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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2012

Commission File Number 333-170376

LOGO

American Renal Holdings Inc.

(Exact name of registrant as specified in its charter)


Delaware		04-3477845
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification Number)

500 Cummings Center Beverly, Massachusetts		01915
(Address of principal executive offices)		(Zip code)

(978) 922-3080

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) or 12(g) of the Act:

None

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ¨ No x*

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No x

As of November 2, 2012 there were outstanding 9,215,594 shares of common stock, $0.01 par value per share, of American Renal Associates Holdings, Inc., the indirect parent of American Renal Holdings Inc., none of which were publicly traded.

The registrant is a voluntary filer of reports required to be filed by certain companies under Sections 13 or 15(d) of the Securities Exchange Act of 1934 and has filed all reports that would have been required to be filed by the registrant during the preceding 12 months had it been subject to such filing requirements.

INDEX


		PAGE

PART I. Financial Information

Item 1.	Financial Statements:
	Consolidated Balance Sheets as of September 30, 2012 (Unaudited) and December 31, 2011		1
	Unaudited Consolidated Statements of Income for the three and nine months ended September 30, 2012 and 2011		2
	Consolidated Statements of Changes in Equity for the nine months ended September 30, 2012 (Unaudited) and for the year ended December 31, 2011		3
	Unaudited Consolidated Statements of Cash Flows for the nine months ended September 30, 2012 and 2011		4
	Notes to Unaudited Consolidated Financial Statements		5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		17
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		30
Item 4.	Controls and Procedures		30

PART II. Other Information

Item 1.	Legal Proceedings		31
Item 1A.	Risk Factors		31
Item 6.	Exhibits		34

SIGNATURES			37

AMERICAN RENAL HOLDINGS INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(in thousands, except for share data)


	September 30, 2012		December 31, 2011
	(Unaudited)
Assets
Current assets:
Cash	$	42,691	$	32,136
Accounts receivable, less allowance for doubtful accounts of $4,926 and $4,084 at September 30, 2012 and December 31, 2011, respectively		55,741		56,027
Inventories		2,427		2,210
Prepaid expenses and other current assets		5,721		4,620
Income tax receivable		1,322		1,322
Deferred tax assets		8,912		8,271

Total current assets		116,814		104,586
Property and equipment, net		81,163		72,416
Deferred financing costs, net		4,101		4,351
Intangible assets, net		35,718		35,416
Other long-term assets		2,751		1,734
Goodwill		531,867		504,045

Total assets	$	772,414	$	722,548

Liabilities and Equity
Current liabilities:
Accounts payable	$	18,561	$	17,059
Accrued compensation and benefits		14,315		11,425
Accrued expenses and other current liabilities		43,089		28,946
Amount due to sellers		675		2,192
Current portion of long-term debt		2,977		2,662
Current portion of capital lease obligations		92		51

Total current liabilities		79,709		62,335
Long-term debt, less current portion		251,585		249,240
Capital lease obligations, less current portion		153		111
Other long-term liabilities		3,539		3,362
Deferred tax liabilities		16,233		16,233

Commitments and contingencies (Note K)

Noncontrolling interests subject to put provisions		53,119		47,492

Equity:
Common stock, no par value, 1,000 shares authorized, issued and outstanding at September 30, 2012 and December 31, 2011		—		—
Additional paid-in capital		188,869		189,108
Receivable from shareholders		—		(761	)
Retained earnings		14,726		1,352

Total American Renal Holdings Inc. equity		203,595		189,699
Noncontrolling interests not subject to put provisions		164,481		154,076

Total equity		368,076		343,775

Total liabilities and equity	$	772,414	$	722,548

See accompanying notes to the unaudited consolidated financial statements.

AMERICAN RENAL HOLDINGS INC. AND SUBSIDIARIES

Unaudited Consolidated Statements of Income

(in thousands)


	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011

Patient service operating revenues	$	108,288		$	92,666		$	307,324		$	266,975
Provision for uncollectible accounts		(869	)		(1,118	)		(1,747	)		(3,492	)

Net patient service operating revenues		107,419			91,548			305,577			263,483

Operating expenses:
Patient care costs		62,245			54,922			179,117			162,497
General and administrative		11,693			9,701			33,539			29,418
Merger related costs		—			—			—			222
Depreciation and amortization		5,333			4,509			15,151			13,222

Total operating expenses		79,271			69,132			227,807			205,359

Operating income		28,148			22,416			77,770			58,124
Interest expense, net		(5,921	)		(5,816	)		(17,716	)		(17,394	)

Income before income taxes		22,227			16,600			60,054			40,730
Income tax expense		4,726			2,602			10,756			5,380

Net income		17,501			13,998			49,298			35,350
Less: Net income attributable to noncontrolling interests		(13,169	)		(10,050	)		(35,924	)		(27,186	)

Net income attributable to American Renal Holdings Inc.	$	4,332		$	3,948		$	13,374		$	8,164

See accompanying notes to the unaudited consolidated financial statements.

