of the procedure and resulting outcomes. Information is collected before, during and up to three months after the procedure through internal data collection by doctors, nurses and technicians and through patient questionnaires. For numerous reasons, including differences in financial structure, program size, economic conditions and distribution policies, the success of the General Partner's Affiliates in the lithotripsy field should not be considered as indicative of the operating results obtainable by the Partnership. SUMMARY OF THE PARTNERSHIP AGREEMENT The Partnership Agreement sets forth the powers and purposes of the Partnership and the respective rights and obligations of the General Partner and the Limited Partners. The following is only a summary of certain provisions of the Partnership Agreement, and does not purport to be a complete statement of the various rights and obligations set forth therein. A complete copy of the Partnership Agreement is set forth as Appendix A to this Memorandum, and Investors are urged to read the Partnership Agreement in its entirety and to review it with their counsel and advisors. Nature of Limited Partnership Interest The Investors will acquire their interests in the Partnership in the form of Units. For each Unit purchased, a cash payment of $11,163 is required. The entire Unit purchase price is due in cash upon subscription; however, certain qualified Investors may finance a portion of the purchase price through either individually borrowed funds or through Limited Partner Loans. See "Terms of the Offering - Limited Partner Loans." No Limited Partner will have any liability for the debts and obligations of the Partnership by reason of being a Limited Partner except to the extent of (i) his Capital Contribution and liability under a Limited Partner Loan, if any; (ii) his proportionate share of the undistributed profits of the Partnership; and (iii) the amount of certain Distributions received from the Partnership as provided by the Act. See "Risk Factors - Other Investment Risks - Limited Partners' Obligation to Return Certain Distributions." See also form of Opinion of Counsel, attached hereto as Appendix C. Profits, Losses and Distributions The following is a Summary of certain provisions of the Partnership Agreement relating to the allocation and distribution of the Profits, Losses, Partnership Cash Flow, Partnership Refinancing Proceeds, Partnership Sales Proceeds, and cash upon dissolution of the Partnership. Because an understanding of the defined financial terms is essential to an evaluation of the information presented below, Investors should carefully review the definitions of the terms appearing in the Glossary. 1. Allocations of Profits and Losses. (a) General. Generally, Profits and Losses, if any, for each Year of the Partnership will be allocated proportionately among the Partners based on their respective Percentage Interests in the Partnership; provided that New Limited Partners will be allocated only Profits and Losses that accrue after the date of their admission to the Partnership as Limited Partners. (b) Allocations. Net gains and net losses from Capital Transactions (a part of Profits and Losses), if any, shall be allocated first. Each Partner will receive his pro rata share of Profits and Losses based upon the number of days such Partner was a member of the Partnership during the Year of the Partnership. Notwithstanding the foregoing, the Partnership's "allocable cash basis items," as that term is used in Section 706(d)(2)(B) of the Code, will be allocated as required by Section 706(d)(2) of the Code and the treasury regulations promulgated thereunder. (c) Qualified Income Offset. If any Limited Partner unexpectedly receives an adjustment, allocation or distribution as described in Treasury Regulation Section 1.704-1(b)(2)(ii)(d)(4) through (6) that causes such Limited Partner to have a deficit Capital Account balance, such Limited Partner will be allocated items of income and gain in an amount and manner sufficient to eliminate such deficit balance as quickly as possible. This provision is intended to be a "qualified income offset" as defined in Regulation Section 1.704-1(b)(2)(ii)(d). 2. Distributions. (a) Non-liquidation Distributions. Partnership Cash Flow for each Year of the Partnership, to the extent available, will be distributed within 60 days after the end of each Year of the Partnership, or earlier in the discretion of the General Partner, proportionately among the Partners based on their respective Percentage Interests in the Partnership at the time of distribution. Partnership Sales Proceeds and Partnership Refinancing Proceeds will be distributed within 60 days of the Capital Transaction giving rise to such proceeds, or earlier in the discretion of the General Partner, proportionately among the Partners based on their respective Percentage Interests in the Partnership as of the date of the Capital Transaction giving rise to such proceeds. The New Limited Partners have no rights to receive any distributions in the future that are made out of the Initial Limited Partners' and General Partner's accrued but undistributed Partnership Cash Flow as of the date the New Limited Partners are admitted to the Partnership. New Limited Partners will be entitled only to Partnership Cash Flow that accrues after the date of their admission to the Partnership as Limited Partners (b) Distribution Upon Dissolution. Upon the dissolution and termination of the Partnership, the General Partner or, if there is none, a representative of the Limited Partners, will liquidate the assets of the Partnership. The proceeds of such liquidation will be applied and distributed in the following order of priority: (a) first, to the payment of the debts and liabilities of the Partnership, and the expenses of liquidation; (b) second, to the creation of any reserves which the General Partner or the representative of the Limited Partners may deem reasonably necessary for the payment of any contingent or unforeseen liabilities or obligations of the Partnership or of the General Partner arising out of or in connection with the business and operation of the Partnership; and (c) third, the balance, if any, will be distributed to the Partners in accordance with the Partners' positive capital account balances. Any General Partner with a negative capital account following the distribution of liquidation proceeds or the liquidation of its interest must contribute to the Partnership an amount equal to such negative capital account on or before the end of the Partnership's taxable year (or, if later, within ninety days after the date of liquidation). Any capital so contributed shall be (i) distributed to those Partners with positive capital accounts until such capital accounts are reduced to zero; and/or (ii) used to discharge recourse liabilities. Management of the Partnership The General Partner has the sole right to manage the business of the Partnership and at all times is required to exercise its responsibilities in a fiduciary capacity. The consent of a Majority in Interest of the Limited Partners is required for any sale of the Lithotripsy Systems or the purchase of additional lithotripsy systems by the Partnership. The General Partner may refinance the Lithotripsy Systems or purchase other assets related to the provision of lithotripsy services without the consent of the Limited Partners. The General Partner will oversee the day-to-day affairs of the Partnership pursuant to the Management Agreement. See "Business Activities - Management." Under the Partnership Agreement, if the General Partner is adjudged by a court of competent jurisdiction to be liable to the Limited Partners or the Partnership for acts of gross negligence or willful misconduct in the performance of its duties under the terms of the Partnership Agreement, the General Partner may be removed and another substituted with the consent of a Majority in Interest of the Limited Partners. The General Partner may also be removed without cause and another party substituted with the consent of the Limited Partners who hold at least 75% of the Limited Partner Percentage Interests. The General Partner may transfer all or a portion of its Partnership Interest only if, in the opinion of the Partnership's accountant, the new general partner has sufficient net worth and meets other requirements to assure that the Partnership will continue to be treated as a partnership for federal tax purposes. Both the admission of any new shareholder and the withdrawal of any shareholder from the General Partner may be done without the approval of the Limited Partners. Powers of the General Partner Except as otherwise provided in the Partnership Agreement, the General Partner may, in its sole discretion, borrow money, acquire, encumber, hold title to, pledge, sell, release or otherwise dispose of, all or any part of the Partnership's assets, when and upon such terms as it determines to be in the best interest of the Partnership, employ such persons as it deems necessary for the operation of the Partnership and deposit, withdraw, invest, pay, retain (including the establishment of reserves) and distribute the Partnership's funds. See "Management of the Partnership" above. The General Partner, however, is expressly prohibited from, among other things: (i) possessing Partnership assets or assigning the rights of the Partnership in Partnership assets, including the Lithotripsy Systems, for other than Partnership purposes; (ii) admitting Limited Partners or General Partners except as provided in the Partnership Agreement; (iii) performing any act (other than an act required by the Partnership Agreement or any act taken in good faith reliance upon legal counsel's opinion) which would, at the time such act occurred, subject any Limited Partner to liability as a general partner in any jurisdiction; (iv) performing any act in contravention of the Partnership Agreement or which would make it possible to carry on the ordinary business of the Partnership; and (v) confessing a judgment against the Partnership. Rights and Liabilities of the Limited Partners The Limited Partners do not have any right to participate in the management of the business of the Partnership and will not transact business for the Partnership. Limited Partners are not required to make any capital contributions to the Partnership except amounts agreed by them to be paid, or pay or be personally liable for, any expense, liability or obligation of the Partnership, except to the extent (i) his Capital Contribution and liability under a Limited Partner Loan, if any; (ii) his proportionate share of the undistributed profits of the Partnership; and (iii) the amount of certain Distributions received from the Partnership as provided by the Act. See "Risk Factors - Other Investment Risks - Limited Partners Obligations to Return Certain Distributions." The Limited Partners may not participate in or own an interest in any competing lithotripsy venture, except with the approval of the General Partner. See "Noncompetition Agreement and Protection of Confidential Information" below. The General Partner may elect to treat participation or ownership by a Limited Partner in a competing venture as an event of default, and such Limited Partner may be required to sell his Partnership Interest. See "Optional Purchase of Limited Partner Interests" below. Restrictions on Transfer of Partnership Interests After acquisition of Units by Investors, no Partnership Interest nor any Units may be transferred without the prior written consent of the General Partner, which approval may be granted or withheld in its sole discretion, and subject to the satisfaction of certain other conditions set forth in the Partnership Agreement. The Partnership Agreement contains additional limitations on transfer, including provisions prohibiting transfer that would cause the termination of the Partnership, would violate federal or state securities laws, would prevent the Partnership from being entitled to use any method of depreciation which the Partnership might otherwise be entitled to use, or would adversely affect the status of the Partnership as a partnership for federal income tax purposes. In addition, the Partnership Agreement prohibits the holding or transfer of a Partnership interest by or to a "tax exempt entity" (as defined in Code Section 168(h)) which would affect the method or manner in which the Partnership may depreciate Partnership assets. No transferee of the Units will automatically become a Limited Partner. Admission of a transferee to the Partnership as a Limited Partner requires the fulfillment of other obligations enumerated in the Partnership Agreement, including either the approval of all the Limited Partners (except the assignor Limited Partner) and the General Partner, or the approval of the assignor Limited Partner and the General Partner. Any transferee of a Partnership Interest who has not been admitted to the Partnership as a Partner shall not be entitled to any of the rights, powers or privileges of his transferor except the right to receive and be credited or debited with his proportionate share of Partnership income, gains, profits, losses, deductions, credits or distributions. A transferor Limited Partner will not be released from his or her personal liability under a Limited Partner Loan, unless otherwise specifically agreed by the Bank. Noncompetition Agreement and Protection of Confidential Information The Partnership Agreement provides that each Limited Partner (other than Units held by the General Partner of its Affiliates) is prohibited from having a direct or indirect ownership of an interest in a competing venture (including the lease or sublease of competing technology) (the "Outside Activities"). While they are Limited Partners in the Partnership, each Limited Partner is precluded from engaging in any Outside Activities. In the event that a Limited Partner's Partnership Interest is terminated or transferred upon the occurrence of certain events as provided in the Partnership Agreement, such Partner is precluded, for a period of two (2) years following the date of such withdrawal, from engaging in any Outside Activity within any market area in which the Partnership is providing services or has provided services within the twelve months preceding the withdrawal. This prohibition is in addition to the right of the General Partner to acquire the interest of a Limited Partner engaged in an Outside Activity as provided in the Partnership Agreement. See "Optional Purchase of Limited Partner Interests" in this Section, and the Partnership Agreement attached hereto as Appendix A. In addition, the Partnership Agreement provides that each Limited Partner acknowledges and agrees that his participation in the Partnership necessarily involves his access to confidential information that is proprietary in nature and, therefore, the exclusive property of the Partnership. Accordingly, the Limited Partners (other than the General Partner and its Affiliates who hold Limited Partner interests) are precluded from disclosing such confidential information during their participation as Limited Partners in the Partnership or thereafter unless required by law or with the prior written consent of the Partnership. Dissolution and Liquidation The Partnership will dissolve and terminate for any of the following reasons: 1. The sale, exchange or disposition of all or substantially all of the property of the Partnership without making provision for the replacement thereof; 2. The expiration of its term on December 31, 2040; 3. The bankruptcy or occurrence of certain other events with respect to the General Partner; 4. The election to dissolve the Partnership made by the General Partner and a Majority in Interest of the Limited Partners; or 5. Any other reason which under the laws of the State of Indiana would cause a dissolution. The retirement, resignation, bankruptcy, assignment for the benefit of creditors, dissolution, death, disability or legal incapacity of a general partner will not, however, result in a termination of the Partnership if the remaining general partner or general partners, if any, elect to continue the business of the Partnership, or if no general partner remains, if within 90 days of the occurrence of one of such events, all of the Limited Partners elect in writing to continue the Partnership and, if necessary, designate a new general partner. Upon dissolution, the General Partner or, if there is none, a representative of the Limited Partners, will liquidate the Partnership's assets and distribute the proceeds thereof in accordance with the priorities set forth in the Partnership Agreement. See "Profits, Losses and Distributions - Distributions - Distribution upon Dissolution" above and "Optional Purchase of Limited Partner Interests" below. Optional Purchase of Limited Partner Interests As provided in the Partnership Agreement, the General Partner has the option to purchase all the interest of a Limited Partner in the Partnership upon the occurrence with respect to the Limited Partner of (i) death, (ii) bankruptcy or insolvency, or (iii) direct or indirect ownership of an interest in a competing venture. The General Partner may, in its sole discretion, assign to the Partnership its purchase option rights. Except in the case of a competing ownership interest, upon the occurrence of one or more of the preceding events, the withdrawing Limited Partner, or his personal representative, will have a brief period within which to sell his entire Partnership Interest to a purchaser approved of by the General Partner. If the withdrawing Limited Partner is unable to sell his Partnership Interest as provided above, the General Partner (or the Partnership) will then have the option to purchase such Partnership Interest. If the General Partner or Limited Partners elect to exercise their respective options, the option purchase price will be equal to the withdrawing Limited Partner's share of the Partnership's book value, if any, as reflected by such Limited Partner's capital account in the Partnership (unadjusted for any appreciation in Partnership assets and as reduced by depreciation deductions claimed by the Partnership for tax purposes). The withdrawing Limited Partner will not be released from his obligations under any Limited Partner Loan unless so agreed by the Bank. Furthermore, sale of his Partnership Interest may constitute an event of default under any outstanding Limited Partner Loan incurred by the selling Limited Partner. See "Terms of the Offering - Limited Partner Loans." There can be no assurance that the option purchase price will represent the fair market value of a Limited Partner's interest in the Partnership. Because Partnership losses, depreciation deductions and Distributions reduce capital accounts, and because appreciation in Partnership assets is not reflected in capital accounts, it is the opinion of the General Partner that the option purchase price will be nominal in amount. Dilution Offerings The General Partner has the authority to periodically offer and sell additional limited partnership interests in the Partnership through Dilution Offerings to local investors who are not Limited Partners in the Partnership ("Qualified Investors"). The primary purpose of Dilution Offerings would be (i) to raise additional capital for any legitimate Partnership purpose; and (ii) to assure the highest quality of patient care by admitting Qualified Investors to the Partnership who will be dedicated and motivated as owners to follow the Partnership's treatment protocol, and comply with its quality assurance and outcome analysis programs. Any sale of limited partnership interests in a Dilution Offering will result in the proportionate dilution of the Percentage Interests of the existing Partners; i.e., the interests of the General Partner and of the Limited Partners in Partnership allocations, cash distributions and voting rights will be proportionately reduced as a result of a successful Dilution Offering. The Limited Partner interests offered in a Dilution Offering will be sold in the manner and according to terms in the best interest of the Partnership, as prescribed in the sole discretion of the General Partner. Any additional limited partnership interests offered in a Dilution Offering will be sold for a price no lower than their fair market value as determined by the General Partner, in its sole discretion, at the time of the Dilution Offering. Arbitration The Partnership Agreement provides that disputes arising thereunder shall be resolved by submission to arbitration in Indianapolis, Indiana in accordance with the then prevailing commercial arbitration rules of the American Arbitration Association. Power of Attorney Each Investor, by executing the Subscription Agreement, irrevocably appoints Dr. Joseph Jenkins to act as attorney-in-fact to execute the Partnership Agreement, any amendments thereto and any certificate of limited partnership filed by the General Partner. The Partnership Agreement, in turn, contains provisions by which each Limited Partner irrevocably appoints Dr. Joseph Jenkins, to act as his attorney-in-fact to make, execute, swear to and file any documents necessary to the conduct of the Partnership's business, such as deeds of conveyance of real or personal property as well as any amendment to the Partnership Agreement or to any certificate of limited partnership which accurately reflects actions properly taken by the Partners. Reports to Limited Partners Within 90 days after the end of each Year of the Partnership, the General Partner will send to each person who was a Limited Partner at any time during such year such tax information, including, without limitation, Federal Tax Schedule K-1, as will be reasonably necessary for the preparation by such person of his federal income tax return, and such other financial information as may be required by the Act. Records Proper and complete records and books of account will be kept by the General Partner in which will be entered fully and accurately all transactions and other matters relative to the Partnership's business as are usually entered into records and books of account maintained by persons engaged in business of a like character. The Partnership books and records will be kept according to the method of accounting determined by the General Partner. The Partnership's fiscal year will be the calendar year. The books and records will be located at the office of the General Partner, and will be open to the reasonable inspection and examination of the Limited Partners or their duly authorized representatives during normal business hours. LEGAL MATTERS On the Closing Date, it is expected that Womble Carlyle Sandridge & Rice, a Professional Limited Liability Company, of Winston-Salem, North Carolina, will render an opinion as to the formation and existence of the Partnership, the status of Investors as Limited Partners and certain federal tax matters, the form of which is attached as Appendix C to this Memorandum. See "Risk Factors - Tax Risks." ADDITIONAL INFORMATION The Partnership will make available to Investors the opportunity to ask questions of its management and to obtain information to the extent it possesses such information or can acquire it without an unreasonable effort or expense, which is necessary to verify the accuracy of the information contained herein or which you or your professional advisors desire in evaluating the merits and risks of an investment in the Partnership. Copies of certain Hospital Contracts and insurance reimbursement agreements may not, however, be available due to confidentiality restrictions contained therein. GLOSSARY Certain terms in this Memorandum shall have the following meanings: Act. The Act means the Indiana Revised Uniform Limited Partnership Act, as in effect on the date hereof. Affiliate. An Affiliate is (i) any person, partnership corporation, association or other legal entity ("person") directly or indirectly controlling, controlled by or under common control with another person; (ii) any person owning or controlling 10% or more of the outstanding voting interests of such other person; (iii) any officer, director or partner of such person; and (iv) if such other person is an officer, director or partner, any entity for which such person acts in such capacity. AK Associates. AK Associates, L.L.C., a subsidiary of Prime. It is anticipated that the Partnership will purchase one new mobile truck from AK Associates with a portion of the proceeds of this Offering and/or Partnership debt financing. Bank. First-Citizens Bank & Trust Company. ---- Capital Account. The Partnership capital account of a Partner as computed pursuant to Article XII of the Partnership Agreement. Capital Contributions. All capital contributions made by a Partner or his predecessor in interest which shall include, without limitation, contributions made pursuant to Article VII of the Partnership Agreement. Capital Transaction. Any transaction which, were it to generate proceeds, would produce Partnership Sales Proceeds or Partnership Refinancing Proceeds. Closing Date. 5:00 p.m., Eastern Time, on August 9, 2000 (or earlier) in the discretion of the General Partner. The Closing Date may be extended for a period of up to 180 days in the discretion of the General Partner. Coach. A self-propelled Calumet Coach which houses the Lithostar(TM)currently operated by the Partnership. Code. The Internal Revenue Code of 1986, or corresponding provisions of subsequent, superseding revenue laws. Compact. The transportable Tripter X-1 Compact extracorporeal shock-wave lithotripter and accessories manufactured by Medirex. Contract Hospitals. The four hospitals to which the Partnership provides lithotripsy services pursuant to four separate Hospital Contracts. Counsel. Womble Carlyle Sandridge & Rice, a Professional Limited Liability Company, P.O. Drawer 84, Winston-Salem, North Carolina 27102. Dilution Offering. The issuance, offering and sale by the Partnership of additional partnership interests in the future. Distributions. Cash or other property, from any source, distributed to Partners. Escrow Agent. First-Citizens Bank & Trust Company. ------------ Existing Lithotripsy System. The Coach with the installed and operational Lithostar(TM)currently operated by the Partnership. FDA. The United States Food and Drug Administration. --- Financial Statement. The Purchaser Financial Statement, included in the Subscription Packet accompanying this Memorandum, to be furnished by the Investors for review by the General Partner and the Bank in connection with their decision to accept or reject a subscription. General Partner. The general partner of the Partnership, Lithotripters, Inc., a North Carolina corporation, and a wholly owned subsidiary of Prime. Hospital Contracts. The four separate lithotripsy services agreements the Partnership has entered into with the Contract Hospitals. Initial Limited Partners. The Individuals who were Limited Partners prior to the commencement of this Offering. Investors. Potential purchasers of Units. --------- Limited Partner Loan. The loan to be made by the Bank to certain qualified Investors that wish to finance a portion of the Unit purchase price. Limited Partner Note. The promissory note from an Investor financing a portion of the Unit purchase price to the Bank in the principal amount of $8,663 per Unit, the proceeds of which will be paid directly to the Partnership. The form of the Limited Partner Note (including the Note Addendum attached thereto) is attached as Exhibit A to the form of Limited Partner Loan Commitment which is attached hereto as Appendix B. Limited Partners. The Limited Partners are those Investors in the Units admitted to the Partnership and any person admitted as a substitute Limited Partner in accordance with the provisions of the Partnership Agreement. Lithostar(TM). The Lithostar(TM)model extracorporeal shock wave lithotripter manufactured by Siemens and currently owned by the Partnership. Lithotripsy Systems. The Existing Lithotripsy System and the New Lithotripsy System, collectively. Loan and Security Agreement. The agreement to be executed in conjunction with the Limited Partner Note by an Investor who finances a portion of the Unit purchase price through a Limited Partner Loan. The form of the Loan and Security Agreement is attached as Exhibit B to the form of Bank Commitment which is attached hereto as Appendix B. Loan Documents. The form of Limited Partner Loan Commitment, the Limited Partner Note, the Loan and Security Agreement, the Security Agreement and UCC-1, collectively. Loss. The net loss (including capital losses and excluding Net Gains from Capital Transactions) of the Partnership for each year as determined by the Partnership for federal income tax purposes. Medirex. Medirex Systems Corp. and its Affiliates. ------- Memorandum. This Confidential Private Placement Memorandum, including all Appendices hereto, and any amendment or supplement hereto. Modularis(TM). The Modularis(TM)Uro Plus transportable lithotripter with accessories manufactured by Siemens. Modulith(R) SLX-T. The Modulith(R) SLX-T transportable lithotripter with accessories manufactured by Storz. Net Gains from Capital Transactions. The gains realized by the Partnership as a result of or upon any sale, exchange, condemnation or other disposition of the capital assets of the Partnership (which assets shall include Code Section 1231 assets) or as a result of or upon the damage or destruction of such capital assets. New Limited Partner. Any Investor admitted to the Partnership as a Limited Partner. New Lithotripsy System. The new transportable lithotripter together with the new mobile truck which will be purchased with the proceeds of the Offering and other financing and which will be owned and operated by the Partnership. Nonrecourse Deductions. A deduction as set forth in Treasury Regulations Section 1.704-2(b)(1). The amount of Nonrecourse Deductions for a given Year equals the excess, if any, of the net increase, if any, in the amount of Partnership Minimum Gain during such Year over the aggregate amount of any Distributions during such Year of proceeds of a Nonrecourse Liability that are allocable to an increase in Partnership Minimum Gain, determined according to the provisions of Treasury Regulations Section 1.704-2(h). Nonrecourse Liability. Any Partnership liability (or portion thereof) for which no Partner bears the "economic risk of loss," within the meaning of Treasury Regulations Section 1.704-2(i). Offering. The offering of Units pursuant to this Memorandum. -------- Partner Minimum Gain. An amount, with respect to each Partner Nonrecourse Debt, equal to the Partnership Minimum Gain that would result if such Partner Nonrecourse Debt were treated as a Nonrecourse Liability, determined in accordance with Treasury Regulations Section 1.704-2(i). Partner Nonrecourse Debt. Any nonrecourse debt (for the purposes of Treasury Regulations Section 1.1001-2) of the Partnership for which any Partner bears the "economic risk of loss," within the meaning of Treasury Regulations Section 1.752-2. Partner Nonrecourse Deductions. Deductions as described in Treasury Regulations Section 1.704-2(i)(2). The amount of Partner Nonrecourse Deductions with respect to a Partner Nonrecourse Debt for any Year equals the excess, if any, of the net increase, if any, in the amount of Partner Minimum Gain attributable to such Partner Nonrecourse Debt during such Year over the aggregate amount of any Distributions during that Year to the Partner that bears the economic risk of loss for such Partner Nonrecourse Debt to the extent such Distributions are from the proceeds of such Partner Nonrecourse Debt and are allocable to an increase in Partner Minimum Gain attributable to such Partner Nonrecourse Debt, determined in accordance with Treasury Regulations Section 1.704-2(i). Partners. The General Partner and the Limited Partners, collectively, when no distinction is required by the context in which the term is used herein. Partnership. Indiana Lithotripters Limited Partnership I, an Indiana limited partnership. Partnership Agreement. The Partnership's Agreement of Limited Partnership, a copy of which is attached hereto as Appendix A, as the same may be amended from time to time. Partnership Cash Flow. For the applicable period the excess, if any, of (A) the sum of (i) all gross receipts from any source for such period, other than from Partnership loans, Capital Transactions and Capital Contributions; and (ii) any funds released by the Partnership from previously established reserves, over (B) the sum of (i) all cash expenses paid by the Partnership for such period; (ii) the amount of all payments of principal on loans to the Partnership; (iii) capital expenditures of the Partnership; and (iv) such reasonable reserves as the General Partner shall deem necessary or prudent to set aside for future repairs, improvements, or equipment replacement or additions, or to meet working capital requirements or foreseen or unforeseen future liabilities and contingencies of the Partnership; provided, however, that the amounts referred to in (B) (i), (ii) and (iii) above shall be taken into account only to the extent not funded by Capital Contributions, loans or paid out of previously established reserves. Such term shall also include all other funds deemed available for distribution and designated as "Partnership Cash Flow" by the General Partner. Partnership Interest. The interest of a Partner in the Partnership as defined by the Act and the Partnership Agreement. Partnership Minimum Gain. Gain as defined in Treasury Regulations Section 1.704-2(d). Partnership Refinancing Proceeds. The cash realized from the refinancing of Partnership assets after retirement of any secured loans and less (i) payment of all expenses relating to the transaction; and (ii) establishment of such reasonable reserves as the General Partner shall deem necessary or prudent to set aside for future repairs, improvements, or equipment replacement or additions, or to meet working capital requirements or foreseen or unforeseen future liabilities or contingencies of the Partnership. Partnership Sales Proceeds. The cash realized from the sale, exchange, casualty or other disposition of all or a portion of Partnership assets after the retirement of all secured loans and less (i) the payment of all expenses related to the transaction; and (ii) establishment of such reasonable reserves as the General Partner shall deem necessary or prudent to set aside for future repairs, improvements, or equipment replacement or additions, or to meet working capital requirements or foreseen or unforeseen future liabilities or contingencies of the Partnership. Percentage Interest. The interest of each Partner in the Partnership, to be determined in the case of each Investor by reference to the percentage opposite his name set forth in Schedule A to the Partnership Agreement. Each Unit sold pursuant to this Offering represents an initial 1% economic interest. The Percentage Interest will be set forth in Schedule A to the Partnership Agreement or any other document or agreement, as a percentage or a fraction or on any numerical basis deemed appropriate by the General Partner. Prime. Prime Medical Services, Inc. a publicly held Delaware corporation and parent of the General Partner and the Sales Agent. Prime Rate. The rate of interest periodically established by the Bank and identified as such in literature published and circulated within the Bank's offices. Pro Rata Basis. In connection with an allocation or distribution, an allocation or distribution in proportion to the respective Percentage Interest of the class of Partners to which reference is made. Profit. The net income of the Partnership for each year as determined by the Partnership for federal income tax purposes. Qualified Income Offset Item. An adjustment, allocation or distribution described in Treasury Regulations Sections 1.704-1(b)(2)(ii)(d)(4), 1.704-1(b)(2)(ii)(d)(5) or 1.704-1(b)(2)(ii)(d)(6) unexpectedly received by a Partner. Sales Agent. MedTech Investments, Inc., a registered broker-dealer, member of the National Association of Securities Dealers, Inc. and an Affiliate of certain members of the General Partner's management personnel. SEC. The United States Securities and Exchange Commission. --- 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 Limited Partner Loan Commitment which is attached hereto as Appendix B. Service. The Internal Revenue Service. ------- Service Area. The geographic region in which Partnership operations are conducted and which presently consists primarily of southern Indiana and the area within a 100-mile radius of Louisville, Kentucky. The General Partner has sole discretion to expand the Service Area subject to fiduciary duties owed by the General Partner to its Limited Partners. Siemens. Siemens Medical Systems, Inc. and its Affiliates. ------- Storz. Karl Storz Lithotripsy-America, Inc. and its Affiliates. Subscription Agreement. The Subscription Agreement, included in the Subscription Packet accompanying this Memorandum, to be executed by the Investors in connection with their purchase of Units. Subscription Packet. The packet of subscription materials to be completed by Investors in connection with their subscription for Units. UCC-1. The Uniform Commercial Code Financing Statement, two copies of which are attached to the Subscription Packet and are to be executed in conjunction with the Limited Partner Note by an Investor who finances a portion of the Unit purchase price through a Limited Partner Loan. The UCC-1 will be used by the Bank to perfect its security interest in such Investor's share of Distributions. Units. The 25 equal units of limited partner interest in the Partnership offered pursuant to this Memorandum for a price per Unit of $11,163 in cash. Year of the Partnership. An annual accounting period ending on December 31 of each year during the term of the Partnership. EX-10.136 49 0049.txt EX 10.136 1ST SUPPLEMENT TO MEMORANDUM - INDIANA I FIRST SUPPLEMENT DATED AUGUST 9, 2000 TO THE CONFIDENTIAL PRIVATE PLACEMENT MEMORANDUM DATED JUNE 28, 2000 INDIANA LITHOTRIPTERS LIMITED PARTNERSHIP I Indiana Lithotripters Limited Partnership I, an Indiana limited partnership (the "Partnership"), by this First Supplement hereby amends and supplements its Confidential Private Placement Memorandum of June 28, 2000 (the "Memorandum"). Capitalized terms used herein are defined in the Glossary appearing in the Memorandum. Persons who have subscribed for or are considering an investment in the Units offered by the Memorandum should carefully review this First Supplement. Extension of the Offering Pursuant to the authority given to the General Partner in the Memorandum, the General Partner hereby elects to extend the offering termination date to September 12, 2000 (or earlier in the discretion of the General Partner, upon the sale of all Units as provided in the Memorandum). EX-10.137 50 0050.txt EX 10.137 2ND SUPPLEMENT TO MEMORANDUM - INDIANA I SECOND SUPPLEMENT DATED SEPTEMBER 12, 2000 TO THE CONFIDENTIAL PRIVATE PLACEMENT MEMORANDUM DATED JUNE 28, 2000 INDIANA LITHOTRIPTERS LIMITED PARTNERSHIP I Indiana Lithotripters Limited Partnership I, an Indiana limited partnership (the "Partnership"), by this Second Supplement hereby amends and supplements its Confidential Private Placement Memorandum of June 28, 2000 (the "Memorandum"). Capitalized terms used herein are defined in the Glossary appearing in the Memorandum. Persons who have subscribed for or are considering an investment in the Units offered by the Memorandum should carefully review this Second Supplement. Extension of the Offering Pursuant to the authority given to the General Partner in the Memorandum, the General Partner hereby elects to extend the offering termination date to September 26, 2000 (or earlier in the discretion of the General Partner, upon the sale of all Units as provided in the Memorandum). EX-10.138 51 0051.txt EX 10.138 3RD SUPPLEMENT TO MEMORANDUM - INDIANA I THIRD SUPPLEMENT DATED SEPTEMBER 26, 2000 TO THE CONFIDENTIAL PRIVATE PLACEMENT MEMORANDUM DATED JUNE 28, 2000 INDIANA LITHOTRIPTERS LIMITED PARTNERSHIP I Indiana Lithotripters Limited Partnership I, an Indiana limited partnership (the "Partnership"), by this Third Supplement hereby amends and supplements its Confidential Private Placement Memorandum of June 28, 2000, as amended (the "Memorandum"). Capitalized terms used herein are defined in the Glossary appearing in the Memorandum. Persons who have subscribed for or are considering an investment in the Units offered by the Memorandum should carefully review this Third Supplement. Extension of the Offering Pursuant to the authority given to the General Partner in the Memorandum, the General Partner hereby elects to extend the offering termination date to October 6, 2000 (or earlier in the discretion of the General Partner, upon the sale of all Units as provided in the Memorandum). EX-10.139 52 0052.txt EX 10.139 CONFIDENTIAL MEMORANDUM - MKSC III Name of Prospective Investor Memorandum Number ------------------------------------------------------------------------------- MOBILE KIDNEY STONE CENTERS OF CALIFORNIA III, L.P. A Limited Partnership Formed Under the Laws of California CONFIDENTIAL PRIVATE PLACEMENT MEMORANDUM up to $60,120 in Cash up to $97,425 in Personal Guaranties 20 Units of Limited Partnership Interest ----------------------------------------------------------------------- THIS MEMORANDUM IS FURNISHED PURSUANT TO A CONFIDENTIALITY AGREEMENT BETWEEN THE PARTNERSHIP AND THE INVESTOR WHOSE NAME APPEARS ABOVE. THE CONFIDENTIALITY AGREEMENT PROHIBITS THE DISCLOSURE OF THE CONFIDENTIAL MATERIAL CONTAINED IN THIS MEMORANDUM, EXCEPT TO THE EXTENT SUCH INVESTOR DEEMS IT NECESSARY TO SHARE SUCH INFORMATION WITH HIS LEGAL, ACCOUNTING OR OTHER FINANCIAL ADVISORS, WHO LIKEWISE SHALL BE BOUND BY THE SAME CONFIDENTIALITY RESTRICTIONS SET FORTH IN THE CONFIDENTIALITY AGREEMENT. MEDTECH INVESTMENTS, INC. Exclusive Sales Agent 2008 Litho Place Fayetteville, North Carolina 28304 1-800-682-7971 MOBILE KIDNEY-CONF PPM.DOC The Date of this Memorandum is May 17, 2000 MOBILE KIDNEY STONE CENTERS OF CALIFORNIA III, L.P. up to $60,120 in Cash up to 20 Units of Limited Partnership Interest at $3,006 in Cash and $4,871.25 in Personal Guaranties per Unit Mobile Kidney Stone Centers of California III, L.P., a California limited partnership (the "Partnership") operated by its general partner, Mobile Kidney Stone Centers of California, Ltd. I, a California limited partnership (the "General Partner") and an affiliate of Prime Medical Services, Inc., a Delaware corporation, hereby offers on the terms set forth herein up to 20 Units (the "Units") of limited partnership interest in the Partnership, at a price per Unit of $3,006 in cash, plus a personal guaranty of 1% of the Partnership's obligations under a loan of $487,125 from First-Citizens Bank & Trust Company (the "Loan") (a $4,871.25 principal guaranty obligation per Unit). See "Terms of the Offering." Each Unit will represent an initial 1% economic interest in the Partnership. See "Risk Factors - Other Investment Risks - Dilution of Limited Partners' Interests." The Partnership owns and operates a Storz Modulith(R) SLX-T model extracorporeal shockwave lithotripter for the lithotripsy of kidney stones. The lithotripter is transported in a mobile van (together with the installed and operational lithotripter, the "Lithotripsy System") enabling the Partnership to provide lithotripsy services at various locations primarily in the following California counties, and such other areas determined by the General Partner: Alameda County, Contra Costa County, Marin County, Merced County, Nevada County, Placer County, San Joaquin County, Shasta County and Stanislaus County (the "Service Area"). The Partnership intends to use the net proceeds of this Offering (after deduction of expenses payable by the Partnership) to reduce the Partnership's currently outstanding indebtedness under the Loan. See "Sources and Applications of Funds." The cash purchase price and personal guaranties are due at subscription. The Offering will terminate on June 28, 2000 (or earlier upon the sale of all 20 Units as provided herein), unless extended at the discretion of the General Partner for a period not to exceed 180 days. ------------------------------ Purchase of Units involves risks and is suitable only for persons of substantial means who have no need for liquidity in this investment. Among other factors, prospective investors should note that the health care industry is undergoing significant government regulatory reforms and that the Partnership faces substantial competition in the Service Area. See "Risk Factors" and "Terms of the Offering - Suitability Standards." ------------------------------ - --- ------------------ ----------------------- ----------------- --------------- Cash Selling Net Cash Amount of Offering Price Commissions(1) Proceeds(2) Guaranties(3) - --- ------------------ ----------------------- ----------------- --------------- - --- ------------------ ----------------------- ----------------- --------------- Per Unit(4) $ 3,006 $ 150 $ 2,856 $ 4,871.25 Total Maximum(5) $60,120 $ 3,000 $57,120 $ 97,425.00 ---------------------- ------------------ ----------------------- ---------------------- ------------------ ----------------------- - --- ------------------ ----------------------- ----------------- --------------- (See Footnotes on Back of Cover Page) See Glossary for capitalized terms used herein and not otherwise defined. ix W##889140 V2 - MOBILE KIDNEY-CONF PPM.DOC (1) The Units will be sold on a "best-efforts" any or all basis by MedTech Investments, Inc., a broker-dealer registered with the Securities and Exchange Commission, a member of the National Association of Securities Dealers, Inc. and an Affiliate of the General Partner (the "Sales Agent"). The Partnership will pay the Sales Agent a $150 commission for each Unit sold and will reimburse the Sales Agent for its Offering costs (not to exceed $7,000). 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 cash price per Unit ($3,006) is payable in cash upon subscription. (3) At subscription, each Investor must execute and deliver to the Sales Agent a guaranty agreement (the "Guaranty") under which he or she will guarantee payment of a portion of the Partnership's obligations under the Loan 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"). The proceeds of the Loan were used by the Partnership to (i) acquire a new Storz Modulith(R) SLX-T model extracorporeal shock-wave lithotripter with accessories; (ii) acquire and upfit a new mobile van to transport the lithotripter; and (iii) pay sales taxes on the purchase of the Lithotripsy System. As a class, the initial Limited Partners guaranteed $292,275 (60%) of the Partnership's principal obligations under the Loan. In its capacity as general partner of the Partnership, the General Partner initially guaranteed 40% of the Loan, which represents a $194,850 principal guaranty obligation. See "Risk Factors - Operating Risks - Partnership Limited Resources and Risks of Leverage." For each Unit purchased, an Investor will be required to guarantee 1% of the Loan, which represents a $4,871.25 principal guaranty obligation. As of the date of this Memorandum the outstanding balance on the Loan is $487,125. A Limited Partner's liability under the Guaranty may exceed the principal guaranty per Unit as provided above because such liability includes not only principal, but also accrued and unpaid interest, late payment penalties and legal costs incurred by the Bank in collecting defaulted obligations. For a description of the guaranty requirements and the terms of the Guaranties, see "Terms of the Offering - Guaranty Arrangements" and the form of Guaranty included in the Subscription Packet accompanying this Memorandum. (4) Each Investor may purchase no less than one Unit. The General Partner, however, reserves the right to sell less than one Unit as an additional investment, and to reject, in whole or in part, any subscription. (5) Offering proceeds will first be used by the Partnership to pay Offering costs and expenses and the remainder of the proceeds will be used to reduce the Partnership's currently outstanding indebtedness under the Loan. See "Sources and Applications of Funds." The Partnership seeks by this Offering to sell up to 20 Units for an aggregate of up to $60,120 in cash ($57,120 net of Sales Agent's commissions) and up to $97,425 in personal guaranties of the Partnership's principal obligations under the Loan. All subscription funds and Guaranties 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 of the Investor Guaranty), rejection of the Investor's subscription or termination of the Offering. The Partnership has set no minimum number of Units to be sold in this Offering. Accordingly, upon the receipt and acceptance of an Investor's subscription by the Partnership and the approval of his or her Guaranty by the Bank as provided herein, such Investor will be admitted to the Partnership as a Limited Partner. Upon admission as a Limited Partner, the Investor's subscription funds will be released to the Partnership and the Guaranties will be released to the Bank. In the event a subscription is rejected, all subscription funds (without interest), Guaranty and other subscription documents held in escrow will be promptly returned to the rejected Investor. The Offering will terminate on June 28, 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.] - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- ? 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. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- ? 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. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- ? 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. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- ? 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. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- ? 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.................................17 Guaranty Arrangements............................................17 Subscription Period; Closing.....................................20 Offering Exemption...............................................21 Suitability Standards............................................21 How to Invest....................................................22 Restrictions on Transfer of Units................................22 PLAN OF DISTRIBUTION......................................................23 BUSINESS ACTIVITIES.......................................................24 General 24 Treatment Methods for Kidney Stone Disease.......................24 The Lithotripsy System...........................................24 Acquisition of Additional Assets.................................26 Hospital Contracts...............................................26 Operation of the Lithotripsy System..............................28 Management.......................................................28 THE GENERAL PARTNER.......................................................29 COMPENSATION AND REIMBURSEMENT TO THE GENERAL PARTNER AND ITS AFFILIATES............................................30 CONFLICTS OF INTEREST.....................................................31 FIDUCIARY RESPONSIBILITY OF THE GENERAL PARTNER...........................33 COMPETITION...............................................................33 Affiliated Competition...........................................33 Other Competition................................................34 REGULATION................................................................35 Federal Regulation...............................................35 State Regulation.................................................43 PRIOR ACTIVITIES..........................................................45 SOURCES AND APPLICATIONS OF FUNDS.........................................46 FINANCIAL CONDITION OF THE PARTNERSHIP...........................47 SUMMARY OF THE PARTNERSHIP AGREEMENT......................................52 Nature of Limited Partnership Interest...........................52 Dilution Offerings...............................................52 Fundamental Changes..............................................52 Profits, Losses and Distributions................................55 Management of the Partnership....................................58 Powers of the General Partner....................................58 Rights and Liabilities of the Limited Partners...................59 Restrictions on Transfer of Partnership Interests................60 Dissolution and Liquidation......................................60 Optional Purchase of Limited Partner Interests...................61 Noncompetition Agreement and Protection of Confidential Information......................................62 Arbitration......................................................62 Power of Attorney................................................62 Reports to Limited Partners......................................63 Records 63 LEGAL MATTERS.............................................................63 ADDITIONAL INFORMATION....................................................63 GLOSSARY 64 APPENDICES Appendix A AGREEMENT OF LIMITED PARTNERSHIP OF MOBILE KIDNEY STONE CENTERS OF CALIFORNIA III, L.P. Appendix B FORM OF OPINION OF WOMBLE CARLYLE SANDRIDGE & RICE, A PROFESSIONAL LIMITED LIABILITY COMPANY Appendix C NOTES TO FINANCIAL STATEMENTS W##889140 V2 - MOBILE KIDNEY-CONF PPM.DOC RISK FACTORS Prior to subscribing for Units, Investors should carefully examine this entire Memorandum, including the Appendices hereto, and should give particular consideration to the general risks attendant to speculative investments and investments in partnerships generally, and to the other special operating, tax and other investment risks set forth below. See the "Glossary" for terms used in this Memorandum and not otherwise defined. Operating Risks General Risks of Operations. The Partnership was formed under the laws of the State of California on February 2, 1999 and only recently commenced operations in September, 1999. Although the General Partner and its personnel have significant experience in managing lithotripsy enterprises, whether the Partnership can continue to effectively operate its business cannot be accurately predicted. The benefits of an investment in the Partnership also depend on many factors over which the Partnership has no control, including competition, technological innovations rendering the Lithotripsy System less competitive or obsolete, and other matters. The Partnership may be adversely affected by various changing local factors such as an increase in local unemployment, a change in general economic conditions, changes in interest rates and availability of financing, and other matters that may render the operation of the Lithotripsy System difficult or unattractive. Other factors that may adversely affect the operation of the Lithotripsy System are unforeseen increased operating expenses, energy shortages and costs attributable thereto, uninsured losses and the capabilities of the Partnership's management personnel. Uncertainties Related to Changing Healthcare Environment. The healthcare industry has experienced substantial changes in recent years. Managed care is becoming a major factor in the delivery of lithotripsy services in the Service Area and the General Partner anticipates that managed care programs, including capitation plans, will continue to play an increasing role in the delivery of lithotripsy services and that competition for these services may shift from individual practitioners to health maintenance organizations and other significant providers of managed care. No assurance can be given that the changing healthcare environment will not have a material adverse effect on the Partnership. Lack of Diversification. The Partnership's principal purpose will be to continue to operate the Lithotripsy System. Because the Partnership is dependent on only one line of business and one Lithotripsy System, there will be greater risks from unexpected service interruptions, equipment breakdowns, technological developments, kidney stone treatment medical breakthroughs, economic problems and similar matters than would be the case with a more diversified business. 42 W##889140 V2 - MOBILE KIDNEY-CONF PPM.DOC Impact of Insurance Reimbursement. The Partnership's revenues are expected to be derived from the fees paid by Contract Hospitals and other health care facilities under lithotripsy service contracts with the Partnership. The Partnership does not currently directly bill or collect for services from patients or their third-party payors. Payments received from Contract Hospitals and other health care facilities may be subject to renegotiation depending on the reimbursement such parties receive. The increasing influence of health maintenance organizations and other managed care companies has resulted in pressure to reduce the reimbursement available for lithotripsy procedures. Some of the General Partner's Affiliates have recently experienced declining revenues based on these managed care pressures in other health care markets. Additionally, the Health Care Financing Administration ("HCFA"), the federal agency which administers the Medicare program, has proposed rules which would reduce the reimbursement available for lithotripsy procedures provided at hospitals to $2,235. See "Regulation - Federal Regulation." In some cases reimbursement rates payable to the General Partner and other Affiliates are less than the proposed HCFA rate. Because of the competitive pressures from managed care companies as well as threatened reductions in Medicare reimbursement, the General Partner anticipates that reimbursement available for lithotripsy procedures may continue to decrease. Such decreases would have a material adverse effect on Partnership revenues. Regarding the professional fees paid to physicians who treat patients on the Lithotripsy System, the General Partner anticipates that similar competitive pressures may result in lower reimbursement paid to physicians, both by private insurers and by government programs such as Medicare. See "Regulation." Reliability and Efficacy of the Storz Modulith(R) SLX-T. The Modulith(R) SLX-T received FDA premarket approval on March 27, 1997. Although, the General Partner and its Affiliates have positive direct experience with the use of the Modulith(R) SLX-T, "downtime" periods necessitated by maintenance and repairs of the Lithotripsy System will adversely effect Partnership revenues. Preliminary reports from abroad and "word of mouth" anecdotal evidence indicate that the Modulith(R) SLX-T is as effective as most of the "portable" lithotripters in the market. The General Partner is aware that early data from abroad concerning one precursor to the Modulith(R) SLX-T reflected a high retreatment rate, and that an Affiliate of the General Partner experienced electrical and mechanical problems using another precursor, the Modulith(R) SLX. However, the General Partner's and its Affiliates' limited experience with the transportable Modulith(R) SLX-T has shown acceptable retreatment rates. A high retreatment rate may adversely affect the Partnership. Investors should note that some studies indicate that lithotripsy may cause high blood pressure and tissue damage. The General Partner questions the reliability of these studies and believes lithotripsy has become a widely accepted method for the treatment of renal stones. Technological Obsolescence. The history of lithotripsy of kidney stones as an accepted treatment procedure is relatively recent, with the first clinical trials being conducted in West Germany beginning in 1980 and the first premarket approval for a renal lithotripter in the United States being granted by the FDA in December 1984. Today, lithotripsy is the treatment procedure of choice for kidney stone disease, having replaced other treatment methods. Published reports indicate that certain researchers are attempting to improve a laser technology to more easily eradicate kidney stones, and pharmaceutical companies and researchers have attempted to develop a safe drug that can be used to dissolve kidney stones in all cases. The General Partner cannot predict the outcome of ongoing research in these areas, and any one or more developments could reduce or eliminate lithotripsy as an acceptable procedure or treatment method of choice for the treatment of kidney stones. Partnership Limited Resources and Risks of Leverage. The Partnership used the Loan proceeds to acquire the Lithotripsy System and to pay state sales taxes on such equipment. The net proceeds of this Offering will be used to reduce the Partnership's currently outstanding indebtedness under the Loan. While the General Partner anticipates that cash generated from operations will continue to enable the Partnership to repay the remainder of the obligations under the Loan in accordance with its terms, lower than anticipated revenues, greater than anticipated expenses, or unexpected interruptions in operations could result in the Partnership failing to make payments of principal or interest when due under the Loan, and the Partnership's equity being reduced or eliminated. In such event, the Limited Partners could lose their entire investment and be called upon to pay their Guaranties. See "Risk Factors - Operating Risks - Liability Under the Guaranty." Moreover, in the event of unanticipated expenses, it may be necessary to supplement Partnership funds with the proceeds of additional debt financing. The terms of the Loan may restrict the Partnership's ability to obtain another financing commitment, and although the General Partner maintains good relationships with certain commercial lending institutions, it cannot be determined whether any additional commitment would be available on terms acceptable to the Partnership. The General Partner and/or its Affiliates may, but are under no obligation to, make loans to the Partnership, and there is no assurance that they would be willing or able to do so at the time, in amounts and on terms required by the Partnership. While the General Partner does not anticipate that it would cause the Partnership to incur indebtedness unless cash generated from Partnership operations were at the time expected to enable repayment of such loan in accordance with its terms, as discussed above, lower than anticipated revenues and/or greater than anticipated expenses could result in the Partnership's failure to make payments of principal or interest when due under such a loan and the Partnership's equity being reduced or eliminated. In such event, the Limited Partners could also lose their entire investment. Acquisition of Additional Assets. If in the future the General Partner determines that it is in the best interest of the Partnership to acquire (i) one or more additional fixed base or mobile Lithotripsy Systems or (ii) any other urological device or equipment so long as such device has received FDA premarket approval at the time it is acquired by the Partnership, and/or (iii) an interest in any business entity that engages in a urological business described above, the General Partner has the authority (without obtaining the Limited Partners' consent) to establish reserves or subject to certain restrictions in the Loan, to borrow additional funds on behalf of the Partnership to accomplish such goals, and may use Partnership assets and revenues to secure and repay such borrowings. The acquisition of additional assets may substantially increase the Partnership's monthly obligations and may result in increased personnel requirements. See "Risk Factors - Operating Risks - - Partnership Limited Resources and Risks of Leverage." The General Partner does not anticipate acquiring additional Partnership assets unless projected Partnership Cash Flow or proceeds from a Dilution Offering are sufficient to finance such acquisitions. See "Risk Factors - Other Investment Risks - Dilution of Limited Partners' Interests." In any event, no Limited Partner would be personally liable on any additional Partnership indebtedness without such Limited Partner's prior written consent. There is no assurance that financing would be available to the Partnership to acquire additional assets or to fund any additional working capital requirements. In any event, the Partnership's ability to incur additional indebtedness while the Loan is outstanding is severely restricted. Any such borrowing by the Partnership will serve to increase the risks to the Partnership associated with leverage as provided above. Liability Under the Guaranty. For each Unit purchased, an Investor will be required to execute and deliver to the Bank a Guaranty pursuant to which the Investor will personally guarantee 1% of the Partnership's total obligations under the Loan, which is equivalent to a $4,871.25 principal guaranty per Unit. As of the date of this Memorandum, the full amount of the Loan ($487,125) is outstanding. Liability under the Guaranty may exceed $4,871.25 per Unit because the guaranty obligation per Unit also includes 1% of all accrued and unpaid interest, late payment penalties, and legal costs incurred by the Bank in collecting any defaulted payments. An Investor should not purchase a Unit if he does not have resources sufficient to bear the loss of this entire amount. See "Terms of the Offering - Guaranty Arrangements - Liability Under the Guaranty" and "Terms of the Offering - Suitability Standards." If Partnership operations continue to generate sufficient revenues to enable the Partnership to make all payments under the Loan when due, no Limited Partner will be required to perform under his Guaranty. If a default occurs under the Loan, the Bank may, among other remedies, seek payment directly from the Limited Partners under the Guaranties. The Guaranties are a guaranty of payment and not of collection and require the Limited Partners to waive certain rights to which they might otherwise be entitled. As a result, the liability of the Limited Partners under the Guaranties is direct and immediate and not conditioned or contingent upon either the pursuit of any remedies against the Partnership or any other person (including any other guarantor) or foreclosure of any security interest or liens available to the Bank. The Guaranties are a continuing guaranty that by their terms will survive the death, bankruptcy or disability of a Limited Partner guarantor. A Limited Partner's liability under the Guaranty continues regardless of whether the Limited Partner remains a limited partner in the Partnership and is not affected or limited by any claims or offsets the Limited Partner may have against the Partnership or the General Partner. See the form of Guaranty Agreement included in the Subscription Packet. Competition. Many fixed-site and mobile lithotripters are currently operating in and around the Service Area which are in direct competition with the Partnership's Lithotripsy System. The General Partner and its Affiliates compete with the Partnership by providing lithotripsy services in the Service Area. The competing lithotripsy service providers, including the General Partner and its Affiliates, generally have existing contracts with hospitals and other facilities. The General Partner and its Affiliates also compete with the Partnership by providing services near the Service Area. In addition, except as provided by law, neither the General Partner nor its Affiliates are prohibited from engaging in any business or arrangement that may compete with the Partnership. See "Prior Activities," "Conflicts of Interest" and "Competition." There is no assurance that other parties will not, in the future, operate fixed-base or mobile lithotripters in and around the Service Area. To the General Partner's knowledge, no manufacturers are restricted from selling their lithotripters to other parties in the Service Area. Furthermore, the Partnership competes with facilities and individual medical practitioners who offer conventional treatment (e.g., surgery) for kidney stones. Managed care companies generally contract either directly with hospitals or specified providers for lithotripsy services for beneficiaries of their plans. It is not uncommon for managed care companies to have contracts already in place with hospitals or specified providers, and the Partnership will not be able to provide services to beneficiaries of those plans unless it convinces either the managed care companies or the hospitals to switch to the Partnership's services. Restrictions on Limited Partners. The Partnership Agreement severely restricts the Limited Partners' ability to own interests in competing equipment or ventures, other than interests held by the General Partner or its Affiliates. However, the General Partner may, in its sole discretion, waive the restrictions with respect to interests held by an Investor at the time he becomes a Limited Partner. See "Summary of the Partnership Agreement - Noncompetition Agreement and Protection of Confidential Information." The enforceability of these noncompetition agreements is generally a matter of state law. No assurance can be given that one or more Limited Partners may not successfully compete with the Partnership. See "Competition." Government Regulation. All facets of the healthcare industry are highly regulated and will become more so in the future. The ability of the Partnership to operate legally and be profitable may be adversely affected by changes in governmental regulations, including expected changes in reimbursement, Medicare and Medicaid certification requirements, federal and state fraud and abuse laws, including the federal Anti-Kickback Statute, the federal False Claims Act, federal and state self-referral laws, state restrictions on fee splitting and other governmental regulation. See "Regulation". These laws and regulations may adversely affect the economic viability of the Partnership. The laws are broad in scope, and interpretations by courts have been limited. Violations of these laws would subject the General Partner and all Limited Partners to governmental scrutiny and/or felony prosecution and punishment in the form of large monetary fines, loss of licensure, imprisonment and exclusion from Medicare and Medicaid. Certain provisions of Medicare and Medicaid law limit provider ownership and control over the various health care services to which physicians may make Medicare and Medicaid referrals. The primary laws involved are the "Stark II" federal statute prohibiting financial relationships between physicians and certain entities to which they refer patients, and the Anti-Kickback Statute which prohibits compensation in exchange for or to induce referrals. Regarding Stark II, HCFA published proposed Stark II regulations in 1998. Under the proposed regulations, physician Limited Partner referrals of Medicare and Medicaid patients to Contract Hospitals for lithotripsy services would be prohibited. If HCFA adopts the proposed Stark II regulations as final, or if a reviewing court were to interpret the Stark II statute using the proposed regulations as interpretive authority, then the Partnership and its physician Limited Partners would likely be found in violation of Stark II. In such instance, the Partnership and/or its physician Limited Partners may be required to refund any amounts collected from 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 Stark II or the Anti-Kickback Statute has been violated. In addition to Stark II, the Anti-Kickback Statute and the False Claims Act, an unfavorable interpretation of other existing laws, or enactment of future laws or regulations, could potentially adversely affect the operation of the Partnership. If this occurs, the General Partner is obligated either to purchase or cause the sale of the Partnership Interests of all of the Limited Partners or to dissolve the Partnership. See "Summary of the Partnership Agreement - Optional Purchase of Limited Partner Interests." Regarding state law, California prohibits physicians from referring patients to facilities in which the physicians have a significant financial interest unless the physician's return on investment is based upon the proportional ownership interest in the facility and the physician discloses the ownership interest to the patient in writing and advises the patient that the patient may choose another provider to obtain the service. Various licensure requirements must be met for the Partnership to provide mobile lithotripsy services in California. The General Partner and the Management Agent have been seeking and will continue to seek to cause the Partnership to comply with such requirements. See "Regulation - State Regulation". Contract Terms and Termination. The Partnership provides lithotripsy services to 7 Contract Hospitals pursuant to 7 separate Hospital Contracts. A majority of the Hospital Contracts grant the Partnership the exclusive right to provide lithotripsy services at the particular Contract Hospital. Two of the Hospital Contracts provide for automatic renewal on a year-to-year basis. These Hospital Contracts are terminable without cause upon 180 days prior written notice by either party prior to any renewal date. Three of the Hospital Contracts have no automatic renewal provision and will terminate on October 31, 2000, November 30, 2000 or December 31, 2000, respectively, unless the parties mutually agree to extend the terms. One Hospital Contract's term expires on June 30, 2001, and is terminable at any time without cause upon 30 days prior written notice by the Contract Hospital. In addition, the Partnership is negotiating a contract extension with Catholic Health Care West which will cover services at one more Contract Hospital. The Partnership is currently providing services at such Contract Hospital on a month-to-month basis. It is expected that most new lithotripsy service contracts, if any, would have one-year terms and be automatically renewed unless either party elects to cancel prior to the end of the term. The General Partner believes it has a good relationship with the Contract Hospitals and does not anticipate significant terminations. There is no assurance, however, that terminations will either not occur or that the resulting impact to the Partnership would not have a material adverse effect on Partnership operations. In addition, competing vendors may attempt to cause certain Contract Hospitals to contract with them instead of the Partnership. The loss of Contract Hospitals to competition will adversely affect Partnership revenues and such effect could be material. Thus, there is no assurance that Partnership operations as conducted on the date of this Memorandum will continue as herein described or contemplated, and the cancellation of a significant number of service contracts or the Partnership's inability to secure new ones could have a material negative impact on the financial condition and results of the Partnership. See "Business Activities - Hospital Contracts"and "Risk Factors - Competition." Loss on Dissolution and Termination. Upon the dissolution and termination of the Partnership, the proceeds realized from the liquidation of its assets, if any, will be distributed to its partners only after satisfaction of the claims of all creditors, including, but not limited to, the Bank. See "Risk Factors Operating Risks - Liability Under the Guaranty" and "Risk Factors - - Other Investment Risks - Liability Under Limited Partner Loan". Accordingly, the ability of a Limited Partner to recover all or any portion of his investment under such circumstances will depend on the amount of funds so realized and the claims to be satisfied therefrom. See "Summary of the Partnership Agreement - Optional Purchase of Limited Partner Interests." Tax Risks Investors should note that the General Partner anticipates no significant tax benefits associated with the operation of the Lithotripsy System or the Partnership. No ruling will be sought from the Service on the United States federal income tax consequences of any of the matters discussed in this Memorandum or any other tax issues affecting the Partnership or the Limited Partners. The Partnership is relying upon an opinion of Counsel with respect to certain material United States federal income tax issues. Counsel's opinion is not binding on the Service as to any issue, and there can be no assurance that any deductions, or the period in which deductions may be claimed, will not be challenged by the Service. Each Investor should carefully review the following risk factors and consult his or her own tax advisor with respect to the federal, state and local income tax consequences of an investment in the Partnership. THE TAX RISKS SET FORTH IN THIS SECTION ARE NOT INTENDED TO BE AN EXHAUSTIVE LIST OF THE GENERAL OR SPECIFIC TAX RISKS RELATING TO THE PURCHASE OF UNITS IN THE PARTNERSHIP. EACH INVESTOR IS DIRECTED TO THE FULL OPINION OF COUNSEL (APPENDIX B TO THE MEMORANDUM). IT IS STRONGLY RECOMMENDED THAT EACH INVESTOR INDEPENDENTLY CONSULT HIS OR HER PERSONAL TAX COUNSEL CONCERNING THE TAX CONSEQUENCES ASSOCIATED WITH HIS OR HER OWNERSHIP OF AN INTEREST IN THE PARTNERSHIP. THE CONCLUSIONS REACHED IN COUNSEL'S OPINION ARE RENDERED WITHOUT ASSURANCE THAT SUCH CONCLUSIONS HAVE BEEN OR WILL BE ACCEPTED BY THE SERVICE OR THE COURTS. THIS MEMORANDUM AND COUNSEL'S OPINION DO NOT DISCUSS, NOR WILL COUNSEL BE RENDERING AN OPINION REGARDING, ANY ESTATE AND GIFT TAX OR STATE AND LOCAL INCOME TAX CONSEQUENCES OF AN INVESTMENT IN THE PARTNERSHIP. FURTHERMORE, INVESTORS SHOULD NOTE THAT THE ANTICIPATED FEDERAL INCOME TAX CONSEQUENCES OF AN INVESTMENT IN THE PARTNERSHIP MAY BE ADVERSELY AFFECTED BY FUTURE CHANGES IN THE FEDERAL INCOME TAX LAWS, WHETHER BY FUTURE ACTS OF CONGRESS OR FUTURE ADMINISTRATIVE OR JUDICIAL INTERPRETATIONS OF APPLICABLE FEDERAL INCOME TAX LAWS. ANY OF THE FOREGOING MAY BE GIVEN RETROACTIVE EFFECT. INVESTORS SHOULD NOTE THAT THE UNITS ARE BEING MARKETED BY THE PARTNERSHIP AS AN ECONOMIC INVESTMENT AND THAT THE PARTNERSHIP ANTICIPATES AND INTENDS NO SIGNIFICANT TAX BENEFITS FROM AN INVESTMENT IN THE UNITS. SEE "PASSIVE INCOME AND LOSSES" IN THIS SECTION. THE INVESTMENT IN UNITS IS A LONG-TERM INVESTMENT. INVESTORS SHOULD NOT INVEST IN THE PARTNERSHIP TO ACHIEVE TAX BENEFITS AS THE GENERAL PARTNER ANTICIPATES SIGNIFICANT PARTNERSHIP TAXABLE INCOME THROUGHOUT THE TERM OF THE PARTNERSHIP. Possible Legislative or Other Actions Affecting Tax Consequences. The federal income tax treatment of an investment in an equipment/service oriented limited partnership such as the Partnership may be modified by legislative, judicial or administrative action at any time, and any such action may retroactively affect investments and commitments previously made. The rules dealing with federal income taxation of limited partnerships are constantly under review by the Service, resulting in revisions of its regulations and revised interpretations of established concepts. In evaluating an investment in the Partnership, each Investor should consult with his or her personal tax advisor with respect to possible legislative, judicial and administrative developments. Disqualification of Employee Benefit Plans. Purchase of Units in the Partnership may cause certain Limited Partners, certain hospitals and healthcare treatment centers, the Partnership, and employees of the foregoing to be treated under Section 414(m) of the Code as being employed in the aggregate by a single employer or "affiliated service group" for purposes of minimum coverage, participation and other employee benefit plan requirements imposed by the Code. In contrast, an employer not affiliated under Section 414(m) need only consider its own employees in determining whether its employee benefit plans satisfy Code requirements. Aggregation of employees could cause the disqualification of the retirement plans of certain Limited Partners and related entities. Aggregation could also require the value of the vested retirement benefit of a highly compensated employee who is a participant in a disqualified plan to be included in his or her gross income, regardless of whether the employee is a Limited Partner. These rules may adversely affect Investors who are currently involved in a medical practice joint venture, regardless of their purchase of Units in the Partnership. The General Partner and Counsel have been informally advised by officials of the Service that the Service would not likely attempt to apply the affiliated service group rules to the Partnership, nor has the Service applied these rules to similar arrangements in the past. Informal discussions with the Service, however, are not binding on the Service, and there can be no guarantee that the Service will not apply the affiliated service group rules to the Partnership. INVESTORS ARE URGED TO CONSULT WITH THEIR OWN TAX ADVISORS REGARDING THE APPLICABILITY OF THE AFFILIATED SERVICE GROUP RULES DESCRIBED HEREIN TO THE EMPLOYEE BENEFIT PLANS MAINTAINED BY THEM OR THEIR MEDICAL PRACTICES. Partnership Allocations. The Partnership Agreement contains certain allocations of profits and losses that could be reallocated by the Service if it were determined that the allocations did not have "substantial economic effect." On December 31, 1985, the Treasury Regulations dealing with the propriety of partnership allocations were finalized. As a general rule, allocations of profits and losses must have "substantial economic effect." Based upon current law, Counsel is of the opinion that, if the question were litigated, it is more probable than not that the allocation of profits and losses set forth in the Partnership Agreement would be sustained for federal income tax purposes. Investors are cautioned that the foregoing opinion is based in part upon final Regulations which have not been extensively commented upon or construed by the courts. Income in Excess of Distributions. The Partnership Agreement provides that in each year annual Distributions may be made to the Partners. Excluded from the definition of cash available for distribution is the amount of funds necessary to discharge Partnership debts (including scheduled payments and certain prepayments under the Loan) and to maintain certain cash reserves deemed necessary by the General Partner. If Partnership cash flow declines, a Limited Partner could be subject to income taxes payable out of personal funds to the extent of the Partnership's income, if any, attributed to him without receiving from the Partnership sufficient Distributions to pay the Limited Partner's tax with respect to such income. Effect of Classification as Corporation. The Partnership has not and will not seek a ruling from the Service concerning the tax status of the Partnership. It is the opinion of Counsel that the Partnership will be treated as a partnership for federal income tax purposes and not as an association taxable as a corporation unless the Partnership so elects. The Partnership has not and will not make an election to be classified as other than a partnership for federal income tax purposes. Although the Partnership intends to rely on the legal opinion of Counsel, the service will not be bound thereby. Moreover, there can be no assurance that legislative or administrative changes or court decisions may not in the future result in the Partnership being treated as an association taxable as a corporation, with a resulting greater tax burden associated with the purchase of Units. The General Partner, in order to comply with applicable tax law, will keep the Partnership's books and records and otherwise compute Profits and Losses based on the accrual method, and not the cash basis method, of accounting pursuant to Section 448 of the Code. The accrual method of accounting generally records income and expenses when they are accrued or economically incurred. Passive Income and Losses. The General Partner expects that the Partnership will continue to realize taxable income and not taxable losses during the foreseeable future. Nevertheless, if it instead realizes taxable losses, the use of such losses by the Limited Partners will generally be limited by Code Section 469. Code Section 469 provides limitations for the use of taxable losses attributable to "passive activities." Code Section 469 operates generally to prohibit passive losses from being used against income from active activities. The passive activity rules are extremely complex and Investors are urged to consult their own tax advisors as to their applicability, particularly as they relate to the ability to deduct any losses from the Partnership against other income of the Investor. THE PASSIVE ACTIVITY LOSS RULES WILL AFFECT EACH INVESTOR DIFFERENTLY, DEPENDING ON HIS OWN TAX SITUATION. EACH INVESTOR SHOULD CONSULT WITH HIS OWN TAX ADVISOR TO DETERMINE THE EFFECT OF THESE RULES ON THE INVESTOR IN LIGHT OF THE INVESTOR'S INDIVIDUAL FACTS AND CIRCUMSTANCES. Depreciation. The Partnership will use the Modified Accelerated Cost Recovery System ("MACRS") to depreciate the cost of any equipment or improvements hereafter acquired. Any additions or improvements to the Lithotripsy System will also be depreciated over a five year term using the 200% declining balance method of depreciation, switching to the straight-line method to maximize the depreciation allowance. If purchases or improvements are made after the beginning of any year, only a fraction of the depreciation deduction may be claimed in that year. As under prior law, the 1986 Act provides that the full amount of depreciation on personal property (such as the Lithotripsy System) is recaptured upon disposition (i.e., is taxed as ordinary income) to the extent gain is realized on the disposition. Investors should note that the 1986 Act repealed the investment tax credit for all personal property. Partnership Elections. The Code permits partnerships to make elections for the purpose of adjusting the basis of partnership property on the distribution of property by a partnership to a partner and on the transfer of an interest in a partnership by sale or exchange or on the death of a partner. The general effect of such elections is that transferees of Partnership Interests will be treated, for the purposes of depreciation and gain, as though they had a direct interest in the Partnership's assets, and the difference between their adjusted bases for their Partnership Interests and their allocable portion of the Partnership's bases for its assets will be allocated to such assets based upon the fair market value of the assets at the times of transfers of the Partnership Interests. Any such election, once made, cannot be revoked without the consent of the Service. Under the terms of the Partnership Agreement, the General Partner, in its discretion, may make the requisite election necessary to effect such adjustment in basis. Sale of Partnership Units. Gain realized on the sale of Units by a Limited Partner who is not a "dealer" in Units or in limited partnership interests will be taxed as capital gain, except that the portion of the sales price attributable to inventory items and unrealized receivables will be taxed as ordinary income. "Unrealized receivables" of the Partnership include the Limited Partner's share of the ordinary income that the Partnership would realize as a result of the recapture of depreciation (as described above) if the Partnership had sold Partnership depreciable property immediately before the Limited Partner sold his Partnership Interest. Investors should note that the IRS Restructuring and Reform Act of 1998 generally imposes a maximum tax rate of 20% on net long-term capital gains. To the extent the Partnership has income attributable to depreciation recapture incurred on the sale of a capital asset, such income will be taxed at a maximum rate of 25%. The Revenue Reconciliation Act of 1993 imposed a maximum potential individual income tax rate of 39.6% on ordinary income. Tax Treatment Of Certain Fees and Expenses Paid By The Partnership. Under the Code, a partnership expenditure will, as a general rule, fall into one of the following categories: (1) deductible expenses -- expenditures such as interest, taxes, and ordinary and necessary business expenses which the partnership is entitled to deduct in full when paid or incurred; (2) amortizable expenses -- expenditures which the partnership is entitled to amortize (i.e., deduct ratably) over a fixed period of time; (3) capital expenditures -- expenditures which must be added to the amortization or depreciation base of partnership property (or partnership loans) and deducted over a period of time as the property (or partnership loan) is amortized or depreciated; (4) organization expenses -- expenditures related to the organization of the partnership, which under Section 709 of the Code are amortized over a 60-month period, provided an election to do so is made; (5) syndication expenses -- expenditures paid or incurred in promoting the sale of interests in the partnership, which under Section 709 of the Code must be capitalized but may be neither depreciated, amortized, nor otherwise deducted; (6) partnership distributions -- payments to partners representing distributions of partnership funds, which may be neither capitalized, amortized nor deducted; (7) start-up expenses -- expenditures incurred by a partnership during an initial period, which under Section 195 of the Code may be amortized over a 60-month period; and (8) guaranteed payments to partners -- payments to partners for services or use of capital which are deductible or treated in the other categories of expenditures listed above, provided they meet the applicable requirements. Several amendments to the Code enacted by the Tax Reform Act of 1984 alter established tax accounting principles. One or more of these amendments may affect the federal income tax treatment of fees and expenses, particularly fees paid or incurred by a partnership for services. In particular, new Code Section 461(h) now provides that an expense or fee paid to a service provider may not be accrued for federal income tax purposes prior to the time "economic performance" occurs. "Economic performance" occurs as (and no sooner than) the service provider provides the required services. All expenditures of the Partnership must constitute ordinary and necessary business expenses in order to be deducted by the Partnership when paid or incurred, unless the deduction of any such item is otherwise expressly permitted by the Code (e.g., taxes). Expenditures must also be reasonable in amount. The Service could challenge a fee deducted by the Partnership on the ground that such fee is a capital expenditure, which must either be amortized over an extended period or indefinitely deferred, rather than deducted as an ordinary and necessary business expense. The Service could also challenge the deduction of any fee on the basis that the amount of such fee exceeds the reasonable value of the services performed, the goods acquired or the other benefits to the Partnership. Under Section 482 of the Code, the Service has broad discretion to reallocate income, deductions, credits or allowances between entities with common ownership or control if it is determined that such reallocation is necessary to prevent the evasion of taxes or to reflect the income of such entities. The Partnership and the General Partner are entities to which Section 482 applies and it is possible that the Service could contend that certain items should be reallocated in a manner that would change the Partnership's proposed tax treatment of such items. The General Partner believes the payments to it and its Affiliates are customary and reasonable payments for the services rendered by them to the Partnership; however, these fees were not determined by arm's length negotiations. Nothing has come to the attention of Counsel which would give Counsel reasonable cause to question the General Partner's determination. On audit the Service may challenge such payments and contend that the amount paid for the services exceeds the reasonable value of those services. Because of the factual nature of the question of the reasonableness of any particular fee, Counsel cannot express an opinion as to the outcome of the reasonableness of the amount of any fee should the issue be litigated. Syndication Expenses. Section 709 of the Code prohibits a partnership from deducting or amortizing costs that are incurred to promote the sale of partnership interests (i.e., syndication expenses). The Regulations provide definitions for syndication expenses that must be capitalized. Syndication expenses include brokerage fees, registration fees, legal fees for securities advice, accounting fees for preparation of representations to be included in the offering materials, and printing costs of the offering materials. The Partnership intends to treat the entire amount payable to the Sales Agent as a sales commission for selling the Units, as well as certain other fees and expenses allocable to the preparation of this Memorandum and to the offering of the Units in the Partnership, as nondeductible, nonamortizable syndication expenses. Investors will economically bear their respective proportionate share of syndication expenses as these costs likely will be paid out of proceeds from the Offering. These costs will be borne irrespective of their amount, timing and ability of the Partnership to deduct these costs for tax purposes. Management Fee to General Partner. The Partnership pays the Management Agent a monthly management fee equal to 7.5% of Partnership Cash Flow per month. The management fee is paid to the Management Agent for the time and attention devoted by it for supervising and coordinating the management and administration of the Partnership's day-to-day operations pursuant to the terms of the Management Agreement. The Partnership will continue to deduct the management fee in full in the year paid. Assuming the management fee to be paid to the Management Agent is ordinary, necessary and reasonable in relation to the services provided, Counsel is of the opinion that the Partnership may deduct the management fee in full in the year paid. State and Local Taxation. Each Investor should consult his own attorney or tax advisor regarding the effect of state and other local taxes on his personal situation. Other Investment Risks Conflicts of Interest. The activities of the Partnership involve numerous existing and potential conflicts of interest between the Partnership, the General Partner and their Affiliates. See "Compensation and Reimbursement to the General Partner and its Affiliates," "The General Partner," "Competition" and "Conflicts of Interest." No Participation in Management. The General Partner has full authority to supervise the business and affairs of the Partnership pursuant to the Partnership Agreement and the Management Agreement. Except as otherwise provided in the Partnership Agreement or the Act, Limited Partners have no right to participate in the management, control or conduct of the Partnership's business and affairs. The General Partner, its employees and its Affiliates are not required to devote their full time to the Partnership's affairs and intend to continue devoting substantial time and effort to organizing other ventures throughout the United States that are similar to the Partnership. The General Partner will continue to devote such time to the Partnership's business and affairs as it deems necessary and appropriate in the exercise of reasonable judgment. The participation by any Limited Partner in the management or control of the Partnership's affairs could render him generally liable for the liabilities of the Partnership that could not be satisfied by assets of the Partnership. See the Form of Legal Opinion of Counsel attached hereto as Appendix B. Ability of the General Partner to Effect Fundamental Changes. The General Partner, with the prior approval of a Majority in Interest of the Limited Partners, has the authority under the Partnership Agreement to effect transactions that could result in the termination or reorganization of the Partnership, a total or partial dilution of the Limited Partners' interests in the Partnership, and/or the exchange of interests in another enterprise for the limited partnership interests held by the Limited Partners. See "Summary of the Partnership Agreement - Fundamental Changes." Limited Partners' Obligation to Return Certain Distributions. Except as provided by other applicable law and provided that a Limited Partner does not participate in the management or control of the Partnership, he will not be liable for the liabilities of the Partnership in excess of his investment, his Guaranty and his ratable share of undistributed profits. However, a Limited Partner shall be liable for a period of up to four years to return to the Partnership any distributions received from the Partnership if, at the time of such distributions, he knew that after giving effect to such distributions, all liabilities of the Partnership, other than liabilities as to Partners on account of their Partnership Interests and liabilities as to which recourse of creditors is limited to specified Partnership property, exceed the fair value of the Partnership's assets. For purposes of calculating the assets and liabilities of the Partnership, the fair value of property in which the recourse of creditors is limited to such property may be treated as a Partnership asset to the extent that the fair value exceeds outstanding liabilities on the property. Dilution of Limited Partners' Interests. The General Partner has the authority under the Partnership Agreement to cause the Partnership to issue, offer and sell additional limited partnership interests in the future (a "Dilution Offering"). Upon the sale of interests in the Partnership in a Dilution Offering, the Percentage Interests of the Partners will be proportionately diluted. See "Summary of the Partnership Agreement - Dilution Offerings." Long-term Investment. The General Partner anticipates that the Partnership will continue to operate the Lithotripsy System for an indefinite period of time and that the Partnership will not liquidate prior to its intended termination. Accordingly, Investors should consider their investment in the Partnership as a long-term investment of indefinite duration. Limited Transferability and Illiquidity of Units. Transferability of Units is severely restricted by the Partnership Agreement and the Subscription Agreement, and the consent of the General Partner is necessary for any transfer. No public market for the Units exists and none is expected to develop. Moreover, the Units generally may not be transferred unless the General Partner is furnished with an opinion of counsel, satisfactory to the General Partner, to the effect that such assignment or transfer may be effected without registration under the Securities Act and any state securities laws applicable to the transfer. The Partnership will be under no obligation to register the Units or otherwise take any action that would enable the assignment or transfer of a Unit to be in compliance with applicable federal and state securities laws. Thus, a Limited Partner may not be able to liquidate an investment in the Partnership in the event of an emergency and the Units may not be readily accepted as collateral for loans. Moreover, a sale of a Unit by a Limited Partner may cause adverse tax consequences to the selling Limited Partner, as well as potentially effect a default under any outstanding Limited Partner Loan.. Accordingly, the purchase of Units must be considered a long-term and illiquid investment. Offering Price. The offering price of the Units has been determined by the General Partner based upon a valuation of the Partnership conducted by an independent third-party valuation firm, and based on various assumptions that may or may not occur. A copy of this valuation will be made available on request. The offering price of the Units is not, however, necessarily indicative of their value, if any, and no assurance can be given that the Units, if and when transferable, could be sold for the offering price or for any amount. Limitation of General Partner's Liability and Indemnification. The Partnership Agreement provides that the General Partner will not be liable to the Partnership or to any Partner of the Partnership for errors in judgment or other acts or omissions in connection with the Partnership as long as the General Partner, in good faith, determined such course of conduct was in the best interest of the Partnership, and such course of conduct did not constitute willful misconduct or gross negligence. Therefore, the Limited Partners may have a more limited right of action against the General Partner in the event of its misfeasance or malfeasance than they would have absent the limitations in the Partnership Agreement. The Partnership will indemnify the General Partner against losses sustained by the General Partner in connection with the Partnership, unless such losses are a result of the General Partner's gross negligence or willful misconduct. In the opinion of the SEC, indemnification for liabilities arising out of the Securities Act is contrary to public policy and therefore is unenforceable. Insurance. The terms of the Loan require the Partnership to cover the Lithotripsy System by insurance for losses due to fire and other casualties under policies customarily obtained for properties of this type. Prime Medical Services, Inc. ("Prime"), an Affiliate of the General Partner and the sole shareholder of Sun Medical, the Management Agent and the sole general partner of the General Partner, maintains active policies of insurance for the benefit of itself and certain affiliated entities covering employee crime, workers' compensation, business and commercial automobile operations, professional liability, inland marine, business interruption, real property and commercial liability risks. These policies include the Partnership, and the General Partner believes that coverage limits of these policies are within acceptable norms for the extent and nature of the risks covered. The Partnership is responsible for its share of premium costs. There are certain types of losses, however, that are either uninsurable or are not economically insurable. For instance, contractual liability is generally not covered under Prime's policies. Should such losses occur with respect to Partnership operations, or should losses exceed insurance coverage limits, the Partnership could suffer a loss of the capital invested in the Partnership and any anticipated profits from such investment. Optional Purchase of Limited Partner Interests. As provided in the Partnership Agreement, the General Partner has the option (which it may assign to the Partnership in its sole discretion) to purchase all the interest of a Limited Partner who (i) dies, (ii) becomes the subject of a domestic proceeding, (iii) becomes insolvent, (iv) acquires a direct or indirect ownership of an interest in a competing venture (including the lease or sublease of competing technology), or (v) defaults on his obligations under the Guaranty. Except in the case of the death of a Limited Partner, the option purchase price is an amount equal to the lesser of the fair market value of the Partnership Interest to be purchased or the Limited Partner's share of the Partnership's book value, if any, as reflected by the Limited Partner's capital account in the Partnership (unadjusted for any appreciation in Partnership assets and as reduced by depreciation deductions claimed by the Partnership for tax purposes). The option purchase price is likely to be considerably less than the fair market value of a Limited Partner's interest in the Partnership. Because losses, depreciation deductions and Distributions reduce capital accounts, and because appreciation in assets is not reflected in capital accounts, it is the opinion of the General Partner that the option purchase price may be nominal in amount. In addition, in the event existing or newly enacted laws or regulations or any other legal developments adversely affect (or potentially adversely affect) the operation of the Partnership or the business of the Partnership (e.g., any prohibitions on provider ownership), the General Partner, in its sole discretion, is obligated to either (i) purchase the Partnership Interests of all of the Limited Partners for an amount equal to the lesser of the fair market value or book value or (ii) dissolve the Partnership. See the Partnership Agreement attached hereto as Appendix A, "Summary of the Partnership Agreement - Optional Purchase of Limited Partner Interests," and "Risk Factors - Operating Risks - Liability Under the Guaranty." THE PARTNERSHIP Mobile Kidney Stone Centers of California III, L.P., a California limited partnership (the "Partnership") was organized and created under the California Revised Limited Partnership Act (the "Act") on February 2, 1999. The general partner of the Partnership is Mobile Kidney Stone Centers of California, Ltd. I, a California limited partnership (the "General Partner"). The General Partner currently holds a 40% interest in the Partnership in its capacity as the general partner and the existing limited partners (the "Initial Limited Partners") currently hold the remaining interest in the Partnership. In the event that all 20 Units offered hereby are sold, the General Partner will hold a 32% general partner interest in the Partnership, the Initial Limited Partners will hold a 48% limited partner interest in the Partnership and the Investors who purchase the Units offered hereby (the "New Limited Partners") will hold approximately an aggregate 20% interest in the Partnership. The Percentage Interests of the General Partner and the Initial Limited Partners (aggregate) will decrease by approximately .4% and .6%, respectively, for each Unit sold. In addition, all Percentage Interests are subject to further reduction in the future by any additional dilution offerings. The principal executive office of the Partnership and the General Partner is located at 15195 National Avenue, Suite 203, Los Gatos, California 95032. The telephone number of the Partnership and the General Partner is (800) 750-0786. TERMS OF THE OFFERING The Units and Subscription Price Mobile Kidney Stone Centers of California III, L.P., a limited partnership formed under the laws of the State of California, hereby offers an aggregate of up to 20 Units of limited partnership interest in the Partnership (the "Units"). Each Unit represents an initial 1% economic interest in the Partnership. See "Risk Factors - Other Investment Risks - Dilution of Limited Partners' Interests." Each Investor may purchase not less than one Unit. The General Partner may, however, in its sole discretion, sell less than one Unit as an additional investment and reject in whole or in part any subscription. The price for each Unit is $3,006 in cash, plus a personal guaranty of 1% of the Partnership's obligations under the Loan of $487,125 from the Bank (a $4,871.25 principal guaranty obligation per Unit). See "Terms of the Offering - Guaranty Arrangements." The cash purchase price and Guaranty are due at subscription. The proceeds of the Offering will first be used by the Partnership to pay Offering costs and expenses. The remaining proceeds, if any, will then be used to reduce the Partnership's current outstanding indebtedness under the Loan. See "Sources and Applications of Funds." Acceptance of Subscriptions To enable the Bank and the General Partner to make credit and investor decisions, respectively, each prospective Investor must complete and deliver to the General Partner a Purchaser Financial Statement in the form included in the Subscription Packet accompanying this Memorandum, or a substitute financial statement containing the same information as provided therein, and pages one and two of the prospective Investor's most recently filed Form 1040 U.S. Individual Income Tax Return. An Investor that pays the full amount of his Unit purchase price with a check at subscription and whose subscription is received and accepted by the Partnership and the Bank (for the purposes of the Guaranty), will become a Limited Partner in the Partnership, and his subscription funds and Guaranty will be released from escrow to the Partnership and the Bank, respectively. Subscriptions may be rejected in whole or in part by the Partnership and need not be accepted in the order received. To the extent the Partnership rejects or reduces an Investor's subscription as provided above, the Investor's Unit cash purchase price and Guaranty will be proportionately refunded and reduced, as the case may be. Notice of acceptance of an Investor's subscription to purchase Units and his Percentage Interest in the Partnership will be furnished promptly after acceptance of the Investor's subscription. Guaranty Arrangements Each Investor will be required to execute a Guaranty as a part of his subscription. Each Limited Partner will have substantial exposure under his Guaranty. See "Risk Factors - Liability Under the Guaranty." The following summary of certain provisions of the Guaranty does not constitute legal advice. The form of the Guaranty is set forth in the Subscription Packet accompanying this Memorandum and should be reviewed carefully by prospective Investors and their counsel. Liability Under the Guaranty. Each Investor will be required to execute and deliver to the Bank a Guaranty pursuant to which he will personally guarantee the payment by the Partnership of a portion of its obligations to the Bank under the Loan. For each Unit purchased, an Investor will be required to guarantee 1% of the Partnership's total obligations under the Loan, which is equivalent to a $4,871.25 principal obligation guaranty per Unit. As of the date of this Memorandum, the outstanding principal balance of the Loan is $487,125. Liability under the Guaranty may exceed $4,871.25 per Unit because the guaranty obligation per Unit includes not only principal, but also 1% of all accrued and unpaid interest, late payment penalties and legal costs incurred by the Bank in collecting any defaulted payments. The amount of the Limited Partners' Guaranties will be proportionately reduced from time to time to the extent of the payments made by the Partnership under the Loan. Interest-only was payable monthly during the first six months of the Loan. The interest-only period expired on March 12, 2000 and the outstanding Loan principal, plus accrued interest, is payable over 36 monthly installments as provided below. The amount of each of the first 35 equal monthly installments of principal and interest is equal to the monthly payment resulting from amortization of the outstanding Loan principal over 36 months, assuming a fixed 10% per annum interest rate. A final payment of all outstanding principal and accrued interest will be payable in the 36th month. The 10% interest rate, as provided above, is used only for purposes of calculating the amount of the equal monthly installments over the 35 month period. Loan interest actually accrues at the Bank's Prime Rate, as the same may change from time to time. Pursuant to a formula set forth in the Loan promissory note, prepayments of Loan principal must be made annually out of Partnership Cash Flow until the Loan is paid in full. As of the date of this Memorandum, the Partnership has not made any prepayments. The General Partner believes that Loan principal prepayments will reduce the term of the Loan. The monthly installment payments of principal and interest for the term of the Loan are equal to $15,718 per month. If Partnership operations continue to generate sufficient revenues to enable the Partnership to make all payments under the Loan to the Bank when due, such payments will be sufficient to repay the Bank fully over the term of the Loan, and no Partner will be required to perform under his Guaranty. However, a default by the Partnership, the General Partner or the Limited Partners under the Loan or the Guaranties will entitle the Bank to exercise one or more of the following remedies: (i) declare all principal payments and accrued interest immediately due and payable; (ii) foreclose on its security interest in the Partnership's assets (including the Lithotripsy System and the Partnership's accounts receivable); and/or (iii) seek payment directly from the Limited Partners under the Guaranties. Events of default include the following: (i) default in the payment or performance of any obligation, covenant or liability contained or referred to in the Loan documents, including the Guaranties, unless remedied to the reasonable satisfaction of Bank within 30 days; (ii) any warranty, representation or statement made or furnished to the Bank by or on behalf of the Partnership or any of its guarantors (including the Limited Partners) proving to have been false in any material respect when made or furnished; (iii) loss, theft, substantial damage, destruction, sale or encumbrance to or of any of the collateral, or the making of any levy, seizure or attachment thereof or thereon, which is not removed within 30 days; (iv) dissolution, termination of existence (or, in the case of an individual guarantor, death), insolvency, business failure, appointment of a receiver of any part of the property of, assignment for the benefit of creditors by, or the commencement of any proceeding under any bankruptcy or insolvency laws by or against the Partnership or any guarantor which is not favorably terminated within 30 days; (v) the Partnership's failure to maintain its existence in good standing unless remedied within 30 days of notice by the Bank; (vi) the assertion or making of any seizure, vesting or intervention by or under authority of any government by which the management of the Partnership is displaced of their authority in the conduct of their business or their business is curtailed; (vii) upon the entry of any monetary judgment or the assessment and/or filing of any tax lien against the Partnership or any guarantor or upon the issuance of any writ or garnishment or attachment against any property of, debts due or rights of the Partnership or such guarantor to specifically include the commencement of any action or proceeding to seize monies of the Partnership or such guarantor on deposit in any bank account with the Bank, which is not removed or terminated within 30 days. However, any default by any one or more of the Partnership's guarantors under the above provisions applicable thereto, will only be an actionable default if one or more such defaulting guarantors either alone or in the aggregate guarantees 25% or more of the Loan, and provided further that the Bank has not, within twelve months of the occurrence of such guarantor's default, received, accepted and approved a substitute guaranty or guaranties from a party or parties acceptable to it in an amount greater than or equal to the amount of such defaulting guarantor's guaranties, or the Partnership has not made a prepayment of the Loan principal in an amount equal to the amount of the defaulting guarantor's guaranty. The Bank may also accelerate the Loan if it should deem itself, or its collateral, insecure or the payment or performance under the Loan impaired and may demand additional collateral at any time it deems the Loan to be insufficiently secured. As discussed below, under the terms of the Guaranties, Limited Partners waive certain rights to which they might otherwise be entitled, and are required to pay their share of the Bank's attorneys' fees and court costs if the Bank is successful in enforcing the Guaranties through a lawsuit. Copies of the Partnership's Loan documentation with the Bank are available upon request to the General Partner. The Guaranties are a guaranty of payment and not of collection. As a result, the liability of the Limited Partners under the Guaranties is direct and immediate and not conditional or contingent upon either the pursuit of any remedies against the Partnership or any other person (including any other guarantor) or foreclosure of any security interest or liens available to the Bank. The Bank may accept any payment, plan for adjustment of debts, plan for reorganization or liquidation, or plan of composition or extension proposed by, or on behalf of, the Partnership without in any way affecting or discharging the liability of the Limited Partners. Limited Partners waive any right to require that an action first be brought against the Partnership, the General Partner, any other guarantor or any other person, or to require that resort be had to any security or to any balance of any deposit account or credit on the books of Bank in favor of the Partnership or any other person. The Guaranty is a continuing guaranty that by its terms survives the death, bankruptcy, dissolution or disability of a Limited Partner guarantor. A Limited Partner's liability under a Guaranty continues regardless of whether the Limited Partner remains a limited partner in the Partnership. Under the terms of the Guaranties, the Limited Partners expressly waive: (i) notice of acceptance of the guaranty and of extensions of credit to the Partnership; (ii) presentment and demand for payment of the Partnership's promissory note; (iii) protest and notice of dishonor or of default; (iv) demand for payment under the Guaranty; and (v) all other notice to which the Limited Partner might otherwise be entitled. The principal liability of an Investor under the Guaranty will be up to $4,871.25 per Unit. Each Investor should regard his exposure with respect to his investment in the Partnership to be his cash subscription ($3,006 per Unit) plus the amount for which he is personally liable under his Guaranty, up to $4,871.25 per Unit in principal, plus accrued and unpaid interest, as well as late payment penalties, legal fees and court costs. An Investor should not purchase a Unit if he does not have resources sufficient to bear the loss of this entire amount. The Guaranty generally provides that within thirty days following the Bank's determination that the Partnership is in default under the Loan, the Bank will send a notice to each Limited Partner (the "Notice") setting forth the Partnership's total Loan obligations as of the date of the Notice (inclusive of all interest, late payment penalties and legal costs incurred in connection with the enforcement of such obligation accrued but unpaid through such date), together with a statement of the amount which the Limited Partner is responsible for paying (the "Guaranty Amount"). Failure by the Bank to send the Notice in a timely fashion will not, however, release the Limited Partner guarantor from any liability under his Guaranty. The Notice will provide that unless the Bank receives payment of the Guaranty Amount from the Limited Partner within five business days following the date of the Notice, the Guaranty Amount will be increased by the Limited Partner's pro rata share (based on the number of guarantors who did not pay the Guaranty Amount within five days of the date of the notice) of any additional accrued but unpaid interest, late payment penalties and legal costs through the date such payment is made. Because each Guaranty runs directly from the Limited Partner to the Bank, claims or defenses the Limited Partner may have against the Partnership or the General Partner may not be used to avoid payment under the Guaranty. See the form of the Guaranty included in the Subscription Packet accompanying this Memorandum. See also "Terms of the Offering - Suitability Standards." Approval of Bank. In addition to meeting the suitability requirements discussed below under "Suitability Standards," each Investor must be approved by the Bank for purposes of their delivery of the Guaranty. The Bank has established its own criteria for approving the credit-worthiness of Investors, either individually or as a group, and has not established objective minimum suitability standards. Instead, the Bank is empowered under the terms of the Loan to accept or reject any Investor. See "Risk Factors - Operating Risks - Liability Under the Guaranty." Subscription Period; Closing The subscription period will commence on the date hereof and will terminate at 5:00 p.m., Eastern time, on June 28, 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 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. The General Partner anticipates selling Units only to individual investors; however, the General Partner reserves the right to sell Units to entities. Because of the risks involved, the General Partner anticipates selling the Units only to Investors residing in California who it reasonably believes meet the definition of "accredited investor" as that term is defined in Rule 501 under the Securities Act, but reserves the right to sell up to 35 Investors who are nonaccredited investors. Certain institutions and the following individuals are "accredited investors": (1) An individual whose net worth (or joint net worth with his or her spouse) exceeds $1,000,000 at the time of subscription; (2) An individual who has had an individual income in excess of $200,000 in each of the two most recent fiscal years and who reasonably expects an individual income in excess of $200,000 in the current year; or (3) An individual who has had with his or her spouse a joint income in excess of $300,000 in each of the two most recent fiscal years and who reasonably expects a joint income in excess of $300,000 in the current year. Individual Investors must also be at least 21 years old and otherwise duly qualified to acquire and hold partnership interests. The General Partner reserves the right to refuse to sell Units to any person, subject to federal and applicable state securities laws. Each Investor must make an independent judgment, in consultation with his own counsel, accountant, investment advisor or business advisor, as to whether an investment in the Units is advisable. The fact that an Investor meets the Partnership's suitability standards should in no way be taken as an indication that an investment in the Units is advisable for that Investor. It is anticipated that suitability standards comparable to those set forth above will be imposed by the Partnership in connection with resales, if any, of the Units. Transferability of Units is severely restricted by the Partnership Agreement and the Subscription Agreement. See "Summary of the Partnership Agreement - Restrictions on Transfer of Partnership Interests." Investors who wish to subscribe for Units must represent to the Partnership that they meet the foregoing standards by completing and delivering to the Sales Agent a Purchaser Questionnaire in the form included in the Subscription Packet. Each Purchaser Representative, if any, acting on behalf of an Investor in connection with this Offering must complete and deliver to the Sales Agent a Purchaser Representative Questionnaire (a copy of which is available upon request to the General Partner). How to Invest Investors who meet the qualifications for investment in the Partnership and who wish to subscribe for Units may do so by following the instructions included in the Subscription Packet accompanying this Memorandum. All information provided by Investors will be kept confidential and not disclosed except to the Partnership, the General Partner, the Bank and their respective counsel and Affiliates and, if required, to governmental and regulatory authorities. Restrictions on Transfer of Units The Units have not been registered under the Securities Act or under any state securities laws and holders of Units have no right to require the registration of such Units or to require the Partnership to disclose publicly information concerning the Partnership. Units can be transferred only in accordance with the provisions of, and upon satisfaction of, the conditions set forth in the Partnership Agreement. Among other things, the Partnership Agreement provides that no assignment of Units may be made if such assignment could not be effected without registration under the Securities Act or state securities laws. Moreover, the assignment generally must be made to an individual approved by the General Partner who meets the suitability requirements described in this Memorandum. Assignors of Units will be required to execute certain documents, in form and substance satisfactory to the General Partner, instructing it to effect the assignment. Assignees of Units may also, in the discretion of the General Partner, be required to pay all costs and expenses of the Partnership with respect to the assignment. Any assignment of Units or the right to receive Partnership distributions in respect of Units will not release the assignor from any liabilities connected with the assigned Units, including liabilities under the Guaranty. An assignee, whether by sale or otherwise, will acquire only the rights of the assignor in the profits and capital of the Partnership and not the rights of a Limited Partner, unless such assignee becomes a substituted Limited Partner. An assignee may not become a substituted Limited Partner without (i) either the written consent of the assignor and the General Partner, or the consent of a Majority in Interest of the Limited Partners (except the assignor Limited Partner) and the General Partner, (ii) the submission of certain documents and (iii) the payment of expenses incurred by the Partnership in effecting the substitution. An assignee, regardless of whether he becomes a substituted Limited Partner, will be subject to and bound by all the terms and conditions of the Partnership Agreement with respect to the assigned Units. See "Summary of the Partnership Agreement - Restrictions on Transfer of Partnership Interests." PLAN OF DISTRIBUTION Subscriptions for Units will be solicited by MedTech Investments, Inc., the Sales Agent, which is an Affiliate of the General Partner. The Sales Agent has entered into a Sales Agency Agreement with the Partnership pursuant to which the Sales Agent has agreed to act as exclusive agent for the placement of the Units on a "best efforts" any or all basis. The Sales Agent is not obligated to purchase any Units. The Sales Agent is a North Carolina corporation that was formed on December 23, 1987, and became a member of the National Association of Securities Dealers on March 15, 1988. The Sales Agent will be engaged in other similar offerings on behalf of the General Partner and its Affiliates during the pendency of this Offering and in the future. The Sales Agent is a wholly owned subsidiary of Prime. Investors should note the material relationship between the Sales Agent and the General Partner, and are advised that the relationship creates conflicts in the Sales Agent's performance of its due diligence responsibilities under the Federal securities laws. As compensation for its services, the Sales Agent will receive a commission equal to $150 for each Unit sold. No other commissions will be paid in connection with this Offering. Subject to the conditions as provided above, the Sales Agent may be reimbursed by the Partnership for its out-of-pocket expenses associated with the sale of the Units in an amount not to exceed $7,000. The Partnership has agreed to indemnify the Sales Agent against certain liabilities, including liabilities under the Securities Act. The Partnership will not pay the fees of any purchaser representative, financial advisor, attorney, accountant or other agent retained by an Investor in connection with his decision to purchase Units. The subscription period will commence on the date hereof and will terminate at 5:00 p.m., Eastern time, on June 28, 2000, (or earlier, in the discretion of the General Partner), unless extended at the discretion of the General Partner for an additional period not to exceed 180 days. See "Terms of the Offering - Subscription Period; Closing." The Partnership seeks by this Offering to sell a maximum of 20 Units for a maximum of an aggregate of $60,120 in cash ($57,120 net of Sales Agent Commissions). The Partnership has set no minimum number of Units to be sold in this Offering. The subscription funds and Guaranty received from each Investor will be held in escrow (which, in the case of cash subscription funds, shall be held in an interest bearing escrow account with the Bank) until either the Investor's subscription is accepted by the Partnership (and approved by the Bank in the case of the Guaranties), the Partnership rejects the subscription or the Offering is terminated. Upon the receipt and acceptance of an Investor's subscription by the Partnership (and the Bank), the Investor will be admitted to the Partnership as a Limited Partner. In connection with his admission as a Limited Partner, the Investor's subscription funds will be released from escrow to the Partnership, and his guaranty will be released to the Bank. In the event a subscription is not accepted, all subscription funds (without interest), the Guaranty 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 the Guaranty will be returned to the Investor. BUSINESS ACTIVITIES General The Partnership was formed to (i) acquire the Lithotripsy System and operate it in the Service Area, (ii) improve the provision of health-care in the Partnership's Service Area by taking advantage of both the technological innovations inherent in the Modulith(R) SLX-T and the Partnership's quality assurance and outcome analysis programs, and (iii) make cash distributions to its partners from revenues generated by the operation of the Lithotripsy System. The Partnership owns and operates the Lithotripsy System in the Service Area and has contracted with the nine Contract Hospitals to provide lithotripsy services. Treatment Methods for Kidney Stone Disease Urolithiasis, or kidney stone disease, affects an estimated 600,000 persons per year in the United States. The exact cause of kidney stone formation is unclear, although it has been attributed to diet, climate, metabolism and certain medications. Approximately 75% of all urinary stones pass spontaneously, usually within one to two weeks, and require little or no clinical or surgical intervention. All other kidney stones, however, require some form of medical or surgical treatment. A number of methods are currently used to treat kidney stones. These methods include drug therapy, endoscopic and laser procedures, open surgery, percutaneous lithotripsy and extracorporeal shock wave lithotripsy. The type of treatment a urologist chooses depends on a number of factors such as the size of the stone, its location in the urinary system and whether the stone is contributing to other urinary complications such as blockage or infection. The extracorporeal shock wave lithotripter, introduced in the United States from West Germany in 1984, has dramatically changed the course of kidney stone disease treatment. The General Partner estimates that currently up to 95% of all kidney stones that require treatment can be treated by lithotripsy. Lithotripsy involves the use of shock waves to disintegrate kidney stones noninvasively. The Lithotripsy System Upon closing the Loan, the Partnership used a portion of the Loan proceeds (approximately $400,000) to acquire a new Modulith(R) SLX-T lithotripter. The Modulith(R) SLX-T received FDA premarket approval on March 27, 1997. The General Partner and its Affiliates have limited, but positive, direct experience with the use of the Modulith(R) SLX-T lithotripter. Preliminary reports from abroad and "word of mouth" anecdotal evidence indicates that the Modulith(R) SLX-T is as effective as most of the "portable" lithotripters in the market. See "Risk Factors - Operating Risks - Reliability and Efficacy of the Storz Modulith(R) SLX-T." The Modulith(R) SLX-T was especially adapted for the treatment of urological stones. In addition to the efficient fragmentation of all types of urinary tract stones, the Modulith(R) SLX-T is suitable for performing a range of urological examinations including cystoscopy and ureterorenoscopy. The Modulith(R) SLX-T consists of a cylindrical pressure wave generator, an OEC 9800 C-arm x-ray system unit and a patient table. The Modulith(R) SLX-T generates pressure waves electromagnetically from the cylindrical energy source and parabolic reflector. The pressure wave generator operates without an acoustic lens, thus avoiding such disadvantages as energy dissipation and aperture limitations. The pressure at the focal point can be varied by means of the energy control in nine steps from 10 Mpa to 100 Mpa. The energy source is fitted with an axial and lateral air-bag. When expanded during fluoroscopy, these air-bags ensure optimal X-ray image quality for monitoring purposes. The pressure wave coupling is dry (water cushion is used). The shock-wave may be released at fixed frequencies of 1 Hz, 1.5 Hz or 2 Hz, or may be triggered using the ECG and/or respiration. The Modulith(R) SLX-T localizes stones using an OEC 9800 C-arm X-ray system. The X-ray system employs an image intensifier, cassette film, digital spot imaging capability and two high resolution 16" monitors capable of displaying stored digital images. The patient table can be moved electronically in all three dimensions, and a floating function allows for quick patient positioning. The table is X-ray transparent and allows visualization of the entire urinary tract. The table includes a patient cradle which provides comfortable and secure support in the prone, supine and lateral positions. The Partnership's Modulith(R) SLX-T came with an eighteen month limited warranty during which time all maintenance, repairs, shock tubes, glassware and capacitors are provided free of charge. The General Partner anticipates that upon the expiration of the warranty, the Partnership will pay for maintenance service on the Modulith(R) SLX-T on an as needed basis. The Partnership also used a portion of the Loan proceeds (approximately $69,510) to acquire from AK Associates, L.L.C., an Affiliate of the General Partner, a Ford 400 Series van which was customized to include a 14' cargo box to house the lithotripter while it is transported from site to site. The floor of the van is loading dock height so the lithotripter can be easily loaded on and off the van at each treatment facility. The van is also upfitted with a lift gate with a load capacity of 3,000 pounds for easy loading of the lithotripter from street level. The van has been modified for securing the lithotripter and its accessories during transport and for heating the cargo box during the winter to prevent freezing of the lithotripter and its components. The General Partner did not purchase the manufacturer's service contract for the van. Instead, the Partnership pays for service on an as needed basis. The General Partner estimates that expenditures for maintenance and repair of the van will be approximately $6,000 per year. Acquisition of Additional Assets If in the future the General Partner determines that it is in the best interest of the Partnership to acquire (i) one or more fixed base or mobile Lithotripsy Systems, (ii) any other urological device or equipment, so long as such device has FDA premarket approval at the time it is acquired by the Partnership, and/or (iii) an interest in any business entity that engages in a urological business described above, the General Partner has the authority (without obtaining the Limited Partners' consent) to establish reserves or, subject to certain restrictions in the Loan, to borrow additional funds on behalf of the Partnership to accomplish such goals, and may use Partnership assets and revenues to secure and repay such borrowings. The acquisition of such assets likely would result in higher operating costs for the Partnership. The General Partner does not anticipate acquiring additional Partnership assets unless projected Partnership Cash Flow or proceeds from a Dilution Offering are sufficient to finance such acquisitions. No Limited Partner would be personally liable on any Partnership indebtedness without such Limited Partner's prior written consent. There is no assurance that additional financing would be available to the Partnership to acquire additional assets or to fund any additional working capital requirements. Any additional borrowing by the Partnership will serve to increase the risks to the Partnership associated with leverage, as well as to increase the risks that cash from operations will be insufficient to fund the obligations secured by the Limited Partners' Guaranties. See "Risk Factors - Operating Risks - Partnership Limited Resources and Risks of Leverage" and "Risk Factors - Operating Risks - Liability Under the Guaranty." Hospital Contracts The Partnership has entered into Hospital Contracts to provide lithotripsy services at seven treatment centers in the Service Area. The Contract Hospitals are: California State Prison-Corcoran Kaweah Delta Healthcare District Lodi Memorial Hospital Lompoc District Hospital Sutter Auburn Faith Hospital Tulare District Hospital Sierra Nevada Memorial Hospital Five of the Hospital Contracts grant the Partnership the exclusive right to deliver lithotripsy services to the relevant Contract Hospital. The Hospital Contracts require the Partnership to make a lithotripter available at the facilities as agreed to by the Contract Hospital and the Partnership. The Partnership generally also provides a technician and certain ancillary services such as scheduling necessary for the lithotripsy procedure. The Contract Hospitals generally pay the Partnership a fee for each lithotripsy procedure performed at that health care facility. The contracts expire by their terms at various times through June 30, 2001 and generally may be extended only upon mutual agreement with the health care facility. Most of these contracts may be terminated without cause upon 180 days or less written notice by either party prior to any renewal date, or upon customary events of default. The Sierra Nevada Memorial Hospital contract expired by its terms in April 1999, though the parties are currently negotiating for a renewal and are continuing to maintain a business relationship on a month-to-month basis substantially in accordance with the terms of the agreement. The General Partner believes it has a good relationship with many of the Contract Hospitals. There is no assurance, however, that one or more of the Hospital Contracts will not terminate in the future. See "Risk Factors - Operating Risks - Contract Terms and Termination." In addition, Sun Medical Technologies, Inc. ("Sun Medical"), the Management Agent for the Partnership, currently provides lithotripsy services to Tahoe Forest Hospital in Truckee and Sutter/Merced Medical Center in Merced. Sun Medical is currently negotiating with these treatment centers to assign their contracts to the Partnership. If Sun Medical is unable to obtain the consent of each facility to the assignment, it will continue to provide lithotripsy services to the facilities for the remaining terms of the agreements, in which case Sun Medical will be competing directly with the Partnership at such locations. See "Competition - Affiliated Competition." Reimbursement Agreements. Prime and its Affiliates have negotiated third-party reimbursement agreements with certain national and local payors. The national agreements apply to all the lithotripsy partnerships with which Prime is affiliated. Although the Partnership currently provides services under the Hospital Contracts on a wholesale basis, the Partnership will be able to take advantage of these reimbursement agreements in the future if in the event it contracts with a treatment facility on a retail basis. Some of the national and local payors have agreed to pay a fixed price for the lithotripsy services. Generally the agreements may be terminated by either party on 90 days' notice. The national and local reimbursement agreements that have been negotiated or renegotiated in the past two to four years almost entirely provide for lower reimbursement rates for lithotripsy services than the older agreements. Operation of the Lithotripsy System It is anticipated that the Partnership will continue to provide services under the Hospital Contracts and similar arrangements. See "Business Activities - Hospital Contracts" and "Risk Factors - Operating Risks - Contract Terms and Termination." Qualified physicians who make appropriate arrangements with Contract Hospitals receiving lithotripsy services pursuant to the Hospital Contracts and other lithotripsy service agreements may treat their own patients using the Lithotripsy System after they have received any necessary training required by the rules of such Contract Hospital. The Partnership may also make arrangements to make the Lithotripsy System available to qualified physicians (including but not limited to qualified physician Limited Partners) desiring to treat their own patients after they have received any necessary training. The General Partner and Management Agent will endeavor to the best of their abilities to require that physicians using the Partnership's Lithotripsy System comply with the Partnership's quality assurance and outcome analysis programs in order to maintain the highest quality of patient care. In addition, the General Partner reserves the right to request that (i) physicians (or members of their practice groups) treat only their own patients with the Lithotripsy System, and (ii) physician Limited Partners disclose to their patients in writing their financial interest in the Partnership prior to treatment, if it determines that such practices are advisable under applicable law. The latter disclosure is required under California law. See "Regulation-State Regulation." The treating qualified physician will be solely responsible for billing and collecting on his own behalf the professional service component of the treatment procedure. Owning an interest in the Partnership is not a condition to using the Lithotripsy System. Thus, local qualified physicians who are not Limited Partners will be given the same opportunity to treat their patients using the Lithotripsy System as provided above. Management The Partnership has entered into a management agreement (the "Management Agreement") with the Management Agent whereby the Management Agent is obligated to supervise and coordinate the management and administration of the operation of the Lithotripsy System on behalf of the Partnership in exchange for a monthly management fee equal to 7.5% of Partnership Cash Flow per month. See "Compensation and Reimbursement to the General Partner and its Affiliates." The Management Agent's services under the Management Agreement include making available any necessary training of physicians in the proper use of the lithotripsy equipment, monitoring technological developments in renal lithotripsy and advising the Partnership of these developments, arranging continuing education programs for qualified physicians who use the lithotripsy equipment and providing advertising, billing, accounts collection, equipment maintenance, medical supply inventory and other incidental services necessary for the efficient operation of the Lithotripsy System. Costs incurred by the Management Agent in performing its duties under the Management Agreement are the responsibility of the Partnership. The Management Agent's engagement under the Management Agreement is as an independent contractor and neither the Partnership nor its Limited Partners have any authority or control over the method or manner in which the Management Agent performs its duties under the Management Agreement. The Management Agreement is in the first year of its initial five-year term. Thereafter, it will be automatically renewed for three additional five-year terms unless terminated by the Partnership or the Management Agent. THE GENERAL PARTNER The General Partner of the Partnership is Mobile Kidney Stone Centers of California, Ltd. I, a California limited partnership formed on October 6, 1987. The general partner of the General Partner is Sun Medical Technologies, Inc., a California corporation formed on June 20, 1990 ("Sun Medical"). Prime acquired all the outstanding stock of Sun Medical on November 10, 1995 and Sun Medical remains a wholly-owned subsidiary of Prime. The principal executive office of the General Partner is located at 15195 National Avenue, Suite 203, Los Gatos, California 95032 and the principal executive office of Sun Medical is located at 1301 Capital of Texas Highway, Suite C-300, Austin, Texas 78746. Management. The General Partner is managed by Sun Medical under an arrangement similar to the Management Agreement. The following table sets forth the names and respective positions of the individuals serving as executive officers and directors of Sun Medical, many of whom also serve as executive officers of Prime. Name Office Stan Johnson President and Director Ken Shifrin Director Joseph Jenkins, M.D. Director Cheryl Williams Vice President, Chief Financial Officer and Director James D. Clark Secretary Supervision of the day-to-day management and administration of the Partnership is the responsibility of Sun Medical in its capacity as the general partner of the General Partner and Management Agent of the Partnership. Sun Medical itself is managed by a four-member Board of Directors composed of Mr. Shifrin, Dr. Jenkins, Ms. Williams and Mr. Johnson. Set forth below are the names and descriptions of the background of the key executive officers and directors of Sun Medical. Stan Johnson has been a Vice President of Prime and President of Sun Medical since November 1995. Mr. Johnson was the Chief Financial Officer of Sun Medical from 1990 to 1995. Kenneth S. Shifrin has been Chairman of the Board and a Director of Prime since October 1989 and was elected a Director of Sun Medical following Prime's acquisition of all of Sun Medical's stock. Mr. Shifrin also has served in various capacities with American Physicians Service Group, Inc. ("APS") since February 1985, and is currently Chairman of the Board and Chief Executive Officer of APS. Joseph Jenkins, M.D. has been President and Chief Executive Officer of Prime since April 1996, and previously practiced urology in Washington, North Carolina. Dr. Jenkins was recently elected to Sun Medical's Board of Directors. Dr. Jenkins is a board certified urologist and is a founding member, past-president and currently a Director of the American Lithotripsy Society. Cheryl Williams is Vice President-Finance, Chief Financial Officer and Director of Sun Medical and has been Chief Financial Officer, Vice President-Finance and Secretary of Prime since October 1989. Ms. Williams was Controller of Fairchild Aircraft Corporation from August 1988 to October 1989. From 1985 to 1988, Ms. Williams served as the Chief Financial Officer of APS Systems, Inc., a wholly-owned subsidiary of APS. James D. Clark recently became Secretary of Sun Medical after previously serving as its Assistant Treasurer. Mr. Clark has served as Tax Manager of Prime since January 1998 and is a Certified Public Accountant in Texas. Prior to joining Prime, Mr. Clark was Controller for ERISA Administrative Services, Inc. COMPENSATION AND REIMBURSEMENT TO THE GENERAL PARTNER AND ITS AFFILIATES The following summary describes the types and, where determinable, the estimated amounts of reimbursements, compensation and other benefits the General Partner and its Affiliates will receive in connection with the continued operation and management of the Partnership and the Lithotripsy System. None of such fees, compensation and other benefits has been determined at arm's length. Except for the items set forth below, the General Partner does not expect to receive any distribution, fee, compensation or other remuneration from the Partnership. See "Business Activities - Management" and "Plan of Distribution." 1. Management Fee. Pursuant to the Management Agreement, the Management Agent has contracted with the Partnership to supervise the management and administration of the day-to-day operations of the Partnership's lithotripsy business for a monthly fee equal to 7.5% of Partnership Cash Flow per month. All costs incurred by the Management Agent in performing its duties under the Management Agreement are the responsibility of, and are paid directly or reimbursed by, the Partnership. The Management Agent is the management agent for various affiliated lithotripsy ventures. As a consequence, many of the Management Agent's employees provide various management and administrative services for numerous ventures, including the Partnership. In order to properly allocate the costs of the Management Agent's employees and other overhead expenses among the entities for which they provide services, such costs are divided among all the ventures based upon the relative number of patients treated by each. The General Partner believes that the sharing of personnel and overhead costs among various entities results in significant costs savings for the Partnership. The management fee for any given month is payable on or before the 30th day of the next succeeding month. The Management Agreement is in the first year of its initial five-year term. The Management Agreement will be automatically renewed for up to three additional successive five-year terms unless it is earlier terminated by the Partnership or the General Partner. The General Partner and the Management Agent are reimbursed by the Partnership for all of their out-of-pocket costs associated with the operation of the Partnership and the Lithotripsy System, and the Partnership will pay or reimburse to the General Partner all expenses related to this Offering. No other fees or compensation will be payable to the General Partner, the Management Agent or their Affiliates for managing the Partnership other than the management fee payable to the Management Agent as provided in the Management Agreement. The Partnership may, however, contract with the General Partner, the Management Agent or their Affiliates to render other services or provide materials to the Partnership provided that the compensation is at the then prevailing rate for the type of services and/or materials provided. 2. Partnership Distributions. In its capacity as general partner of the Partnership, the General Partner is entitled to its distributable share (40% before dilution) of Partnership Cash Flow, Partnership Sales Proceeds and Partnership Refinancing Proceeds as provided by the Partnership Agreement. See "Summary of the Partnership Agreement - Profits, Losses and Distributions" and the Partnership Agreement attached as Appendix A. 3. Sales Commissions. The Sales Agent, a wholly-owned subsidiary of Prime, has entered into a Sales Agency Agreement with the Partnership pursuant to which the Sales Agent has agreed to sell the Units on a "best efforts" any or all basis. As compensation for its services, the Sales Agent will receive a commission equal to $150 for each Unit sold (up to an aggregate of $3,000). If the Offering is successful, the Sales Agent will also be reimbursed by the Partnership for its out-of-pocket expenses associated with its sale of the Units in an amount not to exceed $7,000. See "Plan of Distribution" and "Conflicts of Interest." 4. Loans. The General Partner or its Affiliates will also receive interest on loans, if any, made by them to the Partnership. See "Conflicts of Interest." Neither the General Partner nor any of its Affiliates are, however, obligated to make loans to the Partnership. While the General Partner does not anticipate that it would cause the Partnership to incur indebtedness unless cash generated from the Partnership's operations were at the time expected to enable repayment of such loan in accordance with its terms, lower than anticipated revenues and/or greater than anticipated expenses could result in the Partnership's failure to make payments of principal or interest when due under such a loan and the Partnership's equity being reduced or eliminated. In such event, the Limited Partners could lose their entire investment. CONFLICTS OF INTEREST The operation of the Partnership involves numerous conflicts of interest between the Partnership and the General Partner and its Affiliates. Because the Partnership is operated by the General Partner, such conflicts are not resolved through arm's length negotiations, but through the exercise of the judgment of the General Partner consistent with its fiduciary responsibility to the Limited Partners and the Partnership's investment objectives and policies. The General Partner, its Affiliates and employees of the General Partner will in good faith continue to attempt to resolve potential conflicts of interest with the Partnership, and the General Partner will act in a manner that it believes to be in or not opposed to the best interests of the Partnership. The Management Agent and the Sales Agent will receive management fees and broker-dealer sales commissions, respectively, in connection with the business operations of the Partnership and the sale of the Units that will be paid regardless of whether any sums hereafter are distributed to Limited Partners. None of such fees, compensation and benefits has been determined by arm's length negotiations. In addition, the Partnership may contract with the General Partner or its Affiliates to render other services or provide materials to the Partnership provided that the compensation is at the then prevailing rate for the type of services and/or materials provided. The General Partner will also receive interest on loans, if any, it makes to the Partnership. See "Compensation and Reimbursement to the General Partner and its Affiliates." The General Partner and its Affiliates will devote as much of their time to the business of the Partnership as in their judgment is reasonably required. Principals of Sun Medical may have conflicts of interest in allocating management time, services and functions among their various existing and future business activities in which they are or may become involved. See "Competition" and "Prior Activities." The General Partner believes it and its Affiliates together, have sufficient resources to be capable of fully discharging the General Partner's and its Affiliates' responsibilities to the Partnership. The General Partner and its Affiliates may engage for their own account, or for the account of others, in other business ventures, related to medical services or otherwise, and neither the Partnership nor the holders of any of the Units shall be entitled to any interest therein. The General Partner, its Affiliates (including affiliated limited partnerships and other entities), and their employees engage in medical service activities for their own accounts. See "Prior Activities." The General Partner or the Management Agent may serve as a general partner of other limited partnerships that are similar to the Partnership and they do not intend to devote their entire financial, personnel and other resources to the Partnership. Except as provided by law, none of such entities or their respective Affiliates is prohibited from engaging in any business or arrangement that may be in competition with the Partnership. The General Partner, the Management Agent, and their Affiliates are, however, obligated to act in a fiduciary manner with respect to the management of the Partnership and any other limited partnership in which they serve as the general partner. In the event an issue arises as to whether a particular lithotripsy service opportunity in or near the Service Area belongs to the Partnership, the General Partner or another Affiliate, the General Partner will in good faith attempt to resolve the issue in a manner that it believes to be in or not opposed to the best interest of the Partnership. Notwithstanding the foregoing, no assurance can be given that one or more limited partners of such Affiliates or the Limited Partners themselves, may not challenge the decision of the General Partner on fiduciary or other grounds. The General Partner presently provides lithotripsy services in the Service Area under one separate arrangement, and Affiliates of the General Partner provide services in and near the Service Area. See "Competition" and "Prior Activities." The Sales Agent is MedTech Investments, Inc., which is an Affiliate of the General Partner. Because of the Sales Agent's affiliation with the General Partner, there are conflicts in the Sales Agent's performance of its due diligence responsibilities under the federal securities laws. See "Plan of Distribution." The interests of the Limited Partners have not been separately represented by independent counsel in the formulation of the transactions described herein. The attorneys and accountants who have performed and will perform services for the Partnership were retained by the General Partner, and have in the past performed and are expected in the future to perform similar services for the General Partner, and Prime. FIDUCIARY RESPONSIBILITY OF THE GENERAL PARTNER The General Partner is accountable to the Partnership as a fiduciary and consequently must exercise good faith in handling Partnership affairs. This is a rapidly developing and changing area of the law and Limited Partners who have questions concerning the duties of the General Partner should consult with their counsel. Under the Partnership Agreement, the General Partner and its Affiliates have no liability to the Partnership or to any Partner for any loss suffered by the Partnership that arises out of any action or inaction of the General Partner or its Affiliates if the General Partner or its Affiliates, in good faith, determined that such course of conduct was in the best interest of the Partnership and such course of conduct did not constitute gross negligence or willful misconduct of the General Partner or its Affiliates. Accordingly, Limited Partners have a more limited right of action than they otherwise would absent the limitations set forth in the Partnership Agreement. The General Partner and its Affiliates will be indemnified by the Partnership against any losses, judgments, liabilities, expenses and amounts paid in settlement of any claims sustained by them in connection with the Partnership, provided that the same were not the result of gross negligence or willful misconduct on the part of the General Partner or its Affiliates. Insofar as indemnification for liabilities under the Securities Act may be permitted to persons controlling the Partnership pursuant to the foregoing provisions, the Partnership has been informed that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act and therefore is unenforceable. COMPETITION Many fixed-site and mobile extracorporeal shock-wave lithotripsy services are currently operating in and around the Service Area. The following discussion identifies the existing services in and near the Service Area, to the best knowledge of the General Partner. Affiliated Competition The Partnership faces competition from lithotripters placed in service in California, including lithotripters owned by the General Partner and its Affiliates. The General Partner and its Affiliates provide and will continue to provide lithotripsy services in and near the Service Area. The General Partner directly provides mobile lithotripsy services at Mercy Hospital in Merced and will continue to compete with the Partnership at this location. Sun Medical, the Management Agent, currently provides services at Alta Bates Medical Center in Berkeley, Tahoe Forest Hospital in Truckee, and Sutter/Merced Medical Center in Merced. Sun Medical is currently negotiating an assignment of the Tahoe Forest Hospital and Sutter/Merced Medical Center contracts to the Partnership. If Sun Medical is unable to obtain the consent of each facility to the assignment, it will continue to provide services to the facilities for the remaining terms of the agreements in direct competition with the Partnership. Mobile Kidney Stone Centers of California II, L.P., an Affiliate of the General Partner, provides lithotripsy services using a Modulith(R) SLX-T primarily within a 150-mile radius of Sacramento. Other Affiliates of the General Partner provide services in other areas of California. Other Competition Various hospitals and other facilities in the Service Area have access to lithotripters which will be in direct competition with the Partnership. Medstone operates a mobile lithotripter at Memorial Hospital in Modesto, Emanuel Medical Center in Turlock and John Muir Medical Center in Walnut Creek. To the best knowledge of the General Partner, competing mobile lithotripsy services are available at Kaiser Foundation Hospital in Walnut Creek and a facility in Stockton. The General Partner believes a competing company has recently purchased a transportable Storz lithotripter and is approaching hospitals in the Service Area to provide services. The General Partner is also aware of a fixed-site lithotripter which operates at the University of California Davis Medical Center in Sacramento, as well as a lithotripter operating at HealthSouth Surgery Center - Scripps in Sacramento. Other hospitals, ambulatory surgery centers and other healthcare facilities may have fixed-base or mobile lithotripters of which the General Partner is not aware. These lithotripters would be in competition with the Partnership. Although the General Partner anticipates that the Partnership will continue to operate primarily in the Service Area, the actual itinerary for the Lithotripsy System is expected to be influenced by the number of patients in particular areas and arrangements with various hospitals and health care centers. See "Business Activities - Operation of the Lithotripsy System". Other hospitals in and near the Service Area may operate lithotripters which are not extracorporeal shock-wave lithotripters but rather use lasers or are electrohydraulic lithotripters. The General Partner believes these machines have a competitive disadvantage because such machines are capable of treating stones only in the ureter. The General Partner believes the Lithotripsy System can be used on stones in locations other than the ureter. See "Business Activities - Treatment Methods for Kidney Stone Disease." The health care market in the Service Area is heavily influenced by managed care companies such as health maintenance organizations. Managed care companies generally contract either directly with hospitals or specified providers for lithotripsy services for beneficiaries of their plans. It is not uncommon for managed care companies to have contracts already in place with hospitals or specified providers, and the Partnership will not be able to provide services to beneficiaries of those plans unless it convinces either the managed care companies or the hospitals to switch to the Partnership's services. No assurances can be given that new competing lithotripsy clinics will not open in the future or that innovations in lithotripters or other treatments of kidney stone disease will not make the Partnership's Lithotripsy System competitively obsolete. See "Risk Factors - Operating Risks - Technological Obsolescence". In addition, the General Partner and its Affiliates are not restricted from engaging in lithotripsy ventures unassociated with the Partnership which may compete with the Partnership. See "Conflicts of Interest." The manufacturer of the Lithotripsy System is under no obligation to the General Partner or the Partnership to refrain from selling its lithotripters to urologists, hospitals or other persons for use in the Service Area or elsewhere. In addition, the availability of lower-priced lithotripters in the United States could dramatically increase the number of lithotripters in the United States, increase competition for lithotripsy procedures and create downward pressure on the prices the Partnership can charge for its services. Many potential competitors of the Partnership, including hospitals and medical centers, have financial resources, staffs and facilities substantially greater than those of the Partnership and of the General Partner. REGULATION Federal Regulation The Partnership, the General Partner and the Limited Partners are subject to regulation at the federal, state and local level. An adverse review or determination by certain regulatory organizations (federal, state or private) may result in the Partnership, the General Partner and the Limited Partners being subject to imprisonment, loss of reimbursement, fines or exclusion from participation in Medicare or Medicaid. Adverse reviews of the Partnership's operations at any of the various regulatory levels may adversely affect the operations and profitability of the Partnership. Reimbursement. The Partnership charges hospitals a per-use fee for use of the Lithotripsy System and does not directly bill or collect from any patients or third party payors for lithotripsy services provided using its Lithotripsy System. The amount of this per-use fee primarily depends on the amount that governmental and commercial third party payors are willing to reimburse hospitals for lithotripsy procedures. The primary governmental third party payor is Medicare. Medicare reimbursement policies are statutorily created and are regulated by the federal government. The Balanced Budget Act of 1997 required the Health Care Financing Administration ("HCFA"), the federal agency that administers the Medicare program, to establish a prospective payment system for outpatient procedures. One of the goals of the prospective payment system was to lower medical costs paid by the Medicare program. HCFA issued proposed regulations in 1998 which would reduce the reimbursement rate currently paid for lithotripsy procedures performed on Medicare patients at hospitals to a base rate of $2,235. The base rate includes anesthesia and sedation, equipment and supplies necessary for the procedure, but does not include the treating physician's professional fee. The base rate is subject to adjustment for various hospital-specific factors. The General Partner believes the lower reimbursement rate will be implemented in the latter half of the year 2000. In some cases, reimbursement rates payable to the General Partner and its Affiliates are less than the proposed HCFA rate. Although the Partnership does not currently provide services at any ambulatory surgery centers, the General Partner retains the discretion to make the Lithotripsy System available at ambulatory surgery centers in the future ("ASCs") . Medicare does not currently reimburse for lithotripsy procedures provided at ASCs. However, HCFA issued proposed rules in 1998 which would authorize Medicare reimbursement for lithotripsy procedures provided at ASCs. While the proposed rules had a target effective date of October 1, 1998, the effective date has been postponed indefinitely for reasons unrelated to lithotripsy coverage. The proposed rules assign a Medicare reimbursement rate of $2,107 if the lithotripsy procedure is performed at an ASC. Whether these proposed rules will become effective to authorize Medicare reimbursement at ASCs and, if they do become effective, what the reimbursement rate will be, is unknown to the General Partner. The Medicare program has historically influenced the setting of reimbursement standards by commercial insurers. Therefore, reduced rates of Medicare reimbursement for lithotripsy services may result in reduced payments by commercial insurers for the same services. As was discussed previously, competitive pressure from health maintenance organizations and other managed care companies has in some circumstances already resulted in decreasing reimbursement rates from commercial insurers. See "Risk Factors - Impact of Insurance Reimbursement." No assurances can be given that HCFA will not seek to reduce its proposed reimbursement rates even more to avoid paying more than commercial insurers. As a result, hospitals may seek to lower the fees paid to the Partnership for the use of the Lithotripsy System. The General Partner anticipates that reimbursement for lithotripsy procedures, and therefore overall Partnership revenues, may continue to decline. The physician service (Part B) Medicare reimbursement for renal lithotripsy is determined using Resource Based-Relative Value Scales ("RB-RVS"). The system includes limitations on future physician reimbursement increases tied to annual expenditure targets legislated annually by Congress or set based upon recommendation of the Secretary of the U.S. Department of Health and Human Services. Medicare has in the past, with regard to other Part B services such as cataract implant surgery, imposed significant reductions in reimbursement based upon changes in technology. HCFA has produced a lengthy report whose conclusion is that professional fees for lithotripsy are overvalued. Thus, potential future decreases in reimbursement must be considered probable. Medi-Cal is the name of the Medicaid program in California jointly sponsored by the federal and state governments to reimburse service providers for medical services provided to Medi-Cal recipients, who are primarily the indigent. Medi-Cal currently provides reimbursement for lithotripsy services. The federal Personal Responsibility and Work Opportunity Reconciliation act of 1996 requires state health plans, such a Medi-Cal, to limit Medicaid coverage for certain otherwise eligible persons. The General Partner does not believe this legislation will have a significant impact on the Partnership's revenues. In addition, federal regulations permit state health plans to limit the provision of services based upon such criteria as medical necessity or other criteria identified in utilization or medical review procedures. The General Partner does not know whether Medi-Cal has taken or will take such steps. Self-Referral Restrictions. Health care entities which seek reimbursement for services covered by Medicare or Medicaid are subject to federal regulation restricting referrals by certain physicians or their family members. Congress has passed legislation prohibiting physician self-referral of patients for "designated health services", which include inpatient and outpatient hospital services (42 U.S.C. ss. 1395nn) ("Stark II"). Lithotripsy services were not specifically identified as a designated health service by this legislation, but the prohibition includes any service which is provided to an individual who is registered as an inpatient or outpatient of a hospital under proposed regulations discussed below. Lithotripsy services provided by the Partnership to Medicare and Medicaid patients are billed by the contracting hospital in its name and under its Medicare and Medicaid program provider numbers. Accordingly, these lithotripsy services would likely be considered inpatient or outpatient services under Stark II. Following the passage of the Stark II legislation effective January 1, 1995, the General Partner determined that the statute would not apply to the type of lithotripsy services to be provided by the Partnership. Stark II applies only to ownership interests directly or indirectly in the entity that "furnishes" the designated health care service. The physician-investors and the Partnership will not have an ownership interest in any Contract Hospitals which offer the lithotripsy services to the patients on an inpatient or outpatient basis. See 42 U.S.C. ss. 1395nn(a)(1)(A). Thus, by referring a patient to a hospital offering the service, the physician-investors will not be making a referral to an entity in which they maintain an ownership interest for purposes of the application of Stark II. This interpretation adopted by the General Partner was consistent with the informal view of the General Counsel's Office of the U.S. Department of Health and Human Services. Based upon this reasonable interpretation of Stark II, by referring a patient to a hospital furnishing the outpatient lithotripsy services "under arrangements" with the Partnership, a physician investor in the Partnership is not making a referral to an entity (the hospital) in which he or she has an ownership interest. In 1998, HCFA published proposed regulations interpreting the Stark II statute (the "Proposed Stark II Regulations"). The Proposed Stark II Regulations and HCFA's accompanying commentary would apply the physician referral prohibitions of Stark II to the Partnership's contracts for provision of the Lithotripsy System. Under the Proposed Stark II Regulations, physician Limited Partner referrals of Medicare and Medicaid patients to Contract Hospitals would be prohibited because the Partnership is regarded as an entity that "furnishes" inpatient and outpatient hospital services. The General Partner cannot predict when final regulations will be issued or the substance of the final regulations, but the interpretive provisions of the Proposed Stark II Regulations may be viewed as HCFA's interim position until final regulations are issued. If the Proposed Stark II Regulations are adopted as final (or, in the meantime, if a reviewing court adopted their reasoning as the proper interpretations of the Stark II statute), then the Partnership's operations would not be in compliance with Stark 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 Stark II Regulations that physician overutilization of lithotripsy is unlikely and specifically solicits comments on whether there should be a regulatory exception for lithotripsy. HCFA has received a substantial volume of comments in support of a regulatory exception for lithotripsy. HCFA representatives have informally acknowledged in published commentary that some form of regulatory relief for lithotripsy is under consideration and may be forthcoming; however, no assurances can be made that such will be the case. The General Partner will continue to carefully review the Proposed Stark II Regulations and accompanying HCFA commentary, and explore other alternative plans of operations that would allow the Partnership to operate in compliance with Stark II and its final regulations. HCFA's adoption of the current Proposed Stark II Regulations as final or a reviewing court's interpretation of the Stark II statute in reliance on the Proposed Stark II Regulations and in a manner adverse to the Partnership operations would mean that the Partnership and its physician Limited Partners would likely be found in violation of Stark II. In such circumstance, it is possible the Partnership may be given the opportunity to restructure its operations to bring them into compliance. In the event the General Partner is unable to devise a plan pursuant to which the Partnership may operate in compliance with Stark II and its final regulations, the General Partner is obligated under the Partnership Agreement either (i) to purchase the Partnership Interests of all the Limited Partners at the lesser of fair market value or their Capital Account values (including in certain cases the assumption of their Guaranties) or (ii) to dissolve and liquidate the Partnership. See "Summary of the Partnership Agreement - Optional Purchase of Limited Partner Interests." The Partnership and/or the physician Limited Partners may not be permitted the opportunity to restructure operations and thereby avoid an obligation to refund any amounts collected from Medicare and Medicaid patients in violation of the statute. Further, under these circumstances the Partnership and physician Limited Partners may be assessed with substantial civil monetary penalties and/or exclusion from providing services reimbursed by Medicare and Medicaid. Two bills are currently pending in Congress which would modify the reach of the Stark II self-referral prohibition. One (H.R. 2650) was introduced by Representative Stark, the other (H.R. 2651) by House Ways and Means health subcommittee chair Representative Bill Thomas. The Stark bill would modify, and the Thomas bill would repeal, the ban on physicians who have compensation arrangements with entities to which they refer patients. However, neither bill, nor any other bill currently pending in Congress, would substantively modify the regulation of referrals of physicians with ownership interests. Thus, neither bill would affect the Partnership's analysis of the potential impact of Stark II on this Offering discussed above. Fraud and Abuse. The provisions of the federal Social Security Act addressing illegal remuneration (the "Anti-Kickback Statute") prohibit providers and others from soliciting, receiving, offering or paying, directly or indirectly, any remuneration in return for either making a referral for a Medicare, Medicaid or CHAMPUS covered service or ordering, arranging for or recommending any such covered service. Violations of the Anti-Kickback Statute may be punished by a fine of up to $25,000 or imprisonment for up to five (5) years, or both. In addition, violations may be punished by substantial civil penalties and/or exclusion from the Medicare and Medicaid programs. Regarding exclusion, the Office of Inspector General ("OIG") of the Department of Health and Human Services may exclude a provider from participation in the Medicare program for a 5-year period upon a finding that the Anti-Kickback Statute has been violated. After OIG establishes a factual basis for excluding a provider from the program, the burden of proof shifts to the provider to prove the Anti-Kickback Statute has not been violated. The Limited Partners are to receive cash Distributions from the Partnership. Since it is anticipated that some of the Limited Partners will be physicians or others in a position to refer and perform lithotripsy services using Partnership equipment and personnel, such Distributions could come under scrutiny under the Anti-Kickback Statute. The Third Circuit United States Court of Appeals has held that the Anti-Kickback Statute is violated if one purpose (as opposed to the primary or sole purpose) of a payment to a provider is to induce referrals. United States v. Greber, 760 F.2d 68 (1985). The Greber case was followed by the United States Court of Appeals for the Ninth Circuit, United States v. Kats, 871 F.2d 105 (9th Cir. 1989), and cited favorably by the First Circuit in United States v. Bay State Ambulance and Hospital Rental Service, Inc., 874 F.2d 20 (1st Cir. 1989). The OIG has indicated that it is giving increased scrutiny to health care joint ventures involving physicians and other referral sources. In 1989, it published a Special Fraud Alert that outlined questionable features of "suspect" joint ventures, including some features which may be common to the Partnership. While OIG Special Fraud Alerts do not constitute law, they are informative because they reflect the general views of the OIG as a health care fraud and abuse investigator and enforcer. The OIG has published regulations which protect certain transactions from scrutiny under the Anti-Kickback Statute (the "Safe Harbor" regulations). A Safe Harbor, if complied with fully, will exempt such activity from prosecution under the Anti-Kickback Statute. However, the preamble to the Safe Harbor regulations states that the failure of a particular business arrangement to comply with the regulations does not determine whether or not the arrangement violates the Anti-Kickback Statute because the regulations do not themselves make any particular conduct illegal. This Offering and the business of the Partnership do not comply with any Safe Harbor. A Safe Harbor has been adopted which protects equipment leasing arrangements. It requires that the aggregate rental charge be set in advance, be consistent with fair market value in arms-length transactions and not be determined in a manner that takes into account the volume or value of any referrals or business otherwise generated between the parties. To the best knowledge of the General Partner, the Hospital Contracts entered into by the Partnership do not require that the aggregate rental charge be set in advance and contain other terms which cause the Hospital Contracts not to comply with the Safe Harbor's requirements. When it issued this Safe Harbor, the OIG commented on "per use" charges for equipment rentals. It stated that such arrangements must be examined on a case-by-case basis and may be abusive in certain situations. According to the OIG, payments on a "per use" basis do not necessarily violate the Anti-Kickback Statute, but such payments are not provided Safe Harbor protection. The General Partner cannot give any assurances that the Partnership's Hospital Contracts which involve a "per use" payment to the Partnership by Contract Hospitals would not be deemed to violate the Anti-Kickback Statute. In the commentary introducing the Safe Harbor regulations, the OIG recognized the beneficial effect that business investments in small entities may have on the health care industry. The OIG promulgated a Safe Harbor for investment interests, including limited partnership ownership interests, in small entities which are held by persons in a position to make referrals to the entities so long as eight criteria are met. This Offering does not meet all eight criteria; however, this Offering does meet some of the criteria. Specifically, the terms on which limited partnership interests are offered to physicians who treat their patients on the Lithotripsy System are not related to the previous or expected volume of referrals or amount of business generated by the physicians; there is no requirement that any physician make referrals or be in a position to make referrals as a condition for remaining an investor; there is no cross-referral arrangement involved with the business of the Partnership; the Partnership does not loan funds or guarantee loans for physicians who refer patients for treatment on the Lithotripsy System; and the Distributions to physicians who are Limited Partners are directly proportional to the amount of their capital investment. In order to qualify for Safe Harbor protection, all eight criteria must be met. The General Partner can give no assurance that compliance with some, but not all, of the criteria of the Safe Harbor would prevent the OIG from finding a potential violation of the Anti-Kickback Statute by virtue of this Offering. In November 1999, the OIG issued a Safe Harbor protecting certain physician investment interests in ASCs. The commentary accompanying the new Safe Harbor specifically distinguished physician ownership in ASCs from physician ownership in other facilities, including lithotripsy facilities, end-stage renal disease facilities, comprehensive outpatient rehabilitation facilities and others. The OIG concluded that ASCs benefit from favorable public policy considerations relating to reducing Medicare costs (including through the impending prospective payment system discussed above); other facilities, including lithotripsy facilities, do not share the same policy considerations or reimbursement structures. Therefore, the Safe Harbor status given to certain physician investments in ASCs cannot be viewed as an indication that physician investments in other facilities, including lithotripsy facilities, would not be deemed to violate the Anti-Kickback Statute. Although a separate Safe Harbor was not adopted, HCFA noted in its commentary when the Safe Harbor regulations were issued in 1991 that additional protection may be merited for situations where a physician sees a patient in his or her own office, makes a referral to an entity in which he or she has an ownership interest and performs the service for which the referral is made. In such cases, Medicare makes a payment to the facility for the service it furnishes, which may result in a profit distribution to the physician. HCFA noted that, with respect to the physician's professional fee, such a referral is simply a referral to oneself, and that in such situations, both the professional service fee and the profit distribution from the associated facility fee that are generated from the referral may warrant protection. HCFA stated that its primary concern regarding the above referral situation was the investing physician's ability to profit from any diagnostic testing that is generated from the services he or she performs. The General Partner believes the potential for overutilization posed by referrals for diagnostic services is not present to the same degree with therapeutic services such as lithotripsy where the necessity for the treatment can be objectively determined; i.e., a renal stone can be definitely determined before treatment. The applicability of the Anti-Kickback Statute to physician investments in health care businesses to which they refer patients and which do not qualify for a Safe Harbor has not been the focus of many court decisions, and therefore, judicial guidance is limited. In the only case in which the OIG has attempted to exercise the civil exclusion remedy in the context of a physician-owned joint venture, The Hanlester Network, et al. v. Shalala, the Ninth Circuit for the United States Court of Appeals (the "Court") held that the Anti-Kickback Statute is violated when a person or entity (a) knows that the statute prohibits offering or paying remuneration to induce referrals and (b) engages in prohibited conduct with the specific intent to violate the law. Although the Court upheld a lower court ruling that the joint venture in question violated the Anti-Kickback Statute vicariously through the knowing and willful actions of one of its agents, who was acting outside the parameters of the joint venture's offering documents, the Court concluded there was not sufficient evidence indicating that a return on investment to physicians or other investors in the joint venture could on its own constitute an "offer or payment" of remuneration to make referrals. The Court also stated that since profit distributions in Hanlester were made based on each investor's ownership share and not on the volume of referrals, the fact that large referrals by investors would result in potentially high investment returns did not, standing alone, cause a violation of the Anti-Kickback Statute. The Health Insurance Portability and Accountability Act of 1996 directed the OIG to respond to requests for advisory opinions regarding the effect of the Anti-Kickback Statute on proposed business transactions. The General Partner has not requested the OIG to review this Offering and, to the best knowledge of the General Partner, the OIG has not been asked by anyone to review offerings of this type. Federal regulatory authorities could take the position in future advisory opinions that business transactions similar to this Offering are a means to illegally influence the referral patterns of the prospective physician Limited Partners. Because there is no legal precedent interpreting circumstances identical to these facts, it is not possible to predict how this issue would be resolved if litigated. Whenever an offering of ownership interests is made available to persons with the potential to refer patients for services, there is a possibility that the OIG, HCFA or other government agencies or officials may question whether the ownership interests are being provided in return for or to induce referrals by the new owners. Remuneration, which government officials have said can include the provision of an opportunity to invest in a facility to which a person refers patients for services, may be challenged by the government as constituting a violation of the Anti-Kickback Statute. The risk of such a challenge may be increased in connection with this Offering because the proceeds of any Unit sales will not provide additional capital for the Partnership which would be a typical justification for sales to new investors. Whether the offering of ownership interests to investors who may refer patients to the Partnership might constitute a violation of this law must be determined in each case based upon the specific facts involved. The various mechanisms in place to avoid providing a financial benefit to prospective Limited Partners for any referrals of patients (including the requirement that all distributions of earnings to Limited Partners be made in proportion to their investment interest), the Partnership's utilization review and quality assurance programs, the fact that lithotripsy is a therapeutic treatment the need of which can be objectively determined, and the existence in the General Partner's view of valid business reasons to engage in this transaction, form the basis in part of the General Partner's belief that this Offering is appropriate. The General Partner of the Partnership intends for all business activities and operations of the Partnership to conform in all respects with all applicable anti-kickback statutes (federal or state). The General Partner does not believe that the Partnership's proposed operations violate the Anti-Kickback Statute. No assurance can be given, however, that the proposed activities of the Partnership will not be reviewed and challenged by regulatory authorities empowered to do so, or that if challenged, the Partnership will prevail. If the activities of the Partnership were determined to violate these provisions, the Partnership, the General Partner, officers and directors of the General Partner, and each Limited Partner could be subject, individually, to substantial monetary liability, felony prison sentences and/or exclusion from participation in Medicare, Medicaid and CHAMPUS. A prospective Limited Partner with questions concerning these matters should seek advice from his or her own independent counsel. False Claims Statutes. Federal laws governing reimbursement for medical services generally prohibit an individual or entity from knowingly and willfully presenting a claim (or causing a claim to be presented) for payment from Medicare, Medicaid or other third party payors that is false or fraudulent. The standard for "knowing and willful" includes conduct that amounts to a reckless disregard for whether accurate information is presented by claims processors. Penalties under these statutes include substantial civil and criminal fines, exclusion from the Medicare program and imprisonment. One of the most prominent of these laws is the federal False Claims Act, which may be enforced by the federal government directly, or by a qui tam private plaintiff on the government's behalf. Under the federal False Claims Act, both the government and the private plaintiff, if successful, are permitted to recover substantial monetary penalties and judgments, as well as an amount equal to three times actual damages. In recent cases, some qui tam plaintiffs have taken the position that violations of the Anti-Kickback Statute (discussed above) and Stark II (discussed above) should also be prosecuted as violations of the federal False Claims Act. The Partnership cannot assure that the government, or a reviewing court, would not take the position that billing errors, employee misconduct or violations of other federal statutes, should they occur, are violations of the federal False Claims Act or similar statutes. Some federal courts have recently taken the position that qui tam lawsuits by private plaintiffs are unconstitutional. Most notably, a panel of judges on the Fifth Circuit Court of Appeals took this position in a decision issued in November 1999. That decision is being reviewed by all the judges on the Fifth Circuit. The panel's decision was a minority view; most courts have concluded that qui tam lawsuits are constitutional. In another case, the U.S. Supreme Court may review this issue. Unless and until the Supreme Court decides the issue, prospective Limited Partners should consider the ramifications of the False Claims Act issues discussed in the preceding paragraph. W##889140 V2 - MOBILE KIDNEY-CONF PPM.DOC 47 New Legislation. Two bills currently pending in Congress which would amend or repeal the compensation provisions of the Stark 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 Stark II and the Anti-Kickback laws discussed above. In the event that legislation is enacted which, in the opinion of the General Partner, would adversely affect the operation of the Partnership's business, the General Partner is obligated either to purchase the Partnership Interests of all the Limited Partners or to dissolve the Partnership. See "Summary of the Partnership Agreement - Optional Purchase of Limited Partner Interests." ALS Fraud and Abuse Compliance Guidelines. On March 24, 2000, the American Lithotripsy Society ("ALS") (a voluntary membership organization made up of physicians, health care management personnel, treatment centers and medical suppliers) published Fraud and Abuse Compliance Guidelines for Physician - Owned Lithotripsy Ventures (the "ALS Guidelines"). The ALS Guidelines are aimed at assisting ALS members in recognizing and avoiding certain practices which the ALS believes are unethical or illegal. The ALS Guidelines acknowledge that they are neither authoritative, nor constitute legal advice. Moreover, the ALS Guidelines stipulate that the laws upon which they are based (all of which are discussed in this "Regulation" section) are open to alternative interpretations. Because of the various reasons set forth in this Memorandum, the Company believes the Offering and its operations are appropriate under such laws, however, no assurance can be given that the activities of the Company would be viewed by regulatory authorities as complying with these laws or the ALS Guidelines. FTC Investigation. Issues relating to physician-owned health care facilities have been investigated by the Federal Trade Commission ("FTC"), which investigated two lithotripsy limited partnerships affiliated with the General Partner, to determine whether they posed an unreasonable threat to competition in the health care field. The affiliated limited partnerships were advised in 1996 that the FTC's investigation was terminated without any formal action taken by the FTC or any restrictions being placed on the activities of the limited partnerships. However, the General Partner cannot assure that the FTC will not investigate issues arising from physician-owned health care facilities in the future with respect to the General Partner or any Affiliate, including the Partnership. Ethical Considerations. The American Medical Association's Code of Medical Ethics states that physicians should not refer patients to facilities in which they have an ownership interest unless such physician directly provides care or services to such patient at the facility. Because physician investors will be providing lithotripsy services, the General Partner believes that an investment by a physician will not be in violation of the American Medical Association's Code of Medical Ethics. In the event that the American Medical Association changes its ethical code to preclude such referrals by physicians and such ethical requirements are applied to facilities or services which, at the time of adoption, are owned in whole or in part by referring physicians, the Partnership and the interests of the Limited Partners may be adversely affected. State Regulation California law prohibits the offer, delivery, receipt or acceptance by any licensed person (including physicians) of any money, as compensation or inducement for referring patients. The California Attorney General issued an opinion in 1999 which stated the statute prohibits any situation where the referral of a patient may be induced by considerations other than the best interests of the patients. However, the statute specifically permits referrals to health care facilities in which the physician has an ownership interest, so long as the physician's return on investment for the ownership interest is based on the proportional ownership of the physician and not based on the number or value of any patients referred. To the best knowledge of the General Partner, the Partnership's ownership and investment return structure falls within the exemption to this statute. In 1993, California passed the Physician Ownership and Referral Act, which prohibits physicians from referring patients to certain health services in which the physicians have a financial interest. Those health services are laboratory, diagnostic nuclear medicine, radiation oncology, physical therapy, physical rehabilitation, psychometric testing, home infusion therapy and diagnostic imaging goods and services. If the list of health services were expanded to include lithotripsy services (or surgery services generally), the Partnership would be prohibited from operating under its current method of operations. The General Partner is not aware of any such legislation currently pending in California which would expand the list of health services in this fashion. The Physician Ownership and Referral Act states that any physician who refers a patient to an organization in which the physician has a financial interest for services other than those identified in the previous paragraph, must provide the patient (or the patient's legal guardian) with written notice of such financial interest at the time of the referral. A separate law requires written disclosure of a physician's "significant financial interest" in an entity to which he or she refers patients; "significant financial interest" means $5,000 or five (5) percent of the entity. The law requires disclosure of the financial interest to the patient in writing and advising the patient that the patient may choose another provider to obtain the service. The Partnership will require that its physician Limited Partners comply with this disclosure requirement. California has a false claims statute similar to the federal False Claims Act discussed above. The California false claims statute would be applicable to claims submitted to Medi-Cal for reimbursement for services rendered to Medi-Cal patients. California also prohibits kickbacks for services provided to Medi-Cal patients. For the reasons discussed above with respect to their federal law counterparts, to the best knowledge of the General Partner, neither this Offering nor the business of the Partnership violates either of these California laws. California requires hospitals and ambulatory surgery centers which wish to offer mobile healthcare services at their facilities to apply for an amendment to their licensure status. The amendment assures the hospital or ambulatory surgery center has the physical facilities to accommodate a mobile unit in which patients will be treated. To the best knowledge of the General Partner, this amendment process will not apply with respect to the Partnership's Lithotripsy System, as patients will not be treated in the mobile unit; rather, the lithotripter will be rolled off the Partnership's mobile van and wheeled into an appropriate location within the hospital or center, such as the operating suite. Since patients will be treated on the machine while it is located within the hospital or center, the mobile healthcare service licensure amendment process will not apply. The California Department of Health Services' Licensing and Certification Office, which licenses hospitals and ambulatory surgery centers, expects that the facilities contracting with the Partnership will have appropriate policies and procedures in place with respect to the transportable lithotripter to assure patient care and physical facility needs are met. A certificate of need (CON) is not required before offering lithotripsy services in California. California requires registration of x-ray machines and requires that radiologic technologists be licensed. Many bills introduced in both houses of the California legislature in 1999 concerned health care regulation, and Governor Gray Davis signed a series of health-care related bills into law. Among other things, a new Department of Managed Care was established, and other managed care requirements were enacted. However, to the best knowledge of the General Partner, none of these new laws would have a material adverse effect on the Partnership or this Offering. The General Partner cannot predict whether additional health-care regulatory bills will be introduced or enacted by the California legislature in 2000. The Partnership and the Management Agent have been seeking and will continue to seek to comply with all applicable statutory and regulatory requirements. Further regulations may be imposed in California at any time in the future. Predictions as to the form or content of such potential regulations would be highly speculative. They could apply to the operation of the Lithotripsy System or to the physicians who invest in the Partnership. Such restrictive regulations could materially adversely affect the ability of the Partnership to conduct its business. THE GENERAL PARTNER AND THE PARTNERSHIP BELIEVE LITHOTRIPSY SERVICES WILL CONTINUE TO BE SUBJECT TO INTENSE GOVERNMENTAL REGULATION AT THE FEDERAL AND STATE LEVELS AND, THEREFORE, CANNOT PREDICT THE SCOPE AND EFFECT THEREOF. PROSPECTIVE LIMITED PARTNERS SHOULD CONSULT WITH THEIR LEGAL COUNSEL AS TO THE IMPLICATIONS OF FEDERAL AND STATE LAWS AND PROFESSIONAL ETHICAL CODES DEALING WITH PHYSICIAN OWNERSHIP OF MEDICAL EQUIPMENT AND FACILITIES BEFORE PURCHASING UNITS. PRIOR ACTIVITIES Sun Medical is the general partner of the General Partner. Prime, the sole shareholder of Sun Medical, is the largest and fastest growing provider of lithotripsy services in the United States, providing lithotripsy services at approximately 450 hospitals and surgery centers in 31 states, as well as delivering non-medical services related to the operation of the lithotripters, including scheduling, staffing, training, quality assurance, maintenance, regulatory compliance and contracting with payors, hospitals and surgery centers, while medical care is rendered by urologists utilizing the lithotripters. Prime has an economic interest in 59 mobile and six fixed site lithotripters, all but two of which are operated by Prime, Sun Medical and its Affiliates. Prime began providing lithotripsy services with an acquisition in 1992 and has grown rapidly since that time through acquisitions and de novo development. In November 1995, Prime acquired Sun Medical and thus, a controlling interest in the General Partner. The acquisition of Sun Medical provided Prime with complementary geographic coverage as well as additional expertise in forming and managing lithotripsy operations. Prime and Sun Medical's lithotripters together performed approximately 38,000 lithotripsy procedures in 1999. Approximately 2,300 urologists utilized Prime and Sun Medical's lithotripters in 1999, representing approximately 30% of the estimated 7,700 active urologists in the United States. Prime manages the operations of approximately 63 of its 65 lithotripters. All of its lithotripters are operated in connection with hospitals or surgery centers. Prime operates its lithotripters primarily as the general partner of a limited partnership or through a subsidiary, as is the case with entities affiliated with Sun Medical, including the General Partner. Prime provides a full range of management and other non-medical support services to the lithotripsy operations, while medical care is provided by urologists utilizing the facilities and certain medical support services are provided by the hospital or surgery center. Urologists are investors in 50 of its 65 operations. Prime's lithotripters range in age from one to twelve years. Of its 65 lithotripters, 59 are mobile units mounted in tractor-trailers or self-contained coaches serving locations in 31 states. Prime also operates six fixed site lithotripters in four states. All of Prime's fixed lithotripsy units are located and operated in conjunction with a hospital or surgery center. Most of these locations are in major metropolitan markets where the population can support such an operation. Fixed site lithotripters generally cannot be economically justified in other locations. Prime and Sun Medical believe that they maintain the most comprehensive quality outcomes database and information system in the lithotripsy services industry. Prime has detailed information on over 160,000 procedures covering patient demographic information and medical condition prior to treatment, the clinical and technical parameters of the procedure and resulting outcomes. Information is collected before, during and up to three months after the procedure through internal data collection by doctors, nurses and technicians and through patient questionnaires. For numerous reasons, including differences in financial structure, program size, economic conditions and distribution policies, the success of the General Partner and its Affiliates in the lithotripsy field should not be considered as indicative of the operating results obtainable by the Partnership. SOURCES AND APPLICATIONS OF FUNDS The following table sets forth the funds expected to be available to the Partnership from this Offering if all 20 Units are sold and other sources and their anticipated and estimated uses. - ------------------------------ ------------------------------------------------- Sources of Funds Sale of 40 Units - ------------------------------ ------------------------------------------------- - ------------------------------ -------------------------- ---------------------- Offering Proceeds(1) $60,120 (100%) -------- ------ --------------------------- -------------------------- ---------------------- --------------------------- -------------------------- ---------------------- --------------------------- -------------------------- ---------------------- --------------------------- -------------------------- ---------------------- --------------------------- -------------------------- ---------------------- --------------------------- -------------------------- ---------------------- Syndication Costs(2) $35,000 ( 58%) --------------------------- -------------------------- ---------------------- --------------------------- -------------------------- ---------------------- Repayment of Partnership Debt(3) $25,120 ( 42%) ------- -- ---------------------------- -------------------------- ---------------------- - ------------------------------ -------------------------- ---------------------- TOTAL APPLICATIONS $60,120 (100%) ======= ====== - ------------------------------ -------------------------- ---------------------- W##889140 V2 - MOBILE KIDNEY-CONF PPM.DOC 64 Notes to Sources and Applications of Funds Table (1) Assumes 20 Units are purchased by qualified investors. (2) Includes $3,000 in commissions payable to the Sales Agent, reimbursement of $7,000 to the Sales Agent for out-of-pocket expenses incurred in selling the Units and $25,000 in legal and accounting costs associated with the preparation of this Memorandum. (3) The total outstanding debt of the Partnership incurred pursuant to the Loan from First Citizens Bank & Trust Company for the acquisition of the Partnership's Lithotripsy System is $487,125 as of the date of the Memorandum. Offering Proceeds will first be used by the Partnership to pay offering costs and expenses (up to $35,000), and then the remainder of the proceeds will be used to reduce the existing Partnership debt (up to $25,120). FINANCIAL CONDITION OF THE PARTNERSHIP Set forth on the following pages are the Partnership's internally prepared accrual based (i) Income Statement for the four-month period ended December 31, 1999, (ii) Balance Sheet as of December 31, 1999, (iii) Cash Flow Statement for the four-month period ended December 31, 1999, and (iv) Statements of Partner's Equity for the four-month period ended December 31, 1999. Past financial performance is not necessarily indicative of future performance. There is no assurance that the Partnership will be able to maintain its current revenues or earnings. [The remainder of this page is intentionally left blank] MOBILE KIDNEY STONE CENTERS OF CALIFORNIA III, L.P. INCOME STATEMENT Four Months Ended December 31, 1999 Revenues $261,875 Operating Expenses Employee compensation and benefits 47,456 Equipment maintenance and repairs 8,639 Depreciation and amortization 31,617 Management fees 4,245 Overhead allocation 32,440 Other operating expenses 33,129 -------------- Total operating expenses $157,526 Operating income 104,349 Other income (expense) Interest and other income, net 283 Interest expense (9,641) Organization and syndication costs __(31,465) -------- Total other income (expense) __(40,823) -------- Net income $ 63,526 ============ *See notes to financial statements attached hereto as Appendix C. MOBILE KIDNEY STONE CENTERS OF CALIFORNIA III, L.P. BALANCE SHEET December 31, 1999 ASSETS Cash $112,764 Accounts receivable, net 120,275 Other current assets 2,051 ---------- Total current assets 235,090 Equipment 507,362 Accumulated depreciation (31,617) --------- 475,745 Other assets 0 Total assets $710,835 ========= LIABILITIES Accounts payable $ 27,504 Distributions payable 0 -------------- Total current liabilities 27,504 Long term debt 487,125 PARTNERS' EQUITY Capital contributions 244,180 Syndication costs (11,500) Distributions paid (100,000) Accumulated earnings 63,526 --------- Total partners' equity 196,206 Total liabilities and partners' equity $710,835 ======== *See notes to financial statements attached hereto as Appendix C. MOBILE KIDNEY STONE CENTERS OF CALIFORNIA III, L.P. STATEMENT OF CASH FLOWS Four Months Ended December 31, 1999 Cash flows from Operating Activities: Net income $ 63,526 Adjustments to reconcile net income to cash provided by operating activities: Depreciation and amortization 31,617 Change in operating assets and liabilities: Accounts receivable (120,275) Other current assets (2,051) Accrued expenses 27,504 ------- Net cash provided by operating activities 321 -------- Cash flows from Investing Activities: Purchase of equipment, furniture and fixture (507,362) Net cash (used in) investing activities (507,362) --------- Cash flows from Financing Activities: Cash borrowed from banks 487,125 Capital contributed by partners (net) 232,680 Distributions to partners (100,000) --------- Net cash (used in) financing activities 619,805 --------- Net increase (decrease) in cash during the period 112,764 --------- Cash, beginning of period 0 -------------- Cash, end of period $112,764 ======== $112,764 *See notes to financial statements attached hereto as Appendix C. MOBILE KIDNEY STONE CENTERS OF CALIFORNIA III, L.P. STATEMENT OF PARTNERS' EQUITY Four Months Ended December 31, 1999 Beginning partners' equity $ 0 Capital contributions $244,180 Syndication costs ($ 11,500) Net income $ 63,526 Distributions to partners (100,000) --------- Ending partners' equity $196,206 ======== $196,206 *See notes to financial statements attached hereto as Appendix C. [The remainder of the page is intentionally left blank.] SUMMARY OF THE PARTNERSHIP AGREEMENT The Partnership Agreement sets forth the powers and purposes of the Partnership and the respective rights and obligations of the General Partner and the Limited Partners. The following is only a summary of certain provisions of the Partnership Agreement, and does not purport to be a complete statement of the various rights and obligations set forth therein. A complete copy of the Partnership Agreement is set forth as Appendix A to this Memorandum, and Investors are urged to read the Partnership Agreement in its entirety and to review it with their counsel and advisors. Nature of Limited Partnership Interest The Investors will acquire their interests in the Partnership in the form of Units. For each Unit purchased, a cash payment of $3,006 is required in addition to a personal guaranty of 1% of the Partnership's obligations under the Loan (up to a $4,871.25 principal guaranty obligation). The per Unit cash purchase price and execution and delivery of the Guaranties are both due upon subscription. No Limited Partner will have any liability for the debts and obligations of the Partnership by reason of being a Limited Partner except to the extent of (i) his Capital Contribution (ii) his liability under his Guaranty, (iii) his proportionate share of the undistributed profits of the Partnership, and (iv) the amount of certain Distributions received from the Partnership as provided by the Act or other applicable law. See "Risk Factors - Other Investment Risks - Limited Partners' Obligation to Return Certain Distributions." See also Form of Legal Opinion of Counsel, attached hereto as Appendix B. Dilution Offerings The General Partner has the authority to periodically offer and sell additional limited partnership interests in the Partnership (a "Dilution Offering") to persons who are not investors in the Partnership ("Qualified Investors"). The primary purpose of Dilution Offerings would be to raise additional capital for any legitimate Partnership purpose. Any sale of limited partnership interests in a Dilution Offering will result in proportionate dilution of the Percentage Interests of the existing Partners; i.e., the interests of the General Partner and of the Limited Partners in Partnership allocations, cash distributions and voting rights will be proportionately reduced as a result of a successful Dilution Offering. Limited Partners have no right to purchase additional limited partnership interests offered by the Partnership in a Dilution Offering; however, the General Partner has the right to make capital contributions or purchase additional limited partnership interests offered in a Dilution Offering in order to avoid dilution. Unless otherwise agreed by the General Partner and a Majority in Interest of the Limited Partners, any additional limited partnership interests offered in a Dilution Offering will be sold for a price no lower than the highest price for which proportionate limited partnership interests in the Partnership have been previously sold by the Partnership. Fundamental Changes Under the terms of the Partnership Agreement, the General Partner with the prior approval of a Majority in Interest of the Limited Partners may cause the Partnership to engage in certain transactions in the future, any of which transactions could result in the termination or reorganization of the Partnership and a partial or total dilution of all Limited Partners' interests in the Partnership. The General Partner could propose a plan providing for merger or consolidation of the Partnership with another entity; the sale of all or substantially all of the Partnership's assets to another entity; or any other reorganization, reclassification or exchange of the Partnership Interests, including without limitation the exchange of Partnership Interests for equity interests in another entity or for cash or other consideration. If such a plan were adopted, the Limited Partners are obligated by the terms of the Partnership Agreement to take or refrain from taking, as the case may be, such actions as the plan may provide, including, without limitation, executing such instruments, and providing such information as the General Partner may reasonably request. Any such plan may also result in an amendment to the Partnership Agreement or the adoption of a new partnership agreement in connection with the merger of the Partnership with another entity as provided in Section 15678.2(e) of the Act. The plan may also provide that the General Partner and its affiliates will receive fees for services rendered in connection with the operation of the Partnership or any successor entity following the consummation of the transactions described in the plan, and neither the Partnership nor the Limited Partners will have any right by virtue of the Partnership Agreement in the fees to be derived therefrom. Any securities or other consideration to be distributed to the Partners pursuant to any such plan shall be distributed in the manner set forth in the Partnership Agreement as though the Partnership were being liquidated. Although the General Partner will endeavor to keep the Limited Partners apprised of all relevant information regarding the above transactions, the General Partner is not obligated to provide such information in any particular manner concerning the risks and effect of the proposed transaction; the fairness of the proposed transaction to the Partnership and the Limited Partners; comparative distributions to the General Partner under the Partnership operations and under the proposed reorganization; the method of valuing the Partnership in the proposed transaction and the method of allocating value among various participants in the proposed transaction; the background, reasons for and alternatives to the transaction; and conflicts of interest of the General Partner in the proposed reorganization. In December 1993, Congress passed legislation amending portions of the Securities Exchange Act of 1934 to afford new protections to limited partnership investors in the context of certain limited partnership mergers and reorganizations commonly known as partnership rollups. The law, known as the "Limited Partnership Rollup Reform Act of 1993" (the "Reform Act"), became effective on December 17, 1994, and applies to certain rollup transactions proposed after such date. The Reform Act and the Rules promulgated thereunder are applicable only to certain types of partnership rollups and, when applicable, provide limited partners with the following protections: (i) allows and facilitates communication between limited partners during their consideration of a proposed rollup; (ii) allows the limited partners to obtain a list of the other limited partners involved in the rollup; (iii) disallows the practice of compensating persons soliciting the limited partners' approval of the rollup based on the number of approvals received; (iv) requires greater disclosure to the limited partners of the terms of the rollup and its effects on the limited partners including (a) the reason for the rollup and consideration of the alternatives; (b) the method of allocating interests in the successor entity to the limited partners and why such method was chosen; (c) comparative information including changes in limited partner voting rights, changes in distributions to the limited partners and changes in compensation to the general partner; (d) conflicts of interest of the general partner; (e) changes in the partnership's business plan; (f) the valuation of the limited partnership interests; (g) any significant difference between the exchange values of the limited partnerships and the trading price of the securities to be issued in the rollup transaction; (h) the risks and effects of the proposed rollup transaction; (i) a statement by the general partner of the fairness of the rollup and the general partner's basis for such opinion; (j) full disclosure of any opinion (other than opinions of counsel) or appraisal received by the general partner related to the proposed transaction, or if no such opinion or appraisal was sought by the general partner, an explanation of why no such opinion or appraisal is necessary to permit the limited partners to make an informed decision regarding the proposed transaction; (k) the rights of the limited partners to exercise dissenters' or appraisal rights or similar rights; (l) the method for allocating rollup consideration to the limited partners and an explanation why such method was chosen; and (m) tax consequences of the rollup; and (v) requires a minimum 60 day offering period during which the limited partners may consider the proposed rollup (or such shorter period as required by state law). Further, the Reform Act also provides that related Rules of Fair Practice will be amended to prohibit exchanges and national securities associations from listing securities issued in connection with a rollup unless the limited partners are afforded the following protections: (i) dissenting limited partners must have the right to one of the following: (a) to receive an appraisal and compensation; (b) to retain a security under substantially similar terms as the original issue; (c) to approve of the rollup by a vote of not less than 75% of the outstanding securities of each participating partnership, or; (d) to use an independent committee to negotiate the terms of the transaction. (ii) not to have their voting power unfairly reduced or abridged. (iii) not to bear an unfair proportion of the costs of the rollup transaction. The Reform Act applies only to certain types of rollup transactions, and there is no certainty that any plan considered by the Partnership at any time would be subject to the Reform Act. Thus Investors must assume in making an investment in the Units that their Partnership Interest will be subject to the provisions of the Partnership Agreement permitting fundamental changes which could result in the termination or reorganization of the Partnership and a partial or total dilution of all Limited Partners' interests in the Partnership. Profits, Losses and Distributions The following is a summary of certain provisions of the Partnership Agreement relating to the allocation and distribution of the Profits, Losses, Partnership Cash Flow, Partnership Refinancing Proceeds, Partnership Sales Proceeds, and cash upon dissolution of the Partnership. Investors should note that the Percentage Interests referenced in the discussion below could change as a consequence of a future Dilution Offering. Because an understanding of the defined financial terms is essential to an evaluation of the information presented below, Investors are urged to review carefully the definitions of the terms appearing in the Glossary. 