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American Renal Associates Holdings, Inc. – IPO: ‘424B4’ on 4/22/16

On:  Friday, 4/22/16, at 1:57pm ET   ·   Accession #:  1047469-16-12466   ·   File #:  333-206686

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  As Of                Filer                Filing    For·On·As Docs:Size              Issuer               Agent

 4/22/16  American Renal Assocs Holdin… Inc 424B4                  1:3.2M                                   Merrill Corp/New/FA

Initial Public Offering (IPO):  Prospectus   —   Rule 424(b)(4)
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: 424B4       Prospectus                                          HTML   2.04M 


Document Table of Contents

Page (sequential)   (alphabetic) Top
 
11st Page  –  Filing Submission
"Table of Contents
"Presentation of Financial and Other Information
"Market and Industry Data
"Iii
"Trademarks, Service Marks and Trade Names
"Prospectus Summary
"Risk Factors
"If the rates paid by commercial payors decline, our operating results and cash flows would be adversely affected
"Special Note Regarding Forward-Looking Statements
"Use of Proceeds
"Dividend Policy
"Capitalization
"Dilution
"Unaudited Pro Forma Condensed Consolidated Financial Information
"Selected Historical Consolidated Financial Data
"Management's Discussion and Analysis of Financial Condition and Results of Operations
"Business
"Industry
"125
"Management
"127
"Executive Compensation
"134
"Certain Relationships and Related Party Transactions
"149
"Principal Stockholders
"156
"Description of Indebtedness
"158
"Description of Capital Stock
"162
"Shares Eligible for Future Sale
"171
"Certain United States Federal Income and Estate Tax Consequences to Non-U.S. Holders
"173
"Underwriting (Conflicts of Interest)
"176
"Legal Matters
"185
"Experts
"Where You Can Find More Information
"Index to Financial Statements
"F-1
"Report of Independent Registered Public Accounting Firm
"F-2
"Consolidated Balance Sheets as of December 31, 2015 and 2014
"F-3
"Consolidated Statements of Operations for the years ended December 31, 2015, 2014 and 2013
"F-4
"Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2015, 2014 and 2013
"F-5
"Consolidated Statements of Changes in Equity for the years ended December 31, 2015, 2014 and 2013
"F-6
"Consolidated Statements of Cash Flows for the years ended December 31, 2015, 2014 and 2013
"F-7
"Notes to Consolidated Financial Statements
"F-8

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Table of Contents

Filed Pursuant to Rule 424(b)(4)
Registration No. 333-206686

PROSPECTUS

7,500,000 Shares

LOGO

AMERICAN RENAL ASSOCIATES HOLDINGS, INC.

Common Stock

              This is the initial public offering of our common stock. We are selling 7,500,000 shares of our common stock.

              Prior to this offering, there was no public market for our common stock. The initial public offering price is $22.00 per share. Our common stock has been approved for listing on the New York Stock Exchange under the symbol "ARA."

              Investing in the common stock involves risks that are described in the "Risk Factors" section beginning on page 20 of this prospectus.

              After the completion of this offering, Centerbridge Capital Partners, L.P. and certain of its affiliates will continue to own a majority of the voting power of all outstanding shares of our common stock. As a result, we will be a "controlled company." See "Management—Controlled Company Exception" and "Principal Stockholders."

              We are an "emerging growth company" as defined under the federal securities laws and, as such, may elect to comply with certain reduced public company reporting requirements for future filings. See "Prospectus Summary—Emerging Growth Company Status."

 
  Per Share   Total  

Public offering price

  $ 22.00   $ 165,000,000  

Underwriting discount(1)

  $ 1.485   $ 11,137,500  

Proceeds, before expenses

  $ 20.515   $ 153,862,500  

(1)
We refer you to "Underwriting (Conflicts of Interest)" beginning on page 176 of this prospectus for additional information regarding underwriting compensation.

              The underwriters may also exercise their option to purchase up to an additional 1,125,000 shares from us, at the public offering price, less the underwriting discount, for 30 days after the date of this prospectus.

              Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

              The shares will be ready for delivery on or about April 26, 2016.

BofA Merrill Lynch   Barclays   Goldman, Sachs & Co.

Wells Fargo Securities

 

SunTrust Robinson Humphrey

Leerink Partners

 C:     

The date of this prospectus is April 20, 2016.


 C: 

Table of Contents

GRAPHIC


Table of Contents

 
  Page  

PRESENTATION OF FINANCIAL AND OTHER INFORMATION

    ii  

MARKET AND INDUSTRY DATA

    iii  

TRADEMARKS, SERVICE MARKS AND TRADE NAMES

    iii  

PROSPECTUS SUMMARY

    1  

RISK FACTORS

    20  

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

    55  

USE OF PROCEEDS

    57  

DIVIDEND POLICY

    58  

CAPITALIZATION

    59  

DILUTION

    61  

UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION

    63  

SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA

    69  

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

    72  

BUSINESS

    99  

INDUSTRY

    125  

MANAGEMENT

    127  

EXECUTIVE COMPENSATION

    134  

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

    149  

PRINCIPAL STOCKHOLDERS

    156  

DESCRIPTION OF INDEBTEDNESS

    158  

DESCRIPTION OF CAPITAL STOCK

    162  

SHARES ELIGIBLE FOR FUTURE SALE

    171  

CERTAIN UNITED STATES FEDERAL INCOME AND ESTATE TAX CONSEQUENCES TO NON-U.S. HOLDERS

    173  

UNDERWRITING (CONFLICTS OF INTEREST)

    176  

LEGAL MATTERS

    185  

EXPERTS

    185  

WHERE YOU CAN FIND MORE INFORMATION

    185  

INDEX TO FINANCIAL STATEMENTS

    F-1  



              We have not authorized anyone to provide any information or to make any representations other than those contained in this prospectus or in any free writing prospectuses we have prepared. We take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. This prospectus is an offer to sell only the shares of common stock offered hereby, but only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus is current only as of its date.

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PRESENTATION OF FINANCIAL AND OTHER INFORMATION

              Unless otherwise indicated or the context otherwise requires, references in this prospectus to "we," "our," "us" and "our company" and similar terms refer to American Renal Associates Holdings, Inc. and its consolidated entities taken together as a whole, except where these terms refer to providers of dialysis services, in which case they refer to our dialysis clinic joint ventures, in which we have a controlling interest and our physician partners have the noncontrolling interest, or to the dialysis facilities owned by such joint venture companies, as applicable. References to "ARA" and "Holdings" refer to American Renal Associates Holdings, Inc. and not any of its consolidated entities. References to "ARH" refer to American Renal Holdings Inc., an indirect wholly owned subsidiary of Holdings.

              Our financial statements reflect 100% of the revenues and expenses for our joint ventures (after elimination of intercompany transactions and accounts) and 100% of the assets and liabilities of these joint ventures (after elimination of intercompany assets and liabilities), although we do not own 100% of the equity interests in these consolidated entities. The net income attributable to our joint venture partners is classified within the line item Net income attributable to noncontrolling interests, which we refer to as "NCI."

              In this prospectus, we refer to "non-acquired" treatments and revenues. We consider our existing clinics and our newly developed or "de novo" clinics (including those with existing partners) to be our non-acquired clinics, and we refer to treatments performed at those clinics as non-acquired treatments. We evaluate our operating performance based on non-acquired treatment growth, which we calculate by dividing the number of treatments performed during the applicable period by the number of treatments performed during the corresponding prior period, in each case, excluding the number of treatments performed at clinics acquired during the applicable period, and expressing the resulting number as a percentage. Our non-acquired revenues consist of revenues generated by our existing and de novo clinics during the applicable period.

              In this prospectus, we present certain financial information on a per treatment basis by dividing the relevant number by the number of treatments performed in the applicable period. In particular, we evaluate our patient service operating revenues, patient care costs, general and administrative expenses and provision for uncollectible accounts on a per treatment basis to assess our operational efficiency.

              In this prospectus, we refer to the number of de novo clinics opened during specific periods and the number of clinics as of the end of such periods. We consider a de novo clinic to be opened at the time when such clinic performs its first treatment and include in the number of clinics those clinics that are still performing treatments as of the date specified.

              We present Adjusted EBITDA and Adjusted EBITDA-NCI as non-U.S. generally accepted accounting principles ("non-GAAP") financial measures in various places throughout this prospectus, including under "Prospectus Summary," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business." Our presentation of Adjusted EBITDA and Adjusted EBITDA-NCI has limitations as an analytical tool, and should not be considered in isolation or as a substitute for analysis of our results as reported under U.S. generally accepted accounting principles ("GAAP"). We believe Adjusted EBITDA and Adjusted EBITDA-NCI provide information useful for evaluating our business and understanding our operating performance in a manner similar to management. Because Adjusted EBITDA and Adjusted EBITDA-NCI are not measures determined in accordance with GAAP and are susceptible to varying calculations, we caution investors that these measures as presented may not be comparable to similarly titled measures of other companies. Under "Prospectus Summary—Summary Historical and Pro Forma Consolidated Financial Data" and "Management's Discussion and Analysis of Financial Condition and Results of Operations—Adjusted EBITDA," we include a quantitative reconciliation of Adjusted EBITDA and Adjusted EBITDA-NCI to net income and net income attributable to us, the most directly comparable GAAP financial performance measures.

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MARKET AND INDUSTRY DATA

              Certain market data and other statistical information used throughout this prospectus are based on the July 2015 ESRD Quarterly Update, the 2015 Annual Data Report, the 2014 Annual Data Report and the 2013 Annual Data Report prepared by the United States Renal Data System ("USRDS") and information from the Centers for Medicare and Medicaid Services ("CMS"). Some data is also based on our good faith estimates and derived from management's review of internal data and information, as well as independent sources such as independent industry publications, government publications, reports by market research firms or other published independent sources. Although we believe these sources are reliable, we have not independently verified the information contained therein. The most recent information reported in the USRDS 2015 Annual Data Report is as of and for the year ended December 31, 2013. The most recent information reported in the USRDS July 2015 ESRD Quarterly Update is as of and for the year ended December 31, 2014. In recent years, the gap between patient numbers and patient number growth rates reported by the two leading U.S. data sources has widened, accompanied by a significant time lag in reporting this data. This could lead to revised data for both reported patient numbers as well as growth rates for the U.S. market in the future.


TRADEMARKS, SERVICE MARKS AND TRADE NAMES

              AmericanRenal®, AmericanRenal Associates®, ARA®, The Nephrologist is the Center of Our Universe®, the American Renal Associates logo and other trademarks, service marks and trade names of our company appearing in this prospectus are our property.

              Solely for convenience, the trademarks, service marks, logos and trade names referred to in this prospectus are without the ® and ™ symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights to these trademarks, service marks and trade names. This prospectus contains additional trademarks, service marks and trade names of others, which are the property of their respective owners.

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PROSPECTUS SUMMARY

              The following is a summary of selected information contained elsewhere in this prospectus. It does not contain all of the information that you should consider before deciding to purchase shares of our common stock. You should read this entire prospectus carefully, especially the "Risk Factors" section immediately following this prospectus summary and the consolidated financial statements and the notes to the financial statements at the end of this prospectus.

Overview

              We are the largest dialysis services provider in the United States focused exclusively on joint venture partnerships with physicians. We provide high-quality patient care and clinical outcomes to patients suffering from the most advanced stage of chronic kidney disease, known as end stage renal disease ("ESRD"). Our core values create a culture of clinical autonomy and operational accountability for our physician partners and staff members. We believe our joint venture ("JV") model has helped us become one of the fastest-growing national dialysis services platforms, in terms of the growth rate of our non-acquired treatments since 2012.

              We operate our clinics exclusively through a JV model, in which we partner primarily with local nephrologists to develop, own and operate dialysis clinics, while the providers of the majority of dialysis services in the United States operate through a combination of wholly owned subsidiaries and joint ventures. Each of our clinics is maintained as a separate joint venture in which generally we have the controlling interest and our nephrologist partners and other joint venture partners have a noncontrolling interest. As of December 31, 2015, on average we held 54% of the interests in our clinics and our nephrologist partners held 46% of the interests. We believe our JV model, combined with a high-quality operational infrastructure, provides our physician partners the independence to make improved clinical decisions so they can focus on maximizing patient care and grow their clinical practices.

              We believe our approach has attracted physician partners and facilitated the expansion of our platform through de novo clinics. Since 2012, we have opened 15 or more de novo clinics each year. As of December 31, 2015, we owned and operated 192 dialysis clinics in partnership with 347 nephrologist partners treating over 13,000 patients in 24 states and the District of Columbia. From 2012 to 2015, our total number of treatments grew at a compound annual growth rate ("CAGR") of 15.0%, driven primarily by increases in non-acquired treatments, which grew at a CAGR of 11.1%. During the same period, our revenues, Adjusted EBITDA-NCI and net income attributable to us has grown at a CAGR of 15.7%, 11.6% and 28.2%, respectively. For the year ended December 31, 2015, our revenues, Adjusted EBITDA-NCI and net income attributable to us reached $657.5 million, $113.8 million and $18.8 million, respectively.

              For definitions of Adjusted EBITDA and Adjusted EBITDA-NCI and a reconciliation of Adjusted EBITDA and Adjusted EBITDA-NCI to net income (loss), see "—Summary Historical and Pro Forma Consolidated Financial Data."

Our Strategy Differentiates Our Business Model

              We strive for best-in-class physician partnership, patient care and staff satisfaction. Our core values emphasize quality patient care, providing physicians with clinical autonomy and operational support, hiring and retaining the best possible staff and providing best practices management services. We believe our track record has built premier brand recognition for the ARA brand, further validating our core values and our strategy.

 

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Our Core Values Drive Our Strategy and Delivery of Outstanding Patient Care and Clinical Outcomes

              We provide nephrologists the clinical autonomy and operating infrastructure to take excellent care of their patients. We value our clinic staff members and seek to hire and retain the most well-trained qualified staff. In conjunction with our medical directors, we proactively develop and suggest clinical protocols, clinical training and best practices to be shared across our network. Our corporate office focuses on the needs of our doctors, patients and staff. As a result, our physicians and staff have delivered an outstanding track record of clinical, operating and financial performance.

Exclusive Focus on the JV Model Drives Clinical and Operational Excellence

              Our founders were among the first to recognize and implement the JV model for providing dialysis services in the United States, which we believe provides significant benefits for our patients, providers and payors. Our JV model aligns the interests of our physician partners with ours and enables physicians to focus on high-quality patient outcomes. We believe that such alignment of interests makes us a preferred partner for nephrologists. Our joint venture partners include both individual nephrologists and affiliated groups of nephrologists, including many groups that have interests in multiple clinics with us. In addition, we provide best practices management services to our JV clinics and physician partners, including patient insurance education, revenue cycle management, regulatory and clinical compliance and other back-office operations. We believe that our operational infrastructure helps us deliver quality patient care.

Predictable Clinic Growth Model with Proven Track Record

              We have 143 de novo clinics as of December 31, 2015. Our track record has helped us establish a predictable de novo clinic model for the unit economics, growth and returns of each new clinic. Since 2012, we have opened 15 or more de novo clinics each year; the historical growth of these clinics provides evidence of the consistency and success of our de novo clinic model. We have also successfully applied our clinic development expertise to 49 clinics as of December 31, 2015 that we have acquired and integrated with our JV model. Our track record helps us attract new nephrologists and maintain an active pipeline of de novo clinics to be opened in the near future.

Our Opportunity

              We believe our strategy has positioned us to benefit from trends in the dialysis services and broader physician services markets.

Growing Prevalence of the Joint Venture as a Model for Providing Dialysis Services

              A significant portion of dialysis clinics in the United States are wholly owned. However, we believe the JV model has gained in prevalence as the dialysis services model for practicing nephrologists and has been growing rapidly over the past several years. According to a report prepared for the American Society of Nephrology, there are over 10,000 full-time practicing nephrologists in the United States, and we believe that a significant portion of these physicians treat their patients at clinics in which they have no ownership interest. As of December 31, 2015, we have partnered with 347 of these nephrologists, or less than 4% of all full-time practicing nephrologists in the United States, giving us significant opportunity to grow as a premier JV model operator within the nephrologist community.

Large Dialysis Services Market with Favorable Demographics

              The number of ESRD patients in the United States has historically grown at a rate of 3% to 5% annually since 2000 and has grown approximately 77% from 2000 to 2014. As of December 31, 2014, there were 692,268 patients with ESRD in the United States. From 2000 to 2013, the prevalence rate of ESRD per million in the U.S. population (adjusted for sex and race) increased approximately 15% for ages 22 to 44; approximately 24% for ages 45 to 64; approximately 31% for ages 65 to 74; and

 

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more than 50% for ages 75 and older. Those with ESRD require dialysis or kidney transplantation to sustain life. As of December 31, 2013, the dialysis population reached 466,607 patients, an increase of approximately 4% from the prior year and an increase of approximately 63% from 2000. Expenditures for patients with ESRD in the United States approximate $49 billion annually, according to the latest available USRDS data. We believe the prevalence rates and demographics favor continued growth of the dialysis services market.

Increasing Trend of Clinical Autonomy and Economic Alignment for Physicians

              In the current healthcare regulatory environment, the physician is increasingly moving towards the center of care management initiatives. Across various specialties, physicians have been incentivized to share risk, drive cost containment and deliver superior clinical outcomes. We believe key drivers for physician success in this environment include clinical and operational autonomy combined with excellent administrative support and economic alignment with all stakeholders.

Our Competitive Strengths

              Our competitive strengths are well-aligned with an evolving healthcare services market that demands high-quality patient care, physician-centered care management and continuous clinical and administrative improvement and efficiency.

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Exclusive Focus on the JV Model Delivers Compelling Value Proposition for Patients, Physicians and Payors

              We believe our results reflect the compelling value proposition of our JV model:

Effectiveness of our JV Model in Delivering High Performance

              We meet or exceed the core measures established by CMS to promote high-quality services in outpatient dialysis facilities. As an example, we have demonstrated strong performance in the ESRD Quality Incentive Program ("QIP"), which changes the way Medicare pays for the treatment of patients with ESRD by linking a portion of payment directly to facilities' performance on CMS core measures. The ESRD QIP reduces future payments to dialysis facilities that do not meet or exceed certain performance standards in the measurement year. The maximum payment reduction CMS can apply to any facility is 2% of all payments for services performed by the facility in a given year. Since the inception of the QIP program in 2010, the impact of payment reductions on our revenues has not exceeded 0.1% of our revenues in any year. Based on our performance in measurement years 2013 and 2014, only 1.4% and 1.2% of our clinics were penalized by CMS for payment years 2015 and 2016, respectively, compared to 5.6% and 5.5% of dialysis clinics across the United States penalized by CMS for the same periods, respectively, according to publicly available data from CMS. We believe our performance is driven by a culture of compliance and the advantages of our JV model.

 

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Premier Brand Recognition and Alignment of Interests Makes ARA a Preferred Partner for Nephrologists

              We believe that the ARA brand has a strong reputation and widespread recognition in the industry. We believe that our premier brand has been and will continue to be a key factor in our success. Our nephrologists appreciate the quality of our dialysis clinics, best practices management services and solid track record of clinical and regulatory compliance. According to physician feedback collected by Press Ganey Associates, Inc. in an August 2015 report (the "Press Ganey survey"), 98% of the 51 physicians who responded to the survey agreed or strongly agreed that our clinics provide high-quality care and service (with the remaining 2% giving neutral responses). To date, none of our physician partners has voluntarily left us to join a competitor or terminated a partnership. Further, by owning a portion of the clinics where their patients are treated, our physician partners have a vested stake in the quality, reputation and performance of the clinics.

              We believe our JV model drives growth by enabling our physician partners to reinvest in their practices and develop their practices by adding new nephrologists, which provides us with the opportunity to expand existing clinics or add new clinics. According to the Press Ganey survey, 100% of the responding physicians agreed or strongly agreed that they have adequate input into clinic decisions that affect their practices and 98% agreed or strongly agreed that they had confidence in ARA leadership (with the remaining 2% giving neutral responses). Our physician partners' satisfaction leads to positive references and new physician recommendations within the broader nephrology community, thereby enhancing our ability to partner with leading, established nephrologists. According to the Press Ganey survey, 98% of the responding physicians agreed or strongly agreed that they would recommend our clinics to other physicians and medical staff as a good place to practice medicine (with the remaining 2% giving neutral responses).

Proven De Novo Clinic Model Drives Predictable Market Leading Organic Growth

              We have primarily grown through de novo clinic development. We have developed a streamlined approach to opening clinics that results in competitive return on invested capital for both our company and our physician partners. As of December 31, 2015, we had a portfolio of 143 clinics developed as de novo clinics. Since 2012, we have opened 15 or more de novo clinics each year.

              Highly competitive de novo clinic economics.    A typical de novo clinic is 6,000 to 7,000 square feet, has 15 to 20 dialysis stations (performing approximately 9,000 to 10,000 annual treatments on average) and requires approximately $1.3 to $1.7 million of capital for equipment purchases, leasehold improvements and initial working capital. We have a long track record of achieving positive clinic-level monthly EBITDA within, on average, six months after the first treatment at a clinic. The consistent historical growth of each year's class of de novo clinics attests to the success of our de novo model. For example, eight de novo clinics opened in 2010 generated an average revenue of $2.3 million per clinic in their first year, which grew to $3.8 million per clinic in their second year and $4.4 million per clinic in their third year (a three-year CAGR of approximately 38%); 12 de novo clinics opened in 2011 generated an average revenue of $1.4 million per clinic in their first year, which grew to $2.8 million per clinic in their second year and $3.1 million per clinic in their third year (a three-year CAGR of approximately 47%); 16 de novo clinics opened in 2012 generated an average revenue of $1.7 million per clinic in their first year, which grew to $3.0 million per clinic in their second year and $3.4 million per clinic in their third year (a three-year CAGR of approximately 41%); 17 de novo clinics opened in 2013 generated an average revenue of $1.8 million per clinic in their first year, which grew to $2.9 million per clinic in their second year; and 15 de novo clinics opened in 2014 generated an average revenue of $1.6 million per clinic in their first year.

              Robust business development efforts to maintain momentum of signing de novo clinics.    Our successful track record helps us attract new nephrologists and maintain an active pipeline of de novo clinics to be opened in the near future. At any given time, we have an active roster of nephrologists, including existing physician partners, seeking to open clinics within the next twelve months. We refer to

 

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clinics for which a medical director agreement, an operating agreement and a management services agreement have been signed as our "signed de novo clinics". On average, our signed de novo clinics begin serving patients within 15 months of signing of the agreements. From that point, a clinic may take approximately two to three years to achieve the stabilized revenue initially projected for that clinic. As of December 31, 2014, we had 23 signed de novo clinics. As of December 31, 2015, we had opened 15 of such clinics and had 32 signed de novo clinics scheduled to be opened in 2016 and 2017.

Innovative and Experienced Management Team with a Proven Track Record

              Our management team is among the most experienced in the dialysis services industry. Our executives, including our two founders, have on average 22 years of professional experience in the dialysis services industry while our two founding executives collectively have on average 37 years of professional experience in the dialysis services industry. Our two founding executives and other senior management firmly believe in the advantages of the JV model and the importance of attracting, developing and retaining skilled staff at our clinics, and they endeavor to continue to build our company on these founding philosophies. Most of our executive and senior management have held multiple positions with one or more of our competitors and have contacts throughout the dialysis services industry with physicians, clinical staff, payors, vendors and other parties. Our executive leadership is supported by an experienced team of regional vice presidents who maintain a hands-on approach and are focused on the success of each local clinic in their respective markets. This breadth and depth of experience gives our management team the knowledge and resources to more effectively manage relations with physician partners and other personnel, enhance operating results and promote growth.

Our Growth Strategy

              We believe our focus on the JV model, our core values and the strength of our experienced management team have driven the growth in our patient population and physician relationships, and position us to execute on the following growth strategies.

Partner with High-Quality Nephrologists with Strong Local Market Reputation and Patient Relationships

              We partner with nephrologists who are well-qualified and have strong reputations and patient relationships in the local market. We have a well-established protocol to evaluate the quality of a potential nephrologist partner. Our success to date, together with the opportunities provided by our JV model, make us an attractive partner for nephrologists, including those nephrologists whose contractual relationships as medical directors at our competitors' clinics have expired. Further, our nephrologist partners also generate awareness and recognition of our company within the broader nephrology community and provide recommendations of potential new nephrologist partners. We currently work with 347 nephrologists, or less than 4% of the total number of nephrologists in the United States, giving us significant opportunity to grow as a premier JV model operator within the nephrologist community.

Grow Organically Through De Novo Clinics in New and Existing Markets and Expansion of Existing Clinics

              We intend to leverage our JV model and our reputation in the nephrology community to continue to develop de novo clinics in new as well as existing markets in the United States. As of December 31, 2015, our portfolio included 143 clinics developed as de novo clinics.

              De novo clinics with new physician partners.    We believe our strong brand reputation and widespread recognition in the closely knit nephrologist community give us an opportunity to attract new nephrologists as our physician partners and staff. We believe that patients choose to have their dialysis services at one of our clinics due to their relationship with our physician partners and staff, consistent high-quality care, a comfortable patient care experience, and convenience of location and available

 

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treatment times. Our de novo clinics showcase a core competence in building and operating de novo clinics that are supported by our best practice management services, and grow predictably. The historical growth of these clinics provides evidence of the consistency and success of our de novo clinic model. Since 2012, we have opened 38 new clinics with new physician partners, representing approximately 59% of our de novo clinic openings.

              Additional clinics with existing physician partners.    Our JV model provides our physician partners with opportunities to grow their individual or group practices within their local markets. The growth of our partners' practices contributes to the development of additional clinics with existing partners as new JVs in the same geographic area. New clinics sometimes begin as smaller clinics under the common supervision of an existing clinic in the same market. Over time, these new clinics may grow to the same size as the original clinic, or they may continue to operate fewer shifts or otherwise offer services to a smaller patient base. In either case, new clinics allow us to increase our market share by serving new patients who may find the new clinic location more convenient, or by freeing up capacity at the larger clinic where existing patients may have previously sought treatment. Since 2012, we have opened 26 new clinics with existing physician partners in their respective local markets, representing approximately 41% of our de novo clinic openings.

              Expansion of capacity in existing clinics.    Depending on demand and capacity utilization, we may have space within our existing clinics to accommodate a greater number of dialysis stations or operate additional shifts in order to increase patient volume without compromising our quality standards. Such expansions offer patients more flexibility in scheduling and leverage the fixed cost infrastructure of our existing clinics, which in return provides high incremental returns on capital invested. We intend to continue to work with our physician partners to broaden our market share in existing markets by seeking opportunities to expand our treatment volume through expansion of existing clinics. From 2012 to 2015, we added 137 dialysis stations to our existing clinics, representing the equivalent of nearly eight de novo clinics or an average per year increase in capacity of 1.4%, which further enhance our non-acquired treatment growth rate profile.

Opportunistically Pursue Acquisitions

              We currently operate 49 clinics that we acquired and integrated with our JV model. Because the acquisition cost for an existing dialysis clinic is typically higher than the cost to develop a de novo clinic, we have a disciplined approach to acquiring existing dialysis clinics. Our acquisition strategy is primarily driven by the quality of the nephrologist in the market. We pursue acquisitions in situations where we believe the nephrologist could be a potential partner and where there is an attractive opportunity to enter a new market or expand within an existing market.

              Our disciplined acquisition strategy has yielded significant benefits. Since 2012, we have acquired 24 clinics, two of which were acquired in 2015. Under our JV model, we provide best practices management services such as incorporating the clinic into our revenue cycle management, helping physician partners expand their practices and improving the acquired clinic's cost structure including for laboratory testing, medical supplies, medications and services. As a result, the profitability of these clinics is typically improved. Clinics that we have acquired before 2014 (for which we have data and have no prior relationship) have, on average, increased revenue in the twelve months following acquisition by approximately 35% over the prior twelve-month period.

              We intend to continue to opportunistically pursue acquisitions of clinics with reputations for quality and service. In making these acquisitions, we intend to integrate the ownership of the acquired clinic with our JV model. In addition, from time to time, we may evaluate the acquisition of existing dialysis clinic operators that have implemented a JV model similar to ours.

 

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Deliver on Our Core Values with Best Practices Management Services

              We intend to continue to focus on providing high-quality patient care, clinical autonomy to physicians and extensive professional, operational and managerial support to our clinics through management services arrangements. Based on our experience in the dialysis services industry, we will continue to follow a disciplined approach to enhancing performance in key areas such as: revenue cycle management; patient registration; facilitation and verification of insurance; payor interaction and arrangements; and billing and collection. We believe this has positively impacted our revenue per treatment and allowed us to maintain low levels of days' sales outstanding and bad debt expense. In addition, we believe our management services reduce the burden of back-office management responsibilities associated with the daily operations of a dialysis clinic and enable our physician partners to focus on providing high-quality patient care. As a result, we consistently deliver high-quality clinical outcomes.

Pre-IPO Distributions

              We intend to engage in several transactions, effective at the time of this offering, which are described below and which we refer to collectively as the "Pre-IPO Distributions." As a purchaser in this offering, you will not be eligible to participate in the Pre-IPO Distributions. For additional detail on these transactions and certain other transactions that will occur at or prior to the completion of this offering, please see "Unaudited Pro Forma Condensed Consolidated Financial Information" and "Certain Relationships and Related Party Transactions."

Income Tax Receivable Agreement

              Upon the completion of this offering, we intend to enter into an income tax receivable agreement ("TRA") for the benefit of our pre-IPO stockholders, which will provide for the payment by us to our pre-IPO stockholders on a pro rata basis of 85% of the amount of cash savings, if any, in U.S. federal, state and local income tax that we actually realize as a result of any deductions (including net operating losses resulting from such deductions) attributable to the exercise of (or any payment, including any dividend equivalent right or payment, in respect of) any compensatory stock option issued by us that is outstanding (whether vested or unvested) as of the day before the date of this prospectus. In connection with entering into the TRA, subject to the completion of this offering, we intend to equitably adjust outstanding stock options by reducing exercise prices and, if necessary, increasing the number of shares subject to such stock options. In connection with entering into the TRA, equitable adjustments are required by the terms of our equity incentive plans established after the Acquisition (as defined under "—Our Principal Stockholder") and, with respect to our other equity incentive plans established prior to the Acquisition, are being made at the discretion of our board of directors.

Clinic Loan Assignment and NewCo Distribution

              We partially finance the de novo clinic development costs of some of our joint venture subsidiaries by providing intercompany term loans and revolving loans through our wholly owned operating subsidiary American Renal Associates LLC ("ARA OpCo"). At the time of this offering, we intend to transfer substantially all of the intercompany term loans ("assigned clinic loans") provided to our joint venture subsidiaries by ARA OpCo to a newly formed entity ("NewCo"), which will initially be wholly owned by us. The membership interests in NewCo will then be distributed to our pre-IPO stockholders pro rata in accordance with their ownership in our company, after which we will not own any interest in NewCo. We refer to the distribution of the membership interests in NewCo as the "NewCo Distribution."

              The balance of such assigned clinic loans was $28.1 million as of December 31, 2015 and $26.1 million as of the date of this prospectus. Such loans are currently eliminated in consolidation as intercompany obligations. As a result of the NewCo Distribution, the balance of such assigned clinic

 

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loans will be reflected on our consolidated balance sheet in future reporting periods. Each assigned clinic loan is and will continue to be guaranteed by us and the applicable joint venture partner or partners in proportion to our respective ownership interests in the applicable joint venture. We guaranteed $14.9 million and $13.8 million of such assigned clinic loans as of December 31, 2015 and the date of this prospectus, respectively.

              Following the NewCo Distribution, our pre-IPO stockholders will own NewCo, which will be entitled to receive all interest and principal paid on such loans as the new holder of the assigned clinic loans. In connection with the NewCo Distribution, subject to the completion of this offering, we intend to equitably adjust outstanding stock options by reducing exercise prices and making cash dividend equivalent payments of $2.5 million, of which $0.2 million is payable to vested option holders and $2.3 million is payable to unvested option holders only if such unvested options become vested. In connection with the NewCo Distribution, equitable adjustments are required by the terms of our equity incentive plans established after the Acquisition and, with respect to our other equity incentive plans established prior to the Acquisition, are being made at the discretion of our board of directors.

Cash Dividend

              Upon the completion of this offering, we intend to pay a cash dividend to our pre-IPO stockholders of $28.9 million in the aggregate and make equitable adjustments in the form of cash dividend equivalent payments of $7.4 million in the aggregate to our pre-IPO option holders, of which $1.1 million is payable to vested option holders and $6.3 million is payable to unvested option holders only if such unvested options become vested. In connection with the cash dividend, equitable adjustments are required by the terms of our equity incentive plans established after the Acquisition and, with respect to our other equity incentive plans established prior to the Acquisition, are being made at the discretion of our board of directors.

Credit Facility Amendment and Incremental Debt Financing

              Concurrently with, and subject to completion of, this offering, we intend to amend our first lien credit agreement to, among other things, increase the borrowing capacity under our first lien revolving credit facility by $50.0 million to an aggregate amount of $100.0 million, provide for additional borrowings of $60.0 million of incremental first lien term loans, permit the repayment of our outstanding second lien term loans and permit the Pre-IPO Distributions. We intend to apply the net proceeds of such incremental first lien term loans and borrowings under our first lien revolving credit facility, together with the net proceeds received by us from this offering and cash on hand, to repay in full all outstanding amounts under our second lien credit facility. We refer to such increase of revolving credit facility borrowing capacity, borrowings under our first lien credit facility and repayment of second lien term loans as the "Refinancing." See "Description of Indebtedness."

Investment Risks

              An investment in shares of our common stock involves substantial risks and uncertainties that may adversely affect our business, financial condition and results of operations and cash flows. Some of the more significant challenges and risks relating to an investment in us involve, among other things, the following:

 

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              Please see "Risk Factors" for a discussion of these and other important factors you should consider before making an investment in shares of our common stock.

 

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Organizational Structure

              The following diagram presents a simplified depiction of the organizational structure of our company.

GRAPHIC


(1)
Nephrologist partners and other joint venture partners.