AMERICAN RENAL HOLDINGS INC. AND SUBSIDIARIES

Consolidated Statements of Changes in Equity

(in thousands, except share data)


				Total American Renal Holdings Inc. Equity
	Noncontrolling interests subject to put provisions			Common Stock				Additional Paid-in Capital			Receivable from Shareholders			Accumulated Earnings (Deficit)			Total			Noncontrolling interests not subject to put provisions
	Noncontrolling interests subject to put provisions			Shares		Par Value		Additional Paid-in Capital			Receivable from Shareholders			Accumulated Earnings (Deficit)			Total			Noncontrolling interests not subject to put provisions
Balance at December 31, 2010	$	44,236			1,000	$	—	$	188,347		$	—		$	(9,763	)	$	178,584		$	152,640
Net income		8,756			—		—		—			—			11,115			11,115			28,774
Stock-based compensation		—			—		—		3,649			—			—			3,649			—
Distributions to noncontrolling interests		(8,993	)		—		—		—			—			—			—			(28,030	)
Contributions from noncontrolling interests		283			—		—		—			(761	)		—			(761	)		1,842
Acquisitions of noncontrolling interests		372			—		—		—			—			—			—			257
Sales of noncontrolling interests		284			—		—		404			—			—			404			159
Purchases of noncontrolling interests		(48	)		—		—		(1,535	)		—			—			(1,535	)		(721	)
Reclassification		845			—		—		—			—			—			—			(845	)
Change in fair value of noncontrolling interests		1,757			—		—		(1,757	)		—			—			(1,757	)		—

Balance at December 31, 2011	$	47,492			1,000	$	—	$	189,108		$	(761	)	$	1,352		$	189,699		$	154,076
Net income		8,733			—		—		—			—			13,374			13,374			27,191
Stock-based compensation		—			—		—		664			—			—			664			—
Distributions to noncontrolling interests		(7,441	)		—		—		—			—			—			—			(26,496	)
Contributions from noncontrolling interests		873			—		—		—			761			—			761			1,919
Acquisitions of noncontrolling interests		—			—		—		—			—			—			—			10,744
Sales of noncontrolling interests		38			—		—		536			—			—			536			(63	)
Purchases of noncontrolling interests		—			—		—		556			—			—			556			(1,461	)
Grant of put rights		1,803			—		—		—			—			—			—			(1,803	)
Other adjustments		—			—		—		(374	)		—			—			(374	)		374
Change in fair value of noncontrolling interests		1,621			—		—		(1,621	)		—			—			(1,621	)		—

Balance at September 30, 2012 (unaudited)	$	53,119			1,000	$	—	$	188,869		$	—		$	14,726		$	203,595		$	164,481

See accompanying notes to the unaudited consolidated financial statements.

AMERICAN RENAL HOLDINGS INC. AND SUBSIDIARIES

Unaudited Consolidated Statements of Cash Flows

(in thousands)


	Nine Months Ended September 30,
	2012			2011
Operating activities
Net income	$	49,298		$	35,350
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization		15,151			13,222
Amortization of discounts, fees and deferred financing costs		1,348			1,160
Stock-based compensation		664			3,419
Deferred taxes		(641	)		(298	)
Non-cash rent charges		406			403
Change in operating assets and liabilities, net of acquisitions:
Accounts receivable		286			(5,103	)
Inventories		104			(90	)
Prepaid expenses and other current assets		(1,103	)		826
Other assets		(1,018	)		(93	)
Accounts payable		1,499			(5,835	)
Accrued compensation and benefits		2,770			2,371
Accrued expenses and other current liabilities		7,612			18,428
Other liabilities		6,309			143