1. Allocations. Losses. After giving effect to the special allocations set forth below, the Partnership's Losses, if any, for each Year generally will be allocated to the Partners in accordance with their respective Percentage Interests. Profits. After giving effect to the special allocations set forth below, the Partnership's Profits for any Year generally will be allocated to the Partners in accordance with their respective Percentage Interests. All items of income, gain, loss, deduction, or credit will be allocated among the Partners proportionately. Further, notwithstanding the foregoing, after giving effect to certain special allocations, the General Partner must be allocated at least 1% of all items of income, gain, loss, deduction or credit. 2. Special Allocations. The following special allocations shall be made in the following order: (i) Partnership Minimum Gain Chargeback. If there is a net decrease in Partnership Minimum Gain during any Year, each Partner shall be specially allocated items of Partnership income and gain for such Year (and, if necessary, subsequent Years) in an amount equal to such Partner's share of the net decrease in Partnership Minimum Gain, determined in accordance with Treasury Regulations Section 1.704-2(g)(2). Allocations made pursuant to the previous sentence will be made in proportion to the respective amounts required to be allocated to each Partner pursuant to that section of the Regulations. This provision relating to Partnership Minimum Gain Chargebacks is intended to comply with Treasury Regulations Section 1.704-2(f) and will be interpreted and applied in a manner consistent with that Regulation. (ii) Partner Minimum Gain Chargeback. If there is a net decrease in Partner Minimum Gain attributable to a Partner Nonrecourse Debt during any Year, each Partner who has a share of the Partner Minimum Gain attributable to such Partner Nonrecourse Debt shall be specially allocated items of Partnership income and gain for such Year (and, if necessary, subsequent Years) in an amount equal to such Partner's share of the net decrease in Partner Minimum Gain attributable to such Partner Nonrecourse Debt, to the extent required and determined in accordance with Treasury Regulations Section 1.704-2(i)(4). Allocations pursuant to the previous sentence will be made in proportion to the respective amounts required to be allocated to each Partner pursuant to that section of the Regulations. This provision relating to Partner Minimum Gain Chargebacks is intended to comply with Regulation Section 1.704-2(i)(4) and will be interpreted and applied in a manner consistent with that Regulation. (iii) Qualified Income Offset. If a Partner unexpectedly receives any adjustments, allocations or distributions described in Treasury Regulations Sections 1.704-1(b)(2)(ii)(d)(4) through (6) which causes or increases a deficit balance in such Partner's Capital Account (as adjusted pursuant to Treasury Regulations Section 1.704-1(b)(2)(ii)(d)), items of Partnership income and gain will be specially allocated to each such Partner in an amount and manner sufficient to eliminate, to the extent required by the Regulations, the deficit Capital Account of such Partner as quickly as possible, provided that an allocation pursuant to this provision shall be made only if and to the extent that such Partner would have a deficit Capital Account after all other allocations have been tentatively made as if this provision were not in the Partnership Agreement. This provision is intended to be a "qualified income offset," as defined in Regulation Section 1.704-1(b)(2)(ii)(d). (iv) Sales Commission. The Sales Commission shall be allocated to the Units which are acquired in this Offering in proportion to the respective capital contributions represented by such Units (i.e., $150 in Sales Commissions per each such Unit). 3. Allocations Between Transferor and Transferee. In the event of the transfer of all or any part of a Partner's interest (in accordance with the provisions of the Partnership Agreement) in the Partnership at any time other than at the end of a year, or the admission of a new Partner (in accordance with the provisions of the Partnership Agreement), the transferring or new Partner's share of the Partnership's income, gain, loss, deductions and credits, as computed both for accounting purposes and for federal income tax purposes, will be allocated between the transferor Partner and the transferee Partner (or Partners), or the new Partner and the other Partners, as the case may be, in the same ratio as the number of days in such year before and after the date of the transfer or admission; provided, however, that if there has been a sale or other disposition of the assets of the Partnership (or any part thereof) during such year, then upon the mutual agreement of all the Partners (excluding the new Partner and the transferring Partner), the Partnership may in its sole discretion treat the periods before and after the date of the transfer or admission as separate years and allocate the Partnership's net income, gain, net loss, deductions and credits for each of such deemed separate years. Notwithstanding the foregoing, the Partnership's "allocable cash basis items," as that term is used in Section 706(d)(2)(B) of the Code, shall be allocated as required by Section 706(d)(2) of the Code and the Regulations thereunder. See "Risk Factors - Tax Risks - Partnership Allocations." 4. Incoming Partner Allocations. The Code prohibits the retroactive allocation of a full share of partnership items to persons who were partners for less than the entire year. As provided above, the Partnership Agreement provides that items of income, gain, loss, deductions and credits will be allocated between a transferor Partner and a transferee Partner in the same ratio as the number of days in the year before and after the date of the transfer or admission, unless the Partnership has sold any of its assets in the year of the transfer or admission. If the Partnership has sold any of its assets in the year of the transfer or admission, then the General Partner may elect, in its sole discretion, to use the interim closing of the books method described above. See "Risk Factors - Tax Risks - Partnership Allocations." 5. Other Allocations. The Partnership Agreement provides for other allocations. Investors are encouraged carefully to review the Partnership Agreement attached as Appendix A. 6. Distributions. The Limited Partnership Agreement authorizes the following Distributions to be made to the Partners: Distribution of Partnership Cash Flow. Partnership Cash Flow will be distributed to the Partners within 60 days after the end of each Year of the Partnership, or earlier in the discretion of the General Partner in accordance with their respective Percentage Interests. Distribution of Partnership Sales Proceeds and Partnership Refinancing Proceeds. Partnership Sales Proceeds and Partnership Refinancing Proceeds will be distributed to the Partners within 60 days of the Capital Transaction giving rise to such proceeds. Distribution Upon Dissolution. Upon the dissolution and termination of the Partnership, the General Partner, or if there is none, a representative of the Limited Partners, will cause the cancellation of the Partnership's Certificate of Limited Partnership, liquidate the assets of the Partnership, and apply and distribute the proceeds of such liquidation in the following order of priority: (i) First, to the payment of debts and liabilities of the Partnership (including amounts owed to the General Partner and its Affiliates) and the expenses of liquidation; (ii) Second, to the creation of any reserves that the General Partner or the representatives of the Limited Partners may deem reasonably necessary for the payment of any contingent or unforeseen liabilities or obligations of the Partnership or of the General Partner arising out of or in connection with the business and operation of the Partnership; and (iii) Third, the balance, if any, will be distributed to the Partners in accordance with the Partners' positive Capital Account balances after such Capital Accounts are adjusted as provided in the Partnership Agreement, and any other adjustments required by the final Regulations under Section 704(b) of the Code. Any general partner with a negative Capital Account following distribution of the liquidation proceeds or the liquidation of its interest in the Partnership must contribute to the Partnership an amount equal to such negative capital account on or before the later of the end of the Partnership's taxable year or within 90 days after the date of liquidation. Any capital so contributed will be (i) distributed to those Partners with positive capital accounts until such capital accounts are reduced to zero, and/or (ii) used to discharge recourse liabilities. It is intended that Capital Accounts will allow for liquidation distributions consistent with the manner in which Partnership Sales Proceeds and Partnership Refinancing Proceeds are distributed; however, there can be no assurance that such will be the case. Tax Withholding. The Partnership is authorized to pay, on behalf of any Partner, any amounts to any federal, state or local taxing authority, as may be necessary for the Partnership to comply with tax withholding provisions of the Code or the income tax or revenue laws of any taxing authority. To the extent the Partnership pays any such amounts that it may be required to pay on behalf of a Partner, such amounts will be treated as a cash Distribution to such Partner and will reduce the amount otherwise distributable to him. Management of the Partnership The General Partner has the sole right to manage the business of the Partnership and at all times is required to exercise its responsibilities in a fiduciary capacity. The consent of the Limited Partners is not required for any sale or refinancing of the Lithotripsy System or the purchase of new equipment by the Partnership. The Partnership has contracted with the Management Agent to manage and administer the day-to-day operations of the Lithotripsy System. See "Business Activities - Management." Under the Partnership Agreement, if the General Partner is adjudged by a court of competent jurisdiction to be liable to the Limited Partners or the Partnership for acts or omissions of gross negligence or constituting willful misconduct, the General Partner may be removed and another substituted with the consent of all of the Limited Partners. Powers of the General Partner 1. General. The General Partner may, in its absolute discretion, borrow money, acquire, encumber, hold title to, pledge, sell, release or otherwise dispose of, all or any part of the Partnership's assets, when and upon such terms as it determines to be in the best interest of the Partnership and employ such persons as it deems necessary for the operation of the Partnership. The General Partner, however, is expressly prohibited from, among other things: (i) possessing Partnership assets or assigning the rights of the Partnership in Partnership assets or the Lithotripsy System for other than Partnership purposes; (ii) admitting Limited Partners except as provided in the Partnership Agreement; and (iii) performing any act (other than an act required by the Partnership Agreement or any act taken in good faith reliance upon Counsel's opinion) which would, at the time such act occurred, subject any Limited Partner to liability as a general partner in any jurisdiction. 2. Tax Matters. (i) Elections. The General Partner will, in its sole discretion, make for the Partnership any and all elections for federal, state and local tax purposes including, without limitation, any election, if permitted by applicable law, to adjust the basis of the Partnership's property pursuant to Code Sections 754, 734(b) and 743(b), or comparable provisions of state or local law, in connection with transfers of interests in the Partnership and Partnership Distributions. (ii) Tax Matters Partner. The Partnership Agreement designates the General Partner as the Tax Matters Partner (as defined in Section 6231 of the Code) and authorizes it to act in any similar capacity under state or local law. As the Tax Matters Partner, the General Partner is authorized (at the Partnership's expense): (i) to represent the Partnership and Partners before taxing authorities or courts of competent jurisdiction in tax matters affecting the Partnership or Partners in their capacity as Partners; (ii) to extend the statute of limitations for assessment of tax deficiencies against Partners with respect to adjustments to the Partnership's federal, state or local tax returns; (iii) to execute any agreements or other documents relating to or affecting such tax matters, including agreements or other documents that bind the Partners with respect to such tax matters or otherwise affect the rights of the Partnership and Partners; and (iv) to expend Partnership funds for professional services and costs associated therewith. In its capacity as Tax Matters Partner, the General Partner shall oversee the Partnership tax affairs in the manner which, in its best judgment, are in the interests of the Partners. Moreover, the General Partner will, in its sole discretion, not make an election pursuant to Treasury Regulation 301.7701.3 to be treated as an association taxable as a corporation. Rights and Liabilities of the Limited Partners The Limited Partners do not have any right to participate in the management or control of the business of the Partnership. Limited Partners are not required to make any capital contributions to the Partnership except amounts agreed by them to be paid, or pay or be personally liable for, any expense, liability or obligation of the Partnership, except (i) to the extent of their respective interests in the Partnership, (ii) for the obligation to return certain Distributions made to them as provided by the Act, and (iii) to the extent of their liabilities pursuant to their respective Guaranties. See "Risk Factors - Other Investment Risks - Limited Partners' Obligations to Return Certain Distributions" and "Operating Risks - Liability Under the Guaranty." Restrictions on Transfer of Partnership Interests No Partnership Interest nor any Units may be transferred without the prior written consent of the General Partner, which approval may be granted or denied in the sole discretion of the General Partner, and subject to the satisfaction of certain other conditions set forth in the Partnership Agreement. The Partnership Agreement contains additional limitations on transfer, including provisions prohibiting transfer that would violate federal or state securities laws. No transferee of the Units will automatically become a Limited Partner. Admission of a transferee requires the fulfillment of other obligations enumerated in the Partnership Agreement, including either the approval of a Majority in Interest of the Limited Partners (except the assignor Limited Partner) and the General Partner, or the approval of the assignor Limited Partner and the General Partner. Any transferee of a Partnership Interest who has not been admitted to the Partnership as a Partner shall not be entitled to any of the rights, powers or privileges of his transferor except the right to receive and be credited or debited with his proportionate share of Partnership income, gains, profits, losses, deductions, credits or distributions. A transferor Limited Partner will not be released from his personal liability under the Guaranty upon the transfer of his Partnership Interest, unless otherwise specifically agreed by the Bank at the time of the transfer. The General Partner may transfer all or a portion of its Partnership Interest only with the consent of a Majority in Interest of the Limited Partners before the transferee can be admitted as a Substitute General Partner. Notwithstanding the foregoing, the Partnership Agreement gives the General Partner the authority to transfer all or part of its General Partner interest to any transferee controlled by it or one or more of its Affiliates without obtaining the Limited Partners' consent. Any such transferee would automatically be a Substitute General Partner. Both the admission of any new shareholder and the withdrawal of any shareholder from the General Partner may be done without the approval of the Limited Partners. Dissolution and Liquidation The Partnership will dissolve and terminate for any of the following reasons: 1. The sale, exchange or disposition of all or substantially all of the property of the Partnership without making provision for the replacement thereof (except to the extent otherwise provided in a reorganization plan approved by the General Partner and a Majority in Interest of the Limited Partners as described above); 2. The expiration of its term on December 31, 2049; 3. The bankruptcy or occurrence of certain other events with respect to the General Partner; 4. The determination of the General Partner that the Partnership should be dissolved; or 5. The election to dissolve the Partnership made by the General Partner in the event of certain legislation, case law or regulatory changes adversely affecting the operation of the Partnership. 6. The election to dissolve the Partnership made by all of the Partners. The retirement, resignation, bankruptcy, assignment for the benefit of creditors, dissolution, death, disability or legal incapacity of a general partner will not, however, result in a termination of the Partnership if the remaining general partner or general partners, if any, elect to continue the business of the Partnership, or if no general partner remains, if within 90 days of the occurrence of one of such events, a Majority in Interest of the Limited Partners elect in writing to continue the Partnership and, if necessary, designate a new general partner. Upon dissolution, the General Partner or, if there is none, a representative of the Limited Partners, will liquidate the Partnership's assets and distribute the proceeds thereof in accordance with the priorities set forth in the Partnership Agreement. See "Profits, Losses and Distributions - Distributions - Distribution upon Dissolution" above and "Optional Purchase of Limited Partner Interests" below. Optional Purchase of Limited Partner Interests As provided in the Partnership Agreement, the General Partner has the option (which it may assign to the Partnership in its sole discretion) to purchase all the interest of a Limited Partner who (i) dies, (ii) becomes the subject of a domestic proceeding, (iii) becomes insolvent, (iv) acquires a direct or indirect ownership of an interest in a competing venture (including the lease or sublease of competing technology), or (v) defaults on his obligations under the Guaranty. Except in the case of the death of a Limited Partner, the option purchase price is an amount equal to the lesser of the fair market value of the Partnership Interest to be purchased or the Limited Partner's share of the Partnership's book value, if any, as reflected by the Limited Partner's capital account in the Partnership (unadjusted for any appreciation in Partnership assets and as reduced by depreciation deductions claimed by the Partnership for tax purposes). The option purchase price is likely to be considerably less than the fair market value of a Limited Partner's interest in the Partnership. Because losses, depreciation deductions and Distributions reduce capital accounts, and because appreciation in assets is not reflected in capital accounts, it is the opinion of the General Partner that the option purchase price may be nominal in amount. In addition, in the event existing or newly enacted laws or regulations or any other legal developments adversely affect (or potentially adversely affect) the operation of the Partnership or the business of the Partnership (e.g., any prohibitions on provider ownership), the General Partner, in its sole discretion, is obligated to either (i) purchase the Partnership Interests of all of the Limited Partners for an amount equal to the lesser of fair market value or book value or (ii) dissolve the Partnership. In the event of the death of a Limited Partner, the option purchase price for that Partner's Partnership Interest is an amount equal to the greater of (i) one and one-half times the aggregate distributions made with respect to the Partnership Interest during the twelve-month period ending the last day of the month immediately preceding the month in which the death occurs or (ii) the Limited Partner's share of the Partnership's book value, if any (prorated in the event that only a portion of his Partnership Interest is being purchased) as reflected by the Capital Account of the Limited Partner. If the General Partner exercises the purchase option the General Partner will assume any liabilities under any personal Guaranty still outstanding with respect to the withdrawing Limited Partner. The withdrawing Limited Partner will not be released from his obligations under the Guaranty unless so agreed by the Bank. See the Partnership Agreement attached hereto as Appendix A and "Risk Factors - Operating Risks - Liability Under the Guaranty." Noncompetition Agreement and Protection of Confidential Information The Partnership Agreement provides that each Limited Partner is prohibited from having a direct or indirect ownership of an interest in a competing venture (including the lease or sublease of competing technology) other than an interest held by a Limited Partner in the General Partner or one of its Affiliates (such non-excluded interests, the "Outside Activities"). While they are Limited Partners in the Partnership, each Limited Partner is precluded from engaging in any Outside Activities, provided that the General Partner is authorized, in its sole discretion, to waive this restriction with respect to any ownership interest of a Limited Partner in an Outside Activity acquired before the date the person becomes a Limited Partner. In the event that a Limited Partner's interest in the Partnership is terminated or transferred upon the occurrence of certain events as provided in the Partnership Agreement, he or she is precluded, for a period of two (2) years following the date of his withdrawal, from engaging in any Outside Activity within any market area in which the Partnership is providing services or has provided services within the twelve months preceding the withdrawal. This prohibition is in addition to the right of the General Partner to acquire the interest of a Limited Partner engaged in an Outside Activity as provided in the Partnership Agreement. See "Optional Purchase of Limited Partner Interests" in this Section, and the Partnership Agreement attached hereto as Appendix A. In addition, the Partnership Agreement provides that each Limited Partner acknowledges and agrees that his participation in the Partnership necessarily involves his access to confidential information that is proprietary in nature and, therefore, the exclusive property of the Partnership. Accordingly, the Limited Partners (other than the General Partner and its Affiliates who hold Limited Partner interests) are precluded from disclosing such confidential information during their participation as Limited Partners in the Partnership or thereafter unless required by law or with the prior written consent of the Partnership. Arbitration The Partnership Agreement provides that disputes arising thereunder shall be resolved by submission to arbitration in accordance with the provisions of California law. Power of Attorney Each Investor, by executing the Subscription Agreement, irrevocably appoints Cheryl Williams and Stan Johnson, 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 Cheryl Williams and Stan Johnson, severally, to act as his attorneys-in-fact to make, execute, swear to and file any document necessary to the conduct of the Partnership's business, such as deeds of conveyance of real or personal property as well as any amendment to the Partnership Agreement or to any certificate of limited partnership which accurately reflects actions properly taken by the Partners. Reports to Limited Partners Within 90 days after the end of each Year of the Partnership, the General Partner will send to each person who was a Limited Partner at any time during such year such tax information, including, without limitation, Federal Tax Schedule K-1, as will be reasonably necessary for the preparation by such person of his federal income tax return, and such other financial information as may be required by the Act. Records Proper and complete records and books of account will be kept by the General Partner or the Management Agent in which will be entered fully and accurately all transactions and other matters relative to the Partnership's business as are usually entered into records, books and accounts maintained by persons engaged in businesses of a like character. Pursuant to applicable law, the Partnership books and records will be kept on the accrual method basis of accounting. The Partnership's fiscal year will be the calendar year. The books and records will be located at the Partnership's office, and will be open to the reasonable inspection and examination of the Limited Partners or their duly authorized representatives during normal business hours as provided by the Act. LEGAL MATTERS On the Closing Date, it is expected that Womble Carlyle Sandridge & Rice, 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 B to this Memorandum. See "Risk Factors - Tax Risks." ADDITIONAL INFORMATION The Partnership will make available to you the opportunity to ask questions of its management and to obtain information to the extent it possesses such information or can acquire it without an unreasonable effort or expense, which is necessary to verify the accuracy of the information contained herein or which you or your professional advisors desire in evaluating the merits and risks of an investment in the Partnership. Copies of certain Hospital Contracts and insurance reimbursement agreements may not, however, be available due to confidentiality restrictions contained therein. GLOSSARY Certain terms in this Memorandum shall have the following meanings: Act. The Act means the California Revised Limited Partnership Act, as in effect on the date hereof. Affiliate. An Affiliate is (i) any person, partnership, corporation, association or other legal entity ("person") directly or indirectly controlling, controlled by or under common control with another person, (ii) any person owning or controlling 10% or more of the outstanding voting interests of such other person, (iii) any officer, director or partner of such person and (iv) if such other person is an officer, director or partner, any entity for which such person acts in such capacity. Bank. First-Citizens Bank & Trust Company. ---- Capital Account. The Partnership capital account of a Partner as computed pursuant to the Partnership Agreement. Capital Contributions. All capital contributions made by a Partner or his predecessor in interest which shall include, without limitation, contributions made pursuant Article VII of the Partnership Agreement. Capital Transaction. Any transaction which, were it to generate proceeds, would produce Partnership Sales Proceeds or Partnership Refinancing Proceeds. Closing Date. 5:00 p.m., Eastern Time, on June 1, 2000 (or earlier in the discretion of the General Partner). The Closing Date may be extended for a period of up to 180 days in the discretion of the General Partner. Code. The Internal Revenue Code of 1986, or corresponding provisions of subsequent, superseding revenue laws. Contract Hospitals. The 7 hospitals and medical centers to which the Partnership provides lithotripsy services pursuant to 7 separate Hospital Contracts. Counsel. Womble Carlyle Sandridge & Rice, a Professional Limited Liability Company, P.O. Drawer 84, Winston-Salem, North Carolina 27102. Dilution Offering. Pursuant to the terms of the Partnership Agreement, the future offering of additional limited partnership interests in the Partnership by the General Partner. Any such offering generally will proportionally reduce the existing Percentage Interests of the then current Partners in the Partnership; provided, however, that the General Partner may avoid dilution by either making a proportional additional capital contribution or buying units in a Dilution Offering. Distributions. Cash or other property, from any source, distributed to Partners. Escrow Agent. First-Citizens Bank & Trust Company. ------------ 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, Mobile Kidney Stone Centers of California, Ltd. I, a California limited partnership and an Affiliate of Prime. Guaranty. The Guaranty Agreement in the form included in the Subscription Packet accompanying this Memorandum pursuant to which each new Limited Partner will guarantee his pro rata portion of the Partnership's obligations to the Bank under the Loan. Hospital Contracts. The 7 separate lithotripsy services agreements the Partnership has entered into with the Contract Hospitals. Investors. Potential purchasers of Units. --------- Limited Partners. The current Limited Partners and those Investors in the Units admitted to the Partnership pursuant to this Offering and any person admitted as a substitute Limited Partner in accordance with the provisions of the Partnership Agreement. Lithotripsy System. The van with the installed and operational Modulith(R)SLX-T owned and operated by the Partnership and any other additional or replacement lithotripter and transport vehicle. Loan. The loan of $487,125 from the Bank to the Partnership. Loan proceeds were used by the Partnership to (i) acquire a new lithotripter, (ii) acquire and upfit a new mobile van and (iii) pay sales taxes on the purchases of the lithotripter and the van. The Loan is secured by the Lithotripsy System, the Partnership's accounts receivable and other Partnership assets, the guaranty of the General Partner, and the Limited Partner Guaranties. Loss. The net loss (including capital losses and excluding Net Gains from Capital Transactions) of the Partnership for each year as determined by the Partnership for federal income tax purposes. Management Agent. Sun Medical Technologies, Inc., a California corporation and a wholly-owned subsidiary of Prime. The Management Agent also is the sole general partner of the General Partner. Memorandum. This Confidential Private Placement Memorandum, including all Appendices hereto, and any amendment or supplement hereto. Modulith(R) SLX-T. The Partnership's Storz Modulith(R) SLX Transportable ("SLX-T") model extracorporeal shock-wave lithotripter manufactured by Storz which the Partnership acquired with the proceeds of the Loan. Net Gains from Capital Transactions. The gains realized by the Partnership as a result of or upon any sale, exchange, condemnation or other disposition of the capital assets of the Partnership (which assets shall include Code Section 1231 assets) or as a result of or upon the damage or destruction of such capital assets. Nonrecourse Deductions. A deduction as set forth in Treasury Regulations Section 1.704-2(b)(1). The amount of Nonrecourse Deductions for a given Year equals the excess, if any, of the net increase, if any, in the amount of Partnership Minimum Gain during such Year over the aggregate amount of any Distributions during such Year of proceeds of a Nonrecourse Liability that are allocable to an increase in Partnership Minimum Gain, determined according to the provisions of Treasury Regulations Section 1.704-2(h). Nonrecourse Liability. Any partnership liability (or portion thereof) for which no Partner bears the "economic risk of loss," within the meaning of Treasury Regulations Section 1.704-2(i). Offering. The offering of Units pursuant to this Memorandum. -------- Partner Minimum Gain. An amount, with respect to each Partner Nonrecourse Debt, equal to the Partnership Minimum Gain that would result if such Partner Nonrecourse Debt were treated as a Nonrecourse Liability, determined in accordance with Treasury Regulations Section 1.704-2(i). Partner Nonrecourse Debt. Any nonrecourse debt (for the purposes of Treasury Regulations Section 1.1001-2) of the Partnership for which any Partner bears the "economic risk of loss," within the meaning of Treasury Regulations Section 1.752-2. Partner Nonrecourse Deductions. Deductions as described in Treasury Regulations Section 1.704-2(i)(2). The amount of Partner Nonrecourse Deductions with respect to a Partner Nonrecourse Debt for any Year equals the excess, if any, of the net increase, if any, in the amount of Partner Minimum Gain attributable to such Partner Nonrecourse Debt during such Year over the aggregate amount of any Distributions during that Year to the Partner that bears the economic risk of loss for such Partner Nonrecourse Debt to the extent such Distributions are from the proceeds of such Partner Nonrecourse Debt and are allocable to an increase in Partner Minimum Gain attributable to such Partner Nonrecourse Debt, determined in accordance with Treasury Regulations Section 1.704-2(i). Partners. The General Partner and the Limited Partners, collectively, when no distinction is required by the context in which the term is used herein. Partnership. Mobile Kidney Stone Centers of California III, L.P., a California limited partnership, which owns and operates the Lithotripsy System. Partnership Agreement. The Partnership's Agreement of Limited Partnership, a copy of which is attached as Appendix A, as such may be amended from time to time. Partnership Cash Flow. For the applicable period the excess, if any, of (A) the sum of (i) all gross receipts from any source for such period, other than the Partnership loans, Capital Transactions and Capital Contributions, and (ii) any funds released by the Partnership from previously established reserves, over (B) the sum of (i) all cash expenses paid by the Partnership for such period, (ii) the amount of all payments of principal on loans to such Partnership, (iii) capital expenditures of the Partnership, and (iv) such reasonable reserves as the General Partner shall deem necessary or prudent to set aside for future repairs, improvements, or equipment replacement or additions, or to meet working capital requirements or foreseen or unforeseen future liabilities and contingencies of the Partnership; provided, however, that the amounts referred to in (B) (i), (ii) and (iii) above shall be taken into account only to the extent not funded by Capital Contributions, loans or paid out of previously established reserves. Such term shall also include all other funds deemed available for distribution and designated as "Partnership Cash Flow" by the General Partner. Partnership Interest. The interest of a Partner in the Partnership as defined by the Act and the Partnership Agreement. Partnership Minimum Gain. Gain as defined in Treasury Regulations Section 1.704-2(d). Partnership Refinancing Proceeds. The cash realized from the refinancing of Partnership assets after retirement of any secured loans and less (i) payment of all expenses relating to the transaction and (ii) establishment of such reasonable reserves as the General Partner shall deem necessary or prudent to set aside for future repairs, improvements, or equipment replacement or additions, or to meet working capital requirements or foreseen or unforeseen future liabilities or contingencies of the Partnership. Partnership Sales Proceeds. The cash realized from the sale, exchange, casualty or other disposition of all or a portion of Partnership assets after the retirement of all secured loans and less (i) the payment of all expenses related to the transaction and (ii) establishment of such reasonable reserves as the General Partner shall deem necessary or prudent to set aside for future repairs, improvements, or equipment replacement or additions, or to meet working capital requirements or foreseen or unforeseen future liabilities or contingencies of the Partnership. Percentage Interest. The interest of each Partner in the Partnership, to be determined in the case of each Investor by reference to the percentage oppositive his or her name set forth in Schedule A to the Partnership Agreement. Each Unit sold pursuant to this Offering represents an initial 1% economic interest in the Partnership. The Percentage Interest will be set forth in Schedule A to the Partnership Agreement or any other document or agreement, as a percentage or a fraction or on any numerical basis deemed appropriate by the General Partner. Prime. Prime Medical Services, Inc. a publicly held Delaware corporation and parent of the Management Agent and Sales Agent. Prime Rate. The rate of interest periodically established by the Bank and identified as such in literature published and circulated within the Bank's offices. Pro Rata Basis. In connection with an allocation or distribution, an allocation or distribution in proportion to the respective Percentage Interest of the class of Partners to which reference is made. Profit. The net income of the Partnership for each year as determined by the Partnership for federal income tax purposes. Qualified Income Offset Item. An adjustment, allocation or distribution described in Treasury Regulations Sections 1.704-1(b)(2)(ii)(d)(4), 1.704-1(b)(2)(ii)(d)(5) or 1.704-1(b)(2)(ii)(d)(6) unexpectedly received by a Partner. Sales Agent. MedTech Investments, Inc., a registered broker-dealer, member of the National Association of Securities Dealers, Inc. and an Affiliate of the General Partner. SEC. The United States Securities and Exchange Commission. --- Securities Act. The Securities Act of 1933, as amended. -------------- Service. The Internal Revenue Service. ------- Service Area. The geographic region in which Partnership operations are conducted and which presently consists primarily of the following California counties: Alameda County, Contra Costa County, Marin County, Merced County, Nevada County, Placer County, San Joaquin County, Shasta County and Stanislaus County. The General Partner has sole discretion to expand the Service Area subject to fiduciary duties owned by the General Partner to its Limited Partners. Storz. Karl Storz Lithotripsy-America, Inc. and its Affiliates. Subscription Agreement. The Subscription Agreement, included in the Subscription Packet accompanying this Memorandum, to be executed by the prospective Limited Partners in connection with their purchase of Units. Subscription Packet. The packet of subscription materials to be completed by Investors in connection with their subscription for Units. Units. The 20 equal limited partner interests in the Partnership offered pursuant to this Memorandum for a price per Unit of $3,006 in cash, plus 1% in guaranties of the Partnership's obligations under the Loan (a $4,871.25 principal loan guaranty per Unit). Year of the Partnership. An annual accounting period ending on December 31 of each year during the term of the Partnership. EX-10.140 53 0053.txt EX 10.140 1ST SUPPLEMENT TO MEMORANDUM - MKSC III FIRST SUPPLEMENT DATED JUNE 28, 2000 TO THE CONFIDENTIAL PRIVATE PLACEMENT MEMORANDUM DATED MAY 17, 2000 MOBILE KIDNEY STONE CENTERS OF CALIFORNIA III, L.P. Mobile Kidney Stone Centers of California III, L.P., a California limited partnership (the "Partnership"), by this First Supplement hereby amends and supplements its Confidential Private Placement Memorandum of May 17, 2000 (the "Memorandum"). Capitalized terms used herein are defined in the Glossary appearing in the Memorandum. Persons who have subscribed for or are considering an investment in the Units offered by the Memorandum should carefully review this First Supplement. Extension of the Offering Pursuant to the authority given to the General Partner in the Memorandum, the General Partner hereby elects to extend the offering termination date to November 8, 2000 (or earlier in the discretion of the General Partner, upon the sale of all Units as provided in the Memorandum). EX-10.141 54 0054.txt EX 10.141 CONFIDENTIAL MEMORANDUM - MKSC II Name of Prospective Investor Memorandum Number - -------------------------------------------------------------------------------- MOBILE KIDNEY STONE CENTERS OF CALIFORNIA II, L.P. A Limited Partnership Formed Under the Laws of California CONFIDENTIAL PRIVATE PLACEMENT MEMORANDUM up to $169,320 in Cash up to $97,425 in Personal Guaranties 40 Units of Limited Partnership Interest - -------------------------------------------------------------------------------- THIS MEMORANDUM IS FURNISHED PURSUANT TO A CONFIDENTIALITY AGREEMENT BETWEEN THE PARTNERSHIP AND THE INVESTOR WHOSE NAME APPEARS ABOVE. THE CONFIDENTIALITY AGREEMENT PROHIBITS THE DISCLOSURE OF THE CONFIDENTIAL MATERIAL CONTAINED IN THIS MEMORANDUM, EXCEPT TO THE EXTENT SUCH INVESTOR DEEMS IT NECESSARY TO SHARE SUCH INFORMATION WITH HIS LEGAL, ACCOUNTING OR OTHER FINANCIAL ADVISORS, WHO LIKEWISE SHALL BE BOUND BY THE SAME CONFIDENTIALITY RESTRICTIONS SET FORTH IN THE CONFIDENTIALITY AGREEMENT. MEDTECH INVESTMENTS, INC. Exclusive Sales Agent 2008 Litho Place Fayetteville, North Carolina 28304 1-800-682-7971 iii WINSTON #892462 v 2 The Date of this Memorandum is April 21, 2000 MOBILE KIDNEY STONE CENTERS OF CALIFORNIA II, L.P. up to $169,320 in Cash up to 40 Units of Limited Partnership Interest at $4,233 in Cash and $2,435.63 in Personal Guaranties per Unit Mobile Kidney Stone Centers of California II, L.P., a California limited partnership (the "Partnership") operated by its general partner, Mobile Kidney Stone Centers of California, Ltd. I, a California limited partnership (the "General Partner") and an affiliate of Prime Medical Services, Inc., a Delaware corporation, hereby offers on the terms set forth herein up to 40 Units (the "Units") of limited partnership interest in the Partnership, at a price per Unit of $4,233 in cash, plus a personal guaranty of 0.5% of the Partnership's obligations under a loan of $487,125 from First-Citizens Bank & Trust Company (the "Loan") (a $2,435.63 principal guaranty obligation per Unit). See "Terms of the Offering." Each Unit will represent an initial 0.5% economic interest in the Partnership. See "Risk Factors - Other Investment Risks - Dilution of Limited Partners' Interests." The Partnership owns and operates a Storz Modulith(R) SLX-T model extracorporeal shockwave lithotripter for the lithotripsy of kidney stones. The lithotripter is transported in a mobile van (together with the installed and operational lithotripter, the "Lithotripsy System") enabling the Partnership to provide lithotripsy services at various locations primarily within a 150 mile radius of Sacramento, California (the "Service Area"). The Partnership intends to use the net proceeds of this Offering (after deduction of expenses payable by the Partnership) to reduce the Partnership's currently outstanding indebtedness under the Loan. See "Sources and Applications of Funds." The cash purchase price and personal guaranties are due at subscription; however, prospective Investors who meet certain requirements may be able to personally borrow funds from a third-party financial institution in order to pay a portion of their cash purchase price per Unit. See "Terms of the Offering - Limited Partner Loans." The Offering will terminate on June 1, 2000 (or earlier upon the sale of all 40 Units as provided herein), unless extended at the discretion of the General Partner for a period not to exceed 180 days. ------------------------------- Purchase of Units involves risks and is suitable only for persons of substantial means who have no need for liquidity in this investment. Among other factors, prospective investors should note that the health care industry is undergoing significant government regulatory reforms and that the Partnership faces substantial competition in the Service Area. See "Risk Factors" and "Terms of the Offering - Suitability Standards." ------------------------------- Cash Selling Net Cash Amount of Offering Price Commissions(1) Proceeds (2) Guaranties(3) Per Unit(4) $ 4,233 $ 75 $ 4,158 $ 2,435.63 Total Maximum(5) $169,320 $ 3,000 $166,320 $ 97,425.00 (See Footnotes on Back of Cover Page) See Glossary for capitalized terms used herein and not otherwise defined. (1) The Units will be sold on a "best-efforts" any or all basis by MedTech Investments, Inc., a broker-dealer registered with the Securities and Exchange Commission, a member of the National Association of Securities Dealers, Inc. and an Affiliate of the General Partner (the "Sales Agent"). The Partnership will pay the Sales Agent a $75 commission for each Unit sold and will reimburse the Sales Agent for its Offering costs (not to exceed $7,000). The Partnership has agreed to indemnify the Sales Agent against certain liabilities, including liabilities vender the Securities Act of 1933 (the "Securities Act"). See "Plan of Distribution." (2) Net Cash Proceeds do not reflect deduction of expenses payable by the Partnership. See "Sources and Applications of Funds." The cash price per Unit ($4,233) is payable in cash upon subscription; provided, that prospective Investors who meet certain requirements may be able to personally borrow funds from a third-party financial institution in order to pay a portion of their cash purchase price per Unit. For the convenience of the Investors, the Partnership has arranged for financing of a portion of the Units' cash purchase price (the "Limited Partner Loan") with First-Citizens Bank & Trust Company, which is headquartered in Raleigh, North Carolina, and has approximately 370 offices throughout the southeastern United States (the "Bank"). Therefore, in lieu of paying the entire purchase price in cash at subscription, prospective Investors may execute and deliver to the Sales Agent, together with their Subscription Packets, at least $2,500 in cash and a Limited Partner Note payable to the Bank in a maximum principal amount of up to $1,733 per Unit to be purchased, a Loan and Security Agreement, Security Agreement and two Uniform Commercial Code Financing Statements ("UCC-1's") (collectively, the "Loan Documents"). See "Terms of the Offering - Limited Partner Loans" and the forms of the Limited Partner Note, the Loan and Security Agreement and Security Agreement attached to the Form of Loan Commitment as Exhibits A, B and C, respectively, which is attached hereto as Appendix B and the UCC-1's attached as part of the Subscription Packet. (3) At subscription, each Investor must execute and deliver to the Sales Agent a guaranty agreement (the "Guaranty") under which he or she will guarantee payment of a portion of the Partnership's obligations under the Loan, the proceeds of which were used by the Partnership to (i) acquire a new Storz Modulith(R)SLX-T model extracorporeal shock-wave lithotripter with accessories; (ii) acquire and upfit a new mobile van to transport the lithotripter; and (iii) pay sales taxes on the purchase of the Lithotripsy System. As a class, the initial Limited Partners guaranteed $292,275 (60%) of the Partnership's principal obligations under the Loan. In its capacity as general partner of the Partnership, the General Partner initially guaranteed 40% of the Loan, which represents a $194,850 principal guaranty obligation. See "Risk Factors - Operating Risks - Partnership Limited Resources and Risks of Leverage." For each Unit purchased, an Investor will be required to guarantee 0.5% of the Loan, which represents up to a $2,435.63 principal guaranty obligation. As of the date of this Memorandum the outstanding balance on the Loan is $441,205.79. A Limited Partner's liability under the Guaranty may exceed the principal guaranty per Unit as provided above because such liability includes not only principal, bast also accrued and unpaid interest, late payment penalties and legal costs incurred by the Bank in collecting defaulted obligations. For a description of the guaranty requirements and the terms of the Guaranties, see "Terms of the Offering - Guaranty Arrangements" and the form of Guaranty included in the Subscription Packet accompanying this Memorandum. (4) Each Investor may purchase no less than one Unit. The General Partner, however, reserves the right to sell less than one Unit as an additional investment, and to reject, in whole or in part, any subscription. (5) Offering proceeds will first be used by the Partnership to pay Offering costs and expenses and the remainder of the proceeds will be used to reduce the Partnership's currently outstanding indebtedness under the Loan. See "Sources and Applications of Funds." The Partnership seeks by this Offering to sell up to 40 Units for an aggregate of up to $169,320 in cash ($166,320 net of Sales Agent's commissions) and up to $97,425 in personal guaranties of the Partnership's principal obligations under the Loan. All subscription funds, Guaranties and Loan Documents will be held in an interest bearing escrow account with the Bank until the acceptance of the Investor's subscription (and approval by the Bank if the Investor is financing a portion of the Unit cash purchase price through a Limited Partner Loan), rejection of the Investor's subscription or termination of the Offering. The Partnership has set no minimum number of Units to be sold in this Offering. Accordingly, upon the receipt and acceptance of an Investor's subscription by the Partnership and the approval of his or her Guaranty by the Bank as provided herein, such Investor will be admitted to the Partnership as a Limited Partner, provided that acceptance of subscriptions by an Investor that elects to finance a portion of his or her Unit cash purchase price is also conditioned upon approval by the Bank of his or her Limited Partner Loan. Upon admission as a Limited Partner, the Investor's subscription funds will be released to the Partnership and the Guaranties and the Loan Documents, if any, will be released to the Bank. In the event a subscription is rejected, all subscription funds (without interest), Guaranty and the Loan Documents, if any, and other subscription documents held in escrow will be promptly returned to the rejected Investor. The Offering will terminate on June 1, 2000, unless it is sooner terminated by the General Partner, or unless extended for an additional period not to exceed 180 days. See "Terms of the Offering." [The remainder of this page is intentionally left blank.] WINSTON #892462 v 2 iv o The Units are being offered pursuant to an exemption from the registration requirements of the Securities Act of 1933, as amended, provided by Section 4(2) thereof and Rule 506 of Regulation D promulgated thereunder, as amended, and an exemption from state registration requirements provided by the National Securities markets Improvement Act of 1996. A registration statement relating to these securities has not been filed with the Securities and exchange Commission or any state securities commission. o Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of the Units or determined that this Memorandum is truthful or complete. Any representation to the contrary is a criminal offense. o The Units are subject to restrictions on transferability and resale and may not be transferred or resold without the consent of the General Partner and satisfaction of certain other conditions including the availability of an exemption under the Securities Act of 1933 and applicable state securities laws. See "Risk Factors -Other Investment Risks - Limited Transferability and Illiquidity of Units." No public or other market exists or will develop for the Units. Investors should proceed only on the assumption that they may have to bear the economic risk of an investment in the Units for an indefinite period of time. o Prospective Investors should not construe the contents of this Memorandum or any prior or subsequent communications, whether written or oral, from the Partnership, its General Partner, the Sales Agent or any of their agents or representatives as investment, tax or legal advice. This Memorandum and the appendices hereto, as well as the nature of the investment, should be reviewed by each prospective Investor, such Investor's investment, tax or other advisors, and accountants and/or legal counsel. o No offering literature in whatever form will or may be employed in the offering of Units, except this Memorandum (including amendments and supplements, if any) and documents summarized herein. No person is authorized to give any information or to make any representation not contained in this Memorandum or in the appendices hereto, and, if given or made, such other information or representation must not be relied upon. WINSTON #892462 v 2 vi TABLE OF CONTENTS Page RISK FACTORS..................................................................1 Operating Risks......................................................1 Tax Risks............................................................7 Other Investment Risks..............................................13 THE PARTNERSHIP..............................................................16 TERMS OF THE OFFERING........................................................17 The Units and Subscription Price....................................17 Acceptance of Subscriptions.........................................17 Guaranty Arrangements...............................................18 Limited Partner Loans...............................................21 Subscription Period; Closing........................................23 Offering Exemption..................................................23 Suitability Standards...............................................23 How to Invest.......................................................24 Restrictions on Transfer of Units...................................24 PLAN OF DISTRIBUTION.........................................................25 BUSINESS ACTIVITIES..........................................................26 General 26 Treatment Methods for Kidney Stone Disease..........................26 The Lithotripsy System..............................................27 Acquisition of Additional Assets....................................28 Hospital Contracts..................................................28 Management..........................................................30 THE GENERAL PARTNER..........................................................30 COMPENSATION AND REIMBURSEMENT TO THE GENERAL PARTNER AND ITS AFFILIATES.....32 CONFLICTS OF INTEREST........................................................33 FIDUCIARY RESPONSIBILITY OF THE GENERAL PARTNER..............................34 COMPETITION..................................................................35 Affiliated Competition..............................................35 Other Competition...................................................35 REGULATION...................................................................36 Federal Regulation..................................................36 State Regulation....................................................45 PRIOR ACTIVITIES.............................................................47 SOURCES AND APPLICATIONS OF FUNDS............................................48 FINANCIAL CONDITION OF THE PARTNERSHIP.......................................49 SUMMARY OF THE PARTNERSHIP AGREEMENT.........................................53 Nature of Limited Partnership Interest..............................53 Dilution Offerings..................................................53 Fundamental Changes.................................................54 Profits, Losses and Distributions...................................56 Management of the Partnership.......................................59 Powers of the General Partner.......................................59 Rights and Liabilities of the Limited Partners......................60 Restrictions on Transfer of Partnership Interests...................61 Dissolution and Liquidation.........................................61 Optional Purchase of Limited Partner Interests......................62 Noncompetition Agreement and Protection of Confidential Information..................................................63 Arbitration.........................................................63 Power of Attorney...................................................64 Reports to Limited Partners.........................................64 Records 64 LEGAL MATTERS................................................................64 ADDITIONAL INFORMATION.......................................................64 GLOSSARY 65 WINSTON #892462 v 2 vii APPENDICES Appendix A AGREEMENT OF LIMITED PARTNERSHIP OF MOBILE KIDNEY STONE CENTERS OF CALIFORNIA II, L.P. Appendix B LIMITED PARTNER LOAN COMMITMENT (WITH EXHIBITS) Appendix C FORM OF OPINION OF WOMBLE CARLYLE SANDRIDGE & RICE, A PROFESSIONAL LIMITED LIABILITY COMPANY Appendix D NOTES TO FINANCIAL STATEMENTS WINSTON #892462 v 2 RISK FACTORS Prior to subscribing for Units, Investors should carefully examine this entire Memorandum, including the Appendices hereto, and should give particular consideration to the general risks attendant to speculative investments and investments in partnerships generally, and to the other special operating, tax and other investment risks set forth below. See the "Glossary" for terms used in this Memorandum and not otherwise defined. Operating Risks General Risks of Operations. The Partnership was formed under the laws of the State of California on December 11, 1998 and only recently commenced operations in May, 1999. Although the General Partner and its personnel have significant experience in managing lithotripsy enterprises, whether the Partnership can continue to effectively operate its business cannot be accurately predicted. The benefits of an investment in the Partnership also depend on many factors over which the Partnership has no control, including competition, technological innovations rendering the Lithotripsy System less competitive or obsolete, and other matters. The Partnership may be adversely affected by various changing local factors such as an increase in local unemployment, a change in general economic conditions, changes in interest rates and availability of financing, and other matters that may render the operation of the Lithotripsy System difficult or unattractive. Other factors that may adversely affect the operation of the Lithotripsy System are unforeseen increased operating expenses, energy shortages and costs attributable thereto, uninsured losses and the capabilities of the Partnership's management personnel. Uncertainties Related to Changing Healthcare Environment. The healthcare industry has experienced substantial changes in recent years. Managed care is becoming a major factor in the delivery of lithotripsy services in the Service Area and the General Partner anticipates that managed care programs, including capitation plans, will continue to play an increasing role in the delivery of lithotripsy services and that competition for these services may shift from individual practitioners to health maintenance organizations and other significant providers of managed care. No assurance can be given that the changing healthcare environment will not have a material adverse effect on the Partnership. Lack of Diversification. The Partnership's principal purpose will be to continue to operate the Lithotripsy System. Because the Partnership is dependent on only one line of business and one Lithotripsy System, there will be greater risks from unexpected service interruptions, equipment breakdowns, technological developments, kidney stone treatment medical breakthroughs, economic problems and similar matters than would be the case with a more diversified business. WINSTON #892462 v 2 26 Impact of Insurance Reimbursement. The Partnership's revenues are expected to be derived from the fees paid by Contract Hospitals and other health care facilities under lithotripsy service contracts with the Partnership. The Partnership does not currently directly bill or collect for services from patients or their third-party payors. Payments received from Contract Hospitals and other health care facilities may be subject to renegotiation depending on the reimbursement such parties receive. The increasing influence of health maintenance organizations and other managed care companies has resulted in pressure to reduce the reimbursement available for lithotripsy procedures. Some of the General Partner's Affiliates have recently experienced declining revenues based on these managed care pressures in other health care markets. Additionally, the Health Care Financing Administration ("HCFA"), the federal agency which administers the Medicare program, has proposed rules which would reduce the reimbursement available for lithotripsy procedures provided at hospitals to $2,235. See "Regulation - Federal Regulation." In some cases reimbursement rates payable to the General Partner and other Affiliates are less than the proposed HCFA rate. Because of the competitive pressures from managed care companies as well as threatened reductions in Medicare reimbursement, the General Partner anticipates that reimbursement available for lithotripsy procedures may continue to decrease. Such decreases would have a material adverse effect on Partnership revenues. Regarding the professional fees paid to physicians who treat patients on the Lithotripsy System, the General Partner anticipates that similar competitive pressures may result in lower reimbursement paid to physicians, both by private insurers and by government programs such as Medicare. See "Regulation." Reliability and Efficacy of the Storz Modulith(R) SLX-T. The Modulith(R) SLX-T received FDA premarket approval on March 27, 1997. Although the General Partner and its Affiliates have positive direct experience with the use of the Modulith(R) SLX-T, "downtime" periods necessitated by maintenance and repairs of the Lithotripsy System will adversely effect Partnership revenues. Preliminary reports from abroad and "word of mouth" anecdotal evidence indicate that the Modulith(R) SLX-T is as effective as most of the "portable" lithotripters in the market. The General Partner is aware that early data from abroad concerning one precursor to the Modulith(R) SLX-T reflected a high retreatment rate, and that an Affiliate of the General Partner experienced electrical and mechanical problems using another precursor, the Modulith(R) SLX. However, the General Partner's and its Affiliates' limited experience with the transportable Modulith(R) SLX-T has shown acceptable retreatment rates. A high retreatment rate may adversely affect the Partnership. Investors should note that some studies indicate that lithotripsy may cause high blood pressure and tissue damage. The General Partner questions the reliability of these studies and believes lithotripsy has become a widely accepted method for the treatment of renal stones. Technological Obsolescence. The history of lithotripsy of kidney stones as an accepted treatment procedure is relatively recent, with the first clinical trials being conducted in West Germany beginning in 1980 and the first premarket approval for a renal lithotripter in the United States being granted by the FDA in December 1984. Today, lithotripsy is the treatment procedure of choice for kidney stone disease, having replaced other treatment methods. Published reports indicate that certain researchers are attempting to improve a laser technology to more easily eradicate kidney stones, and pharmaceutical companies and researchers have attempted to develop a safe drug that can be used to dissolve kidney stones in all cases. The General Partner cannot predict the outcome of ongoing research in these areas, and any one or more developments could reduce or eliminate lithotripsy as an acceptable procedure or treatment method of choice for the treatment of kidney stones. Partnership Limited Resources and Risks of Leverage. The Partnership used the Loan proceeds to acquire the Lithotripsy System and to pay state sales taxes on such equipment. The net proceeds of this Offering will be used to reduce the Partnership's currently outstanding indebtedness under the Loan. While the General Partner anticipates that cash generated from operations will continue to enable the Partnership to repay the remainder of the obligations under the Loan in accordance with its terms, lower than anticipated revenues, greater than anticipated expenses, or unexpected interruptions in operations could result in the Partnership failing to make payments of principal or interest when due under the Loan, and the Partnership's equity being reduced or eliminated. In such event, the Limited Partners could lose their entire investment and be called upon to pay their Guaranties. See "Risk Factors - Operating Risks - Liability Under the Guaranty." Moreover, in the event of unanticipated expenses, it may be necessary to supplement Partnership funds with the proceeds of additional debt financing. The terms of the Loan may restrict the Partnership's ability to obtain another financing commitment, and although the General Partner maintains good relationships with certain commercial lending institutions, it cannot be determined whether any additional commitment would be available on terms acceptable to the Partnership. The General Partner and/or its Affiliates may, but are under no obligation to, make loans to the Partnership, and there is no assurance that they would be willing or able to do so at the time, in amounts and on terms required by the Partnership. While the General Partner does not anticipate that it would cause the Partnership to incur indebtedness unless cash generated from Partnership operations were at the time expected to enable repayment of such loan in accordance with its terms, as discussed above, lower than anticipated revenues and/or greater than anticipated expenses could result in the Partnership's failure to make payments of principal or interest when due under such a loan and the Partnership's equity being reduced or eliminated. In such event, the Limited Partners could also lose their entire investment. Acquisition of Additional Assets. If in the future the General Partner determines that it is in the best interest of the Partnership to acquire (i) one or more additional fixed base or mobile Lithotripsy Systems or (ii) any other urological device or equipment so long as such device has received FDA premarket approval at the time it is acquired by the Partnership, and/or (iii) an interest in any business entity that engages in a urological business described above, the General Partner has the authority (without obtaining the Limited Partners' consent) to establish reserves or subject to certain restrictions in the Loan, to borrow additional funds on behalf of the Partnership to accomplish such goals, and may use Partnership assets and revenues to secure and repay such borrowings. The acquisition of additional assets may substantially increase the Partnership's monthly obligations and may result in increased personnel requirements. See "Risk Factors - Operating Risks - - Partnership Limited Resources and Risks of Leverage." The General Partner does not anticipate acquiring additional Partnership assets unless projected Partnership Cash Flow or proceeds from a Dilution Offering are sufficient to finance such acquisitions. See "Risk Factors - Other Investment Risks - Dilution of Limited Partners' Interests." In any event, no Limited Partner would be personally liable on any additional Partnership indebtedness without such Limited Partner's prior written consent. There is no assurance that financing would be available to the Partnership to acquire additional assets or to fund any additional working capital requirements. In any event, the Partnership's ability to incur additional indebtedness while the Loan is outstanding is severely restricted. Any such borrowing by the Partnership will serve to increase the risks to the Partnership associated with leverage as provided above. Liability Under the Guaranty. For each Unit purchased, an Investor will be required to execute and deliver to the Bank a Guaranty pursuant to which the Investor will personally guarantee 0.5% of the Partnership's total obligations under the Loan, which is equivalent to a $2,435.63 principal guaranty per Unit. Although as of the date of this Memorandum, the outstanding principal balance of the Loan is $441,205.79, the terms of the Loan provide that it can be renewed for its initial full amount (i.e., $487,125), and therefore, Investors should view their potential liability under their Guaranties as if the full Loan amount is outstanding. Liability under the Guaranty may exceed $2,435.63 per Unit because the guaranty obligation per Unit also includes 0.5% of all accrued and unpaid interest, late payment penalties, and legal costs incurred by the Bank in collecting any defaulted payments. An Investor should not purchase a Unit if he does not have resources sufficient to bear the loss of this entire amount. See "Terms of the Offering - Guaranty Arrangements - Liability Under the Guaranty" and "Terms of the Offering - Suitability Standards." If Partnership operations continue to generate sufficient revenues to enable the Partnership to make all payments under the Loan when due, no Limited Partner will be required to perform under his Guaranty. If a default occurs under the Loan, the Bank may, among other remedies, seek payment directly from the Limited Partners under the Guaranties. The Guaranties are a guaranty of payment and not of collection and require the Limited Partners to waive certain rights to which they might otherwise be entitled. As a result, the liability of the Limited Partners under the Guaranties is direct and immediate and not conditioned or contingent upon either the pursuit of any remedies against the Partnership or any other person (including any other guarantor) or foreclosure of any security interest or liens available to the Bank. The Guaranties are a continuing guaranty that by their terms will survive the death, bankruptcy or disability of a Limited Partner guarantor. A Limited Partner's liability under the Guaranty continues regardless of whether the Limited Partner remains a limited partner in the Partnership and is not affected or limited by any claims or offsets the Limited Partner may have against the Partnership or the General Partner. See the form of Guaranty Agreement included in the Subscription Packet. Competition. Many fixed-site and mobile lithotripters are currently operating in and around the Service Area which are in direct competition with the Partnership's Lithotripsy System. The General Partner and entities which are Affiliates of the General Partner also compete in and near the Service Area. The competing lithotripsy service providers, including the General Partner and its Affiliates, generally have existing contracts with hospitals and other facilities. The General Partner competes with the Partnership in the Service Area by providing lithotripsy services at the Kaiser Foundation Hospital in Sacramento. The General Partner and its Affiliates also compete with the Partnership by providing lithotripsy services near the Service Area. In addition, except as provided by law, neither the General Partner nor its Affiliates are prohibited from engaging in any business or arrangement that may compete with the Partnership. See "Prior Activities," "Conflicts of Interest" and "Competition." There is no assurance that other parties will not, in the future, operate fixed-base or mobile lithotripters in and around the Service Area. To the General Partner's knowledge, no manufacturers are restricted from selling their lithotripters to other parties in the Service Area. Furthermore, the Partnership competes with facilities and individual medical practitioners who offer conventional treatment (e.g., surgery) for kidney stones. Managed care companies generally contract either directly with hospitals or specified providers for lithotripsy services for beneficiaries of their plans. It is not uncommon for managed care companies to have contracts already in place with hospitals or specified providers, and the Partnership will not be able to provide services to beneficiaries of those plans unless it convinces either the managed care companies or the hospitals to switch to the Partnership's services. Restrictions on Limited Partners. The Partnership Agreement severely restricts the Limited Partners' ability to own interests in competing equipment or ventures, other than interests held by the General Partner or its Affiliates. However, the General Partner may, in its sole discretion, waive the restrictions with respect to interests held by an Investor at the time he becomes a Limited Partner. See "Summary of the Partnership Agreement - Noncompetition Agreement and Protection of Confidential Information." The enforceability of these noncompetition agreements is generally a matter of state law. No assurance can be given that one or more Limited Partners may not successfully compete with the Partnership. See "Competition." Government Regulation. All facets of the healthcare industry are highly regulated and will become more so in the future. The ability of the Partnership to operate legally and be profitable may be adversely affected by changes in governmental regulations, including expected changes in reimbursement, Medicare and Medicaid certification requirements, federal and state fraud and abuse laws, including the federal Anti-Kickback Statute, the federal False Claims Act, federal and state self-referral laws, state restrictions on fee splitting and other governmental regulation. See "Regulation". These laws and regulations may adversely affect the economic viability of the Partnership. The laws are broad in scope, and interpretations by courts have been limited. Violations of these laws would subject the General Partner and all Limited Partners to governmental scrutiny and/or felony prosecution and punishment in the form of large monetary fines, loss of licensure, imprisonment and exclusion from Medicare and Medicaid. Certain provisions of Medicare and Medicaid law limit provider ownership and control over the various health care services to which physicians may make Medicare and Medicaid referrals. The primary laws involved are the "Stark II" federal statute prohibiting financial relationships between physicians and certain entities to which they refer patients, and the Anti-Kickback Statute which prohibits compensation in exchange for or to induce referrals. Regarding Stark II, HCFA published proposed Stark II regulations in 1998. Under the proposed regulations, physician Limited Partner referrals of Medicare and Medicaid patients to Contract Hospitals for lithotripsy services would be prohibited. If HCFA adopts the proposed Stark II regulations as final, or if a reviewing court were to interpret the Stark II statute using the proposed regulations as interpretive authority, then the Partnership and its physician Limited Partners would likely be found in violation of Stark II. In such instance, the Partnership and/or its physician Limited Partners may be required to refund any amounts collected from 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 Stark II or the Anti-Kickback Statute has been violated. In addition to Stark II, the Anti-Kickback Statute and the False Claims Act, an unfavorable interpretation of other existing laws, or enactment of future laws or regulations, could potentially adversely affect the operation of the Partnership. If this occurs, the General Partner is obligated either to purchase or cause the sale of the Partnership Interests of all of the Limited Partners or to dissolve the Partnership. See "Summary of the Partnership Agreement - Optional Purchase of Limited Partner Interests." Regarding state law, California prohibits physicians from referring patients to facilities in which the physicians have a significant financial interest unless the physician's return on investment is based upon the proportional ownership interest in the facility and the physician discloses the ownership interest to the patient in writing and advises the patient that the patient may choose another provider to obtain the service. Various licensure requirements must be met for the Partnership to provide mobile lithotripsy services in California. The General Partner and the Management Agent have been seeking and will continue to seek to cause the Partnership to comply with such requirements. See "Regulation - State Regulation". Contract Terms and Termination. The Partnership provides lithotripsy services to 10 Contract Hospitals pursuant to 7 separate Hospital Contracts. All of the Hospital Contracts grant the Partnership the exclusive right to provide lithotripsy services at the particular Contract Hospital. Two of the Hospital Contracts provide for automatic renewal on a year-to-year basis. These Hospital Contracts are terminable without cause upon 180 days or less prior written notice by either party prior to any renewal date. Three of the Hospital Contracts have no automatic renewal provision and will terminate on December 31, 2000 unless the parties mutually agree to extend the terms. One Hospital Contract's term also expires on December 31, 2000, however, the contract provides for an indefinite term thereafter which is terminable without cause upon 180 days written notice by either party. In addition, the Partnership is negotiating a contract extension with Catholic Health Care West, which will cover services at four more Contract Hospitals. The Partnership is currently providing services at such Contract Hospitals on a month-to-month basis. It is expected that most new lithotripsy service contracts, if any, would have one-year terms and be automatically renewed unless either party elects to cancel prior to the end of the term. The General Partner believes it has a good relationship with the Contract Hospitals and does not anticipate significant terminations. There is no assurance, however, that terminations will either not occur or that the resulting impact to the Partnership would not have a material adverse effect on Partnership operations. In addition, competing vendors may attempt to cause certain Contract Hospitals to contract with them instead of the Partnership. The loss of Contract Hospitals to competition will adversely affect Partnership revenues and such effect could be material. Thus, there is no assurance that Partnership operations as conducted on the date of this Memorandum will continue as herein described or contemplated, and the cancellation of a significant number of service contracts or the Partnership's inability to secure new ones could have a material negative impact on the financial condition and results of the Partnership. See "Business Activities - Hospital Contracts" and "Risk Factors - Competition." Loss on Dissolution and Termination. Upon the dissolution and termination of the Partnership, the proceeds realized from the liquidation of its assets, if any, will be distributed to its partners only after satisfaction of the claims of all creditors, including, but not limited to, the Bank. See "Risk Factors-Operating Risks - Liability Under the Guaranty" and "Risk Factors - - other Investment Risks - Liability Under Limited Partner Loan." Accordingly, the ability of a Limited Partner to recover all or any portion of his investment under such circumstances will depend on the amount of funds so realized and the claims to be satisfied therefrom. See "Summary of the Partnership Agreement - Optional Purchase of Limited Partner Interests." Tax Risks Investors should note that the General Partner anticipates no significant tax benefits associated with the operation of the Lithotripsy System or the Partnership. No ruling will be sought from the Service on the United States federal income tax consequences of any of the matters discussed in this Memorandum or any other tax issues affecting the Partnership or the Limited Partners. The Partnership is relying upon an opinion of Counsel with respect to certain material United States federal income tax issues. Counsel's opinion is not binding on the Service as to any issue, and there can be no assurance that any deductions, or the period in which deductions may be claimed, will not be challenged by the Service. Each Investor should carefully review the following risk factors and consult his or her own tax advisor with respect to the federal, state and local income tax consequences of an investment in the Partnership. THE TAX RISKS SET FORTH IN THIS SECTION ARE NOT INTENDED TO BE AN EXHAUSTIVE LIST OF THE GENERAL OR SPECIFIC TAX RISKS RELATING TO THE PURCHASE OF UNITS IN THE PARTNERSHIP. EACH INVESTOR IS DIRECTED TO THE FULL OPINION OF COUNSEL (APPENDIX C TO THE MEMORANDUM). IT IS STRONGLY RECOMMENDED THAT EACH INVESTOR INDEPENDENTLY CONSULT HIS OR HER PERSONAL TAX COUNSEL CONCERNING THE TAX CONSEQUENCES ASSOCIATED WITH HIS OR HER OWNERSHIP OF AN INTEREST IN THE PARTNERSHIP. THE CONCLUSIONS REACHED IN COUNSEL'S OPINION ARE RENDERED WITHOUT ASSURANCE THAT SUCH CONCLUSIONS HAVE BEEN OR WILL BE ACCEPTED BY THE SERVICE OR THE COURTS. THIS MEMORANDUM AND COUNSEL'S OPINION DO NOT DISCUSS, NOR WILL COUNSEL BE RENDERING AN OPINION REGARDING, ANY ESTATE AND GIFT TAX OR STATE AND LOCAL INCOME TAX CONSEQUENCES OF AN INVESTMENT IN THE PARTNERSHIP. FURTHERMORE, INVESTORS SHOULD NOTE THAT THE ANTICIPATED FEDERAL INCOME TAX CONSEQUENCES OF AN INVESTMENT IN THE PARTNERSHIP MAY BE ADVERSELY AFFECTED BY FUTURE CHANGES IN THE FEDERAL INCOME TAX LAWS, WHETHER BY FUTURE ACTS OF CONGRESS OR FUTURE ADMINISTRATIVE OR JUDICIAL INTERPRETATIONS OF APPLICABLE FEDERAL INCOME TAX LAWS. ANY OF THE FOREGOING MAY BE GIVEN RETROACTIVE EFFECT. INVESTORS SHOULD NOTE THAT THE UNITS ARE BEING MARKETED BY THE PARTNERSHIP AS AN ECONOMIC INVESTMENT AND THAT THE PARTNERSHIP ANTICIPATES AND INTENDS NO SIGNIFICANT TAX BENEFITS FROM AN INVESTMENT IN THE UNITS. SEE "PASSIVE INCOME AND LOSSES" IN THIS SECTION. THE INVESTMENT IN UNITS IS A LONG-TERM INVESTMENT. INVESTORS SHOULD NOT INVEST IN THE PARTNERSHIP TO ACHIEVE TAX BENEFITS AS THE GENERAL PARTNER ANTICIPATES SIGNIFICANT PARTNERSHIP TAXABLE INCOME THROUGHOUT THE TERM OF THE PARTNERSHIP. Possible Legislative or Other Actions Affecting Tax Consequences. The federal income tax treatment of an investment in an equipment/service oriented limited partnership such as the Partnership may be modified by legislative, judicial or administrative action at any time, and any such action may retroactively affect investments and commitments previously made. The rules dealing with federal income taxation of limited partnerships are constantly under review by the Service, resulting in revisions of its regulations and revised interpretations of established concepts. In evaluating an investment in the Partnership, each Investor should consult with his or her personal tax advisor with respect to possible legislative, judicial and administrative developments. Disqualification of Employee Benefit Plans. Purchase of Units in the Partnership may cause certain Limited Partners, certain hospitals and healthcare treatment centers, the Partnership, and employees of the foregoing to be treated under Section 414(m) of the Code as being employed in the aggregate by a single employer or "affiliated service group" for purposes of minimum coverage, participation and other employee benefit plan requirements imposed by the Code. In contrast, an employer not affiliated under Section 414(m) need only consider its own employees in determining whether its employee benefit plans satisfy Code requirements. Aggregation of employees could cause the disqualification of the retirement plans of certain Limited Partners and related entities. Aggregation could also require the value of the vested retirement benefit of a highly compensated employee who is a participant in a disqualified plan to be included in his or her gross income, regardless of whether the employee is a Limited Partner. These rules may adversely affect Investors who are currently involved in a medical practice joint venture, regardless of their purchase of Units in the Partnership. The General Partner and Counsel have been informally advised by officials of the Service that the Service would not likely attempt to apply the affiliated service group rules to the Partnership, nor has the Service applied these rules to similar arrangements in the past. Informal discussions with the Service, however, are not binding on the Service, and there can be no guarantee that the Service will not apply the affiliated service group rules to the Partnership. INVESTORS ARE URGED TO CONSULT WITH THEIR OWN TAX ADVISORS REGARDING THE APPLICABILITY OF THE AFFILIATED SERVICE GROUP RULES DESCRIBED HEREIN TO THE EMPLOYEE BENEFIT PLANS MAINTAINED BY THEM OR THEIR MEDICAL PRACTICES. Partnership Allocations. The Partnership Agreement contains certain allocations of profits and losses that could be reallocated by the Service if it were determined that the allocations did not have "substantial economic effect." On December 31, 1985, the Treasury Regulations dealing with the propriety of partnership allocations were finalized. As a general rule, allocations of profits and losses must have "substantial economic effect." Based upon current law, Counsel is of the opinion that, if the question were litigated, it is more probable than not that the allocation of profits and losses set forth in the Partnership Agreement would be sustained for federal income tax purposes. Investors are cautioned that the foregoing opinion is based in part upon final Regulations which have not been extensively commented upon or construed by the courts. Income in Excess of Distributions. The Partnership Agreement provides that in each year annual Distributions may be made to the Partners. Excluded from the definition of cash available for distribution is the amount of funds necessary to discharge Partnership debts (including scheduled payments and certain prepayments under the Loan) and to maintain certain cash reserves deemed necessary by the General Partner. If Partnership cash flow declines, a Limited Partner could be subject to income taxes payable out of personal funds to the extent of the Partnership's income, if any, attributed to him without receiving from the Partnership sufficient Distributions to pay the Limited Partner's tax with respect to such income. Effect of Classification as Corporation. The Partnership has not and will not seek a ruling from the Service concerning the tax status of the Partnership. It is the opinion of Counsel that the Partnership will be treated as a partnership for federal income tax purposes and not as an association taxable as a corporation unless the Partnership so elects. The Partnership has not and will not make an election to be classified as other than a partnership for federal income tax purposes. Although the Partnership intends to rely on the legal opinion of Counsel, the service will not be bound thereby. Moreover, there can be no assurance that legislative or administrative changes or court decisions may not in the future result in the Partnership being treated as an association taxable as a corporation, with a resulting greater tax burden associated with the purchase of Units. The General Partner, in order to comply with applicable tax law, will keep the Partnership's books and records and otherwise compute Profits and Losses based on the accrual method, and not the cash basis method, of accounting pursuant to Section 448 of the Code. The accrual method of accounting generally records income and expenses when they are accrued or economically incurred. Passive Income and Losses. The General Partner expects that the Partnership will continue to realize taxable income and not taxable losses during the foreseeable future. Nevertheless, if it instead realizes taxable losses, the use of such losses by the Limited Partners will generally be limited by Code Section 469. Code Section 469 provides limitations for the use of taxable losses attributable to "passive activities." Code Section 469 operates generally to prohibit passive losses from being used against income from active activities. The passive activity rules are extremely complex and Investors are urged to consult their own tax advisors as to their applicability, particularly as they relate to the ability to deduct any losses from the Partnership against other income of the Investor. THE PASSIVE ACTIVITY LOSS RULES WILL AFFECT EACH INVESTOR DIFFERENTLY, DEPENDING ON HIS OWN TAX SITUATION. EACH INVESTOR SHOULD CONSULT WITH HIS OWN TAX ADVISOR TO DETERMINE THE EFFECT OF THESE RULES ON THE INVESTOR IN LIGHT OF THE INVESTOR'S INDIVIDUAL FACTS AND CIRCUMSTANCES. Depreciation. The Partnership will use the Modified Accelerated Cost Recovery System ("MACRS") to depreciate the cost of any equipment or improvements hereafter acquired. Any additions or improvements to the Lithotripsy System will also be depreciated over a five year term using the 200% declining balance method of depreciation, switching to the straight-line method to maximize the depreciation allowance. If purchases or improvements are made after the beginning of any year, only a fraction of the depreciation deduction may be claimed in that year. As under prior law, the 1986 Act provides that the full amount of depreciation on personal property (such as the Lithotripsy System) is recaptured upon disposition (i.e., is taxed as ordinary income) to the extent gain is realized on the disposition. Investors should note that the 1986 Act repealed the investment tax credit for all personal property. Partnership Elections. The Code permits partnerships to make elections for the purpose of adjusting the basis of partnership property on the distribution of property by a partnership to a partner and on the transfer of an interest in a partnership by sale or exchange or on the death of a partner. The general effect of such elections is that transferees of Partnership Interests will be treated, for the purposes of depreciation and gain, as though they had a direct interest in the Partnership's assets, and the difference between their adjusted bases for their Partnership Interests and their allocable portion of the Partnership's bases for its assets will be allocated to such assets based upon the fair market value of the assets at the times of transfers of the Partnership Interests. Any such election, once made, cannot be revoked without the consent of the Service. Under the terms of the Partnership Agreement, the General Partner, in its discretion, may make the requisite election necessary to effect such adjustment in basis. Sale of Partnership Units. Gain realized on the sale of Units by a Limited Partner who is not a "dealer" in Units or in limited partnership interests will be taxed as capital gain, except that the portion of the sales price attributable to inventory items and unrealized receivables will be taxed as ordinary income. "Unrealized receivables" of the Partnership include the Limited Partner's share of the ordinary income that the Partnership would realize as a result of the recapture of depreciation (as described above) if the Partnership had sold Partnership depreciable property immediately before the Limited Partner sold his Partnership Interest. Investors should note that the IRS Restructuring and Reform Act of 1998 generally imposes a maximum tax rate of 20% on net long-term capital gains. To the extent the Partnership has income attributable to depreciation recapture incurred on the sale of a capital asset, such income will be taxed at a maximum rate of 25%. The Revenue Reconciliation Act of 1993 imposed a maximum potential individual income tax rate of 39.6% on ordinary income. Tax Treatment Of Certain Fees and Expenses Paid By The Partnership. Under the Code, a partnership expenditure will, as a general rule, fall into one of the following categories: (1) deductible expenses -- expenditures such as interest, taxes, and ordinary and necessary business expenses which the partnership is entitled to deduct in full when paid or incurred; (2) amortizable expenses -- expenditures which the partnership is entitled to amortize (i.e., deduct ratably) over a fixed period of time; (3) capital expenditures -- expenditures which must be added to the amortization or depreciation base of partnership property (or partnership loans) and deducted over a period of time as the property (or partnership loan) is amortized or depreciated; (4) organization expenses -- expenditures related to the organization of the partnership, which under Section 709 of the Code are amortized over a 60-month period, provided an election to do so is made; (5) syndication expenses -- expenditures paid or incurred in promoting the sale of interests in the partnership, which under Section 709 of the Code must be capitalized but may be neither depreciated, amortized, nor otherwise deducted; (6) partnership distributions -- payments to partners representing distributions of partnership funds, which may be neither capitalized, amortized nor deducted; (7) start-up expenses -- expenditures incurred by a partnership during an initial period, which under Section 195 of the Code may be amortized over a 60-month period; and (8) guaranteed payments to partners -- payments to partners for services or use of capital which are deductible or treated in the other categories of expenditures listed above, provided they meet the applicable requirements. Several amendments to the Code enacted by the Tax Reform Act of 1984 alter established tax accounting principles. One or more of these amendments may affect the federal income tax treatment of fees and expenses, particularly fees paid or incurred by a partnership for services. In particular, new Code Section 461(h) now provides that an expense or fee paid to a service provider may not be accrued for federal income tax purposes prior to the time "economic performance" occurs. "Economic performance" occurs as (and no sooner than) the service provider provides the required services. All expenditures of the Partnership must constitute ordinary and necessary business expenses in order to be deducted by the Partnership when paid or incurred, unless the deduction of any such item is otherwise expressly permitted by the Code (e.g., taxes). Expenditures must also be reasonable in amount. The Service could challenge a fee deducted by the Partnership on the ground that such fee is a capital expenditure, which must either be amortized over an extended period or indefinitely deferred, rather than deducted as an ordinary and necessary business expense. The Service could also challenge the deduction of any fee on the basis that the amount of such fee exceeds the reasonable value of the services performed, the goods acquired or the other benefits to the Partnership. Under Section 482 of the Code, the Service has broad discretion to reallocate income, deductions, credits or allowances between entities with common ownership or control if it is determined that such reallocation is necessary to prevent the evasion of taxes or to reflect the income of such entities. The Partnership and the General Partner are entities to which Section 482 applies and it is possible that the Service could contend that certain items should be reallocated in a manner that would change the Partnership's proposed tax treatment of such items. The General Partner believes the payments to it and its Affiliates are customary and reasonable payments for the services rendered by them to the Partnership; however, these fees were not determined by arm's length negotiations. Nothing has come to the attention of Counsel which would give Counsel reasonable cause to question the General Partner's determination. On audit the Service may challenge such payments and contend that the amount paid for the services exceeds the reasonable value of those services. Because of the factual nature of the question of the reasonableness of any particular fee, Counsel cannot express an opinion as to the outcome of the reasonableness of the amount of any fee should the issue be litigated. Syndication Expenses. Section 709 of the Code prohibits a partnership from deducting or amortizing costs that are incurred to promote the sale of partnership interests (i.e., syndication expenses). The Regulations provide definitions for syndication expenses that must be capitalized. Syndication expenses include brokerage fees, registration fees, legal fees for securities advice, accounting fees for preparation of representations to be included in the offering materials, and printing costs of the offering materials. The Partnership intends to treat the entire amount payable to the Sales Agent as a sales commission for selling the Units, as well as certain other fees and expenses allocable to the preparation of this Memorandum and to the offering of the Units in the Partnership, as nondeductible, nonamortizable syndication expenses. Investors will economically bear their respective proportionate share of syndication expenses as these costs likely will be paid out of proceeds from the Offering. These costs will be borne irrespective of their amount, timing and ability of the Partnership to deduct these costs for tax purposes. Management Fee to General Partner. The Partnership pays the Management Agent a monthly management fee equal to 7.5% of Partnership Cash Flow per month. The management fee is paid to the Management Agent for the time and attention devoted by it for supervising and coordinating the management and administration of the Partnership's day-to-day operations pursuant to the terms of the Management Agreement. The Partnership will continue to deduct the management fee in full in the year paid. Assuming the management fee to be paid to the Management Agent is ordinary, necessary and reasonable in relation to the services provided, Counsel is of the opinion that the Partnership may deduct the management fee in full in the year paid. State and Local Taxation. Each Investor should consult his own attorney or tax advisor regarding the effect of state and other local taxes on his personal situation. Other Investment Risks Conflicts of Interest. The activities of the Partnership involve numerous existing and potential conflicts of interest between the Partnership, the General Partner and their Affiliates. See "Compensation and Reimbursement to the General Partner and its Affiliates," "The General Partner," "Competition" and "Conflicts of Interest." No Participation in Management. The General Partner has full authority to supervise the business and affairs of the Partnership pursuant to the Partnership Agreement and the Management Agreement. Except as otherwise provided in the Partnership Agreement or the Act, Limited Partners have no right to participate in the management, control or conduct of the Partnership's business and affairs. The General Partner, its employees and its Affiliates are not required to devote their full time to the Partnership's affairs and intend to continue devoting substantial time and effort to organizing other ventures throughout the United States that are similar to the Partnership. The General Partner will continue to devote such time to the Partnership's business and affairs as it deems necessary and appropriate in the exercise of reasonable judgment. The participation by any Limited Partner in the management or control of the Partnership's affairs could render him generally liable for the liabilities of the Partnership that could not be satisfied by assets of the Partnership. See the Form of Legal Opinion of Counsel attached hereto as Appendix C. Ability of the General Partner to Effect Fundamental Changes. The General Partner, with the prior approval of a Majority in Interest of the Limited Partners, has the authority under the Partnership Agreement to effect transactions that could result in the termination or reorganization of the Partnership, a total or partial dilution of the Limited Partners' interests in the Partnership, and/or the exchange of interests in another enterprise for the limited partnership interests held by the Limited Partners. See "Summary of the Partnership Agreement - Fundamental Changes." Limited Partners' Obligation to Return Certain Distributions. Except as provided by other applicable law and provided that a Limited Partner does not participate in the management or control of the Partnership, he will not be liable for the liabilities of the Partnership in excess of his investment, his Guaranty and his ratable share of undistributed profits. However, a Limited Partner shall be liable for a period of up to four years to return to the Partnership any distributions received from the Partnership if, at the time of such distributions, he knew that after giving effect to such distributions, all liabilities of the Partnership, other than liabilities as to Partners on account of their Partnership Interests and liabilities as to which recourse of creditors is limited to specified Partnership property, exceed the fair value of the Partnership's assets. For purposes of calculating the assets and liabilities of the Partnership, the fair value of property in which the recourse of creditors is limited to such property may be treated as a Partnership asset to the extent that the fair value exceeds outstanding liabilities on the property. Dilution of Limited Partners' Interests. The General Partner has the authority under the Partnership Agreement to cause the Partnership to issue, offer and sell additional limited partnership interests in the future (a "Dilution Offering"). Upon the sale of interests in the Partnership in a Dilution Offering, the Percentage Interests of the Partners will be proportionately diluted. See "Summary of the Partnership Agreement - Dilution Offerings." Liability Under Limited Partner Loan. Investors personally borrowing funds to finance a portion of their Unit cash purchase price with the proceeds of a Limited Partner Loan will be directly obligated to the Bank as provided in the Loan Documents. A default under the Limited Partner Loan could result in the foreclosure of the Investor's right to receive any Partnership Distributions as well as the loss of other personal assets unrelated to his Partnership Interest. Prospective Investors should review carefully all the provisions contained in the Loan Commitment and the terms of the Limited Partner Note and Loan and Security Agreement with their counsel and financial advisors. Neither the Partnership nor the General Partner endorses or recommends to the prospective Investors the desirability of obtaining financing from the Bank nor does the summary of the Loan Documents provided herein constitute legal advice. A Limited Partner's liability under a Limited Partner Note continues regardless of whether the Limited Partner remains a limited partner in the Partnership. As a consequence, such liability cannot be avoided by claims, defenses or set-offs the Limited Partner may have against the Partnership, the General Partner or their Affiliates. In addition to the suitability requirements discussed below, any prospective Investor applying for a Bank loan to fund a portion of his Unit purchase must be approved by the Bank for purposes of his delivery of the Limited Partner Note. The Bank has established its own criteria for approving the creditworthiness of a prospective Investor and has not established objective minimum suitability standards. Instead, the Bank is empowered to accept or reject prospective Investors. Long-term Investment. The General Partner anticipates that the Partnership will continue to operate the Lithotripsy System for an indefinite period of time and that the Partnership will not liquidate prior to its intended termination. Accordingly, Investors should consider their investment in the Partnership as a long-term investment of indefinite duration. Limited Transferability and Liquidity of Units. Transferability of Units is severely restricted by the Partnership Agreement and the Subscription Agreement, and with the exception of certain limited permitted transfers, the consent of the General Partner is necessary for any other transfers. No public market for the Units exists and none is expected to develop. Moreover, the Units generally may not be transferred unless the General Partner is furnished with an opinion of counsel, satisfactory to the General Partner, to the effect that such assignment or transfer may be effected without registration under the Securities Act and any state securities laws applicable to the transfer. The Partnership will be under no obligation to register the Units or otherwise take any action that would enable the assignment or transfer of a Unit to be in compliance with applicable federal and state securities laws. Thus, a Limited Partner may not be able to liquidate an investment in the Partnership in the event of an emergency and the Units may not be readily accepted as collateral for loans. Moreover, a sale of a Unit by a Limited Partner may cause adverse tax consequences to the selling Limited Partner, as well as potentially effect a default under any outstanding Limited Partner Loan. Accordingly, the purchase of Units must be considered a long-term and illiquid investment. Offering Price. The offering price of the Units has been determined by the General Partner based upon a valuation of the Partnership conducted by an independent third-party valuation firm, and based on various assumptions that may or may not occur. A copy of this valuation will be made available on request. The offering price of the Units is not, however, necessarily indicative of their value, if any, and no assurance can be given that the Units, if and when transferable, could be sold for the offering price or for any amount. Limitation of General Partner's Liability and Indemnification. The Partnership Agreement provides that the General Partner will not be liable to the Partnership or to any Partner of the Partnership for errors in judgment or other acts or omissions in connection with the Partnership as long as the General Partner, in good faith, determined such course of conduct was in the best interest of the Partnership, and such course of conduct did not constitute willful misconduct or gross negligence. Therefore, the Limited Partners may have a more limited right of action against the General Partner in the event of its misfeasance or malfeasance than they would have absent the limitations in the Partnership Agreement. The Partnership will indemnify the General Partner against losses sustained by the General Partner in connection with the Partnership, unless such losses are a result of the General Partner's gross negligence or willful misconduct. In the opinion of the SEC, indemnification for liabilities arising out of the Securities Act is contrary to public policy and therefore is unenforceable. Insurance. The terms of the Loan require the Partnership to cover the Lithotripsy System by insurance for losses due to fire and other casualties under policies customarily obtained for properties of this type. Prime Medical Services, Inc. ("Prime"), an Affiliate of the General Partner and the sole shareholder of Sun Medical, the Management Agent and the sole general partner of the General Partner, maintains active policies of insurance for the benefit of itself and certain affiliated entities covering employee crime, workers' compensation, business and commercial automobile operations, professional liability, inland marine, business interruption, real property and commercial liability risks. These policies include the Partnership, and the General Partner believes that coverage limits of these policies are within acceptable norms for the extent and nature of the risks covered. The Partnership is responsible for its share of premium costs. There are certain types of losses, however, that are either uninsurable or are not economically insurable. For instance, contractual liability is generally not covered under Prime's policies. Should such losses occur with respect to Partnership operations, or should losses exceed insurance coverage limits, the Partnership could suffer a loss of the capital invested in the Partnership and any anticipated profits from such investment. Optional Purchase of Limited Partner Interests. As provided in the Partnership Agreement, certain Affiliates of the existing Limited Partners have the first option, and the General Partner has the second option (which it may assign to the Partnership in its sole discretion), to purchase all the interest of a Limited Partner who (i) dies, (ii) becomes the subject of a domestic proceeding, (iii) becomes insolvent, (iv) acquires a direct or indirect ownership of an interest in a competing venture (including the lease or sublease of competing technology), or (v) defaults on his obligations under the Guaranty. Except in the case of the death of a Limited Partner, the option purchase price is an amount equal to the lesser of the fair market value of the Partnership Interest to be purchased or the Limited Partner's share of the Partnership's book value, if any, as reflected by the Limited Partner's capital account in the Partnership (unadjusted for any appreciation in Partnership assets and as reduced by depreciation deductions claimed by the Partnership for tax purposes). The option purchase price is likely to be considerably less than the fair market value of a Limited Partner's interest in the Partnership. Because losses, depreciation deductions and Distributions reduce capital accounts, and because appreciation in assets is not reflected in capital accounts, it is the opinion of the General Partner that the option purchase price may be nominal in amount. In addition, in the event existing or newly enacted laws or regulations or any other legal developments adversely affect (or potentially adversely affect) the operation of the Partnership or the business of the Partnership (e.g., any prohibitions on provider ownership), the General Partner, in its sole discretion, is obligated to either (i) purchase the Partnership Interests of all of the Limited Partners for an amount equal to the lesser of the fair market value or book value or (ii) dissolve the Partnership. See the Partnership Agreement attached hereto as Appendix A, "Summary of the Partnership Agreement - Optional Purchase of Limited Partner Interests," and "Risk Factors - Operating Risks - Liability Under the Guaranty." THE PARTNERSHIP Mobile Kidney Stone Centers of California II, L.P., a California limited partnership (the "Partnership") was organized and created under the California Revised Limited Partnership Act (the "Act") on December 11, 1998. The general partner of the Partnership is Mobile Kidney Stone Centers of California, Ltd. I, a California limited partnership (the "General Partner"). The General Partner currently holds a 41.62% interest in the Partnership in its capacity as the general partner and the existing limited partners (the "Initial Limited Partners") currently hold the remaining interest in the Partnership. In the event that all 40 Units offered hereby are sold, the General Partner will hold approximately a 33.3% general partner interest in the Partnership, the Initial Limited Partners will hold approximately a 46.7% limited partner interest in the Partnership and the Investors who purchase the Units offered hereby (the "New Limited Partners") will hold approximately an aggregate 20% interest in the Partnership. The Percentage Interests of the General Partner and the Initial Limited Partners (aggregate) will decrease by approximately .2% and .3%, respectively, for each Unit sold. In addition, all Percentage Interests are subject to further reduction in the future by any additional dilution offerings. The principal executive office of the Partnership and the General Partner is located at 15195 National Avenue, Suite 203, Los Gatos, California 95032. The telephone number of the Partnership and the General Partner is (800) 750-0786. TERMS OF THE OFFERING The Units and Subscription Price Mobile Kidney Stone Centers of California II, L.P., a limited partnership formed under the laws of the State of California, hereby offers an aggregate of up to 40 Units of limited partnership interest in the Partnership (the "Units"). Each Unit represents an initial 0.5% economic interest in the Partnership. See "Risk Factors - Other Investment Risks - Dilution of Limited Partners' Interests." Each Investor may purchase not less than one Unit. The General Partner may, however, in its sole discretion, sell less than one Unit as an additional investment and reject in whole or in part any subscription. The price for each Unit is $4,233 in cash, plus a personal guaranty of 0.5% of the Partnership's obligations under the Loan of $487,125 from the Bank (a $2,435.63 principal guaranty obligation per Unit). See "Terms of the Offering - Guaranty Arrangements." The cash purchase price and Guaranty are due at subscription; however, certain qualified Investors may personally borrow funds from a third-party financial institution to pay a portion of the cash purchase price. For the convenience of the Investors, the Partnership has arranged for financing of a portion of the Unit cash purchase price with the Bank. See "Terms of the Offering - Limited Partner Loans." The proceeds of the Offering will first be used by the Partnership to pay Offering costs and expenses. The remaining proceeds, if any, will then be used to reduce the Partnership's current outstanding indebtedness under the Loan. See "Sources and Applications of Funds." Acceptance of Subscriptions To enable the Bank and the General Partner to make credit and investor decisions, respectively, each prospective Investor must complete and deliver to the General Partner a Purchaser Financial Statement in the form included in the Subscription Packet accompanying this Memorandum, or a substitute financial statement containing the same information as provided therein, and pages one and two of the prospective Investor's most recently filed Form 1040 U.S. Individual Income Tax Return. An Investor that pays the full amount of his Unit purchase price with a check at subscription and whose subscription is received and accepted by the Partnership and the Bank (for the purposes of the Guaranty), will become a Limited Partner in the Partnership, and his subscription funds will be released from escrow to the Partnership. Acceptance by the General Partner of a subscription of an Investor that elects to finance a portion of the Unit cash purchase price with the proceeds of a Limited Partner Note is conditioned upon the Bank's approval of such loan. If the financing Investor is otherwise acceptable to the Partnership, after receipt of the Bank's approval, the Partnership will inform the Escrow Agent that it has accepted the Investor's subscription and the Escrow Agent will release the Investor's cash subscription proceeds to the Partnership and the Loan Documents to the Bank, and the Bank, in turn, will pay the proceeds from the Limited Partner Note to the Partnership. The Investor will become a Limited Partner in the Partnership at the time the Bank releases the proceeds of his Limited Partner Note to the Partnership. Subscriptions may be rejected in whole or in part by the Partnership and need not be accepted in the order received. To the extent the Partnership rejects or reduces an Investor's subscription as provided above, the Investor's Unit cash purchase price, Guaranty, and the principal amount of his Limited Partner Note will be proportionately refunded and reduced, as the case may be. Notice of acceptance of an Investor's subscription to purchase Units and his Percentage Interest in the Partnership will be furnished promptly after acceptance of the Investor's subscription. Guaranty Arrangements Each Investor will be required to execute a Guaranty as a part of his subscription. Each Limited Partner will have substantial exposure under his Guaranty. See "Risk Factors - Liability Under the Guaranty." The following summary of certain provisions of the Guaranty does not constitute legal advice. The form of the Guaranty is set forth in the Subscription Packet accompanying this Memorandum and should be reviewed carefully by prospective Investors and their counsel. Liability Under the Guaranty. Each Investor will be required to execute and deliver to the Bank a Guaranty pursuant to which he will personally guarantee the payment by the Partnership of a portion of its obligations to the Bank under the Loan. For each Unit purchased, an Investor will be required to guarantee 0.5% of the Partnership's total obligations under the Loan, which is equivalent to up to a $2,435.63 principal obligation guaranty per Unit. As of the date of this Memorandum, the outstanding principal balance of the Loan is $441,205.79, however the terms of the Loan provide for the renewal thereof, and therefore, Investors should view their personal obligations under their Guaranties to equal their pro rata share of the original Loan amount (i.e., $487,125). Liability under the Guaranty may exceed $2,435.63 per Unit because the guaranty obligation per Unit includes not only principal, but also 0.5% of all accrued and unpaid interest, late payment penalties and legal costs incurred by the Bank in collecting any defaulted payments. The amount of the Limited Partners' Guaranties will be proportionately reduced from time to time to the extent of the payments made by the Partnership under the Loan. Interest-only was payable monthly during the first six months of the Loan. The interest-only period expired on October 31, 1999 and the outstanding Loan principal, plus accrued interest, is payable over 36 monthly installments as provided below. The amount of each of the first 35 equal monthly installments of principal and interest is equal to the monthly payment resulting from amortization of the outstanding Loan principal over 36 months, assuming a fixed 10% per annum interest rate. A final payment of all outstanding principal and accrued interest will be payable in the 36th month. The 10% interest rate, as provided above, is used only for purposes of calculating the amount of the equal monthly installments over the 35 month period. Loan interest actually accrues at the Bank's Prime Rate, as the same may change from time to time. Pursuant to a formula set forth in the Loan promissory note, prepayments of Loan principal must be made annually out of Partnership Cash Flow until the Loan is paid in full. As of the date of this Memorandum, the Partnership has not made any prepayments. The General Partner believes that Loan principal prepayments will reduce the term of the Loan. The monthly installment payments of principal and interest for the term of the Loan are equal to $15,718 per month. If Partnership operations continue to generate sufficient revenues to enable the Partnership to make all payments under the Loan to the Bank when due, such payments will be sufficient to repay the Bank fully over the term of the Loan, and no Partner will be required to perform under his Guaranty. However, a default by the Partnership, the General Partner or the Limited Partners under the Loan or the Guaranties will entitle the Bank to exercise one or more of the following remedies: (i) declare all principal payments and accrued interest immediately due and payable; (ii) foreclose on its security interest in the Partnership's assets (including the Lithotripsy System and the Partnership's accounts receivable); and/or (iii) seek payment directly from the Limited Partners under the Guaranties. Events of default include the following: (i) default in the payment or performance of any obligation, covenant or liability contained or referred to in the Loan documents, including the Guaranties, unless remedied to the reasonable satisfaction of Bank within 30 days; (ii) any warranty, representation or statement made or furnished to the Bank by or on behalf of the Partnership or any of its guarantors (including the Limited Partners) proving to have been false in any material respect when made or furnished; (iii) loss, theft, substantial damage, destruction, sale or encumbrance to or of any of the collateral, or the making of any levy, seizure or attachment thereof or thereon, which is not removed within 30 days; (iv) dissolution, termination of existence (or, in the case of an individual guarantor, death), insolvency, business failure, appointment of a receiver of any part of the property of, assignment for the benefit of creditors by, or the commencement of any proceeding under any bankruptcy or insolvency laws by or against the Partnership or any guarantor which is not favorably terminated within 30 days; (v) the Partnership's failure to maintain its existence in good standing unless remedied within 30 days of notice by the Bank; (vi) the assertion or making of any seizure, vesting or intervention by or under authority of any government by which the management of the Partnership is displaced of their authority in the conduct of their business or their business is curtailed; (vii) upon the entry of any monetary judgment or the assessment and/or filing of any tax lien against the Partnership or any guarantor or upon the issuance of any writ or garnishment or attachment against any property of, debts due or rights of the Partnership or such guarantor to specifically include the commencement of any action or proceeding to seize monies of the Partnership or such guarantor on deposit in any bank account with the Bank, which is not removed or terminated within 30 days. However, any default by any one or more of the Partnership's guarantors under the above provisions applicable thereto, will only be an actionable default if one or more such defaulting guarantors either alone or in the aggregate guarantees 25% or more of the Loan, and provided further that the Bank has not, within twelve months of the occurrence of such guarantor's default, received, accepted and approved a substitute guaranty or guaranties from a party or parties acceptable to it in an amount greater than or equal to the amount of such defaulting guarantor's guaranties, or the Partnership has not made a prepayment of the Loan principal in an amount equal to the amount of the defaulting guarantor's guaranty. The Bank may also accelerate the Loan if it should deem itself, or its collateral, insecure or the payment or performance under the Loan impaired and may demand additional collateral at any time it deems the Loan to be insufficiently secured. As discussed below, under the terms of the Guaranties, Limited Partners waive certain rights to which they might otherwise be entitled, and are required to pay their share of the Bank's attorneys' fees and court costs if the Bank is successful in enforcing the Guaranties through a lawsuit. Copies of the Partnership's Loan documentation with the Bank are available upon request to the General Partner. The Guaranties are a guaranty of payment and not of collection. As a result, the liability of the Limited Partners under the Guaranties is direct and immediate and not conditional or contingent upon either the pursuit of any remedies against the Partnership or any other person (including any other guarantor) or foreclosure of any security interest or liens available to the Bank. The Bank may accept any payment, plan for adjustment of debts, plan for reorganization or liquidation, or plan of composition or extension proposed by, or on behalf of, the Partnership without in any way affecting or discharging the liability of the Limited Partners. Limited Partners waive any right to require that an action first be brought against the Partnership, the General Partner, any other guarantor or any other person, or to require that resort be had to any security or to any balance of any deposit account or credit on the books of Bank in favor of the Partnership or any other person. The Guaranty is a continuing guaranty that by its terms survives the death, bankruptcy, dissolution or disability of a Limited Partner guarantor. A Limited Partner's liability under a Guaranty continues regardless of whether the Limited Partner remains a limited partner in the Partnership. Under the terms of the Guaranties, the Limited Partners expressly waive: (i) notice of acceptance of the guaranty and of extensions of credit to the Partnership; (ii) presentment and demand for payment of the Partnership's promissory note; (iii) protest and notice of dishonor or of default; (iv) demand for payment under the Guaranty; and (v) all other notice to which the Limited Partner might otherwise be entitled. The principal liability of an Investor under the Guaranty will be up to $2,435.63 per Unit. Each Investor should regard his exposure with respect to his investment in the Partnership to be his cash subscription ($4,233 per Unit) plus the amount for which he is personally liable under his Guaranty, up to $2,435.63 per Unit in principal, plus accrued and unpaid interest, as well as late payment penalties, legal fees and court costs. An Investor should not purchase a Unit if he does not have resources sufficient to bear the loss of this entire amount. The Guaranty generally provides that within thirty days following the Bank's determination that the Partnership is in default under the Loan, the Bank will send a notice to each Limited Partner (the "Notice") setting forth the Partnership's total Loan obligations as of the date of the Notice (inclusive of all interest, late payment penalties and legal costs incurred in connection with the enforcement of such obligation accrued but unpaid through such date), together with a statement of the amount which the Limited Partner is responsible for paying (the "Guaranty Amount"). Failure by the Bank to send the Notice in a timely fashion will not, however, release the Limited Partner guarantor from any liability under his Guaranty. The Notice will provide that unless the Bank receives payment of the Guaranty Amount from the Limited Partner within five business days following the date of the Notice, the Guaranty Amount will be increased by the Limited Partner's pro rata share (based on the number of guarantors who did not pay the Guaranty Amount within five days of the date of the notice) of any additional accrued but unpaid interest, late payment penalties and legal costs through the date such payment is made. Because each Guaranty runs directly from the Limited Partner to the Bank, claims or defenses the Limited Partner may have against the Partnership or the General Partner may not be used to avoid payment under the Guaranty. See the form of the Guaranty included in the Subscription Packet accompanying this Memorandum. See also "Terms of the Offering - Suitability Standards." Approval of Bank. In addition to meeting the suitability requirements discussed below under "Suitability Standards," each Investor must be approved by the Bank for purposes of their delivery of the Guaranty. The Bank has established its own criteria for approving the credit-worthiness of Investors, either individually or as a group, and has not established objective minimum suitability standards. Instead, the Bank is empowered under the terms of the Loan to accept or reject any Investor. See "Risk Factors - Operating Risks - Liability Under the Guaranty." Limited Partner Loans The purchase price for the Units is payable in cash. The prospective Investor may pay for the Units with personal funds alone or in part with such funds, together with either loan proceeds personally borrowed by the Investor under a Limited Partner Loan or other loan. Financing under the Limited Partner Loans was arranged by the Partnership with the Bank as provided in the Loan Commitment, attached hereto as Appendix B. Prospective Investors should review carefully all the provisions contained in the Loan Commitment and the terms of the Limited Partner Note and Loan and Security Agreement with their counsel and financial advisors. Neither the Partnership nor the General Partner endorses or recommends to the prospective Investors the desirability of obtaining financing from the Bank nor does the summary of the Loan Documents provided herein constitute legal advice. If the prospective Investor wishes to finance a portion of the cash purchase price of his Units as provided herein, he must deliver to the Sales Agent upon submission of his Subscription Packet an executed Limited Partner Note payable to the Bank and Note Addendum, the form of which are attached as Exhibit A to the Loan Commitment, a Loan and Security Agreement, the form of which is attached as Exhibit B to the Loan Commitment, a Security Agreement, the form of which is attached as Exhibit C to the Loan Commitment and two UCC-1's, the forms of which are attached to the Subscription Packet (collectively, the "Loan Documents"). In no event may the maximum amount borrowed per Unit exceed $1,733. The Limited Partner Note is repayable in twelve (12) predetermined installments in the respective amounts set forth in the Loan Commitment. The installments are payable on each January 15th, April 15th, June 15th and September 15th commencing on September 15, 2000 (assuming the Closing occurs prior to May 31, 2000), with a thirteenth (13th) and final installment in an amount equal to the principal balance then owed on the Limited Partner Note and all accrued, unpaid interest thereon due and payable on the third anniversary of the first installment date. Interest accrues at the Bank's "Prime Rate," as the same may change from time to time. The Prime Rate refers to that rate of interest established by the Bank and identified as such in literature published and circulated within the Bank's offices. Such term is used as a means of identifying a rate of interest index and not as a representation by the Bank that such rate is necessarily the lowest or most favorable rate of interest offered to borrowers of the Bank generally. A prospective Investor will have no claim or right of action based on such premise. See the form of the Limited Partner Note attached as Exhibit A to the Loan Commitment which is attached hereto as Appendix B. The Limited Partner Note will be secured by the cash flow distributions payable with respect to the prospective Investor's Partnership Interest as provided in the Loan and Security Agreement and the Security Agreement and as evidenced by the UCC-1s. By executing the Loan and Security Agreement, the prospective Investor requests the Bank to extend the Loan Commitment to him if he is approved for a Limited Partner Loan. The Loan and Security Agreement also authorizes (i) the Bank to pay the proceeds of the Limited Partner Note directly to the Partnership and (ii) the Partnership to remit funds directly to the Bank out of the prospective Investor's share of any Distributions represented by the prospective Investor's percentage Partnership Interest to fund installment payments due on the prospective Investor's Limited Partner Note. See the form of the Loan and Security Agreement attached as Exhibit B to the Loan Commitment which is attached hereto as Appendix B. If the prospective Investor is approved by the Bank and is acceptable to the General Partner, the Escrow Agent will, upon acceptance of the Investor's subscription by the General Partner, release the Loan Documents to the Bank and the Bank will pay the proceeds of the Limited Partner Note to the Partnership to fund a portion of the Investor's Unit purchase. The prospective Investor will have substantial exposure under the Limited Partner Note. Regardless of the results of the Partnership's operations, a prospective Investor will remain liable to the Bank under his Limited Partner Note according to its terms. The Bank can accelerate the entire principal amount of the Limited Partner Note in the event the Bank in good faith believes the prospect of timely payment or performance by the prospective Investor is impaired or the Bank otherwise in good faith deems itself or its collateral insecure and upon certain other events, including, but not limited to, nonpayment of any installment. The Bank may also request additional collateral in the event it deems the Limited Partner Note insufficiently secured. A Limited Partner's liability under a Limited Partner Note also continues regardless of whether the Limited Partner remains a limited partner in the Partnership. A Limited Partner's liability under a Limited Partner Note is directly with the Bank. As a consequence, such liability cannot be avoided by claims, defenses or set-offs the Limited Partner may have against the Partnership, the General Partner or their Affiliates. In addition to the suitability requirements discussed below, the prospective Investor must be approved by the Bank for purposes of his delivery of the Limited Partner Note. The Bank has established its own criteria for approving the creditworthiness of a prospective Investor and has not established objective minimum suitability standards. Instead, the Bank is empowered to accept or reject prospective Investors. See "Risk Factors - Other Investment Risks - Liability Under Limited Partner Loan." Subscription Period; Closing The subscription period will commence on the date hereof and will terminate at 5:00 p.m., Eastern time, on June 1, 2000 (the "Closing Date"), unless sooner terminated by the General Partner or unless extended for an additional period up to 180 days. See "Plan of Distribution." Offering Exemption The Units are being offered and will be sold in reliance on an exemption from the registration requirements of the Securities Act of 1933, as amended, provided by Section 4(2) thereof and Rule 506 of Regulation D promulgated thereunder, as amended, and an exemption from state registration provided by the National Securities Markets Improvement Act of 1996. The suitability standards set forth below have been established in order to comply with the terms of these offering exemptions. Suitability Standards In addition to the suitability requirements discussed below, each Investor wishing to obtain a Limited Partner Loan must be approved by the Bank. The Bank has established its own criteria for approving the credit-worthiness of Investors and has not established objective minimum suitability standards. The Bank has sole discretion to accept or reject any Investor. An investment in the Partnership involves a high degree of financial risk and is suitable only for persons of substantial financial means who have no need for liquidity in their investments and who can afford to lose all of their investment. See "Risk Factors - Other Investment Risks - Limited Transferability and Illiquidity of Units." An Investor should not purchase a Unit if the Investor does not have resources sufficient to bear the loss of the entire amount of the purchase price, including any portion financed. The General Partner anticipates selling Units only to individual investors; however, the General Partner reserves the right to sell Units to entities. Because of the risks involved, the General Partner anticipates selling the Units only to Investors residing in California who it reasonably believes meet the definition of "accredited investor" as that term is defined in Rule 501 under the Securities Act, but reserves the right to sell up to 35 Investors who are nonaccredited investors. Certain institutions and the following individuals are "accredited investors": (1) An individual whose net worth (or joint net worth with his or her spouse) exceeds $1,000,000 at the time of subscription; (2) An individual who has had an individual income in excess of $200,000 in each of the two most recent fiscal years and who reasonably expects an individual income in excess of $200,000 in the current year; or (3) An individual who has had with his or her spouse a joint income in excess of $300,000 in each of the two most recent fiscal years and who reasonably expects a joint income in excess of $300,000 in the current year. Individual Investors must also be at least 21 years old and otherwise duly qualified to acquire and hold partnership interests. The General Partner reserves the right to refuse to sell Units to any person, subject to federal and applicable state securities laws. Each Investor must make an independent judgment, in consultation with his own counsel, accountant, investment advisor or business advisor, as to whether an investment in the Units is advisable. The fact that an Investor meets the Partnership's suitability standards should in no way be taken as an indication that an investment in the Units is advisable for that Investor. It is anticipated that suitability standards comparable to those set forth above will be imposed by the Partnership in connection with resales, if any, of the Units. Transferability of Units is severely restricted by the Partnership Agreement and the Subscription Agreement. See "Summary of the Partnership Agreement - Restrictions on Transfer of Partnership Interests." Investors who wish to subscribe for Units must represent to the Partnership that they meet the foregoing standards by completing and delivering to the Sales Agent a Purchaser Questionnaire in the form included in the Subscription Packet. Each Purchaser Representative, if any, acting on behalf of an Investor in connection with this Offering must complete and deliver to the Sales Agent a Purchaser Representative Questionnaire (a copy of which is available upon request to the General Partner). How to Invest Investors who meet the qualifications for investment in the Partnership and who wish to subscribe for Units may do so by following the instructions included in the Subscription Packet accompanying this Memorandum. All information provided by Investors will be kept confidential and not disclosed except to the Partnership, the General Partner, the Bank and their respective counsel and Affiliates and, if required, to governmental and regulatory authorities. Restrictions on Transfer of Units The Units have not been registered under the Securities Act or under any state securities laws and holders of Units have no right to require the registration of such Units or to require the Partnership to disclose publicly information concerning the Partnership. Units can be transferred only in accordance with the provisions of, and upon satisfaction of, the conditions set forth in the Partnership Agreement. Among other things, the Partnership Agreement provides that no assignment of Units may be made if such assignment could not be effected without registration under the Securities Act or state securities laws. Moreover, the assignment generally must be made to an individual approved by the General Partner who meets the suitability requirements described in this Memorandum. Assignors of Units will be required to execute certain documents, in form and substance satisfactory to the General Partner, instructing it to effect the assignment. Assignees of Units may also, in the discretion of the General Partner, be required to pay all costs and expenses of the Partnership with respect to the assignment. Any assignment of Units or the right to receive Partnership distributions in respect of Units will not release the assignor from any liabilities connected with the assigned Units, including liabilities under the Guaranty and any Limited Partner Loan. Such assignment may constitute an event of default under such loan. An assignee, whether by sale or otherwise, will acquire only the rights of the assignor in the profits and capital of the Partnership and not the rights of a Limited Partner, unless such assignee becomes a substituted Limited Partner. An assignee may not become a substituted Limited Partner without (i) either the written consent of the assignor and the General Partner, or the consent of a Majority in Interest of the Limited Partners (except the assignor Limited Partner) and the General Partner, (ii) the submission of certain documents and (iii) the payment of expenses incurred by the Partnership in effecting the substitution. An assignee, regardless of whether he becomes a substituted Limited Partner, will be subject to and bound by all the terms and conditions of the Partnership Agreement with respect to the assigned Units. See "Summary of the Partnership Agreement - Restrictions on Transfer of Partnership Interests." PLAN OF DISTRIBUTION Subscriptions for Units will be solicited by MedTech Investments, Inc., the Sales Agent, which is an Affiliate of the General Partner. The Sales Agent has entered into a Sales Agency Agreement with the Partnership pursuant to which the Sales Agent has agreed to act as exclusive agent for the placement of the Units on a "best efforts" any or all basis. The Sales Agent is not obligated to purchase any Units. The Sales Agent is a North Carolina corporation that was formed on December 23, 1987, and became a member of the National Association of Securities Dealers on March 15, 1988. The Sales Agent will be engaged in other similar offerings on behalf of the General Partner and its Affiliates during the pendency of this Offering and in the future. The Sales Agent is a wholly owned subsidiary of Prime. Investors should note the material relationship between the Sales Agent and the General Partner, and are advised that the relationship creates conflicts in the Sales Agent's performance of its due diligence responsibilities under the Federal securities laws. As compensation for its services, the Sales Agent will receive a commission equal to $75 for each Unit sold. No other commissions will be paid in connection with this Offering. Subject to the conditions as provided above, the Sales Agent may be reimbursed by the Partnership for its out-of-pocket expenses associated with the sale of the Units in an amount not to exceed $7,000. The Partnership has agreed to indemnify the Sales Agent against certain liabilities, including liabilities under the Securities Act. The Partnership will not pay the fees of any purchaser representative, financial advisor, attorney, accountant or other agent retained by an Investor in connection with his decision to purchase Units. The subscription period will commence on the date hereof and will terminate at 5:00 p.m., Eastern time, on June 1, 2000, (or earlier, in the discretion of the General Partner), unless extended at the discretion of the General Partner for an additional period not to exceed 180 days. See "Terms of the Offering - Subscription Period; Closing." WINSTON #892462 v 2 49 The Partnership seeks by this Offering to sell a maximum of 40 Units for a maximum of an aggregate of $169,320 in cash ($166,320 net of Sales Agent Commissions). The Partnership has set no minimum number of Units to be sold in this Offering. The subscription funds, Guaranty and Loan Documents, if any, received from each Investor will be held in escrow (which, in the case of cash subscription funds, shall be held in an interest bearing escrow account with the Bank) until either the Investor's subscription is accepted by the Partnership (and approved by the Bank in the case of the Guaranties and financed purchases of Units), the Partnership rejects the subscription or the Offering is terminated. Upon the receipt and acceptance of an Investor's subscription by the Partnership (and the Bank), the Investor will be admitted to the Partnership as a Limited Partner. In connection with his admission as a Limited Partner, the Investor's subscription funds will be released from escrow to the Partnership, and his Guaranty and Loan Documents, if any, will be released to the Bank which will pay the proceeds from the Limited Partner Note to the Partnership. In the event a subscription is not accepted, all subscription funds (without interest), the Guaranty, the Loan Documents and other subscription documents held in escrow will be promptly returned to the rejected Investor. A subscription may be rejected in part, in which case a portion of the subscription funds (without interest), the Guaranty and any Limited Partner Note will be returned to the Investor. BUSINESS ACTIVITIES General The Partnership was formed to (i) acquire the Lithotripsy System and operate it in the Service Area, (ii) improve the provision of health-care in the Partnership's Service Area by taking advantage of both the technological innovations inherent in the Modulith(R) SLX-T and the Partnership's quality assurance and outcome analysis programs, and (iii) make cash distributions to its partners from revenues generated by the operation of the Lithotripsy System. The Partnership owns and operates the Lithotripsy System in the Service Area and has contracted with the nine Contract Hospitals to provide lithotripsy services. Treatment Methods for Kidney Stone Disease Urolithiasis, or kidney stone disease, affects an estimated 600,000 persons per year in the United States. The exact cause of kidney stone formation is unclear, although it has been attributed to diet, climate, metabolism and certain medications. Approximately 75% of all urinary stones pass spontaneously, usually within one to two weeks, and require little or no clinical or surgical intervention. All other kidney stones, however, require some form of medical or surgical treatment. A number of methods are currently used to treat kidney stones. These methods include drug therapy, endoscopic and laser procedures, open surgery, percutaneous lithotripsy and extracorporeal shock wave lithotripsy. The type of treatment a urologist chooses depends on a number of factors such as the size of the stone, its location in the urinary system and whether the stone is contributing to other urinary complications such as blockage or infection. The extracorporeal shock wave lithotripter, introduced in the United States from West Germany in 1984, has dramatically changed the course of kidney stone disease treatment. The General Partner estimates that currently up to 95% of all kidney stones that require treatment can be treated by lithotripsy. Lithotripsy involves the use of shock waves to disintegrate kidney stones noninvasively. The Lithotripsy System Upon closing the Loan, the Partnership used a portion of the Loan proceeds (approximately $400,000) to acquire a new Modulith(R) SLX-T lithotripter. The Modulith(R) SLX-T received FDA premarket approval on March 27, 1997. The General Partner and its Affiliates have limited, but positive, direct experience with the use of the Modulith(R) SLX-T lithotripter. Preliminary reports from abroad and "word of mouth" anecdotal evidence indicates that the Modulith(R) SLX-T is as effective as most of the "portable" lithotripters in the market. See "Risk Factors - Operating Risks - Reliability and Efficacy of the Storz Modulith(R) SLX-T." The Modulith(R) SLX-T was especially adapted for the treatment of urological stones. In addition to the efficient fragmentation of all types of urinary tract stones, the Modulith(R) SLX-T is suitable for performing a range of urological examinations including cystoscopy and ureterorenoscopy. The Modulith(R) SLX-T consists of a cylindrical pressure wave generator, an OEC 9800 C-arm x-ray system unit and a patient table. The Modulith(R) SLX-T generates pressure waves electromagnetically from the cylindrical energy source and parabolic reflector. The pressure wave generator operates without an acoustic lens, thus avoiding such disadvantages as energy dissipation and aperture limitations. The pressure at the focal point can be varied by means of the energy control in nine steps from 10 Mpa to 100 Mpa. The energy source is fitted with an axial and lateral air-bag. When expanded during fluoroscopy, these air-bags ensure optimal X-ray image quality for monitoring purposes. The pressure wave coupling is dry (water cushion is used). The shock-wave may be released at fixed frequencies of 1 Hz, 1.5 Hz or 2 Hz, or may be triggered using the ECG and/or respiration. The Modulith(R) SLX-T localizes stones using an OEC 9800 C-arm X-ray system. The X-ray system employs an image intensifier, cassette film, digital spot imaging capability and two high resolution 16" monitors capable of displaying stored digital images. The patient table can be moved electronically in all three dimensions, and a floating function allows for quick patient positioning. The table is X-ray transparent and allows visualization of the entire urinary tract. The table includes a patient cradle which provides comfortable and secure support in the prone, supine and lateral positions. The Partnership's Modulith(R) SLX-T came with an eighteen month limited warranty during which time all maintenance, repairs, shock tubes, glassware and capacitors are provided free of charge. The General Partner anticipates that upon the expiration of the warranty, the Partnership will either pay for maintenance service on the Modulith(R) SLX-T on an as needed basis, or enter into an annual maintenance agreement with a third-party service provider. The General Partner estimates that expenditures for maintenance of the Modulith(R) SLX-T will be approximately $40,000 per year. The Partnership also used a portion of the Loan proceeds ($69,510) to acquire from AK Associates, L.L.C., an Affiliate of the General Partner, a Ford 400 Series van which was customized to include a 14' cargo box to house the lithotripter while it is transported from site to site. The floor of the van is loading dock height so the lithotripter can be easily loaded on and off the van at each treatment facility. The van is also upfitted with a lift gate with a load capacity of 3,000 pounds for easy loading of the lithotripter from street level. The van has been modified for securing the lithotripter and its accessories during transport and for heating the cargo box during the winter to prevent freezing of the lithotripter and its components. The General Partner did not purchase the manufacturer's service contract for the van. Instead, the Partnership pays for service on an as needed basis. The General Partner estimates that expenditures for maintenance and repair of the van will be approximately $6,000 per year. Acquisition of Additional Assets If in the future the General Partner determines that it is in the best interest of the Partnership to acquire (i) one or more fixed base or mobile Lithotripsy Systems, (ii) any other urological device or equipment, so long as such device has FDA premarket approval at the time it is acquired by the Partnership, and/or (iii) an interest in any business entity that engages in a urological business described above, the General Partner has the authority (without obtaining the Limited Partners' consent) to establish reserves or, subject to certain restrictions in the Loan, to borrow additional funds on behalf of the Partnership to accomplish such goals, and may use Partnership assets and revenues to secure and repay such borrowings. The acquisition of such assets likely would result in higher operating costs for the Partnership. The General Partner does not anticipate acquiring additional Partnership assets unless projected Partnership Cash Flow or proceeds from a Dilution Offering are sufficient to finance such acquisitions. No Limited Partner would be personally liable on any Partnership indebtedness without such Limited Partner's prior written consent. There is no assurance that additional financing would be available to the Partnership to acquire additional assets or to fund any additional working capital requirements. Any additional borrowing by the Partnership will serve to increase the risks to the Partnership associated with leverage, as well as to increase the risks that cash from operations will be insufficient to fund the obligations secured by the Limited Partners' Guaranties. See "Risk Factors - Operating Risks - Partnership Limited Resources and Risks of Leverage" and "Risk Factors - Operating Risks - Liability Under the Guaranty." Hospital Contracts The Partnership has entered into Hospital Contracts to provide lithotripsy services at ten treatment centers in the Service Area. The Contract Hospitals are: Greater Sacramento Surgery Center Mark Twain St. Joseph's Hospital Sutter Roseville Community Center Sutter General Hospital Sutter Davis Hospital Marshall Hospital Mercy American River Hospital Mercy Folsom Hospital Mercy General Hospital Woodland Memorial Hospital All of the Hospital Contracts grant the Partnership the exclusive right to deliver lithotripsy services to the relevant Contract Hospital. The Hospital Contracts require the Partnership to make a lithotripter available at the facilities as agreed to by the Contract Hospital and the Partnership. The Partnership generally also provides a technician and certain ancillary services such as scheduling necessary for the lithotripsy procedure. The Contract Hospitals generally pay the Partnership a fee for each lithotripsy procedure performed at that health care facility. The contracts expire by their terms at various times through December 31, 2003 and generally may be extended only upon mutual agreement with the health care facility. Most of these contracts may be terminated without cause upon 180 days or less written notice by either party prior to any renewal date, or upon customary events of default. The Mercy American River, Mercy Folsom, Mercy General and Woodland Memorial contracts recently expired by their terms, though the parties are currently negotiating for renewals and are continuing to maintain a business relationship on a month-to-month basis substantially in accordance with the terms of those agreements. The General Partner believes it has a good relationship with many of the Contract Hospitals. There is no assurance, however, that one or more of the Hospital Contracts will not terminate in the future. See "Risk Factors - Operating Risks - Contract Terms and Termination." Reimbursement Agreements. Prime and its Affiliates have negotiated third-party reimbursement agreements with certain national and local payors. The national agreements apply to all the lithotripsy partnerships with which Prime is affiliated. Although the Partnership currently provides services under the Hospital Contracts on a wholesale basis, the Partnership will be able to take advantage of these reimbursement agreements in the future if in the event it contracts with a treatment facility on a retail basis. Some of the national and local payors have agreed to pay a fixed price for the lithotripsy services. Generally the agreements may be terminated by either party on 90 days' notice. The national and local reimbursement agreements that have been negotiated or renegotiated in the past two to four years almost entirely provide for lower reimbursement rates for lithotripsy services than the older agreements. Operation of the Lithotripsy System It is anticipated that the Partnership will continue to provide services under the Hospital Contracts and similar arrangements. See "Business Activities - Hospital Contracts" and "Risk Factors - Operating Risks - Contract Terms and Termination." Qualified physicians who make appropriate arrangements with Contract Hospitals receiving lithotripsy services pursuant to the Hospital Contracts and other lithotripsy service agreements may treat their own patients using the Lithotripsy System after they have received any necessary training required by the rules of such Contract Hospital. The Partnership may also make arrangements to make the Lithotripsy System available to qualified physicians (including but not limited to qualified physician Limited Partners) desiring to treat their own patients after they have received any necessary training. The General Partner and Management Agent will endeavor to the best of their abilities to require that physicians using the Partnership's Lithotripsy System comply with the Partnership's quality assurance and outcome analysis programs in order to maintain the highest quality of patient care. In addition, the General Partner reserves the right to request that (i) physicians (or members of their practice groups) treat only their own patients with the Lithotripsy System, and (ii) physician Limited Partners disclose to their patients in writing their financial interest in the Partnership prior to treatment, if it determines that such practices are advisable under applicable law. The latter disclosure is required under California law. See "Regulation-State Regulation." The treating qualified physician will be solely responsible for billing and collecting on his own behalf the professional service component of the treatment procedure. Owning an interest in the Partnership is not a condition to using the Lithotripsy System. Thus, local qualified physicians who are not Limited Partners will be given the same opportunity to treat their patients using the Lithotripsy System as provided above. Management The Partnership has entered into a management agreement (the "Management Agreement") with the Management Agent whereby the Management Agent is obligated to supervise and coordinate the management and administration of the operation of the Lithotripsy System on behalf of the Partnership in exchange for a monthly management fee equal to 7.5% of Partnership Cash Flow per month. See "Compensation and Reimbursement to the General Partner and its Affiliates." The Management Agent's services under the Management Agreement include making available any necessary training of physicians in the proper use of the lithotripsy equipment, monitoring technological developments in renal lithotripsy and advising the Partnership of these developments, arranging continuing education programs for qualified physicians who use the lithotripsy equipment and providing advertising, billing, accounts collection, equipment maintenance, medical supply inventory and other incidental services necessary for the efficient operation of the Lithotripsy System. Costs incurred by the Management Agent in performing its duties under the Management Agreement are the responsibility of the Partnership. The Management Agent's engagement under the Management Agreement is as an independent contractor and neither the Partnership nor its Limited Partners have any authority or control over the method or manner in which the Management Agent performs its duties under the Management Agreement. The Management Agreement is in the first year of its initial five-year term. Thereafter, it will be automatically renewed for three additional five-year terms unless terminated by the Partnership or the Management Agent. THE GENERAL PARTNER The General Partner of the Partnership is Mobile Kidney Stone Centers of California, Ltd. I, a California limited partnership formed on October 6, 1987. The general partner of the General Partner is Sun Medical Technologies, Inc., a California corporation formed on June 20, 1990 ("Sun Medical"). Prime acquired all the outstanding stock of Sun Medical on November 10, 1995 and Sun Medical remains a wholly-owned subsidiary of Prime. The principal executive office of the General Partner is located at 15195 National Avenue, Suite 203, Los Gatos, California 95032 and the principal executive office of Sun Medical is located at 1301 Capital of Texas Highway, Suite C-300, Austin, Texas 78746. Management. The General Partner is managed by Sun Medical under an arrangement similar to the Management Agreement. The following table sets forth the names and respective positions of the individuals serving as executive officers and directors of Sun Medical, many of whom also serve as executive officers of Prime. Name Office Stan Johnson President and Director Ken Shifrin Director Joseph Jenkins, M.D. Director Cheryl Williams Vice President, Chief Financial Officer and Director James D. Clark Secretary Supervision of the day-to-day management and administration of the Partnership is the responsibility of Sun Medical in its capacity as the general partner of the General Partner and Management Agent of the Partnership. Sun Medical itself is managed by a four-member Board of Directors composed of Mr. Shifrin, Dr. Jenkins, Ms. Williams and Mr. Johnson. Set forth below are the names and descriptions of the background of the key executive officers and directors of Sun Medical. Stan Johnson has been a Vice President of Prime and President of Sun Medical since November 1995. Mr. Johnson was the Chief Financial Officer of Sun Medical from 1990 to 1995. Kenneth S. Shifrin has been Chairman of the Board and a Director of Prime since October 1989 and was elected a Director of Sun Medical following Prime's acquisition of all of Sun Medical's stock. Mr. Shifrin also has served in various capacities with American Physicians Service Group, Inc. ("APS") since February 1985, and is currently Chairman of the Board and Chief Executive Officer of APS. Joseph Jenkins, M.D. has been President and Chief Executive Officer of Prime since April 1996, and previously practiced urology in Washington, North Carolina. Dr. Jenkins was recently elected to Sun Medical's Board of Directors. Dr. Jenkins is a board certified urologist and is a founding member, past-president and currently a Director of the American Lithotripsy Society. Cheryl Williams is Vice President-Finance, Chief Financial Officer and Director of Sun Medical and has been Chief Financial Officer, Vice President-Finance and Secretary of Prime since October 1989. Ms. Williams was Controller of Fairchild Aircraft Corporation from August 1988 to October 1989. From 1985 to 1988, Ms. Williams served as the Chief Financial Officer of APS Systems, Inc., a wholly-owned subsidiary of APS. James D. Clark recently became Secretary of Sun Medical after previously serving as its Assistant Treasurer. Mr. Clark has served as Tax Manager of Prime since January 1998 and is a Certified Public Accountant in Texas. Prior to joining Prime, Mr. Clark was Controller for ERISA Administrative Services, Inc. COMPENSATION AND REIMBURSEMENT TO THE GENERAL PARTNER AND ITS AFFILIATES The following summary describes the types and, where determinable, the estimated amounts of reimbursements, compensation and other benefits the General Partner and its Affiliates will receive in connection with the continued operation and management of the Partnership and the Lithotripsy System. None of such fees, compensation and other benefits has been determined at arm's length. Except for the items set forth below, the General Partner does not expect to receive any distribution, fee, compensation or other remuneration from the Partnership. See "Business Activities - Management" and "Plan of Distribution." 1. Management Fee. Pursuant to the Management Agreement, the Management Agent has contracted with the Partnership to supervise the management and administration of the day-to-day operations of the Partnership's lithotripsy business for a monthly fee equal to 7.5% of Partnership Cash Flow per month. All costs incurred by the Management Agent in performing its duties under the Management Agreement are the responsibility of, and are paid directly or reimbursed by, the Partnership. The Management Agent is the management agent for various affiliated lithotripsy ventures. As a consequence, many of the Management Agent's employees provide various management and administrative services for numerous ventures, including the Partnership. In order to properly allocate the costs of the Management Agent's employees and other overhead expenses among the entities for which they provide services, such costs are divided among all the ventures based upon the relative number of patients treated by each. The General Partner believes that the sharing of personnel and overhead costs among various entities results in significant costs savings for the Partnership. The management fee for any given month is payable on or before the 30th day of the next succeeding month. The Management Agreement is in the first year of its initial five-year term. The Management Agreement will be automatically renewed for up to three additional successive five-year terms unless it is earlier terminated by the Partnership or the General Partner. The General Partner and the Management Agent are reimbursed by the Partnership for all of their out-of-pocket costs associated with the operation of the Partnership and the Lithotripsy System, and the Partnership will pay or reimburse to the General Partner all expenses related to this Offering. No other fees or compensation will be payable to the General Partner, the Management Agent or their Affiliates for managing the Partnership other than the management fee payable to the Management Agent as provided in the Management Agreement. The Partnership may, however, contract with the General Partner, the Management Agent or their Affiliates to render other services or provide materials to the Partnership provided that the compensation is at the then prevailing rate for the type of services and/or materials provided. 2. Partnership Distributions. In its capacity as general partner of the Partnership, the General Partner is entitled to its distributable share (41.62% before dilution) of Partnership Cash Flow, Partnership Sales Proceeds and Partnership Refinancing Proceeds as provided by the Partnership Agreement. See "Summary of the Partnership Agreement - Profits, Losses and Distributions" and the Partnership Agreement attached as Appendix A. 3. Sales Commissions. The Sales Agent, a wholly-owned subsidiary of Prime, has entered into a Sales Agency Agreement with the Partnership pursuant to which the Sales Agent has agreed to sell the Units on a "best efforts" any or all basis. As compensation for its services, the Sales Agent will receive a commission equal to $75 for each Unit sold (up to an aggregate of $3,000). If the Offering is successful, the Sales Agent will also be reimbursed by the Partnership for its out-of-pocket expenses associated with its sale of the Units in an amount not to exceed $7,000. See "Plan of Distribution" and "Conflicts of Interest." 4. Loans. The General Partner or its Affiliates will also receive interest on loans, if any, made by them to the Partnership. See "Conflicts of Interest." Neither the General Partner nor any of its Affiliates are, however, obligated to make loans to the Partnership. While the General Partner does not anticipate that it would cause the Partnership to incur indebtedness unless cash generated from the Partnership's operations were at the time expected to enable repayment of such loan in accordance with its terms, lower than anticipated revenues and/or greater than anticipated expenses could result in the Partnership's failure to make payments of principal or interest when due under such a loan and the Partnership's equity being reduced or eliminated. In such event, the Limited Partners could lose their entire investment. CONFLICTS OF INTEREST The operation of the Partnership involves numerous conflicts of interest between the Partnership and the General Partner and its Affiliates. Because the Partnership is operated by the General Partner, such conflicts are not resolved through arm's length negotiations, but through the exercise of the judgment of the General Partner consistent with its fiduciary responsibility to the Limited Partners and the Partnership's investment objectives and policies. The General Partner, its Affiliates and employees of the General Partner will in good faith continue to attempt to resolve potential conflicts of interest with the Partnership, and the General Partner will act in a manner that it believes to be in or not opposed to the best interests of the Partnership. The Management Agent and the Sales Agent will receive management fees and broker-dealer sales commissions, respectively, in connection with the business operations of the Partnership and the sale of the Units that will be paid regardless of whether any sums hereafter are distributed to Limited Partners. None of such fees, compensation and benefits has been determined by arm's length negotiations. In addition, the Partnership may contract with the General Partner or its Affiliates to render other services or provide materials to the Partnership provided that the compensation is at the then prevailing rate for the type of services and/or materials provided. The General Partner will also receive interest on loans, if any, it makes to the Partnership. See "Compensation and Reimbursement to the General Partner and its Affiliates." The General Partner and its Affiliates will devote as much of their time to the business of the Partnership as in their judgment is reasonably required. Principals of Sun Medical may have conflicts of interest in allocating management time, services and functions among their various existing and future business activities in which they are or may become involved. See "Competition" and "Prior Activities." The General Partner believes it and its Affiliates together, have sufficient resources to be capable of fully discharging the General Partner's and its Affiliates' responsibilities to the Partnership. The General Partner and its Affiliates may engage for their own account, or for the account of others, in other business ventures, related to medical services or otherwise, and neither the Partnership nor the holders of any of the Units shall be entitled to any interest therein. The General Partner, its Affiliates (including affiliated limited partnerships and other entities), and their employees engage in medical service activities for their own accounts. See "Prior Activities." The General Partner or the Management Agent may serve as a general partner of other limited partnerships that are similar to the Partnership and they do not intend to devote their entire financial, personnel and other resources to the Partnership. Except as provided by law, none of such entities or their respective Affiliates is prohibited from engaging in any business or arrangement that may be in competition with the Partnership. The General Partner, the Management Agent, and their Affiliates are, however, obligated to act in a fiduciary manner with respect to the management of the Partnership and any other limited partnership in which they serve as the general partner. In the event an issue arises as to whether a particular lithotripsy service opportunity in or near the Service Area belongs to the Partnership, the General Partner or another Affiliate, the General Partner will in good faith attempt to resolve the issue in a manner that it believes to be in or not opposed to the best interest of the Partnership. Notwithstanding the foregoing, no assurance can be given that one or more limited partners of such Affiliates or the Limited Partners themselves, may not challenge the decision of the General Partner on fiduciary or other grounds. The General Partner presently provides lithotripsy services in the Service Area under one separate arrangement, and Affiliates of the General Partner provide services near the Service Area. See "Competition" and "Prior Activities." The Sales Agent is MedTech Investments, Inc., which is an Affiliate of the General Partner. Because of the Sales Agent's affiliation with the General Partner, there are conflicts in the Sales Agent's performance of its due diligence responsibilities under the federal securities laws. See "Plan of Distribution." The interests of the Limited Partners have not been separately represented by independent counsel in the formulation of the transactions described herein. The attorneys and accountants who have performed and will perform services for the Partnership were retained by the General Partner, and have in the past performed and are expected in the future to perform similar services for the General Partner, and Prime. FIDUCIARY RESPONSIBILITY OF THE GENERAL PARTNER The General Partner is accountable to the Partnership as a fiduciary and consequently must exercise good faith in handling Partnership affairs. This is a rapidly developing and changing area of the law and Limited Partners who have questions concerning the duties of the General Partner should consult with their counsel. Under the Partnership Agreement, the General Partner and its Affiliates have no liability to the Partnership or to any Partner for any loss suffered by the Partnership that arises out of any action or inaction of the General Partner or its Affiliates if the General Partner or its Affiliates, in good faith, determined that such course of conduct was in the best interest of the Partnership and such course of conduct did not constitute gross negligence or willful misconduct of the General Partner or its Affiliates. Accordingly, Limited Partners have a more limited right of action than they otherwise would absent the limitations set forth in the Partnership Agreement. The General Partner and its Affiliates will be indemnified by the Partnership against any losses, judgments, liabilities, expenses and amounts paid in settlement of any claims sustained by them in connection with the Partnership, provided that the same were not the result of gross negligence or willful misconduct on the part of the General Partner or its Affiliates. Insofar as indemnification for liabilities under the Securities Act may be permitted to persons controlling the Partnership pursuant to the foregoing provisions, the Partnership has been informed that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act and therefore is unenforceable. COMPETITION Many fixed-site and mobile extracorporeal shock-wave lithotripsy services are currently operating in and around the Service Area. The following discussion identifies the existing services in and near the Service Area, to the best knowledge of the General Partner. Affiliated Competition The Partnership faces competition from lithotripters placed in service in California, including lithotripters owned by the General Partner and its Affiliates. The General Partner and an Affiliate provide and will continue to provide lithotripsy services in and near the Service Area. The General Partner directly provides mobile lithotripsy services at Kaiser Foundation Hospital in Sacramento and will continue to compete with the Partnership at this location. Mobile Kidney Stone Centers of California III, L.P., an Affiliate of the General Partner, provides lithotripsy services using a Modulith(R) SLX-T in Alameda County, Contra Costa County, Merced County, Nevada County, Placer County, San Joaquin County and Stanislaus County. Other Affiliates of the General Partner provide services in other areas of California. Other Competition Various hospitals and other facilities in the Service Area have access to lithotripters which will be in direct competition with the Partnership. The General Partner is aware of a fixed-site lithotripter which operates at the University of California Davis Medical Center in Sacramento. In addition, a Medstone mobile lithotripter provides services at various hospitals and ambulatory surgery centers near the Service Area. The General Partner also believes that a competing Modulith(R) SLX-T operated by a physician-owned venture is providing services near the Service Area and may try to commence providing services within the Service Area in the near future. Other hospitals, ambulatory surgery centers and other healthcare facilities may have fixed-base or mobile lithotripters of which the General Partner is not aware. These lithotripters would be in competition with the Partnership. Although the General Partner anticipates that the Partnership will continue to operate primarily in the Service Area, the actual itinerary for the Lithotripsy System is expected to be influenced by the number of patients in particular areas and arrangements with various hospitals and health care centers. See "Business Activities - Operation of the Lithotripsy System". Other hospitals in and near the Service Area may operate lithotripters which are not extracorporeal shock-wave lithotripters but rather use lasers or are electrohydraulic lithotripters. The General Partner believes these machines have a competitive disadvantage because such machines are capable of treating stones only in the ureter. The General Partner believes the Lithotripsy System can be used on stones in locations other than the ureter. See "Business Activities - Treatment Methods for Kidney Stone Disease." The health care market in the Service Area is heavily influenced by managed care companies such as health maintenance organizations. Managed care companies generally contract either directly with hospitals or specified providers for lithotripsy services for beneficiaries of their plans. It is not uncommon for managed care companies to have contracts already in place with hospitals or specified providers, and the Partnership will not be able to provide services to beneficiaries of those plans unless it convinces either the managed care companies or the hospitals to switch to the Partnership's services. No assurances can be given that new competing lithotripsy clinics will not open in the future or that innovations in lithotripters or other treatments of kidney stone disease will not make the Partnership's Lithotripsy System competitively obsolete. See "Risk Factors - Operating Risks - Technological Obsolescence". In addition, the General Partner and its Affiliates are not restricted from engaging in lithotripsy ventures unassociated with the Partnership which may compete with the Partnership. See "Conflicts of Interest." The manufacturer of the Lithotripsy System is under no obligation to the General Partner or the Partnership to refrain from selling its lithotripters to urologists, hospitals or other persons for use in the Service Area or elsewhere. In addition, the availability of lower-priced lithotripters in the United States could dramatically increase the number of lithotripters in the United States, increase competition for lithotripsy procedures and create downward pressure on the prices the Partnership can charge for its services. Many potential competitors of the Partnership, including hospitals and medical centers, have financial resources, staffs and facilities substantially greater than those of the Partnership and of the General Partner. REGULATION Federal Regulation The Partnership, the General Partner and the Limited Partners are subject to regulation at the federal, state and local level. An adverse review or determination by certain regulatory organizations (federal, state or private) may result in the Partnership, the General Partner and the Limited Partners being subject to imprisonment, loss of reimbursement, fines or exclusion from participation in Medicare or Medicaid. Adverse reviews of the Partnership's operations at any of the various regulatory levels may adversely affect the operations and profitability of the Partnership. Reimbursement. The Partnership charges hospitals a per-use fee for use of the Lithotripsy System and does not directly bill or collect from any patients or third party payors for lithotripsy services provided using its Lithotripsy System. The amount of this per-use fee primarily depends on the amount that governmental and commercial third party payors are willing to reimburse hospitals for lithotripsy procedures. The primary governmental third party payor is Medicare. Medicare reimbursement policies are statutorily created and are regulated by the federal government. The Balanced Budget Act of 1997 required the Health Care Financing Administration ("HCFA"), the federal agency that administers the Medicare program, to establish a prospective payment system for outpatient procedures. One of the goals of the prospective payment system was to lower medical costs paid by the Medicare program. HCFA issued proposed regulations in 1998 which would reduce the reimbursement rate currently paid for lithotripsy procedures performed on Medicare patients at hospitals to a base rate of $2,235. The base rate includes anesthesia and sedation, equipment and supplies necessary for the procedure, but does not include the treating physician's professional fee. The base rate is subject to adjustment for various hospital-specific factors. The General Partner believes the lower reimbursement rate will be implemented in the latter half of the year 2000. In some cases, reimbursement rates payable to the General Partner and its Affiliates are less than the proposed HCFA rate. The Partnership currently provides services at one ambulatory surgery center and the General Partner retains the discretion to make the Lithotripsy System available at other ambulatory surgery centers ("ASCs") . Medicare does not currently reimburse for lithotripsy procedures provided at ASCs. However, HCFA issued proposed rules in 1998 which would authorize Medicare reimbursement for lithotripsy procedures provided at ASCs. While the proposed rules had a target effective date of October 1, 1998, the effective date has been postponed indefinitely for reasons unrelated to lithotripsy coverage. The proposed rules assign a Medicare reimbursement rate of $2,107 if the lithotripsy procedure is performed at an ASC. Whether these proposed rules will become effective to authorize Medicare reimbursement at ASCs and, if they do become effective, what the reimbursement rate will be, is unknown to the General Partner. The Medicare program has historically influenced the setting of reimbursement standards by commercial insurers. Therefore, reduced rates of Medicare reimbursement for lithotripsy services may result in reduced payments by commercial insurers for the same services. As was discussed previously, competitive pressure from health maintenance organizations and other managed care companies has in some circumstances already resulted in decreasing reimbursement rates from commercial insurers. See "Risk Factors - Impact of Insurance Reimbursement." No assurances can be given that HCFA will not seek to reduce its proposed reimbursement rates even more to avoid paying more than commercial insurers. As a result, hospitals may seek to lower the fees paid to the Partnership for the use of the Lithotripsy System. The General Partner anticipates that reimbursement for lithotripsy procedures, and therefore overall Partnership revenues, may continue to decline. The physician service (Part B) Medicare reimbursement for renal lithotripsy is determined using Resource Based-Relative Value Scales ("RB-RVS"). The system includes limitations on future physician reimbursement increases tied to annual expenditure targets legislated annually by Congress or set based upon recommendation of the Secretary of the U.S. Department of Health and Human Services. Medicare has in the past, with regard to other Part B services such as cataract implant surgery, imposed significant reductions in reimbursement based upon changes in technology. HCFA has produced a lengthy report whose conclusion is that professional fees for lithotripsy are overvalued. Thus, potential future decreases in reimbursement must be considered probable. Medi-Cal is the name of the Medicaid program in California jointly sponsored by the federal and state governments to reimburse service providers for medical services provided to Medi-Cal recipients, who are primarily the indigent. Medi-Cal currently provides reimbursement for lithotripsy services. The federal Personal Responsibility and Work Opportunity Reconciliation act of 1996 requires state health plans, such a Medi-Cal, to limit Medicaid coverage for certain otherwise eligible persons. The General Partner does not believe this legislation will have a significant impact on the Partnership's revenues. In addition, federal regulations permit state health plans to limit the provision of services based upon such criteria as medical necessity or other criteria identified in utilization or medical review procedures. The General Partner does not know whether Medi-Cal has taken or will take such steps. Self-Referral Restrictions. Health care entities which seek reimbursement for services covered by Medicare or Medicaid are subject to federal regulation restricting referrals by certain physicians or their family members. Congress has passed legislation prohibiting physician self-referral of patients for "designated health services", which include inpatient and outpatient hospital services (42 U.S.C. ss. 1395nn) ("Stark II"). Lithotripsy services were not specifically identified as a designated health service by this legislation, but the prohibition includes any service which is provided to an individual who is registered as an inpatient or outpatient of a hospital under proposed regulations discussed below. Lithotripsy services provided by the Partnership to Medicare and Medicaid patients are billed by the contracting hospital in its name and under its Medicare and Medicaid program provider numbers. Accordingly, these lithotripsy services would likely be considered inpatient or outpatient services under Stark II. Following the passage of the Stark II legislation effective January 1, 1995, the General Partner determined that the statute would not apply to the type of lithotripsy services to be provided by the Partnership. Stark II applies only to ownership interests directly or indirectly in the entity that "furnishes" the designated health care service. The physician-investors and the Partnership will not have an ownership interest in any Contract Hospitals which offer the lithotripsy services to the patients on an inpatient or outpatient basis. See 42 U.S.C. ss. 1395nn(a)(1)(A). Thus, by referring a patient to a hospital offering the service, the physician-investors will not be making a referral to an entity in which they maintain an ownership interest for purposes of the application of Stark II. This interpretation adopted by the General Partner was consistent with the informal view of the General Counsel's Office of the U.S. Department of Health and Human Services. Based upon this reasonable interpretation of Stark II, by referring a patient to a hospital furnishing the outpatient lithotripsy services "under arrangements" with the Partnership, a physician investor in the Partnership is not making a referral to an entity (the hospital) in which he or she has an ownership interest. In 1998, HCFA published proposed regulations interpreting the Stark II statute (the "Proposed Stark II Regulations"). The Proposed Stark II Regulations and HCFA's accompanying commentary would apply the physician referral prohibitions of Stark II to the Partnership's contracts for provision of the Lithotripsy System. Under the Proposed Stark II Regulations, physician Limited Partner referrals of Medicare and Medicaid patients to Contract Hospitals would be prohibited because the Partnership is regarded as an entity that "furnishes" inpatient and outpatient hospital services. The General Partner cannot predict when final regulations will be issued or the substance of the final regulations, but the interpretive provisions of the Proposed Stark II Regulations may be viewed as HCFA's interim position until final regulations are issued. If the Proposed Stark II Regulations are adopted as final (or, in the meantime, if a reviewing court adopted their reasoning as the proper interpretations of the Stark II statute), then the Partnership's operations would not be in compliance with Stark 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 Stark II Regulations that physician overutilization of lithotripsy is unlikely and specifically solicits comments on whether there should be a regulatory exception for lithotripsy. HCFA has received a substantial volume of comments in support of a regulatory exception for lithotripsy. HCFA representatives have informally acknowledged in published commentary that some form of regulatory relief for lithotripsy is under consideration and may be forthcoming; however, no assurances can be made that such will be the case. The General Partner will continue to carefully review the Proposed Stark II Regulations and accompanying HCFA commentary, and explore other alternative plans of operations that would allow the Partnership to operate in compliance with Stark II and its final regulations. HCFA's adoption of the current Proposed Stark II Regulations as final or a reviewing court's interpretation of the Stark II statute in reliance on the Proposed Stark II Regulations and in a manner adverse to the Partnership operations would mean that the Partnership and its physician Limited Partners would likely be found in violation of Stark II. In such circumstance, it is possible the Partnership may be given the opportunity to restructure its operations to bring them into compliance. In the event the General Partner is unable to devise a plan pursuant to which the Partnership may operate in compliance with Stark II and its final regulations, the General Partner is obligated under the Partnership Agreement either (i) to purchase the Partnership Interests of all the Limited Partners at the lesser of fair market value or their Capital Account values (including in certain cases the assumption of their Guaranties) or (ii) to dissolve and liquidate the Partnership. See "Summary of the Partnership Agreement - Optional Purchase of Limited Partner Interests." The Partnership and/or the physician Limited Partners may not be permitted the opportunity to restructure operations and thereby avoid an obligation to refund any amounts collected from Medicare and Medicaid patients in violation of the statute. Further, under these circumstances the Partnership and physician Limited Partners may be assessed with substantial civil monetary penalties and/or exclusion from providing services reimbursed by Medicare and Medicaid. Two bills are currently pending in Congress which would modify the reach of the Stark II self-referral prohibition. One (H.R. 2650) was introduced by Representative Stark, the other (H.R. 2651) by House Ways and Means health subcommittee chair Representative Bill Thomas. The Stark bill would modify, and the Thomas bill would repeal, the ban on physicians who have compensation arrangements with entities to which they refer patients. However, neither bill, nor any other bill currently pending in Congress, would substantively modify the regulation of referrals of physicians with ownership interests. Thus, neither bill would affect the Partnership's analysis of the potential impact of Stark II on this Offering discussed above. Fraud and Abuse. The provisions of the federal Social Security Act addressing illegal remuneration (the "Anti-Kickback Statute") prohibit providers and others from soliciting, receiving, offering or paying, directly or indirectly, any remuneration in return for either making a referral for a Medicare, Medicaid or CHAMPUS covered service or ordering, arranging for or recommending any such covered service. Violations of the Anti-Kickback Statute may be punished by a fine of up to $25,000 or imprisonment for up to five (5) years, or both. In addition, violations may be punished by substantial civil penalties and/or exclusion from the Medicare and Medicaid programs. Regarding exclusion, the Office of Inspector General ("OIG") of the Department of Health and Human Services may exclude a provider from participation in the Medicare program for a 5-year period upon a finding that the Anti-Kickback Statute has been violated. After OIG establishes a factual basis for excluding a provider from the program, the burden of proof shifts to the provider to prove the Anti-Kickback Statute has not been violated. The Limited Partners are to receive cash Distributions from the Partnership. Since it is anticipated that some of the Limited Partners will be physicians or others in a position to refer and perform lithotripsy services using Partnership equipment and personnel, such Distributions could come under scrutiny under the Anti-Kickback Statute. The Third Circuit United States Court of Appeals has held that the Anti-Kickback Statute is violated if one purpose (as opposed to the primary or sole purpose) of a payment to a provider is to induce referrals. United States v. Greber, 760 F.2d 68 (1985). The Greber case was followed by the United States Court of Appeals for the Ninth Circuit, United States v. Kats, 871 F.2d 105 (9th Cir. 1989), and cited favorably by the First Circuit in United States v. Bay State Ambulance and Hospital Rental Service, Inc., 874 F.2d 20 (1st Cir. 1989). The OIG has indicated that it is giving increased scrutiny to health care joint ventures involving physicians and other referral sources. In 1989, it published a Special Fraud Alert that outlined questionable features of "suspect" joint ventures, including some features which may be common to the Partnership. While OIG Special Fraud Alerts do not constitute law, they are informative because they reflect the general views of the OIG as a health care fraud and abuse investigator and enforcer. The OIG has published regulations which protect certain transactions from scrutiny under the Anti-Kickback Statute (the "Safe Harbor" regulations). A Safe Harbor, if complied with fully, will exempt such activity from prosecution under the Anti-Kickback Statute. However, the preamble to the Safe Harbor regulations states that the failure of a particular business arrangement to comply with the regulations does not determine whether or not the arrangement violates the Anti-Kickback Statute because the regulations do not themselves make any particular conduct illegal. This Offering and the business of the Partnership do not comply with any Safe Harbor. A Safe Harbor has been adopted which protects equipment leasing arrangements. It requires that the aggregate rental charge be set in advance, be consistent with fair market value in arms-length transactions and not be determined in a manner that takes into account the volume or value of any referrals or business otherwise generated between the parties. To the best knowledge of the General Partner, the Hospital Contracts entered into by the Partnership do not require that the aggregate rental charge be set in advance and contain other terms which cause the Hospital Contracts not to comply with the Safe Harbor's requirements. When it issued this Safe Harbor, the OIG commented on "per use" charges for equipment rentals. It stated that such arrangements must be examined on a case-by-case basis and may be abusive in certain situations. According to the OIG, payments on a "per use" basis do not necessarily violate the Anti-Kickback Statute, but such payments are not provided Safe Harbor protection. The General Partner cannot give any assurances that the Partnership's Hospital Contracts which involve a "per use" payment to the Partnership by Contract Hospitals would not be deemed to violate the Anti-Kickback Statute. In the commentary introducing the Safe Harbor regulations, the OIG recognized the beneficial effect that business investments in small entities may have on the health care industry. The OIG promulgated a Safe Harbor for investment interests, including limited partnership ownership interests, in small entities which are held by persons in a position to make referrals to the entities so long as eight criteria are met. This Offering does not meet all eight criteria; however, this Offering does meet some of the criteria. Specifically, the terms on which limited partnership interests are offered to physicians who treat their patients on the Lithotripsy System are not related to the previous or expected volume of referrals or amount of business generated by the physicians; there is no requirement that any physician make referrals or be in a position to make referrals as a condition for remaining an investor; there is no cross-referral arrangement involved with the business of the Partnership; the Partnership does not loan funds or guarantee loans for physicians who refer patients for treatment on the Lithotripsy System; and the Distributions to physicians who are Limited Partners are directly proportional to the amount of their capital investment. In order to qualify for Safe Harbor protection, all eight criteria must be met. The General Partner can give no assurance that compliance with some, but not all, of the criteria of the Safe Harbor would prevent the OIG from finding a potential violation of the Anti-Kickback Statute by virtue of this Offering. In November 1999, the OIG issued a Safe Harbor protecting certain physician investment interests in ASCs. The commentary accompanying the new Safe Harbor specifically distinguished physician ownership in ASCs from physician ownership in other facilities, including lithotripsy facilities, end-stage renal disease facilities, comprehensive outpatient rehabilitation facilities and others. The OIG concluded that ASCs benefit from favorable public policy considerations relating to reducing Medicare costs (including through the impending prospective payment system discussed above); other facilities, including lithotripsy facilities, do not share the same policy considerations or reimbursement structures. Therefore, the Safe Harbor status given to certain physician investments in ASCs cannot be viewed as an indication that physician investments in other facilities, including lithotripsy facilities, would not be deemed to violate the Anti-Kickback Statute. Although a separate Safe Harbor was not adopted, HCFA noted in its commentary when the Safe Harbor regulations were issued in 1991 that additional protection may be merited for situations where a physician sees a patient in his or her own office, makes a referral to an entity in which he or she has an ownership interest and performs the service for which the referral is made. In such cases, Medicare makes a payment to the facility for the service it furnishes, which may result in a profit distribution to the physician. HCFA noted that, with respect to the physician's professional fee, such a referral is simply a referral to oneself, and that in such situations, both the professional service fee and the profit distribution from the associated facility fee that are generated from the referral may warrant protection. HCFA stated that its primary concern regarding the above referral situation was the investing physician's ability to profit from any diagnostic testing that is generated from the services he or she performs. The General Partner believes the potential for overutilization posed by referrals for diagnostic services is not present to the same degree with therapeutic services such as lithotripsy where the necessity for the treatment can be objectively determined; i.e., a renal stone can be definitely determined before treatment. The applicability of the Anti-Kickback Statute to physician investments in health care businesses to which they refer patients and which do not qualify for a Safe Harbor has not been the focus of many court decisions, and therefore, judicial guidance is limited. In the only case in which the OIG has attempted to exercise the civil exclusion remedy in the context of a physician-owned joint venture, The Hanlester Network, et al. v. Shalala, the Ninth Circuit for the United States Court of Appeals (the "Court") held that the Anti-Kickback Statute is violated when a person or entity (a) knows that the statute prohibits offering or paying remuneration to induce referrals and (b) engages in prohibited conduct with the specific intent to violate the law. Although the Court upheld a lower court ruling that the joint venture in question violated the Anti-Kickback Statute vicariously through the knowing and willful actions of one of its agents, who was acting outside the parameters of the joint venture's offering documents, the Court concluded there was not sufficient evidence indicating that a return on investment to physicians or other investors in the joint venture could on its own constitute an "offer or payment" of remuneration to make referrals. The Court also stated that since profit distributions in Hanlester were made based on each investor's ownership share and not on the volume of referrals, the fact that large referrals by investors would result in potentially high investment returns did not, standing alone, cause a violation of the Anti-Kickback Statute. The Health Insurance Portability and Accountability Act of 1996 directed the OIG to respond to requests for advisory opinions regarding the effect of the Anti-Kickback Statute on proposed business transactions. The General Partner has not requested the OIG to review this Offering and, to the best knowledge of the General Partner, the OIG has not been asked by anyone to review offerings of this type. Federal regulatory authorities could take the position in future advisory opinions that business transactions similar to this Offering are a means to illegally influence the referral patterns of the prospective physician Limited Partners. Because there is no legal precedent interpreting circumstances identical to these facts, it is not possible to predict how this issue would be resolved if litigated. Whenever an offering of ownership interests is made available to persons with the potential to refer patients for services, there is a possibility that the OIG, HCFA or other government agencies or officials may question whether the ownership interests are being provided in return for or to induce referrals by the new owners. Remuneration, which government officials have said can include the provision of an opportunity to invest in a facility to which a person refers patients for services, may be challenged by the government as constituting a violation of the Anti-Kickback Statute. The risk of such a challenge may be increased in connection with this Offering because the proceeds of any Unit sales will not provide additional capital for the Partnership which would be a typical justification for sales to new investors. Whether the offering of ownership interests to investors who may refer patients to the Partnership might constitute a violation of this law must be determined in each case based upon the specific facts involved. The various mechanisms in place to avoid providing a financial benefit to prospective Limited Partners for any referrals of patients (including the requirement