              American Renal Holdings Intermediate Company, LLC ("Holdings Intermediate") was formed in Delaware on March 18, 2010. American Renal Associates Holdings, Inc. ("Holdings") owns 100% of the membership interests in Holdings Intermediate, which itself has no operations or assets other than its ownership of 100% of the shares of the capital stock of American Renal Holdings Inc. ("ARH"). Holdings Intermediate guarantees our indebtedness under our credit facilities. Holdings and Holdings Intermediate were incorporated and formed, respectively, on the same day in March 2010 in anticipation of the Acquisition and the desire for flexibility in structuring our debt financing in the future. For example, our organizational structure has enabled Holdings Intermediate to provide a secured guarantee of our credit facilities, pledging 100% of the capital stock of ARH.

              ARH was incorporated in Delaware on July 19, 1999. All of our operations are conducted through ARH and its operating subsidiaries. The primary asset of ARH is its ownership of 100% of the membership interests in ARA OpCo. ARH is the borrower under our credit facilities.

              ARA OpCo was formed in Delaware on November 3, 2005. Its primary assets are its ownership interests in our operating clinic joint ventures. See "Business—Our Operating Structure." A portion of our third-party clinic-level debt is guaranteed by ARH or American Renal Associates LLC, as the case may be.

              American Renal Management LLC, the direct wholly owned subsidiary of American Renal Associates, LLC, was formed in Delaware on January 26, 2000. American Renal Management LLC is the subsidiary through which we conduct our management services for our joint ventures, including revenue cycle management, compliance and other back-office operations.

 

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Our Principal Stockholder

              On May 7, 2010, we were acquired by certain affiliates of Centerbridge Capital Partners, L.P. (together with such affiliates, "Centerbridge") and certain members of management in a series of transactions (the "Acquisition"). After completion of this offering, Centerbridge will continue to control a majority of the voting power of our outstanding capital stock. Centerbridge is a private investment firm with offices in New York and London and manages approximately $25 billion of capital as of December 31, 2015 on a discretionary basis. Centerbridge focuses on private equity and credit investments. Centerbridge is dedicated to partnering with world-class management teams across targeted industry sectors to help companies achieve their operating and financial objectives. For a discussion of certain risks, potential conflicts and other matters associated with Centerbridge's control of us, see "Risk Factors—Risks Related to this Offering and Ownership of Our Common Stock—Centerbridge controls us and its interests may conflict with ours or yours in the future" and "Description of Capital Stock."

Our Corporate Information

              American Renal Associates Holdings, Inc. was incorporated in Delaware on March 18, 2010. Our principal executive offices are located at 500 Cummings Center, Suite 6550, Beverly, Massachusetts 01915 and our telephone number is (978) 922-3080. Our corporate website address is www.americanrenal.com. Information contained on our website is not a part of this prospectus and the inclusion of our website address in this prospectus is an inactive textual reference only.

Emerging Growth Company Status

              We are an "emerging growth company" as defined in the Jumpstart Our Business Startups Act enacted on April 5, 2012 (the "JOBS Act"). For as long as we are an emerging growth company, we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies, including, but not limited to, not being required to comply with the auditor attestation requirements in the assessment of our internal control over financial reporting, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding advisory "say-on-pay" and "say-when-on-pay" votes on executive compensation and shareholder advisory votes on golden parachute compensation.

              Under the JOBS Act, we will remain an emerging growth company until the earliest of:

              We have taken advantage of reduced disclosure requirements in this prospectus by providing reduced disclosure regarding executive compensation arrangements. We may choose to take advantage of some, but not all, of these reduced disclosure obligations in future filings. If we do, the information

 

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that we provide stockholders may be different than the information you might get from other public companies in which you hold stock.

              The JOBS Act also provides that an emerging growth company may utilize the extended transition period provided for complying with new or revised accounting standards. However, we are choosing to "opt out" of such extended transition period, and, as a result, we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for companies that are not emerging growth companies. Our decision to opt out of the extended transition period for complying with new or revised accounting standards is irrevocable.

 

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The Offering

   

Common stock offered

 

7,500,000 shares (8,625,000 shares if the underwriters exercise their option to purchase additional shares in full)

Common stock to be outstanding after the offering

 

29,719,803 shares (30,844,803 shares if the underwriters exercise their option to purchase additional shares in full)

Option to purchase additional shares of common stock

 

The underwriters have the option to purchase up to an additional 1,125,000 shares of common stock from us. The underwriters may exercise this option at any time within 30 days from the date of this prospectus.

Use of Proceeds

 

We estimate that net proceeds received by us from this offering, after deducting the underwriting discount and estimated offering expenses payable by us, will be approximately $145.3 million (which accounts for $5.5 million of offering-related costs incurred prior to December 31, 2015). We intend to use the net proceeds received by us from this offering, together with borrowings under our first lien credit facility, as amended, and cash on hand, to repay in full all outstanding amounts under our second lien credit facility. We may use the remaining balance, if any, for working capital and other general corporate purposes, including to fund our continued growth through the development of new clinics, expansion of existing clinics or acquisition of clinics that we may identify from time to time.

Conflicts

 

Because an affiliate of Goldman, Sachs & Co. is a lender under our second lien credit facility and will receive 5% or more of the net proceeds of this offering due to the repayment of borrowings under our second lien credit facility, Goldman, Sachs & Co. is deemed to have a conflict of interest within the meaning of Rule 5121 of the Financial Industry Regulatory Authority, Inc. ("FINRA"). Accordingly, this offering will be conducted in accordance with Rule 5121, which requires, among other things, that a "qualified independent underwriter" participate in the preparation of, and exercise the usual standards of "due diligence" with respect to, the registration statement and this prospectus. Merrill Lynch, Pierce, Fenner & Smith Incorporated has agreed to act as a qualified independent underwriter for this offering and to undertake the legal responsibilities and liabilities of an underwriter under the Securities Act of 1933, as amended (the "Securities Act"), specifically including those inherent in Section 11 thereof. Merrill Lynch, Pierce, Fenner & Smith Incorporated will not receive any additional fees for serving as a qualified independent underwriter in connection with this offering. We have agreed to indemnify Merrill Lynch, Pierce, Fenner & Smith Incorporated against liabilities incurred in connection with acting as a qualified independent underwriter, including liabilities under the Securities Act. See "Underwriting (Conflicts of Interest)—Conflicts of Interest."

 

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Dividend Policy

 

We have no current plans to pay dividends on our common stock in the foreseeable future, except upon the completion of this offering as described under "—Pre-IPO Distributions." Any decision to declare and pay dividends in the future will be made at the sole discretion of our board of directors and will depend on, among other things, our financial condition, results of operations, cash requirements, contractual restrictions and other factors that our board of directors may deem relevant. Because we are a holding company, and have no direct operations, we expect to pay dividends, if any, only from funds we receive from our subsidiaries.

Reserved Shares

 

At our request, the underwriters have reserved for sale, at the initial public offering price, up to 5% of the shares offered by this prospectus for sale to some of our directors, officers and employees. If these persons purchase reserved shares, this will reduce the number of shares available for sale to the general public. Any reserved shares that are not so purchased will be offered by the underwriters to the general public on the same terms as the other shares offered by this prospectus.

Risk Factors

 

See "Risk Factors" and other information included in this prospectus for a discussion of important factors you should carefully consider before deciding to invest in the shares.

NYSE Symbol

 

"ARA"

              The number of shares of our common stock to be outstanding following this offering is based on 22,219,803 shares of our common stock outstanding as of the date of this prospectus and excludes:

              Except as otherwise noted, all information in this prospectus:

 

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Summary Historical and Pro Forma Consolidated Financial Data

              The following tables set forth our summary historical and pro forma consolidated financial data as of the dates and for the periods indicated. The summary historical consolidated financial data as of December 31, 2015 and 2014 and for the years ended December 31, 2015, 2014 and 2013 has been derived from our audited consolidated financial statements included elsewhere in this prospectus. The summary historical consolidated financial data as of December 31, 2013 has been derived from our audited consolidated balance sheet not included elsewhere in this prospectus.

              Our financial statements reflect 100% of the revenues and expenses for our joint ventures (after elimination of intercompany transactions and accounts) and 100% of the assets and liabilities of these joint ventures (after elimination of intercompany assets and liabilities), although we do not own 100% of the equity interests in these consolidated entities. The net income attributable to our joint venture partners is classified within the line item Net income attributable to noncontrolling interests. We generally make distributions to our joint venture partners at least on a quarterly basis in an amount approximating the NCI. See also "Critical Accounting Policies and Estimates—Noncontrolling Interests."

              Historical results are not necessarily indicative of the results expected for any future period. You should read the information set forth below in conjunction with "Selected Historical Consolidated Financial Data" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our financial statements and the related notes thereto included elsewhere in this prospectus.

              The unaudited pro forma consolidated financial data is included for informational purposes only and does not purport to reflect our results of operations or financial position had we operated as a public company during the periods presented. The unaudited pro forma consolidated financial data should not be relied upon as being indicative of our results of operations or financial position had the transactions described under "Unaudited Pro Forma Condensed Consolidated Financial Information" occurred on the dates assumed, nor is such data indicative of our results of operations or financial position for any future period or date.

              The pro forma adjustments with respect to the summary unaudited pro forma statement of operations data gives effect to the transactions described under "Unaudited Pro Forma Condensed Consolidated Financial Information" as if they had occurred on January 1, 2015. The pro forma adjustments are based on preliminary estimates, accounting judgments and currently available information and assumptions that management believes are reasonable. The notes to the unaudited pro forma consolidated financial statements included elsewhere in this prospectus discuss how such adjustments were derived. Actual results may differ as a result of information obtained in the future.

 

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  Year Ended December 31,   Pro Forma
Year Ended
December 31,
 
(in thousands, except per share data and operating data)
  2013   2014   2015   2015  

Statement of Income Data:

                         

Patient service operating revenues

  $ 498,699   $ 563,550   $ 657,505   $ 657,505  

Provision for uncollectible accounts

    2,773     2,816     4,524     4,524  

Net patient service operating revenues

    495,926     560,734     652,981     652,981  

Operating expenses:

                         

Patient care costs

    288,384     329,847     390,949     390,949  

General and administrative expenses

    72,640     63,026     77,250     75,428  

Transaction-related costs

    533         2,086     2,086  

Depreciation and amortization

    23,707     28,527     31,846     31,846  

Total operating expenses

    385,264     421,400     502,131     500,309  

Operating income

    110,662     139,334     150,850     152,672  

Interest expense, net

    (43,314 )   (44,070 )   (45,400 )   (28,662 )

Loss on early extinguishment of debt

    (33,921 )            

Income before income taxes

    33,427     95,264     105,450     124,010  

Income tax expense (benefit)

    (8,200 )   12,858     12,373     19,729  

Net income

    41,627     82,406     93,077     104,281  

Less: Net income attributable to noncontrolling interests

    (62,074 )   (66,209 )   (74,232 )   (74,232 )

Net income (loss) attributable to ARA

  $ (20,447 ) $ 16,197   $ 18,845   $ 30,049  

Earnings (loss) per share:

                         

Basic

  $ (0.94 ) $ 0.74   $ 0.85   $ 1.01  

Diluted

  $ (0.94 ) $ 0.73   $ 0.83   $ 0.99  

Other Financial Data:

   
 
   
 
   
 
   
 
 

Adjusted EBITDA (including noncontrolling interests)(1)(3)

  $ 157,682   $ 170,481   $ 188,055   $ 188,055  

Adjusted EBITDA-NCI(2)(3)

    95,608     104,272     113,823     113,823  

Capital expenditures

    37,752     39,849     46,273                   

Development capital expenditures

    30,558     32,059     35,313                   

Maintenance capital expenditures           

    7,194     7,790     10,960                   

Operating Data:

   
 
   
 
   
 
   
 
 

Number of clinics (as of end of period)

    150     175     192                   

Number of de novo clinics opened (during period)(4)

    17     15     16                   

Number of acquired clinics (during period)

    5     11     2                   

Patients (as of end of period)

    10,095     11,581     13,151                   

Number of treatments

    1,382,548     1,563,802     1,804,910                   

Non-acquired treatment growth

    14.8 %   12.4 %   11.7 %                 

Patient service operating revenues per treatment

  $ 361   $ 360   $ 364                   

Patient care costs per treatment

  $ 209   $ 211   $ 217                   

General and administrative expenses per treatment

  $ 53 (5) $ 40   $ 43                   

Provision for uncollectible accounts per treatment

  $ 2   $ 2   $ 3        

 

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  As of December 31,   Pro Forma
As of December 31,
 
(in thousands)
  2013   2014   2015   2015  

Consolidated Balance Sheet Data:

                         

Cash (other than clinic-level cash)(6)

  $ 2,121   $ 17,689   $ 36,371   $  

Clinic-level cash(6)

    30,749     43,786     54,617     45,900  

Working capital(7)

    52,267     70,660     96,274     36,954  

Total assets

    844,839     883,306     939,469     888,944  

Debt (other than clinic-level debt)(8)

    628,795     618,390     611,777     452,654  

Clinic-level debt(8)

    19,259     44,210     72,396     98,531  

Noncontrolling interests subject to put provisions

    82,539     90,972     108,211     108,211  

Accumulated deficit

    (152,773 )   (136,576 )   (128,261 )   (214,797 )

Total equity

    26,181     43,657     50,710     109,501  

Noncontrolling interests not subject to put provisions

    173,959     178,091     179,903     179,903  

(1)
"Adjusted EBITDA" is defined as net income before income taxes, interest expense, depreciation and amortization, as adjusted for stock-based compensation, loss on early extinguishment of debt, transaction-related costs and management fees.

(2)
"Adjusted EBITDA-NCI" is defined as Adjusted EBITDA less net income attributable to noncontrolling interests.

(3)
We use Adjusted EBITDA and Adjusted EBITDA-NCI to track our performance. We believe Adjusted EBITDA and Adjusted EBITDA-NCI provide information useful for evaluating our business and understanding our operating performance in a manner similar to management. We believe Adjusted EBITDA is helpful in highlighting trends because Adjusted EBITDA excludes the results of decisions that are outside the operational control of management and can differ significantly from company to company depending on long-term strategic decisions regarding capital structure, the tax jurisdictions in which companies operate and capital investments. We believe Adjusted EBITDA-NCI is helpful in highlighting the amount of Adjusted EBITDA that is available to us after reflecting the interests of our joint venture partners. Adjusted EBITDA and Adjusted EBITDA-NCI are not measures of operating performance computed in accordance with GAAP and should not be considered as a substitute for operating income, net income, cash flows from operations, or other statement of operations or cash flow data prepared in conformity with GAAP, or as measures of profitability or liquidity. In addition, Adjusted EBITDA and Adjusted EBITDA-NCI may not be comparable to similarly titled measures of other companies. Adjusted EBITDA and Adjusted EBITDA-NCI may not be indicative of historical operating results, and we do not mean for it to be predictive of future results of operations or cash flows. Adjusted EBITDA and Adjusted EBITDA-NCI have limitations as analytical tools, and you should not consider these items in isolation, or as substitutes for an analysis of our results as reported under GAAP. Some of these limitations are that Adjusted EBITDA and Adjusted EBITDA-NCI:

    do not include interest expense—as we have borrowed money for general corporate purposes, interest expense is a necessary element of our costs and ability to generate profits and cash flows;

    do not include depreciation and amortization—because construction and operation of our dialysis clinics requires significant capital expenditures, depreciation and amortization are a necessary element of our costs and ability to generate profits;

    do not include stock-based compensation expense;

    do not reflect changes in, or cash requirements for, our working capital needs; and

    do not include certain income tax payments that represent a reduction in cash available to us.

    In addition, Adjusted EBITDA is not adjusted for the portion of earnings that we distribute to our joint venture partners.

    You should not consider Adjusted EBITDA and Adjusted EBITDA-NCI as alternatives to income from operations or net income, determined in accordance with GAAP, as an indicator of our operating performance, or as alternatives to cash flows from operating activities, determined in accordance with GAAP, as an indicator of cash flows or as a measure of liquidity. This presentation of Adjusted EBITDA and Adjusted EBITDA-NCI may not be directly comparable to similarly titled measures of other companies, since not all companies use identical calculations.

 

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  Year Ended December 31,   Pro Forma
Year Ended
December 31,
 
(in thousands)
  2013   2014   2015   2015  

Net income

  $ 41,627   $ 82,406   $ 93,077   $ 104,281  

Add:

                         

Stock-based compensation(a)

    21,342     1,047     1,451     1,451  

Depreciation and amortization

    23,707     28,527     31,846     31,846  

Interest expense, net

    43,314     44,070     45,400     28,662  

Income tax expense (benefit)

    (8,200 )   12,858     12,373     19,729  

Loss on early extinguishment of debt

    33,921              

Transaction-related costs(b)

    533         2,086     2,086  

Management fee(c)

    1,438     1,573     1,822      

Adjusted EBITDA (including noncontrolling interests)

    157,682     170,481     188,055     188,055  

Less: Net income attributable to noncontrolling interests

    (62,074 )   (66,209 )   (74,232 )   (74,232 )

Adjusted EBITDA-NCI

  $ 95,608   $ 104,272   $ 113,823   $ 113,823  

(a)
For 2013, we recorded $20,664 of incremental stock-based compensation expense of which $19,747 related to the modification of certain stock options made in connection with the payment of a dividend to our stockholders and $917 was cash paid for employer payroll taxes. We also recorded $678 of stock-based compensation related to our periodic option grants. In addition, in connection with the dividend, we made a payment equal to $7.90 per share, or $30,056 in the aggregate, to option holders, and, in the case of some performance and market options, a future payment will be due upon vesting totaling $2,600. For all other periods, stock-based compensation related to our periodic option grants and cash paid for employer payroll taxes. All dollar amounts in this paragraph, other than per share amounts, are in thousands.

(b)
For 2015, represents the forgiveness of all indebtedness and accrued interest under a revolving credit promissory note issued to an executive. See "Certain Relationships and Related Party Transactions—Loans to Our Chief Executive Officer."

(c)
Represents management fees paid to Centerbridge. In connection with this offering, we intend to amend our transaction fee and advisory services agreement with Centerbridge to terminate our obligation to pay management fees thereunder upon the consummation of this offering. No additional fees will be paid in connection with such termination (other than accrued amounts as of the date of termination). See "Certain Relationships and Related Party Transactions—Transaction Fee and Advisory Services Agreement."
(4)
The following table sets forth the number of de novo clinics opened during the quarterly periods indicated below.

 
  Three Months Ended    
 
 
  March 31   June 30   September 30   December 31   Total  

2015

    1     5     6     4     16  

2014

    2     4     3     6     15  

2013

    1     3     2     11     17  

2012

    4     3     7     2     16  
(5)
See "Management's Discussion and Analysis of Financial Condition and Results of Operations" for discussion of the 2013 Transactions and their effect on our general and administrative expenses on an absolute and per treatment basis.

(6)
Clinic-level cash represents 100% of the cash held at our joint ventures. As of December 31, 2013, 2014 and 2015, ARA's proportionate interest in clinic-level cash amounted to $17.4 million, $24.3 million and $28.4 million, respectively. Our pro forma clinic-level cash reflects a distribution of $8.7 million of cash from our joint ventures to us, but does not reflect the corresponding pro rata distributions to our joint venture partners.

(7)
Current assets minus current liabilities.

(8)
Clinic-level debt represents the debt of our joint ventures other than intercompany loans. As of December 31, 2013, 2014 and 2015, we guaranteed $10.0 million, $21.5 million and $34.6 million, respectively, of third-party clinic-level debt. On a pro forma basis giving effect to the NewCo Distribution of $26.1 million as if it had occurred on December 31, 2015, we would have guaranteed $48.4 million of third-party clinic-level debt as of December 31, 2015.

 

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RISK FACTORS

              Investing in our common stock involves a high degree of risk. You should carefully consider the following risk factors together with other information in this prospectus, including our consolidated financial statements and related notes included elsewhere in this prospectus, before deciding whether to invest in shares of our common stock. The occurrence of any of the events described below could materially adversely affect our business, financial condition, cash flows, results of operations and growth prospects. In such an event, the trading price of our common stock may decline and you may lose all or part of your investment.

Risks Related to Our Business

We depend on commercial payors for reimbursement at rates that allow us to operate at a profit.

              Commercial payors pay us at rates that are generally significantly higher than Medicare rates and the rates paid by other government-based payors such as state Medicaid programs. For the three years ended December 31, 2015, we derived on average approximately 40% of our patient service operating revenues from commercial payors, including for non-contracted providers, even though commercial payors were the source of reimbursement for on average approximately 13% of the treatments performed during the three years ended December 31, 2015. Medicare rates are generally insufficient to cover our total operating expenses allocable to providing dialysis treatments for Medicare patients. As a result, our ability to generate operating earnings is substantially dependent on revenues derived from commercial payors, some of which pay negotiated payment rates and others of which pay based on our usual and customary fee schedule. To the extent the proportion of commercial payors decreases relative to government payors as a source of reimbursement for treatments, it would have a material adverse effect on our revenues, operating results and cash flows.

If the number of patients with commercial insurance declines, our operating results and cash flows would be adversely affected.

              Our revenues are sensitive to the number of patients with commercial insurance coverage. A patient's insurance coverage may change for a number of reasons, including as a result of changes in the patient's or a family member's employment status. Factors that may cause an increase in the number of patients who have government-based programs as their primary payors include: recent economic conditions, the expansion of certain state Medicaid programs under healthcare reform laws, improved longevity and lower standard mortality rates for ESRD patients, resulting in a lower percentage of patients covered under employer group health plans or other commercial insurance plans. To the extent there are sustained or increased job losses in the United States, we could experience a decrease in the number of patients under employer group health plans. We could also experience a further decrease if changes to the healthcare regulatory system, including as a result of healthcare reform laws, result in fewer patients covered under employer group health plans or other commercial insurance plans. In addition, our continued negotiations with commercial payors could result in a decrease in the number of patients under commercial insurance plans to the extent that we cannot reach agreement with commercial payors on rates and other terms. If there is a significant reduction in the number of patients insured through commercial insurance plans relative to patients insured through government-based programs, it would have a material adverse effect on our revenues, earnings and cash flows.

If the rates paid by commercial payors decline, our operating results and cash flows would be adversely affected.

              The dialysis services industry is subject to rate pressure from commercial payors, including employer group health plans as well as healthcare insurance exchange plans, as a result of general conditions in the market, recent and future consolidations among commercial payors and other factors.

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We are continuously in the process of negotiating agreements with our commercial payors. In the event that our continued negotiations result in overall commercial rate reductions in excess of overall commercial rate increases, the net impact could have a material adverse effect on our revenues, results of operations and cash flows. Consolidations among health insurers may significantly increase the negotiating leverage of commercial payors. Our negotiations with payors are also influenced by competitive pressures, which may result in decreases to some of our contracted rates with commercial payors.

              In addition to pressure on contracted commercial payor rates, commercial payors may decrease payment rates for non-contracted providers. Commercial payors have been attempting to impose restrictions and limitations on non-contracted providers. Some of our clinics are currently designated as out-of-network providers by some of our current commercial payors. Commercial payors may restructure their benefits to create disincentives for patients to select or remain with out-of-network providers. If commercial payors increase such restrictions, our revenues derived from commercial payors would decline. Reductions in contracted commercial payor rates would result in a significant decrease in our overall revenues derived from commercial payors and a material adverse effect on our operating results and cash flows.

If we do not continuously obtain new patients covered by commercial insurance, our operating results and financial condition would be adversely affected.

              Our revenues are sensitive to the number of new dialysis patients. Medicare beneficiaries with ESRD generally become eligible for coverage on the first day of the third month after the month in which a course of regular dialysis begins, but this three month waiting period may be partially or completely waived if the patient participates in a self-dialysis training program or has a kidney transplant. For a dialysis patient with commercial insurance coverage, the commercial insurance plan generally is the primary payor for a 30-month coordination period beginning on the first month that the individual would be entitled to Medicare on the basis of ESRD, regardless of whether the patient actually enrolls in Medicare. After the 30-month coordination period, Medicare becomes the primary payor as long as the individual retains eligibility based on ESRD. Medicare coverage ends if the patient has not received dialysis for 12 months or if 36 months have passed since the beneficiary had a successful kidney transplant.

              When Medicare becomes the primary payor, the payment rate we receive for that patient shifts from the commercial insurance rate to the Medicare payment rate, which is generally lower than the commercial rate. For each covered treatment, Medicare pays 80% of the amount set by the Medicare program and the patient is responsible for the remaining 20%. In many cases, a secondary payor, such as Medicare supplemental insurance (offered by commercial payors), another commercial insurance plan or Medicaid, covers all or part of these balances. If dialysis patients who have Medicare as their primary payor do not have secondary insurance coverage, we may endeavor to collect payment from the patient using reasonable collection efforts consistent with federal and state law, but we may not be successful in collecting the 20% balance from those patients. If there is a significant reduction in the number of new dialysis patients covered by commercial insurance, we would not receive the benefit of the 30-month coordination period of higher reimbursement rates from commercial payors, which would materially adversely affect our operating results and cash flows.

The bundled payment system under the Medicare ESRD program may not reimburse us for all of our operating costs.

              For the year ended December 31, 2015, we derived 58.3%, of our revenues from reimbursement from government-based and other programs, including 43.3% from the Medicare ESRD program. The reimbursement that we receive from Medicare under the ESRD prospective payment rate system (the "ESRD PPS"), described below, may be insufficient to cover our treatment costs.

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              Effective January 1, 2011, pursuant to the Medicare Improvements for Patients and Providers Act ("MIPPA"), Congress replaced the composite payment rate methodology for Medicare reimbursement of dialysis services with a more comprehensive ESRD PPS, also referred to as the bundled payment system. The bundled payment under the ESRD PPS covers not only the dialysis treatment itself but also the majority of the renal-related items and services provided to a patient during the dialysis treatment, including laboratory services, pharmaceuticals, such as genetically engineered forms of erythropoietin ("EPO"), and medication administration, which were historically billed separately under the composite rate system.

              The applicable base rate under the ESRD PPS for each calendar year is determined by updating the base rate for the prior calendar year by a market basket percentage factor (accounting for changes over time in the prices of the mix of goods and services included in dialysis) minus a productivity adjustment, and then multiplying the resulting rate by a wage index budget neutrality adjustment factor. The base rate is then modified by a number of additional factors to arrive at the actual payment rate, including facility-level and patient-level adjustments, a training add-on (if applicable), and an outlier adjustment for high resource usage. The payment rate is also subject to additional adjustments that, under MIPPA, CMS has the discretion to implement and which have varied from year to year.

              CMS issues annual updates to the ESRD PPS which may impact the base rate as well as the various adjusters. The final rule setting the rates for 2015 resulted in an increase of payments to dialysis facilities of between 0.3% and 0.5%, with rural facilities receiving a decrease of 0.5%. The ESRD PPS final rule for 2016 released on October 29, 2015 (the "Final Rule") lowered the base rate by approximately 4%. CMS has estimated that the Final Rule will result in an overall increase of payments to all dialysis facilities of 0.2%. It is unclear whether the Final Rule will have the effect of increasing or decreasing the actual payment rate for some or all of our clinics. The Final Rule also adjusted the eligibility criteria for the low volume payment adjustment by eliminating grandfathering, which exempted certain facilities from the requirement to aggregate the number of treatments provided at the facility with other facilities under common ownership within a certain geographic proximity for purposes of qualifying for the low volume payment adjustment. Some of our clinics benefited from such grandfathering and, accordingly, their payment rates may be adversely affected. The Final Rule also changed the geographic proximity criteria for facilities under common ownership. Our clinics that may be affected by the new geographic proximity criteria are considered to be under common ownership, so such adjustments could adversely affect the payment rate for some of our clinics. Additional adjustment factors, including facility-level and patient-level adjustments and changes to the training add-on and outlier adjustment, could have the effect of increasing or decreasing the actual payment rate for some or all of our clinics. Future adjustments to the ESRD PPS implemented by CMS could have a negative impact upon our Medicare program revenues.

              Our operating costs may outpace any rate increases we receive under the ESRD PPS and we may not be able to adjust our operations adequately to manage such costs. If EPO prices, for instance, increase beyond that contemplated when the bundled rate was set by CMS, the difference between the bundled rate and the EPO-related costs could have a significant adverse effect on a facility's profitability. Further, the bundled payment system requires dialysis facilities to provide new services within the payment bundle such as Vitamin D medications and an expanded list of laboratory tests which may increase our operating costs. We may not recoup these costs, even with rate adjustments. Finally, the case-mix adjustment component of the ESRD PPS renders it difficult for us to predict the Medicare related revenues that we will receive, due to the number and variety of patient-level adjustment factors. We may not be able to make necessary adjustments in our operations to accommodate reductions in revenue that may result from case-mix variations.

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Our growth strategy depends in part on our ability to develop de novo clinics. Our attempt to expand through development of de novo clinics entails risks to our growth, as well as our operating results and financial condition.

              We have experienced rapid growth since our inception. We have grown primarily through the development of de novo dialysis clinics as JVs with new and existing partner nephrologists or nephrologist groups. Growth through development places significant demands on our financial and management resources. Inability on our part to address these demands could adversely affect our growth, as well as our operating results and financial condition.

              We generally expand by seeking appropriate locations for a dialysis clinic, taking into consideration the availability of a nephrologist to be our medical director and nephrologist partner, payor types and a skilled work force including qualified nursing and technical personnel. The inability to identify suitable locations, suitable nephrologist partners and workforce personnel for our dialysis clinics could adversely affect our growth as well as our operating results and financial condition.

              The development of a de novo dialysis clinic can be expensive and may include costs related to construction, equipment and initial working capital. De novo dialysis clinics are subject to various risks, including risks associated with the availability and terms of financing for development, securing appropriate licenses and permits, achieving brand awareness in new markets, managing increases in costs, competing for appropriate sites in new markets and maintaining adequate information systems and other operational system capabilities. Our ability to develop additional clinics may be limited by state certificate of need programs and other regulatory restrictions on expansion. States without certificate of need programs may begin restricting the development of new clinics and states with existing programs may institute more restrictive measures.

              Our de novo clinics may not become cash flow positive or profitable on a timely basis or at all. Although we typically achieve positive clinic-level monthly EBITDA within, on average, six months after the first treatment at a clinic, approximately 15% of our de novo clinics have exceeded six months from first treatment to positive clinic-level monthly EBITDA, averaging approximately 12 months to positive clinic-level monthly EBITDA. Delays in the opening of de novo clinics, delays or costs resulting from a decrease in commercial development due to capital constraints, difficulties resulting from commercial, residential and infrastructure development (or lack thereof) near our de novo clinics, difficulties in staffing and operating new locations or lack of acceptance in new market areas may negatively impact our de novo clinic growth and the costs or the profitability associated with de novo clinics. Further, additional federal or state legislative or regulatory restrictions or licensure requirements could negatively impact our ability to operate both existing and de novo clinics.

              The inability to develop de novo clinics with new or existing partner nephrologists or nephrologist groups on reasonable terms or in a cost-effective manner would adversely affect our growth as well as our operating results and financial condition. There is no assurance that we will be able to continue to successfully expand our business through establishing de novo clinics, or that de novo clinics will be able to achieve profitability that is consistent with our past results or otherwise perform as planned. Failure to successfully implement any of our growth strategies, including developing de novo clinics, would likely have a material adverse impact on our operating results and financial condition.

Our growth strategy depends in part on our ability to attract new physician partners on terms favorable to us. If we are unable to do so, our future growth could be limited.

              We believe that an important component of our financial performance and growth is our partnership with physicians that purchase ownership interests in our joint venture clinics. Our ability to partner with physicians may be inhibited in markets where a large portion of nephrologists are subject to covenants not to compete with our competitors. Based on competitive factors and market conditions,

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physicians may seek to negotiate relatively higher levels of equity ownership in our clinics, consequently limiting or reducing our share of the profits from these clinics. In addition, physician ownership in our clinics is subject to significant regulatory restrictions. See "—Our arrangements and relationships with our physician partners and medical directors do not satisfy all of the elements of safe harbors to the federal anti-kickback statute and certain state anti-kickback laws and, as a result, may subject us to government scrutiny or civil or criminal monetary penalties or require us to restructure such arrangements."

De novo clinics, once opened, may not be profitable initially or at all, and the comparable de novo revenue that we have experienced in the past may not be indicative of future results.

              Our results have been, and in the future may continue to be, significantly impacted by a number of factors, including factors outside of our control related to the opening of de novo clinics, such as the timing of de novo clinic openings, associated de novo clinic preopening costs and operating inefficiencies. We typically incur the most significant portion of operating losses associated with a given de novo clinic within a relatively short amount of time preceding and following the opening of the de novo clinic. A de novo clinic builds its patient volumes over time and, as a result, generally has lower revenue than our existing clinics. Newly established dialysis clinics, although contributing to increased revenues, have adversely affected our results of operations in the short term due to a smaller patient base to absorb operating expenses. Any de novo clinics we open may not be profitable or achieve operating results similar to those of our existing de novo clinics. If our de novo clinics do not perform similar to de novo clinics we have opened in the past, then our business and future prospects could be harmed. In addition, if we are unable to achieve expected comparable de novo clinic revenues, our business, results of operations and financial condition could be adversely affected.

Our growth strategy depends in part on our ability to acquire existing dialysis clinics. If we are unable to successfully complete such acquisitions, our future growth could be limited.

              Our business strategy includes the selective acquisition of existing dialysis clinics. In general, acquiring an existing dialysis clinic is more costly than developing a de novo dialysis clinic, but has historically been a faster means for achieving profitability. If we are unable to successfully execute on this strategy in the future, our future growth could be limited. We may be unable to identify suitable acquisition opportunities or to complete acquisitions in a timely manner and on favorable terms. We may need to obtain additional capital or financing, from time to time, to fund these acquisitions. Sufficient capital or financing may not be available to us on satisfactory terms, if at all. In addition, our ability to acquire additional clinics may be limited by state certificate of need programs and other regulatory restrictions on expansion. Even if we are able to acquire additional clinics, there is no guarantee that we will be able to operate them successfully as stand-alone businesses, or that any such acquired clinic will operate profitably or will not otherwise adversely impact our results of operations. Further, we cannot be certain that key talented individuals at the acquired clinic will continue to work for us after the acquisition or that they will be able to continue to successfully manage any acquired clinic. We also face significant competition from local, regional and national dialysis operators and other owners of clinics in pursuing attractive acquisition candidates. See "—Our competitors have increasingly adopted a JV model and compete with us for establishing de novo clinics, acquiring existing dialysis clinics and engaging medical directors, which could materially adversely impact our growth prospects." The inability to acquire existing clinics on reasonable terms or in a cost-effective manner could adversely affect our growth as well as our operating results and financial condition.