Cash provided by operating activities		82,685			63,903

Investing activities
Purchases of property and equipment		(20,582	)		(14,559	)
Cash paid for acquisitions		(21,241	)		(2,563	)
Cash paid for predecessor entity		(1,517	)		(2,891	)

Cash used in investing activities		(43,340	)		(20,013	)

Financing activities		—
Proceeds from term loans		4,348			1,004
Payments on long-term debt		(2,322	)		(2,213	)
Payments on capital lease obligations		(38	)		(36	)
Distributions to noncontrolling interests		(33,937	)		(25,717	)
Issuance of debt, net of issuance costs		—			3,300
Contributions from noncontrolling interests		3,553			778
Purchases of noncontrolling interests		(905	)		(2,303	)
Proceeds from sales of additional noncontrolling interests		511			623

Cash used in financing activities		(28,790	)		(24,564	)

Increase in cash and cash equivalents		10,555			19,326
Cash and cash equivalents at beginning of period		32,136			18,239

Cash and cash equivalents at end of period	$	42,691		$	37,565


Supplemental Disclosure of Cash Flow Information
Cash paid for income taxes	$	4,014		$	734
Cash paid for interest		12,481			12,207
Supplemental Disclosure of Non-Cash Financing Activities
Conversion of line of credit to term loan		1,004			—
Noncontrolling interests in net assets of acquisitions		10,744			628
Contributions from noncontrolling interests in the form of a receivable		—			321

See accompanying notes to the unaudited consolidated financial statements.

AMERICAN RENAL HOLDINGS INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements

September 30, 2012

(dollars in thousands, except per share amounts)

NOTE A—MERGER AND PRESENTATION

On March 22, 2010, American Renal Holdings Inc. (“ARH” or “the Company”) entered into the Merger Agreement with American Renal Associates Holding, Inc. (“ARAH” or “the Parent”), American Renal Holdings Intermediate Company, LLC, C.P. Atlas Acquisition Corp., certain of ARH’s stockholders party thereto and the Sellers’ Representative pursuant to which ARH agreed that C.P. Atlas Acquisition Corp. merge with and into ARH (the “Merger”) and, after which, ARH became the surviving entity and a wholly owned subsidiary of American Renal Holdings Intermediate Company, LLC, which is in turn a wholly owned subsidiary of the Parent. The parties agreed to consummate the Merger, subject to the terms and conditions set forth in the Merger Agreement, for an aggregate purchase price of $415 million, subject to adjustments, including, without limitation, for working capital, indebtedness, certain specified liabilities and certain tax savings. ARH agreed that $2.5 million of the purchase price was to be placed into a third-party escrow account as security for working capital adjustments and that $27.5 million of the purchase price was to be placed into a third-party escrow account as security for indemnification claims. In July 2010, the $2.5 million was released and in 2011, $26.2 million was released with $1.3 million remaining in a third-party escrow for tax indemnification. No additional amounts have been released in 2012

The aggregate purchase price of approximately $415 million for the Merger, plus related fees and expenses, was funded by the equity investment by Centerbridge Capital Partners, L.P. and its affiliates (“Centerbridge”) as well as from certain members of management and the net proceeds from the offering of $250.0 million of Senior Secured Notes (the “Senior Secured Notes”) due 2018 which bear interest at 8.375%. The Merger and the financing transaction described above are collectively referred to herein as the “Transactions.”

The Transactions were consummated on May 7, 2010, with ARH continuing as the surviving corporation and the same legal entity after the Merger. The Merger resulted in a new basis of accounting beginning on May 8, 2010. The Merger was accounted for under the acquisition method of accounting in accordance with Accounting Standards Codification (“ASC”) Topic 805, Business Combinations. Accordingly, the assets acquired, liabilities assumed and noncontrolling interests in the Merger were recorded at fair value.

The accompanying consolidated financial statements do not include the accounts and separate financials activities of the Parent, American Renal Associates Holdings, Inc.

Basis of Presentation

The Company has prepared the accompanying unaudited consolidated financial statements pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America (“U.S. GAAP”) for complete financial statements and should be read in conjunction with the Company’s audited financial statements included in the Annual Report on Form 10-K for the year ended December 31, 2011.

In the opinion of management, the Company has prepared the accompanying unaudited consolidated financial statements on the same basis as its audited financial statements, and these financial statements include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results of the interim periods presented. The operating results for the interim periods presented are not necessarily indicative of the results expected for the full year 2012, or for any other subsequent periods.