that all distributions of earnings to Limited Partners be made in proportion to their investment interest), the Partnership's utilization review and quality assurance programs, the fact that lithotripsy is a therapeutic treatment the need of which can be objectively determined, and the existence in the General Partner's view of valid business reasons to engage in this transaction, form the basis in part of the General Partner's belief that this Offering is appropriate. The General Partner of the Partnership intends for all business activities and operations of the Partnership to conform in all respects with all applicable anti-kickback statutes (federal or state). The General Partner does not believe that the Partnership's proposed operations violate the Anti-Kickback Statute. No assurance can be given, however, that the proposed activities of the Partnership will not be reviewed and challenged by regulatory authorities empowered to do so, or that if challenged, the Partnership will prevail. If the activities of the Partnership were determined to violate these provisions, the Partnership, the General Partner, officers and directors of the General Partner, and each Limited Partner could be subject, individually, to substantial monetary liability, felony prison sentences and/or exclusion from participation in Medicare, Medicaid and CHAMPUS. A prospective Limited Partner with questions concerning these matters should seek advice from his or her own independent counsel. False Claims Statutes. Federal laws governing reimbursement for medical services generally prohibit an individual or entity from knowingly and willfully presenting a claim (or causing a claim to be presented) for payment from Medicare, Medicaid or other third party payors that is false or fraudulent. The standard for "knowing and willful" includes conduct that amounts to a reckless disregard for whether accurate information is presented by claims processors. Penalties under these statutes include substantial civil and criminal fines, exclusion from the Medicare program and imprisonment. One of the most prominent of these laws is the federal False Claims Act, which may be enforced by the federal government directly, or by a qui tam private plaintiff on the government's behalf. Under the federal False Claims Act, both the government and the private plaintiff, if successful, are permitted to recover substantial monetary penalties and judgments, as well as an amount equal to three times actual damages. In recent cases, some qui tam plaintiffs have taken the position that violations of the Anti-Kickback Statute (discussed above) and Stark II (discussed above) should also be prosecuted as violations of the federal False Claims Act. The Partnership cannot assure that the government, or a reviewing court, would not take the position that billing errors, employee misconduct or violations of other federal statutes, should they occur, are violations of the federal False Claims Act or similar statutes. Some federal courts have recently taken the position that qui tam lawsuits by private plaintiffs are unconstitutional. Most notably, a panel of judges on the Fifth Circuit Court of Appeals took this position in a decision issued in November 1999. That decision is being reviewed by all the judges on the Fifth Circuit. The panel's decision was a minority view; most courts have concluded that qui tam lawsuits are constitutional. In another case, the U.S. Supreme Court may review this issue. Unless and until the Supreme Court decides the issue, prospective Limited Partners should consider the ramifications of the False Claims Act issues discussed in the preceding paragraph. New Legislation. Two bills currently pending in Congress which would amend or repeal the compensation provisions of the Stark 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 Stark II and the Anti-Kickback laws discussed above. In the event that legislation is enacted which, in the opinion of the General Partner, would adversely affect the operation of the Partnership's business, the General Partner is obligated either to purchase the Partnership Interests of all the Limited Partners or to dissolve the Partnership. See "Summary of the Partnership Agreement - Optional Purchase of Limited Partner Interests." ALS Fraud and Abuse Compliance Guidelines. On March 24, 2000, the American Lithotripsy Society ("ALS") (a voluntary membership organization made up of physicians, health care management personnel, treatment centers and medical suppliers) published Fraud and Abuse Compliance Guidelines for Physician - - Owned Lithotripsy Ventures (the "ALS Guidelines"). The ALS Guidelines are aimed at assisting ALS members in recognizing and avoiding certain practices which the ALS believes are unethical or illegal. The ALS Guidelines acknowledge that they are neither authoritative, nor constitute legal advice. Moreover, the ALS Guidelines stipulate that the laws upon which they are based (all of which are discussed in this "Regulation" section) are open to alternative interpretations. Because of the various reasons set forth in this Memorandum, the Company believes the Offering and its operations are appropriate under such laws, however, no assurance can be given that the activities of the Company would be viewed by regulatory authorities as complying with these laws or the ALS Guidelines. FTC Investigation. Issues relating to physician-owned health care facilities have been investigated by the Federal Trade Commission ("FTC"), which investigated two lithotripsy limited partnerships affiliated with the General Partner, to determine whether they posed an unreasonable threat to competition in the health care field. The affiliated limited partnerships were advised in 1996 that the FTC's investigation was terminated without any formal action taken by the FTC or any restrictions being placed on the activities of the limited partnerships. However, the General Partner cannot assure that the FTC will not investigate issues arising from physician-owned health care facilities in the future with respect to the General Partner or any Affiliate, including the Partnership. Ethical Considerations. The American Medical Association's Code of Medical Ethics states that physicians should not refer patients to facilities in which they have an ownership interest unless such physician directly provides care or services to such patient at the facility. Because physician investors will be providing lithotripsy services, the General Partner believes that an investment by a physician will not be in violation of the American Medical Association's Code of Medical Ethics. In the event that the American Medical Association changes its ethical code to preclude such referrals by physicians and such ethical requirements are applied to facilities or services which, at the time of adoption, are owned in whole or in part by referring physicians, the Partnership and the interests of the Limited Partners may be adversely affected. State Regulation California law prohibits the offer, delivery, receipt or acceptance by any licensed person (including physicians) of any money, as compensation or inducement for referring patients. The California Attorney General issued an opinion in 1999 which stated the statute prohibits any situation where the referral of a patient may be induced by considerations other than the best interests of the patients. However, the statute specifically permits referrals to health care facilities in which the physician has an ownership interest, so long as the physician's return on investment for the ownership interest is based on the proportional ownership of the physician and not based on the number or value of any patients referred. To the best knowledge of the General Partner, the Partnership's ownership and investment return structure falls within the exemption to this statute. In 1993, California passed the Physician Ownership and Referral Act, which prohibits physicians from referring patients to certain health services in which the physicians have a financial interest. Those health services are laboratory, diagnostic nuclear medicine, radiation oncology, physical therapy, physical rehabilitation, psychometric testing, home infusion therapy and diagnostic imaging goods and services. If the list of health services were expanded to include lithotripsy services (or surgery services generally), the Partnership would be prohibited from operating under its current method of operations. The General Partner is not aware of any such legislation currently pending in California which would expand the list of health services in this fashion. The Physician Ownership and Referral Act states that any physician who refers a patient to an organization in which the physician has a financial interest for services other than those identified in the previous paragraph, must provide the patient (or the patient's legal guardian) with written notice of such financial interest at the time of the referral. A separate law requires written disclosure of a physician's "significant financial interest" in an entity to which he or she refers patients; "significant financial interest" means $5,000 or five (5) percent of the entity. The law requires disclosure of the financial interest to the patient in writing and advising the patient that the patient may choose another provider to obtain the service. The Partnership will require that its physician Limited Partners comply with this disclosure requirement. California has a false claims statute similar to the federal False Claims Act discussed above. The California false claims statute would be applicable to claims submitted to Medi-Cal for reimbursement for services rendered to Medi-Cal patients. California also prohibits kickbacks for services provided to Medi-Cal patients. For the reasons discussed above with respect to their federal law counterparts, to the best knowledge of the General Partner, neither this Offering nor the business of the Partnership violates either of these California laws. California requires hospitals and ambulatory surgery centers which wish to offer mobile healthcare services at their facilities to apply for an amendment to their licensure status. The amendment assures the hospital or ambulatory surgery center has the physical facilities to accommodate a mobile unit in which patients will be treated. To the best knowledge of the General Partner, this amendment process will not apply with respect to the Partnership's Lithotripsy System, as patients will not be treated in the mobile unit; rather, the lithotripter will be rolled off the Partnership's mobile van and wheeled into an appropriate location within the hospital or center, such as the operating suite. Since patients will be treated on the machine while it is located within the hospital or center, the mobile healthcare service licensure amendment process will not apply. The California Department of Health Services' Licensing and Certification Office, which licenses hospitals and ambulatory surgery centers, expects that the facilities contracting with the Partnership will have appropriate policies and procedures in place with respect to the transportable lithotripter to assure patient care and physical facility needs are met. A certificate of need (CON) is not required before offering lithotripsy services in California. California requires registration of x-ray machines and requires that radiologic technologists be licensed. Many bills introduced in both houses of the California legislature in 1999 concerned health care regulation, and Governor Gray Davis signed a series of health-care related bills into law. Among other things, a new Department of Managed Care was established, and other managed care requirements were enacted. However, to the best knowledge of the General Partner, none of these new laws would have a material adverse effect on the Partnership or this Offering. The General Partner cannot predict whether additional health-care regulatory bills will be introduced or enacted by the California legislature in 2000. The Partnership and the Management Agent have been seeking and will continue to seek to comply with all applicable statutory and regulatory requirements. Further regulations may be imposed in California at any time in the future. Predictions as to the form or content of such potential regulations would be highly speculative. They could apply to the operation of the Lithotripsy System or to the physicians who invest in the Partnership. Such restrictive regulations could materially adversely affect the ability of the Partnership to conduct its business. THE GENERAL PARTNER AND THE PARTNERSHIP BELIEVE LITHOTRIPSY SERVICES WILL CONTINUE TO BE SUBJECT TO INTENSE GOVERNMENTAL REGULATION AT THE FEDERAL AND STATE LEVELS AND, THEREFORE, CANNOT PREDICT THE SCOPE AND EFFECT THEREOF. PROSPECTIVE LIMITED PARTNERS SHOULD CONSULT WITH THEIR LEGAL COUNSEL AS TO THE IMPLICATIONS OF FEDERAL AND STATE LAWS AND PROFESSIONAL ETHICAL CODES DEALING WITH PHYSICIAN OWNERSHIP OF MEDICAL EQUIPMENT AND FACILITIES BEFORE PURCHASING UNITS. PRIOR ACTIVITIES Sun Medical is the general partner of the General Partner. Prime, the sole shareholder of Sun Medical, is the largest and fastest growing provider of lithotripsy services in the United States, providing lithotripsy services at approximately 450 hospitals and surgery centers in 31 states, as well as delivering non-medical services related to the operation of the lithotripters, including scheduling, staffing, training, quality assurance, maintenance, regulatory compliance and contracting with payors, hospitals and surgery centers, while medical care is rendered by urologists utilizing the lithotripters. Prime has an economic interest in 59 mobile and six fixed site lithotripters, all but two of which are operated by Prime, Sun Medical and its Affiliates. Prime began providing lithotripsy services with an acquisition in 1992 and has grown rapidly since that time through acquisitions and de novo development. In November 1995, Prime acquired Sun Medical and thus, a controlling interest in the General Partner. The acquisition of Sun Medical provided Prime with complementary geographic coverage as well as additional expertise in forming and managing lithotripsy operations. Prime and Sun Medical's lithotripters together performed approximately 38,000 lithotripsy procedures in 1999. Approximately 2,300 urologists utilized Prime and Sun Medical's lithotripters in 1999, representing approximately 30% of the estimated 7,700 active urologists in the United States. Prime manages the operations of approximately 63 of its 65 lithotripters. All of its lithotripters are operated in connection with hospitals or surgery centers. Prime operates its lithotripters primarily as the general partner of a limited partnership or through a subsidiary, as is the case with entities affiliated with Sun Medical, including the General Partner. Prime provides a full range of management and other non-medical support services to the lithotripsy operations, while medical care is provided by urologists utilizing the facilities and certain medical support services are provided by the hospital or surgery center. Urologists are investors in 50 of its 65 operations. Prime's lithotripters range in age from one to twelve years. Of its 65 lithotripters, 59 are mobile units mounted in tractor-trailers or self-contained coaches serving locations in 31 states. Prime also operates six fixed site lithotripters in four states. All of Prime's fixed lithotripsy units are located and operated in conjunction with a hospital or surgery center. Most of these locations are in major metropolitan markets where the population can support such an operation. Fixed site lithotripters generally cannot be economically justified in other locations. Prime and Sun Medical believe that they maintain the most comprehensive quality outcomes database and information system in the lithotripsy services industry. Prime has detailed information on over 160,000 procedures covering patient demographic information and medical condition prior to treatment, the clinical and technical parameters of the procedure and resulting outcomes. Information is collected before, during and up to three months after the procedure through internal data collection by doctors, nurses and technicians and through patient questionnaires. For numerous reasons, including differences in financial structure, program size, economic conditions and distribution policies, the success of the General Partner and its Affiliates in the lithotripsy field should not be considered as indicative of the operating results obtainable by the Partnership. SOURCES AND APPLICATIONS OF FUNDS The following table sets forth the funds expected to be available to the Partnership from this Offering if all 40 Units are sold and other sources and their anticipated and estimated uses. - ----------------------------- -------------------------------------------------- Sources of Funds Sale of 40 Units - ----------------------------- -------------------------------------------------- - ----------------------------- --------------------- ---------------------------- Offering Proceeds(1) $169,320 (100%) -------- ------ - ----------------------------- --------------------- ---------------------------- - ----------------------------- --------------------- ---------------------------- - ----------------------------- --------------------- ---------------------------- - ----------------------------- --------------------- ---------------------------- - ----------------------------- --------------------- ---------------------------- - ----------------------------- --------------------- ---------------------------- - ----------------------------- --------------------- ---------------------------- - ----------------------------- --------------------- ---------------------------- Repayment of Partnership Debt(3) $134,320 ( 79%) --------- ------- - ----------------------------- --------------------- ---------------------------- TOTAL APPLICATIONS $169,320 (100%) ======== ====== - ----------------------------- --------------------- ---------------------------- Notes to Sources and Applications of Funds Table (1) Assumes 40 Units are purchased by qualified investors. (2) Includes $3,000 in commissions payable to the Sales Agent, reimbursement of $7,000 to the Sales Agent for out-of-pocket expenses incurred in selling the Units and $25,000 in legal and accounting costs associated with the preparation of this Memorandum. (3) The total outstanding debt of the Partnership incurred pursuant to the Loan from First Citizens Bank & Trust Company for the acquisition of the Partnership's Lithotripsy System is $441,205.79 as of the date of the Memorandum; however, the terms of the Loan provide that it may be renewed for its full amount ($487,125). See "Risk Factors - Operating Risks - Liability Under the Guaranty." Offering Proceeds will first be used by the Partnership to pay offering costs and expenses (up to $35,000), and then the remainder of the proceeds will be used to reduce the existing Partnership debt (up to $134,320). FINANCIAL CONDITION OF THE PARTNERSHIP Set forth on the following pages are the Partnership's internally prepared accrual based (i) Income Statement for the eight-month period ended December 31, 1999, (ii) Balance Sheet as of December 31, 1999, (iii) Cash Flow Statement for the eight-month period ended December 31, 1999, and (iv) Statements of Partner's Equity for the eight-month period ended December 31, 1999. Past financial performance is not necessarily indicative of future performance. There is no assurance that the Partnership will be able to maintain its current revenues or earnings. MOBILE KIDNEY STONE CENTERS OF CALIFORNIA II, L.P. INCOME STATEMENT Eight Months Ended December 31, 1999* Revenues $979,234 Operating Expenses Employee compensation and benefits 98,304 Equipment maintenance and repairs 14,555 Depreciation and amortization 64,966 Management fees 36,761 Overhead allocation 76,917 Other operating expenses 60,248 -------------------------- Total operating expenses 351,751 Operating income 627,483 Other income (expense) Interest and other income, net 440 Interest expense (17,842) Organization and syndication costs (41,259) -------------------------- Total other income (expense) (58,661) -------------------------- Net income $568,822 ========================== *See notes to financial statements attached hereto as Appendix D. WINSTON #892462 v 2 70 MOBILE KIDNEY STONE CENTERS OF CALIFORNIA II, L.P. BALANCE SHEET December 31, 1999* ASSETS Cash $76,878 Accounts receivable, net 205,300 Other current assets 3,269 -------------------------- Total current assets 285,447 Equipment 504,681 Accumulated depreciation (64,966) -------------------------- 439,715 Other assets 328 Total assets $725,490 ========================== LIABILITIES Accounts payable $55,623 Distributions payable 0 -------------------------- Total current liabilities 55,623 Long term debt 466,045 PARTNERS' EQUITY Capital contributions 250,000 Syndication costs (15,000) Distributions paid (600,000) Accumulated earnings 568,822 -------------------------- Total partners' equity 203,822 Total liabilities and partners' equity $725,490 ========================== *See notes to financial statements attached hereto as Appendix D. MOBILE KIDNEY STONE CENTERS OF CALIFORNIA II, L.P. STATEMENT OF CASH FLOWS Eight Months Ended December 31, 1999* Cash flows from Operating Activities: Net income $568,822 Adjustments to reconcile net income to cash provided by operating activities: Depreciation and amortization 64,966 Change in operating assets and liabilities: Accounts receivable (205,300) Other current assets (3,269) Accrued expenses 55,623 -------------------------- Net cash provided by operating activities 480,842 -------------------------- Cash flows from Investing Activities: Purchase of equipment, furniture and fixture (504,681) Deposits paid (328) -------------------------- Net cash (used in) investing activities (505,009) -------------------------- Cash flows from Financing Activities: Cash borrowed from banks 466,045 Capital contributed by partners (net) 235,000 Distributions to partners (600,000) -------------------------- Net cash (used in) financing activities 101,045 -------------------------- Net increase(decrease) in cash during the period 76,878 -------------------------- Cash, beginning of period 0 -------------------------- Cash, end of period $76,878 ========================== $76,878 *See notes to financial statements attached hereto as Appendix D. MOBILE KIDNEY STONE CENTERS OF CALIFORNIA II, L.P. STATEMENT OF PARTNERS' EQUITY Eight Months Ended December 31, 1999* Beginning partners' equity $0 Capital contributions $250,000 Syndication costs ($15,000) Net income $568,822 Distributions to partners (600,000) -------------------------- Ending partners' equity $203,822 ========================== 203,822 *See notes to financial statements attached hereto as Appendix D. [The remainder of the page is intentionally left blank.] SUMMARY OF THE PARTNERSHIP AGREEMENT The Partnership Agreement sets forth the powers and purposes of the Partnership and the respective rights and obligations of the General Partner and the Limited Partners. The following is only a summary of certain provisions of the Partnership Agreement, and does not purport to be a complete statement of the various rights and obligations set forth therein. A complete copy of the Partnership Agreement is set forth as Appendix A to this Memorandum, and Investors are urged to read the Partnership Agreement in its entirety and to review it with their counsel and advisors. Nature of Limited Partnership Interest The Investors will acquire their interests in the Partnership in the form of Units. For each Unit purchased, a cash payment of $4,233 is required in addition to a personal guaranty of 0.5% of the Partnership's obligations under the Loan (up to a $2,435.63 principal guaranty obligation). The per Unit cash purchase price and execution and delivery of the Guaranties are both due upon subscription; however, certain qualified Investors may finance a portion of the cash purchase price through either individually borrowed funds or through the Limited Partner Loans. See "Terms of the Offering - Limited Partner Loans." No Limited Partner will have any liability for the debts and obligations of the Partnership by reason of being a Limited Partner except to the extent of (i) his Capital Contribution and liability under a Limited Partner Loan, if any, (ii) his liability under his Guaranty, (iii) his proportionate share of the undistributed profits of the Partnership, and (iv) the amount of certain Distributions received from the Partnership as provided by the Act or other applicable law. See "Risk Factors - Other Investment Risks - Limited Partners' Obligation to Return Certain Distributions." See also Form of Legal Opinion of Counsel, attached hereto as Appendix C. Dilution Offerings The General Partner has the authority to periodically offer and sell additional limited partnership interests in the Partnership (a "Dilution Offering") to persons who are not investors in the Partnership ("Qualified Investors"). The primary purpose of Dilution Offerings would be to raise additional capital for any legitimate Partnership purpose. Any sale of limited partnership interests in a Dilution Offering will result in proportionate dilution of the Percentage Interests of the existing Partners; i.e., the interests of the General Partner and of the Limited Partners in Partnership allocations, cash distributions and voting rights will be proportionately reduced as a result of a successful Dilution Offering. Limited Partners have no right to purchase additional limited partnership interests offered by the Partnership in a Dilution Offering; however, the General Partner has the right to make capital contributions or purchase additional limited partnership interests offered in a Dilution Offering in order to avoid dilution. Unless otherwise agreed by the General Partner and a Majority in Interest of the Limited Partners, any additional limited partnership interests offered in a Dilution Offering will be sold for a price no lower than the highest price for which proportionate limited partnership interests in the Partnership have been previously sold by the Partnership. Fundamental Changes Under the terms of the Partnership Agreement, the General Partner with the prior approval of a Majority in Interest of the Limited Partners may cause the Partnership to engage in certain transactions in the future, any of which transactions could result in the termination or reorganization of the Partnership and a partial or total dilution of all Limited Partners' interests in the Partnership. The General Partner could propose a plan providing for merger or consolidation of the Partnership with another entity; the sale of all or substantially all of the Partnership's assets to another entity; or any other reorganization, reclassification or exchange of the Partnership Interests, including without limitation the exchange of Partnership Interests for equity interests in another entity or for cash or other consideration. If such a plan were adopted, the Limited Partners are obligated by the terms of the Partnership Agreement to take or refrain from taking, as the case may be, such actions as the plan may provide, including, without limitation, executing such instruments, and providing such information as the General Partner may reasonably request. Any such plan may also result in an amendment to the Partnership Agreement or the adoption of a new partnership agreement in connection with the merger of the Partnership with another entity as provided in Section 15678.2(e) of the Act. The plan may also provide that the General Partner and its affiliates will receive fees for services rendered in connection with the operation of the Partnership or any successor entity following the consummation of the transactions described in the plan, and neither the Partnership nor the Limited Partners will have any right by virtue of the Partnership Agreement in the fees to be derived therefrom. Any securities or other consideration to be distributed to the Partners pursuant to any such plan shall be distributed in the manner set forth in the Partnership Agreement as though the Partnership were being liquidated. Although the General Partner will endeavor to keep the Limited Partners apprised of all relevant information regarding the above transactions, the General Partner is not obligated to provide such information in any particular manner concerning the risks and effect of the proposed transaction; the fairness of the proposed transaction to the Partnership and the Limited Partners; comparative distributions to the General Partner under the Partnership operations and under the proposed reorganization; the method of valuing the Partnership in the proposed transaction and the method of allocating value among various participants in the proposed transaction; the background, reasons for and alternatives to the transaction; and conflicts of interest of the General Partner in the proposed reorganization. In December 1993, Congress passed legislation amending portions of the Securities Exchange Act of 1934 to afford new protections to limited partnership investors in the context of certain limited partnership mergers and reorganizations commonly known as partnership rollups. The law, known as the "Limited Partnership Rollup Reform Act of 1993" (the "Reform Act"), became effective on December 17, 1994, and applies to certain rollup transactions proposed after such date. The Reform Act and the Rules promulgated thereunder are applicable only to certain types of partnership rollups and, when applicable, provide limited partners with the following protections: (i) allows and facilitates communication between limited partners during their consideration of a proposed rollup; (ii) allows the limited partners to obtain a list of the other limited partners involved in the rollup; (iii) disallows the practice of compensating persons soliciting the limited partners' approval of the rollup based on the number of approvals received; (iv) requires greater disclosure to the limited partners of the terms of the rollup and its effects on the limited partners including (a) the reason for the rollup and consideration of the alternatives; (b) the method of allocating interests in the successor entity to the limited partners and why such method was chosen; (c) comparative information including changes in limited partner voting rights, changes in distributions to the limited partners and changes in compensation to the general partner; (d) conflicts of interest of the general partner; (e) changes in the partnership's business plan; (f) the valuation of the limited partnership interests; (g) any significant difference between the exchange values of the limited partnerships and the trading price of the securities to be issued in the rollup transaction; (h) the risks and effects of the proposed rollup transaction; (i) a statement by the general partner of the fairness of the rollup and the general partner's basis for such opinion; (j) full disclosure of any opinion (other than opinions of counsel) or appraisal received by the general partner related to the proposed transaction, or if no such opinion or appraisal was sought by the general partner, an explanation of why no such opinion or appraisal is necessary to permit the limited partners to make an informed decision regarding the proposed transaction; (k) the rights of the limited partners to exercise dissenters' or appraisal rights or similar rights; (l) the method for allocating rollup consideration to the limited partners and an explanation why such method was chosen; and (m) tax consequences of the rollup; and (v) requires a minimum 60 day offering period during which the limited partners may consider the proposed rollup (or such shorter period as required by state law). Further, the Reform Act also provides that related Rules of Fair Practice will be amended to prohibit exchanges and national securities associations from listing securities issued in connection with a rollup unless the limited partners are afforded the following protections: (i) dissenting limited partners must have the right to one of the following: (a) to receive an appraisal and compensation; (b) to retain a security under substantially similar terms as the original issue; (c) to approve of the rollup by a vote of not less than 75% of the outstanding securities of each participating partnership, or; (d) to use an independent committee to negotiate the terms of the transaction. (ii) not to have their voting power unfairly reduced or abridged. (iii) not to bear an unfair proportion of the costs of the rollup transaction. The Reform Act applies only to certain types of rollup transactions, and there is no certainty that any plan considered by the Partnership at any time would be subject to the Reform Act. Thus Investors must assume in making an investment in the Units that their Partnership Interest will be subject to the provisions of the Partnership Agreement permitting fundamental changes which could result in the termination or reorganization of the Partnership and a partial or total dilution of all Limited Partners' interests in the Partnership. Profits, Losses and Distributions The following is a summary of certain provisions of the Partnership Agreement relating to the allocation and distribution of the Profits, Losses, Partnership Cash Flow, Partnership Refinancing Proceeds, Partnership Sales Proceeds, and cash upon dissolution of the Partnership. Investors should note that the Percentage Interests referenced in the discussion below could change as a consequence of a future Dilution Offering. Because an understanding of the defined financial terms is essential to an evaluation of the information presented below, Investors are urged to review carefully the definitions of the terms appearing in the Glossary. 1. Allocations. Losses. After giving effect to the special allocations set forth below, the Partnership's Losses, if any, for each Year generally will be allocated to the Partners in accordance with their respective Percentage Interests. Profits. After giving effect to the special allocations set forth below, the Partnership's Profits for any Year generally will be allocated to the Partners in accordance with their respective Percentage Interests. All items of income, gain, loss, deduction, or credit will be allocated among the Partners proportionately. Further, notwithstanding the foregoing, after giving effect to certain special allocations, the General Partner must be allocated at least 1% of all items of income, gain, loss, deduction or credit. 2. Special Allocations. The following special allocations shall be made in the following order: (i) Partnership Minimum Gain Chargeback. If there is a net decrease in Partnership Minimum Gain during any Year, each Partner shall be specially allocated items of Partnership income and gain for such Year (and, if necessary, subsequent Years) in an amount equal to such Partner's share of the net decrease in Partnership Minimum Gain, determined in accordance with Treasury Regulations Section 1.704-2(g)(2). Allocations made pursuant to the previous sentence will be made in proportion to the respective amounts required to be allocated to each Partner pursuant to that section of the Regulations. This provision relating to Partnership Minimum Gain Chargebacks is intended to comply with Treasury Regulations Section 1.704-2(f) and will be interpreted and applied in a manner consistent with that Regulation. (ii) Partner Minimum Gain Chargeback. If there is a net decrease in Partner Minimum Gain attributable to a Partner Nonrecourse Debt during any Year, each Partner who has a share of the Partner Minimum Gain attributable to such Partner Nonrecourse Debt shall be specially allocated items of Partnership income and gain for such Year (and, if necessary, subsequent Years) in an amount equal to such Partner's share of the net decrease in Partner Minimum Gain attributable to such Partner Nonrecourse Debt, to the extent required and determined in accordance with Treasury Regulations Section 1.704-2(i)(4). Allocations pursuant to the previous sentence will be made in proportion to the respective amounts required to be allocated to each Partner pursuant to that section of the Regulations. This provision relating to Partner Minimum Gain Chargebacks is intended to comply with Regulation Section 1.704-2(i)(4) and will be interpreted and applied in a manner consistent with that Regulation. (iii) Qualified Income Offset. If a Partner unexpectedly receives any adjustments, allocations or distributions described in Treasury Regulations Sections 1.704-1(b)(2)(ii)(d)(4) through (6) which causes or increases a deficit balance in such Partner's Capital Account (as adjusted pursuant to Treasury Regulations Section 1.704-1(b)(2)(ii)(d)), items of Partnership income and gain will be specially allocated to each such Partner in an amount and manner sufficient to eliminate, to the extent required by the Regulations, the deficit Capital Account of such Partner as quickly as possible, provided that an allocation pursuant to this provision shall be made only if and to the extent that such Partner would have a deficit Capital Account after all other allocations have been tentatively made as if this provision were not in the Partnership Agreement. This provision is intended to be a "qualified income offset," as defined in Regulation Section 1.704-1(b)(2)(ii)(d). (iv) Sales Commission. The Sales Commission shall be allocated to the Units which are acquired in this Offering in proportion to the respective capital contributions represented by such Units (i.e., $75 in Sales Commissions per each such Unit). 3. Allocations Between Transferor and Transferee. In the event of the transfer of all or any part of a Partner's interest (in accordance with the provisions of the Partnership Agreement) in the Partnership at any time other than at the end of a year, or the admission of a new Partner (in accordance with the provisions of the Partnership Agreement), the transferring or new Partner's share of the Partnership's income, gain, loss, deductions and credits, as computed both for accounting purposes and for federal income tax purposes, will be allocated between the transferor Partner and the transferee Partner (or Partners), or the new Partner and the other Partners, as the case may be, in the same ratio as the number of days in such year before and after the date of the transfer or admission; provided, however, that if there has been a sale or other disposition of the assets of the Partnership (or any part thereof) during such year, then upon the mutual agreement of all the Partners (excluding the new Partner and the transferring Partner), the Partnership may in its sole discretion treat the periods before and after the date of the transfer or admission as separate years and allocate the Partnership's net income, gain, net loss, deductions and credits for each of such deemed separate years. Notwithstanding the foregoing, the Partnership's "allocable cash basis items," as that term is used in Section 706(d)(2)(B) of the Code, shall be allocated as required by Section 706(d)(2) of the Code and the Regulations thereunder. See "Risk Factors - Tax Risks - Partnership Allocations." 4. Incoming Partner Allocations. The Code prohibits the retroactive allocation of a full share of partnership items to persons who were partners for less than the entire year. As provided above, the Partnership Agreement provides that items of income, gain, loss, deductions and credits will be allocated between a transferor Partner and a transferee Partner in the same ratio as the number of days in the year before and after the date of the transfer or admission, unless the Partnership has sold any of its assets in the year of the transfer or admission. If the Partnership has sold any of its assets in the year of the transfer or admission, then the General Partner may elect, in its sole discretion, to use the interim closing of the books method described above. See "Risk Factors - Tax Risks - Partnership Allocations." 5. Other Allocations. The Partnership Agreement provides for other allocations. Investors are encouraged carefully to review the Partnership Agreement attached as Appendix A. 6. Distributions. The Limited Partnership Agreement authorizes the following Distributions to be made to the Partners: Distribution of Partnership Cash Flow. Partnership Cash Flow will be distributed to the Partners within 60 days after the end of each Year of the Partnership, or earlier in the discretion of the General Partner in accordance with their respective Percentage Interests. Distribution of Partnership Sales Proceeds and Partnership Refinancing Proceeds. Partnership Sales Proceeds and Partnership Refinancing Proceeds will be distributed to the Partners within 60 days of the Capital Transaction giving rise to such proceeds. Distribution Upon Dissolution. Upon the dissolution and termination of the Partnership, the General Partner, or if there is none, a representative of the Limited Partners, will cause the cancellation of the Partnership's Certificate of Limited Partnership, liquidate the assets of the Partnership, and apply and distribute the proceeds of such liquidation in the following order of priority: (i) First, to the payment of debts and liabilities of the Partnership (including amounts owed to the General Partner and its Affiliates) and the expenses of liquidation; (ii) Second, to the creation of any reserves that the General Partner or the representatives of the Limited Partners may deem reasonably necessary for the payment of any contingent or unforeseen liabilities or obligations of the Partnership or of the General Partner arising out of or in connection with the business and operation of the Partnership; and (iii)Third, the balance, if any, will be distributed to the Partners in accordance with the Partners' positive Capital Account balances after such Capital Accounts are adjusted as provided in the Partnership Agreement, and any other adjustments required by the final Regulations under Section 704(b) of the Code. Any general partner with a negative Capital Account following distribution of the liquidation proceeds or the liquidation of its interest in the Partnership must contribute to the Partnership an amount equal to such negative capital account on or before the later of the end of the Partnership's taxable year or within 90 days after the date of liquidation. Any capital so contributed will be (i) distributed to those Partners with positive capital accounts until such capital accounts are reduced to zero, and/or (ii) used to discharge recourse liabilities. It is intended that Capital Accounts will allow for liquidation distributions consistent with the manner in which Partnership Sales Proceeds and Partnership Refinancing Proceeds are distributed; however, there can be no assurance that such will be the case. Tax Withholding. The Partnership is authorized to pay, on behalf of any Partner, any amounts to any federal, state or local taxing authority, as may be necessary for the Partnership to comply with tax withholding provisions of the Code or the income tax or revenue laws of any taxing authority. To the extent the Partnership pays any such amounts that it may be required to pay on behalf of a Partner, such amounts will be treated as a cash Distribution to such Partner and will reduce the amount otherwise distributable to him. Management of the Partnership The General Partner has the sole right to manage the business of the Partnership and at all times is required to exercise its responsibilities in a fiduciary capacity. The consent of the Limited Partners is not required for any sale or refinancing of the Lithotripsy System or the purchase of new equipment by the Partnership. The Partnership has contracted with the Management Agent to manage and administer the day-to-day operations of the Lithotripsy System. See "Business Activities - Management." Under the Partnership Agreement, if the General Partner is adjudged by a court of competent jurisdiction to be liable to the Limited Partners or the Partnership for acts or omissions of gross negligence or constituting willful misconduct, the General Partner may be removed and another substituted with the consent of all of the Limited Partners. Powers of the General Partner 1. General. The General Partner may, in its absolute discretion, borrow money, acquire, encumber, hold title to, pledge, sell, release or otherwise dispose of, all or any part of the Partnership's assets, when and upon such terms as it determines to be in the best interest of the Partnership and employ such persons as it deems necessary for the operation of the Partnership. The General Partner, however, is expressly prohibited from, among other things: (i) possessing Partnership assets or assigning the rights of the Partnership in Partnership assets or the Lithotripsy System for other than Partnership purposes; (ii) admitting Limited Partners except as provided in the Partnership Agreement; and (iii) performing any act (other than an act required by the Partnership Agreement or any act taken in good faith reliance upon Counsel's opinion) which would, at the time such act occurred, subject any Limited Partner to liability as a general partner in any jurisdiction. 2. Tax Matters. (i) Elections. The General Partner will, in its sole discretion, make for the Partnership any and all elections for federal, state and local tax purposes including, without limitation, any election, if permitted by applicable law, to adjust the basis of the Partnership's property pursuant to Code Sections 754, 734(b) and 743(b), or comparable provisions of state or local law, in connection with transfers of interests in the Partnership and Partnership Distributions. (ii) Tax Matters Partner. The Partnership Agreement designates the General Partner as the Tax Matters Partner (as defined in Section 6231 of the Code) and authorizes it to act in any similar capacity under state or local law. As the Tax Matters Partner, the General Partner is authorized (at the Partnership's expense): (i) to represent the Partnership and Partners before taxing authorities or courts of competent jurisdiction in tax matters affecting the Partnership or Partners in their capacity as Partners; (ii) to extend the statute of limitations for assessment of tax deficiencies against Partners with respect to adjustments to the Partnership's federal, state or local tax returns; (iii) to execute any agreements or other documents relating to or affecting such tax matters, including agreements or other documents that bind the Partners with respect to such tax matters or otherwise affect the rights of the Partnership and Partners; and (iv) to expend Partnership funds for professional services and costs associated therewith. In its capacity as Tax Matters Partner, the General Partner shall oversee the Partnership tax affairs in the manner which, in its best judgment, are in the interests of the Partners. Moreover, the General Partner will, in its sole discretion, not make an election pursuant to Treasury Regulation 301.7701.3 to be treated as an association taxable as a corporation. Rights and Liabilities of the Limited Partners The Limited Partners do not have any right to participate in the management or control of the business of the Partnership. Limited Partners are not required to make any capital contributions to the Partnership except amounts agreed by them to be paid, or pay or be personally liable for, any expense, liability or obligation of the Partnership, except (i) to the extent of their respective interests in the Partnership, (ii) for the obligation to return certain Distributions made to them as provided by the Act, and (iii) to the extent of their liabilities pursuant to their respective Guaranties. See "Risk Factors - Other Investment Risks - Limited Partners' Obligations to Return Certain Distributions" and "Operating Risks - Liability Under the Guaranty." Restrictions on Transfer of Partnership Interests No Partnership Interest nor any Units may be transferred without the prior written consent of the General Partner, which approval may be granted or denied in the sole discretion of the General Partner, and subject to the satisfaction of certain other conditions set forth in the Partnership Agreement. The Partnership Agreement contains additional limitations on transfer, including provisions prohibiting transfer that would violate federal or state securities laws. No transferee of the Units will automatically become a Limited Partner. Admission of a transferee requires the fulfillment of other obligations enumerated in the Partnership Agreement, including either the approval of a Majority in Interest of the Limited Partners (except the assignor Limited Partner) and the General Partner, or the approval of the assignor Limited Partner and the General Partner. Any transferee of a Partnership Interest who has not been admitted to the Partnership as a Partner shall not be entitled to any of the rights, powers or privileges of his transferor except the right to receive and be credited or debited with his proportionate share of Partnership income, gains, profits, losses, deductions, credits or distributions. A transferor Limited Partner will not be released from his personal liability under the Guaranty upon the transfer of his Partnership Interest, unless otherwise specifically agreed by the Bank at the time of the transfer. In addition, a transferor Limited Partner will not be released from his to her personal liability under the Limited Partner Loan, unless otherwise specifically agreed by the Bank, and the sale of his or her Partnership Interest may constitute an event of default under any outstanding Limited Partner Loan. The General Partner may transfer all or a portion of its Partnership Interest only with the consent of a Majority in Interest of the Limited Partners before the transferee can be admitted as a Substitute General Partner. Notwithstanding the foregoing, the Partnership Agreement gives the General Partner the authority to transfer all or part of its General Partner interest to any transferee controlled by it or one or more of its Affiliates without obtaining the Limited Partners' consent. Any such transferee would automatically be a Substitute General Partner. Both the admission of any new shareholder and the withdrawal of any shareholder from the General Partner may be done without the approval of the Limited Partners. Dissolution and Liquidation The Partnership will dissolve and terminate for any of the following reasons: 1. The sale, exchange or disposition of all or substantially all of the property of the Partnership without making provision for the replacement thereof (except to the extent otherwise provided in a reorganization plan approved by the General Partner and a Majority in Interest of the Limited Partners as described above); 2. The expiration of its term on December 31, 2049; 3. The bankruptcy or occurrence of certain other events with respect to the General Partner; 4. The determination of the General Partner that the Partnership should be dissolved; or 5. The election to dissolve the Partnership made by the General Partner in the event of certain legislation, case law or regulatory changes adversely affecting the operation of the Partnership. 6. The election to dissolve the Partnership made by all of the Partners. The retirement, resignation, bankruptcy, assignment for the benefit of creditors, dissolution, death, disability or legal incapacity of a general partner will not, however, result in a termination of the Partnership if the remaining general partner or general partners, if any, elect to continue the business of the Partnership, or if no general partner remains, if within 90 days of the occurrence of one of such events, a Majority in Interest of the Limited Partners elect in writing to continue the Partnership and, if necessary, designate a new general partner. Upon dissolution, the General Partner or, if there is none, a representative of the Limited Partners, will liquidate the Partnership's assets and distribute the proceeds thereof in accordance with the priorities set forth in the Partnership Agreement. See "Profits, Losses and Distributions - Distributions - Distribution upon Dissolution" above and "Optional Purchase of Limited Partner Interests" below. Optional Purchase of Limited Partner Interests As provided in the Partnership Agreement, certain Affiliates of the existing Limited Partners have the first option, and the General Partner has the second option (which it may assign to the Partnership in its sole discretion), to purchase all the interest of a Limited Partner who (i) dies, (ii) becomes the subject of a domestic proceeding, (iii) becomes insolvent, (iv) acquires a direct or indirect ownership of an interest in a competing venture (including the lease or sublease of competing technology), or (v) defaults on his obligations under the Guaranty. Except in the case of the death of a Limited Partner, the option purchase price is an amount equal to the lesser of the fair market value of the Partnership Interest to be purchased or the Limited Partner's share of the Partnership's book value, if any, as reflected by the Limited Partner's capital account in the Partnership (unadjusted for any appreciation in Partnership assets and as reduced by depreciation deductions claimed by the Partnership for tax purposes). The option purchase price is likely to be considerably less than the fair market value of a Limited Partner's interest in the Partnership. Because losses, depreciation deductions and Distributions reduce capital accounts, and because appreciation in assets is not reflected in capital accounts, it is the opinion of the General Partner that the option purchase price may be nominal in amount. In addition, in the event existing or newly enacted laws or regulations or any other legal developments adversely affect (or potentially adversely affect) the operation of the Partnership or the business of the Partnership (e.g., any prohibitions on provider ownership), the General Partner, in its sole discretion, is obligated to either (i) purchase the Partnership Interests of all of the Limited Partners for an amount equal to the lesser of fair market value or book value or (ii) dissolve the Partnership. In the event of the death of a Limited Partner, the option purchase price for that Partner's Partnership Interest is an amount equal to the greater of (i) one and one-half times the aggregate distributions made with respect to the Partnership Interest during the twelve-month period ending the last day of the month immediately preceding the month in which the death occurs or (ii) the Limited Partner's share of the Partnership's book value, if any (prorated in the event that only a portion of his Partnership Interest is being purchased) as reflected by the Capital Account of the Limited Partner. If the General Partner exercises the purchase option, the General Partner will assume any liabilities under any personal Guaranty still outstanding with respect to the withdrawing Limited Partner. The withdrawing Limited Partner will not be released from his obligations under the Guaranty unless so agreed by the Bank. See the Partnership Agreement attached hereto as Appendix A and "Risk Factors - Operating Risks - Liability Under the Guaranty." Noncompetition Agreement and Protection of Confidential Information The Partnership Agreement provides that each Limited Partner is prohibited from having a direct or indirect ownership of an interest in a competing venture (including the lease or sublease of competing technology) other than an interest held by a Limited Partner in the General Partner or one of its Affiliates (such non-excluded interests, the "Outside Activities"). While they are Limited Partners in the Partnership, each Limited Partner is precluded from engaging in any Outside Activities, provided that the General Partner is authorized, in its sole discretion, to waive this restriction with respect to any ownership interest of a Limited Partner in an Outside Activity acquired before the date the person becomes a Limited Partner. In the event that a Limited Partner's interest in the Partnership is terminated or transferred upon the occurrence of certain events as provided in the Partnership Agreement, he or she is precluded, for a period of two (2) years following the date of his withdrawal, from engaging in any Outside Activity within any market area in which the Partnership is providing services or has provided services within the twelve months preceding the withdrawal. This prohibition is in addition to the right of the General Partner to acquire the interest of a Limited Partner engaged in an Outside Activity as provided in the Partnership Agreement. See "Optional Purchase of Limited Partner Interests" in this Section, and the Partnership Agreement attached hereto as Appendix A. In addition, the Partnership Agreement provides that each Limited Partner acknowledges and agrees that his participation in the Partnership necessarily involves his access to confidential information that is proprietary in nature and, therefore, the exclusive property of the Partnership. Accordingly, the Limited Partners (other than the General Partner and its Affiliates who hold Limited Partner interests) are precluded from disclosing such confidential information during their participation as Limited Partners in the Partnership or thereafter unless required by law or with the prior written consent of the Partnership. Arbitration The Partnership Agreement provides that disputes arising thereunder shall be resolved by submission to arbitration in accordance with the provisions of California law. Power of Attorney Each Investor, by executing the Subscription Agreement, irrevocably appoints Cheryl Williams and Stan Johnson, 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 Cheryl Williams and Stan Johnson, severally, to act as his attorneys-in-fact to make, execute, swear to and file any document necessary to the conduct of the Partnership's business, such as deeds of conveyance of real or personal property as well as any amendment to the Partnership Agreement or to any certificate of limited partnership which accurately reflects actions properly taken by the Partners. Reports to Limited Partners Within 90 days after the end of each Year of the Partnership, the General Partner will send to each person who was a Limited Partner at any time during such year such tax information, including, without limitation, Federal Tax Schedule K-1, as will be reasonably necessary for the preparation by such person of his federal income tax return, and such other financial information as may be required by the Act. Records Proper and complete records and books of account will be kept by the General Partner or the Management Agent in which will be entered fully and accurately all transactions and other matters relative to the Partnership's business as are usually entered into records, books and accounts maintained by persons engaged in businesses of a like character. Pursuant to applicable law, the Partnership books and records will be kept on the accrual method basis of accounting. The Partnership's fiscal year will be the calendar year. The books and records will be located at the Partnership's office, and will be open to the reasonable inspection and examination of the Limited Partners or their duly authorized representatives during normal business hours as provided by the Act. LEGAL MATTERS On the Closing Date, it is expected that Womble Carlyle Sandridge & Rice, a Professional Limited Liability Company, of Winston-Salem, North Carolina, will render an opinion as to the formation and existence of the Partnership, the status of Investors as limited partners and certain federal tax matters, the form of which is attached as Appendix C to this Memorandum. See "Risk Factors - Tax Risks." ADDITIONAL INFORMATION The Partnership will make available to you the opportunity to ask questions of its management and to obtain information to the extent it possesses such information or can acquire it without an unreasonable effort or expense, which is necessary to verify the accuracy of the information contained herein or which you or your professional advisors desire in evaluating the merits and risks of an investment in the Partnership. Copies of certain Hospital Contracts and insurance reimbursement agreements may not, however, be available due to confidentiality restrictions contained therein. GLOSSARY Certain terms in this Memorandum shall have the following meanings: Act. The Act means the California Revised Limited Partnership Act, as in effect on the date hereof. Affiliate. An Affiliate is (i) any person, partnership, corporation, association or other legal entity ("person") directly or indirectly controlling, controlled by or under common control with another person, (ii) any person owning or controlling 10% or more of the outstanding voting interests of such other person, (iii) any officer, director or partner of such person and (iv) if such other person is an officer, director or partner, any entity for which such person acts in such capacity. Bank. First-Citizens Bank & Trust Company. ---- Capital Account. The Partnership capital account of a Partner as computed pursuant to the Partnership Agreement. Capital Contributions. All capital contributions made by a Partner or his predecessor in interest which shall include, without limitation, contributions made pursuant Article VII of the Partnership Agreement. Capital Transaction. Any transaction which, were it to generate proceeds, would produce Partnership Sales Proceeds or Partnership Refinancing Proceeds. Closing Date. 5:00 p.m., Eastern Time, on June 1, 2000 (or earlier in the discretion of the General Partner). The Closing Date may be extended for a period of up to 180 days in the discretion of the General Partner. Code. The Internal Revenue Code of 1986, or corresponding provisions of subsequent, superseding revenue laws. Contract Hospitals. The 10 hospitals and medical centers to which the Partnership provides lithotripsy services pursuant to 7 separate Hospital Contracts. Counsel. Womble Carlyle Sandridge & Rice, a Professional Limited Liability Company, P.O. Drawer 84, Winston-Salem, North Carolina 27102. Dilution Offering. Pursuant to the terms of the Partnership Agreement, the future offering of additional limited partnership interests in the Partnership by the General Partner. Any such offering generally will proportionally reduce the existing Percentage Interests of the then current Partners in the Partnership; provided, however, that the General Partner may avoid dilution by either making a proportional additional capital contribution or buying units in a Dilution Offering. Distributions. Cash or other property, from any source, distributed to Partners. Escrow Agent. First-Citizens Bank & Trust Company. ------------ 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, Mobile Kidney Stone Centers of California, Ltd. I, a California limited partnership and an Affiliate of Prime. Guaranty. The Guaranty Agreement in the form included in the Subscription Packet accompanying this Memorandum pursuant to which each new Limited Partner will guarantee his pro rata portion of the Partnership's obligations to the Bank under the Loan. Hospital Contracts. The 7 separate lithotripsy services agreements the Partnership has entered into with the Contract Hospitals. Investors. Potential purchasers of Units. --------- Limited Partner Loan. The loan to be made by the Bank to certain qualified Investors that wish to finance a portion of the Unit purchase price. Limited Partner Note. The promissory note from an Investor financing a portion of the Unit purchase price to the Bank in the principal amount of up to $1,733 per Unit, the proceeds of which will be paid directly to the Partnership. The form of the Limited Partner Note (including the Note Addendum attached thereto) is attached as Exhibit A to the Form of Loan Commitment which is attached hereto as Appendix B. Limited Partners. The current Limited Partners and those Investors in the Units admitted to the Partnership pursuant to this Offering and any person admitted as a substitute Limited Partner in accordance with the provisions of the Partnership Agreement. Lithotripsy System. The van with the installed and operational Modulith(R)SLX-T owned and operated by the Partnership and any other additional or replacement lithotripter and transport vehicle Loan. The loan of $487,125 from the Bank to the Partnership. Loan proceeds were used by the Partnership to (i) acquire a new lithotripter, (ii) acquire and upfit a new mobile van and (iii) pay sales taxes on the purchases of the lithotripter and the van. The Loan is secured by the Lithotripsy System, the Partnership's accounts receivable and other Partnership assets, the guaranty of the General Partner, and the Limited Partner Guaranties. Loan and Security Agreement. The agreement to be executed in conjunction with the Limited Partner Note by an Investor who finances a portion of the Unit purchase price through a Limited Partner Loan. The form of the Loan and Security Agreement is attached as Exhibit B to the Loan Commitment which is attached hereto as Appendix B. Loan Documents. The Loan Commitment, the Limited Partner Note, the Loan and Security Agreement, the Security Agreement and UCC-1's, collectively. Loss. The net loss (including capital losses and excluding Net Gains from Capital Transactions) of the Partnership for each year as determined by the Partnership for federal income tax purposes. Management Agent. Sun Medical Technologies, Inc., a California corporation, and a wholly-owned subsidiary of Prime. The Management Agent is also the sole general partner of the General Partner. Memorandum. This Confidential Private Placement Memorandum, including all Appendices hereto, and any amendment or supplement hereto. Modulith(R) SLX-T. The Partnership's Storz Modulith(R) SLX Transportable ("SLX-T") model extracorporeal shock-wave lithotripter manufactured by Storz which the Partnership acquired with the proceeds of the Loan. Net Gains from Capital Transactions. The gains realized by the Partnership as a result of or upon any sale, exchange, condemnation or other disposition of the capital assets of the Partnership (which assets shall include Code Section 1231 assets) or as a result of or upon the damage or destruction of such capital assets. Nonrecourse Deductions. A deduction as set forth in Treasury Regulations Section 1.704-2(b)(1). The amount of Nonrecourse Deductions for a given Year equals the excess, if any, of the net increase, if any, in the amount of Partnership Minimum Gain during such Year over the aggregate amount of any Distributions during such Year of proceeds of a Nonrecourse Liability that are allocable to an increase in Partnership Minimum Gain, determined according to the provisions of Treasury Regulations Section 1.704-2(h). Nonrecourse Liability. Any partnership liability (or portion thereof) for which no Partner bears the "economic risk of loss," within the meaning of Treasury Regulations Section 1.704-2(i). Offering. The offering of Units pursuant to this Memorandum. -------- Partner Minimum Gain. An amount, with respect to each Partner Nonrecourse Debt, equal to the Partnership Minimum Gain that would result if such Partner Nonrecourse Debt were treated as a Nonrecourse Liability, determined in accordance with Treasury Regulations Section 1.704-2(i). Partner Nonrecourse Debt. Any nonrecourse debt (for the purposes of Treasury Regulations Section 1.1001-2) of the Partnership for which any Partner bears the "economic risk of loss," within the meaning of Treasury Regulations Section 1.752-2. Partner Nonrecourse Deductions. Deductions as described in Treasury Regulations Section 1.704-2(i)(2). The amount of Partner Nonrecourse Deductions with respect to a Partner Nonrecourse Debt for any Year equals the excess, if any, of the net increase, if any, in the amount of Partner Minimum Gain attributable to such Partner Nonrecourse Debt during such Year over the aggregate amount of any Distributions during that Year to the Partner that bears the economic risk of loss for such Partner Nonrecourse Debt to the extent such Distributions are from the proceeds of such Partner Nonrecourse Debt and are allocable to an increase in Partner Minimum Gain attributable to such Partner Nonrecourse Debt, determined in accordance with Treasury Regulations Section 1.704-2(i). Partners. The General Partner and the Limited Partners, collectively, when no distinction is required by the context in which the term is used herein. Partnership. Mobile Kidney Stone Centers of California II, L.P., a California limited partnership, which owns and operates the Lithotripsy System. Partnership Agreement. The Partnership's Agreement of Limited Partnership, a copy of which is attached as Appendix A, as such may be amended from time to time. Partnership Cash Flow. For the applicable period the excess, if any, of (A) the sum of (i) all gross receipts from any source for such period, other than the Partnership loans, Capital Transactions and Capital Contributions, and (ii) any funds released by the Partnership from previously established reserves, over (B) the sum of (i) all cash expenses paid by the Partnership for such period, (ii) the amount of all payments of principal on loans to such Partnership, (iii) capital expenditures of the Partnership, and (iv) such reasonable reserves as the General Partner shall deem necessary or prudent to set aside for future repairs, improvements, or equipment replacement or additions, or to meet working capital requirements or foreseen or unforeseen future liabilities and contingencies of the Partnership; provided, however, that the amounts referred to in (B) (i), (ii) and (iii) above shall be taken into account only to the extent not funded by Capital Contributions, loans or paid out of previously established reserves. Such term shall also include all other funds deemed available for distribution and designated as "Partnership Cash Flow" by the General Partner. Partnership Interest. The interest of a Partner in the Partnership as defined by the Act and the Partnership Agreement. Partnership Minimum Gain. Gain as defined in Treasury Regulations Section 1.704-2(d). Partnership Refinancing Proceeds. The cash realized from the refinancing of Partnership assets after retirement of any secured loans and less (i) payment of all expenses relating to the transaction and (ii) establishment of such reasonable reserves as the General Partner shall deem necessary or prudent to set aside for future repairs, improvements, or equipment replacement or additions, or to meet working capital requirements or foreseen or unforeseen future liabilities or contingencies of the Partnership. Partnership Sales Proceeds. The cash realized from the sale, exchange, casualty or other disposition of all or a portion of Partnership assets after the retirement of all secured loans and less (i) the payment of all expenses related to the transaction and (ii) establishment of such reasonable reserves as the General Partner shall deem necessary or prudent to set aside for future repairs, improvements, or equipment replacement or additions, or to meet working capital requirements or foreseen or unforeseen future liabilities or contingencies of the Partnership. Percentage Interest. The interest of each Partner in the Partnership, to be determined in the case of each Investor by reference to the percentage oppositive his or her name set forth in Schedule A to the Partnership Agreement. Each Unit sold pursuant to this Offering represents an initial 0.5% economic interest in the Partnership. The Percentage Interest will be set forth in Schedule A to the Partnership Agreement or any other document or agreement, as a percentage or a fraction or on any numerical basis deemed appropriate by the General Partner. Prime. Prime Medical Services, Inc. a publicly held Delaware corporation and parent of the Management Agent and Sales Agent. Prime Rate. The rate of interest periodically established by the Bank and identified as such in literature published and circulated within the Bank's offices. Pro Rata Basis. In connection with an allocation or distribution, an allocation or distribution in proportion to the respective Percentage Interest of the class of Partners to which reference is made. Profit. The net income of the Partnership for each year as determined by the Partnership for federal income tax purposes. Qualified Income Offset Item. An adjustment, allocation or distribution described in Treasury Regulations Sections 1.704-1(b)(2)(ii)(d)(4), 1.704-1(b)(2)(ii)(d)(5) or 1.704-1(b)(2)(ii)(d)(6) unexpectedly received by a Partner. Sales Agent. MedTech Investments, Inc., a registered broker-dealer, member of the National Association of Securities Dealers, Inc. and an Affiliate of the General Partner. SEC. The United States Securities and Exchange Commission. --- 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. The geographic region in which Partnership operations are conducted and which presently consists primarily of areas within a 150 mile radius of Sacramento, California. The General Partner has sole discretion to expand the Service Area subject to fiduciary duties owed by the General Partner to its Limited Partners. Storz. Karl Storz Lithotripsy-America, Inc. and its Affiliates. ----- Subscription Agreement. The Subscription Agreement, included in the Subscription Packet accompanying this Memorandum, to be executed by the prospective Limited Partners in connection with their purchase of Units. Subscription Packet. The packet of subscription materials to be completed by Investors in connection with their subscription for Units. UCC-1. The Uniform Commercial Code Financing Statement, two copies of which are attached to the Subscription Packet and are to be executed in conjunction with the Limited Partner Note by an Investor who finances a portion of the Unit purchase price through a Limited Partner Loan. The UCC-1 will be used by the Bank to perfect its security interest in such Investor's share of Distributions. Units. The 40 equal limited partner interests in the Partnership offered pursuant to this Memorandum for a price per Unit of $4,233 in cash, plus 0.5% in guaranties of the Partnership's obligations under the Loan (a $2,435.63 principal Loan guaranty per Unit). Year of the Partnership. An annual accounting period ending on December 31 of each year during the term of the Partnership. EX-10.142 55 0055.txt EX 10.142 1ST SUPPLEMENT TO MEMORANDUM - MKSC II FIRST SUPPLEMENT DATED JUNE 1, 2000 TO THE CONFIDENTIAL PRIVATE PLACEMENT MEMORANDUM DATED APRIL 21, 2000 MOBILE KIDNEY STONE CENTERS OF CALIFORNIA II, L.P. Mobile Kidney Stone Centers of California II, L.P., a California limited partnership (the "Partnership"), by this First Supplement hereby amends and supplements its Confidential Private Placement Memorandum of April 21, 2000 (the "Memorandum"). Capitalized terms used herein are defined in the Glossary appearing in the Memorandum. Persons who have subscribed for or are considering an investment in the Units offered by the Memorandum should carefully review this First Supplement. Extension of the Offering Pursuant to the authority given to the General Partner in the Memorandum, the General Partner hereby elects to extend the offering termination date to September 28, 2000 (or earlier in the discretion of the General Partner, upon the sale of all Units as provided in the Memorandum). EX-10.143 56 0056.txt EX 10.143 2ND SUPPLEMENT TO MEMORANDUM - MKSC II SECOND SUPPLEMENT DATED SEPTEMBER 28, 2000 TO THE CONFIDENTIAL PRIVATE PLACEMENT MEMORANDUM DATED APRIL 21, 2000 MOBILE KIDNEY STONE CENTERS OF CALIFORNIA II, L.P. Mobile Kidney Stone Centers of California II, L.P., a California limited partnership (the "Partnership"), by this Second Supplement hereby amends and supplements its Confidential Private Placement Memorandum of April 21, 2000, as amended (the "Memorandum"). Capitalized terms used herein are defined in the Glossary appearing in the Memorandum. Persons who have subscribed for or are considering an investment in the Units offered by the Memorandum should carefully review this Second Supplement. Extension of the Offering Pursuant to the authority given to the General Partner in the Memorandum, the General Partner hereby elects to extend the offering termination date to November 7, 2000 (or earlier in the discretion of the General Partner, upon the sale of all Units as provided in the Memorandum). EX-10.144 57 0057.txt EX 10.144 CONFIDENTIAL MEMORANDUM - SO. CAR. II 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 1-800-682-7971 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 WOMBLE CARLYLE SANDRIDGE & RICE, 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 Johannes Gutenberg 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 "Stark II" federal statute prohibiting financial relationships between physicians and certain entities to which they refer patients, and the Anti-Kickback Statute which prohibits compensation in exchange for or to induce referrals. Regarding Stark II, in January, 1998, HCFA, the federal agency responsible for administering the Medicare program, published proposed Stark II regulations. Under the proposed regulations, physician Limited Partner referrals of Medicare and Medicaid patients to contracting hospitals for lithotripsy services would be prohibited. If HCFA adopts the proposed Stark II regulations as final, or if a reviewing court were to interpret the Stark II statute using the proposed regulations as guidance, then the Partnership and its physician Limited Partners would be in violation of Stark II. In such instance, the Partnership and/or its physician Limited Partners may be required to refund any amounts collected from 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 Stark II or the Anti-Kickback Statute have been violated. In addition to Stark 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. Gain realized on the sale of Units by a Limited Partner who is not a "dealer" in Units or in limited partnership interests will be taxed as capital gain, except that the portion of the sales price attributable to inventory items and unrealized receivables will be taxed as ordinary income. "Unrealized receivables" of the Partnership include the Limited Partner's share of the ordinary income that the Partnership would realize as a result of the recapture of depreciation (as described above) if the Partnership had sold Partnership depreciable property immediately before the Limited Partner sold his 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 Womble Carlyle Sandridge & Rice, a Professional Limited Liability Company, attached hereto as Appendix C. Limited Partners' Obligation to Return Certain Distributions. Except as provided by other applicable law and provided that a Limited Partner does not participate in the management of the Partnership, he will not be liable for the liabilities of the Partnership in excess of his investment, his ratable share of undistributed profits and 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 2008 Litho Place, Fayetteville, North Carolina 28034. The telephone number of the Partnership and the General Partner is (800) 682-7971. TERMS OF THE OFFERING The Units and Subscription Price Fayetteville Lithotripters Limited Partnership - 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 faith deems itself or its collateral insecure and upon certain other events, including, but not limited to, nonpayment of any installment. The Bank may also request additional collateral in the event it deems the Limited Partner Note insufficiently secured. A Limited Partner's liability under a Limited Partner Note also continues regardless of whether the Limited Partner remains a limited partner in the Partnership. A Limited Partner's liability under a Limited Partner Note is directly with the Bank. As a consequence, such liability cannot be avoided by claims, defenses or set-offs the Limited Partner may have against the Partnership, the General Partner or their Affiliates. In addition to the suitability requirements discussed below, the prospective Investor must be approved by the Bank for purposes of his delivery of the Limited Partner Note. The Bank has established its own criteria for approving the creditworthiness of a prospective Investor and has not established objective minimum suitability standards. Instead, the Bank is empowered to accept or reject prospective Investors. See "Risk Factors - Other Investment Risks - Liability Under Limited Partner 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 Johannes Gutenberg 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 Margaret R. Pardee Memorial Hospital Mary Black Health System, LLC (d/b/a Mary Black Memorial Hospital) Oconee Memorial Hospital Park Ridge Hospital St. Francis 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 2008 Litho Place, Fayetteville, North Carolina 28304, and its telephone number is (800) 682-7971. Management. The following table sets forth the names and respective positions of the individuals serving as executive officers and directors of the General Partner, many of whom were shareholders of the General Partner prior to its acquisition by Prime and/or are current shareholders and/or management personnel of Prime. Name Office Joseph Jenkins, M.D. President, Chief Executive Officer and Director Kenneth S. Shifrin Director W. Alan Terry Vice President Cheryl Williams Vice President and Director Thomas J. Driber, Ph.D. Vice President Stan Johnson Vice President David Vela, M.D. Vice President Philip J. Gallina Secretary and Treasurer James D. Clark 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 Dr. Jenkins, Mr. Shifrin and Ms. Williams. The General Partner is a wholly-owned subsidiary of Prime. Descriptions of the background of the executive officers and directors of the General Partner appear below. Joseph Jenkins, M.D. has been President and Chief Executive Officer of Prime since April 1996. From May 1990 until December 1991, Dr. Jenkins was a Vice President of the General Partner and previously practiced urology in Washington, North Carolina. Dr. Jenkins has been President of the General Partner since 1992 and was recently elected to its Board of Directors. He also serves as the Chief Executive Officer of the General Partner. Dr. Jenkins is a board certified urologist and is a founding member, past-president and currently a Director of the American Lithotripsy Society. Kenneth S. Shifrin has been Chairman of the Board and a Director of Prime since October 1989 and was recently elected a Director of the General Partner following Prime's acquisition of all of the General Partner's stock. Mr. Shifrin also has served in various capacities with American Physicians Service Group, Inc. ("APS") since February 1985, and is currently Chairman of the Board and Chief Executive Officer of APS. W. Alan Terry 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, Mr. Terry joined The May Department Stores Company at their corporate headquarters in St. Louis, where he held several financial management positions until October, 1987, when he was transferred to one of May's largest divisions, Caldor, Inc., as Vice President of Finance. He remained in that capacity until June, 1990, when he became Chief Operating Officer for the General Partner and served in that capacity until April 1996. Cheryl Williams is a Director and Vice President of the General Partner. Ms. Williams has been Chief Financial Officer, Vice President-Finance and Secretary of Prime since October 1989. Ms. Williams was Controller of Fairchild Aircraft Corporation from August 1988 to October 1989. From 1985 to 1988, Ms. Williams served as the Chief Financial Officer of APS Systems, Inc. Thomas J. Driber, Ph.D. was recently appointed a Vice President of the General Partner. Dr. Driber is an experienced medical practice consultant and has served as a director of Southern Medical Imaging, Inc. (1988-1993), First Choice Health Plan, Inc. (1986-1988) and Tampa Bay Health Plan, Inc. (1985-1986). In addition, Dr. Driber is an accomplished health care scholar and was a member of the teaching faculty at Florida Neurological Institute School of EEG Technology from 1980 to 1984. Dr. Driber received a faculty appointment to the Surgery department (renal transplant surgery) of the University of Florida College of Medicine and taught there from 1977 to 1979. Dr. Driber received a Ph.D. in Medical/Social Change Theory, Concentration: Ambulatory Medical Delivery Systems from Walden University, Institute for Advanced Studies in Minneapolis, Minnesota in 1984. Stan Johnson was recently appointed a Vice President of the General Partner. Mr. Johnson has been a Vice President of Prime and President of Sun Medical Technologies, Inc., an Affiliate of the General Partner ("Sun") since November 1995. Mr. Johnson was the Chief Financial Officer of Sun from 1990 to 1995. David Vela, M.D. was recently appointed a Vice President of the General Partner. Dr. Vela received his medical degree in 1984. Dr. Vela 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. Philip J. Gallina recently became the Secretary and Treasurer of the General Partner, having previously served as a Vice President since 1989. Mr. Gallina is a Certified Public Accountant licensed in the state of Pennsylvania. From 1980 through February 1989, Mr. Gallina served as Plant Controller for the Westinghouse Motor Control and Enclosed Control Product Lines. Mr. Gallina is also a Director, the Vice President, the Treasurer and the Secretary of MedTech Investments, Inc., the Sales Agent. James D. Clark recently became Assistant Secretary of the General Partner. Mr. Clark has served as Tax Manager of Prime since January 1998 and is a Certified Public Accountant in Texas. Prior to joining Prime, Mr. Clark 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 Anderson Area Medical Center in Anderson, South Carolina, at Palmetto Baptist Medical Center in Easley, South Carolina, at Rutherford Hospital in Rutherfordton, North Carolina, and at Harris 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) ("Stark II"). Lithotripsy services were not specifically identified as a designated health service by this legislation, but the prohibition includes any service which is provided to an individual who is registered as an inpatient or outpatient of a hospital under proposed regulations discussed below. Lithotripsy services provided by the Partnership to Medicare and Medicaid patients are billed by the contracting hospital in its name and under its Medicare and Medicaid program provider numbers. Accordingly, these lithotripsy services would likely be considered inpatient or outpatient services under Stark II. Following the passage of the Stark II legislation effective January 1, 1995, the General Partner determined that the statute would not apply to the type of lithotripsy services provided by the Partnership. Stark 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 Stark 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 Stark II. Based upon this reasonable interpretation of Stark II, by referring a patient to a hospital furnishing the outpatient lithotripsy services "under arrangements" with the Partnership, a physician investor in the Partnership is not making a referral to an entity (the hospital) in which he or she has an ownership interest. On January 9, 1998, HCFA published proposed regulations interpreting the Stark II statute (the "Proposed Stark II Regulations"). The Proposed Stark II Regulations and HCFA's accompanying commentary would apply the physician referral prohibitions of Stark II to the Partnership's contracts for provision of the Mobile Lithotripsy System. Under the Proposed Stark 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 Stark II Regulations may be viewed as HCFA's interim position until final regulations are issued. If the Proposed Stark II Regulations are adopted as final (or, in the meantime, if a reviewing court adopted their reasoning as the proper interpretations of the Stark II statute), then the Partnership's operations would not be in compliance with Stark 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 Stark II Regulations that physician overutilization of lithotripsy is unlikely and specifically solicits comments on whether there should be a regulatory exception for lithotripsy. HCFA has received a substantial volume of comments in support of a regulatory exception for lithotripsy. HCFA representatives have informally acknowledged to representatives of the General Partner that some form of regulatory relief for lithotripsy may be forthcoming; however, no assurances can be made that such will be the case. 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 Stark II Regulations and accompanying HCFA commentary, and explore other alternative plans of operations that would allow the Partnership to operate in compliance with Stark II and its final regulations. HCFA's adoption of the current Proposed Stark II Regulations as final or a reviewing court's interpretation of the Stark II statute in reliance on the Proposed Stark II Regulations and in a manner adverse to the Partnership operations would mean that the Partnership and its physician Limited Partners would be in violation of Stark 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 Stark II self-referral prohibition. One (H.R. 2650) was introduced by Representative Stark, the other (H.R. 2651) by House Ways and Means health subcommittee chair Representative Bill Thomas. The Stark bill would modify, and the Thomas bill 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 Stark II on this Offering discussed above. Fraud and Abuse. The provisions of the federal Social Security Act addressing illegal remuneration (the "Anti-Kickback Statute") prohibit providers and others from soliciting, receiving, offering or paying, directly or indirectly, any remuneration in return for either making a referral for a Medicare, Medicaid or CHAMPUS covered service or ordering, arranging for or recommending any such covered service. Violations of the Anti-Kickback Statute may be punished by a fine of up to $25,000 or imprisonment for up to five (5) years, or both. In addition, violations may be punished by substantial civil penalties and/or exclusion from the Medicare and Medicaid programs. Regarding exclusion, the Office of Inspector General ("OIG") of the Department of Health and Human Services may exclude a provider from participation in the Medicare program for a 5-year period upon a finding that the Anti-Kickback Statute has been violated. After OIG establishes a factual basis for excluding a provider from the program, the burden of proof shifts to the provider to prove the Anti-Kickback Statute has not been violated. The Limited Partners 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. v. Greber, 760 F.2d 68 (1985). The Greber case was followed by the United States Court of Appeals for the Ninth Circuit, U.S. v. Kats, 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 Stark 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 Stark 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 Stark 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 Womble Carlyle Sandridge & Rice, 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 Dr. Joseph Jenkins and Alan Terry, severally, to act as attorneys-in-fact to execute the Partnership Agreement, any amendments thereto and any certificate of limited partnership filed by the General Partner. The Partnership Agreement, in turn, contains provisions by which each Limited Partner irrevocably appoints Dr. Joseph Jenkins, to act as his or her attorney-in-fact to make, execute, swear to and file any documents necessary to the conduct of the Partnership's business, such as deeds of conveyance of real or personal property as well as any amendment to the Partnership Agreement or to any certificate of limited partnership which accurately reflects actions properly taken by the Partners. Reports to Limited Partners Within 90 days after the end of each Year of the Partnership, the General Partner will send to each person who was a Limited Partner at any time during such year such tax information, including, without limitation, Federal Tax Schedule K-1, as will be reasonably necessary for the preparation by such person of his federal income tax return, and such other financial information as may be required by the Act. Records Proper and complete records and books of account 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 Womble Carlyle Sandridge & Rice, 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. Womble Carlyle Sandridge & Rice, a Professional Limited Liability Company, P.O. Drawer 84, Winston-Salem, North Carolina 27102. Dilution Offering. The issuance, offering and sale by the Partnership of additional partnership interests in the future. Distributions. Cash or other property, from any source, distributed to Partners. Escrow Agent. First-Citizens Bank & Trust Company. ------------ FDA. The United States Food and Drug Administration. --- Financial Statement. The Purchaser Financial Statement, included in the Subscription Packet accompanying this Memorandum, to be furnished by the Investors for review by the General Partner and the Bank in connection with their decision to accept or reject a subscription. General Partner. The general partner of the Partnership, Lithotripters, Inc., a North Carolina corporation, and a wholly owned subsidiary of Prime Medical Services, Inc. Hospital Contracts. The 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. EX-10.145 58 0058.txt EX 10.145 SUPPLEMENT TO MEMORANDUM - SO. CAR. II SUPPLEMENT TO THE CONFIDENTIAL PRIVATE PLACEMENT MEMORANDUM AND CONSENT February 18, 2000 FAYETTEVILLE LITHOTRIPTERS LIMITED PARTNERSHIP - SOUTH CAROLINA II 2008 Litho Place Fayetteville, North Carolina 28304 Fayetteville Lithotripters Limited Partnership - South Carolina II, a South Carolina limited partnership (the "Partnership"), by this Supplement and Consent hereby amends and supplements its Confidential Private Placement Memorandum of November 17, 1999 (the "Memorandum"), and proposes an Amendment to its Partnership Agreement. Capitalized terms used herein are defined in the Glossary appearing in the Memorandum. All Limited Partners and persons who have subscribed for or are considering an investment in the Units offered by the Memorandum should carefully review this Supplement and Consent. Extension of the Offering Pursuant to the authority reserved by the General Partner in the Memorandum, the General Partner hereby elects to extend the Offering termination date to February 29, 2000 (or such earlier date as the General Partner may, in its sole discretion, otherwise elect). Competition and Revaluation of Units Recently, six Limited Partners acquired an interest in a competing lithotripsy business. The Partnership has exercised its option to purchase the interest of such Limited Partners and is pursuing legal and equitable remedies to enjoin such former Limited Partners from competing with the Partnership and is suing the former Limited Partners for damages. The Partnership believes that the increase in competition in the Greenville market in connection with the former Limited Partners' new venture will adversely affect Partnership revenues. Therefore, the Partnership has engaged ail independent valuation expert to re-value the Units. The new revalued price per Unit is reduced to 89,116. Shortly, revised subscription documents reflecting the reduced price per Unit will be distributed to all existing and prospective investors. See the "Reaffirmation and Consent" section in this Supplement and Consent. Amendment of Partnership Agreement To the extent necessary, the General Partner proposes that the Partnership Agreement, as amended, be further amended in any and all respects in order to ensure that the terms of the Offering as outlined in the Memorandum, including the sale of Units to existing Limited Partners. complies with the terms of the Partnership Agreement. By executing and returning the attached Reaffirmation and Consent, each Limited Partner consents to such Amendment to the Partnership Agreement. Reaffirmation and Consent Attached to this Supplement as Appendix A is a Reaffirmation and Consent that is to be utilized by each subscribing Investor to evidence his election to either (i) withdraw from the Offering and have returned his subscription funds (plus interest) and Loan Documents, if any, or (ii) reaffirm his subscription. In addition, the Reaffirmation and Consent is to be used for each Limited Partner to evidence his approval of or opposition to an amendment to the Partnership Agreement that amends the Partnership Agreement to insure that the terms of the Offering as outlined in the Memorandum, including the sale of Units to existing Limited Partners, complies with the terms of the Partnership Agreement. The Reaffirmation and Consent is self-explanatory. Each Investor and Limited Partner should mark the boxes evidencing his elections, and then return the Reaffirmation and Consent to MedTech Investments, Inc. Any subscribing Investor or Limited Partner who does not timely return his Reaffirmation and Consent will be deemed to have withdrawn his subscription and abstained from adopting or rejecting the Amendment. Questions concerning this Supplement and Consent should be directed to MedTech Investments, Inc., 2008 Litho Place, Fayetteville, North Carolina 28304. MedTech's telephone number is (800) 682-7971. FAYETTEVILLE LITHTRIPTERS LIMITED PARTNERSHIP - SOUTH CAROLINA II A SOUTH CAROLINA LIMITED PARTNERSHIP REAFFIRMATION AND CONSENT Capitalized terms used herein are defined in the Glossary appearing in the Confidential Private Placement Memorandum of November 17, 1999 and accompanying supplements (the "Memorandum"). 1. The undersigned hereby acknowledges receipt of the Memorandum and Supplement and Consent dated February 18, 2000. After careful review of the Memorandum and Supplement and Consent, by completion and execution of this Reaffirmation and Consent, the undersigned wishes to evidence his election either to withdraw from the Offering or to reaffirm his subscription. Please check only one of the boxes set forth below to evidence your desired election: [] I wish to withdraw from the Offering and desire to have my subscription funds (plus interest) and Loan Documents, if any, returned to me. [] I wish to reaffirm my subscription and waive any withdrawal rights associated with the Supplements and Consent and the information provided therein. I understand that subscription documents revised consistent with the Supplement and Consent will be forwarded to me shortly for completion, execution and return. 2. By completion and execution of this Reaffirmation and Consent, the undersigned hereby indicates his approval of or opposition to an amendment to the Partnership Agreement that insures the terms of the Offering as outlined in the Memorandum, including the sale of Units to existing Limited Partners, complies with all the terms of the Partnership Agreement as amended. [] I approve the adoption of the Amendment. [] l oppose the adoption of the Amendment. This ___ day of February, 2000. ---------------------------------- Signature of Subscriber and/or Limited Partner ---------------------------------- Print or Type Name EX-10.146 59 0059.txt EX 10.146 1ST SUPPLEMENT TO MEMORANDUM-SO. CAR. II FIRST SUPPLEMENT DATED DECEMBER 22, 1999 TO THE CONFIDENTIAL PRIVATE PLACEMENT MEMORANDUM DATED NOVEMBER 17, 1999 Fayetteville Lithotripters Limited Partnership - South Carolina II Fayetteville Lithotripters Limited Partnership - South Carolina 1I, a South Carolina limited partnership (the "Partnership"), by this First Supplement hereby amends and supplements its Confidential Private Placement Memorandum of November 17, 1999 (the "Memorandum"). Capitalized terms used herein and not otherwise defined have the meanings provided in the Memorandum. Persons who have subscribed for or are considering an investment in the Units offered by the Memorandum should carefully review this First Supplement. Extension of the Offering Pursuant to the authority given to the General Partner in the Memorandum, the General Partner hereby elects to extend the Closing Date to January 14, 2000 (or such earlier date as the General Partner may, in its sole discretion, otherwise elect). Status of Proposed Non-Competition Provision Amendment On November 29, 1999, the General Partner distributed a proposed Partnership Agreement Amendment that would replace the recently approved strengthened non-competition provision with the old original non-competition provision. Although the Limited Partner Amendment ballots are still being collected, there appears to be substantial support for the Non-Competition Amendment. The General Partner is confident that the Amendment will receive the requisite two-thirds in interest vote required for passage if it votes in favor of the Amendment. The General Partner will vote in favor of the Amendment once the Dilution Offering successfully closes as evidenced by the Offering receiving widespread support through subscriptions from the Partnerships existing Limited Partners. Questions concerning this First Supplement should be directed to Alan Terry at 1-800-682-7971, Extension 3. EX-10.147 60 0060.txt EX 10.147 2ND SUPPLEMENT TO MEMORANDUM-SO. CAR. II SECOND SUPPLEMENT DATED JANUARY 14, 2000 TO THE CONFIDENTIAL PRIVATE PLACEMENT MEMORANDUM DATED NOVEMBER 17, 1999 Fayetteville Lithotripters Limited Partnership - South Carolina II Fayetteville Lithotripters Limited Partnership - South Carolina II, a South Carolina limited partnership (the "Partnership"), by this Second Supplement hereby amends and supplements its Confidential Private Placement Memorandum of November 17, 1999, as amended and supplemented (the "Memorandum"). Capitalized terms used herein and not otherwise defined have the meanings provided in the Memorandum. Persons who have subscribed for or are considering an investment in the Units offered by the Memorandum should carefully review this Second Supplement. Extension of the Offering Pursuant to the authority given to the General Partner in the Memorandum, the General Partner hereby elects to extend the Closing Date to February 18, 2000 (or such earlier date as the General Partner may, in its sole discretion, otherwise elect). Questions concerning this Second Supplement should be directed to James Brady at 1-800-682-7971, extension 3. EX-10.148 61 0061.txt EX 10.148 CONFIDENTIAL MEMORANDUM - TENN. I Name of Prospective Investor Memorandum Number - -------------------------------------------------------------------------------- TENNESSEE LITHOTRIPTERS LIMITED PARTNERSHIP I A Limited Partnership Formed Under the Laws of Tennessee CONFIDENTIAL PRIVATE PLACEMENT MEMORANDUM Sale by Lithotripters, Inc. of 29 Units of Limited Partnership Interest at $4,502 in Cash per Unit - -------------------------------------------------------------------------------- THIS MEMORANDUM IS FURNISHED PURSUANT TO A CONFIDENTIALITY AGREEMENT BETWEEN THE PARTNERSHIP AND THE INVESTOR WHOSE NAME APPEARS ABOVE. THE CONFIDENTIALITY AGREEMENT PROHIBITS THE DISCLOSURE OF THE CONFIDENTIAL MATERIAL CONTAINED IN THIS MEMORANDUM, EXCEPT TO THE EXTENT SUCH INVESTOR DEEMS IT NECESSARY TO SHARE SUCH INFORMATION WITH HIS LEGAL, ACCOUNTING OR OTHER FINANCIAL ADVISORS, WHO LIKEWISE SHALL BE BOUND BY THE SAME CONFIDENTIALITY RESTRICTIONS SET FORTH IN THE CONFIDENTIALITY AGREEMENT. MEDTECH INVESTMENTS, INC. Exclusive Sales Agent 2008 Litho Place Fayetteville, North Carolina 28304 1-800-682-7971 The Date of this Memorandum is January 14, 1999 TENNESSEE LITHOTRIPTERS LIMITED PARTNERSHIP I Sale by Lithotripters, Inc. of 29 Units of Limited Partnership Interest at $4,502 in Cash per Unit Lithotripters, Inc. ("Litho" or the "General Partner"), a North Carolina corporation, and the general partner of Tennessee Lithotripters Limited Partnership I, a Tennessee limited partnership (the "Partnership"), hereby offers for sale and assignment on the terms set forth herein, a maximum of 29 units (the "Units") of limited partnership interest in the Partnership issued to and held by Litho. Each Unit represents a 0.5% economic interest in the Partnership, and the Units are offered for assignment at a price of $4,502 per Unit. See "Terms of the Offering." 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 in western Tennessee and, beginning in February 2000, in South Haven, Mississippi (the "Service Area"). The cash purchase price is due at subscription; however, prospective Investors that meet certain requirements may be able to fund a portion of their Unit purchase price with the proceeds of certain third-party financing. See "Terms of the Offering - Limited Partner Loans." The Offering will terminate on February 29, 2000 (or earlier upon the sale of all 29 Units as provided herein), unless extended at the discretion of Litho for a period not to exceed 180 days. Litho owns the Units, therefore Litho (not the Partnership) will receive any proceeds from the sale of Units. ------------------------------ 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 there is substantial current and anticipated competition in the Service Area and that the health care industry is undergoing significant government regulatory reforms. See "Risk Factors" and "Terms of the Offering - Suitability Standards." ------------------------------ See Glossary for capitalized terms used herein and not otherwise defined. TABLE OF CONTENTS APPENDICES Appendix A AGREEMENT OF LIMITED PARTNERSHIP OF TENNESSEE LITHOTRIPTERS LIMITED PARTNERSHIP I Appendix B FORM OF LOAN COMMITMENT (WITH EXHIBITS) Appendix C FORM OF OPINION OF WOMBLE CARLYLE SANDRIDGE & RICE, A PROFESSIONAL LIMITED LIABILITY COMPANY Appendix D NOTES TO FINANCIAL STATEMENTS 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. General Risks of Operations. Although Litho 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. Managed care is becoming a major factor in the delivery of lithotripsy services, and selection of lithotripsy service providers may be shifting from individual practitioners to health maintenance organizations and commercial insurers. There is no assurance 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 Part-ner-ship 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 price the Partnership is able to charge its patients for the lithotripsy of kidney stones is significantly dependent upon the amount of reimbursement private health care insurers would allow for this procedure. Most of the Partnership's patients pay for services directly from private payment sources, primarily from third-party insurers such as Blue Cross/Blue Shield and other commercial insurers. Coverage and payment levels for these private payment sources vary depending upon the patient's individual insurance policy. The increasing influence of health maintenance organizations and other managed care companies has resulted in pressure to reduce the reimbursement available for lithotripsy procedures. Litho 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 $2,235. See "Regulation - Federal Regulation." In some cases reimbursement rates payable to Affiliates of Litho by commercial insurers are less than the proposed HCFA rate. Because of the competitive pressures from managed care companies as well as threatened reductions in Medicare reimbursement, Litho anticipates that reimbursement available for the lithotripsy procedure may continue to decrease. Such decreases could have a material adverse effect on Partnership revenues. Regarding the professional fees paid to physicians who treat patients on the Mobile Lithotripsy System, Litho anticipates that similar competitive pressures may result in lower reimbursement paid to physicians, both by private insurers and by government programs such as Medicare. Reliability and Efficacy of the Lithotripter. 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 Johannes Gutenberg University of Mainz, West Germany. Litho estimates that more than 400 Lithostar(TM) systems are currently operating in over twenty countries, and Litho and its Affiliates operate over 30 Lithostars(TM) in other ventures. In Litho'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. The Lithostar(TM) operated by the Partnership has been in operation since 1990 and has not required service other than routine maintenance and upgrades. In 1996, the FDA approved a new higher intensity shock--head system for the Lithostar(TM), which Litho 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 Litho's affiliated partnerships using both the original and newer shock-head systems, Litho 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 Litho's experience in doing well in excess of 150,000 cases over the past ten and one-half years in its affiliated limited partnerships, Litho 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. Litho 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. Litho cannot predict the outcome of ongoing research in these areas, and any one or more developments could reduce or eliminate lithotripsy as an acceptable procedure or treatment method of choice for the treatment of kidney stones. In addition, manufacturers have developed and begun selling a new generation of transportable lithotripters which are smaller and more mobile than the Mobile Lithotripsy System. Also, the newer transportable lithotripters cost a fraction of what the Partnership paid for the Mobile Lithotripsy System in 1990. Physicians in some market areas have indicated a preference for the newer transportable lithotripters. Partnership Limited Resources and Risks of Leverage. In the event of unanticipated expenses, it may be necessary to supplement Partnership funds with the proceeds of debt financing. Although Litho 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. Litho 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 Litho 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 Litho determines that it is in the best interest of the Partnership to acquire an additional Lithostar or any other assets related to the provision of lithotripsy services, Litho has the authority (without obtaining the Limited Partners' consent) to borrow additional funds on behalf of the Partnership to accomplish such goals, and may use Partnership assets and revenues to secure and repay such borrowings. The acquisition of additional assets may substantially increase the Partnership's monthly obligations and result in greater personnel requirements. See "Risk Factors - Operating Risks - Partnership Limited Resources and Risks of Leverage." In any event, no Limited Partner would be personally liable on any additional Partnership indebtedness without such Partner's prior written consent. There is no assurance that financing would be available to the Partnership to acquire additional assets or to fund any additional working capital requirements. Any such borrowing by the Partnership will serve to increase the risks to the Partnership associated with leverage as provided above. Competition. Several competing lithotripters are currently operating in and near the Service Area in competition with the Mobile Lithotripsy System, including competitors that are Affiliates of Litho. 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 Litho'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 Litho nor its Affiliates are prohibited from engaging in any business or arrangement that may compete with the Partnership. Several ventures affiliated with Litho 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. Limited Partners recently approved an amendment to the Partnership Agreement that removed the contractual restrictions on Limited Partners' ability to own interests in competing equipment or ventures. Government Regulation . All facets of the healthcare industry are highly regulated and will become more so in the future. The ability of the Partnership to operate legally and be profitable may be adversely affected by changes in governmental regulations, including expected changes in reimbursement, Medicare and Medicaid certification requirements, federal and state fraud and abuse laws, including the federal Anti-Kickback Statute, the federal False Claims Act, federal and state self-referral laws, state restrictions on fee splitting and other governmental regulation. See "Regulation." These laws and regulations may adversely affect the economic viability of the Partnership. The laws are broad in scope, and interpretations by courts have been limited. Violations of these laws would subject Litho and all Limited Partners to governmental scrutiny and/or felony prosecution and punishment in the form of large monetary fines, loss of licensure, imprisonment and exclusion from Medicare and Medicaid. Certain provisions of Medicare and Medicaid law limit provider ownership and control over the various health care services to which physicians may make Medicare and Medicaid referrals. The primary laws involved are the "Stark II" federal statute prohibiting financial relationships between physicians and certain entities to which they refer patients, and the Anti-Kickback Statute which prohibits compensation in exchange for or to induce referrals. Regarding Stark II, in January, 1998, HCFA published proposed Stark II regulations. Under the proposed regulations, physician Limited Partner referrals of Medicare and Medicaid patients to contracting hospitals for lithotripsy services would be prohibited. If HCFA adopts the proposed Stark II regulations as final, or if a reviewing court were to interpret the Stark II statute using the proposed regulations as interpretive authority, then the Partnership and its physician Limited Partners would likely be found in violation of Stark II. In such instance, the Partnership and/or its physician Limited Partners may be required to refund any amounts collected from 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 Litho 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, Litho 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 Stark II or the Anti-Kickback Statute have been violated. In addition to Stark 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 will affect the operation of the Partnership as well. The Partnership commenced its extracorporeal lithotripsy services before Tennessee's certificate of need ("CON") law became effective in 1993, and accordingly the Partnership was not required to obtain a CON prior to commencement of its services at the Contract Hospitals. Litho anticipates that a CON will be issued in Mississippi so that the Partnership can provide service to Baptist Memorial Hospital - DeSoto in Southaven; however, there is no assurance that a CON will be timely issued. Various licensure and registration requirements must be met for the Partnership to provide mobile lithotripsy services in Tennessee and Mississippi. The Partnership has been endeavoring to comply and will continue to seek to comply with all applicable statutory and regulatory requirements. Physicians licensed in Tennessee must treat their own patients on the Mobile Lithotripsy System. See "Regulation - State Regulation." Contract Terms and Termination. The Partnership provides lithotripsy services to seven Contract Hospitals in the Memphis area pursuant to four separate Hospital Contracts. In addition, the Partnership has entered in an additional Hospital Contract with Baptist Memorial Hospital - DeSoto in Southaven, Mississippi pursuant to which the Partnership expects to commence service in February 2000. All but one of the Hospital Contracts grant the Partnership the exclusive right to provide lithotripsy services at the particular Contract Hospital. Each 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 30 days or, in some cases 60 or 90 days prior written notice by either party prior to any renewal date. The Baptist Memorial Hospital - DeSoto contract has a term of three years, but may be terminated without cause by either party on 180 days notice. 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. Litho believes it has a good relationship with the Contract Hospitals and does not anticipate significant Hospital Contract 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. Litho anticipates that some Contract Hospitals may attempt to negotiate rate reductions as a condition to renewal. 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 - Operating Risks -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, before or after January 1, 2000. To date, the Partnership has not experienced any Year 2000 Issue-related problems; however, there is no assurance that Year 2000 Issue-related problems will not adversely affect the Partnership in the future, including on the date February 29, 2000 as some experts have suggested. The Partnership has not inquired as to the Year 2000 readiness of any insurance company, Contract Hospital or other third party it has a relationship with, but is relying that such parties will be Year 2000 compliant. In the event that any 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. Investors should note that Litho 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. Litho 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 IN-DE-PEN-DENT-LY 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 LITHO AS AN ECONOMIC INVESTMENT AND THAT LITHO 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 LITHO 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 part-ner-ship such as the Part-ner-ship 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 Part-ner-ship, 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. Litho and Counsel have been informally advised by officials of the Service that the Service would not likely attempt to apply the affiliated service group rules to the Partnership, nor has the Service applied these rules to similar arrangements in the past. Informal discussions with the Service, however, are not binding on the Service, and there can be no guarantee that the Service will not apply the affiliated service group rules to the Partnership. INVESTORS ARE URGED TO CONSULT WITH THEIR OWN TAX ADVISORS REGARDING THE APPLICABILITY OF THE AFFILIATED SERVICE GROUP RULES DESCRIBED HEREIN TO THE EMPLOYEE BENEFIT PLANS MAINTAINED BY THEM OR THEIR MEDICAL PRACTICES. Partnership Allocations. The Part-ner-ship 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 part-ner-ship 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 Part-ner-ship 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 Litho. If Partnership cash flow declines, a Limited Partner could be subject to income taxes payable out of personal funds to the extent of the Part-ner-ship's income, if any, attributed to him without receiving from the Part-ner-ship sufficient Distributions to pay the Limited Partner's tax with respect to such income. Effect of Classification as Corporation. The Partnership has not and will not seek a ruling from the Service concerning the tax status of the Partnership. It is the opinion of Counsel that the Partnership will be treated as a partnership for federal income tax purposes and not as an association taxable as a corporation unless the Partnership so elects. The Partnership 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 will be classified as a partnership unless they elect to be classified as 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 eligible entity. As the Partnership will not elect to be classified as a corporation for federal income tax purposes, it will be classified as a partnership. 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 Part-ner-ship, the Part-ner-ship may be classified as an association taxable as a corporation. If that occurs, the Part-ner-ship could be taxed on its profits and at rates which may be higher than those imposed on individuals. Any Part-ner-ship losses would only be deductible by the Part-ner-ship, 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 Part-ner-ship, 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 Part-ner-ship Interest, while the remainder would be treated as capital gain, provided the Limited Partner's interest in the Part-ner-ship is a capital asset. Litho, 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. Litho 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. The Part-ner-ship uses 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. Part-ner-ship Elections. The Code permits part-ner-ships to make elections for the purpose of adjusting the basis of part-ner-ship property on the distribution of property by a part-ner-ship to a partner and on the transfer of an interest in a part-ner-ship by sale or exchange or on the death of a partner. The general effect of such elections is that transferees of Part-ner-ship 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 Part-ner-ship'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 Part-ner-ship Agreement, Litho, in its discretion, may make the requisite election necessary to effect such adjustment in basis and has done so. Thus, Investors will be treated, for 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 on the fair market value of the assets at the Closing. Sale of Partnership Units. Gain realized on the sale of Units by a Limited Partner who is not a "dealer" in Units or in limited part-ner-ship 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 Part-ner-ship include the Limited Partner's share of the ordinary income that the Part-ner-ship would realize as a result of the recapture of depreciation (as described above) if the Part-ner-ship 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 Part-ner-ship. Under the Code, a part-ner-ship 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 part-ner-ship is entitled to deduct in full when paid or incurred; (2) amortizable expenses -- expenditures which the part-ner-ship 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 part-ner-ship property (or part-ner-ship loans) and deducted over a period of time as the property (or part-ner-ship loan) is amortized or depreciated; (4) organization expenses -- expenditures related to the organization of the part-ner-ship, 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) part-ner-ship distributions -- payments to partners representing distributions of part-ner-ship funds, which may be neither capitalized, amortized nor deducted; (7) start-up expenses -- expenditures incurred by a part-ner-ship 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 part-ner-ship 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 Part-ner-ship 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 Part-ner-ship 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 Part-ner-ship. 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 Part-ner-ship and Litho 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. Litho believes the payments to it and its Affiliates are customary and reasonable payments for the services rendered by them to the Part-ner-ship; 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 Litho'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. Management Fee to General Partner. The Partnership pays Litho 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 Litho 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 Litho 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. Ownership of Limited Partner Interests by Litho. Litho currently owns a 14.5% limited partner interest in the Partnership. To the extent that Litho continues to hold a limited partner interest in the Partnership following the closing of this Offering, Litho may be able to influence the outcome of matters voted on by the Limited Partners. Litho also owns a 20% general partner interest in the Partnership. Conflicts of Interest. The activities of the Part-ner-ship involve numerous existing and potential conflicts of interest between the Part-ner-ship, Litho and its Affiliates. See Compensation and Reimbursement to Litho and its Affiliates," "The General Partner," "Competition" and "Conflicts of Interest." No Participation in Management. Litho has full authority to supervise the business and affairs of the Part-ner-ship 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. Litho, its employees and its Affiliates are not required to devote their full time to the Part-ner-ship'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. Litho will continue to devote such time to the Partnership's business and affairs as it deems necessary and appropriate in the exercise of reasonable judgment. The participation by any Limited Partner in the management or control of the Partnership's affairs could render him generally liable for the liabilities of the Partnership that could not be satisfied by assets of the Partnership. See the Form of Legal Opinion of Womble Carlyle Sandridge & Rice, a Professional Limited Liability Company, attached hereto as Appendix C. Limited Partners' Obligation to Return Certain Distributions. Except as provided by other applicable law and provided that a Limited Partner does not participate in the management of the Partnership, he or she will not be liable for the liabilities of the Partnership in excess of his investment, his ratable share of undistributed profits and any Distribution received from the Partnership if the Limited Partner knew at the time of the Distribution that, after giving effect to the Distribution, all liabilities of the Partnership, other than liabilities to Partners with respect to their Partnership interests and liabilities for which the recourse of creditors is limited to specific property of the limited partnership, exceed the fair value of the assets of the Partnership, except that the fair value of property that is subject to a liability for which recourse of creditors is limited shall be included in the Partnership assets only to the extent that the fair value of such property excludes such liability. 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 Litho 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, Litho 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. Litho 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 Assignment Agreement, and the consent of Litho 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 Litho is furnished with an opinion of counsel, satisfactory to Litho, 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 Litho 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 Litho 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 Litho, 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 Litho in the event of its misfeasance or malfeasance than they would have absent the limitations in the Partnership Agreement. The Partnership will indemnify Litho and its Affiliates against losses sustained by Litho and its Affiliates in connection with the Partnership, unless such losses are a result of the gross negligence or willful misconduct of Litho or its Affiliates. 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 Litho 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, Litho and the Limited Partners have, under certain circumstances, the option to purchase all the interest of a Limited Partner who (i) dies, (ii) becomes insolvent or (iii) becomes incompetent. In such a case, 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 Litho 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." Tennessee Lithotripters Limited Partnership I, a Tennessee limited partnership (the "Partnership") was organized and created under the Tennessee Uniform Revised Limited Partnership Act (the "Act") on August 6, 1990 and commenced business in December 1990. The general partner of the Partnership is Lithotripters, Inc., a North Carolina corporation (the "General Partner"), and a wholly owned subsidiary of Prime Medical Services, Inc. ("Prime"). Litho 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 14.5% limited partner interest held by Litho). The principal address of the Partnership is 1301 Capital of Texas Highway, Suite C-3000, Austin, Texas 78746. The telephone number of the Partnership and Litho is (800) 682-7971. Lithotripters, Inc. ("Litho" or the "General Partner"), a North Carolina corporation, and the general partner of Tennessee Lithotripters Limited Partnership I, a Tennessee limited partnership (the "Partnership"), hereby offers for sale and assignment on the terms set forth herein, a maximum of 29 units (the "Units") of limited partnership interest in the Partnership issued to and held by Litho. Each Unit represents and initial 0.5% economic interest in the Partnership, and the Units are offered for assignment at a price of $4,502 per Unit. Litho owns the Units, therefore Litho (not the Partnership) will receive any proceeds from the sale of Units. A prospective assignee who pays his purchase price with a check upon submission of his Assignment Packet, and whose assignment materials are received and accepted by Litho, will become a Limited Partner in the Partnership. Acceptance of the assignment by Litho is conditioned on the satisfaction of the suitability standards for an investor in the Partnership as set forth below. Upon admission as a Limited Partner, the prospective assignee' s cash funds (plus interest) will be released from escrow to Litho. If a prospective assignee finances a portion of his purchase price with the proceeds of a Limited Partner Note, Litho's decision to sell and assign the Partnership Interest to such prospective assignee will be further conditioned upon the Bank's approval of the prospective assignee's Loan Documents and the funding of the loan contemplated thereby. If the prospective assignee is acceptable to Litho, after receipt of the Bank's approval of his Loan Documents, Litho will inform the Escrow Agent that it will assign the Partnership Interest to the prospective assignee, and the Escrow Agent will release the cash and Loan Documents, if any, to Litho and the Bank, respectively, and the Bank will pay the proceeds from the Limited Partner Loan to Litho. The prospective assignee will then be assigned the Partnership Interest and become a Limited Partner in the Partnership at the time the Bank releases the proceeds of his Limited Partner Loan to Litho. In the event an application is not accepted, all cash funds (without interest) and Loan Documents, if any, held in escrow will be returned to the rejected applicant. Notice of acceptance of the assignment materials and admission of a prospective assignee as a Limited Partner in the Partnership will be furnished promptly after the Closing Date (as defined below). Upon the Closing Date, the accepted Investors will be entitled to distributions as Limited Partners beginning on the Closing Date. Applications for the sale and assignment of Units will be solicited by MedTech Investments, Inc., a North Carolina corporation and an Affiliate of Litho and the Partnership (the "Sales Agent"). The Sales Agent has entered into a Sales Agency Agreement with Litho pursuant to which the Sales Agent has agreed to act as exclusive agent for the assignment of the Partnership Interests. The 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 form of 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 Assignment 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 $2,002. 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 June 15, 2000 (assuming the Closing occurs before April 15, 2000), with a thirteenth (13th) and final installment in an amount equal to the principal balance then owed on the Limited Partner Note and all accrued, unpaid interest thereon due and payable on the third anniversary of the first installment date. Interest accrues at the Bank's "Prime Rate," as the same may change from time to time. The Prime Rate refers to that rate of interest established by the Bank and identified as such in literature published and circulated within the Bank's offices. Such term is used as a means of identifying a rate of interest index and not as a representation by the Bank that such rate is necessarily the lowest or most favorable rate of interest offered to borrowers of the Bank generally. A prospective Investor will have no claim or right of action based on such premise. See the form of the Limited Partner Note attached as Exhibit A to the form of 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 Litho upon the closing of the Offering 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 form of Loan Commitment which is attached hereto as Appendix B. If the prospective Investor is approved by the Bank and is acceptable to Litho, the Escrow Agent will, upon acceptance of the Investor's Assignment Packet by Litho, release the Loan Documents to the Bank and the Bank will pay the proceeds of the Limited Partner Note to Litho. 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 faith deems itself or its collateral insecure and upon certain other events, including, but not limited to, nonpayment of any installment. The Bank may also request additional collateral in the event it deems the Limited Partner Note insufficiently secured. A Limited Partner's liability under a Limited Partner Note also continues regardless of whether the Limited Partner remains a limited partner in the Partnership. A Limited Partner's liability under a Limited Partner Note is directly with the Bank. As a consequence, such liability cannot be avoided by claims, defenses or set-offs the Limited Partner may have against the Partnership, Litho 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 estab-lished 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." The subscription period will commence on the date hereof and will terminate at 5:00 p.m., Eastern time, on February 29, 2000 (the "Closing Date"), unless sooner terminated by Litho or unless extended for an additional period up to 180 days. See "Plan of Distribution." 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(1) thereof, as amended, and an exemption from the Tennessee Securities Act of 1980 provided by Section 48-2-103(b)(5) of the Tennessee Securities Act of 1980. The suitability standards set forth below have been established in order to comply with the terms of these offering exemptions. 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. Investors must also be at least 21 years old and otherwise duly qualified to acquire and hold partnership interests. Litho 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 foregoing 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 meet the qualifications for investment in the Partnership and who wish to purchase Units may do so by following the instructions included in the Assignment Packet accompanying this Memorandum. All information provided by Investors will be kept confidential and not disclosed except to the Partnership, Litho, the Bank and their respective counsel and Affiliates and, if required, to governmental and regulatory authorities. 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 Litho 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 Litho, instructing it to effect the assignment. Assignees of Units may also, in the discretion of Litho, 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 Litho, or the consent of all of the Limited Partners (except the assignor Limited Partner) and Litho, (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." Unit purchase offers will be solicited by MedTech Investments, Inc., the Sales Agent, which is an Affiliate of Litho. The Sales Agent has entered into a Sales Agency Agreement with Litho pursuant to which the Sales Agent has agreed to act as exclusive agent for the 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 Litho 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 controls Litho. Investors should note the material relationship between the Sales Agent and Litho, and are advised that the relationship potentially creates conflicts in the Sales Agent's performance of its due diligence responsibilities under the Federal securities laws. Litho has agreed to indemnify the Sales Agent against certain liabilities, including liabilities under the Securities Act. Litho 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 offering period will commence on the date hereof and will terminate at 5:00 p.m., Eastern time, on February 29, 2000 (or earlier, in the discretion of Litho), unless extended at the discretion of Litho for an additional period not to exceed 180 days. The purchase price 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 assignment offer is accepted by Litho (and approved by the Bank in the case of financed purchases of Units), Litho (or, if applicable, the Bank) rejects the subscription or the Offering is terminated. Upon the receipt and acceptance of an Investor's subscription by Litho (and, if applicable, the Bank), the Investor will be admitted to the Partnership as a Limited Partner. In connection with his admission as a Limited Partner, the Investor's purchase price funds will be released from escrow to Litho, and the Loan Documents, if any, will be released to the Bank which will pay the proceeds from the Limited Partner Note to Litho. In the event an assignment offer is not accepted, all purchase price funds (without interest), the Loan Documents and other subscription documents held in escrow will be promptly returned to the rejected Investor. An assignment offer may be rejected in part, in which case a portion of the purchase price funds (without interest) and any Limited Partner Note will be returned to the Investor. The Offering will terminate on February 29, 2000, unless it is sooner terminated by Litho, or unless extended for an additional period not to exceed 180 days. See "Terms of the Offering - Subscription Period; Closing." The Partnership was formed to (i) acquire the Mobile Lithotripsy System and operate it in western Tennessee, (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 six Contract Hospitals to provide lithotripsy services. 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. Ap-proxi-mately 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. Litho 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) was developed as a cooperative venture between Siemens and the Urological Clinic at Johannes Gutenberg University in Mainz, West Germany. As a part of this venture, a Lithostar(TM) prototype was installed in March 1986 at the Urological Clinic at the University of Mainz with successful results. On November 18, 1987 the Lithostar(TM) was unanimously recommended for approval by the FDA's advisory panel of experts for urology devices. On September 30, 1988 the Lithostar(TM) received FDA premarket approval for use in the United States for renal lithotripsy. On April 18, 1989, the FDA approved the Lithostar(TM) for mobile lithotripsy. On July 1, 1996, the FDA approved a new higher intensity shock-head system for the Lithostar(TM) which has since been installed in the Partnership's Lithostar(TM). Currently, Litho 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) owned and operated by the Partnership was new when acquired by the Partnership in 1990. See "The Partnership." 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, Litho has found that the Lithostar(TM) can fragment most kidney stones without anesthesia, cystoscopy or the insertion of ureteral catheters. Litho further believes that Lithostars(TM) upfitted with the higher intensity shock-head system experience somewhat shorter treatment durations. Because of Litho's belief in the superior imaging of the Lithostar(TM), Litho 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. See "Risk Factors - Operating Risks - Technological Obsolescence." The Coach, which houses a Lithostar(TM), was acquired by the Partnership in 1990. 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. Litho estimates that expenditures for maintenance and repair have been incurred at a rate of approximately $15,000 per year per Unit. As the Coach ages, higher annual expenditures may be required to maintain it. If in the future Litho determines that it is in the best interest of the Partnership to acquire (i) an additional Lithostar(TM) or (ii) any other assets related to the provision of lithotripsy services, Litho may, without the consent of the Limited Partners, 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. See "Risk Factors - Operating Risks - Acquisition of Additional Assets." Any additional borrowing by the Partnership will serve to increase the risks associated with leverage. See "Risk Factors - Operating Risks - Partnership Limited Resource and Risks of Leverage" and "Risk Factors - Operating Risks - Acquisition of Additional Assets." The Partnership has entered into four Hospital Contracts to provide lithotripsy services at seven hospitals ("Contract Hospitals") in western Tennessee. All the Tennessee Hospital Contracts are in renewal terms. The Contract Hospitals are: Baptist Memorial Hospital, Memphis Baptist Memorial Hospital, Tipton Methodist Healthcare - Germantown, Germantown Methodist Hospital, Dyersburg Methodist Hospital - Central, Memphis Methodist Hospital - North, Memphis Methodist Hospital - South, Memphis In addition, the Partnership recently entered into a Hospital Contract with Baptist Memorial Hospital - DeSoto which is located in Southaven, Mississippi. All but one 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. All 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. Each of the Hospital Contracts, except the Baptist Memorial Hospital - DeSoto contract, have initial terms of one year and automatically renew for successive one-year terms. The Baptist Memorial Hospital - DeSoto contract has a term of three years and is terminable without cause by either party on 180 days notice. Each of the Hospital Contracts with renewal terms are terminable upon 30 days or, in some cases, 60 or 90 days prior written notice prior to any renewal date. 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" and "Risk Factors - Operating Risks - Government Regulation." Litho 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 their agreements with the Partnership in the future. See "Risk Factors - - Operating Risks - Contract Terms and Termination." Litho has negotiated third-party reimbursement agreements with certain national or local payors. The national agreements are negotiated by Litho and apply to all the lithotripsy partnerships with which Litho is affiliated. Litho has also negotiated third-party reimbursement agreements with local payors in the Service Area, including with Blue Cross and Blue Shield of Memphis and Cigna/Equicor. Some of the national and local reimbursement agreements assign a fixed price for the lithotripsy services. For others, Litho has agreed to accepted a specified percentage discount from the normal charges as payment in full; these discounts range from nine to twenty-five percent off normal charges. Generally the agreements may be terminated by either party on ninety 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. In addition, hospitals may negotiate reimbursement agreements with payors which service providers, including lithotripsy providers, must honor; these may result in lower reimbursement for lithotripsy services. 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, Litho 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. The Partnership has entered into a management agreement (the "Management Agreement") with Litho whereby Litho 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." Litho'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 Litho in performing its duties under the Management Agreement are the responsibility of the Partnership. Litho'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 Litho performs its duties under the Management Agreement. The Management Agreement is in the second five-year renewal term. Thereafter, it will be automatically renewed for one additional term unless terminated by the Partnership or Litho. Litho has also appointed a local Medical Director and a Physician's Advisory Board. Litho consults with the Medical Director and the Physician's 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. The General Partner and Management Agent will endeavor to the best of their abilities to require that physicians using a Partnership lithotripter comply with the Partnership's quality assurance and outcome analysis programs in order to maintain the highest quality of patient care. 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. 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. Litho was founded by William R. Jordan, M.D. and became a wholly owned subsidiary of Prime Medical Services, Inc. ("Prime") in 1996. See "Conflicts of Interest" and "Prior Activities." The principal executive office of Litho is 2008 Litho Place, Fayetteville, North Carolina 29304. The following table sets forth the names and respective positions of the individuals serving as executive officers and directors of Litho, many of whom were a shareholders of Litho prior to its acquisition by Prime and/or are current shareholders and/or management personnel of Prime. Name Office Joseph Jenkins, M.D. President, Chief Executive Officer and Director Kenneth S. Shifrin Director W. Alan Terry Vice President Cheryl Williams Vice President and Director Thomas J. Driber, Ph.D. Vice President Stan Johnson Vice President David Vela, M.D. Vice President Philip J. Gallina Secretary and Treasurer James D. Clark Assistant Secretary Supervision of the day-to-day management and administration of the Partnership is the responsibility of Litho. Litho itself is managed by a three-member Board of Directors composed of Dr. Jenkins, Mr. Shifrin and Ms. Williams. Litho is a wholly-owned subsidiary of Prime. Descriptions of the background of the executive officers and directors of Litho appear below. Joseph Jenkins, M.D. has been President and Chief Executive Officer of Prime since April 1996. From May 1990 until December 1991, Dr. Jenkins was a Vice President of Litho and previously practiced urology in Washington, North Carolina. Dr. Jenkins has been President of Litho since 1992 and was recently elected to its Board of Directors. He also serves as the Chief Executive Officer of Litho. Dr. Jenkins is a board certified urologist and is a founding member, past-president and currently a Director of the American Lithotripsy Society. Kenneth S. Shifrin has been Chairman of the Board and a Director of Prime since October 1989 and was recently elected a Director of Litho following Prime's acquisition of all of Litho's stock. Mr. Shifrin also has served in various capacities with American Physicians Service Group, Inc. ("APS") since February 1985, and is currently Chairman of the Board and Chief Executive Officer of APS. W. Alan Terry was recently appointed a Vice President of Litho and served as Chief Financial Officer of Litho from 1991 to 1998. In August, 1986, Mr. Terry joined The May Department Stores Company at their corporate headquarters in St. Louis, where he held several financial management positions until October, 1987, when he was transferred to one of May's largest divisions, Caldor, Inc., as Vice President of Finance. He remained in that capacity until June, 1990, when he became Chief Operating Officer for Litho and served in that capacity until April 1996. Cheryl Williams is a Director and Vice President of Litho. Ms. Williams has been Chief Financial Officer, Vice President-Finance and Secretary of Prime since October 1989. Ms. Williams was Controller of Fairchild Aircraft Corporation from August 1988 to October 1989. From 1985 to 1988, Ms. Williams served as the Chief Financial Officer of APS Systems, Inc. Thomas J. Driber, Ph.D. was recently appointed a Vice President of Litho. Dr. Driber is an experienced medical practice consultant and has served as a director of Southern Medical Imaging, Inc. (1988-1993), First Choice Health Plan, Inc. (1986-1988) and Tampa Bay Health Plan, Inc. (1985-1986). In addition, Dr. Driber is an accomplished health care scholar and was a member of the teaching faculty at Florida Neurological Institute School of EEG Technology from 1980 to 1984. Dr. Driber received a faculty appointment to the Surgery department (renal transplant surgery) of the University of Florida College of Medicine and taught there from 1977 to 1979. Dr. Driber received a Ph.D. in Medical/Social Change Theory, Concentration: Ambulatory Medical Delivery Systems from Walden University, Institute for Advanced Studies in Minneapolis, Minnesota in 1984. Stan Johnson was recently appointed a Vice President of Litho. Mr. Johnson has been a Vice President of Prime and President of Sun Medical Technologies, Inc., an Affiliate of Litho ("Sun") since November 1995. Mr. Johnson was the Chief Financial Officer of Sun from 1990 to 1995. David Vela, M.D. was recently appointed a Vice President of Litho. Dr. Vela received his medical degree in 1984. Dr. Vela 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. Philip J. Gallina recently became the Secretary and Treasurer of Litho, having previously served as a Vice President since 1989. Mr. Gallina is a Certified Public Accountant licensed in the state of Pennsylvania. From 1980 through February 1989, Mr. Gallina served as Plant Controller for the Westinghouse Motor Control and Enclosed Control Product Lines. Mr. Gallina is also a Director, the Vice President, the Treasurer and the Secretary of MedTech Investments, Inc., the Sales Agent. James D. Clark recently became Assistant Secretary of Litho. Mr. Clark has served as Tax Manager of Prime since January 1998 and is a Certified Public Accountant in Texas. Prior to joining Prime, Mr. Clark was Controller for ERISA Administrative Services, Inc. The following summary describes the types and, where determinable, the estimated amounts of reimbursements, compensation and other benefits Litho and its Affiliates will receive in connection with the continued operation and management of the Part-ner-ship 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, Litho does not expect to receive any distribution, fee, compensation or other remuneration from the Part-ner-ship. See "Business Activities - Management" and "Plan of Distribution." 1. Management Fee. Pursuant to the Management Agreement, Litho 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 Litho in performing its duties under the Management Agreement are the responsibility of, and are paid directly or reimbursed by, the Partnership. Litho is the management agent for various affiliated lithotripsy ventures. As a consequence, many of Litho's employees provide various management and administrative services for numerous ventures, including the Partnership. In order to properly allocate the costs of Litho'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. Litho 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 Litho. Litho 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. No other fees or compensation will be payable to Litho or its Affiliates for managing the Partnership other than the management fee payable to Litho as provided in the Management Agreement. The Partnership may, however, contract with Litho 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, Litho is entitled its distributable share (20%) of Partnership Cash Flow, Partnership Sales Proceeds and Partnership Refinancing Proceeds as provided by the Partnership Agreement. Litho also owns an aggregate 14.5% (prior to this Offering) limited partner interest in the Partnership. Litho 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. See "Sources and Applications of Funds." 3. Rental of Loaner Coach. In the event the Mobile Lithotripsy System experiences significant down time for maintenance or repairs, it is anticipated that Litho would cause the Partnership to contract with Litho 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. 4. Loans. Litho or its Affiliates will also receive interest on loans, if any, made by them to the Partnership. See "Conflicts of Interest." Neither Litho nor any of its Affiliates are, however, obligated to make loans to the Partnership. While Litho 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. The operation of the Partnership involves numerous conflicts of interest between the Part-ner-ship and Litho and its Affiliates. Because the Part-ner-ship is operated by Litho, such conflicts are not resolved through arm's length negotiations, but through the exercise of the judgment of Litho consistent with its fiduciary responsibility to the Limited Partners and the Part-ner-ship's investment objectives and policies. Litho, its Affiliates and employees will in good faith continue to attempt to resolve potential conflicts of interest with the Partnership, and Litho will act in a manner that it believes to be in or not opposed to the best interests of the Partnership. Litho will receive management fees in connection with the business operations of the Part-ner-ship regardless of whether any sums hereafter are distributed to Limited Partners. Such fees, compensation and benefits have not been determined by arm's length negotiations. In addition, the Partnership may contract with Litho 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. Litho will also receive interest on loans, if any, it makes to the Partnership. See "Compensation and Reimbursement to the General Partner and its Affiliates." Litho and its Affiliates will devote as much of their time to the business of the Part-ner-ship as in their judgment is reasonably required. Principals of Litho 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." Litho believes it and its Affiliates, together, have sufficient resources to be capable of fully discharging Litho's and its Affiliates' responsibilities to the Part-ner-ship. Litho 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 Part-ner-ship nor the holders of any of the Units shall be entitled to any interest therein. Litho, its Affiliates (including affiliated limited partnerships) and employees engage in medical service activities for their own accounts. See "Prior Activities." Litho 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. Litho operates other lithotripsy partnerships in and around Tennessee and 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 Litho. Because of the Sales Agent's affiliation with Litho, there are potential conflicts of interest with respect to the Sales Agent's performance of its due diligence responsibilities under the federal securities laws. See "Plan of Distribution." The interests of the Investors 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 Litho-- were retained by Litho, and have in the past performed and are expected in the future to perform similar services for Litho and Prime. Litho, as General Partner, is accountable to the Part-ner-ship as a fiduciary and consequently must exercise good faith in handling Part-ner-ship affairs. This is a rapidly developing and changing area of the law and Limited Partners who have questions concerning the duties of Litho should consult with their counsel. Under the Partnership Agreement, Litho and its Affiliates have no liability to the Part-ner-ship or to any Partner for any loss suffered by the Partnership that arises out of any action or inaction of Litho or its Affiliates if Litho or its Affiliates, in good faith, determined that such course of conduct was in the best interest of the Part-ner-ship and such course of conduct did not constitute gross negligence or willful misconduct of Litho 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. Litho 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 Part-ner-ship, provided that the same were not the result of gross negligence or willful misconduct on the part of Litho or its Affiliates. Insofar as indemnification for liabilities under the Securities Act may be permitted to persons controlling the Part-ner-ship pursuant to the foregoing provisions, the Part-ner-ship 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. 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 Litho. Affiliates of Litho operate several mobile lithotripters in Tennessee, Arkansas and Kentucky. Such lithotripters do not currently compete directly with the Partnership, and it is not anticipated that they will in the future; however, Litho and its Affiliates are not contractually prohibited from competing with the Partnership. Litho is planning to conduct other limited partnership offerings that would operate lithotripters in other states. To the best knowledge of Litho, no lithotripters compete directly with the Partnership in the metropolitan Memphis area; however, competitors operate lithotripters at several hospitals in northern Mississippi and Arkansas and in central Tennessee, including several lithotripters which operate in the Nashville area. There may be other existing fixed-base or mobile lithotripsy services in or near the Service Area which will directly compete with the Partnership's Mobile Lithotripsy System, but Litho is not familiar with these other competitors. It is possible that some or all of the Partnership's competitors are physician-owned or include physicians among their owners. Litho 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. Litho 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. Litho 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 health care 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 for lithotripsy services for beneficiaries of their plans. It is not uncommon for managed care companies to have contracts already in place with hospitals or specified providers, and the Partnership will not be able to provide services to beneficiaries of those plans unless it convinces either the managed care companies or the hospitals to switch to the Partnership's services. 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 businesses will not commence operations in the future or that other treatment methods for kidney stone disease will not make the Mobile Lithotripsy System competitively obsolete. See "Risk Factors - Operating Risk - Technological Obsolescence." Other service providers are soliciting physician ownership and attempting to establish competing ventures in the Service Area. Litho 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 Litho 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 Litho. The Partnership, Litho 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, Litho 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 seeks reimbursement for its equipment and services from health care facilities whose patients 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 federal agency that administers the Medicare program, to establish a prospective payment system for outpatient procedures. One of the goals of the prospective payment system was to lower medical costs paid by the Medicare program. HCFA issued proposed regulations in September, 1998 which would reduce the reimbursement rate currently paid for lithotripsy procedures performed on Medicare patients at hospitals to a base rate of $2,235. The base rate includes anesthesia and sedation, equipment and supplies necessary for the procedure, but does not include the treating physician's professional fee. The base rate is subject to adjustment for various hospital-specific factors. Litho believes the reduced reimbursement rate will be implemented in the latter half of the year 2000. In some cases, reimbursement rates payable to Litho and its Affiliates by commercial insurers are less than the proposed HCFA rate. Litho retains the discretion to make the Mobile Lithotripsy System available at ambulatory surgery centers ("ASCs"). Medicare does not currently reimburse for lithotripsy procedures provided at ASCs. However, HCFA issued proposed rules in June, 1998 which would authorize Medicare reimbursement for lithotripsy procedures provided at ASCs. While the proposed rules had a target effective date of October 1, 1998, the effective date has been postponed indefinitely for reasons unrelated to lithotripsy coverage. The June, 1998 proposed rules assign a Medicare reimbursement rate of $2,107 if the lithotripsy procedure is performed at an ASC. Whether these proposed rules will become effective to authorize Medicare reimbursement at ASCs and, if they do become effective, what the reimbursement rate will be, is unknown to Litho. The Medicare program has historically influenced the setting of reimbursement standards by commercial insurers. Therefore, reduced rates of Medicare reimbursement for lithotripsy services may result in reduced payments by commercial insurers for the same services. As was discussed previously, competitive pressure from health maintenance organizations and other managed care companies has in some circumstances already resulted in decreasing reimbursement rates from commercial insurers. See "Risk Factors - Operating Risks - Impact of Insurance Reimbursement." No assurances can be given that HCFA will not seek to reduce its proposed reimbursement rates even more to avoid paying more than commercial insurers. As a result, hospitals may seek to lower the fees paid to the Partnership for the use of the Mobile Lithotripsy System. Litho 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 Tennessee (TennCare) and in Mississippi 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 TennCare program and the Mississippi Medicaid program currently provide reimbursement for lithotripsy services. The federal Personal Responsibility and Work Opportunity Reconciliation Act of 1996 requires state health plans, such as TennCare and the Mississippi Medicaid program, to limit Medicaid coverage for certain otherwise eligible persons. Litho 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. Litho believes such steps have been taken in Tennessee with the establishment of the TennCare program; the General Partner does not know whether the Mississippi Medicaid program has taken or will in the future 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) ("Stark II"). Lithotripsy services were not specifically identified as a designated health service by this legislation, but the prohibition includes any service which is provided to an individual who is registered as an inpatient or outpatient of a hospital under proposed regulations discussed below. Lithotripsy services provided by the Partnership to Medicare and Medicaid patients are billed by the contracting hospital in its name and under its Medicare and Medicaid program provider numbers. Accordingly, these lithotripsy services would likely be considered inpatient or outpatient services under Stark II. Following the passage of the Stark II legislation effective January 1, 1995, Litho determined that the statute would not apply to the type of lithotripsy services to be provided by the Partnership. Stark 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 Stark II. This interpretation adopted by Litho was consistent with the informal view of the General Counsel's Office of the U.S. Department of Health and Human Services. Based upon this reasonable interpretation of Stark II, by referring a patient to a hospital furnishing the outpatient lithotripsy services "under arrangements" with the Partnership, a physician investor in the Partnership is not making a referral to an entity (the hospital) in which he or she has an ownership interest. On January 9, 1998, HCFA published proposed regulations interpreting the Stark II statute (the "Proposed Stark II Regulations"). The Proposed Stark II Regulations and HCFA's accompanying commentary would apply the physician referral prohibitions of Stark II to the Partnership's contracts for provision of the Mobile Lithotripsy System. Under the Proposed Stark 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. Litho cannot predict when final regulations will be issued or the substance of the final regulations, but the interpretive provisions of the Proposed Stark II Regulations may be viewed as HCFA's interim position until final regulations are issued. If the Proposed Stark II Regulations are adopted as final (or, in the meantime, if a reviewing court adopted their reasoning as the proper interpretations of the Stark II statute), then the Partnership's operations would not be in compliance with Stark 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 Stark II Regulations that physician overutilization of lithotripsy is unlikely and specifically solicits comments on whether there should be a regulatory exception for lithotripsy. HCFA has received a substantial volume of comments in support of a regulatory exception for lithotripsy. HCFA representatives have informally acknowledged in published commentary that some form of regulatory relief for lithotripsy is under consideration and may be forthcoming; however, no assurances can be made that such will be the case. Litho 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, Litho will continue to carefully review the Proposed Stark II Regulations and accompanying HCFA commentary, and explore other alternative plans of operations that would allow the Partnership to operate in compliance with Stark II and its final regulations. HCFA's adoption of the current Proposed Stark II Regulations as final or a reviewing court's interpretation of the Stark II statute in reliance on the Proposed Stark II Regulations and in a manner adverse to the Partnership operations would mean that the Partnership and its physician Limited Partners would likely be found in violation of Stark II. In such circumstance, it is possible the Partnership may be given the opportunity to restructure its operations to bring them into compliance. In the event Litho is unable to devise a plan pursuant to which the Partnership may operate in compliance with Stark II and its final regulations, Litho is obligated under the Partnership Agreement either (i) to purchase the Partnership Interests of all the Limited Partners at the lesser of fair market value or their Capital Account values (including in certain cases the assumption of their Guaranties) or (ii) to dissolve and liquidate the Partnership. See "Summary of the Partnership Agreement - Optional Purchase of Limited Partner Interests." The Partnership and/or the physician Limited Partners may not be permitted the opportunity to restructure operations and thereby avoid an obligation to refund any amounts collected from Medicare and Medicaid patients in violation of the statute. Further, under these circumstances the Partnership and physician Limited Partners may be assessed with substantial civil monetary penalties and/or exclusion from providing services reimbursed by Medicare and Medicaid. Two bills are currently pending in Congress which would modify the reach of the Stark II self-referral prohibition. One (H.R. 2650) was introduced by Representative Stark, the other (H.R. 2651) by House Ways and Means health subcommittee chair Representative Bill Thomas. The Stark bill would modify, and the Thomas bill would repeal, the ban on physicians who have compensation arrangements with entities to which they refer patients. However, neither bill, nor any other bill currently pending in Congress, would substantively modify the regulation of referrals of physicians with ownership interests. Thus, neither bill would affect the Partnership's analysis of the potential impact of Stark II on this Offering discussed above. Fraud and Abuse. The provisions of the federal Social Security Act addressing illegal remuneration (the "Anti-Kickback Statute") prohibit providers and others from soliciting, receiving, offering or paying, directly or indirectly, any remuneration in return for either making a referral for a Medicare, Medicaid or CHAMPUS covered service or ordering, arranging for or recommending any such covered service. Violations of the Anti-Kickback Statute may be punished by a fine of up to $25,000 or imprisonment for up to five (5) years, or both. In addition, violations may be punished by substantial civil penalties and/or exclusion from the Medicare and Medicaid programs. Regarding exclusion, the Office of Inspector General ("OIG") of the Department of Health and Human Services may exclude a provider from participation in the Medicare program for a 5-year period upon a finding that the Anti-Kickback Statute has been violated. After OIG establishes a factual basis for excluding a provider from the program, the burden of proof shifts to the provider to prove the Anti-Kickback Statute has not been violated. The Limited Partners are to receive cash Distributions from the Partnership. Since it is anticipated that some of the Limited Partners will be physicians or others in a position to refer and perform lithotripsy services using Partnership equipment and personnel, such Distributions could come under scrutiny under the Anti-Kickback Statute. The Third Circuit United States Court of Appeals has held that the Anti-Kickback Statute is violated if one purpose (as opposed to the primary or sole purpose) of a payment to a provider is to induce referrals. United States v. Greber, 760 F.2d 68 (1985). The Greber case was followed by the United States Court of Appeals for the Ninth Circuit, United States v. Kats, 871 F.2d 105 (9th Cir. 1989), and cited favorably by the First Circuit in United States v. Bay State Ambulance and Hospital Rental Service, Inc., 874 F.2d 20 (1 st Cir. 1989). The OIG has indicated that it is giving increased scrutiny to health care 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 health care fraud and abuse investigator and enforcer. The OIG has published regulations which protect certain transactions from scrutiny under the Anti-Kickback Statute (the "Safe Harbor" regulations). A Safe Harbor, if complied with fully, will exempt such activity from prosecution under the Anti-Kickback Statute. However, the preamble to the Safe Harbor regulations states that the failure of a particular business arrangement to comply with the regulations does not determine whether or not the arrangement violates the Anti-Kickback Statute because the regulations do not themselves make any particular conduct illegal. This Offering and the business of the Partnership do not comply with any Safe Harbor. In the commentary introducing the Safe Harbor regulations, the OIG recognized the beneficial effect that business investments in small entities may have on the health care industry. The OIG promulgated a Safe Harbor for investment interests, including limited partnership ownership interests, in small entities which are held by persons in a position to make referrals to the entities so long as eight criteria are met. This Offering does not meet all eight criteria; however, this Offering does meet some of the criteria. Specifically, the terms on which Limited Partnership interests are offered to physicians who treat their patients on the Mobile Lithotripsy System are not related to the previous or expected volume of referrals or amount of business generated by the physicians; there is no requirement that any physician make referrals or be in a position to make referrals as a condition for remaining an investor; there is no cross-referral arrangement involved with the business of the Partnership; the Partnership does not loan funds or guarantee loans for physicians who refer patients for treatment on the Mobile Lithotripsy System; and the Distributions to physicians who are Limited Partners are directly proportional to the amount of their capital investment. In order to qualify for Safe Harbor protection, all eight criteria must be met. Litho can give no assurance that compliance with some, but not all, of the criteria of the Safe Harbor would prevent the OIG from finding a potential violation of the Anti-Kickback Statute by virtue of this Offering. In November 1999, the OIG issued a Safe Harbor protecting certain physician investment interests in ASCs. The commentary accompanying the new Safe Harbor specifically distinguished physician ownership in ASCs from physician ownership in other facilities, including lithotripsy facilities, end-stage renal disease facilities, comprehensive outpatient rehabilitation facilities and others. The OIG concluded that ASCs benefit from favorable public policy considerations relating to reducing Medicare costs (including through the impending prospective payment system discussed above); other facilities, including lithotripsy facilities, do not share the same policy considerations or reimbursement structures. Therefore, the Safe Harbor status given to certain physician investments in ASCs cannot be viewed as an indication that physician investments in other facilities, including lithotripsy facilities, would not be deemed to violate the Anti-Kickback Statute. Although a separate Safe Harbor was not adopted, HCFA noted in its commentary when the Safe Harbor regulations were issued in 1991 that additional protection may be merited for situations where a physician sees a patient in his or her own office, makes a referral to an entity in which he or she has an ownership interest and performs the service for which the referral is made. In such cases, Medicare makes a payment to the facility for the service it furnishes, which may result in a profit distribution to the physician. HCFA noted that, with respect to the physician' s professional fee, such a referral is simply a referral to oneself, and that in such situations, both the professional service fee and the profit distribution from the associated facility fee that are generated from the referral may warrant protection. HCFA stated that its primary concern regarding the above referral situation was the investing physician's ability to profit from any diagnostic testing that is generated from the services he or she performs. Litho believes the potential for overutilization posed by referrals for diagnostic services is not present to the same degree with therapeutic services such as lithotripsy where the necessity for the treatment can be objectively determined; i.e., a renal stone can be definitely determined before treatment. The applicability of the Anti-Kickback Statute to physician investments in health care businesses to which they refer patients and which do not qualify for a Safe Harbor has not been the focus of many court decisions, and therefore, judicial guidance is limited. In the only case in which the OIG has attempted to exercise the civil exclusion remedy in the context of a physician-owned joint venture, The Hanlester Network, et al. v. Shalala, the Ninth Circuit for the United States Court of Appeals (the "Court") held that the Anti-Kickback Statute is violated when a person or entity (a) knows that the statute prohibits offering or paying remuneration to induce referrals and (b) engages in prohibited conduct with the specific intent to violate the law. Although the Court upheld a lower court ruling that the joint venture in question violated the Anti-Kickback Statute vicariously through the knowing and willful actions of one of its agents, who was acting outside the parameters of the joint venture' s offering documents, the Court concluded there was not sufficient evidence indicating that a return on investment to physicians or other investors in the joint venture could on its own constitute an "offer or payment" of remuneration to make referrals. The Court also stated that since profit distributions in Hanlester were made based on each investor's ownership share and not on the volume of referrals, the fact that large referrals by investors would result in potentially high investment returns did not, standing alone, cause a violation of the Anti-Kickback Statute. The Health Insurance Portability and Accountability Act of 1996 directed the OIG to respond to requests for advisory opinions regarding the effect of the Anti-Kickback Statute on proposed business transactions. Litho has not requested the OIG to review this Offering and, to the best knowledge of Litho, the OIG has not been asked by anyone to review offerings of this type. Federal regulatory authorities could take the position in future advisory opinions that business transactions similar to this Offering are a means to illegally influence the referral patterns of the prospective physician Limited Partners. Because there is no legal precedent interpreting circumstances identical to these facts, it is not possible to predict how this issue would be resolved if litigated. Whenever an offering of ownership interests is made available to persons with the potential to refer patients for services, there is a possibility that the OIG, HCFA or other government agencies or officials may question whether the ownership interests are being provided in return for or to induce referrals by the new owners. Remuneration, which government officials have said can include the provision of an opportunity to invest in a facility to which a person refers patients for services, may be challenged by the government as constituting a violation of the Anti-Kickback Statute. Whether the offering of ownership interests to investors who may refer patients to the Partnership might constitute a violation of this law must be determined in each case based upon the specific facts involved. The various mechanisms in place to avoid providing a financial benefit to prospective Limited Partners for any referrals of patients (including the requirement that all distributions of earnings to Limited Partners be made in proportion to their investment interest), the Partnership's utilization review and quality assurance programs, the fact that lithotripsy is a therapeutic treatment the need of which can be objectively determined, and the existence in Litho's view of valid business reasons to engage in this transaction, form the basis in part of Litho's belief that this Offering is appropriate. Litho 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). Litho 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, Litho, officers and directors of Litho, 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 own independent counsel. False Claims Statutes. Federal laws governing reimbursement for medical services generally prohibit an individual or entity from knowingly and willfully presenting a claim (or causing a claim to be presented) for payment from Medicare, Medicaid or other third party payors that is false or fraudulent. The standard for "knowing and willful" includes conduct that amounts to a reckless disregard for whether accurate information is presented by claims processors. Penalties under these statutes include substantial civil and criminal fines, exclusion from the Medicare program and imprisonment. One of the most prominent of these laws is the federal False Claims Act, which may be enforced by the federal government directly, or by a qui tam private plaintiff on the government's behalf. Under the federal False Claims Act, both the government and the private plaintiff, if successful, are permitted to recover substantial monetary penalties and judgments, as well as an amount equal to three times actual damages. In recent cases, some qui tam plaintiffs have taken the position that violations of the Anti-Kickback Statute (discussed above) and Stark II (discussed above) should also be prosecuted as violations of the federal False Claims Act. The Partnership cannot assure that the government, or a reviewing court, would not take the position that billing errors, employee misconduct or violations of other federal statutes, should they occur, are violations of the federal False Claims Act or similar statutes. Some federal courts have recently taken the position that qui tam lawsuits by private plaintiffs are unconstitutional. Most notably, a panel of judges on the Fifth Circuit Court of Appeals took this position in a decision issued in November 1999. That decision is being reviewed by all the judges on the Fifth Circuit. The panel's decision was a minority view; most courts have concluded that qui tam lawsuits are constitutional. In another case, the U.S. Supreme Court may review this issue. Unless and until the Supreme Court decides the issue, prospective Limited Partners should consider the ramifications of the False Claims Act issues discussed in the preceding paragraph. New Legislation. Two bills currently pending in Congress which would amend or repeal the compensation provisions of the Stark II law were discussed above in the disclosures related to self-referral restrictions. Litho 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 Stark II and the Anti-Kickback laws discussed above. In the event that legislation is enacted which, in the opinion of Litho, would adversely affect the operation of the Partnership's business, Litho 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 Litho, to determine whether they posed an unreasonable threat to competition in the health care field. Litho 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, Litho cannot assure that the FTC will not investigate issues arising from physician-owned health care facilities in the future with respect to Litho 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, Litho 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. Tennessee. Tennessee requires a certificate of need ("CON") to initiate extracorporeal lithotripsy services. This CON requirement became effective in 1993, after the Partnership commenced its services at the Contract Hospitals. Accordingly, no CON was necessary to initiate the Partnership's services. To the best knowledge of Litho, the Mobile Lithotripsy System does not require licensure as health care institutions; rather, services are deemed to be hospital services which are regulated under the contracting hospital's license. Tennessee requires registration of x-ray machines. Tennessee bars referrals of patients to entities in which the referring physician has an ownership interest unless the referring physician performs health care services at the entity. To ensure compliance with this law, patients referred by physician Limited Partners for treatment on the Partnership's Mobile Lithotripsy System must be treated by the referring physician. Tennessee requires that physicians disclose their ownership interests in health care facilities or equipment in which they have ownership interests. The Partnership will require Limited Partners to comply with this requirement. Mississippi. Mississippi requires a certificate of need, among other things, to offer extracorporeal shockwave lithotripsy services if the services have not been provided by the proposed provider of such services within the previous year. The hospital is deemed to be the provider and must obtain the CON. To the best knowledge of Litho, Baptist Memorial Hospital - DeSoto has applied for a CON to offer extracorporeal shockwave lithotripsy services. The Partnership cannot commence providing the Mobile Lithotripsy System at Baptist Memorial Hospital - DeSoto until a CON has been issued; to the best knowledge of Litho, the Partnership will be able to provide the Mobile Lithotripsy System at Baptist Memorial Hospital - DeSoto on and after February 10, 2000. However, if a CON is not issued or is successfully challenged by a competitor, the Partnership will not be able to provide the Mobile Lithotripsy System at Baptist Memorial Hospital - DeSoto. To the best knowledge of Litho, no licensure of the Mobile Lithotripsy System is necessary as a health care facility in Mississippi. Mississippi requires registration of x-ray machines. The Mississippi Board of Medical Licensure has adopted a policy regarding the corporate practice of medicine. The policy states that physicians shall not receive compensation as an inducement for the referral of patients. As the Partnership's Distributions to Limited Partners will be based solely on ownership of equity interest, and not on referrals, Litho believes this policy will not be violated. The same policy also prohibits physicians from violating the federal Anti-Kickback Statute. The Mississippi Medicaid statutes forbid paying or receiving kickbacks or bribes related to the furnishing of goods or services for which payment may be made in whole or in part pursuant to the Medicaid program. For the reasons explained above with respect to the federal Anti-Kickback Statutes, the Litho does not believe this Offering or the business of the Partnership would violate the Mississippi Board of Medical Licensure's policy or the state Medicaid law. The Partnership has been endeavoring to comply and will continue to seek to comply with all applicable statutory and regulatory requirements. Further regulations may be imposed in Tennessee or Mississippi 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. LITHO 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. Prime, the indirect sole shareholder of Litho, 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 61 mobile and seven fixed site lithotripters, all but two of which are operated by Prime, Litho and their 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 63 lithotripters and development of five lithotripters. Prime lithotripters 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 lithotripters in 1998, representing approximately 30% of the estimated 7,700 active urologists in the United States. Prime manages the operations of 63 of its 68 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. 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 49 of its 68 operations. Prime's lithotripters range in age from one to twelve years. Of its 68 lithotripters, 61 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 Litho 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, equipment, economic conditions and distribution policies, the success of Litho's Affiliates in the lithotripsy field should not be considered as indicative of the operating results obtainable by 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, 1997 and December 31, 1998 and the period ended November 30, 1999, (ii) Balance Sheets as of December 31, 1997, December 31, 1998 and November 30, 1999, (iii) Cash Flow Statements for the years ended December 31, 1997, December 31, 1998 and the period ended November 30, 1999 and (iv) Statements of Partner's Equity for the years ended December 31, 1997, December 31, 1998 and the period ended November 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. Revenues. Total revenues increased $17,647 (1%) for the eleven months ended November 30, 1999 compared to the same period in 1998 due to a 9% increase in the number of procedures performed, and a 13% decrease in revenue per case. Operating Expenses. Operating expenses decreased by $75,220 (8%) for the eleven months ended November 30, 1999 compared to the same period in 1998 primarily due to decreases of $25,674 in property taxes, $10,431 in legal and accounting fees, $21,918 in employee benefit costs and $12,186 in repairs and maintenance costs. Other Income (Expense). Total other income (expense), net decreased by $6,636 (26%) due to a decrease in interest income. Revenues. Total revenues increased $6,563 (0%) for the year ended December 31, 1998 compared to the same period in 1997 due to a 12% increase in the number of procedures performed, and a 10% decrease in revenue per case. Operating Expenses. Operating expenses decreased by $6,229 (1%) for the year ended December 31, 1998 compared to the same period in 1997. Other Income (Expense). Total other income (expense), net increased by $831 (3%) due to the decrease in interest income. Revenues. Total revenues decreased $550,395 (15%) for the year ended December 31, 1997 compared to the same period in 1996 related to a 2% increase in the number of procedures performed, and a 16% decrease in revenue per case. Operating Expenses. Operating expenses decreased by $102,755 (10%) for the year ended December 31, 1997 compared to the same period in 1996, primarily due to a decrease of $49,683 in management fees due to lower revenues and collections, a decrease of $15,687 in repairs and maintenance costs, and a decrease of $22,647 in legal fees. Other Income (Expense). Total other income (expense), net decreased by $9,617 (25%) due to the decrease in interest income. The Partnership Agreement sets forth the powers and purposes of the Partnership and the respective rights and obligations of the Litho 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. The Investors will acquire their interests in the Partnership in the form of Units. Each Unit costs $4,502. The entire Unit purchase price is due in cash upon submission of the Assignment Packet; 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 Unit purchase price 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 certain Distributions 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 Womble Carlyle Sandridge & Rice, a Professional Limited Liability Company, attached hereto as Appendix C. 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 a portion of the Partnership's Profits and Losses based on their varying Percentage Interests during the year. The Profits and Losses shall be apportioned on the basis of the number in such year each New Limited Partner was a holder of the Units transferred without regard to the specific income and losses of the Partnership before or after the transfer. (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 Litho, 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 Litho, 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 Litho'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, Litho 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 Litho 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 Litho 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. Litho, in its capacity as 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. Litho will continue oversee the day-to-day affairs of the Partnership pursuant to the Management Agreement. See "Business Activities - Management." Under the Partnership Agreement, if Litho 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, Litho may be removed and another substituted with the consent of all of the Limited Partners. Litho 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 Litho may be done without the approval of the Limited Partners. 1. General. Litho 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. Litho, 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. Litho 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. Litho has made a an election pursuant to Code Section 754. See "Risk Factors- Tax Risks- Partnership Elections." (ii) Tax Matters Partner. The Partnership Agreement designates Litho 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, Litho 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, Litho shall oversee the Partnership tax affairs in the manner which, in its best judgment, are in the interests of the Partners. Moreover, Litho 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. 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) his or her obligation to return certain Distributions made to them as provided by the Act. See "Risk Factors - Other Investment Risks - Limited Partners' Obligation to Return Certain Distributions." After acquisition of Units by Investors, no Partnership Interest nor any Units may be transferred without the prior written consent of Litho, which approval may be granted or denied in the sole discretion of Litho, 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 Litho, or the approval of the assignor Limited Partner and Litho. 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. 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 Litho; 4. The election to dissolve the Partnership made by Litho and a Majority in Interest of the Limited Partners; or 5. Any other reason which under the laws of the State of Tennessee 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, Litho 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. As provided in the Partnership Agreement, the General Partner has the option (which it may assign to the Partnership in its sole discretion) to purchase all of the interest of a Limited Partner who (i) dies, (ii) becomes the subject of a domestic proceeding, (iii) becomes insolvent, (iv) acquires direct or indirect ownership of an interest in a competing venture (including the lease or sublease of competing technology), or (v) defaults on his obligations under the Guaranty. Except in the case of the death of a Limited Partner, the option purchase price is an amount equal to the lesser of (a) the fair market value of the Partnership Interest to be purchased or (b) the Limited Partner's share of the Partnership's book value, if any, as reflected by the Limited Partner's capital account in the Partnership (unadjusted for any appreciation in Partnership assets or amounts due and payable to the Partnership as account receivables, and as reduced by depreciation deductions claimed by the Partnership for tax purposes) and, in certain cases, the assumption of the Limited Partner's Guaranty. Although it is anticipated that the Partnership will use the accrual method of accounting, the cash method will be used for determining the capital account value option purchase price discussed herein. 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 capital account value option purchase price may be nominal in amount. In addition, in the event existing or newly enacted laws or regulations or any other legal developments adversely affect (or potentially adversely affect) the operation of the Partnership or the business of the Partnership (e.g., any prohibitions on provider ownership), the General Partner, in its sole discretion, is obligated to either (x) purchase the Partnership Interests of all of the Limited Partners at the option purchase price provided above or (y) dissolve the Partnership. See the form of Partnership Agreement attached hereto as Appendix B, "Summary of the Partnership Agreement - Optional Purchase of Limited Partner Interests," and "Risk Factors - Operating Risks - Liability Under the Guaranty." The Partnership Agreement provides that disputes arising thereunder shall be resolved by submission to arbitration in Memphis, Tennessee. Each Investor, by executing the Subscription Agreement, irrevocably appoints Dr. Joseph Jenkins to act as attorneys-in-fact to execute the Partnership Agreement, any amendments thereto and any certificate of limited partnership filed by Litho. The Partnership Agreement, in turn, contains provisions by which each Limited Partner irrevocably appoints Dr. Joseph Jenkins, to act as his or her attorney-in-fact to make, execute, swear to and file any documents necessary to the conduct of the Partnership's business, such as deeds of conveyance of real or personal property as well as any amendment to the Partnership Agreement or to any certificate of limited partnership which accurately reflects actions properly taken by the Partners. Within 90 days after the end of each Year of the Partnership, Litho 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. Proper and complete records and books of account are kept by Litho 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 Litho, and are open to the reasonable inspection and examination of the Limited Partners or their duly authorized representatives during normal business hours. On the Closing Date, it is expected that Womble Carlyle Sandridge & Rice, 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." 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. [Remainder of page intentionally left blank.] Certain terms in this Memorandum shall have the following meanings: Act. The Act means the Tennessee Uniform Revised Limited Partnership Act, as in effect on the date hereof. Affiliate. An Affiliate is (i) any person, partnership, corporation, association or other legal entity ("person") directly or indirectly controlling, controlled by or under common control with another person, (ii) any person owning or controlling 10% or more of the outstanding voting interests of such other person, (iii) any officer, director or partner of such person and (iv) if such other person is an officer, director or partner, any entity for which such person acts in such capacity. Bank. First-Citizens Bank & Trust Company. ---- 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 February 29, 2000 (or earlier) in the discretion of Litho. The Closing Date may be extended for a period of up to 180 days in the discretion of Litho. Coach. The 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 eight hospitals and medical centers to which the Partnership provides lithotripsy services pursuant to five separate Hospital Contracts. Counsel. Womble Carlyle Sandridge & Rice, a Professional Limited Liability Company, P.O. Drawer 84, Winston-Salem, North Carolina 27102. 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 Litho 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. Hospital Contracts. The five 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 $2,002 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. Litho. Lithotripters, Inc., a North Carolina corporation, and a wholly owned subsidiary of Prime Medical Services, Inc. Litho is the General Partner of the Partnership. Lithostar(TM). The Lithostar(TM)model extracorporeal shock wave lithotripter manufactured by Siemens which the Partnership owns and operates. 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. Litho and the Limited Partners, collectively, when no distinction is required by the context in which the term is used herein. Partnership. Tennessee Lithotripters Limited Partnership I, a Tennessee 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 Litho 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 Litho. 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 re-financing 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 Litho 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 Litho 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 1% 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 Litho. Prime. Prime Medical Services, Inc. a publicly held Delaware corporation and parent of Litho 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 Litho. 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. Western Tennessee and northern Mississippi. Litho has sole discretion to expand the Service Area. 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 29 equal limited partner interests in the Partnership offered by Litho pursuant to this Memorandum for a price per Unit of $4,502 in cash. Year of the Partnership. An annual accounting period ending on December 31 of each year during the term of the Partnership. EX-10.149 62 0062.txt EX 10.149 1ST SUPPLEMENT TO MEMORANDUM - TENN. I FIRST SUPPLEMENT TO THE CONFIDENTIAL PRIVATE PLACEMENT MEMORANDUM January 14, 2000 Tennessee Lithotripters Limited Partnership I Assignment Offering 1900 Church Street, Suite 101 Nashville, TN 37203 Lithotripters, Inc., a North Carolina corporation ("Litho"), by this First Supplement hereby amends and supplements its Confidential Private Placement Memorandum of January 14, 2000 (the "Memorandum") offering for assignment units of limited partnership interest in Tennessee Lithotripters Limited Partnership I, a Tennessee limited partnership. Capitalized terms used herein are defined in the Glossary appearing in the Memorandum. Persons who have subscribed for or are considering an investment in the Units offered by the Memorandum should carefully review this First Supplement. Expansion of the Offering to Mississippi Residents The Offering is hereby open to residents of the state of Mississippi that otherwise qualify to purchase Units as provided in the Memorandum. Litho is relying on an exemption from the registration provisions of the Mississippi Securities Act provided by Section 75-71-203(9) of such Act with respect to the Offering. Questions concerning this First Supplement should be directed to the Sales Agent at (800) 682-7971. EX-10.150 63 0063.txt EX 10.150 2ND SUPPLEMENT TO MEMORANDUM - TENN. I SECOND SUPPLEMENT TO THE CONFIDENTIAL PRIVATE PLACEMENT MEMORANDUM February 29, 2000 Tennessee Lithotripters Limited Partnership I Assignment Offering 1900 Church Street, Suite 101 Nashville, TN 37203 Lithotripters, Inc., a North Carolina corporation ("Litho"), by this Second Supplement hereby amends and supplements its Confidential Private Placement Memorandum of January 14, 2000, as previously supplemented (the "Memorandum") offering for assignment units of limited partnership interest in Tennessee Lithotripters Limited Partnership I, a Tennessee limited partnership. Capitalized terms used herein are defined in the Glossary appearing in the Memorandum. Persons who have subscribed for or are considering an investment in the Units offered by the Memorandum should carefully review this Second Supplement. Extension of the Offering Pursuant to the authority reserved by the General Partner in the Memorandum, the General Partner hereby elects to extend the Closing Date to March 15, 2000 (or such earlier date as the General Partner may, in its sole discretion, otherwise elect). Questions concerning this Second Supplement should be directed to the Sales Agent at (800) 682-7971. EX-10.151 64 0064.txt EX 10.151 CONFIDENTIAL MEMORANDUM - UTAH I Name of Prospective Investor Memorandum Number - -------------------------------------------------------------------------------- FAYETTEVILLE LITHOTRIPTERS LIMITED PARTNERSHIP-UTAH I A Limited Partnership Formed Under the Laws of Utah CONFIDENTIAL PRIVATE PLACEMENT MEMORANDUM up to $439,104 in Cash 48 Units of Limited Partnership Interest at $9,148 in Cash per Unit - -------------------------------------------------------------------------------- THIS MEMORANDUM IS FURNISHED PURSUANT TO A CONFIDENTIALITY AGREEMENT BETWEEN THE PARTNERSHIP AND THE INVESTOR WHOSE NAME APPEARS ABOVE. THE CONFIDENTIALITY AGREEMENT PROHIBITS THE DISCLOSURE OF THE CONFIDENTIAL MATERIAL CONTAINED IN THIS MEMORANDUM, EXCEPT TO THE EXTENT SUCH INVESTOR DEEMS IT NECESSARY TO SHARE SUCH INFORMATION WITH HIS LEGAL, ACCOUNTING OR OTHER FINANCIAL ADVISORS, WHO LIKEWISE SHALL BE BOUND BY THE SAME CONFIDENTIALITY RESTRICTIONS SET FORTH IN THE CONFIDENTIALITY AGREEMENT. MEDTECH INVESTMENTS, INC. Exclusive Sales Agent 2008 Litho Place Fayetteville, North Carolina 28304 1-800-682-7971 ii WINSTON #906586 v 1 The Date of this Memorandum is September 5, 2000 FAYETTEVILLE LITHOTRIPTERS LIMITED PARTNERSHIP-UTAH I up to $439,104 in Cash up to 48 Units of Limited Partnership Interest at $9,148 in Cash per Unit Fayetteville Lithotripters Limited Partnership-Utah I, a Utah 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 48 units (the "Units") of limited partnership interest in the Partnership. Forty Units will be offered directly by the Partnership; and eight Units will be offered by the Partnership as agent for the account of the General Partner from a portion of the General Partner's interest in the Partnership as a limited partner. The sale of the eight Units held by the General Partner will not result in any dilution of the interests of any other existing Limited Partner. The Units are offered at the per Unit price of $9,148 in cash, and each Unit will represent an initial 0.5% economic interest in the Partnership. See "Terms of the Offering" and "Risk Factors - Other Investment Risks - Dilution of Limited Partners' Interest." The Partnership currently operates a Lithostar(TM) second generation extracorporeal shock-wave lithotripter for the lithotripsy of kidney stones. The Lithostar(TM) is installed in a self-propelled Coach (the Coach with the installed Lithostar(TM) is referred to herein as the "Lithotripsy System") enabling the Partnership to provide lithotripsy services at various locations primarily in Idaho and Utah (the "Service Area"). The first eight Units will be sold for the account of the General Partner from a portion of its limited partnership interest and the proceeds (net of sales commissions) will be paid to the General Partner. See "Conflicts of Interest." Sales of additional Units in excess of the first eight Units sold will be made for the account of the Partnership and the Partnership intends to use the proceeds therefrom to (i) pay the costs of this Offering, and (ii) finance the Partnership's costs of upgrading the imaging system of the Lithostar(TM). 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 October 17, 2000 (or earlier upon the sale of all 48 Units as provided herein), unless extended at the discretion of the General Partner for a period not to exceed 180 days. Purchase of Units involves risks and is suitable only for persons of substantial means who have no need for liquidity in this investment. Among other factors, prospective investors should note that the health care industry is undergoing significant government regulatory reforms and that the Partnership faces substantial competition in the Service Area. See "Risk Factors" and "Terms of the Offering - Suitability Standards." ------------------------------ Cash Selling Net Cash Offering Price Commissions(1) Proceeds(2) -------------- ----------- -------- Per Unit(3) $ 9,148 $ 150 $ 8,998 Total Maximum(4) $439,104 $ 7,200 $431,904 (See Footnotes on Back of Cover Page) See Glossary for capitalized terms used herein and not otherwise defined. WINSTON #906586 v 1 vii (1) The Units will be sold on a "best-efforts" any or all basis by MedTech Investments, Inc., a broker-dealer registered with the Securities and Exchange Commission, a member of the National Association of Securities Dealers, Inc. and an Affiliate of the General Partner (the "Sales Agent"). The Partnership will pay the Sales Agent a $150 commission for each Unit sold and will reimburse the Sales Agent for its Offering costs (not to exceed $5,000). The Partnership has agreed to indemnify the Sales Agent against certain liabilities, including liabilities under the Securities Act of 1933 (the "Securities Act"). See "Plan of Distribution." The Partnership will act as the transfer agent for Units sold for the account of the General Partner; provided, that no fees will be paid to the Partnership for acting in that capacity. (2) Net Cash Proceeds do not reflect deduction of all expenses payable by the Partnership. The first eight Units sold will be for the account of the General Partner and the proceeds (net of sales commissions) will be paid to the General Partner. Sales of additional Units will be made for the account of the Partnership and the proceeds therefrom will be used to pay the costs of the Offering and the costs of the imaging upgrade to the Partnership's Lithostar(TM). See "Sources and Applications of Funds and "Conflicts of Interest." The price per Unit ($9,148) is payable in cash upon subscription; provided, that prospective Investors who meet certain requirements may be able to personally borrow funds from a third-party financial institution in order to pay a portion of their cash purchase price per Unit. For the convenience of Investors, the Partnership has arranged for financing of a portion of the Units' purchase price with First-Citizens Bank & Trust Company, which is headquartered in Raleigh, North Carolina, and has approximately 370 offices throughout the southeastern United States (the "Bank"). Therefore, in lieu of paying the entire purchase price in cash at subscription, prospective Investors may execute and deliver to the Sales Agent together with their Subscription Packets, at least $2,500 cash and a Limited Partner Note payable to the Bank in a maximum principal amount of up to $6,648 per Unit to be purchased, a Loan and Security Agreement, Security Agreement and two Uniform Commercial Code Financing Statements ("UCC-1s") (collectively, the "Loan Documents"). See "Terms of the Offering - Limited Partner Loans" and the forms of the Limited Partner Note, the Loan and Security Agreement and Security Agreement attached to the form of Limited Partner Loan Commitment as Exhibits A, B and C, respectively, which is attached hereto as Appendix B and the UCC-1's attached as part of the Subscription Packet. (3) Each Investor may purchase no less than one Unit. The General Partner, however, reserves the right to sell less than one Unit as an additional investment, and to reject in whole or in part any subscription. (4) All subscription funds and Loan Documents will be held in an interest bearing escrow account with the Bank until the acceptance of the Investor's subscription (and approval by the Bank if the Investor is financing a portion of the Unit purchase price through a Limited Partner Loan), rejection of the Investor's subscription or termination of this Offering. The Partnership and the General Partner collectively seek by this Offering to sell up to 48 Units for up to $439,104 in cash ($431,904 net of Sales Agent's commissions). Certain sales will be made for the account of the General Partner by the Partnership as transfer agent. See Note (1) above. The Partnership and the General Partner have 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 General Partner 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 also conditioned upon approval by the Bank of his Limited Partner Loan. Upon admission as a Limited Partner, the Investor's subscription funds will be released to the Partnership or the General Partner, as the case may be, 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 October 17, 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." Neither the General Partner nor its Affiliates will purchase any Units. [The remainder of this page is left intentionally blank.] - -------------------------------------------------------------------------------- o The Units for the account of the Partnership 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. The Units for the account of the General Partner are being offered pursuant to an exemption from the registration requirements of the Securities Act of 1933, as amended, provided by Section 4(1) thereof, as amended, and exemptions from state registration requirements provided by Section 61-1-14(2) of the Utah Code Annotated, 1953, as amended, Section 30-1435(1)(b) of the Idaho Code of 1946, as amended, and Section 90.530(11) of the Nevada Revised Statutes, as amended. 