Acquisitions may subject us to unknown liabilities, and we may not be indemnified for all of these liabilities.

              Businesses we acquire may have unknown or contingent liabilities or liabilities that are in excess of the amounts that we originally estimated. Although we generally seek indemnification from

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the sellers of businesses we acquire for matters that are not properly disclosed to us, we may not be successful in obtaining indemnification. In addition, even in cases where we are able to obtain indemnification, we may be subject to liabilities greater than the contractual limits of our indemnification or the financial resources of the indemnifying party. In the event that we are responsible for liabilities substantially in excess of any amounts recovered through rights to indemnification, we could suffer severe consequences that could adversely impact our operating results and financial condition.

Damage to our reputation or our brand in existing or new markets could negatively impact our business, financial condition and results of operations.

              We believe we have built our reputation on the high quality of our dialysis clinic services, physicians and operating personnel, as well as on our culture and the experience of our patients in our clinics, and we must protect and grow the value of our brand to continue to be successful in the future. Our brand may be diminished if we do not continue to make the day-to-day investments required for clinic operations, equipment upgrades and staff training. Any incident, real or perceived, regardless of merit or outcome, that erodes our brand, such as, but not limited to, adverse patient outcomes due to medical malpractice or allegations of medical malpractice, failure to comply with federal, state or local regulations including allegations or perceptions of non-compliance or failure to comply with ethical and operating standards, could significantly reduce the value of our brand, expose us to adverse publicity and damage our overall business and reputation. Further, our brand value could suffer and our business could be adversely affected if patients perceive a reduction in the quality of service or staff, or an adverse change in our culture or otherwise believe we have failed to deliver a consistently positive patient experience.

Infringement of our trademarks and other proprietary rights or a finding that our services infringe the proprietary rights of others could impair our competitive position, require us to change our business practices or subject us to significant costs and monetary penalties.

              Our ability to successfully grow our business depends in part on our ability to maintain brand recognition using our trademarks and logos. If our efforts to protect our trademarks are unsuccessful, and third parties are able to use the same or similar brand names in competitive business lines, the value of our business may be harmed. If we are found to infringe a third party's intellectual property rights, we could be liable for damages or be subject to an injunction that forces us to rebrand our services or replace certain technology or other intellectual property. If we are unable to protect our trademarks and other proprietary rights, or if we are found to infringe the proprietary rights of others, such events could have a material effect on our business, financial condition or results of operations.

Federal laws negatively impacting Medicare reimbursement to our dialysis facilities may have an adverse effect on our revenues.

              Subsequent to the establishment of the ESRD PPS, Congress enacted legislation that has resulted in reductions to Medicare program reimbursement rates for dialysis services. Under the American Taxpayer Relief Act of 2012 ("ATRA") and the Protecting Access to Medicare Act of 2014 ("PAMA"), the market basket inflation adjustment to the ESRD PPS bundled rate will be reduced by 1.25% for the 2016 and 2017 payment years and by 1% for the 2018 payment year. According to the Congressional Budget Office, these adjustments will result in a reduction in payments to dialysis providers of $1.8 billion over ten years, and, thus, could have a material adverse effect on the financial performance of our dialysis facilities. The ATRA and PAMA legislation may also affect the bundle of items and services for which we are reimbursed. For example, the inclusion of oral-only ESRD-related drugs in the bundled payment was delayed by ATRA until 2016, was further delayed by PAMA until at least 2024, and was finally delayed by the Stephen Beck, Jr. Achieving a Better Life Experience Act of

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2014 until January 1, 2025. CMS also adopted a regulation implementing this delay until January 1, 2025 in the Final Rule. The Final Rule also established a drug designation process for determining when a product is no longer an oral-only drug and for determining when new injectibles and intravenous products will be included in the ESRD bundled payment, which could adversely affect our results of operations, cash flows and revenues as a result of being required to provide these drugs without additional reimbursement.

              Federal budget sequestration cuts, including a 2% reduction to Medicare payments, have affected and will continue to affect our revenues, earnings and cash flows. On August 2, 2011, President Obama and the U.S. Congress enacted the Budget Control Act of 2011 to increase the federal government's borrowing authority (the "debt ceiling") and reduce the federal government's projected operating deficit, which resulted in sequestration. In addition, President Obama and members of the U.S. Congress proposed various spending cuts and tax reform initiatives, some of which could result in changes (including substantial reductions in funding) to Medicare, Medicaid or Medicare Advantage Plans. These measures have affected and will continue to affect our revenues, earnings and cash flows. Future federal legislation relating to the debt ceiling or deficit reduction may also have a negative impact on our financial performance.

              The Trade Preferences Extension Act of 2015 (the "TPE Act") was enacted on June 29, 2015 and allows outpatient dialysis facilities to receive Medicare reimbursement for renal dialysis services furnished to individuals with acute kidney injury ("AKI") on or after January 1, 2017. The TPE Act will allow our facilities to receive Medicare reimbursement for services furnished to individuals with acute kidney injuries, resulting in a new stream of revenue. However, there is no guarantee that Medicare will reimburse dialysis treatments for AKI at a level that will allow us to satisfy our related operating expenses or that we will otherwise generate revenue from the provision of AKI services in our facilities.

The ESRD Quality Incentive Program may adversely affect our results of operations, cash flows and revenues.

              The ESRD Quality Incentive Program, which was established by MIPPA and is administered by CMS, is designed to promote the provision of high-quality dialysis services in outpatient dialysis facilities. Under the ESRD QIP, a portion of the bundled per treatment payment that a dialysis facility receives from Medicare is tied to the facility's performance on certain quality of care measures. These measures include anemia management, dialysis adequacy, and other measures that CMS may specify from time to time, including iron management, bone mineral metabolism, vascular access and patient satisfaction. If a dialysis facility does not meet or exceed certain performance standards related to these measures during a performance year, the facility will be subject to a reduction in payments for all services performed during a subsequent payment year of up to 2%. CMS intends to modify the ESRD QIP over time, such that the quality measures selected, the performance scoring system and other factors that impact a dialysis facility's QIP performance will likely differ from year to year. The requirements for the ESRD QIP for payment years 2017, 2018 and 2019 are set forth in the Final Rule. The Final Rule modified the calculation for scoring facility performance on the Pain Assessment and Follow-Up reporting measure commencing in payment year 2018, replaced four clinical measures for payment year 2019 with a single comprehensive dialysis adequacy clinical measure, and revised the small facility adjuster, any of which could have an adverse impact on our ability to avoid or minimize payment reductions under the ESRD QIP. Under the ESRD QIP, our dialysis facilities may be subject to downward Medicare program payment adjustments that could adversely affect our results of operations, cash flows and revenues.

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The federal government publishes performance and quality data on dialysis facilities and recently added a star rating system. If our facilities receive low ratings or if the ratings and data published by CMS are inaccurate, our revenues could be materially and adversely affected by a loss of patients or lack of new patients.

              On January 22, 2015, CMS added a star rating system to the Dialysis Facility Compare ("DFC") website, a portal that publishes qualitative and quantitative information regarding clinical outcomes and the efficacy of dialysis at Medicare certified dialysis facilities. The star rating system ranks facilities on a scale of 1 to 5 stars based on DFC quality measures and utilizes a normal distribution. Due to differences in patient populations, DFC quality measures, and accordingly, star ratings, can vary significantly between dialysis facilities without reflecting actual differences in treatment quality. Although CMS has recently established the ESRD Star Rating Technical Experts Panel to review the methodology for producing the star ratings, there is no guarantee that star ratings will accurately reflect the quality of care provided at a dialysis facility. If our facilities receive low star ratings or if data published on the DFC website is inaccurate, it could adversely affect our ability to retain or attract new patients, and, accordingly, adversely affect our revenues.

Changes in VA, state Medicaid or other non-Medicare government programs or payment rates could adversely affect our operating results and financial condition.

              For the year ended December 31, 2015, we derived approximately 2% of our revenues from patients primarily insured through the Department of Veterans Affairs (the "VA"). In December of 2010, the VA adopted the reimbursement methodology of the Medicare bundled payment system, resulting in a reduction in payments for dialysis services at centers such as ours that have a dialysis contract with the VA. To the extent payments are further reduced or to the extent we lose VA patients as a result of VA policies, our operating results and financial condition could be adversely affected.

              For the year ended December 31, 2015, we derived approximately 1.1% of our revenues from patients who have Medicaid as their primary insurer. As state governments face increasing budgetary pressure, they may propose reductions in payment rates, delays in the timing of payments, limitations on eligibility or other changes to Medicaid programs. Some states have already taken steps to reduce or delay payments. In addition, some states' Medicaid eligibility requirements mandate that enrollees in Medicaid programs provide documented proof of citizenship. Our revenues, earnings and cash flows could be negatively affected to the extent that we are not paid by Medicaid or other state programs for services provided to patients who are unable to satisfy the eligibility requirements. If state governments reduce the rates paid by Medicaid programs for dialysis and related services, delay the timing of payment for services provided, further limit eligibility for Medicaid coverage or adopt changes to the Medicaid payment structure that reduce our overall payments from Medicaid, then our revenues, earnings, and cash flows could be adversely affected.

Changes in clinical practices, payment rates or regulations relating to erythropoietin-stimulating agents and other pharmaceuticals could adversely affect our operating results and financial condition as well as our ability to care for patients.

              The Medicare bundled payment system includes reimbursement for erythropoietin-stimulating agents ("ESAs") such that ESA dosing variations do not change the amount paid to a dialysis facility. Many commercial insurance programs have been moving towards a bundled payment system inclusive of ESAs, while some continue to pay for ESAs separately. Further increases in utilization of ESAs for patients for whom the cost of ESAs is included in a bundled reimbursement rate, further decreases in reimbursement for ESAs and other pharmaceuticals that are not included in a bundled reimbursement rate, or changes to administration policies could have a material adverse effect on our revenues, earnings and cash flows. In addition, reductions in the frequency with which ESAs are administered by our facilities should reduce their operating costs. On the other hand, Medicare in the future may

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reduce the national base rate to take into account these lower costs. Any such reduction could have a negative impact on our revenues, earnings and cash flows.

              We may be subject to inquiries or audits from a variety of governmental bodies or claims by third parties related to our medication administration and billing policies for ESAs and other pharmaceuticals. Inquiries or audits from governmental bodies or claims by third parties would require management's attention and could result in significant legal expense. Any negative findings could result in substantial financial penalties or repayment obligations, mandates to change our practices and procedures as well as the attendant financial burden on us to comply with the obligations, and exclusion from future participation in federal healthcare programs.

Changes in the availability and cost of ESAs and other pharmaceuticals could adversely affect our operating results and financial condition as well as our ability to care for patients.

              Amgen Inc. ("Amgen") is the sole supplier of ESAs to our clinics with its drugs branded as EPOGEN® ("EPO") and Aranesp® ("Aranesp"), and it may unilaterally decide to increase its prices for these drugs at any time. We do not have the ability to pass on any price increases to Medicare and Medicaid and may not have the ability to pass on price increases to commercial payors. We also may not have access to certain other alternatives to ESAs that may be more cost-effective. Furthermore, even if we do have access to other ESAs, we cannot assure you that these ESAs would be cost-effective for us or work as effectively as EPO or Aranesp. Changes in the availability and cost of EPO, Aranesp, other ESAs and other renal-related pharmaceuticals could have a material adverse effect on our earnings and cash flows and ultimately reduce our income.

If our suppliers are unable to meet our needs, if there are material price increases or if we are unable to effectively access new technology, our operating results and financial condition could be adversely affected.

              The available supply of ESAs from Amgen could be delayed or reduced, whether by Amgen itself, through unforeseen circumstances or as a result of excessive demand. If Amgen is unable to meet our needs for EPO or EPO alternatives, including in the event of a product recall, and we are not able to find adequate alternative sources, it could adversely affect our operating results and financial condition. In addition, Amgen may terminate for convenience with 30 days' notice the group purchasing organization agreement through which we are supplied ESAs.

              In addition, the technology related to EPO is subject to new developments that may result in superior products. If we are not able to access these superior products on a cost-effective basis or if suppliers are not able to fulfill our requirements for products, we could face patient attrition which could adversely affect our operating results and financial condition.

              We monitor our relationships with suppliers to better anticipate any potential shortages and reduce the likelihood of the loss of a supplier. We also have systems in place to mitigate shortages and price increases. However, if we experience shortages or material price increases that we are unable to mitigate, this could adversely affect our operating results and financial condition.

              Due to manufacturing issues experienced by a supplier as well as increased overall demand for sterile solutions, there is a current shortage of peritoneal dialysis solution affecting dialysis providers and patients throughout the United States. We are subject to supply restrictions imposed by this supplier which have the effect of limiting the number of patients who may elect to receive peritoneal dialysis through our facilities each month. Although our supplier has indicated that these supply restrictions may be lifted in early 2016, there can be no guarantee that these restrictions will be lifted at that time or at a future date. The ongoing imposition of restrictions on the supply of peritoneal dialysis solution could have a negative impact on our revenues, earnings and cash flows.

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The development of new technologies could adversely affect our revenues, earnings and cash flows.

              The development of new kidney transplant technologies could decrease the need for dialysis services. Similarly, the development of new home dialysis technologies could decrease our in-center patient population and require us to refocus on providing home dialysis services. If new technologies are developed that require changes to our business structure or that otherwise decrease our in-center patient population, it could adversely affect our revenues, earnings, and cash flows.

There are significant risks associated with estimating the amount of revenues that we recognize that could impact the timing of our recognition of revenues or have a significant impact on our operating results and financial condition.

              There are significant risks associated with estimating the amount of revenues that we recognize in a reporting period. Ongoing insurance coverage changes, geographic coverage differences, differing interpretations of contract coverage, and other payor issues complicate the billing and collection process. In addition, laws and regulations governing the Medicare and Medicaid programs are extremely complex and subject to interpretation. Determining applicable primary and secondary coverage for an extensive number of patients at any point in time, together with the changes in patient coverage that occur each month, requires complex, resource-intensive processes. Errors in determining the correct coordination of benefits may result in refunds to payors. Revenues associated with federal health insurance programs are also subject to risk related to estimating amounts not paid by the primary government payor that will ultimately be collectible from a secondary payor or the patient. Collections, refunds and payor retractions typically continue to occur for up to three years or longer after services are provided. If our estimates of revenues are materially inaccurate, it could impact the timing and amount of our recognition of revenues and have a significant impact on our operating results and financial condition.

If we do not timely or accurately bill for our services, our revenues, bad debt expense and cash flows may be adversely affected.

              We are subject to a number of complex billing requirements. The process of providing medical care prior to receiving payment or determining a patient's ability to pay carries risks which may adversely affect our revenues, bad debt expense and cash flows. Payor billing requirements may differ by the type of payor as well as by the individual payor contract. Reimbursement for services we provide may be conditioned upon, amongst other requirements, properly coding and documenting services. Further, payors may fail to pay or refuse to pay for services even when properly billed. Additional factors that may influence our ability to receive reimbursement include, but are not limited to:

              If we are unable to meet payor billing requirements, reimbursement may be denied or delayed, which could adversely affect our revenues, bad debt expense and cash flows.

Federal or state healthcare reform laws could adversely affect our operating results and financial condition.

              In March 2010, President Obama signed into law the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act, commonly and jointly referred to as the Affordable Care Act (the "ACA"). The ACA, among other things, increased the number of individuals with private insurance coverage and Medicaid, implemented reimbursement policies that tie payment to

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quality, facilitated the creation of accountable care organizations that may use capitation and other alternative payment methodologies, strengthened enforcement of fraud and abuse laws and encouraged the use of information technology. Some of these changes require implementing regulations which have not yet been drafted or have been released only as proposed rules.

              While the ACA was intended to increase the number of insured persons by expanding eligibility for public programs or assistance and compelling individuals and employers to purchase health coverage, the ACA may increase pricing pressure on existing commercial payors by seeking to reform the underwriting and marketing practices of health plans. As a result, some commercial payors have sought and may continue to seek to lower their rates of reimbursement for the services we provide.

              In addition, the ACA introduced healthcare insurance exchanges, which provide a marketplace for eligible individuals and small employers to purchase healthcare insurance. Although we cannot predict the short or long term effects of these measures, we believe the healthcare insurance exchanges could result in a reduction in the number of patients covered by traditional commercial insurance policies and an increase in the number of patients covered through the exchanges under more restrictive plans with lower reimbursement rates. To the extent that the implementation of such exchanges results in a reduction in patients covered by traditional commercial insurance or a reduction in reimbursement rates for our services from commercial or government payors, our revenues, earnings and cash flows could be adversely affected.

              We expect that additional federal and state healthcare reform measures will be adopted in the future and cannot predict how employers, private payors or persons buying insurance might react to these changes. Full implementation of the ACA or any future healthcare reform legislation may increase our costs, limit the amounts that federal and state governments and other third-party payors will pay for healthcare products and services, expose us to expanded liability or require us to revise the ways in which we conduct our business, any of which could materially adversely affect our business, results of operations and financial condition.

If we fail to adhere to all of the complex federal, state and local government regulations that apply to our business, we could suffer severe consequences that could adversely affect our operating results and financial condition.

              Our dialysis operations are subject to extensive federal, state and local government regulations, all of which are subject to change. These government regulations currently relate, among other things, to:

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              Because of the breadth of these laws and the strict requirements of the statutory exceptions and safe harbors available, it is possible that some of our business activities could be subject to challenge under one or more of such laws. Achieving and sustaining compliance with these laws may prove costly. Failure to comply with these laws and other laws can result in civil and criminal penalties such as fines, damages, overpayment recoupment, loss of enrollment status and exclusion from federal healthcare programs. As many of these laws and regulations have not been fully interpreted by the regulatory authorities or the courts, and their provisions are sometimes open to a variety of interpretations, there is an increased risk that we may be found to have violated them. Our failure to accurately anticipate the application of these laws and regulations to our business or any other failure to comply with regulatory requirements could create liability for us and negatively affect our business. Any action against us for violation of these laws or regulations, even if we successfully defend against it, could cause us to incur significant legal expenses, divert our management's attention from the operation of our business and result in adverse publicity.

              In addition, the laws, regulations and standards governing the provision of healthcare services may change significantly in the future. We cannot assure you that any new or changed healthcare laws, regulations or standards will not materially adversely affect our business.

              We cannot assure you that a review of our business by judicial, law enforcement, regulatory or accreditation authorities under existing or new healthcare laws will not result in a determination that could materially adversely affect our operations. If such a determination is made, we could suffer severe consequences that would have a material adverse effect on our revenues, earnings cash flows and financial condition including:

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Heightened federal and state investigation and enforcement efforts could subject us to increased costs of compliance and material adverse consequences.

              Both federal and state government agencies, as well as commercial payors, have heightened and coordinated audits and administrative, civil and criminal enforcement efforts as part of numerous ongoing investigations of healthcare organizations. These investigations relate to a wide variety of topics, including cost reporting and billing practices, quality of care, financial reporting, financial relationships with referral sources, and medical necessity of services provided.

              To enforce compliance with the federal laws, the U.S. Department of Justice and the Department of Health and Human Services Office of Inspector General ("OIG") have increased their scrutiny of healthcare providers, which has led to a number of investigations, prosecutions, convictions and settlements in the healthcare industry. Dealing with investigations can be time- and resource-consuming and can divert management's attention from the business. Any such investigation or settlement could increase our costs or otherwise have an adverse effect on our business. In addition, because of the potential for large monetary exposure under the federal False Claims Act, which provides for treble damages and mandatory minimum penalties of $5,500 to $11,000 per false claim or statement, healthcare providers often resolve allegations without admissions of liability for significant and material amounts to avoid the uncertainty of treble damages that may be awarded in litigation proceedings, including qui tam or whistleblower suits brought by private individuals on behalf of the government. Such settlements often contain additional compliance and reporting requirements as part of a consent decree, settlement agreement or corporate integrity agreement. Given the significant size of actual and potential settlements, it is expected that the government will continue to devote substantial resources to investigating healthcare providers' compliance with the healthcare reimbursement rules and fraud and abuse laws.

              State governments have also increased enforcement efforts against healthcare providers in connection with anti-fraud, physician self-referral and other laws. We may be especially susceptible to enforcement risks in states where we have large concentrations of business and in states in which we establish new JVs but in which we may be unfamiliar with the regulatory requirements. To the extent that we become the subject of such enforcement activities, in addition to any adverse legal consequences, such enforcement could cause us to incur significant legal expenses, divert our management's attention from the operation of our business and result in adverse publicity.

              In particular, the dialysis services industry has been subject to scrutiny by the federal government, and some of our competitors have been or are currently under investigation. In the last year, one of our competitors paid the federal government a substantial amount to settle allegations of illegal kickbacks under the False Claims Act and was required to enter into a corporate integrity

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agreement with the OIG, under which an independent monitor was appointed to review and supervise certain aspects of its business. Certain proceedings against companies in our industry may be filed under seal, such as a whistleblower action under the federal False Claims Act. Although we cannot predict whether or when proceedings might be initiated or when these matters may be resolved, it is not unusual for these investigations to continue for a considerable period of time. Responding to these investigations can require substantial management attention and significant legal expense, which could materially adversely affect our operations. Further, in many cases the mere existence or announcement of any such inquiry could have a material adverse effect on our business. If we become the subject of an investigation, it could cause us to incur significant legal expenses, divert our management's attention from the operation of our business or result in adverse publicity. Any negative findings could result in substantial financial penalties against us, exclusion from future participation in the Medicare, Medicaid and other federal healthcare programs, and, in some cases, criminal penalties, any of which could have a material adverse effect on our business, financial condition and results of operations.

Our arrangements and relationships with our physician partners and medical directors do not satisfy all of the elements of safe harbors to the federal anti-kickback statute and certain state anti-kickback laws and, as a result, may subject us to government scrutiny or civil or criminal monetary penalties or require us to restructure such arrangements.

              We endeavor to structure our JV arrangements and medical director agreements, including agreements with our chief medical officers, to comply with applicable laws and government regulations and applicable safe harbors. Our business model is focused on JVs with nephrologist partners, and we endeavor to structure these JVs in compliance with the federal anti-kickback statute, the Stark Law, and analogous state anti-kickback and self-referral laws, including the exceptions applicable to Medicare ESRD services. In addition, our chief medical officers have been granted stock options in ARA and a number of our physician partners own shares of ARA as a result of common stock offerings that we have made. Substantially all of our JVs with physicians or physician groups also involve the provision of medical director services by our nephrologist partners to those clinics. Under Medicare regulations, each of our dialysis clinics is required to have an active medical director who is responsible for decision-making in analyzing core processes and patient outcomes and in stimulating a team approach to continuous quality improvement and patient safety. For these services, we retain a physician on an independent contractor basis at an annual fixed fee to serve as the medical director.

              We believe that our relationships with our physician partners, which include our medical directors, meet many but not all of the elements of the safe harbors to the federal anti-kickback statute and may not meet all of the elements of analogous state safe harbors. Arrangements that do not meet all of the elements of a safe harbor do not necessarily violate the federal anti-kickback statute, but are susceptible to government scrutiny. The OIG has issued guidance expressing concerns about joint ventures with referring physicians and the Department of Justice has pursued actions relating to joint venture arrangements between physicians and other healthcare providers. Accordingly, there is some risk that the OIG, the Department of Justice or another government agency might investigate our JV arrangements and medical director contracts. In addition, if the government were to interpret the physician self-referral laws such that they viewed our operations to be in violation of such laws, it could have a material adverse effect on our business, prospects, results of operations and financial condition.

              If our arrangements with our physician partners and medical directors were investigated and determined to violate the federal anti-kickback statute, Stark Law, or analogous state laws, we could be required to restructure these relationships and there can be no assurances that we could successfully restructure those relationships. We could become subject to a corporate integrity agreement, which requires costly external monitors and could require changes to our operations. We could also be subjected to civil and criminal penalties and severe monetary consequences that could adversely affect our operating results and financial condition, including, but not limited to, the repayment of amounts received from Medicare by the offending clinics and the payment of penalties and possible exclusion

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from federal healthcare programs. Additionally, new federal or state laws could be enacted that would construe our relationships with our physician partners as violating applicable law or result in the imposition of penalties against us or our facilities. If any of our business arrangements with physician partners were alleged or deemed to violate the federal anti-kickback statute or similar laws, or if new federal or state laws or regulations were enacted rendering these arrangements illegal, it could have a material adverse effect on our business, prospects, results of operations and financial condition.

If our arrangements are found to violate the Stark Law, it may subject us to government scrutiny or monetary penalties or require us to restructure such arrangements.

              As the Stark Law prohibits physician self-referral for certain designated health services ("DHS") and is a strict liability statute, we may be subject to liability due to the referral practices of our physician partners. None of the Stark Law exceptions applicable to physician ownership interests in entities to which they make referrals for DHS apply to the kinds of ownership arrangements that our physician partners hold in our JVs. If a center bills for DHS referred by our physician partners, the claims would not be payable and the dialysis center could be subject to the Stark Law penalties described below. See "Business—Government Regulation—Stark Law."

              If CMS determined that we have submitted claims in violation of the Stark Law, the claims would not be payable and we could be subject to the penalties described below. In addition, it might be necessary to restructure existing compensation agreements with our medical directors and to repurchase or to request the sale of ownership interests in our JVs held by our physician partners or, alternatively, to refuse to accept referrals for DHS from these physicians. Any such penalties and restructuring could have a material adverse effect on our business, prospects, results of operations and financial condition.

If our arrangements are found to violate state laws prohibiting the corporate practice of medicine or fee-splitting, we may not be able to operate in those states.

              The laws and regulations relating to our operations vary from state to state, and many states prohibit general business corporations, as we are, from practicing medicine, controlling physicians' medical decisions or engaging in some practices such as splitting professional fees with physicians. In some states, these prohibitions are expressly stated in a statute or regulation, while in other states the prohibition is a matter of judicial or regulatory interpretation. Possible sanctions for violation of these restrictions include loss of license and civil and criminal penalties. In addition, agreements between the corporation and the physician may be considered void and unenforceable. We have endeavored to structure our activities and operations to avoid conflict with state law restrictions on the corporate practice of medicine, and we have endeavored to structure all of our corporate and operational agreements to conform to any licensure requirements, fee-splitting and related corporate practice of medicine prohibitions. However, other parties may assert that we are engaged in the corporate practice of medicine or unlawful fee-splitting despite the way we are structured. Were such allegations to be asserted successfully before the appropriate judicial or administrative forums, we could be subject to adverse judicial or administrative penalties, certain contracts could be determined to be unenforceable and we may be required to restructure our contractual arrangements. We may not be able to operate in certain states, which would adversely impact our business, financial condition and results of operations.

We are subject to CMS certification, claims processing requirements and audits, and any adverse findings in a CMS review could adversely affect our operating results and financial condition.

              The Medicare and Medicaid reimbursement rules related to claims submission, clinic and professional licensing requirements, cost reporting and payment processes impose complex and extensive requirements upon dialysis providers. A violation or departure from these requirements may result in government audits, lower reimbursements, overpayments, recoupments or voluntary repayments, and the potential loss of certification to participate in the Medicare and Medicaid

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program. CMS has increased the frequency and intensity of its certification inspections of dialysis clinics.

              We are also subject to prepayment and post-payment reviews. CMS relies on a network of multi-state, regional contractors to process Medicare claims and audit healthcare providers. In addition, CMS has established a network of privately contracted auditors, called Recovery Audit Contractors ("RACs"), which conduct post-payment reviews to identify improper payments made by Medicare to providers. RACs are paid on a contingency basis for all overpayments identified and recovered. CMS also has a network of Zone Program Integrity Contractors, which investigate instances of suspected fraud, waste and abuse, and may refer cases to CMS for administrative action or to law enforcement for civil or criminal prosecution. If such claims are pursued by CMS or law enforcement, the penalties may be severe and may include, but not be limited to, substantial fines and exclusion from government healthcare programs.

              The ACA established a requirement for providers and suppliers to report and return any overpayments received from government payors under the Medicare and Medicaid programs within sixty (60) days of identification. Failure to identify and return such overpayments exposes the provider or supplier to False Claims Act liability. As set forth in the final rule issued by CMS on February 12, 2016, providers and suppliers have a duty to exercise reasonable diligence to determine whether a Medicare overpayment exists. If we fail to identify, process and refund overpayments to the government in a timely manner, or if any audit, enforcement action or payment review reveals any failure to report and return an identified overpayment or a suspected instance of fraud, waste or abuse, we could be subject to substantial costs and penalties, which could adversely affect our operating results and financial condition.

Delays in Medicare and state Medicaid certification of our dialysis clinics could adversely affect our operating results and financial condition.

              We are required to obtain federal and state certification for participation in the Medicare and Medicaid programs before we can begin billing for patients treated in our clinics who are enrolled in government-based programs. Due to budgetary pressures and staffing limitations, significant delays in obtaining initial certification have occurred in some states and additional delays may occur in the future. Failures or delays in obtaining certification could cause significant delays in our ability to bill for services provided to patients covered under government programs, cause us to incur write-offs of investments or accelerate the recognition of lease obligations in the event we have to close clinics or our clinics' operating performance deteriorates. This could have an adverse effect on our growth and operating results.

We may be required, as a result of this offering or future changes in our ownership structure, to comply with notification and reapplication requirements in order to maintain our licenses, permits, certifications or other authorizations to operate, and failure to do so, or an allegation that we have failed to do so, could result in payment delays, forfeitures of payments or civil and criminal penalties.

              We are subject to various federal, state and local licensing and certification laws with which we must comply in order to maintain authorization to provide, or receive payment for, our services. Compliance with such requirements is complicated by the fact that such requirements differ from jurisdiction to jurisdiction, and in some cases are not uniformly applied or interpreted even within the same jurisdiction. Failure to comply with these requirements can lead to delays in payment and refund requests as well as civil or criminal penalties.

              In certain jurisdictions, changes in our ownership structure, including changes in beneficial ownership of our company, require pre-transaction or post-transaction notification to state governmental licensing and certification agencies. Relevant laws in some jurisdictions may also require reapplication or reenrollment and approval to maintain or renew our licensure, certification, contracts

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or other operating authority. The extent of such notices and filings may vary in each jurisdiction in which we operate.

              While we intend to comply with any notification, reenrollment or reapplication requirements that may result from this offering or future changes in our ownership structure, we cannot assure you that the agencies that administer these programs will not find that we have failed to comply in some manner. A finding of non-compliance and any resulting payment delays, refund demands or other sanctions could have a material adverse effect on our business, financial condition or results of operations.

Because our senior management has been key to our growth and success, we may be materially adversely affected if we lose any member of our senior management.

              We are highly dependent on our senior management. Although we have employment agreements with our chairman and chief executive officer, president, chief operating officer, chief financial officer and general counsel, we do not maintain "key man" life insurance policies on any of our officers. Because our senior management has contributed greatly to our growth since inception, the loss of key management personnel or our inability to attract, retain and motivate sufficient members of qualified management or other personnel could have a material adverse effect on us.

If patients no longer choose to use our dialysis clinics, or if a significant number of physicians or hospitals were to cease recommending our dialysis clinics to patients, our revenues would decrease.

              Our dialysis services business is dependent upon patients choosing our clinics as the location for their treatments. Patients may select a clinic based, in part, on the recommendation of their physician. We believe that physicians and other clinicians typically consider a number of factors when recommending a particular dialysis facility to an ESRD patient, including, but not limited to, the quality of care at a clinic, the competency of a clinic's staff, convenient scheduling and a clinic's location and physical condition. Physicians may change their facility recommendations at any time, which may result in the transfer of our existing patients to competing clinics, including clinics established by the physicians themselves. Our dialysis care business also depends on recommendations by hospitals, managed care plans, other payors and other healthcare institutions. If a significant number of providers cease recommending their patients to our clinics, this would reduce our dialysis care revenue and could materially adversely affect our overall operations.

We depend on our relationships with our medical directors. Our ability to provide medical services at our facilities would be impaired and our revenues reduced if we were not able to maintain these relationships.

              Our ability to attract physicians to become medical directors at our clinics is essential to the growth of our business. Our business depends, in part, on the strength of our relationships with these physicians. Our revenues would be reduced if we lost relationships with key medical directors or groups of medical directors. If we were not able to attract or maintain these relationships, our ability to provide medical services at our facilities would be impaired. Our business also depends on the efforts and success of the physicians who are medical directors at our clinics. The efforts of these medical directors directly correlate to the patient satisfaction and operating metrics of our clinics. Any failure of these medical directors to maintain the quality of medical care provided or to otherwise adhere to professional guidelines at our clinics or any damage to the reputation of a key medical director or group of medical directors could damage our reputation, subject us to liability and significantly reduce our revenues.

              The Medicare conditions for coverage for ESRD facilities require that our medical directors be board-certified in internal medicine or pediatrics by a professional board and complete a board-approved training program in nephrology. Where a physician is not available with these qualifications, we seek a waiver of this requirement for our medical director from CMS. For certain of our facilities,

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physicians with these qualifications are not available, and we have obtained waivers from CMS for the medical directors of these facilities. If we are unable to attract physicians with these qualifications to become our medical directors or are unable to obtain waivers of this requirement for our medical directors, it could result in the closure of facilities and have a material adverse effect on our business, prospects, results of operations and financial condition.

              In addition, we may take actions to restructure existing relationships or take positions in negotiating extensions of relationships to assure compliance with the anti-kickback statute, Stark Law and other similar laws. These actions could negatively impact the decision of physicians to extend their medical director agreements with us. If the terms of any existing agreement are found to violate applicable laws, we may not be successful in restructuring the relationship, which could lead to the early termination of the agreement. If a significant number of our physician partners were to cease using our dialysis clinics, our revenues, earnings and cash flows would be substantially reduced.

If we cannot renew our medical director agreements or enforce the noncompetition provisions of our medical director agreements, whether due to regulatory or other reasons, our operating results and financial condition could be materially and adversely affected.

              Our medical director contracts are typically for fixed initial ten-year periods with automatic renewal options. Medical directors have no obligation to extend their agreements with us. We may take actions to restructure existing relationships or take positions in negotiating extensions of relationships in an effort to meet the safe harbor provisions of the anti-kickback statute, Stark Law and other similar laws. These actions could negatively impact the decision of physicians to extend their medical director agreements with us. If the terms of any existing agreement are found to violate applicable laws, we may not be successful in restructuring the relationship which could lead to the early termination of the agreement. If a medical director agreement terminates, whether before or at the end of its term, we may be unable to find a replacement medical director with comparable qualifications, and the business, results of operations, financial condition and quality of medical services of the facility may be adversely affected.