Segment Information

Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision-maker, or decision-making group, in making decisions how to allocate resources and assess performance. The Company’s chief decision-maker is a combination of the Chief Executive Officer and the Chief Operating Officer. The Company views its operations and manages its business as one reportable business segment, the ownership and operation of dialysis clinics, all of which are located in the United States.

AMERICAN RENAL HOLDINGS INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements – (Continued)

September 30, 2012

(dollars in thousands, except per share amounts)

Recent Accounting Pronouncements

Effective January 1, 2012, the Company adopted the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Update (“ASU”) 2011-07: “Health Care Entities: Presentation and Disclosure of Patient Services Revenue, Provision for Bad Debts, and the Allowance for Doubtful Accounts for certain Health Care Entities.” ASU 2011-07 requires healthcare entities to present the provision for bad debts as a component of net revenues within the revenue section of their statement of income on a retrospective basis. The statements of income for the three and nine months ended September 30, 2011 have been reclassified to account for this retrospective application. The adoption resulted in a reduction of the Company’s net patient service operating revenues and total operating expenses but did not have an impact on our financial position, results of operations or cash flows.

NOTE B—ACCOUNTS RECEIVABLE

Accounts receivable are reduced by an allowance for doubtful accounts. In evaluating the ultimate collectability and net realizable value of the Company’s accounts receivable, the Company analyzes its historical cash collection experience and trends for each of its government payors and commercial payors to estimate the adequacy of the allowance for doubtful accounts and the amount of the provision for bad debts. Management regularly updates its analysis based upon the most recent information available to it 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, the Company receives 80% of the payment directly from Medicare as established under the governments’ bundled payment system and determines an appropriate allowance for doubtful accounts and provision for bad debts on the remaining balance due depending upon the Company’s 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, the Company provides an allowance for doubtful accounts and a provision for bad debts based upon its historical collection experience, potential inefficiencies in its billing processes and for which collectability is determined to be unlikely. Less than 1% of the Company’s accounts receivable are associated with patient pay and it is the Company’s policy to reserve 100% of these outstanding accounts receivable balances.

During the nine months ended September 30, 2012, the Company’s allowance for doubtful accounts increased by approximately $0.8 million. This was primarily as a result of the provision for bad debts exceeding the amount of write-offs that occurred during the period.

NOTE C—ACQUISITIONS

The Company periodically acquires assets and liabilities of dialysis centers. The results of operations for these acquisitions are included in the Company’s consolidated statements of income from their acquisition dates.

On March 1, 2012, the Company entered into a joint venture with a university hospital to acquire in the assets and assume certain liabilities of a dialysis center in the District of Columbia. The Company has a majority interest in the joint venture.

On April 1, 2012, the Company entered into a joint venture with a pair of nephrologists to acquire the assets of a dialysis center in Florida for cash. The Company has a majority interest in the joint venture.

On June 1, 2012, the Company acquired the assets and assumed certain liabilities of a dialysis center in Massachusetts. The Company currently owns a majority interest in the joint venture.

On June 30, 2012, the Company entered into a joint venture with a university hospital to acquire the assets and assume certain liabilities of a dialysis center in Kentucky. The Company has a majority interest in the joint venture.

AMERICAN RENAL HOLDINGS INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements – (Continued)

September 30, 2012

(dollars in thousands, except per share amounts)

The purchase price, on a combined basis for all acquisitions consummated during the nine months ended September 30, 2012, was allocated preliminarily (the Company has not yet received independent appraisals) as follows:


Inventory and other tangible assets	$	1,090
Noncompete agreements		3,193
Goodwill		27,823
Liabilities assumed		(121	)
Noncontrolling interests in net assets acquired		(10,744	)


Purchase price	$	21,241

NOTE D—FAIR VALUE MEASUREMENTS

The Company’s noncontrolling interests subject to put provisions are accounted for at fair value on a recurring basis and are classified and disclosed in one of the following three categories:

Level 1: Financial instruments with unadjusted, quoted prices listed on active market exchanges.

Level 2: Financial instruments determined using prices for recently traded financial instruments with similar underlying terms, as well as directly or indirectly observable inputs, such as interest rates and yield curves that are observable at commonly quoted intervals.

Level 3: Financial instruments not actively traded on a market exchange. This category includes situations where there is little, if any, market activity for the financial instrument. The prices are determined using significant unobservable inputs or valuation techniques.