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...................................................................6 Other Investment Risks.....................................................12 THE PARTNERSHIP...............................................................15 TERMS OF THE OFFERING.........................................................16 The Units and Subscription Price...........................................16 Acceptance of Subscriptions................................................16 Limited Partner Loans......................................................17 Subscription Period; Closing...............................................19 Offering Exemption.........................................................19 Suitability Standards......................................................19 How to Invest..............................................................20 Restrictions on Transfer of Units..........................................21 PLAN OF DISTRIBUTION..........................................................21 BUSINESS ACTIVITIES...........................................................23 General....................................................................23 Treatment Methods for Kidney Stone Disease.................................23 The Lithotripsy System.....................................................23 Acquisition of Additional Assets...........................................25 Hospital Contracts.........................................................25 Operation of the Lithotripsy System........................................26 Management.................................................................26 Employees..................................................................27 FINANCIAL CONDITION OF THE PARTNERSHIP........................................27 MANAGEMENTS DISCUSSION AND ANALYSIS OF THE RESULTS OF OPERATIONS..............31 SOURCES AND APPLICATIONS OF FUNDS.............................................33 THE GENERAL PARTNER...........................................................34 COMPENSATION AND REIMBURSEMENT TO THE GENERAL PARTNER AND ITS AFFILIATES............................................................35 CONFLICTS OF INTEREST.........................................................37 FIDUCIARY RESPONSIBILITY OF THE GENERAL PARTNER...............................39 COMPETITION...................................................................39 Affiliated Competition.....................................................39 Other Competition..........................................................40 REGULATION....................................................................41 Federal Regulation.........................................................41 State Regulation...........................................................49 PRIOR ACTIVITIES..............................................................51 SUMMARY OF THE PARTNERSHIP AGREEMENT..........................................52 Nature of Limited Partnership Interest.....................................52 Profits, Losses and Distributions..........................................52 Management of the Partnership..............................................54 Powers of the General Partner..............................................54 Rights and Liabilities of the Limited Partners.............................55 Restrictions on Transfer of Partnership Interests..........................55 Noncompetition Agreement and Protection of Confidential Information........56 Dissolution and Liquidation................................................56 Optional Purchase of Limited Partner Interests.............................57 Dilution Offerings.........................................................58 Arbitration................................................................58 Power of Attorney..........................................................58 Reports to Limited Partners................................................58 Records....................................................................59 LEGAL MATTERS.................................................................59 ADDITIONAL INFORMATION........................................................59 GLOSSARY......................................................................59 APPENDICES Appendix A AGREEMENT OF LIMITED PARTNERSHIP OF FAYETTEVILLE LITHOTRIPTERS LIMITED PARTNERSHIP - UTAH I Appendix B FORM OF LIMITED PARTNER LOAN COMMITMENT (WITH EXHIBITS) Appendix C FORM OF OPINION OF WOMBLE CARLYLE SANDRIDGE & RICE, PLLC Appendix D NOTES TO FINANCIAL STATEMENTS WINSTON #906586 v 1 31 WINSTON #906586 V 1 RISK FACTORS Prior to subscribing for Units, Investors should carefully examine this entire Memorandum, including the Appendices hereto, and should give particular consideration to the general risks attendant to speculative investments and investments in partnerships generally, and to the other special operating, tax and other investment risks set forth below. Operating Risks General Risks of Operations. The Partnership was formed under the laws of the State of Utah on June 15, 1988 and commenced operations in 1990. Although the General Partner and its personnel have significant experience in managing lithotripsy enterprises, whether the Partnership can continue to effectively operate its business cannot be accurately predicted. The benefits of an investment in the Partnership also depend on many factors over which the Partnership has no control, including competition, technological innovations rendering the Lithotripsy System less competitive or obsolete, and other matters. The Partnership may be adversely affected by various changing local factors such as an increase in local unemployment, a change in general economic conditions, changes in interest rates and availability of financing, and other matters that may render the operation of the Lithotripsy System difficult or unattractive. Other factors that may adversely affect the operation of the Lithotripsy System are unforeseen increased operating expenses, energy shortages and costs attributable thereto, uninsured losses and the capabilities of the Partnership's management personnel. Uncertainties Related to Changing Healthcare Environment. The healthcare industry has experienced substantial changes in recent years. Managed care is becoming a major factor in the delivery of lithotripsy services, and the General Partner anticipates that managed care programs, including capitation plans, will continue to play an increasing role in the delivery of lithotripsy services and that competition for these services may shift from individual practitioners to health maintenance organizations and other significant providers of managed care. No assurance can be given that the changing healthcare environment will not have a material adverse effect on the Partnership. Lack of Diversification. The Partnership's fundamental purpose will be to continue to operate the Lithotripsy System. Because the Partnership is dependent on only one line of business, it will have greater risks from unexpected service interruptions, equipment breakdowns, technological developments, kidney stone treatment medical breakthroughs, economic problems and similar matters than would be the case with a more diversified business. Impact of Insurance Reimbursement. The Partnership's revenues are expected to continue to be derived from the fees paid by Contract Hospitals and other health care facilities under contracts with the Partnership, as well as fees directly billed or collected for services from patients or their third-party payors. Payments received from Contract Hospitals and other health care facilities may be subject to renegotiation depending on the reimbursement such parties receive. Such reimbursement may be reduced for several reasons, including the introduction of an outpatient prospective payment system regarding Medicare patients, which in turn could lower reimbursement available from private health insurers. The increasing influence of health maintenance organizations and other managed care companies has resulted in pressure to reduce the reimbursement available for lithotripsy procedures. Additionally, the Health Care Financing Administration ("HCFA"), the federal agency which administers the Medicare program, has issued rules which reduce the reimbursement available for lithotripsy procedures provided at hospitals to $2,265. See "Regulation - Federal Regulation." In some cases reimbursement rates payable to the General Partner's Affiliates from commercial third-party payors are already less than the proposed HCFA rate. Because of the competitive pressures from managed care companies as well as threatened reductions in Medicare reimbursement, the General Partner anticipates that reimbursement available for lithotripsy procedures may continue to decrease. Such decreases would have a material adverse effect on Partnership revenues. Regarding the professional fees paid to physicians who treat patients on the Lithotripsy 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 Partnership's Lithostar(TM). The Partnership currently operates a Lithostar(TM) model lithotripter. The Lithostar(TM) has more than 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 Johannes Gutenberg University of Mainz, West Germany. The General Partner estimates that more than 400 Lithostar(TM) systems are currently operating in over twenty countries, and the General Partner and its Affiliates operate over 30 Lithostars(TM) in this and other ventures. In the General Partner's opinion, the Lithostar(TM) has proven to be reliable and dependable medical equipment; however, any downtime periods necessitated for maintenance or repairs of the Lithotripsy System will adversely affect Partnership revenues. In 1996, the FDA approved a new higher intensity shock-head system for the Lithostar(TM), which the General Partner believes has shortened procedure times. The Lithostar(TM) operated by the Partnership was upfitted with the new shock-head system in 1996. Based upon a detailed follow-up study of renal and ureteral stones treated on the Partnership's Lithostar(TM) using both the original and newer shock-head systems, the General Partner notes an 86% total success rate with an overall retreatment rate of approximately 8%. This retreatment rate included stones of all sizes and locations, including staghorn calculi which at times required multiple treatments. Based upon this study and the General Partner's experience in doing well in excess of 128,000 cases over the past ten and one-half years in its affiliated limited partnerships, the General Partner is of the opinion that the Lithostar(TM) is generally an effective and sound alternative for the treatment of renal stones. Investors should note that some studies indicate that lithotripsy may cause high blood pressure and tissue damage. The Partnership questions the reliability of these studies and believes lithotripsy has become a widely accepted method for the treatment of renal stones. Technological Obsolescence. The history of lithotripsy of kidney stones as an accepted treatment procedure is relatively recent, with the first clinical trials being conducted in West Germany beginning in 1980 and the first premarket approval for a renal lithotripter in the United States being granted by the FDA in December 1984. Today, lithotripsy is the treatment procedure of choice for kidney stone disease, having replaced other treatment methods. Published reports indicate that certain researchers are attempting to improve a laser technology to more easily eradicate kidney stones, and pharmaceutical companies and researchers have attempted to develop a safe drug that can be used to dissolve kidney stones in all cases. The General Partner cannot predict the outcome of ongoing research in these areas, and any one or more developments could reduce or eliminate lithotripsy as an acceptable procedure or treatment method of choice for the treatment of kidney stones. In addition, the availability of lower-priced transportable lithotripters in the United States has dramatically increased the number of lithotripters in the United States, increased competition for lithotripsy procedures and created downward pressure on the prices the Partnership can charge for its services. Partnership Limited Resources and Risks of Leverage. The proceeds of this Offering cannot be accurately determined until the Closing has occurred and the number of Units sold for the account of the Partnership has been calculated. In the event such proceeds are insufficient to fund all anticipated Partnership expenses, the Partnership will have to use Partnership reserves, Cash Flow and/or the proceeds of debt financing to supplement the funds available for such expenses. See "Business Activities - The Lithotripsy System" and "Sources and Application of Funds." Although the General Partner maintains good relationships with certain commercial lending institutions, it has not obtained a loan commitment from any party in any amount on behalf of the Partnership and whether one would timely be forthcoming on terms acceptable to the Partnership cannot be assured. The General Partner and/or its Affiliates may, but are under no obligation to, make loans to the Partnership, and there is no assurance that they would be willing or able to do so at the time, in amounts and on terms required by the Partnership. While the General Partner does not anticipate that it would cause the Partnership to incur indebtedness unless cash generated from Partnership operations were at the time expected to enable repayment of such loan in accordance with its terms, lower than anticipated revenues and/or greater than anticipated expenses could result in the Partnership's failure to make payments of principal or interest when due under such a loan and the Partnership's equity being reduced or eliminated. In such event, the Limited Partners could lose their entire investment. Acquisition of Additional Assets. If in the future the General Partner determines that it is in the best interest of the Partnership to acquire (i) one or more fixed base or mobile lithotripsy systems in addition to the Lithotripsy System; or (ii) any other assets related to the provision of lithotripsy services, the General Partner has the authority (without obtaining the Limited Partners' consent) to establish reserves or borrow additional funds on behalf of the Partnership to accomplish such goals, and may use Partnership assets and revenues to secure and repay such borrowings. The acquisition of additional assets may substantially increase the Partnership's monthly obligations and result in greater personnel requirements. See "Risk Factors - Operating Risks - Partnership Limited Resources and Risks of Leverage." The General Partner does not anticipate acquiring additional Partnership assets unless projected Partnership Cash Flow or proceeds from a Dilution Offering are sufficient to finance such acquisitions. In any event, no Limited Partner would be personally liable on any additional Partnership indebtedness without such Partner's prior written consent. There is no assurance that financing would be available to the Partnership to acquire additional assets or to fund any additional working capital requirements. Any such borrowing by the Partnership will serve to increase the risks to the Partnership associated with leverage as provided above. Competition. Many fixed-site and mobile lithotripters are currently operating in and around the Service Area which will be in direct competition with the Partnership's Lithotripsy Systems. Affiliates of the General Partner operate in and near the Service Area. The competing lithotripsy service providers, including the General Partner's Affiliates, generally have existing contracts with hospitals and other facilities. Except as provided by law, neither the General Partner nor its Affiliates are prohibited from engaging in any business or arrangement that may compete with the Partnership. See "Prior Activities," "Conflicts of Interest" and "Competition." There is no assurance that other parties will not, in the future, operate fixed-base or mobile lithotripters in and around the Service Area. To the General Partner's knowledge, no manufacturers are restricted from selling their lithotripters to other parties in the Service Area. Furthermore, the Partnership competes with facilities and individual medical practitioners who offer conventional treatment (e.g., surgery) for kidney stones. Managed care companies generally contract either directly with hospitals or specified providers for lithotripsy services for beneficiaries of their plans. It is not uncommon for managed care companies to have contracts already in place with hospitals or specified providers, and the Partnership will not be able to provide services to beneficiaries of those plans unless it convinces either the managed care companies or the hospitals to switch to the Partnership's services. Limited Partner Restrictions. The Partnership Agreement severely restricts the Limited Partners' ability to own interests in competing equipment or ventures. The enforceability of these noncompetition agreements is generally a matter of state law. No assurance can be given that one or more Limited Partners may not successfully compete with the Partnership. See "Competition." Government Regulation. All facets of the healthcare industry are highly regulated and will become more so in the future. The ability of the Partnership to operate legally and remain profitable may be adversely affected by changes in governmental regulations, including expected changes in reimbursement, Medicare and Medicaid certification requirements, federal and state fraud and abuse laws, including the federal Anti-Kickback Statute, the federal False Claims Act, federal and state self-referral laws, state restrictions on fee splitting and other governmental regulation. See "Regulation." These laws and regulations may adversely affect the economic viability of the Partnership. The laws are broad in scope, and interpretations by courts have been limited. Violations of these laws would subject the General Partner and all Limited Partners to governmental scrutiny and/or felony prosecution and punishment in the form of large monetary fines, loss of licensure, imprisonment and exclusion from Medicare and Medicaid. Certain provisions of Medicare and Medicaid law limit provider ownership and control over the various health care services to which physicians may make Medicare and Medicaid referrals. The primary laws involved are the "Stark II" federal statute prohibiting financial relationships between physicians and certain entities to which they refer patients, and the Anti-Kickback Statute which prohibits compensation in exchange for or to induce referrals. Regarding Stark II, HCFA published proposed Stark II regulations in 1998. Under the proposed regulations, physician Limited Partner referrals of Medicare and Medicaid patients to Contract Hospitals for lithotripsy services would be prohibited. If HCFA adopts the proposed Stark II regulations as final, or if a reviewing court were to interpret the Stark II statute using the proposed regulations as interpretive authority, then the Partnership and its physician Limited Partners would likely be found in violation of Stark II. In such instance, the Partnership and/or its physician Limited Partners may be required to refund any amounts collected from Medicare and Medicaid patients in violation of the statute, and they may be subject to civil monetary penalties and/or exclusion from the Medicare and Medicaid programs. The Anti-Kickback Statute prohibits paying or receiving any remuneration in exchange for making a referral for healthcare services which may be paid for by Medicare, Medicaid or TRICARE (formerly known as CHAMPUS). The law has been broadly interpreted to include any payments which may induce or influence a physician to refer patients. One of the federal agencies that enforces the Anti-Kickback Statute has issued several "safe harbors" which, if complied with, mean the payment or transaction will be deemed not to violate the law. This Offering does not comply with any "safe harbor." There is limited guidance from reviewing courts regarding the application of the broad language of the Anti-Kickback Statute to joint ventures similar to the one described in this Offering. In order to prove violations of the Anti-Kickback law, the government must establish that one or more parties offered, solicited or paid remuneration to induce or reward referrals. The government has said that in certain situations the mere offering of an opportunity to invest in a venture would constitute illegal remuneration in violation of the Anti-Kickback Statute. Although the General Partner believes the structure and purpose of the Partnership are in compliance with the Anti-Kickback Statute, no assurances can be given that government officials or a reviewing court would agree. Violation of the Anti-Kickback Statute could subject the Partnership, the General Partner and the physician Limited Partners to criminal penalties, imprisonment, fines and/or exclusion from the Medicare and Medicaid programs. The federal False Claims Act and similar laws generally prohibit an individual or entity from knowingly and willfully presenting a claim (or causing a claim to be presented) for payment from Medicare, Medicaid or other third party payors that is false and fraudulent. In recent cases, False Claims Act violations have been based on allegations that Stark II or the Anti-Kickback Statute have been violated. In addition to Stark 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. Regarding state law, physicians in Nevada and Utah must give their patients written notice when they refer their patients to health care facilities in which the physicians have an ownership interest. Various licensure requirements must be met for the Partnership to provide mobile lithotripsy services in Utah, Nevada and Idaho. The General Partner has been seeking and will continue to seek to comply with such requirements. See "Regulation - State Regulation". Contract Terms and Termination. The Partnership provides lithotripsy services to three Contract Hospitals pursuant to three separate Hospital Contracts. The Contract Hospitals generally pay the Partnership a fee for each lithotripsy procedure performed at the health care facility; however the Partnership does directly bill and collect for services from some patients or their third-party payors. All of the Hospital Contracts grant the Partnership the exclusive right to provide lithotripsy services at the particular Contract Hospitals. One of the Hospital Contracts provides for automatic renewal on a year-to-year basis. The remaining two Hospital Contracts provide for year-to-year renewals upon the mutual agreement of the parties. All of the Hospital Contracts are terminable without cause at the end of the initial term or any renewal period upon 60 days prior written notice. The General Partner believes it has a good relationship with the Contract Hospitals and does not anticipate any terminations. There is no assurance, however, that fees payable to the Partnership by Contract Hospitals will not decline or that terminations will not occur. The resulting impact of such events would have a material adverse effect on Partnership operations. It is expected that most new lithotripsy service contracts, if any, would have one-year terms and be automatically renewed unless either party elects to cancel prior to the end of the term. In addition, two of the existing contracts have, and any new contracts are expected to have, provisions permitting termination in the event certain laws or regulations are enacted or applied to the contracting parties' business arrangements in a manner deemed materially detrimental to either party. See "Government Regulation" above. In addition, competing vendors may attempt to cause certain Contract Hospitals to contract with them instead of the Partnership. The loss of Contract Hospitals to competition would adversely affect Partnership revenues and such effect could be material. Thus, there is no assurance that Partnership operations as carried on as of the date of this Memorandum or contemplated in the future will continue as herein described or contemplated, and the cancellation of any service contract or the Partnership's inability to secure new ones could have a material negative impact on the financial condition and results of the Partnership. See "Business Activities - Hospital Contracts" and "Risk Factors - Competition." Loss on Dissolution and Termination. Upon the dissolution and termination of the Partnership, the proceeds realized from the liquidation of its assets, if any, will be distributed to its Partners only after satisfaction of the claims of all creditors. Accordingly, the ability of a Limited Partner to recover all or any portion of his investment under such circumstances will depend on the amount of funds so realized and the claims to be satisfied therefrom. See "Summary of the Partnership Agreement - Optional Purchase of Limited Partner Interests." Tax Risks Investors should note that the General Partner anticipates no significant tax benefits associated with the operation of the Lithotripsy System or the Partnership. No ruling will be sought from the Service on the federal income tax consequences of any of the matters discussed in this Memorandum or any other tax issues affecting the Partnership or the Limited Partners. The Partnership is relying upon an opinion of Counsel with respect to certain material United States federal income tax issues. Counsel's opinion is not binding on the Service as to any issue, however, and there is no assurance that any deductions, or the period in which deductions may be claimed, will not be challenged by the Service. Each Investor should carefully review the following risk factors and consult his own tax advisor with respect to the federal, state and local income tax consequences of an investment in the Partnership. THE TAX RISKS SET FORTH IN THIS SECTION ARE NOT INTENDED TO BE AN EXHAUSTIVE LIST OF THE GENERAL OR SPECIFIC TAX RISKS RELATING TO THE PURCHASE OF UNITS IN THE PARTNERSHIP. EACH INVESTOR IS DIRECTED TO THE FULL OPINION OF COUNSEL (APPENDIX C TO THE MEMORANDUM). IT IS STRONGLY RECOMMENDED THAT EACH INVESTOR INDEPENDENTLY CONSULT HIS PERSONAL TAX COUNSEL CONCERNING THE TAX CONSEQUENCES ASSOCIATED WITH HIS OWNERSHIP OF AN INTEREST IN THE PARTNERSHIP. THE CONCLUSIONS REACHED IN THE OPINION ARE RENDERED WITHOUT ASSURANCE THAT SUCH CONCLUSIONS HAVE BEEN OR WILL BE ACCEPTED BY THE SERVICE OR THE COURTS. THIS MEMORANDUM AND THE OPINION DO NOT DISCUSS, NOR WILL COUNSEL BE RENDERING AN OPINION REGARDING, THE ESTATE AND GIFT TAX OR STATE AND LOCAL INCOME TAX CONSEQUENCES OF AN INVESTMENT IN THE PARTNERSHIP. FURTHERMORE, INVESTORS SHOULD NOTE THAT THE ANTICIPATED FEDERAL INCOME TAX CONSEQUENCES OF AN INVESTMENT IN THE PARTNERSHIP MAY BE ADVERSELY AFFECTED BY FUTURE CHANGES IN THE FEDERAL INCOME TAX LAWS, WHETHER BY FUTURE ACTS OF CONGRESS OR FUTURE ADMINISTRATIVE AND JUDICIAL INTERPRETATIONS OF APPLICABLE FEDERAL INCOME TAX LAWS. ANY OF THE FOREGOING MAY BE GIVEN RETROACTIVE EFFECT. Possible Legislative or Other Actions Effecting Tax Consequences. The federal income tax treatment of an investment in an equipment/service oriented limited partnership such as the Partnership may be modified by legislative, judicial or administrative action at any time, and any such action may retroactively affect investments and commitments previously made. The rules dealing with federal income taxation of limited partnerships are constantly under review by the Service, resulting in revisions of its regulations and revised interpretations of established concepts. In evaluating an investment in the Partnership, each Investor should consult with his personal tax advisor with respect to possible legislative, judicial and administrative developments. Disqualification of Employee Benefit Plans. Purchase of Units in the Partnership may cause certain Limited Partners, certain hospitals and out-patient centers, the Partnership, and employees of the foregoing to be treated under Section 414(m) of the Code as being employed in the aggregate by a single employer or "affiliated service group" for purposes of minimum coverage, participation and other employee benefit plan requirements imposed by the Code. In contrast, an employer not affiliated under Section 414(m) need only consider its own employees in determining whether its employee benefit plans satisfy Code requirements. Aggregation of employees could cause the disqualification of the retirement plans of certain Limited Partners and related entities. Aggregation could also require the value of the vested retirement benefit of a highly compensated employee who is a participant in a disqualified plan to be included in his gross income, regardless of whether the employee is a Limited Partner. These rules may adversely affect Investors who are currently involved in a medical practice joint venture, regardless of their purchase of Units in the Partnership. The General Partner and Counsel have been informally advised by officials of the Service that the Service would not likely attempt to apply the affiliated service group rules to the Partnership, nor has the Service applied these rules to similar arrangements in the past. Informal discussions with the Service, however, are not binding on the Service, and there can be no guarantee that the Service will not apply the affiliated service group rules to the Partnership. INVESTORS ARE URGED TO CONSULT WITH THEIR OWN TAX ADVISORS REGARDING THE APPLICABILITY OF THE AFFILIATED SERVICE GROUP RULES DESCRIBED HEREIN TO THE EMPLOYEE BENEFIT PLANS MAINTAINED BY THEM OR THEIR MEDICAL PRACTICES. Partnership Allocations. The Partnership Agreement contains certain allocations of profits and losses that could be reallocated by the Service if it were determined that the allocations did not have "substantial economic effect." On December 31, 1985, the Regulations dealing with the propriety of partnership allocations were finalized. As a general rule, allocations of profits and losses must have "substantial economic effect." Based upon current law, Counsel is of the opinion that, if the question were litigated, it is more probable than not that the allocation of profits and losses set forth in the Partnership Agreement would be sustained for federal income tax purposes. This opinion is subject to certain assumptions and qualifications. Investors are cautioned that the foregoing opinion is based in part upon final regulations which have not been extensively commented upon or construed by the courts. Income in Excess of Distributions. The Partnership Agreement provides that in each year annual Distributions may be made to the Partners. Excluded from the definition of cash available for distribution is the amount of funds necessary to discharge Partnership debts and to maintain certain cash reserves deemed necessary by the General Partner. If Partnership Cash Flow is insufficient to fund expenses and maintain adequate reserves, a Limited Partner could be subject to income taxes payable out of personal funds to the extent of the Partnership's income, if any, attributed to him without receiving from the Partnership sufficient Distributions to pay the Limited Partner's tax with respect to such income. Effect of Classification as Corporation. The Partnership has not and will not seek a ruling from the Service concerning the tax status of the Partnership. It is the opinion of Counsel that the Partnership will be treated as a partnership for federal income tax purposes and not as an association taxable as a corporation unless the Partnership so elects. The Partnership has not and will not make an election to be classified as other than a partnership for federal income tax purposes. Although the Partnership intends to rely on the legal opinion of Counsel, the Service will not be bound thereby. Moreover, there can be no assurance that legislative or administrative changes or court decisions may not in the future result in the Partnership being treated as an association taxable as a corporation, with a resulting greater tax burden associated with the purchase of Units. The General Partner, in order to comply with applicable tax law, will keep the Partnership's books and records and otherwise compute Profits and Losses based on the accrual method, and not the cash basis method, of accounting pursuant to Section 448 of the Code. The accrual method of accounting generally records income and expenses when they are accrued or economically incurred. Passive Income and Losses. The General Partner expects that the Partnership will continue to realize taxable income and not taxable losses during the foreseeable future. Nevertheless, if it instead realizes taxable losses, the use of such losses by the Limited Partners will generally be limited by Code Section 469. Code Section 469 provides limitations for the use of taxable losses attributable to "passive activities." Code Section 469 operates generally to prohibit passive losses from being used against income from active activities. The passive activity rules are extremely complex and Investors are urged to consult their own tax advisors as to their applicability, particularly as they relate to the ability to deduct any losses from the Partnership against other income of the Investor. THE PASSIVE ACTIVITY LOSS RULES WILL AFFECT EACH INVESTOR DIFFERENTLY, DEPENDING ON HIS OWN TAX SITUATION. EACH INVESTOR SHOULD CONSULT WITH HIS OWN TAX ADVISOR TO DETERMINE THE EFFECT OF THESE RULES ON THE INVESTOR IN LIGHT OF THE INVESTOR'S INDIVIDUAL FACTS AND CIRCUMSTANCES. Depreciation. As in the case of its existing equipment, the Partnership will use the Modified Accelerated Cost Recovery System ("MACRS") to depreciate the cost of any newly acquired equipment. Any additions or improvements to the Lithotripsy System will also be depreciated over a five year term using the 200% declining balance method of depreciation, switching to the straight-line method to maximize the depreciation allowance. If purchases or improvements are made after the beginning of any year, only a fraction of the depreciation deduction may be claimed in that year. As under prior law, the 1986 Act provides that the full amount of depreciation on personal property (such as the Lithotripsy System) is recaptured upon disposition (i.e., is taxed as ordinary income) to the extent gain is realized on the disposition. Investors should note that the 1986 Act repealed the investment tax credit for all personal property. Partnership Elections. The Code permits partnerships to make elections for the purpose of adjusting the basis of partnership property on the distribution of property by a partnership to a partner and on the transfer of an interest in a partnership by sale or exchange or on the death of a partner. The general effect of such elections is that transferees of Partnership Interests will be treated, for the purposes of depreciation and gain, as though they had a direct interest in the Partnership's assets, and the difference between their adjusted bases for their Partnership Interests and their allocable portion of the Partnership's bases for its assets will be allocated to such assets based upon the fair market value of the assets at the times of transfers of the Partnership Interests. Any such election, once made, cannot be revoked without the consent of the Service. Under the terms of the Partnership Agreement, the General Partner, in its discretion, may make the requisite election necessary to effect such adjustment in basis. Sale of Partnership Units. Gain realized on the sale of Units by a Limited Partner who is not a "dealer" in Units or in limited partnership interests will be taxed as capital gain, except that the portion of the sales price attributable to inventory items and unrealized receivables will be taxed as ordinary income. "Unrealized receivables" of the Partnership include the Limited Partner's share of the ordinary income that the Partnership would realize as a result of the recapture of depreciation (as described above) if the Partnership had sold Partnership depreciable property immediately before the Limited Partner sold his Partnership Interest. Investors should note that the IRS Restructuring and Reform Act of 1998 generally imposes a maximum tax rate of 20% on net long-term capital gains. To the extent the Partnership has income attributable to depreciation recapture incurred on the sale of a capital asset, such income will be taxed at a maximum rate of 25%. The Revenue Reconciliation Act of 1993 imposed a maximum potential individual income tax rate of 39.6% on ordinary income. Tax Treatment Of Certain Fees and Expenses Paid By The Partnership. Under the Code, a partnership expenditure will, as a general rule, fall into one of the following categories: (1) deductible expenses -- expenditures such as interest, taxes, and ordinary and necessary business expenses which the partnership is entitled to deduct in full when paid or incurred; (2) amortizable expenses -- expenditures which the partnership is entitled to amortize (i.e., deduct ratably) over a fixed period of time; (3) capital expenditures -- expenditures which must be added to the amortization or depreciation base of partnership property (or partnership loans) and deducted over a period of time as the property (or partnership loan) is amortized or depreciated; (4) organization expenses -- expenditures related to the organization of the partnership, which under Section 709 of the Code are amortized over a 60-month period, provided an election to do so is made; (5) syndication expenses -- expenditures paid or incurred in promoting the sale of interests in the partnership, which under Section 709 of the Code must be capitalized but may be neither depreciated, amortized, nor otherwise deducted; (6) partnership distributions -- payments to partners representing distributions of partnership funds, which may be neither capitalized, amortized nor deducted; (7) start-up expenses -- expenditures incurred by a partnership during an initial period, which under Section 195 of the Code may be amortized over a 60-month period; and (8) guaranteed payments to partners -- payments to partners for services or use of capital which are deductible or treated in the other categories of expenditures listed above, provided they meet the applicable requirements. Several amendments to the Code enacted by the Tax Reform Act of 1984 alter established tax accounting principles. One or more of these amendments may affect the federal income tax treatment of fees and expenses, particularly fees paid or incurred by a partnership for services. In particular, Code Section 461(h) now provides that an expense or fee paid to a service provider may not be accrued for federal income tax purposes prior to the time "economic performance" occurs. "Economic performance" occurs as (and no sooner than) the service provider provides the required services. All expenditures of the Partnership must constitute ordinary and necessary business expenses in order to be deducted by the Partnership when paid or incurred, unless the deduction of any such item is otherwise expressly permitted by the Code (e.g., taxes). Expenditures must also be reasonable in amount. The Service could challenge a fee deducted by the Partnership on the ground that such fee is a capital expenditure, which must either be amortized over an extended period or indefinitely deferred, rather than deducted as an ordinary and necessary business expense. The Service could also challenge the deduction of any fee on the basis that the amount of such fee exceeds the reasonable value of the services performed, the goods acquired or the other benefits to the Partnership. Under Section 482 of the Code, the Service has broad discretion to reallocate income, deductions, credits or allowances between entities with common ownership or control if it is determined that such reallocation is necessary to prevent the evasion of taxes or to reflect the income of such entities. The Partnership and the General Partner are entities to which Section 482 applies and it is possible that the Service could contend that certain items should be reallocated in a manner that would change the Partnership's proposed tax treatment of such items. The General Partner believes the payments to it and its Affiliates are customary and reasonable payments for the services rendered by them to the Partnership; however, these fees were not determined by arm's length negotiations. Nothing has come to the attention of Counsel which would give Counsel reasonable cause to question the General Partner's determination. On audit the Service may challenge such payments and contend that the amount paid for the services exceeds the reasonable value of those services. Because of the factual nature of the question of the reasonableness of any particular fee, Counsel cannot express an opinion as to the outcome of the reasonableness of the amount of any fee should the issue be litigated. Syndication Expenses. Section 709 of the Code prohibits a partnership from deducting or amortizing costs that are incurred to promote the sale of partnership interests (i.e., syndication expenses). The Regulations provide definitions for syndication expenses that must be capitalized. Syndication expenses include brokerage fees, registration fees, legal fees for securities advice, accounting fees for preparation of representations to be included in the offering materials, and printing costs of the offering materials. The Partnership intends to treat the entire amount payable to the Sales Agent as a sales commission for selling the Units, as well as certain other fees and expenses allocable to the preparation of this Memorandum and to the offering of the Units in the Partnership, as nondeductible, nonamortizable syndication expenses. Investors will economically bear their respective proportionate share of syndication expenses as these costs likely will be paid out of proceeds from this Offering. These costs will be borne irrespective of their amount, timing and ability of the Partnership to deduct these costs for tax purposes. Management Fee to General Partner. The Partnership pays the General Partner, in its capacity as the Partnership's management agent, a monthly management fee equal to the greater of $8,000 or 7.5% of Partnership Cash Flow per month. The management fee is paid to the General Partner for the time and attention 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 own attorney or tax advisor regarding the effect of state and other local taxes on his personal situation. Other Investment Risks Conflicts of Interest. The activities of the Partnership involve numerous existing and potential conflicts of interest between the Partnership, the General Partner and their Affiliates. See "Compensation and Reimbursement to the General Partner and its Affiliates," "The General Partner," "Competition" and "Conflicts of Interest." No Participation in Management. The General Partner has full authority to supervise the business and affairs of the Partnership pursuant to the Partnership Agreement and the Management Agreement. Limited Partners have no right to participate in the management, control or conduct of the Partnership's business and affairs. The General Partner, its employees and its Affiliates are not required to devote their full time to the Partnership's affairs and intend to continue devoting substantial time and effort to organizing and operating partnerships and other ventures throughout the United States that are similar to the Partnership. The General Partner will continue to devote such time to the Partnership's business and affairs as it deems necessary and appropriate in the exercise of reasonable judgment. The participation by any Limited Partner in the management or control of the Partnership's affairs could render him generally liable for the liabilities of the Partnership that could not be satisfied by assets of the Partnership. See the form of Opinion of Counsel, attached hereto as Appendix C. Limited Partners' Obligation to Return Certain Distributions. Except as provided by other applicable law and provided that a Limited Partner does not participate in the management or control of the Partnership, he will not be liable for the liabilities of the Partnership in excess of his investment, his ratable share of undistributed profits, and any distributions received from the Partnership to the extent that, after giving effect to such distributions, all liabilities of the Partnership, other than liabilities attributable to Partners on account of their Partnership Interests, would exceed the fair value of the Partnership's assets. However, under Utah law, to the extent that cash distributed to a Limited Partner constitutes the return of all or a portion of such Limited Partner's capital contribution as provided by the Act, although such distribution was rightfully made, such Limited Partner will be liable to the Partnership for a period of one year following the receipt of such distribution for any sum not in excess of such return of capital necessary to discharge the Partnership's liabilities to creditors who extended credit to the Partnership during the period the contribution was held by the Partnership. Furthermore, if a Limited Partner receives a return of all or a portion of such Limited Partner's capital contribution in violation of the Partnership Agreement or the Act, such Limited Partner will be liable to the Partnership for a period of six years for the amount of such contribution wrongfully returned to the Limited Partner. Dilution of Limited Partners' Interests. The General Partner has the authority under the Partnership Agreement to cause the Partnership to periodically offer and sell additional limited partnership interests (a "Dilution Offering"). Partnership interests offered in a Dilution Offering must be sold in a manner and according to terms in the best interest of the Partnership, as prescribed in the sole discretion of the General Partner. Upon the sale of interests in the Partnership in a Dilution Offering, the Percentage Interests of the Partners will be proportionately diluted. See "Summary of the Partnership Agreement - Dilution Offerings." Liability Under Limited Partner Loan. Investors personally borrowing funds to finance a portion of their Unit purchase price with the proceeds of a Limited Partner Loan will be directly obligated to the Bank as provided in the Loan Documents. A default under the Limited Partner Loan could result in the foreclosure of the Investor's right to receive any Partnership Distributions as well as the loss of other personal assets unrelated to his Partnership Interest. Prospective Investors should review carefully all the provisions contained in the Loan Commitment and the terms of the Limited Partner Note and Loan and Security Agreement with their counsel and financial advisors. Neither the Partnership nor the General Partner endorses or recommends to the prospective Investors the desirability of obtaining financing from the Bank nor does the summary of the Loan Documents provided herein constitute legal advice. A Limited Partner's liability under a Limited Partner Note continues regardless of whether the Limited Partner remains a limited partner in the Partnership. As a consequence, such liability cannot be avoided by claims, defenses or set-offs the Limited Partner may have against the Partnership, the General Partner or their Affiliates. In addition to the suitability requirements discussed below, any prospective Investor applying for a Limited Partner Loan to fund a portion of his Unit purchase must be approved by the Bank for purposes of his delivery of the Limited Partner Note. The Bank has established its own criteria for approving the creditworthiness of a prospective Investor and has not established objective minimum suitability standards. Instead, the Bank is empowered to accept or reject prospective Investors. Long-term Investment. The General Partner anticipates that the Partnership will continue to operate the Lithotripsy 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, as well as potentially effect a default under any outstanding Limited Partner Loan. Accordingly, the purchase of Units must be considered a long-term and illiquid investment. Arbitrary Offering Price. The offering price of the Units has been determined by the General Partner based upon a valuation of the Partnership conducted by an independent third-party valuation firm, and based on various assumptions that may or may not occur. A copy of this valuation will be made available on request. The offering price of the Units is not, however, necessarily indicative of their value, if any, and no assurance can be given that the Units, if and when transferable, could be sold for the offering price or for any amount. Limitation of General Partner's Liability and Indemnification. The Partnership Agreement provides that the General Partner will not be liable to the Partnership or to any Partner for errors in judgment or other acts or omissions in connection with the Partnership as long as the General Partner, in good faith, determined such course of conduct was in the best interest of the Partnership, and such course of conduct did not constitute willful misconduct or gross negligence. Therefore, the Limited Partners may have a more limited right of action against the General Partner in the event of its misfeasance or malfeasance than they would have absent the limitations in the Partnership Agreement. The Partnership will indemnify the General Partner against losses sustained by the General Partner in connection with the Partnership, unless such losses came as a result of the General Partner's gross negligence or willful misconduct. In the opinion of the SEC, indemnification for liabilities arising out of the Securities Act is contrary to public policy and therefore is unenforceable. Insurance. Prime Medical Services, Inc. ("Prime"), the sole shareholder of the General Partner, maintains active policies of insurance for the benefit of itself and certain affiliated entities covering employee crime, workers' compensation, business and commercial automobile operations, professional liability, inland marine, business interruption, real property and commercial liability risks. These policies include the Partnership, and the General Partner believes that coverage limits of these policies are within acceptable norms for the extent and nature of the risks covered. The Partnership is responsible for its share of premium costs. There are certain types of losses, however, that are either uninsurable or are not economically insurable. For instance, contractual liability is generally not covered under Prime's policies. Should such losses occur with respect to Partnership operations, or should losses exceed insurance coverage limits, the Partnership could suffer a loss of the capital invested in the Partnership and any anticipated profits from such investment. Optional Purchase of Limited Partner Interests. As provided in the Partnership Agreement, the General Partner, and then the Limited Partners, have the option 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 of an interest in a competing venture. The General Partner, in its sole discretion, may elect to assign its priority purchase option rights to the Partnership. A Limited Partner whose Limited Partner Interest is sold, as provided above, or who ceases to be a Limited Partner of the Partnership for any reason, will be further restricted from having a direct or indirect ownership in a competing venture (including the lease or sublease of competing technology) within a certain restricted market area for two years after the disposition of his Partnership Interest. Limited Partners, except in certain circumstances set forth in the Partnership Agreement, are also absolutely prohibited from disclosing Partnership trade secrets and confidential information. Except in the case of death, the option purchase price for the Partnership Interest is equal to the Partner's share of the Partnership's book value, if any, as reflected by such Partner's Capital Account (unadjusted for any appreciation in Partnership assets and as reduced by depreciation deductions claimed by the Partnership for tax purposes). Because losses, depreciation, deductions and distributions reduce capital accounts, and because appreciation in assets is not reflected in capital accounts, the capital account value option purchase price may be nominal in amount. See the Partnership Agreement attached hereto as Appendix A and "Summary of the Partnership Agreement - Optional Purchase of Limited Partner Interests." THE PARTNERSHIP Fayetteville Lithotripters Limited Partnership - Utah I, a Utah limited partnership (the "Partnership") was organized and created under the laws of Utah on June 15, 1988. The general partner of the Partnership is Lithotripters, Inc., a North Carolina corporation (the "General Partner"), and a wholly owned subsidiary of Prime. The General Partner currently holds approximately a 20.3% interest in the Partnership in its capacity as the general partner and the existing limited partners (the "Initial Limited Partners") currently hold the remaining approximately 79.7% interest in the Partnership as limited partners (including approximately a 15.8% limited partner interest held by the General Partner). In the event that all 48 Units offered hereby are sold, the General Partner will hold approximately a 16.2% general partner interest in the Partnership, the Initial Limited Partners will hold a 59.8% limited partner interest in the Partnership (includes adjustment for sale of 4% of General Partner's limited partner interest) and the Investors who purchase the Units offered hereby will hold an aggregate 24% interest in the Partnership. The Percentage Interests of the General Partner and Initial Limited Partners (aggregate) will decrease by approximately 0.10% and 0.40%, respectively, for each Unit sold. All Partners will have their Partnership Interests further reduced in the event of additional dilution offerings. See "Summary of the Partnership Agreement - Dilution Offerings." The principal address of the Partnership and the General Partner is 1301 Capital of Texas Highway, Suite C-300, Austin, Texas 78746. The telephone number of the Partnership and the General Partner is (888) 252-6575. TERMS OF THE OFFERING The Units and Subscription Price Fayetteville Lithotripters Limited Partnership - Utah I, a Utah limited partnership, hereby offers an aggregate of 48 Units of limited partnership interest in the Partnership (the "Units"). Forty Units will be offered directly by the Partnership; and eight Units will be offered by the Partnership as agent for the account of the General Partner from a portion of the General Partner's interest in the Partnership as a limited partner. Each Unit represents an initial 0.5% economic interest in the Partnership. See "Risk Factors - Other Investment Risks - Dilution of Limited Partners' Interests." The sale of the eight Units held by the General Partner will not result in any dilution of the interests of any other Initial Limited Partner. Each Investor may purchase not less than one Unit. The General Partner may, however, in its sole discretion, sell less than one Unit as an additional investment and reject in whole or in part any subscription. The price for each Unit is $9,148 in cash payable at subscription; however, certain qualified Investors may personally borrow funds from a third-party financial institution to pay a portion of the cash purchase price. For the convenience of Investors, the Partnership has arranged for financing a portion of the purchase price with the Bank. See "Terms of the Offering - Limited Partner Loans." The first eight Units will be sold for the account of the General Partner from a portion of its limited partnership interest and the proceeds (net of sales commissions) will be paid to the General Partner. See "Conflicts of Interest." Sales of additional Units in excess of the first eight Units sold will be made for the account of the Partnership and the proceeds therefrom will first be used by the Partnership to pay offering costs and expenses, and the remainder of the proceeds will be used to fund the cost of upgrading the imaging system of the Partnership's Lithostar(TM) (estimated at $56,500). See "Sources and Applications of Funds." The proceeds of this Offering cannot be calculated until the number of Units sold has been determined at the Closing. In the event Offering proceeds allocable to the Partnership remain after funding the costs of the Offering and the upgrade, such proceeds will be kept in Partnership reserves and/or distributed to the Initial Limited Partners. Alternatively, in the event the proceeds of the Offering are insufficient to fund all of the costs described above, it is anticipated that the Partnership will also use Partnership reserves, Cash Flow or the proceeds of debt financing to fund such costs. There is no assurance, however, that debt financing will be available for such purposes. See "Risk Factors - Operating Risks - Partnership Limited Resources and Risks of Leverage." Acceptance of Subscriptions To enable the Bank and the General Partner to make credit and investor decisions, respectively, each prospective Investor must complete and deliver to the General Partner a Purchaser Financial Statement in the form included in the Subscription Packet accompanying this Memorandum, or a substitute financial statement containing the same information as provided therein, and pages one and two of the prospective Investor's most recently filed Form 1040 U.S. Individual Income Tax Return. An Investor that pays the full amount of his Unit purchase price with a check at subscription and whose subscription is received and accepted by the General Partner, will become a Limited Partner in the Partnership, and his subscription funds will be released from escrow to the Partnership. Acceptance by the General Partner of a subscription of an Investor that elects to finance a portion of the Unit purchase price with the proceeds of a Limited Partner Loan is also conditioned upon the Bank's approval of such loan. See "Terms of the Offering - Limited Partner Loans." If the financing Investor is otherwise acceptable to the General Partner, after receipt of the Bank's approval, the General Partner 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 either the General Partner or the Partnership as the case may be. The Investor will become a Limited Partner in the Partnership at the time the Bank releases the proceeds of his Limited Partner Loan to the appropriate party. Subscriptions may be rejected in whole or in part by the General Partner and need not be accepted in the order received. To the extent the General Partner reduces an Investor's subscription as provided above, the Investor's cash Unit purchase price, and the principal amount of his Limited Partner Note, if any, will be proportionately refunded and reduced. Notice of acceptance of an Investor's subscription to purchase Units and his Percentage Interest in the Partnership will be furnished promptly after acceptance of the Investor's Subscription. Limited Partner Loans The purchase price for the Units is payable in cash. The prospective Investor may pay for the Units with personal funds alone or in part with such funds, together with either loan proceeds personally borrowed by the Investor under a Limited Partner Loan or other loan. Financing under the Limited Partner Loans was arranged by the Partnership with the Bank as provided in the Limited Partner Loan Commitment, attached hereto as Appendix B. Prospective Investors should review carefully all the provisions contained in the Limited Partner Loan Commitment and the terms of the Limited Partner Note and Loan and Security Agreement with their counsel and financial advisors. Neither the Partnership nor the General Partner endorses or recommends to the prospective Investors the desirability of obtaining financing from the Bank nor does the summary of the Loan Documents provided herein constitute legal advice. If the prospective Investor wishes to finance a portion of the purchase price of his Units as provided herein, he must deliver to the Sales Agent upon submission of his Subscription Packet an executed Limited Partner Note payable to the Bank and Note Addendum, the form of which are attached as Exhibit A to the Limited Partner Loan Commitment, a Loan and Security Agreement, the form of which is attached as Exhibit B to the Limited Partner Loan Commitment, a Security Agreement, the form of which is attached as Exhibit C to the Limited Partner Loan Commitment and two UCC-1's, the form of which are attached to the Subscription Packet (collectively, the "Loan Documents"). In no event may the maximum amount borrowed per Unit exceed $6,648. The Limited Partner Note is repayable in twelve (12) predetermined installments in the respective amounts set forth in the Limited Partner Loan Commitment. The installments are payable on each January 15th, April 15th, June 15th and September 15th commencing on April 15, 2001 (assuming the Closing occurs prior to December 31, 2000), with a thirteenth (13th) and final installment in an amount equal to the principal balance then owed on the Limited Partner Note and all accrued, unpaid interest thereon due and payable on the third anniversary of the first installment date. Interest accrues at the Bank's "Prime Rate," as the same may change from time to time. The Prime Rate refers to that rate of interest established by the Bank and identified as such in literature published and circulated within the Bank's offices. Such term is used as a means of identifying a rate of interest index and not as a representation by the Bank that such rate is necessarily the lowest or most favorable rate of interest offered to borrowers of the Bank generally. A prospective Investor will have no claim or right of action based on such premise. Under the terms of the Limited Partner Loan, the Bank may extend the maturity date for the Limited Partner Note and increase installment payments in the event interest rates substantially increase. See the form of the Limited Partner Note attached as Exhibit A to the Limited Partner Loan Commitment which is attached hereto as Appendix B. The Limited Partner Note will be secured by the cash flow distributions payable with respect to the prospective Investor's Partnership Interest as provided in the Loan and Security Agreement and the Security Agreement and as evidenced by the UCC-1s. By executing the Loan and Security Agreement, the prospective Investor requests the Bank to extend the Limited Partner Loan Commitment to him if he is approved for a Limited Partner Loan. The Loan and Security Agreement also authorizes (i) the Bank to pay the proceeds of the Limited Partner Note directly to the General Partner or the Partnership, as the case may be; and (ii) the Partnership to remit funds directly to the Bank out of the prospective Investor's share of any Distributions represented by the prospective Investor's percentage Partnership Interest to fund installment payments due on the prospective Investor's Limited Partner Note. In the event the Distributions are insufficient for full payment of any installment due under the Limited Partner Note, the Limited Partner himself shall be liable for the timely payment of any remaining sums due under the Limited Partner Note. See the form of the Loan and Security Agreement attached as Exhibit B to the Limited Partner Loan Commitment which is attached hereto as Appendix B. If the prospective Investor is approved by the Bank and is acceptable to the General Partner, the Escrow Agent will, upon acceptance of the Investor's subscription by the General Partner, release the Loan Documents to the Bank and the Bank will pay the proceeds of the Limited Partner Note to either the General Partner or the Partnership, as appropriate, to fund a portion of the Investor's Unit purchase. The prospective Investor will have substantial exposure under the Limited Partner Note. Regardless of the results of Partnership operations, a prospective Investor will remain liable to the Bank under his Limited Partner Note according to its terms. The Bank can accelerate the entire principal amount of the Limited Partner Note in the event the Bank in good faith believes the prospect of timely payment or performance by the prospective Investor is impaired or the Bank otherwise in good faith deems itself or its collateral insecure and upon certain other events, including, but not limited to, nonpayment of any installment. The Bank may also request additional collateral in the event it deems the Limited Partner Note insufficiently secured. A Limited Partner's liability under a Limited Partner Note also continues regardless of whether the Limited Partner remains a limited partner in the Partnership. A Limited Partner's liability under a Limited Partner Note is directly with the Bank. As a consequence, such liability cannot be avoided by claims, defenses or set-offs the Limited Partner may have against the Partnership, the General Partner or their Affiliates. In addition to the suitability requirements discussed below, the prospective Investor must be approved by the Bank for purposes of his delivery of the Limited Partner Note. The Bank has established its own criteria for approving the creditworthiness of a prospective Investor and has not established objective minimum suitability standards. Instead, the Bank is empowered to accept or reject prospective Investors. See "Risk Factors - Other Investment Risks - Liability Under Limited Partner Loan." Subscription Period; Closing The subscription period will commence on the date hereof and will terminate at 5:00 p.m., Eastern time, on October 17, 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 for the account of the Partnership 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 Units for the account of the General Partner are being offered pursuant to an exemption from the registration requirements of the Securities Act of 1933, as amended, provided by Section 4(1) thereof, as amended, and exemptions from state registration provided by Section 61-1-14(2) of the Utah Code Annotated, 1953, as amended, Section 30-1435(1)(b) of the Idaho Code of 1946, as amended, Section 90.530(11) of the Nevada Revised Statutes, as amended. 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 Utah, Idaho and Nevada who it reasonably believes meet the definition of "accredited investor" as that term is defined in Rule 501 under the Securities Act, but reserves the right to sell up to 35 Investors who are nonaccredited investors. Certain institutions and the following individuals are "accredited investors": (1) An individual whose net worth (or joint net worth with his or her spouse) exceeds $1,000,000 at the time of subscription; (2) An individual who has had an individual income in excess of $200,000 in each of the two most recent fiscal years and who reasonably expects an individual income in excess of $200,000 in the current year; or (3) An individual who has had with his or her spouse a joint income in excess of $300,000 in each of the two most recent fiscal years and who reasonably expects a joint income in excess of $300,000 in the current year. Individual Investors must also be at least 21 years old and otherwise duly qualified to acquire and hold partnership interests. The General Partner reserves the right to refuse to sell Units to any person, subject to federal and applicable state securities laws. Each Investor must make an independent judgment, in consultation with his own counsel, accountant, investment advisor or business advisor, as to whether an investment in the Units is advisable. The fact that an Investor meets the Partnership's suitability standards should in no way be taken as an indication that an investment in the Units is advisable for that Investor. It is anticipated that suitability standards comparable to those set forth above will be imposed by the Partnership in connection with resales, if any, of the Units. Transferability of Units is severely restricted by the Partnership Agreement and the Subscription Agreement. See "Summary of the Partnership Agreement - Restrictions on Transfer of Partnership Interests." Investors who wish to subscribe for Units must represent to the General Partner that they meet the foregoing standards by completing and delivering to the Sales Agent a Purchaser Questionnaire in the form included in the Subscription Packet. Each Purchaser Representative, if any, acting on behalf of an Investor in connection with this Offering must complete and deliver to the Sales Agent a Purchaser Representative Questionnaire (a copy of which is available upon request to the General Partner). How to Invest Investors that meet the qualifications for investment in the Partnership and who wish to subscribe for Units may do so by following the instructions contained in the Subscription Packet accompanying this Memorandum. All information provided by Investors will be kept confidential and not disclosed except to the Partnership, the General Partner, the Bank and their respective counsel and Affiliates and, if required, to governmental and regulatory authorities. Restrictions on Transfer of Units The Units have not been registered under the Securities Act or under any state securities laws and holders of Units have no right to require the registration of such Units or to require the Partnership to disclose publicly information concerning the Partnership. Units can be transferred only in accordance with the provisions of, and upon satisfaction of, the conditions set forth in the Partnership Agreement. Among other things, the Partnership Agreement provides that no assignment of Units may be made if such assignment could not be effected without registration under the Securities Act or state securities laws. Moreover, the assignment generally must be made to an individual approved by the General Partner who meets the suitability requirements described in this Memorandum. Assignors of Units will be required to execute certain documents, in form and substance satisfactory to the General Partner, instructing it to effect the assignment. Assignees of Units may also, in the discretion of the General Partner, be required to pay all costs and expenses of the Partnership with respect to the assignment. Any assignment of Units or the right to receive Partnership Distributions in respect of Units will not release the assignor from any liabilities connected with the assigned Units, including liabilities under any Limited Partner Loan. Such event may constitute a default under a Limited Partner Note. An assignee, whether by sale or otherwise, will acquire only the rights of the assignor in the profits and capital of the Partnership and not the rights of a Limited Partner, unless such assignee becomes a substituted Limited Partner. An assignee may not become a substituted Limited Partner without (i) either the written consent of the assignor and the General Partner, or the consent of all of the Limited Partners (except the assignor Limited Partner) and the General Partner; (ii) the submission of certain documents; and (iii) the payment of expenses incurred by the Partnership in effecting the substitution. An assignee, regardless of whether he becomes a substituted Limited Partner, will be subject to and bound by all the terms and conditions of the Partnership Agreement with respect to the assigned Units. See "Summary of the Partnership Agreement - Restrictions on Transfer of Partnership Interests." PLAN OF DISTRIBUTION Subscriptions for Units will be solicited by MedTech Investments, Inc., the Sales Agent, which is an Affiliate of the General Partner. The Sales Agent has entered into a Sales Agency Agreement with the Partnership and the General Partner pursuant to which the Sales Agent has agreed to act as exclusive agent for the placement of the Units on a "best efforts" any or all basis. The Sales Agent is not obligated to purchase any Units. The Sales Agent is a North Carolina Corporation that was formed on December 23, 1987, and became a member of the National Association of Securities Dealers on March 15, 1988. The Sales Agent will be engaged in other similar offerings on behalf of the General Partner and its Affiliates during the pendency of this Offering and in the future. The Sales Agent is a wholly owned subsidiary of Prime, which also owns all the stock of the General Partner. Investors should note the material relationship between the Sales Agent and the General Partner, and are advised that the relationship creates conflicts in the Sales Agent's performance of its due diligence responsibilities under the federal securities laws. As compensation for its services, the Sales Agent will receive a commission equal to $150 for each Unit sold. No other commissions will be paid in connection with this Offering. Subject to the conditions as provided above, the Sales Agent may be reimbursed by the Partnership for its out-of-pocket expenses associated with the sale of the Units in an amount not to exceed $5,000. The Partnership has agreed to indemnify the Sales Agent against certain liabilities, including liabilities under the Securities Act. The Partnership will not pay the fees of any purchaser representative, financial advisor, attorney, accountant or other agent retained by an Investor in connection with his decision to purchase Units. The subscription period will commence on the date hereof and will terminate at 5:00 p.m., Eastern time, on October 17, 2000, (or earlier, in the discretion of the General Partner), unless extended at the discretion of the General Partner for an additional period not to exceed 180 days. See "Terms of the Offering - Subscription Period; Closing." The Partnership and General Partner collectively seek by this Offering to sell a maximum of 48 Units for a maximum of an aggregate of $439,104 in cash ($431,904 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 General Partner (and approved by the Bank in the case of financed purchases of Units), the General Partner rejects the subscription or the Offering is terminated. Upon the receipt and acceptance of an Investor's subscription, which, if the Investor intends to finance a portion of the Unit purchase price with a Limited Partner Loan, will also be conditioned upon the Bank's approval of such loan, the Investor will be admitted to the Partnership as a Limited Partner. Upon admission as a Limited Partner, the Investor's subscription funds will be released from escrow to the either the General Partner or the Partnership, as appropriate, and the Loan Documents, if any, will be released to the Bank which will pay the proceeds from the Limited Partner Note to the either the General Partner or the Partnership as appropriate. In the event a subscription is not accepted, all subscription funds (without interest), the Loan Documents and other subscription documents held in escrow will be promptly returned to the rejected Investor. A subscription may be rejected in part, in which case a portion of the cash subscription funds (without interest) and any Limited Partner Note will be returned to the Investor. BUSINESS ACTIVITIES General The Partnership was formed to (i) acquire one or more Lithotripsy Systems and operate them at various locations in the Service Area; (ii) improve the provision of health-care in the Partnership's Service Area by taking advantage of both the technological innovations inherent in the Lithotripsy System and the Partnership's quality assurance and outcome analysis programs; and (iii) make cash distributions to its Partners from revenues generated by the operation of the Lithotripsy System. The Partnership has contracted with three hospitals and medical centers to provide lithotripsy services to their patients. Treatment Methods for Kidney Stone Disease Urolithiasis, or kidney stone disease, affects an estimated 600,000 persons per year in the United States. The exact cause of kidney stone formation is unclear, although it has been attributed to diet, climate, metabolism and certain medications. Approximately 75% of all urinary stones pass spontaneously, usually within one to two weeks, and require little or no clinical or surgical intervention. All other kidney stones, however, require some form of medical or surgical treatment. A number of methods are currently used to treat kidney stones. These methods include drug therapy, cystoscopic procedures, endoscopic procedures, laser procedures, open surgery, percutaneous lithotripsy and extracorporeal shock wave lithotripsy. The type of treatment a urologist chooses depends on a number of factors such as the size of the stone, its location in the urinary system and whether the stone is contributing to other urinary complications such as blockage or infection. The extracorporeal shock wave lithotripter, introduced in the United States from West Germany in 1984, has dramatically changed the course of kidney stone disease treatment. The General Partner estimates that currently up to 95% of all kidney stones that require treatment can be treated by lithotripsy. Lithotripsy involves the use of shock waves to disintegrate kidney stones noninvasively. The Lithotripsy System The Partnership currently operates a Lithostar(TM) which was acquired new and first placed in service in 1990. The Lithostar(TM) was developed as a cooperative venture between Siemens and the Urological Clinic at Johannes Gutenberg University in Mainz, West Germany. As a part of this venture, a Lithostar(TM) prototype was installed in March 1986 at the Urological Clinic at the University of Mainz with successful results. On November 18, 1987 the Lithostar(TM) was unanimously recommended for approval by the FDA's advisory panel of experts for urology devices. On September 30, 1988 the Lithostar(TM) received FDA premarket approval for use in the United States for renal lithotripsy. On April 18, 1989, the FDA approved the Lithostar(TM) for mobile lithotripsy. On July 1, 1996, the FDA approved a new higher intensity shock-head system for the Lithostar(TM) which has since been installed in the Lithostar(TM) used by the Partnership. Currently, the General Partner estimates that more than 400 Lithostar(TM) systems are performing lithotripsy procedures in over 20 countries throughout the world. All components of the Lithostar(TM) are manufactured by Siemens, a diversified multinational company. The Lithostar(TM) was designed with a view towards substantially improving early lithotripsy technology. See "Business Activities - Treatment Methods for Kidney Stone Disease." Technological improvements incorporated into the Lithostar(TM) include an improved work station, a shock-wave component that has eliminated the need for both water bath treatment and disposable electrodes, and an excellent stone localization and imaging system. Based upon its experience in its affiliated lithotripsy ventures, the General Partner believes that most patients can be treated with the Lithostar(TM) without anesthesia of any kind. The General Partner also believes that Lithostars(TM) upfitted with the higher intensity shock-head system experience somewhat shorter treatment durations. Based upon its experience with over 30 Lithostars(TM) in this and other limited partnerships sponsored by the General Partner and its Affiliates, the General Partner has found that the Lithostar(TM) can fragment most kidney stones without anesthesia, cystoscopy or the insertion of ureteral catheters, and the General Partner believes that overall the Lithostar(TM) has been an effective alternative for the treatment of patients. However, the General Partner believes that in order to increase the efficiency of the Lithostar(TM), thereby improving the Partnership's overall quality of care, the Lithostar(TM)'s imaging system must be upgraded. During the past year, an upgrade to the Lithostar(TM)'s imaging system has become available and the General Partner, through its limited direct experience with its Affiliates, believes that such an upgrade significantly enhances the imaging capabilities of the Lithostar(TM), and thus the overall efficiency of the lithotripter. Upon the successful closing of the Offering, the Partnership will contract with Servicetrends, Inc., a lithotripsy maintenance provider, to replace the lithotripter's image intensifiers, install new digital x-ray cameras and pickup tubes and replace associated power supplies. In addition, Servicetrends, Inc. may replace existing computer monitors. The estimated cost of the imaging upgrade is $56,500. The General Partner does not anticipate that the upgrade will require any downtime for the Lithotripsy System. In 1997 the Partnership replaced the initial mobile coach which housed the Lithostar(TM) with a new self-propelled mobile coach (the "Coach") manufactured by AK Associates, L.L.C., an Affiliate of the General Partner. The Coach has been completely upfitted for the Lithostar(TM) and its clinical operations. The Coach is powered by a 350 HP Cummins engine and is 41' 8" long, 8' wide and 13' 6" high. The Coach is divided into two sections: a staff office and a patient treatment room. The Coach is equipped with a 20 kw generator, complete HVAC, a small plumbing system, a humidifier system, two Wolf film viewers and complete thermal insulation. The Coach is fully wired for electricity and lighting. Four hydraulic stabilizing stands are provided, one at each corner of the unit, to level the Coach at each site. In addition, the patient treatment room is shielded to prevent leakage of microwave signals that may interfere with local or government transmitting bands. 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. Acquisition of Additional Assets If in the future the General Partner determines that it is in the best interest of the Partnership to acquire (i) one or more fixed base or mobile lithotripsy systems in addition to the Lithotripsy System, or (ii) any other assets related to the provision of lithotripsy services, the General Partner has the authority (without obtaining the Limited Partners' consent) to establish reserves or borrow funds on behalf of the Partnership to acquire such assets, and may use Partnership assets and revenues to secure and repay such borrowings. The acquisition of such assets likely would result in higher operating costs for the Partnership. The General Partner does not anticipate acquiring additional Partnership assets unless projected Partnership Cash Flow or proceeds from a Dilution Offering are sufficient to finance such acquisitions. No Limited Partner would be personally liable on any Partnership indebtedness without such Limited Partner's written consent. There is no assurance that additional financing would be available to the Partnership to acquire additional assets or to fund any additional working capital requirements. Any additional borrowing by the Partnership will serve to increase the risks to the Partnership associated with leverage. See "Risk Factors - Operating Risks - Partnership Limited Resources and Risks of Leverage." Hospital Contracts The Partnership has entered into three Hospital Contracts with three Contract Hospitals to operate the Lithotripsy System at the Contract Hospitals. The Contract Hospitals are: Bannock Regional Medical Center Salt Lake Regional Medical Center St. Marks Hospital - HCA All of the Hospital Contracts grant the Partnership the exclusive right to deliver lithotripsy services to the relevant Contract Hospital. The Hospital Contracts require the Partnership to make a lithotripter available at the facilities as agreed to by the Contract Hospital and the Partnership. The Partnership generally also provides a technician and certain ancillary services such as scheduling necessary for the lithotripsy procedures. The Contract Hospitals generally pay the Partnership a fee for each lithotripsy procedure performed at that health care facility; however, the Partnership does directly bill and collect for services from some patients or their third-party payors. One of the Hospital Contracts provides for automatic renewal on a year-to-year basis, and the remaining two contracts provide for year-to-year renewals upon the mutual agreement of the parties. All of the Hospital Contracts may be terminated without cause upon 60 days or less written notice by either party prior to any renewal date. The General Partner believes it has a good relationship with the Contract Hospitals. There is no assurance, however, that one or more of the Hospital Contracts will not terminate in the future. See "Risk Factors - Operating Risks - Contract Terms and Termination." The Partnership is attempting to negotiate similar agreements to the existing Hospital Contracts with additional treatment centers in the Service Area. There can be no assurance that the Partnership will be able to enter into any new agreements. Reimbursement Agreements. Prime and the General Partner have negotiated third-party reimbursement agreements with certain national and local commercial third-party payors. The national agreements are negotiated by Prime and the General Partner and apply to all the lithotripsy partnerships which are Affiliates of the General Partner, including the Partnership, to the extent such entities directly bill and collect from patients or their third-party payors. Some of the national and local payors have agreed to pay a fixed price for lithotripsy services. For the most part, the agreements may be terminated by either party on 60 to 120 days' notice. The national and local reimbursement agreements that have been negotiated or renegotiated in the past two to four years almost entirely provide for lower reimbursement rates for lithotripsy services than the older agreements. Operation of the Lithotripsy System It is anticipated that the Partnership will continue to provide services under the Hospital Contracts and similar arrangements. See "Business Activities - Hospital Contracts" and "Risk Factors - Operating Risks - Contract Terms and Termination." Qualified physicians who make appropriate arrangements with Contract Hospitals receiving lithotripsy services pursuant to the Hospital Contracts and other lithotripsy service agreements may treat their own patients using the Lithotripsy System after they have received any necessary training required by the rules of such Contract Hospital. The Partnership may also make arrangements to make the Lithotripsy System available to qualified physicians (including, but not limited to, qualified physician Limited Partners) desiring to treat their own patients after they have received any necessary training. The General Partner will endeavor to the best of its abilities to require that physicians using the General Partner's Lithotripsy System comply with the Partnership's quality assurance and outcome analysis programs in order to maintain the highest quality of patient care. In addition, the Partnership reserves the right to request that (i) physicians (or members of their practice groups) treat only their own patients with the Lithotripsy System; and (ii) physician Limited Partners disclose to their patients in writing their financial interest in the Company prior to treatment, if it determines that such practices are advisable under applicable law. The latter disclosure is required under Utah and Nevada law. See "Regulation." The treating qualified physician will be solely responsible for billing and collecting on his own behalf the professional service component of the treatment procedure. Owning an interest in the Partnership is not a condition to using the Lithotripsy System. Thus, local qualified physicians who are not Limited Partners will be given the same opportunity to treat their patients using the Lithotripsy System as provided above. Management The Partnership has entered into a management agreement (the "Management Agreement") with the General Partner whereby the General Partner is obligated to supervise and coordinate the management and administration of the operation of the Lithotripsy System on behalf of the Partnership in exchange for a monthly management fee equal to the greater of 7.5% of Partnership Cash Flow per month or $8,000 per month. See "Compensation and Reimbursement to the General Partner and its Affiliates." The General Partner's services under the Management Agreement include arranging for the training of physicians in the proper use of the lithotripsy equipment, monitoring technological developments in renal lithotripsy and advising the Partnership of these developments, arranging education programs for qualified physicians who use the lithotripsy equipment and providing advertising, billing, accounts collection, equipment maintenance, medical supply inventory and other incidental services necessary for the efficient operation of the Lithotripsy 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 of its second 5-year renewal term and will be automatically renewed for an additional five-year term unless terminated by the Partnership or the General Partner. The General Partner has also appointed a local Medical Director who assists in supervising the operation of the Lithotripsy System. The General Partner consults with the Medical Director from time to time, as needed on matters including the Partnership's quality assurance program, utilization review, outcome analysis, patient scheduling and certain Partnership expenditures. Employees The Partnership employs as full time employees two registered technicians and two registered nurses. Prime provides group medical, dental, long-term disability, accidental death and dismemberment and life insurance benefits. The Partnership also provides paid holidays, sick leave, and vacation benefits and other miscellaneous benefits including bereavement, military reserves, jury duty and educational assistance benefits. FINANCIAL CONDITION OF THE PARTNERSHIP Set forth on the following pages are the Partnership's internally prepared accrual based (i) Income Statements for the six-month periods ended June 30, 2000 and June 30, 1999, and the years ended December 31, 1997, December 31, 1998 and December 31, 1999; (ii) Balance Sheets as of June 30, 2000, June 30, 1999, December 31, 1997, December 31, 1998 and December 31, 1999; (iii) Cash Flow Statements for the six-month periods ended June 30, 2000 and June 30, 1999, and the years ended December 31, 1997, December 31, 1998 and December 31, 1999; and (iv) Statements of Partner's Equity for the six-month periods ended June 30, 2000 and June 30, 1999, and the years ended December 31, 1997, December 31, 1998 and December 31, 1999. Past financial performance is not necessarily indicative of future performance. There is no assurance that the Partnership will be able to maintain its current revenues or earnings. FAYETTEVILLE LITHOTRIPTERS LIMITED PARTNERSHIP - UTAH I INCOME STATEMENTS* Period ended June 30, Years Ended December 31, --------------------- ------------------------- 2000 1999 1999 1998 1997 ------------- -------------- --------------- ---------------- --------------- Revenues $1,668,876 $1,721,584 $3,188,808 $3,738,287 $4,036,328 Operating Expenses Employee compensation and benefits 176,746 197,238 396,464 344,050 385,813 Equipment maintenance and repairs 46,835 46,457 98,153 126,639 141,228 Depreciation and amortization 42,764 40,014 77,822 218,504 192,901 Management fees 91,835 123,639 233,243 195,850 226,360 Overhead allocation 74,248 57,415 129,317 125,078 180,948 Other operating expenses 23,836 66,504 165,749 223,163 214,721 ------------- -------------- --------------- ---------------- --------------- Total operating expenses 456,264 531,267 1,100,748 1,233,284 1,341,971 ------------- -------------- --------------- ---------------- --------------- Operating income 1,212,612 1,190,317 2,088,060 2,505,003 2,694,357 Other income (expense) Interest and other income, net 8,972 8,582 18,849 24,814 23,867 Interest expense (4,852) 0 (1,322) (29) Gain (Loss) on sale of Assets 1,613 1,613 10,302 ------------- -------------- --------------- ---------------- --------------- Total other income (expense) 4,120 10,195 19,140 35,116 23,838 ------------- -------------- --------------- ---------------- --------------- Net income $1,216,732 $1,200,512 $2,107,200 $2,540,119 $2,718,195 ============= ============== =============== ================ ===============
*See notes to financial statements attached hereto as Appendix D FAYETTEVILLE LITHOTRIPTERS LIMITED PARTNERSHIP - UTAH I BALANCE SHEETS* June 30, June 30, December 31, December 31, December 31, 2000 1999 1999 1998 1997 --------------- ---------------- --------------- ---------------- --------------- ASSETS Cash 225,704 227,737 969,152 749,990 1,149,807 Accounts receivable, net 1,212,347 1,577,826 1,153,574 1,568,660 1,372,753 Other current assets 9,682 3,420 6,035 0 10,464 --------------- ---------------- --------------- ---------------- --------------- Total current assets 1,447,733 1,808,983 2,128,761 2,318,650 2,533,024 --------------- ---------------- --------------- ---------------- --------------- Equipment 1,738,381 1,683,322 1,683,322 2,139,802 1,781,615 Accumulated depreciation (1,305,012) (1,224,440) (1,262,249) (1,630,322) (1,411,818) --------------- ---------------- --------------- ---------------- --------------- 433,369 458,882 421,073 509,480 369,797 --------------- ---------------- --------------- ---------------- --------------- Other assets 0 0 0 0 0 --------------- ---------------- --------------- ---------------- --------------- Total assets 1,881,102 2,267,865 2,549,834 2,828,130 2,902,821 =============== ================ =============== ================ =============== LIABILITIES Accounts payable 123,728 100,016 131,406 112,591 95,396 Current portion of long-term debt 279 21,110 10,793 0 0 Accrued expenses 167,878 114,943 91,151 79,552 111,557 Distributions payable 0 0 910,000 657,000 1,100,000 --------------- ---------------- --------------- ---------------- --------------- Total current liabilities 291,885 236,069 1,143,350 849,143 1,306,953 --------------- ---------------- --------------- ---------------- --------------- Long-term debt 55,443 55,443 55,443 0 0 PARTNERS' EQUITY Capital contributions 140,167 222,166 222,166 325,313 325,313 Syndication costs (35,750) (35,750) (35,750) (35,750) (35,750) Distributions paid (29,816,000) (27,332,000) (28,864,000) (26,232,000) (24,075,000) Accumulated earnings 31,245,357 29,121,937 30,028,625 27,921,424 25,381,305 ------------- -------------- ------------- -------------- ------------- Total partners' equity 1,533,774 1,976,353 1,351,041 1,978,987 1,595,868 --------------- ---------------- --------------- ---------------- -------------- Total liabilities and partners' equity 1,881,102 2,267,865 2,549,834 2,828,130 2,902,821 =============== ================ ============== ================ ==============
*See notes to financial statements attached hereto as Appendix D FAYETTEVILLE LITHOTRIPTERS LIMITED PARTNERSHIP - UTAH I STATEMENTS OF CASH FLOWS* Period ending June 30, Years ended December 31, 2000 1999 1999 1998 1997 ------------- ------------- -------------- ------------- ------------- Cash flows from Operating Activities: Net income 1,216,732 1,200,512 2,107,200 2,540,119 2,718,195 Adjustments to reconcile net income Depreciation and amortization 42,764 40,014 77,822 218,504 192,901 Gain (Loss) on sale of assets 0 (1,613) (1,613) (10,302) Change in operating assets and liabilities: Accounts receivable (58,774) (9,167) 415,086 (195,907) (249,382) Other current assets (3,647) (3,420) (6,035) 10,464 (4,176) Accounts payable (7,678) (12,575) 18,815 17,195 52,340 Accrued expenses 76,727 35,391 11,599 (32,005) 85,571 ------------- ------------- -------------- ------------- ------------- Net cash provided by operating activities 1,266,124 1,249,142 2,622,874 2,548,068 2,795,449 ------------- ------------- -------------- ------------- ------------- Cash flows from Investing Activities: Other assets acquired Proceeds from sale of assets 0 12,199 12,199 10,302 Purchase of equipment, furniture and (55,059) 0 0 (358,187) 0 Fixtures ------------- ------------- -------------- ------------- ------------- Net cash (used in) investing activities (55,059) 12,199 12,199 (347,885) 0 ------------- ------------- -------------- ------------- ------------- Cash flows from Financing Activities: Funds borrowed from banks 0 76,553 76,553 0 0 Funds used to pay bank debt (10,514) 0 (10,317) 0 0 Capital contributed by partners 0 0 0 0 227,500 Purchase of partners' interests (81,999) (103,147) (103,147) 0 0 Distributions to partners (1,862,000) (1,757,000) (2,379,000) (2,600,000) (2,750,000) ------------- ------------- -------------- ------------- ------------- Net cash (used in) financing activities (1,954,513) (1,783,594) (2,415,911) (2,600,000) (2,522,500) ------------- ------------- -------------- ------------- ------------- Net increase (decrease) in cash during the period (743,448) (522,253) 219,162 (399,817) 272,949 ------------- ------------- -------------- ------------- ------------- Cash, beginning of period 969,152 749,990 749,990 1,149,807 876,858 ------------- ------------- -------------- ------------- ------------- Cash, end of period 225,704 227,737 969,152 749,990 1,149,807 ============ ============= ============== ============= =============
*See notes to financial statements attached hereto as Appendix D FAYETTEVILLE LITHOTRIPTERS LIMITED PARTNERSHIP - UTAH I STATEMENTS OF PARTNERS' EQUITY* Period ended June 30, Years ended December 31, 2000 1999 1999 1998 1997 --------------- -------------- -------------- --------------- -------------- Beginning partners' equity $1,351,041 $1,978,987 $1,978,987 $1,595,868 $1,650,173 Capital contributions 0 0 0 0 227,500 Purchase of partners' interests (81,999) (103,146) (103,146) 0 0 Net income 1,216,732 1,200,512 2,107,200 2,540,119 2,718,195 Distributions to partners (952,000) (1,100,000) (2,632,000) (2,157,000) (3,000,000) --------------- -------------- -------------- --------------- -------------- Ending partners' equity $1,533,774 $1,976,353 $1,351,041 $1,978,987 $1,595,868 =============== ============== ============== =============== ==============
*See notes to financial statements attached hereto as Appendix D MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE RESULTS OF OPERATIONS Six Months Ended June 30, 2000 and June 30, 1999 Revenues. Total revenues decreased $52,708 (3%) for the six months ended June 30, 2000 compared to the same period in 1999 primarily due to a 5% decrease in the number of procedures performed and a 2% increase in net revenue per case. Operating Expenses. Operating expenses decreased by $75,003 (14%) for the six months ended June 30, 2000 compared to the same period in 1999 primarily due to a decrease of $20,492 in employee compensation and benefits due to a decreased need for driver salaries, a decrease of $31,804 in management fees, a decrease of $42,668 in other operating expenses primarily due to decreases in travel costs and property taxes and an offsetting increase of $16,833 in overhead expense due to an increase in overhead expenses incurred and allocated. Other Income (Expense). Total other income (expense), net decreased by $6,075 primarily due to an increase of $4,852 in interest expense due to the partnership assuming a note from a partner that was bought out in 1999. Year Ended December 31, 1999 and December 31, 1998 Revenues. Total revenues decreased $549,479 (15%) for the year ended December 31, 1999 compared to the same period in 1998 primarily due to a 10% decrease in the number of procedures performed and an 6% decrease in net revenue per case. Operating Expenses. Operating expenses decreased by $132,536 (11%) for the year ended December 31, 1999 compared to the same period in 1998 primarily due to a decrease of $140,682 in depreciation expense due to some of the equipment being fully depreciated in 1999, an increase of 52,414 in employee compensation and benefits due to an increase in incentive compensation, and a decrease of $57,414 in other operating expenses primarily due to the rental of a loaner unit while a new trailer was under construction in 1998. Other Income (Expense). Total other income (expense), net decreased by $15,976 due to a decrease of $5,965 in interest income, an increase of $1,322 in interest expense due to the partnership assuming a note from a partner that was bought out in 1999 and a decrease in gain on sale of assets of $8,689. Year Ended December 31, 1998 and December 31, 1997 Revenues. Total revenues decreased $298,041 (7%) for the year ended December 31, 1998 compared to the same period in 1997 due to a 1% decrease in the number of procedures performed and a 7% decrease in net revenue per case. Operating Expenses. Operating expenses decreased by $108,687 (8%) for the year ended December 31, 1998 compared to the same period in 1997, primarily due to a decrease of $41,763 in employee compensation and benefits and a decrease of $55,870 in overhead allocation due to lower overhead costs incurred. Other Income (Expense). Total other income (expense), net increased by $11,278 primarily due to an increase of $10,302 in gain on sale of assets. [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 48 Units are sold and their anticipated and estimated uses. - -------------------------------------------------------------------------- Sources of Funds Sale of 96 Units Offering Proceeds(1) $ 439,104 ( 100.00%) -------- -------- TOTAL SOURCES $ 439,104 ( 100.00%) ======== ======= Application of Funds Syndication Costs(2) $ 36,200 ( 8.24%) Lithostar(TM)Upgrade(3) $ 56,500 ( 12.87%) General Partner Sales Proceeds(4) $ 71,984 ( 16.39%) Capital Reserve(5) $274,420 ( 62.50%) -------- ------- TOTAL APPLICATIONS $439,104 ( 100.00%) ======= ======= - -------------------------------------------------------------------------- Notes to Sources and Applications of Funds Table (1) Assumes all 48 Units are purchased by qualified Investors. (2) Includes $7,200 in commissions payable to the Sales Agent, (i.e., $6,000 for Units sold for the account of the Partnership and $1,200 for Units sold for the account of the General Partner) reimbursement of $5,000 to the Sales Agent for out-of-pocket expenses incurred in selling the Units and $24,000 in legal and accounting costs associated with the preparation of this Memorandum. (3) It is anticipated that after the Closing of this Offering, the Partnership will use the Offering proceeds allocable to the sale of its Units for upgrading the Partnership's Lithostar(TM) (estimated up to $56,500). See "Business Activities - the Lithotripsy System". (4) The first eight Units sold will be for the account of the General Partner and the proceeds (net of sales commissions up to $1,200) will be paid to the General Partner. Sales of additional Units will be made for the account of the Partnership and the proceeds will be used to pay the costs of the Offering and the purposes set forth under "Business Activities - The Lithotripsy System(TM) ." See Notes (2) and (3) above. The Partnership will act as the transfer agent for Units sold for the account of the General Partner. (5) The proceeds of this Offering cannot be accurately determined until the Closing has occurred and the number of Units sold has been calculated. In the event Offering proceeds allocable to the Partnership remain after funding the costs of the Offering and the upgrade, such proceeds will be kept in Partnership reserves and/or distributed to the Initial Limited Partners. THE GENERAL PARTNER General. The General Partner of the Partnership is Lithotripters, Inc., a North Carolina corporation formed in November 1987 for the purpose of sponsoring medical service limited partnerships in the United States (the "General Partner"). On April 26, 1996, the General Partner became a wholly-owned subsidiary of Prime. The principal executive office of the General Partner is located at 1301 Capital of Texas Highway, Suite C-300, Austin, Texas 78746, (888) 252-6575. The General Partner's assets are illiquid in nature. The primary assets of the General Partner are equity interests in other medical ventures. The General Partner also has substantial potential financial exposure as a guarantor of certain Prime indebtedness. Further information regarding the financial condition of the General Partner will be made available to Investors upon request. Management. The following table sets forth the names and respective positions of the individuals serving as executive officers and directors of the General Partner, many of whom were shareholders of the General Partner prior to its acquisition by Prime and/or are current shareholders and/or management personnel of Prime. Name Office Joseph Jenkins, M.D. President, Chief Executive Officer and Director Kenneth S. Shifrin Director Cheryl Williams Vice President and Director David Vela, M.D. Vice President Stan Johnson Vice President Philip J. Gallina Secretary and Treasurer James Clark Assistant Secretary Supervision of the day-to-day management and administration of the Partnership will be the responsibility of the General Partner in its capacity as the management agent. The General Partner itself is managed by a three-member Board of Directors composed of Mr. Shifrin, Ms. Williams and Dr. Jenkins. Set forth below are the names and descriptions of the background of the key executive officers and directors of the General Partner. Joseph Jenkins, M.D. was recently elected Vice Chairman of the Board of Directors of Prime and served as President and Chief Executive Officer of Prime from April 1996 to June 2000. From May 1990 until December 1991, Dr. Jenkins was a Vice President of the General Partner and previously practiced urology in Washington, North Carolina. Dr. Jenkins has been President of the General Partner since 1992 and is a member of its Board of Directors. Dr. Jenkins is a board certified urologist and is a founding member, a past-president and currently a Director of the American Lithotripsy Society. Kenneth S. Shifrin has been Chairman of the Board and a Director of Prime since October 1989 and was elected a Director of the General Partner following Prime's acquisition of all of the General Partner's stock. Mr. Shifrin also has served in various capacities with American Physicians Service Group, Inc. ("APS") since February 1985, and is currently Chairman of the Board and Chief Executive Officer of APS. Cheryl Williams is a Vice President and Director of the General Partner and has been Chief Financial Officer, Vice President-Finance and Secretary of Prime since October 1989. Ms. Williams was Controller of Fairchild Aircraft Corporation from August 1988 to October 1989. From 1985 to 1988, Ms. Williams served as the Chief Financial Officer of APS Systems, Inc., a wholly-owned subsidiary of APS. Stan Johnson is a Vice President of the General Partner and has been President of Sun Medical Technologies, Inc. ("Sun") (an affiliate of the General Partner) since November 1995. Mr. Johnson was the Chief Financial Officer of Sun from 1990 to 1995. Mr. Johnson was also recently appointed a Group Vice President of Prime. David Vela, M.D. is a Vice President of the General Partner. Dr. Vela received his medical degree in 1984. Dr. Vela developed and operated various outpatient centers throughout the United States from 1986 to 1995 and was recently appointed a Group Vice President of Prime. Philip J. Gallina is the Secretary and Treasurer of the General Partner, having previously served as a Vice President since 1989. Mr. Gallina is a Certified Public Accountant licensed in the state of Pennsylvania. From 1980 through February 1989, Mr. Gallina served as Plant Controller for the Westinghouse Motor Control and Enclosed Control Product Lines. Mr. Gallina is also a Director, the Vice President, the Treasurer and the Secretary of MedTech Investments, Inc., the Sales Agent. James D. Clark is Assistant Secretary of the General Partner. Mr. Clark has served as Tax Manager of Prime since January 1998 and is a Certified Public Accountant in Texas. Prior to joining Prime, Mr. Clark was Controller for ERISA Administrative Services, Inc. COMPENSATION AND REIMBURSEMENT TO THEGENERAL PARTNER AND ITS AFFILIATES The following summary describes the types and, where determinable, the estimated amounts of reimbursements, compensation and other benefits the General Partner and its Affiliates will receive in connection with the continued operation and management of the Partnership and the Lithotripsy 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 the second year of its second five-year renewal term. The Management Agreement will be automatically renewed for an 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 Lithotripsy System (excluding the costs of employing one or more local physicians to supervise the management and administration of the Lithotripsy System), and the Partnership will pay or reimburse to the General Partner all expenses related to this Offering. No other fees or compensation will be payable to the General Partner 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, and does not exceed $75,000 in any Year of the Partnership. 2. Partnership Distributions. In its capacity as general partner of the Partnership, the General Partner is entitled to its distributable share (approximately 20.3%, before dilution) of Partnership Cash Flow, Partnership Sales Proceeds and Partnership Refinancing Proceeds as provided by the Partnership Agreement. The General Partner also owns approximately a 15.8% (before dilution) limited partner interest in the Partnership and is entitled to Distributions on account of such interest. See "Summary of the Partnership Agreement - Profits, Losses and Distributions" and the Partnership Agreement attached as Appendix A. The General Partner will also receive its proportionate share of any Offering proceeds distributed to the Initial Limited Partners. See "Sources and Applications of Funds." 3. Sales Commissions. The Sales Agent, a wholly-owned subsidiary of Prime, has entered into a Sales Agency Agreement with the Partnership pursuant to which the Sales Agent has agreed to sell the Units on a "best efforts" any or all basis. As compensation for its services, the Sales Agent will receive a commission equal to $150 for each Unit sold (up to an aggregate of $7,200). If this Offering is successful, the Sales Agent will also be reimbursed by the Partnership for its out-of-pocket expenses associated with its sale of the Units in an amount not to exceed $5,000. See "Plan of Distribution" and "Conflicts of Interest." 4. General Partner Sales. The first eight Units sold in this Offering will be sold for the account of the General Partner. The price payable to the General Partner will be $8,998 for each Unit, i.e., the cash Unit price collected by the Partnership of $9,148 less deduction of the $150 per Unit commission to the Sales Agent. See "Plan of Distribution." 5. Loans. The General Partner or its Affiliates will also receive interest on loans, if any, made by them to the Partnership. See "Conflicts of Interest." Neither the General Partner nor any of its Affiliates are, however, obligated to make loans to the Partnership. While the General Partner does not anticipate that it would cause the Partnership to incur indebtedness unless cash generated from Partnership operations were at the time expected to enable repayment of such loan in accordance with its terms, lower than anticipated revenues and/or greater than anticipated expenses could result in the Partnership's failure to make payments of principal or interest when due under such a loan and the Partnership's equity being reduced or eliminated. In such event, the Limited Partners could lose their entire investment. See "Risk Factors - Operating Risks - Partnership Limited Resources and Risks of Leverage." CONFLICTS OF INTEREST The operation of the Partnership involves numerous conflicts of interest between the Partnership and the General Partner and its Affiliates. Because the Partnership is operated by the General Partner, such conflicts are not resolved through arm's length negotiations, but through the exercise of the judgment of the General Partner consistent with its fiduciary responsibility to the Limited Partners and the Partnership's investment objectives and policies. The General Partner, its Affiliates and employees of the General Partner will in good faith continue to attempt to resolve potential conflicts of interest with the Partnership, and the General Partner will act in a manner that it believes to be in or not opposed to the best interests of the Partnership. The General Partner and its Affiliates will receive management fees and broker-dealer sales commissions in connection with the business operations of the Partnership and the sale of the Units that will be paid regardless of whether any sums hereinafter are distributed to Limited Partners. None of such fees, compensation and benefits has been determined by arm's length negotiations. In addition, the Partnership may contract with the General Partner or its Affiliates to render other services or provide materials to the Partnership provided that the compensation is at the then prevailing rate for the type of services and/or materials provided and does not exceed $75,000 during any Year of the Partnership. 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 their responsibilities to the Partnership. The General Partner and its Affiliates may engage for their own account, or for the account of others, in other business ventures, related to medical services or otherwise, and neither the Partnership nor the holders of any of the Units shall be entitled to any interest therein. See the Partnership Agreement attached hereto as Appendix A. The General Partner, its Affiliates (including affiliated limited partnerships) and employees of the General Partner engage in medical service activities for their own accounts. See "Prior Activities." The General Partner may serve as a general partner of other limited partnerships that are similar to the Partnership and does not intend to devote its entire financial, personnel and other resources to the Partnership. Except as provided by law, none of such entities or their respective Affiliates is prohibited from engaging in any business or arrangement that may be in competition with the Partnership. The General Partner and its Affiliates are, however, obligated to act in a fiduciary manner with respect to the management of the Partnership and any other medical venture in which they have management responsibilities. The General Partner has an Affiliate which provides mobile lithotripsy services near the Service Area. Wyoming Urological Services Limited Partnership provides mobile lithotripsy services using a Storz Modulith(R) SLX-T throughout the State of Wyoming. See "Competition-Affiliated Competition." Because other ventures controlled by the General Partner or its Affiliates may operate near the Service Area, an issue may arise as to whether a particular lithotripsy service opportunity belongs to the Partnership or to another Affiliate. In the event an issue arises as to whether a particular lithotripsy service opportunity in or near the Service Area belongs to the Partnership, the General Partner or another Affiliate, the General Partner will in good faith attempt to resolve the issue in a manner that it believes to be in or not opposed to the best interest of the Partnership. Notwithstanding the foregoing, no assurance can be given that one or more limited partners of such Affiliates or the Limited Partners themselves, may not challenge the decision of the General Partner on fiduciary grounds. See "Competition" and "Prior Activities." The General Partner through its ownership of limited partner interest in the Partnership is able to influence any vote on matters requiring Limited Partner approval. See "Summary of the Partnership Agreement." The Sales Agent is MedTech Investments, Inc., which is an Affiliate of the General Partner. Because of the Sales Agent's affiliation with the General Partner, there are conflicts in the Sales Agent's performance of its due diligence responsibilities under the federal securities laws. See "Plan of Distribution." The interests of the Limited Partners have not been separately represented by independent counsel in the formulation of the transactions described herein. The attorneys and accountants who have performed and will perform services for the Partnership were retained by the General Partner, and have in the past performed and are expected in the future to perform similar services for the General Partner and Prime. FIDUCIARY RESPONSIBILITY OF THE GENERAL PARTNER The General Partner is accountable to the Partnership as a fiduciary and consequently must exercise good faith in handling Partnership affairs. This is a rapidly developing and changing area of the law and Investors who have questions concerning the duties of the General Partner should consult with their counsel. Under the Partnership Agreement, the General Partner and its Affiliates have no liability to the Partnership or to any Partner for any loss suffered by the Partnership that arises out of any action or inaction of the General Partner or its Affiliates if the General Partner or its Affiliates, in good faith, determined that such course of conduct was in the best interest of the Partnership and such course of conduct did not constitute gross negligence or willful misconduct of the General Partner or its Affiliates. Accordingly, Limited Partners have a more limited right of action than they otherwise would absent the limitations set forth in the Partnership Agreement. The General Partner and its Affiliates will be indemnified by the Partnership against any losses, judgments, liabilities, expenses and amounts paid in settlement of any claims sustained by them in connection with the Partnership, provided that the same were not the result of gross negligence or willful misconduct on the part of the General Partner or its Affiliates. Insofar as indemnification for liabilities under the Securities Act may be permitted to persons controlling the Partnership pursuant to the foregoing provisions, the Partnership has been informed that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act and therefore is unenforceable. COMPETITION Many fixed-site and mobile extracorporeal shock-wave lithotripsy services are currently operating in and around the Service Area. The following discussion identifies the existing services in and near the Service Area, to the best knowledge of the General Partner. Affiliated Competition The Partnership faces competition primarily from lithotripters placed in service in Utah, Idaho and, to a lesser extent, from lithotripters located in adjacent states, including lithotripters owned and/or operated by Affiliates of the General Partner. The General Partner has not organized any entities offering lithotripsy services within the Partnership's Service Area. Although not in the Partnership's immediate service area, the General Partner and Prime, through its subsidiaries, do offer lithotripsy services in Wyoming and Montana. For example, Montana Lithotripters Limited Partnership I provides fixed-based lithotripsy services at a site in Billings, Montana. Wyoming Urological Services Limited Partnership offers mobile lithotripsy services in Laramie, Casper, Rock Springs, Riverton, Sheridan and Jackson, Wyoming, and Mobile Kidney Stone Centers of California, LTD I, offers mobile lithotripsy services in Missoula, Kalispell, Bozeman, Dillon, Butte, Helena and Great Falls, Montana. Las Vegas Lithotripters Limited Partnership operates a fixed base Lithostar(TM) at an ambulatory surgery center located in Las Vegas, Nevada, and Mountain Lithotripsy Limited Partnership I provides mobile lithotripsy services in Colorado. Other Competition To the best knowledge of the General Partner, there are several fixed-base lithotripters located within or near the Service Area: a Dornier HM-4 located in Boise, Idaho; a Medstone unit located in a surgery center in Reno, Nevada; and a lithotripter located at the University of Utah Medical Center in Salt Lake City, Utah. Intermountain Healthcare has recently acquired a new Storz Modulith(R) SLX-T lithotripter for use at its hospitals in the Salt Lake City area. In addition, the General Partner is aware of two mobile Medstone machines in the Service Area; one located in Idaho, and the other in Utah. The Medstone machine in Idaho serves the Twin Falls, Idaho City, Boise and Pocatello areas, and the Medstone machine in Utah serves the Salt Lake City, Provo, Brigham, Logan and Price areas. Although the General Partner anticipates that the Partnership will continue to operate primarily in the Service Area, the actual itinerary for the Lithotripsy System is expected to be influenced by the number of patients in particular areas and arrangements with various hospitals and health care centers including the Contract Hospitals. See "Business Activities - Operation of the Lithotripsy System." Other hospitals in and near the Service Area may operate lithotripters which are not extracorporeal shock-wave lithotripters but rather use lasers or are electrohydraulic lithotripters. The General Partner believes these machines have a competitive disadvantage because such machines are capable of treating stones only in the ureter. The General Partner believes the Lithotripsy Systems can be used on stones in locations other than the ureter. See "Business Activities - Treatment Methods for Kidney Stone Disease." The health care market in the Service Area is influenced by managed care companies such as health maintenance organizations. Managed care companies generally contract either directly with hospitals or specified providers for lithotripsy services for beneficiaries of their plans. It is not uncommon for managed care companies to have contracts already in place with hospitals or specified providers, and the Partnership will not be able to provide services to beneficiaries of those plans unless it convinces either the managed care companies or the hospitals to switch to the Partnership's services. No assurance can be given that new competing lithotripsy clinics will not open in the future or that innovations in lithotripters or other treatments of kidney stone disease will not make the Partnership's Lithotripsy System competitively obsolete. See "Risk Factors - Operating Risks - Technological Obsolescence." In addition, the General Partner and its Affiliates are not restricted from engaging in lithotripsy ventures unassociated with the Partnership which may compete with the Partnership. The manufacturer of the Lithotripsy System is under no obligation to the General Partner or the Partnership to refrain from selling its lithotripters to urologists, hospitals or other persons for use in the Service Area or elsewhere. In addition, the availability of lower-priced lithotripters in the United States has dramatically increased the number of lithotripters in the United States, increased competition for lithotripsy procedures and created downward pressure on the prices the Partnership can charge for its services. Many potential competitors of the Partnership, including hospitals and medical centers, have financial resources, staffs and facilities substantially greater than those of the Partnership and of the General Partner. REGULATION Federal Regulation The Partnership, the General Partner and the Limited Partners are subject to regulation at the federal, state and local level. An adverse review or determination by certain regulatory organizations (federal, state or private) may result in the Partnership, the General Partner and the Limited Partners being subject to imprisonment, loss of reimbursement, fines or exclusion from participation in Medicare or Medicaid. Adverse reviews of the Partnership's operations at any of the various regulatory levels may adversely affect the operations and profitability of the Partnership. Reimbursement. The Partnership either charges Contract Hospitals a fee for use of the Lithotripsy System or directly bills and collects from patients a fee for lithotripsy services provided using its Lithotripsy System. The amount of the fee charged to Contract Hospitals and patients is dependent on the amount that governmental and commercial third party payors are willing to reimburse hospitals and patients for lithotripsy procedures. The primary governmental third party payor is Medicare. Medicare reimbursement policies are statutorily created and are regulated by the federal government. The General Partner expects that the level of reimbursement under Medicare for lithotripsy procedures may continue to decline. As required by the Balanced Budget Act of 1997, the Health Care Financing Administration ("HCFA"), the federal agency that administers the Medicare program, has established a prospective payment system for outpatient procedures. One of the goals of the prospective payment system is to lower medical costs paid by the Medicare program. HCFA has issued regulations which reduce the reimbursement rate currently paid for lithotripsy procedures performed on Medicare patients at hospitals to a base rate of $2,265. The base rate includes anesthesia and sedation, equipment and supplies necessary for the procedure, but does not include the treating physician's professional fee. The base rate is subject to adjustment for various hospital-specific factors. The $2,265 reimbursement rate became effective on August 1, 2000. In some cases, reimbursement rates payable to Affiliates of the General Partner from commercial third-party payors are already less than the new HCFA rate. The Partnership does not currently provide services at any ambulatory surgery centers, however the General Partner retains the discretion to make the Lithotripsy System available at ambulatory surgery centers ("ASCs") in the future. Medicare does not currently reimburse for lithotripsy procedures provided at ASCs. However, HCFA issued proposed rules in 1998 which would authorize Medicare reimbursement for lithotripsy procedures provided at ASCs. While the proposed rules had a target effective date of October 1, 1998, the effective date has been postponed indefinitely for reasons unrelated to lithotripsy coverage. The proposed rules assign a Medicare reimbursement rate of $2,107 if the lithotripsy procedure is performed at an ASC. Whether these proposed rules will become effective to authorize Medicare reimbursement at ASCs and, if they do become effective, what the reimbursement rate will be, is unknown to the General Partner. The Medicare program has historically influenced the setting of reimbursement standards by commercial insurers. Therefore, reduced rates of Medicare reimbursement for lithotripsy services may result in reduced payments by commercial insurers for the same services. As was discussed previously, competitive pressure from health maintenance organizations and other managed care companies has in some circumstances already resulted in decreasing reimbursement rates from commercial insurers. See "Risk Factors - Operating Risks - Impact of Insurance Reimbursement." No assurances can be given that HCFA will not seek to reduce its proposed reimbursement rates even more to avoid paying more than commercial insurers. As a result, hospitals may seek to lower the fees paid to the Partnership for the use of the Lithotripsy System. The General Partner anticipates that reimbursement for lithotripsy procedures, and therefore overall Partnership revenues, may continue to decline. The physician service (Part B) Medicare reimbursement for renal lithotripsy is determined using Resource Based-Relative Value Scales ("RB-RVS"). The system includes limitations on future physician reimbursement increases tied to annual expenditure targets legislated annually by Congress or set based upon recommendation of the Secretary of the U.S. Department of Health and Human Services. Medicare has in the past, with regard to other Part B services such as cataract implant surgery, imposed significant reductions in reimbursement based upon changes in technology. HCFA has produced a lengthy report whose conclusion is that professional fees for lithotripsy are overvalued. Thus, potential future decreases in reimbursement must be considered probable. The Medicaid programs in Idaho, Nevada and Utah 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. To the best knowledge of the General Partner, the Medicaid programs in Idaho, Nevada and Utah currently provide reimbursement for lithotripsy services. The federal Personal Responsibility and Work Opportunity Reconciliation Act of 1996 requires state Medicaid health plans to limit Medicaid coverage for certain otherwise eligible persons. The General Partner does not believe this legislation will have a significant impact on the Partnership's revenues. In addition, federal regulations permit state health plans to limit the provision of services based upon such criteria as medical necessity or other criteria identified in utilization or medical review procedures. The General Partner is unable to predict whether the Medicaid programs in Idaho, Nevada and Utah 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) ("Stark II"). Lithotripsy services were not specifically identified as a designated health service by this legislation, but the prohibition includes any service which is provided to an individual who is registered as an inpatient or outpatient of a hospital under proposed regulations discussed below. Lithotripsy services provided by the Partnership to Medicare and Medicaid patients are billed by the contracting hospital in its name and under its Medicare and Medicaid program provider numbers. Accordingly, these lithotripsy services would likely be considered inpatient or outpatient services under Stark II. Following the passage of the Stark II legislation effective January 1, 1995, the General Partner determined that the statute would not apply to the type of lithotripsy services provided by the Partnership. Stark II applies only to ownership interests directly or indirectly in the entity that "furnishes" the designated health care service. The physician-investors and the Partnership do not and will not have an ownership interest in any Contract Hospitals which offer the lithotripsy services to the patients on an inpatient or outpatient basis. See 42 U.S.C. ss. 1395nn(a)(1)(A). Thus, by referring a patient to a hospital offering the service, the physician-investors will not be making a referral to an entity in which they maintain an ownership interest for purposes of the application of Stark II. This interpretation adopted by the General Partner was consistent with the informal view of the General Counsel's Office of the U.S. Department of Health and Human Services. Based upon this reasonable interpretation of Stark II, by referring a patient to a hospital furnishing the outpatient lithotripsy services "under arrangements" with the Partnership, a physician investor in the Partnership is not making a referral to an entity (the hospital) in which he or she has an ownership interest. In 1998, HCFA published proposed regulations interpreting the Stark II statute (the "Proposed Stark II Regulations"). The Proposed Stark II Regulations and HCFA's accompanying commentary would apply the physician referral prohibitions of Stark II to the Partnership's contracts for provision of the Lithotripsy System. Under the Proposed Stark II Regulations, physician Limited Partner referrals of Medicare and Medicaid patients to Contract Hospitals would be prohibited because the Partnership is regarded as an entity that "furnishes" inpatient and outpatient hospital services. The General Partner cannot predict when final regulations will be issued or the substance of the final regulations, but the interpretive provisions of the Proposed Stark II Regulations may be viewed as HCFA's interim position until final regulations are issued. If the Proposed Stark II Regulations are adopted as final (or, in the meantime, if a reviewing court adopted their reasoning as the proper interpretations of the Stark II statute), then the Partnership's operations would not be in compliance with Stark 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 Stark II Regulations that physician overutilization of lithotripsy is unlikely and specifically solicits comments on whether there should be a regulatory exception for lithotripsy. HCFA has received a substantial volume of comments in support of a regulatory exception for lithotripsy. HCFA representatives have informally acknowledged in published commentary that some form of regulatory relief for lithotripsy is under consideration and may be forthcoming; however, no assurance can be made that such will be the case. The General Partner will continue to carefully review the Proposed Stark II Regulations and accompanying HCFA commentary, and explore other alternative plans of operations that would allow the Partnership to operate in compliance with Stark II and its final regulations. HCFA's adoption of the current Proposed Stark II Regulations as final or a reviewing court's interpretation of the Stark II statute in reliance on the Proposed Stark II Regulations and in a manner adverse to the Partnership operations would mean that the Partnership and its physician Limited Partners would likely be found in violation of Stark 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 Stark II self-referral prohibition. One (H.R. 2650) was introduced by Representative Stark, the other (H.R. 2651) by House Ways and Means health subcommittee chair Representative Bill Thomas. The Stark bill would modify, and the Thomas bill would repeal, the general prohibition on physician compensation arrangements with entities to which they refer patients. However, neither bill, nor any other bill currently pending in Congress, would substantively modify the regulation of referrals of physicians with ownership interests. Thus, neither bill would affect the Partnership's analysis of the potential impact of Stark II on this Offering discussed above. Fraud and Abuse. The provisions of the federal Social Security Act addressing illegal remuneration (the "Anti-Kickback Statute") prohibit providers and others from soliciting, receiving, offering or paying, directly or indirectly, any remuneration in return for either making a referral for a Medicare, Medicaid or TRICARE 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 others in a position to refer and perform lithotripsy services using Partnership equipment and personnel, such Distributions could come under scrutiny under the Anti-Kickback Statute. The Third Circuit United States Court of Appeals has held that the Anti-Kickback Statute is violated if one purpose (as opposed to the primary or sole purpose) of a payment to a provider is to induce referrals. United States v. Greber, 760 F.2d 68 (1985). The Greber case was followed by the United States Court of Appeals for the Ninth Circuit, United States v. Kats, 871 F.2d 105 (9th Cir. 1989), and cited favorably by the First Circuit in United States v. Bay State Ambulance and Hospital Rental Service, Inc., 874 F.2d 20 (1st Cir. 1989). The OIG has indicated that it is giving increased scrutiny to health care joint ventures involving physicians and other referral sources. In 1989, it published a Special Fraud Alert that outlined questionable features of "suspect" joint ventures, including some features which may be common to the Partnership. While OIG Special Fraud Alerts do not constitute law, they are informative because they reflect the general views of the OIG as a health care fraud and abuse investigator and enforcer. The OIG has published regulations which protect certain transactions from scrutiny under the Anti-Kickback Statute (the "Safe Harbor" regulations). A Safe Harbor, if complied with fully, will exempt such activity from prosecution under the Anti-Kickback Statute. However, the preamble to the Safe Harbor regulations states that the failure of a particular business arrangement to comply with the regulations does not determine whether or not the arrangement violates the Anti-Kickback Statute because the regulations do not themselves make any particular conduct illegal. This Offering and the business of the Partnership do not comply with any Safe Harbor. In the commentary introducing the Safe Harbor regulations, the OIG recognized the beneficial effect that business investments in small entities may have on the health care industry. The OIG promulgated a Safe Harbor for investment interests, including limited partnership ownership interests, in small entities which are held by persons in a position to make referrals to the entities so long as eight criteria are met. This Offering does not meet all eight criteria; however, this Offering does meet some of the criteria. Specifically, the terms on which limited partnership interests are offered to physicians who treat their patients on the Lithotripsy System are not related to the previous or expected volume of referrals or amount of business generated by the physicians; there is no requirement that any physician make referrals or be in a position to make referrals as a condition for remaining an investor; there is no cross-referral arrangement involved with the business of the Partnership; the Partnership does not loan funds or guarantee loans for physicians who refer patients for treatment on the Lithotripsy System; and the Distributions to physicians who are Limited Partners are directly proportional to the amount of their capital investment. In order to qualify for Safe Harbor protection, all eight criteria must be met. The General Partner can give no assurance that compliance with some, but not all, of the criteria of the Safe Harbor would prevent the OIG from finding a potential violation of the Anti-Kickback Statute by virtue of this Offering. A Safe Harbor has been adopted which protects equipment leasing arrangements. It requires that the aggregate rental charge be set in advance, be consistent with fair market value in arms-length transactions and not be determined in a manner that takes into account the volume or value of any referrals or business otherwise generated between the parties. To the best knowledge of the General Partner, the Hospital Contracts entered into by the Partnership do not require that the aggregate rental charge be set in advance and contain other terms which cause the Hospital Contracts not to comply with the Safe Harbor's requirements. When it issued this Safe Harbor, the OIG commented on per-use charges for equipment rentals. It stated that such arrangements must be examined on a case-by-case basis and may be abusive in certain situations. According to the OIG, payments on a per-use basis do not necessarily violate the Anti-Kickback Statute, but such payments are not provided Safe Harbor protection. The General Partner cannot give any assurances that the Partnership's Hospital Contracts which involve a per-use payment to the Partnership by Contract Hospitals would not be deemed to violate the Anti-Kickback Statute. In November 1999, the OIG issued a Safe Harbor protecting certain physician investment interests in ASCs. The commentary accompanying the new Safe Harbor specifically distinguished physician ownership in ASCs from physician ownership in other facilities, including lithotripsy facilities, end-stage renal disease facilities, comprehensive outpatient rehabilitation facilities and others. The OIG concluded that ASCs benefit from favorable public policy considerations relating to reducing Medicare costs (including through the impending prospective payment system discussed above); other facilities, including lithotripsy facilities, do not share the same policy considerations or reimbursement structures. Therefore, the Safe Harbor status given to certain physician investments in ASCs cannot be viewed as an indication that physician investments in other facilities, including lithotripsy facilities, would not be deemed to violate the Anti-Kickback Statute. Although a separate Safe Harbor was not adopted, HCFA noted in its commentary when the Safe Harbor regulations were issued in 1991 that additional protection may be merited for situations where a physician sees a patient in his or her own office, makes a referral to an entity in which he or she has an ownership interest and performs the service for which the referral is made. In such cases, Medicare makes a payment to the facility for the service it furnishes, which may result in a profit distribution to the physician. HCFA noted that, with respect to the physician's professional fee, such a referral is simply a referral to oneself, and that in such situations, both the professional service fee and the profit distribution from the associated facility fee that are generated from the referral may warrant protection. HCFA stated that its primary concern regarding the above referral situation was the investing physician's ability to profit from any diagnostic testing that is generated from the services he or she performs. The General Partner believes the potential for overutilization posed by referrals for diagnostic services is not present to the same degree with therapeutic services such as lithotripsy where the necessity for the treatment can be objectively determined; i.e., a renal stone can be definitely determined before treatment. The applicability of the Anti-Kickback Statute to physician investments in health care businesses to which they refer patients and which do not qualify for a Safe Harbor has not been the focus of many court decisions, and therefore, judicial guidance is limited. In the only case in which the OIG has attempted to exercise the civil exclusion remedy in the context of a physician-owned joint venture, The Hanlester Network, et al. v. Shalala, the Ninth Circuit for the United States Court of Appeals (the "Court") held that the Anti-Kickback Statute is violated when a person or entity (a) knows that the statute prohibits offering or paying remuneration to induce referrals and (b) engages in prohibited conduct with the specific intent to violate the law. Although the Court upheld a lower court ruling that the joint venture in question violated the Anti-Kickback Statute vicariously through the knowing and willful actions of one of its agents, who was acting outside the parameters of the joint venture's offering documents, the Court concluded there was not sufficient evidence indicating that a return on investment to physicians or other investors in the joint venture could on its own constitute an "offer or payment" of remuneration to make referrals. The Court also stated that since profit distributions in Hanlester were made based on each investor's ownership share and not on the volume of referrals, the fact that large referrals by investors would result in potentially high investment returns did not, standing alone, cause a violation of the Anti-Kickback Statute. The Health Insurance Portability and Accountability Act of 1996 directed the OIG to respond to requests for advisory opinions regarding the effect of the Anti-Kickback Statute on proposed business transactions. The General Partner has not requested the OIG to review this Offering and, to the best knowledge of the General Partner, the OIG has not been asked by anyone to review offerings of this type. Federal regulatory authorities could take the position in future advisory opinions that business transactions similar to this Offering are a means to illegally influence the referral patterns of the prospective physician Limited Partners. Because there is no legal precedent interpreting circumstances identical to these facts, it is not possible to predict how this issue would be resolved if litigated. Whenever an offering of ownership interests is made available to persons with the potential to refer patients for services, there is a possibility that the OIG, HCFA or other government agencies or officials may question whether the ownership interests are being provided in return for or to induce referrals by the new owners. Remuneration, which government officials have said can include the provision of an opportunity to invest in a facility to which a person refers patients for services, may be challenged by the government as constituting a violation of the Anti-Kickback Statute. Whether the offering of ownership interests to investors who may refer patients to the Partnership might constitute a violation of this law must be determined in each case based upon the specific facts involved. The various mechanisms in place to avoid providing a financial benefit to prospective Limited Partners for any referrals of patients (including the requirement that all distributions of earnings to Limited Partners be made in proportion to their investment interest), the Partnership's utilization review and quality assurance programs, the fact that lithotripsy is a therapeutic treatment the need of which can be objectively determined, and the existence in the General Partner's view of valid business reasons to engage in this transaction, form the basis in part of the General Partner's belief that this Offering is appropriate. The General Partner of the Partnership intends for all business activities and operations of the Partnership to conform in all respects with all applicable anti-kickback statutes (federal or state). The General Partner does not believe that the Partnership's operations violate the Anti-Kickback Statute. No assurance can be given, however, that the activities of the Partnership will not be reviewed and challenged by regulatory authorities empowered to do so, or that if challenged, the Partnership will prevail. If the activities of the Partnership were determined to violate these provisions, the Partnership, the General Partner, officers and directors of the General Partner, and each Limited Partner could be subject, individually, to substantial monetary liability, felony prison sentences and/or exclusion from participation in Medicare, Medicaid and TRICARE. A prospective Investor with questions concerning these matters should seek advice from his own independent counsel. False Claims Statutes. Federal laws governing reimbursement for medical services generally prohibit an individual or entity from knowingly and willfully presenting a claim (or causing a claim to be presented) for payment from Medicare, Medicaid or other third party payors that is false or fraudulent. The standard for "knowing and willful" includes conduct that amounts to a reckless disregard for whether accurate information is presented by claims processors. Penalties under these statutes include substantial civil and criminal fines, exclusion from the Medicare program and imprisonment. One of the most prominent of these laws is the federal False Claims Act, which may be enforced by the federal government directly, or by a qui tam private plaintiff on the government's behalf. Under the federal False Claims Act, both the government and the private plaintiff, if successful, are permitted to recover substantial monetary penalties and judgments, as well as an amount equal to three times actual damages. In recent cases, some private plaintiffs have taken the position that violations of the Anti-Kickback Statute (discussed above) and Stark II (discussed above) should also be prosecuted as violations of the federal False Claims Act. The Partnership cannot assure that the government, or a reviewing court, would not take the position that billing errors, employee misconduct or violations of other federal statutes, should they occur, are violations of the federal False Claims Act or similar statutes. Some federal courts have recently taken the position that qui tam lawsuits by private plaintiffs are unconstitutional. Most notably, a panel of judges on the Fifth Circuit Court of Appeals took this position in a decision issued in November 1999. That decision is being reviewed by all the judges on the Fifth Circuit. The panel's decision was a minority view; most courts have concluded that qui tam lawsuits are constitutional. In another case, the U.S. Supreme Court ruled on May 22, 2000 that private plaintiffs have standing to bring suits under the False Claims Act. It is unknown how this decision by the U.S. Supreme Court will affect the case which is pending in the Fifth Circuit. However, because the Supreme Court's decision will allow private plaintiffs to continue to bring suit under the False Claims Act, prospective Limited Partners should consider the ramifications of the False Claims Act issues discussed in the preceding paragraph. New Legislation. Two bills currently pending in Congress which would amend or repeal the compensation provisions of the Stark 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 Stark II and the Anti-Kickback laws discussed above. ALS Fraud and Abuse Compliance Guidelines. On March 24, 2000, the American Lithotripsy Society ("ALS") ( a voluntary membership organization made up of physicians, health care management personnel, treatment centers and medical suppliers) published Fraud and Abuste Compliance Guidelines for Physician - Owned Lithotripsy Ventures (the "ALS Guidelines"). The ALS Guidelines are aimed at assisting ALS members in recognizing and avoiding certain practices which the ALS believes are unethical or illegal. The ALS Guidelines acknowledge that they are neither authoritative, nor constitute legal advice. Moreover, the ALS Guidelines stipulate that the laws upon which they are based (all of which are discussed in this "Regulation" section) are open to alternative interpretations. Because of the various reasons set forth in this Memorandum, the Partnership believes the Offering and its operations are appropriate under such laws; however, no assurance can be given that the activities of the Partnership would be viewed by regulatory authorities as complying with these laws or the ALS Guidelines. FTC Investigation. Issues relating to physician-owned health care facilities have been investigated by the Federal Trade Commission ("FTC"), which investigated two lithotripsy limited partnerships affiliated with the General Partner, to determine whether they posed an unreasonable threat to competition in the health care field. The affiliated limited partnerships were advised in 1996 that the FTC's investigation was terminated without any formal action taken by the FTC or any restrictions being placed on the activities of the limited partnerships. However, the General Partner cannot assure that the FTC will not investigate issues arising from physician-owned health care facilities in the future with respect to the General Partner or any Affiliate, including the Partnership. Ethical Considerations. The American Medical Association's Code of Medical Ethics states that physicians should not refer patients to facilities in which they have an ownership interest unless such physician directly provides care or services to such patient at the facility. Because physician investors will be providing lithotripsy services, the General Partner believes that an investment by a physician will not be in violation of the American Medical Association's Code of Medical Ethics. In the event that the American Medical Association changes its ethical code to preclude such referrals by physicians and such ethical requirements are applied to facilities or services which, at the time of adoption, are owned in whole or in part by referring physicians, the Partnership and the interests of the Limited Partners may be adversely affected. State Regulation Idaho. Idaho's certificate of need ("CON") law was repealed in 1983. Therefore, a CON is not necessary to operate the Lithotripsy System in Idaho. To the best knowledge of the General Partner, the services provided by the Partnership will not require licensure as a hospital or other health care facility. Idaho requires that lithotripters be registered with the Hazardous Materials Bureau of the Idaho Department of Health and Welfare. The General Partner has been and will continue to comply with this requirement. The General Partner is not aware of any other regulatory issues related to the provision of lithotripsy services in Idaho. Nevada. Nevada requires a CON for new construction on behalf of a health facility which both is located in a county with fewer than 100,000 people and costs $2 million or more. Neither of these conditions applies to the operation of the Lithotripsy System in Nevada, and accordingly a CON is not necessary in Nevada. To the best knowledge of the General Partner, the services provided by the Partnership will not require licensure as a hospital or other health care facility. Nevada requires that lithotripters be registered with the Department of Radiological Health. The General Partner has been and will continue to comply with this requirement. Nevada law prohibits referrals of patients to health care facilities in which the referring physician has a financial interest. However, there is an exception in the law which applies to urologists making referrals for lithotripsy services. Accordingly, all Limited Partners licensed as physicians in Nevada must be urologists in order to refer patients for treatment on the Lithotripsy System. Physicians in Nevada are required to provide written disclosure to patients of their financial relationships in entities to which they refer the patients. The Partnership will continue to require that its Limited Partners comply with this requirement. Utah. Utah's CON law was repealed effective in 1990. Therefore, no CON is necessary to operate the Lithotripsy System in Utah. To the best knowledge of the General Partner, the services provided by the Partnership will not require licensure as a hospital or other health care facility. Utah requires that lithotripters be registered with the Utah Bureau of Radiation Control, and that radiologic technologists be licensed by the state. The General Partner has been complying and will continue to comply with these requirements. Physicians in Utah are required to provide written disclosure to patients of their financial relationships in entities to which they refer the patients. The Partnership will continue to require that its Limited Partners comply with this requirement. Further regulations may be imposed in Idaho, Nevada or Utah at any time in the future. Predictions as to the form or content of such potential regulations would be highly speculative. They could apply to the operation of the Lithotripsy System or to the physicians who invest in the Partnership. Such restrictive regulations could adversely affect the ability of the Partnership to conduct its business. THE GENERAL PARTNER AND THE PARTNERSHIP BELIEVE LITHOTRIPSY SERVICES WILL CONTINUE TO BE SUBJECT TO INTENSE GOVERNMENTAL REGULATION AT THE FEDERAL AND STATE LEVELS AND, THEREFORE, CANNOT PREDICT THE SCOPE AND EFFECT THEREOF. PROSPECTIVE LIMITED PARTNERS SHOULD CONSULT WITH THEIR LEGAL COUNSEL AS TO THE IMPLICATIONS OF FEDERAL AND STATE LAWS AND PROFESSIONAL ETHICAL CODES DEALING WITH PHYSICIAN OWNERSHIP OF MEDICAL EQUIPMENT AND FACILITIES BEFORE PURCHASING UNITS. PRIOR ACTIVITIES Prime, the sole shareholder of the General Partner, is the largest and fastest growing provider of lithotripsy services in the United States, providing lithotripsy services at over 450 hospitals and surgery centers in 31 states, as well as delivering non-medical services related to the operation of the lithotripters, including scheduling, staffing, training, quality assurance, maintenance, regulatory compliance and contracting with payors, hospitals and surgery centers, while medical care is rendered by urologists utilizing the lithotripters. Prime has an economic interest in 59 mobile and six fixed site lithotripters, all but two of which are operated by Prime or the General Partner and its Affiliates. Prime began providing lithotripsy services with an acquisition in 1992 and has grown rapidly since that time through acquisitions and de novo development. In April 1996, Prime acquired the General Partner. The General Partner operates over 30 lithotripters serving approximately 200 locations in 19 states. The acquisition of the General Partner provided Prime with complementary geographic coverage as well as additional expertise in forming and managing lithotripsy operations. Prime and the General Partner's lithotripters together performed approximately 38,000 lithotripsy procedures in 1999. Approximately 2,300 urologists utilized Prime and the General Partner's lithotripters in 1999, representing approximately 30% of the estimated 7,700 active urologists in the United States. Prime manages the operations of approximately 63 of its 65 lithotripters. All of its lithotripters are operated in connection with hospitals or surgery centers. Prime operates its lithotripters as the general partner of a limited partnership or through a subsidiary, as is the case with the General Partner affiliated partnerships. Prime provides a full range of management and other non-medical support services to the lithotripsy operations, while medical care is provided by urologists utilizing the facilities and certain medical support services are provided by the hospital or surgery center. Urologists are investors in 50 of its 65 operations. Prime's lithotripters range in age from one to twelve years. Of its 65 lithotripters, 59 are mobile units mounted in tractor-trailers or self-contained coaches serving locations in 31 states. Prime also operates six fixed site lithotripters in four states. All of Prime's fixed lithotripsy units are located and operated in conjunction with a hospital or surgery center. Most of these locations are in major metropolitan markets where the population can support such an operation. Fixed site lithotripters generally cannot be economically justified in other locations. Prime and the General Partner believe that they maintain the most comprehensive quality outcomes database and information system in the lithotripsy services industry. Prime has detailed information on over 160,000 procedures covering patient demographic information and medical condition prior to treatment, the clinical and technical parameters of the procedure and resulting outcomes. Information is collected before, during and up to three months after the procedure through internal data collection by doctors, nurses and technicians and through patient questionnaires. For numerous reasons, including differences in financial structure, program size, economic conditions and distribution policies, the success of the General Partner's Affiliates in the lithotripsy field should not be considered as indicative of the operating results obtainable by the Partnership. SUMMARY OF THE PARTNERSHIP AGREEMENT The Partnership Agreement sets forth the powers and purposes of the Partnership and the respective rights and obligations of the General Partner and the Limited Partners. The following is only a summary of certain provisions of the Partnership Agreement, and does not purport to be a complete statement of the various rights and obligations set forth therein. A complete copy of the Partnership Agreement is set forth as Appendix A to this Memorandum, and Investors are urged to read the Partnership Agreement in its entirety and to review it with their counsel and advisors. Nature of Limited Partnership Interest The Investors will acquire their interests in the Partnership in the form of Units. For each Unit purchased, a cash payment of $9,148 is required. The entire Unit purchase price is due in cash upon subscription; however, certain qualified Investors may finance a portion of the purchase price through either individually borrowed funds or through Limited Partner Loans. See "Terms of the Offering - Limited Partner Loans." No Limited Partner will have any liability for the debts and obligations of the Partnership by reason of being a Limited Partner except to the extent of (i) his Capital Contribution and liability under a Limited Partner Loan, if any; (ii) his proportionate share of the undistributed profits of the Partnership; and (iii) the amount of certain Distributions received from the Partnership as provided by the Act. See "Risk Factors - Other Investment Risks - Limited Partners' Obligation to Return Certain Distributions." See also form of Opinion of Counsel, attached hereto as Appendix C. Profits, Losses and Distributions The following is a Summary of certain provisions of the Partnership Agreement relating to the allocation and distribution of the Profits, Losses, Partnership Cash Flow, Partnership Refinancing Proceeds, Partnership Sales Proceeds, and cash upon dissolution of the Partnership. Because an understanding of the defined financial terms is essential to an evaluation of the information presented below, Investors should carefully review the definitions of the terms appearing in the Glossary. 1. Allocations of Profits and Losses. (a) General. Generally, Profits and Losses, if any, for each Year of the Partnership will be allocated proportionately among the Partners based on their respective Percentage Interests in the Partnership; provided that New Limited Partners will be allocated only Profits and Losses that accrue after the date of their admission to the Partnership as Limited Partners. (b) Allocations. Net gains and net losses from Capital Transactions (a part of Profits and Losses), if any, shall be allocated first. Each Partner will receive his pro rata share of Profits and Losses based upon the number of days such Partner was a member of the Partnership during the Year of the Partnership. Notwithstanding the foregoing, the Partnership's "allocable cash basis items," as that term is used in Section 706(d)(2)(B) of the Code, will be allocated as required by Section 706(d)(2) of the Code and the treasury regulations promulgated thereunder. (c) Qualified Income Offset. If any Limited Partner unexpectedly receives an adjustment, allocation or distribution as described in Treasury Regulation Section 1.704-1(b)(2)(ii)(d)(4) through (6) that causes such Limited Partner to have a deficit Capital Account balance, such Limited Partner will be allocated items of income and gain in an amount and manner sufficient to eliminate such deficit balance as quickly as possible. This provision is intended to be a "qualified income offset" as defined in Regulation Section 1.704-1(b)(2)(ii)(d). 2. Distributions. (a) Non-liquidation Distributions. Partnership Cash Flow for each Year of the Partnership, to the extent available, will be distributed within 60 days after the end of each Year of the Partnership, or earlier in the discretion of the General Partner, proportionately among the Partners based on their respective Percentage Interests in the Partnership at the time of distribution. Partnership Sales Proceeds and Partnership Refinancing Proceeds will be distributed within 60 days of the Capital Transaction giving rise to such proceeds, or earlier in the discretion of the General Partner, proportionately among the Partners based on their respective Percentage Interests in the Partnership as of the date of the Capital Transaction giving rise to such proceeds. The New Limited Partners (including the assignees of the Units offered by the General Partner) have no rights to receive any distributions in the future that are made out of the Initial Limited Partners' and General Partner's accrued but undistributed Partnership Cash Flow as of the date the New Limited Partners are admitted to the Partnership. New Limited Partners will be entitled only to Partnership Cash Flow that accrues after the date of their admission to the Partnership as Limited Partners (b) Distribution Upon Dissolution. Upon the dissolution and termination of the Partnership, the General Partner or, if there is none, a representative of the Limited Partners, will liquidate the assets of the Partnership. The proceeds of such liquidation will be applied and distributed in the following order of priority: (a) first, to the payment of the debts and liabilities of the Partnership, and the expenses of liquidation; (b) second, to the creation of any reserves which the General Partner or the representative of the Limited Partners may deem reasonably necessary for the payment of any contingent or unforeseen liabilities or obligations of the Partnership or of the General Partner arising out of or in connection with the business and operation of the Partnership; and (c) third, the balance, if any, will be distributed to the Partners in accordance with the Partners' positive capital account balances. Any General Partner with a negative capital account following the distribution of liquidation proceeds or the liquidation of its interest must contribute to the Partnership an amount equal to such negative capital account on or before the end of the Partnership's taxable year (or, if later, within ninety days after the date of liquidation). Any capital so contributed shall be (i) distributed to those Partners with positive capital accounts until such capital accounts are reduced to zero; and/or (ii) used to discharge recourse liabilities. Management of the Partnership The General Partner has the sole right to manage the business of the Partnership and at all times is required to exercise its responsibilities in a fiduciary capacity. The consent of the Limited Partners is not required for any sale or refinancing of the Lithotripsy Systems or the purchase of other new assets by the Partnership. The General Partner will oversee the day-to-day affairs of the Partnership pursuant to the Management Agreement. See "Business Activities - Management." Under the Partnership Agreement, if the General Partner is adjudged by a court of competent jurisdiction to be liable to the Limited Partners or the Partnership for acts of gross negligence or willful misconduct in the performance of its duties under the terms of the Partnership Agreement, the General Partner may be removed and another substituted with the consent of all of the Limited Partners. The General Partner may transfer all or a portion of its Partnership Interest only if, in the opinion of the Partnership's accountant, the new general partner has sufficient net worth and meets other requirements to assure that the Partnership will continue to be treated as a partnership for federal tax purposes. Both the admission of any new shareholder and the withdrawal of any shareholder from the General Partner may be done without the approval of the Limited Partners. Powers of the General Partner The General Partner may, in its sole discretion, borrow money, acquire, encumber, hold title to, pledge, sell, release or otherwise dispose of, all or any part of the Partnership's assets, when and upon such terms as it determines to be in the best interest of the Partnership, employ such persons as it deems necessary for the operation of the Partnership and deposit, withdraw, invest, pay, retain (including the establishment of reserves) and distribute the Partnership's funds. The General Partner, however, is expressly prohibited from, among other things: (i) possessing Partnership assets or assigning the rights of the Partnership in Partnership assets, including the Lithotripsy System, for other than Partnership purposes; (ii) admitting Limited Partners or General Partners except as provided in the Partnership Agreement; (iii) performing any act (other than an act required by the Partnership Agreement or any act taken in good faith reliance upon legal counsel's opinion) which would, at the time such act occurred, subject any Limited Partner to liability as a general partner in any jurisdiction; (iv) performing any act in contravention of the Partnership Agreement or which would make it possible to carry on the ordinary business of the Partnership; and (v) confessing a judgment against the Partnership. Rights and Liabilities of the Limited Partners The Limited Partners do not have any right to participate in the management of the business of the Partnership and will not transact business for the Partnership. Limited Partners are not required to make any capital contributions to the Partnership except amounts agreed by them to be paid, or pay or be personally liable for, any expense, liability or obligation of the Partnership, except to the extent (i) his Capital Contribution and liability under a Limited Partner Loan, if any; (ii) his proportionate share of the undistributed profits of the Partnership; and (iii) the amount of certain Distributions received from the Partnership as provided by the Act. See "Risk Factors - Other Investment Risks - Limited Partners Obligations to Return Certain Distributions." The Limited Partners may not participate in or own an interest in any competing lithotripsy venture, except with the approval of the General Partner. See "Noncompetition Agreement and Protection of Confidential Information" below. The General Partner may elect to treat participation or ownership by a Limited Partner in a competing venture as an event of default, and such Limited Partner may be required to sell his Partnership Interest. See "Optional Purchase of Limited Partner Interests" below. Restrictions on Transfer of Partnership Interests After acquisition of Units by Investors, no Partnership Interest nor any Units may be transferred without the prior written consent of the General Partner, which approval may be granted or withheld in the General Partner's sole discretion, and subject to the satisfaction of certain other conditions set forth in the Partnership Agreement. The Partnership Agreement contains additional limitations on transfer, including provisions prohibiting transfer that would cause the termination of the Partnership, would violate federal or state securities laws, would prevent the Partnership from being entitled to use any method of depreciation which the Partnership might otherwise be entitled to use, or would adversely affect the status of the Partnership as a partnership for federal income tax purposes. In addition, the Partnership Agreement prohibits the holding or transfer of a Partnership interest by or to a "tax exempt entity" (as defined in Code Section 168(h)) which would affect the method or manner in which the Partnership may depreciate Partnership assets. No transferee of the Units will automatically become a Limited Partner. Admission of a transferee to the Partnership as a Limited Partner requires the fulfillment of other obligations enumerated in the Partnership Agreement, including either the approval of all the Limited Partners (except the assignor Limited Partner) and the General Partner, or the approval of the assignor Limited Partner and the General Partner. Any transferee of a Partnership Interest who has not been admitted to the Partnership as a Partner shall not be entitled to any of the rights, powers or privileges of his transferor except the right to receive and be credited or debited with his proportionate share of Partnership income, gains, profits, losses, deductions, credits or distributions. A transferor Limited Partner will not be released from his personal liability under a Limited Partner Loan, unless otherwise specifically agreed by the Bank. Noncompetition Agreement and Protection of Confidential Information The Partnership Agreement provides that each Limited Partner (other than Units held by the General Partner of its Affiliates) is prohibited from having a direct or indirect ownership of an interest in a competing venture (including the lease or sublease of competing technology) (the "Outside Activities"). While they are Limited Partners in the Partnership, each Limited Partner is precluded from engaging in any Outside Activities. In the event that a Limited Partner's Partnership Interest is terminated or transferred upon the occurrence of certain events as provided in the Partnership Agreement, such Limited Partner is precluded, for a period of two years following the date of 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 date of withdrawal. This prohibition is in addition to the right of the General Partner to acquire the interest of a Limited Partner engaged in an Outside Activity as provided in the Partnership Agreement. See "Optional Purchase of Limited Partner Interests" in this Section, and the Partnership Agreement attached hereto as Appendix A. In addition, the Partnership Agreement provides that each Limited Partner acknowledges and agrees that his participation in the Partnership necessarily involves his access to confidential information that is proprietary in nature and, therefore, the exclusive property of the Partnership. Accordingly, the Limited Partners (other than the General Partner and its Affiliates who hold Limited Partner interests) are precluded from disclosing such confidential information during their participation as Limited Partners in the Partnership or thereafter unless required by law or with the prior written consent of the Partnership. Dissolution and Liquidation The Partnership will dissolve and terminate for any of the following reasons: 1. The sale, exchange or disposition of all or substantially all of the property of the Partnership without making provision for the replacement thereof; 2. The expiration of its term on December 31, 2040; 3. The bankruptcy or occurrence of certain other events with respect to the General Partner; 4. The election to dissolve the Partnership made by the General Partner and a Majority in Interest of the Limited Partners; or 5. Any other reason which under the laws of the State of Utah 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 then Limited Partners, have an option to purchase all the interest of a Limited Partner in the Partnership upon the occurrence with respect to the Limited Partner of (i) death, (ii) bankruptcy or insolvency, (iii) incompetency, or (iv) direct or indirect ownership of an interest in a competing venture. The General Partner may, in its sole discretion, assign to the Partnership its priority purchase option rights. Except in the case of a competing ownership interest, upon the occurrence of one or more of the preceding events, the withdrawing Limited Partner, or his personal representative, will have a brief period within which to sell his entire Partnership Interest to a purchaser approved of by the General Partner. If the withdrawing Limited Partner is unable to sell his Partnership Interest as provided above, the General Partner 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 capital account value option purchase price will be nominal in amount. 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. In the event of the death of a Limited Partner, the General Partner (or the Partnership) may purchase the deceased Limited Partner's Partnership Interest for an amount equal to 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. The withdrawing Limited Partner will not be released from his obligations under any Limited Partner Loan unless so agreed by the Bank. Furthermore, sale of his Partnership Interest may constitute an event of default under any outstanding Limited Partner Loan incurred by the selling Limited Partner. See "Terms of the Offering - - Limited Partner Loans." Dilution Offerings The General Partner has the authority to periodically offer and sell additional limited partnership interests in the Partnership through Dilution Offerings to investors (including Initial Limited Partners) who meet certain suitability standards determined by the General Partner ("Qualified Investors"). The primary purpose of Dilution Offerings would be (i) to raise additional capital for any legitimate Partnership purpose; and (ii) to assure the highest quality of patient care by admitting Qualified Investors to the Partnership who will be dedicated and motivated as owners to follow the Partnership's treatment protocol, and comply with its quality assurance and outcome analysis programs. Any sale of limited partnership interests in a Dilution Offering will result in the proportionate dilution of the Percentage Interests of the existing Partners; i.e., the interests of the General Partner and of the Limited Partners in Partnership allocations, cash distributions and voting rights will be proportionately reduced as a result of a successful Dilution Offering. The Limited Partner interests offered in a Dilution Offering will be sold in the manner and according to terms in the best interest of the Partnership, as prescribed in the sole discretion of the General Partner. Any additional limited partnership interests offered in a Dilution Offering will be sold for a price no lower than their fair market value as determined by the General Partner, in its sole discretion, at the time of the Dilution Offering. Arbitration The Partnership Agreement provides that disputes arising thereunder shall be resolved by submission to arbitration in Salt Lake City, Utah in accordance with the then prevailing commercial arbitration rules of the American Arbitration Association. Power of Attorney Each Investor, by executing the Subscription Agreement, irrevocably appoints Dr. Joseph Jenkins to act as attorney-in-fact to execute the Partnership Agreement, any amendments thereto and any certificate of limited partnership filed by the General Partner. The Partnership Agreement, in turn, contains provisions by which each Limited Partner irrevocably appoints Dr. Joseph Jenkins, to act as his attorney-in-fact to make, execute, swear to and file any documents necessary to the conduct of the Partnership's business, such as deeds of conveyance of real or personal property as well as any amendment to the Partnership Agreement or to any certificate of limited partnership which accurately reflects actions properly taken by the Partners. Reports to Limited Partners Within 90 days after the end of each Year of the Partnership, the General Partner will send to each person who was a Limited Partner at any time during such year such tax information, including, without limitation, Federal Tax Schedule K-1, as will be reasonably necessary for the preparation by such person of his federal income tax return, and such other financial information as may be required by the Act. Records Proper and complete records and books of account will be kept by the General Partner in which will be entered fully and accurately all transactions and other matters relative to the Partnership's business as are usually entered into records and books of account maintained by persons engaged in business of a like character. The Partnership books and records will be kept according to the method of accounting determined by the General Partner. The Partnership's fiscal year will be the calendar year. The books and records will be located at the office of the General Partner, and will be open to the reasonable inspection and examination of the Limited Partners or their duly authorized representatives during normal business hours. LEGAL MATTERS On the Closing Date, it is expected that Womble Carlyle Sandridge & Rice, a Professional Limited Liability Company, of Winston-Salem, North Carolina, will render an opinion as to the formation and existence of the Partnership, the status of Investors as Limited Partners and certain federal tax matters, the form of which is attached as Appendix C to this Memorandum. See "Risk Factors - Tax Risks." ADDITIONAL INFORMATION The Partnership will make available to Investors the opportunity to ask questions of its management and to obtain information to the extent it possesses such information or can acquire it without an unreasonable effort or expense, which is necessary to verify the accuracy of the information contained herein or which you or your professional advisors desire in evaluating the merits and risks of an investment in the Partnership. Copies of certain Hospital Contracts and insurance reimbursement agreements may not, however, be available due to confidentiality restrictions contained therein. GLOSSARY Certain terms in this Memorandum shall have the following meanings: Act. The Act means the Utah Revised Uniform Limited Partnership Act, as in effect on the date hereof. Affiliate. An Affiliate is (i) any person, partnership corporation, association or other legal entity ("person") directly or indirectly controlling, controlled by or under common control with another person; (ii) any person owning or controlling 10% or more of the outstanding voting interests of such other person; (iii) any officer, director or partner of such person; and (iv) if such other person is an officer, director or partner, any entity for which such person acts in such capacity. Bank. First-Citizens Bank & Trust Company. ---- Capital Account. The Partnership capital account of a Partner as computed pursuant to Article XII of the Partnership Agreement. Capital Contributions. All capital contributions made by a Partner or his predecessor in interest which shall include, without limitation, contributions made pursuant to Article VII of the Partnership Agreement. 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 October 17, 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 self-propelled mobile vehicle manufactured by AK Associates, L.L.C., which houses the Partnership's Lithostar(TM)lithotripter. Code. The Internal Revenue Code of 1986, or corresponding provisions of subsequent, superseding revenue laws. Contract Hospitals. The 3 hospitals, medical centers and ambulatory surgery centers to which the Partnership provides lithotripsy services pursuant to 3 separate Hospital Contracts. Counsel. Womble Carlyle Sandridge & Rice, a Professional Limited Liability Company, P.O. Drawer 84, Winston-Salem, North Carolina 27102. Dilution Offering. The issuance, offering and sale by the Partnership of additional partnership interests in the future. Distributions. Cash or other property, from any source, distributed to Partners. Escrow Agent. First-Citizens Bank & Trust Company. ------------ FDA. The United States Food and Drug Administration. --- Financial Statement. The Purchaser Financial Statement, included in the Subscription Packet accompanying this Memorandum, to be furnished by the Investors for review by the General Partner and the Bank in connection with their decision to accept or reject a subscription. General Partner. The general partner of the Partnership, Lithotripters, Inc., a North Carolina corporation, and a wholly owned subsidiary of Prime. Hospital Contracts. The 3 separate lithotripsy services agreements the Partnership has entered into with the Contract Hospitals. Initial Limited Partners. The Individuals who were Limited Partners prior to the commencement of this Offering. Investors. Potential purchasers of Units, including the Initial Limited Partners. 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 $6,648 per Unit, the proceeds of which will be paid directly to the Partnership. The form of the Limited Partner Note (including the Note Addendum attached thereto) is attached as Exhibit A to the form of Limited Partner Loan Commitment which is attached hereto as Appendix B. Limited Partners. The Limited Partners are those Investors in the Units admitted to the Partnership and any person admitted as a substitute Limited Partner in accordance with the provisions of the Partnership Agreement. Lithostar(TM). The Lithostar(TM)model extracorporeal shock wave lithotripter manufactured by Siemens and currently owned by the Partnership. Lithotripsy System. The Coach with the installed and operational Lithostar(TM)currently operated by the Partnership. Loan and Security Agreement. The agreement to be executed in conjunction with the Limited Partner Note by an Investor who finances a portion of the Unit purchase price through a Limited Partner Loan. The form of the Loan and Security Agreement is attached as Exhibit B to the form of Bank Commitment which is attached hereto as Appendix B. Loan Documents. The form of Limited Partner Loan Commitment, the Limited Partner Note, the Loan and Security Agreement, the Security Agreement and UCC-1, collectively. Loss. The net loss (including capital losses and excluding Net Gains from Capital Transactions) of the Partnership for each year as determined by the Partnership for federal income tax purposes. Memorandum. This Confidential Private Placement Memorandum, including all Appendices hereto, and any amendment or supplement hereto. Net Gains from Capital Transactions. The gains realized by the Partnership as a result of or upon any sale, exchange, condemnation or other disposition of the capital assets of the Partnership (which assets shall include Code Section 1231 assets) or as a result of or upon the damage or destruction of such capital assets. New Limited Partner. Any Investor admitted to the Partnership as a Limited Partner. 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 - Utah I, a Utah limited partnership. Partnership Agreement. The Partnership's Agreement of Limited Partnership, a copy of which is attached hereto as Appendix A, as the same may be amended from time to time. Partnership Cash Flow. For the applicable period the excess, if any, of (A) the sum of (i) all gross receipts from any source for such period, other than from Partnership loans, Capital Transactions and Capital Contributions; and (ii) any funds released by the Partnership from previously established reserves, over (B) the sum of (i) all cash expenses paid by the Partnership for such period; (ii) the amount of all payments of principal on loans to the Partnership; (iii) capital expenditures of the Partnership; and (iv) such reasonable reserves as the General Partner shall deem necessary or prudent to set aside for future repairs, improvements, or equipment replacement or additions, or to meet working capital requirements or foreseen or unforeseen future liabilities and contingencies of the Partnership; provided, however, that the amounts referred to in (B) (i), (ii) and (iii) above shall be taken into account only to the extent not funded by Capital Contributions, loans or paid out of previously established reserves. Such term shall also include all other funds deemed available for distribution and designated as "Partnership Cash Flow" by the General Partner. Partnership Interest. The interest of a Partner in the Partnership as defined by the Act and the Partnership Agreement. Partnership Minimum Gain. Gain as defined in Treasury Regulations Section 1.704-2(d). Partnership Refinancing Proceeds. The cash realized from the refinancing of Partnership assets after retirement of any secured loans and less (i) payment of all expenses relating to the transaction; and (ii) establishment of such reasonable reserves as the General Partner shall deem necessary or prudent to set aside for future repairs, improvements, or equipment replacement or additions, or to meet working capital requirements or foreseen or unforeseen future liabilities or contingencies of the Partnership. Partnership Sales Proceeds. The cash realized from the sale, exchange, casualty or other disposition of all or a portion of Partnership assets after the retirement of all secured loans and less (i) the payment of all expenses related to the transaction; and (ii) establishment of such reasonable reserves as the General Partner shall deem necessary or prudent to set aside for future repairs, improvements, or equipment replacement or additions, or to meet working capital requirements or foreseen or unforeseen future liabilities or contingencies of the Partnership. Percentage Interest. The interest of each Partner in the Partnership, to be determined in the case of each Investor by reference to the percentage opposite his name set forth in Schedule A to the Partnership Agreement. Each Unit sold pursuant to this Offering represents an initial 0.5% economic interest. The Percentage Interest will be set forth in Schedule A to the Partnership Agreement or any other document or agreement, as a percentage or a fraction or on any numerical basis deemed appropriate by the General Partner. Prime. Prime Medical Services, Inc. a publicly held Delaware corporation and parent of the General Partner and the Sales Agent. Prime Rate. The rate of interest periodically established by the Bank and identified as such in literature published and circulated within the Bank's offices. Pro Rata Basis. In connection with an allocation or distribution, an allocation or distribution in proportion to the respective Percentage Interest of the class of Partners to which reference is made. Profit. The net income of the Partnership for each year as determined by the Partnership for federal income tax purposes. Qualified Income Offset Item. An adjustment, allocation or distribution described in Treasury Regulations Sections 1.704-1(b)(2)(ii)(d)(4), 1.704-1(b)(2)(ii)(d)(5) or 1.704-1(b)(2)(ii)(d)(6) unexpectedly received by a Partner. Sales Agent. MedTech Investments, Inc., a registered broker-dealer, member of the National Association of Securities Dealers, Inc. and an Affiliate of the General Partner. 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 Limited Partner Loan Commitment which is attached hereto as Appendix B. Service. The Internal Revenue Service. ------- Service Area. The geographic region in which Partnership operations are conducted and which presently consists primarily of the States of Idaho and Utah. The General Partner has sole discretion to expand the Service Area subject to fiduciary duties owed by the General Partner to its Limited Partners. Siemens. Siemens Medical Systems, Inc. and its Affiliates. ------- Subscription Agreement. The Subscription Agreement, included in the Subscription Packet accompanying this Memorandum, to be executed by the Investors in connection with their purchase of Units. Subscription Packet. The packet of subscription materials to be completed by Investors in connection with their subscription for Units. UCC-1. The Uniform Commercial Code Financing Statement, two copies of which are attached to the Subscription Packet and are to be executed in conjunction with the Limited Partner Note by an Investor who finances a portion of the Unit purchase price through a Limited Partner Loan. The UCC-1 will be used by the Bank to perfect its security interest in such Investor's share of Distributions. Units. The 48 equal units of limited partner interest in the Partnership offered pursuant to this Memorandum for a price per Unit of $9,148 in cash. Year of the Partnership. An annual accounting period ending on December 31 of each year during the term of the Partnership. EX-10.152 65 0065.txt EX 10.152 1ST SUPPLEMENT TO MEMORANDUM-UTAH FIRST SUPPLEMENT DATED OCTOBER 17, 2000 TO THE CONFIDENTIAL PRIVATE PLACEMENT MEMORANDUM DATED SEPTEMBER 5, 2000 FAYETTEVILLE LITHOTRIPTERS LIMITED PARTNERSHIP I - UTAH I Fayetteville Lithotripters Limited Partnership - Utah I, a Utah limited partnership (the "Partnership"), by this First Supplement hereby amends and supplements its Confidential Private Placement Memorandum of September 5, 2000 (the "Memorandum"). Capitalized terms used herein are defined in the Glossary appearing in the Memorandum. Persons who have subscribed for or are considering an investment in the Units offered by the Memorandum should carefully review this First Supplement. Extension of the Offering Pursuant to the authority given to the General Partner in the Memorandum, the General Partner hereby elects to extend the offering termination date to April 13, 2001 (or earlier in the discretion of the General Partner, upon the sale of all Units as provided in the Memorandum). EX-10.153 66 0066.txt EX 10.153 CONFIDENTIAL MEMORANDUM-WASHINGTON - ------------------------ Name of Prospective Investor Memorandum Number - -------------------------------------------------------------------------------- WASHINGTON UROLOGICAL SERVICES, LLC A Limited Liability Company Formed Under the Laws of Washington CONFIDENTIAL PRIVATE PLACEMENT MEMORANDUM up to $169,480 in Cash up to $110,000 in Personal Guaranties 40 Units of Limited Liability Company Membership Interest - -------------------------------------------------------------------------------- THIS MEMORANDUM IS FURNISHED PURSUANT TO A CONFIDENTIALITY AGREEMENT BETWEEN THE COMPANY AND THE INVESTOR WHOSE NAME APPEARS ABOVE. THE CONFIDENTIALITY AGREEMENT PROHIBITS THE DISCLOSURE OF THE CONFIDENTIAL MATERIAL CONTAINED IN THIS MEMORANDUM, EXCEPT TO THE EXTENT SUCH INVESTOR DEEMS IT NECESSARY TO SHARE SUCH INFORMATION WITH HIS LEGAL, ACCOUNTING OR OTHER FINANCIAL ADVISORS, WHO LIKEWISE SHALL BE BOUND BY THE SAME CONFIDENTIALITY RESTRICTIONS SET FORTH IN THE CONFIDENTIALITY AGREEMENT. MEDTECH INVESTMENTS, INC. Exclusive Sales Agent 2008 Litho Place Fayetteville, North Carolina 28304 1-800-682-7971 WINSTON #893892 v 3 v WINSTON #893892 v 3 The Date of this Memorandum is April 24, 2000 WASHINGTON UROLOGICAL SERVICES, LLC up to $169,480 in Cash up to 40 Units of Limited Liability Company Membership Interest at $4,237 in Cash and $2,750 in Personal Guaranties per Unit Washington Urological Services, LLC, a Washington limited liability company (the "Company") operated by its four-member managing board (the "Managing Board"), hereby offers on the terms set forth herein up to 40 Units (the "Units") of limited liability company membership interest in the Company, at a price per Unit of $4,237 in cash, plus a personal guaranty of 0.5% of the Company's obligations under a loan of $550,000 from First-Citizens Bank & Trust Company (the "Loan") (a $2,750 principal guaranty obligation per Unit). See "Terms of the Offering." Each Unit will represent an initial 0.5% economic interest in the Company. See "Risk Factors - Other Investment Risks - Dilution of Members' Interests." The Company owns and operates a Storz Modulith(R) SLX-T model extracorporeal shockwave lithotripter for the lithotripsy of kidney stones. The lithotripter is transported in a mobile van (together with the operational lithotripter, the "Existing Lithotripsy System") enabling the Company to provide lithotripsy services at various locations primarily in the area of the State of Washington west of the Cascade Mountains, and such other areas as determined by the Managing Board (the "Service Area"). The Company intends to use the net proceeds of this Offering primarily to (i) pay the costs of the Offering and (ii) finance a portion of the cost of purchasing a new Storz Modulith(R) SLX-T transportable lithotripter and a new mobile van to transport the lithotripter (collectively, the "New Lithotripsy System"). See "Sources and Applications of Funds." The Existing Lithotripsy System and New Lithotripsy System are referred to hereinafter collectively as the "Lithotripsy Systems." The cash purchase price and personal guaranties are due at subscription; however, prospective Investors who meet certain requirements may be able to personally borrow funds from a third-party financial institution in order to pay a portion of their cash purchase price per Unit. See "Terms of the Offering - Member Loans." The Offering will terminate on June 6, 2000 (or earlier upon the sale of all 40 Units as provided herein), unless extended at the discretion of the Managing Board for a period not to exceed 180 days. ------------------------------- Purchase of Units involves risks and is suitable only for persons of substantial means who have no need for liquidity in this investment. Among other factors, prospective investors should note that the health care industry is undergoing significant government regulatory reforms and that the Company faces substantial competition in the Service Area. See "Risk Factors" and "Terms of the Offering - Suitability Standards." ------------------------------- Cash Selling Net Cash Amount of Offering Price Commissions(1) Proceeds (2) Guaranties(3) Per Unit(4) $ 4,237 $ 75 $ 4,162 $ 2,750 Total Maximum(5) $169,480 $ 3,000 $166,480 $110,000 (See Footnotes on Back of Cover Page) See Glossary for capitalized terms used herein and not otherwise defined. (1) The Units will be sold on a "best-efforts" any or all basis by MedTech Investments, Inc., a broker-dealer registered with the Securities and Exchange Commission, a member of the National Association of Securities Dealers, Inc. and an Affiliate of a Member of the Company, Sun Medical Technologies, Inc. (the "Sales Agent"). The Company will pay the Sales Agent a $75 commission for each Unit sold and will reimburse the Sales Agent for its Offering costs (not to exceed $7,000). The Company has agreed to indemnify the Sales Agent against certain liabilities, including liabilities vender the Securities Act of 1933 (the "Securities Act"). See "Plan of Distribution." (2) Net Cash Proceeds do not reflect deduction of expenses payable by the Company. See "Sources and Applications of Funds." The cash price per Unit ($4,237) is payable in cash upon subscription; provided, that prospective Investors who meet certain requirements may be able to personally borrow funds from a third-party financial institution in order to pay a portion of their cash purchase price per Unit. For the convenience of the Investors, the Company has arranged for financing of a portion of the Units' cash purchase price (the "Member Loan") with First-Citizens Bank & Trust Company, which is headquartered in Raleigh, North Carolina, and has approximately 370 offices throughout the southeastern United States (the "Bank"). Therefore, in lieu of paying the entire purchase price in cash at subscription, prospective Investors may execute and deliver to the Sales Agent, together with their Subscription Packets, at least $2,500 in cash and a Member Note payable to the Bank in a maximum principal amount of up to $1,737 per Unit to be purchased, a Loan and Security Agreement, Security Agreement and two Uniform Commercial Code Financing Statements ("UCC-1's") (collectively, the "Loan Documents"). See "Terms of the Offering - Member Loans" and the forms of the Member Note, the Loan and Security Agreement and Security Agreement attached to the form of Loan Commitment as Exhibits A, B and C, respectively, which is attached hereto as Appendix B and the UCC-1's attached as part of the Subscription Packet. (3) At subscription, each Investor must execute and deliver to the Sales Agent a guaranty agreement (the "Guaranty") under which he will guarantee payment of a portion of the Company's obligations under the Loan, the proceeds of which were used by the Company to acquire the Existing Lithotripsy System and pay sales taxes on such equipment. For each Unit purchased, an Investor will be required to guarantee 0.5% of the Loan, which represents up to a $2,750 principal guaranty obligation. As of the date of this Memorandum the outstanding balance on the Loan is $433,000. A Member's liability under the Guaranty may exceed the principal guaranty per Unit as provided above because such liability includes not only the maximum stated principal amount, but also accrued and unpaid interest, late payment penalties and legal costs incurred by the Bank in collecting defaulted obligations. For a description of the guaranty requirements and the terms of the Guaranties, see "Terms of the Offering - Guaranty Arrangements" and the form of Guaranty included in the Subscription Packet accompanying this Memorandum. (4) Each Investor may purchase no less than one Unit. The Managing Board, however, reserves the right to sell less than one Unit as an additional investment, and to reject, in whole or in part, any subscription. (5) Offering proceeds will first be used by the Company to pay Offering costs and expenses (up to $35,000) and the remainder of the proceeds will be used to finance a portion of the cost of purchasing the New Lithotripsy System. See "Sources and Applications of Funds." The Company seeks by this Offering to sell up to 40 Units for an aggregate of up to $169,480 in cash ($166,480 net of Sales Agent's commissions) and up to $110,000 in personal guaranties of the Company's principal obligations under the Loan. All subscription funds, Guaranties and Loan Documents will be held in an interest bearing escrow account with the Bank until the acceptance of the Investor's subscription (and approval by the Bank if the Investor is financing a portion of the Unit cash purchase price through a Member Loan), rejection of the Investor's subscription or termination of the Offering. The Company 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 Company and the approval of his Guaranty by the Bank as provided herein, such Investor will be admitted to the Company as a Member, provided that acceptance of subscriptions by an Investor that elects to finance a portion of his Unit cash purchase price is also conditioned upon approval by the Bank of his Member Loan. Upon admission as a Member, the Investor's subscription funds will be released to the Company and the Guaranties and the Loan Documents, if any, will be released to the Bank. In the event a subscription is rejected, all subscription funds (without interest), Guaranty and the Loan Documents, if any, and other subscription documents held in escrow will be promptly returned to the rejected Investor. The Offering will terminate on June 6, 2000, unless it is sooner terminated by the Managing Board, 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 Managing Board 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 Company, its Managing Board, 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 Page RISK FACTORS...............................................................1 Operating Risks...................................................1 Tax Risks.........................................................7 Other Investment Risks...........................................13 THE COMPANY...............................................................17 TERMS OF THE OFFERING.....................................................17 The Units and Subscription Price.................................17 Acceptance of Subscriptions......................................18 Guaranty Arrangements............................................18 Member Loans.....................................................21 Subscription Period; Closing.....................................23 Offering Exemption...............................................23 Suitability Standards............................................23 How to Invest....................................................24 Restrictions on Transfer of Units................................24 PLAN OF DISTRIBUTION......................................................25 BUSINESS ACTIVITIES.......................................................26 General..........................................................26 Treatment Methods for Kidney Stone Disease.......................26 The Existing Lithotripsy System..................................27 Acquisition of New Lithotripsy System............................28 Acquisition of Additional Assets.................................28 Hospital Contracts...............................................29 Operation of the Lithotripsy Systems.............................30 Management.......................................................31 Employees........................................................31 FINANCIAL CONDITION OF THE COMPANY........................................32 SOURCES AND APPLICATIONS OF FUNDS.........................................36 MANAGING BOARD............................................................37 MANAGEMENT AGENT..........................................................37 COMPENSATION AND REIMBURSEMENT TO CERTAIN MEMBERS AND THEIR AFFILIATES....38 CONFLICTS OF INTEREST.....................................................40 FIDUCIARY RESPONSIBILITY OF THE MANAGING BOARD............................41 COMPETITION...............................................................41 Affiliated Competition...........................................42 Other Competition................................................42 REGULATION................................................................43 Federal Regulation...............................................43 ALS GUIDELINES DISCLOSURE...........................Error! Bookmark not defined. State Regulation.................................................52 PRIOR ACTIVITIES..........................................................53 SUMMARY OF THE OPERATING AGREEMENT........................................54 Nature of Membership Interest....................................54 Dilution Offerings...............................................54 Fundamental Changes..............................................55 Profits, Losses and Distributions................................57 Management of the Company........................................60 Powers of the Managing Board and Members' Voting Rights..........61 Rights and Liabilities of the Members............................62 Restrictions on Transfer of Membership Interests.................63 Dissolution and Liquidation......................................63 Optional Purchase of Membership Interests........................64 Noncompetition Agreement and Protection of Confidential Information..............................................65 Arbitration......................................................65 Power of Attorney................................................65 Reports to Members...............................................66 Records..........................................................66 LEGAL MATTERS.............................................................66 ADDITIONAL INFORMATION....................................................66 GLOSSARY 66 APPENDICES Appendix A OPERATING AGREEMENT OF WASHINGTON UROLOGICAL SERVICES, LLC Appendix B MEMBER LOAN COMMITMENT (WITH EXHIBITS) Appendix C FORM OF OPINION OF WOMBLE CARLYLE SANDRIDGE & RICE, A PROFESSIONAL LIMITED LIABILITY COMPANY Appendix D. FORM OF OPINION OF REED MCCLURE, A PROFESSIONAL SERVICES CORPORATION Appendix E NOTES TO FINANCIAL STATEMENTS WINSTON #893892 v 3 72 WINSTON #893892 v 3 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 limited liability companies generally, and to the other special operating, tax and other investment risks set forth below. See the "Glossary" for terms used in this Memorandum and not otherwise defined. Operating Risks General Risks of Operations. The Company was formed under the laws of the State of Washington on August 31, 1998 and commenced operations in March, 1999. Although the Managing Board's members and its personnel have significant experience in managing lithotripsy enterprises, whether the Company can continue to effectively operate its business cannot be accurately predicted. The benefits of an investment in the Company also depend on many factors over which the Company has no control, including competition, technological innovations rendering the Lithotripsy Systems less competitive or obsolete, and other matters. The Company may be adversely affected by various changing local factors such as an increase in local unemployment, a change in general economic conditions, changes in interest rates and availability of financing, and other matters that may render the operation of the Lithotripsy Systems difficult or unattractive. Other factors that may adversely affect the operation of the Lithotripsy Systems are unforeseen increased operating expenses, energy shortages and costs attributable thereto, uninsured losses and the capabilities of the Company's management personnel. Uncertainties Related to Changing Healthcare Environment. The health care industry has experienced substantial changes in recent years. Managed care is becoming a major factor in the delivery of lithotripsy services in the Service Area and the Managing Board anticipates that managed care programs, including capitation plans, will continue to play an increasing role in the delivery of lithotripsy services and that competition for these services may shift from individual practitioners to health maintenance organizations and other significant providers of managed care. No assurance can be given that the changing healthcare environment will not have a material adverse effect on the Company. Lack of Diversification. The Company's principal purpose will be to operate the Lithotripsy Systems. Because the Company is dependent on only one line of business and prospectively two Lithotripsy Systems, 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 Company's revenues are expected to continue to be derived from the fees paid by Contract Hospitals and other health care facilities under lithotripsy service contracts with the Company. The Company does not currently directly bill or collect for services from patients or their third-party payors. Payments received from Contract Hospitals and other health care facilities may be subject to renegotiation depending on the reimbursement such parties receive. The increasing influence of health maintenance organizations and other managed care companies has resulted in pressure to reduce the reimbursement available for lithotripsy procedures. The Management Agent and some of its Affiliates have recently experienced declining revenues based on these managed care pressures in other health care markets. Additionally, the Health Care Financing Administration ("HCFA"), the federal agency which administers the Medicare program, has proposed rules which would reduce the reimbursement available for lithotripsy procedures provided at hospitals to $2,235. See "Regulation - Federal Regulation." In most cases reimbursement rates payable to the Company 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 Managing Board anticipates that reimbursement available for lithotripsy procedures may continue to decrease. Such decreases would have a material adverse effect on Company revenues. Regarding the professional fees paid to physicians who treat patients on the Lithotripsy Systems, the Managing Board anticipates that similar competitive pressures may result in lower reimbursement paid to physicians, both by private insurers and by government programs such as Medicare. See "Regulation." Reliability and Efficacy of the Storz Modulith(R) SLX-T. The Modulith(R) SLX-T received FDA premarket approval on March 27, 1997. Although the Managing Board and its Affiliates have limited positive direct experience with the use of the Modulith(R) SLX-T, "downtime" periods necessitated by maintenance and repairs of the Lithotripsy Systems will adversely affect Company revenues. Preliminary reports from abroad and "word of mouth" anecdotal evidence indicate that the Modulith(R) SLX-T is as effective as most of the "portable" lithotripters in the market. The Managing Board is aware that early data from abroad concerning one precursor to the Modulith(R) SLX-T reflected a high retreatment rate, and that an Affiliate of the Managing Agent experienced electrical and mechanical problems using another precursor, the Modulith(R) SLX. However, the Managing Agent's and its Affiliates' limited experience with the transportable Modulith(R) SLX-T has shown acceptable retreatment rates. A high retreatment rate may adversely affect the Company. Investors should note that some studies indicate that lithotripsy may cause high blood pressure and tissue damage. The Company 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 Company 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. Company Limited Resources and Risks of Leverage. The Company used the Loan proceeds to acquire the Existing Lithotripsy System and to pay state sales taxes on such equipment. The proceeds of this Offering cannot be accurately determined until the Closing has occurred and the number of Units sold has been calculated. In any event such proceeds are not sufficient to fund all anticipated expenses, and the Company will have to supplement Company funds with the proceeds of debt financing. See "Business Activities - Anticipated Partnership Expenditures" and "Sources and Application of Funds." The terms of the Loan may restrict the Company's ability to obtain another financing commitment, and although members of the Managing Board maintain good relationships with certain commercial lending institutions, the Company has not obtained a loan commitment from any party in any amount and whether one would timely be forthcoming on terms acceptable to the Company cannot be assured. While the Managing Board anticipates that cash generated from operations will continue to enable the Company to repay the remainder of the obligations under the Loan in accordance with its terms, lower than anticipated revenues, greater than anticipated expenses, or unexpected interruptions in operations could result in the Company failing to make payments of principal or interest when due under the Loan, and the Company's equity being reduced or eliminated. In such event, the Members could lose their entire investment and be called upon to pay their Guaranties. See "Risk Factors - Operating Risks - Liability Under the Guaranty." In addition, while the Managing Board does not anticipate that it would cause the Company to incur indebtedness unless cash generated from Company operations were at the time expected to enable repayment of such loan in accordance with its terms, as discussed above, lower than anticipated revenues and/or greater than anticipated expenses could result in the Company's failure to make payments of principal or interest when due under such a loan and the Company's equity being reduced or eliminated. In such event, the Members could also lose their entire investment. Acquisition of Additional Assets. If in the future the Managing Board determines that it is in the best interest of the Company to acquire (i) one or more additional fixed base or mobile Lithotripsy Systems or (ii) any other urological device or equipment so long as such device has received FDA premarket approval at the time it is acquired by the Company, and/or (iii) an interest in any business entity that engages in a urological business described above, the Managing Board has the authority to establish reserves or subject to certain restrictions in the Loan, to borrow additional funds on behalf of the Company to accomplish such goals, and may use Company assets and revenues to secure and repay such borrowings. The Managing Board must obtain the prior written approval of the Members representing two-thirds of the aggregate interests in the Company to take certain actions. See "Summary of the Operating Agreement - Power of the Managing Board and Members' Voting Rights." The acquisition of additional assets may substantially increase the Company's monthly obligations and may result in increased personnel requirements. See "Risk Factors - Operating Risks - Company Limited Resources and Risks of Leverage." Other than the New Lithotripsy System which the Company intends to purchase with the proceeds of this Offering and Company debt financing, the Managing Board does not anticipate acquiring additional Company assets unless projected Company Cash Flow or proceeds from another Dilution Offering are sufficient to finance such acquisitions. See "Risk Factors - Other Investment Risks - Dilution of Members' Interests." In any event, no Member would be personally liable on any additional Company indebtedness without such Member's prior written consent. There is no assurance that financing would be available to the Company to acquire additional assets or to fund any additional working capital requirements. In any event, the Company's ability to incur additional indebtedness while the Loan is outstanding is severely restricted. Any such borrowing by the Company will serve to increase the risks to the Company associated with leverage as provided above. Liability Under the Guaranty. For each Unit purchased, an Investor will be required to execute and deliver to the Bank a Guaranty pursuant to which the Investor will personally guarantee 0.5% of the Company's total obligations under the Loan, which is equivalent to a $2,750 principal guaranty per Unit. Although as of the date of this Memorandum, the outstanding principal balance of the Loan is $433,000, the terms of the Loan provide that it can be renewed for its initial full amount (i.e., $550,000), and therefore, Investors should view their potential liability under their Guaranties as if the full Loan amount is outstanding. Liability under the Guaranty may exceed $2,750 per Unit because the guaranty obligation per Unit also includes 0.5% of all accrued and unpaid interest, late payment penalties, and legal costs incurred by the Bank in collecting any defaulted payments. An Investor should not purchase a Unit if he does not have resources sufficient to bear the loss of this entire amount. See "Terms of the Offering - Guaranty Arrangements - Liability Under the Guaranty" and "Terms of the Offering - Suitability Standards." If Company operations continue to generate sufficient revenues to enable the Company to make all payments under the Loan when due, no Member will be required to perform under his Guaranty. If a default occurs under the Loan, the Bank may, among other remedies, seek payment directly from the Members under the Guaranties. The Guaranties are a guaranty of payment and not of collection and require the Members to waive certain rights to which they might otherwise be entitled. As a result, the liability of the Members under the Guaranties is direct and immediate and not conditioned or contingent upon either the pursuit of any remedies against the Company or any other person (including any other guarantor) or foreclosure of any security interest or liens available to the Bank. The Guaranties are a continuing guaranty that by their terms will survive the death, bankruptcy or disability of a Member guarantor. A Member's liability under the Guaranty continues regardless of whether the Member remains a Member in the Company and is not affected or limited by any claims or offsets the Member may have against the Company or the Managing Board. See the form of Guaranty Agreement included in the Subscription Packet. Competition. Many fixed-site and mobile lithotripters are currently operating in and around the Service Area which are in direct competition with the Company's Lithotripsy Systems. An Affiliate of the Management Agent also competes in the Service Area. The competing lithotripsy service providers, including the Management Agent's Affiliate, generally have existing contracts with hospitals and other facilities. The Management Agent's Affiliate competes with the Company in the Service Area by providing lithotripsy services at Covington Day Surgery Center in Kent. The Management Agent is currently negotiating an assignment of this services agreement to the Company. In the event the Management Agent is unable to obtain the consent of the facility to the assignment, its Affiliate will continue to provide services to the facility for the remaining term of the agreement in direct competition with the Company. Affiliates of the Management Agent also compete with the Company by providing lithotripsy services near the Service Area. See "Prior Activities," "Conflicts of Interest" and "Competition." There is no assurance that other parties will not, in the future, operate fixed-base or mobile lithotripters in and around the Service Area. To the Company's knowledge, no manufacturers are restricted from selling their lithotripters to other parties in the Service Area. Furthermore, the Company competes with facilities and individual medical practitioners who offer conventional treatment (e.g., surgery) for kidney stones. Managed care companies generally contract either directly with hospitals or specified providers for lithotripsy services for beneficiaries of their plans. It is not uncommon for managed care companies to have contracts already in place with hospitals or specified providers, and the Company 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 Company's services. Restrictions on Members. The Operating Agreement severely restricts the Members' ability to own interests in competing equipment or ventures. However, the Managing Board may, in its sole discretion, waive the restrictions with respect to interests held by an Investor at the time he becomes a Member. See "Summary of the Operating 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 Members may not successfully compete with the Company. 