              Our medical director agreements generally provide for noncompetition restrictions prohibiting the medical directors from owning an interest in or serving as a medical director of a competing facility within specified geographical areas for specified periods of time. If we are unable to enforce the noncompetition provisions contained in our medical director agreements, it is possible that these medical directors may choose to provide medical director services for competing providers or establish their own dialysis clinics in competition with ours. Our inability to enforce noncompetition provisions and related patient attrition could materially and adversely affect our operating results and financial condition.

Our business is subject to substantial competition and could be adversely affected if we are unable to compete effectively in the dialysis services industry.

              The dialysis services industry is highly competitive. Because of the lack of barriers to entry into the dialysis services business and the ability of nephrologists to be medical directors for their own clinics, competition for growth in existing and expanding markets is not limited to large competitors with substantial financial resources. According to CMS data, there were more than 6,490 dialysis clinics in the United States as of December 31, 2015. We face competition from large and medium-sized providers for patients and for the acquisition of existing dialysis clinics. We face particularly intense competition for the identification of nephrologists, whether as attending physicians, medical directors or physician partners. In many instances, our competitors have taken steps to include comprehensive non-competition provisions within various agreements, thereby limiting the ability of physicians to serve as medical directors or potential joint venture partners for competing dialysis clinics. These non-competition provisions often contain both time and geographic limitations during the term of the

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agreement and for a period of years thereafter. Such non-competition provisions may limit our ability to compete effectively for nephrologists.

              In addition, the dialysis services industry has undergone rapid consolidation. As of the end of 2013, according to the USRDS 2015 Annual Data Report, Fresenius Medical Care and DaVita Healthcare Partners Inc. accounted for 64.1% of dialysis treatments and 68.3% of dialysis patients in the United States. The largest not-for-profit provider of dialysis services, Dialysis Clinic, Inc., accounted for 3.3% of dialysis treatments and 3.1% of dialysis patients in the United States. Hospital-based providers accounted for 9.5% of dialysis treatments and 4.3% of dialysis patients in the United States, while independent providers and small- and medium-sized dialysis organizations, including our company, collectively accounted for the remainder. Since the time of the data reported in the USRDS 2015 Annual Data Report, consolidation has increased due to recent acquisitions, intensifying competition in the dialysis services industry. If we are unable to compete effectively in the dialysis services industry, our business, prospects, results of operations and financial condition could be materially and adversely affected.

Our competitors have increasingly adopted a JV model and compete with us for establishing de novo clinics, acquiring existing dialysis clinics and engaging medical directors, which could materially adversely impact our growth prospects.

              The development, acquisition and operation of dialysis clinics is highly competitive. Our competition comes from other dialysis clinics, many of which are owned by much larger public companies, small to mid-sized private companies, acute care hospitals, nursing homes and physician groups. The dialysis services industry is rapidly consolidating, resulting in several large dialysis services companies competing with us for the acquisition of existing dialysis clinics and the development of relationships with nephrologists to serve as medical directors for new clinics. Over the past few years, several dialysis companies, including some of our largest competitors, have adopted a JV model of dialysis clinic ownership resulting in increased competition in the development, acquisition and operation of JV dialysis clinics. Competition to develop clinics using a JV model could materially adversely affect our growth as well as our operating results and financial condition. Some of our competitors have significantly greater financial resources, more dialysis clinics, a significantly larger patient base, and are vertically integrated, and, accordingly may be able to achieve better economies of scale by asserting leverage against their suppliers, payors and other commercial parties. In addition, because of the ease of entry into the dialysis business and the ability of physicians to serve as medical directors for their own centers, competition for growth in existing and expanding markets is not limited to large competitors with substantial financial resources. We may experience competition from former medical directors or attending physicians who open their own dialysis centers. If we face a reduction in the number of our medical directors or physician partners, it could adversely affect our business.

Deteriorations in economic conditions, particularly in states where we operate a large number of clinics, as well as disruptions in the financial markets could adversely impact our operating results and financial condition.

              Deteriorations in economic conditions could adversely affect our operating results and financial condition. Among other things, the potential decline in federal and state revenues that may result from these conditions may create additional pressures to contain or reduce reimbursements for our services from Medicare, Medicaid and other government sponsored programs. Our business may be particularly sensitive to economic conditions in certain states in which we operate a large number of clinics, such as Florida (39 clinics), Texas (19 clinics), Georgia (18 clinics), Ohio (16 clinics), Rhode Island (9 clinics) or others. Slow improvement in the unemployment rates in the United States as a result of adverse economic conditions has and may continue to result in a smaller percentage of patients being covered by commercial payors and a larger percentage being covered by lower-paying Medicare and Medicaid programs. Employers may also select more restrictive commercial plans with lower reimbursement

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rates. To the extent that payors are adversely affected by a decline in the economy, we may experience further pressure on commercial rates, delays in fee collections and a reduction in the amounts we are able to collect. Any or all of these factors, as well as other consequences of the deterioration in economic conditions which currently cannot be anticipated, could adversely impact our operating results and financial condition.

If we fail to comply with current or future laws or regulations governing the collection, processing, storage, access, use, security and privacy of personally identifiable, protected health or other sensitive or confidential information, our business, reputation and profitability could suffer.

              The privacy and security of personally identifiable, protected health and other sensitive or confidential information that is collected, stored, maintained, received or transmitted in any form or media is a major issue in the healthcare industry. Along with our own confidential data and information, we collect, process, use and store a large amount of such hard-copy and electronic data and information from our patients and employees. We must comply with numerous federal and state laws and regulations governing the collection, processing, sharing, access, use, security and privacy of personally identifiable information, including protected health information ("PHI"). Such laws and regulations include but are not limited to the Health Insurance Portability and Accountability Act of 1996 and its implementing regulations and the Health Information Technology for Economic and Clinical Health Act of 2009 and its implementing regulations (collectively, "HIPAA"), and state data breach disclosure laws. If we fail to comply with applicable privacy and security laws, regulations and standards, properly protect the integrity and security of our facilities and systems and the data located within them, protect our proprietary rights to our systems, or defend against cybersecurity attacks, or if our third-party service providers fail to do any of the foregoing with respect to data and information accessed, used or collected on our behalf, our business, reputation, results of operations and cash flows could be materially and adversely affected.

              Privacy laws, including those that specifically cover PHI, are changing rapidly and subject to differing interpretations. New laws, regulations and standards relating to privacy and security, whether implemented pursuant to HIPAA or otherwise, could have a significant effect on the manner in which we must handle healthcare-related data, and the cost of monitoring and complying with such laws, regulations and standards could be significant. We cannot provide assurances with regard to how governmental regulation and other legal obligations related to privacy and security will be interpreted, enforced or applied to our operations. If we do not properly comply with existing or new laws and regulations related to PHI, we could be subject to threatened or actual civil or criminal proceedings, investigations, actions, monetary fines, civil penalties or sanctions by government entities, consumer advocacy groups, private individuals or others.

              Information security risks have significantly increased in recent years in part because of the proliferation of new technologies, the use of the internet and telecommunications technologies to conduct our operations and the increased sophistication and activities of organized crime, hackers, terrorists and other external parties, including foreign state agents. Our operations rely on the secure processing, transmission and storage of confidential, proprietary and other information in our computer systems and networks, as well as those of our third-party service providers.

              We address our information and data security needs by relying on applicable members of our staff and third parties, including auditors and third-party service providers. We have implemented administrative, physical and technical safeguards to ensure the security of personally identifiable, protected health and other sensitive or confidential information that we collect, process, store, access or use, and we take commercially reasonable actions to ensure that our third-party service providers are taking appropriate security measures to protect the data and information they access, use or collect on our behalf. However, there is no guarantee that these measures can provide absolute security. Despite these efforts, our facilities and systems and those of our third-party service providers, as well as the

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data that they hold, may be vulnerable to security attacks and breaches caused by acts of vandalism, fraud or theft, computer viruses, criminal activity, coordinated attacks by activist entities, programming and/or human errors or other similar events. Because the techniques used to obtain unauthorized access, disable services or sabotage systems change frequently, may originate from less regulated and remote areas around the world and generally are not recognized until launched against us, we may be unable to proactively address these techniques or to implement adequate preventative measures. Emerging and advanced security threats, including coordinated attacks, require additional layers of security which may disrupt or impact efficiency of operations.

              Any security breach involving the misappropriation, loss, corruption or other unauthorized disclosure or use of personally identifiable, PHI or other sensitive or confidential information, including financial data, competitively sensitive information or other proprietary data, whether suffered by us or one of our third-party service providers, could have a material adverse effect on our business, reputation, financial condition, cash flows or results of operations. The occurrence of any of the foregoing events to us or a third-party service provider could result in business interruptions and delays, cessations in the availability of systems and our ability to provide services, potential liability and regulatory action, harm or loss to our reputation and relationships with our patients and vendors, investigations, monetary fines, civil or criminal suits, civil penalties or criminal sanctions, as well as significant costs, including as they relate to legal requirements to disclose the breach publicly, repairing any system damage, incentives offered to patients or others to maintain business relationships after a breach, and the implementation of measures to prevent future breaches. Any of the foregoing may result in a material adverse effect on our results of operations, financial position, and cash flows or our business reputation. In addition, concerns about our practices with regard to the collection, use, disclosure or security of personally identifiable and other sensitive or confidential information, even if unfounded and even if we are in compliance with applicable laws, could damage our reputation and harm our business.

Complications associated with implementing an electronic medical records system could have a material adverse effect on our revenues, cash flows and operating results.

              We are currently evaluating electronic medical record ("EMR") systems for implementation at our facilities. The cost of implementing an EMR system at our facilities may be significant, and the system's launch may be unsuccessful or may result in inefficiencies. Defects or design issues with the EMR may increase costs and subject us to additional regulatory risks. For example, problems with system implementation and operation may increase the likelihood of or cause noncompliance with federal and state security and privacy laws such as HIPAA and with requirements imposed by third-party payors. If such issues were to arise, they could materially adversely affect our revenues, cash flows and operating results.

We may be subject to liability claims for malpractice, professional liability and other matters which could harm our reputation or result in damages and other expenses not covered by insurance that could adversely impact us.

              The administration of dialysis services to patients subjects us to litigation and liability for damages based on an allegation of malpractice, professional negligence in the performance of our treatment and related services, the acts or omissions of our employees, or other matters. Our exposure to this litigation and liability for damages increases with growth in the number of our clinics and treatments performed. Potential judgments, settlements or costs relating to potential future claims, complaints or lawsuits could result in substantial damages and could subject us to the incurrence of significant fees and costs. In addition, our business, reputation profitability and growth prospects could suffer if we face negative publicity in connection with such claims, including claims related to adverse patient events, contractual disputes, professional and general liability and directors' and officers' duties. We maintain liability insurance in amounts that we believe are appropriate for our operations, including

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professional and general liability insurance. Our insurance coverage may not cover all claims against us, and insurance coverage may not continue to be available at a cost satisfactory to us to allow for the maintenance of adequate levels of insurance. If we incur damages or defense costs in connection with a claim that is outside the scope of any applicable insurance coverage or if one or more successful claims against us exceeded the coverage limit of our insurance, it could have a material adverse effect on our business, prospects, results of operations and financial condition.

Our insurance costs have been increasing substantially over the last several years, and our coverage may not be sufficient to cover claims and losses.

              We maintain a program of insurance coverage against a broad range of risks in our business, including professional liability insurance, which is subject to deductibles. The premiums and deductibles under our insurance program have been increasing over the last several years as a result of general business rate increases. We are unable to predict further increases in premiums and deductibles, but based on recent experience, expect further increases in premiums and deductibles, which could adversely impact our earnings. The liability exposure of operations in the healthcare services industry has increased, resulting not only in increased premiums, but in limitations on the liability covered by insurance carriers. We may not be able to obtain necessary or sufficient insurance coverage for our operations upon expiration of our insurance policies, or obtain any insurance on acceptable terms, if at all, which could materially and adversely affect our business, financial condition and results of operations. In addition, we could be materially and adversely affected by the collapse or insolvency of our insurance carriers.

Material decisions regarding our dialysis clinics may require the consent of our joint venture partners, and we may not be able to resolve disputes.

              Our joint venture partners, who may be single practitioners, an affiliated group of nephrologists, hospitals or multi-practice institutions, participate in material strategic and operating decisions we make for our clinics. For example, we generally must obtain the consent of our joint venture partners before making any material amendments to the operating agreement for the dialysis clinic or admitting additional members. The operating agreement for a clinic may provide that we cannot take certain specified actions affecting that clinic without the consent of the joint venture partner(s) for that clinic. Such actions may include (i) a sale, transfer, liquidation or reorganization of all or substantially all of the clinic, or a merger or dissolution of the clinic, (ii) a lease of all or substantially all of the clinic, (iii) the admission of a new or substituted member, (iv) an amendment or modification of the applicable operating agreement or the constituent documents for the clinic, (v) certain transactions with affiliates, (vi) any capital calls except to the extent specifically provided, (vii) any hiring or firing of certain key employees of the clinic, (viii) entering into borrowing arrangements on behalf of the clinic or incurring other liabilities, in each case, exceeding specified amounts, and (ix) entering into any material agreements on behalf of the clinic where annual payments exceed a specified amount. The rights of our joint venture partners to approve material decisions could limit our ability to take actions that we believe are in our best interest and the best interest of the dialysis clinic. Some of our joint venture partners may have interests in multiple clinics and it may be more difficult for us to successfully negotiate or resolve disputes with such partners to the extent they have approval rights over material decisions for a number of clinics. We may not be able to resolve favorably, or at all, any dispute regarding material decisions with our joint venture partners.

We may be required to purchase the ownership interests of our physician partners, which may require additional debt or equity financing, and in certain limited circumstances some of our physician partners may have the right to purchase our JV ownership interests.

              A substantial number of our JV operating agreements grant our physician partners rights to require us to purchase their ownership interests, at fair market value, at certain set times or upon the

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occurrence of certain triggering events. Our nephrologist partners in each JV are generally required to collectively maintain a minimum percentage, most commonly at least 20%, of the total outstanding membership interests in the clinic following the exercise of their put rights. Event-based triggers of these rights in various JV operating agreements may include sale of assets, closure of the clinic, acquisitions over a certain dollar amount, departure of key executives and other events. Time-based triggers give physician partners at certain of our clinics the option to require us to purchase previously agreed upon percentages of their ownership interests at certain set dates. The time when some of the time-based put rights are exercisable may be accelerated upon the occurrence of certain events, such as a sale of all or substantially all of our assets, a change of control or this offering.

              The estimate of the fair values of the interests subject to these put provisions is a critical accounting estimate that involves significant judgments and assumptions and may not be indicative of the actual values at which these obligations may ultimately be settled in the future. The estimated fair values of the interests subject to these put provisions can also fluctuate and the implicit multiple of earnings at which these obligations may be settled will vary depending upon clinic performance, market conditions and access to the credit and capital markets, and may increase as a result of this offering. As of December 31, 2015, we had recorded liabilities of approximately $80.8 million, for all existing time-based obligations, of which $22.0 million may be accelerated as a result of this offering, and approximately $27.4 million (including certain time-based put obligations that became event-based put obligations but are not currently exercisable), for all existing event-based obligations to our physician partners, of which $15.4 million may be accelerated as a result of this offering. The funds required to honor our put obligations may make it difficult for us to meet our other debt obligations, including obligations under our credit facilities or require us to incur additional indebtedness or issue additional common stock to fund such purchases.

              In addition, in certain limited circumstances, some of our JV operating agreements grant our physician partners rights to purchase our JV ownership interests. A limited number of our JV operating agreements do not exist in perpetuity and give our physician partners the right to purchase all of our membership interests within a specified period, at fair market value, or otherwise dissolve the JV. In the event of a change of control transaction, such as a merger or sale of all or substantially all of our assets or stock to a third party, some of our physician partners would have the right to purchase all of our JV ownership interests or require us to offer to sell our JV ownership interests to them, at a purchase price based on, in part, the transaction valuation. These provisions could adversely affect the value of our company to a potential acquirer and our ability to fully realize the value of a change of control transaction.

We may have a special legal responsibility to our physician partners, which may conflict with, and prevent us from acting solely in, our own best interests.

              We generally hold our ownership interests in facilities through JVs in which we maintain an ownership interest along with physicians. As majority managing member of most of our JVs, we may have fiduciary duties under state laws to manage these entities in the best interests of the minority interest holders. We may encounter conflicts between our responsibility to further the interests of these physician partners and our own best interests. For example, we have entered into management agreements to provide management services to the dialysis clinics in exchange for a fee. Disputes may arise as to the nature of the services to be provided or the amount of the fee to be paid. Disputes may also arise between us and our physician partners with respect to a particular business decision or regarding the interpretation of the provisions of the applicable JV operating agreement. In addition, disputes may arise as to the amounts and timing of distributions we make to our physician partners. In these cases, we may be obligated to exercise reasonable, good faith judgment to resolve the disputes and may not be free to act solely in our own best interests. We seek to avoid these disputes and have not implemented any measures to resolve these conflicts if they arise. If we are unable to resolve a

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dispute on terms favorable or satisfactory to us, it could have a material adverse effect on our business, prospects, results of operations and financial condition.

Shortages of qualified skilled clinical personnel, or higher than normal turnover rates, could affect our ability to grow and deliver quality, timely and cost-effective care services.

              We depend on qualified nurses and other skilled clinical personnel to provide quality service to patients in our clinics. Competition is intense for qualified nursing, technical staff and nephrologists. We depend on our ability to attract and retain skilled clinical personnel to support our growth and generate revenues. There is currently a shortage of skilled clinical personnel in many of the markets in which we operate our clinics as well as markets in which we are considering opening new clinics. This nursing shortage may adversely affect our ability to grow or, in some cases, to replace existing staff, thereby leading to disruptions in our services. In addition, this shortage of skilled clinical personnel and the more stressful working conditions it creates for those remaining in the profession are increasingly viewed as a threat to patient safety and may trigger the adoption of state and federal laws and regulations intended to reduce that risk. For example, some states have adopted or are considering legislation that would prohibit forced overtime for nurses or establish mandatory staffing level requirements.

              In response to the shortage of skilled clinical personnel, we have increased and are likely to have to continue to increase our wages and benefits to recruit and retain nurses or to engage contract nurses at a higher expense until we hire permanent staff nurses. We may not be able to increase the rates we charge to offset increased costs. The shortage of skilled clinical personnel may in the future delay our ability to achieve our operational goals at a dialysis clinic by limiting the number of patients we are able to service. The shortage of skilled clinical personnel also makes it difficult for us in some markets to reduce personnel expense at our clinics by implementing a temporary reduction in the size of the skilled clinical personnel staff during periods of reduced patient admissions and procedure volumes. In addition, we believe that retention of skilled clinical personnel is an important factor in a patient's decision to continue receiving treatment at one of our clinics. If we are unable to hire skilled clinical personnel when needed, or if we experience a higher than normal turnover rate for our skilled clinical personnel, our operations and treatment growth will be negatively impacted, which would result in reduced revenues, earnings and cash flows.

              Growing numbers of skilled clinical personnel are also joining unions that threaten and sometimes call work stoppages. Although we do not currently directly employ personnel that are members of a union, we lease employees in New York and the District of Columbia that are members of unions. Accordingly, we are required to abide by certain laws, regulations and procedures in our interactions with these employees. Union organizing activities at our clinics could adversely affect our operating costs, our employee relations, productivity, earnings and cash flows. If union organizing activities or other national or local trends result in an increase in labor and employment costs or claims, including class action lawsuits, our operating costs, earnings and cash flows could be adversely affected.

Our substantial level of indebtedness could adversely affect our ability to raise additional capital to fund our operations, expose us to interest rate risk to the extent of our variable rate debt and prevent us from meeting our obligations under our indebtedness.

              We have substantial indebtedness. As of December 31, 2015, we had total consolidated long-term indebtedness of $658.6 million (or $517.2 million on a pro forma basis giving effect to the NewCo Distribution and the Refinancing as if they had occurred on December 31, 2015). Our high level of indebtedness could, among other consequences:

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              Substantially all of our indebtedness is floating rate debt. We are exposed to interest rate volatility to the extent such interest rate risk is not hedged. We have and may continue to enter into swaps to reduce our exposure to floating interest rates as described under "—We may utilize derivative financial instruments to reduce our exposure to market risks from changes in interest rates on our variable rate indebtedness and we will be exposed to risks related to counterparty creditworthiness or non-performance of these instruments."

Our debt agreements impose significant operating and financial restrictions on us and our subsidiaries, which may prevent us from capitalizing on business opportunities and taking some actions.

              Our credit facilities impose significant operating and financial restrictions on us. These restrictions limit our ability to, among other things:

              In addition, under our credit facilities, we are required to satisfy and maintain specified financial ratios and other financial condition tests. Our ability to meet those financial ratios and tests can be affected by events beyond our control, and we cannot assure you that we will meet those ratios and tests. A breach of any of those covenants could result in a default under our credit facilities. Upon the occurrence of an event of default under our credit facilities, our lenders could elect to declare all amounts outstanding under our credit facilities to be immediately due and payable and terminate all commitments to extend further credit.

              As a result of these covenants and restrictions, we are limited in how we conduct our business, and we may be unable to raise additional debt or equity financing to compete effectively or to take

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advantage of new business opportunities. The terms of any future indebtedness we may incur could include more restrictive covenants. A breach of any of these covenants could result in a default in respect of the related indebtedness. If a default occurs, the relevant lenders could elect to declare the indebtedness, together with accrued interest and other fees, to be due and payable immediately.

              This, in turn, could cause our other debt, including debt under our credit facilities, to become due and payable as a result of cross-default or acceleration provisions contained in the agreements governing such other debt. In the event that some or all of our debt is accelerated and becomes immediately due and payable, we may not have the funds to repay, or the ability to refinance, such debt.

Our ability to repay our indebtedness depends on the performance of our subsidiaries and their ability to make distributions to us.

              We are a holding company. We have no operations of our own and derive all of our revenues and cash flow from our joint venture and other subsidiaries. We depend on our joint venture subsidiaries for dividends and other payments to generate the funds necessary to meet our financial obligations, including payments of principal and interest on our indebtedness. The earnings from, or other available assets of, our subsidiaries may not be sufficient to pay dividends or make distributions or loans to enable us to make payments in respect of our indebtedness when such payments are due. Legal and contractual restrictions in agreements governing current and future indebtedness and our joint ventures, as well as the financial condition and operating requirements of our subsidiaries, limit our ability to obtain cash from our joint ventures. Such agreements, including the agreements governing our credit facilities and joint ventures, may restrict our subsidiaries from providing us with sufficient dividends, distributions or loans to fund interest and principal payments on our indebtedness when due. In addition, our operating agreements generally provide that distributions may only be made to us if at the same time we make pro rata distributions to our joint venture partners, and accordingly, a significant portion of our cash flows is used to make distributions to our joint venture partners and is not available to service our indebtedness. Further, if our subsidiaries' operating performance declines or if our subsidiaries are unable to generate sufficient cash flows or are otherwise unable to obtain funds necessary to meet required payments on indebtedness, or if our subsidiaries otherwise fail to comply with the various covenants, including financial and operating covenants, in the instruments governing their indebtedness, our subsidiaries could be in default under the terms of the agreements governing such indebtedness. Under such a scenario, our subsidiaries would need to seek to obtain waivers from their lenders to avoid being in default, which they may not be able to obtain. In the event of such default, the holders of such indebtedness could elect to declare all the funds borrowed thereunder to be due and payable, together with accrued and unpaid interest, could elect to terminate their commitments, cease making further loans and institute foreclosure proceedings against our subsidiaries' assets, and our subsidiaries could be forced into bankruptcy or liquidation.

We may utilize derivative financial instruments to reduce our exposure to market risks from changes in interest rates on our variable rate indebtedness and we will be exposed to risks related to counterparty creditworthiness or non-performance of these instruments.

              In May 2013, we entered into two interest rate swap agreements with notional amounts totaling $320 million, as a means of fixing the floating interest rate component on $400 million of our variable rate debt under our term loans. The swaps are designated as a cash flow hedge, with a termination date of March 31, 2017. We may enter into additional interest rate swaps to limit our exposure to changes in variable interest rates. Such instruments may result in economic losses should interest rates decline to a point lower than our fixed rate commitments. We will be exposed to credit-related losses, which could impact the results of operations in the event of fluctuations in the fair value of the interest

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rate swaps due to a change in the credit worthiness or non-performance by the counterparties to the interest rate swaps.

We will be required to pay our pre-IPO stockholders for certain tax benefits, which amounts are expected to be material.

              Upon the completion of this offering, we intend to enter into an income tax receivable agreement, or TRA, for the benefit of our pre-IPO stockholders that will provide for the payment by us to our pre-IPO stockholders on a pro rata basis of 85% of the amount of cash savings, if any, in U.S. federal, state and local income tax that we actually realize as a result of any deductions (including net operating losses resulting from such deductions) attributable to the exercise of (or any payment, including any dividend equivalent right or payment, in respect of) any compensatory stock option issued by us that is outstanding (whether vested or unvested) as of the day before the date of this prospectus (such stock options, "Relevant Stock Options" and such deductions, "Option Deductions").

              These payment obligations will be our obligations and not obligations of any of our subsidiaries. The actual amount and timing of any payments under the TRA will vary depending upon a number of factors, including the amount and timing of the taxable income we generate in the future, whether and when any Relevant Stock Options are exercised and the value of our common stock at the time of such exercise. We expect that during the term of the TRA the payments that we make will be material. Such payments will reduce the liquidity that would otherwise have been available to us. See "Certain Relationships and Related Party Transactions—Income Tax Receivable Agreement."

              In addition, the TRA will provide that upon certain mergers, consolidations, acquisitions, asset sales, other changes of control (including changes of continuing directors) or our complete liquidation, the TRA will be terminable with respect to certain Relevant Stock Options at the election of Centerbridge (or its assignee). If Centerbridge (or its assignee) elects to terminate the TRA with respect to such Relevant Stock Options, we will be required to make a payment equal to the present value of future payments under the TRA with respect to such Relevant Stock Options, which payment would be based on certain assumptions, including those relating to our future taxable income. Upon such termination, our obligations under the TRA could have a substantial negative impact on our liquidity and could have the effect of reducing the amount otherwise payable to stockholders in a change of control transaction or delaying, deferring or preventing certain mergers, consolidations, acquisitions, asset sales or other changes of control. If Centerbridge (or its assignee) does not elect to terminate the TRA with respect to such Relevant Stock Options upon a change of control, subsequent payments under the TRA will be calculated assuming that we have sufficient taxable income to utilize any available Option Deductions, in which case we may be required to make payments under the TRA that exceed our actual cash savings as a result of the Option Deductions in the taxable year.

              The TRA will provide that in the event that we breach any of our material obligations under it, whether as a result of our failure to make any payment when due (subject to a specified cure period), failure to honor any other material obligation under it or by operation of law as a result of the rejection of it in a case commenced under the United States Bankruptcy Code or otherwise, then all our payment and other obligations under the TRA could be accelerated and become due and payable applying the same assumptions described above. Such payments could be substantial and could exceed our actual cash tax savings under the TRA.

              Additionally, we generally have the right to terminate the TRA upon certain changes of control or following December 31, 2018 (whether or not any change of control has occurred). If we terminate the TRA, our payment and other obligations under the TRA will be accelerated and will become due and payable, also applying assumptions similar to those described above, except that if we terminate the TRA at a time during which any Relevant Stock Options remain outstanding, the value of the common stock that would be delivered as a result of the exercise of such Relevant Stock Options will be

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assumed to be the value of our common stock at such time plus a premium on such value, determined as of the date the TRA is terminated (the "Applicable Premium"). The Applicable Premium is 40% if we terminate the TRA on or before the second anniversary of the date we enter into the TRA, 30% if we terminate the TRA after the second anniversary but on or before the third anniversary of such date, 20% if we terminate the TRA after the third anniversary but on or before the fourth anniversary of such date, 10% if we terminate the TRA after the fourth anniversary but on or before the fifth anniversary of such date and 0% if we terminate the TRA after the fifth anniversary of such date. Any such termination payments could be substantial and could exceed our actual cash tax savings under the TRA.

              Our pre-IPO stockholders will not reimburse us for any payments previously made under the TRA if the tax benefits giving rise to any payments under the TRA are subsequently disallowed (although future payments would be adjusted to the extent possible to reflect the result of such disallowance). As a result, in certain circumstances, payments could be made under the TRA in excess of our cash tax savings.

              Because we are a holding company with no operations of our own, our ability to make payments under the TRA is dependent on the ability of our subsidiaries to make distributions to us. To the extent that we are unable to make payments under the TRA, such payments will generally accrue interest at a rate equal to LIBOR plus 500 basis points from the due date until paid; however, if we are unable to make payments under the TRA because we do not have sufficient cash to make such payments as a result of limitations imposed by existing credit agreements to which we or any of our subsidiaries is a party, such payments will accrue interest at a rate equal to LIBOR plus 100 basis points from the due date until paid.

Risks Related to this Offering and Ownership of Our Common Stock

Our stock price will likely be volatile and an active, liquid and orderly trading market may not develop for our common stock. As a result you may not be able to resell your shares at or above your purchase price.

              Before this offering, there has been no public market for shares of our common stock. Although our common stock has been approved to be listed on the New York Stock Exchange ("NYSE"), an active trading market for our common stock may not develop or, if it develops, may not be sustained after this offering. The lack of an active market may impair your ability to sell your shares at the time you wish to sell them or at a price that you consider reasonable, which may reduce the fair market value of your shares. Further, an inactive market may also impair our ability to raise capital by selling our common stock and may impair our ability to enter into a strategic partnership or acquire future assets by using our common stock as consideration. Our company and the representatives of the underwriters will negotiate to determine the initial public offering price. The initial public offering price may be higher than the market price of our common stock after the offering and you may not be able to sell your shares of our common stock at or above the price you paid in the offering. As a result, you could lose all or part of your investment.

              The market price of our common stock following this offering may fluctuate substantially as a result of many factors, some of which are beyond our control. These fluctuations could cause you to lose all or part of the value of your investment in our common stock. Factors that could cause fluctuations in the market price of our common stock include the following:

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              In addition, the stock market in general has experienced significant price and volume fluctuations that have often been unrelated or disproportionate to operating performance of individual companies. These broad market factors may adversely affect the market price of our common stock, regardless of our operating performance. In the past, following periods of volatility in the market price of a company's securities, securities class action litigation has often been instituted. A securities class action suit against us could result in significant liabilities and, regardless of the outcome, could result in substantial costs and the diversion of our management's attention and resources.

Because we have no current plans to pay cash dividends on our common stock for the foreseeable future, you may not receive any return on investment unless you sell your common stock for a price greater than that which you paid for it.

              We intend to retain future earnings, if any, for future operations, expansion, and debt repayment and have no current plans to pay any cash dividends for the foreseeable future, except prior to the completion of this offering as described under "Prospectus Summary—Pre-IPO Distributions." The declaration, amount and payment of any future dividends on shares of common stock will be at the sole discretion of our board of directors. Our board of directors may take into account general and economic conditions, our financial condition, and results of operations, our available cash and current and anticipated cash needs, capital requirements, contractual, legal, tax and regulatory restrictions, implications on the payment of dividends by us to our stockholders or by our subsidiaries to us, and such other factors as our board of directors may deem relevant. In addition, our ability to pay dividends is limited by covenants of our existing outstanding indebtedness and may be limited by covenants of any future indebtedness we or our subsidiaries incur, including pursuant to our first lien credit agreement, as amended in connection with this offering. As a result, you may not receive any return on an investment in our common stock unless you sell our common stock for a price greater than that which you paid for it.

You will incur immediate and substantial dilution in the net tangible book value of the shares you purchase in this offering.

              The initial public offering price of our common stock will be higher than the net tangible book value per share of outstanding common stock prior to completion of this offering. Based on our pro forma net tangible book deficit as of December 31, 2015, upon the issuance and sale of 7,500,000

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shares of common stock by us at the initial public offering price of $22.00 per share, and after deducting the underwriting discount and estimated offering expenses payable by us, if you purchase our common stock in this offering, you will suffer immediate dilution of approximately $44.46 per share in net tangible book value. See "Dilution." In addition, we will have a large number of outstanding stock options to purchase shares of common stock with exercise prices that are below the initial offering price of shares of our common stock. As of December 31, 2015, before giving effect to the Pre-IPO Distributions, we had outstanding options to purchase 5,696,966 shares of our common stock, with exercise prices ranging from $0.45 to $28.36 per share and a weighted average exercise price of $11.44 per share. To the extent that these options are exercised, you will experience further dilution. Further, we have reserved an aggregate of 4,000,000 shares for future issuance under our 2016 Omnibus Incentive Plan. You may experience additional dilution upon future equity issuances or the exercise of options to purchase common stock granted to our directors, officers, employees and consultants under our current and future stock incentive plans, including our 2016 Omnibus Incentive Plan. See "Executive Compensation—Equity Incentive Plans."

Future sales, or the perception of future sales, of a substantial amount of our common shares could depress the trading price of our common stock.

              Upon the consummation of this offering, we will have a total of 29,719,803 shares of common stock outstanding (30,844,803 shares if the underwriters exercise their option to purchase additional shares in full). All 7,500,000 shares (or 8,625,000 shares, if the underwriters exercise in full their option to purchase additional shares) sold in this offering will be freely tradable without restriction or further registration under the Securities Act, except that any shares held by our affiliates, as that term is defined under Rule 144 of the Securities Act ("Rule 144"), including our directors, executive officers and other affiliates (including Centerbridge), may be sold only in compliance with the limitations described in "Shares Eligible for Future Sale." The remaining outstanding 22,219,803 shares held by our existing stockholders will be "restricted securities" within the meaning of Rule 144 and subject to certain restrictions on resale following the consummation of this offering. Restricted securities may be sold in the public market if they are registered under the Securities Act or are sold pursuant to an exemption from registration such as Rule 144, as described in "Shares Eligible for Future Sale."