The asset or liability fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. There were no changes in the methodologies used at September 30, 2012.

Noncontrolling interests subject to put provisions—See Note F for a discussion of the Company’s methodology for estimating fair value of noncontrolling interest subject to put provisions.

September 30, 2012

Total

Level 1

Level 2

Level 3

Noncontrolling interests subject to put provisions

53,119

—

53,119


	December 31, 2011
	Total		Level 1		Level 2		Level 3

Noncontrolling interests subject to put provisions	$	47,492	$	—	$	—	$	47,492

The carrying amounts reported in the accompanying consolidated balance sheets for financial instruments including cash, accounts receivable, accounts payable and accrued liabilities approximate fair value because of their short-term nature. The fair value of the Company’s debt is estimated based on the quoted market prices for the same or similar issues or on the current rates offered to the Company for debt of the same remaining maturities. The Company estimates the fair value of the Senior Secured Notes at $265,000, term loans at $10,400, and a line of credit at $200 as of September 30, 2012. The Company estimates the fair value of the Senior Secured Notes at $264,375 and term loans at $7,594, and the line of credit at $1,004 as of December 31, 2011.

NOTE E–ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

Accrued compensation and benefits consist of the following:


	September 30, 2012		December 31, 2011
Accrued compensation	$	8,328	$	6,929
Accrued vacation pay		5,987		4,496

	$	14,315	$	11,425

AMERICAN RENAL HOLDINGS INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements – (Continued)

September 30, 2012

(dollars in thousands, except per share amounts)

Accrued expenses and other current liabilities consist of the following:


	September 30, 2012		December 31, 2011
Payor refunds and retractions	$	16,496	$	18,591
Accrued income taxes		11,939		5,746
Accrued interest		7,908		2,672
Other		6,746		1,937

	$	43,089	$	28,946

NOTE F—NONCONTROLLING INTERESTS SUBJECT TO PUT PROVISIONS

The Company has potential obligations to purchase the noncontrolling interests held by third parties in several of its consolidated subsidiaries. These obligations are in the form of put provisions and are exercisable at the third-party owners’ discretion within specified periods as outlined in each specific put provision. If these put provisions were exercised, the Company would be required to purchase the third-party owners’ noncontrolling interests at the appraised fair value. The methodology the Company uses to estimate the fair value of the noncontrolling interests subject to these put provisions is based on an average multiple of earnings, taking into consideration historical earnings and other factors. The estimated fair values of the noncontrolling interests subject to put provisions can also fluctuate and the implicit multiple of earnings at which these noncontrolling interest obligations may ultimately be settled could vary significantly from our current estimates depending upon market conditions including potential purchasers’ access to the credit and capital markets, which can impact the level of competition for dialysis and non-dialysis related businesses, the economic performance of these businesses and the restricted marketability of the third-party owners’ noncontrolling interests.

As of September 30, 2012 and December 31, 2011, the Company’s potential obligations under these put provisions totaled approximately $40,142 and $34,708, respectively. Additionally, the Company has certain put agreements which are exercisable upon the occurrence of specific events, including third-party members’ death, disability, bankruptcy, retirement, or if third-party members are dissolved. As of September 30, 2012 and December 31, 2011, the Company’s potential additional obligations under these put provisions were approximately $12,977 and $12,784, respectively. The Company’s potential obligations for all of these put provisions are included in noncontrolling interests subject to put provisions in the accompanying consolidated balance sheets.

NOTE G—LONG-TERM DEBT

Long-term debt consists of the following:


	September 30, 2012			December 31, 2011
Senior secured notes issued May 7, 2010, interest due semi-annually at a fixed rate of 8.375% with a balloon payment due on May 15, 2018	$	250,000		$	250,000
Term loans, principal payments of $25 and interest at a fixed monthly rate of 3.35 - 3.5% payable monthly through December 2016		1,254			1,475
Term loan, principal payments of $9 and interest at a fixed monthly rate of 3.35% payable monthly through May 2014, with balloon payment of $536 due May 2014		705			785
Term loans, principal and interest payable monthly at rates between 3.84% and 7.0% over varying periods through April 2017		8,052			5,024
Mortgage payable, principal and interest due monthly through March 2014 at a rate of 4.79%		104			146
Line of credit, variable interest rate (4.75% as of September 30, 2012) due monthly through May, 2013		200			—
Line of credit, fixed interest of 4.8% due monthly, converted to term loan in January 2012		—			1,004