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 Company 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 Company. The laws are broad in scope, and interpretations by courts have been limited. Violations of these laws would subject the Managing Board and all physician Members to governmental scrutiny and/or felony prosecution and punishment in the form of large monetary fines, loss of licensure, imprisonment and exclusion from Medicare and Medicaid. Certain provisions of Medicare and Medicaid law limit provider ownership and control over the various health care services to which physicians may make Medicare and Medicaid referrals. The primary laws involved are the "Stark II" federal statute prohibiting financial relationships between physicians and certain entities to which they refer patients, and the Anti-Kickback Statute which prohibits compensation in exchange for or to induce referrals. Regarding Stark II, HCFA published proposed Stark II regulations in 1998. Under the proposed regulations, physician Member referrals of Medicare and Medicaid patients to Contract Hospitals for lithotripsy services would be prohibited. If HCFA adopts the proposed Stark II regulations as final, or if a reviewing court were to interpret the Stark II statute using the proposed regulations as interpretive authority, then the Company and its physician Members would likely be found in violation of Stark II. In such instance, the Company and/or its physician Members 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 Managing Board believes the structure and purpose of the Company are in compliance with the Anti-Kickback Statute, no assurance can be given that government officials or a reviewing court would agree. Violation of the Anti-Kickback Statute could subject the Company, the Managing Board and the physician Members 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 Stark II or the Anti-Kickback Statute has been violated. In addition to Stark 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 Company. If this occurs, the Managing Board and the Members are obligated to use their best efforts to devise a plan for restructuring the Company's operations to comply with such laws. In the event such a plan cannot be devised within a reasonable time period, the Managing Board is obligated either to cause the sale of the Membership Interests of all of the Members or to dissolve the Company. See "Summary of the Operating Agreement - Optional Purchase of Membership Interests." Regarding state law, Washington passed one of the first self-referral laws affecting physicians in 1949. Violation of the law is a criminal misdemeanor, and can subject the violator to a sentence of up to ninety (90) days in jail, a fine of up to one thousand dollars ($1,000), or both. In addition, violation of the law constitutes unprofessional conduct and could jeopardize the professional (i.e., medical) license of a violator, including potential loss of the license. The Company requested local health care counsel in Washington ("Local Counsel") to review the self-referral law and provide a written opinion on its impact on this Offering and the business of the Company. Prospective Members are encouraged to closely review the opinion of Local Counsel, attached as Appendix D. Based on Local Counsel's opinion, the Company has determined to proceed with the Offering. However, Local Counsel's opinion is not binding on any Washington government agency, and no assurance can be given that the Offering would not be found to violate the Washington self-referral law. Various licensure requirements must be met for the Company to operate the Lithotripsy Systems in Washington. The Company has been seeking and will continue to seek to comply with such licensure requirements. See "Regulation - State Regulation." Contract Terms and Termination. The Company provides lithotripsy services to 16 Contract Hospitals pursuant to 11 separate Hospital Contracts. Generally, the Hospital Contracts grant the Company the exclusive right to provide lithotripsy services at the particular Contract Hospital, and provide for automatic renewal on a year-to-year basis. The Hospital Contracts are terminable without cause upon 180 days or less prior written notice by either party prior to any renewal date. The Management Agent is currently negotiating services contracts with two additional treatment facilities and the Company is presently providing services to such facilities on a month-to-month basis. It is expected that most new lithotripsy service contracts, if any, would have one-year terms and be automatically renewed unless either party elects to cancel prior to the end of the term. The Managing Board believes the Company has a good relationship with the Contract Hospitals and does not anticipate significant terminations. There is no assurance, however, that fees payable to the Company by Contract Hospitals will not decline or that terminations will not occur. The resulting impact to the Company of such events would have a material adverse effect on Company operations. In addition, competing vendors may attempt to cause certain Contract Hospitals to contract with them instead of the Company. The loss of Contract Hospitals to competition will adversely affect Company revenues and such effect could be material. Thus, there is no assurance that Company 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 Company's inability to secure new ones could have a material negative impact on the financial condition and results of the Company. See "Business Activities - Hospital Contracts" and "Risk Factors - Competition." Loss on Dissolution and Termination. Upon the dissolution and termination of the Company, the proceeds realized from the liquidation of its assets, if any, will be distributed to its Members only after satisfaction of the claims of all creditors, including, but not limited to the Bank. See "Risk Factors - Operating Risks - Liability Under the Guaranty" and "Risk Factors - Other Investment Risks - Liability Under Member Loan." Accordingly, the ability of a Member 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 Operating Agreement - Optional Purchase of Membership Interests." Tax Risks Investors should note that the Managing Board anticipates no significant tax benefits associated with the operation of the Lithotripsy Systems or the Company. 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 Company or the Members. The Company 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 Company. 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 COMPANY. 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 COMPANY. 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 COMPANY. FURTHERMORE, INVESTORS SHOULD NOTE THAT THE ANTICIPATED FEDERAL INCOME TAX CONSEQUENCES OF AN INVESTMENT IN THE COMPANY 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 COMPANY AS AN ECONOMIC INVESTMENT AND THAT THE COMPANY 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 COMPANY TO ACHIEVE TAX BENEFITS AS THE MANAGING BOARD ANTICIPATES SIGNIFICANT COMPANY TAXABLE INCOME THROUGHOUT THE TERM OF THE COMPANY. Possible Legislative or Other Actions Affecting Tax Consequences. The federal income tax treatment of an investment in an equipment/service oriented limited liability company such as the Company 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 liability companies 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 Company, 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 Company may cause certain Members, certain hospitals and healthcare treatment centers, the Company, 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 Members 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 Member. These rules may adversely affect Investors who are currently involved in a medical practice joint venture, regardless of their purchase of Units in the Company. The Managing Board and Counsel to the Company 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 Company, 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 Company. 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. Company Allocations. The Operating 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 (and, in effect, any entities taxed as partnerships, e.g., limited liability companies) 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 Operating 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 Operating Agreement provides that in each year annual Distributions may be made to the Members. Excluded from the definition of cash available for distribution is the amount of funds necessary to discharge Company debts (including scheduled payments and certain prepayments under the Loan) and to maintain certain cash reserves deemed necessary by the Managing Board. In addition, the Managing Board anticipates that the Company will incur significant capital costs for the acquisition of the New Lithotripsy System to be funded with debt proceeds whose principal will have to be paid out of Company revenues. If Company cash flow declines, a Member could be subject to income taxes payable out of personal funds to the extent of the Company's income, if any, attributed to him without receiving from the Company sufficient Distributions to pay the Member's tax with respect to such income. Effect of Classification as Corporation. The Company will not seek a ruling from the Service concerning the tax status of the Company. It is the opinion of Counsel that the Company will be treated as a partnership for federal income tax purposes and not as an association taxable as a corporation unless the Company so elects. The Company has not and will not make an election to be classified as other than a partnership for federal income tax purposes. Although the Company 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 Company being treated as an association taxable as a corporation, with a resulting greater tax burden associated with the purchase of Units. The Managing Board, in order to comply with applicable tax law, will keep the Company'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 Managing Board expects that the Company 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 Members 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 Company against other income of the Investor. THE PASSIVE ACTIVITY LOSS RULES WILL AFFECT EACH INVESTOR DIFFERENTLY, DEPENDING ON HIS OWN TAX SITUATION. EACH INVESTOR SHOULD CONSULT WITH HIS OWN TAX ADVISOR TO DETERMINE THE EFFECT OF THESE RULES ON THE INVESTOR IN LIGHT OF THE INVESTOR'S INDIVIDUAL FACTS AND CIRCUMSTANCES. Depreciation. As in the case of its existing equipment, the Company will use the Modified Accelerated Cost Recovery System ("MACRS") to depreciate the cost of any equipment (including the New Lithotripsy System) or improvements hereafter acquired. Any additions or improvements to the Lithotripsy Systems will also be depreciated over a five year term using the 200% declining balance method of depreciation, switching to the straight-line method to maximize the depreciation allowance. If purchases or improvements are made after the beginning of any year, only a fraction of the depreciation deduction may be claimed in that year. As under prior law, the 1986 Act provides that the full amount of depreciation on personal property (such as the Lithotripsy Systems) is recaptured upon disposition (i.e., is taxed as ordinary income) to the extent gain is realized on the disposition. Investors should note that the 1986 Act repealed the investment tax credit for all personal property. Company Elections. The Code permits limited liability companies to make elections for the purpose of adjusting the basis of Company property on the distribution of property by a limited liability company to a member and on the transfer of an interest in a limited liability company by sale or exchange or on the death of a member. The general effect of such elections is that transferees of Membership Interests will be treated, for the purposes of depreciation and gain, as though they had a direct interest in the Company's assets, and the difference between their adjusted bases for their Membership Interests and their allocable portion of the Company'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 Membership Interests. Any such election, once made, cannot be revoked without the consent of the Service. Under the terms of the Operating Agreement, the Managing Board, in its discretion, may make the requisite election necessary to effect such adjustment in basis. Sale of Company Units. Gain realized on the sale of Units by a Member who is not a "dealer" in Units or in membership 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 Company include the Member's share of the ordinary income that the Company would realize as a result of the recapture of depreciation (as described above) if the Company had sold Company depreciable property immediately before the Member sold his Membership 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 Company 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 Company. Under the Code, a Company 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 Company is entitled to deduct in full when paid or incurred; (2) amortizable expenses -- expenditures which the Company 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 Company property (or Company loans) and deducted over a period of time as the property (or Company loan) is amortized or depreciated; (4) organization expenses -- expenditures related to the organization of the Company, 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 Company, which under Section 709 of the Code must be capitalized but may be neither depreciated, amortized, nor otherwise deducted; (6) Company distributions -- payments to Members representing distributions of Company funds, which may be neither capitalized, amortized nor deducted; (7) start-up expenses -- expenditures incurred by the Company during an initial period, which under Section 195 of the Code may be amortized over a 60-month period; and (8) guaranteed payments to Members -- payments to Members 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 the Company for services. In particular, Code Section 461(h) now provides that an expense or fee paid to a service provider may not be accrued for federal income tax purposes prior to the time "economic performance" occurs. "Economic performance" occurs as (and no sooner than) the service provider provides the required services. All expenditures of the Company must constitute ordinary and necessary business expenses in order to be deducted by the Company 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 Company 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 Company. 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 Company is an entity 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 Company's proposed tax treatment of such items. The Company believes the payments to certain Members and their Affiliates are customary and reasonable payments for the services rendered by them to the Company; 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 Company'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 limited liability company taxed as a partnership from deducting or amortizing costs that are incurred to promote the sale of membership 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 Company 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 Company, 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 Company to deduct these costs for tax purposes. Management Fee. The Company pays the Management Agent a quarterly management fee equal to 7.5% of Company net profits. The management fee is paid to the Management Agent for the time and attention devoted by it for supervising and coordinating the management and administration of the Company's day-to-day operations pursuant to the terms of the Management Agreement. The Company will continue to deduct the management fee in full in the year paid. Assuming the management fee to be paid to the Management Agent is ordinary, necessary and reasonable in relation to the services provided, Counsel is of the opinion that the Company may deduct the management fee in full in the year paid. State and Local Taxation. Each Investor should consult his own attorney or tax advisor regarding the effect of state and other local taxes on his personal situation. Other Investment Risks Conflicts of Interest. The activities of the Company involve numerous existing and potential conflicts of interest between the Company and certain Members and their Affiliates. See "Compensation and Reimbursement to Certain Members and their Affiliates," "Competition" and "Conflicts of Interest." No Participation in Management. The Managing Board and the Management Agent are vested with full authority to supervise the business and affairs of the Company pursuant to the Operating Agreement and the Management Agreement. Except as otherwise provided in the Operating Agreement or the Act, Members have no right to participate in the management, control or conduct of the Company's business and affairs. The members of the Managing Board, the Management Agent, their employees and their Affiliates are not required to devote their full time to the Company's affairs and intend to continue devoting substantial time and effort to organizing other ventures throughout the United States that are similar to the Company. The members of the Managing Board and the Management Agent will continue to devote such time to the Company's business and affairs as they deem necessary and appropriate in the exercise of reasonable judgment. Ability of the Managing Board to Effect Fundamental Changes. The Managing Board, with the prior approval of the Members representing two-thirds of the aggregate interests in the Company, has the authority under the Operating Agreement to effect transactions that could result in the termination or reorganization of the Company, a total or partial dilution of the Members' interests in the Company, and/or the exchange of interests in another enterprise for the Membership Interests held by the Members. See "Summary of the Operating Agreement - Fundamental Changes." Members' Obligation to Return Certain Distributions. Except as provided by other applicable law and provided that a Member does not participate in the management or control of the Company, he will not be liable for the liabilities of the Company in excess of his investment, his Guaranty and his ratable share of undistributed profits. However, under Washington law a Member will be liable to the Company for a period of three years for any distributions received from the Company if at the time of such distributions the Member knew that, after giving effect to the distributions, (i) the Company would not be able to pay its debts as they became due in the usual course of business, or (ii) all liabilities of the Company, other than liabilities as to Members on account of their interest in the Company and liabilities as to which recourse of creditors is limited to specified Company property, exceed the fair value of the Company's assets. For purposes of calculating the assets and liabilities of the Company, the fair value of property in which the recourse of creditors is limited to such property may be treated as a Company asset to the extent that the fair value exceeds outstanding liabilities on the property. Dilution of Members' Interests. The Managing Board, subject to certain limitations set forth in the Operating Agreement, has the authority under the Operating Agreement to cause the Company to issue, offer and sell additional membership interests in the future (a "Dilution Offering"). Upon the sale of interests in the Company in a Dilution Offering, the Percentage Interests of the Members will be proportionately diluted. See "Summary of the Operating Agreement - Dilution Offerings." Liability Under Member Loan. Investors personally borrowing funds to finance a portion of their Unit cash purchase price with the proceeds of a Member Loan will be directly obligated to the Bank as provided in the Loan Documents. A default under the Member Loan could result in the foreclosure of the Investor's right to receive any Company Distributions as well as the loss of other personal assets unrelated to his Membership Interest. Prospective Investors should review carefully all the provisions contained in the Loan Commitment and the terms of the Member Note and Loan and Security Agreement with their counsel and financial advisors. Neither the Company nor the Managing Board 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 Member's liability under a Member Note continues regardless of whether the Member remains a member in the Company. As a consequence, such liability cannot be avoided by claims, defenses or set-offs the Member may have against the Company, the Managing Board 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 Member 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 Managing Board anticipates that the Company will continue to operate the Lithotripsy Systems for an indefinite period of time and that the Company will not liquidate prior to its intended termination. Accordingly, Investors should consider their investment in the Company as a long-term investment of indefinite duration. Limited Transferability and Liquidity of Units. Transferability of Units is severely restricted by the Operating Agreement and the Subscription Agreement, and the consent of the Managing Board is necessary for any other transfers. No public market for the Units exists and none is expected to develop. Moreover, the Units generally may not be transferred unless the Company is furnished with an opinion of counsel, satisfactory to the Managing Board, 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 Company 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 Member may not be able to liquidate an investment in the Company 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 Member may cause adverse tax consequences to the selling Member, as well as potentially effect a default under any outstanding Member Loan. Accordingly, the purchase of Units must be considered a long-term and illiquid investment. Offering Price. The offering price of the Units has been determined by the Managing Board in accordance with the purchase price formula adopted by the Members in accordance with the Operating Agreement. The approved purchase price formula requires that the price be based upon a fair market valuation of the Company conducted by an independent third-party valuation firm. The valuation is 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 Managing Board's Liability and Indemnification. The Operating Agreement provides that the Managing Board and its members will not be liable to the Company or to any Member of the Company for errors in judgment or other acts or omissions in connection with the Company except for those involving willful misconduct or gross negligence. Therefore, the Members may have a more limited right of action against the Managing Board and its Members in the event of their misfeasance or malfeasance than they would have absent the limitations in the Operating Agreement. The Company will indemnify the Managing Board and its members against losses sustained by them in connection with the Company, unless such losses are a result of their gross negligence or willful misconduct. In the opinion of the SEC, indemnification for liabilities arising out of the Securities Act is contrary to public policy and therefore is unenforceable. Insurance. The terms of the Loan require the Company to cover the Existing Lithotripsy System by insurance for losses due to fire and other casualties under policies customarily obtained for properties of this type. The Managing Board anticipates that the terms of any additional debt financing for the purchase of the New Lithotripsy System will include similar coverage requirements. Prime Medical Services, Inc. ("Prime"), and the sole shareholder of Sun Medical Technologies, Inc. ("Sun Medical") (the Management Agent and a Member of the Company) 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 Company, and the Managing Board believes that coverage limits of these policies are within acceptable norms for the extent and nature of the risks covered. The Company 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 Company operations, or should losses exceed insurance coverage limits, the Company could suffer a loss of the capital invested in the Company and any anticipated profits from such investment. Optional Purchase of Membership Interests. As provided in the Operating Agreement, the Company, and then the individual Members, have the option to purchase all the interest of Member who (i) dies, (ii) becomes the subject of a domestic proceeding, (iii) becomes insolvent, (iv) acquires a direct or indirect ownership of an interest in a competing venture (including the lease or sublease of competing technology), or (v) defaults on his obligation under the Guaranty. A Member whose Membership Interest is sold, as provided above, or who ceases to be a Member of the Company for any reason, will be further restricted from having a direct or indirect ownership in a competing venture (including the lease or sublease of competing technology) within the Company's Service Area for two years after the disposition of his Membership Interest. Members, except in certain circumstances set forth in the Operating Agreement, are also absolutely prohibited from disclosing Company trade secrets and confidential information. The option purchase price for the Membership Interests of a Member who becomes insolvent, acquires a direct or indirect ownership interest in a competing venture or defaults under his Guaranty is an amount equal to the Member's share of the Company's book value, if any, as reflected by the Investing Member's capital account in the Company (unadjusted for any appreciation in Company assets and as reduced by depreciation deductions claimed by the Company for tax purposes). Because losses, depreciation deductions and Distributions reduce capital accounts, and because appreciation in assets is not reflected in capital accounts, the capital account value option purchase price may be nominal in amount. In addition, in the event existing or newly enacted laws or regulations or any other legal developments adversely affect (or potentially adversely affect) the operation of the Company or the business of the Company, the Managing Board and Members will in good faith use their best efforts to develop an alternative method of operations for the Company. In the event such an alternative plan cannot be developed within a reasonable time period, the Managing Board is obligated to either (i) cause the sale of the Membership Interests of all of the Members or (ii) dissolve the Company. The option purchase price for the Membership Interest of a Member who dies, becomes involved in a domestic proceeding or is divested due to a legal development adversely or potentially adversely affecting the Company's business will be an amount equal to a multiple of the aggregate distributions recently made with respect to such Membership Interest. See the Operating Agreement attached hereto as Appendix A and "Summary of the Operating Agreement - Optional Purchase of Membership Interests", "- Noncompetition Agreement and Protection of Confidential Information" and "Risk Factors - Operating Risks - Liability Under the Guaranty." THE COMPANY Washington Urological Services, LLC, a Washington limited liability company (the "Company") was organized and created under the Washington Limited Liability Company Act (the "Act") on August 31, 1998. The existing Members of the Company (the "Initial Members") currently hold an aggregate 100% interest in the Company. In the event that all 40 Units offered hereby are sold, the Initial Members will hold an 80% interest in the Company and the Investors who purchase the Units offered hereby (the "New Members") will hold an aggregate 20% interest in the Company. The Percentage Interests of the Initial Members (aggregate) will decrease by approximately .5% for each Unit sold. In addition, all Percentage Interests are subject to further reduction in the future by any additional dilution offerings. See "Risk Factors - Other Investment Risks - Dilution of Members' Interests." The principal executive office of the Company and the Managing Board is located at 15195 National Avenue, Suite 203, Los Gatos, California 95032. The telephone number of the Company and the Managing Board is (800) 750-0786. TERMS OF THE OFFERING The Units and Subscription Price The Company hereby offers an aggregate of up to 40 Units of limited liability company membership interest in the Company (the "Units"). Each Unit represents an initial 0.5% economic interest in the Company. See "Risk Factors - Other Investment Risks - Dilution of Members' Interests." Each Investor may purchase not less than one Unit. The Managing Board may, however, in its sole discretion, sell less than one Unit as an additional investment and reject in whole or in part any subscription. The price for each Unit is $4,237 in cash, plus a personal guaranty of 0.5% of the Company's obligations under the Loan of $550,000 from the Bank (up to a $2,750 principal guaranty obligation per Unit). See "Terms of the Offering - Guaranty Arrangements." The cash purchase price and Guaranty are due at subscription; however, certain qualified Investors may personally borrow funds from a third-party financial institution to pay a portion of the cash purchase price. For the convenience of the Investors, the Company has arranged for financing of a portion of the Unit cash purchase price with the Bank. See "Terms of the Offering - Member Loans." The proceeds of the Offering will first be used by the Company to pay Offering costs and expenses, and the remaining proceeds, if any, will then be used to finance a portion of the cost of purchasing a new Storz Modulith(R) SLX-T lithotripter (estimated at $405,000) and a new mobile van (estimated at $75,000), as well as pay applicable state sales or use taxes on the New Lithotripsy System. See "Sources and Applications of Funds." The proceeds of this Offering cannot be calculated until the number of Units sold has been determined at the Closing. In any event, the proceeds of the Offering will be insufficient to fund all of the costs described above, and it is anticipated that the Company will also use the proceeds of debt financing to fund such costs. There is no assurance, however, that debt financing will be available for such purposes. See "Risk Factors - Operating Risks - Company Limited Resources and Risks of Leverage." Acceptance of Subscriptions To enable the Bank and the Managing Board to make credit and investor decisions, respectively, each prospective Investor must complete and deliver to the Managing Board a Purchaser Financial Statement in the form included in the Subscription Packet accompanying this Memorandum, or a substitute financial statement containing the same information as provided therein, and pages one and two of the prospective Investor's most recently filed Form 1040 U.S. Individual Income Tax Return. An Investor that pays the full amount of his Unit purchase price with a check at subscription and whose subscription is received and accepted by the Company and the Bank (for the purposes of the Guaranty), will become a Member in the Company, and his subscription funds will be released from escrow to the Company. Acceptance by the Managing Board of a subscription of an Investor that elects to finance a portion of the Unit cash purchase price with the proceeds of a Member Note is conditioned upon the Bank's approval of such loan. If the financing Investor is otherwise acceptable to the Company, after receipt of the Bank's approval, the Company will inform the Escrow Agent that it has accepted the Investor's subscription and the Escrow Agent will release the Investor's cash subscription proceeds to the Company and the Loan Documents to the Bank, and the Bank, in turn, will pay the proceeds from the Member Note to the Company. The Investor will become a Member in the Company at the time the Bank releases the proceeds of his Member Note to the Company. Subscriptions may be rejected in whole or in part by the Company and need not be accepted in the order received. To the extent the Company rejects or reduces an Investor's subscription as provided above, the Investor's Unit cash purchase price, Guaranty, and the principal amount of his Member 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 Company will be furnished promptly after acceptance of the Investor's subscription. Guaranty Arrangements Each Investor will be required to execute a Guaranty as a part of his subscription. Each Member will have substantial exposure under his Guaranty. See "Risk Factors - Liability Under the Guaranty." The following summary of certain provisions of the Guaranty does not constitute legal advice. The form of the Guaranty is set forth in the Subscription Packet accompanying this Memorandum and should be reviewed carefully by prospective Investors and their counsel. Liability Under the Guaranty. Each Investor will be required to execute and deliver to the Bank a Guaranty pursuant to which he will personally guarantee the payment by the Company of a portion of its obligations to the Bank under the Loan. For each Unit purchased, an Investor will be required to guarantee 0.5% of the Company's total obligations under the Loan, which is equivalent to up to a $2,750 principal obligation guaranty per Unit. As of the date of this Memorandum, the outstanding principal balance of the Loan is $433,000 however the terms of the Loan provide for the renewal thereof, and therefore, Investors should view their personal obligations under their Guaranties to equal their pro rata share of the original Loan amount (i.e., $550,000). Liability under the Guaranty may exceed $2,750 per Unit because the guaranty obligation per Unit includes not only principal, but also 0.5% of all accrued and unpaid interest, late payment penalties and legal costs incurred by the Bank in collecting any defaulted payments. The amount of the Members' Guaranties will be proportionately reduced from time to time to the extent of the payments made by the Company under the Loan. Interest-only was payable monthly during the first six months of the Loan. The interest-only period expired on March 18, 2000 and the outstanding Loan principal, plus accrued interest, is payable over 36 monthly installments as provided below. The amount of each of the first 35 equal monthly installments of principal and interest is equal to the monthly payment resulting from amortization of the outstanding Loan principal over 36 months, assuming a fixed 10% per annum interest rate. A final payment of all outstanding principal and accrued interest will be payable in the 36th month. The 10% interest rate, as provided above, is used only for purposes of calculating the amount of the equal monthly installments over the 35 month period. Loan interest actually accrues at the Bank's Prime Rate, as the same may change from time to time. Pursuant to a formula set forth in the Loan promissory note, prepayments of Loan principal must be made annually out of Company Cash Flow until the Loan is paid in full. As of the date of this Memorandum, the Company has not made any prepayments. The Managing Board believes that Loan principal prepayments will reduce the term of the Loan. The monthly installment payments of principal and interest for the term of the Loan are equal to $13,972 per month. If Company operations continue to generate sufficient revenues to enable the Company to make all payments under the Loan to the Bank when due, such payments will be sufficient to repay the Bank fully over the term of the Loan, and no Member will be required to perform under his Guaranty. However, a default by the Company or the Members under the Loan or the Guaranties will entitle the Bank to exercise one or more of the following remedies: (i) declare all principal payments and accrued interest immediately due and payable; (ii) foreclose on its security interest in the Company's assets (including the Lithotripsy Systems and the Company's accounts receivable); and/or (iii) seek payment directly from the Members under the Guaranties. Events of default include the following: (i) default in the payment or performance of any obligation, covenant or liability contained or referred to in the Loan documents, including the Guaranties, unless remedied to the reasonable satisfaction of Bank within 30 days; (ii) any warranty, representation or statement made or furnished to the Bank by or on behalf of the Company or any of its guarantors (including the Members) proving to have been false in any material respect when made or furnished; (iii) loss, theft, substantial damage, destruction, sale or encumbrance to or of any of the collateral, or the making of any levy, seizure or attachment thereof or thereon, which is not removed within 30 days; (iv) dissolution, termination of existence (or, in the case of an individual guarantor, death), insolvency, business failure, appointment of a receiver of any part of the property of, assignment for the benefit of creditors by, or the commencement of any proceeding under any bankruptcy or insolvency laws by or against the Company or any guarantor which is not favorably terminated within 30 days; (v) the Company's failure to maintain its existence in good standing unless remedied within 30 days of notice by the Bank; (vi) the assertion or making of any seizure, vesting or intervention by or under authority of any government by which the management of the Company is displaced of their authority in the conduct of their business or their business is curtailed; (vii) upon the entry of any monetary judgment or the assessment and/or filing of any tax lien against the Company or any guarantor or upon the issuance of any writ or garnishment or attachment against any property of, debts due or rights of the Company or such guarantor to specifically include the commencement of any action or proceeding to seize monies of the Company or such guarantor on deposit in any bank account with the Bank, which is not removed or terminated within 30 days. However, any default by any one or more of the Company's guarantors under the above provisions applicable thereto, will only be an actionable default if one or more such defaulting guarantors either alone or in the aggregate guarantees 25% or more of the Loan, and provided further that the Bank has not, within twelve months of the occurrence of such guarantor's default, received, accepted and approved a substitute guaranty or guaranties from a party or parties acceptable to it in an amount greater than or equal to the amount of such defaulting guarantor's guaranties, or the Company has not made a prepayment of the Loan principal in an amount equal to the amount of the defaulting guarantor's guaranty. The Bank may also accelerate the Loan if it should deem itself, or its collateral, insecure or the payment or performance under the Loan impaired and may demand additional collateral at any time it deems the Loan to be insufficiently secured. As discussed below, under the terms of the Guaranties, Members waive certain rights to which they might otherwise be entitled, and are required to pay their share of the Bank's attorneys' fees and court costs if the Bank is successful in enforcing the Guaranties through a lawsuit. Copies of the Company's Loan documentation with the Bank are available upon request to the Managing Board. The Guaranties are a guaranty of payment and not of collection. As a result, the liability of the Members under the Guaranties is direct and immediate and not conditional or contingent upon either the pursuit of any remedies against the Company or any other person (including any other guarantor) or foreclosure of any security interest or liens available to the Bank. The Bank may accept any payment, plan for adjustment of debts, plan for reorganization or liquidation, or plan of composition or extension proposed by, or on behalf of, the Company without in any way affecting or discharging the liability of the Members. Members waive any right to require that an action first be brought against the Company, any other guarantor or any other person, or to require that resort be had to any security or to any balance of any deposit account or credit on the books of Bank in favor of the Company or any other person. The Guaranty is a continuing guaranty that by its terms survives the death, bankruptcy, dissolution or disability of a Member guarantor. A Member's liability under a Guaranty continues regardless of whether the Member remains a member in the Company. Under the terms of the Guaranties, the Members expressly waive: (i) notice of acceptance of the guaranty and of extensions of credit to the Company; (ii) presentment and demand for payment of the Company's promissory note; (iii) protest and notice of dishonor or of default; (iv) demand for payment under the Guaranty; and (v) all other notice to which the Member might otherwise be entitled. The principal liability of an Investor under the Guaranty will be up to $2,750 per Unit. Each Investor should regard his exposure with respect to his investment in the Company to be his cash subscription ($4,237 per Unit) plus the amount for which he is personally liable under his Guaranty, up to $2,750 per Unit in principal, plus accrued and unpaid interest, as well as late payment penalties, legal fees and court costs. An Investor should not purchase a Unit if he does not have resources sufficient to bear the loss of this entire amount. The Guaranty generally provides that within thirty days following the Bank's determination that the Company is in default under the Loan, the Bank will send a notice to each Member (the "Notice") setting forth the Company's total Loan obligations as of the date of the Notice (inclusive of all interest, late payment penalties and legal costs incurred in connection with the enforcement of such obligation accrued but unpaid through such date), together with a statement of the amount which the Member is responsible for paying (the "Guaranty Amount"). Failure by the Bank to send the Notice in a timely fashion will not, however, release the Member guarantor from any liability under his Guaranty. The Notice will provide that unless the Bank receives payment of the Guaranty Amount from the Member within five business days following the date of the Notice, the Guaranty Amount will be increased by the Member's pro rata share (based on the number of guarantors who did not pay the Guaranty Amount within five days of the date of the notice) of any additional accrued but unpaid interest, late payment penalties and legal costs through the date such payment is made. Because each Guaranty runs directly from the Member to the Bank, claims or defenses the Member may have against the Company or the Managing Board may not be used to avoid payment under the Guaranty. See the form of the Guaranty included in the Subscription Packet accompanying this Memorandum. See also "Terms of the Offering - Suitability Standards." Approval of Bank. In addition to meeting the suitability requirements discussed below under "Suitability Standards," each Investor must be approved by the Bank for purposes of their delivery of the Guaranty. The Bank has established its own criteria for approving the credit-worthiness of Investors, either individually or as a group, and has not established objective minimum suitability standards. Instead, the Bank is empowered under the terms of the Loan to accept or reject any Investor. See "Risk Factors - Operating Risks - Liability Under the Guaranty." Member Loans The purchase price for the Units is payable in cash. The prospective Investor may pay for the Units with personal funds alone or in part with such funds, together with either loan proceeds personally borrowed by the Investor under a Member Loan or other loan. Financing under the Member Loans was arranged by the Company with the Bank as provided in the Loan Commitment, attached hereto as Appendix B. Prospective Investors should review carefully all the provisions contained in the Loan Commitment and the terms of the Member Note and Loan and Security Agreement with their counsel and financial advisors. Neither the Company nor the Managing Board endorses or recommends to the prospective Investors the desirability of obtaining financing from the Bank nor does the summary of the Loan Documents provided herein constitute legal advice. If the prospective Investor wishes to finance a portion of the cash purchase price of his Units as provided herein, he must deliver to the Sales Agent upon submission of his Subscription Packet an executed Member Note payable to the Bank and Note Addendum, the form of which are attached as Exhibit A to the Loan Commitment, a Loan and Security Agreement, the form of which is attached as Exhibit B to the Loan Commitment, a Security Agreement, the form of which is attached as Exhibit C to the Loan Commitment and two UCC-1's, the forms of which are attached to the Subscription Packet (collectively, the "Loan Documents"). In no event may the maximum amount borrowed per Unit exceed $1,737. The Member Note is repayable in twelve (12) predetermined installments in the respective amounts set forth in the Loan Commitment. The installments are payable on each January 15th, April 15th, June 15th and September 15th commencing on September 15, 2000 (assuming the Closing occurs prior to May 31, 2000), with a thirteenth (13th) and final installment in an amount equal to the principal balance then owed on the Member 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 Member Note attached as Exhibit A to the Loan Commitment which is attached hereto as Appendix B. The Member Note will be secured by the cash flow distributions payable with respect to the prospective Investor's Membership 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 Member Loan. The Loan and Security Agreement also authorizes (i) the Bank to pay the proceeds of the Member Note directly to the Company and (ii) the Company to remit funds directly to the Bank out of the prospective Investor's share of any Distributions represented by the prospective Investor's percentage Membership Interest to fund installment payments due on the prospective Investor's Member 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 Managing Board, the Escrow Agent will, upon acceptance of the Investor's subscription by the Managing Board, release the Loan Documents to the Bank and the Bank will pay the proceeds of the Member Note to the Company to fund a portion of the Investor's Unit purchase. The prospective Investor will have substantial exposure under the Member Note. Regardless of the results of the Company's operations, a prospective Investor will remain liable to the Bank under his Member Note according to its terms. The Bank can accelerate the entire principal amount of the Member Note in the event the Bank in good faith believes the prospect of timely payment or performance by the prospective Investor is impaired or the Bank otherwise in good faith deems itself or its collateral insecure and upon certain other events, including, but not limited to, nonpayment of any installment. The Bank may also request additional collateral in the event it deems the Member Note insufficiently secured. A Member's liability under a Member Note also continues regardless of whether the Member remains a member in the Company. A Member's liability under a Member Note is directly with the Bank. As a consequence, such liability cannot be avoided by claims, defenses or set-offs the Member may have against the Company, the Managing Board 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 Member 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 Member Loan." Subscription Period; Closing The subscription period will commence on the date hereof and will terminate at 5:00 p.m., Eastern time, on June 6, 2000 (the "Closing Date"), unless sooner terminated by the Managing Board 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 Member 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 Company 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 Managing Board anticipates selling Units only to individual investors; however, the Managing Board reserves the right to sell Units to entities. Because of the risks involved, the Managing Board anticipates selling the Units only to Investors residing in Washington who it reasonably believes meet the definition of "accredited investor" as that term is defined in Rule 501 under the Securities Act, but reserves the right to sell up to 35 Investors who are nonaccredited investors. Certain institutions and the following individuals are "accredited investors": (1) An individual whose net worth (or joint net worth with his or her spouse) exceeds $1,000,000 at the time of subscription; (2) An individual who has had an individual income in excess of $200,000 in each of the two most recent fiscal years and who reasonably expects an individual income in excess of $200,000 in the current year; or (3) An individual who has had with his or her spouse a joint income in excess of $300,000 in each of the two most recent fiscal years and who reasonably expects a joint income in excess of $300,000 in the current year. Individual Investors must also be at least 21 years old and otherwise duly qualified to acquire and hold limited liability company membership interests. The Managing Board 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 Company'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 Company in connection with resales, if any, of the Units. Transferability of Units is severely restricted by the Operating Agreement and the Subscription Agreement. See "Summary of the Operating Agreement - Restrictions on Transfer of Membership Interests." Investors who wish to subscribe for Units must represent to the Company 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 Managing Board). How to Invest Investors who meet the qualifications for investment in the Company 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 Company, the Managing Board, 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 Company to disclose publicly information concerning the Company. Units can be transferred only in accordance with the provisions of, and upon satisfaction of, the conditions set forth in the Operating Agreement. Among other things, the Operating 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 Managing Board 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 Managing Board, instructing it to effect the assignment. Assignees of Units may also, in the discretion of the Managing Board, be required to pay all costs and expenses of the Company with respect to the assignment. Any assignment of Units or the right to receive Company distributions in respect of Units will not release the assignor from any liabilities connected with the assigned Units, including liabilities under the Guaranty and any Member Loan. Such assignment may constitute an event of default under a Member Loan. An assignee, whether by sale or otherwise, will acquire only the rights of the assignor in the profits and capital of the Company and not the rights of a Member, unless such assignee becomes a substituted Member. An assignee may not become a substituted Member without (i) either the written consent of the assignor and the Managing Board, or the consent of a Majority in Interest of the Members (except the assignor Member) and the Managing Board, (ii) the submission of certain documents and (iii) the payment of expenses incurred by the Company in effecting the substitution. An assignee, regardless of whether he becomes a substituted Member, will be subject to and bound by all the terms and conditions of the Operating Agreement with respect to the assigned Units. See "Summary of the Operating Agreement - Restrictions on Transfer of Membership Interests." PLAN OF DISTRIBUTION Subscriptions for Units will be solicited by MedTech Investments, Inc., the Sales Agent, which is an Affiliate of Sun Medical. The Sales Agent has entered into a Sales Agency Agreement with the Company 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 Affiliates of Sun Medical during the pendency of this Offering and in the future. The Sales Agent is a wholly owned subsidiary of Prime. Investors should note the material relationship between the Sales Agent and Sun Medical, and are advised that the relationship creates conflicts in the Sales Agent's performance of its due diligence responsibilities under the Federal securities laws. As compensation for its services, the Sales Agent will receive a commission equal to $75 for each Unit sold. No other commissions will be paid in connection with this Offering. Subject to the conditions as provided above, the Sales Agent may be reimbursed by the Company for its out-of-pocket expenses associated with the sale of the Units in an amount not to exceed $7,000. The Company has agreed to indemnify the Sales Agent against certain liabilities, including liabilities under the Securities Act. The Company 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 June 6, 2000, (or earlier, in the discretion of the Managing Board), unless extended at the discretion of the Managing Board for an additional period not to exceed 180 days. See "Terms of the Offering - Subscription Period; Closing." The Company seeks by this Offering to sell a maximum of 40 Units for a maximum of an aggregate of $169,480 in cash ($166,480 net of Sales Agent Commissions). The Company has set no minimum number of Units to be sold in this Offering. The subscription funds, Guaranty and Loan Documents, if any, received from each Investor will be held in escrow (which, in the case of cash subscription funds, shall be held in an interest bearing escrow account with the Bank) until either the Investor's subscription is accepted by the Company (and approved by the Bank in the case of the Guaranties and financed purchases of Units), the Company rejects the subscription or the Offering is terminated. Upon the receipt and acceptance of an Investor's subscription by the Company, the Investor will be admitted to the Company as a Member, provided that acceptance of subscriptions by an Investor that elects to finance a portion of his Unit cash purchase price is also conditioned on Bank approval. In connection with his admission as a Member, the Investor's subscription funds will be released from escrow to the Company, and his Guaranty and Loan Documents, if any, will be released to the Bank which will pay the proceeds from any Member Note to the Company. In the event a subscription is rejected, all subscription funds (without interest), the Guaranty, the Loan Documents, if any, and other subscription documents held in escrow will be promptly returned to the rejected Investor. A subscription may be rejected in part (subject to the minimum one Unit investment), in which case a portion of the subscription funds (without interest), the Guaranty and any Member Note will be returned to the Investor. BUSINESS ACTIVITIES General The Company was formed to (i) acquire one or more Lithotripsy Systems and operate them in the Service Area, (ii) improve the provision of healthcare in the Company's Service Area by taking advantage of both the technological innovations inherent in the Modulith(R) SLX-T and the Company's quality assurance and outcome analysis programs, and (iii) make cash distributions to its Members from revenues generated by the operation of the Lithotripsy Systems. The Company owns and operates the Existing Lithotripsy System in the Service Area and has contracted with the 16 Contract Hospitals to provide lithotripsy services to their patients. Treatment Methods for Kidney Stone Disease Urolithiasis, or kidney stone disease, affects an estimated 600,000 persons per year in the United States. The exact cause of kidney stone formation is unclear, although it has been attributed to diet, climate, metabolism and certain medications. Approximately 75% of all urinary stones pass spontaneously, usually within one to two weeks, and require little or no clinical or surgical intervention. All other kidney stones, however, require some form of medical or surgical treatment. A number of methods are currently used to treat kidney stones. These methods include drug therapy, endoscopic and laser procedures, open surgery, percutaneous lithotripsy and extracorporeal shock wave lithotripsy. The type of treatment a urologist chooses depends on a number of factors such as the size of the stone, its location in the urinary system and whether the stone is contributing to other urinary complications such as blockage or infection. The extracorporeal shock wave lithotripter, introduced in the United States from West Germany in 1984, has dramatically changed the course of kidney stone disease treatment. The Company estimates that currently up to 95% of all kidney stones that require treatment can be treated by lithotripsy. Lithotripsy involves the use of shock waves to disintegrate kidney stones noninvasively. The Existing Lithotripsy System Upon closing the Loan, the Company used a portion of the Loan proceeds (approximately $400,000) to acquire a new Modulith(R) SLX-T lithotripter. The Modulith(R) SLX-T received FDA premarket approval on March 27, 1997. The Managing Board and its Affiliates have limited, but positive, direct experience with the use of the Modulith(R) SLX-T lithotripter. Preliminary reports from abroad and "word of mouth" anecdotal evidence indicates that the Modulith(R) SLX-T is as effective as most of the "portable" lithotripters in the market. See "Risk Factors - Operating Risks - Reliability and Efficacy of the Storz Modulith(R) SLX-T." The Modulith(R) SLX-T was especially adapted for the treatment of urological stones. In addition to the efficient fragmentation of all types of urinary tract stones, the Modulith(R) SLX-T is suitable for performing a range of urological examinations including cystoscopy and ureterorenoscopy. The Modulith(R) SLX-T consists of a cylindrical pressure wave generator, an OEC 9800 C-arm x-ray system unit and a patient table. The Modulith(R) SLX-T generates pressure waves electromagnetically from the cylindrical energy source and parabolic reflector. The pressure wave generator operates without an acoustic lens, thus avoiding such disadvantages as energy dissipation and aperture limitations. The pressure at the focal point can be varied by means of the energy control in nine steps from 10 Mpa to 100 Mpa. The energy source is fitted with an axial and lateral air-bag. When expanded during fluoroscopy, these air-bags ensure optimal X-ray image quality for monitoring purposes. The pressure wave coupling is dry (water cushion is used). The shock-wave may be released at fixed frequencies of 1 Hz, 1.5 Hz or 2 Hz, or may be triggered using the ECG and/or respiration. The Modulith(R) SLX-T localizes stones using an OEC 9800 C-arm X-ray system. The X-ray system employs an image intensifier, cassette film, digital spot imaging capability and two high resolution 16" monitors capable of displaying stored digital images. The patient table can be moved electronically in all three dimensions, and a floating function allows for quick patient positioning. The table is X-ray transparent and allows visualization of the entire urinary tract. The table includes a patient cradle which provides comfortable and secure support in the prone, supine and lateral positions. The Company's existing Modulith(R) SLX-T came with an eighteen month limited warranty (commencing in March 1999) during which time all maintenance, repairs, shock tubes, glassware and capacitors are provided free of charge. The Managing Board anticipates that upon the expiration of the warranty, the Company will either pay for maintenance service on the Modulith(R) SLX-T on an as needed basis, or enter into an annual maintenance agreement with a third-party service provider. The Managing Board estimates that expenditures for maintenance of the Modulith(R) SLX-T will be approximately $40,000 per year. The Company also used a portion of the Loan proceeds ($68,000) to acquire from AK Associates, L.L.C., an Affiliate of Sun Medical, a Ford 400 Series van which was customized to include a 14' cargo box to house the lithotripter while it is transported from site to site. The floor of the van is loading dock height so the lithotripter can be easily loaded on and off the van at each treatment facility. The van is also upfitted with a lift gate with a load capacity of 3,000 pounds for easy loading of the lithotripter from street level. The van has been modified for securing the lithotripter and its accessories during transport and for heating the cargo box during the winter to prevent freezing of the lithotripter and its components. The Company did not purchase the manufacturer's service contract for the van. Instead, the Company pays for service on an as needed basis. The Managing Board estimates that expenditures for maintenance and repair of the van will be approximately $6,000 per year. Acquisition of New Lithotripsy System It is anticipated that during the current calendar year the Company will purchase a new Modulith(R) SLX-T lithotripter (estimated at $405,000) and a new Ford 400 Series van (or an equivalent model van) to transport the Modulith(R) SLX-T from site to site (estimated at $75,000) with the proceeds of this Offering and the proceeds of debt financing. The Offering proceeds cannot be accurately determined until the Closing has occurred and the number of Units sold has been calculated. In any event, such proceeds will not be sufficient to fund all anticipated expenses. In the view of risks associated with leverage, a desire to conserve Partnership resources and the absence of commitments for new hospital contracts, it is not expected that the Company will acquire the New Lithotripsy System unless at least a minimal number of Units are sold in this Offering and sufficient business opportunities with new treatment centers are anticipated by the Managing Board to be available. See "Risk Factors - - Operating Risks - Company Limited Resources and Risks of Leverage" and "Sources and Applications of Funds." The portion of the proceeds of the Offering reserved for the purchase of the New Lithotripsy System will be held in the Company's capital reserves until the purchase of the New Lithotripsy System is made. The terms of the Loan may restrict the Company's ability to obtain another financing commitment, and although members of the Managing Board maintain good relationships with certain commercial lending institutions, the Company has not obtained a loan commitment from any party in any amount and whether one would timely be forthcoming on terms acceptable to the Company cannot be assured. Acquisition of Additional Assets If in the future the Managing Board determines that it is in the best interest of the Company to acquire (i) one or more fixed base or mobile Lithotripsy Systems, (ii) any other urological device or equipment, so long as such device has FDA premarket approval at the time it is acquired by the Company, and/or (iii) an interest in any business entity that engages in a urological business described above, the Managing Board has the authority to establish reserves or, subject to certain restrictions in the Loan, to borrow additional funds on behalf of the Company to accomplish such goals, and may use Company assets and revenues to secure and repay such borrowings. The Managing Board must obtain the prior approval of the Members representing two-thirds of the aggregate interests in the Company to take certain actions. See "Summary of the Operating Agreement - Powers of the Managing Board and Members' Voting Rights." The acquisition of such assets likely would result in higher operating costs for the Company. The Managing Board does not anticipate acquiring additional Company assets unless projected Company Cash Flow or proceeds from a Dilution Offering are sufficient to finance such acquisitions. No Member would be personally liable on any Company indebtedness without such Member's prior written consent. There is no assurance that additional financing would be available to the Company to acquire additional assets or to fund any additional working capital requirements. Any additional borrowing by the Company will serve to increase the risks to the Company associated with leverage, as well as to increase the risks that cash from operations will be insufficient to fund the obligations secured by the Members' Guaranties. See "Risk Factors - Operating Risks - Company Limited Resources and Risks of Leverage" and "Risk Factors - Operating Risks - Liability Under the Guaranty." Hospital Contracts The Company has entered into Hospital Contracts to provide lithotripsy services at 16 treatment centers in the Service Area. The Contract Hospitals are: Columbia Capital Medical Center Jefferson General Hospital Kennewick General Hospital Providence General Medical Center Providence St. Peter Hospital Providence Yakima Hospital St. Francis Community Hospital St. Joseph Hospital & Health Center St. Mary Medical Center Sequim Clinic Swedish Hospital Medical Center The Everett Clinic Walla Walla Clinic Walla Walla General Hospital Washington Cascade Surgery Center Yakima Urology Surgery Center Generally, the Hospital Contracts grant the Company the exclusive right to deliver lithotripsy services to the relevant Contract Hospital. The Swedish Hospital contract also provides that, without the prior consent of such Contract Hospital, the Company may not provide lithotripsy services to any other health care facility (with the exception of Providence General Medical Center) within a five-mile radius of the Contract Hospital. The Hospital Contracts require the Company to make a lithotripter available at the facilities as agreed to by the Contract Hospital and the Company. The Company generally also provides a technician and certain ancillary services such as scheduling necessary for the lithotripsy procedure. The Contract Hospitals generally pay the Company a fee for each lithotripsy procedure performed at that health care facility. The contracts expire by their terms at various times through December 31, 2002 and generally provide for automatic renewal on a year to year basis. Most of these contracts may be terminated without cause upon 180 days or less written notice by either party prior to any renewal date, or upon customary events of default. The Management Agent is currently negotiating written services agreements with Evergreen Hospital Medical Center and Olympic Memorial Hospital, and the Company is presently providing services to these facilities on a month-to-month basis. No assurance can be given that the Management Agent will be successful in obtaining such contracts. The Managing Board believes it has a good relationship with many of the Contract Hospitals. There is no assurance, however, that one or more of the Hospital Contracts will not terminate in the future. See "Risk Factors - Operating Risks - Contract Terms and Termination." The Company is attempting to negotiate similar agreements to the existing Hospital Contracts with additional treatment centers in the Service Area. Reimbursement Agreements. Prime and its Affiliates have negotiated third-party reimbursement agreements with certain national and local payors. The national agreements apply to all the lithotripsy companies with which Prime is affiliated. Although the Company currently provides services under the Hospital Contracts on a wholesale basis, the Company may be able to take advantage of these reimbursement agreements in the future in the event it contracts with a treatment facility on a retail basis. Some of the national and local payors have agreed to pay a fixed price for the lithotripsy services. Generally the agreements may be terminated by either party on 90 days' notice. The national and local reimbursement agreements that have been negotiated or renegotiated in the past two to four years almost entirely provide for lower reimbursement rates for lithotripsy services than the older agreements. Operation of the Lithotripsy Systems It is anticipated that the Company will continue to provide services under the Hospital Contracts and similar arrangements. See "Business Activities - Hospital Contracts" and "Risk Factors - Operating Risks - Contract Terms and Termination." Qualified physicians who make appropriate arrangements with Contract Hospitals receiving lithotripsy services pursuant to the Hospital Contracts and other lithotripsy service agreements may treat their own patients using the Lithotripsy Systems after they have received any necessary training required by the rules of such Contract Hospital. The Company may also make arrangements to make the Lithotripsy Systems available to qualified physicians (including but not limited to qualified physician Members) desiring to treat their own patients after they have received any necessary training. The Managing Board and Management Agent will endeavor to the best of their abilities to require that physicians using the Company's Lithotripsy Systems comply with the Company's quality assurance and outcome analysis programs in order to maintain the highest quality of patient care. In addition, the Company reserves the right to request that (i) physicians (or members of their practice groups) treat only their own patients with the Lithotripsy Systems, and (ii) physician Members disclose to their patients in writing their financial interest in the Company prior to treatment, if it determines that such practices are advisable under applicable law. 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 Company is not a condition to using the Lithotripsy Systems. Thus, local qualified physicians who are not Members will be given the same opportunity to treat their patients using the Lithotripsy Systems as provided above. Management The Company has entered into a management agreement (the "Management Agreement") with the Management Agent whereby the Management Agent is obligated to supervise and coordinate the management and administration of the operation of the Lithotripsy Systems on behalf of the Company in exchange for a quarterly management fee equal to 7.5% of Company net profits. See "Compensation and Reimbursement to Certain Members and their Affiliates." For the purposes of the Management Agreement, the term "net profits" refers to the excess, if any, of the Company's revenues from operations (adjusted for revenues from Capital Transactions) and funds released from reserves, over cash operating expenses (not funded by loans or reserves). The Management Agent's services under the Management Agreement include making available any necessary training of physicians in the proper use of the lithotripsy equipment, monitoring technological developments in renal lithotripsy and advising the Company of these developments, arranging continuing education programs for qualified physicians who use the lithotripsy equipment and providing advertising, billing, accounts collection, equipment maintenance, medical supply inventory and other incidental services necessary for the efficient operation of the Lithotripsy Systems. The Management Agent also assists the Managing Board in the coordination and supervision of the Company's quality assurance and outcome analysis programs. Costs incurred by the Management Agent in performing its duties under the Management Agreement are the responsibility of the Company. The Management Agent's engagement under the Management Agreement is as an independent contractor, and except as otherwise provided in the Management Agreement, neither the Company nor its Members have any authority or control over the method or manner in which the Management Agent performs its duties under the Management Agreement. The Management Agreement is in the second year of its initial five-year term. Thereafter, it will be automatically renewed for three additional five-year terms unless terminated by the Company or the Management Agent. Employees The Company employs two full-time registered technicians who currently operate the Existing Lithotripsy System and will also staff the New Lithotripsy System. All active full-time employees of the Company 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 Company also provides paid holidays, sick leave, and vacation benefits and other miscellaneous benefits including bereavement, military reserves, jury duty and educational assistance benefits. FINANCIAL CONDITION OF THE COMPANY Set forth on the following pages are the Company's internally prepared accrual based (i) Income Statement for the ten-month period ended December 31, 1999, (ii) Balance Sheet as of December 31, 1999, (iii) Cash Flow Statement for the ten-month period ended December 31, 1999, and (iv) Statements of Partner's Equity for the ten-month period ended December 31, 1999. Past financial performance is not necessarily indicative of future performance. There is no assurance that the Company will be able to maintain its current revenues or earnings. WASHINGTON UROLOGICAL SERVICES, LLC INCOME STATEMENT Ten Months Ended December 31, 1999 REVENUES $1,364,867 Operating Expenses Employee compensation and benefits 115,810 Equipment maintenance and repairs 27,398 Depreciation and amortization 75,470 Management fees 76,492 Overhead allocation 70,906 Other operating expenses 58,215 ------- ------ Total operating expenses 424,291 Operating Income 940,576 Other income (expenses) Interest and other income, net 796 Interest expense (29,122) Organization and syndication costs (100,394) -- --------- Total other income (expense) (128,720) --- --------- Net Income $811,856 == ======== *See notes to financial statements attached hereto as Appendix E. WASHINGTON UROLOGICAL SERVICES, LLC BALANCE SHEET December 31, 1999 ASSETS Cash $76,307 Accounts receivable, net 211,733 Other current assets 6,487 ----- Total current assets 294,527 Equipment 517,584 Accumulated depreciation (75,470) -------- 442,114 Other assets 0 --------- Total assets $736,641 === ======== LIABILITIES Accounts payable $42,769 Current portion of long-term debt 135,472 Accrued liabilities 9,014 Distributions payable 0 ------------ Total current liabilities 187,255 Long term debt 297,528 PARTNERS'EQUITY Capital contributions 147,610 Syndication costs (7,608) Distributions paid (700,000) Accumulated earnings 811,856 ------- Total partners' equity 251,858 -------- Total liabilities and partners' equity $736,641 ======== *See notes to financial statements attached hereto as Appendix E. WASHINGTON UROLOGICAL SERVICES, LLC STATEMENT OF CASH FLOWS Ten Months Ended December 31, 1999 Cash flows from Operating Activities: Net income $811,856 Adjustments to reconcile net income to Change in operating assets and liabilities: Accounts receivable (211,733) Other current assets (6,487) Accounts payable 42,769 Accrued expenses 9,014 ----- Net cash provided by operating activities 720,889 ------- Cash flows from Investing Activities: Purchase of equipment, furniture and fixture (517,584) --------- Net cash (used in) investing activities (517,584) --------- Cash flows from Financing Activities: Cash borrowed from banks 433,000 Funds used to pay bank debt 0 Capital contributed by partners (net) 140,002 Distributions to partners (700,000) --------- Net cash (used in) financing activities (126,998) --------- Net increase (decrease) in cash during the period 76,307 ------ ------ Cash, beginning of period Cash, end of period $76,307 === ======= *See notes to financial statements attached hereto as Appendix E. WASHINGTON UROLOGICAL SERVICES, LLC STATEMENT OF PARTNERS' EQUITY Ten Months Ended December 31, 1999 Beginning partners' equity $0 Capital contributions $147,610 Syndication costs ($7,608) Net income $811,856 Distributions to partners (700,000) - --------- Ending partners' equity $251,858 = ======== *See notes to financial statements attached hereto as Appendix E. [The remainder of the page is intentionally left blank.] SOURCES AND APPLICATIONS OF FUNDS The following table sets forth the funds expected to be available to the Company from this Offering if all 40 Units are sold and other sources and their anticipated and estimated uses. - ----------------------------- -------------------------------------------------- Sources of Funds Sale of 40 Units - ----------------------------- -------------------------------------------------- - ----------------------------- --------------------- ---------------------------- Offering Proceeds(1) $169,480 (100%) -------- ------ - ----------------------------- --------------------- ---------------------------- - ----------------------------- --------------------- ---------------------------- - ----------------------------- --------------------- ---------------------------- - ----------------------------- --------------------- ---------------------------- - ----------------------------- --------------------- ---------------------------- - ----------------------------- --------------------- ---------------------------- - ----------------------------- --------------------- ---------------------------- - ----------------------------- --------------------- ---------------------------- Capital Reserve(3) $134,480 ( 79%) --------- ------- - ----------------------------- --------------------- ---------------------------- TOTAL APPLICATIONS $169,480 (100%) ======== ====== - ----------------------------- --------------------- ---------------------------- Notes to Sources and Applications of Funds Table (1) Assumes 40 Units are purchased by qualified investors. (2) Includes $3,000 in commissions payable to the Sales Agent, reimbursement of $7,000 to the Sales Agent for out-of-pocket expenses incurred in selling the Units and $25,000 in legal and accounting costs associated with the preparation of this Memorandum. (3) It is anticipated that in 2000 the Company will purchase a new Storz Modulith(R) SLX-T transportable lithotripter at an estimated price of $405,000 and a new van to transport the lithotripter at an estimated cost of $75,000. See "Business Activities - Acquisition of New Lithotripsy System." The Capital Reserve represents proceeds of the Offering that will be used to pay a portion of such costs. The proceeds of this Offering cannot be accurately determined until the Closing has occurred and the number of Units sold has been calculated. In any event, such proceeds will not be sufficient to fund all anticipated expenses. In the view of risks associated with leverage, a desire to conserve Partnership resources and the absence of commitments for new hospital contracts, it is not expected that the Company will acquire the New Lithotripsy System unless at least a minimal number of Units are sold in this Offering and sufficient business opportunities with new treatment centers are anticipated by the Managing Board to be available. See "Risk Factors - Company Limited Resources and Risks of Leverage." The terms of the Loan may restrict the Company's ability to obtain another financing commitment, and although members of the Managing Board maintain good relationships with certain commercial lending institutions, the Company has not obtained a loan commitment from any party in any amount and whether one would timely be forthcoming on terms acceptable to the Company cannot be assured. MANAGING BOARD The Company is managed by a four-member managing board consisting of two managers designated by Sun Medical and two managers elected annually pursuant to a vote of a Majority in Interest of the other Members (excluding Sun Medical and its Affiliates). The Managing Board is responsible for all decisions with respect to the management of the business and affairs of the Company. The Managing Board has full and complete authority, power and discretion to manage and control the business of the Company, to make all decisions regarding those matters and to perform any and all other acts or activities customary or incident to the management of the Company business, except only as to those acts and things as to which approval by the Members is expressly required by the Operating Agreement. See "Summary of the Operating Agreement - Powers of the Managing Board and Members' Voting Rights." The Managing Board, pursuant to the Management Agreement, has delegated responsibility for the day-to-day management of the Company to the Management Agent. See "Business Activities - Management." The current members of the Managing Board are Stan Johnson, Jim Turner, Dr. John Keene and Dr. Dennis Gaskill. Mr. Johnson also serves as the Chairman of the Managing Board, and has such authority to act on behalf of the Company as approved by the Managing Board and Members. See the Operating Agreement attached hereto as Appendix A. The principal executive office of the Company and the Managing Board is located at 15195 National Avenue, Suite 203, Los Gatos, California 95032. MANAGEMENT AGENT The Management Agent of the Company is Sun Medical Technologies, Inc. ("Sun Medical"), a California corporation formed on June 20, 1990. Prime acquired all the outstanding stock of Sun Medical on November 10, 1995 and Sun Medical remains a wholly-owned subsidiary of Prime. The principal executive office of Sun Medical is located at 1301 Capital of Texas Highway, Suite C-300, Austin, Texas 78746 and its telephone number is (800) 750-0786. Sun Medical's assets are illiquid in nature. The primary assets of Sun Medical are used mobile lithotripters and equity interests in other medical ventures. Management. The following table sets forth the names and respective positions of the individuals serving as executive officers and directors of Sun Medical, many of whom also serve as executive officers of Prime. Name Office Stan Johnson President and Director Ken Shifrin Director Joseph Jenkins, M.D. Director Cheryl Williams Vice President, Chief Financial Officer and Director James D. Clark Secretary Supervision of the day-to-day management and administration of the Company is the responsibility of Sun Medical in its capacity as the Management Agent of the Company. Sun Medical itself is managed by a four-member Board of Directors composed of Mr. Shifrin, Dr. Jenkins, Ms. Williams and Mr. Johnson. Set forth below are the names and descriptions of the background of the key executive officers and directors of Sun Medical. Stan Johnson has been a Vice President of Prime and President of Sun Medical since November 1995. Mr. Johnson was the Chief Financial Officer of Sun Medical from 1990 to 1995. Kenneth S. Shifrin has been Chairman of the Board and a Director of Prime since October 1989 and was elected a Director of Sun Medical following Prime's acquisition of all of Sun Medical's stock. Mr. Shifrin also has served in various capacities with American Physicians Service Group, Inc. ("APS") since February 1985, and is currently Chairman of the Board and Chief Executive Officer of APS. Joseph Jenkins, M.D. has been President and Chief Executive Officer of Prime since April 1996, and previously practiced urology in Washington, North Carolina. Dr. Jenkins was recently elected to Sun Medical's Board of Directors. Dr. Jenkins is a board certified urologist and is a founding member, past-president and currently a Director of the American Lithotripsy Society. Cheryl Williams is Vice President-Finance, Chief Financial Officer and Director of Sun Medical and has been Chief Financial Officer, Vice President-Finance and Secretary of Prime since October 1989. Ms. Williams was Controller of Fairchild Aircraft Corporation from August 1988 to October 1989. From 1985 to 1988, Ms. Williams served as the Chief Financial Officer of APS Systems, Inc., a wholly-owned subsidiary of APS. James D. Clark recently became Secretary of Sun Medical after previously serving as its Assistant Treasurer. Mr. Clark has served as Tax Manager of Prime since January 1998 and is a Certified Public Accountant in Texas. Prior to joining Prime, Mr. Clark was Controller for ERISA Administrative Services, Inc. COMPENSATION AND REIMBURSEMENT TO CERTAIN MEMBERS AND THEIR AFFILIATES The following summary describes the types and, where determinable, the estimated amounts of reimbursements, compensation and other benefits certain Members and their Affiliates will receive in connection with the continued operation and management of the Company and the Lithotripsy Systems. See "Business Activities - Management" and "Plan of Distribution." 1. Management Fee. Pursuant to the Management Agreement, the Management Agent has contracted with the Company to supervise the management and administration of the day-to-day operations of the Company's lithotripsy business for a quarterly fee equal to 7.5% of Company net profits per calendar quarter. All costs incurred by the Management Agent in performing its duties under the Management Agreement are the responsibility of, and are paid directly or reimbursed by, the Company. The management fee for any given quarter is payable on or before the 30th day of the month immediately following such quarter. The Management Agreement is in the second year of its initial five-year term. The Management Agreement will be automatically renewed for up to three additional successive five-year terms unless it is earlier terminated by the Company or the Management Agent. The Management Agent is reimbursed by the Company for all of its out-of-pocket costs associated with the operation of the Company and the Lithotripsy Systems. The Company will pay or reimburse to the members of the Managing Board all of their expenses related to this Offering. No other fees or compensation will be payable to the Managing Board, the Management Agent or its Affiliates for managing the Company other than the management fee payable to the Management Agent as provided in the Management Agreement. The Company may, however, contract with the any Member or an Affiliate of any Member to render other services or provide materials to the Company provided that the compensation is at the then prevailing rate for the type of services and/or materials provided. 2. Company Distributions. In its capacity as a Member of the Company, the Management Agent, Sun Medical, is entitled to its distributable share (23.9% before dilution) of Company Cash Flow, Company Sales Proceeds and Company Refinancing Proceeds as provided by the Operating Agreement. See "Summary of the Operating Agreement - Profits, Losses and Distributions" and the Operating Agreement attached as Appendix A. 3. Sales Commissions. The Sales Agent, a wholly-owned subsidiary of Prime and an Affiliate of Sun Medical, has entered into a Sales Agency Agreement with the Company pursuant to which the Sales Agent has agreed to sell the Units on a "best efforts" any or all basis. As compensation for its services, the Sales Agent will receive a commission equal to $75 for each Unit sold (up to an aggregate of $3,000). If the Offering is successful, the Sales Agent will also be reimbursed by the Company for its out-of-pocket expenses associated with its sale of the Units in an amount not to exceed $7,000. See "Plan of Distribution" and "Conflicts of Interest." 4. New Mobile Van. It is anticipated that as in the case of the Existing Lithotripsy System, the Company will also use a portion of the Offering proceeds and/or debt financing to acquire a new Ford 400 Series van (or an equivalent model van) from AK Associates, L.L.C., an Affiliate of Sun Medical, at a cost of approximately $75,000. See "Business Activities - Acquisition of New Lithotripsy System." 5. Loans. The Members or their Affiliates will also receive interest on loans, if any, made by them to the Company. See "Conflicts of Interest." Neither the Members nor any of their Affiliates are, however, obligated to make loans to the Company. While the Managing Board does not anticipate that it would cause the Company to incur indebtedness unless cash generated from the Company'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 Company's failure to make payments of principal or interest when due under such a loan and the Company's equity being reduced or eliminated. In such event, the Members could lose their entire investment. CONFLICTS OF INTEREST The operation of the Company involves numerous conflicts of interest between the Company, certain Members and their Affiliates. Because the Company is operated by the Managing Board (and Sun Medical in its capacity as the Management Agent), such conflicts are not always resolved through arm's length negotiations, but through the exercise of the judgment of the Managing Board consistent with its fiduciary responsibility to the Members and the Company's investment objectives and policies. The Managing Board, Sun Medical, their Affiliates and their employees will in good faith continue to attempt to resolve potential conflicts of interest with the Company, and the Managing Board and Sun Medical will each act in a manner that each believes to be in or not opposed to the best interests of the Company. Sun Medical, in its capacity as the Management Agent, and its Affiliate, the Sales Agent, will receive management fees and broker-dealer sales commissions, respectively, in connection with the business operations of the Company and the sale of the Units that will be paid regardless of whether any sums hereafter are distributed to Members. In addition, the Company may contract with additional Members or their Affiliates to render other services or provide materials to the Company provided that the compensation is at the then prevailing rate for the type of services and/or materials provided. The Members will also receive interest on loans, if any, they make to the Company. In addition, it is anticipated that the Company will purchase a new mobile van to transport the new Modulith(R) SLX-T from AK Associates, L.L.C., an Affiliate of Sun Medical. See "Compensation and Reimbursement to Certain Members and their Affiliates" and "Business Activities - Acquisition of New Lithotripsy System." The members of the Managing Board, and Sun Medical in its capacity as Management Agent, will devote as much of their time to the business of the Company as in their judgment is reasonably required. Managing Board members and the principals of Sun Medical may have conflicts of interest in allocating management time, services and functions among their various existing and future business activities in which they are or may become involved. See "Competition" and "Prior Activities." The Managing Board believes it and Sun Medical together, have sufficient resources to be capable of fully discharging their responsibilities to the Company. Subject to the limitations set forth in the Operating Agreement, Sun Medical 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 Company nor the holders of any of the Units shall be entitled to any interest therein. See the Operating Agreement attached hereto as Appendix A. Sun Medical, its Affiliates (including limited partnerships and other entities), and their employees engage in medical service activities for their own accounts. See "Prior Activities." Sun Medical serves as a general partner or management agent of other medical ventures that are similar to the Company and it does not intend to devote its entire financial, personnel and other resources to the Company. Except as provided by the Operating Agreement or 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 Company. Members of the Managing Board, Sun Medical, and their Affiliates are, however, obligated to act in a fiduciary manner with respect to the management of the Company and any other medical venture in which they have management responsibility. An Affiliate of Sun Medical presently provides lithotripsy services in the Service Area under one separate arrangement, and Sun Medical and its Affiliates provide services in states adjacent to the State of Washington. See "Competition" and "Prior Activities." The Sales Agent is MedTech Investments, Inc., which is an Affiliate of Sun Medical. Because of the Sales Agent's affiliation with Sun Medical, 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 Members 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 Company were retained by Sun Medical on behalf of the Managing Board and Company, and have in the past performed and are expected in the future to perform similar services for Sun Medical and its Affiliates. FIDUCIARY RESPONSIBILITY OF THE MANAGING BOARD The members of the Managing Board are accountable to the Company as fiduciaries and consequently must exercise good faith in handling Company affairs. This is a rapidly developing and changing area of the law and Members who have questions concerning the duties of the Managing Board should consult with their counsel. Under the Operating Agreement, the Managing Board, its members and its representatives have no liability to the Company or to any Member for any loss suffered by the Company that arises out of any action or inaction of such parties if they, in good faith, determined that such course of conduct was in the best interest of the Company and such course of conduct did not constitute gross negligence or willful misconduct of such parties. Accordingly, Members have a more limited right of action than they otherwise would absent the limitations set forth in the Operating Agreement. The Managing Board, its Members and its representatives will be indemnified by the Company against any losses, judgments, liabilities, expenses and amounts paid in settlement of any claims sustained by them in connection with the Company, provided that the same were not the result of gross negligence or willful misconduct on the part of such parties. Insofar as indemnification for liabilities under the Securities Act may be permitted to persons controlling the Company pursuant to the foregoing provisions, the Company has been informed that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act and therefore is unenforceable. COMPETITION Many fixed-site and mobile extracorporeal shock-wave lithotripsy services are currently operating in and around the Service Area. The following discussion identifies the existing services in and near the Service Area, to the best knowledge of the Company. Affiliated Competition An Affiliate of Sun Medical owns and operates a mobile lithotripsy service in the Company's Service Area. Executive Medical Enterprises, Inc. presently provides lithotripsy services using a mobile Dornier HM-4 lithotripter at Covington Day Surgery Center in Kent. Sun Medical in its capacity as the Management Agent is currently negotiating the assignment of this services contract to the Company. No assurance can be given that Sun Medical will be successful in its efforts to assign such contract. In the event Sun Medical is unsuccessful in its efforts, EME will continue to compete with the Company in the Service Area until the contract expires by its own terms. Another Affiliate of Sun Medical presently provides and will continue to provide mobile lithotripsy services in Washington outside the Service Area at Kadlec Medical Center in Richland. Sun Medical and its Affiliates also provide lithotripsy services in Oregon and Idaho. Other Competition Various hospitals and other facilities in the Service Area have access to lithotripters which will be in direct competition with the Company. Virginia Mason Medical Center in Seattle operates a fixed-site Dornier HM-3. Tacoma General Hospital operates a fixed-site Dornier DoLi. There are several mobile lithotripsy service providers in the Service Area. Stonehenge Urological Services operates a mobile Medstone at Highline Community Hospital in Seattle, Auburn Regional Medical Center in Auburn and Overlake Hospital in Bellevue. Cascade Urological Services operates a Healthtronics Lithotron at various hospitals and ambulatory surgery centers in the Service Area. Medstone also operates a mobile unit at various hospitals and ambulatory surgery centers in the Service Area. WaveForm operates a mobile Healthtronics lithotripter at various hospitals and ambulatory surgery centers in the Service Area. The foregoing information is to the best knowledge of the Company. Other hospitals, ambulatory surgery centers and other healthcare facilities may have fixed-base or mobile lithotripters of which the Company is not aware. These lithotripters would be in competition with the Company. Although the Managing Board anticipates that the Company will continue to operate primarily in the Service Area, the actual itinerary for the Lithotripsy Systems is expected to be influenced by the number of patients in particular areas and arrangements with various Contract Hospitals and other health care centers. See "Business Activities - Operation of the Lithotripsy Systems." Other hospitals in and near the Service Area may operate lithotripters which are not extracorporeal shock-wave lithotripters but rather use lasers or are electrohydraulic lithotripters. The Company believes these machines have a competitive disadvantage because such machines are capable of treating stones only in the ureter. The Company believes the Lithotripsy Systems can be used on stones in locations other than the ureter. See "Business Activities - Treatment Methods for Kidney Stone Disease." The health care market in the Service Area is heavily influenced by managed care companies such as health maintenance organizations. Managed care companies generally contract either directly with hospitals or specified providers for lithotripsy services for beneficiaries of their plans. It is not uncommon for managed care companies to have contracts already in place with hospitals or specified providers, and the Company 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 Company's services. No assurances can be given that new competing lithotripsy clinics will not open in the future or that innovations in lithotripters or other treatments of kidney stone disease will not make the Company's Lithotripsy Systems competitively obsolete. See "Risk Factors - Operating Risks - Technological Obsolescence". The manufacturer of the Lithotripsy System is under no obligation to the Managing Board or the Company to refrain from selling its lithotripters to urologists, hospitals or other persons for use in the Service Area or elsewhere. In addition, the availability of lower-priced lithotripters in the United States has dramatically increased the number of lithotripters in the United States, increased competition for lithotripsy procedures and created downward pressure on the prices the Company can charge for its services. Many potential competitors of the Company, including hospitals and medical centers, have financial resources, staffs and facilities substantially greater than those of the Company. REGULATION Federal Regulation The Company, the Managing Board and the Members 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 Company, the Managing Board and the Members being subject to imprisonment, loss of reimbursement, fines or exclusion from participation in Medicare or Medicaid. Adverse reviews of the Company's operations at any of the various regulatory levels may adversely affect the operations and profitability of the Company. Reimbursement. The Company charges hospitals a per-use fee for use of its Lithotripsy Systems and does not directly bill or collect from any patients or third party payors for lithotripsy services provided using its Lithotripsy Systems. The amount of this per-use fee primarily depends on the amount that governmental and commercial third party payors are willing to reimburse hospitals for lithotripsy procedures. The primary governmental third party payor is Medicare. Medicare reimbursement policies are statutorily created and are regulated by the federal government. The Balanced Budget Act of 1997 required the Health Care Financing Administration ("HCFA"), the federal agency that administers the Medicare program, to establish a prospective payment system for outpatient procedures. One of the goals of the prospective payment system was to lower medical costs paid by the Medicare program. HCFA issued proposed regulations in 1998 which would reduce the reimbursement rate currently paid for lithotripsy procedures performed on Medicare patients at hospitals to a base rate of $2,235. The base rate includes anesthesia and sedation, equipment and supplies necessary for the procedure, but does not include the treating physician's professional fee. The base rate is subject to adjustment for various hospital-specific factors. The Managing Board believes the lower reimbursement rate will be implemented in the latter half of the year 2000. In some cases, reimbursement rates payable to the Company are less than the proposed HCFA rate. The Company currently provides services at two ambulatory surgery centers and the Managing Board retains the discretion to make the Lithotripsy Systems available at other ambulatory surgery centers ("ASCs") . Medicare does not currently reimburse for lithotripsy procedures provided at ASCs. However, HCFA issued proposed rules in 1998 which would authorize Medicare reimbursement for lithotripsy procedures provided at ASCs. While the proposed rules had a target effective date of October 1, 1998, the effective date has been postponed indefinitely for reasons unrelated to lithotripsy coverage. The proposed rules assign a Medicare reimbursement rate of $2,107 if the lithotripsy procedure is performed at an ASC. Whether these proposed rules will become effective to authorize Medicare reimbursement at ASCs and, if they do become effective, what the reimbursement rate will be, is unknown to the Company. The Medicare program has historically influenced the setting of reimbursement standards by commercial insurers. Therefore, reduced rates of Medicare reimbursement for lithotripsy services may result in reduced payments by commercial insurers for the same services. As was discussed previously, competitive pressure from health maintenance organizations and other managed care companies has in some circumstances already resulted in decreasing reimbursement rates from commercial insurers. See "Risk Factors - Impact of Insurance Reimbursement." No assurances can be given that HCFA will not seek to reduce its proposed reimbursement rates even more to avoid paying more than commercial insurers. As a result, hospitals may seek to lower the fees paid to the Company for the use of the Lithotripsy Systems. The Managing Board anticipates that reimbursement for lithotripsy procedures, and therefore overall Company 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 program in Washington is jointly sponsored by the federal and state governments to reimburse service providers for medical services provided to Medicaid recipients, who are primarily the indigent. The Washington Medicaid program currently provides reimbursement for lithotripsy services. The federal Personal Responsibility and Work Opportunity Reconciliation Act of 1996 requires state health plans, such as the Washington Medicaid program, to limit Medicaid coverage for certain otherwise eligible persons. The Company and its representatives do not believe this legislation will have a significant impact on the Company'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 Company does not know whether the Washington Medicaid program has taken or will take such steps. Self-Referral Restrictions. Health care entities which seek reimbursement for services covered by Medicare or Medicaid are subject to federal regulation restricting referrals by certain physicians 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) ("Stark II"). Lithotripsy services were not specifically identified as a designated health service by this legislation, but the prohibition includes any service which is provided to an individual who is registered as an inpatient or outpatient of a hospital under proposed regulations discussed below. Lithotripsy services provided by the Company to Medicare and Medicaid patients are billed by the contracting hospital in its name and under its Medicare and Medicaid program provider numbers. Accordingly, these lithotripsy services would likely be considered inpatient or outpatient services under Stark II. Following the passage of the Stark II legislation effective January 1, 1995, the Management Agent and its Affiliates determined that the statute would not apply to the type of lithotripsy services provided by them which are similar to the services provided by the Company. Stark II applies only to ownership interests directly or indirectly in the entity that "furnishes" the designated health care service. The physician-investors and the Company will not have an ownership interest in any Contract Hospitals which offer the lithotripsy services to the patients on an inpatient or outpatient basis. See 42 U.S.C. ss. 1395nn(a)(1)(A). Thus, by referring a patient to a hospital offering the service, the physician-investors will not be making a referral to an entity in which they maintain an ownership interest for purposes of the application of Stark II. This interpretation adopted by the Management Agent and its Affiliates was consistent with the informal view of the General Counsel's Office of the U.S. Department of Health and Human Services. Based upon this reasonable interpretation of Stark II, by referring a patient to a hospital furnishing the outpatient lithotripsy services "under arrangements" with the Company, a physician investor in the Company is not making a referral to an entity (the hospital) in which he or she has an ownership interest. In 1998, HCFA published proposed regulations interpreting the Stark II statute (the "Proposed Stark II Regulations"). The Proposed Stark II Regulations and HCFA's accompanying commentary would apply the physician referral prohibitions of Stark II to the Company's contracts for provision of the Lithotripsy Systems. Under the Proposed Stark II Regulations, physician Member referrals of Medicare and Medicaid patients to Contract Hospitals would be prohibited because the Company is regarded as an entity that "furnishes" inpatient and outpatient hospital services. The Company and its representatives cannot predict when final regulations will be issued or the substance of the final regulations, but the interpretive provisions of the Proposed Stark II Regulations may be viewed as HCFA's interim position until final regulations are issued. If the Proposed Stark II Regulations are adopted as final (or, in the meantime, if a reviewing court adopted their reasoning as the proper interpretations of the Stark II statute), then the Company's operations would not be in compliance with Stark II, as Members would have an ownership interest in an entity to which they referred patients. HCFA acknowledges in its commentary to the Proposed Stark II Regulations that physician overutilization of lithotripsy is unlikely and specifically solicits comments on whether there should be a regulatory exception for lithotripsy. HCFA has received a substantial volume of comments in support of a regulatory exception for lithotripsy. HCFA representatives have informally acknowledged in published commentary that some form of regulatory relief for lithotripsy is under consideration and may be forthcoming; however, no assurance can be made that such will be the case. The Company will continue to carefully review the Proposed Stark II Regulations and accompanying HCFA commentary, and explore other alternative plans of operations that would allow the Company to operate in compliance with Stark II and its final regulations. HCFA's adoption of the current Proposed Stark II Regulations as final or a reviewing court's interpretation of the Stark II statute in reliance on the Proposed Stark II Regulations and in a manner adverse to the Company operations would mean that the Company and its physician Members would likely be found in violation of Stark II. In such circumstance, it is possible the Company may be given the opportunity to restructure its operations to bring them into compliance. In the event the Managing Board and the Members are unable to devise a plan pursuant to which the Company may operate in compliance with Stark II and its final regulations, the Managing Board is obligated under the Operating Agreement either (i) to cause the sale of the Membership Interests of all the Members or (ii) to dissolve and liquidate the Company. See "Summary of the Operating Agreement - Optional Purchase of Membership Interests." The Company and/or the physician Members 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 Company and physician Members 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 Stark II self-referral prohibition. One (H.R. 2650) was introduced by Representative Stark, the other (H.R. 2651) by House Ways and Means health subcommittee chair Representative Bill Thomas. The Stark bill would modify, and the Thomas bill would repeal, the general prohibition on physician compensation arrangements with entities to which they refer patients. However, neither bill, nor any other bill currently pending in Congress, would substantively modify the regulation of referrals of physicians with ownership interests. Thus, neither bill would affect the Company's analysis of the potential impact of Stark II on this Offering discussed above. Fraud and Abuse. The provisions of the federal Social Security Act addressing illegal remuneration (the "Anti-Kickback Statute") prohibit providers and others from soliciting, receiving, offering or paying, directly or indirectly, any remuneration in return for either making a referral for a Medicare, Medicaid or CHAMPUS covered service or ordering, arranging for or recommending any such covered service. Violations of the Anti-Kickback Statute may be punished by a fine of up to $25,000 or imprisonment for up to five (5) years, or both. In addition, violations may be punished by substantial civil penalties and/or exclusion from the Medicare and Medicaid programs. Regarding exclusion, the Office of Inspector General ("OIG") of the Department of Health and Human Services may exclude a provider from participation in the Medicare program for a 5-year period upon a finding that the Anti-Kickback Statute has been violated. After OIG establishes a factual basis for excluding a provider from the program, the burden of proof shifts to the provider to prove the Anti-Kickback Statute has not been violated. The Members are to receive cash Distributions from the Company. Since some of the Members are physicians or others in a position to refer and perform lithotripsy services using Company equipment and personnel, such Distributions could come under scrutiny under the Anti-Kickback Statute. The Third Circuit United States Court of Appeals has held that the Anti-Kickback Statute is violated if one purpose (as opposed to the primary or sole purpose) of a payment to a provider is to induce referrals. United States v. Greber, 760 F.2d 68 (1985). The Greber case was followed by the United States Court of Appeals for the Ninth Circuit, United States v. Kats, 871 F.2d 105 (9th Cir. 1989), and cited favorably by the First Circuit in United States v. Bay State Ambulance and Hospital Rental Service, Inc., 874 F.2d 20 (1st Cir. 1989). The OIG has indicated that it is giving increased scrutiny to health care joint ventures involving physicians and other referral sources. In 1989, it published a Special Fraud Alert that outlined questionable features of "suspect" joint ventures, including some features which may be common to the Company. While OIG Special Fraud Alerts do not constitute law, they are informative because they reflect the general views of the OIG as a health care fraud and abuse investigator and enforcer. The OIG has published regulations which protect certain transactions from scrutiny under the Anti-Kickback Statute (the "Safe Harbor" regulations). A Safe Harbor, if complied with fully, will exempt such activity from prosecution under the Anti-Kickback Statute. However, the preamble to the Safe Harbor regulations states that the failure of a particular business arrangement to comply with the regulations does not determine whether or not the arrangement violates the Anti-Kickback Statute because the regulations do not themselves make any particular conduct illegal. This Offering and the business of the Company do not comply with any Safe Harbor. A Safe Harbor has been adopted which protects equipment leasing arrangements. It requires that the aggregate rental charge be set in advance, be consistent with fair market value in arms-length transactions and not be determined in a manner that takes into account the volume or value of any referrals or business otherwise generated between the parties. To the best knowledge of the Managing Board, the Hospital Contracts entered into by the Company do not require that the aggregate rental charge be set in advance and contain other terms which cause the Hospital Contracts not to comply with the Safe Harbor's requirements. When it issued this Safe Harbor, the OIG commented on "per use" charges for equipment rentals. It stated that such arrangements must be examined on a case-by-case basis and may be abusive in certain situations. According to the OIG, payments on a "per use" basis do not necessarily violate the Anti-Kickback Statute, but such payments are not provided Safe Harbor protection. The Company cannot give any assurances that the Company's Hospital Contracts which involve a "per use" payment to the Company by Contract Hospitals would not be deemed to violate the Anti-Kickback Statute. In the commentary introducing the Safe Harbor regulations, the OIG recognized the beneficial effect that business investments in small entities may have on the health care industry. The OIG promulgated a Safe Harbor for investment interests, including limited liability company ownership interests, in small entities which are held by persons in a position to make referrals to the entities so long as eight criteria are met. This Offering does not meet all eight criteria; however, this Offering does meet some of the criteria. Specifically, the terms on which membership interests are offered to physicians who treat their patients on the Lithotripsy Systems are not related to the previous or expected volume of referrals or amount of business generated by the physicians; there is no requirement that any physician make referrals or be in a position to make referrals as a condition for remaining an investor; there is no cross-referral arrangement involved with the business of the Company; the Company does not loan funds or guarantee loans for physicians who refer patients for treatment on the Lithotripsy Systems; and the Distributions to physicians who are Members are directly proportional to the amount of their capital investment. In order to qualify for Safe Harbor protection, all eight criteria must be met. The Company can give no assurance that compliance with some, but not all, of the criteria of the Safe Harbor would prevent the OIG from finding a potential violation of the Anti-Kickback Statute by virtue of this Offering. In November 1999, the OIG issued a Safe Harbor protecting certain physician investment interests in ASCs. The commentary accompanying the new Safe Harbor specifically distinguished physician ownership in ASCs from physician ownership in other facilities, including lithotripsy facilities, end-stage renal disease facilities, comprehensive outpatient rehabilitation facilities and others. The OIG concluded that ASCs benefit from favorable public policy considerations relating to reducing Medicare costs (including through the impending prospective payment system discussed above); other facilities, including lithotripsy facilities, do not share the same policy considerations or reimbursement structures. Therefore, the Safe Harbor status given to certain physician investments in ASCs cannot be viewed as an indication that physician investments in other facilities, including lithotripsy facilities, would not be deemed to violate the Anti-Kickback Statute. Although a separate Safe Harbor was not adopted, HCFA noted in its commentary when the Safe Harbor regulations were issued in 1991 that additional protection may be merited for situations where a physician sees a patient in his or her own office, makes a referral to an entity in which he or she has an ownership interest and performs the service for which the referral is made. In such cases, Medicare makes a payment to the facility for the service it furnishes, which may result in a profit distribution to the physician. HCFA noted that, with respect to the physician's professional fee, such a referral is simply a referral to oneself, and that in such situations, both the professional service fee and the profit distribution from the associated facility fee that are generated from the referral may warrant protection. HCFA stated that its primary concern regarding the above referral situation was the investing physician's ability to profit from any diagnostic testing that is generated from the services he or she performs. The Company believes the potential for overutilization posed by referrals for diagnostic services is not present to the same degree with therapeutic services such as lithotripsy where the necessity for the treatment can be objectively determined; i.e., a renal stone can be definitely determined before treatment. The applicability of the Anti-Kickback Statute to physician investments in health care businesses to which they refer patients and which do not qualify for a Safe Harbor has not been the focus of many court decisions, and therefore, judicial guidance is limited. In the only case in which the OIG has attempted to exercise the civil exclusion remedy in the context of a physician-owned joint venture, The Hanlester Network, et al. v. Shalala, the Ninth Circuit for the United States Court of Appeals (the "Court") held that the Anti-Kickback Statute is violated when a person or entity (a) knows that the statute prohibits offering or paying remuneration to induce referrals and (b) engages in prohibited conduct with the specific intent to violate the law. Although the Court upheld a lower court ruling that the joint venture in question violated the Anti-Kickback Statute vicariously through the knowing and willful actions of one of its agents, who was acting outside the parameters of the joint venture's offering documents, the Court concluded there was not sufficient evidence indicating that a return on investment to physicians or other investors in the joint venture could on its own constitute an "offer or payment" of remuneration to make referrals. The Court also stated that since profit distributions in Hanlester were made based on each investor's ownership share and not on the volume of referrals, the fact that large referrals by investors would result in potentially high investment returns did not, standing alone, cause a violation of the Anti-Kickback Statute. The Health Insurance Portability and Accountability Act of 1996 directed the OIG to respond to requests for advisory opinions regarding the effect of the Anti-Kickback Statute on proposed business transactions. The Company has not requested the OIG to review this Offering and, to the best knowledge of the Company and its representatives, 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 Members. Because there is no legal precedent interpreting circumstances identical to these facts, it is not possible to predict how this issue would be resolved if litigated. Whenever an offering of ownership interests is made available to persons with the potential to refer patients for services, there is a possibility that the OIG, HCFA or other government agencies or officials may question whether the ownership interests are being provided in return for or to induce referrals by the new owners. Remuneration, which government officials have said can include the provision of an opportunity to invest in a facility to which a person refers patients for services, may be challenged by the government as constituting a violation of the Anti-Kickback Statute. Whether the offering of ownership interests to investors who may refer patients to the Company might constitute a violation of this law must be determined in each case based upon the specific facts involved. The various mechanisms in place to avoid providing a financial benefit to prospective Members for any referrals of patients (including the requirement that all distributions of earnings to Members be made in proportion to their investment interest), the Company'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 Company's view of valid business reasons to engage in this transaction, form the basis in part of the Company's belief that this Offering is appropriate. The Managing Board intends for all business activities and operations of the Company to conform in all respects with all applicable anti-kickback statutes (federal or state). The Company and its representatives do not believe that the Company's proposed operations violate the Anti-Kickback Statute. No assurance can be given, however, that the activities of the Company will not be reviewed and challenged by regulatory authorities empowered to do so, or that if challenged, the Company will prevail. If the activities of the Company were determined to violate these provisions, the Company, the Members of the Managing Board, and each Member could be subject, individually, to substantial monetary liability, felony prison sentences and/or exclusion from participation in Medicare, Medicaid and CHAMPUS. A prospective Member with questions concerning these matters should seek advice from his own independent counsel. False Claims Statutes. Federal laws governing reimbursement for medical services generally prohibit an individual or entity from knowingly and willfully presenting a claim (or causing a claim to be presented) for payment from Medicare, Medicaid or other third party payors that is false or fraudulent. The standard for "knowing and willful" includes conduct that amounts to a reckless disregard for whether accurate information is presented by claims processors. Penalties under these statutes include substantial civil and criminal fines, exclusion from the Medicare program and imprisonment. One of the most prominent of these laws is the federal False Claims Act, which may be enforced by the federal government directly, or by a qui tam private plaintiff on the government's behalf. Under the federal False Claims Act, both the government and the private plaintiff, if successful, are permitted to recover substantial monetary penalties and judgments, as well as an amount equal to three times actual damages. In recent cases, some private plaintiffs have taken the position that violations of the Anti-Kickback Statute (discussed above) and Stark II (discussed above) should also be prosecuted as violations of the federal False Claims Act. The Company cannot assure that the government, or a reviewing court, would not take the position that billing errors, employee misconduct or violations of other federal statutes, should they occur, are violations of the federal False Claims Act or similar statutes. Some federal courts have recently taken the position that qui tam lawsuits by private plaintiffs are unconstitutional. Most notably, a panel of judges on the Fifth Circuit Court of Appeals took this position in a decision issued in November 1999. That decision is being reviewed by all the judges on the Fifth Circuit. The panel's decision was a minority view; most courts have concluded that qui tam lawsuits are constitutional. In another case, the U.S. Supreme Court may review this issue. Unless and until the Supreme Court decides the issue, prospective Members should consider the ramifications of the False Claims Act issues discussed in the preceding paragraph. New Legislation. Two bills currently pending in Congress which would amend or repeal the compensation provisions of the Stark II law were discussed above in the disclosures related to self-referral restrictions. The Company and its representatives are not aware of any other bill currently before Congress which, if enacted into law, would have an adverse effect on the Company's operations in a fashion similar to the Stark II and the Anti-Kickback laws discussed above. In the event that legislation is enacted which, in the opinion of the Managing Board, would adversely affect the operation of the Company's business, the Managing Board, after exploring alternative methods for Company operations, is obligated either to cause the sale of the Membership Interests of all the Members or to dissolve the Company. See "Summary of the Operating Agreement - Optional Purchase of Membership Interests." ALS Fraud and Abuse Compliance Guidelines. On March 24, 2000, the American Lithotripsy Society ("ALS") (a voluntary membership organization made up of physicians, health care management personnel, treatment centers and medical suppliers) published Fraud and Abuse Compliance Guidelines for Physician - - Owned Lithotripsy Ventures (the "ALS Guidelines"). The ALS Guidelines are aimed at assisting ALS members in recognizing and avoiding certain practices which the ALS believes are unethical or illegal. The ALS Guidelines acknowledge that they are neither authoritative, nor constitute legal advice. Moreover, the ALS Guidelines stipulate that the laws upon which they are based (all of which are discussed in this "Regulation" section) are open to alternative interpretations. Because of the various reasons set forth in this Memorandum, the Company believes the Offering and its operations are appropriate under such laws, however, no assurance can be given that the activities of the Company would be viewed by regulatory authorities as complying with these laws or the ALS Guidelines. FTC Investigation. Issues relating to physician-owned health care facilities have been investigated by the Federal Trade Commission ("FTC"), which investigated two lithotripsy limited Partnerships affiliated with Sun Medical, to determine whether they posed an unreasonable threat to competition in the health care field. The affiliated limited partnerships were advised in 1996 that the FTC's investigation was terminated without any formal action taken by the FTC or any restrictions being placed on the activities of the limited partnerships. However, the Company cannot assure that the FTC will not investigate issues arising from physician-owned health care facilities in the future with respect to Sun Medical, any other Member or their Affiliates, including the Company. 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 Company and its representatives believe 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 Company and the interests of the Members may be adversely affected. State Regulation Washington's certificate of need ("CON") law applies to new hospitals, new beds and a few other health care services. The CON law does not apply to the acquisition of a lithotripter or the initiation of lithotripsy services. To the best knowledge of the Company and its representatives, since the hospitals and other treatment facilities contracting with the Company will not own the Lithotripsy System, there is no facility licensure requirement applicable to the Lithotripsy System. Washington requires registration and inspection of x-ray producing medical machines, and requires registration of radiologic technologists. Washington enacted one of the first self-referral laws affecting physicians in 1949. The statute prohibits (1) physicians and other licensed persons from (2) receiving any rebate, refund, commission, unearned discount or profit (3) in connection with the referral of patients or in connection with the furnishing of medical diagnosis, treatment or services. Violation of the law is a criminal misdemeanor, and can subject the violator to a sentence of up to ninety (90) days in jail, a fine of up to one thousand dollars ($1,000), or both. In the event the violator is a corporation, Washington law holds that a person is criminally liable for conduct constituting an offense which he performs or causes to be performed in the name or on behalf of a corporation to the same extent as if such conduct were performed in his own name or behalf. In addition, violation of the law constitutes unprofessional conduct and could jeopardize the professional (i.e., medical) license of a violator, including potential loss of the license. The Company requested Local Counsel in Washington to review the self-referral law and provide a written opinion on its impact on this Offering and the business of the Company. Prospective Members should closely review the opinion of Local Counsel attached as Appendix D. Based on Local Counsel's opinion, the Company has determined to proceed with the Offering. However, Local Counsel's opinion is not binding on any Washington government agency, and no assurance can be given that the Offering or the business of the Company would not be found to violate the Washington self-referral law. As noted above, violations can result in a criminal penalty, including jail, or disciplinary action against the violator's medical license, including revocation. Washington's Medicaid program and workers' compensation program prohibit kickbacks in exchange for referrals. Violation is a felony. Prospective Members are referred to the discussion above regarding the federal Anti-Kickback Statute for an analysis of the reasons why the Managing Board believes this Offering and the business of the Company do not violate anti-kickback laws, whether federal or state. The Washington Medicaid statute incorporates the self-referral limitations contained in the federal Stark II law; prospective Members are referred to the discussion above regarding the federal Stark II law for an analysis of its effect on this Offering and the business of the Company. If the Company, its Managing Board or its Members were deemed to have violated the federal Anti-Kickback Statute or the federal Stark II law, then it is possible the state of Washington would conclude a violation of the similar state law occurred also. The Company has been seeking and will continue to seek to comply with all applicable statutory and regulatory requirements. Further regulations may be imposed in Washington at any time in the future. Predictions as to the form or content of such potential regulations would be highly speculative. Such laws could apply to the operation of the Lithotripsy Systems or to the physicians who invest in the Company. Such restrictive regulations could materially adversely affect the ability of the Company to conduct its business. THE COMPANY BELIEVES 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 MEMBERS SHOULD CONSULT WITH THEIR LEGAL COUNSEL AS TO THE IMPLICATIONS OF FEDERAL AND STATE LAWS AND PROFESSIONAL ETHICAL CODES DEALING WITH PHYSICIAN OWNERSHIP OF MEDICAL EQUIPMENT AND FACILITIES BEFORE PURCHASING UNITS. PRIOR ACTIVITIES Sun Medical is the Management Agent of the Company. Prime, the sole shareholder of Sun Medical, is the largest and fastest growing provider of lithotripsy services in the United States, providing lithotripsy services at approximately 450 hospitals and surgery centers in 31 states, as well as delivering non-medical services related to the operation of the lithotripters, including scheduling, staffing, training, quality assurance, maintenance, regulatory compliance and contracting with payors, hospitals and surgery centers, while medical care is rendered by urologists utilizing the lithotripters. Prime has an economic interest in 59 mobile and six fixed site lithotripters, all but two of which are operated by Prime, Sun Medical and its Affiliates. Prime began providing lithotripsy services with an acquisition in 1992 and has grown rapidly since that time through acquisitions and de novo development. The acquisition of Sun Medical provided Prime with complementary geographic coverage as well as additional expertise in forming and managing lithotripsy operations. Prime and Sun Medical's lithotripters together performed approximately 38,000 lithotripsy procedures in 1999. Approximately 2,300 urologists utilized Prime and Sun Medical's lithotripters in 1999, representing approximately 30% of the estimated 7,700 active urologists in the United States. Prime manages the operations of approximately 63 of its 65 lithotripters. All of its lithotripters are operated in connection with hospitals or surgery centers. Prime operates its lithotripters primarily as the general partner of a limited partnership or through a subsidiary, as is the case with entities affiliated with Sun Medical. Prime provides a full range of management and other non-medical support services to the lithotripsy operations, while medical care is provided by urologists utilizing the facilities and certain medical support services are provided by the hospital or surgery center. Urologists are investors in 50 of its 65 operations. Prime's lithotripters range in age from one to twelve years. Of its 65 lithotripters, 59 are mobile units mounted in tractor-trailers or self-contained coaches serving locations in 31 states. Prime also operates six fixed site lithotripters in four states. All of Prime's fixed lithotripsy units are located and operated in conjunction with a hospital or surgery center. Most of these locations are in major metropolitan markets where the population can support such an operation. Fixed site lithotripters generally cannot be economically justified in other locations. Prime and Sun Medical believe that they maintain the most comprehensive quality outcomes database and information system in the lithotripsy services industry. Prime has detailed information on over 160,000 procedures covering patient demographic information and medical condition prior to treatment, the clinical and technical parameters of the procedure and resulting outcomes. Information is collected before, during and up to three months after the procedure through internal data collection by doctors, nurses and technicians and through patient questionnaires. For numerous reasons, including differences in financial structure, program size, economic conditions and distribution policies, the success of the Sun Medical and its Affiliates in the lithotripsy field should not be considered as indicative of the operating results obtainable by the Company. SUMMARY OF THE OPERATING AGREEMENT The Operating Agreement sets forth the powers and purposes of the Company and the respective rights and obligations of the Managing Board and the Members. The following is only a summary of certain provisions of the Operating Agreement, and does not purport to be a complete statement of the various rights and obligations set forth therein. A complete copy of the Operating Agreement is set forth as Appendix A to this Memorandum, and Investors are urged to read the Operating Agreement in its entirety and to review it with their counsel and advisors. Nature of Membership Interest The Investors will acquire their interests in the Company in the form of Units. For each Unit purchased, a cash payment of $4,237 is required in addition to a personal guaranty of 0.5% of the Company's obligations under the Loan (up to a $2,750 principal guaranty obligation). The per Unit cash purchase price and execution and delivery of the Guaranties are both due upon subscription; however, certain qualified Investors may finance a portion of the cash purchase price through either individually borrowed funds or through the Member Loans. See "Terms of the Offering - Member Loans." No Member will have any liability for the debts and obligations of the Company by reason of being a Member except to the extent of (i) his Capital Contribution and liability under a Member Loan, if any, (ii) his liability under his Guaranty, (iii) his proportionate share of the undistributed profits of the Company, and (iv) the amount of certain Distributions received from the Company as provided by the Act or other applicable law. See "Risk Factors - Other Investment Risks - Members' Obligation to Return Certain Distributions." See also form of Legal Opinion of Counsel, attached hereto as Appendix C. Dilution Offerings The Managing Board, subject to certain limitations set forth in the Operating Agreement, has the authority to periodically offer and sell additional Membership Interests in the Company (a "Dilution Offering") to persons who are not investors in the Company ("Qualified Investors"). The primary purpose of Dilution Offerings will be to raise additional capital for any legitimate Company purpose. Money raised in a Dilution Offering may also be distributed to the Members. Any sale of Membership Interests in a Dilution Offering will result in proportionate dilution of the Membership Interests of the existing Members; i.e., the interests of the Members in Company allocations, cash distributions and voting rights will be proportionately reduced as a result of a successful Dilution Offering. Existing Members will have no right to purchase additional Membership Interests offered by the Company in a Dilution Offering. Any additional Membership Interests offered in a Dilution Offering will be sold for a price determined in accordance with the purchase price formula set forth in the Operating Agreement, as such formula may be amended from time to time. Pursuant to the terms of the Operating Agreement, the Members and the Managing Board recently amended the purchase price formula for Dilution Offerings. The approved purchase price formula requires that the price of Membership Interests be based upon a fair market valuation of the Company conducted by an independent third-party valuation firm. Fundamental Changes Under the terms of the Operating Agreement, the Managing Board, with the consent of the Members representing two-thirds of the aggregate interests of the Company, may cause the Company to engage in certain transactions in the future, any of which transactions could result in the termination or reorganization of the Company and a partial or total dilution of all Investing Members' interests in the Company. The Managing Board could adopt a plan providing for the merger or consolidation of the Company with another entity; the sale of all or substantially all of the Company's assets to another entity; or any other reorganization, reclassification or exchange of the Membership Interests, including without limitation the exchange of Membership Interests for equity interests in another entity or for cash or other consideration. In such event, the Members are obligated by the terms of the Operating Agreement to take or refrain from taking, as the case may be, such actions as the plan may provide, including, without limitation, executing such instruments, and providing such information as the Managing Board may reasonably request. Any such plan may also result in an amendment to the Operating Agreement or the adoption of a new operating agreement in being liquidated. Although, the Managing Board will endeavor to keep the Members apprised of all relevant information regarding the above transactions, the Managing Board is not obligated to provide such information in any particular manner concerning the risks and effect of the proposed transaction; the fairness of the proposed transaction to the Company and the Members; the method of valuing the Company in the proposed transaction and the method of allocating value among various participants in the proposed transaction; the background, reasons for and alternatives to the roll-up transactions; and any conflicts of interest of the members of the Managing Board, the Members participating in the plan, or their Affiliates in the proposed reorganization. In December 1993, Congress passed legislation amending portions of the Securities Exchange Act of 1934 to afford new protections to limited partnership investors in the context of certain limited partnership mergers and reorganizations commonly known as partnership rollups. The law, known as the "Limited Partnership Rollup Reform Act of 1993" (the "Reform Act"), became effective on December 17, 1994, and applies to certain rollup transactions proposed after such date. The Reform Act and the Rules promulgated thereunder are applicable only to certain types of partnership rollups and, when applicable, provide Members with the following protections: (i) allows and facilitates communication between Members during their consideration of a proposed rollup; (ii) allows the Members to obtain a list of the other Members involved in the rollup; (iii) disallows the practice of compensating persons soliciting the Members' approval of the rollup based on the number of approvals received; (iv) requires greater disclosure to the Members of the terms of the rollup and its effects on the Members including (a) the reason for the rollup and consideration of the alternatives; (b) the method of allocating interests in the successor entity to the Members and why such method was chosen; (c) comparative information including changes in Member voting rights, changes in distributions to the Members and changes in compensation to the Managing Board members; (d) conflicts of interest of the Managing Board members; (e) changes in the Company's business plan; (f) the valuation of the Membership Interests; (g) any significant difference between the exchange values of the Membership Interests and the trading price of the securities to be issued in the rollup transaction; (h) the risks and effects of the proposed rollup transaction; (i) a statement by the Managing Board of the fairness of the rollup and the Managing Board's basis for such opinion; (j) full disclosure of any opinion (other than opinions of counsel) or appraisal received by the Managing Board related to the proposed transaction, or if no such opinion or appraisal was sought by the Managing Board, an explanation of why no such opinion or appraisal is necessary to permit the Members to make an informed decision regarding the proposed transaction; (k) the rights of the Members to exercise dissenters' or appraisal rights or similar rights; (l) the method for allocating rollup consideration to the Members and an explanation why such method was chosen; and (m) tax consequences of the rollup; and (v) requires a minimum 60 day offering period during which the Members may consider the proposed rollup (or such shorter period as required by state law). Further, the Reform Act also provides that related Rules of Fair Practice will be amended to prohibit exchanges and national securities associations from listing securities issued in connection with a rollup unless the Members are afforded the following protections: (i) dissenting Members must have the right to one of the following: (a) to receive an appraisal and compensation; (b) to retain a security under substantially similar terms as the original issue; (c) to approve of the rollup by a vote of not less than 75% of the outstanding securities of each participating entity, or; (d) to use an independent committee to negotiate the terms of the transaction. (ii) not to have their voting power unfairly reduced or abridged. (iii) not to bear an unfair proportion of the costs of the rollup transaction. The Reform Act applies only to certain types of rollup transactions, and there is no certainty that any plan considered by the Company at any time would be subject to the Reform Act. Thus Investors must assume in making an investment in the Units that their Membership Interests will be subject to the provisions of the Operating Agreement permitting fundamental changes which could result in the termination or reorganization of the Company and a partial or total dilution of all Members' Membership Interests without the consent of, or disclosure of detailed information concerning the transaction to, the Members. Profits, Losses and Distributions The following is a summary of certain provisions of the Operating Agreement relating to the allocation and distribution of the Profits, Losses, Company Cash Flow, Company Refinancing Proceeds, Company Sales Proceeds, and cash upon dissolution of the Company. Investors should note that the Membership Interests referenced in the discussion below could change as a consequence of a future Dilution Offering. Because an understanding of the defined financial terms is essential to an evaluation of the information presented below, Investors are urged to review carefully the definitions of the terms appearing in the Glossary. 1. Allocations. Losses. After giving effect to the special allocations set forth below, the Company's Losses, if any, for each Fiscal Year generally will be allocated to the Members, in accordance with their respective Membership Interests. Profits. After giving effect to the special allocations set forth below, the Company's Profits for any Fiscal Year generally will be allocated to the Members, in accordance with their respective Membership Interests. All items of income, gain, loss, deduction, or credit will be allocated among the Members proportionately. 2. Special Allocations. The following special allocations shall be made in the following order: (i) Company Minimum Gain Chargeback. If there is a net decrease in Company Minimum Gain during any Year, each Member shall be specially allocated items of Company income and gain for such Year (and, if necessary, subsequent Years) in an amount equal to such Member's share of the net decrease in Company Minimum Gain, determined in accordance with Treasury Regulations Section 1.704-2(g)(2). Allocations made pursuant to the previous sentence will be made in proportion to the respective amounts required to be allocated to each Member pursuant to that section of the Regulations. This provision relating to Company Minimum Gain Chargebacks is intended to comply with Treasury Regulations Section 1.704-2(f) and will be interpreted and applied in a manner consistent with that Regulation. (ii) Member Minimum Gain Chargeback. If there is a net decrease in Member Minimum Gain attributable to a Member Nonrecourse Debt during any Year, each Member who has a share of the Member Minimum Gain attributable to such Member Nonrecourse Debt shall be specially allocated items of Company income and gain for such Year (and, if necessary, subsequent Years) in an amount equal to such Member's share of the net decrease in Member Minimum Gain attributable to such Member Nonrecourse Debt, to the extent required and determined in accordance with Treasury Regulations Section 1.704-2(i)(4). Allocations pursuant to the previous sentence will be made in proportion to the respective amounts required to be allocated to each Member pursuant to that section of the Regulations. This provision relating to Member Minimum Gain Chargebacks is intended to comply with Regulation Section 1.704-2(i)(4) and will be interpreted and applied in a manner consistent with that Regulation. (iii) Qualified Income Offset. If a Member unexpectedly receives any adjustments, allocations or distributions described in Treasury Regulations Sections 1.704-1(b)(2)(ii)(d)(4) through (6) which causes or increases a deficit balance in such Member's Capital Account (as adjusted pursuant to Treasury Regulations Section 1.704-1(b)(2)(ii)(d)), items of Company income and gain will be specially allocated to each such Member in an amount and manner sufficient to eliminate, to the extent required by the Regulations, the deficit Capital Account of such Member as quickly as possible, provided that an allocation pursuant to this provision shall be made only if and to the extent that such Member would have a deficit Capital Account after all other allocations have been tentatively made as if this provision were not in the Operating Agreement. This provision is intended to be a "qualified income offset," as defined in Regulation Section 1.704-1(b)(2)(ii)(d). (iv) Sales Commission. The Sales Commission shall be allocated to the Units which are acquired in this Offering in proportion to the respective capital contributions represented by such Units (i.e., $75 in Sales Commissions per each such Unit). 3. Allocations Between Transferor and Transferee. In the event of the transfer of all or any part of a Member's Membership Interest (in accordance with the provisions of the Operating Agreement) in the Company at any time other than at the end of a year, or the admission of a new Member (in accordance with the provisions of the Operating Agreement), the transferring or new Member's share of the Company's income, gain, loss, deductions and credits, as computed both for accounting purposes and for federal income tax purposes, will be allocated between the transferor Member and the transferee Member (or Members), or the new Member and the other Members, as the case may be, in the same ratio as the number of days in such year before and after the date of the transfer or admission; provided, however, that if there has been a sale or other disposition of the assets of the Company (or any part thereof) during such year, then upon the mutual agreement of all the Members (excluding the new Member and the transferring Member), the Company will treat the periods before and after the date of the transfer or admission as separate years and allocate the Company's net income, gain, net loss, deductions and credits for each of such deemed separate years. Notwithstanding the foregoing, the Company's "allocable cash basis items," as that term is used in Section 706(d)(2)(B) of the Code, shall be allocated as required by Section 706(d)(2) of the Code and the Regulations thereunder. See "Risk Factors-Tax Risks-Company Allocations." 4. Incoming Partner Allocations. The Code prohibits the retroactive allocation of a full share of limited liability company items to persons who were members for less than the entire year. As provided above, the Operating Agreement provides that items of income, gain, loss, deductions and credits will be allocated between a transferor Member and a transferee Member in the same ratio as the number of days in the year before and after the date of the transfer or admission, unless the Company has sold any of its assets in the year of the transfer or admission. If the Company has sold any of its assets in the year of the transfer or admission, then the Managing Board may elect, in its sole discretion, to use the interim closing of the books method described above. See "Risk Factors - Tax Risks - Company Allocations." 5. Other Allocations. The Operating Agreement provides for other allocations. Investors are encouraged carefully to review the Operating Agreement attached as Appendix A. 6. Distributions. The Operating Agreement authorizes the following Distributions to be made to the Members: Distribution of Company Cash Flow. Company Cash Flow will be distributed to the Members within 60 days after the end of each Fiscal Year of the Company, or earlier in the discretion of the Managing Board, in accordance with their respective Membership Interests. Distribution of Company Sales Proceeds and Company Refinancing Proceeds. Company Sales Proceeds and Company Refinancing Proceeds will be distributed to the Members within 60 days of the Capital Transaction giving rise to such proceeds, or earlier in the discretion of the Managing Board, in accordance with their respective Membership Interests. Distribution Upon Dissolution. Upon the dissolution and termination of the Company, the Managing Board, or if there is none, another representative of the Company and Members, will cause the cancellation of the Company's Certificate of Formation, liquidate the assets of the Company, and apply and distribute the proceeds of such liquidation in the following order of priority: (i) First, to the payment of debts and liabilities of the Company, including without limitation debts and liabilities to Members, and the expenses of liquidation; (ii) Second, to the creation of any reserves that the Managing Board or the representative of the Company may deem reasonably necessary for the payment of any contingent or unforeseen liabilities or obligations of the Company or of the Managing Board arising out of or in connection with the business and operation of the Company; and (iii) Third, the balance, if any, will be distributed pro rata to the Members in accordance with the Members' positive Capital Account balances after such Capital Accounts are adjusted as provided in the Operating Agreement and any other adjustments required by the final Regulations under Section 704(b) of the Code. It is intended that Capital Accounts will allow for liquidation distributions consistent with the manner in which Company Sales Proceeds and Company Refinancing Proceeds are distributed; however, there can be no assurance that such will be the case. Tax Withholding. The Company is authorized to pay, on behalf of any Member, any amounts to any federal, state or local taxing authority, as may be necessary for the Company to comply with tax withholding provisions of the Code or the income tax or revenue laws of any taxing authority. To the extent the Company pays any such amounts that it may be required to pay on behalf of a Member, such amounts will be treated as a cash Distribution to such Member and will reduce the amount otherwise distributable to him, her or it. Management of the Company The Managing Board has the sole right to manage the business of the Company and at all times is required to exercise its responsibilities in a fiduciary capacity. In certain instances, the requisite consent of the Members is required for any sale or refinancing of the Lithotripsy Systems or the purchase of new equipment by the Company. See "Powers of the Managing Board and Members' Voting Rights" in this Section. The Company has contracted with Sun Medical as the Management Agent to manage and administer the day-to-day operations of the Lithotripsy Systems. See "Business Activities - Management." Under the Operating Agreement, the members of the Managing Board may be removed and replaced with or without cause by their respective designating Members. Powers of the Managing Board and Members' Voting Rights 1. General. The business and affairs of the Company shall be managed under the direction of the Managing Board; provided, however, that without the prior approval of the Members representing two-thirds of the aggregate interests in the Company, the Managing Board shall have no authority to do any of the following: (a) Any act in contravention of the Operating Agreement or the Company's Certificate of Formation; (b) Any act which would make it impossible to carry on the ordinary business of the Company, other than a transfer of all or substantially all of the assets of the Company; (c) Confess a material judgment against the Company in connection with any threatened or pending legal action; (d) Offer and sell additional membership interests in the Company pursuant to any Dilution Offering in which the Membership Interests of the existing Members are diluted by more than 15% in the aggregate; (e) Institute and carry out any plan providing for the merger, consolidation or sale of Membership Interests or any other action set forth under "Fundamental Changes" in this Section; (f) Sell any Company assets in a single transaction or series of related transactions with an aggregate fair market value in excess of $50,000; (g) Adopt the annual Company capital and operating budget, including the approval of the Company's Purchase Price Formula (as that term is defined in Section 10.7 of the Operating Agreement), incurring any single capital expenditure in excess of $50,000 not contemplated in the annual budget, or incurring any long-term debt or any single borrowing of the Company in excess of $50,000 not contemplated in the annual budget; (h) Amend the Operating Agreement; (i) Modify the purposes of the Company's business; (j) Accept or reject the Company's right of first refusal to provide the Alternative Services as such terms is defined in Section 4.6 of the Operating Agreement (provided that Sun and its Affiliates shall abstain from voting on such right of first refusal); or (k) Terminate the Management Agreement. 2. Tax Matters. (i) Elections. The Managing Board will, in its sole discretion, make for the Company 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 Company'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 Company and Company Distributions. (ii) Tax Matters Partner. The Operating Agreement provides that the Managing Board shall designate the Tax Matters Partner (as defined in Section 6231 of the Code) and authorize it to act in any similar capacity under state or local law. The Tax Matters Partner is authorized (at the Company's expense): (i) to represent the Company and Members before taxing authorities or courts of competent jurisdiction in tax matters affecting the Company or Members in their capacity as Members; (ii) to extend the statute of limitations for assessment of tax deficiencies against Members with respect to adjustments to the Company'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 Members with respect to such tax matters or otherwise affect the rights of the Company and Members; and (iv) to expend Company funds for professional services and costs associated therewith. The Tax Matters Partner shall oversee the Company tax affairs in the manner which, in its best judgment, are in the interests of the Members. Moreover, the Tax Matters 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 Members Except as otherwise provided in "Powers of the Managing Board and Members' Voting Rights" in this Section, the Members do not have any right to participate in the management or control of the business of the Company. Members are not required to make any capital contributions to the Company except amounts agreed by them to be paid, or pay or be personally liable for, any expense, liability or obligation of the Company, except (i) to the extent of their respective interests in the Company, (ii) for the obligation to return certain Distributions made to them as provided by the Act, and (iii) to the extent of their liabilities pursuant to their respective Guaranties. See "Risk Factors - Other Investment Risks - Members' Obligations to Return Certain Distributions" and "Operating Risks - Liability Under the Guaranty." Restrictions on Transfer of Membership Interests No Membership Interest nor any Units may be transferred without the prior written consent of the Managing Board, which approval may be granted or denied in the sole discretion of the Managing Board, and subject to the satisfaction of certain other conditions set forth in the Operating Agreement. The Operating Agreement contains additional limitations on transfer, including provisions prohibiting transfer that would violate federal or state securities laws. No transferee of the Units will automatically become a Member. Admission of a transferee requires the fulfillment of other obligations enumerated in the Operating Agreement, including either the approval of a Majority in Interest of the Members (except the assignor Member) and the Managing Board, or the approval of the assignor Member and the Managing Board. Any transferee of a Membership Interest who has not been admitted to the Company as a Member shall not be entitled to any of the rights, powers or privileges of his, her or its transferor except the right to receive and be credited or debited with his, her or its proportionate share of Company income, gains, profits, losses, deductions, credits or distributions. A transferor Member will not be released from his, her or its personal liability under the Guaranty upon the transfer of his, her or its Membership Interest, unless otherwise specifically agreed by the Bank at the time of the transfer. Dissolution and Liquidation The Company will dissolve and terminate for any of the following reasons: 1. The expiration of its term on December 31, 2020; 2. The determination of the Managing Board and the Members representing two-thirds of the aggregate interests of the Company that the Company should be dissolved; 3. The approval of a plan by the Managing Board and the Members providing for the merger, consolidation or sale of the Membership Interests as described under "Fundamental Changes" in this Section; 4. The election of the Managing Board to dissolve the Company in the event of certain legislation, case law or regulatory changes adversely affecting Company operations; 5. The sale, exchange or other disposition of all or substantially all of the property of the Company without making provision for the replacement thereof; 6. The Bankruptcy or dissolution of a Member or the occurrence of any other event which terminates the continued membership of any Member, unless there is at least one remaining Member and the business of the Company is continued by the written consent of a Majority in Interest of the remaining Members within ninety (90) days of the occurrence of such event; or 7. Any other event resulting in the dissolution or termination of the Company under the laws of the State of Washington. The retirement, resignation, bankruptcy, assignment for the benefit of creditors, dissolution, death, disability or legal incapacity of a Member will not, however, result in a termination of the Company if a Majority in Interest of the remaining Members, if any, elect to continue the business of the Company within 90 days of the occurrence of one of such events. Upon dissolution, the Managing Board or, if there is none, a representative of the Members, will liquidate the Company's assets and distribute the proceeds thereof in accordance with the priorities set forth in the Operating Agreement. See "Profits, Losses and Distributions - Distributions - - Distribution upon Dissolution" above and "Optional Purchase of Membership Interests" below. Optional Purchase of Membership Interests As provided in the Operating Agreement, the Company, and then the Members, have the option to purchase all the interest of a Member who (i) dies, (ii) becomes the subject of a domestic proceeding, (iii) becomes insolvent, (iv) acquires a direct or indirect ownership of an interest in a competing venture (including the lease or sublease of competing technology), or (v) defaults on his, her or its obligations under the Guaranty. Except in the event a Member dies or becomes the subject of a domestic proceeding, the option purchase price is an amount equal to the Member's share of the Partnership's book value, if any, as reflected by the Member's capital account in the Company (unadjusted for any appreciation in Company assets and as reduced by depreciation deductions claimed by the Company for tax purposes). The option purchase price as reflected by a Member's capital account value is likely to be considerably less than the fair market value of a Member's interest in the Company. 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 Company that the option purchase price may be nominal in amount. In addition, in the event existing or newly enacted laws or regulations or any other legal developments adversely affect (or potentially adversely affect) the operation of the Company or the business of the Company (e.g., any prohibitions on provider ownership), the Managing Board and the Members will in good faith use their best efforts to develop an alternative method of operations for the Company. In the event an alternative plan in the best interest of the Company cannot be developed within a reasonable time period, the Managing Board is obligated to either (i) cause the sale of the Membership Interests of all of the Members or (ii) dissolve the Company. In the event of the death of a Member, a Member becomes the subject of a domestic proceeding, or a regulatory event described in the preceding sentence occurs, the option purchase price for a Member's Membership Interest will be an amount equal to two times the aggregate distributions made with respect to the Membership Interest during the twelve-month period ending the last day of the month immediately preceding the month in which either the death occurs, the domestic proceeding commences, or the date the Managing Board notifies the Members of the regulatory event, whichever is applicable. In the event the Company does not elect to exercise its purchase rights, and the Members exercise their purchase option, the purchasing Members will assume any liabilities under any personal Guaranty still outstanding with respect to the withdrawing Member. The withdrawing Member will not be released from his, her or its obligations under the Guaranty unless so agreed by the Bank. See the Operating Agreement attached hereto as Appendix A and "Risk Factors - Operating Risks - Liability Under the Guaranty." Noncompetition Agreement and Protection of Confidential Information The Operating Agreement provides that, subject to certain limited exceptions, each Member is prohibited from having a direct or indirect ownership of an interest in a competing venture (including the lease or sublease of competing technology) (the "Outside Activities"). While they are Members in the Company, each Member is precluded from engaging in any Outside Activities. In the event that a Membership Interest in the Company is terminated or transferred upon the occurrence of certain events as provided in the Operating Agreement, he, she or it is precluded, for a period of two (2) years following the date of his, her or its withdrawal, from engaging in any Outside Activity within the Service Area. This prohibition is in addition to the right of the Company (or the Members) to acquire the interest of a Member engaged in an Outside Activity as provided in the Operating Agreement. See "Optional Purchase of Membership Interests" in this Section, and the Operating Agreement attached hereto as Appendix A. In addition, the Operating Agreement provides that each Member acknowledges and agrees that his, her or its participation in the Company necessarily involves his, her or its access to confidential information that is proprietary in nature and, therefore, the exclusive property of the Company. Accordingly, the Members are precluded from disclosing such confidential information during their participation as Members of the Company or thereafter unless required by law or with the prior written consent of the Company. Arbitration The Operating Agreement provides that disputes arising thereunder shall be resolved by submission to arbitration in accordance with the provisions of Washington law. Power of Attorney Each Investor, by executing the Subscription Agreement, irrevocably appoints Stan Johnson or his successor in interest as determined by the Managing Board, severally, to act as attorney-in-fact to execute the Operating Agreement, any amendments thereto and any certificate of formation filed by the Company. The Operating Agreement, in turn, contains provisions by which each Member irrevocably appoints Stan Johnson or his successor in interest as determined by the Managing Board, severally, to act as his, her or its attorney-in-fact to make, execute, swear to and file any document necessary to the conduct of the Company's business, such as deeds of conveyance of real or personal property as well as any amendment to the Operating Agreement or to the Certificate of Formation which accurately reflects actions properly taken by the Managing Board and/or the Members. Reports to Members Within 90 days after the end of each Year of the Company, the Managing Board will send to each person who was a Member 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, her or its federal income tax return, and such other financial information as may be required by the Act. Records Proper and complete records and books of account will be kept by the Managing Board in which will be entered fully and accurately all transactions and other matters relative to the Company's business as are usually entered into records, books and accounts maintained by persons engaged in businesses of a like character. Pursuant to applicable law, the Company books and records will be kept on the accrual method basis of accounting. The Company's fiscal year will be the calendar year. The books and records will be located at the Company's office, and will be open to the reasonable inspection and examination of the Members or their duly authorized representatives during normal business hours as provided by the Act. LEGAL MATTERS On the Closing Date, it is expected that Womble Carlyle Sandridge & Rice, a Professional Limited Liability Company, of Winston-Salem, North Carolina, will render an opinion as to the formation and existence of the Company, the status of Investors as Members 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 Company 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 Company. 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 Washington Limited Liability Company Act, as in effect on the date hereof. Affiliate. An Affiliate is (i) any person, Company, 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, or its successor-in-interest. Capital Account. The Company capital account of a Member as computed pursuant to the Operating Agreement. Capital Contributions. All capital contributions made by a Member or his predecessor in interest which shall include, without limitation, contributions made pursuant Article V of the Operating Agreement. Capital Transaction. Any transaction which, were it to generate proceeds, would produce Company Sales Proceeds or Company Refinancing Proceeds. Closing Date. 5:00 p.m., Eastern Time, on June 6, 2000 (or earlier in the discretion of the Managing Board). The Closing Date may be extended for a period of up to 180 days in the discretion of the Managing Board. Code. The Internal Revenue Code of 1986, or corresponding provisions of subsequent, superseding revenue laws. Company. Washington Urological Services, LLC, a Washington limited liability company, which owns and operates the Existing Lithotripsy System. Company 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 Company loans, Capital Transactions and Capital Contributions, and (ii) any funds released by the Company from previously established reserves, over (B) the sum of (i) all cash expenses paid by the Company for such period, (ii) the amount of all payments of principal on loans to such Company, (iii) capital expenditures of the Company, and (iv) such reasonable reserves as the Managing Board 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 Company; provided, however, that the amounts referred to in (B) (i), (ii) and (iii) above shall be taken into account only to the extent not funded by Capital Contributions, loans or paid out of previously established reserves. Such term shall also include all other funds deemed available for distribution and designated as "Company Cash Flow" by the Managing Board. Company Minimum Gain. Gain as defined in Treasury Regulations Section 1.704-2(d). Company Refinancing Proceeds. The cash realized from the refinancing of Company 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 Managing Board 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 Company. Company Sales Proceeds. The cash realized from the sale, exchange, casualty or other disposition of all or a portion of Company 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 Managing Board 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 Company. Contract Hospitals. The 16 hospitals and medical centers to which the Company provides lithotripsy services pursuant to 11 separate written Hospital Contracts. Counsel. Womble Carlyle Sandridge & Rice, a Professional Limited Liability Company, P.O. Drawer 84, Winston-Salem, North Carolina 27102. Dilution Offering. Pursuant to the terms of the Operating Agreement, the future offering of additional limited liability company membership interests in the Company by the Managing Board. Any such offering generally will proportionally reduce the existing Percentage Interests of the then current Members in the Company: Distributions. Cash or other property, from any source, distributed to Members. Escrow Agent. First-Citizens Bank & Trust Company. ------------ Existing Lithotripsy System. The van with the operational Modulith(R)SLX-T currently owned and operated by the 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 Managing Board and the Bank in connection with their decision to accept or reject a subscription. Fiscal Year. An annual accounting period ending on December 31 of each year during the term of the Company. Guaranty. The Guaranty Agreement in the form included in the Subscription Packet accompanying this Memorandum pursuant to which each new Member will guarantee his pro rata portion of the Company's obligations to the Bank under the Loan. Hospital Contracts. The 11 separate lithotripsy services agreements the Company has entered into with the Contract Hospitals. Investors. Potential purchasers of Units. --------- Lithotripsy Systems. The Existing Lithotripsy System and the New Lithotripsy System owned and operated by the Company, and any other additional or replacement lithotripter and transport vehicle. Loan. The loan of $550,000 from the Bank to the Company. Loan proceeds were used by the Company to (i) acquire a new lithotripter, (ii) acquire and upfit a new mobile van and (iii) pay sales taxes on the purchases of the lithotripter and the van. The Loan is secured by the Existing Lithotripsy System, the Company's accounts receivable and other Company assets and the Member Guaranties. Loan and Security Agreement. The agreement to be executed in conjunction with the Member Note by an Investor who finances a portion of the Unit purchase price through a Member 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 Member Note, the Loan and Security Agreement, the Security Agreement and UCC-1's, collectively. Local Counsel. Reed McClure, a Washington professional services corporation. Loss. The net loss (including capital losses and excluding Net Gains from Capital Transactions) of the Company for each year as determined by the Company for federal income tax purposes. Managing Board. The four person board of managers comprised of two designees appointed by Sun Medical and two designees elected by the non-Sun Medical affiliated Members of the Company, and which is responsible for the management of the daily operations of the Company. Management Agent. Sun Medical in its capacity as the management agent of the Company. Member Loan. The loan to be made by the Bank to certain qualified Investors that wish to finance a portion of the Unit purchase price. Member Minimum Gain. An amount, with respect to each Member Nonrecourse Debt, equal to the Company Minimum Gain that would result if such Member Nonrecourse Debt were treated as a Nonrecourse Liability, determined in accordance with Treasury Regulations Section 1.704-2(i). Member Nonrecourse Debt. Any nonrecourse debt (for the purposes of Treasury Regulations Section 1.1001-2) of the Company for which any Member bears the "economic risk of loss," within the meaning of Treasury Regulations Section 1.752-2. Member Nonrecourse Deductions. Deductions as described in Treasury Regulations Section 1.704-2(i)(2). The amount of Member Nonrecourse Deductions with respect to a Member Nonrecourse Debt for any Fiscal Year equals the excess, if any, of the net increase, if any, in the amount of Member Minimum Gain attributable to such Member Nonrecourse Debt during such Fiscal Year over the aggregate amount of any Distributions during that Year to the Member that bears the economic risk of loss for such Member Nonrecourse Debt to the extent such Distributions are from the proceeds of such Member Nonrecourse Debt and are allocable to an increase in Member Minimum Gain attributable to such Member Nonrecourse Debt, determined in accordance with Treasury Regulations Section 1.704-2(i). Member Note. The promissory note from an Investor financing a portion of the Unit purchase price to the Bank in the principal amount of up to $1,737 per Unit, the proceeds of which will be paid directly to the Company. The form of the Member 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. Members. The current Members and those Investors in the Units admitted to the Company pursuant to this Offering, and any person admitted as a substitute Member in accordance with the provisions of the Operating Agreement. Membership Interest. The interest of a Partner in the Company as defined by the Act and the Operating Agreement. Memorandum. This Confidential Private Placement Memorandum, including all Appendices hereto, and any amendment or supplement hereto. Modulith(R) SLX-T. The Storz Modulith(R) SLX Transportable ("SLX-T") model extracorporeal shock-wave lithotripter manufactured by Storz. Net Gains from Capital Transactions. The gains realized by the Company as a result of or upon any sale, exchange, condemnation or other disposition of the capital assets of the Company (which assets shall include Code Section 1231 assets) or as a result of or upon the damage or destruction of such capital assets. New Lithotripsy System. The new mobile van with the new operational Modulith(R) SLX-T lithotripter to be acquired by the Company with a portion of the Offering proceeds and available debt financing. Nonrecourse Deductions. A deduction as set forth in Treasury Regulations Section 1.704-2(b)(1). The amount of Nonrecourse Deductions for a given Fiscal Year equals the excess, if any, of the net increase, if any, in the amount of Company Minimum Gain during such Fiscal Year over the aggregate amount of any Distributions during such Year of proceeds of a Nonrecourse Liability that are allocable to an increase in Company Minimum Gain, determined according to the provisions of Treasury Regulations Section 1.704-2(h). Nonrecourse Liability. Any Company liability (or portion thereof) for which no Member 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. -------- Operating Agreement. The Company's Operating Agreement, a copy of which is attached as Appendix A, as such may be amended from time to time. Percentage Interest. The interest of each Member in the Company, to be determined in the case of each Investor by reference to the percentage opposite his name set forth in Schedule A to the Operating Agreement. Each Unit sold pursuant to this Offering represents an initial 0.5% economic interest in the Company. The Percentage Interest will be set forth in Schedule A to the Operating Agreement or any other document or agreement, as a percentage or a fraction or on any numerical basis deemed appropriate by the Managing Board. Prime. Prime Medical Services, Inc. a publicly held Delaware corporation and parent of Sun Medical 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 Members to which reference is made. Profit. The net income of the Company for each year as determined by the Company 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 Member. Sales Agent. MedTech Investments, Inc., a registered broker-dealer, member of the National Association of Securities Dealers, Inc. and an Affiliate of Sun Medical. 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 Member 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. The geographic region in which Company operations are conducted and which consists primarily of the area of the State of Washington west of the Cascade Mountains. The Managing Board reserves the right to expand the Service Area. Storz. Karl Storz Lithotripsy-America, Inc. and its Affiliates. ----- Subscription Agreement. The Subscription Agreement, included in the Subscription Packet accompanying this Memorandum, to be executed by prospective Members 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. Sun Medical. Sun Medical Technologies, Inc., a California corporation and a wholly-owned subsidiary of Prime. Sun Medical serves as the Company's Management Agent and is a Member of the Company. 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 Member Note by an Investor who finances a portion of the Unit purchase price through a Member 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 liability company membership interests in the Company offered pursuant to this Memorandum for a price per Unit of $4,237 in cash, plus 0.5% in guaranties of the Company's obligations under the Loan (up to a $2,750 principal Loan guaranty per Unit). EX-10.154 67 0067.txt EX 10.154 1ST SUPPLEMENT TO MEMORANDUM-WASHINGTON FIRST SUPPLEMENT DATED JUNE 6, 2000 TO THE CONFIDENTIAL PRIVATE PLACEMENT MEMORANDUM DATED APRIL 24, 2000 WASHINGTON UROLOGICAL SERVICES, LLC Washington Urological Services, LLC, a Washington limited liability company (the "Company"), by this First Supplement hereby amends and supplements its Confidential Private Placement Memorandum of April 24, 2000 (the "Memorandum"). Capitalized terms used herein are defined in the Glossary appearing in the Memorandum. Persons who have subscribed for or are considering an investment in the Units offered by the Memorandum should carefully review this First Supplement. Extension of the Offering Pursuant to the authority given to the Managing Board in the Memorandum, the Managing Board hereby elects to extend the offering termination date to September 28, 2000 (or earlier in the discretion of the Managing Board, upon the sale of all Units as provided in the Memorandum). EX-10.155 68 0068.txt EX 10.155 2ND SUPPLEMENT TO MEMORANDUM-WASHINGTON SECOND SUPPLEMENT DATED SEPTEMBER 28, 2000 TO THE CONFIDENTIAL PRIVATE PLACEMENT MEMORANDUM DATED APRIL 24, 2000 WASHINGTON UROLOGICAL SERVICES, LLC Washington Urological Services, LLC, a Washington limited liability company (the "Company"), by this Second Supplement hereby amends and supplements its Confidential Private Placement Memorandum of April 24, 2000, as amended (the "Memorandum"). Capitalized terms used herein are defined in the Glossary appearing in the Memorandum. Persons who have subscribed for or are considering an investment in the Units offered by the Memorandum should carefully review this Second Supplement. Extension of the Offering Pursuant to the authority given to the Managing Board in the Memorandum, the Managing Board hereby elects to extend the offering termination date to December 5, 2000 (or earlier in the discretion of the Managing Board, upon the sale of all Units as provided in the Memorandum). EX-10.156 69 0069.txt EX 10.156 CONFIDENTIAL MEMORANDUM -WESTERN KY. - ---------------------------- ---------------------------- Name of Prospective Investor Memorandum No. WESTERN KENTUCKY LITHOTRIPTERS LIMITED PARTNERSHIP A Limited Partnership Formed Under the Laws of Kentucky CONFIDENTIAL PRIVATE PLACEMENT MEMORANDUM $200,000 in Cash $478,272 in Personal Guaranties 80 Units of Limited Partnership Interest MEDTECH INVESTMENTS, INC. Exclusive Sales Agent 2008 Litho Place Fayetteville, North Carolina 28304 1-800-682-7971 The Date of this Memorandum is December 15, 1999 WESTERN KENTUCKY LITHOTRIPTERS LIMITED PARTNERSHIP $200,000 in Cash and $478,272 in Personal Guaranties 80 Units of Limited Partnership Interest at $2,500 in Cash and $5,978.40 in Personal Guaranties per Unit Western Kentucky Lithotripters Limited Partnership, a Kentucky limited partnership (the "Partnership"), organized by its general partner, Prime Lithotripter Operations, Inc., a New York corporation (the "General Partner") and a wholly-owned subsidiary of Prime Medical Services, Inc., a Delaware corporation, hereby offers on the terms set forth herein 80 units of limited partnership interest (the "Units"). The Partnership was formed to acquire and operate (i) one new Storz Modulith(R) SLX-T model extracorporeal shock-wave lithotripter, and (ii) one used Dornier HM-3 model extracorporeal shock-wave lithotripter. The Storz Modulith SLX-T will be transported from site to site by a new mobile vehicle and the Dornier HM-3 will be housed in a used mobile trailer which will be transported from site to site by a used tractor truck (the installed lithotripters and mobile vehicles, collectively, the "Lithotripsy Systems") to enable the Partnership to provide lithotripsy services primarily in the following Kentucky counties and such other areas as determined by the General Partner: Christian County, Daviess County, Henderson County, Hopkins County, McCracken County and Warren County (the "Service Area"). See "Proposed Activities." The Units are divided into 80 Units offered at a per Unit price of $2,500 in cash, plus a personal guaranty of 1% of the Partnership's obligations under the loan of up to $597,840 from First-Citizens Bank & Trust Company (the "Loan") (up to a $5,978.40 principal guaranty obligation per Unit). See "Terms of the Offering." Each Unit represents an initial 1% economic interest in the Partnership. See "Risk Factors - Other Investment Risks - Dilution of Limited Partners' Interests." The Units are offered to individual investors and certain entities that meet the requirements for investment in the Partnership as set forth herein. The offering will terminate on January 31, 2000 unless, in the discretion of the General Partner, it is sooner terminated or extended for a period of up to 180 days. The Unit cash price and the executed Guaranties are both due at subscription. --------------- Purchase of Units involves significant risks and is suitable only for persons of substantial means who have no need for liquidity in this investment. Among other factors, prospective Investors should note that (1) the Partnership has not begun any revenue-producing business operations, (2) the health care industry is undergoing significant government regulatory reforms, and (3) the Partnership expects to face increasing competition in the Service Area. See "Risk Factors" and "Terms of the Offering - Suitability Standards." Cash Net Offering Price Selling Cash Amount of Commissions(1) Proceeds (2) Guaranties (3) Per Unit (4) $ 2,500 $ 250 $ 2,250 $ 5,978.40 Total (5) $200,000 $20,000 $180,000 $478,272.00 (See Footnotes on Back of Cover Page) See Glossary for capitalized terms used herein and not otherwise defined. (1) The Units will be sold on a "best efforts" all or none basis by MedTech Investments, Inc., a broker-dealer registered with the Securities and Exchange Commission and a member of the National Association of Securities Dealers, Inc. (the "Sales Agent"). MedTech is an Affiliate of the General Partner. The Partnership will pay the Sales Agent a $250 commission for each Unit sold and will reimburse the Sales Agent for its out of pocket Offering costs (not to exceed $10,000). No commission will be paid with respect to Units sold to the General Partner or its Affiliates as provided in note (4) below. No commission is payable to the Sales Agent unless all the Units are sold as provided herein. The Partnership has agreed to indemnify the Sales Agent against certain liabilities, including liabilities under the Securities Act. See "Plan of Distribution." (2) Before deduction of expenses payable by the Partnership. See "Sources and Applications of Funds" and "Compensation and Reimbursement to the General Partner and its Affiliates." The cash price per Unit ($2,500) is payable in full at subscription. See "Terms of the Offering." (3) At subscription, each Investor must execute and deliver to the Sales Agent a guaranty agreement (the "Guaranty") under which he will guarantee payment of a portion of the Partnership's obligations under a loan of up to $597,840 (the "Loan") from First-Citizens Bank & Trust Company (the "Bank") which is headquartered in Raleigh, North Carolina, and has approximately 370 offices throughout the southeastern United States. The proceeds of the Loan will be used to (i) acquire one new Storz Modulith(R)SLX-T model extracorporeal shock-wave lithotripter with accessories (estimated at $400,000); (ii) acquire and upfit one new mobile vehicle to transport the new Storz Modulith(R)SLX-T lithotripter (estimated at $70,000); (iii) acquire one used Dornier HM-3 model extracorporeal shock-waver lithotripter (estimated at $60,000); (iv) acquire one used trailer to house the Dornier HM-3 lithotripter (estimated at $21,500); (v) acquire one used tractor truck to transport the trailer housing the Dornier HM-3 lithotripter (estimated at $12,500) and (vi) pay state sales and use taxes on the purchase of the lithotripters, mobile transport vehicles and tractor truck (estimated at $33,840). If necessary, the Partnership anticipates using a portion of the cash Offering proceeds (up to $20,691) to acquire certain service contracts from the General Partner (the "Service Contracts"). See "Proposed Activities - Service Contracts." In addition, the General Partner anticipates (subject to the approval of the Partnership's Medical Advisory Board) that during the first year of Partnership operations, the Partnership will use a portion of the Partnership's working capital, Cash Flow and/or reserves (estimated at $60,000) and contract with certain service providers (including Affiliates of the General Partner) to refurbish the used Dornier HM-3 and used trailer. See "Proposed Activities - Acquisition of Lithotripsy Systems - Used Equipment." As a class, the Limited Partners will guarantee up to $478,272 (80%) of the Partnership's principal obligations under the Loan. The $400,000 purchase price for the Storz Modulith(R) SLX-T lithotripter represents an approximate 24% discount below the current list price of $525,000 due to special discount arrangements between Prime Medical Services, Inc. (the General Partner's parent) and Storz accorded to volume purchasers. See "Risk Factors - Operating Risks - Partnership Limited Resources and Risks of Leverage." For each Unit purchased, an Investor will be required to guarantee 1% of the Loan, which represents up to a $5,978.40 principal guaranty obligation. A Limited Partner's liability under the Guaranty may exceed the principal guaranty per Unit as provided above because such liability includes not only principal, but also accrued and unpaid interest, late payment penalties and legal costs incurred by the Bank in collecting defaulted obligations. See "Proposed Activities - Funding for Partnership Activities." For a description of the guaranty requirements and the terms of the Guaranties, see "Terms of the Offering - Guaranty Arrangements" and the form of the Guaranty included in the Subscription Packet accompanying this Memorandum. In its capacity as general partner of the Partnership, the General Partner will contribute cash in an amount equal to 20% (up to $50,000) of the total cash contributed to the Partnership by the Partners pursuant to this Offering. The General Partner will guarantee 20% of the Loan, which represents up to a $119,568 principal guaranty obligation. See "Terms of the Offering - Guaranty Arrangements," "Summary of the Partnership Agreement - Capital Contribution of the General Partner" and "Proposed Activities - Funding for Partnership Activities." The General Partner will hold a 20% economic interest as the general partner of the Partnership. (4) Each Investor may purchase no less than one Unit. The General Partner reserves the right to sell a limited number of fractional Units as a minimum investment and to reject in whole or in part any subscription. Purchases of fractional Units will be in multiples of 1/2 Units; provided, that the General Partner and its Affiliates may purchase fractional Units in increments other than 1/2 Units for a proportional purchase price. (5) All subscription funds and Guaranties will be held in an interest bearing escrow account with the Bank, until the Closing or the termination of the Offering. The Partnership seeks by this Offering to sell 80 Units for $200,000 in cash ($180,000 net of Sales Agent 's commissions) and up to $478,272 in personal guaranties of the Partnership's principal obligations under the Loan. In the event complete subscriptions for all 80 Units are timely received and accepted by the General Partner, the subscription funds (plus interest) and Guaranties held in escrow will be released to the Partnership. If complete subscriptions for all 80 Units are not timely received and accepted, the Offering will be terminated and all subscriptions canceled. In the event of termination, all subscription funds (together with interest), Guaranties and other subscription documents will be promptly returned to the Investors. The General Partner reserves the right for it or any of its Affiliates to purchase up to 50 Units in order to meet the full subscription amount of 80 Units required to successfully close the offering. The purchase of Units by the General Partner or its Affiliates will be on the same terms and conditions as any other Investor, except that (i) their Unit purchase price will be reduced by the savings to the Partnership attributable to no commissions being payable to the Sales Agent on the transaction, and (ii) the General Partner and its Affiliates may purchase fractional Units in multiples other than 1/2 Unit for a proportional purchase price. See "Risk Factors - Other Investment Risks - Purchases by General Partner and its Affiliates." - -------------------------------------------------------------------------------- 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 o Prospective Investors should not construe the contents of this Memorandum or any prior or subsequent o No offering literature in whatever form will or may be employed in the offering of Units, except this o All 80 Units must be sold in order to close the Offering. Up to 50 Units may be purchased by the General Partner and its Affiliates, each of which will receive in the future fees or compensation made possibly only if the Offering successfully closes. Investors should therefore not expect that the sale of all 80 Units indicates that such sales have been made to Investors that have no financial or other interest in the Offering or that are otherwise exercising independent judgment. The requirement that all 80 Units be sold, while necessary to the business operations of the Partnership, is not designed as a protection to Investors, i.e., the all or none requirement is not designed to indicate that an Investor's decision to purchase Units is shared by other unaffiliated Investors. - -------------------------------------------------------------------------------- TABLE OF CONTENTS Page APPENDICES Appendix A FINANCIAL PROJECTIONS Appendix B AGREEMENT OF LIMITED PARTNERSHIP OF WESTERN KENTUCKY LITHOTRIPTERS LIMITED PARTNERSHIP Appendix C LOAN COMMITMENT Appendix D FORM OF MANAGEMENT AGREEMENT Appendix E FORM OF OPINION OF WOMBLE CARLYLE SANDRIDGE & RICE, A PROFESSIONAL LIMITED LIABILITY COMPANY This summary of certain provisions of the Memorandum is intended for a quick reference and is not complete. The Memorandum and accompanying Appendices must be read and understood in their entirety by Investors. See the "Glossary" for terms used in this Memorandum and not otherwise defined. The Units and Subscription Price. Western Kentucky Lithotripters Limited Partnership, a limited partnership formed under the laws of the State of Kentucky, hereby offers an aggregate of 80 Units of limited partner interest in the Partnership. Each Unit represents an initial 1% economic interest in the Partnership. Investors should note that their initial Percentage Interests in the Partnership may be reduced by future Dilution Offerings. See "Summary of the Partnership Agreement - Dilution Offerings" and the Partnership Agreement attached hereto as Appendix B. The price for each Unit is $2,500 in cash and a 1% personal guaranty of the Partnership's obligations under the Loan (up to a $5,978.40 principal guaranty obligation per Unit). At subscription, each Limited Partner must pay his cash Unit price and execute and deliver to the Sales Agent a guaranty agreement (the "Guaranty") under which he will guarantee payment of a portion of the Partnership' s obligations under the Loan of up to $597,840 from the Bank, the proceeds of which will be used to (i) acquire one new Storz Modulith(R) SLX-T model extracorporeal shock-wave lithotripter with accessories (estimated at $400,000); (ii) acquire and upfit one new mobile vehicle to transport the Modulith(R) SLX-T lithotripter (estimated at $70,000); (iii) acquire one used Dornier HM-3 Model extracorporeal shock-wave lithotripter (estimated at $60,000); (iv) acquire one used trailer to house the Dornier HM-3 lithotripter (estimated at $21,500), (v) acquire one used tractor truck to transport the trailer housing the Dornier HM-3 lithotripter (estimated at $12,500) and (vi) pay state sales and use taxes on the purchase of the lithotripters, mobile transport vehicles and tractor truck (estimated at $33,840). See "Compensation and Reimbursement to the General Partner and its Affiliates." As a class, Limited Partners will guarantee 80% of the Partnership's obligations under the Loan. For each Unit purchased an Investor will be required to guarantee 1% of the Loan (up to a $5,978.40 principal guaranty). Liability under the Guaranty may exceed the principal guaranty per Unit as provided above because the guaranty obligation per Unit includes not only principal, but also accrued and unpaid interest, late payment penalties and legal costs incurred by the Bank in collecting any defaulted obligations. Each Investor may purchase not less than one Unit. However, the General Partner may, in its sole discretion, permit the Partnership to sell a limited number of fractional Units as a minimum investment and to reject in whole or in part any subscription. Purchases of fractional Units will be in increments of 1/2 Units at a price of $1,250 in cash and up to $2,989.20 in principal guaranties per each 1/2 Unit (0.5% of the Loan). The General Partner and its Affiliates may purchase fractional Units in multiples other than 1/2 Units for a proportional purchase price. See "Risk Factors - Operating Risks - Liability Under the Guaranty," "Terms of the Offering - General - The Units and Subscription Price" and "Risk Factors - Other Investment Risks - Purchases by General Partner and its Affiliates." The Offering. By this Offering the Partnership seeks to sell 80 Units for a maximum of $200,000 in cash ($180,000 net of Sales Agent's commissions) and an aggregate of up to $478,272 in personal guaranties of the Partnership's obligations under the Loan. The Units are offered to individual investors and certain entities who meet the requirements for investment in the Partnership as set forth herein. In the event complete subscriptions for all 80 Units are received and accepted by the General Partner, all subscription funds (plus interest) and Guaranties held in escrow will be released to the Partnership. If complete subscriptions for all 80 Units are not received and accepted by the end of the subscription period as defined in "Subscription Period" below, the Offering will be terminated and all subscription funds (together with interest) and Guaranties will be returned to the Investors. In order to successfully close the Offering, the General Partner reserves the right for it or any of its Affiliates to purchase up to 50 Units in order to meet the full subscription amount of 80 Units. The purchase of Units by the General Partner or its Affiliates will be on the same terms and conditions as any other Investor, except that (i) their Unit purchase price will be reduced by the savings to the Partnership attributable to no commissions being payable to the Sales Agent on the transaction, and (ii) the General Partner and its Affiliates may purchase fractional units in multiples other than 1/2 Units for a proportional purchase price. See "Risk Factors - Other Investment Risks - Purchases by Affiliates" and "Terms of the Offering - General." All subscription funds and Guaranties will be held in escrow by the Escrow Agent until the Closing or the termination of the Offering. Subscription Period. The subscription period will commence on the date hereof and will terminate at 5:00 p.m., Eastern time on January 31, 2000 (or earlier, in the discretion of the General Partner, upon the sale of all 80 Units as provided herein), unless sooner terminated by the General Partner or unless extended for an additional period up to 180 days. See "Terms of the Offering - General - Subscription Period," and "Risk Factors - Other Investment Risks - Purchases by Affiliates." Proposed Activities. Upon successful completion of this Offering, the Partnership will close the Loan and from the proceeds thereof purchase (i) one new Storz Modulith(R) SLX-T model extracorporeal shock-wave lithotripter together with accessories for an approximate purchase price of $400,000 (ii) one new mobile vehicle to transport the Modulith(R) SLX-T from site to site for an approximate purchase price of $70,000, (iii) one used Dornier HM-3 model extracorporeal shock-waver lithotripter for an approximate purchase price of $60,000; (iv) one used trailer to house the Dornier HM-3 lithotripter for an approximate purchase price of $21,500; (v) one used tractor truck to transport the trailer housing the Dornier HM-3 lithotripter for an approximate purchase price of $12,500; and (vi) pay applicable state sales and use taxes on the lithotripters, mobile transport vehicles and tractor truck. The $400,000 purchase price for the Storz lithotripter represents an approximate 24% discount below the current list price of $525,000 due to special discount arrangements between Prime and Storz accorded to volume purchasers. See "Proposed Activities - Acquisition of the Lithotripsy Systems." The Partnership will use the cash proceeds of this Offering and the General Partner's initial cash contribution to fund syndication, organization, start-up and working capital costs. The Partnership intends to use a portion of the Loan and cash Offering proceeds to acquire certain assets from the General Partner. If necessary, the Partnership intends to use up to $20,691 of the cash Offering proceeds to acquire from the General Partner certain Service Contracts to provide lithotripsy services at various hospitals. See "Proposed Activities - Service Contracts" and "Sources and Applications of Funds." The Partnership will indemnify the General Partner against the future performance of obligations under the Service Contracts assigned to it. As discussed above, the Partnership will also use a portion of the Loan proceeds to acquire from the General Partner the used Dornier HM-3 lithotripter, the used trailer and the used tractor truck for an aggregate purchase price of $94,000 payable upon the Closing of the Offering. The Partnership will have to pay the applicable state use tax on the equipment to be purchased from the General Partner (estimated at $5,640). In addition, the General Partner anticipates (subject to the approval of the Partnership's Medical Advisory Board) that during the first year of Partnership operations, the Partnership will use a portion of the Partnership's working capital, Cash Flow and/or reserves (estimated at $60,000) and contract with certain service providers (including Affiliates of the General Partner) to refurbish the used Dornier HM-3 and used trailer. See "Proposed Activities - Acquisition of Lithotripsy Systems," "- Funding for Partnership Activities," "Risk Factors - Operating Risks - Partnership Limited Resources and Risks of Leverage," "Compensation and Reimbursement to the General Partner and its Affiliates" and the Financial Projections attached hereto as Appendix A. The Partnership will attempt to obtain the Service Contracts from the General Partner by taking assignment of the existing contracts or by causing the termination thereof and the negotiation of new contracts directly between the Partnership and the customer. See "Proposed Activities - Service Contracts." The Partnership will also attempt to contract directly with other licensed health care facilities in the Service Area to make lithotripsy services available to their patients. No assurance can be given that the Partnership will be successful in negotiating new contracts on financial terms comparable to those in the existing Service Contracts, or at all. See "Risk Factors - Operating Risks - Competition" and "Risk Factors - Operating Risks - Contract Terms and Termination." The travel itinerary for the Lithotripsy Systems will be determined by the General Partner after consultation with the various treatment facilities to be served by the Partnership's Lithotripsy Systems. The travel schedule is expected to be influenced by the number of treating physicians and patients in particular areas and the Partnership's arrangements with licensed treatment facilities located across the Service Area. The Partnership will enter into a separate Management Agreement with Lithotripters, Inc., an Affiliate of the General Partner (the "Management Agent"). Pursuant to the Management Agreement, the Management Agent will generally (i) manage all operations of the Lithotripsy Systems, (ii) where necessary, train, or arrange and supervise the training of, interested qualified physicians (which may include qualified physician Limited Partners) in the use of the Lithotripsy Systems for the treatment of their patients, and (iii) conduct quality assurance and outcome analysis programs. See "Proposed Activities - Operation of the Lithotripsy Systems," and the form of the Management Agreement attached hereto as Appendix D. Qualified physicians desiring to treat patients with one of the Partnership's lithotripters will make appropriate arrangements with either the Partnership or the health care facilities contracting with the Partnership (as the case may be) to make a lithotripter available for their use. See "Risk Factors - Tax Risks - Disqualification of Employee Benefit Plans" and "Proposed Activities - Operation of the Lithotripsy Systems." Generally, all qualified physicians desiring to treat their own patients on a Partnership lithotripter may do so after they have received any necessary training as prescribed by the rules of the applicable health care facility. The General Partner and Management Agent will endeavor to the best of their abilities to require that physicians using a Partnership lithotripter comply with the Partnership's quality assurance and outcome analysis programs in order to maintain the highest quality of patient care. In addition, the General Partner reserves the right to request that (i) physicians (or members of their practice group) treat only their own patients with the lithotripter and (ii) that physician Limited Partners disclose to their patients in writing their financial interest in the Partnership prior to treatment, if it determines that such practices are advisable under applicable law. The former requirement is mandatory under Kentucky law. See "Regulation." The treating qualified physicians or the health care facilities will be solely responsible for billing and collecting on their own behalf the professional component of the lithotripsy procedure. Subject to certain limitations set forth in the Partnership Agreement, in the event the General Partner determines in the future that it is in the best interest of the Partnership, it may cause the Partnership (i) to acquire one or more additional mobile or fixed base lithotripter systems (or any other urological device or equipment which has received FDA premarket approval) in such location(s) as the General Partner may determine, in its sole discretion, to be in the best interests of the Partnership; (ii) to acquire an interest in any business entity, including, without limitation, a limited partnership, limited liability company or corporation, that engages in any such business activity; and (iii) to engage in any and all activities incidental or related to the foregoing, upon and subject to the terms and conditions of the Partnership Agreement; and/or (iv) to engage in Dilution Offerings on behalf of the Partnership to accomplish such goals, and may use Partnership assets and revenues to secure and repay such borrowings. As provided in the Partnership Agreement, the General Partner may not incur any single capital expenditure, any long-term debt or any single borrowing of the Partnership during any twelve-month period in excess of $100,000 without the prior approval of a Majority in Interest of the Limited Partners. In addition, the consent of a Majority in Interest of the Limited Partners is required prior to the Partnership engaging in any Dilution Offering to raise capital for the acquisition of additional assets. See "Summary of the Partnership Agreement - Powers of the General Partner and Limited Partners' Voting Rights." Anticipated Benefits to Investors. The primary objectives of the Partnership are (i) to improve the provision of health care in the Partnership's Service Area by taking advantage of the technological innovations inherent in the Lithotripsy Systems and the Partnership's quality assurance and outcome analysis programs, and (ii) to make cash distributions to its Partners from revenues generated from the operation of the Lithotripsy Systems. It is anticipated that cash Distributions may begin in the first twelve-month period after the Partnership begins business operations. There is no assurance that the Partnership's cash distribution objective can be met. The amount of cash available for distribution will further be limited by the Partnership's obligation to make certain prepayments under the Loan. See "Proposed Activities - - Funding For Partnership Activities." Each Unit represents an initial 1% interest in Partnership income, loss and cash Distributions. See "Risk Factors - Other Investment Risks - Dilution of Limited Partners' Interests." The General Partner represents that Investors should not invest in the Partnership for purposes of obtaining deductions, losses or other tax benefits, as it is anticipated by the General Partner that taxable income will be reportable by the Limited Partners along with their receipt of cash Distributions. To the extent available, the General Partner will use its best efforts to distribute cash from operations to enable the Partners to pay their income tax liabilities on their respective shares of Partnership taxable income. No assurance can be given that such will be the case. See "Risk Factors - Tax Risks - Income in Excess of Distributions." The Partnership's projected statements of taxable income (loss), cash flow, sources and uses of funds, and projected statements of return per Unit, are set forth in Appendix A hereto. The Financial Projections are based on assumptions set forth therein and in this Memorandum, and are included for the information and convenience of Investors and their professional advisors. THE PROJECTED DATA ARE THE GENERAL PARTNER'S ESTIMATE OF REASONABLE, BUT NOT NECESSARILY THE MOST LIKELY, RESULTS OF THE PARTNERSHIP'S OPERATIONS AND REPRESENT A PREDICTION OF FUTURE EVENTS BASED ON ASSUMPTIONS THAT MAY OR MAY NOT OCCUR, AND SHOULD NOT BE RELIED UPON TO INDICATE THE ACTUAL RESULTS THAT WILL BE OBTAINED. Whether the Partnership will be able to operate under the Service Contracts has not been determined. See "Risk Factors - Other Investment Risks - Financial Projections" and "Risk Factors - Operating Risks - Contract Terms and Termination." Organization of the Partnership. Western Kentucky Lithotripters Limited Partnership, a Kentucky limited partnership (the "Partnership"), was organized and created under the Act on November 24, 1999. The general partner of the Partnership is Prime Lithotripter Operations, Inc. (the "General Partner"), a New York corporation and a wholly-owned subsidiary of Prime Medical Services, Inc., a Delaware corporation. The General Partner will hold a 20% interest in the Partnership as general partner. The initial Limited Partner of the Partnership will withdraw from the Partnership upon the admission of the Limited Partners to the Partnership as provided in this Offering. The initial address of the principal office of the General Partner and the Partnership is 1301 Capital of Texas Highway, Suite C-300, Austin, Texas 78746. The Lithotripsy Systems will be acquired and operated by the Partnership. See the form of Partnership Agreement attached as Appendix B and "Summary of the Partnership Agreement." Limited Liability. Other than the purchase price for a Unit, no capital assessments will be requested of or imposed on the Limited Partners. Limited Partners may, however, be called upon to perform under their Guaranties. See "Risk Factors - Operating Risks - Liability Under the Guaranty." Provided a Limited Partner does not participate in the management or control of the Partnership, he will not incur any liability with respect to obligations of the Partnership, except to the extent of his (i) capital contributions, (ii) Guaranty of the Partnership's obligations under the Loan, and (iii) obligation to return certain Distributions made to him constituting a return of capital contributions in accordance with the Act. See "Risk Factors - Other Investment Risks - Limited Partners' Obligation to Return Certain Distributions." See also, the form of Opinion of Counsel attached hereto as Appendix E. Optional Purchase of Limited Partner Interests. As provided in the Partnership Agreement, the General Partner has the option (which it may assign to the Partnership in its sole discretion) to purchase all of the interest of a Limited Partner who (i) dies, (ii) becomes the subject of a domestic proceeding, (iii) becomes insolvent, (iv) acquires direct or indirect ownership of an interest in a competing venture (including the lease or sublease of competing technology), or (v) defaults on his obligations under the Guaranty. Except in the case of the death of a Limited Partner, the option purchase price is an amount equal to the lesser of (a) the fair market value of the Partnership Interest to be purchased or (b) the Limited Partner 's share of the Partnership's book value, if any, as reflected by the Limited Partner's capital account in the Partnership (unadjusted for any appreciation in Partnership assets or amounts due and payable to the Partnership as account receivables, and as reduced by depreciation deductions claimed by the Partnership for tax purposes) and, in certain cases, the assumption of the Limited Partner's Guaranty. Although it is anticipated that the Partnership will use the accrual method of accounting, the cash method will be used for determining the capital account value option purchase price discussed herein. 