              In connection with this offering, we, our directors and executive officers, and certain holders of our common stock prior to this offering have agreed with the underwriters, subject to certain exceptions, not to dispose of or hedge any of our or their common stock or securities convertible into or exchangeable for shares of common stock during the period from the date of this prospectus continuing through the date 180 days after the date of this prospectus, except with the prior written consent of at least a majority of the representatives of the underwriters. In addition, in connection with this offering, subject to certain exceptions, Centerbridge has agreed not to waive the transfer restrictions applicable to parties to our stockholders agreement for a period of 180 days after the date of this prospectus without the consent of at least a majority of the representatives of the underwriters. See "Underwriting (Conflicts of Interest)" for a description of these lock-up agreements. Upon the expiration of the contractual lock-up agreements, including the restrictions in our stockholders agreement, pertaining to this offering, up to 22,219,803 shares will be eligible for sale in the public market, of which 19,300,671 shares are held by directors, executive officers and other affiliates and will be subject to volume, manner of sale and other limitations under Rule 144. The parties to our stockholders agreement, other than our directors, executive officers and other affiliates, will not be subject to the volume, manner of sale and other limitations under Rule 144.

              Pursuant to our amended and restated registration rights agreement, as further amended in connection with this offering, Centerbridge has the right to require us to file a registration statement with the Securities and Exchange Commission (the "SEC") for the resale of our common stock following the completion of this offering and expiration of the contractual lock-up agreements.

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Following completion of this offering, shares covered by such demand registration rights would represent approximately 59.3% (or approximately 57.1%, if the underwriters exercise in full their option to purchase additional shares) of our outstanding common stock. Registration of any of these outstanding shares of common stock would result in such shares becoming freely tradable without compliance with Rule 144 upon effectiveness of the registration statement. See "Shares Eligible for Future Sale."

              As restrictions on resale end or if these stockholders exercise their registration rights, the market price of our shares of common stock could drop significantly if the holders of these shares sell them or are perceived by the market as intending to sell them. These factors could also make it more difficult for us to raise additional funds through future offerings of our shares of common stock or other securities.

              As of the date of this prospectus, we have outstanding options to purchase 5,657,953 shares of our common stock (or, on a pro forma basis giving effect to the Pre-IPO Distributions, options to purchase 5,746,857 shares of our common stock, with exercise prices ranging from $0.68 to $26.12 per share and a weighted average exercise price of $9.84 per share). In addition, we have reserved shares for future issuance under our 2016 Omnibus Incentive Plan. We intend to file one or more registration statements on Form S-8 under the Securities Act to register all of the common stock subject to outstanding equity awards, as well as stock options and shares reserved for future issuance, under our 2016 Omnibus Incentive Plan. Any such Form S-8 registration statements will automatically become effective upon filing. Accordingly, shares registered under such registration statements will be available for sale in the open market, subject in the case of shares held by our officers and directors to volume limits under Rule 144 and any applicable lock-up period.

              In the future, we may also issue our securities in connection with investments or acquisitions. The amount of shares of our common stock issued in connection with an investment or acquisition could constitute a material portion of our then-outstanding shares of our common stock. Any issuance of additional securities in connection with investments or acquisitions may result in additional dilution to you.

If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, our stock price and trading volume could decline.

              The trading market for our common stock will depend in part on the research and reports that securities or industry analysts publish about us or our business. We do not currently have and may never obtain research coverage by securities and industry analysts. If no securities or industry analysts commence coverage of our company, the trading price for our stock would be negatively impacted. If we obtain securities or industry analyst coverage and if one or more of the analysts who covers us downgrades our stock or publishes inaccurate or unfavorable research about our business, our stock price would likely decline. If one or more of these analysts ceases coverage of us or fails to publish reports on us regularly, demand for our stock could decrease, which could cause our stock price and trading volume to decline.

Centerbridge controls us and its interests may conflict with ours or yours in the future.

              Immediately following this offering of common stock, Centerbridge will beneficially own approximately 59.3% of our outstanding common stock, or approximately 57.1% if the underwriters exercise in full their option to purchase additional shares. Investment funds associated with or designated by Centerbridge will continue to have the ability to elect a majority of the members of our board of directors and thereby control our policies and operations, including the appointment of management, future issuances of our common stock or other securities, the payment of dividends, if any, on our common stock, the incurrence or modification of debt by us, amendments to our amended

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and restated certificate of incorporation and amended and restated bylaws, and the entering into of extraordinary transactions, and their interests may not in all cases be aligned with your interests. In addition, Centerbridge may have an interest in pursuing acquisitions, divestitures, and other transactions that, in its judgment, could enhance its investment, even though such transactions might involve risks to you. For example, Centerbridge could cause us to make acquisitions that increase our indebtedness. Centerbridge may direct us to make significant changes to our business operations and strategy, including with respect to, among other things, clinic openings and closings, sales of other assets, employee headcount levels and initiatives to reduce costs and expenses.

              Centerbridge is in the business of making investments in companies and may from time to time acquire and hold interests in businesses that compete directly or indirectly with us. Our amended and restated certificate of incorporation will provide that neither Centerbridge nor any director who is not employed by us (including any non-employee director who serves as one of our officers in both his director and officer capacities) nor his or her affiliates will have any duty to refrain from engaging, directly or indirectly, in the same business activities or similar business activities or lines of business in which we operate.

              So long as Centerbridge continues to own a significant amount of the outstanding shares of our common stock, even if such amount is less than 50%, Centerbridge will continue to be able to strongly influence or effectively control our decisions. In addition, so long as Centerbridge continues to maintain this ownership, it will be able effectively to determine the outcome of all matters requiring stockholder approval and will be able to cause or prevent a change of control or a change in the composition of our board of directors and could preclude any unsolicited acquisition of our company. The concentration of ownership could deprive you of an opportunity to receive a premium for your shares of common stock as part of a sale of our company and ultimately might affect the market price of our common stock.

We will be a "controlled company" within the meaning of the NYSE rules and the rules of the SEC. As a result, we will qualify for, and intend to rely on, exemptions from certain corporate governance requirements that provide protection to stockholders of other companies.

              After completion of this offering, Centerbridge will continue to own a majority of our outstanding common stock. As a result, we will be a "controlled company" within the meaning of the corporate governance standards of the NYSE. Under these rules, a company of which more than 50% of the voting power is held by an individual, group or another company is a "controlled company" and may elect not to comply with certain corporate governance requirements, including:

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              Following this offering, we intend to utilize these exemptions. As a result, we will not be required to have a majority of independent directors, and our nominating/corporate governance committee, if any, and compensation committee will not be required to consist entirely of independent directors and such committees will not be subject to annual performance evaluations. Accordingly, you may not have the same protections afforded to stockholders of companies that are subject to all of the corporate governance requirements of the NYSE.

Provisions in our amended and restated certificate of incorporation, amended and restated bylaws, amended and restated stockholders agreement and under Delaware law might discourage, delay or prevent a change of control of our company or changes in our management.

              Our amended and restated certificate of incorporation, amended and restated bylaws and amended and restated stockholders agreement will contain provisions that could depress the trading price of our common stock by discouraging, delaying or preventing a change of control of our company or changes in our management that the stockholders of our company may believe advantageous. These provisions include:

              Additionally, we expect to opt out of Section 203 of the Delaware General Corporation Law (the "DGCL"). While we expect to include a similar provision in our amended and restated certificate of incorporation, which will, subject to certain exceptions, prohibit us from engaging in a business combination with an interested stockholder (generally a person that together with its affiliates owns, or within the last three years has owned, 15% of our voting stock, for a period of which the person became an interested stockholder), unless the business combination is approved in a prescribed manner, our amended and restated certificate of incorporation will provide that Centerbridge and any of its respective direct or indirect transferees, and any group as to which such persons are party, do not constitute interested stockholders for purposes of this provision.

              These anti-takeover provisions could make it more difficult for a third party to acquire us, even if the third party's offer may be considered beneficial by many of our stockholders. As a result, our stockholders may be limited in their ability to obtain a premium for their shares. See "Description of Capital Stock."

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We are an emerging growth company and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our common stock less attractive to investors.

              We are an emerging growth company as defined in the JOBS Act. For as long as we continue to be an emerging growth company, we may choose to take advantage of certain exemptions from various reporting requirements applicable to other public companies, including, among other things:

              We will be an emerging growth company until the last day of the fiscal year following the fifth anniversary after the completion of this offering, or until the earliest of (i) the last day of the fiscal year in which we have annual gross revenue of $1 billion or more, (ii) the date on which we have, during the previous three-year period, issued more than $1 billion in non-convertible debt or (iii) the date on which we are deemed to be a large accelerated filer under the federal securities laws. We will qualify as a large accelerated filer as of the first day of the first fiscal year after we (i) have more than $700 million in aggregate market value of outstanding common equity held by our non-affiliates as of the last day of our second fiscal quarter, (ii) have been public for at least 12 months and (iii) have filed at least one annual report pursuant to the Exchange Act.

              We cannot predict if investors will find our common stock less attractive if we rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.

We have broad discretion in the use of the net proceeds from this offering and may not apply the proceeds of this offering in ways that increase the value of your investment.

              Although we currently intend to use the net proceeds from this offering in the manner described in "Use of Proceeds" elsewhere in this prospectus, our management will have broad discretion in the application of the net proceeds from this offering and could spend the proceeds in ways that do not improve our results of operations or enhance the value of our common stock. The failure by our management to apply these funds effectively could result in financial losses that could have a material adverse effect on our business, cause the market price of our common stock to decline and delay the development of our business. Pending their use, we may invest the net proceeds from this offering in a manner that does not produce income or that loses value. If we do not invest the net proceeds from this offering in ways that enhance stockholder value, we may fail to achieve expected financial results, which could cause the price of our common stock to decline.

We will incur significant increased costs as a result of operating as a public company, and our management will be required to devote substantial time to comply with the laws and regulations affecting public companies, particularly after we are no longer an emerging growth company.

              As a public company, particularly after we cease to qualify as an emerging growth company, we will incur significant legal, accounting and other expenses that we did not incur as a private company, including costs associated with public company reporting and corporate governance requirements, in

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order to comply with the rules and regulations imposed by the Sarbanes-Oxley Act, as well as rules implemented by the SEC and the NYSE. Our management and other personnel will need to devote a substantial amount of time to these compliance initiatives and our legal and accounting compliance costs will increase. It is likely that we will need to hire additional staff in the areas of investor relations, legal and accounting to operate as a public company. We also expect that these new rules and regulations may make it more difficult and expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. As a result, it may be more difficult for us to attract and retain qualified individuals to serve on our board of directors or as executive officers. We are currently evaluating and monitoring developments with respect to these rules, and we cannot predict or estimate the amount of additional costs we may incur or the timing of such costs.

              The Sarbanes-Oxley Act requires, among other things, that we maintain effective internal controls over financial reporting and disclosure controls and procedures. In particular, as a public company, we will be required to perform system and process evaluations and testing of our internal control over financial reporting to allow management and our independent registered public accounting firm to report on the effectiveness of our internal controls over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act. As described above, as an emerging growth company, we may not need to comply with the auditor attestation provisions of Section 404 for several years. Our testing, or the subsequent testing by our independent registered public accounting firm, may reveal deficiencies in our internal control over financial reporting that are deemed to be material weaknesses. Our compliance with Section 404 will require that we incur substantial accounting expense and that management expend time on compliance-related issues. Moreover, if we are not able to comply with the requirements of Section 404 in a timely manner, or if we or our independent registered public accounting firm identify deficiencies in our internal control over financial reporting that are deemed to be material weaknesses, we could lose investor confidence in the accuracy and completeness of our financial reports, which could cause our stock price to decline.

              When the available exemptions under the JOBS Act, as described above, cease to apply, we expect to incur additional expenses and devote increased management effort toward ensuring compliance with the applicable regulatory and corporate governance requirements. We cannot predict or estimate the amount of additional costs we may incur as a result of becoming a public company or the timing of such costs.

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

              This prospectus contains certain "forward-looking statements" and information relating to us that are based on the beliefs of our management as well as assumptions made by, and information currently available to, us. Forward-looking statements include, but are not limited to, those statements that are based upon management's current plans and expectations as opposed to historical and current facts and are often identified in this prospectus by use of words including but not limited to "estimates," "expects," "contemplates," "anticipates," "projects," "plans," "intends," "believes," "forecasts," "may," "should" and variations of such words or similar expressions. These statements are based upon estimates and assumptions made by our management that, although believed to be reasonable, are subject to numerous factors, risks and uncertainties that could cause actual outcomes and results to be materially different from those projected. These and other important factors, including those discussed in this prospectus under the headings "Prospectus Summary," "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business," may cause our actual results, performance or achievements to differ materially from any future results, performance or achievements expressed or implied by these forward-looking statements. Some of the factors that could cause actual results to differ materially from those expressed or implied by the forward-looking statements include, among others, the following:

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              There may be other factors that may cause our actual results to differ materially from the forward-looking statements, including factors disclosed under the sections entitled "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in this prospectus. You should evaluate all forward-looking statements made in this prospectus in the context of these risks and uncertainties.

              We caution you that the risks, uncertainties and other factors referenced above, many of which are beyond our control, may not contain all of the risks, uncertainties and other factors that are important to you. In addition, we cannot assure you that we will realize the results, benefits or developments that we expect or anticipate or, even if substantially realized, that they will result in the consequences or affect us or our business in the way expected. All forward-looking statements in this prospectus apply only as of the date made and are expressly qualified in their entirety by the cautionary statements included in this prospectus. We undertake no obligation to publicly update or revise any forward-looking statements to reflect subsequent events or circumstances.

              All subsequent written and oral forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by these cautionary statements.

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USE OF PROCEEDS

              We estimate that the net proceeds received by us from our sale of shares of common stock in this offering, after deducting the underwriting discount and estimated offering expenses payable by us, will be approximately $145.3 million (or approximately $168.4 million if the underwriters fully exercise their option to purchase additional shares of common stock, which, in each case, accounts for $5.5 million of offering-related costs incurred prior to December 31, 2015).

              We intend to use the net proceeds received by us from this offering, together with aggregate borrowings of $75.0 million under our first lien credit facility, as amended, and cash on hand, to repay in full all outstanding amounts under our second lien credit facility. As of December 31, 2015, the interest rate on our second lien term loans, which were borrowed on March 2013 and are scheduled to mature in March 2020, was 8.50%. See "Description of Indebtedness." We may use the remaining balance, if any, for working capital and other general corporate purposes, including to fund our continued growth through the development of new clinics, expansion of existing clinics or acquisition of clinics that we may identify from time to time.

              Our use of the balance of the net proceeds for general corporate purposes may also include the potential acquisition of, or investment in, technologies or companies that complement our business, although we have no current understandings, commitments or agreements to do so.

              The amounts that we actually expend for these specified purposes may vary significantly depending on a number of factors, including changes in our growth strategy, the amount of our future revenues and expenses and our future cash flow. As a result, we will retain broad discretion in the allocation of the net proceeds of this offering and may spend these proceeds for any purpose, including purposes not presently contemplated.

              Pending the uses described above, we may invest the net proceeds of this offering in short-term, interest-bearing, investment-grade securities.

              An affiliate of one of the underwriters is a lender under our second lien credit facility and will receive a portion of the proceeds of this offering. Accordingly, this offering is being made in compliance with FINRA Rule 5121. See "Underwriting (Conflicts of Interest)—Conflicts of Interest."

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DIVIDEND POLICY

              Prior to the completion of this offering, we intend to make the Pre-IPO Distributions as described under "Prospectus Summary—Pre-IPO Distributions."

              We have no plans to pay any other dividends on our common stock in the foreseeable future. Any decision to declare and pay dividends in the future will be made at the sole discretion of our board of directors and will depend on, among other things, our financial condition, results of operations, cash requirements, contractual restrictions and other factors that our board of directors may deem relevant. Because we are a holding company, and have no direct operations, we expect to pay dividends, if any, only from funds we receive from our subsidiaries. See "Risk Factors—Risks Related to this Offering and Ownership of Our Common Stock—Because we have no current plans to pay cash dividends on our common stock for the foreseeable future, you may not receive any return on investment unless you sell your common stock for a price greater than that which you paid for it." In addition, our ability to pay dividends is limited by covenants in our existing outstanding indebtedness and may be limited by covenants in any future indebtedness we or our subsidiaries incur, including pursuant to our first lien credit agreement, as amended in connection with this offering. See "Description of Indebtedness."

              In March 2013, we made a $199.7 million return of capital dividend and related payments to our stockholders and option holders with the proceeds of debt refinancing transactions (collectively, the "2013 Transactions"). For a description of the distributions in 2013, see the notes to our audited consolidated financial statements included elsewhere in this prospectus. We did not pay any dividends in 2015 or 2014.

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CAPITALIZATION

              The following tables set forth our cash and capitalization as of December 31, 2015:

              The information below is illustrative only and our capitalization following the offering will be adjusted based on the actual initial public offering price and other terms of this offering determined at pricing.

              Cash is not a component of our total capitalization. You should read these tables in conjunction with the information contained in "Use of Proceeds," "Unaudited Pro Forma Condensed Consolidated Financial Information," "Selected Historical Consolidated Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Description of Indebtedness," as well as our consolidated financial statements and unaudited consolidated financial statements and the related notes thereto included elsewhere in this prospectus.

 
  As of
December 31, 2015
 
(in thousands)
  Actual   Pro Forma  

Cash (including clinic-level cash)

  $ 90,988   $ 45,900  

Long-term debt, including current maturities:

             

Debt (other than clinic-level debt):

             

Revolving credit facility(1)

  $   $ 15,000  

First lien term loans

    378,235     438,235  

Second lien term loans

    238,559      

Other corporate debt

    3,527     3,527  

Unamortized debt discount and fees

    (8,544 )   (4,108 )

Clinic-level debt(2)

    72,396     98,531  

Total debt obligations

    684,173     551,185  

Noncontrolling interests subject to put provisions

    108,211     108,211  

Stockholders' equity:

             

Preferred stock, $0.01 par value, 1,000,000 shares authorized; none issued

         

Common stock, $0.01 par value, 29,770,000 shares authorized, 22,213,967 issued and outstanding, actual; 37,270,000 shares authorized, 29,713,967 shares issued and outstanding, pro forma(3)

    98     171  

Additional paid-in capital

        145,254  

Receivable from noncontrolling interests

    (529 )   (529 )

Accumulated deficit

    (128,261 )   (214,796 )

Accumulated other comprehensive income, net of tax

    (501 )   (501 )

Total ARA deficit

    (129,193 )   (70,401 )

Noncontrolling interests not subject to put provisions

    179,903     179,903  

Total equity

    50,710     109,502  

Total capitalization

  $ 843,094   $ 768,898  

(1)
As of December 31, 2015, we had $50.0 million of borrowing capacity and no letters of credit outstanding under our revolving credit facility. After giving effect to the Refinancing, we would have $85.0 million of borrowing capacity under our revolving credit facility as of December 31, 2015.

(2)
Represents the aggregate principal amount of term loan borrowings by our JV clinics under various credit agreements with third-party lenders as well as indebtedness under lines of credit available to our JV clinics. No third-party debt at a single clinic exceeds $3.1 million. Such debt is generally secured by all of the assets of the respective clinic, with guarantees by ARH or our operating subsidiary, American Renal Associates LLC, as the case may be, and the physician partners, in each case, in accordance with their pro rata percentage ownership in the clinic. As of

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(3)
Does not include options to purchase 5,696,966 shares of common stock outstanding as of December 31, 2015.

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DILUTION

              If you invest in our common stock in this offering, your ownership interest in us will be diluted to the extent of the difference between the initial public offering price per share of our common stock and the net tangible book value per share of common stock after this offering. Dilution results from the fact that the per share offering price of the common stock is substantially in excess of the net tangible book value per share attributable to the shares of common stock held by the existing owners.

              Our pro forma net tangible book value (deficit) as of December 31, 2015 was $(806.1) million, or $(36.29) per share of our common stock. We calculate pro forma net tangible book value per share by taking the amount of our total tangible assets, reduced by the amount of our total liabilities and noncontrolling interests, and then dividing that amount by the total number of shares of common stock outstanding after giving effect to the transactions described under "Unaudited Pro Forma Condensed Consolidated Financial Information" but before giving effect to this offering. Specifically, this pro forma calculation reflects our historical net tangible book value (deficit) as of December 31, 2015 of $(726.1) million adjusted for the Pre-IPO Distributions and related transactions described under "Unaudited Pro Forma Condensed Consolidated Financial Information," which adjustment reduces our total assets by approximately $30.2 million, reflecting cash dividend payments of $28.9 million in the aggregate to our pre-IPO stockholders and cash dividend equivalent payments of $1.3 million in the aggregate payable to vested option holders in connection with such cash dividend and the NewCo Distribution. In addition, giving effect to such transactions increases our total liabilities by approximately $49.8 million, which reflects our entry into the TRA for the benefit of our pre-IPO stockholders with an aggregate estimated value of $23.4 million (based on the initial public offering price of $22.0 per share), the NewCo Distribution of $26.1 million, and accrued cash dividend equivalent payments in connection with unvested outstanding stock options of $0.3 million.

              Without taking into account any other changes in such pro forma net tangible book value after December 31, 2015, after giving effect to our sale of the shares in this offering at the initial public offering price of $22.0 per share, and after deducting the underwriting discount and estimated offering expenses payable by us, our pro forma net tangible book value (deficit) as of December 31, 2015 would have been $(667.4) million, or $(22.46) per share of common stock. Specifically, giving effect to this offering reduces our total assets by approximately $20.4 million, which reflects an increase of $145.3 million of cash from the net proceeds of this offering (which is reduced by the $5.5 million of offering-related costs incurred prior to December 31, 2015), a decrease of $238.6 million of cash related to the repayment of our second lien term loans, and an increase of $72.8 million of cash related to additional borrowings under our first lien credit facility (representing $75.0 million of borrowings, net of discounts and fees of $2.2 million). In addition, giving effect to this offering decreases our total liabilities by approximately $159.1 million, which reflects a decrease of approximately $233.8 million (representing $238.6 million related to the repayment of our second lien term loans offset by the write-off of $4.7 million in associated deferred financing fees), offset by an increase of $74.7 million related to additional borrowings under our first lien credit facility (representing $75.0 million of borrowings, net of discounts of $0.3 million). This represents an immediate increase in pro forma net tangible book value of $13.83 per share of common stock to our existing owners and an immediate and substantial dilution in pro forma net tangible book value of $44.46 per share of common stock to investors in this offering at the initial public offering price.

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              The following table illustrates this dilution on a per share of common stock basis assuming the underwriters do not exercise their option to purchase additional shares of common stock:

Initial public offering price per share

  $ 22.00  

Pro forma net tangible book value (deficit) per share as of December 31, 2015

  $ (36.29 )

Increase per share attributable to new investors in this offering

  $ 13.83  

Pro forma net tangible book value (deficit) per share after giving effect to this offering

  $ (22.46 )

Dilution per share to new investors in this offering

  $ 44.46  

              The dilution information above is for illustration purposes only. Our net tangible book value following the consummation of this offering is subject to adjustment based on the actual initial public offering price of our shares and other terms of this offering determined at pricing.

              The following table summarizes, on the pro forma basis described above as of December 31, 2015, the total number of shares of common stock purchased from us, the total net cash consideration paid to us, and the average price per share paid by existing owners and by new investors. As the table shows, new investors purchasing shares in this offering will pay an average price per share substantially higher than our existing owners paid. The table below reflects an initial public offering price of $22.00 per share for shares purchased in this offering and excludes the underwriting discount and estimated offering expenses payable by us:

 
  Shares of common
stock purchased
   
   
   
 
 
  Total consideration    
 
 
  Average price
per share of
common stock
 
(amounts in thousands, except per share amounts)
  Number   Percentage   Amount   Percentage  

Existing owners(1)

    22,213,967     75 % $ 201,512,784     56 % $ 9.07  

New investors in this offering

    7,500,000     25 % $ 165,000,000     44 % $ 22.00  

Total

    29,713,967     100.0 % $ 366,512,784     100.0 % $ 12.33  

(1)
The amounts paid by existing owners has not been adjusted for distributions of $298.0 million in the aggregate made to existing owners since the acquisition by Centerbridge or any distributions pursuant to the Pre-IPO Distributions.

              The tables above do not give effect to the exercise of options to purchase 5,696,966 shares of common stock outstanding as of December 31, 2015, with exercise prices ranging from $0.45 to $28.36 per share and a weighted average exercise price of $11.44 per share and an aggregate of 4,000,000 shares of our common stock reserved for future issuance under our 2016 Omnibus Incentive Plan as described in "Executive Compensation—Equity Incentive Plans—2016 Omnibus Incentive Plan." In addition, the tables above do not give pro forma effect to equitable adjustments or modifications to stock options in connection with the Pre-IPO Distributions or this offering.

              To the extent any outstanding options are exercised or become vested, any additional options are granted and exercised, other equity awards are granted and become vested or other issuances of shares of common stock are made, there may be further economic dilution to our investors.

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UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION

              The unaudited pro forma consolidated statement of income for the fiscal year ended December 31, 2015 present our consolidated results of operations giving pro forma effect to the transactions described below, including this offering and the application of the estimated net proceeds therefrom as described under "Use of Proceeds," as if such transactions occurred on January 1, 2015. The unaudited pro forma consolidated balance sheet as of December 31, 2015 presents our consolidated financial position giving pro forma effect to the transactions described below, including this offering and the application of the estimated net proceeds therefrom as described under "Use of Proceeds," as if such transactions occurred on December 31, 2015.

              The unaudited pro forma consolidated financial information should be read together with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the historical financial statements and related notes included elsewhere in this prospectus.

              The unaudited pro forma consolidated financial information is included for informational purposes only and does not purport to reflect our results of operations or financial position had we operated as a public company during the periods presented. The unaudited pro forma consolidated financial information should not be relied upon as being indicative of our results of operations or financial position had the transactions described below, including this offering and the application of the estimated net proceeds therefrom as described under "Use of Proceeds" occurred on the dates assumed. The unaudited pro forma consolidated financial information also does not project our results of operations or financial position for any future period or date.

              The pro forma adjustments give effect to:

              The unaudited pro forma adjustments are based on preliminary estimates, accounting judgments and currently available information and assumptions that management believes are reasonable. Actual financial information may differ as a result of information obtained in the future,

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including, among other information, the actual initial public offering price of the shares in this offering. Pro forma adjustments reflected in the unaudited pro forma consolidated statements of income only include adjustments that are expected to have a continuing effect on us.

              The following transactions related to the Pre-IPO Distributions, which either have no effect on our statements of income or are not expected to have a continuing effect, have not been reflected in the unaudited pro forma consolidated statements of income:

              In connection with the foregoing transactions, equitable adjustments to the options outstanding under our 2010 Stock Incentive Plan and our 2011 Stock Option Plan for Nonemployee Directors are required by the terms of those equity incentive plans and will not result in any incremental stock-based compensation expense, whereas equitable adjustments to the options outstanding under our 2000 Equity Incentive Plan and our 2005 Equity Incentive Plan are being made at the discretion of our board of directors and will result in $0.3 million in incremental stock-based compensation expense. All dollar and share amounts provided in this prospectus in connection with the equitable adjustments to stock options are affected by the estimated value of the TRA, which is based on the initial public offering price of $22.00 per share.

              In connection with the additional borrowings under our first lien credit facility along with the repayment of our outstanding second lien term loans, we will incur $6.2 million in charges for early extinguishment of debt and transaction-related costs.

              In addition, the unaudited pro forma financial information does not reflect the impact of the modification of certain outstanding market and performance-based stock options to be made in connection with this offering since the impact will not have a continuing effect. As a result of these modifications, the amount of our unrecognized compensation costs related to unvested share-based compensation arrangements will increase by a material amount, which we estimate will be approximately $48.6 million (based on the initial public offering price of $22.00 per share). We expect that these compensation costs, after giving effect to the modifications, will be recognized over a period of approximately 12 months. See "Management's Discussion and Analysis of Financial Condition and Results of Operations."

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              Set forth below is a summary of our outstanding stock options as of the date of this prospectus, after giving effect to the equitable adjustments and modifications described above.

Option Class*
  Number of
Options
  Weighted
Average
Exercise
Price
  Weighted
Average
Term
Remaining
Years
  Share Price
Target for
Vesting
 

Rollover Options(1)

    120,047     0.68     2.23     N/A  

Time Options(2)

    1,442,120     9.30     7.33     N/A  

2.5x MOIC Options(3)

    1,411,777     5.39     5.43   $ 8.70  

3.0x MOIC Options(3)

    1,413,560     5.41     5.44   $ 13.28  

2014 Plan Tranche A Options(4)

    453,115     20.45     8.04   $ 39.69  

2014 Plan Tranche B Options(4)

    453,109     20.45     8.04   $ 51.04  

2014 Plan Tranche C Options(5)

    453,129     20.45     8.04   $ 53.95  

*
See "Executive Compensation—Narrative Disclosure to Summary Compensation Table—2014 Long-Term Incentive Awards," "—Description of Outstanding Equity Awards" and "—Narrative Disclosure to Director Compensation Table."

(1)
Includes vested stock options granted under our 2000 Equity Incentive Plan and our 2005 Equity Incentive Plan.

(2)
Includes time-based vesting stock options granted under our 2010 Stock Incentive Plan and our 2011 Stock Option Plan for Nonemployee Directors.

(3)
The applicable stock options will vest based on achievement of certain return on investment targets by Centerbridge and also on the date the volume weighted average price per share ("VWAP") of our common stock for the prior 365 consecutive days is equal to or greater than the share price target set forth in the table above.

(4)
Granted under our 2014 Incremental Nonqualified Stock Option Program. The applicable stock options will vest on the date the average closing price of our common stock for a 60 consecutive trading day period (together with the amount of any dividends paid per share of our common stock since the date of grant) is equal to or greater than the share price target set forth in the table above.

(5)
Granted under our 2014 Incremental Nonqualified Stock Option Program. The applicable stock options will vest based on achievement of a Consolidated EBITDA target and also on the date the VWAP of our common stock for the prior 60 consecutive trading days is equal to or greater than the price set forth in the table above.

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AMERICAN RENAL ASSOCIATES HOLDINGS, INC. AND SUBSIDIARIES

Unaudited Pro Forma Condensed Consolidated Balance Sheets

As of December 31, 2015

(dollars in thousands, except for share data)

 
  Historical   Adjustments   Pro Forma  

Assets

                   

Current assets:

                   

Cash

  $ 90,988   $ (45,088) (a) $ 45,900  

Accounts receivable, less allowance for doubtful accounts of $8,376

    76,919         76,919  

Inventories

    4,291         4,291  

Prepaid expenses and other current assets

    18,863     (5,535) (b)   13,328  

Income tax receivable

    2,686         2,686  

Total current assets

    193,747     (50,623 )   143,124  

Property and equipment, net

    142,701         142,701  

Deferred financing costs, net

    1,900     98 (c)   1,998  

Intangible assets, net

    25,662         25,662  

Other long-term assets

    6,141         6,141  

Goodwill

    569,318         569,318  

Total assets

  $ 939,469   $ (50,525 ) $ 888,944  

Liabilities and Equity

                   

Current liabilities:

                   

Accounts payable

  $ 22,571   $   $ 22,571  

Accrued compensation and benefits

    22,504         22,504  

Accrued expenses and other current liabilities

    26,788     271 (d)   27,059  

Current portion of long-term debt

    25,610     8,426 (e)   34,036  

Total current liabilities

    97,473     8,697     106,170  

Long-term debt, less current portion

    658,563     (141,414) (e)   517,149  

Other long-term liabilities

    9,483     23,400 (f)   32,883  

Deferred tax liabilities

    15,029         15,029  

Total liabilities

    780,548     (109,317 )   671,231  

Commitments and contingencies

                   

Noncontrolling interests subject to put provisions

    108,211         108,211  

Equity:

                   

Common stock

    98     73 (g)   171  

Additional paid-in capital

        145,254 (g)   145,254  

Receivable from noncontrolling interest

    (529 )       (529 )

Accumulated deficit

    (128,261 )   (86,535) (h)   (214,796 )

Accumulated other comprehensive loss, net of tax        

    (501 )       (501 )

Total American Renal Associates Holdings, Inc. deficit

    (129,193 )   58,792     (70,401 )

Noncontrolling interests not subject to put provisions

    179,903         179,903  

Total equity

    50,710     58,792     109,502  

Total liabilities and equity

  $ 939,469   $ (50,525 ) $ 888,944  

(a)
Represents the pro forma adjustments of:

    (i)
    a decrease of $30.2 million of cash related to dividend payments to our pre-IPO stockholders and dividend equivalent payments to vested option holders;

    (ii)
    a decrease of $238.6 million of cash related to the repayment of our second lien term loans;

    (iii)
    an increase of $75.0 million of cash related to additional borrowings under our first lien credit facility, net of discounts and fees of $2.2 million; and

    (iv)
    an increase of $150.9 million of cash reflecting the net proceeds of this offering (which is not reduced by the $5.5 million of offering-related costs incurred prior to December 31, 2015).

(b)
Represents the pro forma adjustment of a decrease of $5.5 million of deferred offering-related costs.

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AMERICAN RENAL ASSOCIATES HOLDINGS, INC. AND SUBSIDIARIES

Unaudited Pro Forma Condensed Consolidated Balance Sheets (Continued)

As of December 31, 2015

(dollars in thousands, except for share data)

(c)
Represents the pro forma adjustments of:

(d)
Represents the pro forma adjustment of an increase in liabilities of $0.3 million related to accrued cash dividend equivalent payments in connection with unvested outstanding stock options.

(e)
Represents the pro forma adjustments of:

(f)
Represents the pro forma adjustments of an increase in liabilities of $23.4 million for the TRA. We calculate fair value of the TRA by using a Monte Carlo simulation-based approach that relies on significant assumptions about our stock price, stock volatility and risk-free rate as well as the timing and amounts of options exercised. Changes in assumptions based on future events, including the price of our common stock, will change the amount of the liability for the TRA, and such changes may be material. Any changes to the TRA liability in the future would be recognized in our statement of operations as other income (expense) in future periods.

(g)
Represents the pro forma adjustment of $145.3 million reflecting the net proceeds of this offering (which is reduced by the $5.5 million of offering-related costs incurred prior to December 31, 2015).