		260,315			258,434
Less: discounts and fees, net of accumulated amortization		(5,753	)		(6,532	)
Less: current maturities		(2,977	)		(2,662	)

	$	251,585		$	249,240

AMERICAN RENAL HOLDINGS INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements – (Continued)

September 30, 2012

(dollars in thousands, except per share amounts)

Scheduled maturities of long-term debt as of September 30, 2012 are as follows for the periods ending December 31:


2012 (remainder)	$	802
2013		3,010
2014		2,586
2015		2,078
2016		1,555
Thereafter		250,284

	$	260,315

Senior Secured Notes

In connection with the Transactions, the Company issued $250.0 million of Senior Secured Notes (the “Notes”) at an offering price of 99.28%. The Notes are secured, subject to certain exceptions, by (i) all of the Company’s capital stock and (ii) substantially all of the assets of the Company’s wholly owned subsidiary guarantors. The Notes are guaranteed by the Company’s direct parent, American Renal Holdings Intermediate Company, LLC and all existing and future wholly owned domestic subsidiaries. The Notes mature on May 15, 2018. Interest is payable semi-annually at 8.375% per annum.

On or after May 15, 2015, the Company may redeem the Notes at its option, subject to certain notice periods, at a price equal to 100% of the aggregate principal amount of the Notes plus accrued and unpaid interest. From May 15, 2013 to May 14, 2015, the Company may redeem the Notes at prices ranging from 102.094% to 104.188% of the aggregate principal balance of the Notes plus accrued and unpaid interest. Prior to May 15, 2013, the Company has the option to redeem during each 12-month period up to 10% of the aggregate principal amount of the Notes at 103% of the aggregate principal amount of the Notes redeemed plus accrued and unpaid interest to the date of redemption. In addition, the Company may redeem up to 35% of the Notes before May 15, 2013, with the net cash proceeds from certain equity offerings at 108.375% of the aggregate principal amount of the Notes redeemed plus accrued and unpaid interest. The Company may also redeem some or all of the Notes before May 15, 2013 at a redemption price of 100% of the principal amount thereof plus accrued and unpaid interest, if any, to the redemption date, plus a “make-whole” premium. Upon a change in control, the Company must offer to purchase the Notes at 101% of the principal amount, plus accrued interest to the purchase date.

Credit Facility

On August 27, 2012, the Company amended its Senior Secured Revolving Credit Facility (the “Credit Facility”) in order to increase the combined commitments from $25,000 to $37,500 and decrease the applicable rate of interest. ARH capitalized $0.1 million of fees associated with the amendment. The Credit Facility expires on May 7, 2015. Borrowings under the Credit Facility bear interest at a rate equal to, at the Company’s option, either (a) an alternate base rate determined by reference to the higher of (1) the prime rate in effect on such day, (2) the federal funds effective rate plus 0.50% and (3) the Eurodollar rate applicable for an interest period of one month plus 1.00% or (b) the LIBOR rate, plus an applicable margin. The initial applicable margin for borrowings under the Credit Facility is 3.25% with respect to alternate base rate borrowings and 4.25% with respect to LIBOR borrowings. In addition to paying interest on outstanding principal under the Credit Facility, the Company is required to pay a commitment fee, initially 0.75% per annum, in respect of the unutilized revolving credit commitments thereunder. The Company is subject to leverage and fixed charge financial covenants under the Credit Facility as set forth below.

The Company has agreed that it will not permit the Consolidated Net Debt to Consolidated EBITDA (both as defined in the agreement) Ratio for any 12 month period (last four fiscal quarters) ending during a period set forth below to be greater than the ratio set forth below opposite such period:


Period	Ratio
December 31, 2011 through September 30, 2012		5.50:1.00
December 31, 2012 through September 30, 2013		5.00:1.00
December 31, 2013 through September 30, 2014		4.75:1.00
December 31, 2014 and thereafter		4.25:1.00

AMERICAN RENAL HOLDINGS INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements – (Continued)

September 30, 2012

(dollars in thousands, except per share amounts)

The Company has also agreed that it will not permit the Consolidated EBITDA to Fixed Charges (both as defined in the agreement) Ratio for any 12 month period (last four fiscal quarters) ending during a period set forth below to be lower than the ratio set forth below opposite such period:


Period	Ratio
December 31, 2011 through September 30, 2012		1.80:1.00
December 31, 2012 through September 30, 2013		2.00:1.00
December 31, 2013 through September 30, 2014		2.25:1.00
December 31, 2014 and thereafter		2.50:1.00

As of September 30, 2012, there were no borrowings outstanding under the Credit Facility and the Company was in compliance with its covenants.