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 capital account value option purchase price may be nominal in amount. In addition, in the event existing or newly enacted laws or regulations or any other legal developments adversely affect (or potentially adversely affect) the operation of the Partnership or the business of the Partnership (e.g., any prohibitions on provider ownership), the General Partner, in its sole discretion, is obligated to either (x) purchase the Partnership Interests of all of the Limited Partners at the option purchase price provided above or (y) dissolve the Partnership. See the form of Partnership Agreement attached hereto as Appendix B, "Summary of the Partnership Agreement - Optional Purchase of Limited Partner Interests," and "Risk Factors - Operating Risks - Liability Under the Guaranty." Investment of the General Partner. In its capacity as general partner of the Partnership, the General Partner will contribute cash to the Partnership in an amount equal to 20% (up to $50,000) of the total cash contributed to the Partnership by the Partners pursuant to this Offering. The General Partner will guarantee 20% of the Loan, which is equivalent to up to a $119,568 principal guaranty obligation. See "Terms of the Offering - Guaranty Arrangements." All lithotripsy operations of the Partnership will be conducted by the General Partner and the Management Agent. See "Proposed Activities - Funding for Partnership Activities," "Summary of the Partnership Agreement - Capital Contribution of the General Partner," "General Partner" and "Proposed Activities - Management and Administration." Compensation and Reimbursement of the General Partner and its Affiliates. Beginning on the Closing Date, the Management Agent will receive a monthly management fee throughout the term of the Partnership equal to the greater of 7% of Partnership Cash Flow per month or $8,000 per month. The General Partner and its Affiliates will receive interest on loans, if any, they make to the Partnership. It is also expected that concurrent with the Closing of the Offering, or as soon as reasonably possible thereafter, the Partnership will acquire a Lithotripsy System and the Service Contracts from the General Partner for $94,000 and up to $20,691, respectively. In addition, the Partnership may contract with the General Partner or its Affiliates to render services or provide materials to the Partnership provided that the compensation is at the then prevailing rate for the type of services and/or materials provided. The General Partner and the Management Agent will also be entitled to reimbursement from the Partnership for all costs incurred by each in managing the Partnership. Upon the successful completion of this Offering, the Sales Agent, an Affiliate of the General Partner, will receive up to $20,000 in sales commissions from the Partnership for the sale of Units and may be reimbursed for up to $10,000 in out-of-pocket offering expenses. The General Partner and its Affiliates will receive no development fee or other compensation for organizing or operating the Partnership except as otherwise provided herein. See "Proposed Activities - Management and Administration," "Proposed Activities - Funding for Partnership Activities," "Plan of Distribution," "Compensation and Reimbursement to the General Partner and its Affiliates" and "Conflicts of Interest." Plan of Distribution. Subscriptions for Units will be solicited on a "best efforts" all or none basis by the Sales Agent. Upon the successful completion of this Offering, the Partnership will pay the Sales Agent a $250 commission for each Unit sold and will reimburse the Sales Agent for out-of-pocket expenditures incurred in connection with this Offering (not to exceed $10,000). No commission will be paid with respect to Units sold to the General Partner or its Affiliates, nor will any compensation be payable to the Sales Agent unless all Units are sold as provided herein. See "Plan of Distribution" and "Conflicts of Interest." Eligible Investors. Generally, this offer is made only to qualified investors acceptable to the Partnership, and approved by the Bank for purposes of the Guaranties. See "Terms of the Offering - Suitability Standards" and "Terms of the Offering - Guaranty Arrangements." 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. Lack of Operating History; General Risks of Operations. The Partnership was formed under the laws of the State of Kentucky on November 24, 1999 and has not engaged in any revenue-producing business activities. The benefits of an investment in the Partnership depend on many factors over which the Partnership will have no control, including competition, technological innovations rendering the Lithotripsy Systems less competitive or obsolete, and other matters. The Partnership may be adversely affected by various changing local factors such as an increase in local unemployment, a change in general economic conditions, changes in interest rates and availability of financing, and other matters that may render the operation of the Lithotripsy Systems difficult or unattractive. Other factors that may adversely affect the operation of the Lithotripsy Systems are unforeseen increased operating expenses, energy shortages and costs attributable thereto, uninsured losses and the capabilities of the Partnership's management personnel. Uncertainties Related to Changing Healthcare Environment. The health care industry has experienced substantial changes in recent years. The General Partner anticipates that managed care programs, including capitation plans, will play an increasing role in the delivery of lithotripsy services in the Service Area 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 health care environment will not have a material adverse effect on the Partnership. Lack of Diversification. The Partnership's sole purpose is to operate the Lithotripsy Systems. Because the Part-ner-ship will be dependent on only one line of business and the operation of two Lithotripsy Systems, it will have greater risks from casualties, 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 price the Partnership will be able to charge for lithotripsy equipment and/or services is significantly dependent upon the amount of reimbursement private health care insurers will reimburse hospitals and centers contracting with the Partnership. Most patients of treatment facilities will 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. Other important payment sources include government programs such as Medicare and Medicaid. The increasing influence of health maintenance organizations and other managed care companies has resulted in pressure to reduce the reimbursement available for lithotripsy procedures. Some of the General Partner's Affiliates have recently experienced declining revenues based on these managed care pressures in other health care markets. Additionally, the Health Care Financing Administration ("HCFA"), the federal agency which administers the Medicare program, has proposed rules which would reduce the reimbursement available for lithotripsy procedures provided at hospitals to $2,235. See "Regulation - Federal Regulation." In some cases reimbursement rates payable to the General Partner and other Affiliates are less than the proposed HCFA rate. Because of the competitive pressures from managed care companies as well as threatened reductions in Medicare reimbursement, the General Partner anticipates that reimbursement available for lithotripsy procedures may continue to decrease. Such decreases would have a material adverse effect on Partnership revenues. Regarding the professional fees paid to physicians who treat patients on the Lithotripsy Systems, the General Partner anticipates that similar competitive pressures may result in lower reimbursement paid to physicians, both by private insurers and by government programs such as Medicare. Reliability and Efficacy of the Lithotripsy Systems. The Dornier HM-3 lithotripter to be acquired from the General Partner is an extracorporeal shock-wave lithotripter manufactured by Dornier Medizintechnik GmbH of Munich, Germany acquired through Dornier Medical Systems, the manufacturer' s U.S. Affiliate. The HM-3 has a United States operating history of approximately 14 years. The Dornier lithotripter is housed in a specially upfitted trailer manufactured by the Calumet Coach Company and is transported by a tractor truck requiring special driver licensure to operate. The experience of the General Partner and its Affiliates, however, with such unit and the several other Dornier units operated by the General Partner's Affiliates, has been very satisfactory. Upon the successful completion of this Offering, the Partnership intends to also acquire a new Storz Modulith(R) SLX-T model extracorporeal shock-wave lithotripter. The Modulith (R) SLX-T will be transported from site to site in a specially upfitted vehicle and will be wheeled directly into equipped treatment rooms in prospective service locations. The Modulith(R) SLX-T has a short United States operating history, having received FDA premarket approval on March 27, 1997. The reliability and efficacy risks inherent in the Modulith(R) SLX-T are especially acute because it is so new. Affiliates of the General Partner have limited direct experience with the use of Storz lithotripters and cannot accurately predict the mechanical and technological reliability of the Modulith(R) SLX-T. "Downtime" periods necessitated by maintenance and repairs of either of the Partnership's Lithotripsy Systems will adversely effect Partnership revenues. It is anticipated that, subject to availability, the General Partner or its Affiliates will rent the Partnership one of its or their mobile lithotripters in the event of substantial downtime problems. See "Compensation and Reimbursement to the General Partner and its Affiliates." The General Partner estimates that the Dornier HM-3 has a 7-10% overall retreatment rate (however, the experience of the General Partner and its Affiliates has shown an average retreatment rate of 5%). Preliminary reports from abroad and "word of mouth" anecdotal evidence indicate that the Modulith(R) SLX-T is as effective as most of the "portable" lithotripters in the market. The General Partner is aware that early data from abroad concerning one precursor to the Modulith(R) SLX-T reflected a high retreatment rate, and that an Affiliate of the General Partner experienced electrical and mechanical problems using another precursor, the Modulith(R) SLX. However, the General Partner's and its Affiliates' limited experience with the transportable Modulith(R) SLX-T has shown acceptable retreatment rates. A high retreatment rate may adversely affect the Partnership. Investors should also 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. See "Proposed Activities - Acquisition of the Lithotripsy Systems." 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. It is anticipated by the General Partner that all initial costs of the Partnership's operations including, but not limited to (i) the estimated $400,000 purchase price of the new Modulith(R) SLX-T lithotripter together with accessories, (ii) the estimated $70,000 purchase price of the new mobile vehicle to transport the new lithotripter, (iii) the estimated $60,000 purchase price for the used Dornier HM-3, (iv) the estimated $21,500 purchase price for the used trailer housing the Dornier HM-3, (v) the estimated $12,500 for the used tractor truck, (vi) the estimated $33,840 in state sales and use taxes for the purchase of the lithotripters, mobile transport vehicles and tractor truck, (vii) the maximum $20,691 cash purchase price for the Service Contracts to be acquired by the Partnership upon the successful Closing of the Offering and (viii) syndication, organization, start-up and working capital expenses, will be financed through the Loan, the cash proceeds of this Offering and the General Partners's initial cash contribution. In addition, the General Partner anticipates (subject to the approval of the Partnership's Medical Advisory Board) that during the first year of Partnership operations, the Partnership will use a portion of the Partnership's working capital, Cash Flow and/or reserves (estimated at $60,000) and contract with certain service providers (including Affiliates of the General Partner) to refurbish the used Dornier HM-3 and Used trailer. See "Proposed Activities - Acquisition of the Lithotripsy Systems" and "Proposed Activities - Funding for Partnership Activities." While the Financial Projections indicate that cash generated from operations will enable the Partnership to repay the Loan in accordance with its terms, lower than anticipated revenues, greater than anticipated expenses, or delays in commencing operations could result in the Partnership failing to make payments of principal or interest when due under the Loan, and the Partnership' s equity being reduced or eliminated. In such event, the Limited Partners could lose their entire investment and be called upon to pay their Guaranties. See "Proposed Activities - Funding For Partnership Activities" and the Financial Projections attached to this Memorandum as Appendix A. Acquisition of Additional Assets. If in the future the General Partner determines that it is in the best interest of the Partnership to acquire (i) one or more additional fixed base or mobile Lithotripsy Systems or (ii) any other urological device or equipment so long as such device has received FDA premarket approval at the time it is acquired by the Partnership, and/or (iii) an interest in any business entity that engages in a urological business described above, the General Partner has the authority, subject to certain express limitations set forth in the Partnership Agreement, 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. As provided in the Partnership Agreement, the General Partner may not incur any single capital expenditure, any long-term debt or any single borrowing of the Partnership during any twelve-month period in excess of $100,000 without the prior approval of a Majority in Interest of the Limited Partners. In addition, the consent of a Majority in Interest of the Limited Partners is required prior to the Partnership engaging in any Dilution Offering to raise capital for the acquisition of additional assets. See "Summary of the Partnership Agreement - Powers of the General Partner and Limited Partners' Voting Rights." The acquisition of additional assets may substantially increase the Partnership's monthly obligations and may result in increased personnel requirements. See "Risk Factors - Operating Risks - Partnership Limited Resources and Risks of Leverage." The General Partner does not anticipate acquiring additional Partnership assets unless projected Partnership Cash Flow or proceeds from a Dilution Offering are sufficient to finance such acquisitions. See "Risk Factors - Other Investment Risks - Dilution of Limited Partners' Interests." In any event, no Limited Partner would be personally liable on any additional Partnership indebtedness without such 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. The Partnership's ability to incur additional indebtedness while the Loan is outstanding is restricted. Any such borrowing by the Partnership will serve to increase the risks to the Partnership associated with leverage as provided in the immediately preceding paragraph. Liability Under the Guaranty. For each Unit purchased, an Investor will be required to execute and deliver to the Bank a Guaranty pursuant to which the Investor will personally guarantee 1% of the Partnership' s total obligations under the Loan which is equivalent to up to a $5,978.40 principal guaranty per Unit. Liability under the Guaranty may exceed $5,978.40 per Unit because the guaranty obligation per Unit also includes 1% of all accrued and unpaid interest, late payment penalties, and legal costs incurred by the Bank in collecting any defaulted payments. An Investor should not purchase a Unit if he does not have resources sufficient to bear the loss of this entire amount. Limited Partners in the aggregate will guarantee 80% of the Loan, or up to $478,272. See "Proposed Activities - Acquisition of the Lithotripsy Systems" and "Proposed Activities - Funding for Partnership Activities." See "Terms of the Offering - Guaranty Arrangements - Liability Under the Guaranty" and "Terms of the Offering - Suitability Standards." If Partnership operations generate sufficient revenues to enable the Partnership to make all payments under the Loan when due, no Limited Partner will be required to perform under his Guaranty. If a default occurs under the Loan, the Bank may, among other remedies, seek payment directly from the Limited Partners under the Guaranties. The Guaranties are a guaranty of payment and not of collection and require the Limited Partners to waive certain rights to which they might otherwise be entitled. As a result, the liability of the Limited Partners under the Guaranties is direct and immediate and not conditioned or contingent upon either the pursuit of any remedies against the Partnership or any other person (including any other guarantor) or foreclosure of any security interest or liens available to the Bank. The Guaranties are a continuing guaranty that by their terms will survive the death, bankruptcy, dissolution or disability of a Limited Partner guarantor. A Limited Partner's liability under the Guaranty continues regardless of whether the Limited Partner remains a limited partner in the Partnership and is not affected or limited by any claims or offsets the Limited Partner may have against the Partnership or the General Partner. Except to the extent of their indirect equity interests in Partnership assets, the Limited Partners will not be personally liable for the Loan other than pursuant to the Limited Partner Guaranties. See "Proposed Activities - Funding for Partnership Activities," the Loan Commitment and the form of Guaranty Agreement attached as Appendix C. Competition. Several competing fixed site and mobile lithotripters are currently operating in and around the Service Area in direct competition with the Partnership's Lithotripsy Systems, including competitors that are 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. Limited Partner Restrictions. The Partnership Agreement severely restricts the Limited Partners' ability to own interests in competing equipment or ventures, other than interests held by the General Partner or its Affiliates. 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 "Summary of the Partnership Agreement - Noncompetition Agreement and Confidential Information." Government Regulation. All facets of the healthcare industry are highly regulated and will become more so in the future. The ability of the Partnership to operate legally and be profitable may be adversely affected by changes in governmental regulations, including expected changes in reimbursement, Medicare and Medicaid certification requirements, federal and state fraud and abuse laws, including the federal Anti-Kickback Statute, the federal False Claims Act, federal and state self-referral laws, state restrictions on fee splitting and other governmental regulation. See "Regulation". These laws and regulations may adversely affect the economic viability of the Partnership. The laws are broad in scope, and interpretations by courts have been limited. Violations of these laws would subject the General Partner and all Limited Partners to governmental scrutiny and/or felony prosecution and punishment in the form of large monetary fines, loss of licensure, imprisonment and exclusion from Medicare and Medicaid. Certain provisions of Medicare and Medicaid law limit provider ownership and control over the various health care services to which physicians may make Medicare and Medicaid referrals. The primary laws involved are the "Stark II" federal statute prohibiting financial relationships between physicians and certain entities to which they refer patients, and the Anti-Kickback Statute which prohibits compensation in exchange for or to induce referrals. Regarding Stark II, in January, 1998, HCFA published proposed Stark II regulations. Under the proposed regulations, physician Limited Partner referrals of Medicare and Medicaid patients to contracting hospitals for lithotripsy services would be prohibited. If HCFA adopts the proposed Stark II regulations as final, or if a reviewing court were to interpret the Stark II statute using the proposed regulations as interpretive authority, then the Partnership and its physician Limited Partners would likely be found in violation of Stark II. In such instance, the Partnership and/or its physician Limited Partners may be required to refund any amounts collected from 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 Stark II or the Anti-Kickback Statute have been violated. In addition to Stark II, the Anti-Kickback Statute and the False Claims Act, an unfavorable interpretation of other existing laws, or enactment of future laws or regulations, could potentially adversely affect the operation of the Partnership. If this occurs, the General Partner is obligated either to purchase or cause the sale of the Partnership Interests of all of the Limited Partners or to dissolve the Partnership. See "Summary of the Partnership Agreement - Optional Purchase of Limited Partner Interests." To the best knowledge of the General Partner, no certificate of need ("CON") will be required to operate on a wholesale basis in Kentucky, meaning the Partnership will lease the Lithotripsy Systems to hospitals, which will in turn be responsible for providing the lithotripsy services and for billing. Various licensure and registration requirements must be met for the Partnership to provide mobile lithotripsy services in Kentucky. The Partnership will seek to comply with all such requirements. Kentucky law requires that physician Limited Partners must treat their own patients on the Lithotripsy Systems. See "Regulation - State Regulation". Contract Terms and Termination. The General Partner will attempt to assign to the Partnership up to six Service Contracts. The Service Contracts require the General Partner to make lithotripsy equipment available at the Contract Hospitals. The Contract Hospitals generally pay the General Partner a fee for each lithotripsy procedure performed at that Contract Hospital. Three of the Service Contracts grant the General Partner the exclusive right to provide lithotripsy services at the particular Contract Hospital, however, all of the Service Contracts have very short-terms ranging from less than a month to approximately one and one-half years. In any event, most of the Service Contracts may be terminated without cause upon 90 days written notice by either party at anytime. Two of the Service Contracts are presently continuing on a month-to-month basis. No assurance can be given that the General Partner will be successful in negotiating transfers of the Service Contracts to the Partnership or procuring new agreements with any Contract Hospitals. In addition, no assurance can be given that current Service Contracts will be renewed upon their respective renewal dates or that the resulting impact to the Partnership from any cancellation would not have a materially adverse effect on the Partnership's operations. While the Partnership will seek to expand its operations by contracting with additional health care facilities for the purpose of providing lithotripsy services, whether the Partnership will be successful in negotiating new contracts on financial terms comparable to those in the existing Service Contracts, or at all, is uncertain. See "Risk Factors - Operating Risks - Competition" and "Proposed Activities - Service Contracts." Thus, no assurance can be given that Partnership operations as planned on the date of this Memorandum will occur as herein described or contemplated, and the termination of a significant number of Service Contracts or the Partnership's inability to secure new ones could have a severely negative impact on the financial condition and results of the Partnership. Loss on Dissolution and Termination. Upon the dissolution and termination of the Partnership, the proceeds realized from the liquidation of its assets, if any, will be distributed to its partners only after satisfaction of the claims of all creditors, including but not limited to the Bank. See "Risk Factors - Operating Risks - Liability Under the Guaranty." 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, these 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 Lithotripsy Systems may be adversely affected; (ii) third party payors may be adversely affected resulting in delays in payment to the Partnership; (iii) facilities served by the Lithotripsy Systems may be adversely affected resulting in a cessation of service to the affected facilities; and (iv) the Partnership's internal information systems, including its accounting system, may be adversely affected resulting in record keeping and accounting delays. Storz, the manufacturer of the Modulith(R) SLX-T, has assured Prime that its lithotripters will be Year 2000 compliant, in all necessary respects, i.e., that they will continue to operate normally after January 1, 2000. The General Partner cannot predict with certainty whether such will be the case or the effects of noncompliance. No assurances have been forthcoming from Dornier, the manufacturer of the HM-3 lithotripter. The General Partner has not inquired as to the Year 2000 readiness of any other lithotripter manufacturer, insurance company or any facility the Partnership intends to serve, but is relying that such third parties will be Year 2000 compliant. The General Partner anticipates that the internal information systems, including accounting systems, that it will use for Partnership purposes will be Year 2000 compliant by the end of 1999, although no assurance can be given that such will be the case. The Partnership currently has no contingency plans in the event that any of the above-described risks is realized. In the event that any of the above-described risks are realized, or any other, unanticipated Year 2000 Issue problems arise, the Partnership could be forced to cease its operations for an indefinite period of time while the Year 2000 problems are remedied, at a cost which cannot be accurately predicted at this time. Any such interruption in Partnership operations would adversely affect Partnership revenues. Investors should note that the General Partner anticipates no significant tax benefits associated with the operation of the Lithotripsy Systems or the Partnership. No ruling will be sought from the Service on the United States federal income tax consequences of any of the matters discussed in this Memorandum or any other tax issues affecting the Partnership or the Limited Partners. The Partnership is relying upon an opinion of its Counsel with respect to certain material United States federal income tax issues. Counsel's opinion is not binding on the Service as to any issue, and there can be no assurance that any deductions, or the period in which deductions may be claimed, will not be challenged by the Service. Each Investor should carefully review the following risk factors and consult his own tax advisor with respect to the federal, state and local income tax consequences of an investment in the Partnership. THE TAX RISKS SET FORTH IN THIS SECTION ARE NOT INTENDED TO BE AN EXHAUSTIVE LIST OF THE GENERAL OR SPECIFIC TAX RISKS RELATING TO THE PURCHASE OF UNITS IN THE PARTNERSHIP. EACH INVESTOR IS DIRECTED TO THE FULL OPINION OF COUNSEL (APPENDIX E TO THE MEMORANDUM). IT IS STRONGLY RECOMMENDED THAT EACH INVESTOR IN-DE-PEN-DENT-LY CONSULT HIS PERSONAL TAX COUNSEL CONCERNING THE TAX CONSEQUENCES ASSOCIATED WITH HIS 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, AND THE FINANCIAL PROJECTIONS FORECAST, 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 part-ner-ship such as the Part-ner-ship 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 Part-ner-ship each Investor should consult with his personal tax advisor with respect to possible legislative, judicial and administrative developments. Disqualification of Employee Benefit Plans. Purchase of Units in the Partnership may cause certain Limited Partners, certain hospitals and health care 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 gross income, regardless of whether the employee is a Limited Partner. These rules may adversely affect Investors who are currently involved in a medical practice joint venture, regardless of their purchase of Units in the Partnership. The General Partner and Counsel have been informally advised by officials of the Service that the Service would not likely attempt to apply the affiliated service group rules to the Partnership, nor has the Service applied these rules to similar arrangements in the past. Informal discussions with the Service, however, are not binding on the Service, and there can be no guarantee that the Service will not apply the affiliated service group rules to the Partnership. INVESTORS ARE URGED TO CONSULT WITH THEIR OWN TAX ADVISORS REGARDING THE APPLICABILITY OF THE AFFILIATED SERVICE GROUP RULES DESCRIBED HEREIN TO THE EMPLOYEE BENEFIT PLANS MAINTAINED BY THEM OR THEIR MEDICAL PRACTICES. Partnership Allocations. The Part-ner-ship 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 part-ner-ship 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 Part-ner-ship 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. The Partnership will also incur significant up-front capital costs that may have to be paid out of the Partnership's revenues. Because of the circumstances outlined above, if Partnership cash flow falls substantially below the estimates as set forth in the Financial Projections, a Limited Partner could be subject to income taxes payable out of personal funds to the extent of the Part-ner-ship's income, if any, attributed to him without receiving from the Part-ner-ship 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 eligible entity that may choose 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 Part-ner-ship, the Part-ner-ship may be classified as an association taxable as a corporation. If that occurs, the Part-ner-ship could be taxed on its profits and at rates which may be higher than those imposed on individuals. Any Part-ner-ship losses would only be deductible by the Part-ner-ship, rather than being allocated among the Partners and deductible by Limited Partners on their federal income tax returns. See "Passive Income and Losses." Cash Distributions to Limited Partners would be treated as dividends to the extent of current and accumulated earnings and profits of the Part-ner-ship, 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 Part-ner-ship Interest, while the remainder would be treated as capital gain, provided the Limited Partner' s interest in the Part-ner-ship 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 Partnership expects and the Financial Projections forecast that the Partnership will realize taxable income and not taxable losses during its first five full years of operation. Nevertheless, if certain assumptions upon which the Financial Projections are based do not materialize, there can be no assurance that the Partnership will not realize taxable losses, in which event the use of such losses by the Limited Partners will generally be limited by Code Section 469. Code Section 469 provides limitations for the use of taxable losses attributable to "passive activities." Code Section 469 operates generally to prohibit passive losses from being used against income from active activities. The passive activity rules are extremely complex and Investors are urged to consult their own tax advisors as to their applicability, particularly as they relate to the ability to deduct any losses from the Partnership against other income of the Investor. THE PASSIVE ACTIVITY LOSS RULES WILL AFFECT EACH INVESTOR DIFFERENTLY, DEPENDING ON HIS OWN TAX SITUATION. EACH INVESTOR SHOULD CONSULT WITH HIS OWN TAX ADVISOR TO DETERMINE THE EFFECT OF THESE RULES ON THE INVESTOR IN LIGHT OF THE INVESTOR'S INDIVIDUAL FACTS AND CIRCUMSTANCES. Depreciation. The Financial Projections assume that the Part-ner-ship will use the Modified Accelerated Cost Recovery System ("MACRS") to depreciate the cost of any newly acquired equipment. Further, the Financial Projections assume that any newly purchased equipment will be placed into service after January 1, 2000 but prior to October 1, 2000, and that the mid-year convention will apply. In such case, the Partnership will claim only a half year of depreciation in its first year of operations. If the Lithotripsy Systems are placed in service after October 1, the mid-quarter convention may apply to the Lithotripsy Systems which would require the Partnership to claim only one-eighth of the depreciation that would otherwise be allowable if the Lithotripsy Systems had been in service during an entire year after its first year in service. In addition, the estimated $33,840 of Kentucky sales and use taxes paid by the Partnership on the lithotripters, the mobile transport vehicles and the tractor truck used for such Lithotripsy Systems will be treated as part of their cost for depreciation purposes. It is anticipated that any additions or improvements to the Lithotripsy System will also be depreciated over a five year term using the 200% declining balance method of depreciation, switching to the straight-line method to maximize the depreciation allowance. As under prior law, the 1986 Act provides that the full amount of depreciation on personal property (such as the Lithotripsy Systems) is recaptured upon disposition (i.e., is taxed as ordinary income) to the extent gain is realized on the disposition. Investors should note that the 1986 Act repealed the investment tax credit for all personal property. Part-ner-ship Elections. The Code permits part-ner-ships to make elections for the purpose of adjusting the basis of part-ner-ship property on the distribution of property by a part-ner-ship to a partner and on the transfer of an interest in a part-ner-ship by sale or exchange or on the death of a partner. The general effect of such elections is that transferees of Part-ner-ship 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 Part-ner-ship '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 Part-ner-ship Agreement, the General Partner, in its discretion, may make the requisite election necessary to effect such adjustment in basis. The Partnership Agreement also grants the General Partner discretion to make other types of elections which could affect the Limited Partners. Sale of Partnership Units. Gain realized on the sale of Units by a Limited Partner who is not a "dealer" in Units or in limited part-ner-ship 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 Part-ner-ship include the Limited Partner's share of the ordinary income that the Part-ner-ship would realize as a result of the recapture of depreciation (as described above) if the Part-ner-ship had sold Partnership depreciable property immediately before the Limited Partner sold his Partnership Interest. Investors should note that the IRS Restructuring and Reform Act of 1998 generally imposes a maximum tax rate of 20% on net long-term capital gains. To the extent the Partnership has income attributable to depreciation recapture incurred on the sale of a capital asset, such income will be taxed at a maximum rate of 25%. The Revenue Reconciliation Act of 1993 imposed a maximum potential individual income tax rate of 39.6% on ordinary income. Tax Treatment Of Certain Fees and Expenses Paid By The Part-ner-ship. Under the Code, a part-ner-ship 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 part-ner-ship is entitled to deduct in full when paid or incurred; (2) amortizable expenses -- expenditures which the part-ner-ship 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 part-ner-ship property (or part-ner-ship loans) and deducted over a period of time as the property (or part-ner-ship loan) is amortized or depreciated; (4) organization expenses -- expenditures related to the organization of the part-ner-ship, 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) part-ner-ship distributions -- payments to partners representing distributions of part-ner-ship funds, which may be neither capitalized, amortized nor deducted; (7) start-up expenses -- expenditures incurred by a part-ner-ship 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 part-ner-ship 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 Part-ner-ship 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 Part-ner-ship 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 Part-ner-ship. 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 Part-ner-ship, the Management Agent 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 Part-ner-ship; 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. The Partnership will incur certain legal, accounting, and other expenses related to its formation. Under current federal income tax law, no deduction is allowed for expenses relating to the foregoing and such expenses must be capitalized. Consequently, no Partner will be allocated any portion of such capitalized expenses. It is expected that these expenses will be paid out of the proceeds of the Offering and Partnership Cash Flow. Organizational and Syndication Expenses. Section 709 of the Code permits certain costs relating to the organization of a partnership to be amortized over a period of not less than 60 months, but prohibits a partnership from deducting or amortizing those costs of forming the partnership that do not strictly relate to the organization of the partnership, or that are incurred to promote the sale of partnership interests (i.e., syndication expenses). The Regulations provide definitions for organizational expenses that are deductible and syndication expenses that must be capitalized and explain how the amortization election is made. Organizational expenses include legal fees for services incident to the organization of a partnership, such as negotiation and preparation of a partnership agreement, accounting fees for services incident to the organization of the partnership and filing fees. Syndication expenses include brokerage fees, registration fees, legal fees for securities advice, accounting fees for preparation of representations to be included in the offering materials, and printing costs of the offering materials. The Partnership intends to treat the entire amount payable to the Sales Agent as a sales commission for selling the Units, as well as certain other fees and expenses allocable to the preparation of this Memorandum and to the offering of the Units in the Partnership, as nondeductible, nonamortizable syndication expenses. The Partnership intends to amortize, over a 60-month period, that portion of the costs of forming the Partnership that is attributable to the organization of the entity, pursuant to the Regulations. The Service may take the position that some portion or all of these costs relate to matters other than the organization of the Partnership and fail to qualify as amortizable expenses under Section 709 and, therefore, must be capitalized rather than deducted. The General Partner believes that the various expenses have been properly characterized. Because the allocation of these expenses is a factual question, Counsel cannot predict the outcome should the character of certain expenses be challenged on audit. Investors will economically bear their respective proportionate share of organizational and syndication expenses as these costs likely will be paid out of proceeds from the Offering. These costs will be borne irrespective of their amount, timing and ability of the Partnership to deduct these costs for tax purposes. Start-Up Expenditures. Section 195 of the Code permits costs relating to the investigation and establishment of an active trade or business to be amortized over a period of not less than 60 months. The Partnership intends to amortize, over a 60-month period, that portion of the costs incurred by the Partnership prior to the time the business of the Partnership commences that are attributable to the investigation and establishment of such business. The Service may take the position that some portion or all of these costs relate to matters other than the investigation and establishment of the Partnership's business and fail to qualify as amortizable expenses under Section 195 and, therefore, must be capitalized rather than deducted. The General Partner believes that the various expenses have been properly characterized. Because the allocation of these expenses is a factual question, Counsel cannot predict the outcome should the character of certain expenses be challenged on audit. Investors will economically bear their respective proportionate share of start-up expenditures as these costs likely will be paid out of proceeds from the Offering. These costs will be borne irrespective of their amount, timing and ability of the Partnership to deduct these costs for tax purposes. Management Fee to General Partner. The Partnership will pay the Management Agent a monthly management fee equal to the greater of 7% of Partnership Cash Flow per month or $8,000 per month. The management fee will be 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 form of which is attached to this Memorandum as Appendix D. The Partnership intends to deduct the management fee in full in the year paid. Assuming the management fee to be paid to the Management Agent is ordinary, necessary and reasonable in relation to the services provided, Counsel is of the opinion that the Partnership may deduct the management fee in full in the year paid. State and Local Taxation. Each Investor should consult his own attorney or tax advisor regarding the effect of state and other local taxes on his personal situation. Conflicts of Interest. The activities of the Part-ner-ship will give rise to numerous immediate and potential conflicts of interest between the Part-ner-ship and the General Partner and its Affiliates. See "Compensation and Reimbursement to the General Partner and its Affiliates," "General Partner," "Competition," and "Conflicts of Interest." Purchases by General Partner and its Affiliates. The General Partner and its Affiliates may purchase up to 50 Units. As holders of limited partner interests, the General Partner and its Affiliates are likely to have interests which conflict with those of other Limited Partners. In addition, substantial purchases of Units by the General Partner and/or its Affiliates may limit the ability of the other Limited Partners to exercise voting rights granted by the Partnership Agreement. Substantial purchases of Units by the General Partner may also limit the General Partner's financial capacity to fulfill other financial obligations to or on behalf of the Partnership. No Participation in Management. The General Partner has full authority to supervise the business and affairs of the Part-ner-ship. Except as otherwise provided in the Partnership Agreement or the Act, the Limited Partners will have no right to participate in the management, control or conduct of the Partnership's business and affairs. The General Partner, its employees and their Affiliates are not required to devote their full time to the Part-ner-ship's affairs and intend to devote substantial time and effort in organizing and operating partnerships and other medical enterprises throughout the United States that are similar to the Partnership. The General Partner will devote such time to the Partnership' s business and affairs as it deems necessary and appropriate in the exercise of reasonable judgment. The participation by any Limited Partner in the management or control of the Partnership's affairs could render him generally liable for the liabilities of the Partnership that could not be satisfied by assets of the Partnership. See the Form of Legal Opinion of Counsel, attached hereto as Appendix E. Ability of the General Partner to Effect Fundamental Changes. The General Partner, with the prior approval of a Majority in Interest of the Limited Partners, has the authority under the Partnership Agreement to effect transactions that could result in the termination or reorganization of the Partnership, a total or partial dilution of the Limited Partners' interests in the Partnership, and/or the exchange of interests in another enterprise for the limited partnership interests held by the Limited Partners. See "Summary of the Partnership Agreement - Fundamental Changes." Limited Partners' Obligation to Return Certain Distributions. Except as provided by other applicable law and provided that a Limited Partner does not participate in the management or control of the Partnership, he will not be liable for the liabilities of the Partnership in excess of his investment, his Guaranty and his ratable share of undistributed profits. However, under Section 362.475 of the Kentucky Revised Uniform Limited Partnership Act (the "Act"), a Limited Partner shall be liable for a period of up to six years to return to the Partnership any distributions (without interest) received from the Partnership representing a return of any part of his capital contribution in violation of the Partnership Agreement or the Act, but only to the extent necessary to discharge Partnership liabilities incurred during the period the contribution was held by the Partnership. Similarly, a Limited Partner shall be liable for a period of one year for any such distributions not in violation of the Partnership Agreement or Act. The Act also restricts distributions if, after giving effect to such distributions, all liabilities of the Partnership, other than liabilities as to Partners on account of their Partnership Interests, exceed the fair value of the Partnership's assets. Dilution of Limited Partners' Interests. The "Net Tangible Book Value" of the Units purchased will, immediately after the Offering and the funding of the Partnership by the Limited Partners, be less than the price at which Units were offered. The "Net Tangible Book Value" of the Units may be regarded as the value of the Units after deduction of organization expenses of the Part-ner-ship, Offering expenses and other amounts, other than capital expenditures, paid or to be paid by the Part-ner-ship out of the proceeds of this Offering. Accordingly, if the Part-ner-ship were to be liquidated immediately after the Offering and funding, each Limited Partner would receive an amount equal to the amount paid by him for Units less his pro rata share of the organization and Offering expenses and other amounts paid by the Part-ner-ship out of the Offering proceeds. In addition, the General Partner, with the prior approval of a Majority in Interest of the Limited Partners, has the authority under the Partnership Agreement to cause the Partnership to issue, offer and sell additional limited partnership interests in the future (a "Dilution Offering"). Upon the successful closing of a Dilution Offering, the Percentage Interests of the Limited Partners will be proportionately diluted. See "Summary of the Partnership Agreement - Dilution Offerings." Financial Projections. The Financial Projections contain data that are the General Partner's estimate of possible, but not necessarily the most likely, results of the Part-ner-ship's operations and represent a prediction of future events based on assumptions that may or may not occur and should not be relied upon to indicate the actual results that will be attained. Whether the Partnership will be able to operate under the Service Contracts, the results of such operations and its ability to take advantage of additional treatment opportunities has not been determined. Further, no assurance can be given that the results of Partnership operations under the Service Contracts, if any, will favorably compare to those of the General Partner and the differences could be materially adverse. The Financial Projections begin on the Closing Date and reflect five full twelve-month tax years; thus, they will not accurately reflect the consequences of the first tax year of operations, which will be less than a full twelve-month period. Investors should carefully review the notes to the Financial Projections, which contain various assumptions and other information concerning the data therein. The General Partner believes that the underlying assumptions provide a reasonable basis for the projections, but some assumptions inevitably will not materialize and unanticipated events and circumstances may occur subsequent to the date of the Financial Projections. Accordingly, the actual results achieved during the projected periods will vary from the Financial Projections and the variations may be material. Furthermore, to the extent the Financial Projections reflect taxable income and loss, Service audit adjustments could adversely affect the timing and the amount of deductions that the Part-ner-ship plans to claim. See "Proposed Activities - Operation of the Lithotripsy Systems" and the Financial Projections attached hereto as Appendix A. Long-term Investment. The General Partner anticipates that the Partnership will operate the Lithotripsy Systems for an indefinite period of time and that the Partnership will not liquidate prior to its intended termination. Accordingly, Investors should consider their investment in the Partnership as a long-term investment of indefinite duration. Limited Transferability and Illiquidity of Units. Transferability of Units is severely restricted by the Part-ner-ship 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 may not be transferred unless the Part-ner-ship is furnished with an opinion of counsel, satisfactory to the Part-ner-ship and 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 Part-ner-ship 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 Part-ner-ship 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. See "Risk Factors - Tax Risks - Sale of Partnership Units." 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 arbitrarily determined by the General Partner based upon, among other things, its expectations concerning the financial needs for the Part-ner-ship's anticipated operations, the availability of financing, the cost of organizing the Part-ner-ship, the cost of the Lithotripsy Systems and other matters. The offering price of the Units is not necessarily indicative of their value and no assurance can be given that the Units, if and when transferable, could be sold for the offering price or for any amount. Limitation of General Partner's Liability and Indemnification. The Partnership Agreement provides that the General Partner will not be liable to the Partnership or to any Partner for errors in judgment or other acts or omissions in connection with the Partnership, except for those involving willful misconduct or gross negligence. Therefore, the Limited Partners may have a more limited right of action against the General Partner in the event of its misfeasance or malfeasance than they would have absent the limitations in the Partnership Agreement. In the opinion of the SEC, indemnification for liabilities arising out of the Securities Act is contrary to public policy and therefore is unenforceable. Insurance. The Loan documents will require the General Partner to cause the Lithotripsy Systems to be covered by insurance for losses due to fire and other casualties under policies customarily obtained for properties of this type. Prime Medical Services, Inc. ("Prime"), the indirect sole shareholder of the General Partner, maintains active policies of insurance for the benefit of itself and certain affiliated entities covering employee crime, workers' compensation, business and commercial automobile operations, professional liability, inland marine, business interruption, real property and commercial liability risks. These policies will be amended to include the Partnership and the General Partner believes that coverage limits of these policies are within acceptable norms for the extent and nature of the risks covered. The Partnership will be responsible for its share of premium costs. In addition, there are certain types of losses that are either uninsurable or are not economically insurable. Should such losses occur with respect to the operation of the Lithotripsy Systems, or should losses exceed insurance coverage limits, the Part-ner-ship could suffer a loss of the capital invested in the Lithotripsy Systems and any anticipated profits from its investment. Optional Purchase of Limited Partner Interests. As provided in the Partnership Agreement, the General Partner has the option (which it may assign to the Partnership in its sole discretion) to purchase all the interest of a Limited Partner who (i) dies, (ii) becomes the subject of a domestic proceeding, (iii) becomes insolvent, (iv) acquires a direct or indirect ownership of an interest in a competing venture (including the lease or sublease of competing technology), or (v) defaults on his obligations under the Guaranty. Except in the case of the death of a Limited Partner, the option purchase price is an amount equal to the lesser of (a) the fair market value of the Partnership Interest to be purchased or (b) the Limited Partner 's share of the Partnership's book value, if any, as reflected by the Limited Partner's capital account in the Partnership (unadjusted for any appreciation in Partnership assets or amounts due and payable to the Partnership as account receivables, and as reduced by depreciation deductions claimed by the Partnership for tax purposes), and in certain cases the assumption of the Limited Partner's Guaranty, if any. Although it is anticipated that the Partnership will use the accrual method of accounting, the cash method will be used for determining the capital account value option purchase price discussed herein. 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 capital account value option purchase price may be nominal in amount. In addition, in the event existing or newly enacted laws or regulations or any other legal developments adversely affect (or potentially adversely affect) the operation of the Partnership or the business of the Partnership (e.g., any prohibitions on provider ownership), the General Partner, in its sole discretion, is obligated to either (x) purchase the Partnership Interests of all of the Limited Partners for an amount equal to the lesser of the fair market value or book value or (y) dissolve the Partnership. See the Partnership Agreement attached hereto as Appendix B, "Summary of the Partnership Agreement - Optional Purchase of Limited Partner Interests," and "Risk Factors - Operating Risks - Liability Under the Guaranty." Financial Resources of the General Partner. The General Partner will guarantee 20% of the Partnership's total obligations under the Loan (up to a $119,568 principal guaranty). In addition, if the General Partner purchases Units as allowed by this Offering, for each Unit the General Partner purchases the General Partner will be required to guarantee the Loan on the same terms as any other Unit purchaser. The General Partner was formed under the laws of the State of New York and has fairly illiquid assets. See "Prior Activities" and "General Partner." Lithotripsy Systems Location. The Management Agent will negotiate on behalf of the Partnership with various licensed health care facilities located in the Service Area regarding operating the Lithotripsy Systems at their facilities. There can be no assurance that any such commitment will be forthcoming on terms acceptable to the Partnership. After consultation with the local Medical Advisory Board and the local Medical Director appointed by the General Partner, and taking into consideration any obligations under the Service Contracts, the travel itinerary for the Lithotripsy Systems will be determined by the General Partner. See "Proposed Activities - Operation of the Lithotripsy Systems." Certain terms in this Memorandum shall have the following meanings: Act. The Act means the Kentucky Revised Uniform Limited Partnership Act, as in effect on the date hereof. Affiliate. An Affiliate is (i) any person, partnership corporation, association or other legal entity ("person") directly or indirectly controlling, controlled by or under common control with another person, (ii) any person owning or controlling 10% or more of the outstanding voting interests of such other person, (iii) any officer, director or partner of such person and (iv) if such other person is an officer, director or partner, any entity for which such person acts in such capacity. Bank. First Citizens Bank & Trust Company, or its successor in interest. Capital Account. The Partnership capital account of a Partner as computed pursuant to Article XII of the Partnership Agreement. Capital Contributions. All capital contributions made by a Partner or his predecessor in interest which shall include, without limitation, contributions made pursuant to Article VII of the Partnership Agreement. Capital Transaction. Any transaction which, were it to generate proceeds, would produce Partnership Sales Proceeds or Partnership Refinancing Proceeds. Closing. The admission to the Partnership as Limited Partners of Investors subscribing for Units. Closing Date. The date of the Closing, which is scheduled to occur on January 31, 2000 (or earlier, in the discretion of the General Partner, upon the sale of all 80 Units as provided herein and the approval of the Liquidation), unless extended at the discretion of the General Partner for a period up to 180 days. Code. The Internal Revenue Code of 1986, or corresponding provisions of subsequent, superseding revenue laws. Contract Hospitals. The hospitals and health care facilities to which the General Partner provides lithotripsy services pursuant to the Service Contracts. Counsel. Womble Carlyle Sandridge & Rice, a Professional Limited Liability Company, P.O. Drawer 84, Winston-Salem, North Carolina 27102. Dilution Offering. Pursuant to the terms of the Partnership Agreement, the future offering of additional limited partnership interests in the Partnership by the General Partner. Any such offering generally will proportionally reduce the existing Percentage Interests of the then current Partners in the Partnership; provided, however, that the General Partner may avoid dilution by either making a proportional additional capital contribution or buying units in a Dilution Offering. Distributions. Cash or other property, from any source, distributed to the Partners. Escrow Agent. First Citizens Bank & Trust Company, or its successor in interest. FDA. The United States Food and Drug Administration. --- Financial Projections. Projections of Partnership revenue, cash flow, income, loss, and sources and uses of funds, and of Partnership return per Unit, attached hereto as Appendix A, which have been prepared by the General Partner based upon the assumptions stated therein. Financial Statement. The Purchaser Financial Statement, included in the Subscription Packet accompanying this Memorandum, to be furnished by the Investors for review by the General Partner and the Bank in connection with their decision to accept or reject a subscription. General Partner. The general partner of the Partnership, Prime Lithotripter Operations, Inc., a New York corporation and a wholly-owned subsidiary of Prime. Guaranty. The Guaranty Agreement in the form included in the Subscription Packet accompanying this Memorandum pursuant to which each Limited Partner will guarantee a portion of the Partnership's obligations to the Bank under the Loan. Initial Limited Partner. Joseph Jenkins, M.D., a resident of North Carolina and an officer of the General Partner. The Initial Limited Partner is to be the only limited partner of the Partnership until such time as the Limited Partners are admitted to the Partnership on the Closing Date, at which time the Initial Limited Partner will withdraw from the Partnership. Investors. Potential purchasers of Units of the Partnership. --------- Limited Partners. The Limited Partners are those Investors in the Units admitted to the Partnership and any person admitted as a substitute Limited Partner in accordance with the provisions of the Partnership Agreement. Lithotripsy Systems. The mobile transport vehicles (including the used trailer) with the installed and operational Storz Modulith(R) SLX-T and Dornier HM-3 lithotripters. Loan. The loan of up to $597,840 from the Bank to the Partnership. Loan proceeds will be used by the Partnership to (i) acquire one new lithotripter (estimated at $400,000), (ii) acquire and upfit one new mobile vehicle (estimated at $70,000), (iii) acquire one used Dornier HM-3 lithotripter (estimated at $60,000); (iv) acquire one used trailer to house the Dornier HM-3 lithotripter (estimated at $21,500); (v) acquire one used tractor truck to transport the trailer housing the Dornier HM-3 lithotripter (estimated at $12,500) and (vi) pay state sales and use taxes on the purchases of the lithotripters, mobile transport vehicles and tractor truck (estimated at $33,840). The Loan will be secured by the Lithotripsy Systems, the Partnership's accounts receivable and other Partnership assets, the guaranty of the General Partner, and the Limited Partner Guaranties. Loan Agreement . The Future Advance Loan Agreement to be entered into between the Partnership and the Bank to evidence the Loan. The form of the Future Advance Loan Agreement is an exhibit to the Loan Commitment which is attached hereto as Appendix C. Loan Commitment. The commitment to the Partnership dated December 13, 1999 attached hereto as Appendix C, pursuant to which the Bank has agreed to fund the Loan. 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. Majority in Interest. Limited Partners holding more than 50% of the Percentage Interests held by Limited Partners. Management Agent. Lithotripters, Inc., a North Carolina corporation and an Affiliate of the General Partner. Memorandum. This Confidential Private Placement Memorandum, including all Appendices hereto, and any amendment or supplement hereto. Modulith(R) SLX-T. The new Storz Modulith(R) SLX Transportable ("SLX-T") model extracorporeal shock-wave lithotripter manufactured by Storz. It is anticipated that the Partnership will acquire one new Modulith(R) SLX-T lithotripter with the proceeds of the Loan. Net Gains from Capital Transactions. The gains realized by the Partnership as a result of or upon any sale, exchange, condemnation or other disposition of the capital assets of the Partnership (which assets shall include Code Section 1231 assets) or as a result of or upon the damage or destruction of such capital assets. Nonrecourse Deductions. A deduction as set forth in Treasury Regulations Section 1.704-2(b)(1). The amount of Nonrecourse Deductions for a given Year equals the excess, if any, of the net increase, if any, in the amount of Partnership Minimum Gain during such Year over the aggregate amount of any Distributions during such Year of proceeds of a Nonrecourse Liability that are allocable to an increase in Partnership Minimum Gain, determined according to the provisions of Treasury Regulations Section 1.704-2(h). Nonrecourse Liability. Any Partnership liability (or portion thereof) for which no Partner bears the "economic risk of loss," within the meaning of Treasury Regulations Sections 1.704-2(b)(3), 1.752-1(a)(2) and 1.752-2. Offering. This offering of Units. -------- Partner Minimum Gain. An amount, with respect to each Partner Nonrecourse Debt, equal to the Partnership Minimum Gain that would result if such Partner Nonrecourse Debt were treated as a Nonrecourse Liability, determined in accordance with Treasury Regulations Section 1.704-2(i). Partner Nonrecourse Debt. Any nonrecourse debt (for the purposes of Treasury Regulations Section 1.1001-2) of the Partnership for which any Partner bears the "economic risk of loss," within the meaning of Treasury Regulations Section 1.752-2. Partner Nonrecourse Deductions. Deductions as described in Treasury Regulations Section 1.704-2(i)(2). The amount of Partner Nonrecourse Deductions with respect to a Partner 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. Western Kentucky Lithotripters Limited Partnership, a Kentucky limited partnership. Partnership Agreement. The Partnership's Agreement of Limited Partnership, the form of which is attached to this Memorandum as Appendix B, as the same may be amended from time to time. Partnership Cash Flow. For the applicable period the excess, if any, of (A) the sum of (i) all gross receipts from any source for such period, other than from Partnership loans, Capital Transactions and Capital Contributions, and (ii) any funds released by the Partnership from previously established reserves, over (B) the sum of (i) all cash expenses paid by the Partnership for such period, (ii) the amount of all payments of principal on loans to the Partnership, (iii) capital expenditures of the Partnership, and (iv) such reasonable reserves as the General Partner shall deem necessary or prudent to set aside for future repairs, improvements, or equipment replacement or additions, or to meet working capital requirements or foreseen or unforeseen future liabilities and contingencies of the Partnership; provided, however, that the amounts referred to in (B) (i), (ii) and (iii) above shall be taken into account only to the extent not funded by Capital Contributions, loans or paid out of previously established reserves. Such term shall also include all other funds deemed available for distribution and designated as "Partnership Cash Flow" by the General Partner. Partnership Interest. The interest of a Partner in the Partnership as defined by the Act and the Partnership Agreement. Partnership Minimum Gain. Gain as defined in Treasury Regulations Section 1.704-2(d). Partnership Refinancing Proceeds. The cash realized from the re-financing 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 a Limited Partner by reference to his Unit ownership based upon the Limited Partners holding an aggregate 80% Percentage Interest in the Partnership, with each Unit sold representing an initial 1% interest. The General Partner will own a 20% Percentage Interest in the Partnership. The Percentage Interest may be set forth in the Partnership Agreement or any other document or agreement, as a percentage or a fraction or on any numerical basis deemed appropriate by the General Partner. The Percentage Interest of existing Limited Partners will be reduced in the event of a future Dilution Offering. The General Partner may avoid dilution by either making a proportional additional capital contribution or buying units in a Dilution Offering. Prime. Prime Medical Services, Inc., a publicly held Delaware corporation and the sole shareholder of the General Partner, Management Agent and Sales Agent. Prime Rate. The rate of interest periodically established by the Bank and identified as such in literature published and circulated within the Bank's offices. Profit. The net income of the Partnership for each year as determined by the Partnership for federal income tax purposes. Pro Rata Basis. In connection with an allocation or distribution, an allocation or distribution in proportion to the respective Percentage Interest of the class of Partners to which reference is made. Qualified Income Offset Item. An adjustment, allocation or distribution described in Treasury Regulations Sections 1.704-1(b)(2)(ii)(d)(4), 1.704-1(b)(2)(ii)(d)(5) or 1.704-1(b)(2)(ii)(d)(6) unexpectedly received by a Partner. Sales Agent. MedTech Investments, Inc., a registered broker-dealer, and member of the National Association of Securities Dealers, Inc. The Sales Agent is an Affiliate of the General Partner. SEC. The United States Securities and Exchange Commission. --- Securities Act. The Securities Act of 1933, as amended. -------------- Service. The Internal Revenue Service. ------- Service Area. The geographic region in which Partnership operations are expected to be conducted and which is anticipated to consist primarily of the following Kentucky counties: Christian County, Daviess County, Henderson County, Hopkins County, McCracken County and Warren County. The General Partner has sole discretion to expand the Service Area. Service Contracts. The lithotripsy service agreements entered into by the General Partner pursuant to which the General Partner provides lithotripsy services to the Contract Hospitals. Storz. Karl Storz Lithotripsy-America, Inc. and its Affiliates. ----- Subscription Agreement. The Subscription Agreement, included in the Subscription Packet accompanying this Memorandum, to be executed by the Limited Partners in connection with their purchase of Units. Subscription Packet. The packet of subscription materials to be distributed to and completed by Investors in connection with their subscription for Units. Units. The 80 equal limited partner interests in the Partnership offered pursuant to this Memorandum for a price per Unit of $2,500 in cash, plus 1% in guaranties of the Partnership's obligations under the Loan (up to a $5,978.40 principal Loan guaranty per Unit). The Partnership was recently formed under the laws of the State of Kentucky, has no material assets or liabilities and has not commenced operations. The General Partner of the Partnership is Prime Lithotripter Operations, Inc., a New York corporation. See "General Partner." The Partnership was formed to acquire one new lithotripter and one used lithotripter for the lithotripsy of renal stones. The new lithotripter will be transported from site to site by a new mobile vehicle and the used lithotripter will be housed in a used trailer pulled by a used tractor truck to enable the Partnership to provide lithotripsy services at various locations in the Service Area. The Partnership intends to begin lithotripsy operations as soon as possible after the Closing of the Offering and the acquisition of the Lithotripsy Systems. See "Proposed Activities." The initial principal executive office of the General Partner and the Partnership is located at 1301 Capital of Texas Highway, Suite C-300, Austin, Texas 78746. The Units and Subscription Price. Western Kentucky Lithotripters Limited Partnership, a limited partnership formed under the laws of the State of Kentucky, hereby offers an aggregate of 80 Units of limited partner interest in the Partnership. Each Unit represents an initial 1% economic interest in the Partnership. Investors should note that their initial Percentage Interests in the Partnership may be reduced by future Dilution Offerings. See "Summary of the Partnership Agreement - Dilution Offerings" and the form of Partnership Agreement attached hereto as Appendix B. The price for each Unit is $2,500 in cash and a 1% personal guaranty of the Partnership's obligations under the Loan (up to a $5,978.40 principal guaranty obligation per Unit). See "Terms of the Offering - Guaranty Arrangements." At subscription, each Limited Partner must pay the cash Unit purchase price and execute and deliver a Guaranty to the Sales Agent. Each Investor may purchase not less than one Unit. The General Partner may, in its sole discretion, permit the Partnership to sell a limited number of fractional Units as a minimum investment and to reject in whole or in part any subscription. Rejected subscription funds (without interest) and the executed Guaranty will be returned promptly to the rejected Investor. Purchases of fractional Units will be in increments of 1/2 Units at a price of $1,250 in cash and up to a $2,989.20 Guaranty (0.5% of the Partnership's obligations under the Loan) per each 1/2 Unit. The General Partner and its Affiliates may purchase fractional Units in multiples other than 1/2 Units for a proportional purchase price. See "Risk Factors - Operating Risks - Liability Under the Guaranty." The Offering. By this Offering the Partnership seeks to sell in the aggregate 80 Units for $200,000 in cash ($180,000 net of Sales Agent's commissions) and up to $478,272 in personal guaranties of Partnership principal obligations under the Loan. In the event subscriptions for all 80 Units are received and accepted by the General Partner on the Closing Date, all subscription funds (plus interest) and Guaranties held in escrow will be released to the Partnership. If complete subscriptions for all 80 Units are not received and accepted during the subscription period as defined in "Subscription Period" below, the Offering will be terminated and all subscription funds (plus interest) and Guaranties will be returned to the Investors. In order to successfully close the Offering, the General Partner reserves the right for it or any of its Affiliates to purchase up to 50 Units in order to meet the full subscription amount of 80 Units. The purchase of Units by the General Partner or its Affiliates will be on the same terms and conditions as any other Investor, except that (i) their Unit purchase price will be reduced by the savings to the Partnership attributable to no commissions being payable to the Sales Agent on the transaction, and (ii) the General Partner and its Affiliates may purchase fractional Units in multiples other than 1/2 Unit for a proportional purchase price. See "Risk Factors - Other Investment Risks - Purchases by the General Partner and its Affiliates." All subscription funds and Guaranties will be held in an interest bearing escrow account until the Closing or the termination of the Offering. See "Risk Factors" and the Loan Commitment attached hereto as Appendix C. Subscription Period. The subscription period will commence on the date hereof and will terminate at 5:00 p.m., Eastern time, on January 31, 2000 (or earlier, in the discretion of the General Partner, upon the sale of all 80 Units as provided herein), unless sooner terminated by the General Partner or unless extended for an additional period up to 180 days. See "Plan of Distribution." Acceptance of Subscriptions. To enable the Bank and the General Partner to make credit and investor decisions, respectively, the prospective Investor must complete and deliver to the General Partner a Purchaser Financial Statement in the form included in the Subscription Packet accompanying this Summary, or a substitute financial statement containing the same information as provided therein, and pages one and two of the prospective Investor's most recently filed Form 1040 U.S. Individual Income Tax Return. An Investor whose subscription is received and accepted by the General Partner and by the Bank (for purposes of the Guaranty) will become a Limited Partner in the Partnership on the Closing Date. See "Guaranty Arrangements." Subscriptions may be rejected in whole or in part by the General Partner and need not be accepted in the order received. The General Partner reserves the right to reduce any subscriptions, to accept subscriptions for less than a full Unit in satisfaction of the minimum investment requirements, and to allocate subscriptions received in the event the Units are oversubscribed. To the extent the General Partner reduces an Investor's subscription as provided above, the Investor's cash Unit purchase price and Guaranty will be proportionately refunded and reduced. If the General Partner elects to terminate the Offering or if all 80 Units are not timely sold as provided above under "The Offering," all subscription funds (plus interest) and Guaranties will be returned in full within 30 days of such termination. Notice of acceptance of an Investor's subscription to purchase Units, his Percentage Interest in the Partnership and his liability under the Guaranty, will be furnished promptly after the Closing. Closing Date. On the Closing Date, subscriptions to purchase all 80 Units acceptable to the Partnership as provided herein will be accepted and the Investors whose subscriptions were accepted will be admitted as Limited Partners to the Partnership, and the subscription funds and Guaranties will be released from escrow to the Partnership. Each Investor will be required to execute a Guaranty as a part of his subscription. Each Limited Partner will have substantial exposure under his Guaranty. See "Risk Factors - Liability Under the Guaranty." The following summary of certain provisions of the Guaranty does not constitute legal advice. The form of the Guaranty is set forth in the Subscription Packet accompanying this Memorandum and should be reviewed carefully by prospective Investors and their counsel. Liability Under the Guaranty. Each Investor will be required to execute and deliver to the Bank a Guaranty pursuant to which he will personally guarantee the payment by the Partnership of a portion of its obligations to the Bank under the Loan. The Limited Partners will guarantee 80% of such obligations in the aggregate, which includes a principal guaranty obligation of up to $478,272. For each Unit purchased, an Investor will be required to guarantee 1% of the Partnership's total obligations under the Loan, which is equivalent to up to a $5,978.40 principal obligation guaranty per Unit. Liability under the Guaranty may exceed $5,978.40 per Unit because the guaranty obligation per Unit includes not only principal, but also 1% of all accrued and unpaid interest, late payment penalties and legal costs incurred by the Bank in collecting any defaulted payments. See "Proposed Activities - Funding for Partnership Activities." The amount of the Limited Partners' Guaranties will be proportionately reduced from time to time to the extent of the payments made by the Partnership under the Loan. Interest-only will be payable monthly during the first six months of the Loan. At the end of the first six months, the outstanding Loan principal, plus accrued interest, will be payable over 36 monthly installments as provided below. The amount of each of the first 35 equal monthly installments of principal and interest will be equal to the monthly payment resulting from amortization of the outstanding Loan principal over 36 months, assuming a fixed 10% per annum interest rate. A final payment of all outstanding principal and accrued interest will be payable in the 36th month. The 10% interest rate, as provided above, is used only for purposes of calculating the amount of the equal monthly installments over the 35 month period. Loan interest shall actually accrue at the Bank' s Prime Rate, as the same may change from time to time. Pursuant to a formula set forth in the Loan promissory note, prepayments of Loan principal must be made annually out of Partnership Cash Flow until the Loan is paid in full. The General Partner anticipates that Loan principal prepayments will reduce the term of the Loan, and the projections forecast a term of 27 months based on projected operations. Assuming the Partnership borrows $597,840 under the Loan Agreement, the regular monthly installment payments of principal and interest for the term of the Loan after the initial six months will be equal to $19,291 per month. See "Proposed Activities - Funding for Partnership Activities" and the Financial Projections attached hereto as Exhibit A. If Partnership operations generate sufficient revenues to enable the Partnership to make all payments under the Loan to the Bank when due, such payments will be sufficient to repay the Bank fully over the term of the Loan, and no Partner will be required to perform under his Guaranty. However, a default by the Partnership, the General Partner or the Limited Partners under the Loan or the Guaranties will entitle the Bank to exercise one or more of the following remedies: (i) declare all principal payments and accrued interest immediately due and payable; (ii) foreclose on its security interest in the Partnership 's assets (including the Lithotripsy Systems and the Partnership's accounts receivable); and/or (iii) seek payment directly from the Limited Partners under the Guaranties. Events of default include the following: (i) default in the payment or performance of any obligation, covenant or liability contained or referred to in the Loan documents, including the Guaranties, unless remedied to the reasonable satisfaction of Bank within 30 days; (ii) any warranty, representation or statement made or furnished to the Bank by or on behalf of the Partnership or any of its guarantors (including the Limited Partners) proving to have been false in any material respect when made or furnished; (iii) loss, theft, substantial damage, destruction, sale or encumbrance to or of any of the collateral, or the making of any levy, seizure or attachment thereof or thereon, which is not removed within 30 days; (iv) dissolution, termination of existence (or, in the case of an individual guarantor, death), insolvency, business failure, appointment of a receiver of any part of the property of, assignment for the benefit of creditors by, or the commencement of any proceeding under any bankruptcy or insolvency laws by or against the Partnership or any guarantor which is not favorably terminated within 30 days; (v) the Partnership's failure to maintain its existence in good standing unless remedied within 30 days of notice by the Bank; (vi) the assertion or making of any seizure, vesting or intervention by or under authority of any government by which the management of the Partnership is displaced of their authority in the conduct of their business or their business is curtailed; (vii) upon the entry of any monetary judgment or the assessment and/or filing of any tax lien against the Partnership or any guarantor or upon the issuance of any writ or garnishment or attachment against any property of, debts due or rights of the Partnership or such guarantor to specifically include the commencement of any action or proceeding to seize monies of the Partnership or such guarantor on deposit in any bank account with the Bank, which is not removed or terminated within 30 days. However, any default by any one or more of the Partnership's guarantors under the above provisions applicable thereto, will only be an actionable default if one or more such defaulting guarantors either alone or in the aggregate guarantees 25% or more of the Loan, and provided further that the Bank has not, within twelve months of the occurrence of such guarantor's default, received, accepted and approved a substitute guaranty or guaranties from a party or parties acceptable to it in an amount greater than or equal to the amount of such defaulting guarantor's guaranties, or the Partnership has not made a prepayment of the Loan principal in an amount equal to the amount of the defaulting guarantor's guaranty. The Bank may also accelerate the Loan if it should deem itself, or its collateral, insecure or the payment or performance under the Loan impaired and may demand additional collateral at any time it deems the Loan to be insufficiently secured. As discussed below, under the terms of the Guaranties, Limited Partners will waive certain rights to which they might otherwise be entitled, and would be required to pay their share of the Bank's attorneys' fees and court costs if the Bank were successful in enforcing the Guaranties through a lawsuit. See "Proposed Activities - Funding for Partnership Activities" and the Loan Commitment and form of Loan Agreement attached as Appendix C. The Guaranties are a guaranty of payment and not of collection. As a result, the liability of the Limited Partners under the Guaranties is direct and immediate and not conditional or contingent upon either the pursuit of any remedies against the Partnership or any other person (including any other guarantor) or foreclosure of any security interest or liens available to the Bank. The Bank may accept any payment, plan for adjustment of debts, plan for reorganization or liquidation, or plan of composition or extension proposed by, or on behalf of, the Partnership without in any way affecting or discharging the liability of the Limited Partners. Limited Partners will waive any right to require that an action first be brought against the Partnership, the General Partner, any other guarantor or any other person, or to require that resort be had to any security or to any balance of any deposit account or credit on the books of Bank in favor of the Partnership or any other person. The Guaranty is a continuing guaranty that by its terms will survive the death, bankruptcy, dissolution or disability of a Limited Partner guarantor. A Limited Partner's liability under a Guaranty continues regardless of whether the Limited Partner remains a limited partner in the Partnership. Under the terms of the Guaranties, the Limited Partners will expressly waive: (i) notice of acceptance of the guaranty and of extensions of credit to the Partnership; (ii) presentment and demand for payment of the Partnership's promissory note; (iii) protest and notice of dishonor or of default; (iv) demand for payment under the Guaranty; and (v) all other notice to which the Limited Partner might otherwise be entitled. The principal liability of an Investor under the Guaranty will be up to $5,978.40 per Unit, an amount greater than the cash price of a Unit. Accordingly, each Investor should regard his exposure with respect to his investment in the Partnership to be his cash subscription ($2,500 per Unit) plus the amount for which he is personally liable under his Guaranty, up to $5,978.40 per Unit in principal, plus accrued and unpaid interest, as well as late payment penalties, legal fees and court costs. An Investor should not purchase a Unit if he does not have resources sufficient to bear the loss of this entire amount. The Guaranty generally provides that within thirty days following the Bank' s determination that the Partnership is in default under the Loan, the Bank will send a notice to each Limited Partner (the "Notice") setting forth the Partnership's total Loan obligations as of the date of the Notice (inclusive of all interest, late payment penalties and legal costs incurred in connection with the enforcement of such obligation accrued but unpaid through such date), together with a statement of the amount which the Limited Partner is responsible for paying (the "Guaranty Amount"). Failure by the Bank to send the Notice in a timely fashion will not, however, release the Limited Partner guarantor from any liability under his Guaranty. The Notice will provide that unless the Bank receives payment of the Guaranty Amount from the Limited Partner within five business days following the date of the Notice, the Guaranty Amount will be increased by the Limited Partner's pro rata share (based on the number of guarantors who did not pay the Guaranty Amount within five days of the date of the notice) of any additional accrued but unpaid interest, late payment penalties and legal costs through the date such payment is made. Because each Guaranty runs directly from the Limited Partner to the Bank, claims or defenses the Limited Partner may have against the Partnership or the General Partner may not be used to avoid payment under the Guaranty. See the form of the Guaranty included in the Subscription Packet accompanying this Memorandum. See also "Terms of the Offering - Suitability Standards." Approval of Bank. In addition to meeting the suitability requirements discussed below under "Suitability Standards," each Investor must be approved by the Bank for purposes of their delivery of the Guaranty. The Bank has established its own criteria for approving the credit-worthiness of Investors, either individually or as a group, and has not established objective minimum suitability standards. Instead, the Bank is empowered under the Loan Commitment to accept or reject any Investor. See "Risk Factors - Operating Risks - - Liability Under the Guaranty." The Units are being offered and will be sold in reliance on an exemption from the registration requirements of the Securities Act provided in Section 4(2) thereof and Rule 506 of Regulation D promulgated thereunder, as amended, and an exemption from state registration provided by the National Securities Markets Improvement Act of 1996. Only a limited number of investors other than accredited investors, as such term is defined under Regulation D of the Securities Act may purchase Units hereunder. The suitability standards set forth below have been established in order to comply with the terms of these registration exemptions. An investment in the Partnership involves a high degree of financial risk and is suitable only for persons of substantial financial means who have no need for liquidity in their investments and who can afford to lose all of their investment. For purposes of analyzing his investment in the Partnership, each Investor should regard his exposure with respect to his investment to be his cash subscription plus the amount for which he is personally liable under his Guaranty. See "Terms of the Offering - Guaranty Arrangements." An Investor should not purchase a Unit if he does not have resources sufficient to bear the loss of this entire amount. The General Partner anticipates selling Units primarily to individual Investors; however, the General Partner reserves the right to sell Units to other entities, to sell Units to its Affiliates and to purchase Units for its own account. See "Terms of the Offering - General - The Offering." Because of the risks involved, the General Partner anticipates selling the Units only to individual Investors residing in Kentucky who it reasonably believes are "accredited investors" as that term is defined in Rule 501 under the Securities Act, but reserves the right to sell to a limited number of Investors who do not meet these criteria. Certain institutions and the following individuals are "accredited investors": (1) An individual whose net worth (or joint net worth with his 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 spouse a joint income in excess of $300,000 in each of the two most recent fiscal years and who reasonably expects a joint income in excess of $300,000 in the current year. Individual Investors must also be at least 21 years old and otherwise duly qualified to acquire and hold partnership interests. The General Partner reserves the right to refuse to sell Units to any person, subject to 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 "Risk Factors" and "Summary of the Partnership Agreement - Restrictions on Transfer of Partnership Interests." Investors who wish to subscribe for Units must represent to the Partnership that they meet the foregoing standards by completing and delivering to the Sales Agent a Purchaser Questionnaire in the form included in the Subscription Packet accompanying this Memorandum. Each Purchaser Representative, if any, acting on behalf of an Investor in connection with this Offering must complete and deliver to the Sales Agent a Purchaser Representative Questionnaire, which will be made available to an Investor upon request. Investors who meet the qualifications for investment in the Partnership and who wish to subscribe for Units may do so by following the instructions in the Subscription Packet accompanying this Memorandum. All information provided by Investors, including the information in the Purchaser Questionnaire and the Purchaser Financial Statement, will be kept confidential and not disclosed except to the Partnership, the General Partner, the Bank and their respective counsel and Affiliates and, if required, to governmental and regulatory authorities. 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, in the opinion of counsel to the Partnership, an assignment could not be effected without registration under the Securities Act or state securities laws. Moreover, the assignment generally must be made to an individual approved by the General Partner who meets the suitability requirements described in this Memorandum. Assignors of Units will be required to execute certain documents, in form and substance satisfactory to the General Partner, instructing it to effect the assignment. Assignees of Units may also, in the discretion of the General Partner, be required to pay all costs and expenses of the Partnership with respect to the assignment. Any assignment of Units or the right to receive Partnership Distributions in respect of Units will not release the assignor from any liabilities connected with the assigned Units, including liabilities under the Guaranty. An assignee, whether by sale or otherwise, will acquire only the rights of the assignor in the profits and capital of the Partnership and not the rights of a Limited Partner, unless such assignee becomes a substituted Limited Partner. An assignee may not become a substituted Limited Partner without (i) either the written consent of the assignor and the General Partner, or the consent of a Majority in Interest of the Limited Partners (except the assignor Limited Partner) and the General Partner, (ii) the submission of certain documents, and (iii) the payment of expenses incurred by the Partnership in effecting the substitution. An assignee, regardless of whether he becomes a substituted Limited Partner, will be subject to and bound by all the terms and conditions of the Partnership Agreement with respect to the assigned Units. See "Summary of the Partnership Interest - Restrictions on Transfer of Partnership Interests." Subscriptions for Units will be solicited by MedTech Investments, Inc., the Sales Agent. The Sales Agent is an Affiliate of the General Partner. The Sales Agent has entered into a Sales Agency Agreement with the Partnership pursuant to which the Sales Agent has agreed to act as exclusive agent for the placement of the Units on a "best efforts" all or none 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 may be engaged in other similar offerings on behalf of the Affiliates of the General Partner during the pendency of this Offering and in the future. Investors should note the material relationship between the Sales Agent and the General Partner, and are advised that the relationship creates conflicts in the Sales Agent's performance of its due diligence responsibilities under the federal securities laws. As compensation for its services, the Sales Agent will receive a commission equal to $250 for each Unit sold. No commission is payable to the Sales Agent unless all 80 Units are sold as provided herein, and a successful Closing has occurred. In addition, no commission will be payable with respect to Units sold to the General Partner or its Affiliates. No other commissions will be paid in connection with this Offering. Subject to the conditions 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 $10,000. The Partnership has agreed to indemnify the Sales Agent against certain liabilities, including liabilities under the Securities Act. The Partnership will not pay the fees of any purchaser representative, financial advisor, attorney, accountant or other agent retained by an Investor in connection with his decision to purchase Units. The General Partner reserves the right for it and its Affiliates (including the Sales Agent) to acquire Units for their own account, and the General Partner and its Affiliates may purchase up to 50 Units in order to meet the full subscription amount of 80 Units required to successfully close the Offering. See "Terms of the Offering - General - The Offering" and "Risk Factors - Other Investment Risks - Purchases by General Partner and its Affiliates." The subscription period will commence on the date hereof and will terminate at 5:00 p.m., Eastern time, on January 31, 2000 (or earlier, in the discretion of the General Partner, upon the sale of all 80 Units as provided herein and the consummation of the Liquidation), unless extended at the discretion of the General Partner for an additional period not to exceed 180 days. Investors whose subscriptions have been accepted will not be admitted as Limited Partners to the Partnership until all 80 Units are sold. An Investor whose subscription is received and accepted will become a Limited Partner in the Partnership on the Closing Date. Subscriptions may be rejected in whole or in part by the Partnership and need not be accepted in the order received. The Partnership reserves the right to reduce any subscriptions, to accept subscriptions for less than a full Unit in satisfaction of the minimum investment requirements and to allocate subscriptions received in the event the Units are oversubscribed. See "Terms of the Offering - General - Acceptance of Subscriptions." If the General Partner elects to terminate the Offering, or all 80 Units are not timely purchased as provided herein, all subscription funds (plus interest) and Guaranties will be returned within 30 days of such termination. Notice of acceptance of an Investor's subscription to purchase Units, his Percentage Interest in the Partnership and his liability under the Guaranty will be furnished promptly after the Closing. To the extent the Partnership reduces an Investor's subscription as provided above, the Investor's cash Unit purchase price and Guaranty will be proportionally refunded and reduced. All subscription funds and Guaranties will be held in an interest bearing escrow account with the Escrow Agent until the Closing or the termination of the Offering. The primary purposes of the Partnership are (i) to improve the provision of health-care in the Service Area by taking advantage of the technological innovations offered by the Lithotripsy Systems and the Partnership's quality assurance and outcome analysis programs, and (ii) to make cash distributions to its Partners from revenues generated from the operation of the Lithotripsy Systems. No assurance can be given that these efforts will be successful. See "Risk Factors." The Partnership intends to purchase the Lithotripsy Systems and begin lithotripsy operations in the Service Area as soon as possible after the Closing of the Offering. 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. Ap-proxi-mately 75% of all urinary stones pass spontaneously, usually within one to two weeks, and require little or no clinical or surgical intervention. All other kidney stones, however, require some form of medical or surgical treatment. A number of methods are currently used to treat kidney stones. These methods include drug therapy, endoscopic and laser procedures, open surgery, percutaneous lithotripsy and extracorporeal shock wave lithotripsy. The type of treatment a urologist chooses depends on a number of factors such as the size of the stone, its location in the urinary system and whether the stone is contributing to other urinary complications such as blockage or infection. The extracorporeal shock-wave lithotripter, introduced in the United States from West Germany in 1984, has dramatically changed the course of kidney stone disease treatment. The General Partner estimates that currently up to 95% of all kidney stones that require treatment can be treated by lithotripsy. Lithotripsy involves the use of shock waves to disintegrate kidney stones noninvasively. Upon the successful completion of the Offering, the Partnership will use the Loan proceeds to acquire (i) a new Storz Modulith(R) SLX-T model extracorporeal shock-wave lithotripter (estimated at $400,000), (ii) a new mobile transport vehicle (estimated at $70,000), (iii) a used Dornier HM-3 model extracorporeal shock-wave lithotripter (estimated at $60,000), (iv) a used mobile trailer to house the Dornier HM-3 (estimated at $21,500) and (v) a used tractor truck to transport the trailer (estimated at $12,500). The Loan will be guaranteed 80% by the Limited Partners in the aggregate and 20% by the General Partner. A default by the Partnership, the General Partner or the Limited Partners under the Loan or their respective Guaranties could result in, among other things, a foreclosure on the Lithotripsy Systems and enforcement against the Guaranties. See "Terms of the Offering - Guaranty Arrangements" and "Proposed Activities - Funding for Partnership Activities" for a description of the terms of the Guaranties and of the Loan. Investors are urged to review carefully the Loan Commitment (with exhibits) attached hereto as Appendix C and the form of Guaranty Agreement included in the Subscription Packet accompanying this Memorandum. Used Equipment. The Partnership will acquire a Dornier HM-3 lithotripter housed in a tractor-trailer configuration from the General Partner. The Dornier HM-3 is manufactured by Dornier Medizintechnik GmbH, Germany ("Dornier"). The unit consists of a stainless steel water tub, patient positioning unit, shock-wave generator, radiological localization system, hydraulic supply system, water treatment system and control cabinet. The localization system, which employs two image intensifiers, allows normal and high-current fluoroscopy. The control cabinet contains control units for both image intensifiers, TV monitors and video image memory. After positioning the patient in the tub, the image intensifiers are swung by hand into the centered position and are moved along the cental beams by motor. The shock-wave generation system consists of the capacitor charging unit, the pulse generator, shock-wave generator, ECG-trigger unit, ellipsoid reflector and underwater electrode. The underwater electrode is mechanically linked to the reflector and is positioned in such a way that the electric energy is discharged exactly in the lower focus. The shock-wave energy, which can be controlled within defined limits, is taken from the charging unit and stored in the shock-wave generator. The spark pulses are released synchronously to the R-waves of the ECG-signals via the ECG triggering unit. The spark pulses cause energy discharges in the form of arcs between the electrode tips of the underwater electrode leading to explosive vaporizations of the water in the zone of the arc. The resulting shock-waves are reflected by the ellipsoid wall and concentrated in the upper focus where the kidney stone is located. The patient positioning unit enables the exact line-up of the kidney stone in the upper focus of the reflector. The patient is placed on a support which makes possible the optimum application of the shock-waves in accordance with the individual anatomic conditions. The movement of the patient support in the three coordinates is performed by a positioning unit, which is guided by a guideway installed on the ceiling of the trailer. The positioning procedure is performed hydraulically and controlled via the control cabinet. The HM-3 has been upgraded by the (i) installation of a larger ellipsoid and 40 nanofarad generator which enables treatment without the need for general anesthesia; (ii) installation of a Stryker Frame and manual gantry controls which enable treatment stones in the distal third of the ureter; and (iii) replacement of all x-ray glassware. The lithotripter has been in operation several years, and other than the upgrades described above, typically requires only routine maintenance and repair. The General Partner currently contracts with Servicetrends, Inc. ("Servicetrends") to provide maintenance for the HM-3 at an annual cost of $33,000, and anticipates that the Partnership will also contract with Servicetrends for the same services and under the same terms. The trailer is a 1991 Calumet Coach. The trailer is upfitted to house the HM-3 lithotripter and contains a generator and an HVAC system, is fully wired and is fitted with expanding sides to accommodate operation of the lithotripter. During the first year of Partnership operations, the General Partner anticipates (subject to the approval of the Partnership's Medical Advisory Board) that the Partnership will use a portion of the Partnership's working capital, Cash Flow and/or reserves (estimated at $60,000) and contract with Servicetrends and AK Associates, L.L.C. (or other similar services providers) to refurbish the Dornier HM-3 and trailer, respectively. Such refurbishments, if undertaken, will only occur after the Partnership's new Modulith(R) SLX-T is in service, and therefore, the General Partner does not expect that the Partnership will need to rent a "loaner" Lithotripsy System during the time the Dornier HM-3 and trailer are being reconditioned. The trailer is transported from site to site by a 1988 Kenworth Tractor Model T-800 truck. The tractor truck is powered by a 350 Cummins engine and an Eaton 9-speed transmission. The mileage on the tractor truck is in excess of 500,000 miles; however the engine underwent a complete re-build in Spring 1999. The Partnership will pay for service of the trailer and truck on an as needed basis. The General Partner anticipates that expenditures for maintenance and repair of the transport vehicle (trailer and truck) will be approximately $20,000 per year. See "Compensation and Reimbursement to the General Partner and its Affiliates." New Equipment. The Partnership will also acquire a new Storz Modulith(R) SLX-T model extracorporeal shock-wave lithotripter and a new mobile vehicle to transport the lithotripter from site to site. Due to a special volume discount arrangement between Storz and Prime, Storz has agreed to provide the Partnership with a Modulith(R) SLX-T lithotripter together with accessories for an estimated purchase price of $400,000, which price reflects approximately a 24% discount ($125,000) from Storz's current list price of $525,000. The Modulith(R) SLX-T received FDA premarket approval on March 27, 1997. The reliability and efficacy risks associated with operating the Modulith(R) SLX-T are especially acute because the Modulith(R) SLX-T is so new. The General Partner and its Affiliates have limited experience with the use of the Modulith(R) SLX-T lithotripter. Preliminary reports from abroad and "word of mouth" anecdotal evidence indicates that the Modulith(R) SLX-T is as effective as most of the "portable" lithotripters in the market. See "Risk Factors - Operating Risks - Reliability and Efficacy of the Storz Modulith(R) SLX-T." The Modulith(R) SLX-T was especially adapted for the treatment of urological stones. In addition to the efficient fragmentation of all types of urinary tract stones, the Modulith(R) SLX-T is suitable for performing a range of urological examinations including cystoscopy and ureterorenoscopy. The Modulith(R) SLX-T consists of a cylindrical pressure wave generator, an OEC 9600 C-arm x-ray system unit and a patient table. The Modulith (R) SLX-T generates pressure waves electromagnetically from the cylindrical energy source and parabolic reflector. The pressure wave generator operates without an acoustic lens, thus avoiding such disadvantages as energy dissipation and aperture limitations. The pressure at the focal point can be varied by means of the energy control in nine steps from 10 Mpa to 100 Mpa. The energy source is fitted with an axial and lateral air-bag. When expanded during fluoroscopy, these air-bags ensure optimal X-ray image quality for monitoring purposes. The pressure wave coupling is dry (water cushion is used). The shock-wave may be released at fixed frequencies of 1 Hz, 1.5 Hz or 2 Hz, or may be triggered using the ECG and/or respiration. The mode of triggering is chosen by the attending physician. Standby readiness and all safety features of the Modulith(R) SLX-T are electronically monitored and displayed. The Modulith (R) SLX-T localizes stones using an OEC 9600 C-arm X-ray system. The C-arm laterally rotates into over- and under-table positions to allow display of the entire ureter without repositioning the patient, and the pressure generator can be rotated out of the X-ray path. The attending physician can choose between pa/ap, lateral and cranio-caudal projections for fluoroscopy. Further localization and focus adjustment is available with reduced radiation exposure using a collimated-field view through the center of the treatment head. When adjusting for stone localization in the vertical direction, wide-field view fluoroscopy can be carried out at any angle between 90(degree) and + 30(degree) in a lateral direction and, independently, between 90(degree) and + 30(degree) in the cranio-caudal direction. Vertical in situ fluoroscopy limits the range to between 0 (degree) and + 30(degree) in the lateral direction. The X-ray technique employs a continuously adjustable, elliptical, round, and rectangular collimator, an image intensifier, cassette film, digital spot imaging capability and two high resolution 16" monitors capable of displaying four stored digital images. The patient table can be moved electronically in all three dimensions, and a floating function allows manual adjustment in the horizontal direction. The table is X-ray transparent and allows visualization of the entire urinary tract. The table includes a patient cradle which provides comfortable and secure support in the prone, supine and lateral positions. Upon the successful Closing of the Offering, the Partnership will order a Modulith(R) SLX-T from Storz. The General Partner anticipates that it will take approximately 90 days for delivery of a Modulith(R) SLX-T lithotripter after it is ordered on behalf of the Partnership. Storz will provide the Partnership with technical support to facilitate installation and testing of the Modulith(R) SLX-T. The Modulith(R) SLX-T comes with an eighteen month limited warranty during which time all maintenance, repairs, shock tubes, glassware and capacitors will be provided free of charge. The Storz maintenance contract in future years covers the same items listed above and is currently quoted at an annual price of $40,000. The General Partner intends to enter into this maintenance contract on behalf of the Partnership. Any expenses for maintenance and repairs not covered by the warranty or service contract will be obligations of the Partnership. See "Risk Factors-Operating Risks-Partnership Limited Resources and Risks of Leverage." The General Partner will also cause the Partnership to purchase and upfit a new mobile vehicle to transport the lithotripter from site to site. The Partnership will not purchase the manufacturer's, or seller's, as the case may be, service contract. Instead, the Partnership will pay for service on an as needed basis. The General Partner anticipates that expenditures for maintenance and repair of the transport vehicle will be approximately $500 per month ($6,000 annually). The General Partner anticipates that the Partnership will purchase a Ford 400 Series truck (or an equivalent model truck from an alternative manufacturer) which will be customized to include a 14' cargo box to house the lithotripter while it is transported from site to site. The floor of the truck will be loading dock height so the lithotripter can be easily loaded on and off the truck at each treatment facility. The truck will also be upfitted with a lift gate with a load capacity of 3000 pounds for easy loading of the lithotripter from street level. The truck will be modified for securing the lithotripter and its accessories during transport and for heating the cargo box during the winter to prevent freezing of the lithotripter and its components. The General Partner currently provides mobile lithotripsy services in the Service Area under the name of Tennessee Valley Lithotripter. The General Partner provides such services using a Dornier HM-3 lithotripter and pursuant to Service Contracts with various hospitals including the following: Owensboro Mercy Medical Center in Owensboro; Lourdes Hospital in Paducah; Regional Medical Center in Madisonville; Jennie Stuart Medical Center in Hopkinsville; Community United Methodist Hospital in Henderson; and Greenview Hospital in Bowling Green (collectively, the "Contract Hospitals"). The Service Contracts require the General Partner to make lithotripsy services available at the Contract Hospitals. The Contract Hospitals generally pay the General Partner a fee for each lithotripsy procedure performed at that Contract Hospital. Three of the Service Contracts grant the General Partner the exclusive right to provide lithotripsy services at the particular Contract Hospital, however, all of the Services Contracts have very short terms ranging from less than a month to approximately one and one-half years. In any event, most of the Service Contracts may be terminated without cause upon 90 days notice by either party at anytime. The Community United Methodist Hospital contract and the Owensboro Mercy Medical Center contract are continuing on a month-to-month basis. The General Partner has received a notice of termination from Regional Medical Center. As of the date of the Memorandum, the fair market value of the Service Contracts as determined by an independent third party valuation firm is $20,691. However, due to the short terms of the Service Contracts, the ability of the treatment facilities to terminate a majority of the Service Contracts at any time upon 90 days notice and other factors noted above, the valuation firm has also determined that as of the anticipated Closing Date the Service Contracts will have no aggregate fair market value. See "Sources and Applications of Funds." The General Partner intends to negotiate on behalf of the Partnership with the Contract Hospitals to terminate their existing contracts and to enter into new agreements with the Partnership for the Partnership to provide lithotripsy services at those facilities. Alternatively, to the extent permissible under contract law, the General Partner may attempt to assign the existing Service Contracts to the Partnership. In cases where the agreement requires the consent of the other party to the assignment, the General Partner will use reasonable efforts to obtain such consent. If the General Partner is unable to obtain the consent of a facility to the assignment, the General Partner will continue to provide lithotripsy services to the facility for the remaining term of the agreement, in which case the General Partner will be competing directly with the Partnership at that location. See "Competition - Affiliated Competition." No assurance can be given that the General Partner will be successful in procuring new contracts with the Contract Hospitals or assigning the Service Contracts to the Partnership. The General Partner intends that new agreements with the Contract Hospitals and other health care facilities will be on financial terms substantially similar to those in the existing Service Contracts. There can be no assurance that the General Partner will be successful in negotiating contracts on financial terms comparable to those in existing Service Contracts, or at all. Several of the Service Contracts have been amended from time to time to provide for, among other things, lower payments per procedure to the General Partner. It is expected that most Partnership lithotripsy service contracts would obligate the Partnership to make the Lithotripsy Systems available to health care centers at specified times in exchange for payments to the Partnership based on the number of procedures performed by the health care center with the Lithotripsy Systems. The General Partner expects that the agreements would have multi-year terms and be automatically renewed unless either party elects to cancel prior to the end of the term. See "Risk Factors - Competition." General. It is anticipated that the Partnership will continue to provide lithotripsy services under the Service Contracts and similar arrangements. See "Proposed Activities - Service Contracts" and "Risk Factors - Operating Risks - Contract Terms and Termination." Qualified physicians may use the Lithotripsy Systems in accordance with the rules of the applicable health care facility. See "Regulation" and "Risk Factors - Tax Risks - Disqualification of Employee Benefit Plans." The Partnership may also make arrangements to make the Partnership's Lithotripsy Systems available to qualified physicians (including but not limited to qualified physician Limited Partners) desiring to treat patients using the lithotripters. It is anticipated that all qualified physicians desiring to treat their own patients using the lithotripters may do so after they have received any necessary training. The General Partner and Management Agent will endeavor to the best of their abilities to require that physicians using a Partnership lithotripter comply with the Partnership's quality assurance and outcome analysis programs in order to maintain the highest quality of patient care. In addition, the General Partner reserves the right to request that (i) physicians (or members of their practice groups) treat only their own patients with a Partnership lithotripter, and (ii) physician Limited Partners disclose to their patients in writing their financial interest in the Partnership prior to treatment, if it determines that such practices are advisable under applicable law. The former requirement is mandatory under Kentucky law. See "Regulation." The treating qualified physicians or the health care facilities will be solely responsible for billing and collecting on their own behalf the professional service component of the treatment procedure. Owning an interest in the Partnership is not a condition to using a Partnership lithotripter. Thus local qualified physicians that are not Limited Partners will be given the same opportunity to treat their own patients using a Partnership lithotripter as provided above. New Services. After the Closing Date, in addition to operating, if possible, under the Service Contracts, the General Partner and/or the Management Agent will also attempt to negotiate on behalf of the Partnership with other hospitals and treatment facilities located primarily in the Service Area regarding operating the Lithotripsy Systems at their facilities. There can be no assurance that any such commitments will be forthcoming on terms acceptable to the Partnership. The General Partner, in its sole discretion, has the authority to expand Partnership lithotripsy operations throughout, and outside of the Service Area. After consultation with the Partnership's Medical Advisory Board and Medical Director, the travel itinerary of the Lithotripsy Systems will be determined by the General Partner. See "Proposed Activities - Management and Administration." The travel schedule is expected to be influenced by the requirements of the Service Contracts, the number of treating physicians and patients in particular areas and Partnership arrangements with various hospitals and other health care facilities located primarily in the Service Area. The General Partner also expects to consult with the Limited Partners regarding locations for the Lithotripsy Systems. The General Partner anticipates the Partnership will be able to obtain new pad site space and utility hook-ups from local hospitals and treatment centers at little or no charge for the Dornier HM-3. It is further anticipated that the transportable Modulith(R) SLX-T and its components will be moved into a surgery room at the host treatment facility. After treatment with the Modulith(R) SLX-T (estimated at 30-60 minutes in duration), the patient will be moved from the surgery room to a post-anesthesia recovery area of the treatment facility for recovery, discharge instructions and discharge at the direction of the treating physician and/or anesthesiologist. In addition, the General Partner believes the local hospitals or treatment centers will also bear certain responsibilities and costs associated with the Lithotripsy Systems, all in exchange for such entities sharing in Lithotripsy Systems revenues through a fee billed by them (or a fee paid to them by the Partnership) for each lithotripsy procedure. See "Proposed Activities - Management and Administration." Charges for Lithotripsy Procedures. Based on historical operating history regarding the Service Contracts and anticipated new treatment opportunities, the Financial Projections forecast that when fully operational the Partnership will use the Lithotripsy Systems to perform 650 lithotripsy procedures per year and that the gross Partnership fee per procedure for patients will be at least $2,200. There can be no assurance that the Partnership will perform at the procedure levels as forecast in the Financial Projections or as anticipated by the General Partner. See "Risk Factors." The $2,200 estimated fee as provided above represents compensation only for the technical component of the lithotripsy procedure and represents an average reimbursement level for all patients to be treated with the Partnership's Lithotripsy Systems. It is anticipated that the Management Agent will be responsible for patient scheduling as well as billing and collection for the technical component of the lithotripsy procedure. There can be no assurance that lithotripsy procedure fees approaching those estimated by the General Partner may be charged or maintained by the Partnership. The prices that the Partnership will be able to charge hospitals and other health care centers for the lithotripsy of kidney stones is significantly dependent upon the amount of reimbursement private health care insurers will allow for this procedure. The General Partner anticipates that over time reimbursement amounts for both the professional component and technical component of the lithotripsy procedure may continue to decrease as technological innovations continue to make this procedure simpler and less costly. A 2,000 page report released by the federal Health Care Financing Administration indicates that the professional component of Medicare payments for lithotripsy procedures may soon be greatly reduced because of the relative simplicity and risk-free nature of the procedure. See "Risk Factors - Operating Risks - Impact of Insurance Reimbursement" and "Regulation." General. The General Partner intends that financing for the Partnership's acquisition of the Lithotripsy Systems, any costs associated with the acquisition of the Service Contracts and the Partnership's start-up, syndication, organization and working capital expenses will come from borrowings under the Loan, the cash proceeds of this Offering and the initial cash contribution of the General Partner. See "Proposed Activities - Service Contracts." In addition, the General Partner anticipates (subject to the approval of the Partnership's Medical Advisory Board) that during the first year of Partnership operations, the Partnership will use a portion of the Partnership's working capital, Cash Flow and/or reserves (estimated at $60,000) and contract with certain service providers (including Affiliates of the General Partner) to refurbish the used Dornier HM-3 and used trailer. See "Proposed Activities - Acquisition of Lithotripsy Systems - Used Equipment." Although each Limited Partner remains liable to the Bank as provided in his Guaranty, no assessments will otherwise be imposed upon or requested of the Limited Partners. See "Proposed Activities - Acquisition of Additional Assets" for a description of the General Partner's authority to borrow additional funds on behalf of the Partnership to acquire additional Partnership assets. See the Loan Commitment (with Exhibits) and form of Loan Agreement attached as Appendix C for a detailed description of the terms of the Loan. Investors should note that the Loan Agreement, the promissory note and the security agreement are subject to minor modifications at or prior to the Loan closing to meet the requirements of local counsel for purposes of an enforceability opinion. Furthermore, certain amendments to the terms of the Loan may be made at any time without the consent of the Limited Partners. Outlined below are a few of the key terms of the Loan. The Partnership will borrow up to $597,840 to (i) acquire one new Storz Modulith(R) SLX-T extracorporeal shock-wave lithotripter with accessories (estimated at $400,000); (ii) acquire and upfit one new mobile vehicle to transport the new lithotripter from site to site (estimated at $70,000); (iii) acquire one used Dornier HM-3 extracorporeal shock-wave lithotripter (estimated at $60,000); (iv) acquire one used trailer to house the Dornier HM-3 lithotripter (estimated at $21,500); (v) acquire one used tractor truck to transport the trailer housing the Dornier HM-3 lithotripter (estimated at $12,500); and (vi) pay state sales and use taxes on the purchase of the Lithotripsy Systems (estimated at $33,840). See "Proposed Activities - Acquisition of the Lithotripsy Systems." Interest-only will be payable monthly during the first six months of the Loan. At the end of the first six months, the outstanding Loan principal, plus accrued interest, will be payable over 36 monthly installments as provided below. The amount of each of the first 35 equal monthly installments of principal and interest will be equal to the monthly payment resulting from the amortization of the outstanding Loan principal over 36 months, assuming a fixed 10% per annum interest rate. A final payment of all outstanding principal and accrued interest will be payable in the 36th month. The 10% interest rate, as provided above, is used only for purposes of calculating the amount of the equal monthly installments over the 35 month period. Interest shall actually accrue during the entire 42 month term of the Loan at the variable rate provided above. The Bank also imposes an additional charge of 4% of the unpaid balance of any payment past due for 15 days or more. The Partnership is required to make an annual principal prepayment determined pursuant to the following formula: CF - PTL - MRP = Prepayment. In this formula, (i) CF, cash flow of the Partnership, is defined as the excess of gross income from all sources over all operating expenses (excluding depreciation), less capital expenditures permitted under the Loan and regularly scheduled principal payments on Partnership indebtedness; (ii) PTL is the tax liability of the Partners to pay taxes on their share of Partnership taxable income, assuming a combined federal and state tax liability of 40% and treating the General Partner as an individual partner for purposes of this determination; and (iii) MRP, the minimum return to Partners, is an amount equal to 25% of cash flow as defined above. The General Partner anticipates that Loan principal prepayments will reduce the term of the Loan, and the Financial Projections forecast a term of 27 months based on projected operations. Assuming the Partnership borrows $597,840 under the Loan Agreement, the regular monthly installment payments of principal and interest for the term after the initial six months will be equal to $19,291 per month. See the Financial Projections attached hereto as Exhibit A. Additional prepayments of principal and interest can be made without penalty. Moreover, the Partnership will be required to furnish the Bank with annual and monthly financial statements each year, and maintain liability, hazard and other insurance acceptable to the Bank. Borrowings under the Loan Agreement will be secured 80% by the Limited Partner Guaranties and by a first and prior lien on all existing and after acquired assets of the Partnership, including the Lithotripsy Systems and the Partnership's accounts receivable. The Loan will also be guaranteed 20% by the General Partner. Except to the extent of their interests in Partnership assets, the Limited Partners will not be personally liable for the Loan other than pursuant to their Limited Partner Guaranties. See "Terms of the Offering - Guaranty Arrangements." The Loan Agreement will prohibit, among other things, (i) the creation of additional liens on the Lithotripsy Systems and (ii) the sale or transfer of the Lithotripsy Systems without the written consent of the Bank. A default by the Partnership, the General Partner or the Limited Partners under the Loan or the Guaranties (or the guaranty given by the General Partner) will entitle the Bank to exercise any one or more of the following remedies: (i) declare all principal payments and accrued interest immediately due and payable; (ii) foreclose on its security interest in the Partnership's assets (including the Lithotripsy System and the Partnership's accounts receivable); and/or (iii) seek payment directly from the Limited Partners under the Guaranties. Events of default include but are not limited to the following: (i) default in the payment or performance of any obligation, covenant or liability contained or referred to in the Loan documents, including the Guaranties, unless remedied to the reasonable satisfaction of the Bank within 30 days; (ii) any warranty, representation or statement made or furnished to the Bank by or on behalf of the Partnership or any of its guarantors (including the Limited Partners, and the General Partners) proving to have been false in any material respect when made or furnished; (iii) loss, theft, substantial damage, destruction, sale or encumbrance to or of any of the collateral, or the making of any levy, seizure or attachment thereof or thereon, which is not removed within 30 days; (iv) dissolution, termination of existence (or, in the case of an individual guarantor, death), insolvency, business failure, appointment of a receiver of any part of the property of, assignment for the benefit of creditors by, or the commencement of any proceeding under bankruptcy or insolvency laws by or against the Partnership or any guarantor which is not favorably terminated within 30 days; (v) the Partnership's failure to maintain its existence in good standing unless remedied within 30 days of notice by the Bank; (vi) the assertion or making of any seizure, vesting or intervention by or under authority of any government by which the management of the Partnership is displaced of their authority in the conduct of their business or their business is curtailed; and (vii) upon the entry of any monetary judgment or the assessment and/or filing of any tax lien against the Partnership or any guarantor or upon the issuance of any writ or garnishment or attachment against any property of, debts due or rights of the Partnership or such guarantor to specifically include the commencement of any action or proceeding to seize monies of the Partnership or such guarantor on deposit in any bank account with Bank, which is not removed or terminated within 30 days. However, any default by any one or more of the Partnership's guarantors under the above provisions, will be an actionable default only if one or more such defaulting guarantors either alone or in the aggregate guarantees 25% or more of the Loan, and provided further, that the Bank has not, within twelve months of the occurrence of such guarantor's default, received, accepted and approved a substitute guaranty or guaranties from a party or parties acceptable to it in an amount greater than or equal to the amount of such defaulting guarantor's guaranties, or the Partnership has not made a prepayment of the Loan principal in an amount equal to the amount of the defaulting guarantor's Guaranty. The Bank may also accelerate the Loan if it should deem itself, or its collateral, insecure, or the payment or performance under the Loan impaired and may demand additional collateral at any time it deems the Loan to be insufficiently secured. See the Loan Commitment attached as Appendix C, the form of Guaranty Agreement attached as an exhibit to the Loan Commitment, and "Terms of the Offering - Guaranty Arrangements." Other Borrowings. Subject to certain limitations set forth in the Loan documents and/or the Partnership Agreement, the Partnership is permitted to incur indebtedness for any purpose and such indebtedness may be secured by Partnership assets. Additional indebtedness will be incurred only if the General Partner expects that Partnership revenues will be sufficient for repayment. See "Proposed Activities - Acquisition of Additional Assets." It is expected that additional Partnership indebtedness, if any, will consist primarily of borrowings from commercial banks, and advances from suppliers and other companies. Although it is not expected to occur, the General Partner or any of its Affiliates may also make loans to the Partnership. In such event, neither the General Partner nor any such Affiliate will make any loans to the Partnership on terms and conditions less favorable than those that the Partnership could obtain from unaffiliated third parties or banks for the same purposes (without reference to the General Partner's financial abilities). Any advances made by the General Partner, or an Affiliate, to the Partnership will not obligate the General Partner, any such Affiliate or any other Affiliate of the General Partner, to make future advances to the Partnership. The Partnership may not make loans to the General Partner or any of its Affiliates. Borrowings by the Partnership must be used solely for the benefit of the Partnership. See "Conflicts of Interest." There can be no assurance that the Partnership will be able to borrow funds (other than under the Loan) on terms satisfactory to the Partnership. The Partnership's ability to borrow will depend in large part on the success of its activities. Neither the General Partner nor its Affiliates is obligated to guarantee or otherwise provide security for Partnership borrowings, or lend funds directly to the Partnership, however, the General Partner reserves the right to take such actions in order to provide financing for the benefit of the Partnership. Partnership borrowings will be repaid from Partnership revenues, thereby reducing the amounts available for Distributions and creating the risk that a Limited Partner's tax liability on his share of the Partnership's taxable income may be greater than the amounts distributed to him. See "Risk Factors - Operating Risks - Partnership Limited Resources and Risks of Leverage" and "Risk Factors - Tax Risks - Income in Excess of Distributions." While the General Partner does not anticipate that it would cause the Partnership to incur indebtedness unless cash generated from Partnership operations were at the time expected to enable repayment of such loan in accordance with its terms, lower than anticipated revenues and/or greater than anticipated expenses could result in the Partnership's failure to make payments of principal or interest when due under such a loan and the Partnership's equity being reduced or eliminated. In such event, the Limited Partners could lose their entire investment. See "Proposed Activities - Funding For Partnership Activities" and the Financial Projections attached to this Memorandum as Appendix A. If in the future the General Partner determines that it is in the best interest of the Partnership to acquire (i) one or more fixed base or mobile Lithotripsy Systems, (ii) any other urological device or equipment, so long as such device has FDA premarket approval at the time it is acquired by the Partnership, and/or (iii) an interest in any business entity that engages in a urological business described above, the General Partner has the authority (subject to certain limitations set forth in the Partnership Agreement) to establish reserves or, subject to certain restrictions in the Loan, 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. As provided in the Partnership Agreement, the General Partner may not incur any single capital expenditure, any long-term debt or any single borrowing of the Partnership during any twelve-month period in excess of $100,000 without the prior approval of a Majority in Interest of the Limited Partners. In addition, the consent of a Majority in Interest of the Limited Partners is required prior to the Partnership engaging in any Dilution Offering to raise capital for the acquisition of additional assets. See "Summary of the Partnership Agreement - Powers of the General Partner and Limited Partners' Voting Rights." See also the form of Partnership Agreement attached hereto as Appendix B. The acquisition of such assets likely would result in higher operating costs for the Partnership. The General Partner does not anticipate acquiring additional Partnership assets unless projected Partnership Cash Flow or proceeds from a Dilution Offering are sufficient to finance such acquisitions. See "Summary of the Partnership Agreement - Dilution Offerings." No Limited Partner would be personally liable on any additional Partnership indebtedness (other than under his Guaranty) without such Limited Partner's prior written consent. There is no assurance that additional financing would be available to the Partnership to acquire additional assets or to fund any additional working capital requirements. Any additional borrowing by the Partnership will serve to increase the risks to the Partnership associated with leverage, as well as to increase the risks that cash from operations will be insufficient to fund the obligations secured by the Limited Partners' Guaranties. Further, a default under any such loan could severely and negatively impact the Partnership. See "Risk Factors - Operating Risks - Partnership Limited Resources and Risks of Leverage" and "Risk Factors - Operating Risks - Liability Under the Guaranty." Management Fee . Pursuant to the Management Agreement, the Management Agent will contract with the Partnership to supervise and coordinate the management and administration of the day-to-day operations of the Lithotripsy Systems for a monthly fee equal to the greater of 7% of Partnership Cash Flow per month or $8,000 per month (beginning as of the Closing Date). See "Compensation and Reimbursement to the General Partner and its Affiliates." The Management Agent may, upon the approval of the General Partner, engage at the Partnership's expense one or more local Medical Directors to provide consultation regarding patient needs and treatment. All costs incurred by the Management Agent in performing its duties under the Management Agreement and costs under related contracts will be the responsibility of, and will be paid directly or reimbursed to it by, the Partnership. The Management Agent is the management agent for various affiliated lithotripsy enterprises. As a consequence, many of the Management Agent's employees provide various management and administrative services for numerous entities, including the Partnership. In order to properly allocate the costs of such employees and other overhead expenses among the entities for which they provide services, such costs will be divided among all the entities based upon the relative number of patients treated by each. The General Partner believes that the sharing of personnel and other costs among various entities results in significant cost savings for the Partnership. Management Duties of the Management Agent. Investors are urged to review carefully the Management Agreement, the form of which is attached hereto as Appendix D. The Management Agent's services under the Management Agreement generally will include the supervision and coordination of any necessary lithotripsy training of the qualified physicians, arranging for the continuing education of the qualified physicians in lithotripsy techniques, the provision of lithotripsy related services, housekeeping, laundry, equipment maintenance, medical and office supply inventory and other incidental services necessary for efficient operation of the Lithotripsy Systems. The Management Agent will also be responsible for implementing and overseeing the Partnership's quality assurance and outcome analysis programs. The General Partner and Management Agent will endeavor to the best of their abilities to require that physicians using a Partnership lithotripter comply with the Partnership's quality assurance and outcome analysis programs in order to maintain the highest quality of patient care. Except as otherwise provided below, the Management Agent will also employ on behalf of the Partnership certain nonphysician personnel reasonably necessary to staff and operate the Lithotripsy Systems, including, without limitation, drivers, lithotripsy technicians, secretary/receptionists and office managers. All such personnel will at all times remain employees and the financial responsibility of the Partnership, and the Management Agent may increase or decrease each Lithotripsy System's personnel to the extent the Management Agent deems it would benefit the Partnership's operations. See "Proposed Activities - Employees and Benefits" below. The General Partner may contract to have the center or hospital provide most of the necessary nonphysician personnel to staff and operate the Lithotripsy Systems, in which case such personnel would remain the responsibility of the treatment center or hospital. The Financial Projections, attached hereto as Appendix A, assume that the Partnership will engage two drivers and two technicians and that the hospitals will provide all supplies. The Management Agent generally will also be responsible for the billing and collection of amounts owed to the Partnership, the scheduling of patients and coordinating professional urological services for treatments on the Partnership's lithotripters. The Management Agent's engagement by the Partnership under the Management Agreement will be as an independent contractor, and neither the Partnership nor its Limited Partners will have any authority or control of the method or manner in which the General Partner performs its duties pursuant to the Management Agreement. The Management Agreement vests in the Management Agent full operational control of all aspects of management and administration of the Lithotripsy Systems. The term of the Management Agreement is for five years, and will be automatically renewed for up to three successive five-year terms unless terminated by the Partnership or the Management Agent. The Management Agent, upon consulting with the General Partner, may appoint one or more local Medical Director(s) and a Medical Advisory Board made up of representative local physicians. If appointed, the Management Agent will consult with the Medical Advisory Board from time to time on such matters as instituting its detailed quality assurance program, utilization review, outcome analysis and patient scheduling. Except as otherwise provided below, the Management Agent will be responsible for maintaining on behalf of the Partnership complete books and records for the management of the Lithotripsy Systems. If the Lithotripsy Systems are located at a hospital or other health care center, the General Partner may contract to have such hospital or center be responsible for the Lithotripsy Systems' books and records and to provide billing and collection services. There can be no assurance that the Management Agent will be able to contract with such entities in the manner as outlined above. The Management Agreement provides that all funds furnished by the Partnership as working capital together with all Partnership revenues will be accounted for separately. Such funds will be disbursed by the Management Agent on behalf of the Partnership to pay all expenses associated with the operation of the Lithotripsy Systems, including, without limitation, the management fee payable to the Management Agent under the Management Agreement and reimbursements to the Management Agent for all of its out-of-pocket costs incurred in the operation of the Lithotripsy Systems. The Management Agent and its Affiliates will receive no compensation under the Management Agreement other than its management fee and reimbursement for its out-of-pocket costs in-curred in ful-filling its re-spon-si-bilities under the Management Agreement. Consultation and Education. Pursuant to the Management Agreement, personnel of the Management Agent will provide on-site supervision at the Lithotripsy Systems in an advisory capacity until such time as the Management Agent determines that they are no longer required. The local Medical Director will communicate regularly with officers of the Management Agent, who will remain available for consultation by phone and who plan to regularly visit the Lithotripsy Systems. To ensure that the Partnership remains advised of the latest technological developments in the field of lithotripsy, the Management Agent (pursuant to the Management Agreement) will arrange for continuing education of the qualified physicians who use the lithotripters to treat patients. The Management Agent will continually monitor progress in technological developments in renal lithotripsy and advise the Partnership regarding the nature of these developments and its recommended course of action. Employees and Benefits. All active full-time employees of the Partnership are eligible to participate in Prime's benefit plans. At the cost of the Partnership, Prime provides group medical, dental, long-term disability, accidental death and dismemberment and life insurance benefits. The Partnership likely will also provide paid holidays, sick leave, and vacation benefits and other miscellaneous benefits including bereavement, military reserves, jury duty and educational assistance benefits. Investors are urged to review the Financial Projections and assumptions thereto attached as Appendix A. The Financial Projections contain data supplied by the General Partner that is based upon the General Partner's estimate of reasonable, but not necessarily the most likely, results of Partnership operations. The data in the Financial Projections includes the General Partner's estimate of projected Lithotripsy Systems expenses and revenues, and also assumptions regarding the anticipated number of lithotripsy procedures that will be performed with the Lithotripsy Systems each year. Because the Financial Projections represent a prediction of future events based on certain assumptions that may or may not occur, Investors should not rely on the Financial Projections as an indication of the actual results that will be attained. Some assumptions inevitably will not materialize and unanticipated events and circumstances may occur subsequent to the date of the Financial Projections. The actual results achieved during the period covered by the Financial Projections will vary from the projected results and these variations may be material. See "Risk Factors - Other Investment Risks - Financial Projections" and the Financial Projections (with accompanying assumptions and notes) attached hereto as Appendix A. The following table sets forth the funds expected to be available to the Partnership from this Offering and other sources and their anticipated and estimated uses. Sources of Funds Limited Partners Contribution (1)..................$200,000 (23.59%) General Partner Contribution (1) 50,000 (5.90%) Loan (2) 597,840 (70.51%) ------- -------- TOTAL SOURCES ..................$847,840 (100.00%) ======== ========= Application of Funds One Modulith(R)SLX-T with Accessories (2)...........$400,000 (47.18%) Notes to Sources and Applications of Funds Table (1) Assumes 80 Units are purchased by qualified Investors. In its capacity as general partner of the Partnership, the General Partner will contribute cash to the Partnership in an amount equal to 20% of the total cash contributed to the Partnership by the Partners (up to $50,000). See "Summary of the Partnership Agreement - Capital Contribution of the General Partner." (2) Represents the proceeds available under the Loan Commitment to acquire (i) one new Storz Modulith(R) SLX-T extracorporeal shock-wave lithotripter and accessories (estimated at $400,000), (ii) one new mobile transport vehicle (estimated at $70,000), (iii) one used Dornier HM-3 Model extracorporeal shock-wave lithotripter (estimated at $60,000), (iv) one used trailer to house the Dornier HM-3 lithotripter (estimated at $21,500), (v) one used tractor truck to transport the trailer housing the Dornier HM-3 lithotripter (estimated at $12,500) and (vi) applicable state sales and use taxes on such equipment (estimated at $33,840). See "Proposed Activities - Acquisition of the Lithotripsy Systems." (3) Upon the Closing of the Offering, the Partnership anticipates purchasing from the General Partner a used Dornier HM-3, Calumet Coach trailer and tractor truck. Servicetrends, Inc. ("Servicetrends"), a lithotripter service company and an experienced dealer of used medical technology and equipment, has valued the Dornier HM-3 to be acquired by the Partnership at $60,000. AK Associates, L.L.C. ("AK Associates"), a manufacturer and refurbisher of medical transport vehicles, has appraised the trailer at $21,500, and Ronnie Burns Ford, Inc., a tractor truck vendor, has appraised the General Partner's tractor truck at $12,500. Investors should note that Servicetrends, AK Associates and the tractor truck dealer are not expert appraisers. Servicetrends provides maintenance to many medical enterprises affiliated with the General Partner and AK Associates is an Affiliate of the General Partner, factors which may undermine their independence. Based upon such estimates and the General Partner's own experience, the General Partner believes that $94,000 is the fair value of the Dornier HM-3, trailer, and tractor-truck; however, there has been no formal valuation, and there is no assurance that such $94,000 price accurately reflects the value of such equipment. See "Compensation and Reimbursement to the General Partner and its Affiliates." (4) As of the date of this Memorandum, the State of Kentucky has a maximum 6.0% sales and use tax on the purchases of equipment including the Lithotripsy Systems. The total amount of the tax on the purchase of the Lithotripsy Systems (estimated at $33,840) will be paid out of the proceeds of the Loan. (5) Represents the fair market value of the Service Contracts as of the date of the Memorandum as determined by an independent third party valuation firm; provided, however, on the anticipated Closing Date, such Service Contracts will have no aggregate fair market value as determined by the same independent third party valuation firm. See "Proposed Activities - Service Contracts." (6) This amount includes the General Partner 's estimate of (i) legal and accounting costs associated with organizing the Partnership, preparing the Partnership Agreement, the Management Agreement and other ancillary Partnership documents, and (ii) all out-of-pocket expenses incurred by the General Partner and its Affiliates associated with the initial start-up of the Partnership's operations. (7) Includes $20,000 in commissions payable to the Sales Agent (assuming 80 Units are sold to purchasers other than the General Partner or its Affiliates), reimbursement of $10,000 to the Sales Agent for out-of-pocket expenses incurred in selling the Units and $21,000 in legal and accounting costs associated with the preparation of this Memorandum (including costs attributable to the valuation of the Service Contracts as discussed in note (5) above). (8) The amount of working capital and reserve primarily will be a function of the amount of funds remaining after all other expenses, listed immediately above, are paid. The reserve may be used to fund any unanticipated start-up cost overruns. It is anticipated (subject to the approval of the Partnership's Medical Advisory Board) that as soon as practicable during the first year of Partnership operations, the Partnership will use a portion of Partnership working capital, Cash Flow and/or reserves (estimated at $60,000) and contract with Servicetrends and AK Associates to refurbish the used Dornier HM-3 and used Calumet Coach trailer, respectively. Such refurbishments, if any, will only occur after the Partnership's Modulith(R) SLX-T is placed in service, and therefore, the General Partner does not anticipate that the Partnership will need to rent a "loaner" Lithotripsy System during the time the Dornier HM-3 and trailer are being refurbished. The following summary describes the types and, where determinable, the estimated amounts of reimbursements, compensation and other benefits the General Partner and its Affiliates will receive in connection with the organization, operation and management of the Part-ner-ship and the Lithotripsy Systems. None of such fees, compensation and other benefits has been determined at arm's length. Except for the items set forth below, the General Partner does not expect to receive any distribution, fee, compensation or other remuneration from the Part-ner-ship. See "Proposed Activities - Management and Administration" and "Plan of Distribution." 1. Organizational Expenses. The General Partner will be reimbursed by the Partnership for all its out-of-pocket costs associated with the organization of the Partnership and all expenses of this Offering. No other fees or compensation will be payable to the General Partner or its Affiliates, except for the Management Fee and related reimbursements (described below), for managing the Partnership. 2. Management Fee. Pursuant to the Management Agreement, the Management Agent will contract with the Partnership to supervise the management and administration of the day-to-day operations of the Partnership's lithotripsy business for a monthly fee equal to the greater of 7% of Partnership Cash Flow per month or $8,000 per month. All costs incurred by the Management Agent in performing its duties under the Management Agreement will be the responsibility of, and will be paid directly by, the Partnership. The Management Agent is the management agent for various affiliated lithotripsy entities. As a consequence, many of the Management Agent's employees provide various management and administrative services for numerous entities, including the Partnership. In order to properly allocate the costs of such employees and other overhead among the entities for which it provides services, such costs will be divided among all the entities based upon the relative number of patients treated by each entity. The General Partner believes that the sharing of personnel costs and other overhead expenses among various entities results in significant costs savings for the Partnership. Investors are urged to review carefully the Management Agreement, the form of which is attached hereto as Appendix D. The management fee for any given month will be payable on or before the 30th day of the next succeeding month and will begin to accrue immediately following the Closing Date. The term of the Management Agreement is for five years, and will be automatically renewed for up to three successive five-year terms unless terminated by the Partnership or the Management Agent. The Management Agent and the General Partner will be reimbursed by the Partnership for all of their out-of-pocket costs associated with the operation of the Partnership and the Lithotripsy Systems, and the General Partner will also be reimbursed for all expenses related to the organization of the Partnership and this Offering. 3. Partnership Distributions. In its capacity as general partner of the Partnership, the General Partner is entitled to its distributable share (20%) of Partnership Cash Flow, Partnership Sales Proceeds and Partnership Refinancing Proceeds as provided by the Partnership Agreement. The General Partner and its Affiliates will also receive Partnership Distributions in respect of any Units they own. The amount of such Distributions to the General Partner, if any, cannot be determined at this time. See "Summary of the Partnership Agreement - Profits, Losses and Distributions," the Financial Projections attached as Appendix A and the Partnership Agreement, the form of which is attached as Appendix B. In addition, whereas the Limited Partners cannot participate in any future Dilution Offering to avoid dilution, the General Partner may make capital contributions or acquire additional limited partnership interests in a Dilution Offering in order to avoid economic dilution. See "Summary of the Partnership Agreement - Dilution Offerings." 4. 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" all or none basis. As compensation for its services, the Sales Agent will receive a commission equal to $250 for each Unit sold. No commission is payable to the Sales Agent unless all Units are sold as provided herein. 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 $10,000. See "Plan of Distribution" and "Conflicts of Interest." 5. Acquisition of Dornier HM-3. The Partnership anticipates purchasing from the General Partner a used Dornier HM-3 lithotripter, trailer and tractor-truck. Servicetrends has valued the Dornier HM-3 to be acquired by the Partnership at $60,000. AK Associates has appraised the trailer at $21,000, and Ronnie Burns Ford, Inc., a tractor truck vendor, has appraised the General Partner's tractor truck at $12,500. Investors should note that Servicetrends, AK Associates and the tractor truck dealer are not expert appraisers. Servicetrends provides maintenance to many medical enterprises affiliated with the General Partner and AK Associates is an Affiliate of the General Partner, factors which may undermine their independence. Based upon such estimates and the General Partner's own experience, the General Partner believes that $94,000 is the fair value of the Dornier HM-3, trailer, and tractor-truck; however, there has been no formal valuation, and there is no assurance that such $94,000 price accurately reflects the value of such equipment. 6. Loans. The General Partner or its Affiliates will also receive interest on loans, if any, made by them to the Partnership. See "Conflicts of Interest." Neither the General Partner nor any of its Affiliates are, however, obligated to make loans to the Partnership. While the General Partner does not anticipate that it would cause the Partnership to incur indebtedness unless cash generated from Partnership operations were at the time expected to enable repayment of such loan in accordance with its terms, lower than anticipated revenues and/or greater than anticipated expenses could result in the Partnership's failure to make payments of principal or interest when due under such a loan and the Partnership's equity being reduced or eliminated. In such event, the Limited Partners could lose their entire investment. 7. Miscellaneous. The Partnership may contract with the General Partner or its Affiliates to render services or provide materials to the Partnership provided that the compensation is at the then prevailing rate for the type of services and/or materials provided. If the Partnership's Lithotripsy Systems experience substantial downtime for unexpected maintenance and repairs, the General Partner or its Affiliates may provide a loaner system to the Partnership for a reasonable fee. The General Partner anticipates (subject to the approval of the Partnership's Medical Advisory Board) that during the first year of Partnership operations, the Partnership will contract with AK Associates, L.L.C., an Affiliate of the General Partner, to refurbish the used Calumet Coach trailer. See "Proposed Activities - Acquisition of Lithotripsy Systems - Used Equipment." General. The General Partner of the Partnership is Prime Lithotripter Operations, Inc., a New York corporation originally formed under the name DCG Tape Scan, Inc. ("DCG") on November 16, 1981. DCG subsequently changed its name to Satellite EKG Systems, Inc. ("Satellite") in March 1982. Prime indirectly acquired all of the outstanding stock of Satellite in July 1993 and subsequently changed the name of Satellite to Prime Lithotripter Operations, Inc. in January 1994. The principal executive office of the General Partner is located at 1301 Capital of Texas Highway, Suite C-300, Austin, Texas 78746, (512) 328-2892. The General Partner also has an office at 1900 Church Street, Suite 101, Nashville, Tennessee 37203, (800) 699-8190. The primary assets of the General Partner are used mobile lithotripters and numerous lithotripsy services agreements with hospitals and other treatment centers located in Alabama, Arkansas, Kentucky and Tennessee. The General Partner has substantial potential financial exposure as a guarantor of certain Prime indebtedness. Management. The following table sets forth the name and respective positions of the individuals serving as executive officers and directors of the General Partner many of whom also serve as executive officers of Prime. Name Office Joseph Jenkins, M.D. President Thomas J. Driber, Ph.D. Vice President Cheryl Williams Treasurer and Director James D. Clark Secretary The General Partner itself is managed by its sole Director, Ms. Williams. Descriptions of the background of the key executive officers and directors of the General Partner are set forth in "The Management Agent" below. The Management Agent of the Partnership is Lithotripters, Inc., a North Carolina corporation formed in November 1987 for the purpose of sponsoring and managing medical service limited partnerships in the United States ("Litho"). Litho became a wholly-owned subsidiary of Prime on April 26, 1996. Litho is an Affiliate of the General Partner. Litho's assets are illiquid in nature. The primary assets of Litho are partnership interests in over 20 lithotripsy limited partnerships. The Management Agent has substantial potential financial exposure as a guarantor of certain Prime indebtedness. Additional information about Litho appears below. The following table sets forth the names and respective positions of the individuals serving as executive officers and directors of Litho, many of whom were shareholders of Litho prior to its acquisition by Prime and/or are current shareholders and/or management personnel of Prime. Name Office Joseph Jenkins, M.D. President, Chief Executive Officer and Director Kenneth S. Shifrin Director W. Alan Terry Vice President Cheryl Williams Vice President and Director Thomas J. Driber, Ph.D. Vice President David Vela, M.D. Vice President Stan Johnson Vice President Philip J. Gallina Secretary and Treasurer James D. Clark Assistant Secretary Supervision of the day-to-day management and administration of the Partnership will be the responsibility of the Management Agent. The Management Agent itself is managed by a three-member Board of Directors composed of Mr. Shifrin, Ms. Williams and Dr. Jenkins. Set forth below are the names and descriptions of the background of the key executive officers and directors of the Management Agent. Joseph Jenkins, M.D. has been President and Chief Executive Officer of the Management Agent since April 1996 and is President of the General Partner. From May 1990 until December 1991, Dr. Jenkins was a Vice President of the Management Agent and previously practiced urology in Washington, North Carolina. Dr. Jenkins was recently elected to the Board of Directors of the Management Agent. Dr. Jenkins is a board certified urologist and is a founding member, a past-president and currently a Director of the American Lithotripsy Society. Kenneth S. Shifrin has been Chairman of the Board and a Director of Prime since October 1989 and was elected a Director of the Management Agent following Prime's acquisition of all of the Management Agent's stock. Mr. Shifrin also has served in various capacities with American Physicians Service Group, Inc. ("APS") since February 1985, and is currently Chairman of the Board and Chief Executive Officer of APS. W. Alan Terry was recently appointed a Vice President of the Management Agent and served as the Chief Financial Officer of the Management Agent from 1991 to 1998. In August, 1986, Mr. Terry joined The May Department Stores Company at their corporate headquarters in St. Louis, where he held several financial management positions until October, 1987, when he was transferred to one of May's largest divisions, Caldor, Inc., as Vice President of Finance. He remained in that capacity until June, 1990, when he became Chief Operating Officer for the Management Agent and served in that capacity until April 1996. Cheryl Williams is the Treasurer and Director of the General Partner and has been Chief Financial Officer, Vice President-Finance and Secretary of Prime since October 1989. Ms. Williams is also a Vice President and Director of the Management Agent and was Controller of Fairchild Aircraft Corporation from August 1988 to October 1989. From 1985 to 1988, Ms. Williams served as the Chief Financial Officer of APS Systems, Inc., a wholly-owned subsidiary of APS. Thomas J. Driber, Ph.D. is a Vice President of the General Partner and was recently appointed a Vice President of the Management Agent. Dr. Driber is an experienced medical practice consultant and has served as a director of Southern Medical Imaging, Inc. (1988-1993), First Choice Health Plan, Inc. (1986-1988) and Tampa Bay Health Plan, Inc. (1985-1986). In addition, Dr. Driber is an accomplished health care scholar and was a member of the teaching faculty at Florida Neurological Institute School of EEG Technology from 1980 to 1984. Dr. Driber received a faculty appointment to the Surgery department (renal transplant surgery) of the University of Florida College of Medicine and taught there from 1977 to 1979. Dr. Driber received a Ph.D. in Medical/Social Change Theory, Concentration: Ambulatory Medical Delivery Systems from Walden University, Institute for Advanced Studies in Minneapolis, Minnesota in 1984. Stan Johnson was recently appointed a Vice President of the Management Agent and has been a Vice President of Prime and President of Sun Medical Technologies, Inc. ("Sun") (an affiliate of the General Partner) since November 1995. Mr. Johnson was the Chief Financial Officer of Sun from 1990 to 1995. David Vela, M.D. was recently appointed a Vice President of the Management Agent. Dr. Vela received his medical degree in 1984. Dr. Vela developed and operated various outpatient centers throughout the United States from 1986 to 1995 and has served as Regional Vice President of Prime for the Central Region since February 1997. Philip J. Gallina recently became the Secretary and Treasurer of the Management Agent, having previously served as a Vice President since 1989. Mr. Gallina is a Certified Public Accountant licensed in the state of Pennsylvania. From 1980 through February 1989, Mr. Gallina served as Plant Controller for the Westinghouse Motor Control and Enclosed Control Product Lines. Mr. Gallina is also a Director, the Vice President, the Treasurer and the Secretary of MedTech Investments, Inc., the Sales Agent. James D. Clark is the Secretary of the General Partner and recently became Assistant Secretary of the Management Agent. Mr. Clark has served as Tax Manager of Prime since January 1998 and is a Certified Public Accountant in Texas. Prior to joining Prime, Mr. Clark was Controller for ERISA Administrative Services, Inc. The organization and operation of the Partnership involve numerous conflicts of interest between the Part-ner-ship and the General Partner and its Affiliates. Because the Part-ner-ship will be operated by the General Partner, such conflicts will not be resolved through arm's length negotiations, but through the exercise of the judgment of the General Partner consistent with its fiduciary responsibility to the Limited Partners and the Part-ner-ship's investment objectives and policies. The General Partner, its Affiliates and employees of the General Partner will in good faith attempt to resolve potential conflicts of interest with the Partnership, and the General Partner will act in a manner that it believes to be in or not opposed to the best interests of the Partnership. See "Fiduciary Responsibility of the General Partner." The Management Agent and the Sales Agent, both Affiliates of the General Partner, will receive management fees and broker-dealer sales commissions, respectively, in connection with the business operations of the Part-ner-ship and the sale of the Units that will be paid regardless of whether any sums are distributed to Limited Partners. None of such fees, compensation and benefits has been determined by arm's length negotiations. In addition, the Partnership may contract with the General Partner or its Affiliates to render services or provide materials to the Partnership provided that the compensation is at the then prevailing rate for the type of services and/or materials provided. The General Partner or its Affiliates will also receive interest on loans, if any, they make to the Partnership. In addition, upon the Closing of the Offering it is anticipated that the Partnership will purchase a used Dornier HM-3, a trailer and a tractor truck from the General Partner. See "Compensation and Reimbursement to the General Partner and its Affiliates" and "Proposed Activities - Acquisition of the Lithotripsy Systems." The General Partner and its Affiliates will devote as much of their time to the business of the Part-ner-ship as in their judgment is reasonably required. Principals of the General Partner and the Management Agent 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 Part-ner-ship. 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 Part-ner-ship nor the holders of any of the Units shall be entitled to any interest therein. The General Partner, its Affiliates (including affiliated limited partnerships and other entities), and their employees engage in medical related service activities for their own accounts. See "Prior Activities." The General Partner may serve as a general partner and/or management agent of other limited partnerships that are similar to the Partnership and does not intend to devote its entire financial, personnel and other resources to the Partnership. Except as provided by law, none of such entities or their respective Affiliates is prohibited from engaging in any business or arrangement that may be in competition with the Partnership. See "Competition" and "Prior Activities." The General Partner and its Affiliates are, however, obligated to act in a fiduciary manner with respect to the management of the Partnership and any other medical enterprise in which they serve in a management capacity. In the event an issue arises as to whether a particular lithotripsy service opportunity in or near the Service Area belongs to the Partnership, the General Partner or another Affiliate, the General Partner will in good faith attempt to resolve the issue in a manner that it believes to be in or not opposed to the best interest of the Partnership. Notwithstanding the foregoing, no assurance can be given that one or more limited partners of such Affiliates or the Limited Partners themselves, may not challenge the decision of the General Partner on fiduciary or other grounds. To the extent the General Partner or its Affiliates purchase Units in the Offering, they will be able to effect any vote on matters requiring Limited Partner approval. See "Summary of the Partnership Agreement." The Sales Agent is MedTech Investments, Inc., which is an Affiliate of the General Partner. Because of the Sales Agent's affiliation with the General Partner, there are conflicts in the Sales Agent's performance of its due diligence responsibilities under the federal securities laws. See "Plan of Distribution." The interests of the Limited Partners have not been separately represented by independent counsel in the formulation of the transactions described herein. The attorneys and accountants who have performed and will perform services for the Part-ner-ship were retained by the General Partner and have in the past performed and are expected in the future to perform similar services for the General Partner and its Affiliates. The General Partner is accountable to the Part-ner-ship as a fiduciary and consequently must exercise good faith in handling Part-ner-ship affairs. This is a rapidly developing and changing area of the law and Limited Partners who have questions concerning the duties of the General Partner should consult with their counsel. Under the Partnership Agreement, the General Partner and its Affiliates will have no liability to the Part-ner-ship or to any Partner for any loss suffered by the Part-ner-ship that arises out of any action or inaction of the General Partner or its Affiliates if the General Partner or its Affiliates, in good faith, determined that such course of conduct was in the best interest of the Part-ner-ship and such course of conduct did not constitute gross negligence or willful misconduct of the General Partner or its Affiliates. Accordingly, Limited Partners will have a more limited right of action than they otherwise would have absent the limitations set forth in the Partnership Agreement. The General Partner and its Affiliates will be indemnified by the Part-ner-ship against any losses, judgments, liabilities, expenses and amounts paid in settlement of any claims sustained by them in connection with the Part-ner-ship, 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 Part-ner-ship pursuant to the foregoing provisions, the Part-ner-ship 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. Several competing fixed-site and mobile extracorporeal shock-wave lithotripters are currently operating in and around the Service Area. The following discussion identifies the existing competitors in the Service Area, to the best knowledge of the General Partner. Affiliated Competition The General Partner directly provides mobile lithotripsy services in the Service Area using a Dornier HM-3 lithotripter and pursuant to certain Service Contracts at: Owensboro Mercy Medical Center in Owensboro; Lourdes Hospital in Paducah; Regional Medical Center in Madisonville; Jennie Stuart Medical Center in Hopkinsville; Community United Methodist Hospital in Henderson; and Greenview Hospital in Bowling Green. The General Partner intends to terminate these contracts or to assign these contracts to the Partnership after the Partnership commences operations. If the General Partner is unable to terminate or assign one or more of the existing Service Contracts prior to the commencement of Partnership operations, the General Partner may be providing lithotripsy services in direct competition with the Partnership until all such related contracts to provide lithotripsy services in the Service Area can be terminated. Generally, the arrangements in the Service Area terminate by their own terms or may be terminated by written notice provided 90 days prior to the anniversary date of the contract. Assuming the General Partner provides timely notice, all of its contracts in the Service Area will be terminated by August 1, 2001. Several Affiliates of the General Partner also provide services near the Service Area. Kentucky I Lithotripsy, LLC provides mobile lithotripsy services in central and eastern Kentucky. Indiana Lithotripters Limited Partnership I provides mobile lithotripsy services in southern Indiana and treats patients who are residents of northern Kentucky. The General Partner operates several Dornier HM-3 lithotripters in Tennessee. Other Affiliates of the General Partner are planning and conducting other limited partnership offerings that would operate lithotripters in other states. Other Competition Lithotripsy services are available at Deaconess Hospital and St. Mary's Medical Center in Evansville, Indiana; to the best knowledge of the General Partner, these services are used by physicians from Kentucky. The General Partner is aware that Healthtronics and Medispect, two manufacturers of lithotripters, are demonstrating their machines in the Service Area; indeed, the General Partner understands that Healthtronics has temporarily installed a unit in a hospital in the Service Area in an effort to attract business. There may be other existing or planned fixed-base or mobile lithotripsy services in or near the Service Area which will directly compete with the Partnership's Lithotripsy Systems, but the General Partner is not familiar with these other competitors or potential 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 "Proposed 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 have a competitive disadvantage because such machines are capable of treating stones only in the ureter. The General Partner believes the Lithotripsy Systems can be used on stones in locations other than the ureter. See "Proposed Activities - Treatment Methods for Kidney Stone Disease." The health care 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 for lithotripsy services for beneficiaries of their plans. It is not uncommon for managed care companies to have contracts already in place with hospitals or specified providers, and the Partnership will not be able to provide services to beneficiaries of those plans unless it convinces either the managed care companies or the hospitals to switch to the Partnership's services. No assurances can be given that new competing lithotripsy operations will not commence operations in the future or that innovations in lithotripters or other treatment methods for kidney stone disease will not make the Lithotripsy Systems competitively obsolete. See "Risk Factors - Operating Risk - Technological Obsolescence." In addition, the General Partner and its Affiliates are not prohibited from engaging in lithotripsy ventures unassociated with the Partnership that may compete with the Partnership. The manufacturers of the Lithotripsy Systems are under no obligation to the General Partner or the Partnership to refrain from selling their 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 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. 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 seeks reimbursement for its equipment and services from health care facilities whose patients 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 federal agency that administers the Medicare program, to establish a prospective payment system for outpatient procedures. One of the goals of the prospective payment system was to lower medical costs paid by the Medicare program. HCFA issued proposed regulations in September, 1998 which would reduce the reimbursement rate currently paid for lithotripsy procedures performed on Medicare patients at hospitals to a base rate of $2,235. The base rate includes anesthesia and sedation, equipment and supplies necessary for the procedure, but does not include the treating physician's professional fee. The base rate is subject to adjustment for various hospital-specific factors. The General Partner believes the lower reimbursement rate will be implemented in the latter half of the year 2000. In some cases, reimbursement rates payable to the General Partner and its Affiliates are less than the proposed HCFA rate. The General Partner retains the discretion to make the Lithotripsy Systems available at ambulatory surgery centers ("ASCs"). Medicare does not currently reimburse for lithotripsy procedures provided at ASCs. However, HCFA issued proposed rules in June, 1998 which would authorize Medicare reimbursement for lithotripsy procedures provided at ASCs. While the proposed rules had a target effective date of October 1, 1998, the effective date has been postponed indefinitely for reasons unrelated to lithotripsy coverage. The June, 1998 proposed rules assign a Medicare reimbursement rate of $2,107 if the lithotripsy procedure is performed at an ASC. Whether these proposed rules will become effective to authorize Medicare reimbursement at ASCs and, if they do become effective, what the reimbursement rate will be, is unknown to the General Partner. The Medicare program has historically influenced the setting of reimbursement standards by commercial insurers. Therefore, reduced rates of Medicare reimbursement for lithotripsy services may result in reduced payments by commercial insurers for the same services. As was discussed previously, competitive pressure from health maintenance organizations and other managed care companies has in some circumstances already resulted in decreasing reimbursement rates from commercial insurers. See "Risk Factors - Impact of Insurance Reimbursement." No assurances can be given that HCFA will not seek to reduce its proposed reimbursement rates even more to avoid paying more than commercial insurers. As a result, hospitals may seek to lower the fees paid to the Partnership for the use of the Lithotripsy Systems. The General Partner anticipates that reimbursement for lithotripsy procedures, and therefore overall Partnership revenues, may continue to decline. The physician service (Part B) Medicare reimbursement for renal lithotripsy is determined using Resource Based-Relative Value Scales ("RB-RVS"). The system includes limitations on future physician reimbursement increases tied to annual expenditure targets legislated annually by Congress or set based upon recommendation of the Secretary of the U.S. Department of Health and Human Services. Medicare has in the past, with regard to other Part B services such as cataract implant surgery, imposed significant reductions in reimbursement based upon changes in technology. HCFA has produced a lengthy report whose conclusion is that professional fees for lithotripsy are overvalued. Thus, potential future decreases in reimbursement must be considered probable. The Medicaid program in Kentucky is jointly sponsored by the federal and state governments to reimburse service providers for medical services provided to Medicaid recipients, who are primarily the indigent. The Kentucky Medicaid program currently provides reimbursement for lithotripsy services. The federal Personal Responsibility and Work Opportunity Reconciliation Act of 1996 requires state health plans, such as the Kentucky Medicaid program, to limit Medicaid coverage for certain otherwise eligible persons. The General Partner does not believe this legislation will have a significant impact on the Partnership's revenues. In addition, federal regulations permit state health plans to limit the provision of services based upon such criteria as medical necessity or other criteria identified in utilization or medical review procedures. The General Partner does not know whether the Kentucky Medicaid program has taken or will take such steps. Self-Referral Restrictions. Health care entities which seek reimbursement for services covered by Medicare or Medicaid are subject to federal regulation restricting referrals by certain physicians 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) ("Stark II"). Lithotripsy services were not specifically identified as a designated health service by this legislation, but the prohibition includes any service which is provided to an individual who is registered as an inpatient or outpatient of a hospital under proposed regulations discussed below. Lithotripsy services provided by the Partnership to Medicare and Medicaid patients are billed by the contracting hospital in its name and under its Medicare and Medicaid program provider numbers. Accordingly, these lithotripsy services would likely be considered inpatient or outpatient services under Stark II. Following the passage of the Stark II legislation effective January 1, 1995, the General Partner determined that the statute would not apply to the type of lithotripsy services to be provided by the Partnership. Stark 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 Stark II. This interpretation adopted by the General Partner was consistent with the informal view of the General Counsel's Office of the U.S. Department of Health and Human Services. Based upon this reasonable interpretation of Stark II, by referring a patient to a hospital furnishing the outpatient lithotripsy services "under arrangements" with the Partnership, a physician investor in the Partnership is not making a referral to an entity (the hospital) in which he or she has an ownership interest. On January 9, 1998, HCFA published proposed regulations interpreting the Stark II statute (the "Proposed Stark II Regulations"). The Proposed Stark II Regulations and HCFA's accompanying commentary would apply the physician referral prohibitions of Stark II to the Partnership's contracts for provision of the Lithotripsy Systems. Under the Proposed Stark 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 Stark II Regulations may be viewed as HCFA's interim position until final regulations are issued. If the Proposed Stark II Regulations are adopted as final (or, in the meantime, if a reviewing court adopted their reasoning as the proper interpretations of the Stark II statute), then the Partnership's operations would not be in compliance with Stark 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 Stark II Regulations that physician overutilization of lithotripsy is unlikely and specifically solicits comments on whether there should be a regulatory exception for lithotripsy. HCFA has received a substantial volume of comments in support of a regulatory exception for lithotripsy. HCFA representatives have informally acknowledged in published commentary that some form of regulatory relief for lithotripsy is under consideration and may be forthcoming; however, no assurances can be made that such will be the case. The General Partner will continue to 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 Stark II Regulations and accompanying HCFA commentary, and explore other alternative plans of operations that would allow the Partnership to operate in compliance with Stark II and its final regulations. HCFA's adoption of the current Proposed Stark II Regulations as final or a reviewing court's interpretation of the Stark II statute in reliance on the Proposed Stark II Regulations and in a manner adverse to the Partnership operations would mean that the Partnership and its physician Limited Partners would likely be found in violation of Stark II. In such circumstance, it is possible the Partnership may be given the opportunity to restructure its operations to bring them into compliance. In the event the General Partner is unable to devise a plan pursuant to which the Partnership may operate in compliance with Stark II and its final regulations, the General Partner is obligated under the Partnership Agreement either (i) to purchase the Partnership Interests of all the Limited Partners at the lesser of fair market value or their Capital Account values (including in certain cases the assumption of their Guaranties) or (ii) to dissolve and liquidate the Partnership. See "Summary of the Partnership Agreement - Optional Purchase of Limited Partner Interests." The Partnership and/or the physician Limited Partners may not be permitted the opportunity to restructure operations and thereby avoid an obligation to refund any amounts collected from Medicare and Medicaid patients in violation of the statute. Further, under these circumstances the Partnership and physician Limited Partners may be assessed with substantial civil monetary penalties and/or exclusion from providing services reimbursed by Medicare and Medicaid. Two bills are currently pending in Congress which would modify the reach of the Stark II self-referral prohibition. One (H.R. 2650) was introduced by Representative Stark, the other (H.R. 2651) by House Ways and Means health subcommittee chair Representative Bill Thomas. The Stark bill would modify, and the Thomas bill would repeal, the ban on physicians who have compensation arrangements with entities to which they refer patients. However, neither bill, nor any other bill currently pending in Congress, would substantively modify the regulation of referrals of physicians with ownership interests. Thus, neither bill would affect the Partnership's analysis of the potential impact of Stark II on this Offering discussed above. Fraud and Abuse. The provisions of the federal Social Security Act addressing illegal remuneration (the "Anti-Kickback Statute") prohibit providers and others from soliciting, receiving, offering or paying, directly or indirectly, any remuneration in return for either making a referral for a Medicare, Medicaid or CHAMPUS covered service or ordering, arranging for or recommending any such covered service. Violations of the Anti-Kickback Statute may be punished by a fine of up to $25,000 or imprisonment for up to five (5) years, or both. In addition, violations may be punished by substantial civil penalties and/or exclusion from the Medicare and Medicaid programs. Regarding exclusion, the Office of Inspector General ("OIG") of the Department of Health and Human Services may exclude a provider from participation in the Medicare program for a 5-year period upon a finding that the Anti-Kickback Statute has been violated. After OIG establishes a factual basis for excluding a provider from the program, the burden of proof shifts to the provider to prove the Anti-Kickback Statute has not been violated. The Limited Partners are to receive cash Distributions from the Partnership. Since it is anticipated that some of the Limited Partners will be physicians or others in a position to refer and perform lithotripsy services using Partnership equipment and personnel, such Distributions could come under scrutiny under the Anti-Kickback Statute. The Third Circuit United States Court of Appeals has held that the Anti-Kickback Statute is violated if one purpose (as opposed to the primary or sole purpose) of a payment to a provider is to induce referrals. United States v. Greber, 760 F.2d 68 (1985). The Greber case was followed by the United States Court of Appeals for the Ninth Circuit, United States v. Kats, 871 F.2d 105 (9th Cir. 1989), and cited favorably by the First Circuit in United States v. Bay State Ambulance and Hospital Rental Service, Inc., 874 F.2d 20 (1 st Cir. 1989). The OIG has indicated that it is giving increased scrutiny to health care 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 health care fraud and abuse investigator and enforcer. The OIG has published regulations which protect certain transactions from scrutiny under the Anti-Kickback Statute (the "Safe Harbor" regulations). A Safe Harbor, if complied with fully, will exempt such activity from prosecution under the Anti-Kickback Statute. However, the preamble to the Safe Harbor regulations states that the failure of a particular business arrangement to comply with the regulations does not determine whether or not the arrangement violates the Anti-Kickback Statute because the regulations do not themselves make any particular conduct illegal. This Offering and the business of the Partnership do not comply with any Safe Harbor. In the commentary introducing the Safe Harbor regulations, the OIG recognized the beneficial effect that business investments in small entities may have on the health care industry. The OIG promulgated a Safe Harbor for investment interests, including limited partnership ownership interests, in small entities which are held by persons in a position to make referrals to the entities so long as eight criteria are met. This Offering does not meet all eight criteria; however, this Offering does meet some of the criteria. Specifically, the terms on which Limited Partnership interests are offered to physicians who treat their patients on the Lithotripsy Systems are not related to the previous or expected volume of referrals or amount of business generated by the physicians; there is no requirement that any physician make referrals or be in a position to make referrals as a condition for remaining an investor; there is no cross-referral arrangement involved with the business of the Partnership; the Partnership does not loan funds or guarantee loans for physicians who refer patients for treatment on the Lithotripsy Systems; and the Distributions to physicians who are Limited Partners are directly proportional to the amount of their capital investment. In order to qualify for Safe Harbor protection, all eight criteria must be met. The General Partner can give no assurance that compliance with some, but not all, of the criteria of the Safe Harbor would prevent the OIG from finding a potential violation of the Anti-Kickback Statute by virtue of this Offering. In November 1999, the OIG issued a Safe Harbor protecting certain physician investment interests in ASCs. The commentary accompanying the new Safe Harbor specifically distinguished physician ownership in ASCs from physician ownership in other facilities, including lithotripsy facilities, end-stage renal disease facilities, comprehensive outpatient rehabilitation facilities and others. The OIG concluded that ASCs benefit from favorable public policy considerations relating to reducing Medicare costs (including through the impending prospective payment system discussed above); other facilities, including lithotripsy facilities, do not share the same policy considerations or reimbursement structures. Therefore, the Safe Harbor status given to certain physician investments in ASCs cannot be viewed as an indication that physician investments in other facilities, including lithotripsy facilities, would not be deemed to violate the Anti-Kickback Statute. Although a separate Safe Harbor was not adopted, HCFA noted in its commentary when the Safe Harbor regulations were issued in 1991 that additional protection may be merited for situations where a physician sees a patient in his or her own office, makes a referral to an entity in which he or she has an ownership interest and performs the service for which the referral is made. In such cases, Medicare makes a payment to the facility for the service it furnishes, which may result in a profit distribution to the physician. HCFA noted that, with respect to the physician' s professional fee, such a referral is simply a referral to oneself, and that in such situations, both the professional service fee and the profit distribution from the associated facility fee that are generated from the referral may warrant protection. HCFA stated that its primary concern regarding the above referral situation was the investing physician's ability to profit from any diagnostic testing that is generated from the services he or she performs. The General Partner believes the potential for overutilization posed by referrals for diagnostic services is not present to the same degree with therapeutic services such as lithotripsy where the necessity for the treatment can be objectively determined; i.e., a renal stone can be definitely determined before treatment. The applicability of the Anti-Kickback Statute to physician investments in health care businesses to which they refer patients and which do not qualify for a Safe Harbor has not been the focus of many court decisions, and therefore, judicial guidance is limited. In the only case in which the OIG has attempted to exercise the civil exclusion remedy in the context of a physician-owned joint venture, The Hanlester Network, et al. v. Shalala, the Ninth Circuit for the United States Court of Appeals (the "Court") held that the Anti-Kickback Statute is violated when a person or entity (a) knows that the statute prohibits offering or paying remuneration to induce referrals and (b) engages in prohibited conduct with the specific intent to violate the law. Although the Court upheld a lower court ruling that the joint venture in question violated the Anti-Kickback Statute vicariously through the knowing and willful actions of one of its agents, who was acting outside the parameters of the joint venture' s offering documents, the Court concluded there was not sufficient evidence indicating that a return on investment to physicians or other investors in the joint venture could on its own constitute an "offer or payment" of remuneration to make referrals. The Court also stated that since profit distributions in Hanlester were made based on each investor's ownership share and not on the volume of referrals, the fact that large referrals by investors would result in potentially high investment returns did not, standing alone, cause a violation of the Anti-Kickback Statute. The Health Insurance Portability and Accountability Act of 1996 directed the OIG to respond to requests for advisory opinions regarding the effect of the Anti-Kickback Statute on proposed business transactions. The General Partner has not requested the OIG to review this Offering and, to the best knowledge of the General Partner, the OIG has not been asked by anyone to review offerings of this type. Federal regulatory authorities could take the position in future advisory opinions that business transactions similar to this Offering are a means to illegally influence the referral patterns of the prospective physician Limited Partners. Because there is no legal precedent interpreting circumstances identical to these facts, it is not possible to predict how this issue would be resolved if litigated. Whenever an offering of ownership interests is made available to persons with the potential to refer patients for services, there is a possibility that the OIG, HCFA or other government agencies or officials may question whether the ownership interests are being provided in return for or to induce referrals by the new owners. Remuneration, which government officials have said can include the provision of an opportunity to invest in a facility to which a person refers patients for services, may be challenged by the government as constituting a violation of the Anti-Kickback Statute. Whether the offering of ownership interests to investors who may refer patients to the Partnership might constitute a violation of this law must be determined in each case based upon the specific facts involved. The various mechanisms in place to avoid providing a financial benefit to prospective Limited Partners for any referrals of patients (including the requirement that all distributions of earnings to Limited Partners be made in proportion to their investment interest), the Partnership's utilization review and quality assurance programs, the fact that lithotripsy is a therapeutic treatment the need of which can be objectively determined, and the existence in the General Partner's view of valid business reasons to engage in this transaction, form the basis in part of the General Partner's belief that this Offering is appropriate. The General Partner of the Partnership intends for all business activities and operations of the Partnership to conform in all respects with all applicable anti-kickback statutes (federal or state). The General Partner does not believe that the Partnership's 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 own independent counsel. False Claims Statutes. Federal laws governing reimbursement for medical services generally prohibit an individual or entity from knowingly and willfully presenting a claim (or causing a claim to be presented) for payment from Medicare, Medicaid or other third party payors that is false or fraudulent. The standard for "knowing and willful" includes conduct that amounts to a reckless disregard for whether accurate information is presented by claims processors. Penalties under these statutes include substantial civil and criminal fines, exclusion from the Medicare program and imprisonment. One of the most prominent of these laws is the federal False Claims Act, which may be enforced by the federal government directly, or by a qui tam private plaintiff on the government's behalf. Under the federal False Claims Act, both the government and the private plaintiff, if successful, are permitted to recover substantial monetary penalties and judgments, as well as an amount equal to three times actual damages. In recent cases, some qui tam plaintiffs have taken the position that violations of the Anti-Kickback Statute (discussed above) and Stark II (discussed above) should also be prosecuted as violations of the federal False Claims Act. The Partnership cannot assure that the government, or a reviewing court, would not take the position that billing errors, employee misconduct or violations of other federal statutes, should they occur, are violations of the federal False Claims Act or similar statutes. Some federal courts have recently taken the position that qui tam lawsuits by private plaintiffs are unconstitutional. Most notably, a panel of judges on the Fifth Circuit Court of Appeals took this position in a decision issued in November 1999. That decision is being reviewed by all the judges on the Fifth Circuit. The panel's decision was a minority view; most courts have concluded that qui tam lawsuits are constitutional. In another case, the U.S. Supreme Court may review this issue. Unless and until the Supreme Court decides the issue, prospective Limited Partners should consider the ramifications of the False Claims Act issues discussed in the preceding paragraph. New Legislation. Two bills currently pending in Congress which would amend or repeal the compensation provisions of the Stark 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 Stark 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. Kentucky requires a certificate of need ("CON") to establish a health facility, to make a substantial change in a health service, or to purchase any capital equipment which costs more than $1,655,678. The General Partner has sought and received a written opinion from the Certificate of Need Office of the Kentucky Cabinet for Health Services that no CON is necessary for mobile lithotripsy services similar to those discussed in this Offering so long as the hospital establishes and provides the service; the General Partner has confirmed this opinion is the same for transportable lithotripters such as the Storz Modulith(R) SLX-T. To ensure that the hospital establishes and provides the service, contracting hospitals will lease the Lithotripsy Systems and pay the Partnership for the use of the equipment; the Partnership will not bill for the services itself. To the best knowledge of the General Partner, the Partnership's mobile Dornier HM-3 must be licensed as a mobile health service by the Division of Licensing and Regulation. Licensure requires a survey of the Lithotripsy Systems and approval of the policies and procedures related to the Lithotripsy Systems. The General Partner does not believe the licensure requirement will prevent the Partnership from operating as planned in Kentucky. The Division of Licensing and Regulation has not determined whether transportable lithotripters such as the Storz Modulith(R) SLX-T must be licensed as a mobile health service. Given that the procedures performed on the transportable lithotripter are performed within a hospital's premises, it is possible the Division of Licensing and Regulation would conclude no separate licensure is necessary for the lithotripter; however, no assurances can be given in this regard. When a Storz Modulith(R) SLX-T or any other transportable lithotripter is purchased, the Partnership will seek to comply with any licensure requirements. Regarding physician referrals, Kentucky law incorporates the American Medical Association's Code of Medical Ethics (discussed above) in requiring physicians to provide services at entities in which they have an ownership interest and to which they refer patients. Therefore, all physician Limited Partners who make referrals to the Partnership's Lithotripsy Systems must provide services on the lithotripter. Kentucky law prohibits physicians from receiving any compensation in exchange for referrals of Medicare or Medicaid patients. As the Partnership will not compensate any physician for referrals (rather, all payments to physicians are based on their equity interests in the Partnership), the General Partner believes this law will not be violated. The law also provides that any conduct which violates the federal Stark II and Anti-Kickback laws (discussed above) shall be deemed to violate Kentucky law. Violations are punishable by criminal penalties, repayment of Medicaid reimbursements which were in violation of the law and exclusion from the Kentucky Medicaid program. Kentucky requires registration of x-ray machines and certification of radiologic technologists. The Partnership will seek to comply with this and all other regulatory requirements in order to operate the Lithotripsy Systems. Further regulations may be imposed in Kentucky at any time in the future. Predictions as to the form or content of such potential regulations would be highly speculative. They could apply to the operation of the Partnership's Lithotripsy Systems 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. Prime, the indirect 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 61 mobile and seven fixed site lithotripters, all but two of which are operated by Prime, the General Partner and their 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 63 lithotripters and development of five lithotripters. Prime lithotripters 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 lithotripters in 1998, representing approximately 30% of the estimated 7,700 active urologists in the United States. Prime manages the operations of 63 of its 68 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. 