(h)
Represents the pro forma adjustments of:

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AMERICAN RENAL ASSOCIATES HOLDINGS, INC. AND SUBSIDIARIES

Unaudited Pro Forma Condensed Consolidated Statements of Income

For the Year Ended December 31, 2015

(dollars in thousands, except for share data)

 
  Historical   Adjustments   Pro Forma  

Patient service operating revenues

  $ 657,505   $   $ 657,505  

Provision for uncollectible accounts

    4,524         4,524  

Net patient service operating revenues

    652,981         652,981  

Operating expenses:

                   

Patient care costs

    390,949         390,949  

General and administrative

    77,250     (1,822) (a)   75,428  

Transaction costs

    2,086         2,086  

Depreciation and amortization

    31,846         31,846  

Total operating expenses

    502,131     (1,822 )   500,309  

Operating income

    150,850     1,822     152,672  

Interest expense, net

    (45,400 )   16,738 (b)   (28,662 )

Income before income taxes

    105,450     18,560     124,010  

Income tax expense

    12,373     7,356 (c)   19,729  

Net income

    93,077     11,204     104,281  

Less: Net income attributable to noncontrolling interests

    (74,232 )       (74,232 )

Net income attributable to American Renal Associates Holdings, Inc. 

  $ 18,845     11,204   $ 30,049  

Earnings per share:

                   

Basic

  $ 0.85   $ 1.49   $ 1.01  

Diluted

  $ 0.83   $ 1.49   $ 0.99  

Weighted average number of common shares outstanding

   
 
   
 
   
 
 

Basic

    22,153,451     7,500,000     29,653,451 (d)

Diluted

    22,707,874     7,500,000     30,207,874 (e)

(a)
Represents the pro forma adjustments of a decrease of $1.8 million of other general and administrative expenses associated with the termination of our obligation to pay management fees to Centerbridge.
(b)
Represents the pro forma adjustments of:

    (i)
    a decrease of $21.8 million in interest expense related to the repayment of our second lien term loans;

    (ii)
    an increase of $5.0 million in interest expense related to the incurrence of additional borrowings under the first lien term loan and revolving credit facility and the interest rate margin increase of 0.25% on our first lien term loans under our first lien credit facility, as amended in connection with this offering; and

    (iii)
    an increase of $0.1 million in interest expense related to the assigned clinic loans in connection with the NewCo Distribution.
(c)
Represents the adjustment to our provision for income taxes for (a) and (b) at the estimated effective tax rate of 15.9%, which gives effect to the pro forma adjustments above.
(d)
The basic pro forma net income per share represents the net income attributed to us divided by the sum of the 22,153,451 shares outstanding and the 7,500,000 shares sold in this offering.
(e)
The diluted pro forma net income per share represents the net income attributed to us divided by the sum of the 22,707,874 diluted shares outstanding and the 7,500,000 shares sold in this offering.

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SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA

              The following tables set forth our selected historical consolidated financial data as of the dates and for the periods indicated. The selected historical consolidated financial data as of December 31, 2015 and 2014 and for the years ended December 31, 2015, 2014 and 2013 has been derived from our audited consolidated financial statements included elsewhere in this prospectus. The selected historical consolidated financial data for the year ended December 31, 2012 and 2011, and as of December 31, 2013, 2012 and 2011 have been derived from our audited consolidated financial statements, which are not included elsewhere in this prospectus.

              Our financial statements reflect 100% of the revenues and expenses for our joint ventures (after elimination of intercompany transactions and accounts) and 100% of the assets and liabilities of these joint ventures (after elimination of intercompany assets and liabilities), although we do not own 100% of the equity interests in these consolidated entities. The net income attributable to our joint venture partners is classified within the line item Net income attributable to noncontrolling interests. We generally make distributions to our joint venture partners at least on a quarterly basis in an amount approximating the NCI. See also "Management's Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates—Noncontrolling Interests."

              Historical results are not necessarily indicative of the results expected for any future period. You should read the information set forth below in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our financial statements and the related notes thereto included elsewhere in this prospectus.

 
  Year Ended December 31,  
(in thousands, except operating data)
  2011   2012   2013   2014   2015  

Statement of Income Data:

                               

Patient service operating revenues

  $ 360,081   $ 424,010   $ 498,699   $ 563,550   $ 657,505  

Provision for uncollectible accounts

    4,178     2,543     2,773     2,816     4,524  

Net patient service operating revenues

    355,903     421,467     495,926     560,734     652,981  

Operating expenses:

                               

Patient care costs

    217,036     244,973     288,384     329,847     390,949  

General and administrative expenses

    39,326     45,904     72,640     63,026     77,250  

Transaction-related costs

    604         533         2,086  

Depreciation and amortization

    17,865     20,991     23,707     28,527     31,846  

Total operating expenses

    274,831     311,868     385,264     421,400     502,131  

Operating income

    81,072     109,599     110,662     139,334     150,850  

Interest expense, net

    (36,236 )   (40,884 )   (43,314 )   (44,070 )   (45,400 )

Loss on early extinguishment of debt

            (33,921 )        

Income before income taxes

    44,836     68,715     33,427     95,264     105,450  

Income tax expense (benefit)

    4,400     8,953     (8,200 )   12,858     12,373  

Net income

    40,436     59,762     41,627     82,406     93,077  

Less: Net income attributable to noncontrolling interests

    (37,530 )   (50,808 )   (62,074 )   (66,209 )   (74,232 )

Net income (loss) attributable to ARA

  $ 2,906   $ 8,954   $ (20,447 ) $ 16,197   $ 18,845  

Earnings (loss) per share:

                               

Basic

        $ 0.42   $ (0.94 ) $ 0.74   $ 0.85  

Diluted

        $ 0.41   $ (0.94 ) $ 0.73   $ 0.83  

Weighted average number of common shares outstanding:

                               

Basic

          21,096,294     21,653,168     21,930,398     22,153,451  

Diluted

          21,853,059     21,653,168     22,332,887     22,707,874  

Other Financial Data:

                               

Adjusted EBITDA (including noncontrolling interests)(1)

  $ 103,879   $ 132,784   $ 157,682   $ 170,481   $ 188,055  

Adjusted EBITDA-NCI(1)

  $ 66,349     81,976     95,608     104,272     113,823  

Development capital expenditures(2)

  $ 18,835   $ 28,223   $ 30,558   $ 32,059   $ 35,313  

Maintenance capital expenditures(3)

    3,073     6,916     7,194     7,790     10,960  

Total capital expenditures

  $ 21,908   $ 35,139   $ 37,752   $ 39,849   $ 46,273  

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  December 31,  
 
  2011   2012   2013   2014   2015  

Operating Data:

                               

Number of clinics (as of end of period)

    108     129     150     175     192  

Number of de novo clinics opened (during period)        

    12     16     17     15     16  

Number of acquired clinics (during period)

    3     6     5     11     2  

Patients (as of end of period)

    7,374     8,942     10,095     11,581     13,151  

Number of treatments

    1,023,444     1,187,390     1,382,548     1,563,802     1,804,910  

Non-acquired treatment growth(4)

    17.4 %   11.7 %   14.8 %   12.4 %   11.7 %

Patient service operating revenues per treatment(5)

  $ 352   $ 357   $ 361   $ 360   $ 364  

Patient care costs per treatment(5)

  $ 212   $ 206   $ 209   $ 211   $ 217  

General and administrative expenses per treatment(5)(6)

  $ 38   $ 39   $ 53 (6) $ 40   $ 43  

Provision for uncollectible accounts per treatment

  $ 4   $ 2   $ 2   $ 2   $ 3  

 

 
  As of December 31,  
(in thousands)
  2011   2012   2013   2014   2015  

Consolidated Balance Sheet Data:

                               

Cash

  $ 36,774   $ 31,023   $ 32,870   $ 61,475   $ 90,988  

Working capital(7)

    51,637     50,240     52,267     70,660     96,274  

Total assets

    727,797     790,569     844,839     883,306     939,469  

Total debt

    393,746     420,460     648,054     662,600     684,173  

Noncontrolling interests subject to put provisions

    47,492     61,207     82,539     90,972     108,211  

Accumulated earnings (deficit)

    (6,857 )   2,097     (152,773 )   (136,576 )   (128,261 )

Noncontrolling interests not subject to put provisions

    154,076     164,619     173,959     178,091     179,903  

(1)
For definitions of Adjusted EBITDA and Adjusted EBITDA-NCI, see "Prospectus Summary—Summary Historical and Pro Forma Consolidated Financial Data."

The following table presents the reconciliation from net income to Adjusted EBITDA and Adjusted EBITDA-NCI for the periods indicated:

 
  Year Ended December 31,  
(in thousands)
  2011   2012   2013   2014   2015  

Net income

  $ 40,436   $ 59,762   $ 41,627   $ 82,406   $ 93,077  

Add:

                               

Stock-based compensation(a)

    3,649     897     21,342     1,047     1,451  

Depreciation and amortization

    17,865     20,991     23,707     28,527     31,846  

Interest expense, net

    36,236     40,884     43,314     44,070     45,400  

Income tax expense (benefit)

    4,400     8,953     (8,200 )   12,858     12,373  

Loss on early extinguishment of debt

            33,921          

Transaction-related costs(b)

    604         533         2,086  

Management fee(c)

    689     1,297     1,438     1,573     1,822  

Adjusted EBITDA (including noncontrolling interests)

    103,879     132,784     157,682     170,481     188,055  

Less: Net income attributable to noncontrolling interests

    (37,530 )   (50,808 )   (62,074 )   (66,209 )   (74,232 )

Adjusted EBITDA-NCI

  $ 66,349   $ 81,976   $ 95,608   $ 104,272   $ 113,823  

(a)
For 2013, we recorded $20,664 of incremental stock-based compensation expense of which $19,747 related to the modification of certain stock options made in connection with the payment of a dividend to our stockholders and $917 was cash paid for employer payroll taxes. We also recorded $678 of stock-based compensation related to our periodic option grants. In addition, in connection with the dividend, we made a payment equal to $7.90 per share, or $30,056 in the aggregate, to option holders, and, in the case of some performance and market stock options, a future payment will be due upon vesting totaling $2,600. For all other periods, stock-based compensation related to our periodic option grants and cash paid for employer payroll taxes. All dollar amounts in this paragraph, other than per share amounts, are in thousands.

(b)
For 2015, represents the forgiveness of all indebtedness and accrued interest under a revolving credit promissory note issued to an executive. See "Certain Relationships and Related Party Transactions—Loans to Our Chief Executive Officer."

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(c)
Represents management fees paid to Centerbridge. In connection with this offering, we intend to amend our transaction fee and advisory services agreement with Centerbridge to terminate our obligation to pay management fees thereunder upon the consummation of this offering. No additional fees will be paid in connection with such termination (other than accrued amounts as of the date of termination). See "Certain Relationships and Related Party Transactions—Transaction Fee and Advisory Services Agreement."
(2)
Capital expenditures primarily incurred in connection with development of our de novo clinics.

(3)
Capital expenditures primarily incurred in connection with maintenance of our existing clinics, primarily capital improvements, including renovations and equipment replacement.

(4)
We calculate non-acquired treatment growth by dividing the number of treatments performed during the applicable period by the number of treatments performed during the corresponding prior period, including the number of treatments performed at de novo clinics but excluding the number of treatments performed at clinics acquired during the applicable period, and expressing the resulting number as a percentage.

(5)
We calculate revenues per treatment, patient care costs per treatment and general and administrative expenses per treatment by dividing patient service operating revenues, patient care costs and general and administrative expenses, respectively, for the applicable period by the number of treatments performed in the applicable period.

(6)
See "Management's Discussion and Analysis of Financial Condition and Results of Operations" for discussion of the 2013 Transactions and their effect on our general and administrative expenses on an absolute and per treatment basis.

(7)
Current assets minus current liabilities.

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

              You should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and related notes included elsewhere in this prospectus. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs and involve numerous risks and uncertainties, including but not limited to those described in the "Risk Factors" section of this prospectus. Actual results may differ materially from those contained in any forward-looking statements. You should carefully read "Risk Factors" and "Special Note Regarding Forward-Looking Statements."

Executive Overview

              We are the largest dialysis services provider in the United States focused exclusively on joint venture partnerships with physicians. We provide high-quality patient care and clinical outcomes through physicians, known as nephrologists, who specialize in treating patients suffering from ESRD. Our core values create a culture of clinical autonomy and operational accountability for our physician partners and staff members. We believe our joint venture model has helped us become one of the fastest-growing national dialysis services platforms, in terms of the growth rate of our non-acquired treatments since 2012.

              We derive our patient service operating revenues from providing outpatient and inpatient dialysis treatments. The sources of these patient service operating revenues are principally government-based programs, including Medicare and Medicaid plans as well as commercial insurance plans. Substantially all of our payors (both government-based and commercial) have moved toward a bundled payment system of reimbursement, with a single lump-sum per treatment covering not only the dialysis treatment itself but also the ancillary items and services provided to a patient during the treatment, such as laboratory services and pharmaceuticals.

              We operate our clinics exclusively through our JV model, in which we share the ownership and operational responsibility of our dialysis clinics with our nephrologist partners and other joint venture partners, while the providers of the majority of dialysis services in the United States operate through a combination of wholly owned subsidiaries and joint ventures. Each of our clinics is maintained as a separate joint venture in which generally we have the controlling interest and our nephrologist partners and other joint venture partners have a noncontrolling interest. We believe that our exclusive focus on a JV model makes us well-positioned to increase our market share by attracting nephrologists who are not only interested in our service platform but also want greater clinical autonomy and a potential return on capital investment associated with ownership of a noncontrolling interest in a dialysis clinic. We believe our JV model best aligns our interests with those of our nephrologist partners and their patients. By owning a portion of the clinics where their patients are treated, our nephrologist partners have a vested stake in the quality, reputation and performance of the clinics. We believe that this enhances patient and staff satisfaction and retention, clinical outcomes, patient growth, and operational and financial performance.

Key Factors Affecting Our Results of Operations

Clinic Growth and Start-Up Clinic Costs

              Our results of operations are dependent on increases in the number of, and growth at, our de novo clinics and acquired clinics as well as growth at our existing clinics. We have experienced significant growth since opening our first clinic in December 2000. As of December 31, 2015, we had

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developed 143 de novo clinics and acquired 49 clinics. The following table shows the number of de novo and acquired clinics over the periods indicated:

 
  Years Ended
December 31,
 
 
  2013   2014   2015  

De novo clinics(1)

    17     15     16  

Acquired clinics(2)

    5     11     2  

Total new clinics

    22     26     18  

(1)
Clinics formed by us which began to operate and dialyze patients in the applicable period.

(2)
Clinics acquired by us in the applicable period.

              De novo clinics.    We have primarily grown through de novo clinic development. A typical de novo facility is 6,000 to 7,000 square feet, has 15 to 20 dialysis stations (performing approximately 9,000 to 10,000 annual treatments on average) and requires approximately $1.3 to $1.7 million of capital for equipment purchases, leasehold improvements and initial working capital. A portion of the total capital required to develop a de novo clinic is typically equity capital funded by us and our nephrologist partners in proportion to our respective ownership interests, and the balance of such development cost is typically funded through third-party loans or intercompany loans. In each case, we and our nephrologist partners generally guarantee such third-party loans or intercompany loans on a basis proportionate to our respective ownership interests. For the years ended December 31, 2013, 2014 and 2015, our development capital expenditures were $30.6 million, $32.1 million and $35.3 million, respectively, representing 6.1%, 5.7% and 5.4% of our revenues, respectively.

              Our results of operations have been and will continue to be materially affected by the timing and number of de novo clinic openings and the amount of de novo clinic opening costs incurred. In particular, our patient care costs on an absolute basis and as a percentage of our patient service operating revenues may fluctuate from quarter to quarter due to the timing and number of de novo clinic openings, which affect our operating income in a given quarter. Our patient care costs reflect pre-opening expenses, which primarily consist of staff expenses, including the costs of hiring and training new staff, as well as rent and utilities. In addition, a de novo clinic builds its patient volumes over time and, as a result, generally has lower revenue than our existing clinics. Newly established de novo clinics, although contributing to increased revenues, have adversely affected our results of operations in the short term due to a smaller patient base to absorb operating expenses. We consider a de novo clinic to be a "start-up clinic" until the first month it generates positive clinic-level EBITDA. We typically achieve positive clinic-level monthly EBITDA within, on average, six months after the first treatment at a clinic. However, approximately 15% of our de novo clinics have exceeded six months from first treatment to positive clinic-level monthly EBITDA, averaging approximately 12 months to positive clinic-level monthly EBITDA. Clinic-level EBITDA differs from our consolidated EBITDA in that management fees, consisting of a percentage of the clinic's net revenues paid to ARA for management services, are eliminated in consolidation but are reflected on a clinic-level basis.

              Start-up clinic losses affect the comparability of our results from period to period and may disproportionately impact our operating margins in any given quarter, including quarters during which

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we have a significant number of clinics qualifying as start-up clinics. The following table sets forth the number of de novo clinics opened during the periods indicated.

 
  Three Months Ended    
 
 
  March 31   June 30   September 30   December 31   Total  

2015

    1     5     6     4     16  

2014

    2     4     3     6     15  

2013

    1     3     2     11     17  

2012

    4     3     7     2     16  

              Existing clinics.    Depending on demand and capacity utilization, we may have space within our existing clinics to accommodate a greater number of dialysis stations or operate additional shifts in order to increase patient volume without compromising our quality standards. Such expansions leverage the fixed cost infrastructure of our existing clinics. From January 1, 2012 to December 31, 2015, we added 137 dialysis stations to our existing clinics, representing the equivalent of nearly eight de novo clinics.

              Acquired clinics.    We have also grown through acquisitions of existing clinics. Our results of operations have been and will continue to be affected by the timing and number of our acquisitions. Our acquisition strategy is primarily driven by the quality of the nephrologist in the market. We opportunistically pursue select acquisitions in situations where we believe the clinic offers us an attractive opportunity to enter a new market or expand within an existing market. Acquiring an existing dialysis clinic requires a greater initial investment, but an acquired clinic contributes positively to our results of operations sooner than a de novo clinic. Acquisition integration costs are typically minimal compared with start-up costs in connection with opening de novo clinics. Clinics that we have acquired before 2014 (for which we have data and have no prior relationship) have, on average, increased revenue in the twelve months following acquisition by approximately 35% over the prior twelve-month period.

              Our clinic growth drives our treatment growth. The following table summarizes the sources of our treatment growth for the periods indicated:

 
  Year Ended
December 31,
 
 
  2013   2014   2015  

Source of Treatment Growth:

                   

Non-acquired treatment growth(1)

    14.8 %   12.4 %   11.7 %

Acquired treatment growth(2)

    1.7 %   0.7 %   3.7 %

Total treatment growth

    16.5 %   13.1 %   15.4 %

(1)
Represents net growth in treatments attributable to clinics operating at the end of the period that were also open at the end of the prior period and de novo clinics opened since the end of the prior period.

(2)
Represents net growth in treatments attributable to clinics acquired since the end of the prior period.

Sources of Revenues by Payor

              Our patient service operating revenues are principally driven by our mix of commercial and government payor patients and commercial and government payment rates. We are generally paid more for services provided to patients covered by commercial healthcare plans than we are for patients

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covered by Medicare or Medicaid. ESRD patients covered by employer group health plans generally transition to Medicare coverage after a maximum of 33 months. Medicare payment rates are determined under the Medicare ESRD program's bundled payment system, which sets a base rate on an annual basis that is subject to adjustments to arrive at the actual payment rate for individual clinics. During the year ended December 31, 2014 and 2015, the Medicare ESRD PPS payment rates for our clinics were approximately $248 and $247, respectively, per treatment. The ESRD PPS final rule for 2016 released on October 29, 2015 (the "Final Rule") lowered the base rate from $239.43 to $230.39 and modified criteria for certain rate adjustments. Due to the various adjusters, we do not expect that the changes in the Medicare payment rates for 2016 will be material to us, although it is unclear whether the Final Rule will have the effect of increasing or decreasing the actual payment rate for some or all of our clinics. See "Business—Reimbursement—Medicare Reimbursement." Medicare payment rates are generally insufficient to cover our total operating expenses allocable to providing dialysis treatments for Medicare patients, although in some circumstances they are sufficient to cover such patient care costs. See "Risk Factors—Risks Related to Our Business—The bundled payment system under the Medicare ESRD program may not reimburse us for all of our operating costs." As a result, our ability to generate operating income is substantially dependent on revenues derived from commercial payors, which pay us either negotiated payment rates or based on our usual and customary fee schedule. Many commercial insurance programs have been moving towards a bundled payment system, which may not reimburse us for all of our operating costs, such as the cost of EPO and other pharmaceuticals. See "Risk Factors—Risks Related to Our Business—We depend on commercial payors for reimbursement at rates that allow us to operate at a profit" and "—If the rates paid by commercial payors decline, our operating results and cash flows would be adversely affected."

              The percentage of treatments by payor source does not necessarily correlate with our results of operations or margins in any given period because of a number of other factors, including the effect of the difference in rates per treatment associated with each commercial payor. For the three years ended December 31, 2015, commercial payors accounted for, on average, approximately 13% of the treatments we performed. The mix of patients and treatments is largely driven by the overall economic environment, particularly unemployment.

              The following table summarizes our patient service operating revenues by source for the periods indicated.

 
  Year Ended
December 31,
 
 
  2013   2014   2015  

Source of revenues:

                   

Government-based and other(1)

    60.0 %   60.3 %   58.3 %

Commercial and other(2)

    40.0 %   39.7 %   41.7 %

    100.0 %   100.0 %   100.0 %

(1)
Principally Medicare-based and Medicaid-based. Also includes hospitals and patient pay. "Patient pay" revenues consist of payments received directly from patients who are either uninsured or self-pay a portion of the bill.

(2)
Principally commercial insurance companies. Also includes the VA.

Clinical Staff, Pharmaceutical and Medical Supply Costs

              Because our ability to influence the pricing of our services is limited, our profitability depends not only on our ability to grow but also on our ability to manage patient care costs, including clinical staff, pharmaceutical and medical supply costs. The principal drivers of our patient care costs are clinical staff hours per treatment, salary rates and vendor pricing and utilization of pharmaceuticals and medical supplies. The price of EPO supplied by Amgen increased for us in 2016 and such increase

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could adversely affect our operating results and financial condition. We may not have access to certain other ESAs that may be more cost-effective. Furthermore, even if we do have access to other sources of ESAs, we cannot assure you that these alternatives would be cost-effective for us or work as effectively as EPO or Aranesp. Increased utilization of EPO or Aranesp for patients for whom the cost of ESAs is included in a bundled reimbursement rate could increase our operating costs without any increase in revenue. In addition, shortage of supplies, such as the current shortage of peritoneal dialysis solution affecting dialysis providers throughout the United States, could have a negative impact on our revenues, earnings and cash flows. Other cost categories, such as employee benefit costs and insurance costs, can also result in significant cost changes from period to period. Our results of operations are also affected by the start-up clinic costs described above.

Seasonality

              Our treatment volumes are sensitive to seasonal fluctuations due to generally fewer treatment days during the first quarter of the calendar year. Additionally, our patients are generally responsible for a greater percentage of the cost of their treatments during the early months of the year which may lead to lower total net revenues and lower net revenues per treatment during the early months of the year. Our quarterly operating results may fluctuate significantly in the future depending on these and other factors.

Future Charges

              The completion of this offering will have effects on our results of operations and financial conditions. In connection with this offering, our results of operations will be affected by one-time costs and recurring costs of being a public company, including increases in executive and board compensation (including equity based compensation), increased insurance, accounting, legal and investor relations costs and the costs of compliance with the Sarbanes-Oxley Act of 2002 and the costs of complying with the other rules and regulations of the SEC and the NYSE. In addition, when the available exemptions under the JOBS Act cease to apply, we expect to incur additional expenses and devote increased management effort toward ensuring compliance with the applicable regulatory and corporate governance requirements.

              As of December 31, 2015, we had approximately $14.5 million of unrecognized compensation costs related to unvested share-based compensation arrangements of which $9.9 million is attributable to share-based awards with market and performance conditions and $4.6 million is attributable to share-based awards with performance or time-based vesting. The compensation costs associated with time-based vesting awards are expected to be recognized as expense over a weighted average period of approximately three years. As a result of certain modifications to be made to our outstanding market and performance-based stock options at the time of this offering, the amount of the unrecognized non-cash compensation costs will increase by a material amount, which we estimate will be approximately $48.6 million (based on the initial public offering price of $22.00 per share). We expect that these compensation costs, after giving effect to the modifications, will be recognized over a period of approximately 12 months. See "Executive Compensation."

              In addition, in connection with the NewCo Distribution relating to the assigned clinic loans, since the interest on these loans will no longer be eliminated in consolidation, we expect to incur additional interest expense. This increase in interest expense is expected to be offset by the reduction in interest expense as a result of the Refinancing.

              In addition, we expect to record a write-off of deferred financing costs of approximately $0.4 million related to our repayment of our outstanding second lien term loans in connection with this offering as described under "Use of Proceeds."

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              Upon the completion of this offering, we intend to enter into the TRA for the benefit of our pre-IPO stockholders, which will provide for the payment by us to our pre-IPO stockholders on a pro rata basis of 85% of the amount of cash savings, if any, in U.S. federal, state and local income tax that we actually realize as a result of the Option Deductions. While the actual amount and timing of any payments under the TRA will vary depending upon a number of factors, including the amount and timing of the taxable income we generate in the future and whether and when any Relevant Stock Options are exercised and the value of our common stock at such time, we expect that during the term of the TRA the payments that we make will be material. See "Certain Relationships and Related Party Transactions—Income Tax Receivable Agreement." We will initially record a liability for the value of the TRA. We will calculate fair value of the TRA initially and for future periods by using a Monte Carlo simulation-based approach that relies on significant assumptions about our stock price, stock volatility and risk-free rate as well as the timing and amounts of options exercised. Changes in assumptions based on future events, including the price of our common stock, will change the amount of the liability for the TRA, and such changes may be material. Any changes to the TRA liability in the future would be recognized in our statement of operations as other income (expense) in future periods.

              The costs described above may materially affect our results of operations in the future and are not reflected in our historical results.

Key Performance Indicators

              We use a variety of financial and other information to evaluate our financial condition and operating performance. Some of this information is financial information that is prepared in accordance with GAAP, while other financial information, such as Adjusted EBITDA, is not prepared in accordance with GAAP. The following table presents certain operating data, which we monitor as key performance indicators, for the periods indicated.

 
  Year Ended December 31,  
 
  2013   2014   2015  

Operating Data:

                   

Number of clinics (as of end of period)

    150     175     192  

Number of de novo clinics opened (during period)

    17     15     16  

Patients (as of end of period)

    10,095     11,581     13,151  

Number of treatments

    1,382,548     1,563,802     1,804,910  

Non-acquired treatment growth

    14.8 %   12.4 %   11.7 %

Patient service operating revenues per treatment

  $ 361   $ 360   $ 364  

Patient care costs per treatment

  $ 209   $ 211   $ 217  

General and administrative expenses per treatment

  $ 53 (a) $ 40   $ 43  

Provision for uncollectible accounts per treatment

  $ 2   $ 2   $ 3  

(a)
For 2013, we recorded $20.7 million of incremental stock-based compensation expense, of which $17.7 million was included in our general and administrative expenses.

Number of Clinics

              We track our number of clinics as an indicator of growth. The number of clinics as of the end of the period includes all opened de novo clinics, acquired clinics and existing clinics. See "—Key Factors Affecting Our Results of Operations—Clinic Growth and Start-Up Clinic Costs" for a discussion of clinic growth and start-up costs as a factor affecting our operating performance.

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Patient Volume

              The number of patients as of the end of the period is an indicator we use to assess our performance. Our patient volumes are correlated with our de novo clinic openings, and to a lesser extent, our marketing efforts and certain external factors, such as the overall economic environment. We believe that patients choose to get their dialysis services at one of our clinics due to their relationship with our physicians, as well as the quality of care, comfort and amenities and convenience of location and clinic hours.

Non-Acquired Treatments

              We evaluate our operating performance based on the growth in number of non-acquired treatments, or treatments performed at our existing and de novo clinics, including those de novo clinics opened during the applicable period. Accordingly, our non-acquired treatment growth rate is affected by the timing and number of de novo clinic openings. We calculate non-acquired treatment growth by dividing the number of treatments performed during the applicable period by the number of treatments performed during the corresponding prior period, excluding the number of treatments performed at clinics acquired during the applicable period, and expressing the resulting number as a percentage.

Per Treatment Metrics

              We evaluate our patient service operating revenues, patient care costs, general and administrative expenses and provision for uncollectible accounts on a per treatment basis to assess our operational efficiency. We believe our disciplined revenue cycle management has contributed to the consistency of our historical results. The following table sets forth our patient service operating revenues per treatment for each of the years indicated below.

Year Ended December 31,  
2007   2008   2009   2010   2011   2012   2013   2014   2015  
$ 354   $ 360   $ 353   $ 350   $ 352   $ 357   $ 361   $ 360   $ 364  

Adjusted EBITDA

              We use Adjusted EBITDA and Adjusted EBITDA-NCI to track our performance. "Adjusted EBITDA" is defined as net income before income taxes, interest expense, depreciation and amortization, as adjusted for stock-based compensation, loss on early extinguishment of debt, transaction-related costs and management fees. "Adjusted EBITDA-NCI" is defined as Adjusted EBITDA less net income attributable to noncontrolling interests. We believe Adjusted EBITDA and Adjusted EBITDA-NCI provide information useful for evaluating our business and understanding our operating performance in a manner similar to management. We believe Adjusted EBITDA is helpful in highlighting trends because Adjusted EBITDA excludes the results of decisions that are outside the operational control of management and can differ significantly from company to company depending on long-term strategic decisions regarding capital structure, the tax jurisdictions in which companies operate and capital investments. We believe Adjusted EBITDA-NCI is helpful in highlighting the amount of Adjusted EBITDA that is available to us after reflecting the interests of our joint venture partners. Adjusted EBITDA and Adjusted EBITDA-NCI are not measures of operating performance computed in accordance with GAAP and should not be considered as a substitute for operating income, net income, cash flows from operations, or other statement of operations or cash flow data prepared in conformity with GAAP, or as measures of profitability or liquidity. In addition, Adjusted EBITDA and Adjusted EBITDA-NCI may not be comparable to similarly titled measures of other companies. Adjusted EBITDA and Adjusted EBITDA-NCI may not be indicative of historical operating results, and we do not mean for it to be predictive of future results of operations or cash flows. Adjusted EBITDA and Adjusted EBITDA-NCI have limitations as analytical tools, and you should not

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consider these items in isolation, or as substitutes for an analysis of our results as reported under GAAP. Some of these limitations are that Adjusted EBITDA and Adjusted EBITDA-NCI:

              In addition, Adjusted EBITDA is not adjusted for the portion of earnings that we distribute to our joint venture partners.

              You should not consider Adjusted EBITDA and Adjusted EBITDA-NCI as alternatives to income from operations or net income, determined in accordance with GAAP, as an indicator of our operating performance, or as alternatives to cash flows from operating activities, determined in accordance with GAAP, as an indicator of cash flows or as a measure of liquidity. This presentation of Adjusted EBITDA and Adjusted EBITDA-NCI may not be directly comparable to similarly titled measures of other companies, since not all companies use identical calculations.

              The following table presents the reconciliation from net income to Adjusted EBITDA and Adjusted EBITDA-NCI for the periods indicated:

 
  Year Ended December 31,  
(in thousands)
  2013   2014   2015  

Net income

  $ 41,627   $ 82,406   $ 93,077  

Add:

   
 
   
 
   
 
 

Stock-based compensation(a)

    21,342     1,047     1,451  

Depreciation and amortization

    23,707     28,527     31,846  

Interest expense, net

    43,314     44,070     45,400  

Income tax expense (benefit)

    (8,200 )   12,858     12,373  

Loss on early extinguishment of debt

    33,921          

Transaction-related costs

    533         2,086  

Management fee(b)

    1,438     1,573     1,822  

Adjusted EBITDA (including noncontrolling interests)

    157,682     170,481     188,055  

Less: Net income attributable to noncontrolling interests

    (62,074 )   (66,209 )   (74,232 )

Adjusted EBITDA-NCI

  $ 95,608   $ 104,272   $ 113,823  

(a)
For 2013, we recorded $20,664 of incremental stock-based compensation expense of which $19,747 related to the modification of certain stock options made in connection with the payment of a dividend to our stockholders and $917 was cash paid for employer payroll taxes. We also recorded $678 of stock-based compensation related to our periodic option grants. In addition, in connection with the dividend, we made a payment equal to $7.90 per share, or $30,056 in the aggregate, to stock option holders, and, in the case of some performance and market options, a future payment will be due upon vesting totaling $2,600. For all other periods, stock-based compensation related to our periodic option grants and cash paid for employer payroll taxes. All dollar amounts in this paragraph, other than per share amounts, are in thousands.

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(b)
Represents management fees paid to Centerbridge. In connection with this offering, we intend to amend our transaction fee and advisory services agreement with Centerbridge to terminate our obligation to pay management fees thereunder upon the consummation of this offering. No additional fees will be paid in connection with such termination (other than accrued amounts as of the date of termination). See "Certain Relationships and Related Party Transactions—Transaction Fee and Advisory Services Agreement."

Components of Earnings

Net Patient Service Operating Revenues

              Patient service operating revenues.    The major component of our revenues, which we refer to as patient service operating revenues, is derived from dialysis services. Our patient service operating revenues primarily consist of reimbursement from government-based programs and other (Medicare, Medicaid, state workers' compensation programs and hospitals) and commercial insurance payors and other (including the VA) for dialysis treatments and related services at our clinics. Patient service operating revenues are recognized as services are provided to patients. We maintain a usual and customary fee schedule for dialysis treatment and other patient services; however, actual collectible revenues are normally at a discount to the fee schedule. Medicare and Medicaid programs are billed at predetermined net realizable rates per treatment that are established by statute or regulation. Revenue for contracted payors is recorded at contracted rates and other payors are billed at usual and customary rates, and a contractual allowance is recorded to reflect the expected net realizable revenue for services provided.

              Provision for uncollectible accounts.    Patient service operating revenues are reduced by the provision for uncollectible revenues to arrive at net patient service operating revenues. Provision for uncollectible accounts represents reserves established for amounts for which patients are primarily responsible that we believe will not be collectible.

              Contractual allowances, along with provisions for uncollectible amounts, are estimated based upon contractual terms, regulatory compliance and historical collection experience. Net revenue recognition and allowances for uncollectible billings require the use of estimates of the amounts that will actually be realized.

Operating Expenses

              Patient care costs.    Patient care costs are those costs directly associated with operating and supporting our dialysis clinics. Patient care costs consist principally of salaries, wages and benefits, pharmaceuticals, medical supplies, facility costs and laboratory testing. Salaries, wages and benefits consist of compensation and benefits to staff at our clinics, including stock-based compensation expense. Salaries, wages and benefits also include certain labor costs associated with de novo clinic openings. Facility costs consist of rent and utilities and also include rent in connection with de novo clinic openings. Patient care costs also include medical director fees and insurance costs.