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 49 of its 68 operations. Prime's lithotripters range in age from one to twelve years. Of its 68 lithotripters, 61 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, equipment, 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 Part-ner-ship Agreement sets forth the powers and purposes of the Part-ner-ship 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 Part-ner-ship Agreement, and does not purport to be a complete statement of the various rights and obligations set forth therein. A complete copy of the form of the Part-ner-ship Agreement is set forth as Appendix B to this Memorandum, and Investors are urged to read the Part-ner-ship Agreement in its entirety and to review it with their counsel and advisors. The Part-ner-ship was formed on November 24, 1999 as a limited partnership under the laws of the State of Kentucky and has had no operations to date. The Initial Limited Partner will with-draw from the Part-ner-ship upon the admission of the Limited Partners to the Part-ner-ship pursuant to this Offering. The General Partner of the Part-ner-ship is Prime Lithotripter Operations, Inc., a New York corporation. See "General Partner." The Limited Partners will acquire their interests in the Part-ner-ship in the form of Units. Upon the successful completion of the Offering, each purchaser of the Units whose subscription is accepted by the General Partner and the Bank will become a Limited Partner in the Part-ner-ship. For each Unit purchased, a cash payment of $2,500 is required in addition to a personal guaranty of 1% of the Partnership 's obligations under the Loan (up to a $5,978.40 principal guaranty obligation). The per Unit cash purchase price and execution and delivery of the Guaranties are both due upon subscription. No Limited Partner will have any liability for the debts and obligations of the Part-ner-ship by reason of being a Limited Partner, except to the extent of (i) his Capital Contribution, (ii) his liability under the Guaranty to which he is a party, (iii) his proportionate share of the undistributed profits of the Part-ner-ship, and (iv) the amount of certain Distributions received from the Partnership as provided by the Act. See "Risk Factors - Operating Risks - Liability Under the Guaranty" and "Risk Factors - Other Investment Risks - Limited Partners' Obligation to Return Certain Distributions." See also Form of Legal Opinion of Womble Carlyle Sandridge & Rice, a Professional Limited Liability Company, attached hereto as Appendix E. The General Partner will contribute cash to the Partnership in an amount equal to 20% (up to $50,000) of all cash contributed to the Partnership. The General Partner, with the prior approval of a Majority in Interest of the Limited Partners, has the authority to periodically offer and sell additional limited partnership interests in the Partnership (a "Dilution Offering") to local investors who are not investors in the Partnership ("Qualified Investors"). The primary purpose of a Dilution Offering is expected to 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 proportionate dilution of the Partnership Percentage Interests of the existing Partners; i.e., the interests of the General Partner and of the Limited Partners in Partnership allocations, cash Distributions and voting rights will be proportionately reduced as a result of a successful Dilution Offering. Limited Partners have no right to purchase additional limited Partnership interests offered by the Partnership in a Dilution Offering; however, the General Partner may elect, in its sole discretion, to make capital contributions or purchase additional limited partnership interests offered in a Dilution Offering in order to avoid dilution. Unless otherwise agreed by the General Partner and a Majority in Interest of the Limited Partners, any additional limited partnership interests offered in a Dilution Offering will be sold for a price no lower than the highest cash price for which proportionate limited partnership interests in the Partnership have been previously sold by the Partnership. Under the terms of the Partnership Agreement, the General Partner with the prior approval of a Majority in Interest of the Limited Partners may cause the Partnership to engage in certain transactions in the future, any of which transactions could result in the termination or reorganization of the Partnership and a partial or total dilution of all Limited Partners' interests in the Partnership. The General Partner could propose a plan providing for merger or consolidation of the Partnership with another entity; the sale of all or substantially all of the Partnership's assets to another entity; or any other reorganization, reclassification or exchange of the Partnership Interests, including without limitation the exchange of Partnership Interests for equity interests in another entity or for cash or other consideration. If such a plan were adopted, the Limited Partners are obligated by the terms of the Partnership Agreement to take or refrain from taking, as the case may be, such actions as the plan may provide, including, without limitation, executing such instruments, and providing such information as the General Partner may reasonably request. Any such plan may also result in an amendment to the Partnership Agreement or the adoption of a new partnership agreement in connection with the merger of the Partnership with another entity as provided in Section 362.546(5) of the Act. The plan may also provide that the General Partner and its affiliates will receive fees for services rendered in connection with the operation of the Partnership or any successor entity following the consummation of the transactions described in the plan, and neither the Partnership nor the Limited Partners will have any right by virtue of the Partnership Agreement in the fees to be derived therefrom. Any securities or other consideration to be distributed to the Partners pursuant to any such plan shall be distributed in the manner set forth in the Partnership Agreement as though the Partnership were being liquidated. Although the General Partner will endeavor to keep the Limited Partners apprised of all relevant information regarding the above transactions, the General Partner is not obligated to provide such information in any particular manner concerning the risks and effect of the proposed transaction; the fairness of the proposed transaction to the Partnership and the Limited Partners; comparative distributions to the General Partner under the Partnership operations and under the proposed reorganization; the method of valuing the Partnership in the proposed transaction and the method of allocating value among various participants in the proposed transaction; the background, reasons for and alternatives to the transaction; and conflicts of interest of the General Partner in the proposed reorganization. In December 1993, Congress passed legislation amending portions of the Securities Exchange Act of 1934 to afford new protections to limited partnership investors in the context of certain limited partnership mergers and reorganizations commonly known as partnership rollups. The law, known as the "Limited Partnership Rollup Reform Act of 1993" (the "Reform Act"), became effective on December 17, 1994, and applies to certain rollup transactions proposed after such date. The Reform Act and the Rules promulgated thereunder are applicable only to certain types of partnership rollups and, when applicable, provide limited partners with the following protections: (i) allows and facilitates communication between limited partners during their consideration of a proposed rollup; (ii) allows the limited partners to obtain a list of the other limited partners involved in the rollup; (iii) disallows the practice of compensating persons soliciting the limited partners' approval of the rollup based on the number of approvals received; (iv) requires greater disclosure to the limited partners of the terms of the rollup and its effects on the limited partners including (a) the reason for the rollup and consideration of the alternatives; (b) the method of allocating interests in the successor entity to the limited partners and why such method was chosen; (c) comparative information including changes in limited partner voting rights, changes in distributions to the limited partners and changes in compensation to the general partner; (d) conflicts of interest of the general partner; (e) changes in the partnership's business plan; (f) the valuation of the limited partnership interests; (g) any significant difference between the exchange values of the limited partnerships and the trading price of the securities to be issued in the rollup transaction; (h) the risks and effects of the proposed rollup transaction; (i) a statement by the general partner of the fairness of the rollup and the general partner' s basis for such opinion; (j) full disclosure of any opinion (other than opinions of counsel) or appraisal received by the general partner related to the proposed transaction, or if no such opinion or appraisal was sought by the general partner, an explanation of why no such opinion or appraisal is necessary to permit the limited partners to make an informed decision regarding the proposed transaction; (k) the rights of the limited partners to exercise dissenters' or appraisal rights or similar rights; (l) the method for allocating rollup consideration to the limited partners and an explanation why such method was chosen; and (m) tax consequences of the rollup; and (v) requires a minimum 60 day offering period during which the limited partners may consider the proposed rollup (or such shorter period as required by state law). Further, the Reform Act also provides that related Rules of Fair Practice will be amended to prohibit exchanges and national securities associations from listing securities issued in connection with a rollup unless the limited partners are afforded the following protections: (i) dissenting limited partners must have the right to one of the following: (a) to receive an appraisal and compensation; (b) to retain a security under substantially similar terms as the original issue; (c) to approve of the rollup by a vote of not less than 75% of the outstanding securities of each participating partnership, or; (d) to use an independent committee to negotiate the terms of the transaction. (ii) not to have their voting power unfairly reduced or abridged. (iii) not to bear an unfair proportion of the costs of the rollup transaction. The Reform Act applies only to certain types of rollup transactions, and there is no certainty that any plan considered by the Partnership at any time would be subject to the Reform Act. Thus Investors must assume in making an investment in the Units that their Partnership Interest will be subject to the provisions of the Partnership Agreement permitting fundamental changes which could result in the termination or reorganization of the Partnership and a partial or total dilution of all Limited Partners' interests in the Partnership. The following is a summary of certain provisions of the Part-ner-ship Agreement relating to the allocation and distribution of the Profits, Losses, Part-ner-ship Cash Flow, Part-ner-ship Refinancing Proceeds, Part-ner-ship Sales Proceeds, and cash upon dissolution of the Part-ner-ship. Investors should note that the Percentage Interests referenced in the discussion below could change as a consequence of a future Dilution Offering. Because an understanding of the defined financial terms is essential to an evaluation of the information presented below, Investors are urged to review carefully the definitions of the terms appearing in the Glossary. 1. Allocations. Losses. After giving effect to the special allocations set forth below, the Partnership's Losses, if any, for each Year generally will be allocated to the Partners in accordance with their respective Percentage Interests. Profits. After giving effect to the special allocations set forth below, the Partnership's Profits for any Year generally will be allocated to the Partners in accordance with their respective Percentage Interests. All items of income, gain, loss, deduction, or credit will be allocated among the Partners proportionately. Further, notwithstanding the foregoing, after giving effect to certain special allocations, the General Partner must be allocated at least 1% of all items of income, gain, loss, deduction or credit. 2. Special Allocations. The following special allocations shall be made in the following order: (i) Partnership Minimum Gain Chargeback. If there is a net decrease in Partnership Minimum Gain during any Year, each Partner shall be specially allocated items of Partnership income and gain for such Year (and, if necessary, subsequent Years) in an amount equal to such Partner' s share of the net decrease in Partnership Minimum Gain, determined in accordance with Treasury Regulations Section 1.704-2(g)(2). Allocations made pursuant to the previous sentence will be made in proportion to the respective amounts required to be allocated to each Partner pursuant to that section of the Regulations. This provision relating to Partnership Minimum Gain Chargebacks is intended to comply with Treasury Regulations Section 1.704-2(f) and will be interpreted and applied in a manner consistent with that Regulation. (ii) Partner Minimum Gain Chargeback. If there is a net decrease in Partner Minimum Gain attributable to a Partner Nonrecourse Debt during any Year, each Partner who has a share of the Partner Minimum Gain attributable to such Partner Nonrecourse Debt shall be specially allocated items of Partnership income and gain for such Year (and, if necessary, subsequent Years) in an amount equal to such Partner's share of the net decrease in Partner Minimum Gain attributable to such Partner Nonrecourse Debt, to the extent required and determined in accordance with Treasury Regulations Section 1.704-2(i)(4). Allocations pursuant to the previous sentence will be made in proportion to the respective amounts required to be allocated to each Partner pursuant to that section of the Regulations. This provision relating to Partner Minimum Gain Chargebacks is intended to comply with Regulation Section 1.704-2(i)(4) and will be interpreted and applied in a manner consistent with that Regulation. (iii) Qualified Income Offset. If a Partner unexpectedly receives any adjustments, allocations or distributions described in Treasury Regulations Sections 1.704-1(b)(2)(ii)(d)(4) through (6) which causes or increases a deficit balance in such Partner's Capital Account (as adjusted pursuant to Treasury Regulations Section 1.704-1(b)(2)(ii)(d)), items of Partnership income and gain will be specially allocated to each such Partner in an amount and manner sufficient to eliminate, to the extent required by the Regulations, the deficit Capital Account of such Partner as quickly as possible, provided that an allocation pursuant to this provision shall be made only if and to the extent that such Partner would have a deficit Capital Account after all other allocations have been tentatively made as if this provision were not in the Partnership Agreement. This provision is intended to be a "qualified income offset," as defined in Regulation Section 1.704-1(b)(2)(ii)(d). (iv) Sales Commission. The Sales Commission shall be allocated to the Units which are not held by the General Partner and its Affiliates and are acquired in the Offering in proportion to the respective capital contributions represented by such Units (i.e., $250 in Sales Commissions per each such Unit). 3. Allocations Between Transferor and Transferee. In the event of the transfer of all or any part of a Partner's interest (in accordance with the provisions of the Partnership Agreement) in the Partnership at any time other than at the end of a year, or the admission of a new Partner (in accordance with the provisions of the Partnership Agreement), the transferring or new Partner's share of the Partnership's income, gain, loss, deductions and credits, as computed both for accounting purposes and for federal income tax purposes, will be allocated between the transferor Partner and the transferee Partner (or Partners), or the new Partner and the other Partners, as the case may be, in the same ratio as the number of days in such year before and after the date of the transfer or admission; provided, however, that if there has been a sale or other disposition of the assets of the Partnership (or any part thereof) during such year, then upon the mutual agreement of all the Partners (excluding the new Partner and the transferring Partner), the Partnership may in its sole discretion treat the periods before and after the date of the transfer or admission as separate years and allocate the Partnership's net income, gain, net loss, deductions and credits for each of such deemed separate years. Notwithstanding the foregoing, the Partnership's "allocable cash basis items," as that term is used in Section 706(d)(2)(B) of the Code, shall be allocated as required by Section 706(d)(2) of the Code and the Regulations thereunder. See "Risk Factors - Tax Risks - Partnership Allocations." 4. Incoming Partner Allocations. The Code prohibits the retroactive allocation of a full share of partnership items to persons who were partners for less than the entire year. As provided above, the Partnership Agreement provides that items of income, gain, loss, deductions and credits will be allocated between a transferor Partner and a transferee Partner in the same ratio as the number of days in the year before and after the date of the transfer or admission, unless the Partnership has sold any of its assets in the year of the transfer or admission. If the Partnership has sold any of its assets in the year of the transfer or admission, then the General Partner may elect, in its sole discretion, to use the interim closing of the books method described above. See "Risk Factors - Tax Risks - Partnership Allocations." 5. Other Allocations. Additional allocations are discussed in the Partnership Agreement and each Investor should carefully review Article 13 of the Partnership Agreement. See the Partnership Agreement attached hereto as Appendix B. 6. Distributions. The Partnership Agreement authorizes the following Distributions to be made to the Partners: Distribution of Partnership Cash Flow. Partnership Cash Flow will be distributed to the Partners within 60 days after the end of each Year of the Partnership, or earlier in the discretion of the General Partner in accordance with their respective Percentage Interests. Distribution of Partnership Sales Proceeds and Partnership Refinancing Proceeds. Partnership Sales Proceeds and Partnership Refinancing Proceeds will be distributed to the Partners within 60 days of the Capital Transaction giving rise to such proceeds, or earlier in the discretion of the General Partner in accordance with their respective Percentage Interests. Distribution Upon Dissolution. Upon the dissolution and termination of the Partnership, the General Partner, or if there is none, a representative of the Limited Partners, will cause the cancellation of the Partnership's Certificate of Limited Partnership, liquidate the assets of the Partnership, and apply and distribute the proceeds of such liquidation in the following order of priority: (i) First, to the payment of debts and liabilities of the Partnership (including amounts owed to the General Partner and its Affiliates) and the expenses of liquidation; (ii) Second, to the creation of any reserves that the General Partner or the representatives of the Limited Partners may deem reasonably necessary for the payment of any contingent or unforeseen liabilities or obligations of the Partnership or of the General Partner arising out of or in connection with the business and operation of the Partnership; and (iii) Third, the balance, if any, will be distributed to the Partners in accordance with the Partners' positive Capital Account balances after such Capital Accounts are adjusted as provided in the Partnership Agreement, and any other adjustments required by the final Regulations under Section 704(b) of the Code. Any general partner with a negative Capital Account following distribution of the liquidation proceeds or the liquidation of its interest in the Partnership must contribute to the Partnership an amount equal to such negative capital account on or before the later of the end of the Partnership's taxable year or within 90 days after the date of liquidation. Any capital so contributed will be (i) distributed to those Partners with positive capital accounts until such capital accounts are reduced to zero, and/or (ii) used to discharge recourse liabilities. It is intended that Capital Accounts will allow for liquidation distributions consistent with the manner in which Partnership Sales Proceeds and Partnership Refinancing Proceeds are distributed; however, there can be no assurance that such will be the case. Tax Withholding. The Partnership is authorized to pay, on behalf of any Partner, any amounts to any federal, state or local taxing authority, as may be necessary for the Partnership to comply with tax withholding provisions of the Code or the income tax or revenue laws of any taxing authority. To the extent the Partnership pays any such amounts that it may be required to pay on behalf of a Partner, such amounts will be treated as a cash Distribution to such Partner and will reduce the amount otherwise distributable to him. The General Partner has the sole right to manage the business of the Part-ner-ship and at all times is required to exercise its responsibilities in a fiduciary capacity. Although the consent of the Limited Partners is not required for any sale or refinancing of the Lithotripsy Systems, in certain instances the requisite consent of the Limited Partners is required for the purchase of additional assets by the Part-ner-ship. See "Powers of the General Partner and Limited Partners' Voting Rights" below. On the Closing Date, the Partnership will contract with the Management Agent to manage and administer the day-to-day operations of the Lithotripsy Systems. See "Proposed Activities - Management and Administration" and the Management Agreement, the form of which is attached as Appendix D. Under the Part-ner-ship Agreement, if the General Partner is adjudged by a court of competent jurisdiction to be liable to the Limited Partners or the Part-ner-ship for acts or omissions of gross negligence or constituting willful misconduct, the General Partner may be removed and another substituted with the consent of all of the Limited Partners. 1. General. The business and affairs of the Partnership will be managed by the General Partner; provided, however, that without the prior approval of a Majority in Interest of the Limited Partners, the General Partner shall have no authority to do any of the following: (a) Offer and sell additional limited partnership interests in the Partnership pursuant to a Dilution Offering; (b) Institute and carry out any plan providing for the merger, consolidation or sale of Partnership Interests; or (c) Incurring any single capital expenditure, any long-term debt or any single borrowing of the Partnership during any twelve month period in excess of $100,000. The General Partner is also expressly prohibited from, among other things: (i) possessing Partnership assets or assigning the rights of the Part-ner-ship in Partnership assets or the Lithotripsy Systems for other than Part-ner-ship purposes; (ii) admitting Limited Partners except as provided in the Part-ner-ship Agreement; and (iii) performing any act (other than an act required by the Part-ner-ship Agreement or any act taken in good faith reliance upon Counsel's opinion) which would, at the time such act occurred, subject any Limited Partner to liability as a general partner in any jurisdiction. 2. Tax Matters. (i) Elections. The General Partner will, in its sole discretion, make for the Partnership any and all elections for federal, state and local tax purposes including, without limitation, any election, if permitted by applicable law, to adjust the basis of the Partnership's property pursuant to Code Sections 754, 734(b) and 743(b), or comparable provisions of state or local law, in connection with transfers of interests in the Partnership and Partnership Distributions. (ii) Tax Matters Partner. The Partnership Agreement designates the General Partner as the Tax Matters Partner (as defined in Section 6231 of the Code) and authorizes it to act in any similar capacity under state or local law. As the Tax Matters Partner, the General Partner is authorized (at the Partnership's expense): (i) to represent the Partnership and Partners before taxing authorities or courts of competent jurisdiction in tax matters affecting the Partnership or Partners in their capacity as Partners; (ii) to extend the statute of limitations for assessment of tax deficiencies against Partners with respect to adjustments to the Partnership's federal, state or local tax returns; (iii) to execute any agreements or other documents relating to or affecting such tax matters, including agreements or other documents that bind the Partners with respect to such tax matters or otherwise affect the rights of the Partnership and Partners; and (iv) to expend Partnership funds for professional services and costs associated therewith. In its capacity as Tax Matters Partner, the General Partner shall oversee the Partnership tax affairs in the manner which, in its best judgment, are in the interests of the Partners. Moreover, the General Partner will, in its sole discretion, not make an election pursuant to Treasury Regulation 301.7701.3 to be treated as an association taxable as a corporation. Subject to certain exceptions provided in the Partnership Agreement or the Act, the Limited Partners generally do not have any right to participate in the management or control of the business of the Partnership. Limited Partners are not required to make any capital contributions to the Part-ner-ship except amounts agreed by them to be paid, or pay or be personally liable for, any expense, liability or obligation of the Part-ner-ship, except (i) to the extent of their respective interests in the Part-ner-ship, (ii) for the obligation to return certain Distributions made to them as provided by the Act, and (iii) to the extent of their liabilities pursuant to their respective Guaranties. See "Risk Factors - Other Investment Risks - Limited Partners' Obligations to Return Certain Distributions" and "Operating Risks - Liability Under the Guaranty." No Part-ner-ship 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 Part-ner-ship Agreement. The Part-ner-ship Agreement contains additional limitations on transfer, including provisions prohibiting transfer that would violate federal or state securities laws. No transferee of the Units will automatically become a Limited Partner. Admission of a transferee requires the fulfillment of other obligations enumerated in the Part-ner-ship Agreement, including either the approval of a Majority in Interest of the Limited Partners (except the assignor Limited Partner) and the General Partner, or the approval of the assignor Limited Partner and the General Partner. Any transferee of a Part-ner-ship Interest who has not been admitted to the Part-ner-ship as a Partner shall not be entitled to any of the rights, powers or privileges of his transferor except the right to receive and be credited or debited with his proportionate share of Part-ner-ship income, gains, profits, losses, deductions, credits or distributions. A transferor Limited Partner will not be released from his personal liability under the Guaranty upon the transfer of his Partnership Interest, unless otherwise specifically agreed by the Bank at the time of the transfer. The General Partner may transfer all or a portion of its Part-ner-ship Interest only with the consent of a Majority in Interest of the Limited Partners before the transferee can be admitted as a Substitute General Partner. Notwithstanding the foregoing, the Partnership Agreement gives the General Partner the authority to transfer all or part of its General Partner interest to any transferee controlled by it or one or more of its Affiliates without obtaining the Limited Partners' consent. Any such transferee would automatically be a substitute general partner. The admission of any new shareholder, the withdrawal of any shareholder from the General Partner or a merger of the General Partner with and into another entity may be done without the approval of the Limited Partners. The Part-ner-ship 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 Part-ner-ship without making provision for the replacement thereof (except to the extent otherwise provided in a reorganization plan approved by the General Partner and Limited Partners as described above); 2. The expiration of its term on December 31, 2049; 3. The bankruptcy or occurrence of certain other events with respect to the General Partner; 4. The election to dissolve the Part-ner-ship made by the General Partner and a Majority in Interest of the Limited Partners, including, pursuant to a reorganization plan; 6. The election to dissolve the Partnership made by the General Partner in the event of certain legislation, case law or regulatory changes adversely affecting the operation of the Partnership; or 7. Any other event resulting in the dissolution or termination of the Partnership under the laws of the State of Kentucky. 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 Part-ner-ship if the remaining general partner or general partners, if any, elect to continue the business of the Partnership, or if no general partner remains, if within 90 days of the occurrence of one of such events, a Majority in Interest of the Limited Partners elect in writing to continue the Part-ner-ship 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 Part-ner-ship's assets and distribute the proceeds thereof in accordance with the priorities set forth in the Part-ner-ship Agreement. See "Profits, Losses and Distributions - Distributions - Distribution upon Dissolution" above and "Optional Purchase of Limited Partner Interests" below. As provided in the Partnership Agreement, the General Partner has the option (which it may assign to the Partnership in its sole discretion) to purchase all the interest of a Limited Partner who (i) dies, (ii) becomes the subject of a domestic proceeding, (iii) becomes insolvent, (iv) acquires a direct or indirect ownership of an interest in a competing venture (including the lease or sublease of competing technology), or (v) defaults on his obligations under the Guaranty. Except in the case of the death of a Limited Partner, the option purchase price is an amount equal to the lesser of (a) the fair market value of the Partnership Interest to be purchased or (b) the Limited Partner's share of the Partnership's book value, if any, as reflected by the Limited Partner's Capital Account in the Partnership, prorated in the event only a portion of the Partnership Interest is being purchased (unadjusted for any appreciation in Partnership assets or amounts due and payable to the Partnership as account receivables, and as reduced by depreciation deductions claimed by the Partnership for tax purposes), and, in certain circumstances, the assumption of the Limited Partner's Guaranty, if any. Although it is anticipated that the Partnership will use the accrual method of accounting, the cash method will be used for determining the capital account value option purchase price discussed herein. 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 capital account value option purchase price may be nominal in amount. In addition, in the event existing or newly enacted laws or regulations or any other legal developments adversely affect (or potentially adversely affect) the operation of the Partnership or the business of the Partnership (e.g., any prohibitions on provider ownership), the General Partner, in its sole discretion, is obligated to either (i) purchase the Partnership Interests of all of the Limited Partners for an amount equal to the lesser of fair market value or book value or (ii) dissolve the Partnership. In the event of the death of a Limited Partner, the option purchase price for that Limited Partner's Partnership Interest is an amount equal to the greater of (x) two (2) 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 (prorated in the event that only a portion of his Partnership Interest is being purchased) as reflected by the Capital Account of the Limited Partner; provided, however, that the purchase price under either method (x) or (y) shall not exceed the fair market value of the Partnership Interest. The withdrawing Limited Partner will not be released from his obligations under the Guaranty unless so agreed by the Bank. See the Partnership Agreement attached hereto as Appendix B and "Risk Factors - Operating Risks - Liability Under the Guaranty." The Partnership Agreement provides that each Limited Partner (other than the General Partner and its Affiliates who hold Limited Partner interests) is prohibited from having a direct or indirect ownership of an interest in a competing venture (including the lease or sublease of competing technology), other than certain ownership interests acquired before the date of the Partnership Agreement (the "Outside Activities"). While they are Limited Partners in the Partnership, each Limited Partner is precluded from engaging in any Outside Activities. In the event that a Limited Partner's interest in the Partnership is terminated or transferred upon the occurrence of certain events as provided in the Partnership Agreement, he is precluded, for a period of two (2) years following the date of his withdrawal, from engaging in any Outside Activity within any market area in which the Partnership is providing services or has provided services within the twelve months preceding the withdrawal. This prohibition is in addition to the right of the General Partner to acquire the interest of a Limited Partner engaged in an Outside Activity as provided in the Partnership Agreement. See "Optional Purchase of Limited Partner Interests" in this Section, and the Partnership Agreement attached hereto as Appendix B. In addition, the Partnership Agreement provides that each Limited Partner acknowledges and agrees that his participation in the Partnership necessarily involves his access to confidential information that is proprietary in nature and, therefore, the exclusive property of the Partnership. Accordingly, the Limited Partners (other than the General Partner and its Affiliates who hold Limited Partner interests) are precluded from disclosing such confidential information during their participation as Limited Partners in the Partnership or thereafter unless required by law or with the prior written consent of the Partnership. The Part-ner-ship Agreement provides that disputes arising thereunder shall be resolved by submission to arbitration in accordance with the provisions of Kentucky law. Each Investor, by executing the Subscription Agreement, irrevocably appoints Cheryl Williams and Joseph Jenkins, M.D., severally, to act as attorneys-in-fact to execute the Part-ner-ship Agreement, any amendments thereto and any certificate of limited part-ner-ship filed by the General Partner. The Part-ner-ship Agreement, in turn, contains provisions by which each Limited Partner irrevocably appoints Cheryl Williams and Joseph Jenkins, M.D., severally, to act as his attorneys-in-fact to make, execute, swear to and file any document necessary to the conduct of the Part-ner-ship's business, such as deeds of conveyance of real or personal property as well as any amendment to the Part-ner-ship Agreement or to any certificate of limited part-ner-ship which accurately reflects actions properly taken by the Partners. Within 90 days after the end of each Year of the Part-ner-ship, 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. Proper and complete records and books of account will be kept by the General Partner in which will be entered fully and accurately all transactions and other matters relative to the Part-ner-ship's business as are usually entered into records, books and accounts maintained by persons engaged in businesses of a like character. Pursuant to applicable law, the Part-ner-ship books and records will be kept on the accrual method basis of accounting. The Part-ner-ship's fiscal year will be the calendar year. The books and records will be located at the Partnership's office, and will be open to the reasonable inspection and examination of the Limited Partners or their duly authorized representatives during normal business hours as provided by the Act. On the Closing Date, it is expected that Womble Carlyle Sandridge & Rice, a Professional Limited Liability Company, 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 E to this Memorandum. 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 Service Contracts may not, however, be available due to confidentiality restrictions contained therein. EX-10.157 70 0070.txt EX 10.157 L. P. AGREEMENT - WESTERN KY. AGREEMENT OF LIMITED PARTNERSHIP OF WESTERN KENTUCKY LITHOTRIPTERS LIMITED PARTNERSHIP iii W##864200 V2 - WESTERN KY LITHO-LTD PARTNERSH.DOC AGREEMENT OF LIMITED PARTNERSHIP OF WESTERN KENTUCKY LITHOTRIPTERS LIMITED PARTNERSHIP TABLE OF CONTENTS Page 1. FORMATION........................................................1 --------- 2. NAME.............................................................1 ---- 3. OFFICES..........................................................1 ------- 4. PURPOSE..........................................................2 ------- 5. TERM.............................................................2 ---- 6. CERTAIN DEFINED TERMS............................................2 --------------------- 7. CAPITAL CONTRIBUTIONS AND DILUTION OFFERINGS.....................6 -------------------------------------------- 8. GUARANTIES.......................................................7 ---------- 9. CONDITIONS TO THE CAPITAL CONTRIBUTIONS OF CERTAIN LIMITED PARTNERS.........................................7 10. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE GENERAL PARTNER..................................................7 11. ADMISSION OF LIMITED PARTNERS....................................8 ----------------------------- 12. CAPITAL ACCOUNTS.................................................9 ---------------- 13. ALLOCATIONS.....................................................10 ----------- 14. DISTRIBUTIONS...................................................14 ------------- l5. RIGHTS AND OBLIGATIONS OF LIMITED PARTNERS......................14 ------------------------------------------ 15. LIMITED LIABILITY...............................................16 ----------------- 16. TRANSFER OF INTERESTS AND ADMISSION OF PARTNERS.................16 ----------------------------------------------- 17. OPTIONAL PURCHASE OF LIMITED PARTNERSHIP INTERESTS ON CERTAIN EVENTS...................................20 18. SALE, ASSIGNMENT OR OTHER TRANSFER OF THE GENERAL PARTNER'S INTEREST........................................26 19. TERMINATION OF THE SERVICES OF THE GENERAL PARTNER..............27 -------------------------------------------------- 20. MANAGEMENT AND OPERATION OF BUSINESS............................28 ------------------------------------ 21. RESERVES.........................................................31 -------- 22. INDEMNIFICATION AND EXCULPATION OF THE GENERAL PARTNER...........31 ------------------------------------------------------ 23. DISSOLUTION OF THE PARTNERSHIP...................................31 ------------------------------ 24. DISTRIBUTION UPON DISSOLUTION....................................33 ----------------------------- 25. BOOKS OF ACCOUNT, RECORDS AND REPORTS............................33 ------------------------------------- 26. NOTICES..........................................................35 ------- 27. AMENDMENTS.......................................................35 ---------- 28. LIMITATIONS ON AMENDMENTS........................................35 ------------------------- 29. MEETINGS, CONSENTS AND VOTING....................................36 ----------------------------- 30. SUBMISSIONS TO THE LIMITED PARTNERS..............................36 ----------------------------------- 31. ADDITIONAL DOCUMENTS.............................................36 -------------------- 32. SURVIVAL OF RIGHTS...............................................36 ------------------ 33. INTERPRETATION AND GOVERNING LAW.................................37 -------------------------------- 34. SEVERABILITY.....................................................37 ------------ 35. AGREEMENT IN COUNTERPARTS........................................37 ------------------------- 36. THIRD PARTIES....................................................37 ------------- 37. POWER OF ATTORNEY................................................37 ----------------- 38. ARBITRATION......................................................38 ----------- 39. CREDITORS........................................................38 --------- SCHEDULES Schedule A - Schedule of Partnership Interests W##864200 V2 - WESTERN KY LITHO-LTD PARTNERSH.DOC THE LIMITED PARTNERSHIP INTERESTS REPRESENTED BY THIS LIMITED PARTNERSHIP AGREEMENT HAVE NOT BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION UNDER THE SECURITIES ACT OF 1933, AS AMENDED, UNDER THE KENTUCKY REVISED STATUTES, AS AMENDED, OR REGISTERED UNDER SIMILAR LAWS OR ACTS OF OTHER STATES IN RELIANCE UPON EXEMPTIONS UNDER SUCH LAWS. IN ADDITION, NO TRANSFERS OF LIMITED PARTNERSHIP INTERESTS MAY BE MADE WITHOUT COMPLIANCE WITH THE RESTRICTIONS SET FORTH IN ARTICLE 17 BELOW. AGREEMENT OF LIMITED PARTNERSHIP OF WESTERN KENTUCKY LITHOTRIPTERS LIMITED PARTNERSHIP THIS AGREEMENT OF LIMITED PARTNERSHIP (the "Agreement") is made as of April 7, 2000, by and among PRIME LITHOTRIPTER OPERATIONS, INC., a New York corporation and a wholly-owned subsidiary of Prime Medical Services, Inc., a Delaware corporation (the "General Partner"), and persons listed on Schedule A attached hereto as the Limited Partners. 1. FORMATION. --------- The Partnership was formed pursuant to the filing in the Office of the Secretary of State of Kentucky on or about November 24, 1999 of a Certificate of Limited Partnership in accordance with the provisions of the Act. 2. NAME. ---- 2.1 The name of the Partnership is "Western Kentucky Lithotripters Limited Partnership." 2.2 The Partnership business shall be conducted under such names as the General Partner may from time to time deem necessary or advisable, provided that appropriate amendments to this Agreement and all necessary filings under applicable assumed or fictitious name statutes or the Act are first obtained. 3. OFFICES. ------- 3.1 The initial principal office of the Partnership shall be at 1301 Capital of Texas Highway, Suite C-300, Austin, Texas 78746, or at such other place as the General Partner may, from time to time, designate by notice to the Limited Partners (the "Records Office"). 3 W##864200 V2 - WESTERN KY LITHO-LTD PARTNERSH.DOC 3.2 The Partnership may have such additional offices as the General Partner may, from time to time, deem necessary or advisable. 4. PURPOSE. ------- The purpose and business of the Partnership shall be: (i) to acquire and operate two or more extracorporeal shock-wave lithotripters (or any other renal stone treatment equipment) for the treatment of renal stones primarily in Kentucky in the counties of Christian, Daviess, Henderson, Hopkins, McCracken and Warren or in such other location(s) as the General Partner may determine, in its sole discretion, to be in the best interests of the Partnership; (ii) to acquire and operate in the future any other urological device or equipment; provided, that such equipment as of the date of acquisition by the Partnership has received FDA premarket approval; (iii) to acquire an interest in any business entity, including, without limitation, a limited partnership, limited liability company or corporation, that engages in any business activity described in this Article 4; and (iv) to engage in any and all activities incidental or related to the foregoing, upon and subject to the terms and conditions of this Agreement. 5. TERM. ---- The Partnership shall terminate on December 31, 2049, unless sooner terminated as herein provided. 6. CERTAIN DEFINED TERMS. --------------------- Certain terms used in this Agreement shall have the following meanings: Act. The Act means the Kentucky Revised Uniform Limited Partnership Act, as then in effect. Affiliate. An Affiliate is (i) any person, partnership, corporation, association or other legal entity ("person") directly or indirectly controlling, controlled by or under common control with another person; (ii) any person owning or controlling 10% or more of the outstanding voting interest of such other person; (iii) any officer, director or partner of such person; and (iv) if such other person is an officer, director or partner, any entity for which such person acts in such capacity. Agreement. This Agreement of Limited Partnership, as the same may be amended from time to time. Bank. First Citizens Bank & Trust Company, its successor in interest, or any other commercial financial institution providing financing to the Partnership. Capital Account. The Partnership capital account of a Partner as computed pursuant to Article 12 of this Agreement. Capital Contributions. All capital contributions made by a Partner or his predecessor in interest which shall include, without limitation, contributions made pursuant to Article 7 of this Agreement. Capital Transaction. Any transaction which, were it to generate proceeds, would produce Partnership Sales Proceeds or Partnership Refinancing Proceeds. Code. The Internal Revenue Code of 1986, as amended, or corresponding provisions of subsequent, superseding revenue laws. Dilution Offering. As provided in Article 7.4 of this Agreement, the future offering of additional limited partnership interests in the Partnership as determined by the General Partner. Except as otherwise provided in Article 7.4, any successful Dilution Offering will proportionately reduce the Percentage Interests of the then current Partners in the Partnership. Domestic Proceeding. Any divorce, annulment, separation or similar domestic proceeding between a married couple. Equipment. The equipment used in the operation of the Lithotripter Systems, including the mobile transport vehicles, the lithotripters and miscellaneous medical equipment and supplies, and any similar additional equipment acquired by the Partnership in the future. FDA. The United States Food and Drug Administration. --- General Partner. The general partner of the Partnership, Prime Lithotripter Operations, Inc., a New York corporation and a wholly-owned subsidiary of Prime Medical Services, Inc., a Delaware corporation. Guaranty. The Guaranty Agreement pursuant to which each Limited Partner will guarantee a portion of the Partnership's obligations to the Bank under the Loan. The form of the Guaranty Agreement is included in the Subscription Packet accompanying the Memorandum. Initial Limited Partner. Joseph Jenkins, M.D., a resident of North Carolina and an Affiliate of the General Partner. The Initial Limited Partner is to be the only limited partner of the Partnership until such time as the new Limited Partners are admitted to the Partnership, at which time the Initial Limited Partner shall withdraw from the Partnership. Limited Partners. The Limited Partners are those investors in the Units admitted to the Partnership and any person admitted as a Limited Partner in accordance with the provisions of this Agreement. Lithotripters. The extracorporeal shock-wave lithotripters to be acquired by the Partnership and any replacements therefor or additional lithotripters to be purchased by the Partnership. Lithotripter Systems. The mobile transport vehicles and operational Lithotripters. Loan. The loan of up to $597,840 from the Bank to the Partnership. Loan proceeds will be used by the Partnership to (i) acquire one new transportable extracorporeal shock-wave lithotripter with options (estimated at $400,000), (ii) acquire one new transport vehicle to transport the new Lithotripter from site to site (estimated at $70,000), (iii) acquire one used Dornier HM-3 model lithotripter housed in a mobile trailer, and a used tractor truck (estimated in the aggregate at $94,000) and (iv) pay sales taxes on the purchase of the Lithotripter Systems (estimated at $33,840). Losses. The net loss (including Net Losses from Capital Transactions) of the Partnership for each Year of the Partnership as determined for federal income tax purposes. Majority in Interest of the Limited Partners. The Limited Partners who hold more than 50% of the Percentage Interests in the Partnership held by the Limited Partners. Memorandum. The Confidential Private Placement Memorandum of the Partnership dated December 15, 1999, as amended or as supplemented. Net Gains from Capital Transactions. The gains realized by the Partnership as a result of or upon any sale, exchange, condemnation or other disposition of the capital assets of the Partnership (which assets shall include Code Section 1231 assets) or as a result of or upon the damage or destruction of such capital assets. Net Losses from Capital Transactions. The losses realized by the Partnership as a result of or upon any sale, exchange, condemnation or other disposition of the capital assets of the Partnership (which shall include Code Section 1231 assets) or as a result of or upon the damage or destruction of such capital assets. Offering. The offer to potential investors of 80 Units pursuant to the Memorandum. Partners. The General Partner and the Limited Partners, collectively, where no distinction is required by the context in which the term is used herein. Partnership. Western Kentucky Lithotripters Limited Partnership, a Kentucky limited partnership. Partnership Cash Flow. For the applicable period, the excess, if any, of (A) the sum of (i) all gross receipts from any source for such period, other than from Partnership loans, Capital Transactions and Capital Contributions, and (ii) any funds released by the Partnership from previously established reserves, over (B) the sum of (i) all cash expenses paid by the Partnership for such period; (ii) the amount of all payments of principal on loans to the Partnership; (iii) capital expenditures of the Partnership; and (iv) such reasonable reserves as the General Partner shall deem necessary or prudent to set aside for future repairs, improvements or equipment replacement or additions, or to meet working capital requirements or foreseen or unforeseen future liabilities and contingencies of the Partnership; provided, however, that the amounts referred to in (B)(i), (ii) and (iii) above shall be taken into account only to the extent not funded by Capital Contributions, loans or paid out of previously established reserves. Such term shall also include all other funds deemed available for distribution and designated as "Partnership Cash Flow" by the General Partner. Partnership Interest. The interest of a Partner in the Partnership as defined by the Act and this Agreement. Partnership Refinancing Proceeds. The cash realized from the refinancing of Partnership assets after retirement of any secured loans and less (i) payment of all expenses relating to the transaction and (ii) establishment of such reasonable reserves as the General Partner shall deem necessary or prudent to set aside for future repairs, improvements, or equipment replacement or additions, or to meet working capital requirements or foreseen or unforeseen future liabilities or contingencies of the Partnership. Partnership Sales Proceeds. The cash realized from the sale, exchange, casualty or other disposition of all or a portion of Partnership assets after the retirement of all secured loans and less (i) the payment of all expenses related to the transaction and (ii) establishment of such reasonable reserves as the General Partner shall deem necessary or prudent to set aside for future repairs, improvements, or equipment replacement or additions, or to meet working capital requirements or foreseen or unforeseen future liabilities or contingencies of the Partnership. Percentage Interest. The interest of each Partner in the Partnership, to be determined initially in the case of a Limited Partner by reference to his Unit ownership based upon the Limited Partners holding an aggregate 80% Percentage Interest in the Partnership, with each initial Unit sold representing an initial 1% interest. The General Partner will initially own a 20% Percentage Interest in the Partnership. A Partner's Percentage Interest may be reduced by a future Dilution Offering. The Partners' Percentage Interests in the Partnership as of the date hereof are as set forth in Schedule A attached hereto. Any future adjustments in the Partners' Percentage Interests, due to future Dilution Offerings or otherwise, will also be reflected by amendments to Schedule A. Profit. The net income of the Partnership (including Net Gains from Capital Transactions) for each Year of the Partnership as determined for federal income tax purposes. Pro Rata Basis. In connection with an allocation or distribution, an allocation or distribution in proportion to the respective Percentage Interests of the class of Partners to which reference is made. Sales Agency Agreement. The sales agency agreement through which MedTech Investments, Inc., an Affiliate of the General Partner and a broker-dealer company registered with the Securities and Exchange commission and a member of the National Association of Securities Dealers, Inc. shall offer and sell the limited partnership interest of the Partnership pursuant to the Memorandum. Sales Commission. The $250 sales commission paid to MedTech Investments, Inc. for each Unit sold. Service. The Internal Revenue Service. Units. The 80 equal limited partner interests in the Partnership offered pursuant to the Memorandum for a price per Unit of $2,500 in cash, plus a personal guaranty of 1% of the Partnership's obligations under the Loan (up to a $5,978.40 principal guaranty obligation). Year. An annual accounting period ending on December 31 of each year during the term of the Partnership. 7. CAPITAL CONTRIBUTIONS AND DILUTION OFFERINGS. -------------------------------------------- 7.1 General Partner Contribution. On or before the date of this Agreement, the General Partner will contribute to the capital of the Partnership cash in the amount equal to 20% (up to $50,000) of the total cash contributed to the Partnership by the Partners in the Offering made pursuant to the Memorandum. 7.2 Limited Partner Contribution. Each Limited Partner hereby agrees to contribute and shall contribute to the capital of the Partnership on the date of his admission to the Partnership the cash amount set forth opposite his name on Schedule A attached hereto. 7.3 No Interest. Except as otherwise provided herein, no interest shall be paid on any contribution to the capital of the Partnership. 7.4 Dilution Offerings. If the General Partner and a Majority in Interest of the Limited Partners determine that it is in the best interest of the Partnership, the General Partner may, from time to time, offer, sell and issue, for and on behalf of the Partnership, additional limited partnership interests in the Partnership (a "Dilution Offering") to investors who are not already Limited Partners ("Qualified Investors"). The primary purpose of any Dilution Offering would be to raise additional capital for any legitimate Partnership purpose as set forth in Article 4. Any limited partnership interests offered by the Partnership in a Dilution Offering shall be sold in the manner and according to the terms prescribed in the sole discretion of the General Partner; provided, however, that any additional limited partnership interests offered in a Dilution Offering will be sold for a price no lower than the highest cash price for which proportionate limited partnership interests in the Partnership have been previously sold by the Partnership unless otherwise determined by a vote of the General Partner and a Majority in Interest of the Limited Partners. Any sale of additional limited partnership interests will result in the proportionate dilution of the Percentage Interests of the existing Partners. Notwithstanding the above, in the event of a Dilution Offering, the General Partner may elect, in its sole discretion, to prevent dilution of its Percentage Interest by either contributing additional capital to the Partnership or purchasing additional limited partnership interests in any Dilution Offering. Limited Partners shall have no right to purchase additional limited partner interests in any Dilution Offering or to make additional capital contributions or take any other action to prevent dilution of their Percentage Interests. Any investor acquiring a limited partnership interest in a Dilution Offering shall agree to be bound by the terms of this Agreement, and shall be automatically admitted as a Limited Partner of the Partnership. Any adjustment in the Partners' Percentage Interests resulting from a Dilution Offering shall be set forth on an amended Schedule A to be attached hereto. 8. GUARANTIES. ---------- Each Partner agrees to execute and deliver to the Partnership on the date of his admission to the Partnership a Guaranty in the amount set forth opposite his name on Schedule A attached hereto. 9. CONDITIONS TO THE CAPITAL CONTRIBUTIONS OF CERTAIN LIMITED PARTNERS. ------------------------------------------------------------------- The obligations of any Limited Partners acquiring their Partnership Interests in the Offering or a Dilution Offering to make cash Capital Contributions hereunder are subject to the condition that the representations, warranties, agreements and covenants of the General Partner set forth in Article 10 of this Agreement are and shall be true and correct or have been and will have been complied with in all material respects on the date such Capital Contributions are required to be made, except to the extent that any such representation or warranty expressly pertains to an earlier date. 10. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE GENERAL PARTNER. ---------------------------------------------------------------- 10.1 The General Partner hereby represents and warrants to the Limited Partners that: (a) The Partnership is a limited partnership formed in accordance with and validly existing under the Act and the other applicable laws of the State of Kentucky; (b) The interests in the Partnership of the Limited Partners will have been duly authorized or created and validly issued and the Limited Partners shall have no personal liability to contribute money to the Partnership other than the amounts agreed to be contributed by them in the manner and on the terms set forth in this Agreement, subject, however, to such limitations as may be imposed under the Act; (c) Except as disclosed in the Memorandum or documentation prepared in connection with a Dilution Offering, no material breach or default adverse to the Partnership exists under the terms of any other material agreement affecting the Partnership; and (d) The General Partner is a New York corporation formed and existing under the laws of the State of New York. 10.2 The General Partner hereby covenants to the Limited Partners that: (a) It will at all times act in a fiduciary manner with respect to the Partnership and the Limited Partners; (b) Except as provided in Article 19, it will serve as the General Partner of the Partnership until the Partnership is terminated without reconstitution; and (c) It will cause the Partnership to carry adequate public liability, property damage and other insurance as is customary in the business to be engaged in by the Partnership. 11. ADMISSION OF LIMITED PARTNERS. ----------------------------- The General Partner may permit the offer and sale of limited partnership interests on the terms and conditions provided in the Memorandum or future Dilution Offerings and may admit persons subscribing for interests as Limited Partners in the Partnership on the terms and conditions set forth in this Article 11. (a) The General Partner shall have approved of the admission of said person in writing on such terms and conditions as the General Partner shall determine; (b) Said person shall have executed such documents or instruments as the General Partner may deem necessary or desirable to effect his admission as a Limited Partner; (c) Said person shall have accepted and adopted all of the terms and provisions of this Agreement, as then amended; (d) Said person (if a corporation) shall deliver to the General Partner a certified copy of a resolution of its Board of Directors authorizing it to become a Limited Partner under the terms and conditions of this Agreement; and (e) Said person, upon request by the General Partner, shall pay such reasonable expenses as may be incurred in connection with its admission as a Limited Partner. 12. CAPITAL ACCOUNTS. ---------------- A Capital Account shall be established for each Partner and shall at all times be determined and maintained in accordance with the Final Treasury Regulations under Section 704(b) of the Code, as the same may be amended. A Partner shall not be entitled to withdraw any part of his Capital Account or to receive any distribution from the Partnership, except as provided in Articles 14 and 25. (a) Each Partners' Capital Account shall be increased by: (i) The amount of his Capital Contribution pursuant to Article 7; and (ii) The amount of Profits allocated to him pursuant to Article 13; and (iii) The Partner's pro rata share (determined in the same manner as such Partner's share of Profits and Losses allocated pursuant to Article 13 hereof) of any income or gain exempt from tax. (b) Each Partner's Capital Account shall be decreased by: (i) The amount of Losses allocated to him pursuant to Article 13; and (ii) The amount of Partnership Cash Flow, Partnership Sales Proceeds and Partnership Refinancing Proceeds distributed to him pursuant to Article 14; and (iii) The Partner's pro rata share of any other expenditures of the Partnership which are not deductible in computing Partnership Profits or Losses and which are not added to the tax basis of any Partnership property, including, without limitation, expenditures described in Section 705(a)(2)(B) of the Code. The Partner's pro rata share of such expenditures shall be determined in the same manner as such Partner's share of Profits and Losses allocated pursuant to Article 13. 13. ALLOCATIONS (a) Nonrecourse Deductions. Nonrecourse Deductions shall be allocated among the Partners in accordance with their respective Percentage Interests. (b) Partner Nonrecourse Deductions. Any Partner Nonrecourse Deductions shall be specially allocated to the Partner who bears the economic risk of loss with respect to the Partner Nonrecourse Debt to which such Partner Nonrecourse Deductions are attributable in accordance with Treasury Regulations Section 1.704-2(i). (c) Profits and Losses. ------------------ (i) The Profits and Losses of the Partnership shall be allocated among the Partners in accordance with their respective Percentage Interests. In allocating Profits and Losses, Net Gains and Losses from Capital Transactions (a part of Profits and Losses), if any, shall be allocated first. (ii) In no event shall Losses be allocated under this Article 13(c) to a Limited Partner if and to the extent that such allocation would cause, as of the end of the Year, the negative balance in such Limited Partner's Capital Account to exceed such Limited Partner's share of Partnership Minimum Gain plus such Limited Partner's share, if any, of Partner Minimum Gain. Any Losses which are not allocated to the Limited Partner by virtue of the application of the preceding sentence shall be allocated to the General Partner. For purposes of this Article 13(c), a Partner's Capital Account shall be treated as reduced by Qualified Income Offset Items as provided in Article 13(d)(iii). All items of income, gain, loss, deduction, or credit shall be allocated among the Partners proportionately. Further, notwithstanding the foregoing, after giving effect to the special allocations in Article 13(d), the General Partner shall be allocated at least 1% of all items of income, gain, loss, deduction or credit. (d) Special Allocations. The following special allocations shall be made: (i) Partnership Minimum Gain Chargeback. If there is a net decrease in Partnership Minimum Gain during any Year, each Partner shall be specially allocated items of Partnership income and gain for such Year (and, if necessary, subsequent Years) in an amount equal to such Partner's share of the net decrease in Partnership Minimum Gain, determined in accordance with Treasury Regulations Section 1.704-2(g)(2). Allocations pursuant to the previous sentence shall be made in proportion to the respective amounts required to be allocated to each Partner. The items to be so allocated shall be determined in accordance with Treasury Regulations Section 1.704-2(f). This Article 13(d)(i) is intended to comply with the minimum gain chargeback requirement in such Section of the Regulations and shall be interpreted consistently therewith. (ii) Partner Minimum Gain Chargeback. Notwithstanding any other provision of this Article 13 except Article 13(d)(i), if there is a net decrease in Partner Minimum Gain attributable to a Partner Nonrecourse Debt during any Year, each Partner who has a share of the Partner Minimum Gain attributable to such Partner Nonrecourse Debt, determined in accordance with Treasury Regulations Section 1.704-2(f), shall be specially allocated items of Partnership income and gain for such Year (and, if necessary, subsequent Years) in an amount equal to such Partner's share of the net decrease in Partner Minimum Gain attributable to such Partner Nonrecourse Debt, to the extent required by and determined in accordance with Treasury Regulations Section 1.704-2(i)(4). Allocations pursuant to the previous sentence shall be made in proportion to the respective amounts required to be allocated to each Partner pursuant thereto. The items to be so allocated shall be determined in accordance with Treasury Regulations Section 1.704-2(i)(4). This Article 13(d)(ii) is intended to comply with the minimum gain chargeback requirement in such Section of the Regulations and shall be interpreted consistently therewith. (iii) Qualified Income Offset. If any Partner unexpectedly receives any adjustment, allocation or distribution described in Treasury Regulations Section 1.704-1(b)(2)(ii)(d)(4) through (6) which causes or increases a deficit balance in such Partner's Capital Account (adjusted for this purpose in the manner provided in Treasury Regulations Section 1.704-1(b)(2)(ii)(d)), items of Partnership income and gain shall be specially allocated to each such Partner in an amount and manner sufficient to eliminate, to the extent required by the Regulations, the deficit Capital Account of such Partner as quickly as possible, provided that an allocation pursuant to this Article 13(d)(iii) shall be made if and only to the extent that such Partner would have a deficit Capital Account after all other allocations provided for in this Article 13 have been tentatively made as if this Article 13(d)(iii) were not in the Agreement. This provision is intended to be a "qualified income offset," as defined in Treasury Regulations Section 1.704-1(b)(2)(ii)(d), such Regulation being specifically incorporated herein by reference. (iv) Sales Commission. The Sales Commission shall be allocated to the Units which are not held by the General Partner and its Affiliates and are acquired in the Offering in proportion to the respective capital contributions represented by such Units (i.e., $250 in Sales Commissions per each such Unit). The purpose of this Article 13(d)(iv) is to allocate the Sales Commission to those Partners who actually bore the burden of paying the Sales Commission. (e) Ordering Provision. In applying the provisions of Articles 13 and 14 with respect to distributions and allocations, the following ordering of priorities shall apply: (i) Capital Accounts shall be deemed to be reduced by Qualified Income Offset Items. (ii) Capital Accounts shall be reduced by Distributions of Partnership Cash Flow under Article 14(a). (iii) Capital Accounts shall be reduced by Distributions of Partnership Sales Proceeds and Partnership Refinancing Proceeds under Article 14(b). (iv) Capital Accounts shall be increased by any Minimum Gain Chargeback under Articles 13(d)(i) and (ii). (v) Capital Accounts shall be increased by any Qualified Income Offset under Article 13(d)(iii). (vi) Capital Accounts shall be reduced by allocations of Nonrecourse Deductions under Article 13(a). (vii) Capital Accounts shall be reduced by allocations of Partner Nonrecourse Deductions under Article 13(b). (viii) Capital Accounts shall be increased by allocations of Profits under Article 13(c). (ix) Capital Accounts shall be reduced by allocations of Losses under Article 13(c). To the maximum extent permitted under the Code, allocations of Profits and Losses shall be modified so that the Partners' Capital Accounts reflect the amount they would have reflected if adjustments required by Articles 13(d)(i), (ii) and (iii) had not occurred. (f) Allocations Between Transferor and Transferee. In the event of the transfer (other than the pledges of the General Partner's interest permitted by Article 19 or Permitted Pledges described in Article 17.2(b)) of all or any part of a Partner's interest (in accordance with the provisions of this Agreement) in the Partnership at any time other than at the end of a Year, or the admission of a new Partner (in accordance with the terms of this Agreement), the transferring Partner or new Partner's share of the Partnership's income, gain, loss, deductions and credits, as computed both for accounting purposes and for federal income tax purposes, shall be allocated between the transferor Partner and the transferee Partner (or Partners), or the new Partner and the other Partners, as the case may be, in the same ratio as the number of days in such Year before and after the date of the transfer or admission; provided, however, that if there has been a sale or other disposition of the assets of the Partnership (or any part thereof) during such Year, then the General Partner may elect, in its sole discretion, to treat the periods before and after the date of the transfer or admission as separate Years and allocate the Partnership's net income, gain, net loss, deductions and credits for each of such deemed separate Years. Notwithstanding the foregoing, the Partnership's "allocable cash basis items," as that term is used in Section 706(d)(2)(B) of the Code, shall be allocated as required by Section 706(d)(2) of the Code and the regulations thereunder. (g) Tax Withholding. The Partnership shall be authorized to pay, on behalf of any Partner, any amounts to any federal, state or local taxing authority, as may be necessary for the Partnership to comply with tax withholding provisions of the Code or the other income tax or revenue laws of any taxing authority. To the extent the Partnership pays any such amounts that it may be required to pay on behalf of a Partner, such amounts shall be treated as a cash distribution to such Partner and shall reduce the amount otherwise distributable to such Partner. 14. DISTRIBUTIONS. ------------- (a) Distribution of Partnership Cash Flow. Partnership Cash Flow shall be distributed to the Partners within 60 days after the end of each Year, or earlier in the discretion of the General Partner, in proportion to their respective Percentage Interests at the time of distribution. (b) Distribution of Partnership Refinancing Proceeds and Partnership Sales Proceeds. Partnership Refinancing Proceeds and Partnership Sales Proceeds shall be distributed to the Partners within 60 days of the Capital Transaction giving rise to such proceeds, or earlier in the discretion of the General Partner, in proportion to their respective Percentage Interests at the time of distribution. (c) Distribution in Liquidation. Upon liquidation of the Partnership, all of the Partnership's property shall be sold and Profits and Losses allocated accordingly. Proceeds from the liquidation of the Partnership shall be distributed in accordance with Article 25. l5. RIGHTS AND OBLIGATIONS OF LIMITED PARTNERS. ------------------------------------------ 15.1 Management. The Limited Partners shall not take part in the management of the business, nor transact any business for the Partnership, nor shall they have power to sign for or to bind the Partnership. The Partnership may, however, contract with one or more Limited Partners to act as the local medical director(s) of the Lithotripter Systems. No Limited Partner may withdraw from the Partnership except as expressly permitted herein. 15.2 Operation of Lithotripter Systems. The Limited Partners shall not operate or utilize the Partnership Lithotripter Systems or other Partnership equipment except pursuant to (i) an agreement with the Partnership; or (ii) any other arrangement specifically approved by the General Partner. 15.3 Outside Activities. The Limited Partners agree that they owe fiduciary duties to the Partnership and, as a consequence, each Limited Partner (that is not the General Partner or an Affiliate of the General Partner) agrees that he shall not engage in "Outside Activities" (as defined below) in the "Market Area" (as defined below) while he is a Limited Partner in the Partnership and shall otherwise be subject to the provisions of this Article 15.3. The phrase "Outside Activities" means directly or indirectly owning, leasing or subleasing a lithotripter (or any similar equipment or competing devices used for treating renal or biliary stone disease) or any other therapeutic equipment acquired by the Partnership. Prohibited indirect ownership shall include without limitation the direct or indirect ownership of any interest in a business venture (through stock ownership, partnership interest ownership, ownership by or through a close family member, or as otherwise determined in good faith by the General Partner) involving the ownership, purchase, lease, sublease, promotion, management or operation of a lithotripter (or similar equipment or competing devices used for treating renal or biliary stone disease) or other competing device or equipment, unless the General Partner determines that such activity by the Limited Partners is not detrimental to the best interests of the Partnership. Notwithstanding the above, Outside Activities shall not include (i) ownership of less than 1% of the capital stock (calculated on a fully diluted basis) of a corporation whose stock is publicly owned or regularly traded on any public exchange, (ii) any ownership interest in an entity engaging in an Outside Activity acquired before the date hereof; provided, that the Limited Partner may not increase or enhance any such previously held investment during the term of the Partnership, and (iii) any other activity determined by the General Partner, in its sole discretion, not to be detrimental to the best interests of the Partnership. Upon the termination or transfer of a Limited Partner's interest in the Partnership for any reason, including a transfer pursuant to Article 18.3 hereof, the withdrawing Limited Partner shall not, for a period of two (2) years following the date of withdrawal, engage in any Outside Activities in any "Market Area" in which the Partnership is transacting business or within the prior twelve months has transacted business (the "Restricted Facilities"). For the purposes of this Article 15.3, the term "Market Area" shall mean (i) the area within a fifty (50) mile radius of any Restricted Facility, but if such area is determined by a court of competent jurisdiction to be too broad, then it shall mean (ii) the area within a thirty (30) mile radius of any Restricted Facility, but if such area is determined by a court of competent jurisdiction to be too broad then it shall mean (iii) the area within a fifteen (15) mile radius of any Restricted Facility. In the event a Limited Partner wishes and intends to engage in an Outside Activity in a Market Area, he must provide written notice of such intent to the General Partner prior to engaging in the Outside Activity. The written notice shall be deemed an election by the Limited Partner to withdraw from the Partnership (the "Notice of Withdrawal"), and shall give the General Partner the purchase rights as provided in Article 18.3 hereof. After the Notice of Withdrawal, the former Limited Partner may engage in an Outside Activity in the Market Area only after waiting the period of two years specified in this Article 15.3. In the event of breach of the waiting period, the Partnership shall be entitled to any remedy at law or equity with respect to such breach, including without limitation an injunction or suit for damages. If a Limited Partner during his participation in the Partnership engages in an Outside Activity in a Market Area without first notifying the General Partner in violation of this Article 15.3, the Limited Partner shall be deemed to have given a Notice of Withdrawal on the date the General Partner first becomes aware of the Limited Partner's Outside Activity in the Market Area. Upon receiving a Limited Partner's Notice of Withdrawal or equivalent thereof, the Partnership may invoke the purchase rights provided in Article 18.3 and shall be entitled to any other remedy at law or equity including without limitation an injunction or suit for damages. 15.4 Disclosure of Confidential Information. Each Limited Partner acknowledges and agrees that his participation in the Partnership under this Agreement necessarily involves his understanding of and access to certain trade secrets and other confidential information pertaining to the business of the Partnership. Accordingly, each Limited Partner (other than the General Partner and its Affiliates that may also hold Limited Partner Partnership Interests) agrees that at all times during his participation in the Partnership as a Limited Partner and thereafter, he will not, directly or indirectly, without the express written authority of the Partnership, unless required by law or directed by a applicable legal authority having jurisdiction over the Limited Partner, disclose or use for the benefit of any person, corporation or other entity (other than the Partnership), or the Limited Partner, (i) any trade, technical, operational, management or other secrets, any patient or customer lists or other confidential or secret data, or any other proprietary, confidential or secret information of the Partnership or (ii) any confidential information concerning any of the financial arrangements, financial condition, hospital or physician contracts, third party payor arrangements, quality assurance and outcome analysis programs, competitive status, customer or supplier matters, internal organizational matters, technical abilities, or other business affairs of or relating to the Partnership. The Limited Partners (other than the General Partner and its Affiliates that may also hold Limited Partner Partnership Interests) acknowledge that all of the foregoing constitutes proprietary information, which is the exclusive property of the Partnership. In the event of breach of this Article 15.4 as determined by the General Partner, the Partnership shall be entitled to any remedy at law or equity with respect to such breach, including without limitation, an injunction or suit for damages. 15. LIMITED LIABILITY. ----------------- No Limited Partner shall be required to make any contribution to the capital of the Partnership except as set forth in Article 7, nor shall any Limited Partner in his capacity as such, be bound by, or personally liable for, any expense, liability or obligation of the Partnership except to the extent of his (i) interest in the Partnership; (ii) Guaranties of Partnership obligations; and (iii) obligation to return distributions made to him under certain circumstances as required by the Act. 16. TRANSFER OF INTERESTS AND ADMISSION OF PARTNERS. ----------------------------------------------- 17.1 Transferability. --------------- (a) The term "transfer" when used in this Agreement with respect to a Partnership Interest includes a sale, assignment, gift, pledge, exchange or any other disposition (but does not include the issuance of new Partnership Interests pursuant to a Dilution Offering); (b) Except as otherwise provided in this Article 17 and Article 19, the General Partner shall not at any time transfer or assign its interest or obligation as General Partner; (c) The Partnership Interest of any Limited Partner shall not be transferred, in whole or in part, except in accordance with the conditions and limitations set forth in Articles 17.2 or 18; (d) The transferee of a Partnership Interest by assignment, operation of law or otherwise, shall have only the rights, powers and privileges enumerated in Article 17.3 or otherwise provided by law and may not be admitted to the Partnership as a Limited Partner except as provided in Article 17.4 or as a General Partner except as provided in Article 17.5; (e) Notwithstanding any provision herein to the contrary, the Partnership Agreement shall in no way restrict the issuance or transfers of stock of the General Partner or the merger of the General Partner with another person or entity; and (f) Notwithstanding any provision herein to the contrary, the issuance of Partnership Interests pursuant to a Dilution Offering and the admission of new Limited Partners pursuant to a Dilution Offering shall be governed by the provisions of Article 7.4 of this Agreement. 17.2 Restrictions on Transfers by Limited Partners. --------------------------------------------- (a) All or part of a Partnership Interest may be transferred by a Limited Partner only with the prior written approval of the General Partner, which approval may be granted or denied in the sole discretion of the General Partner. (b) The General Partner shall not approve any transfer of a Partnership Interest, except a pledge of any Partnership Interest by the General Partner to any bank, insurance company or other financial institution to secure payment of indebtedness (a "Permitted Pledge"), or otherwise unless the proposed transferee shall have furnished the General Partner with a sworn statement that: (i) The proposed transferee proposes to acquire his Partnership Interest as a principal, for investment and not with a view to resale or distribution; (ii) The proposed transferee meets such requirements regarding sophistication, income and net worth as required by applicable state and federal securities laws; (iii) The proposed transferee has met such net worth and income suitability standards as have been established by the General Partner; (iv) The proposed transferee recognizes that investment in the Partnership involves certain risks and has taken full cognizance of and understands all of the risk factors related to the purchase of a Partnership Interest; and (v) The proposed transferee has met all other requirements of the General Partner for the proposed transfer. (c) Other than in the case of a Permitted Pledge, a transfer of a Partnership Interest may be made only if, prior to the date thereof, the Partnership upon request receives an opinion of counsel, satisfactory in form and substance to the General Partner, that neither the offering nor the proposed transfer will require registration under federal or applicable state securities laws or regulations. 17.3 Rights of Transferee. Unless admitted to the Partnership in accordance with Article 17.4, 17.5 or 20, the transferee of a Partnership Interest or a part thereof or any right, title or interest therein shall not be entitled to any of the rights, powers, or privileges of his predecessor in interest, except that he shall be entitled to receive and be credited or debited with his proportionate share of Partnership income, gains, Profits, Losses, deductions, credits or distributions. 17.4 Admission of Limited Partners. Except as otherwise provided in Article 18, the General Partner, or the transferee of all or part of the Partnership Interest of either a General Partner or a Limited Partner, may be admitted to the Partnership as a Limited Partner upon furnishing to the General Partner all of the following: (a) The written approval of a Majority in Interest of all of the Limited Partners (except the assignor Partner), or the assignor Partner alone, which approval may be granted or denied in the sole discretion of such Partners or Partner (as the case may be); (b) The written approval of the General Partner, which approval may be granted or denied in the sole discretion of the General Partner; (c) Acceptance, in a form satisfactory to the General Partner, of all the terms and conditions of this Agreement and any other documents required in connection with the operation of the Partnership pursuant to the terms of this Agreement; (d) A properly executed power of attorney substantially identical to that contained in Article 38; (e) Such other documents or instruments as may be required in order to effect his admission as a Limited Partner; and (f) Payment of such reasonable expenses as may be incurred in connection with his admission as a Limited Partner. 17.5 Admission of General Partners. A Limited Partner, or the transferee of all or part of the Partnership Interest of the General Partner, may be admitted to the Partnership as a general partner upon furnishing to the General Partner all of the following: (a) The written consent of both the General Partner and a Majority in Interest of the Limited Partners, which consent may be granted or denied in the sole discretion of the Partners; (b) Such financial statements, guarantees or other assurances as the General Partner may require with regard to the ability of the proposed general partner to fulfill the financial obligations of a general partner hereunder; (c) Acceptance, in form satisfactory to the General Partner, of all the terms and provisions of this Agreement and any other documents required in connection with the operation of the Partnership pursuant to the terms of this Agreement; (d) A certified copy of a resolution of its Board of Directors (if it is a corporation) authorizing it to become a general partner under the terms and conditions of this Agreement; (e) A power of attorney substantially identical to that contained in Article 38; (f) Such other documents or instruments as may be required in order to effect its admission as a general partner; and (g) Payment of such reasonable expenses as may be incurred in connection with its admission as a general partner. Notwithstanding the above, a transferee that controls or is controlled by the General Partner or one or more of its Affiliates that receives all or part of the Partnership Interest of the General Partner may be admitted to the Partnership as a general partner upon complying with all the provisions of Article 17.5 except for subparagraph 17.5(a). As long as such transferee either controls or is controlled by the General Partner or one or more of its Affiliates, no Limited Partner consents will be required to admit such transferee as a general partner to the Partnership. 17.6 Amendment of Certificate of Limited Partnership and Qualification. The General Partner shall take all steps necessary and appropriate to prepare and record any amendments to the Certificate of Limited Partnership, as may be necessary or appropriate from time to time to comply with the requirements of the Act, including, without limitation, upon the admission to the Partnership of any general partner pursuant to the provisions of Article 17.5, and may for this purpose exercise the power of attorney delivered to the General Partner pursuant to Article 17.5 or 38. In addition, the General Partner shall take all steps necessary and appropriate to prepare and record any and all documents necessary to qualify the Partnership to do business in jurisdictions where the Partnership is doing business, and may for this purpose exercise the power of attorney delivered to the General Partner pursuant to Articles 17.4, 17.5 or 38. 17.7 Fundamental Changes. In the event a plan is approved by the General Partner and a Majority in Interest of the Limited Partners providing for the merger or consolidation of the Partnership with another person or entity, or the sale of all or substantially all of the Partnership Interests, including without limitation the exchange of Partnership Interests for equity interests in another person or entity or for cash or other consideration or combination thereof, then and in such event, the Limited Partners shall be obligated to take or refrain from taking, as the case may be, such actions as the plan may provide, including, without limitation, executing such instruments, and providing such information as the General Partner shall reasonably request. Any plan described in this Article 17.7 may also effect an amendment to the Partnership Agreement or the adoption of a new partnership agreement in connection with the merger of the Partnership with another person or entity as provided in Section 362.546(5) of the Act. The plan may also provide that the General Partner and its Affiliates shall receive fees for services rendered in connection with the operation of the Partnership or any successor entity following the consummation of the transactions described in the plan, and neither the Partnership nor the Partners shall have any right by virtue of this Agreement in the income derived therefrom. Any securities or other consideration to be distributed to the Partners pursuant to the plan shall be distributed in the manner set forth in Article 25(c) as though the Partnership were being liquidated. For this purpose only, the fair market value of the securities or other consideration to be received pursuant to the plan shall be treated as "Profits" and the capital accounts of the Partners shall be increased in the manner provided in Article 13(c)(i). No Partner shall be entitled to any dissent, appraisal or similar rights in connection with a plan contemplated by this Article 17.7. 17.8 Withdrawal of Initial Limited Partner. Upon the date the first Limited Partner is admitted to the Partnership in accordance with Article 11 of this Agreement, the Initial Limited Partner shall withdraw from the Partnership, and thereupon his Capital Contribution shall be returned and his Partnership Interest canceled and reallocated to the Limited Partners. 17. OPTIONAL PURCHASE OF LIMITED PARTNERSHIP INTERESTS ON CERTAIN EVENTS. -------------------------------------------------------------------- 18.1 Death. Upon the death of a Limited Partner, the deceased Limited Partner's executor, administrator, or other legal or personal representative shall give written notice of that fact to the General Partner. The General Partner shall have the option to purchase at the Closing (as defined below) the Partnership Interest of the deceased Limited Partner (whose executor, administrator or other legal or personal representative shall then become obligated to sell such Partnership Interest) at the price determined in the manner provided in Article 18.7 of this Agreement and on the terms and conditions provided in Article 18.8 of this Agreement. The General Partner shall have a period of thirty (30) days following the date of notice of the death of the Limited Partner (the "Option Period") within which to notify in writing the deceased Limited Partner's executor, administrator or other legal or personal representative, whether the General Partner wishes to purchase all or a portion of the Partnership Interest of the deceased Limited Partner. If the General Partner does not elect to purchase the entire Partnership Interest of the deceased Limited Partner before the expiration of the Option Period and in the manner provided herein, the portion of the Partnership Interest not purchased shall be held by the deceased Limited Partner's executor, administrator or other legal representative pursuant to the terms of this Agreement. The General Partner, in its sole discretion, may elect to assign its rights to purchase the Partnership Interest of a deceased Limited Partner under this Article 18.1 to the Partnership and, in such case, the Partnership shall have the same rights as provided for the General Partner under this Article 18.1. 18.2 Bankruptcy, Insolvency or Assignment for Benefit of Creditors of a Limited Partner. In the event that an involuntary or voluntary proceeding under the Federal Bankruptcy Code, as amended, is filed for or against any Limited Partner, or if any Limited Partner shall make an assignment for the benefit of his creditors, or if any Limited Partner has a receiver or custodian appointed for his assets, or any Limited Partner generally fails to pay his debts when due, the insolvent Limited Partner shall give written notice (the "Notice of Insolvency") to the General Partner of the commencement of any such proceeding or the occurrence of such event within five days of the first notice to him of such commencement or occurrence of such event. The General Partner shall have the option to purchase at the Closing (as defined below) the Partnership Interest of the insolvent Limited Partner (which the insolvent Limited Partner or his trustee, custodian, receiver or other personal or legal representative, as the case may be, shall then become obligated to sell) at the price determined in the manner provided in Article 18.7 of this Agreement and on the terms and conditions provided in Article 18.8 of this Agreement. The General Partner shall have a period of thirty (30) days following the date of the Notice of Insolvency (the "Option Period") within which to notify in writing the insolvent Limited Partner or his trustee, custodian, receiver, or other legal or personal representative, whether the General Partner wishes to purchase all or a portion of the Partnership Interest of the insolvent Limited Partner. If the General Partner does not elect to purchase the entire Partnership Interest of the insolvent Limited Partner before the expiration of the Option Period and in the manner provided herein, the portion of the Partnership Interest not purchased shall be held by the insolvent Partner, his trustee, custodian, receiver or other legal or personal representative pursuant to the terms of this Agreement. The General Partner, in its sole discretion, may elect to assign its rights to purchase the Partnership Interest of an insolvent Limited Partner under this Article 18.2 to the Partnership and, in such case, the Partnership shall have the same rights as provided for the General Partner under this Article 18.2. 18.3 Breach of Article 15.3. In the event the General Partner either receives a Notice of Withdrawal as provided in Article 15.3 or receives notice of a breach of Article 15.3 by or with respect to a Limited Partner (the "Competing Limited Partner"), the General Partner may elect, in its sole discretion, to treat such event as a default under this Agreement and enforce the provisions of this Article 18.3. If the General Partner elects to enforce the provisions of this Article 18.3, the General Partner shall give written notice of such election (the "Notice of Default") to the Competing Limited Partner. The General Partner shall have the option to purchase at the Closing (as defined below) the Partnership Interest of the Competing Limited Partner (which the Competing Limited Partner shall then become obligated to sell) at the price determined in the manner provided in Article 18.7 of this Agreement and on the terms and conditions provided in Article 18.8 of this Agreement. The General Partner shall have a period of thirty (30) days following the date it sends the Notice of Default (the "Option Period") within which to notify in writing the Competing Limited Partner, whether the General Partner wishes to purchase all or a portion of the Partnership Interest of the Competing Limited Partner. If the General Partner does not elect to purchase the entire Partnership Interest of the Competing Limited Partner before the expiration of the Option Period and in the manner provided herein, the portion of the Partnership Interest not purchased shall be held by the Competing Limited Partner pursuant to the terms of this Agreement. The General Partner, in its sole discretion, may elect to assign its rights to purchase the Partnership Interest of a Competing Limited Partner under this Article 18.3 to the Partnership and, in such case, the Partnership shall have the same rights as provided for the General Partner under this Article 18.3. 18.4 Domestic Proceeding. In the event that a spouse of a Limited Partner commences against a Limited Partner, or a Limited Partner is named in, a Domestic Proceeding, the Limited Partner shall give written notice (the "Notice of Domestic Proceeding") to the General Partner of the commencement of any such proceeding within five days of the first notice to him of such commencement. The General Partner shall have the option to purchase at the Closing (as defined below) the Partnership Interest of the Limited Partner involved in the Domestic Proceeding (which the Limited Partner shall then become obligated to sell), at the price determined in the manner provided in Article 18.7 of this Agreement and on the terms and conditions provided in Article 18.8 of this Agreement. The General Partner shall have a period of thirty (30) days following the date of the Notice of Domestic Proceeding (the "Option Period") within which to notify in writing the Limited Partner involved in the Domestic Proceeding, whether the General Partner wishes to purchase all or a portion of the Partnership Interest of such Limited Partner. If the General Partner does not elect to purchase the Partnership Interest of the Limited Partner involved in the Domestic Proceeding before the expiration of the Option Period and in the manner provided herein, the portion of the Partnership Interest not purchased shall be held by such Limited Partner pursuant to the terms of this Agreement. The General Partner, in its sole discretion, may elect to assign its rights to purchase the Partnership Interest of the Limited Partner involved in the Domestic Proceeding under this Article 18.4 to the Partnership and, in such case, the Partnership shall have the same rights as provided for the General Partner under this Article 18.4. 18.5 Divestiture Option. If state or federal regulations or laws are enacted or applied, or if any other legal developments occur, which, in the opinion of the General Partner adversely affect (or potentially adversely affect) the operation of the Partnership (e.g., the enactment or application of prohibitory physician self-referral legislation against the Partnership or its Partners), the General Partner shall promptly either, in its sole discretion, (i) take the steps outlined in this Article 18.5 to divest the Limited Partners of their Partnership Interests, or (ii) dissolve the Partnership as provided in Article 24.1(e). If the General Partner chooses option (i), it shall deliver a written notice to all of the Limited Partners (the "Notice of Election") and purchase such Partnership Interests for its own account. The purchase price to be paid for each Partnership Interest shall be determined in the manner as provided in Article 18.7 and shall be on the terms and conditions as provided in Article 18.8. The transfer of the Partnership Interests, the payment of the purchase price and the assumption of the Limited Partners' obligations under their respective Guaranties (as provided in Article 18.7) shall be made at such time as determined by the General Partner to be in the best interests of the Partnership and its Limited Partners. Each Limited Partner hereby makes, constitutes and appoints the General Partner, with full power of substitution, his true and lawful attorney-in-fact, to take such actions and execute such documents on his behalf to effect the transfer of his Partnership Interest as provided in this Article 18.5. The foregoing power of attorney shall not be affected by the subsequent incapacity, mental incompetence, dissolution or bankruptcy of any Limited Partner. 18.6 Default under Guaranties. Notwithstanding any other provision in this Article 18 to the contrary, if any of the events outlined in Articles 18.1 or 18.2 or any other defaulting event outlined in the Guaranty (the "Defaulting Events") should occur with respect to a Limited Partner (the "Defaulting Limited Partner"), and the General Partner determines (in its sole discretion) that such event may result in default and acceleration of an obligation secured by the Guaranty unless another guarantor acceptable to the Lender can be substituted in the place of the Defaulting Limited Partner, then the General Partner shall have the right to immediately take the steps as outlined in this Article 18.6 to prevent such default. Upon the General Partner receiving notice of a Defaulting Event as provided above, the General Partner, in its sole discretion, shall immediately have the right to either (i) sell the entire Partnership Interest of the Defaulting Limited Partner to an investor approved of by the General Partner, (ii) purchase for its own account the entire Partnership Interest of the Defaulting Limited Partner, or (iii) sell the entire Partnership Interest of the Defaulting Limited Partner to one or more of the other Limited Partners. The Defaulting Limited Partner shall sell his Partnership Interest to the purchaser at the purchase price determined in the manner as provided in Article 18.7 and on the terms and conditions as provided in Article 18.8. The transfer of the Partnership Interest, the payment of the purchase price, and the assumption of the Defaulting Limited Partner's obligations under his Guaranty (as provided in Article 18.7), shall be made at such time as determined by the General Partner in order to avoid the default and acceleration of the obligation secured by the Guaranty. Each Limited Partner hereby makes, constitutes and appoints the General Partner, with full power of substitution, his true and lawful attorney-in-fact, to take such actions and execute such documents on his behalf to effect the transfer of his Partnership Interest as provided in this Article 18.6, in the event such Limited Partner becomes a Defaulting Limited Partner. 18.7 Purchase Price. The purchase price to be paid for the Partnership Interest of any Limited Partner whose interest is being purchased pursuant to the provisions of Articles 18.1, 18.2, 18.3, 18.4, 18.5 or 18.6 (the "Selling Limited Partner") shall be determined in the manner provided in this Article 18.7. The purchase price for a Partnership Interest purchased pursuant to the provisions of Article 18.1 shall be an amount equal to the greater of (i) two (2) times the aggregate distributions made with respect to such Partnership Interest pursuant to Article 14(a) during the twelve-month period ending on the Valuation Date (as defined below), or (ii) the Selling Limited Partner's share of the Partnership's book value determined in the manner described below; provided, however, that the purchase price under either method (i) or (ii) shall not exceed the fair market value of the Partnership Interest. The purchase price for a Partnership Interest purchased pursuant to the provisions of Articles 18.2, 18.3, 18.4, 18.5 or 18.6 shall be an amount equal to the lesser of (a) the fair market value of the Selling Limited Partner's Partnership Interest on the Valuation Date (prorated in the event that only a portion of his or her Partnership Interest is being purchased) as determined by an Appraiser (as defined below) selected by the General Partner, or (b) the Selling Limited Partner's share of the Partnership's book value, if any (prorated in the event that only a portion of his or her Partnership Interest is being purchased) as reflected by the Capital Account of the Selling Limited Partner (unadjusted for any appreciation in Partnership assets or amounts due and payable to the Partnership as account receivables, and as reduced by depreciation deductions claimed by the Partnership for tax purposes) as of the Valuation Date (as defined below), and if as of the date of the Closing the Selling Limited Partner still has an outstanding personal obligation under the Guaranty (the "Obligation"), the assumption of the portion of the Obligation as is equal to the portion of the Partnership Interest being purchased. The General Partner, in its sole discretion, may pursue both of the above valuation methods and choose the lesser value of the two as indicated above, or may designate and follow only one of the methods in calculating the purchase price. For purposes of this Article 18.7, the term "Appraiser" shall mean an independent appraiser who is qualified in appraising limited partnership interests and who has at least five years experience. In determining fair market value, the Appraiser shall take into consideration any outstanding indebtedness, liabilities, liens and obligations of the Partnership and the relative Partnership Interests and capital accounts of all Partners, as well as applying any customary discounts for lack of liquidity and control. Such appraisal shall be conducted in accordance with professional appraisal standards. The valuation of the Appraiser shall be conclusive and binding upon the Partnership, the purchaser and the Selling Limited Partner and his representatives. The determination of the Selling Limited Partner's Capital Account or aggregate distributable amount on the Valuation Date (as defined below) shall be made by the Partnership's internal accountant (the "Partnership Accountant") upon a review of the Partnership books of account, and a formal audit is expressly waived. Although the Partnership shall use the accrual method of accounting, for the purposes of this Section 18.7, the cash method of accounting shall be used for determining the Capital Account of the Selling Limited Partner. The statement of the Partnership Accountant with respect to the Capital Account or aggregate distributable amount of the Selling Limited Partner on the Valuation Date shall be binding and conclusive upon the Partnership, the purchaser and the Selling Limited Partner and his representatives. The Valuation Date means the last day of the month immediately preceding the month in which occurs: (i) the death of a Selling Limited Partner, in the case of a purchase by reason of death; (ii) the bankruptcy or insolvency of a Selling Limited Partner, in the case of a purchase by reason of such bankruptcy or insolvency; (iii) the Notice of Withdrawal or breach of Article 15.3 as provided in Article 18.3 in the case of a purchase by reason thereof; (iv) the commencement of the Domestic Proceeding, in the case of a purchase by reason thereof; (v) the Notice of Election as provided in Article 18.5, in the case of a purchase by reason thereof; or (vi) the notice of Defaulting Event as provided in Article 18.6, in the case of a purchase occurring by reason of one of such events. Any Limited Partner whose Partnership Interest is purchased pursuant to the provisions of Article 18.1, 18.2, 18.3, 18.4, 18.5 or 18.6 shall be entitled only to the purchase price which shall be paid at the Closing in cash (or by certified or cashier's check) and shall not be entitled to any Partnership distributions made after the Valuation Date. In the event the purchase price for the Selling Limited Partner's Partnership Interest includes the assumption of a portion of the Obligation, the purchaser shall indemnify the Selling Limited Partner from such portion of the Obligation, and take such steps deemed necessary by the General Partner to formally evidence the assumption of such portion of the Obligation, including without limitation, executing such documents and providing such financial information to the Bank (as the case may be) to evidence the assumption of such portion of the Obligation, and obtain if possible, the release of the Selling Limited Partner from such portion of the Obligation. Notwithstanding the above, in the event of a purchase of a Partnership Interest by the Partnership, the Partnership shall not be obligated to assume the Obligation of the Selling Limited Partner. The transfer of a Partnership Interest of a Selling Limited Partner shall be deemed to occur as of the Valuation Date and the Selling Limited Partner shall have no voting or other rights as a Limited Partner after such date. The purchaser shall be entitled to any distributions attributable to the transferred interest after the Valuation Date and the Partnership shall have the right to deduct the amount of any such distributions made to the Selling Limited Partner after the Valuation Date from the purchase price. 18.8 Closing. ------- 18.8.1 Closing of Purchase and Sale. The Closing of any purchase and sale of a Partnership Interest pursuant to Article 18.1, 18.2, 18.3, 18.4, 18.5 or 18.6 of this Agreement shall take place at the principal office of the Partnership, or such other place designated by the General Partner, on the date determined as follows (the "Closing"): (a) In the case of a purchase and sale occurring by reason of the death of a Limited Partner as provided in Article 18.1 of this Agreement, the Closing shall be held on the thirtieth day (or if such thirtieth day is not a business day, the next business day following the thirtieth day) next following the last to occur of: (i) Qualification of the executor or personal administrator of the deceased Limited Partner's estate; (ii) The date on which any necessary determination of the purchase price of the Partnership Interest to be purchased has been made; or (iii) The date that coincides with the close of the Option Period. (b) In the case of a purchase and sale occurring by reason of the occurrence of one of the events described in Articles 18.2, 18.3 or 18.4 of this Agreement, the Closing shall be held on the thirtieth day (or if such thirtieth day is not a business day, the next business day following the thirtieth day) next following the later to occur of: (i) The date on which any necessary determination of the purchase price of the Partnership Interest to be purchased has been made; or (ii) The date that coincides with the close of the Option Period. (c) In the case of a purchase and sale occurring by reason of the occurrence of one of the events described in either Article 18.5 or 18.6, the Closing shall be held as soon as possible following the determination of the purchase price. At the Closing, although not necessary to effect the transfer, the Selling Limited Partner shall concurrently with tender and receipt of the applicable purchase price, deliver to the purchaser duly executed instruments of transfer and assignment, assigning good and marketable title to the portion or portions of the Selling Limited Partner's entire Partnership Interest thus purchased, free and clear from any liens or encumbrances or rights of others therein. The parties acknowledge that occurrence of any of the triggering events described in Article 18.1, 18.2, 18.3, 18.4, 18.5 or 18.6 and compliance with all the Articles of this Agreement, except the execution of the transfer documents by the Selling Limited Partner as provided above in this Article 18.8.1, are sufficient to effect the complete transfer of the Selling Limited Partner's Partnership Interest and the Selling Limited Partner shall be deemed to consent to admission of the transferee as a substitute Limited Partner. Notwithstanding the date of the Closing or whether a Closing is successfully held, the transfer of a Partnership Interest of a Selling Limited Partner shall be deemed to occur as of the Valuation Date as defined in Article 18.7. The deemed transfer is effective regardless of whether the Selling Limited Partner performs the duties set forth in this Article 18.8.1. 18.8.2 Terms and Conditions of Purchase. The Partnership Interest of a Limited Partner shall not be transferred to any Partner unless the requirements of Articles 17.2 and 17.4 (b) through (f) are satisfied with respect to it. The purchaser shall be liable for all obligations and liabilities connected with that portion of the Partnership Interest transferred to it unless otherwise agreed in writing. 18. SALE, ASSIGNMENT OR OTHER TRANSFER OF THE GENERAL PARTNER'S INTEREST. -------------------------------------------------------------------- 19.1 The General Partner may not mortgage, pledge, hypothecate, transfer, sell, assign or otherwise dispose of all or any part of its interest in the Partnership, whether voluntarily, by operation of law or otherwise (the foregoing actions being hereafter collectively referred to as "Transfers" or singularly as a "Transfer") except as permitted by this Article. 19.2 If the General Partner makes a Transfer (other than a mortgage, pledge or hypothecation) of its general partner interest in the Partnership pursuant to this Article, it shall be liable for all obligations and liabilities incurred by it as the general partner of the Partnership on or before the effective date of such Transfer, but shall not be liable for any obligations or liabilities of the Partnership arising after the effective date of the Transfer. 19.3 No Transfer by the General Partner shall be permitted unless: (a) Counsel for the Partnership shall have rendered an opinion that none of the actions taken in connection with such Transfer will cause the Partnership to be classified other than as a partnership for federal income tax purposes or will cause the termination or dissolution of the Partnership under state law; and (b) Such documents or instruments, in form and substance satisfactory to counsel for the Partnership, shall have been executed and delivered as may be required in the opinion of counsel for the Partnership to effect fully any such Transfer. Notwithstanding the foregoing provisions of this Article 19.3, the General Partner may pledge its interest in the Partnership to any bank, insurance company or other financial institution to secure payment of indebtedness. 19. TERMINATION OF THE SERVICES OF THE GENERAL PARTNER. -------------------------------------------------- If the General Partner shall be finally adjudged by a court of competent jurisdiction to be liable to the Limited Partners or the Partnership for any act of gross negligence or willful misconduct in the performance of its duties under the terms of this Agreement, the General Partner may be removed and another substituted with the consent of all of the Limited Partners. Such consent shall be evidenced by a certificate of removal signed by all of the Limited Partners. In the event of removal, the new general partner shall succeed to all of the powers, privileges and obligations of the General Partner, and the General Partner's interest in the Partnership shall become that of a Limited Partner, and the General Partner shall maintain its same Percentage Interest in the Partnership notwithstanding anything contained in the Act to the contrary. In addition, in the event of removal, the new general partner shall take all steps necessary and appropriate to prepare and record an amendment to the Certificate of Limited Partnership to reflect the removal of the General Partner and the admission of such new general partner. 20. MANAGEMENT AND OPERATION OF BUSINESS. ------------------------------------ 21.1 All decisions with respect to the management of the business and affairs of the Partnership shall be made by the General Partner. 21.2 The General Partner shall be under no duty to devote all of its time to the business of the Partnership, but shall devote only such time as it deems necessary to conduct the Partnership business and to operate and manage the Partnership in an efficient manner. 21.3 The General Partner may charge to the Partnership all ordinary and necessary costs and expenses, direct and indirect, attributable to the activities, conduct and management of the business of the Partnership. The costs and expenses to be borne by the Partnership shall include, but are not limited to, all expenditures incurred in acquiring and financing the Equipment or other Partnership property, legal and accounting fees and expenses, salaries of employees of the Partnership, consulting and quality assurance fees paid to independent contractors, insurance premiums and interest. 21.4 In addition to, and not in limitation of, any rights and powers covenanted by law or other provisions of this Agreement, and except as limited, restricted or prohibited by the express provisions of this Agreement, the General Partner shall have and may exercise on behalf of the Partnership all powers and rights necessary, proper, convenient or advisable to effectuate and carry out the purposes, business and objectives of the Partnership. Such powers shall include, without limitation, the following: (a) Subject to the applicable limitations set forth in Article 21.5(a), to conduct the Offering and any Dilution Offering on behalf of the Partnership; (b) Subject to the limitations set forth in Article 21.5(c), to acquire on behalf of the Partnership (i) two or more fixed base or mobile lithotripsy systems, including the Lithotripter Systems, (ii) any other assets related to the provision of lithotripsy services, or (iii) any other assets or equipment or an interest in another entity consistent with the purposes of the Partnership as provided in Article 4 (collectively, the "Additional Assets"), at such times and at such price and upon such terms, as the General Partner deems to be in the best interest of the Partnership; (c) To purchase, hold, manage, lease, license and dispose of Partnership assets, including the purchase, exchange, trade or sale of the Partnership's assets at such price, or amount, for cash, securities or other property and upon such terms, as the General Partner deems to be in the best interest of the Partnership; provided, that should the Partnership assets be exchanged or traded for securities or other property (the "Replacement Property") the General Partner shall have the same powers with regard to the Replacement Property as it does towards the traded property; (d) To exercise the option of the General Partner or the Partnership to purchase a Limited Partner's Partnership Interest pursuant to Article 18; (e) To determine the travel itinerary and site locations for the Lithotripter Systems or other Partnership technology; (f) Subject to the limitations set forth in Article 21.5(c), to borrow money for any Partnership purpose (including the acquisition of the Additional Assets) and, if security is required therefor, to subject to any security device any portion of the property for the Partnership, to obtain replacements of any other security device, to prepay, in whole or in part, refinance, increase, modify, consolidate or extend any encumbrance or other security device; (g) To deposit, withdraw, invest, pay, retain (including the establishment of reserves in order to acquire the Additional Assets) and distribute the Partnership's funds in any manner consistent with the provisions of this Agreement; (h) To institute and defend actions at law or in equity; (i) To enter into and carry out contracts and agreements and any or all documents and instruments and to do any and all such other things as may be in furtherance of Partnership purposes or necessary or appropriate to the conduct of the Partnership activities; (j) To execute, acknowledge and deliver any and all instruments which may be deemed necessary or convenient to effect the foregoing; (k) To engage or retain one or more persons to perform acts or provide materials as may be required by the Partnership, at the Partnership's expense, and to compensate such person or persons at a rate to be set by the General Partner, provided that the compensation is at the then prevailing rate for the type of services and materials provided, or both. Any person, whether a Partner, an Affiliate of a Partner or otherwise, including without limitation the General Partner, may be employed or engaged by the Partnership to render services and provide materials, including, but not limited to, management services, professional services, accounting services, quality assessment services, legal services, marketing services, maintenance services or provide materials; and if such person is a Partner or an Affiliate of a Partner, he shall be entitled to, and shall be paid compensation for said services or materials, anything in this Agreement to the contrary notwithstanding, provided that the compensation to be received for such services or materials is competitive in price and terms with then prevailing rate for the type of services and/or materials provided. The Partnership, pursuant to the terms of a Management Agreement, will contract with Lithotripters, Inc., a North Carolina Corporation and an Affiliate of the General Partner (the "Management Agent"), with respect to the supervision and coordination of the management and administration of the day-to-day operations of the Partnership's business for a monthly fee equal to the greater of 7% of net Partnership Cash Flow per month, or $5,000 per month. All costs incurred by the Management Agent under the Management Agreement shall be paid or reimbursed by the Partnership directly. The Partnership may also contract with healthcare facilities and/or qualified physicians desiring to use its Lithotripter Systems for the treatment of patients. Owning an interest in the Partnership shall not be a condition to using the Lithotripter Systems. The General Partner and its Affiliates (including the Management Agent) may engage in or possess an interest in other business ventures of any nature and description independently or with others, including, but not limited to, the operation of a fixed-base or mobile lithotripsy unit, whether or not such business ventures are in direct or indirect competition with the Partnership, and neither the Partnership nor the Partners shall have any right by virtue of this Agreement in and to said independent ventures or to the income or profits derived therefrom. 21.5 Notwithstanding the provisions of Article 21.4 above, the General Partner shall have the authority to take the following actions only if it first receives the prior written consent of a Majority in Interest of the Limited Partners: (a) Offer and sell additional limited partnership interests in the Partnership pursuant to a Dilution Offering as described in Article 7.4 hereof; (b) Institute and carry out any plan providing for the merger, consolidation or sale of Partnership Interests or any other actions outlined in Article 17.7 hereof; or (c) Incurring any single capital expenditure, any long-term debt or any single borrowing of the Partnership during any twelve month period in excess of $100,000. 21.6 Notwithstanding the provisions of Articles 21.4 and 22.5, and in addition to other acts expressly prohibited or restricted by this Agreement, the Act or by other applicable laws, the General Partner shall have no authority to act on behalf of the Partnership in: (a) Doing any act in contravention of this Agreement or the Partnership's Certificate of Limited Partnership; (b) Doing any act which would make it impossible to carry on the ordinary business of the Partnership; (c) Possessing or in any manner dealing with the Partnership's property or assigning the rights of the Partnership in the Partnership's property for other than Partnership purposes; (d) Admitting a person as a Limited Partner or a General Partner except as provided in this Agreement; or (e) Performing any act (other than an act required by this Agreement or any act taken in good faith reliance upon counsel's opinion) which would, at the time such act occurred, subject any Limited Partner to liability as a general partner in any jurisdiction. 21. RESERVES. -------- The General Partner may cause the Partnership to create a reserve account to be used exclusively for repairs and acquisition of Additional Assets and for any other valid Partnership purpose. The General Partner shall, in its sole discretion, determine the amount of payments to such reserve. 22. INDEMNIFICATION AND EXCULPATION OF THE GENERAL PARTNER. ------------------------------------------------------ 23.1 The General Partner is accountable to the Partnership as a fiduciary and consequently must exercise good faith and integrity in handling Partnership affairs. The General Partner and its Affiliates shall have no liability to the Partnership which arises out of any action or inaction of the General Partner or its Affiliates if the General Partner or its Affiliates, in good faith, determined that such course of conduct was in the best interest of the Partnership and such course of conduct did not constitute gross negligence or willful misconduct of the General Partner or its Affiliates. The General Partner and its Affiliates shall be indemnified by the Partnership against any losses, judgments, liabilities, expenses and amounts paid in settlement of any claims sustained by them in connection with the Partnership, provided that the same were not the result of gross negligence or willful misconduct on the part of the General Partner or its Affiliates. 23.2 The General Partner shall not be liable for the return of the Capital Contributions of the Limited Partners, and upon dissolution, Limited Partners shall look solely to the assets of the Partnership. 23. DISSOLUTION OF THE PARTNERSHIP. ------------------------------ 24.1 The Partnership shall be dissolved and terminated and its business wound up upon the occurrence of any one of the following events: (a) The expiration of its term on December 31, 2049; (b) The filing by, on behalf of, or against the General Partner of any petition or pleading, voluntary or involuntary, to declare the General Partner bankrupt under any bankruptcy law or act, or the commencement in any court of any proceeding, voluntary or involuntary, to declare the General Partner insolvent or unable to pay its debts, or the appointment by any court or supervisory authority of a receiver, trustee or other custodian of the property, assets or business of the General Partner or the assignment by it of all or any part of its property or assets for the benefit of creditors, if said action, proceeding or appointment is not dismissed, vacated or otherwise terminated within ninety (90) days of its commencement; (c) The determination of the General Partner and a Majority in Interest of the Limited Partners that the Partnership should be dissolved; (d) The occurrence of an event described in a plan approved by the General Partner and a Majority in Interest of the Limited Partners pursuant to Article 17.7 resulting in the dissolution of the Partnership; (e) The election of the General Partner to dissolve the Partnership following the occurrence of an event described in Article 18.5; (f) Except as otherwise provided in any plan approved by the General Partner and a Majority in Interest of the Limited Partners pursuant to Article 17.7, the sale, exchange or other disposition of all or substantially all of the property of the Partnership without making provision for the replacement thereof; and (g) The dissolution, retirement, resignation, death, disability or legal incapacity of a general partner, and any other event resulting in the dissolution or termination of the Partnership under the laws of the State of Kentucky. 24.2 Notwithstanding the provisions of Article 24.1, the Partnership shall not be dissolved and terminated upon the retirement, resignation, bankruptcy, assignment for the benefit of creditors, dissolution, death, disability or legal incapacity of a general partner, and its business shall continue pursuant to the terms and conditions of this Agreement, if any general partner or general partners remain following such event; provided that such remaining general partner or general partners are hereby obligated to continue the business of the Partnership. If no general partner remains after the occurrence of such event, the business of the Partnership shall continue pursuant to the terms and conditions of this Agreement, if, within ninety (90) days after the occurrence of such event, a Majority in Interest of the Limited Partners agree in writing to continue the business of the Partnership, and, if necessary, to the appointment of one or more persons or entities to be substituted as the general partner. In the event the Limited Partners agree as provided above to continue the business of the Partnership, the new general partner or general partners shall succeed to all of the powers, privileges and obligations of the General Partner, and the General Partner's interest in the Partnership shall become a Limited Partner's interest hereunder. Furthermore, in the event a remaining general partner or the Limited Partners, as the case may be, agree to continue the business of the Partnership as provided herein, the remaining general partner or the newly appointed general partner or general partners, as the case may be, shall take all steps necessary and appropriate to prepare and record an amendment to the Certificate of Limited Partnership to reflect the continuation of the business of the Partnership and the admission of a new general partner or general partners, if any. 24. DISTRIBUTION UPON DISSOLUTION. ----------------------------- Upon the dissolution and termination of the Partnership, the General Partner or, if there is none, a representative of the Limited Partners, shall cause the cancellation of the Partnership's Certificate of Limited Partnership, shall liquidate the assets of the Partnership, and shall apply and distribute the proceeds of such liquidation in the following order of priority: (a) First, to the payment of the debts and liabilities of the Partnership, and the expenses of liquidation; (b) Second, to the creation of any reserves which the General Partner (or such representatives of the Limited Partners) may deem reasonably necessary for the payment of any contingent or unforeseen liabilities or obligations of the Partnership or of the General Partner arising out of or in connection with the business and operation of the Partnership; and (c) Third, the balance, if any, shall be distributed to the Partners in accordance with the Partners' positive Capital Account balances after such Capital Accounts are adjusted as provided by Article 13, and any other adjustments required by the Final Treasury Regulations under Section 704(b) of the Code. Any general partner with a negative Capital Account following the distribution of liquidation proceeds or the liquidation of its interest must contribute to the Partnership an amount equal to such negative Capital Account on or before the end of the Partnership's taxable year (or, if later, within ninety days after the date of liquidation). Any capital so contributed shall be (i) distributed to those Partners with positive Capital Accounts until such Capital Accounts are reduced to zero, and/or (ii) used to discharge recourse liabilities. 25. BOOKS OF ACCOUNT, RECORDS AND REPORTS. ------------------------------------- 26.1 Proper and complete records and books of account shall be kept by the General Partner in which shall be entered fully and accurately all transactions and such other matters relating to the Partnership's business as are usually entered into records and books of account maintained by persons engaged in businesses of a like character. The books and records of the Partnership shall be prepared according to the accounting method determined by the General Partner. The Partnership's fiscal year shall be the calendar year. The books and records shall at all times be maintained at the Partnership's Records Office and shall be open to the reasonable inspection and examination of the Partners or their duly authorized representatives during reasonable business hours. 26.2 Within ninety (90) days after the end of each Year, the General Partner shall send to each person who was a Limited Partner at any time during such year such tax information, including, without limitation, federal tax Schedule K-1, as shall be reasonably necessary for the preparation by such person of his federal income tax return. The General Partner will also make available to the Limited Partners any other information required by the Act. 26.3 The General Partner shall maintain at the Partnership's Records Office copies of the Partnership's original Certificate of Limited Partnership and any certificate of amendment, restated certificate or certificate of cancellation with respect thereto and such other documents as the Act shall require. The General Partner will furnish to any Limited Partner upon request or as otherwise required by law a copy of the Partnership's original Certificate of Limited Partnership and any certificate of amendment, restated certificate, or certificate of cancellation, if any. 26.4 The General Partner shall, in its sole discretion, make for the Partnership any and all elections for federal, state and local tax purposes including, without limitation, any election, if permitted by applicable law, to adjust the basis of the Partnership's property pursuant to Code Sections 754, 734(b) and 743(b), or comparable provisions of state or local law, in connection with transfers of interests in the Partnership and Partnership Distributions. 26.5 The General Partner is designated as the Tax Matters Partner (as defined in Section 6231 of the Code) and to act in any similar capacity under state or local law, and is authorized (at the Partnership's expense): (i) to represent the Partnership and Partners before taxing authorities or courts of competent jurisdiction in tax matters affecting the Partnership or Partners in their capacity as Partners; (ii) to extend the statute of limitations for assessment of tax deficiencies against Partners with respect to adjustments to the Partnership's federal, state or local tax returns; (iii) to execute any agreements or other documents relating to or affecting such tax matters, including agreements or other documents that bind the Partners with respect to such tax matters or otherwise affect the rights of the Partnership and Partners; and (iv) to expend Partnership funds for professional services and costs associated therewith. The General Partner is authorized and required to notify the federal, state or local tax authorities of the appointment of a Tax Matters Partner in the manner provided in Treasury Regulations Section 301.6231(a)(7)-1, as modified from time to time. In its capacity as Tax Matters Partner, the General Partner shall oversee the Partnership's tax affairs in the manner which, in its best judgment, is in the interests of the Partners. 26. NOTICES. ------- All notices under this Agreement shall be in writing and shall be deemed to have been given when delivered personally, or mailed by certified or registered mail, postage prepaid, return receipt requested. Notices to the General Partner shall be delivered at, or mailed to, its principal office. Notices to the Partnership shall be delivered at, or mailed to, its principal office with a copy to each of its business offices. Notice to a Limited Partner shall be delivered to such Limited Partner, or mailed to the last address furnished by him for such purposes to the General Partner. Limited Partners shall give notice of a change of address to the General Partner in the manner provided in this Article. 27. AMENDMENTS. ---------- Subject to the provisions of Article 28, this Agreement is subject to amendment only by written consent of the General Partner and a Majority in Interest of the Limited Partners; provided, however, the consent of the Limited Partners shall not be required if such amendments are ministerial in nature and do not contravene the provisions of Article 29. Further, no Limited Partner consent shall be required to amend Schedule A to reflect the admission of Partners as contemplated by the Offering, any Dilution Offering or as otherwise herein permitted. 28. LIMITATIONS ON AMENDMENTS. ------------------------- Notwithstanding the provisions of Article 28, no amendment to this Agreement shall: (a) Enlarge the obligations of any Partner under this Agreement or convert the interest in the Partnership of any Limited Partner into the interest of a general partner or modify the limited liability of any Limited Partner, without the consent of such Partner; (b) Amend the provisions of Article 13, 14, 16 or 25 without the approval of the General Partner and a Majority in Interest of the Limited Partners; provided, however, that the General Partner may at any time amend such Articles without the consent of the Limited Partners in order to permit the Partnership allocations to be sustained for federal income tax purposes, but only if such amendments do not materially affect adversely the rights and obligations of the Limited Partners, in which case such amendments may only be made as provided in this Article 29(b); or (c) Amend this Article 29 without the consent of all Partners. 29. MEETINGS, CONSENTS AND VOTING. ----------------------------- 30.1 A meeting of the Partnership to consider any matter with respect to which the Partners may vote as set forth in this Agreement may be called by the General Partner or by Limited Partners who hold more than twenty-five percent (25%) of the aggregate interests in the Partnership held by all the Limited Partners. Upon receipt of a notice requesting a meeting by such Partner or Partners and stating the purpose of the meeting, the General Partner shall, within ten (10) days thereafter, give notice to the Partners of a meeting of the Partnership to be held at a time and place generally convenient to the Limited Partners on a date not earlier than fifteen (15) days after receipt by the General Partner of the notice requesting a meeting. The notice of the meeting shall set forth the time, date, location and purpose of the meeting. 30.2 Any consent of a Partner required by this Agreement may be given as follows: (a) By a written consent given by the consenting Partner and received by the General Partner at or prior to the doing of the act or thing for which the consent is solicited, or (b) By the affirmative vote by the consenting Partner to the doing of the act or thing for which the consent is solicited at any meeting called pursuant to this Article to consider the doing of such act or thing. 30.3 When exercising voting rights expressly granted under the Articles of this Agreement, each Partner shall have that number of votes as is equal to the Percentage Interest of such Partner at the time of the vote, multiplied by 100. 30. SUBMISSIONS TO THE LIMITED PARTNERS. ----------------------------------- The General Partner shall give the Limited Partners notice of any proposal or other matter required by any provision of this Agreement or by law to be submitted for consideration and approval of the Limited Partners. Such notice shall include any information required by the relevant provision or by law. 31. ADDITIONAL DOCUMENTS. -------------------- Each party hereto agrees to execute and acknowledge all documents and writings which the General Partner may deem necessary or expedient in the creation of this Partnership and the achievement of its purpose. 32. SURVIVAL OF RIGHTS. ------------------ Except as herein otherwise provided to the contrary, this Agreement shall be binding upon and inure to the benefit of the parties hereto, their successor and assigns. 33. INTERPRETATION AND GOVERNING LAW. -------------------------------- When the context in which words are used in this Agreement indicates that such is the intent, words in the singular number shall include the plural and vise versa; in addition, the masculine gender shall include the feminine and neuter counterparts. The Article headings or titles and the table of contents shall not define, limit, extend or interpret the scope of this Agreement or any particular Article. This Agreement shall be governed and construed in accordance with the laws of the State of Kentucky without giving effect to the conflicts of laws provisions thereof. 34. SEVERABILITY. ------------ If any provision, sentence, phrase or word of this Agreement or the application thereof to any person or circumstance shall be held invalid, the remainder of this Agreement, or the application of such provision, sentence, phrase, or word to persons or circumstances, other than those as to which it is held invalid, shall not be affected thereby. 35. AGREEMENT IN COUNTERPARTS. ------------------------- This Agreement may be executed in several counterparts, each of which shall be deemed an original, but all of which shall constitute one and the same instrument. In addition, this Agreement may contain more than one counterpart of the signature page and this Agreement may be executed by the affixing of the signatures of each of the Partners to one of such counterpart signature pages; all of such signature pages shall be read as though one, and they shall have the same force and effect as though all of the signers had signed a single signature page. 36. THIRD PARTIES. ------------- The agreements, covenants and representations contained herein are for the benefit of the parties hereto inter se and are not for the benefit of any third parties including, without limitation, any creditors of the Partnership. 37. POWER OF ATTORNEY. ----------------- Each Limited Partner hereby makes, constitutes and appoints Joseph Jenkins, M.D. and Cheryl Williams, severally, with full power of substitution, his true and lawful attorneys-in-fact, for him and in his name, place and stead and for his use and benefit to sign and acknowledge, file and record, any amendments hereto among the Partners for the further purpose of executing and filing on behalf of each Limited Partner, any and all certificates of limited partnership or other documents necessary to constitute the Partnership or to effect the continuation of the Partnership, the admission or withdrawal of a general partner or a limited partner, the qualification of the Partnership in a foreign jurisdiction (or amendment to such qualification), the admission of substitute Limited Partners or the dissolution or termination of the Partnership, provided such continuation, admission, withdrawal, qualification, or dissolution and termination are in accordance with the terms of this Agreement. The foregoing power of attorney is a special power of attorney coupled with an interest, is irrevocable and shall survive the death, legal incapacity, dissolution or bankruptcy of each Limited Partner. It may be exercised by any one of said attorneys by listing all of the Limited Partners executing any instrument over the signature of the attorney-in-fact acting for all of them. The power of attorney shall survive the delivery of an assignment by a Limited Partner of the whole or any portion of his Unit. In those cases in which the assignee of, or the successor to, a Limited Partner owning a Unit has been approved by the Partners for admission to the Partnership as a substitute Limited Partner, the power of attorney shall survive for the sole purpose of enabling the General Partner to execute, acknowledge and file any instrument necessary to effect such substitution. This power of attorney shall not be affected by the subsequent bankruptcy, dissolution, incapacity or mental incompetence of any Limited Partner. 38. ARBITRATION. ----------- Except as provided in Articles 15.3 and 15.4 of this Agreement, any dispute arising out of or in connection with this Agreement or the breach thereof shall be decided by arbitration in Louisville, Kentucky in accordance with the then effective commercial arbitration rules of the American Arbitration Association, and judgment thereof may be entered in any court having jurisdiction thereof. 39. CREDITORS. --------- None of the provisions of this Agreement shall be for the benefit of or enforceable by any creditors of the Partnership. [Signature Page Follows] IN WITNESS WHEREOF, the parties have executed this Agreement of Limited Partnership as of the day and year first above written. GENERAL PARTNER: PRIME LITHOTRIPTER OPERATIONS, INC., a New York corporation By: __________________________________ Joseph Jenkins, M.D., President ATTEST: _________________________ [CORPORATE SEAL] Secretary INITIAL LIMITED PARTNER: ----------------------- --------------------------------------- Joseph Jenkins, M.D. STATE OF ____________________) ) COUNTY OF __________________ ) On this _______ day of ___________, ____, before me, the undersigned Notary Public in and for the County of _______________ in the State of ___________, personally came Joseph Jenkins, M.D., who, being by me duly sworn, said that he is President of Prime Lithotripter Operations, Inc., the sole general partner of Western Kentucky Lithotripters Limited Partnership, that the seal affixed to the foregoing instrument in writing is the corporate seal of the corporation, and that said writing was signed, sworn to, and sealed by him in behalf of said corporation by its authority duly given. And the said Joseph Jenkins, M.D., further certified that the facts set forth in said writing are true and correct, and acknowledged said instrument to be the act and deed of said corporation. WITNESS my hand and notarial seal. Notary Public My commission expires: - --------------------------- [SEAL] STATE OF ________________ ) ) COUNTY OF ______________ ) I, _______________________________, a notary public in and for the State and County set forth above, do hereby certify that Joseph Jenkins, M.D. personally appeared before me this _____ day of _________, ____ and acknowledged and swore to the due execution of the foregoing Limited Partnership Agreement in his capacity as the initial limited partner. Notary Public My commission expires: - --------------------------- [SEAL] COUNTERPART SIGNATURE PAGE By signing this Counterpart Signature Page, the undersigned acknowledges his or her acceptance of that certain Agreement of Limited Partnership of Western Kentucky Lithotripters Limited Partnership, and his or her intention to be legally bound thereby. Dated this _________ day of ___________________, ____. Signature Printed Name STATE OF _______________ ) ) COUNTY OF _____________ ) BEFORE ME, the undersigned Notary Public in and for the State and County set forth above, on the _______ day of __________________, ____, personally appeared ________________________________________, and, being by me first duly sworn, stated that (s)he signed this Counterpart Signature Page for the purpose set forth above and that the statements contained therein are true. Signature of Notary Public Printed Name of Notary My Commission Expires: - --------------------------- [SEAL] SCHEDULE A Schedule of Partnership Interests WESTERN KENTUCKY LITHOTRIPTERS LIMITED PARTNERSHIP CONTRIBUTIONS OF CAPITAL TO THE PARTNERSHIP AND PERCENTAGE INTERESTS Cash Percentage General Partner Contribution Guaranty(1) _Interest_ - --------------- ------------ -------- -------- Prime Lithotripter Operations, Inc. $ 49,000 $119,568 20% 1301 Capital of Texas Highway Suite C-300 Austin, Texas 78746 Limited Partners William H. Brigance $ 15,000 $ 35,870.40 6% Mukesh B. Desai 10,000 23,913.60 4% Hugh Kendrick Dougherty 17,500 41,848.80 7% Lyndon S. Goode 25,000 59,784.00 10% J. Roger Goodwin 10,000 23,913.60 4% William H. Klompus 5,000 11,956.80 2% Ronald M. Kupper 12,500 29,892.00 5% Robert G. Kupper 7,500 17,935.20 3% Charles H. McKelvey 20,000 47,827.20 8% Prime Lithotripter Operations, Inc. 36,000 95,654.40 16% Charles W. Ransler 10,000 23,913.60 4% Jay R. Ross 10,000 23,913.60 4% David P. Russell 10,000 23,913.60 4% Donald L. Spicer 7,500 17,935.20 3% TOTAL: $ 245,000 $597,840 100% ========== ============ ==== (1) Represents the principal portion of each Partner's guaranty obligation, as each Partner's obligation under the Guaranty includes not only principal, but also (as provided in the Guaranty) accrued and unpaid interest, late payment penalties and all costs incurred by the Bank in collecting any defaulted obligations. The principal amount of the Loan is $597,840. EX-10.158 71 0071.txt EX 10.158 1ST SUPPLEMENT TO MEMORANDUM-WESTERN KY. FIRST SUPPLEMENT DATED JANUARY 31, 2000 TO THE CONFIDENTIAL PRIVATE PLACEMENT MEMORANDUM DATED DECEMBER 15, 1999 WESTERN KENTUCKY LITHOTRIPTERS LIMITED PARTNERSHIP Western Kentucky Lithotripters Limited Partnership, a Kentucky limited partnership (the "Partnership"), by this First Supplement hereby amends and supplements its Confidential Private Placement Memorandum dated December 15, 1999 (the "Memorandum"). Capitalized terms used herein are defined in the Glossary appearing in the Memorandum. Persons who have subscribed for or are considering an investment in the Units offered by the Memorandum should carefully review this First Supplement. Extension of the Offering Pursuant to the authority given to the General Partner in the Memorandum, the General Partner hereby elects to extend the offering termination date to February 29, 2000 (or earlier in the discretion of the General Partner, upon the sale of all Units as provided in the Memorandum). EX-10.159 72 0072.txt EX 10.159 2ND SUPPLEMENT TO MEMORANDUM-WESTERN KY. SECOND SUPPLEMENT DATED FEBRUARY 24, 2000 TO THE CONFIDENTIAL PRIVATE PLACEMENT MEMORANDUM DATED DECEMBER 15, 1999 WESTERN KENTUCKY LITHOTRIPTERS LIMITED PARTNERSHIP Western Kentucky Lithotripters Limited Partnership, a Kentucky limited partnership (the "Partnership"), by this Second Supplement hereby amends and supplements its Confidential Private Placement Memorandum dated December 15, 1999, as amended (the "Memorandum"). Capitalized terms used herein are defined in the Glossary appearing in the Memorandum. Persons who have subscribed for or are considering an investment in the Units offered by the Memorandum should carefully review this Second Supplement. Extension of the Offering Pursuant to the authority given to the General Partner in the Memorandum, the General Partner hereby elects to extend the offering termination date to March 29, 2000 (or earlier at the discretion of the General Partner, upon the sale of all Units as provided in the Memorandum). EX-10.160 73 0073.txt EX 10.160 3RD SUPPLEMENT TO MEMORANDUM-WESTERN KY. THIRD SUPPLEMENT DATED MARCH 29, 2000 TO THE CONFIDENTIAL PRIVATE PLACEMENT MEMORANDUM DATED DECEMBER 15, 1999 WESTERN KENTUCKY LITHOTRIPTERS LIMITED PARTNERSHIP Western Kentucky Lithotripters Limited Partnership, a Kentucky limited partnership (the "Partnership"), by this Third Supplement hereby amends and supplements its Confidential Private Placement Memorandum dated December 15, 1999, as amended and as supplemented (the "Memorandum"). Capitalized terms used herein are defined in the Glossary appearing in the Memorandum. Persons who have subscribed for or are considering an investment in the Units offered by the Memorandum should carefully review this Third Supplement. Extension of the Offering Pursuant to the authority given to the General Partner in the Memorandum, the General Partner hereby elects to extend the offering termination date to April 7, 2000 (or earlier in the discretion of the General Partner, upon the sale of all Units as provided in the Memorandum). EX-10.161 74 0074.txt EX 10.161 L.L.C.AGREEMENT - CONN. LASER LIMITED LIABILITY COMPANY AGREEMENT OF CONNECTICUT LASER MANAGEMENT, L.L.C. Organized under the Delaware Limited Liability Company Act (the "Act"). ARTICLE I. NAME AND LOCATION Section 1.1. Name. The name of this limited liability company is Connecticut Laser Management, L.L.C. (the "Company"). Section 1.2. Members. The only members of the Company upon the execution of this Limited Liability Company Agreement (this "Agreement") shall be Ken Moadel, M.D. ("Moadel"), and Prime RVC, Inc., a Delaware corporation ("Prime"). For purposes of this Agreement, the "Members" shall include such named members and any new members admitted pursuant to the terms of this Agreement, but does not include any person or entity who has ceased to be a member in the Company. Section 1.3. Principal Offices. The principal office of the Company shall be located at 1301 Capital of Texas Hwy., Suite C-300, Austin, Texas 78746-6550 and or at such other locations as may be selected by the Members. Section 1.4. Registered Agent and Address. The name of the registered agent and the address of the registered office of the Company as set forth in the Certificate of Formation of the Company are: The Corporation Trust Company 1209 Orange Street Wilmington, Delaware 19801 Section 1.5. Other Offices. Other offices and other locations for the transaction of business shall be located at such places as the Managers may from time to time determine. Section 1.6 Formation and Ownership. The Company was initially formed with a single member, Moadel. Moadel subsequently transferred a 60% Membership Interest in the Company to Prime RVC pursuant to a certain Assignment Agreement. This agreement supercedes and replaces any prior membership agreement or other governing or organizational document of the Company other than the Certificate of Formation. Section 1.7 Other Agreements. Prime RVC and Moadel each acknowledge that they are parties to a certain Contribution Agreement dated effective April 1, 2000, among Prime Medical Services, Inc., a Delaware corporation ("PMSI"), Prime, New York Laser Management, L.L.C., a Delaware limited liability company, Ken Moadel, M.D., P.C. d/b/a New York Eye Specialists, a New York professional corporation, and Moadel (the "Contribution Agreement"). Prime RVC and Moadel each acknowledge and agree that the Company is being formed as a result of the transactions consummated pursuant to the Contribution Agreement, and that the formation of the Company and the transaction of business by the Company shall not be deemed to alter, amend or terminate the Contribution Agreement or any other Transaction Document (as defined in the Contribution Agreement). Prime RVC and Moadel also acknowledge the existence and enforceability of (a) that certain Facility Development Agreement, entered into as of the date of this Agreement among the parties to the Contribution Agreement and the Company (the "Facility Development Agreement"), and (b) that certain Office and Equipment Use Agreement, entered into as of the date of this Agreement between the Company, Moadel and Ken Moadel, M.D., P.C., a Connecticut professional corporation (the "Office and Equipment Use Agreement"). Each of Prime RVC and Moadel agrees that this Agreement, the Facility Development Agreement, the Office and Equipment Use Agreement, and all other New Development Documents (as defined in the Facility Development Agreement) shall be deemed Transaction Documents for purposes of the Contribution Agreement. ARTICLE II. MEMBERSHIP Section 2.1. Members' Interests. The "Membership Interest" of each Member is set forth on Exhibit A. Section 2.2. Admission to Membership. The admission of new Members shall be only by the vote of the Managers pursuant to Section 8.9 hereof. If new Members are admitted, this Agreement shall be amended to reflect each Member's revised Membership Interest. Section 2.3. Property Rights. No Member shall have any right, title, or interest in any of the property or assets of the Company. Section 2.4. Liability of Members. No Member of the Company shall be personally liable for any debts, liabilities, or obligations of the Company, including under a judgment decree, or order of court, except as expressly provided otherwise in an agreement between the Member and the Company or another party. Section 2.5. Transferability of Membership. Except as provided below, Membership Interests in the Company are transferable only with the unanimous written consent of all Members. If such unanimous written consent is not obtained when required, the transferee shall be entitled to receive only the share of profits or other compensation by way of income and the return of contributions and distributions of available earnings to which the transferor Member otherwise would be entitled. Notwithstanding the foregoing, the following shall not be deemed to violate any provision of this Agreement (each, a "Permitted Transfer"): (i) the Membership Interests of Prime may be freely transferred, without consent, to any entity that is then owned or controlled, directly or indirectly, by PMSI (or its successor in interest), (ii) the Membership Interests of Prime (or any affiliate of Prime that is a Permitted Transferee of such Membership Interests) may be transferred pursuant to and in accordance with Section 8 of the Facility Development Agreement, (iii) the Membership Interests of any Member may be freely assigned, pledged or otherwise transferred, without consent, to secure any debt, liability or obligation owed to Prime by the Company, any Member or any entity affiliated with the Company, (iv) the Membership Interests of any Member may be freely assigned, pledged or otherwise transferred, without consent, in favor of the Lender(s) under, or by the Lender(s) as a result of the enforcement of any security interest arising pursuant to, those certain Credit Facilities (the "Credit Facilities") of PMSI and/or any of PMSI's subsidiaries, (v) the pledge by Moadel of his right to receive distributions from the Company in respect of his Membership Interest, and (vi) the Membership Interests of Moadel may be transferred (A) to a trust or trusts (a "Permitted Trust") for the benefit of Moadel and/or members of Moadel's immediate family (including an entity owned by a Permitted Trust) but only where Moadel either controls the trust or retains during his lifetime the exclusive ability to vote the Membership Interests (pursuant to a written proxy or other instrument reasonably acceptable in form and substance to Prime), (B) to an entity (a "Permitted Entity") that is wholly-owned, directly or indirectly, by Moadel and/or members of Moadel's immediate family, but only where Moadel either controls the entity or retains during his lifetime the exclusive ability to vote the Membership Interests (pursuant to a written proxy or other instrument reasonably acceptable in form and substance to Prime), or (C) from a Permitted Trust or Permitted Entity to Moadel. In addition, after the expiration of the four (4) year period (the "Toll Period") immediately following the Closing Date (as such term is defined in the Facility Development Agreement), Moadel shall be entitled to give a two (2) year notice of his intent to sell all or any portion of his Membership Interest at the expiration of the two (2) year notification period to one or more New York licensed ophthalmologists that are primarily engaged in Refractive Surgery and reasonably acceptable to Prime (and such transfer shall be a "Permitted Transfer"). Notwithstanding the foregoing, the Toll Period and the two (2) year notice requirements shall not apply if (a) the physician transferee of the Membership Interest being transferred by Moadel will own less than five percent (5%) of the total outstanding Membership Interests of the Company after the transfer, (b) the physician transferee is reasonably acceptable to Prime, and (c) the physician transferee executes both an exclusive use agreement and a non-compete agreement containing terms and provisions substantially similar to those contained in Section 9.2 and Section 9.3 of the Contribution Agreement, except that (i) the term of the non-compete agreement shall end one year after such transferee ceases its use of Newco's offices and equipment, and if such cessation of use occurs within three years of such transferee's receipt of the equity interest, then such transferee must forfeit the equity interest for no consideration and (ii) it shall not be necessary to include a provision requiring such physician to transferee devote his or her full business time and attention to rendering professional opthalmic and medical services for any period of time or in any location following such cessation of use by such physician transferee. If the recipient of the Membership Interest being transferred by Moadel will own more than five percent (5%) of the total outstanding Membership Interests of the Company (after the transfer), then, as a condition to any such transfer, the physician transferee must execute both an exclusive use agreement and a non-compete agreement containing terms and provisions substantially similar to those contained in Section 9.2 and Section 9.3 of the Contribution Agreement. As an express condition to any transfer by any Member or any transferee of any Member, the proposed transferee shall have agreed in writing, in form and substance reasonably satisfactory to the non-transferring Members, that such proposed transferee will be bound by all of the terms and provisions of this Agreement, the Facility Development Agreement, the Contribution Agreement and any other Transaction Document which by reasonable implication are applicable to the Membership Interest being transferred and not solely the transferring Member. Notwithstanding any other provisions of this Agreement, if Moadel dies or becomes incapacitated and can no longer manage his affairs, Moadel's executor, administrator, conservator, guardian, trustee, personal representative, or the holder of a power of attorney from Moadel may exercise all of the rights of Moadel under this Agreement, including the right to vote, to designate a Manager, and to receive distributions. In the event of Moadel's death, Moadel's Membership Interest shall transfer to, and this Agreement shall be binding upon (to the extent such provisions may be reasonably applied to a Member who is not a licensed ophthalmologist) and inure to the benefit of, Moadel's heirs or legatees, including, if applicable, to the beneficiaries of a Permitted Trust, whether by the laws of descent and distribution, operation of law or otherwise, each of whom shall be a Permitted Transferee of Moadel's Membership Interest. Section 2.6. Withdrawal of Members. Except in the case of Moadel's death or permanent disability, and without limiting a Member's ability to complete a Permitted Transfer, a Member may not withdraw as a Member from the Company except on the unanimous consent of the remaining Members. The terms of the Member's withdrawal shall be determined by agreement between the remaining Members and the withdrawing Member. ARTICLE III. MEMBERS' MEETINGS Section 3.1. Time and Place of Meeting. All meetings of the Members shall be held at such time and at such place within or without the State of Delaware as shall be determined by the Managers. Section 3.2. Annual Meetings. In the absence of an earlier meeting at such time and place as the Managers shall specify, annual meetings of the Members shall be held at the principal office of the Company on the date which is thirty (30) days after the end of the Company's fiscal year if not a legal holiday, and if a legal holiday, then on the next full business day following, at 10:00 a.m., at which meeting the Members may transact such business as may properly be brought before the meeting. Section 3.3. Special Meetings. Special meetings of the Members may be called at any time by any Member. Business transacted at special meetings shall be confined to the purposes stated in the notice of the meeting. Section 3.4. Notice. Written or printed notice stating the place, day and hour of any Members' meeting, and, in the case of a special meeting, the purpose or purposes for which the meeting is called, shall be delivered not less than ten (10) days nor more than thirty (30) days before the date of the special meeting, either personally or by mail, by or at the direction of the person calling the meeting, to each Member entitled to vote at such meeting. If mailed, such notice shall be deemed to be delivered three (3) days after it is deposited in the United States mail, postage prepaid, to the Member at such Member's address as it appears on the records of the Company at the time of mailing. Section 3.5. Quorum. Members present in person or represented by proxy, holding more than fifty percent (50%) of the total votes which may be cast at any meeting shall constitute a quorum at all meetings of the Members for the transaction of business. If, however, such quorum shall not be present or represented at any meeting of the Members, the Members entitled to vote, present in person or represented by proxy, shall have power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present or represented. When any adjourned meeting is reconvened and a quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally noticed. Once a quorum is constituted, the Members present or represented by proxy at a meeting may continue to transact business until adjournment, notwithstanding the subsequent withdrawal therefrom of such number of Members as to leave less than a quorum. Section 3.6. Voting. Members shall be required to vote in instances or with respect to matters where member voting is required by applicable law or to the extent expressly set forth in this Agreement. With respect to any act or transaction that requires a vote by the Members under applicable law, the affirmative vote or written consent of two of the three Managers shall be required in order to approve the act or transaction, in each instance. Subject to the foregoing, when a quorum is present at any meeting, the vote of the Members, whether present or represented by proxy at such meeting, holding more than fifty percent (50%) of the total votes which may be cast at any meeting shall be the act of the Members, unless the vote of a different number is required by the Act, the Certificate of Formation or this Limited Liability Company Agreement. Each Member shall be entitled to one vote for each percentage point represented by their Membership Interest. Fractional percentage point interests shall be entitled to a corresponding fractional vote. The provisions of this Section shall not interfere with the provisions of Section 8.9 relating to acts or transactions requiring the written approval of two (2) or more Managers, one of which must be a Manager designated by Moadel. Section 3.7. Proxy. Every proxy must be executed in writing by the Member or by his duly authorized attorney-in-fact, and shall be filed with the Secretary of the Company prior to or at the time of the meeting. No proxy shall be valid after eleven (11) months from the date of its execution unless otherwise provided therein. Each proxy shall be revocable unless expressly provided therein to be irrevocable and unless otherwise made irrevocable by law. Section 3.8. Action by Written Consent. Subject to the provisions of Section 8.9, any action required or permitted to be taken at any meeting of the Members may be taken without a meeting if a consent in writing, setting forth the action so taken, shall be signed by all of the Members entitled to vote with respect to the subject matter thereof, and such consent shall have the same force and effect as a unanimous vote of Members. Section 3.9. Meetings by Conference Telephone. Members may participate in and hold meetings of Members by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation in such a meeting shall constitute presence in person at such meeting, except where a person participates in the meeting for the express purpose of objecting to the transaction of any business on the ground that the meeting is not lawfully called or convened. ARTICLE IV. MEMBERSHIP CAPITAL CONTRIBUTIONS Section 4.1. Capital Contributions. Each Member has contributed to the Company the assets set forth in Schedule A. Schedule A sets forth the fair market value of the assets contributed to the Company by each Member, which amount shall be credited to each Member's Capital Account as their initial capital contribution. Capital Accounts shall be maintained in accordance with Treasury Regulations 1.704-1(b) and -2 and shall be interpreted and applied in a manner consistent therewith. The Managers shall have the power to amend this Agreement as may be reasonably necessary to comply with such regulations. No capital contributions shall be required of any Member without the unanimous approval of all the Members to raise additional capital, and only then proportionately as to each Member. Section 4.2. Deficit Capital Account Balances. Upon liquidation of the Company, no Member with a deficit balance in his Capital Account shall have any obligation to restore such deficit balance, or to make any contribution to the capital of the Company. Section 4.3. Tax Matters Partner. The Managers shall designate one Manager by majority vote to act as the tax matters partner (the "TMP") of the Company (as defined in the Code), and the TMP is hereby authorized and required to represent the Company, or designate another person or firm to represent the Company, (in each case, at the Company's expense) in connection with all examinations of the Company's affairs by tax authorities, including resulting administrative and judicial proceedings, and to expend Company funds for professional services and costs associated therewith. The initial TMP shall be Teena Belcik. The Members agree to cooperate with the TMP and its designee, if any, and to do or refrain from doing any or all things reasonably required by the TMP or its designee, if any, to conduct such proceedings. The Company will reimburse the TMP and any such designee for all expenses incurred in connection with its duties as TMP and any costs associated with any administrative or judicial proceeding with respect to the tax liabilities of the Members. ARTICLE V. DISTRIBUTION TO MEMBERS At the end of each calendar quarter, subject only to the qualifications and limitations set forth below, the Company shall, unless provided otherwise in accordance with Section 8.9(b) or Section 8.9(c), distribute its Available Excess Earnings (as hereinafter defined) to its members, to be divided among them in accordance with their Membership Interests as set forth on Exhibit A hereto. As used herein, "Available Excess Earnings" shall mean and refer to all cash and cash equivalents of the Company that would not be reasonably required in order to (a) satisfy all accounts payable and payment obligations of the Company that will become due in the ordinary course within thirty (30) days of the date of determination (assuming no receipt of additional cash or cash equivalents during such thirty (30) day period) or (b) establish adequate reserves to satisfy liabilities or obligations of the Company that are foreseen and can be reasonably estimated on the date of determination. Distributions in kind shall be made on the basis of agreed value as determined by the Managers pursuant to Section 8.9(b)(xvii). Notwithstanding the foregoing, the Company may not make a distribution to its Members in respect of their Membership Interests to the extent that, immediately after giving effect to the distribution, all liabilities of the Company, other than liabilities to the Members with respect to their interests and liabilities for which the recourse of creditors is limited to specified property of the Company, exceed the fair value of the Company assets; except that the fair value of property that is subject to liability for which recourse of creditors is limited, shall be included in the Company assets only to the extent that the fair value of the property exceeds that liability. Notwithstanding the foregoing the Company may not make distributions to its Members in respect of their Membership Interests, other than required Quarterly Tax Distributions (as hereinafter defined), if amounts are owed under the rights of offset in Section 11.1 of the Facility Development Agreement. As long as no party other than PMSI or Prime is in default under the Facility Development Agreement or any other Transaction Document, then, to the extent that (but only to the extent that) the Company possesses the cash flow necessary (in the reasonable discretion of a majority of its managers) to pay its liabilities in the ordinary course consistent with past practices, the Company agrees to make quarterly estimates of its taxable income for the current tax year and, if not prohibited by law, distribute quarterly (the "Quarterly Tax Distributions") an amount that would cover the federal and state income taxes required to be paid by its members with respect such taxable income, based on each member's then current proportionate interest in the Company, assuming that all members pay income taxes on the Company's taxable earnings at a rate equal to the highest effective individual tax rate in effect from time to time; provided, further, that the Company shall determine its actual taxable income at the end of each taxable year and (A) if the Quarterly Tax Distributions in a given year should have been higher based on the amount of actual taxable income for that year, promptly distribute the amounts necessary to eliminate such deficiency or (B) if the Quarterly Tax Distributions in a given year should have been lower based on the amount of actual taxable income for that year, and amounts are owed under the Acquisition Line, withhold dollar for dollar from the first following Quarterly Tax Distribution, and then against subsequent Quarterly Tax Distributions in a like manner, the amounts necessary to eliminate such surplus. ARTICLE VI. ALLOCATION OF NET PROFITS AND LOSSES For accounting and income tax purposes, all items of income, gain, loss, deduction and credit of the Company for any fiscal year shall be allocated between the Members in accordance with their respective Membership Interests as set forth on Exhibit A hereto, except as may be otherwise required by the Internal Revenue Code of 1986, as amended, and the Treasury Regulations promulgated thereunder, in which case, the Members agree to restructure their relationship in a manner that preserves their respective economic benefits intended under the Facility Development Agreement and other Transaction Documents. ARTICLE VII. DISSOLUTION AND WINDING UP Section 7.1. Dissolution. Notwithstanding any provision of the Act, the Company shall be dissolved only upon the first of the following to occur: (a) Forty (40) years from the date of filing the Certificate of Formation of the Company; or (b) Written consent of all the then current Members to dissolution. (c) The bankruptcy of a Member, unless there is at least one remaining Member and such Member or, if more than one remaining Member, all remaining Members agree to continue the Company and its business. (d) The sale of all or substantially all of the assets of the Company. Section 7.2. Winding Up. In the event of dissolution of the Company, the Managers (excluding any Manager holding office pursuant to designation by a Member subject to bankruptcy proceedings) shall wind up the Company's affairs as soon as reasonably practicable. On the winding up of the Company, the Managers shall pay and/or transfer the assets of the Company in the following order: (a) In discharging liabilities (including loans from Members) and the expenses of concluding the Company's affairs; and (b) The balance, if any, shall be distributed to the Members in accordance with the positive balances of the Members Capital Accounts. Upon dissolution and distribution of the Company assets, such distributed assets shall be deemed sold with the resulting net income or net loss being allocated among the Members and credited or debited to their respective Capital Accounts pursuant to Articles IV and VI. ARTICLE VIII. MANAGERS Section 8.1. Selection of Managers. Management of the Company shall be vested in the Managers. Initially, the Company shall have three (3) Managers, being Brad Hummel and Teena Belcik (as the initial Manager designees of Prime), and Ken Moadel, M.D. (as the initial Manager designee of Moadel). Thereafter, for so long as there are three (3) Managers, (a) Prime shall be entitled to designate two (2) of the Managers; and (b) Moadel shall be entitled to designate the remaining one (1) Manager. Notwithstanding the foregoing, a Member shall not be entitled to designate any Manager unless its Membership Interest: (y) has not (other than as allowed under Section 2.5 of this Agreement) been transferred, repurchased, assigned, pledged, hypothecated or in any way alienated; and (z) equals or exceeds the Required Percent (as defined in the Facility Development Agreement) of the aggregate Membership Interests (after including in such determination all Membership Interests held by the Permitted Transferees of such Member); provided, however, that the foregoing limitations shall not apply in the event the parties restructure their relationship pursuant to this Agreement in an effort to comply with any applicable law, rule or regulation that makes such restructuring necessary. Subject to Section 8.3 of this Agreement, the Members may, by unanimous vote of all Members, from time to time, change the number of Managers of the Company and remove or add Managers accordingly. A Manager shall serve as a Manager until his or her resignation or removal pursuant to Section 8.2 or 8.3 of this Article VIII. Managers need not be residents of the State of Delaware or Members of the Company. Section 8.2. Resignations. Each Manager shall have the right to resign at any time upon written notice of such resignation to the Members. Unless otherwise specified in such written notice, the resignation shall take effect upon the receipt thereof, and acceptance of such resignation shall not be necessary to make same effective. The Member who designated a resigning manager shall be entitled to designate the successor thereto without any further action by the Members or other Managers. If any action of the Members is required under applicable law, the Members agree to take such action and any other action as may be necessary from time to time to effectuate the provisions of this Section 8.2. Section 8.3. Removal of Managers. Any Manager may be removed, for or without cause, at any time, but only by the Member who designated such Manager, upon the written notice to all Members. The Member who designated such removed Manager shall be entitled to designate the successor without any further action by the Members or other Managers. If any action of the Members is required under applicable law, the Members agree to take such action and any other action as may be necessary from time to time to effectuate the provisions of this Section 8.3. Section 8.4. General Powers. Subject to the provisions of Section 8.9, the business of the Company shall be managed by its Managers, which may, by the vote or written consent in accordance with this Agreement, exercise any and all powers of the Company and do any and all such lawful acts and things as are not by the Act, the Certificate of Formation or this Limited Liability Company Agreement directed or required to be exercised or done by the Members, including, but not limited to, contracting for or incurring on behalf of the Company debts, liabilities and other obligations, without the consent of any other person, except as otherwise provided herein. Section 8.5. Place of Meetings. The Managers of the Company may hold their meetings, both regular and special, either within or without the State of Delaware. Section 8.6. Annual Meetings. The annual meeting of the Managers shall be held without further notice immediately following the annual meeting of the Members, and at the same place, unless by unanimous consent of the Managers that such time or place shall be changed. Section 8.7. Regular Meetings. Regular meetings of the Managers may be held without written notice at such time and place as shall from time to time be determined by the Managers. Section 8.8. Special Meetings. Special meetings of the Managers may be called by any Manager on seven (7) days notice to each Manager, with such notice to be given personally, by mail or by telecopy. Section 8.9. Quorum and Voting. ----------------- (a) At all meetings of the Managers the presence of at least two (2) Managers shall be necessary and sufficient to constitute a quorum for the transaction of business, and the affirmative vote of at least a majority of the Managers present at any meeting at which there is a quorum shall be the act of the Managers, except as may be otherwise specifically provided by the Act, the Facility Development Agreement, the Certificate of Formation or this Agreement. If a quorum shall not be present at any meeting of Managers, the Managers present there may adjourn the meeting from time to time without notice other than announcement at the meeting, until a quorum shall be present. (b) In addition to the other provision contained in this Agreement requiring the unanimous vote of the Members or the consent of Moadel or Moadel's designated Manager, as long as Moadel is not in material breach of this Agreement, the Facility Development Agreement or any other Transaction Document (subject to any applicable right to cure), the following acts or transactions by, or involving, the Company shall require the prior written consent of two (2) or more Managers, one of which must be the Manager designee of Moadel; provided, however, that no written consent of any party is required under this subsection to take a particular action if (but only to the extent that) such action is required to be taken pursuant to the express terms and provisions of the Facility Development Agreement or any Transaction Document, provided further, that the provisions of this Section shall terminate automatically upon Moadel's Membership Interest dropping below the Required Percent of all outstanding Membership Interests: i. Purchase by the Company of any interest in the Company, irrespective of the source of such interest. ii. Disposition, sale, assignment or other transfer by the Company of any interest it owns in the Company, except that such interest may be extinguished without the approval required under this Article. iii. Issuance of any interest in the Company to any party. iv. Hiring or changing the Company's accountants or legal counsel. v. The Company's entering into a materially different line of business. vi. Entering into a transaction or other action with any Manager, officer or Member, or affiliate thereof. vii. Taking any other action which, by the terms of this Agreement or applicable law, requires the approval or consent of not less than sixty-six percent (66%) of the Members. viii. Any amendment to the Company's Certificate of Formation or this Agreement. ix. Mergers, consolidations or combinations of the Company with another limited liability company or other entity. x. Filing bankruptcy or seeking relief under any debtor relief law. xi. Sale, lease or other transfer of all or substantially all of the Company's assets, or any material amount of the Company's assets other than in the ordinary course of the Company's business. xii. Electing or deciding upon the type of equipment to be acquired by Newco, but only to the extent such equipment is used in or materially relied on for the conduct of Refractive Surgery. xiii. Waiving, refusing to enforce, amending, restating, superseding or modifying any of the provisions of this Agreement or any Transaction Document. xiv. Election or removal of the Manager, if any, designated by Moadel pursuant to this Article. xv. Not making any cash distributions to its Members that are required by this Agreement to be made, or making any distributions to its Members of cash or property that are prohibited under this Agreement. xvi. The determination to make, and the value of, any in kind distributions made pursuant to Article V. xvii. The granting by the Company of any license or permit to use any trade name or trademark associated with the Company business. (c) Any of the above actions taken by the Company without the necessary approval pursuant to Section 8.9(b) is void ab initio. Section 8.10. Committees. The Managers may, by resolution passed by sixty-six percent (66%) of the Managers, designate committees, each committee to consist of two or more Managers (at least one of which must be a Manager designee of Prime and one of which, must be a Manager designee of Moadel), which committees shall have such power and authority and shall perform such functions as may be provided in such resolution. Such committee or committees shall have such name or names as may be designated by the Managers and shall keep regular minutes of their proceedings and report the same to the Managers when required. The foregoing paragraph notwithstanding, the Managers shall establish a Medical Executive Committee, the size and composition of which shall be established by the affirmative vote or written consent of two of the three Managers (one of whom must, as long as Moadel has not delivered the written notice described in Section 9.3(a) of the Contribution Agreement, be the Manager designee of Moadel). Members of the Medical Executive Committee must be licensed physicians, but need not be Members, Managers, or officers of the Company. The Medical Executive Committee shall meet at such time or times as it may, by majority vote of its members, elect and may adopt procedures for the conduct of its meetings. The Medical Executive Committee shall have authority and control over all nonprofessional medical aspects of the Company's business, and shall provide advice to the Managers on decisions relating to equipment purchases, technological obsolescence, quality assurance, credentialing, and such other matters as shall be requested by the Managers. The Medical Executive Committee shall have the authority to bind the Company only with respect to the medical aspects of the Company's business. The majority of the members of the Medical Executive Committee shall constitute a quorum for the transaction of its business and the affirmative vote of the majority of the members of the Medical Executive Committee shall constitute action validly taken by that body. Section 8.11. Compensation of Managers. The Members, by unanimous approval, shall have the authority to provide that any one or more of the Managers shall be compensated, and may, by unanimous approval, fix any compensation (which may include expenses) they elect to pay to any one or more of the Managers. Section 8.12. Action by Written Consent. Any action required or permitted to be taken at any meeting of the Managers or of any committee designated by the Managers may be taken without a meeting if written consent, setting forth the action so taken, is signed by all the Managers or of such committee, and such consent shall have the same force and effect as a unanimous vote at a meeting. Section 8.13. Meetings by Conference Telephone. Managers or members of any committee designated by the Managers may participate in and hold a meeting of the Managers or such committee by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation in such a meeting shall constitute presence in person at such meeting, except where a person participates in the meeting for the express purpose of objecting to the transaction of any business on the ground that the meeting is not lawfully called or convened. Section 8.14. Liability of Managers. No Manager of the Company shall be personally liable for any debts, liabilities, or obligations of the Company, including under a judgment, decree, or order of the court. Section 8.15. Specific Power of Managers. The Managers shall have the authority to enter into and execute all documents in relation to the formation of the Company including, but not limited to, issuance of the Certificate of Formation and this Limited Liability Company Agreement. ARTICLE IX. NOTICES Section 9.1. Form of Notice. Whenever under the provisions of the Act, the Certificate of Formation or this Limited Liability Company Agreement notice is required to be given to any Manager or Member, and no provision is made as to how such notice shall be given, notice shall be given in writing and shall be deemed received (a) when delivered personally or by courier service to the relevant party at its address as set forth below or (b) if sent by mail, on the third (3rd) day following the date when deposited in the United States mail, certified or registered mail, postage prepaid, to the relevant party at its address indicated below: Prime: 1301 Capital of Texas Highway Suite C-300 Austin, Texas 78746 Attention: President Facsimile: (512) 314-4398 with a copy to: Mr. Timothy L. LaFrey Akin, Gump, Strauss, Hauer & Feld, L.L.P. 816 Congress Avenue, Suite 1900 Austin, Texas 78701 Facsimile: (512) 703-1111 Moadel: Ken Moadel, M.D. New York Eye Specialists 16 East 53rd Street, 5th Floor New York, New York 10022 Facsimile: (212) 752-4730 Each party may change its address for purposes of this Section by proper notice to the other parties. Section 9.2. Waiver. Whenever any notice is required to be given to any Manager or Member of the Company under the provision of the Act, the Certificate of Formation or this Limited Liability Company Agreement, a waiver thereof in writing signed by the person or persons entitled to such notice, whether signed before or after the time stated in such waiver, shall be deemed equivalent to the giving of such notice. ARTICLE X. OFFICERS Any Manager may also serve as an officer of the Company. The Managers may designate one or more persons to serve as officers and may designate the titles of all officers. The initial officers of the Company shall be: Ken Shifrin, Chairman of the Board; Brad Hummel, President; Teena Belcik, Vice President, Secretary and Treasurer; and Ken Moadel, M.D., Vice President. The officers of the Company shall have powers commensurate with the corporate powers ordinarily designated with respect to such offices and as otherwise established by the Managers. ARTICLE XI. INDEMNITY Section 11.1. Indemnification. The Company shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative, arbitrative or investigative, any appeal in such an action, suit or proceeding and any inquiry or investigation that could lead to such an action, suit or proceeding (whether or not by or in the right of the Company), by reason of the fact that such person is or was a manager, officer, employee or agent of the Company or is or was serving at the request of the Company as a director, manager, officer, partner, venturer, proprietor, trustee, employee, agent or similar functionary of another corporation, employee benefit plan, other enterprise, or other entity, against all judgments, penalties (including excise and similar taxes), fines, settlements and reasonable expenses (including attorneys' fees and court costs) actually and reasonably incurred by him in connection with such action, suit or proceeding to the fullest extent permitted by any applicable law, and such indemnity shall inure to the benefit of the heirs, executors and administrators of any such person so indemnified pursuant to this Article XI. The right to indemnification under this Article XI shall be a contract right and shall not be deemed exclusive of any other right to which those seeking indemnification may be entitled under any law, bylaw, agreement, vote of members or disinterested managers or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office. Any repeal or amendment of this Article XI by the Managers (pursuant to Section 8.9 hereof) or by changes in applicable law shall, to the extent permitted by applicable law, be prospective only, and shall not adversely affect the indemnification of any person who may be indemnified at the time of such repeal or amendment. Furthermore, subject only to a Manager's indemnification obligations (if any) under the any Transaction Document, and any applicable statutory limitations, Newco agrees that it shall not bring any action, suit or proceeding against any Manager except for intentional misconduct by such Manager. Section 11.2. Indemnification Not Exclusive. The rights of indemnification and reimbursement provided for in this Article XI shall not be deemed exclusive of any other rights to which any such Manager, officer, employee or agent may be entitled under the Certificate of Formation, this Limited Liability Company Agreement, agreement or vote of Members, or as a matter of law or otherwise. Section 11.3. Other Indemnification Clauses. Notwithstanding the foregoing, this Article XI shall not be construed to contradict the indemnification provision of the Facility Development Agreement. Notwithstanding anything contained herein, this Article XI shall be ineffectual and shall not permit or require indemnification for all, or any, losses, costs, liabilities, claims or expenses arising, directly or indirectly, from any action or omission permitting or requiring indemnification under the Facility Development Agreement; and in no event may any indemnity be allowed under this Agreement or pursuant to any provision of the Act for an amount paid or payable pursuant to the indemnification provisions of the Facility Development Agreement. ARTICLE XII. MISCELLANEOUS Section 12.1. Fiscal Year. The fiscal year of the Company shall be the calendar year. Section 12.2. Records. At the expense of the Company, the Managers shall maintain records and accounts of all operations of the Company. At a minimum, the Company shall keep at its principal place of business the following records: (a) A current list of the full name, last known mailing address and Membership Interest of each Member; (b) A current list of the full name and business or residence address of each Manager; (c) A copy of the Certificate of Formation and Limited Liability Company Agreement of the Company, and all amendments thereto, together with executed copies of any powers of attorney pursuant to which any of the foregoing were executed; (d) Copies of the Company's federal, state and local income tax or information returns and reports, if any, for the six most recent tax years; and (e) Correct and complete books and records of account of the Company. Section 12.3. Seal. The Company may by resolution of the Managers adopt and have a seal, and said seal may be used by causing it or a facsimile thereof to be impressed or affixed or in any manner reproduced. Any officer of the Company shall have authority to affix the seal to any document requiring it. Section 12.4. Agents. Every Manager and Officer is an agent of the Company for the purpose of the business. The act of a Manager or Officer, including the execution in the name of the Company of any instrument for carrying on in the usual way the business of the Company, binds the Company; provided, however, if such act requires the approval of the Members or the Managers, such approval has first been obtained. Section 12.5. Checks. All checks, drafts and orders for the payment of money, notes and other evidences of indebtedness issued in the name of the Company shall be signed by such officer, officers, agent or agents of the Company and in such manner as shall from time to time be determined by resolution of the Managers. In the absence of such determination by the Managers, such instruments shall be signed by the Treasurer or the Secretary and countersigned by the President or a Vice President of the Company, if the Company has such officers. Section 12.6. Deposits. Subject to the provisions of Section 8.9(b)(v), all funds of the Company shall be deposited from time to time to the credit of the Company in such banks, trust companies or other depositories as the Managers may select. Section 12.7. Annual Statement. The Managers shall present at each annual meeting a full and clear statement of the business and condition of the Company. Section 12.8. Financial Statements. As soon as practicable after the end of each fiscal year of the Company, a balance sheet as at the end of such fiscal year, and a profit and loss statement for the period ended, shall be distributed to the Members, along with such tax information (including all information returns) as may be necessary for the preparation of each Member of its federal, state and local income tax returns. The balance sheet and profit and loss statement referred to in the previous sentence may be as shown on the Company's federal income tax return. Section 12.9. Binding Arbitration. Any controversy between the Members regarding this Agreement or any other Transaction Document, any claims arising out of any breach or alleged breach of this Agreement or any other Transaction Document, and any claims arising out of the relationship between the Members created hereunder, shall be submitted to binding arbitration by all Members involved in accordance with the procedures for arbitration contained in the Facility Development Agreement. Section 12.10. Counterparts. This Agreement may be executed in several counterparts, each of which shall constitute an original and all of which together shall constitute one and the same instrument. Any party hereto may execute this Agreement by signing any one counterpart. ARTICLE XIII. AMENDMENTS Section 13.1. Amendments. Except to the extent expressly provided otherwise herein, this Agreement may only be altered, amended or repealed and a new limited liability company agreement may only be adopted only in accordance with the provisions of Section 8.9 by the Members at any regular meeting of the Members or at any special meeting of the Members called for that purpose, or by execution of a written consent in accordance with the provisions of Section 3.8. Section 13.2. When Limited Liability Company Agreement Silent. It is expressly recognized that when the Limited Liability Company Agreement is silent or in conflict with the requirements of the Act as to the manner of performing any Company function, the provisions of the Act shall control. Section 13.3. Integration with Facility Development Agreement. To the extent of any inconsistency between the provisions of the Facility Development Agreement and this Agreement, the terms and provisions of the Facility Development Agreement shall control. Accordingly, no Member or Manager shall be deemed to have breached any fiduciary duty owed to any other Member or the Company as a result of investing in, acquiring or developing any office location, business or operations that are related or similar to, or in direct competition with, the Company's business if such act or transaction is allowed or not prohibited by the provisions of Article VIII of the Facility Development Agreement, or the termination of such provisions. [Signature page follows] S-1 SIGNATURE PAGE TO LIMITED LIABILITY COMPANY AGREEMENT IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the day and year first above written. -------------------------------- Ken Moadel, M.D. Prime RVC, Inc. Teena Belcik, Treasurer A-1 EXHIBIT A OWNERSHIP INTERESTS Name Contribution Agreed Value Membership Interest Prime Assets and 65% 65% other property Moadel Assets and 35% 35% other property EX-10.162 75 0075.txt EX 10.162 L.L.C.AGREEMENT - ST. LOUIS LIMITED LIABILITY COMPANY AGREEMENT OF PRIME REFRACTIVE - St. Louis, L.L.C. Organized under the Delaware Limited Liability Company Act (the "Act"). ARTICLE I. NAME AND LOCATION Section 1.1. Name. The name of this limited liability company is Prime Refractive - St. Louis, L.L.C. (the "Company"). Section 1.2. Members. The only members of the Company upon the execution of this Limited Liability Company Agreement (this "Agreement") shall be Prime Refractive, L.L.C., a Delaware limited liability company ("Prime"), Kirk P. Morey, M.D. and Sean Mulqueeny, O.D. For purposes of this Agreement, the "Members" shall include such named members and any new members admitted pursuant to the terms of this Agreement, but does not include any person or entity who has ceased to be a member in the Company. Section 1.3. Principal Office. The principal office of the Company shall be located in 1301 Capital of Texas Hwy., Suite C-300, Austin, Texas 78746-6550, or such other location as may be selected by the Members. Section 1.4. Registered Agent and Address. The name of the registered agent and the address of the registered office of the Company as set forth in the Certificate of Formation of the Company are: The Corporation Trust Company 1209 Orange Street Wilmington, Delaware 19801 Section 1.5. Other Offices. Other offices and other facilities for the transaction of business shall be located at such places as the Managers may from time to time determine. ARTICLE II. MEMBERSHIP Section 2.1. Members' Interests. As used herein, "Membership Interest" shall refer to a percentage membership interest of the Company. The Membership Interest of each Member is set forth on Exhibit A. Section 2.2. Admission to Membership. The admission of new Members shall be only by the vote of Members holding a majority of the Membership Interests. If new members are admitted, this Agreement shall be amended to reflect each Member's revised Membership Interest. Section 2.3. Property Rights. No Member shall have any right, title, or interest in any of the property or assets of the Company. Section 2.4. Liability of Members. No Member of the Company shall be personally liable for any debts, liabilities, or obligations of the Company, including under a judgment decree, or order of court. Section 2.5. Transferability of Membership. The Membership Interests are transferable only with the unanimous written consent of Prime (or Prime's permitted designee). If such unanimous written consent is not obtained when required, the transferee shall be entitled to receive only the share of profits or other compensation by way of income and the return of contributions to which the transferor Member otherwise would be entitled. Section 2.6. Resignation of Members. A Member may not withdraw from the Company except on the written consent of Prime (or Prime's permitted designee). The terms of the Member's withdrawal shall be determined by agreement between the withdrawing Member and the remaining Members holding a majority of the Membership Interests (excluding the Membership Interest of the withdrawing Member). ARTICLE III. MEMBERS' MEETINGS Section 3.1. Time and Place of Meeting. All meetings of the Members shall be held at such time and at such place within or without the State of Delaware as shall be determined by the Managers. Section 3.2. Annual Meetings. In the absence of an earlier meeting at such time and place as the Managers shall specify, annual meetings of the Members shall be held at the principal office of the Company on the date which is thirty (30) days after the end of the Company's fiscal year if not a legal holiday, and if a legal holiday, then on the next full business day following, at 10:00 a.m., at which meeting the Members may transact such business as may properly be brought before the meeting. Section 3.3. Special Meetings. Special meetings of the Members may be called at any time by any Member. Business transacted at special meetings shall be confined to the purposes stated in the notice of the meeting. Section 3.4. Notice. Written or printed notice stating the place, day and hour of any Members' meeting, and, in the case of a special meeting, the purpose or purposes for which the meeting is called, shall be delivered not less than ten (10) days nor more than thirty (30) days before the date of the special meeting, either personally or by mail, by or at the direction of the person calling the meeting, to each Member entitled to vote at such meeting. If mailed, such notice shall be deemed to be delivered three (3) days after it is deposited in the United States mail, postage prepaid, to the Member at his address as it appears on the records of the Company at the time of mailing. Section 3.5. Quorum. Members present in person or represented by proxy, holding more than fifty percent (50%) of the total votes which may be cast at any meeting shall constitute a quorum at all meetings of the Members for the transaction of business. If, however, such quorum shall not be present or represented at any meeting of the Members, the Members entitled to vote, present in person or represented by proxy, shall have power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present or represented. When any adjourned meeting is reconvened and a quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally noticed. Once a quorum is constituted, the Members present or represented by proxy at a meeting may continue to transact business until adjournment, notwithstanding the subsequent withdrawal therefrom of such number of Members as to leave less than a quorum. Section 3.6. Voting. When a quorum is present at any meeting, the vote of the Members, whether present or represented by proxy at such meeting, holding more than fifty percent (50%) of the total votes which may be cast at any meeting shall be the act of the Members, unless the vote of a different number is required by the Act, the Certificate of Formation or this Limited Liability Company Agreement. Each Member shall be entitled to one vote for each percentage point represented by their Membership Interest. Fractional percentage point interests shall be entitled to a corresponding fractional vote. Section 3.7. Proxy. Every proxy must be executed in writing by the Member or by his duly authorized attorney-in-fact, and shall be filed with the Secretary of the Company prior to or at the time of the meeting. No proxy shall be valid after eleven (11) months from the date of its execution unless otherwise provided therein. Each proxy shall be revocable unless expressly provided therein to be irrevocable and unless otherwise made irrevocable by law. Section 3.8. Action by Written Consent. Any action required or permitted to be taken at any meeting of the Members may be taken without a meeting if a consent in writing, setting forth the action so taken, shall be signed by Members having not less than the minimum votes that would be necessary to authorize or take such action at a meeting at which all Membership Interests were present and voted, and such consent shall have the same force and effect as a unanimous vote of Members. Section 3.9. Meetings by Conference Telephone. Members may participate in and hold meetings of Members by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation in such a meeting shall constitute presence in person at such meeting, except where a person participates in the meeting for the express purpose of objecting to the transaction of any business on the ground that the meeting is not lawfully called or convened. ARTICLE IV. MEMBERSHIP CAPITAL CONTRIBUTIONS Except for each Member's initial capital contribution made in connection with the formation of the Company, no capital contributions shall be required of any Member without the approval of all the Members to raise additional capital, and only then proportionately as to each Member. ARTICLE V. DISTRIBUTION TO MEMBERS The Managers shall determine, in their sole discretion, the amount and timing of all distributions from the Company. Distributions shall be divided among the Members in accordance with their Membership Interests. Distributions in kind shall be made on the basis of agreed value as determined by the Members. In no event may the Company make a distribution to its Members if, immediately after giving effect to the distribution, all liabilities of the Company, other than liabilities to the Members with respect to their interests and liabilities for which the recourse of creditors is limited to specified property of the Company, exceed the fair value of the Company's assets; except that the fair value of property that is subject to liability for which recourse of creditors is limited, shall be included in the Company assets only to the extent that the fair value of the property exceeds that liability. Except as contemplated in this Article V, no distributions of cash or other assets of the Company shall be made to the Members in their capacity as owners of the Company. ARTICLE VI. ALLOCATION OF NET PROFITS AND LOSSES FOR TAX PURPOSES For accounting and income tax purposes, all items of income, gain, loss, deduction, and credit of the Company for any taxable year shall be allocated among the Members in accordance with their respective Membership Interests, except as may be otherwise required by the Internal Revenue Code of 1986, as amended. ARTICLE VII. DISSOLUTION AND WINDING UP Section 7.1. Dissolution. Notwithstanding any provision of the Act, the Company shall be dissolved only upon the first of the following to occur: (a) Forty (40) years from the date of filing the Certificate of Formation of the Company; (b) Written consent of all the then current Members to dissolution; (c) The bankruptcy of a Member, unless there is at least one remaining Member and such Member or, if more than one remaining Member, all remaining Members agree to continue the Company and its business. Section 7.2. Winding Up. Unless the Company is continued pursuant to Section 7.1(c) of this Article VII., in the event of dissolution of the Company, the Managers (excluding any Manager(s) holding office pursuant to designation by a Member subject to bankruptcy proceedings) shall wind up the Company's affairs as soon as reasonably practicable. On the winding up of the Company, the Managers shall pay and/or transfer the assets of the Company in the following order: (a) In discharging liabilities (including loans from Members) and the expenses of concluding the Company's affairs; and (b) The balance, if any, shall be divided between the Members in accordance with the Members' Membership Interests. ARTICLE VIII. MANAGERS Section 8.1. Selection of Managers. Management of the Company shall be vested in the Managers. Initially, the Company shall have five (5) Managers, being Ken Shifrin, Joe Jenkins, M.D., and Brad Hummel, David D. Dulaney, M.D., and Mark Rosenberg. Thereafter, the Managers shall be elected or removed pursuant to the vote or written consent of Members holding a majority of the Membership Interests. A Manager shall serve as a Manager until his or her earlier resignation or removal pursuant to Section 8.2 or 8.3 of this Article VIII. Managers need not be residents of the State of Delaware or Members of the Company. Section 8.2. Resignations. Each Manager shall have the right to resign at any time upon written notice of such resignation to the Members. Unless otherwise specified in such written notice, the resignation shall take effect upon the receipt thereof, and acceptance of such resignation shall not be necessary to make same effective. Members holding a majority of the Membership Interests shall be entitled to designate the successor thereto. Section 8.3. Removal of Managers. Any Manager may be removed, for or without cause, at any time, but only by Members holding a majority of the Membership Interests. Members holding a majority of the Membership Interests shall be entitled to designate the successor thereto. Section 8.4. General Powers. The business of the Company shall be managed by its Managers, which may, by the vote or written consent in accordance with this Agreement, exercise any and all powers of the Company and do any and all such lawful acts and things as are not by the Act, the Certificate of Formation or this Limited Liability Company Agreement directed or required to be exercised or done by the Members, including, but not limited to, contracting for or incurring on behalf of the Company debts, liabilities and other obligations, without the consent of any other person, except as otherwise provided herein. Section 8.5. Place of Meetings. The Managers of the Company may hold their meetings, both regular and special, either within or without the State of Delaware. Section 8.6. Annual Meetings. The annual meeting of the Managers shall be held without further notice immediately following the annual meeting of the Members, and at the same place, unless by unanimous consent of the Managers that such time or place shall be changed. Section 8.7. Regular Meetings. Regular meetings of the Managers may be held without notice at such time and place as shall from time to time be determined by the Managers. Section 8.8. Special Meetings. Special meetings of the Mangers may be called by any Manager on seven (7) days notice to each Manager, with such notice to be given personally, by mail or by telecopy, telegraph or mailgram. Section 8.9. Quorum and Voting. At all meetings of the Managers the presence of at least four (4) Managers shall be necessary and sufficient to constitute a quorum for the transaction of business, and the affirmative vote of at least a majority of the Managers present at any meeting at which there is a quorum shall be the act of the Managers, except as may be otherwise specifically provided by the Act, the Certificate of Formation or this Agreement. If a quorum shall not be present at any meeting of Managers, the Managers present there may adjourn the meeting from time to time without notice other than announcement at the meeting, until a quorum shall be present. Section 8.10. Committees. The Managers may, by resolution passed by eighty percent (80%) of the Managers, designate committees, each committee to consist of two or more Managers, which committees shall have such power and authority and shall perform such functions as may be provided in such resolution. Such committee or committees shall have such name or names as may be designated by the Managers and shall keep regular minutes of their proceedings and report the same to the Managers when required. The foregoing paragraph notwithstanding, the Managers shall establish a Medical Executive Committee, the size and composition of which shall be established by resolution passed by the affirmative vote of not less than eighty percent (80%) of the Managers. The Medical Executive Committee shall initially consist of the following three (3) members: David D. Dulaney, M.D., Kirk P. Morey, M.D. and Sean Mulqueeny, O.D. Members of the Medical Executive Committee must be licensed physicians or optometrists, but need not be Members, Managers, or officers of the Company. The Medical Executive Committee shall meet at such time or times as it may, by majority vote of its members, elect and may adopt procedures for the conduct of its meetings. The Medical Executive Committee shall have authority and control over the medical aspects of the Company's business, and shall provide advice to the Managers on decisions relating to equipment purchases, technological obsolescence, quality assurance, credentialing, and such other matters as shall be requested by the Managers. The Medical Executive Committee shall have the authority to bind the Company only with respect to the medical aspects of the Company's business. Unless otherwise established by a resolution adopted by at least a majority of the members of the Medical Executive Committee, the majority of the members of the Medical Executive Committee shall constitute a quorum of the transaction of its business and the affirmative vote of the majority of the members of the Medical Executive Committee shall constitute action validly taken by that body. Section 8.11. Compensation of Managers. The Managers may be reimbursed for reasonable actual expenses incurred in connection with the management of the Company, but Managers shall not otherwise be compensated unless such compensation is agreed upon in advance by all Members. Section 8.12. Action by Written Consent. Any action required or permitted to be taken at any meeting of the Managers or of any committee designated by the Managers may be taken without a meeting if written consent, setting forth the action so taken, is signed by all the Managers or of such committee, and such consent shall have the same force and effect as a unanimous vote at a meeting. Section 8.13. Meetings by Conference Telephone. Managers or members of any committee designated by the Managers may participate in and hold a meeting of the Managers or such committee by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation in such a meeting shall constitute presence in person at such meeting, except where a person participates in the meeting for the express purpose of objecting to the transaction of any business on the ground that the meeting is not lawfully called or convened. Section 8.14. Liability of Managers. No Manager of the Company shall be personally liable for any debts, liabilities, or obligations of the Company, including under a judgment, decree, or order of the court. Section 8.15. Specific Power of Managers. The Managers shall have the authority to enter into and execute all documents in relation to the formation of the Company including, but not limited to, issuance of the Certificate of Formation and this Limited Liability Company Agreement. ARTICLE IX. NOTICES Section 9.1. Form of Notice. Whenever under the provisions of the Act, the Certificate of Formation or this Limited Liability Company Agreement notice is required to be given to any Manager or Member, and no provision is made as to how such notice shall be given, notice shall not be construed to mean personal notice only, but any such notice may also be given in writing, by mail, postage prepaid, addressed to such Manager or Member at such address as appears on the books of the Company, or by telecopy. Any notice required or permitted to be given by mail shall be deemed to be given three (3) days after it is deposited, postage prepaid, in the United States mail as aforesaid. Section 9.2. Waiver. Whenever any notice is required to be given to any Manager or Member of the Company under the provision of the Act, the Certificate of Formation or this Limited Liability Company Agreement, a waiver thereof in writing signed by the person or persons entitled to such notice, whether signed before or after the time stated in such waiver, shall be deemed equivalent to the giving of such notice. ARTICLE X. OFFICERS Any Manager may also serve as an officer of the Company. The Managers may designate one or more persons who are not Managers of the Company to serve as officers and may designate the titles of all officers. The initial officers of the Company shall be: Ken Shifrin, Chairman of the Board; Brad Hummel, President; Cheryl Williams, Vice President, Secretary and Chief Financial Officer; Teena Belcik, Vice President and Treasurer; and Mark Rosenberg, Vice President. Unless otherwise provided in a resolution of the Members or Managers, the officers of the Company shall have the powers designated with respect to such offices under the Delaware Limited Liability Company Act, and any successor statute, as amended from time-to-time. ARTICLE XI. INDEMNITY Section 11.1. Indemnification. The Company shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative, arbitrative or investigative, any appeal in such an action, suit or proceeding and any inquiry or investigation that could lead to such an action, suit or proceeding (whether or not by or in the right of the Company), by reason of the fact that such person is or was a Manager, officer, employee or agent of the Company or is or was serving at the request of the Company as a director, manager, officer, partner, venturer, proprietor, trustee, employee, agent or similar functionary of another corporation, employee benefit plan, other enterprise, or other entity, against all judgments, penalties (including excise and similar taxes), fines, settlements and reasonable expenses (including attorneys' fees and court costs) actually and reasonably incurred by him in connection with such action, suit or proceeding to the fullest extent permitted by any applicable law, and such indemnity shall inure to the benefit of the heirs, executors and administrators of any such person so indemnified pursuant to this Article XI. The right to indemnification under this Article XI shall be a contract right and shall not be deemed exclusive of any other right to which those seeking indemnification may be entitled under any law, bylaw, agreement, vote of members or disinterested managers or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office. Any repeal or amendment of this Article XI by the Members of the Company or by changes in applicable law shall, to the extent permitted by applicable law, be prospective only, and shall not adversely affect the indemnification of any person who may be indemnified at the time of such repeal or amendment. Section 11.2. Indemnification Not Exclusive. The rights of indemnification and reimbursement provided for in this Article XI shall not be deemed exclusive of any other rights to which any such Manager, officer, employee or agent may be entitled under the Certificate of Formation, this Limited Liability Company Agreement, agreement or vote of Members, or as a matter of law or otherwise. ARTICLE XII. NO OVERHEAD ALLOCATIONS No Member shall be entitled to allocate to the Company any costs or expenses that are paid or incurred by any Member or its affiliates (excluding the Company). ARTICLE XIII. MISCELLANEOUS Section 13.1. Fiscal Year. The fiscal year of the Company shall be fixed by resolution of the Managers. Section 13.2. Records. At the expense of the Company, the Managers shall maintain records and accounts of all operations of the Company. At a minimum, the Company shall keep at its principal place of business the following records: (a) A current list of the name and last known mailing address of each Member; (b) A current list of each Member's Membership Interest; (c) A copy of the Certificate of Formation and Limited Liability Company Agreement of the Company, and all amendments thereto, together with executed copies of any powers of attorney; (d) Copies of the Federal, state, and local income tax returns and reports for the Company's six most recent tax years; and (e) Correct and complete books and records of account of the Company. Section 13.3. Seal. The Company may by resolution of the Managers adopt and have a seal, and said seal may be used by causing it or a facsimile thereof to be impressed or affixed or in any manner reproduced. Any officer of the Company shall have authority to affix the seal to any document requiring it. Section 13.4. Agents. Every Manager and Officer is an agent of the Company for the purpose of the business. The act of a Manager or Officer, including the execution in the name of the Company of any instrument for carrying on in the usual way the business of the Company, binds the Company. Section 13.5. Checks. All checks, drafts and orders for the payment of money, notes and other evidences of indebtedness issued in the name of the Company shall be signed by such officer, officers, agent or agents of the Company and in such manner as shall from time to time be determined by resolution of the Managers. In the absence of such determination by the Mangers, such instruments shall be signed by the Treasurer or the Secretary and countersigned by the President or a Vice President of the Company, if the Company has such officers. Section 13.6. Deposits. All funds of the Company shall be deposited from time to time to the credit of the Company in such banks, trust companies or other depositories as the Managers may select. Section 13.7. Annual Statement. The Managers shall present at each annual meeting, and, when called for by vote of the Members, at any special meeting of the Members, a full and clear statement of the business and condition of the Company. Section 13.8. Financial Statements. As soon as practicable after the end of each fiscal year of the Company, a balance sheet as at the end of such fiscal year, and a profit and loss statement for the period ended, shall be distributed to the Members, along with such tax information (including all information returns) as may be necessary for the preparation of each Member of its Federal, state and local income tax returns. The balance sheet and profit and loss statement referred to in the previous sentence may be as shown on the Company's federal income tax return. Section 13.9. Binding Arbitration. Any controversy between the parties regarding this Agreement and any claims arising out of this Agreement or its breach shall be submitted to arbitration by either party. The arbitration proceedings shall be conducted by a single arbitrator pursuant to the Commercial Arbitration Rules of the American Arbitration Association. The arbitration shall be conducted in Dallas, Texas and the arbitrator shall have the right to award actual damages and attorney fees and costs, but shall not have the right to award punitive, exemplary or consequential damages against either party. ARTICLE XIV. AMENDMENTS Section 14.1. Amendments. This Agreement may be altered, amended or repealed and a new limited liability company agreement may be adopted, only in accordance with the provisions of Section 8.9, but otherwise at any regular meeting or at any special meeting called for that purpose, or by execution of a written consent in accordance with the provisions of Section 3.8. Section 14.2. When Limited Liability Company Agreement Silent. It is expressly recognized that when the Limited Liability Company Agreement is silent or in conflict with the requirements of the Act as to the manner of performing any Company function, the provisions of the Act shall control. [Signature page follows] S-1 SIGNATURE PAGE TO LIMITED LIABILITY COMPANY AGREEMENT OF PRIME REFRACTIVE - St. Louis, L.L.C. IN WITNESS WHEREOF, the undersigned Members hereby adopt this Limited Liability Company Agreement as the Limited Liability Company Agreement of the Company, effective as of the 1st day of June, 2000. Kirk P. Morey, M.D. Sean Mulqueeny, O.D. Prime Refractive, L.L.C. Cheryl Williams, Vice President A-1 EXHIBIT A OWNERSHIP INTERESTS Name Ownership Percentage Prime Refractive, L.L.C. 90% Sean Mulqueeny, O.D. 5% EX-10.163 76 0076.txt EX 10.163 AMENDED L. P. AGREEMENT - TEXAS VIII AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF TEXAS LITHOTRIPSY LIMITED PARTNERSHIP VIII -1- -1- AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF TEXAS LITHOTRIPSY LIMITED PARTNERSHIP VIII THE PARTNERSHIP INTEREST REPRESENTED BY THIS AMENDED AND RESTATED LIMITED PARTNERSHIP AGREEMENT HAVE NOT BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR UNDER THE SECURITIES LAWS OF ANY STATE IN RELIANCE UPON AN EXEMPTION THEREFROM. THESE SECURITIES HAVE NOT BEEN APPROVED BY THE SECURITIES REGULATORY AUTHORITY OF ANY STATE. THE SALE OR OTHER DISPOSITION OF THE PARTNERSHIP INTEREST IS RESTRICTED AS SET FORTH IN THIS AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP, AND IN ANY EVENT IS PROHIBITED UNLESS THE LIMITED PARTNERSHIP RECEIVES AN OPINION OF COUNSEL SATISFACTORY TO THE LIMITED PARTNERSHIP AND ITS COUNSEL THAT SUCH SALE OR OTHER DISPOSITION CAN BE MADE WITHOUT REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR UNDER THE SECURITIES LAWS OF ANY STATE IN RELIANCE UPON AN EXEMPTION THEREFROM. BY ACQUIRING THE PARTNERSHIP INTEREST REPRESENTED BY THIS AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP, THE LIMITED PARTNER REPRESENTS THAT IT WILL NOT SELL OR OTHERWISE DISPOSE OF THE PARTNERSHIP INTEREST WITHOUT REGISTRATION OR OTHER COMPLIANCE WITH THE SECURITIES ACT OF 1933, AS AMENDED, AND OTHER APPLICABLE STATE STATUTES AND THE RULES AND REGULATIONS THEREUNDER. This Amended and Restated Agreement of Limited Partnership of Texas Lithotripsy Limited Partnership VIII (the "Agreement") is entered into by and among Lithotripters, Inc., a North Carolina corporation ("Lithotripters"), as the General Partner (the "General Partner"), and each of the limited partners listed on the Signature Pages attached hereto (collectively, the "Limited Partners" and individually, a "Limited Partner"). R E C I T A L S : A. Lithotripters, as general partner, and David Vela, M.D., as the initial limited partner, formed a limited partnership under the laws of the State of Texas effective as of October 6, 2000, for the purpose of acquiring, owning and operating the Lithotripsy Systems (as hereinafter defined) in the Service Area (as hereinafter defined). B. Lithotripters caused the Partnership to offer to sell Units (as hereinafter defined) pursuant to the Memorandum (as hereinafter defined). C. Upon the closing of the offering of the Units, David Vela, M.D. withdrew as the initial limited partner and the subscribers of the Units were admitted as new Limited Partners. D. Lithotripters and the Limited Partners desire to provide for the governance of the Partnership and to set forth in detail their respective rights and duties relating to the Partnership and to amend and restate the original partnership agreement in its entirety. A G R E E M E N T : NOW THEREFORE, in consideration of the mutual covenants set forth in this Agreement, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Lithotripters and the Limited Partners hereby agree as follows: 1 ARTICLE 2 DEFINITIONS 2.1. Terms Defined. When used in this Agreement, the following terms shall have the meanings set forth below: (a) "Act" shall mean the Texas Revised Limited Partnership Act as set forth in Vernon's Revised Civil Statutes Annotated Article 6132a-1, as subsequently amended. (b) "Additional Capital Contributions" shall have the meaning set forth in Section 3.2. (c) "Adjusted Capital Account Deficit" means, with respect to any Partner, the deficit balance, if any, in such Partner's Capital Account as of the end of the relevant Fiscal Year, after giving effect to the following adjustments: (i) Credit to such Capital Account any amounts which such Partner is obligated to restore or is deemed to be obligated to restore pursuant to the penultimate sentences of Regulations Sections 1.704-2(g)(1) and 1.704-2(i)(5); and (ii) Debit to such Capital Account the items described in Sections 1.7041(b)(2)(ii)(d)(4), 1.704-1(b)(2)(ii)(d)(5), and 1.704-1(b)(2)(ii)(d)(6) of the Regulations. -1- -1- The foregoing definition of Adjusted Capital Account Deficit is intended to comply with the provisions of Section 1.704-1(b)(2)(ii)(d) of the Regulations and shall be interpreted consistently therewith. (d) "Adjusted Gross Revenues" shall mean, with respect to the calculation of the Management Fee for the applicable period, all gross receipts from any source for such period, other than from Partnership loans, the refinancing, sale, exchange, casualty or other disposition of the Partnership's assets and Capital Contributions, less adjustments for contractual reimbursements and bad debts. (e) "Affiliate" shall mean a Person, directly or indirectly, through one or more intermediaries, controlling, controlled by, or under common control with the Person in question. The term "control," as used in the immediately preceding sentence, means, with respect to an entity that is a corporation, the right to exercise, directly or indirectly, more than 10% of the voting rights attributable to the shares of such corporation and, with respect to a Person that is not a corporation, the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of such Person. (f) "Bank" shall mean Whitney National Bank. (g) "Bankruptcy" means, with respect to any Person, a "Voluntary Bankruptcy" or an "Involuntary Bankruptcy". A "Voluntary Bankruptcy" means, with respect to any Person, the inability of such Person generally to pay its debts as such debts become due, or an admission in writing by such Person of its inability to pay its debts generally or a general assignment by such Person for the benefit of creditors; the filing of any petition or answer by such Person seeking to adjudicate it a bankrupt or insolvent, or seeking for itself any liquidation, winding up, reorganization, arrangement, adjustment, protection, relief, or composition of such Person or its debts under any law relating to bankruptcy, insolvency or reorganization or relief of debtors, or seeking, consenting to, or acquiescing in the entry of an order for relief or the appointment of a receiver, trustee, custodian, or other similar official for such Person or for any substantial part of its property; or corporate action taken by such Person to authorize any of the actions set forth above. An "Involuntary Bankruptcy" means, with respect to any Person, without the consent or acquiescence of such Person, the entering of an order for relief or approving a petition for relief or reorganization or any other petition seeking any reorganization, arrangement, composition, readjustment, liquidation, dissolution, or other similar relief under any present or future bankruptcy, insolvency, or similar statute, law, or regulation, or the filing of any such petition against such Person which petition shall not be dismissed within ninety (90) days, or, without the consent or acquiescence of such Person, the entering of an order appointing a trustee, custodian, receiver, or liquidator of such Person or of all or any substantial part of the property of such Person which order shall not be dismissed within sixty (60) days. (h) "Bill of Sale and Assignment" shall mean that bill of sale and assignment (or similar instrument of transfer) to be received by the Partnership from Sunbelt in connection with the Partnership's purchase of the Sunbelt Assets. (i) "Capital Contributions" shall mean, with respect to any Partner, the amount of money and the initial Gross Asset Value of any property other than money (net of liabilities which the Partnership assumes or takes the property subject to) contributed to the Partnership with respect to the Partnership Interest held by such Partner. (j) "Capital Transaction" shall mean either a Major Capital Event or Liquidating Event. (k) "Cash Flow" shall mean, for the period in question, or in the case of a Major Capital Event, the event in question, the amount by which the aggregate cash receipts of the Partnership from any source (including loans and Capital Contributions) exceed the sum of the cash expenditures of the Partnership plus a cash reserve in the amount determined by the General Partner to be sufficient to meet the working capital requirements of the Partnership. (l) "Certificate" shall mean the Certificate of Limited Partnership filed on behalf of the Partnership with the Secretary of State of Texas in accordance with all applicable statutes. (m) "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time. (n) "Defaulting Limited Partner shall have the meaning set forth in Section 9.2(c) hereof. (o) "Depreciation" means, for each Fiscal Year, an amount equal to the depreciation, amortization, or other cost recovery deduction allowable with respect to an asset for such Fiscal Year, except that if the Gross Asset Value of an asset differs from its adjusted basis for federal income tax purposes at the beginning of such Fiscal Year, Depreciation shall be an amount which bears the same ratio to such beginning Gross Asset Value as the federal income tax depreciation, amortization, or other cost recovery deduction for such Fiscal Year bears to such beginning adjusted tax basis; provided, however, that if the adjusted basis for federal income tax purposes of an asset at the beginning of such Fiscal Year is zero, Depreciation shall be determined with reference to such beginning Gross Asset Value using any reasonable method selected by the General Partner. (p) "Dilution Offering" shall mean the sale of additional Partnership Interest after the Offering. (q) "Escrow Agent" shall mean Whitney National Bank. (r) "Escrow Agreement" shall mean that certain agreement by and between the Partnership and the Escrow Agent. (s) "Exhibit" shall mean an exhibit attached to this Agreement. (t) "Fiscal Year" shall mean (i) the period commencing on the effective date of this Agreement and ending on December 31, 2000, (ii) any subsequent twelve (12) month period commencing on January 1st and ending on December 31st, or (iii) any portion of the period described in clause (ii) for which the Partnership is required to allocate Profits, Losses, and other items of Partnership income, gain, loss, or deduction pursuant to Article VI hereof. (u) "General Partner" shall mean Lithotripters, so long as such Person shall continue as a general partner hereunder, and any other Person who has been admitted as and continues to be a general partner of the Partnership. (v) "Gross Asset Value" means, with respect to any asset, the asset's adjusted basis for federal income tax purposes, except as follows: (i) The initial Gross Asset Value of any asset contributed by a Partner to the Partnership shall be the gross fair market value of such asset, as determined by the contributing Partner and the General Partner; provided, however, if the contributing Partner is the General Partner, the determination of the fair market value of a contributed asset shall be determined by appraisal; (ii) The Gross Asset Values of all Partnership assets shall be adjusted to equal their respective gross fair market values, as determined by the General Partner, as of the following times: (a) the acquisition of an additional interest in the Partnership (other than pursuant to Section 3.1(c) hereof) by any new or existing Partner in exchange for more than a de minimis Capital Contribution; (b) the distribution by the Partnership to a Partner of more than a de minimis amount of Partnership Assets as consideration for an interest in the Partnership; and (c) the liquidation of the Partnership within the meaning of Regulations Section 1.704-1(b)(2)(ii)(g); provided, however, that the adjustments pursuant to clauses (a) and (b) above shall be made only if the General Partner reasonably determines that such adjustments are necessary or appropriate to reflect the relative economic interests of the Partners in the Partnership; (iii) The Gross Asset Value of any Partnership asset distributed to any Partner shall be adjusted to equal the gross fair market value of such asset on the date of distribution as determined by the distributee and the General Partner; provided, however, if the distributee is the General Partner, the determination of the fair market value of the distributed asset shall be determined by appraisal; and (iv) The Gross Asset Values of Partnership assets shall be increased (or decreased) to reflect any adjustments to the adjusted basis of such assets pursuant to Code Section 734(b) or Code Section 743(b), but only to the extent that such adjustments are taken into account in determining Capital Accounts pursuant to Regulations Section 1.704-1(b) (2) (iv) (m) and Sections 1.1(bf) (vi) and 6.5(g) hereof; provided, however, that Gross Asset Values shall not be adjusted pursuant to this Section 1.1(v)(iv) to the extent the General Partner determines that an adjustment pursuant to Section 1.1(v)(ii) hereof is necessary or appropriate in connection with a transaction that would otherwise result in an adjustment pursuant to this Section 1.1(v)(iv). If the Gross Asset Value of an asset has been determined or adjusted pursuant to Section 1.1(v)(i), Section 1.1(v)(ii), or Section 1.1(v)(iv) hereof, such Gross Asset Value shall thereafter be adjusted by the Depreciation taken into account with respect to such asset for purposes of computing Profits and Losses. (w) "Involuntary Bankruptcy" shall have the meaning set forth in Section 1.1(f) hereof. (x) "Limited Partner" shall mean any Person who has been admitted as, and who continues to be, a limited partner of the Partnership. (y) "Liquidating Event" shall mean the sale, condemnation or exchange of all or substantially all of the Partnership Assets, or any other transaction which, individually or together with any similar transaction or transactions, results in the disposition of all or substantially all of the Partnership Assets and occurs in the course of liquidation of the Partnership or upon and with respect to which event the Partnership is dissolved and wound-up and all payments, including payments on any promissory notes, have been received. (z) "Lithotripsy Systems" shall mean, collectively, the Sunbelt Lithotripsy System, the New Lithotripsy System and any other shock-wave lithotripter acquired by the Partnership for the lithotripsy of kidney stones. (aa) "Major Capital Event" shall mean any event (excluding a Liquidating Event) arising other than in the ordinary course of the Partnership's business, including, without limitation: (i) the sale of less than substantially all of the Partnership Assets; (ii) a condemnation of less than substantially all of the Partnership Assets; (iii) the recovery of damage awards or settlements or insurance proceeds from the loss of or damage to the Partnership Assets; and (iv) a borrowing or refinancing. The General Partner's designation of an event as a Major Capital Event shall be binding upon the Partners and the Partnership absent manifest error. (bb) "Majority in Interest" shall mean Partners (or Partners of a designated class) owning more than 50% of the Partnership Interests (or Partnership Interests of the designated class). (cc) "Management Agreement" shall mean the agreement by and between the Partnership and the General Partner, as the same may be amended from time to time, with respect to the management of the Partnership. (dd) "Management Fee" shall mean that certain fee, accrued and payable monthly to the General Partner pursuant to the Management Agreement, equal to 7.0% of Adjusted Gross Revenues for the month in question. (ee) "Memorandum" shall mean that certain Confidential Private Placement Memorandum dated October 13, 2000 relating to the offering of Units. (ff) "Negative Cash Flow" shall mean, for the period in question, the amount by which the operating expenses, capital expenditures and debt service of the Partnership due and payable within the period in question exceed the cash amounts held by the Partnership or which are expected to be received by the Partnership within the period in question and which are or will be available for payment of such expenses and debt service. (gg) "Net Gains from Capital Transactions" shall mean the net gains and income, if any, realized by the Partnership as a result of or upon any sale, exchange or other disposition of the capital assets of the Partnership (including assets described in Section 1231 of the Code) or as a result of or upon the damage or destruction of such capital assets. (hh) "Net Losses from Capital Transactions" shall mean the net losses and deductions, if any, realized by the Partnership as a result of or upon any sale, exchange or other disposition of the capital assets of the Partnership (including assets described in Section 1231 of the Code) or as a result of or upon the damage or destruction of such capital assets. (ii) "New Lithotripsy System" shall mean, collectively, a new Storz Modulith(R) SLX-T transportable lithotripter and a new coach to transport such lithotripter. (jj) "Nonrecourse Deductions" shall have the meaning set forth in Section 1.704-2(b) (1) of the Regulations. (kk) "Nonrecourse Liability" shall have the meaning set forth in Section 1.704-2(b)(3) of the Regulations. (ll) "Notice of Default" shall have the meaning set forth in Section 9.2(c) hereof. (mm) "Notice of Election" shall have the meaning set forth in Section 9.2(e) hereof. (nn) "Notice of Incompetency" shall have the meaning set forth in Section 9.2(d) hereof. (oo) "Notice of Insolvency" shall have the meaning set forth in Section 9.2(b) hereof. (pp) "Offering" shall mean the sale of Units pursuant to the Memorandum. (qq) "Offering Expenses" shall mean all expenditures classified as syndication expenses pursuant to Section 1.709-2(b) of the Regulations. Offering Expenses shall be taken into account under this Agreement at the time they would be taken into account under the Partnership's method of accounting if they were deductible expenses. (rr) "Offering Termination Date" shall mean January ___, 2001, or such earlier date on which the maximum number of Units set forth in the Memorandum is sold or such later date to which such date may be extended in accordance with the Memorandum. (ss) "Operations" shall mean all activities arising in the ordinary course of the Partnership's business not constituting a Major Capital Event or a Liquidating Event. (tt) "Option Period" shall have the meaning set forth in Section 9.2 hereof. (uu) "Partner Nonrecourse Debt" shall have the meaning set forth in Section 1.704-2(b)(4) of the Regulations. (vv) "Partner Nonrecourse Debt Minimum Gain" shall mean 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 Section 1.704-2(i)(3) of the Regulations. (ww) "Partner Nonrecourse Deductions" shall have the meaning set forth in Sections 1.704-2(i)(1) and 1.704-2(i)(2) of the Regulations. (xx) "Partners" shall mean the General Partner and the Limited Partners. "Partner" shall mean any one of the Partners. (yy) "Partnership" shall mean Texas Lithotripsy Limited Partnership VIII, as constituted from time to time. (zz) "Partnership Assets" shall mean, collectively, all property and assets owned by the Partnership, whether real, personal or mixed or tangible or intangible. (aaa)"Partnership Accountant" shall have the meaning set forth in Section 9.2(f) hereof. (bbb)"Partnership Minimum Gain" shall have the meaning set forth in Sections 1.704-2(b)(2) and 1.704-2(d) of the Regulations. (ccc) "Partnership Interest" shall mean a Partner's interest in the Profits, Losses, Net Gains from Capital Transactions, Net Losses from Capital Transactions, any other income, gains, losses, or deductions, tax credits, voting rights and distributions of the Partnership as may be affected by the provisions of this Agreement and as may hereafter be adjusted. (ddd) "Person" shall mean an individual, partnership, joint venture, corporation, limited liability company, trust, estate or other entity or organization. (eee) "Proceeding" shall mean any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative, arbitrative or investigative, any appeal in such an action, suit or proceeding, and any inquiry or investigation that could lead to such an action, suit or proceeding. (fff) "Profits" and "Losses" means, for each Fiscal Year, an amount equal to the Partnership's taxable income or loss for such year or period, determined in accordance with Code Section 703(a) (for this purpose, all items of income, gain, loss, or deduction required to be stated separately pursuant to Code Section 703(a)(1) shall be included in taxable income or loss), with the following adjustments: (i) Any income of the Partnership that is exempt from federal income tax and not otherwise taken into account in computing Profits and Losses pursuant to this Section 1.1(bf) shall be added to such taxable income or loss; (ii) Any expenditures of the Partnership described in Code Section 705(a)(2)(B) or treated as Code Section 705(a)(2)(B) expenditures pursuant to Regulations Section 1.704-1(b) (2)(iv)(f), and not otherwise taken into account in computing Profits or Losses pursuant to this Section 1.1(bf) shall be subtracted from such taxable income or loss; (iii) In the event the Gross Asset Value of any Partnership Asset is adjusted pursuant to Section 1.1(v)(ii) or Section 1.1(v)(iii) hereof, the amount of such adjustment shall be taken into account as gain or loss from the disposition of such asset for purposes of computing Profits or Losses; (iv) Gain or loss resulting from any disposition of Partnership Assets with respect to which gain or loss is recognized for federal income tax purposes shall be computed by reference to the Gross Asset Value of the property disposed of, notwithstanding that the adjusted tax basis of such property differs from its Gross Asset Value; (v) In lieu of the depreciation, amortization, and other cost recovery deductions taken into account in computing such taxable income or loss, there shall be taken into account Depreciation for such fiscal year or other period, computed in accordance with Section 1.1(o) hereof; (vi) To the extent an adjustment to the adjusted tax basis of any Partnership Asset pursuant to Code Section 734(b) or Code Section 743(b) is required pursuant to Regulations Section 1.704-1(b) (2)(iv)(m)(4) to be taken into account in determining Capital Accounts as a result of a distribution other than in liquidation of a Partner's interest in the Partnership, the amount of such adjustment shall be treated as an item of gain (if the adjustment increases the basis of the asset) or loss (if the adjustment decreases the basis of the asset) from the disposition of the asset and shall be taken into account for purposes of computing Profits or Losses; (vii) Notwithstanding any other provision of this Section 1.1(bf), any items which are specially allocated pursuant to Section 6.5 or Section 6.6 hereof shall not be taken into account in computing Profits or Losses. The amounts of the items of Partnership income, gain, loss, or deduction available to be specially allocated pursuant to Sections 6.5 and 6.6 hereof shall be determined by applying rules analogous to those set forth in Sections 1.1(bf)(i) through 1.1(bf)(vi) above. (ggg) "Regulations" shall mean the Income Tax Regulations, including Temporary Regulations, promulgated under the Code, as such regulations may be amended from time to time (including corresponding provisions of succeeding regulations). (hhh)"Regulatory Allocations" shall have the meaning set forth in Section 6.6 hereof. (iii)"Retiring Limited Partner" shall have the meaning set forth in Section 9.2(f) hereof. (jjj) "Sales Agency Agreement" shall mean that certain agreement by and between the Partnership and the Sales Agent with respect to the sale of Units. (kkk)"Sales Agent" shall mean MedTech Investments, Inc., a registered broker-dealer, member of the National Association of Securities Dealers, Inc. and an Affiliate of the General Partner. (lll) "Section" shall mean any section or subsection in this Agreement. (mmm) "Service" shall mean the Internal Revenue Service. (nnn)"Service Area" shall mean the geographic area of Harris County, Texas and surrounding counties. (ooo)"Subscription Agreement" shall mean the Subscription Agreement, included in the Subscription Packet accompanying the Memorandum. (ppp)"Sunbelt" shall mean Sunbelt Lithotripsy Associates, Ltd., a Texas limited partnership. (qqq) "Sunbelt Assets" shall mean, collectively, certain tangible assets owned and operated by Sunbelt and certain intangible property rights held by Sunbelt, including but not limited to, the Sunbelt Lithotripsy System and eight separate lithotripsy services agreements with hospitals, medical centers and ambulatory surgery centers in the Service Area. (rrr) "Sunbelt Lithotripsy System" shall mean the Storz Modulith SLX mobile lithotripter and the related trailer. (sss) "Tax Matters Partner" shall mean the General Partner. (ttt) "Transfer" shall mean, as a noun, any voluntary or involuntary transfer, sale, conveyance, assignment, pledge, hypothecation, mortgage or other encumbrance or other disposition of all or any part of a Partnership Interest and, as a verb, to voluntarily or involuntarily transfer, sell, convey, assign, pledge, hypothecate, mortgage, encumber or otherwise dispose of all or any part of a Partnership Interest. (uuu)"Unit" shall mean a unit of limited partner partnership interest equal to a 1% Partnership Interest. (vvv) "Unreturned Capital Contributions" shall mean, as to each Partner, the aggregate Capital Contributions made to the Partnership by such Partner reduced by the aggregate distributions to such Partner from the Partnership pursuant to Sections 6.2(a) and 6.4(a). (www)"Valuation Date" shall have the meaning set forth in Section 9.2(f) hereof. (xxx)"Voluntary Bankruptcy" shall have the meaning set forth in Section 1.1(g) hereof. 2.2. Number and Gender. Whenever the context requires, references in this Agreement to the singular number shall include the plural, and the plural number shall include the singular, and words denoting gender shall include the masculine, feminine and neuter. 3 ARTICLE 4 CONTINUATION 4.1. Continuation. The Partners hereby continue the Partnership as a limited partnership pursuant to the Act for the purposes hereinafter described. 4.2. Name. The business of the Partnership shall be conducted under the name "Texas Lithotripsy Limited Partnership VIII". 4.3. Principal Place of Business; Registered Office; Registered Agent. The principal place of business, the principal office and the registered office of the Partnership shall be at 1301 Capital of Texas Highway, Suite C-300, Austin, Texas 78746. The General Partner may change the principal place of business of the Partnership to any other place within the State of Texas upon ten (10) days written notice to the Limited Partners. The registered agent shall be the General Partner. 4.4. Purposes. The purposes of the Partnership shall be: -------- (a) to acquire and own the Sunbelt Assets and the New Lithotripsy System; (b) to operate the Lithotripsy Systems in the Service Area; (c) to manage, maintain, lease, sell or otherwise deal with the Partnership Assets; (d) to do any and all other acts and things necessary, incidental or convenient to carry on the Partnership business as contemplated under this Agreement; and (e) to engage in any lawful act or activity for which partnerships may be organized under the Act. 4.5. Term. The Partnership shall continue until terminated pursuant to Section 12.1. 5 ARTICLE CAPITAL CONTRIBUTIONS 6 6.1. Initial Capital Contributions. (a) General Partner. At the time of executing this Agreement, the General Partner will make a Capital Contribution of cash in exchange for its Partnership Interest. (b) Limited Partners. At the time of executing this Agreement, each Limited Partner will make a Capital Contribution of cash in exchange for its Partnership Interest. 6.2 . Additional Capital Contributions. At the request of the General Partner each Partner shall be permitted to make, but shall not be personally liable to make, additional Capital Contributions ("Additional Capital Contributions") to the Partnership in an amount equal to such Partner's pro rata share, based on its respective Partnership Interest, of all Negative Cash Flow from Operations of the Partnership. A Partner's pro rata share shall be the product of the Additional Capital Contribution then due multiplied by such Partner's respective Partnership Interest. Such Partner's pro rata share shall be paid to the Partnership no later than the date specified by the General Partner. 6.3 . Capital Accounts. The Partnership shall establish and maintain a capital account ("Capital Account") for each Partner in accordance with Section 704(b) of the Code and Section 1.704-1(b)(2)(iv) of the Regulations. Except as otherwise provided in this Agreement, the Capital Account balance of each Partner shall be credited (increased) by (i) the amount of cash contributed by such Partner to the capital of the Partnership, (ii) the fair market value of property contributed by such Partner to the capital of the Partnership (net of liabilities secured by such property that the Partnership assumes or takes subject to under Code Section 752), and (iii) such Partner's allocable share of Partnership income and gain (or items thereof) including income and gain exempt from federal taxation and income and gain attributable to adjustments to reflect book value pursuant to Regulations' Section 1.704-1(b)(2)(iv)(g), but excluding income and gain attributable to tax items which differ as a result of the revaluation of Partnership property as described in Regulations' Section 1.704-1(b)(4), and the Capital Account balance of each Partner shall be debited (decreased) by (i) the amount of cash distributed to such Partner, (ii) the fair market value of property distributed to such Partner (net of liabilities secured by such property which the Partner assumes or takes subject to under Code Section 752), (iii) such Partner's allocable share of expenditures of the Partnership described in Code Section 705(a)(2)(B), and (iv) such Partner's allocable share of Partnership losses, depreciation and other deductions (or items thereof) including loss and deduction attributable to adjustments to reflect book value pursuant to Regulations' Section 1.704-1(b)(2)(iv)(g) but excluding expenditures described in (iii) above and loss or deduction attributable to tax items which differ as a result of the revaluation of Partnership property or excess percentage depletion as described in Regulations' Section 1.704-1(b)(4)(i) and (ii). Notwithstanding the foregoing, a Partner's Capital Account shall not be adjusted to reflect gain or loss attributable to the disposition of property contributed by such Partner to the extent such Partner's Capital Account reflected such inherent gain or loss in the property on the date of its contribution to the Partnership. 6.4. Failure to Make Additional Capital Contributions. In the event a Partner fails to contribute cash equal to his pro rata share of a requested Additional Capital Contribution, the General Partner may, at its election, do any one or more of the following: (a) Contribute cash to the Partnership as an Additional Capital Contribution in an amount up to the difference between the total Additional Capital Contribution requested from all Partners and the aggregate of the Additional Capital Contributions actually contributed by the Partners; (b) Loan funds to the Partnership as provided in Section 3.5; and/or (c) Cause the Partnership to offer to the other Partners (other than the non-contributing Partner) the right to contribute the amount which the non-contributing Partner elected not to contribute (and if more than one other Partner elects to contribute pursuant to this subclause (c), each such other Partner shall have the priority right to contribute that portion of the amount which the non-contributing Partner elected not to contribute which is equal to the ratio of such other Partner's Partnership Interest to the aggregate Partnership Interests owned by all such other Partners who elect to contribute pursuant to this subclause (c)). (d) Upon the occurrence of an event described in subsection (a) and/or (c) above, the Partnership Interests of the Partners shall be redetermined, and each Partner's Partnership Interest shall thereafter be equal to a fraction, the numerator of which shall be equal to the aggregate Capital Contributions made by such Partner (or his assignor) and the denominator of which shall be equal to the aggregate Capital Contributions made by all Partners. 6.5 . Partner Loans. A Partner, or an Affiliate of a Partner, may, but is not obligated to, loan or cause to be loaned to the Partnership such additional sums as the General Partner deems appropriate or necessary for the conduct of the Partnership's business. Loans made by a Partner, or an Affiliate of a Partner, shall be upon such terms and for such maturities as the General Partner deems reasonable in view of all the facts and circumstances and the repayment of which may be designated in priority to distributions of Cash Flow. In no event shall a Partner be permitted to make a loan to the Partnership pursuant to this Section 3.5, in lieu of making an Additional Capital Contribution which it is permitted to make pursuant to Section 3.2. 6.6. Other Matters Relating to Capital Contributions. (a) Loans by any Partner to the Partnership shall not be considered Capital Contributions. (b) No Partner shall be required to make Capital Contributions except to the extent expressly provided by this Article III. (c) No Partner shall be entitled to withdraw, or to obtain a return of, any part of its Capital Contribution, or to receive property or assets other than cash in return thereof, and no Partner shall be liable to any other Partner for a return of its Capital Contributions, except as provided in this Agreement. (d) No Partner shall be entitled to priority over any other Partner, either with respect to a return of its Capital Contributions, or to allocations of Profits, Losses, Net Gains from Capital Transactions, Net Losses from Capital Transactions or any other income, gains, losses or deductions, credits, or to distributions, except as provided in this Agreement. (e) No interest shall be paid on any Partner's Capital Contribution or Additional Capital Contribution. 6.7 . Deficit Capital Account Balances. Upon liquidation of the Partnership, no Partner with a deficit balance in its Capital Account shall have any obligation to restore such deficit balance, or to make any contribution to the capital of the Partnership, except to the extent such Partner is personally liable to make contributions to the capital of the Partnership pursuant to Article III of this Agreement. 7 ARTICLE RIGHTS AND POWERS OF THE GENERAL PARTNER 8 8.1 . Duties of General Partner. The General Partner shall be solely responsible for the operation and management of the business of the Partnership, and, except as otherwise expressly provided in this Agreement, shall possess all rights and powers generally conferred by applicable law or otherwise deemed by the General Partner as necessary, advisable or consistent in connection therewith. 8.2 . Illustrative Rights and Powers. In addition to any other rights and powers which it may possess by law, the General Partner shall have all the specific rights, powers and authorities required or appropriate to the operation and management of the business of the Partnership which, by way of illustration, but not by way of limitation, shall include the right and power: (a) To acquire other assets related to the provision of lithotripsy services (collectively, the "Additional Assets"), at such times and at such price and upon such terms, as the General Partner deems to be in the best interest of the Partnership; (b) To purchase, hold, manage and dispose of Partnership Assets, including the purchase, exchange, trade or sale of the Partnerships' assets at such price, or amount, for cash, securities or other property and upon such terms, as the General Partner deems to be in the best interest of the Partnership; (c) To determine the travel itinerary and site locations for the Lithotripter Systems; (d) To borrow money for any Partnership purpose (including the acquisition of the Additional Assets) and, if security is required therefor, to subject to any security device any portion of the property of the Partnership, to obtain replacements of any other security device, to prepay, in whole or in part, refinance, increase, modify, consolidate or extend any encumbrance or other security device; (e) To deposit, withdraw, invest, pay, retain (including the establishment of reserves in order to acquire the Additional Assets) and distribute the Partnership's funds in any manner consistent with the provisions of this Agreement; (f) To institute and defend actions at law or in equity; (g) To enter into and carry out contracts and agreements and any or all documents and instruments and to do any and all such other things as may be in furtherance of Partnership purposes or necessary or appropriate to the conduct of the Partnership activities; (h) To execute, acknowledge and deliver any and all instruments which may be deemed necessary or convenient to effect the Partnership's business; (i) to acquire the Sunbelt Assets and the New Lithotripsy System; (j) to perform any and all acts necessary or appropriate in connection with the business of the Partnership, including, without limitation, commencing, defending and settling litigation; (k) to take and hold all Partnership Assets in the name of the Partnership; (l) to negotiate, execute and deliver contracts, deeds, notes, leases, subleases, mortgages, bills of sale, financing statements, security agreements and any and all other instruments necessary or incidental to the conduct of the business of the Partnership, and to amend or modify any such instruments; (m) to coordinate all accounting and clerical functions of the Partnership and to employ such accountants, lawyers, managers, agents and other management or service personnel as may from time to time be required to carry on the business of the Partnership; and (n) if a Transfer has occurred in accordance with this Agreement, to admit such transferee to the Partnership and to amend this Agreement to reflect such admission. 8.3 . Payment of Costs and Expenses. The Partnership shall be responsible for paying all costs and expenses of forming and continuing the Partnership, owning, operating and holding the Partnership Assets, and conducting the business of the Partnership, including, without limitation, costs of utilities, costs of furniture, fixtures, equipment and supplies, insurance premiums, property taxes, advertising expenses, accounting costs, legal expenses and office supplies. If any such costs and expenses are or have been paid by the General Partner, or any of its Affiliates, on behalf of the Partnership, then such General Partner (or its Affiliates) shall be entitled to be reimbursed for such payment so long as such cost or expense was reasonably necessary and was reasonable in amount. Any reimbursement pursuant to this Section shall not be treated as compensation to the General Partner. 8.4 . Exercise of Rights and Powers. The General Partner shall endeavor to operate and manage the business of the Partnership to the best of its ability, in a careful and prudent manner and in accordance with good industry practice. The authority of the General Partner to take any action required or permitted under the provisions of this Agreement shall in all respects be exercised in its sole and absolute discretion, and the General Partner shall be required to devote only such time to the performance of its duties and obligations hereunder as it shall, in its sole and absolute discretion, determine to be necessary or advisable. The General Partner shall be entitled to deal with its Affiliates in the performance of its duties and obligations under this Agreement, so long as the material terms and conditions of such dealings are not substantially different from the prevailing market terms, conditions and prices available from non-Affiliated third parties. 8.5 . Management Fee. As compensation for its services rendered to or on behalf of the Partnership, the General Partner shall be entitled to payment of the Management Fee in accordance with the terms and conditions of the Management Agreement. 8.6 . Liability. The General Partner shall endeavor to perform its duties under this Agreement with ordinary prudence and in a manner reasonable under the circumstances. The General Partner shall not be liable to the Partnership or the Limited Partners for any loss or liability caused by any act, or by the failure to do any act, unless such loss or liability arises from the General Partner's intentional misconduct, gross negligence or fraud. In no event shall the General Partner be liable by reason of a mistake in judgment made in good faith, or action or lack of action based on the advice of legal counsel. Further, the General Partner shall in no event be liable for its failure to take any action unless it is specifically directed to take such action under the terms of this Agreement. 8.7 . Indemnification. Upon the determination as set forth in Section 11.06 of the Act that such indemnification is permissible under Section 11.02 of the Act, the Partnership (but not the Limited Partners) hereby indemnifies and holds harmless any Person who is or was a General Partner (and its Affiliates) against any and all losses, costs, expenses (including reasonable attorneys' fees), penalties, taxes, fines, settlements, damages and judgments resulting from the fact the General Partner was or is threatened to be named a defendant or respondent in a Proceeding because such Person was or is a General Partner in the Partnership, EVEN IF SUCH LOSSES, COSTS, EXPENSES ETC. WERE THE RESULT OF THE GENERAL PARTNER'S OWN NEGLIGENCE. This indemnification shall only be effective if the General Partner (i) acted in good faith, (ii) reasonably believed that in instances that the General Partner was acting in its official capacity that its conduct was in the Partnership's best interest and in all other instances that the General Partner's conduct was not opposed to the Partnership's best interests, and (iii) in a criminal proceeding, had no cause to believe its conduct was unlawful; provided, however, this indemnification shall in no event be applicable to a Proceeding in which the General Partner has been found to be liable for intentional misconduct, gross negligence or fraud in the performance of the General Partner's duty to the Partnership or the Limited Partners. 8.8 . Removal of the General Partner. ------------------------------ (a) Upon unanimous written consent of all of the Limited Partners, the General Partner may be removed upon (but only upon) delivery of written notice to the General Partner of the occurrence of any of the following events: (i) Any act of the General Partner, or its Affiliates, in contravention of the terms or intent of any provision contained in this Agreement; (ii) The Bankruptcy or insolvency of the General Partner; (iii) Entry of a final judgment by a court of competent jurisdiction to the effect that the General Partner was guilty of intentional misconduct, gross negligence or fraud in connection with any duty or obligation hereunder; (iv) The application or appropriation of Partnership Assets in a manner contrary to that which is permitted under this Agreement; (v) The appointment of a receiver for all or substantially all of the assets of the General Partner and the failure to have such receiver discharged within thirty (60) days of such appointment; or (vi) The bringing of any legal action against the General Partner by a creditor of the General Partner, or an Affiliate of the General Partner, resulting in the attachment, garnishment or sequestration of any portion of the General Partner's Partnership Interest and the failure of the General Partner to have such attachment, garnishment or sequestration discharged within thirty (30) days of such event. The General Partner shall be deemed removed upon delivery to it of notice of its removal. Upon the removal of the General Partner, the General Partner shall retain its Partnership Interest as a Limited Partner with all the rights and duties pertaining thereto. (b) Upon the removal of the General Partner as described in subsection (a) above, a new General Partner shall be elected by a vote of a Majority in Interest of the Limited Partners and shall be admitted to the Partnership as a General Partner. 8.9. Tax Matters Partner. (a) The General Partner is hereby designated as the "tax matters partner" of the Partnership (as defined in the Code) and is authorized and required to represent the Partnership (at the Partnership's expense) in connection with all examinations of the Partnership's affairs by tax authorities, including resulting administrative and judicial proceedings, and to expend Partnership funds for professional services and costs associated therewith. The Limited Partners agree to cooperate with the General Partner and to do or refrain from doing any or all things reasonably required by the General Partner to conduct such proceedings. In addition, each Limited Partner agrees that: (i) it will not file a statement under section 6224(c)(3)(B) of the Code prohibiting the tax matters partner from entering into a settlement on its behalf with respect to Partnership items; (ii) it will not form or become a member of a group of Partners having a 5% or greater interest in the profits of the Partnership under section 6223(b)(2) of the Code; and (iii) the General Partner is authorized to file a copy of this Agreement with the Service pursuant to section 6224(b) of the Code if necessary to perfect such Partner's waiver of rights hereunder. (b) As the Tax Matters Partner, the General Partner will give notice to all Partners, within 30 days (in advance, unless impossible), of: (i) the receipt by the Partnership of notification from the Service of its intent to conduct an audit of the Partnership; (ii) the receipt of final Partnership administrative adjustments pursuant to section 6223 of the Code; (iii)any settlement by the General Partner with the Service or any settlement by any other Partner with the Service of which the General Partner received notice; (iv) notice of the Partnership's filing of a petition for judicial review of any final Partnership administrative adjustment or an appeal of a judicial decision; (v) notice of the Partnership's decision not to file a petition for judicial review of any final Partnership administrative adjustment; and (vi) any other information required by section 6223(g) of the Code. (c) Subject to the limitations set forth in this Agreement, the General Partner is authorized to: (i) enter into a settlement agreement with the Service with respect to any tax audit or judicial review, in which agreement the General Partner may expressly state that the agreement will bind all Partners; (ii) file a petition for judicial review of a final administrative adjustment pursuant to section 6226 of the Code; (iii)intervene in any action brought by any other Partner for judicial review of a final administrative adjustment; (iv) file a request for an administrative adjustment with the Service at any time and, if any part of the request is not allowed by the Service, to file a petition for judicial review with respect to the request; and (v) take any other action on behalf of the Partners or the Partnership in connection with any administrative or judicial tax proceeding to the extent permitted by applicable law or regulations. (d) The Partnership shall reimburse the General Partner for all expenses incurred by it in connection with any administrative or judicial proceeding with respect to the tax liabilities of the Partners. 9 ARTICLE 10 LIMITED PARTNER MATTERS 10.1 . Limitation of Liability. No Limited Partner shall be bound by, or personally liable for, obligations or liabilities of the Partnership beyond the amount of its required contributions to the capital of the Partnership, and no Limited Partner shall be required to contribute any capital to the Partnership in excess of the contributions for which it is personally liable for under Article III. 10.2 . Management. No Limited Partner shall participate in the operation or management of the business of the Partnership, or transact any business for or in the name of the Partnership, nor shall any Limited Partner have any right or power to sign for or bind the Partnership in any manner. The right of a Limited Partner to consent to and approve of certain matters under the provisions of this Agreement shall not be deemed a participation in the operation and management of the business of the Partnership, or the exercise of control over the Partnership's affairs. 10.3 . Consents. Any action requiring the consent or approval of the Limited Partners under the provisions of this Agreement shall be taken only if the consent or approval of the requisite number of Limited Partners is evidenced by a written instrument executed by such Limited Partners. 10.4 . Power of Attorney. ----------------- (a) Each Limited Partner hereby irrevocably severally appoints and constitutes the General Partner, its successors and assigns hereunder as its true and lawful attorney-in-fact, with full power and authority, on its behalf and in its name, to execute, acknowledge, swear to, deliver and, where appropriate, file in such offices and places as may be required by law: (i) the Certificate, and any amendment thereto authorized under this Agreement; and (ii) any amendment to this Agreement upon compliance with this Agreement. (b) The power of attorney granted by a Limited Partner to the General Partner under paragraph (a) above is a special power coupled with an interest and is irrevocable, and may be exercised by any Person who at the time of exercise is the General Partner. Such power of attorney shall survive the death or legal disability of a Limited Partner and any Transfer or abandonment of its Partnership Interest, or its withdrawal from the Partnership. 10.5.Death, Bankruptcy, Etc. In no event shall the death, incompetency, Bankruptcy, insolvency or other incapacity of a Limited Partner operate to dissolve the Partnership. 10.6 . Outside Activities. A Limited Partner (which is not an Affiliate of the General Partner) shall not directly or indirectly own a lithotripter (or any other type of equipment used for treating renal stones and/or urinary tract stones). Prohibited indirect ownership of a lithotripter shall include the ownership of any interest in a business venture (through stock ownership, partnership interest ownership, or as otherwise determined in the sole discretion of the General Partner) involving the ownership, purchase, use or operation of a lithotripter (or similar equipment used for treating renal stones and/or urinary tract stones), unless the General Partner determines in its sole and absolute discretion that such activity by the Limited Partner is not detrimental to the best interests of the Partnership. The Partnership's sole remedy for a Limited Partner's breach of this Section 5.6 shall be the purchase rights provided in Section 9.1(c). 11 ARTICLE 12 ALLOCATIONS AND DISTRIBUTIONS 12.1 . Allocation of Profits and Losses. -------------------------------- (a) Profits and Losses for each Fiscal Year shall be determined for financial accounting purposes in accordance with the method of accounting used for federal income tax purposes and the books and records of the Partnership. Except as provided in Sections 6.3, 6.5, 6.6, 6.7 and 6.11(b), Profits and Losses shall be allocated to the Partners pro rata in accordance with their Partnership Interests. (b) Notwithstanding anything to the contrary in Section 6.1(a), any item of net loss or deduction that is attributable to a Partner Nonrecourse Debt must be allocated to the Partner that bears the economic risk of loss for such debt as determined under Code Sections 704 and 752 and the Regulations thereunder. If more than one Partner bears the economic risk of loss for a Partner Nonrecourse Debt, any net loss attributable to such debt must be allocated among such Partners in accordance with the ratios in which the Partners share the economic risk of loss for such Partner Nonrecourse Debt. (c) The Losses allocated pursuant to Section 6.1(a) hereof shall not exceed the maximum amount of Losses that can be so allocated without causing any Partner to have an Adjusted Capital Account Deficit at the end of any Fiscal Year. In the event some but not all of the Partners would have Adjusted Capital Account Deficits as a consequence of an allocation of Losses pursuant to Section 6.1(a), the limitation set forth in this Section 6.1(c) shall be applied on a Partner by Partner basis so as to allocate the maximum permissible Losses to each Partner under Section 1.704-1(b)(2)(ii)(d) of the Regulations. 12.2 . Distributions of Cash Flow from Operations. The General Partner shall, in its sole discretion and to the extent sufficient funds are available, distribute Cash Flow from Operations from time to time, but at least annually. Notwithstanding the frequency or amounts of distributions, Cash Flow shall be distributed as follows: (a) First, to the Partners pro rata in accordance with their respective Unreturned Capital Contributions in such amount, and until such time, as each Partner's Unreturned Capital Contributions have been reduced to zero; and (b) Thereafter, to the Partners pro rata in accordance with their Partnership Interests. 12.3 . Allocation of Net Gains from Capital Transactions and Net Losses from Capital Transactions. Except as otherwise provided in Sections 6.5, 6.6, 6.7 and 6.11(b), Net Gains from Capital Transactions and Net Losses from Capital Transactions recognized by the Partnership in accordance with the method of accounting and the books and records of the Partnership as in effect from time to time upon the occurrence of a Capital Transaction shall be allocated to the Partners, prior to any distributions of Cash Flow attributable thereto, as set forth below. (a) Net Gains from Capital Transactions shall be allocated as follows: (i) First, to the Partners with deficit Capital Account balances pro rata in accordance with such deficit balances in an amount to each such Partner until such Partner's deficit balance has been reduced to zero; (ii) Next, to the Partners in the proportion of the difference between their Unreturned Capital Contributions less their Capital Account balance until the credit balance of each Partner's Capital Account, if any, is equal to such Partner's Unreturned Capital Contributions; (iii) Next, to the Partners in such amounts as necessary to cause their Capital Account balances, in excess of their Unreturned Capital Contributions, to be in the ratio of their Partnership Interests; and (iv) Thereafter, to the Partners in accordance with their Partnership Interests. (b) Net Losses from Capital Transactions shall be allocated as follows: (i) First, to the Partners with a positive balance in their Capital Accounts in excess of their Unreturned Capital Contributions, in the ratio of such excess positive balances, in such amounts necessary to reduce each such Partner's positive Capital Account balance to an amount equal to its Unreturned Capital Contributions; (ii) Next, to the Partners with positive balances in their Capital Accounts pro rata in the ratio of such positive balances, in amounts equal to such positive balances; and (iii) Thereafter, to the General Partner. 12.4 . Distributions of Cash Flow from a Major Capital Event. Cash Flow arising from a Major Capital Event shall be distributed within 60 days of such event as follows: (a) First, to the Partners pro rata in accordance with their respective Unreturned Capital Contributions in such amount, and until such time, as each Partner's Unreturned Capital Contributions have been reduced to zero; and (b) Thereafter, to the Partners pro rata in accordance with their Partnership Interests. 12.5 . Special Allocations. The following special allocations shall be made in the following order: (a) Minimum Gain Chargeback. Except as otherwise provided in Section 1.704-2(f) of the Regulations, notwithstanding any other provision of this Section 6, if there is a net decrease in Partnership Minimum Gain during any Partnership Fiscal Year, each Partner shall be specially allocated items of Partnership income and gain for such Fiscal Year (and, if necessary, subsequent Fiscal Years) in an amount equal to such Partner's share of the net decrease in Partnership Minimum Gain, determined in accordance with Regulations Section 1.704-2(g). Allocations pursuant to the previous sentence shall be made in proportion to the respective amounts required to be allocated to each Partner pursuant thereto. The items to be so allocated shall be determined in accordance with Sections 1.704-2(f)(6) and 1.704-2(j)(2) of the Regulations. This Section 6.5(a) is intended to comply with the minimum gain chargeback requirement in Section 1.704-2(f) of the Regulations and shall be interpreted consistently therewith. (b) Partner Minimum Gain Chargeback. Except as otherwise provided in Section 1.704-2(i)(4) of the Regulations, notwithstanding any other provision of this Section 6.5, if there is a net decrease in Partner Nonrecourse Debt Minimum Gain attributable to a Partner Nonrecourse Debt during any Partnership Fiscal Year, each Partner who has a share of the Partner Nonrecourse Debt Minimum Gain attributable to such Partner Nonrecourse Debt, determined in accordance with Section 1.7042(i)(5) of the Regulations, shall be specially allocated items of Partnership income and gain for such Fiscal Year (and, if necessary, subsequent Fiscal Years) in an amount equal to such Person's share of the net decrease in Partner Nonrecourse Debt Minimum Gain attributable to such Partner Nonrecourse Debt, determined in accordance with Regulations Section 1.704-2(i)(4). Allocations pursuant to the previous sentence shall be made in proportion to the respective amounts required to be allocated to each Partner pursuant thereto. The items to be so allocated shall be determined in accordance with Sections 1.704-2(i)(4) and 1.704-2(j)(2) of the Regulations. This Section 6.5(b) is intended to comply with the minimum gain chargeback requirement in Section 1.704-2(i) (4) of the Regulations and shall be interpreted consistently therewith. (c) Qualified Income Offset. In the event any Partner unexpectedly receives any adjustments, allocations, or distributions described in Regulations Section 1.704-1(b)(2)(ii)(d)(4), Regulations Section 1.704-1(b)(2)(ii)(d)(5), or Regulations Section 1.704-1(b)(2)(ii)(d)(6), items of Partnership income and gain shall be specially allocated to each such Partner in an amount and manner sufficient to eliminate, to the extent required by the Regulations, the Adjusted Capital Account Deficit of such Partner as quickly as possible, provided that an allocation pursuant to this Section 6.5(c) shall be made if and only to the extent that such Partner would have an Adjusted Capital Account Deficit after all other allocations provided for in this Section 6 have been tentatively made as if this Section 6.5(c) were not in the Agreement. (d) Gross Income Allocation. In the event any Partner has an Adjusted Capital Account Deficit at the end of any Fiscal Year, each such Partner shall be specially allocated items of Partnership income and gain in the amount of such excess as quickly as possible, provided that an allocation pursuant to this Section 6.5(d) shall be made if and only to the extent that such Partner would have an Adjusted Capital Account Deficit in excess of such sum after all other allocations provided for in this Section 6 have been tentatively made as if this Section 6.5(d) and Section 6.5(c) hereof were not in the Agreement. (e) Partner Nonrecourse Deductions. Any Partner Nonrecourse Deductions for any Fiscal Year shall be specially allocated to the Partner who bears the economic risk of loss with respect to the Partner Nonrecourse Debt to which such Partner Nonrecourse Deductions are attributable in accordance with Regulations Section 1.704-2(i)(1). (f) Section 754 Adjustment. To the extent an adjustment to the adjusted tax basis of any Partnership asset pursuant to Code Section 734(b) or Code Section 743(b) is required, pursuant to Regulations Section 1.704-1(b)(2)(iv)(m)(2) or Regulations Section 1.704-1(b) (2)(iv)(m)(4), to be taken into account in determining Capital Accounts as the result of a distribution to a Partner in complete liquidation of his interest in the Partnership, the amount of such adjustment to the Capital Accounts shall be treated as an item of gain (if the adjustment increases the basis of the asset) or loss (if the adjustment decreases such basis) and such gain or loss shall be specially allocated to the Partners in accordance with their interests in the Partnership in the event that Regulations Section 1.704-1(b)(2)(iv)(m)(2) applies, or to the Partners to whom such distribution was made in the event that Regulations Section 1.7041(b)(2)(iv)(m)(4) applies. (g) Offering Expenses. Offering Expenses for any Fiscal Year shall be specially allocated to the Partners in proportion to their Partnership Interests, provided that, if additional Partners are admitted to the Partnership on different dates, all Offering Expenses shall be divided among the Partners from time to time so that, to the extent possible, the cumulative Offering Expenses allocated with respect to each Partnership Interest at any time is the same amount. In the event the General Partner shall determine that such result is not likely to be achieved through future allocations of Offering Expenses, the General Partner may allocate other items of income, gain, deduction, or loss so as to achieve the same effect on the Capital Accounts of the Partners. 12.6 . Curative Allocations. The allocations set forth in Sections 6.1(c), 6.5(a), 6.5(b), 6.5(c), 6.5(d), 6.5(e), and 6.5(f) hereof (the "Regulatory Allocations") are intended to comply with certain requirements of the Regulations. It is the intent of the Partners that, to the extent possible, all Regulatory Allocations shall be offset either with other Regulatory Allocations or with special allocations of other items of Partnership income, gain, loss, or deduction pursuant to this Section 6.6. Therefore, notwithstanding any other provision of this Section 6 (other than the Regulatory Allocations), the General Partner shall make such offsetting special allocations of Partnership income, gain, loss, or deduction in whatever manner it determines appropriate so that, after such offsetting allocations are made, each Partner's Capital Account balance is, to the extent possible, equal to the Capital Account balance such Partner would have had if the Regulatory Allocations were not part of the Agreement and all Partnership items were allocated pursuant to Sections 6.1(a) and 6.5(g). In exercising its discretion under this Section 6.6, the General Partner shall take into account future Regulatory Allocations under Sections 6.5(a) and 6.5(b) that, although not yet made, are likely to offset other Regulatory Allocations previously made under Sections 6.5(f). 12.7 . Section 704(b) Limitation. Notwithstanding any other provision of this Agreement to the contrary, no allocation of any item of income or loss shall be made to a Partner if such allocation would not have "economic effect" pursuant to Treasury Regulation Section 1.704-1(b)(2)(ii) or otherwise be in accordance with its interest in the Partnership within the meaning of Treasury Regulation Sections 1.704-1(b)(3) and 1.704-2. To the extent an allocation cannot be made to a Partner due to the application of this Section 6.7, such allocation shall be made to the other Partners entitled or required to receive such allocation hereunder. 12.8 . Distributions Upon Liquidation of Partnership. --------------------------------------------- (a) Upon liquidation of the Partnership the assets of the Partnership shall be distributed no later than the later of 90 days after the date of such liquidation or the end of the Partnership's taxable year in which the liquidation occurs and shall be applied in the following order of priority: (i) To the payment of debts and liabilities of the Partnership (including amounts owed to Partners or former Partners) and expense of liquidation; (ii) Unless inconsistent with Treasury Regulation Section 1.704-1(b)(2)(ii)(b), or any successor provision, to set up any reserves which the General Partner deems reasonably necessary for contingent or unforeseen liabilities or obligations of the Partnership arising out of or in connection with the business of the Partnership; and (iii) After all Capital Account adjustments for the Partnership's taxable year in which the liquidation occurs (including without limitation adjustments required under Treasury Regulation Section 1.704-1(b)(2)(iv)(e), relating to distributions in kind), to the Partners in accordance with each Partner's positive Capital Account balance. 12.9 . Liquidation of Partner's Partnership Interest. Except as may otherwise be required in this Agreement, if a Partner's Partnership Interest is to be liquidated, liquidating distributions shall be made in accordance with the positive Capital Account balance of such Partner, as determined after taking into account all Capital Account adjustments for the Partnership's taxable year during which such liquidation occurs, by the end of the taxable year, or if later, within ninety (90) days after the date of such liquidation. If a Partner's Partnership Interest is to be liquidated, it has a negative Capital Account balance and it is obligated to restore some or all of its negative Capital Account upon liquidation of the Partnership pursuant to Section 3.7, then such Partner shall, by the end of the taxable year or, if earlier, within ninety (90) days of the date of such liquidation, contribute cash to the Partnership in an amount equal to its negative Capital Account or such lesser amount as provided in Section 3.7. Where a Partner's Partnership Interest is to be liquidated by a series of distributions, such Partner's Partnership Interest shall not be considered liquidated until the final distribution has been made. For purposes of this Section 6.9, a liquidation of a Partner's Partnership Interest means the termination of the Partner's entire Partnership Interest by means of a distribution or series of distributions to the Partner by the Partnership. 12.10 . In-Kind Distributions. --------------------- (a) Prior to a distribution of property (other than cash and other than in complete liquidation of the Partnership or a Partner's Partnership Interest), the Capital Accounts of the Partners shall be adjusted to reflect the manner in which the unrealized income, gain, loss and deduction inherent in such property (that has not previously been reflected in the Capital Accounts), would be allocated among the Partners if there were a taxable disposition of the property on the date of distribution. (b) If the distribution of property (other than cash) is to a Partner in complete liquidation of the Partner's Partnership Interest or in liquidation of the Partnership, prior to such distribution, the Capital Accounts of all the Partners shall be adjusted to reflect the manner in which the unrealized income, gain, loss and deduction inherent in all the Partnership's property (that has not previously been reflected in the Capital Accounts) would be allocated among the Partners if there was a taxable disposition of all such property on the date of the liquidating distribution. (c) If any assets of the Partnership are distributed to the Partners in kind, the Partners shall own and hold the same as tenants in common. 12.11 . Additional Tax Allocation Provisions. ------------------------------------ (a) For income tax purposes, allocations of income and loss (and items thereof) shall be made in accordance with the foregoing allocations of income, gain and loss for financial purposes. (b) Notwithstanding anything to the contrary contained herein, items of income, gain, loss and deduction with respect to property, other than cash, contributed to the Partnership by a Partner or with respect to an adjustment to the Partners' Capital Accounts to reflect a revaluation of the Partnership Assets, shall be allocated among the Partners so as to take into account the variation between the basis of the property to the Partnership and its fair market value at the time of contribution or, in the case of a revaluation of the Partnership Assets, the variation between the basis of the Partnership Assets to the Partnership and its fair market value as of the date of revaluation, as provided in Section 704(c) of the Code and Regulations thereunder and Treasury Regulations Section 1.704-1(b)(2)(iv)(g). (c) As between a Partner who has transferred all or part of its Partnership Interest and its transferee, all items of income, gain, deduction and loss, for any year shall be apportioned on the basis of the number of days in each such year that each was the holder of such Partnership Interest (making any adjustments necessary to comply with the provisions of Section 706(d)(2) of the Code), without regard to the results of the Partnership's operations during the period before and after the date of such transfer, provided that if both the transferor and transferee consent thereto a special closing of the books shall be had as of the effective date of such transfer and the apportionment of items of income and gain, and deduction and loss, shall be made on the basis of actual operating results. Notwithstanding the above, gain or loss resulting from a Major Capital Event or a Liquidating Event shall be allocated only to those persons who are Partners as of the date on which such transaction is consummated. 13 ARTICLE 14 FISCAL MATTERS 14.1 . Books and Records. The General Partner shall keep, or cause to be kept, at the expense of the Partnership, full and accurate books and records of all transactions of the Partnership in accordance with accepted accounting principles, consistently applied. Among such books and records the General Partner shall keep: (a) A current list of the following items: (i) the name and mailing address of each Partner, separately identifying in alphabetical order the General Partner and the Limited Partners; (ii) the last known street address of the business or residence of each General Partner; (iii) the Partnership Interest of each Partner; and (b) Copies of the Partnership's federal, state and local tax returns for each of the Partnership's six most recent tax years; (c) A copy of this Agreement, the Certificate, all amendments and restatements, executed copies of any powers of attorney under which this Agreement, the Certificate and any and all amendments or restatements thereto have been executed. All of such books and records shall, at all times, be maintained at the principal place of business of the Partnership and the Limited Partners and their agents and attorneys shall have the right to inspect and copy any of them, at their own expense, during normal business hours. 14.2 . Reports and Statements. Within ninety (90) days after the end of each Year of the Partnership, the General Partner shall send to each person who was a Limited Partner at any time during such year such tax information, including without limitation, federal tax Schedule K-1, as shall be reasonably necessary for the preparation by such person of his federal income tax return. 14.3 . Audit. A Majority in Interest of the Limited Partners may require an audit of the books and records of the Partnership to be conducted at any time (but not more frequently than once each calendar year). Any such audit so required shall be conducted by auditors selected by a Majority in Interest of the Limited Partners at the expense of the Partnership. 14.4 . Tax Returns. The General Partner shall cause to be prepared and delivered to the Partners on or before seventy-five days following the end of each Fiscal Year, at the expense of the Partnership, all federal and any required state and local income tax returns for the Partnership for the preceding Fiscal Year. If the Partnership's income tax returns are audited, the General Partner shall retain, at the expense of the Partnership, lawyers, accountants and other professionals to participate in such audit in order to contest assertions by the auditing agent that may be materially adverse to the Partners. 14.5 . Bank Accounts. The General Partner, in the name of the Partnership, shall open and maintain a special bank account or accounts in a bank or savings and loan association, the deposits of which are insured by an agency of the United States government, in which shall be deposited all funds of the Partnership. There shall be no commingling of the Partnership Assets with the property and assets of any other Person. 14.6 . Tax Elections. The General Partner shall determine all federal income tax elections available to the Partnership. 15 ARTICLE TRANSFERS OF GENERAL PARTNERSHIP INTEREST; 16 ADMISSION OF SUBSTITUTE PARTNERS 16.1 . Restriction on Transfers by the General Partner. ----------------------------------------------- (a) All or part of a general Partnership Interest may be Transferred by the General Partner only with the prior written approval of a Majority in Interest of the Limited Partners. (b) The General Partner shall have the right and power, at any time and from time to time without the consent of any other Partner, to Transfer limited Partnership Interests. 16.2 Admission of General Partner. ---------------------------- A transferee of all or part of a general Partnership Interest may be admitted to the Partnership as a general partner only upon providing to the General Partner all of the following: (a) The written approval of the General Partner and a Majority in Interest of the Limited Partners, which approval may be granted or denied in the sole discretion of the Partners; (b) such financial statements, guarantee or other assurance as the General Partner may require with regard to the ability of the proposed general partner to fulfill the financial obligations of a general partner hereunder; (c) acceptance, in form satisfactory to the General Partner, of all the terms and provisions of this Agreement and any other documents required in connection with the operation of the Partnership pursuant to the terms of this Agreement; (d) a certified copy of a resolution of its Board of Directors (if it is a corporation) authorizing it to become a general partner under the terms and conditions of this Agreement; (e) such other documents or instruments as may be required in order to effect its admission as a general partner; and (f) payment of such reasonable expenses as may be incurred in connection with its admission as a general partner. 16.3 . Restrictions on Transfers by Limited Partners. --------------------------------------------- (a) All or part of a Partnership Interest may be transferred by a Limited Partner only with the prior written approval of the General Partner and a Majority in Interest of the Limited Partners, which approval may be granted or denied in the sole discretion of the Partners. In no event may a Partnership Interest be transferred if such Transfer would result in a termination of the Partnership under Code Section 708, nor may a Partnership Interest be transferred to a "tax-exempt entity" (as defined in Code Section 168(h)) which would effect the method or manner in which the Partnership may depreciate Partnership Assets. (b) A transfer of a Partnership Interest may be made only if, prior to the date thereof, the Partnership receives an opinion of counsel, satisfactory in form and substance to the General Partner, that neither the offering nor the proposed transfer will violate any Federal or applicable state securities law or regulations, will prevent the Partnership from being entitled to use any method of depreciation which the Partnership might otherwise be entitled to use, or will adversely affect the status of the Partnership as a partnership for Federal income tax purposes. 16.4 Admission of Limited Partners. A transferee of a Limited Partner's Partnership Interest may be admitted to the Partnership as a Limited Partner only upon furnishing to the General Partner all of the following: (a) the written approval of the General Partner and a Majority in Interest of the Limited Partners, which approval may be granted or denied in the sole discretion of the Partners; (b) acceptance, in a form satisfactory to the General Partner, of all the terms and conditions of this Agreement and any other documents required in connection with the operation of the Partnership pursuant to the terms of this Agreement; (c) such other documents or instruments as may be required in order to effect his admission as a Limited Partner; and (d) payment of such reasonable expenses as may be incurred in connection with his admission as a Limited Partner. Provided, however, the General Partner shall have the right to admit Persons as Limited Partners in the event of a Dilution Offering pursuant to Article X. 16.5 . Cost of Transfers. The transferor and, if it fails or refuses to do so, then the transferee, of any Partnership Interest shall reimburse the Partnership for all costs incurred by the Partnership resulting from any Transfer. 16.6 . Effect of Attempted Disposition in Violation of this Agreement. Any attempted Transfer of any Partnership Interest in breach of this Agreement shall be null and void and of no effect whatsoever. 16.7 Rights of Transferee. Unless admitted to the Partnership in accordance with Section 8.3 or Section 8.5, the transferee of a Partnership Interest or a part thereof shall not be entitled to any of the rights, powers, or privileges of his predecessor in interest, except that he shall be entitled to receive and be credited or debited with his proportionate share of Partnership income, gains, profits, losses, deductions, credits or distributions. 16.8 Amendment of Certificate of Limited Partnership and Qualification. The General Partner shall take all steps necessary and appropriate to prepare and record any amendments to the Certificate, as may be necessary or appropriate from time to time to comply with the requirements of the Act, including, without limitation, upon the admission to the Partnership of any general partner pursuant to the provisions of Section 8.3, and may for this purpose exercise the power of attorney delivered to the General Partner pursuant to Section 8.3, Section 8.5 or Section 5.4. In addition, the General Partner shall take all steps necessary and appropriate to prepare and record any and all documents necessary to qualify the Partnership to do business in jurisdictions where the Partnership is doing business, and may for this purpose exercise the power of attorney delivered to the General Partner pursuant to Section 8.3, Section 8.5 or Section 5.4. 17 ARTICLE PURCHASE AND SALE OF A PARTNERSHIP INTEREST 18 18.1 . Optional Purchase of Partnership Interest from Limited Partners upon Certain Events. (a) Death. Upon the death of a Limited Partner, the deceased Limited Partner's executor, administrator, or other legal or personal representative shall give written notice of that fact to the Partnership. The Partnership shall have the option to purchase at the Closing (as defined below) the Partnership Interest of the deceased Limited Partner (whose executor, administrator or other legal or personal representative shall then become obligated to sell such Partnership Interest) at the price determined in the manner provided in Section 9.1(f) of this Agreement and on the terms and conditions provided in Section 9.2 of this Agreement. The Partnership shall have a period of thirty (30) days following the date of notice of the death of the Limited Partner (the "Option Period") within which to notify in writing the deceased Limited Partner's executor, administrator or other legal or personal representative, whether the Partnership wishes to purchase all or a portion of the Partnership Interest of the deceased Limited Partner. If the Partnership does not elect to purchase all of the Partnership Interest of the deceased Limited Partner before the expiration of the Option Period and in the manner provided herein, the portion of the Partnership Interest not purchased shall be held by the deceased Limited Partner's executor, administrator or other legal representative pursuant to the terms of this Agreement. The Partnership, in its sole discretion, may elect to assign its rights to purchase the Partnership Interest of a deceased Limited Partner under this Section 9.1(a) to the General Partner and, in such case, the General Partner shall have the same rights as provided for the Partnership under this Section 9.1(a). (b) Bankruptcy, Insolvency or Assignment for Benefit of Creditors of a Limited Partner. In the event that an involuntary or voluntary proceeding under the Federal Bankruptcy Code, as amended, is filed for or against any Limited Partner, or if any Limited Partner shall make an assignment for the benefit of his creditors, or if any Limited Partner has a receiver or custodian appointed for his assets, or any Limited Partner generally fails to pay his debts when due, the insolvent Limited Partner shall give written notice (the "Notice of Insolvency") to the Partnership of the commencement of any such proceeding or the occurrence of such event within five days of the first notice to him of such commencement or occurrence of such event. The Partnership shall have the option to purchase at the Closing (as defined below) the Partnership Interest of the insolvent Limited Partner (which the insolvent Limited Partner or his trustee, custodian, receiver or other personal or legal representative, as the case may be, shall then become obligated to sell) at the price determined in the manner provided in Section 9.1(f) of this Agreement and on the terms and conditions provided in Section 9.2 of this Agreement. The Partnership shall have a period of thirty (30) days following the date of the Notice of Insolvency (the "Option Period") within which to notify in writing the insolvent Limited Partner or his trustee, custodian, receiver, or other legal or personal representative, whether the Partnership wishes to purchase all or a portion of the Partnership Interest of the insolvent Limited Partner. If the Partnership does not elect to purchase all of the Partnership Interest of the insolvent Limited Partner before the expiration of the Option Period and in the manner provided herein, the portion of the Partnership Interest not purchased shall be held by the insolvent Limited Partner, his trustee, custodian, receiver or other legal or personal representative pursuant to the terms of this Agreement. The Partnership, in its sole discretion, may elect to assign its rights to purchase the Partnership Interest of an insolvent Limited Partner under this Section 9.1(b) to the General Partner and, in such case, the General Partner shall have the same rights as provided for the Partnership under this Section 9.1(b). (c) Breach of Section 5.6. In the event the Partnership receives notice of a breach of Section 5.6 by or with respect to a Limited Partner (the "Defaulting Limited Partner"), the Partnership may elect, in its sole discretion, to treat such event as a default under this Agreement and enforce the provisions of this Section 9.1(c). If the Partnership elects to enforce the provisions of this Section 9.1(c), the Partnership shall give written notice of such election (the "Notice of Default") to the Defaulting Limited Partner. The Partnership shall have the option to purchase at the Closing (as defined below) the Partnership Interest of the Limited Partner (which the Limited Partner shall then become obligated to sell) at the price determined in the manner provided in Section 9.1(f) of this Agreement and on the terms and conditions provided in Section 9.2 of this Agreement. The Partnership shall have a period of thirty (30) days following the date it sends the Notice of Default (the "Option Period") within which to notify in writing the Defaulting Limited Partner, whether the Partnership wishes to purchase all or a portion of the Partnership Interest of the Defaulting Limited Partner. If the Partnership does not elect to purchase all of the Partnership Interest of the Defaulting Limited Partner before the expiration of the Option Period and in the manner provided herein, the portion of the Partnership Interest not purchased shall be held by the Defaulting Limited Partner pursuant to the terms of this Agreement. The Partnership, in its sole discretion, may elect to assign its rights to purchase the Partnership Interest of a Defaulting Limited Partner under this Section 9.1(c) to the General Partner and, in such case, the General Partner shall have the same rights as provided for the Partnership under this Section 9.1(c). (d) Incompetency. If any Limited Partner shall be adjudicated incompetent in an appropriate judicial proceeding, the legal or personal representative of the incompetent Limited Partner shall give written notice to the Partnership of the occurrence of such event (the "Notice of Incompetency"). The Partnership shall have the option to purchase at the Closing (as defined below) the Partnership Interest of the Limited Partner adjudicated incompetent (which the Limited Partner shall then become obligated to sell), at the price determined in the manner provided in Section 9.1(c) of this Agreement and on the terms and conditions provided in Section 9.2 of this Agreement. The Partnership shall have a period of thirty (30) days following the date of the Notice of Incompetency (the "Option Period") within which to notify in writing the Limited Partner involved in the Domestic Proceeding, whether the Partnership wishes to purchase all or a portion of the Partnership Interest of such Limited Partner. If the Partnership does not elect to purchase the Partnership Interest of the Limited Partner adjudicated incompetent before the expiration of the Option Period and in the manner provided herein, the portion of the Partnership Interest not purchased shall be held by the legal or personal representative of such Limited Partner pursuant to the terms of this Agreement. The Partnership, in its sole discretion, may elect to assign its rights to purchase the Partnership Interest of the Limited Partner adjudicated incompetent under this Section 9.1(d) to the General Partner and, in such case, the General Partner shall have the same rights as provided for the Partnership under this Section 9.1(d). (e) Divestiture Option. If state or federal regulations or laws are enacted or applied, or if any other legal developments occur, which, in the opinion of the General Partner adversely affect (or potentially adversely affect) the operation of the Partnership (e.g., the enactment or application of prohibitory physician self-referral legislation against the Partnership or its Partners), the General Partner shall promptly either, in its sole discretion, (i) take the steps outlined in this Section 9.1(e) to divest the Limited Partners of their Partnership Interest, or (ii) dissolve the Partnership. If the General Partner chooses option (i), it shall deliver a written notice to all of the Limited Partners (the "Notice of Election") and purchase such Partnership Interest for its own account. The purchase price to be paid for the Partnership Interest shall be determined in the manner as provided in Section 9.1(f) and shall be on the terms and conditions as provided in Section 9.2. The transfer of the Partnership Interest and the payment of the purchase price Limited Partners' shall be made at such time as determined by the General Partner to be in the best interests of the Partnership and its Limited Partners. Each Limited Partner hereby makes, constitutes and appoints the General Partner, with full power of substitution, his true and lawful attorney-in-fact, to take such actions and execute such documents on his behalf to effect the transfer of his Partnership Interest as provided in this Section 9.1(e). The foregoing power of attorney shall not be affected by the subsequent incapacity, mental incompetence, dissolution or bankruptcy of any Limited Partner. (f) Purchase Price. The purchase price to be paid for the Partnership Interest of any Limited Partner whose interest is being purchased pursuant to the provisions of Sections 9.1(a) - (e) (the "Retiring Limited Partner") shall be determined in the manner provided in this Section 9.1(f). The purchase price for the Partnership Interest purchased pursuant to the provisions of Section 9.1(a) shall be an amount equal to one and one-half (1 1/2) times the aggregate distributions made with respect to such Partnership Interest pursuant to Section 6.2 during the twelve-month period ending on the Valuation Date (as defined below); provided, however, that the purchase price shall not exceed the fair market value of the Partnership Interest. The purchase price for the Partnership Interest purchased pursuant to the provisions of Sections 9.1(b) - (e) shall be an amount equal to the Retiring Limited Partner's share of the Partnership's book value, if any, as reflected by the Capital Account of the Retiring Limited Partner (unadjusted for any appreciation in Partnership assets and as reduced by depreciation deductions claimed by the Partnership for tax purposes). The determination of the Retiring Limited Partner's Capital Account on the Valuation Date (as defined below) shall be made by the Partnership's firm of certified public accountants (the "Partnership Accountant") upon a review of the Partnership books of account, and a formal audit is expressly waived. The statement of the Partnership Accountant with respect to the Capital Account of the Retiring Limited Partner on the Valuation Date shall be binding and conclusive upon the Partnership, the purchasing Partners and the Retiring Limited Partner and his executor, administrator, trustee, custodian, receiver or other personal or legal representative. The "Valuation Date" means the last day of the month immediately preceding the month in which occurs: (i) the death of a Retiring Limited Partner, in the case of a purchase by reason of death; (ii) the bankruptcy or insolvency of a Retiring Limited Partner, in the case of a purchase by reason of such bankruptcy or insolvency; (iii) breach of Section 5.6 as provided in Section 9.1(c) in the case of a purchase by reason thereof; (iv) the Notice of Incompetency as provided in Section 9.1(c), in the case of a purchase by reason thereof; (v) the Notice of Election as provided in Section 9.1(e), in the case of a purchase by reason thereof. Any Limited Partner whose Partnership Interest is purchased pursuant to the provisions of Section 9.1(a) - (e) shall be entitled only to the purchase price which shall be paid at the Closing in cash (or by certified or cashier's check) and shall not be entitled to any Partnership distributions made after the Valuation Date. The transfer of Partnership Interest of a Retiring Limited Partner shall be deemed to occur as of the Valuation Date and the Retiring Limited Partner shall have no voting or other rights as a Limited Partner after such date. The purchaser shall be entitled to any distributions attributable to the transferred interest after the Valuation Date and the Partnership shall have the right to deduct the amount of any such distributions made to the Retiring Limited Partner after the Valuation Date from the purchase price. 9.2 Closing. ------- (a) Closing of Purchase and Sale. The Closing of any purchase and sale of Partnership Interest pursuant to Sections 9.1(a) - (e) of this Agreement shall take place at the principal office of the Partnership, or such other place designated by the General Partner, on the date determined as follows (the "Closing"): (i) In the case of a purchase and sale occurring by reason of the death of a Limited Partner as provided in Section 9.1(a) of this Agreement, the Closing shall be held on the thirtieth day (or if such thirtieth day is not a business day, the next business day following the thirtieth day) next following the last to occur of (a) Qualification of the executor or personal administrator of the deceased Limited Partner's estate; (b) The date on which any necessary determination of the purchase price of the Partnership Interest to be purchased has been made; or (c) The date that coincides with the close of the Option Period. (ii) In the case of a purchase and sale occurring by reason of the occurrence of one of the events described in Sections 9.1(b) - (d) of this Agreement, the Closing shall be held on the thirtieth day (or if such thirtieth day is not a business day, the next business day following the thirtieth day) next following the later to occur of: (a) The date on which any necessary determination of the purchase price of the Partnership Interest to be purchased has been made; or (b) The date that coincides with the close of the Option Period. At the Closing, although not necessary to effect the transfer, the Retiring Limited Partner shall concurrently with tender and receipt of the applicable purchase price, deliver to the purchaser duly executed instruments of transfer and assignment, assigning good and marketable title to the portion or portions of the Retiring Limited Partner's entire Partnership Interest thus purchased, free and clear from any liens or encumbrances or rights of others therein. The parties acknowledge that occurrence of any of the triggering events described in Sections 9.1(a) - (e) and compliance with all the Sections of this Agreement are sufficient to effect the complete transfer of the Retiring Limited Partner's Partnership Interest and the Retiring Limited Partner shall be deemed to consent to admission of the transferee as a substitute Limited Partner. Notwithstanding the date of the Closing or whether a Closing is successfully held, the transfer of the Partnership Interest of a Retiring Limited Partner shall be deemed to occur as of the Valuation Date as defined in Section 9.1(f). The deemed transfer is effective regardless of whether the Retiring Limited Partner performs the duties set forth in this Section 9.2. 19 ARTICLE DILUTION OFFERING 20 Notwithstanding any other provision of this Agreement to the contrary, the General Partner may cause the Partnership to issue additional Partnership Interest from time to time upon such terms and conditions and in exchange for such Capital Contributions as determined by the General Partner in its sole and absolute discretion. As a result of a Dilution Offering, the Partnership Interest of each Partner will be diluted proportionately. 21 ARTICLE RESIGNATION AND WITHDRAWAL OF 22 GENERAL PARTNER The General Partner shall not resign or withdraw as General Partner except with the consent of a Majority in Interest of the Limited Partners. 23 ARTICLE 24 DISSOLUTION 24.1 . Dissolution. ----------- (a) It is the intention of the Partners that the business of the Partnership be continued by the Partners, or those remaining, pursuant to the provisions of this Agreement, notwithstanding the occurrence of any event which would result in a statutory dissolution of the Partnership pursuant to the laws of the State of Texas, and no Partner shall be released or relieved of any duty or obligation hereunder by reason thereof; provided, however, that the business of the Partnership shall be terminated, its affairs wound-up and its property and assets distributed in liquidation on the earlier to occur of: (i) December 31, 2040; (ii) a determination by all of the Partners that the business of the Partnership should be terminated; (iii) the Bankruptcy or insolvency of the Partnership; (iv) subject to the provisions of paragraph (b) below, the death, incompetency, Bankruptcy, insolvency, withdrawal or removal from the Partnership of the last remaining General Partner; (v) the date upon which a Liquidating Event occurs, and all payments have been received; or (vi) entry of a decree of judicial dissolution. (b) Upon the occurrence of any event set forth in subparagraph (iv) of paragraph (a) above with respect to the last remaining General Partner, the business of the Partnership shall be continued pursuant to the provisions of this Agreement if, within a period of 90 days from the date of such occurrence, each of the Limited Partners shall elect in writing that it be so continued and shall designate one or more Persons to be admitted to the Partnership as a General Partner. Any such Person shall upon admission to the Partnership succeed to all of the rights and powers of a General Partner hereunder, provided that the former General Partner shall retain and be entitled to its share of Profits, Losses, distributions, and capital associated with the General Partner's Partnership Interest. 24.2 . Wind-Up of Affairs. As expeditiously as possible following the occurrence of an event giving rise to a termination of the business of the Partnership, the General Partner (or a special liquidator who may be appointed by a Majority in Interest of the other Partners if the termination results from a circumstance described in Section 12.1 (a)(iv) above relative to the General Partner) shall wind-up the affairs of the Partnership, sell Partnership Assets for cash at the highest price reasonably obtainable, distribute the proceeds in accordance with Section 6.8 in liquidation of the Partnership and file a certificate of cancellation with the Secretary of State of Texas. 25 ARTICLE 26 MISCELLANEOUS 26.1 . Amendments. In addition to the right of the General Partner to amend certain of the provisions of this Agreement by reason of the power of attorney granted to the General Partner under Section 5.4, a Majority in Interest of the Partners may, by instrument in writing, amend any of the other provisions hereof, except for those provisions which affect the rights of Partners to share income, gain, distributions, loss and deductions and require Partners to make Additional Capital Contributions, which provisions shall be amended only upon the written consent of all Partners adversely affected thereby. 26.2 . Partition. No Partner shall be entitled to a partition of the Partnership Assets notwithstanding any provision of law to the contrary. 26.3 . Notices. All notices, demands, requests or other communications that may be or are required to be given, served or sent by either party to the other party pursuant to this Agreement shall be in writing and shall be mailed by first-class, registered or certified mail, return receipt requested, postage prepaid, or transmitted by hand delivery, telegram or facsimile transmission addressed as set forth on the Signature Pages attached hereto. Each party may designate by notice in writing a new address to which any notice, demand, request or communication may thereafter be so given, served or sent. Each notice, demand, request or communication that is mailed, delivered or transmitted in the manner described above shall be deemed sufficiently given, served, sent and received for all purposes at such time as it is delivered to the addressee with the return receipt, the delivery receipt, the affidavit of messenger or (with respect to a facsimile transmission) the answer back being deemed conclusive evidence of such delivery or at such time as delivery is refused by the addressee upon presentation. 26.4 . Provisions Severable. Every provision of this Agreement is intended to be severable and, if any term or provision hereof is illegal or invalid for any reason whatsoever, such illegality or invalidity shall not affect the validity of the remainder of this Agreement. 26.5 . Counterparts. This Agreement, and any amendments hereto, may be executed in counterparts, each of which shall be deemed an original, and such counterparts shall constitute but one and the same instrument. 26.6 . Headings. The headings of the various Sections are intended solely for convenience of reference, and shall not be deemed or construed to explain, modify or place any construction upon the provisions hereof. 26.7 . Successors and Assigns. This Agreement and any amendments hereto shall be binding upon and, to the extent expressly permitted by the provisions hereof, shall inure to the benefit of the Partners and their respective heirs, legal representatives, successors and assigns. 26.8 . APPLICABLE LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS AND ALL OBLIGATIONS OF ONE PARTNER TO ANOTHER ARE PERFORMABLE IN HARRIS COUNTY. 26.9 . NOTICE OF INDEMNIFICATION. THE PARTIES TO THIS AGREEMENT HEREBY ACKNOWLEDGE AND AGREE THAT THIS AGREEMENT CONTAINS CERTAIN INDEMNIFICATION PROVISIONS PURSUANT TO SECTION 4.8. [Remainder of Page Intentionally Left Blank; Signature Page Follows] IN WITNESS WHEREOF, the Partners have executed this Agreement this _____ day of January, 2001. GENERAL PARTNER: LITHOTRIPTERS, INC. By: Brad Hummel, President TABLE OF CONTENTS (Continued) Page ARTICLE I.......DEFINITIONS 2 1.1....Terms Defined 2 1.2. Number and Gender......................12 ARTICLE II..... CONTINUATION 12 2.1....Continuation 12 2.2....Name 12 2.3....Principal Place of Business; Registered Office; Registered Agent 13 2.4. Purposes...............................13 2.5....Term 13 ARTICLE III.....CAPITAL CONTRIBUTIONS 13 3.1....Initial Capital Contributions 13 3.2. Additional Capital Contributions.......14 3.3....Capital Accounts 14 3.4. Failure to Make Additional Capital Contributions..........................14 3.5. Partner Loans..........................15 3.6. Other Matters Relating to Capital Contributions..........................15 3.7....Deficit Capital Account Balances 16 ARTICLE IV......RIGHTS AND POWERS OF THE GENERAL PARTNER 16 4.1....Duties of General Partner 16 4.2....Illustrative Rights and Powers 16 4.3....Payment of Costs and Expenses 18 4.4. Exercise of Rights and Powers..........18 4.5....Management Fee 18 4.6....Liability 18 4.7....Indemnification 19 4.8....Removal of the General Partner 19 4.9. Tax Matters Partner....................20 ARTICLE V.......LIMITED PARTNER MATTERS 22 5.1....Limitation of Liability 22 5.2. Management.............................22 5.3....Consents 22 5.4....Power of Attorney 22 5.5....Death, Bankruptcy, Etc. 23 5.6....Outside Activities 23 ARTICLE VI......ALLOCATIONS AND DISTRIBUTIONS 23 6.1... Allocation of Profits and Losses 23 6.2....Distributions of Cash Flow from Operations 24 6.3. Allocation of Net Gains from Capital Transactions and Net Losses from Capital Transactions...........................24 6.4....Distributions of Cash Flow from a Major Capital Event 25 6.5. Special Allocations....................25 6.6....Curative Allocations 28 6.7....Section 704(b) Limitation 28 6.8. Distributions Upon Liquidation of Partnership............................28 6.9....Liquidation of Partner's Partnership Interest 29 6.10...In-Kind Distributions 29 6.11...Additional Tax Allocation Provisions 30 ARTICLE VII.....FISCAL MATTERS 31 7.1....Books and Records 31 7.2. Reports and Statements.................31 7.3....Audit 31 7.4....Tax Returns 32 7.5. Bank Accounts..........................32 7.6....Tax Elections 32 ARTICLE VIII TRANSFERS OF GENERAL PARTNERSHIP INTEREST; ADMISSION OF SUBSTITUTE PARTNERS 32 8.1....Restriction on Transfers by the General Partner 32 8.2....Admission of General Partner 32 8.3. Restrictions on Transfers by Limited Partners...............................33 8.4....Admission of Limited Partners 34 8.5....Cost of Transfers 34 8.6. Effect of Attempted Disposition in Violation of this Agreement............34 8.7....Rights of Transferee 34 8.8 Amendment of Certificate of Limited Partnership and Qualification......................35 ARTICLE IX.....PURCHASE AND SALE OF A PARTNERSHIP INTEREST 35 9.1. Optional Purchase of Partnership Interest from Limited Partners upon Certain Events.....................35 9.2. .Closing 39 ARTICLE X......DILUTION OFFERING 40 ARTICLE XI.....RESIGNATION AND WITHDRAWAL OF GENERAL PARTNER 40 ARTICLE XII....DISSOLUTION 41 12.1..Dissolution 41 12.2. Wind-Up of Affairs......................42 ARTICLE XIII MISCELLANEOUS...........................42 13.1..Amendments 42 13.2..Partition 42 13.3. Notices.................................42 13.4..Provisions Severable 43 13.5..Counterparts 43 13.6. Headings................................43 13.7..Successors and Assigns 43 13.8..APPLICABLE LAW 43 13.9..NOTICE OF INDEMNIFICATION 43 EX-10.164 77 0077.txt EX 10.164 MANAGEMENT AGREEMENT- TEXAS VIII MANAGEMENT AGREEMENT THIS MANAGEMENT AGREEMENT (this "Agreement"), is made and entered into this the 13th day of October, 2000, by and between Texas Lithotripsy Limited Partnership VIII, a limited partnership formed under the laws of the State of Texas (the "Partnership"), and Lithotripters, Inc., a North Carolina corporation (the "Management Agent'"). W I T N E S S E T H : -------------------- WHEREAS, the Partnership is in the business of owning and operating one or more mobile extracorporeal shock-wave lithotripters for the treatment of kidney stones (the "Lithotripsy Systems") at various locations in Harris County, Texas and the surrounding counties (the "Service Area"); and WHEREAS, the Partnership desires to engage the Management Agent upon the terms and conditions hereinafter set forth, to supervise and coordinate the management and administration of the day-to-day operations of the Partnership's Lithotripsy Systems, and the Management Agent desires and is willing to accept such engagement upon such terms and conditions. NOW, THEREFORE, in consideration of the mutual promises and covenants herein contained, the Partnership and the Management Agent agree as follows: 1. Engagement. The Partnership hereby engages the Management Agent to coordinate and supervise the management and administration of the day-to-day operations of the Lithotripsy Systems during the term hereof. The Management Agent hereby accepts the engagement offered by the Partnership for and in consideration of the compensation hereinafter provided, and agrees to use its best efforts in coordinating and supervising the management and administration of the day-to-day operations of the Lithotripsy Systems. 2. Term. The initial term of this Agreement shall be for a period of five (5) years beginning on the date hereof. Thereafter, the term of this Agreement shall be extended automatically, without any further action by the Partnership or the Management Agent, for three (3) successive five-year terms. If either party desires to terminate this Agreement at the end of the initial term or any succeeding five-year term, such party shall give written notice of such desire to the other party at least sixty (60) days prior to the expiration of the initial term or any succeeding five-year term, and after such notice and at the expiration of the then existing term, this Agreement shall become of no further force or effect whatsoever, and each of the parties shall be relieved and discharged therefrom. 3. Compilation of Partnership Data. The Partnership hereby agrees to provide any and all patient data concerning the Partnership's Lithotripsy Systems treatment services (the "Partnership Data") to the Management Agent and grants to the Management Agent the right to compile the Partnership Data for the creation and maintenance of an outcome analysis program database (the "Database"). The Management Agent covenants that the Partnership Data will be used for the creation of the Database and that such use will be in compliance with all applicable state laws and regulations, including those relating to physician-patient confidentiality. As a part of the services to be rendered by the Management Agent hereunder, the Management Agent will use the Database to provide outcome analysis reports to the Partnership solely for use by the Partnership in maintaining and improving its quality of care to its patients. The Partnership shall have no ownership interest in the Database and may not disclose any information or data contained in the Database to any third party except for the express purpose of treatment of patients of the Partnership. 4. Specific Management Duties. -------------------------- (a) The Management Agent shall perform, or shall contract with third parties (including Affiliates) for the performance of the following services: (i) Coordinating, the marketing and advertising of the Lithotripsy Systems. (ii) Managing billing and collection services for the Lithotripsy Systems' operations. The fees charged to patients for different urological services provided by the Lithotripsy Systems shall be established by the mutual agreement of the Partnership and the Management Agent. The Management Agent will not bill the professional urological component of the services provided by the Partnership as the same will be the responsibility of each treating urologist. (iii) Engaging all nonphysician personnel reasonably necessary to staff and operate the Lithotripsy Systems, including without limitation, drivers, technicians, nurses, physicians' assistants, secretaries, office managers and receptionists. It is understood and agreed that the Partnership shall pay the wages or other compensation of such personnel and that the Management Agent shall in no way be liable to such persons for their wages or other compensation, nor to the Partnership or others for any action or omission on the part of such persons. (iv) Making or causing to be made all repairs, replacements, alterations, additions and improvements to the equipment comprising or used in connection with the Lithotripsy Systems. (v) Purchasing or causing to be purchased all equipment, medical and office supplies necessary for the efficient maintenance and operation of the Lithotripsy Systems. (vi) Making all contracts for electricity, gas, fuel, steam, water, telephone, rubbish removal, laundry service, and other utilities or services as are necessary for the efficient maintenance and operation of the Lithotripsy Systems. (vii)Supervising and coordinating any necessary training of physicians who will use the Lithotripsy Systems. (viii) Consulting with and advising the Partnership, through the Management Agent's physician personnel, regarding all medical aspects of the Partnership's practice. (ix) Monitoring the progress in technological developments in lithotripsy and advising the Partnership regarding the nature of these developments. (x) Arranging for the continuing education of the physicians trained to use the Lithotripsy Systems regarding the latest developments in lithotripsy. (xi) Supervising the management of the day-to-day operations of the Lithotripsy Systems through the engagement by the Management Agent of one or more local physician medical directors as provided in Section 8 herein. (xii) Determining the travel and location itinerary of the Lithotripsy Systems in the Service Area, and coordinating and communicating the same with the physicians responsible for providing professional urological services for the Partnership. (xiii) Providing the scheduling of patients for treatment with the Lithotripsy Systems. (xiv) Administering any usage agreement between the Partnership and a third party with aspect to such party's operation of the Lithotripsy Systems. (xv) Creating and maintaining an outcome analysis program and quality assurance program, including without limitation, the creation and maintenance of the Database referenced in Section 2, for monitoring and improving the efficacy of the Lithotripsy Systems treatment services. (b) It is specifically understood and agreed that the Management Agent may contract with one or more hospitals and surgical centers where the Lithotripsy Systems will be located, or any other third party (including Affiliates), for the direct provision of the services as provided in Sections 4(a)(i), (ii), (iii), (iv), (v), (vi) and (xiii) above. In such case, all personnel necessary to provide such services will remain the employees and responsibility of such third party. Compensation payable to third parties providing services to the Partnership shall be the sole responsibility of the Partnership, and the amount of such compensation and terms of such employment shall be determined in the sole discretion of the Partnership. 5. Fiscal Responsibilities. ----------------------- (a) All monies furnished by the Partnership as working capital and all Lithotripsy Systems revenues received by the Management Agent for or on behalf of the Partnership shall be accounted for separately. Such funds shall be disbursed by the Management Agent in such amounts and at such times as the same are required to pay for obligations, liabilities, costs, expenses and fees (including, without limitation, the compensation of the Management Agent as hereinafter provided) arising on account of or in connection with the operation and management of the Lithotripsy Systems. The Management Agent shall remit to the Partnership upon submission of the monthly statement described in Section 5(b) below, the difference between (i) the Lithotripsy Systems revenues and other monies received by the Management Agent, and (ii) the expenses paid and disbursements made by the Management Agent, after deduction of the payment to the Management Agent of the compensation for its services hereunder. (b) The Management Agent shall maintain complete books and records of the management and operation of the Lithotripsy Systems in accordance with generally accepted accounting principles, which books of account shall at all times be open to the inspection of the Partnership or any of its partners or duly authorized agents. The Partnership shall have the right to audit the Management Agent's books and records for any period during normal business hours. In the event that any such audit discloses that the Management Agent has not reported the full amount payable to the Partnership hereunder, the Management Agent shall promptly pay the deficiency and the Management Agent shall reimburse the Partnership for the entire cost of the audit. The Management Agent shall render to the Partnership a monthly statement of receipts and disbursements, such statements to be furnished on or before the thirtieth day of each month for the preceding month. The Management Agent may contract with any third party, including Affiliates, as provided in Section 4(b) above, to maintain the books and records of the Lithotripsy Systems as provided in this Section 5(b). (c) Except as otherwise provided herein, the Partnership shall pay all obligations, liabilities, costs (including without limitation, overhead, personnel costs and regional director fees), expenses and fees arising on account of or in connection with the operation and management of the Partnership's Lithotripsy Systems. (d) The Management Agent is the management agent for various medical services partnerships. As a consequence, many employees of the Management Agent and its Affiliates provide various management and administrative services for numerous partnerships, including the Partnership. In order to properly allocate the costs of the Management Agent's and its Affiliates' employees among all the partnerships (including the Partnership) for which they provide services, such costs will be divided among all the partnerships based upon the relative number of patients treated by each partnership. (e) The Partnership shall reimburse the Management Agent promptly for any monies which the Management Agent may elect to advance for the account of the Partnership. Nothing herein contained, however, shall be construed to obligate the Management Agent to make any such advances. 6. Independent Contractor. In the performance of its work, duties and obligations, it is mutually understood and agreed that the Management Agent is at all times acting and performing as an independent contractor. The Partnership shall neither have nor exercise any control or direction over the methods by which the Management Agent or its employees, if any, shall perform their work and functions. The sole interest and responsibility of the Partnership is to assure that the services covered under this Agreement shall be performed and rendered in a competent, efficient and satisfactory manner. Nothing herein contained shall be construed to limit the Management Agent from providing similar services to other partnerships as long as the provision of such services does not infringe upon its ability to perform its duties under this Agreement. 7. Management Fee. -------------- (a) The Partnership covenants and agrees to pay to the Management Agent for its services hereunder a monthly fee equal to 7.0% of the Adjusted Gross Revenues (as defined below) per month (the "Management Fee"). It is intended that the Management Agent's only compensation for its services rendered pursuant to this Agreement shall be the Management Fee and the reimbursement of expenses incurred by the Management Agent as provided in Section 5(e) above. For purposes of this Agreement, the Partnership's "Adjusted Gross Revenues" for the applicable period shall be all gross receipts from any source for such period, other than from Partnership loans, the refinancing, sale, exchange casualty or other disposition of the Partnership's assets and capital contributions, less adjustments for contractual reimbursements and bad debts. (b) The Management Fee for any given month shall be paid on or before the 30th day of the next succeeding month and shall begin to accrue as of the date hereof. 8. Medical Directors. The Management Agent may engage one or more local medical directors to coordinate and supervise the local medical management and administration of the Mobile Lithotripsy Systems. The Partnership will pay and be solely liable for the payment of the compensation to be received by the local medical director(s). 9. Assignment. Except as expressly provided herein, the Management Agent may not assign this Agreement nor any of its duties or obligations hereunder without the prior written consent of the Partnership. Subject to the foregoing, this Agreement shall be binding upon, and inure to the benefit of, the successors in interest and permitted assignees of the parties hereto. 10. Entire Agreement. This Agreement contains the entire agreement of the parties relating to the subject matter hereof, and the parties hereto have made no agreements, representations or warranties relating to the subject matter of this Agreement which are not set forth herein. No amendment or modification of this Agreement shall be valid unless made in writing and signed by the parties hereto. No term or condition of this Agreement shall be deemed to have been waived except by written instrument of the party charged with such waiver. 11. Governing Law. This Agreement shall be construed and enforced in accordance with the laws of the State of Texas. 12. Notices. Any notice to be sent hereunder shall be either hand delivered or sent by registered mail, return receipt requested, addressed to the appropriate party at: To the Partnership: Texas Lithotripsy Limited Partnership VIII c/o Lithotripters, Inc. 1301 Capital of Texas Highway, Suite C-300 Austin, Texas 78746 Attention: David Vela, M.D. To the Management Agent: Lithotripters, Inc. 1301 Capital of Texas Highway, Suite C-300 Austin, Texas 78746 Attention: David Vela M.D. 13. Counterparts. This Agreement may be executed simultaneously in one or more counterparts, each of which shall be deemed to be an original, but all of which together constitute one and the same instrument. [Remainder of this page intentionally left blank.] IN WITNESS WHEREOF, this Agreement has been executed on behalf of the Partnership and the Management Agent on the day and year first above written. PARTNERSHIP: ----------- TEXAS LITHOTRIPSY LIMITED PARTNERSHIP VIII By: Lithotripters, Inc., a North Carolina corporation and the General Partner of the Partnership By: Joseph Jenkins, M.D. President MANAGEMENT AGENT LITHOTRIPTERS, INC., a North Carolina corporation By: Joseph Jenkins, M.D. President EX-10.165 78 0078.txt EX 10.165 ACQUISITION AGREEMENT - WINDOR January ____, 2001 Karen E. Perlman A. Derrill Crowe, M.D. 2703 Quail Creek Drive Missouri City, TX 77459 Re: Acquisition of 100% of the Issued and Outstanding Capital Stock of The Windsor Group, Inc. Dear Ms. Perlman and Dr. Crowe: This letter serves to confirm our agreement with respect to your sale to Prime Medical Services, Inc. (or its assignee, "Prime") of 100% of the issued and outstanding capital stock of The Windsor Group, Inc., a Texas corporation (the "Company"). 1. Purchase and Sale of Purchased Shares. Upon the execution hereof, Prime will purchase from each of you, 100% of the capital stock of the Company owned by each of you, either directly or beneficially in any capacity (the "Purchased Shares"), which Purchased Shares you hereby represent and warrant are 100% of the issued and outstanding shares of capital stock of the Company as of the date hereof. In consideration for the Purchased Shares, against receipt of the stock certificates representing the Purchased Shares duly endorsed to Prime, Prime will pay each of you by wire transfer the amounts set forth opposite your names below: Karen E. Perlman $975,000 A. Derrill Crowe, M.D. $487,500 2. Representations and Warranties of Perlman. Perlman (and Crowe only as to subparagraph (a) below) hereby represents and warrants to Prime as follows (which representations and warranties shall survive the closing hereof): (a) Purchased Shares. Each of you own your Purchased Shares free and clear of any liens or encumbrances and has the power and authority to convey those shares to Prime in accordance herewith. (b) Existence, Good Standing and Authority of the Company. The Company is duly organized, validly existing and in good standing under the laws of the State of Texas, and has full corporate power and authority to conduct its business as it is now being conducted. Copies of the Company's articles of incorporation and bylaws, as now in effect, have been delivered to Prime. (c) The Company as General Partner. The Company is currently the sole general partner of Sunbelt Lithotripsy Associates, Ltd. (the "Partnership") and owns its general partner's interest in the Partnership free and clear of any liens or encumbrances. (d) Existence and Authority of Partnership. The Partnership is duly organized under the laws of the State of Texas, and has full partnership power and authority to (i) conduct its business as it is now being conducted, and (ii) sell all or substantially all of its operating assets, together with certain of its third party hospital service contracts (collectively, the "Sunbelt Assets"), to Texas Lithotripsy Limited Partnership VIII ("Texas VIII"). Copies of the Partnership's certificate of limited partnership and agreement of limited partnership, each as amended and as now in effect, have been delivered to Prime. In addition, a list containing the names, current addresses and telephone numbers of all of the Partnership's partners, as of the date hereof, has been delivered to Prime. (e) Sunbelt Assets. The Partnership owns all of the Sunbelt Assets free and clear of any liens or encumbrances. (f) No Conflicts. Neither the sale of the Purchased Shares to Prime nor the sale by the Partnership of the Sunbelt Assets to Texas VIII will conflict with or result in a violation of (i) any resolution adopted by the Company's board of directors, or any resolution of the Partnership adopted by the Company in its capacity as general partner of the Partnership, or (ii) any agreement to which either of you or either of the Company or the Partnership is a party. (g) Nondisclosed Material Items. Except as previously disclosed in writing to Prime, neither the Company nor the Partnership are (i) subject to any existing liabilities, (ii) delinquent in the payment of any taxes, or (iii) subject to any pending or threatened litigation. (h) Company and Partnership Bank Accounts. Attached hereto as Schedule I is a complete list of all the bank accounts currently maintained by the Company and the Partnership, including the full name and address of each bank, the full account name and number of each account, and a complete list of all individuals who have signature authority on each such account. 3. Resignation. Each of you hereby resigns, effective immediately, all of your positions, if any, as employees, officers and directors of the Company or the Partnership. 4. Release. Each of you, on behalf of yourself and each of your successors, heirs and assigns, effective immediately, hereby releases Prime, all of Prime's affiliates, and each of their respective individual, joint or mutual past, present and future representatives, affiliates, stockholders, controlling persons, officers, directors, employees, successors and assigns (individually, a "Releasee" and collectively, the "Releasees") from any and all claims, demands, proceedings, causes of action, orders, obligations, contracts, agreements, debts, and liabilities whatsoever (collectively, "Claims") whether known or unknown, suspected or unsuspected, both at law or in equity, which you or any of your successors, heirs or assigns, now has, have ever had, or may hereafter have against the respective Releasees arising contemporaneously with or prior to the date hereof or on account of or arising out of any matter, cause or event occurring contemporaneously with or prior to the date hereof, including, but not limited to (i) Claims in your capacity as shareholders, officers, or directors against the Company or against the other shareholders, officers or directors of the Company arising out of or in connection with the business of the Company, and (ii) Claims, in your capacity as an employee, agent or representative of the Company, against the Company or against the officers, directors, shareholders or other employees of the Company arising out of or in connection with your employment by the Company; provided, however, this release does not in any way effect a release of your rights under this Agreement. 5. Indemnification. Each of you, on behalf of yourself and each of your successors, heirs, and assigns will indemnify and hold harmless Prime, all of Prime's affiliates, and each of their respective individual, joint or mutual past, present and future representatives, affiliates, stockholders, controlling persons, officers, directors, employees, successors and assigns (individually, an "Indemnitee" and collectively, the "Indemnitees") from the amount of any loss, liability, claim, damage (including incidental and consequential damages), expense (including costs of investigation and defense) or diminution of value arising directly or indirectly from or in connection with (i) any breach of any representation or warranty made by you in this Agreement (which in Crowe's case means only subparagraph 2(a) above), and (ii) with respect to Perlman only, any action or inaction by you or the Company occurring prior to the date hereof. 6. Covenant Not to Compete. Each of you hereby agree that you shall not, for a period of five (5) years commencing on the date hereof, compete in any way, directly or indirectly, with the Company, the Partnership or Texas VIII, or any successors to the business thereof with respect to the provision of lithotripsy services or the treatment of renal stones and/or urinary tract stones (collectively, the "Services"), or own in any way, directly or beneficially, any interest in any business enterprise that competes, directly or indirectly, with the Company, the Partnership or Texas VIII, or any successors to the business thereof with respect to the provision of the Services in any way, or otherwise consult with or provide services to any business enterprise that competes, directly or indirectly, with the Company, the Partnership or Texas VIII, or any successors to the business thereof with respect to the provision of the Services in any way; provided, however, this covenant not to compete shall not prohibit or in any way restrict (i) Perlman's employment by Lithotripters, Inc., (ii) Crowe's investment in Prime or any of its affiliates, or (iii) any other activity by either of you that is consented to in writing by Prime. 7. Books and Records. Promptly following the execution hereof, and in any event within 10 days of the execution hereof, you shall deliver to Prime all original books and records of the Company and the Partnership. You may, at your expense, make copies of only such books and records as you may be required to maintain under applicable law. 8. Confidentiality. You shall not disclose any of the terms and provisions of this Agreement to anyone at any time, except for the members of your immediate family and your attorney and except as otherwise required by law, and you shall take all reasonable steps necessary to insure that all of those to whom you disclose the terms and provisions of this Agreement are notified of and bound by the terms of this provision. 9. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Texas. 10. Counterparts. This Agreement may be executed in any number of counterparts, each of which when so executed and delivered shall be deemed an original, and such counterparts together shall constitute one instrument. Each party to this Agreement shall receive a duplicate original of the counterpart copy or copies executed by it and the other party. [Remainder of this page intentionally left blank; Signature page follows] If this letter accurately reflects your understanding of our agreement with respect to the matters addressed herein, please so indicate by executing this letter in the space provided below and returning it to us. PRIME MEDICAL SERVICES, INC. By: Brad Hummel, President ACCEPTED AND AGREED TO THIS ____ day of January ___, 2001 Karen E. Perlman A. Derrill Crowe, M.D. SCHEDULE I Bank Accounts EX-10.166 79 0079.txt EX 10.166 CONDENTIAL MEMORANDUM-TEXAS VII Name of Prospective Assignee TEXAS LITHOTRIPSY LIMITED PARTNERSHIP VII, L.P. A Limited Partnership Formed Under the Laws of Texas CONFIDENTIAL ASSIGNMENT SUMMARY Sale by Lithotripters, Inc. of 21 Units of Limited Partnership Interest MEDTECH INVESTMENTS, INC. Exclusive Sales Agent 2008 Litho Place Fayetteville, North Carolina 28304 1-800-682-7971 [PG NUMBER] R##375388 v1 - CONFIDENTIAL ASSIGNMENT SUMMARY.doc 4 R##375388 v1 - CONFIDENTIAL ASSIGNMENT SUMMARY.doc The Date of this Summary is February 29, 2000 SUMMARY OF ASSIGNMENT OF LIMITED PARTNERSHIP INTERESTS OF TEXAS LITHOTRIPSY LIMITED PARTNERSHIP VII, L.P. Lithotripters, Inc. ("Litho"), a North Carolina corporation, and the general partner of Texas Lithotripsy Limited Partnership VII, L.P., a Texas limited partnership (the "Partnership"), hereby offers for sale and assignment on the terms set forth herein, a maximum of 21 units of limited partnership interest (collectively, the "Partnership Interests") in the Partnership issued to and held by Litho. Each Partnership Interest represents an initial 0.19% economic interest in the Partnership, and the Partnership Interests are offered for assignment at a price per Partnership Interest of $5,688 in cash. See "The Partnership - Dilution of Limited Partners' Interests" and "The Offering - Terms of the Offering." Prospective assignees who meet certain requirements may be able to personally borrow funds from a third-party bank in order to pay for a portion of their Partnership Interest purchase price. See "The Offering - Limited Partner Loans" below. Each prospective assignee is a current limited partner of the Partnership and may purchase up to a maximum of an aggregate .57% Partnership Interest. The Partnership has been in operation since January 1999 and is the successor by merger (the "Merger") to three other affiliated lithotripsy limited partnerships. The Partnership owns and operates three mobile lithotripsy systems for the lithotripsy of kidney stones at various locations in Texas, Oklahoma and Arkansas and has acquired a fourth mobile lithotripter. See "The Partnership - Selection and Acquisition of New Mobile Lithotripsy System." As the Partnership Interests being offered are owned by Litho, Litho (not the Partnership) will receive any proceeds from the sale of such Partnership Interests. Partnership Interests may only be purchased by persons meeting certain suitability standards as provided herein. See "Terms of the Offering - Suitability Standards." An investment in the Partnership Interests is a long-term investment and should not be made by persons who need liquidity in their investments. THE PARTNERSHIP INTERESTS ARE BEING OFFERED PURSUANT TO AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, AND APPLICABLE STATE SECURITIES LAWS. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS NOT BEEN FILED WITH ANY STATE SECURITIES AGENCY OR WITH THE SECURITIES AND EXCHANGE COMMISSION. -------------- NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE REGULATORY BODY HAS PASSED UPON THE VALUE OF THE PARTNERSHIP INTERESTS, MADE ANY RECOMMENDATIONS AS TO THEIR PURCHASE, APPROVED OR DISAPPROVED THE SALE, OR PASSED UPON THE ADEQUACY OR ACCURACY OF THIS SUMMARY. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL. -------------- THE PARTNERSHIP INTERESTS ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND THE APPLICABLE STATE SECURITIES LAWS, PURSUANT TO REGISTRATION OR EXEMPTION THEREFROM. NO PUBLIC OR OTHER MARKET EXISTS OR WILL DEVELOP FOR THE PARTNERSHIP INTERESTS. PARTNERSHIP INTERESTS ARE NOT TRANSFERABLE WITHOUT THE CONSENT OF LITHO AND SATISFACTION OF CERTAIN OTHER CONDITIONS INCLUDING THE AVAILABILITY OF AN EXEMPTION UNDER THE SECURITIES ACT OF 1933 AND VARIOUS STATE SECURITIES LAWS. INVESTORS SHOULD PROCEED ONLY ON THE ASSUMPTION THAT THEY MAY HAVE TO BEAR THE ECONOMIC RISK OF AN INVESTMENT IN THE PARTNERSHIP INTERESTS FOR AN INDEFINITE PERIOD OF TIME. --------------- OFFERING MEMORANDUM AND CERTAIN SUPPLEMENTAL INFORMATION The sole purpose of this summary (the "Summary") is to set forth the terms and conditions of the sale and assignment of the Partnership Interests in the Partnership by Litho, and to provide information concerning the Partnership's operations since the consummation of the Merger on January 1, 1999 and the related closing on February 2, 1999 of the Partnership's initial offering of limited partnership interests (the "Offering"). The terms of the Partnership's Offering and a description of its business and the risks associated with an investment in the Partnership are set forth in the Partnership's Confidential Private Placement Memorandum dated September 4, 1998, as amended and as supplemented (the "Memorandum"), and are incorporated herein by reference. A copy of the Memorandum accompanies this Summary. Prospective assignees are also urged to review carefully the Partnership's Agreement of Limited Partnership, a conformed copy of which has previously been delivered to each Assignee and is also available from Litho upon request (the "Partnership Agreement"). Capitalized terms used herein and not otherwise defined shall have the meanings set forth in the Memorandum. IN MAKING AN INVESTMENT DECISION, PROSPECTIVE ASSIGNEES MUST RELY ON THEIR OWN EXAMINATION OF THE PARTNERSHIP, ITS BUSINESS AND OPERATIONS. PROSPECTIVE ASSIGNEES SHOULD NOTE THAT AN INVESTMENT IN THE PARTNERSHIP INTERESTS IS SUBJECT TO CERTAIN RISKS. SEE "RISK FACTORS" IN THE MEMORANDUM. Between September 4, 1998 and the closing of the Offering, certain terms of the Offering changed as reflected in supplements to the Memorandum, copies of which are herewith provided and should be carefully reviewed. In summary, the First Supplement dated October 7, 1998, increased the number of Units offered from 40 to 90. Of the Units available in the Offering, 40 were offered directly by the Partnership and 50 Units were offered by the Partnership as agent for the account of Litho. In accordance with the authority provided to Litho by the First Supplement, the 68 Units sold in the Offering were allocated as follows: 40 Units for the account of the Partnership and 28 Units for the account of Litho. The Partnership Interests offered hereby represent a portion of the limited partner partnership interests retained by Litho following the closing of the Offering. See "The Partnership" below. See "Regulations - Risks Associated with General Partner Sales" in the First Supplement. The Second Supplement dated November 30, 1998 extended the Offering termination date to January 1, 1999. The Third Supplement dated January 1, 1999 further extended the Offering termination date to February 2, 1999, on which date the closing in fact occurred. See "The Partnership - Closing of the Partnership's Offering" below. THE PARTNERSHIP The Partnership was organized and created under the Texas Revised Limited Partnership Act, as amended, on January 5, 1998. Litho is the general partner of the Partnership and is a wholly-owned subsidiary of Prime. Litho currently holds approximately a 19.45% economic interest in the Partnership in its capacity as the General Partner, and the existing Limited Partners, including Litho, collectively, hold the remaining 80.55% economic interest in the form of limited partner interests in the Partnership. Litho holds an aggregate of an approximately15.23% limited partner interest in the Partnership, and affiliates of Prime and Litho hold an aggregate .96% limited partner interest in the Partnership. In the event all the Partnership Interests hereby offered are assigned, Litho will continue to own approximately an 11.24% limited partner interest in the Partnership. Prospective assignees should note that as holders of limited partner interests, Litho and its Affiliates are likely to have interests which conflict with those of the other Limited Partners and may limit the ability of the other Limited Partners to exercise voting rights granted by the Partnership Agreement. The address of the Partnership and Litho is 1301 Capital of Texas Highway, Suite C-300, Austin, Texas 78746. The telephone number of the Partnership and Litho is (800) 252-3628. Closing of the Partnership's Offering The Merger was consummated effective January 1, 1999 and the Offering closed on February 2, 1999. In total, the Partnership sold 40 Units for its own account for $227,520 in cash. 28 Units were sold for Litho's own account by the Partnership as its agent. See "Sources and Applications of Funds" in the First Supplement and "Financial Condition of the Partnership" below. Partnership Operations Service Agreements. The Partnership's lithotripsy operations commenced on January 1, 1999. The Partnership has been successful in either maintaining or securing renewals of a majority of the services agreements formerly serviced by the Merging Partnerships. See "Proposed Activities - Operations of Merging Partnerships - Service Agreements" in the Memorandum. However, the Partnership continues to negotiate with several Independent Contract Hospitals in the Service Area. Shortly after the Merger, the Partnership submitted a bid to provide lithotripsy services at Hendrick Medical Center in Abilene. Although the Partnership was unsuccessful in its initial bid to provide services at Hendrick Medical Center, the center has requested that the Partnership submit a new bid for such services. The Partnership has submitted a revised bid to the center and is presently awaiting its response. As noted in the Memorandum, Memorial Hospital and Medical Center in Midland provided a notice of termination to ESWL stating that its Hospital Contract would expire on December 9, 1998. Presently, the Partnership continues to provide services at this facility on a month-to-month basis. The Partnership recently entered into a services agreement with North Central Medical Center in McKinney, Texas. The agreement provides that the Partnership will be the exclusive service provider at the center on a year-to-year basis, and such services are to commence on March 1, 2000. In addition, the General Partner is currently negotiating with the following treatment centers regarding providing lithotripsy services at their sites: Northeast Medical Center in Bonham; Medical Center of Mesquite in Mesquite; Presbyterian Hospital in Kaufman; and Baylor Grapevine Hospital in Grapevine. No assurance can be given that the General Partner will be successful in procuring new contracts with these treatment centers. Reimbursement Agreements. Litho, in its capacity as the Management Agent for the Partnership, has negotiated third-party reimbursement agreements with certain national or local payors. The national agreements are negotiated by Litho and apply to all the lithotripsy partnerships with which Litho is affiliated. Litho has also negotiated third-party reimbursement agreements with local payors in the Service Area, including with Prudential, Humana and Pacificare. Some of the national and local reimbursement agreements assign a fixed price for the lithotripsy services. For others, Litho has agreed to accept a specified percentage discount from the normal charges as payment in full; these discounts range from nine to twenty-five percent off normal charges. Generally the agreements may be terminated by either party on ninety 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. Selection and Acquisition of New Mobile Lithotripsy System R##375388 v1 - CONFIDENTIAL ASSIGNMENT SUMMARY.doc As disclosed in the Memorandum, Litho was granted the discretion to cause the Partnership to purchase a new transportable lithotripter for use in Partnership operations. See "Proposed Activities - Acquisition of Mobile Lithotripsy System" in the Memorandum. Based on discussions with the Limited Partners and careful consideration of the alternatives as outlined in the Memorandum, Litho determined that the Partnership should purchase a Tripter X-1 Compact (the "Compact") transportable extracorporeal shock-wave lithotripter and accessories manufactured by Medirex Systems Corp. ("Medirex"). The Compact was placed in service in November 1999. Medirex agreed to provide the Partnership with a Compact lithotripter together with accessories for a total purchase price of approximately $395,000 (excluding state sales tax), which price reflects approximately a 11.2% discount ($50,000) from the current list price of $445,000. The Compact is transported from site to site by a van, which is temporarily being lent to the Partnership by Medirex at no cost. The Compact received FDA premarket approval in 1996. The reliability and efficacy risks associated with operating the Compact are especially acute because the Compact is so new. Litho and its Affiliates have limited direct experience with the use of the Compact lithotripter. Medirex is affiliated with the Direx group of companies, which have been pioneers in the development of transportable lithotripsy technology. The Compact was particularly designed for the treatment of urological stones. In addition to the efficient fragmentation of all types of urinary tract stones, the Compact is suitable for performing a range of simple urological procedures. The Compact consists of a spark gap generator, a Digiscope RX2 fluoroscopic image intensifier and a patient table. The operating technology is known as electrohydraulic technology, and the Compact generates pressure waves by the use of an electrode inside a metal reflector. The Compact localizes stones using a Digiscope RX2 fluoroscopic image intensifier, which is collapsible for easy transport. The U-arm laterally rotates into over- and under-table positions to allow display of the entire ureter without repositioning the patient, and the pressure generator can be rotated out of the X-ray path. The patient table can be moved electronically by remote control in all three dimensions and is capable of supporting heavy patients. It folds down at both ends to improve transportability. During treatment under the supervision of the attending physician and x-ray technician, the patient is placed on the treatment table and the kidney stone is localized in two planes with the use of the Digiscope RX2. Once the kidney stone is localized, the reflector is covered by a latex membrane, filled with water, and placed against the patient's body. Generally, each patient receives 2,400 shocks with the Compact and the procedure lasts for approximately twenty minutes. Medirex also provides a blank patient database with the Compact for the discretionary use and ownership by the Partnership. Medirex has provided the Partnership with technical support to facilitate installation and testing of the Compact. The Compact has an eighteen month limited warranty during which time all maintenance, repairs, shock tubes, glassware and capacitors will be provided free of charge. The Medirex maintenance contract in future years covers the same items listed above and is currently quoted at an annual price of $35,000. The Partnership may enter into this maintenance contract or provide for maintenance of the Compact on a time and material basis. Any expenses for maintenance and repairs not covered by the warranty or service contract will be obligations of the Partnership. See "Risk Factors-Operating Risks-Partnership Limited Resources and Risks of Leverage" in the Memorandum. As a result of certain facility limitations of several treatment centers currently contracting with the Partnership, Litho, in its capacity as General Partner, recently caused the Partnership to use the remaining Offering proceeds (previously held in Partnership reserves) and the proceeds of the Loan (as defined below) to acquire a new self-propelled coach upfitted to house the Compact. Although the Compact presently is transported in a substantially less expensive mobile van, Litho believes that the installation of the lithotripter in a coach is preferable in order to best provide lithotripsy services in the Service Area, particularly since Litho is aware that several contracting hospitals and other treatment centers in the Service Area have limited facilities inside the centers in which the Partnership can operate a lithotripter. The self-contained coach configuration instead requires only that a site provide a level parking surface, an electric receptacle and a telephone connection. The Partnership purchased the self-propelled coach from AK Associates, L.L.C., an Affiliate of Litho, for a total purchase price of $250,000 (excluding state sales tax). The coach will be specially upfitted to house a lithotripter and allow full operations at the host site. The coach is approximately 34 feet long, 8 feet wide and 13 feet 6 inches high and has a 275 horsepower engine and a Model FO-8406-ASX Fuller automatic transmission. The coach is easy to drive and can be operated by a radiology technician or nurse, thus there is no need for an additional or special driver. A Del patient/equipment lift-platform with safety handrails is located on the right side of the coach for easy handling of patients or equipment. There is also a large approximately 8 foot wide overhead roll up door adjacent to the patient/equipment lift to allow ease of patient and equipment handling on and off the coach. A complete air conditioning, heating and humidifying system is also provided. Four hydraulic stabilizing jacks are provided to stabilize the coach at each site. Litho anticipates delivery of the coach in mid February 2000. The coach comes with a one year limited warranty during which time all maintenance and repairs will be provided free of charge. Litho anticipates that the Partnership will pay for coach maintenance in future years on an as needed basis. Litho anticipates that expenditures for maintenance and repair of the coach will be approximately $1,000 per month ($12,000 annually). Funding For Acquisition of New Mobile Lithotripsy System The Partnership recently entered into a loan agreement with First Citizens Bank & Trust Company pursuant to which it may borrow up to $680,000 (the "Loan"). The Partnership has used a portion of the Loan proceeds and the remaining Offering proceeds to acquire (i) the new Compact lithotripter ($395,000), and (ii) the new mobile coach to house and transport the Compact ($250,000), as well as to pay applicable state sales tax on such equipment. The Loan has a 36-month term and interest accrues at prime rate. The Partnership is the borrower under the Loan, and therefore, the Limited Partners are not liable for such debt individually. However, payments by the Partnership under the Loan will impact the cash flow of the Partnership, and consequently, the distributions received by the Partners from Partnership operations during the term of the Loan. Dilution of Limited Partners' Interests R##375388 v1 - CONFIDENTIAL ASSIGNMENT SUMMARY.doc Prospective assignees should note that their initial Percentage Interests in the Partnership may be reduced by future Dilution Offerings. See "Risk Factors - Other Investment Risks - Dilution of Limited Partners' Interests" and "Summary of the Partnership Agreement - Dilution Offerings" in the Memorandum. Pending Litigation On July 30, 1999, Nathan L. Graves, M.D., Steven P. Ash, M.D. and International Lithotripsy, L.L.C. filed suit against Litho, the Partnership, and Texas Lithotripsy Limited Partnership II L.P. and Texas Lithotripsy Limited Partnership IV L.P., in the 67th Judicial District Court of Tarrant County, Texas. Dr. Graves requests damages of $2 million, Dr. Ash seeks $500,000 in damages, and plaintiff International Lithotripsy, L.L.C. seeks lost profits and earnings of $5 million. Litho believes that the claims are without merit, and will be vigorously defending the lawsuit. However, if the suit is successful, it may have a material adverse impact on Litho and the Partnership. Competition Other Competition. Litho believes that a newly formed physician-owned partnership has purchased a portable Econolith unit and is providing services at Presbyterian Hospital and Medical Cities, both in Dallas. Litho believes that a physician-owned service, the House Group, is attempting to provide lithotripsy equipment in and near the Service Area. In addition, the General Partner has learned that United Regional Hospitals in Wichita Falls intends to acquire and operate a Lithotron model lithotripter at its facility. The healthcare market in the Service Area is influenced by managed care companies such as health maintenance organizations. Managed care companies generally contract with specified providers for lithotripsy services for beneficiaries of their plans. Most managed care companies already have contracts with specified providers, which may or may not include the Partnership. See "Reimbursement Agreements". REGULATORY UPDATES Federal Issues Reimbursement. Since the Memorandum was issued, the Health Care Financing Administration ("HCFA"), which administers the Medicare program, issued proposed regulations which would reduce the reimbursement rate currently paid for lithotripsy procedures performed on Medicare patients at hospitals to a base rate of $2,235. The base rate includes anesthesia and sedation, equipment and supplies necessary for the procedure, but does not include the treating physician's professional fee. The base rate is subject to adjustment for various hospital-specific factors. Litho believes the lower reimbursement rate will be implemented in the latter half of 2000. In some cases, reimbursement rates payable to the Partnership as well as to Litho and its Affiliates by commercial insurers are less than the proposed HCFA rate. Litho retains the discretion to make its services available at ambulatory surgery centers ("ASCs"). Medicare does not currently reimburse for lithotripsy procedures provided at ASCs. However, HCFA issued proposed rules in June, 1998 which would authorize Medicare reimbursement for lithotripsy procedures provided at ASCs. While the proposed rules had a target effective date of October 1, 1998, the effective date has been postponed indefinitely for reasons unrelated to lithotripsy coverage. The June, 1998 proposed rules assign a Medicare reimbursement rate of $2,107 if the lithotripsy procedure is performed at an ASC. Whether these proposed rules will become effective to authorize Medicare reimbursement at ASCs and, if they do become effective, what the reimbursement rate will be, is unknown to Litho. The Medicare program has historically influenced the setting of reimbursement standards by commercial insurers. Therefore, reduced rates of Medicare reimbursement for lithotripsy services may result in reduced payments by commercial insurers for the same services. Competitive pressure from health maintenance organizations and other managed care companies has in some circumstances already resulted in decreasing reimbursement rates from commercial insurers. 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. Litho anticipates that reimbursement for lithotripsy procedures, and therefore overall Partnership revenues, may continue to decline. Self -Referral Restrictions. Two bills are currently pending in Congress which would modify the reach of the Stark II self-referral prohibition. One (H.R. 2650) was introduced by Representative Stark, the other (H.R. 2651) by House Ways and Means health subcommittee chair Representative Bill Thomas. The Stark bill would modify, and the Thomas bill would repeal, the ban on physicians who have compensation arrangements with entities to which the 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 Stark II on its operations as discussed in the Memorandum. Fraud and Abuse. Regarding the federal Anti-Kickback Statute discussed in the Memorandum, in November 1999, the Office of the Inspector General ("OIG") of the U.S. Department of Health and Human Services, one of the federal agencies empowered to enforce the Anti-Kickback Statute, issued a Safe Harbor protecting certain physician investment interests in ASCs. The commentary accompanying the new Safe Harbor specifically distinguished physician ownership in ASCs from physician ownership in other facilities, including lithotripsy facilities, end-stage renal disease facilities, comprehensive outpatient rehabilitation facilities and others. The OIG concluded that ASCs benefit from favorable public policy considerations relating to reducing Medicare costs (including through the impending prospective payment system discussed above); other facilities, including lithotripsy facilities, do not share the same policy considerations or reimbursement structures. Therefore, the Safe Harbor status given to certain physician investments in ASCs cannot be viewed as an indication that physician investments in other facilities, including lithotripsy facilities, would not be deemed to violate the Anti-Kickback Statute. As was noted in the Memorandum, the Health Insurance Portability and Accountability Act of 1996 directed the OIG to respond to requests for advisory opinions regarding the effect of the Anti-Kickback Statute on proposed business transactions. Litho has not requested the OIG to review this Offering and, to the best knowledge of Litho, the OIG has not been asked by anyone to review offerings of this type. False Claims Statute. Regarding the discussion of the False Claims statute in the Memorandum, some federal courts have recently taken the position that qui tam lawsuits by private plaintiffs are unconstitutional. Most notably, a panel of judges on the Fifth Circuit Court of Appeals (which includes Texas in its jurisdiction) took this position in a decision issued in November 1999. That decision is being reviewed by all the judges on the Fifth Circuit. The panel's decision was a minority view; most courts have concluded that qui tam lawsuits are constitutional. In another case, the U.S. Supreme Court may review this issue. Unless and until the Supreme Court decides the issue, prospective Limited Partners should consider the ramifications of the False Claims Act issues discussed in the Memorandum. FINANCIAL CONDITION OF THE PARTNERSHIP General Attached hereto as Appendix A are the internally prepared (unaudited) financial statements of the Partnership for the 12-month period ended December 31, 1999. Prospective assignees should carefully review the same in connection with their decision to purchase Partnership Interests. Partnership Operations As illustrated by the financial statements of the Partnership attached hereto as Appendix A, the operations of the Partnership as of the date of this Summary have not met the expectations of Litho as forecasted in the Financial Projections attached as Appendix A to the Memorandum. It is Litho's opinion that the primary factors impacting the unanticipated reduced performance of the Partnership are (i) the Partnership's delayed acquisition of a fourth lithotripter to provide lithotripsy services in the Service Area, (ii) prolonged contractual negotiations with various treatment facilities in the Service Area, (iii) the actual costs associated with the startup of Partnership operations exceeded the forecasted amount, and (iv) a majority of the Partnership's existing services agreements are retail in nature and revenues generated by these agreements will not be realized until early 2000 due to a lag between billing and collection cycles. The Financial Projections assumed that a new transportable Lithotripter and a mobile van would be purchased from the proceeds from the Offering and a Loan from Prime shortly after the closing of the Offering on February 2, 1999, However, as a result of extended discussions with various Limited Partners concerning the type of lithotripter technology to be acquired, and Litho's overall lack of experience with the Medirex Compact lithotripter chosen by the majority of the Limited Partners involved in the selection process, the Compact was not actually placed in service until November 1999. The Compact is currently transported from site to site in a van which limits the ability of the Partnership to provide services at several existing treatment centers contracting with the Partnership that do not have available operating rooms into which the Compact can be located. In order to address this issue, the Partnership has used the remaining Offering proceeds and a portion of the proceeds of the Loan to acquire a new mobile coach to house the Compact. See "The Partnership-Selection and Acquisition of New Mobile Lithotripsy System" above. This new configuration will allow the Partnership to provide better and more frequent scheduling at various existing treatment centers to take advantage of more treatment opportunities, as well as give the Partnership the opportunity to possibly contract with several additional hospitals in the Service Area. Additionally, the Partnership encountered unexpected difficulty in negotiating contract renewals with two treatment centers. Consequently, no revenues were generated from those contracts in 1999. One factor impacting the negotiations has been the ability of the Partnership to provide new lithotripter technology. Litho believes the acquisition of the Compact has addressed the critical issue involved in the negotiations and anticipates the renewals to be executed shortly. No assurance can be given, however, that the Partnership will be successful in securing such renewals. Although Litho believes that the various detrimental factors adversely impacting the Partnership's operations have been or will shortly be satisfactorily resolved, no assurance can be given that the Partnership's operations will ever meet the expectations set forth in the Financial Projections, or that the offering price of the Partnership Interests is indicative of their value. Furthermore, no assurance can be given that the Partnership Interests, if and when transferable, could be sold for the offering price or for any amount. THE OFFERING The Partnership Interests Litho is hereby offering for sale and assignment Partnership Interests which in the aggregate represent an initial 3.99% economic interest in the Partnership. Each Partnership Interest represents an initial 0.19% economic interest in the Partnership. See "The Partnership - Dilution of Limited Partners' Interests." The price for each Partnership Interest is $5,688 in cash payable at assignment. Those Investors wishing to finance a portion of the Partnership Interest purchase price may borrow funds directly from their own banks. For the convenience of the Investors, Litho has arranged for financing of a portion of the Partnership Interests' purchase price with First-Citizens Bank & Trust Company (the "Bank"). Therefore, in lieu of paying the entire purchase price in cash, prospective assignees may execute and deliver to the Sales Agent upon delivery of their Assignment Packets, at least $2,500 in cash and a Limited Partner Note, a Loan and Security Agreement, Security Agreement and two Uniform Commercial Code Financing Statements ("UCC-1's") (collectively, the "Loan Documents"). See "The Offering - Limited Partner Loans" and the forms of the Limited Partner Note, the Loan and Security Agreement and Security Agreement attached to the Bank Commitment as Exhibits A, B and C, respectively, which is attached hereto as Appendix B, and the UCC-l's attached as a part of the Assignment Packet. Each prospective assignee may purchase up to a maximum of an aggregate .57% Partnership Interest. The purchase price for the Partnership Interests has been arbitrarily determined by Litho and is not necessarily indicative of their value. No assurance can be given that the Partnership Interests, if and when transferable, could be sold for the price set forth herein or for any amount. Litho acquired its entire Limited Partner interest in the Partnership in the Merger upon conversion of limited partner interests it held in the Merging Partnerships. See "Proposed Activities - The Merger" in the Memorandum. Determination of Purchase Price The offering price of the Partnership Interests has been determined by Litho based upon valuations of the Merging Partnerships and a related initial valuation of the Partnership (as of August 27, 1998) conducted by Philpott, Ball & Co., an independent third party valuation firm, for the purpose of establishing the purchase price of units of limited partnership interest sold in the Offering. Although, as discussed above, the Partnership's operations have not met the expectations initially forecasted in the Financial Projections due to the reasons set forth herein, Litho believes the initial valuation provides a valid basis for the purchase price of the Partnership Interests offered pursuant to this Summary. See "Financial Condition of the Partnership - Partnership Operations." Terms of the Offering The cash purchase price and, if applicable, the Loan Documents of the prospective assignees will be held in an interest bearing escrow account with the Bank, until (i) the application for assignment is accepted by Litho and approved by the Bank, (ii) Litho (or the Bank, in the case of a prospective assignee seeking to finance a portion of his Partnership Interest purchase price) rejects the application or (iii) this assignment offering is terminated. A prospective assignee who pays his purchase price with a check upon submission of his Assignment Packet, and whose assignment materials are received and accepted by Litho, will become a Limited Partner in the Partnership. Acceptance of the assignment by Litho is conditioned on the satisfaction of the suitability standards for an investor in the Partnership as set forth below. Upon admission as a Limited Partner, the prospective assignee's cash funds (plus interest) will be released from escrow to Litho. If a prospective assignee finances a portion of his purchase price with the proceeds of a Limited Partner Note, Litho's decision to sell and assign the Partnership Interest to such prospective assignee will be further conditioned upon the Bank's approval of the prospective assignee's Loan Documents and the funding of the loan contemplated thereby. If the prospective assignee is acceptable to Litho, after receipt of the Bank's approval of his Loan Documents, Litho will inform the Escrow Agent that it will assign the Partnership Interest to the prospective assignee and the Escrow Agent will release the Loan Documents to the Bank and the Bank will pay the proceeds from the Limited Partner Loan to Litho. The prospective assignee will then be assigned the Partnership Interest and become a Limited Partner in the Partnership at the time the Bank releases the proceeds of his Limited Partner Loan to Litho. In the event an application is not accepted, all cash funds (without interest) and Loan Documents, if any, held in escrow will be returned to the rejected applicant. Notice of acceptance of the assignment materials and admission of a prospective assignee as a Limited Partner in the Partnership will be furnished promptly after the Assignment Closing (as defined below). Applications for the sale and assignment of Partnership Interests will be taken by MedTech Investments, Inc., a North Carolina corporation and an Affiliate of Litho and the Partnership (the "Sales Agent"). The Sales Agent has entered into a Sales Agency Agreement with Litho pursuant to which the Sales Agent has agreed to act as exclusive agent for the assignment of the Partnership Interests. The assignment period will commence on the date hereof and will terminate at 5:00 p.m., Austin, Texas time on April 11, 2000 (or earlier in the discretion of Litho), unless extended at the discretion of Litho for an additional period not to exceed 180 days (the "Assignment Closing"). Limited Partner Loans The purchase price for the Partnership Interests is payable in cash with the prospective assignee's cash funds or in part with such funds and the proceeds of a Limited Partner Note. Financing under the Limited Partner Note was arranged by Litho with the Bank as provided in the Bank Commitment, attached hereto as Appendix B. If the prospective assignee wishes to finance a portion of the purchase price of his Partnership Interest as provided herein, he must deliver to the Sales Agent upon submission of his Assignment Packet at least $2,500 in cash per 0.19% Partnership Interest and an executed Limited Partner Note and Note Addendum, the form of which are attached as Exhibit A to the Bank Commitment, a Loan and Security Agreement, the form of which is attached as Exhibit B to the Bank Commitment, a Security Agreement, the form of which is attached as Exhibit C to the Bank Commitment and two UCC-1's, the form of which are attached to the Assignment Packet. The Limited Partner Note is repayable in 12 installments in the respective amounts set forth in the Bank Commitment. The installments are payable on each January 15th, April 15th, June 15th and September 15th commencing on September 15, 2000, with a 13th and final installment in an amount equal to the principal balance then owed on the Limited Partner Note and all accrued, unpaid interest thereon due and payable on the third anniversary of the first installment date. Interest accrues at the Bank's "Prime Rate." The Prime Rate refers to that rate of interest established by the Bank and identified as such in literature published and circulated within the Bank's offices. Such term is used as a means of identifying a rate of interest index and not as a representation by the Bank that such rate is necessarily the lowest or most favorable rate of interest offered to borrowers of the Bank generally. A prospective assignee shall have no claim or right of action based on such premise. See the form of the Limited Partner Note attached as Exhibit A to the Bank Commitment. The Limited Partner Note will be secured by the cash flow distributions of the prospective assignee's Partnership Interest as provided in the Loan and Security Agreement and the Security Agreement and as evidenced by the UCC-1s. By executing the Loan and Security Agreement, the prospective assignee requests the Bank to extend the Bank Commitment to him 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 Litho and Litho to acknowledge receipt thereof and (ii) the Partnership to remit funds directly to the Bank out of the prospective assignee's share of any distributions represented by the prospective assignee's percentage Partnership Interest to fund installment payments due on the prospective assignee's Limited Partner Note. See the form of the Loan and Security Agreement attached as Exhibit B to the Bank Commitment which is attached hereto as Appendix A. If the prospective assignee is approved by the Bank and is acceptable to Litho, the Escrow Agent will release the Loan Documents to the Bank and the Bank will pay the proceeds of the Limited Partner Note to Litho. The prospective assignee will have substantial exposure under the Limited Partner Note. Regardless of the success of the Partnership, the prospective assignee will remain liable to the Bank under his or its Limited Partner Note according to its terms. The Bank can accelerate the entire principal amount of the Limited Partner Note in the event the Bank in good faith believes the prospect of timely payment or performance by the prospective assignee is impaired or the Bank otherwise in good faith deems itself or its collateral insecure and upon certain other events, including, but not limited to, nonpayment of any installment. The Bank may also request additional collateral in the event it deems the Limited Partner Note insufficiently secured. THE PROSPECTIVE ASSIGNEE SHOULD REVIEW CAREFULLY ALL THE PROVISIONS CONTAINED IN THE BANK COMMITMENT AND THE TERMS OF THE LIMITED PARTNER NOTE AND LOAN AND SECURITY AGREEMENT WITH HIS OR ITS COUNSEL AND FINANCIAL ADVISORS. LITHO DOES NOT ENDORSE OR RECOMMEND TO THE PROSPECTIVE ASSIGNEES THE DESIRABILITY OF OBTAINING FINANCING FROM THE BANK NOR DOES THE SUMMARY OF THE LOAN DOCUMENTS PROVIDED HEREIN CONSTITUTE LEGAL ADVICE. A Limited Partner's liability under a Limited Partner Note continues regardless of whether the Limited Partner remains a limited partner in the Partnership. A Limited Partner's liability under a Limited Partner Note is directly with the Bank. As a consequence, such liability cannot be avoided by claims, defenses or set-offs the Limited Partner may have against the Partnership or Litho. In addition to the suitability requirements discussed below and in the Memorandum, the prospective assignee must be approved by the Bank for purposes of its delivery of the Limited Partner Note. The Bank has established its own criteria for approving the creditworthiness of the prospective assignee and has not established objective minimum suitability standards. Instead, the Bank is empowered to accept or reject the prospective assignee. To enable the Bank and Litho to make credit and investor decisions, respectively, the prospective assignee must complete and deliver to Litho a Purchaser Financial Statement in the form included in the Assignment Packet accompanying this Summary, or a substitute financial statement containing the same information as provided therein, and pages one and two of the prospective assignee's most recently filed Form 1040 U.S. Individual Income Tax Return. Offering Exemption The Partnership Interests are being offered and will be sold and assigned in reliance on (i) the exemption from the registration requirements of the Securities Act of 1933 provided by Section 4(1) thereof, and (ii) the exemption from registration provided by Section 5.T of the Texas Securities Act and Section 139.14 of the Regulations promulgated thereunder, as amended. The suitability standards set forth below have been established in order to comply with the terms of these offering exemptions. Suitability Standards An investment in the Partnership involves a high degree of financial risk and is suitable only for persons of substantial financial means who have no need for liquidity in, and who can bear the loss of, the entire Partnership Interest investment. See "Risk Factors" in the Memorandum. Each assignee must also be at least 21 years old and otherwise duly qualified to acquire and hold limited partnership interests. Litho reserves the right to refuse to sell and assign Partnership Interests to any prospective assignee, subject to federal, Texas and other applicable state securities laws. Each prospective assignee must make an independent judgment, in consultation with his or its own counsel, accountant, investment advisor or business advisor, as to whether an investment in the Partnership Interests is advisable. The fact that such person meets Litho's or the Bank's suitability standards should in no way be taken as an indication that an investment in the Partnership Interests is advisable. It is anticipated that suitability standards comparable to those set forth above will be imposed by the Partnership in connection with resales, if any, of the Partnership Interests. Transferability of Partnership Interests is severely restricted by the Partnership Agreement and the Assignment Agreement. See "Summary of the Partnership Agreement" in the Memorandum. How to Apply Prospective assignees who meet the qualifications for investment in the Partnership and who wish to purchase the Partnership Interests may do so by following the instructions included in the Assignment Packet accompanying this Summary. All information provided by prospective assignees, including information in the Questionnaire and Statement of Assignee and any purchaser financial information, will be kept confidential and not disclosed except to Litho, the Partnership, the Bank and their respective counsel and Affiliates and, if required, to governmental and regulatory authorities. If a prospective assignee would like to request additional information concerning the Partnership prior to making a decision to acquire a Partnership Interest, please contact either the Sales Agent (Jim Brady, (800) 423-1055) or Litho (Joseph Jenkins, M.D., (800) 682-7971). EX-10.167 80 0080.txt EX 10.167 1ST SUPPLEMENT TO MEMORANDUM-TEXAS VII FIRST SUPPLEMENT DATED JANUARY 17, 2001 TO THE CONFIDENTIAL ASSIGNMENT SUMMARY DATED DECEMBER 7, 2000 TEXAS LITHOTRIPSY LIMITED PARTNERSHIP VII, L.P. Lithotripters, Inc., a North Carolina corporation ("Litho"), by this First Supplement hereby amends and supplements its Confidential Assignment Summary dated December 7, 2000 (the "Summary"). Persons who have subscribed for or are considering an investment in the Units offered by the Summary should carefully review this First Supplement. Extension of the Offering Pursuant to the authority given to Litho in the Summary, it hereby elects to extend the offering termination date to February 20, 2001 (or earlier in the discretion of Litho, upon the sale of all Units as provided in the Summary). EX-10.168 81 0081.txt EX 10.168 2ND SUPPLEMENT TO MEMORANDUM-TEXAS VII SECOND SUPPLEMENT DATED FEBRUARY 20, 2001 TO THE CONFIDENTIAL ASSIGNMENT SUMMARY DATED DECEMBER 7, 2000 TEXAS LITHOTRIPSY LIMITED PARTNERSHIP VII, L.P. Lithotripters, Inc., a North Carolina corporation ("Litho"), by this Second Supplement hereby amends and supplements its Confidential Assignment Summary dated December 7, 2000, as amended (the "Summary"). Persons who have subscribed for or are considering an investment in the Partnership Interests offered by the Summary should carefully review this Second Supplement. Capitalized terms used herein and not otherwise defined have the meanings provided in the Summary. Extension of the Offering Pursuant to the authority given to Litho in the Summary, Litho hereby elects to extend the offering termination date to March 20, 2001 (or earlier in the discretion of Litho, upon the sale of all Partnership Interests as provided in the Summary). Stark II Final Regulations As set forth in the Memorandum, on January 9, 1998, the Health Care Financing Administration ("HCFA") published proposed regulations designed to interpret and clarify the application of certain legislation prohibiting physician self-referral of Medicare and Medicaid patients for specifically enumerated designated health services, including inpatient and outpatient hospital services ("Stark II"). As these regulations were simply proposed and subject to future modification or repeal, the Partnership awaited the issuance of final Stark II regulations. On January 4, 2001 HCFA issued the first of two rules intended to implement the final Stark II regulations (the "Final Regulations"). The first rule ("Phase I") implements the Final Regulations pertaining to (i) Stark II's general prohibition against physician self-referrals to entities in which they have a financial relationship, (ii) the general exceptions applicable to both the ownership and compensation arrangement prohibitions, (iii) certain new regulatory exceptions, and (iv) the definitions that are used throughout Stark II. HCFA intends to publish a second final rule ("Phase II") shortly which will address the remainder of the Stark II statute and its application to the Medicaid program, as well as certain proposals for new exceptions not included in the proposed Stark II regulations, but suggested in the public comments thereto. Phase I will become effective on January 4, 2002. HCFA has delayed the effective date of Phase I to allow individuals and entities engaged in business arrangements impacted by Phase I time to restructure those arrangements to comply with the provisions in Phase I. Consequently, as discussed below, the Partnership will have time to take the steps required to ensure Stark II compliance. Currently, Medicare and Medicaid only reimburse for lithotripsy if the service is provided through a hospital. The lithotripsy services provided by the Partnership to Medicare/Medicaid hospital outpatients are provided "under arrangements" with hospitals, with the treatment being billed under the hospital's provider billing number. Prior to the release of Phase I, the existence of ambiguities and the lack of definitions for certain terms in the Stark II statute, as well as the uncertainty as to the contents of the Final Regulations, gave rise to alternative interpretations of the Stark II statute. One alternative interpretation led to a reasonable conclusion that Stark II did not apply to the operations of the Partnership. See "Regulation-Federal Regulation-Self-Referral Restrictions" in the Memorandum. As related in the Memorandum, HCFA acknowledged in its commentary to the proposed Stark II regulations that physician overutilization of lithotripsy is unlikely and specifically solicited comments on whether there should be a regulatory exception to Stark II specifically for lithotripsy services. See "Regulation-Federal Regulation Self-Referral Restrictions" in the Memorandum. Upon consideration of numerous public comments received on the proposed regulations and upon review of the Stark II legislative history, HCFA concludes in its commentary to the Final Regulations that it did not have the authority to exclude lithotripsy as an inpatient or outpatient hospital service covered by Stark II. Consequently, the Partnership's practice of providing lithotripsy services "under arrangements" to hospitals for treatment of Medicare and Medicaid patients must comply with the provisions of the Final Regulations. Although the General Partner is disappointed that the Final Regulations do not provide a specific Stark II exception for lithotripsy services, it is pleased that the regulations provided needed clarity and certain opportunities for the Partnership to operate in compliance with Stark II. HCFA asserts in Phase I that its express purpose in the Final Regulations is to interpret the prohibitions of Stark II narrowly while interpreting its exceptions broadly. HCFA also notes its desire to permit physician-owned lithotripsy ventures to continue if such ventures are structured such that no direct or indirect compensation arrangement is created, or the arrangement fits within a compensation arrangement exception to the Stark II statute. The Final Regulations accomplish HCFA's stated purpose and desire by: (i) clarifying that physician-owned lithotripsy vendors providing services "under arrangements" with hospitals are either structured such that they are not compensation arrangements, as defined in the Final Regulations, or that they need only qualify under a compensation exception, and not an ownership interest exception as well; (ii) broadening certain existing Stark II statutory exceptions by redefining certain standards to allow "per use" lithotripsy payments, as long as such payments are at fair market value; and (iii) adding two new Stark II regulatory exceptions that are potentially available for Partnership operations. In order for the Partnership to comply with Stark II as modified by the Final Regulations, the Partnership's financial relationships with its Independent Contract Hospitals must either fall outside the definition of a compensation arrangement, or comply with a Stark II compensation arrangement exception. The General Partner, along with the Partnership's legal counsel, have worked to establish a compliance program that is in the process of implementation. As noted above, due to the Final Regulations delayed effective date, the Partnership has until January 4, 2002 to take reasonable steps to review the Partnership's operations under the Final Regulations. Specifically, the Partnership intends to work with all its Independent Contract Hospitals to review and modify, if necessary, its lithotripsy service contracts so that they satisfy the standards set forth in the new Final Regulations. To the extent financial arrangements with Independent Contract Hospitals meet the definition of "indirect compensation arrangements" under the Final Regulations, then the Partnership intends to see that such agreements fit within the new indirect compensation arrangement exception. Indirect compensation arrangements have several important elements, including the presence of an intervening entity, such as the Partnership, that directly links referring physician owners with the entity providing the designated health service (e.g., the Independent Contract Hospital). In order to comply with the indirect compensation exception, the Partnership's Hospital Contracts must meet each of the following standards: o The compensation received directly by the Partnership from the Independent Contract Hospitals must be fair market value for the items or services provided under the arrangement and must not take into account the value or volume of referrals or other business generated by the referring physician for the Independent Contract Hospital; o The compensation arrangement between the Partnership and the Independent Contract Hospitals must be set out in writing, signed by the parties, and specify the services covered by the arrangement; and o The compensation arrangement must not violate the Anti-kickback Statute or any laws or regulations governing billing or claims submission. In regard to the Partnership's operations, the indirect compensation arrangement exception may be used with respect to any or all payments made by Independent Contract Hospitals to the Partnership, including payments for the use of the lithotripter, as well as the personal services of a technician and/or nurse. It is important to note that the Final Regulations allow per use payments for lithotripsy services, as long as they reflect fair market value. The General Partner believes that the Partnership's current Hospital Contracts can be modified to the extent necessary to satisfy the requirements of the indirect compensation arrangement exception, and that accordingly, the Partnership will be able to operate in compliance with Stark II. To succeed with its compliance plan, the General Partner must obtain the Independent Contract Hospitals' cooperation in making any necessary revisions to their lithotripsy service agreements consistent with the indirect compensation arrangement exception. Whereas the Partnership believes that its financial relationships with Independent Contract Hospitals have always met the fair market value standard, the Final Regulations clearly shifts the burden to the contracting parties that rely on the indirect compensation exception to prove the standard is met. The Partnership intends to engage an independent valuation expert or pursue other commercially reasonable methodologies to assist it in meeting that burden of proof. The General Partner believes it will successfully implement its above described compliance plan, however, there can be no assurance that such will be the case. Independent Contract Hospitals may not cooperate with the Partnership. Further, reliable fair market value assessments regarding Independent Contract Hospital payments to the Partnership may be difficult to obtain. If the Partnership is unable to successfully implement its plan to comply with the indirect compensation arrangement exception (to the extent a Stark II exception is needed), then the General Partner intends to explore and implement any other available options that would allow the Partnership to comply with Stark II, as well as all other material health care statutes and regulations. Such alternative options may include contracting with ambulatory surgery centers ("ASCs") rather than hospitals, since lithotripsy services at ASCs are not covered by Stark II. The Medicare and Medicaid programs, however, do not reimburse for lithotripsy services at ASCs at this time. It is anticipated that ASCs will receive reimbursement for treatment of Medicare and Medicaid patients in the near future, but there can be no assurance that such will be the case. It should be noted that there can be no assurances that compliance action taken by the Partnership under any potential alternative can be carried out in a manner that does not have a material adverse effect on the Partnership. The General Partner Pursuant to his recent retirement, effective December 31, 2000, Dr. Joseph Jenkins resigned as Director, and as President and Chief Executive Officer of the General Partner. Dr. Jenkins' position on the Board of Directors will be assumed by Brad Hummel. Mr. Hummel will also succeed Dr. Jenkins as President and Chief Executive Officer of the General Partner. Set forth below is a brief description of Mr. Hummel's background. Brad Hummel was elected President and Chief Executive Officer of Prime in May 2000, and previously served as Chief Operating Officer of Prime from October 1999 until May 2000. Effective January 1, 2001, Mr. Hummel was appointed a Director of the General Partner and was elected as President and Chief Executive Officer of the General Partner. From 1984 to 1999, Mr. Hummel served in various operating capacities at Diagnostic Health Services, and served as its Chief Executive Officer from February 1999 until October 1999. Bank Commitment Litho has obtained the approved and executed Bank Commitment providing financing under the Limited Partner Note. The terms and conditions for financing a portion of the purchase price of a Partnership Interest are set forth in the Bank Commitment which is attached hereto as Appendix A, and are discussed in the section entitled "The Offering - Limited Partner Loans" in the Summary. The necessary documents for prospective assignees to apply for financing under the Bank Commitment are included in the Assignment Packet. EX-10.169 82 0082.txt EX 10.169 3RD SUPPLEMENT TO MEMORANDUM-TEXAS VII THIRD SUPPLEMENT DATED MARCH 20, 2001 TO THE CONFIDENTIAL ASSIGNMENT SUMMARY DATED DECEMBER 7, 2000 TEXAS LITHOTRIPSY LIMITED PARTNERSHIP VII, L.P. Lithotripters, Inc., a North Carolina corporation ("Litho"), by this Third Supplement hereby amends and supplements its Confidential Assignment Summary dated December 7, 2000, as amended (the "Summary"). Persons who have subscribed for or are considering an investment in the Units offered by the Summary should carefully review this Third Supplement. Extension of the Offering Pursuant to the authority given to Litho in the Summary, it hereby elects to extend the offering termination date to April 24, 2001 (or earlier in the discretion of Litho, upon the sale of all Units as provided in the Summary). EX-12 83 0083.txt COMPUTATION OF EARNINGS TO FIXED CHARGES PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES FOR THE YEARS ENDED DECEMBER 31, 2000, 1999, 1998, 1997 and 1996 Years Ended December 31, 2000 1999 1998 1997 1996 ------------ ------------ ------------ ------------ ------------ Income before income taxes and after minority interests $17,383 $24,471 $18,171 $20,651 $10,957 Undistributed equity income (274) (583) (102) (408) - Minority interest income of subsidiaries with fixed charges 11,684 3,726 1,823 6,074 7,000 ------------ ------------ ------------ ------------ ------------ Adjusted earnings 28,793 27,614 19,892 26,317 17,957 ------------ ------------ ------------ ------------ ------------ Interest on debt 10,563 9,408 8,469 7,477 5,977 Debt issuance costs 173 566 4,978 360 2,735 ------------ ------------ ------------ ------------ ------------ Total fixed charges 10,736 9,974 13,447 7,837 8,712 ------------ ------------ ------------ ------------ ------------ Total available earnings before fixed charges $39,529 $37,588 $33,339 $34,154 $26,669 ============ ============ ============ ============ ============ Ratio 3.7 3.8 2.5 4.4 3.1 ============ ============ ============ ============ ============
EX-21 84 0084.txt LIST OF SUBSIDIARIES EXHIBIT 21.1 SUBSIDIARIES OF PRIME MEDICAL SERVICES, INC. AS OF MARCH 30, 2001 Name of Subsidiary State of Incorporation (doing business as) or Organization - ------------------- ---------------------- Prime Medical Operating, Inc. Delaware Prime Management, Inc. Nevada Prime Medical Management L. P. Delaware Prime Cardiac Rehabilitation Services, Inc. Delaware Prime Diagnostic Services, Inc. Delaware Prime Lithotripsy Services, Inc. New York (Reston Lithotripsy) Prime Kidney Stone Treatment, Inc. New Jersey (Indiana Lithotripsy, West Virginia Lithotripsy) Prime Diagnostic Corp. of Florida Delaware Prime Lithotripter Operations, Inc. New York (Tennessee Valley Lithotripter, Alabama Lithotripsy) Prime Practice Management, Inc. New York R.R. Litho, Inc. Delaware Ohio Litho, Inc. Delaware Alabama Renal Stone Institute, Inc. Alabama Sun Medical Technologies, Inc. California Sun Acquisition, Inc. California Lithotripters, Inc. North Carolina FastStart, Inc. North Carolina National Lithotripters Association, Inc. North Carolina MedTech Investments, Inc. North Carolina Executive Medical Enterprises, Inc. Delaware Texas Litho, Inc. Delaware Prime/BDR Acquisition, L.L.C. Delaware Prime/BDEC Acquisition, L.L.C. Delaware Horizon Vision Center, Inc. Nevada Ohio Mobile Lithotripter, Ltd. Ohio Ohio Mobile Lithotripter II, Ltd. Ohio ARKLATX Mobile Lithotripter, LP Louisiana (Kidney Stone Center of Louisiana) TENN-GA Stone Group Two, LP Tennessee Southern California Stone Center, L.L.C. California AK Associates, L.L.C. Texas Metro Atlanta Stonebusters, GP Georgia Kidney Stone Center of South Florida, LC Florida Mobile Kidney Stone Centers, Ltd. California Mobile Kidney Stone Centers II, Ltd. California Mobile Kidney Stone Centers III, Ltd. California Northern California Lithotripsy Associates California Northern California Kidney Stone Center, Ltd California Lithotripsy Institute of Northern California California Fayetteville Lithotripters Limited Partnership - Arizona I Arizona Fayetteville Lithotripters Limited Partnership - Arkansas I Arkansas San Diego Lithotripters Limited Partnership California California Lithotripters Limited Partnership - II, LP California California Lithotripters Limited Partnership - III, LP California California Lithotripters Limited Partnership - IV, LP California California Lithotripsy Joint Venture California Florida Lithotripsy Limited Partnership I Florida Indiana Lithotripsy Limited Partnership I Indiana Pacific Medical Limited Partnership Hawaii Las Vegas Lithotripters Limited Partnership Nevada Fayetteville Lithotripters Limited Partnership - Louisiana I Louisiana Louisiana Lithotripsy Investment Limited Partnership Louisiana Montana Lithotripsy Limited Partnership I Montana Mountain Lithotripsy Limited Partnership I Colorado Mountain Lithotripsy GP Colorado Fayetteville Lithotripters Limited Partnership - South Carolina I South Carolina Fayetteville Lithotripters Limited Partnership - South Carolina II South Carolina Tennessee Lithotripters Limited Partnership I Tennessee Texas Lithotripsy Limited Partnership I Texas Texas Lithotripsy Limited Partnership III Texas Texas Lithotripsy Limited Partnership V Texas Texas Lithotripsy Limited Partnership VI Texas Texas Lithotripsy Limited Partnership VII Texas Texas Lithotripsy Limited Partnership VIII Texas Texas Lithotripsy Joint Venture, L.L.C. Texas Fayetteville Lithotripters Limited Partnership - Utah I Utah Fayetteville Lithotripters Limited Partnership - Virginia I Virginia Pacific Lithotripsy GP California Great Lakes Lithotripsy Partnership, LP Wisconsin Big Sky Urological Services, LP Montana Wyoming Urological Services Ltd. Partnership Wyoming Washington Urological Services, L.L.C. Washington Kentucky I Lithotripsy, L.L.C. Kentucky Prime RVC, Inc. Delaware Prime Refractive Management L. L. C. Delaware Prime Refractive L. L. C. Delaware Horizon Vision Centers L. L. C. Delaware Mann Berkeley Caplan Laser Center of Austin Delaware Caster One L. L. C. Delaware New York Laser Management L. L. C. Delaware Connecticut Laser Management L. L. C. Delaware Vision Correction Centers of Kansas City Delaware Prime Refractive L. L. C. - St. Louis Delaware EX-23 85 0085.txt INDEPENDENT AUDITORS' CONSENT EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT ---------------------------------------------------- We consent to incorporation by reference in the registration statements (No. 33-70478 and 333-62245) on Form S-8 and (No. 333-12893 and 333-47621) on Form S-3 of Prime Medical Services, Inc. of our report dated March 6, 2001, relating to the consolidated balance sheets of Prime Medical Services, Inc. and subsidiaries as of December 31, 2000 and 1999, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2000, which report appears in the December 31, 2000, Annual Report on Form 10-K of Prime Medical Services, Inc. /s/ KPMG LLP - -------------------------- Austin, Texas March 30, 2001 -----END PRIVACY-ENHANCED MESSAGE-----