              General and administrative expenses.    General and administrative expenses generally consist of: compensation and benefits to personnel at our corporate office for clinic and corporate administration, including accounting, billing and cash collection functions, as well as for regulatory compliance and legal oversight; charitable contributions; and professional fees. General and administrative expenses also include stock-based compensation expense in connection with stock awards to our corporate officers and employees.

              Depreciation and amortization.    Depreciation and amortization expense is primarily attributable to our clinics' equipment and leasehold improvements and amortizing intangible assets. We calculate

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depreciation and amortization expense using a straight-line method over the assets' estimated useful lives.

Operating Income

              Operating income is equal to our net patient service operating revenues minus our operating expenses. Our operating income is impacted by the factors described above and reflects the effects of losses relating to our start up clinics.

Interest and Taxes

              Interest expense, net.    Interest expense represents charges for interest associated with our corporate level debt and credit facilities entered into by our dialysis clinics.

              Income tax expense.    Income tax expense relates to our share of pre-tax income (losses) from our wholly owned subsidiaries and joint ventures as these entities are pass-through entities for tax purposes. We are not taxed on the share of pre-tax income attributable to noncontrolling interests, and net income attributable to noncontrolling interests in our financial statements has not been presented net of income taxes attributable to these noncontrolling interests.

Net Income Attributable to Noncontrolling Interests

              Noncontrolling interests represent the equity interests in our consolidated entities that we do not wholly own, which is primarily the equity interests of our nephrologist partners in our JV clinics. Our financial statements reflect 100% of the revenues and expenses for our joint ventures (after elimination of intercompany transactions and accounts) and 100% of the assets and liabilities of these joint ventures (after elimination of intercompany assets and liabilities), although we do not own 100% of the equity interests in these consolidated entities. The net income attributable to owners of our consolidated entities, other than us, is classified within the line item Net income attributable to noncontrolling interests. See also "—Critical Accounting Policies and Estimates—Noncontrolling Interests."

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Results of Operations

Year Ended December 31, 2015 Compared With Year Ended December 31, 2014

              The following table summarizes our results of operations for the years ended December 31, 2015 and 2014.

 
  Year Ended
December 31,
   
   
 
(dollars in thousands)
  2015   2014   Increase (Decrease)  

Patient service operating revenues

  $ 657,505   $ 563,550   $ 93,955     16.7 %

Provision for uncollectible accounts

    4,524     2,816     1,708     60.7 %

Net patient service operating revenues

    652,981     560,734     92,247     16.5 %

Operating expenses:

                         

Patient care costs

    390,949     329,847     61,102     18.5 %

General and administrative

    77,250     63,026     14,224     22.6 %

Transaction-related costs

    2,086         2,086      

Depreciation and amortization

    31,846     28,527     3,319     11.6 %

Total operating expenses

    502,131     421,400     80,731     19.2 %

Operating income

    150,850     139,334     11,516     8.3 %

Interest expense, net

    (45,400 )   (44,070 )   (1,330 )   3.0 %

Income before income taxes

    105,450     95,264     10,186     10.7 %

Income tax expense

    12,373     12,858     (485 )   (3.8 )%

Net income

    93,077     82,406     10,671     12.9 %

Net income attributable to noncontrolling interests

    (74,232 )   (66,209 )   (8,023 )   12.1 %

Net income attributable to ARA

    18,845   $ 16,197     2,648     16.3 %

              Patient service operating revenues.    Patient service operating revenues for the year ended December 31, 2015 were $657.5 million, an increase of 16.7% from $563.6 million for the year ended December 31, 2014. The increase in patient service operating revenues was primarily due to an increase of approximately 15.4% in the number of dialysis treatments. The increase in treatments resulted principally from non-acquired treatment growth of 11.7% from existing clinics and de novo clinics in 2015. Patient service operating revenues relating to start-up clinics for the years ended December 31, 2015 was $10.1 million compared to $7.3 million for the year ended December 31, 2014. Patient service operating revenues per treatment for the year ended December 31, 2015 were $364, compared to $360 for the year ended December 31, 2014. The sources of revenues by payor type were also relatively consistent, with government-based and other payors accounting for 58.3% and 60.3%, respectively, of our revenues for the years ended December 31, 2015 and 2014.

              Provision for uncollectible accounts.    Provision for uncollectible accounts for the year ended December 31, 2015 was $4.5 million, or 0.7% of patient service operating revenues as compared to $2.8 million, or 0.5% of patient service operating revenues for the same period in 2014. The increase in provision for uncollectible accounts is primarily due to a favorable adjustment to our provision for uncollectible accounts in the year ended December 31, 2014 as a result of a one-time Medicare cost reporting benefit. Our accounts receivable, net of the bad debt allowance, represented approximately 40 days of patient service operating revenues as of December 31, 2015 and 43 days of patient service operating revenues as of December 31, 2014.

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              Patient care costs.    Patient care costs for the year ended December 31, 2015 were $390.9 million, an increase of 18.5% from $329.8 million for the year ended December 31, 2014. This increase was primarily due to an increase in the number of treatments. As a percentage of patient service operating revenues, patient care costs were approximately 59.5% for the year ended December 31, 2015 compared to 58.5% for the year ended December 31, 2014. Patient care costs per treatment for the year ended December 31, 2015 were $217 compared to $211 for the year ended December 31, 2014. The increase was primarily attributable to an increase in salary costs, pharmaceutical unit costs, occupancy costs and other direct clinic expenses, partially offset by improved productivity.

              General and administrative expenses.    General and administrative expenses for the years ended December 31, 2015 and December 31, 2014 were $77.3 million and $63.0 million, respectively. As a percentage of patient service operating revenues, general and administrative expenses were approximately 11.7% for the year ended December 31, 2015, compared to 11.2% for the year ended December 31, 2014. General and administrative expenses per treatment for the year ended December 31, 2015 were $43, compared to $40 for the year ended December 31, 2014. This increase is primarily due to treatment growth of 15.4%, and, to a lesser extent, due to an increase in charitable contributions and professional fees.

              Depreciation and amortization.    Depreciation and amortization expense for the year ended December 31, 2015 was $31.8 million, an increase of 11.6% from $28.5 million for the year ended December 31, 2014, primarily related to new clinics. As a percentage of patient service operating revenues, depreciation and amortization expense was approximately 4.8% for the year ended December 31, 2015 compared to 5.1% for the year ended December 31, 2014.

              Operating income for the year ended December 31, 2015 was $150.9 million, an increase of $11.5 million, or 8.3%, from $139.3 million for the year ended December 31, 2014. The increase was primarily due to the factors described above. In addition, for the years ended December 31, 2015 and 2014, start-up clinics reduced operating income by $7.9 million and $8.0 million, respectively, a decrease of $0.1 million reflecting the timing of opening of de novo clinics each year as described under "—Key Factors Affecting our Results of Operations—Clinic Growth and Start-Up Clinic Costs." As a percentage of patient service operating revenues, operating income was 22.9% for the year ended December 31, 2015 compared to 24.7% for the year ended December 31, 2014, reflecting the factors described above.

              Interest expense, net.    Interest expense, net for the year ended December 31, 2015 was $45.4 million, compared to $44.1 million for the year ended December 31, 2014, an increase of 3.0% primarily due to an increase in third-party clinic-level debt.

              Income tax expense.    The provision for income taxes for the year ended December 31, 2015 represented an effective tax rate of 11.7% compared with 13.5% in 2014. The variation from the statutory federal rate of 35% on our share of pre-tax income during the years ended December 31, 2015 and December 31, 2014 is primarily due to the tax impact of the noncontrolling interest in the clinics as a result of the JV model.

              Net income attributable to noncontrolling interests for the year ended December 31, 2015 was $74.2 million, an increase of 12.1% from $66.2 million for the year ended December 31, 2014. The

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increase was primarily due to the addition of de novo and acquired clinics and growth in the earnings of our existing JVs.

Year Ended December 31, 2014 Compared With Year Ended December 31, 2013

              The following table summarizes our results of operations for the years ended December 31, 2014 and 2013.

 
  Year Ended
December 31,
   
   
 
(dollars in thousands)
  2014   2013   Increase (Decrease)  

Patient service operating revenues

  $ 563,550   $ 498,699   $ 64,851     13.0 %

Provision for uncollectible accounts

    2,816     2,773     43     1.6 %

Net patient service operating revenues

    560,734     495,926     64,808     13.1 %

Operating expenses:

                         

Patient care costs

    329,847     288,384     41,463     14.4 %

General and administrative

    63,026     72,640     (9,614 )   (13.2 )%

Transaction-related costs

        533     (533 )    

Depreciation and amortization

    28,527     23,707     4,820     20.3 %

Total operating expenses

    421,400     385,264     36,136     9.4 %

Operating income

    139,334     110,662     28,672     25.9 %

Interest expense, net

    (44,070 )   (43,314 )   (756 )   1.7 %

Loss on early extinguishment of debt

        (33,921 )   33,921      

Income before income taxes

    95,264     33,427     61,837     185.0 %

Income tax expense (benefit)

    12,858     (8,200 )   21,058     (256.8 )%

Net income

    82,406     41,627     40,779     98.0 %

Net income attributable to noncontrolling interests

    (66,209 )   (62,074 )   (4,135 )   6.7 %

Net income (loss) attributable to ARA

  $ 16,197   $ (20,447 ) $ 36,644     (179.2 )%

              Patient service operating revenues.    Patient service operating revenues for the year ended December 31, 2014 were $563.6 million, an increase of 13.0% from $498.7 million for the year ended December 31, 2013. The increase in patient service operating revenues was primarily due to an increase of approximately 13.1% in the number of dialysis treatments. The increase in treatments resulted principally from non-acquired treatment growth of 12.4% from existing clinics and de novo clinics in 2014. Patient service operating revenues relating to start-up clinics for the years ended December 31, 2014 was $7.3 million compared to $3.6 million for the year ended December 31, 2013. Patient service operating revenues per treatment for the year ended December 31, 2014 were $360, consistent with $361 for the year ended December 31, 2013. The sources of revenues by payor type were also relatively consistent, with government-based and other payors accounting for 60.3% and 60.0%, respectively, of our revenues for the years ended December 31, 2014 and 2013.

              Provision for uncollectible accounts.    Provision for uncollectible accounts for the year ended December 31, 2014 was $2.8 million, or 0.5% of patient service operating revenues as compared to $2.8 million, or 0.6% of patient service operating revenues for the same period in 2013.

              Patient care costs.    Patient care costs for the year ended December 31, 2014 were $329.8 million, an increase of 14.4% from $288.4 million for the year ended December 31, 2013. This

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increase was primarily due to an increase in the number of treatments. As a percentage of patient service operating revenues, patient care costs were approximately 58.5% for the year ended December 31, 2014 compared to 57.8% for the year ended December 31, 2013. Patient care costs per treatment for the year ended December 31, 2014 were $211 compared to $209 for the year ended December 31, 2013. The increase was primarily attributable to an increase in salary costs, pharmaceutical unit costs, occupancy costs and other direct clinic expenses, partially offset by improved productivity and the $20.7 million of stock-based compensation expense associated with the 2013 Transactions. Expenses relating to start-up clinics increased in 2014 particularly as a result of opening 11 clinics in the fourth quarter of 2013 and in general due to the timing of de novo clinic openings each year, as described under "—Key Factors Affecting our Results of Operations—Clinic Growth and Start-Up Clinic Costs."

              General and administrative expenses.    General and administrative expenses for the years ended December 31, 2014 and December 31, 2013 were $63.0 million and $72.6 million, respectively. As a percentage of patient service operating revenues, general and administrative expenses were approximately 11.2% for the year ended December 31, 2014, compared to 14.6% for the year ended December 31, 2013. General and administrative expenses per treatment for the year ended December 31, 2014 were $40, compared to $53 for the year ended December 31, 2013. This decrease in general and administrative expenses on an absolute basis and per treatment is primarily due to the stock-based compensation expense associated with the 2013 Transactions, of which $17.7 million was included in our general and administrative expenses for 2013.

              Depreciation and amortization.    Depreciation and amortization expense for the year ended December 31, 2014 was $28.5 million, an increase of 20.3% from $23.7 million for the year ended December 31, 2013, primarily related to new clinics. As a percentage of patient service operating revenues, depreciation and amortization expense was approximately 5.1% for the year ended December 31, 2014 compared to 4.8% for the year ended December 31, 2013.

              Operating income for the year ended December 31, 2014 was $139.3 million, an increase of $28.6 million, or 25.9%, from $110.7 million for the year ended December 31, 2013. The increase was primarily due to the factors described above. In addition, for the years ended December 31, 2014 and 2013, start-up clinics reduced operating income by $8.0 million and $4.8 million, respectively, an increase of $3.2 million reflecting the timing of opening of de novo clinics each year as described under "—Key Factors Affecting our Results of Operations—Clinic Growth and Start-Up Clinic Costs." As a percentage of patient service operating revenues, operating income was 24.7% for the year ended December 31, 2014 compared to 22.2% for the year ended December 31, 2013, reflecting the factors described above, including the stock-based compensation in 2013.

              Interest expense, net.    Interest expense, net for the year ended December 31, 2014 was $44.1 million, compared to $43.3 million for the year ended December 31, 2013, an increase of 1.7% primarily due to an increase in third-party clinic-level debt.

              Loss on early extinguishment of debt.    Loss on early extinguishment of debt for the year ended December 31, 2013 was $33.9 million as a result of our debt refinancing activities during the first quarter of 2013. The loss was comprised of a call premium of $21.1 million and the write-off of $12.8 million of unamortized debt issuance costs.

              Income tax (benefit) expense.    The benefit for income taxes for the year ended December 31, 2014 represented an effective tax rate of 13.5% compared with (24.5)% in 2013. The variation from the statutory federal rate of 35% on our share of pre-tax income during the years ended December 31,

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2014 and December 31, 2013 is primarily due to the tax impact of the noncontrolling interest in the clinics as a result of the JV model.

              Net income attributable to noncontrolling interests for the year ended December 31, 2014 was $66.2 million, an increase of 6.7% from $62.1 million for the year ended December 31, 2013. The increase was primarily due to the addition of de novo and acquired clinics and growth in the earnings of our existing JVs.

Quarterly Results of Operations

              The following tables set forth our unaudited quarterly consolidated financial data for each of the eight quarters in the 24-month period ended December 31, 2015. We have prepared the quarterly data on a basis consistent with our audited consolidated financial statements included in this prospectus and include, in our opinion, all normal recurring adjustments necessary for a fair statement of the financial information contained in those statements. This information should be read in conjunction with the audited consolidated financial statements and related notes included elsewhere in this prospectus. The results of historical periods are not necessarily indicative of the results of operations for a full year or any future period.

 
  Three Months Ended  
(in thousands, except operating data)
  March 31,
2014
  June 30,
2014
  September 30,
2014
  December 31,
2014
  March 31,
2015
  June 30,
2015
  September 30,
2015
  December 31,
2015
 

Statement of Income Data:

                                                 

Patient service operating revenues

  $ 130,516   $ 139,492   $ 142,768   $ 150,774   $ 150,344   $ 162,585   $ 169,190   $ 175,386  

Provision for uncollectible accounts

    934     72     942     868     1,021     1,084     1,244     1,175  

Net patient service operating revenues

    129,582     139,420     141,826     149,906     149,323     161,501     167,946     174,211  

Operating expenses:

                                                 

Patient care costs

    78,884     81,330     81,886     87,747     92,130     96,103     100,110     102,606  

General and administrative

    14,866     15,639     15,754     16,767     17,203     20,087     19,373     20,587  

Transaction-related costs

                            2,105     (19 )

Depreciation and amortization

    6,639     6,858     7,322     7,708     7,741     7,431     7,670     9,004  

Total operating expenses

    100,389     103,827     104,962     112,222     117,074     123,621     129,258     132,178  

Operating Income

    29,193     35,593     36,864     37,684     32,249     37,880     38,688     42,033  

Interest expense, net

    (10,633 )   (11,213 )   (10,758 )   (11,466 )   (11,462 )   (11,361 )   (11,816 )   (10,761 )

Income before income taxes

    18,560     24,380     26,106     26,218     20,787     26,519     26,872     31,272  

Income tax expense

    1,865     3,432     3,837     3,724     2,207     3,338     3,276     3,552  

Net income

    16,695     20,948     22,269     22,494     18,580     23,181     23,596     27,720  

Less: Net income attributable to noncontrolling interest

    (14,347 )   (16,638 )   (17,438 )   (17,786 )   (15,704 )   (18,159 )   (19,491 )   (20,878 )

Net income attributable to ARA

  $ 2,348   $ 4,310   $ 4,831   $ 4,708   $ 2,876   $ 5,022   $ 4,105   $ 6,842  

Other Financial Data:

                                                 

Adjusted EBITDA (including noncontrolling interests)(1)

  $ 36,390   $ 43,050   $ 44,852   $ 46,189   $ 40,731   $ 46,143   $ 49,169   $ 52,012  

Adjusted EBITDA-NCI(1)

    22,043     26,412     27,414     28,403     25,027     27,984     29,678     31,134  

Capital Expenditures

    8,918     7,700     12,705     10,526     10,997     16,895     10,005     8,376  

Development capital expenditures

    7,412     6,024     11,282     7,341     9,065     14,219     6,440     5,588  

Maintenance capital expenditures

    1,506     1,676     1,423     3,185     1,932     2,676     3,565     2,788  

Operating Data

   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
 

Number of clinics (as of end of period)

    152     156     160     175     177     181     187     192  

Number of de novo clinics opened (during period)

    2     4     3     6     1     5     6     4  

Patients (as of end of period)

    10,376     10,466     10,857     11,581     11,982     12,300     12,543     13,151  

Number of treatments

    368,080     383,833     394,936     416,953     419,966     445,695     463,181     476,068  

Non-acquired treatment growth

    9.3 %   8.9 %   9.6 %   11.3 %   9.4 %   11.7 %   13.3 %   11.2 %

Patient service operating revenues per treatment

  $ 355   $ 363   $ 361   $ 362   $ 358   $ 365   $ 365   $ 368  

Patient care costs per treatment

  $ 214   $ 212   $ 207   $ 210   $ 219   $ 216   $ 216   $ 216  

General and administrative expenses per treatment

  $ 40   $ 41   $ 40   $ 40   $ 41   $ 45   $ 42   $ 43  

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(1)
The following table presents the reconciliation from net income to Adjusted EBITDA and Adjusted EBITDA-NCI for the periods indicated:

 
  Three Months Ended  
(in thousands)
  March 31, 2014   June 30, 2014   September 30, 2014   December 31, 2014   March 31, 2015   June 30, 2015   September 30, 2015   December 31, 2015  

Net Income

  $ 16,695   $ 20,948   $ 22,269   $ 22,494   $ 18,580   $ 23,181   $ 23,596   $ 27,720  

Add:

                                                 

Stock-based compensation

    205     222     313     307     306     297     449     399  

Depreciation and amortization

    6,639     6,858     7,322     7,708     7,741     7,431     7,670     9,004  

Interest expense, net

    10,633     11,213     10,758     11,466     11,462     11,361     11,816     10,761  

Income tax expense

    1,865     3,432     3,837     3,724     2,207     3,338     3,276     3,522  

Transaction-related costs

                            2,105     (19 )

Management fee

    353     377     353     490     435     535     257     595  

Adjusted EBITDA (including noncontrolling interests)

    36,390     43,050     44,852     46,189     40,731     46,143     49,169     52,012  

Less: Net income attributable to noncontrolling interests

    (14,347 )   (16,638 )   (17,438 )   (17,786 )   (15,704 )   (18,159 )   (19,491 )   (20,878 )

Adjusted EBITDA -NCI

  $ 22,043   $ 26,412   $ 27,414   $ 28,403   $ 25,027   $ 27,984   $ 29,678   $ 31,134  

Liquidity and Capital Resources

              Our primary sources of liquidity are funds generated from our operations, short-term borrowings under our revolving credit facility and borrowings of long-term debt. Our principal needs for liquidity are to pay our operating expenses, to fund the development and acquisition of new clinics, to fund capital expenditures and to service our debt. In addition, a significant portion of our cash flows is used to make distributions on the noncontrolling equity interests held by our nephrologist partners in our JV clinics. Except as otherwise indicated, the following discussion of our liquidity and capital resources presents information on a consolidated basis, without adjusting for the effect of noncontrolling interests.

              We believe our cash flows from operations, combined with availability under our revolving credit facility, provide sufficient liquidity to fund our current obligations, projected working capital requirements and capital spending for a period that includes the next 12 months. If existing cash and cash generated from operations and borrowings under our revolving credit facility are insufficient to satisfy our liquidity requirements, we may seek to obtain additional debt or equity financing. If additional funds are raised through the issuance of debt securities, these securities could contain covenants that would restrict our operations. Any financing may not be available in amounts or on terms acceptable to us. If we are unable to obtain required financing, we may be required to reduce the scope of our planned growth efforts, which could harm our financial condition and operating results.

              If we decide to pursue one or more acquisitions, we may incur additional debt or sell additional equity to finance such acquisitions.

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Cash Flows

              The following table shows a summary of our cash flows for the periods indicated.

 
  Year Ended December 31,  
(dollars in thousands)
  2013   2014   2015  

Net cash provided by operating activities

  $ 94,177   $ 118,259   $ 133,595  

Net cash used in investing activities

    (50,177 )   (44,935 )   (48,915 )

Net cash used in financing activities

    (42,153 )   (44,719 )   (55,167 )

Net increase in cash

  $ 1,847   $ 28,605   $ 29,513  

Net Cash from Operating Activities

              Net cash provided by operating activities in 2015 was $133.6 million compared to $118.3 million in 2014, an increase of $15.3 million, or 13.0%, primarily attributable to an increase in net income. Days sales outstanding was 40 days as of December 31, 2015 compared to 43 days as of December 31, 2014.

              Net cash provided by operating activities in 2014 was $118.3 million compared to $94.2 million in 2013, an increase of $24.1 million, or 25.6%, driven by an increase in net income after non-cash items and stock compensation expense and, to a lesser extent, a decrease in accounts receivable as a result of increased collections. Days sales outstanding was 43 days as of December 31, 2014 compared to 48 days as of December 31, 2013.

Net Cash from Investing Activities

              Net cash used in investing activities in 2015 was $48.9 million compared to $44.9 million in 2014, an increase of $4.0 million, or 8.9%, primarily attributable to an increase in development capital expenditures for construction of de novo clinics.

              Net cash used in investing activities in 2014 was $44.9 million compared to $50.2 million in 2013, a decrease of $5.2 million, or 10.4%, primarily due to a decrease in the amount of cash used for acquisitions in 2014 compared to 2013.

Net Cash from Financing Activities

              Net cash used in financing activities in 2015 was $55.2 million compared to $44.7 million in 2014, an increase of $10.4 million, or 23.4%. This increase was primarily attributable to an increase in distributions to noncontrolling interests and payments on long-term debt, offset by an increase in proceeds from borrowings.

              Net cash used in financing activities in 2014 was $44.7 million compared to $42.2 million in 2013, an increase of $2.5 million, or 6.1%. This increase was primarily attributable a $10.1 million, or 17.5%, increase in distributions to noncontrolling interests, which totaled $68.2 million in 2014 compared to $58.1 million in 2013, partially offset by an increase in proceeds from term loan borrowings, net of the activity related to the 2013 transactions described below.

              In March 2013, we issued $400 million in term B loans under our first lien credit agreement and $240 million in term loans under our second lien credit agreement. With the net proceeds from such issuance, we made payments on long-term debt relating to our redemption of the $250 million outstanding principal amount of our 8.375% Senior Secured Notes due 2018 initially issued in May 2010 and the $174 million outstanding principal amount of our 9.75% / 10.50% Senior PIK Toggle Notes due 2016 issued in March 2011. We also made a $199.7 million return of capital dividend and

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related payments to our stockholders and option holders in the same month. We refer to these concurrent March 2013 transactions collectively as the "2013 Transactions."

Capital Expenditures

              For the years ended December 31, 2015, 2014 and 2013, we made capital expenditures of $46.3 million, $39.8 million and $37.8 million, respectively, of which $35.3 million, $32.1 million and $30.6 million, respectively, were development capital expenditures primarily incurred in connection with de novo clinic development and $11.0 million, $7.8 million and $7.2 million, respectively, were maintenance capital expenditures, which consist primarily of capital improvements at our existing clinics, including renovations and equipment replacement. For 2016, we expect to spend approximately 5% to 6% of total annual revenues for development capital expenditures and 1% to 2% of total annual revenues on maintenance capital expenditures.

Debt Facilities

              As of December 31, 2015, we had outstanding $684.2 million in aggregate principal amount of indebtedness, with an additional $50.0 million of borrowing capacity available under our revolving credit facility (and no outstanding letters of credit). Our outstanding indebtedness included $378.2 million of term B loans under our first lien credit agreement and $238.6 million of term loans under our second lien credit agreement as of December 31, 2015. Such outstanding indebtedness also included our third-party clinic-level debt, which consisted of term loans and lines of credit (excluding intercompany loans) totaling $75.9 million as of December 31, 2015 with maturities ranging from January 2016 to December 2023 and interest rates ranging from 3.15% to 8.57%. On a pro forma basis giving effect to the NewCo Distribution and the Refinancing as if they had occurred on December 31, 2015, we would have had outstanding $551.2 million in aggregate principal amount of indebtedness, with $85.0 million of borrowing capacity available under our revolving credit facility, which indebtedness would have included $15.0 million of borrowings under our revolving credit facility, $438.2 million of first lien term loans and $98.5 million of third-party clinic-level debt. For further information on our indebtedness, see "Description of Indebtedness."

Contractual Obligations and Commitments

              The following is a summary of contractual obligations and commitments as of December 31, 2015, without giving effect to this offering, the Refinancing or the NewCo Distribution (excluding put obligations relating to our joint ventures, which are described separately below):

Scheduled payments under contractual obligations
(in thousands)
  Total   Less than
1 year
  1 - 3 years   3 - 5 years   More than
5 years
 

Third-party clinic-level debt (including current portion)(1)

  $ 72,396   $ 21,125   $ 34,217   $ 16,295   $ 759  

Term B loans(2)

    378,235     4,000     8,000     366,235      

Second lien term loans(3)

    238,559             238,559      

Other corporate debt

    3,527     485     3,042          

Operating leases(4)

    156,881     22,726     42,669     34,343     57,143  

Interest payments(5)

    156,769     40,752     78,355     37,648     14  

Management fee(6)

    5,939     1,774     3,548     617      

Total

  $ 1,012,306   $ 90,862   $ 169,831   $ 693,697   $ 57,916  

(1)
Bears interest at either fixed or variable rates, with principal and interest payments due monthly.

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(2)
Bears interest at a variable rate, with principal payments of $1.0 million and interest payments due quarterly.

(3)
Bears interest at a variable rate with interest payments due quarterly.

(4)
Net of estimated sublease proceeds of approximately $1.0 million per year from 2016 through 2022 and approximately $0.6 million or less thereafter.

(5)
Represents interest payments on debt obligations, including the term B loans, the term loans under the second lien credit agreement and the loans under the revolving credit facility. To project interest payments on floating rate debt, we have used the rate as of December 31, 2015. Reflects net effect of swap payments under our existing interest rate swap agreements.

(6)
Represents minimum management fees payable to Centerbridge. In connection with this offering, we intend to amend our transaction fee and advisory services agreement with Centerbridge to terminate our obligation to pay management fees thereunder upon the consummation of this offering. No additional fees will be paid in connection with such termination (other than accrued amounts as of the date of termination). See "Certain Relationships and Related Party Transactions—Transaction Fee and Advisory Services Agreement."

              The following is a summary of contractual obligations and commitments as of December 31, 2015, on a pro forma basis giving effect to this offering, the Refinancing and the NewCo Distribution (excluding put obligations relating to our joint ventures and payments under the TRA, which are described separately below):

Scheduled payments under contractual obligations
(in thousands)
  Total   Less than
1 year
  1 - 3 years   3 - 5 years   More than
5 years
 

Third-party clinic-level debt (including current portion)(1)

  $ 98,531   $ 27,017   $ 47,872   $ 22,883   $ 759  

Term B loans and incremental term loans(2)

    453,235     4,636     24,272     424,327      

Other corporate debt

    3,527     485     3,042          

Operating leases(3)

    156,881     22,726     42,669     34,343     57,143  

Interest payments(4)

    81,441     22,804     43,760     14,877      

Total

  $ 793,615   $ 77,668   $ 161,615   $ 496,430   $ 57,902  

(1)
Bears interest at either fixed or variable rates, with principal and interest payments due monthly. After giving effect to the NewCo Distribution, our third-party clinic-level debt will include our assigned clinic loans, which are currently eliminated in consolidation as intercompany obligations. See "Description of Indebtedness—Third-Party Clinic-Level Debt."

(2)
Bears interest at a variable rate, with principal payments of $1.2 million and interest payments due quarterly. See "Description of Indebtedness—Credit Facilities—ARH First Lien Credit Agreement."

(3)
Net of estimated sublease proceeds of approximately $1.0 million per year from 2016 through 2022 and approximately $0.6 million or less thereafter.

(4)
Represents interest payments on debt obligations, including the term B loans, incremental term loans and clinic-level debt. To project interest payments on floating rate debt, we have used the rate as of December 31, 2015. Reflects net effect of swap payments under our existing interest rate swap agreements.

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Put Obligations

              We also have potential obligations with respect to some of our non-wholly owned subsidiaries in the form of put provisions, which are exercisable at our nephrologist partners' future discretion at certain time periods ("time-based puts") or upon the occurrence of certain events ("event-based puts") as set forth in each specific put provision, which may include the sale of assets, closure of the clinic, acquisitions over a certain dollar amount, departure of key executives and other events. The time when some of the time-based put rights may be exercised may be accelerated as a result of this offering. If the put obligations are exercised by a physician partner, we are required to purchase, at fair market value, a previously agreed upon percentage of such physician partner's ownership interest. See "Note F—Noncontrolling Interests Subject to Put Provisions" in the notes to our unaudited consolidated financial statements, included elsewhere in this prospectus, for discussion of these put provisions. See also "Risk Factors—Risks Related to Our Business—We may be required to purchase the ownership interests of our physician partners, which may require additional debt or equity financing, and in certain limited circumstances some of our physician partners may have the right to purchase our JV ownership interests."

              As of December 31, 2015, $12.1 million of time-based put obligations were exercisable by our nephrologist partners. Since our inception, only $5.8 million of time-based puts have been exercised by our nephrologist partners. The following is a summary of the estimated potential cash payments in each of the specified years under all time-based puts existing as of December 31, 2015 and reflects the payments that would be made, assuming (a) all vested puts as of December 31, 2015 were exercised on January 1, 2016 and paid according to the applicable agreement and (b) all puts exercisable thereafter were exercised as soon as they vest and are paid accordingly.

(in thousands)
Year
  Potential Cash
Payment
 

2016

  $ 20,752  

2017

    10,654  

2018

    11,409  

2019

    10,818  

2020

    9,190  

Thereafter

    17,941  

Total

  $ 80,764  

              The estimated fair values of the interests subject to these put provisions can also fluctuate and the implicit multiple of earnings at which these obligations may be settled will vary depending upon clinic performance, market conditions and access to the credit and capital markets, and may increase as a result of this offering. As of December 31, 2015, we had recorded liabilities of approximately $80.8 million for all existing time-based obligations, of which $22.0 million may be accelerated as a result of this offering, substantially all of which obligations were recorded for 2016 and thereafter. In addition, as of December 31, 2015, we had $27.4 million of event-based put obligations (including certain time-based put obligations that became event-based put obligations but are not currently exercisable), none of which were exercisable by our nephrologist partners at December 31, 2015, but $15.4 million of which would be accelerated as a result of this offering.

Income Tax Receivable Agreement

              Upon the completion of this offering, we intend to enter into a TRA that will provide for the payment by us to our pre-IPO stockholders on a pro rata basis of 85% of the amount of cash savings, if any, in U.S. federal, state and local income tax that we actually realize as a result of any Option Deductions. We plan to fund the payments under the TRA with cash flows from operations and, to the extent necessary, the proceeds of borrowings under our credit facilities. The amounts and timing of our

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obligations under the TRA are subject to a number of factors, including the amount and timing of the taxable income we generate in the future, whether and when any Relevant Stock Options are exercised and the value of our common stock at the time of such exercise, and to uncertainty relating to the future events that could impact such obligations. Estimating the amount of payments that may be made under the TRA is by its nature imprecise given such uncertainty. However, we expect that during the term of the TRA the payments that we make will be material. Such payments will reduce the liquidity that would otherwise have been available to us. See "Certain Relationships and Related Party Transactions—Income Tax Receivable Agreement."

Off Balance Sheet Arrangements

              We do not have any off balance sheet arrangements.

Recent Accounting Pronouncements

              In November 2015, the Financial Accounting Standards Board (FASB) issued ASU 2015-17, "Income Taxes (Topic 740)—Balance Sheet Classification of Deferred Taxes," which requires an entity to classify deferred tax liabilities and assets as noncurrent within a classified balance sheet. Previous guidance required deferred tax liabilities and assets to be separated into current and noncurrent amounts on the balance sheet. ASU 2015-17 is effective for annual reporting periods, and interim periods therein, beginning after December 15, 2016, with early adoption permitted. This update may be applied either prospectively to all deferred tax liabilities and assets or retrospectively to all periods presented. We have adopted ASU 2015-17 early on a retrospective basis. Adoption did not have a material impact on our consolidated results of operations or financial position.

              In April 2015, the FASB issued ASU 2015-03, "Interest—Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs." The amendments require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The amendments are effective beginning January 1, 2016. Early adoption is permitted. Upon adoption, the guidance must be applied retrospectively to all periods presented in the financial statements. We have elected not to early adopt this standard. Adoption of the standard will impact the presentation of our debt issuance costs on our consolidated balance sheets and the related disclosures.

              In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers," which requires companies to recognize revenue when a customer obtains control rather than when companies have transferred substantially all risks and rewards of a good or service. The new standard also requires entities to enhance disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The new standard allows for either a full retrospective or a modified retrospective transition method and is effective for fiscal years beginning after December 15, 2016. In July 2015, the FASB issued a deferral of ASU 2014-09 for one year making it effective for annual reporting periods beginning on or after December 15, 2017 while also providing for early adoption but not before the original effective date. We are currently assessing the impact the adoption of ASU 2014-09 will have on our consolidated financial statements.

              In April 2014, the Financial Accounting Standards Board issued ASU 2014-08, "Presentation of Financial Statements and Property, Plant, and Equipment: Reporting Discontinued Operations and Disclosure of Disposals of Components of Equity." The new guidance changes the criteria for reporting discontinued operations while enhancing disclosures in this area. It also addresses sources of confusion and inconsistent application related to financial reporting of discontinued operations guidance in GAAP. Under the new guidance, only disposals representing a strategic shift in operations should be presented as discontinued operations. Those strategic shifts should have a major effect on the organization's operations and financial results. Examples include a disposal of a major geographic area,

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a major line of business, or a major equity method investment. In addition, the new guidance requires expanded disclosures about discontinued operations that will provide financial statement users with more information about the assets, liabilities, income, and expenses of discontinued operations. The new guidance also requires disclosure of the pre-tax income attributable to a disposal of a significant part of an organization that does not qualify for discontinued operations reporting. This disclosure will provide users with information about the ongoing trends in a reporting organization's results from continuing operations. The ASU amendments are effective in the first quarter of 2015 for public organizations with calendar year ends. Early adoption is permitted. The adoption of this standard did not have a material impact on our consolidated financial statements.

Critical Accounting Policies and Estimates

              We believe that the accounting policies described below are critical to understanding our business, results of operations and financial condition because they involve significant judgments and estimates used in the preparation of our consolidated financial statements. An accounting policy is deemed to be critical if it requires a judgment or accounting estimate to be made based on assumptions about matters that are highly uncertain, and if different estimates that could have been used, or if changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact our consolidated financial statements. Other significant accounting policies, primarily those with lower levels of uncertainty than those discussed below, are also critical to understanding our consolidated financial statements. The notes to our consolidated financial statements contain additional information related to our accounting policies and should be read in conjunction with this discussion.

Net Patient Service Operating Revenues

              Patient service operating revenues are recognized as services are provided to patients and consist primarily of reimbursement for dialysis. We maintain a fee schedule for dialysis treatment and other patient services; however, actual collectible revenues are normally at a discount to the fee schedule. We bill Medicare and Medicaid programs at predetermined net realizable rates per treatment that are established by statute or regulation. Revenue for contracted payors is recorded at contracted rates and other payors are billed at usual and customary rates, and a contractual allowance is recorded to reflect the expected net realizable revenue for services provided. Contractual allowances, along with provisions for uncollectible amounts, are estimated based upon contractual terms, regulatory compliance, and historical collection experience. Net revenue recognition and allowances for uncollectible billings require the use of estimates of the amounts that will actually be realized.

              Patient service operating revenues may be subject to adjustment as a result of (i) examinations of the Company or Medicare or Medicaid Managed Care programs that the Company serves, by government agencies or contractors, for which the resolution of any matters raised may take extended periods of time to finalize; (ii) differing interpretations of government regulations by different fiscal intermediaries or regulatory authorities; (iii) differing opinions regarding a patient's medical diagnosis or the medical necessity of service provided; (iv) retroactive applications or interpretations of governmental requirements; and (v) claims for refund from private payors, including as the result of government actions.

              Patient service operating revenues associated with patients whose primary coverage is under governmental programs, including Medicare and Medicaid, and Medicare or Medicaid Managed Care programs, accounted for approximately 58% and 60%, respectively of total patient service operating revenues for both the year ended December 31, 2015 and December 31, 2014.

              Patient service operating revenues are reduced by the provision for uncollectible accounts to arrive at net patient service operating revenues.

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Accounts Receivable

              Accounts receivable, which are recorded based on our recognition of net patient service operating revenues as described above, are reduced by an allowance for doubtful accounts. In evaluating the ultimate collectability and net realizable value of our accounts receivable, we analyze our historical cash collection experience and trends for each of our government payors and commercial payors to estimate the adequacy of the allowance for doubtful accounts and the amount of the provision for bad debts. Our management regularly updates its analysis based upon the most recent information available to determine its current provision for bad debts and the adequacy of its allowance for doubtful accounts. For receivables associated with services provided to patients covered by government payors, like Medicare, we receive 80% of the payment directly from Medicare as established under the government's bundled payment system and determine an appropriate allowance for doubtful accounts and provision for bad debts on the remaining balance due depending upon our estimate of the amounts ultimately collectible from other secondary coverage sources or from the patients. For receivables associated with services to patients covered by commercial payors that are either based upon contractual terms or for non-contracted health plan coverage, we provide an allowance for doubtful accounts and a provision for bad debts based upon our historical collection experience and potential inefficiencies in our billing processes and for which collectability is determined to be unlikely. Receivables where the patient is the primary payor make up less than 2% of our accounts receivable and it is our policy to reserve for a portion of these outstanding accounts receivable balances based on historical collection experience and for which collectability is determined to be unlikely.

              Patient accounts receivable from the Medicare and Medicaid programs were $73.6 million and $62.1 million at December 31, 2015 and 2014, respectively. No other single payor accounted for more than 6% of total patient accounts receivable.

Noncontrolling Interests

              We have a controlling interest in each of our 192 clinics as of December 31, 2015, and our joint venture partners have the remaining noncontrolling interests. We are required to treat noncontrolling interests (other than noncontrolling interests subject to put provisions) as a separate component of equity, but apart from our equity, and not as a liability or other item outside of equity. We are also required to present consolidated net income attributable to us and to noncontrolling interests on the face of the consolidated statement of income. In addition, changes in our ownership interest while we retain a controlling financial interest are prospectively accounted for as equity transactions. We are also required to expand disclosures in the financial statements to include a reconciliation of the beginning and ending balances of the equity attributable to us and the noncontrolling owners and a schedule showing the effects of changes in our ownership interest in a subsidiary on the equity attributable to us.

              Further, we are also required to classify securities with redemption features that are not solely within our control, such as the noncontrolling interests subject to put provisions, outside of permanent equity and to measure these noncontrolling interests at fair value. See "Note I—Noncontrolling Interests Subject to Put Provisions" in our audited consolidated financial statements included elsewhere in this prospectus for further details. These put provisions, if exercised, would require us to purchase our nephrologist partners' interests at the appraised fair value. We estimate the fair value of the noncontrolling interests subject to these put provisions using an average multiple of earnings, based on historical earnings and other factors. The estimate of the fair values of the interests subject to these put provisions is a critical accounting estimate that involves significant judgments and assumptions and may not be indicative of the actual values at which these obligations may ultimately be settled in the future. The estimated fair values of the interests subject to these put provisions can also fluctuate and the implicit multiple of earnings at which these obligations may be settled will vary depending upon market

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conditions and access to the credit and capital markets, which can impact the level of competition for dialysis and non-dialysis related businesses and the economic performance of these businesses.

              Net income attributable to noncontrolling interests for 2015, 2014 and 2013 was approximately $74.2 million, $66.2 million and $62.1 million, respectively. The increases in noncontrolling interests in 2015 and 2014 were primarily due to increases in the number of new joint ventures and increases in the profitability of our dialysis-related joint ventures.

Inventories

              Inventories are stated at the lower of cost (first-in, first-out method) or market, and consist principally of pharmaceuticals and dialysis-related consumable supplies.

Property and Equipment

              Property and equipment was recorded at fair value as of May 8, 2010, the date after which the Acquisition was consummated by Centerbridge, and are currently stated at the May 8, 2010 fair value less accumulated depreciation through December 31, 2015. Depreciation is being recorded over the remaining useful lives. Property and equipment acquired after May 7, 2010 as part of an acquisition are recorded at fair value and other purchases are stated at cost with depreciation calculated using the straight-line method over their estimated useful lives as follows:

Buildings   39 years
Leasehold improvements   Shorter of lease term or useful lives
Equipment and information systems   3 to 10 years

              Upon retirement or sale, the cost and related accumulated depreciation are removed from the accounts, and any resulting gain or loss is credited or charged to income. Maintenance and repairs are charged to expense as incurred. We capitalize interest on funds borrowed to finance facility construction.

Deferred Financing Costs

              Costs incurred in connection with debt issuances are deferred and are amortized using the effective interest method over the term of the related instrument as interest expense. Upon extinguishment of the related debt prior to its original maturity date, the cost and related accumulated amortization are removed from the accounts and any resulting loss is included with loss on early extinguishment of debt.

Amortizable Intangible Assets

              Amortizable intangible assets include a right of first refusal waiver, noncompete agreements and certificates of need. Each of these assets is amortized on a straight-line basis over the term of the agreement, which is generally five to ten years.

Stock-Based Compensation

              We measure and recognize compensation expense for all share-based payment awards based on estimated fair values at the date of grant. Determining the fair value of share-based awards requires judgment in developing assumptions, which involve a number of variables. We calculate fair value by using a Monte Carlo simulation-based approach for the portion of the option that contains both a market and performance condition and the Black-Scholes valuation model for the portion of the option that contains a performance or service-based condition. Key inputs used to estimate the fair value of stock options include the exercise price of the award, the expected term of the option, the expected volatility of the common stock over the option's expected terms, the risk-free interest rate over the

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option's expected term, and our expected annual dividend yield. Since we are not yet a public company and do not have any trading history for our common stock, the expected volatility was estimated based on the historical equity volatility of common stock of comparable publicly traded entities over a period equal to the expected term of the stock option grants. For each of the comparable publicly traded entities, the historical equity volatility and the capital structure of the entity were used to calculate the implied stock volatility. The average implied stock volatility of the comparable publicly traded entities was then used to calculate a relevered equity volatility for the Company based on the Company's own capital structure. The comparable entities from the health care sector were chosen based on area of specialty. We will continue to apply this process until a sufficient amount of historical information regarding the volatility of our own stock price becomes available after the consummation of this offering. Stock-based compensation expense for performance and service-based stock awards is recognized over the requisite service period using the straight-line method, which is generally the vesting period of the equity award, and is adjusted each period for anticipated forfeitures. Forfeitures are estimated at time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from estimates. For market and performance awards whose vesting is contingent upon a specified event, we defer all stock-based compensation until the consummation of the event. See "Note P—Stock-Based Compensation" in our audited consolidated financial statements included elsewhere in this prospectus for discussion of the key assumptions included in determining the fair value of our equity awards at grant date.

Fair Value of Common Stock

              We granted stock options with the following exercise prices during the period beginning on and after the 2013 Transactions to the date of this prospectus:

Option Grant Dates
  Number of Shares
Underlying Options
  Exercise Price
Per Share
  Fair Market Value Per
Underlying Share as of
Grant Date
 

March 2013

    103,508     6.93     6.93  

    1,095,861 (1)   8.70     6.93  

May 2013

    95,722     9.41     9.41  

August 2013

    102,592     11.05     11.05  

March 2014

    208,963     13.41     13.41  

May 2014

    62,975     13.79     13.79  

    1,359,353     22.68     13.79  

July 2014

    73,395     16.39     16.39  

October 2014

    136,026     17.77     17.77  

March 2015

    168,315     18.72     18.72  

May 2015

    71,677     20.72     20.72  

August 2015

    287,281     28.36     28.36  

(1)
Reflects re-pricing of time-based vesting stock options issued in exchange for outstanding stock options.

              Valuations were prepared in accordance with the guidelines in the American Institute of Certified Public Accountants Practice Aid, Valuation of Privately-Held-Company Equity Securities Issued as Compensation, referred to as the AICPA Practice Aid, which prescribes several valuation approaches for setting the value of an enterprise, such as the cost, market and income approaches, and various methodologies for allocating the value of an enterprise to its common stock. We considered the following approaches in the preparation of our valuations as follows:

              Market Approach.    The market approach values a business by reference to guideline companies, for which enterprise values are known. This approach has two principal methodologies. The guideline public company methodology derives valuation multiples from the operating data and share prices of similar publicly-traded companies. The guideline acquisition methodology focuses on

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comparisons between the subject company and guideline acquired public or private companies. A derivative of the guideline public company method is the guideline initial public offering, or IPO, method, which compares the enterprise values of newly public enterprises in our industry.

              Discounted Cash Flow Method, or DCF.    The discounted cash flow method estimates the value of the business by discounting the estimated future cash flows available for distribution after funding internal needs to present value.

              The foregoing valuation methodologies are not the only methodologies available and they will not be used to value our common stock once this offering is complete. We cannot make assurances as to any particular valuation for our common stock. Accordingly, investors are cautioned not to place any reliance on the foregoing valuation methodologies as an indicator of future stock prices.

Identified Non-Amortizable Intangible Assets and Goodwill

              Goodwill represents the excess cost of a business acquisition over the fair value of the net assets acquired. Indefinite-life identifiable intangible assets and goodwill are not amortized but are tested for impairment at least annually. We perform our annual review in the fourth quarter of each year, or more frequently if indicators of potential impairment exist, to determine if the carrying value of the recorded goodwill or indefinite lived intangible assets is impaired. If an asset is impaired, the difference between the value of the asset reflected on the financial statements and its current fair value is recognized as an expense in the period in which the impairment occurs.

              Each period, we can elect to initially perform a qualitative assessment to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. If we believe, as a result of its qualitative assessment, that it is not more likely than not that the fair value of a reporting unit containing goodwill is less than its carrying amount, then the first and second steps of the quantitative goodwill impairment test are unnecessary. If we elect to bypass the qualitative assessment option, or if the qualitative assessment was performed and resulted in our being unable to conclude that it is not more likely than not that the fair value of a reporting unit containing goodwill is less than its carrying amount, we will perform the two-step quantitative goodwill impairment test. We perform the first step of the two-step quantitative goodwill impairment test by calculating the fair value of the reporting unit using a discounted cash flow method, and then comparing the fair value with the carrying amount of the reporting unit. If the carrying amount of the reporting unit exceeds its fair value, we perform the second step of the quantitative goodwill impairment test to measure the amount of the impairment loss, if any. Based on these assessments and tests, we have concluded there was no impairment for the years ended December 31, 2015 and 2014.

Impairment of Long-Lived Assets

              Long-lived assets include property and equipment and finite-lived intangibles. In the event that facts and circumstances indicate that these assets may be impaired, an evaluation of recoverability at the lowest asset group level would be performed. If an evaluation is required, the estimated future undiscounted cash flows associated with the asset would be compared to the asset's carrying amount to determine if a write-down to fair value is required. The lowest level for which identifiable cash flows exist is the operating clinic level. There was no impairment charge recorded in either 2015, 2014 or 2013.

Income Taxes

              We account for income taxes under the liability approach. Under this approach, deferred tax assets and liabilities are recognized based upon temporary differences between the financial statement and tax bases of assets and liabilities, as measured by the enacted tax rates, which will be in effect when these differences reverse. Deferred tax expense or benefit is the result of changes in deferred tax

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assets and liabilities between reporting periods. A valuation allowance is established when, based on an evaluation of objectively verifiable evidence, there is a likelihood that some portion or all of the deferred tax assets will not be realized.

              Our income tax provision (benefit) relates to its share of pre-tax income (losses) from our ownership interest in our subsidiaries as these entities are pass-through entities for tax purposes. Accordingly, we are not taxed on the share of pre-tax income attributable to noncontrolling interests and net income attributable to noncontrolling interests in the accompanying consolidated financial statements has not been presented net of income taxes attributable to these noncontrolling interests.

              We recognize a tax position in its financial statements when that tax position, based solely upon its technical merits, is more likely than not to be sustained upon examination by the relevant taxing authority. Once the recognition threshold is met, the tax position is then measured to determine the actual amount of benefit to recognize in the financial statements. In addition, the recognition threshold of more-likely-than-not must continue to be met in each reporting period to support continued recognition of the tax benefit. Tax positions that previously failed to meet the more-likely-than-not recognition threshold are recognized in the first financial reporting period in which that threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not recognition threshold are derecognized in the financial reporting period in which that threshold is no longer met. We recognize interest and penalties related to unrecorded tax positions in our income tax expense.

Quantitative and Qualitative Disclosure About Market Risk

              Our investments include cash. The primary objective of our investment activities is to preserve principal while maximizing income without significantly increasing risk. We do not enter into investments for trading or speculative purposes.

Interest Rate Risk

              Our credit facilities contain multiple interest rate options which allow us to choose between a rate based on U.S. prime rate-based interest rate, a federal funds rate or a London Interbank Offered Rate-based interest rate. We are subject to changes in interest rates on our outstanding term loans. As of December 31, 2015, there were no borrowings under our revolving credit facility. If we were to draw on it, then we would also be subject to changes in interest rates with respect to these borrowings. We may be exposed to interest rate volatility to the extent such interest rate risk is not hedged.

              We have entered into two interest swap agreements as a means of hedging exposure to, and volatility from, variable-based interest rate changes as part of an overall interest rate risk management strategy. The agreements are not held for trading or speculative purposes and have the economic effect of converting the London Interbank Offered Rate ("LIBOR") variable component of our interest rate to a fixed rate. These swap agreements are designated as cash flow hedges, and as a result, hedge-effective gains or losses resulting from changes in fair values of these swaps are reported in other comprehensive income until such time as each swap is realized, at which time the amounts are classified as net income. The swaps are not perfectly effective. At each reporting period we measure the ineffectiveness and record those cumulative measurements in the non-cash component of interest expense. Net amounts paid or received for each swap that has settled has been reflected as adjustments to interest expense. The swaps do not contain credit risk contingent features.

Inflation Risk

              We do not believe that inflation has had a material effect on our business, financial condition or results of operations. If our costs were to become subject to significant inflationary pressures, we may not be able to fully offset such higher costs through price increases. Our inability or failure to do so could harm our business, financial condition and results of operations.

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BUSINESS

Overview

              We are the largest dialysis services provider in the United States focused exclusively on joint venture partnerships with physicians. We provide high-quality patient care and clinical outcomes to patients suffering from ESRD. Our core values create a culture of clinical autonomy and operational accountability for our physician partners and staff members. We believe our joint venture model has helped us become one of the fastest-growing national dialysis services platforms, in terms of the growth rate of our non-acquired treatments since 2012.

              We operate our clinics exclusively through a JV model, in which we partner primarily with local nephrologists to develop, own and operate dialysis clinics, while the providers of the majority of dialysis services in the United States operate through a combination of wholly owned subsidiaries and joint ventures. Each of our clinics is maintained as a separate joint venture in which generally we have the controlling interest and our nephrologist partners and other joint venture partners have a noncontrolling interest. As of December 31, 2015, on average we held 54% of the interests in our clinics and our nephrologist partners held 46% of the interests. We believe our JV model, combined with a high-quality operational infrastructure, provides our physician partners the independence to make improved clinical decisions so they can focus on maximizing patient care and grow their clinical practices.

              We believe our approach has attracted physician partners and facilitated the expansion of our platform through de novo clinics. Since 2012, we have opened 15 or more de novo clinics each year. As of December 31, 2015, we owned and operated 192 dialysis clinics in partnership with 347 nephrologist partners treating over 13,000 patients in 24 states and the District of Columbia. From 2012 to 2015, our total number of treatments grew at a compound annual growth rate, or CAGR, of 15.0%, driven primarily by increases in non-acquired treatments, which grew at a CAGR of 11.1%. During the same period, our revenues, Adjusted EBITDA-NCI and net income attributable to us has grown at a CAGR of 15.7%, 11.6% and 28.2%, respectively. For the year ended December 31, 2015, our revenues, Adjusted EBITDA-NCI and net income attributable to us reached $657.5 million, $113.8 million and $18.8 million, respectively.

              For definitions of Adjusted EBITDA and Adjusted EBITDA-NCI and a reconciliation of Adjusted EBITDA and Adjusted EBITDA-NCI to net income (loss), see "Prospectus Summary—Summary Historical and Pro Forma Consolidated Financial Data."

Our Core Values

              Our business and operating model emphasize the following core values.

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Our Competitive Strengths

              Our competitive strengths are well-aligned with an evolving healthcare services market that demands high-quality patient care, physician-centered care management and continuous clinical and administrative improvement and efficiency.

Exclusive Focus on the JV Model Delivers Compelling Value Proposition for Patients, Physicians and Payors

              We are the largest exclusively joint venture-focused dialysis services provider in the United States. As of December 31, 2015, we owned 192 outpatient dialysis clinics across 24 states and the District of Columbia in joint venture partnerships with our nephrologist partners. We have grown our network of clinics in a disciplined manner while focusing on partnering with high-quality physicians and employing well-trained clinical staff members. None of our physician partners have voluntarily terminated their partnerships with us since our founding in 1999. We believe our results reflect the compelling value proposition of our JV model:

Effectiveness of our JV Model in Delivering High Performance

              We meet or exceed the core measures established by CMS to promote high-quality services in outpatient dialysis facilities. As an example, we have demonstrated strong performance in the ESRD Quality Incentive Program ("QIP"), which changes the way CMS pays for the treatment of patients with ESRD by linking a portion of payment directly to facilities' performance on CMS core measures.

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The ESRD QIP reduces future payments to dialysis facilities that do not meet or exceed certain performance standards. The maximum payment reduction CMS can apply to any facility is 2% of all payments for services performed by the facility in a given year. Since the inception of the QIP program in 2010, the impact of payment reductions on our revenues has not exceeded 0.1% of our revenues in any year. Based on our performance in measurement years 2013 and 2014, only 1.4% and 1.2% of our clinics were penalized by CMS for payment years 2015 and 2016, respectively, compared to 5.6% and 5.5% of dialysis clinics across the United States penalized by CMS for the same periods, respectively, according to publicly available data from CMS. We believe our performance is driven by a culture of compliance and the advantages of our JV model.

Premier Brand Recognition and Alignment of Interests Makes ARA a Preferred Partner for Nephrologists

              We believe that the ARA brand has a strong reputation and widespread recognition in the industry. We believe that our premier brand has been and will continue to be a key factor in our success. This reputation has been built since our inception, backed by the performance and success of our nephrologists and clinical staff. Our brand is further associated with high-quality care as evidenced by our clinical outcomes and patient satisfaction levels. According to the Press Ganey survey, 98% of the 51 physicians who responded to the survey agreed or strongly agreed that our clinics provide high-quality care and service (with the remaining 2% giving neutral responses). Our exclusive focus on the JV model combined with our premium brand recognition afford us high success rates in partnering with nephrologists interested in pursuing a JV model.

              Our nephrologists appreciate the quality of our dialysis clinics, best practices management services and solid track record of clinical and regulatory compliance. To date, none of our physician partners has voluntarily left us to join a competitor or terminated a partnership. Further, by owning a portion of the clinics where their patients are treated, our physician partners have a vested stake in the quality, reputation and performance of the clinics.

              We believe our JV model drives growth by enabling our physician partners to reinvest in their practices and develop their practices by adding new nephrologists, which provides us with the opportunity to expand existing clinics or add new clinics. According to the Press Ganey survey, 100% of the responding physicians agreed or strongly agreed that they have adequate input into clinic decisions that affect their practices and 98% agreed or strongly agreed that they had confidence in ARA leadership (with the remaining 2% giving neutral responses). Our physician partners' satisfaction leads to positive references and new physician recommendations within the broader nephrology community, thereby enhancing our ability to partner with leading, established nephrologists. According to the Press Ganey survey, 98% of the responding physicians agreed or strongly agreed that they would recommend our clinics to other physicians and medical staff as a good place to practice medicine (with the remaining 2% giving neutral responses).

Proven De Novo Clinic Model Drives Predictable Market Leading Organic Growth

              We have primarily grown through de novo clinic development. We have developed a streamlined approach to opening clinics that results in competitive return on invested capital for both our company and our physician partners. As of December 31, 2015, we had a portfolio of 143 clinics developed as de novo clinics. Since 2012, we have opened 15 or more de novo clinics each year.

              Highly competitive de novo clinic economics.    A typical de novo clinic is 6,000 to 7,000 square feet, has 15 to 20 dialysis stations (performing approximately 9,000 to 10,000 annual treatments on average) and requires approximately $1.3 to $1.7 million of capital for equipment purchases, leasehold improvements and initial working capital. A portion of this required capital is typically equity capital funded by us and our nephrologist partners in proportion to our respective ownership interests, and the balance of such development cost is typically funded through third-party loans or intercompany loans

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that we and our nephrologist partners guarantee on a basis proportionate to our respective ownership interests.

              We have a long track record of achieving positive clinic-level monthly EBITDA within, on average, six months after the first treatment at a clinic. The consistent historical growth of each year's class of de novo clinics attests to the success of our de novo model. For example, eight de novo clinics opened in 2010 generated an average revenue of $2.3 million per clinic in their first year, which grew to $3.8 million per clinic in their second year and $4.4 million per clinic in their third year (a three-year CAGR of approximately 38%); 12 de novo clinics opened in 2011 generated an average revenue of $1.4 million per clinic in their first year, which grew to $2.8 million per clinic in their second year and $3.1 million per clinic in their third year (a three-year CAGR of approximately 47%); 16 de novo clinics opened in 2012 generated an average revenue of $1.7 million per clinic in their first year, which grew to $3.0 million per clinic in their second year and $3.4 million per clinic in their third year (a three-year CAGR of approximately 41%); 17 de novo clinics opened in 2013 generated an average revenue of $1.8 million per clinic in their first year, which grew to $2.9 million per clinic in their second year; and 15 de novo clinics opened in 2014 generated an average revenue of $1.6 million per clinic in their first year.

              Robust business development efforts to maintain momentum of signing de novo clinics.    Our successful track record helps us attract new nephrologists and maintain an active pipeline of de novo clinics to be opened in the near future. We frequently receive inquiries from nephrologists seeking to partner with us as a result of recommendations from our existing nephrologist partners or based on our brand recognition and reputation in the nephrologist community. Our senior management consistently meets with high-quality lead nephrologists and engages them in discussions regarding benefits of partnering with us. This affords us the opportunity to selectively partner with the most qualified and credentialed physicians. At any given time, we have an active roster of nephrologists, including existing physician partners, seeking to open clinics within the next twelve months.

              We refer to clinics for which a medical director agreement, an operating agreement and a management services agreement have been signed as our "signed de novo clinics." On average, our signed de novo clinics begin serving patients within 15 months of signing of the agreements. From that point, a clinic may take approximately two to three years to achieve the stabilized revenue initially projected for that clinic. As of December 31, 2014, we had 23 signed de novo clinics. As of December 31, 2015, we had opened 15 of such clinics and had 32 signed de novo clinics. Scheduled to be opened in 2016 and 2017.

              Our track record of opening signed clinics within a predictable timeline and ability to maintain momentum of signing de novo clinics has helped us sustain our industry-leading growth rates in terms of percentage growth in non-acquired treatments.

Innovative and Experienced Management Team with a Proven Track Record

              Our management team is among the most experienced in the dialysis services industry. Our executives, including our two founders, have on average 22 years of professional experience in the dialysis services industry while our two founding executives collectively have on average 37 years of professional experience in the dialysis services industry. Our two founding executives and other senior management firmly believe in the advantages of the JV model and the importance of attracting, developing and retaining skilled staff at our clinics, and they endeavor to continue to build our company on these founding philosophies. Most of our executive and senior management have held multiple positions with one or more of our competitors and have contacts throughout the dialysis services industry with physicians, clinical staff, payors, vendors and other parties. Our executive leadership is supported by an experienced team of regional vice presidents who maintain a hands-on approach and are focused on the success of each local clinic in their respective markets. This breadth and depth of experience gives our management team the knowledge and resources to more effectively

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manage relations with physician partners and other personnel, enhance operating results and promote growth.

Our Growth Strategy

              We believe our focus on the JV model, our core values and the strength of our experienced management team have driven the growth in our patient population and physician relationships, and position us to execute on the following growth strategies.

Partner with High-Quality Nephrologists with Strong Local Market Reputation and Patient Relationships

              We partner with nephrologists who are well-qualified and have strong reputations and patient relationships in the local market. We have a well-established protocol to evaluate the quality of a potential nephrologist partner. Our success to date, together with the opportunities provided by our JV model, make us an attractive partner for nephrologists, including those nephrologists whose contractual relationships as medical directors at our competitors' clinics have expired. Further, our nephrologist partners also generate awareness and recognition of our company within the broader nephrology community and provide recommendations of potential new nephrologist partners physicians. Consequently, we have the opportunity to be selective when choosing our future physician partners.

              According to a report prepared for the American Society of Nephrology, there are over 10,000 full-time practicing nephrologists in the United States. We believe that many of these physicians treat their patients at clinics in which they have no ownership and may be interested in partnering with us in a JV model. As of December 31, 2015, we have partnered with 347 of these nephrologists, or less than 4% of all full-time practicing nephrologists, giving us significant opportunity to grow as a premier JV model operator within the nephrologist community.

Grow Organically Through De Novo Clinics in New and Existing Markets and Expansion of Existing Clinics

              We intend to leverage our JV model and our reputation in the nephrology community to continue to develop de novo clinics in new as well as existing markets in the United States. Our nephrologist relationships and strong reputation in the industry allow us to maintain an active pipeline of de novo clinics to be opened in the near future, which we expect to drive continued growth in our non-acquired treatments and non-acquired revenues. As of December 31, 2015, our portfolio included 143 clinics developed as de novo clinics.

              De novo clinics with new physician partners.    We believe our strong brand reputation and widespread recognition in the closely knit nephrologist community give us an opportunity to attract new nephrologists as our physician partners and staff. We believe that patients choose to have their dialysis services at one of our clinics due to their relationship with our physician partners and staff, consistent high-quality care, a comfortable patient care experience and convenience of location and available treatment times. Our de novo clinics showcase a core competence in building and operating de novo clinics that are supported by our best practice management services, and grow predictably. The historical growth of these clinics provides evidence of the consistency and success of our de novo clinic model. Since 2012, we have opened 38 new clinics with new physician partners, representing approximately 59% of our de novo clinic openings.

              Additional clinics with existing physician partners.    Our JV model provides our physician partners with opportunities to grow their individual or group practices within their local markets. The growth of our partners' practices contributes to the development of additional clinics with existing partners as new JVs in the same geographic area. New clinics sometimes begin as smaller clinics under the common supervision of an existing clinic in the same market. Over time, these new clinics may grow to the same size as the original clinic, or they may continue to operate fewer shifts or otherwise offer services to a smaller patient base. In either case, new clinics allow us to increase our market share by serving new patients

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who may find the new clinic location more convenient, or by freeing up capacity at the larger clinic where existing patients may have previously sought treatment. Since 2012, we have opened 26 new clinics with existing physician partners in their respective local markets, representing approximately 41% of our de novo clinic openings.

              Expansion of capacity in existing clinics.    Depending on demand and capacity utilization, we may have space within our existing clinics to accommodate a greater number of dialysis stations or operate additional shifts in order to increase patient volume without compromising our quality standards. Such expansions offer patients more flexibility in scheduling and leverage the fixed cost infrastructure of our existing clinics, which in turn provides high incremental returns on capital invested. We intend to continue to work with our physician partners to broaden our market share in existing markets by seeking opportunities to expand our treatment volume through expansion of existing clinics. From 2012 to 2015, we added 137 dialysis stations to our existing clinics, representing the equivalent of nearly eight de novo clinics or an average per year increase in capacity of 1.4%, which further enhance our non-acquired treatment growth rate profile.

Opportunistically Pursue Acquisitions

              We currently operate 49 clinics that we acquired and integrated with our JV model. Because the acquisition cost for an existing dialysis clinic is typically higher than the cost to develop a de novo clinic, we have a disciplined approach to acquiring existing dialysis clinics. Our acquisition strategy is primarily driven by the quality of the nephrologist in the market. We pursue acquisitions in situations where we believe the nephrologist could be a potential partner and where there is an attractive opportunity to enter a new market or expand within an existing market.

              Our disciplined acquisition strategy has yielded significant benefits. Since 2012, we have acquired 24 clinics, two of which were acquired in 2015. Under our JV model, we provide best practices management services such as incorporating the clinic into our revenue cycle management, helping physician partners expand their practices and improving the acquired clinic's cost structure including for laboratory testing, medical supplies, medications and services. As a result, the profitability of these clinics is typically improved. Clinics that we have acquired before 2014 (for which we have data and have no prior relationship) have, on average, increased revenue in the twelve months following acquisition by approximately 35% over the prior twelve-month period.

              We intend to continue to opportunistically pursue acquisitions of clinics with reputations for quality and service. In making these acquisitions, we intend to integrate the ownership of the acquired clinic with our JV model. In addition, from time to time, we may evaluate the acquisition of existing dialysis clinic operators that have implemented a JV model similar to ours.

Deliver on Our Core Values with Best Practices Management Services

              We intend to continue to focus on providing high-quality patient care, clinical autonomy to physicians and extensive professional, operational and managerial support to our clinics through management services arrangements. Based on our experience in the dialysis services industry, we will continue to follow a disciplined approach to enhancing performance in key areas such as: revenue cycle management; patient registration; facilitation and verification of insurance; payor interaction and arrangements; and billing and collection. We believe this has positively impacted our revenue per treatment and allowed us to maintain low levels of days' sales outstanding and bad debt expense. In addition, we believe our management services reduce the burden of back-office management responsibilities associated with the daily operations of a dialysis clinic and enable our physician partners to focus on providing high-quality patient care. As a result, we consistently deliver high-quality clinical outcomes.

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              Our management team adheres to several core values that foster best practices which we believe set us apart from other companies in our industry. Since our inception we have placed a strong emphasis on attracting, developing and retaining skilled staff at our clinics. We provide our clinical staff with necessary resources, equipment and administrative support to perform their duties effectively, and we closely monitor our staff's satisfaction levels, responsibilities and workloads. We believe this emphasis promotes staff satisfaction and helps us attract and retain skilled clinical personnel. We believe our low employee turnover helps improve our operating efficiency and clinical outcomes.

              As a result of our growth and the other competitive strengths outlined above, we are able to generate significant cash flows from the operation of our JV clinics. This cash flow enhances our financial flexibility and enables us to pursue our de novo clinic growth strategy. The cash flows generated by our JV clinics also enable us to make distributions to our physician partners so that they may reinvest in and continue to grow their practices.

Our Clinics and Services

              We provide dialysis services for patients with ESRD, which is the end stage of advanced chronic kidney disease characterized by the irreversible loss of kidney function. ESRD patients require continued dialysis treatments or a kidney transplant to sustain life. Our clinics offer both in-center and home dialysis options to meet the needs of patients.

              Our clinics primarily provide in-center hemodialysis treatments and ancillary items and services. Hemodialysis typically last