NOTE H—INCOME TAXES

The income tax expense included in the accompanying unaudited consolidated statements of income principally relates to the Company’s proportionate share of the pre-tax income of its majority-owned subsidiaries. The determination of income tax expense for interim reporting purposes is based upon the estimated effective tax rate for the year adjusted for the impact of any discrete items which are accounted for in the period in which they occur.

The Company’s effective income tax rate for the three and nine months ended September 30, 2012 and 2011 was 21.3%, 15.2%, 17.9% and 11.5%, respectively. These rates differ from the federal statutory rate of 35% principally due to the portion of pre-tax income that is allocable to noncontrolling interests in our majority-owned subsidiaries which are pass-through entities for income tax purposes and the change in the estimated amount due to sellers.

NOTE I—STOCK-BASED COMPENSATION

Stock-based compensation expense included in the accompanying consolidated statements of income is as follows:


	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
Patient care costs	$	20		$	20		$	61		$	796
General and administrative		201			174			603			2,623

Total stock-based compensation before tax	$	221		$	194		$	664		$	3,419
Income tax benefit		(88	)		(78	)		(266	)		(1,368	)

During the three and nine months ended September 30, 2012, the Parent granted 50,900 and 103,850 stock options to employees of ARH, respectively.

As of September 30, 2012, the Company had approximately $9.6 million of unrecognized compensation costs, net of estimated forfeitures, related to unvested share-based compensation arrangements of which $7.1 million is attributable to vesting upon contingent events and $2.5 million is attributable to time-based vesting. The compensation cost associated with time-based vesting is expected to be recognized as expense over a weighted-average period of approximately 2.9 years

In March 2011, the Parent declared and paid a dividend equal to $14.49 per share to holders of its common stock. In connection with the dividend, the Parent also made a dividend equivalent payment of approximately $2.5 million to holders of rollover options which was recorded as stock-based compensation expense in the consolidated statement of income for the three months ended March 31, 2011. Additionally, in connection with the dividend, the exercise prices of the outstanding rollover options were also adjusted. The adjustment was made at the election of the Board of Directors and was not required to be made under the applicable predecessor option plan provisions. As such, the adjustment was accounted for as a modification of the rollover options which resulted in the recognition of incremental stock-based compensation expense of approximately $0.3 million during the three months ended March 31, 2011.

AMERICAN RENAL HOLDINGS INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements – (Continued)

September 30, 2012

(dollars in thousands, except per share amounts)

In connection with the March 2011 dividend, the exercise prices of the outstanding 2010 Plan options were also adjusted as required under the 2010 Plan. No stock-based compensation was required to be recognized in connection with the exercise price adjustment of these options.

In January 2011, the Parent adopted the American Renal Associates Holdings, Inc. 2011 Stock Option Plan for Nonemployee Directors (the “2011 Directors’ Plan”) under which 100,000 shares of the Company’s common stock were reserved for issuance to the Company’s directors and consultants. Options granted under the 2011 Directors’ Plan must be nonstatutory stock options. Stock appreciation rights may also be granted under the 2011 Directors’ Plan.

NOTE J—RELATED PARTY TRANSACTIONS

The Company has lease agreements at fair value for dialysis clinics with noncontrolling interest members or entities under the control of noncontrolling interest members. The amount of rent expense under these lease arrangements was approximately $1.1 million, $3.3 million, $0.7 million and $2.0 million for the three and nine months ended September 30, 2012 and 2011, respectively. In addition, in 2008, the Company sub-leased space at one of its dialysis clinics to the noncontrolling interest member. Rent income under this sub-lease arrangement, which extends to 2023, was approximately $0.1 million for both the three months ended September 30, 2012 and 2011 and $0.4 million for both the nine months ended September 30, 2012 and 2011.

Upon consummation of the Merger, the Company entered into a management services agreement with Centerbridge. Under this management services agreement, Centerbridge agreed to provide to the Company certain investment banking, management, consulting, and financing planning services on an ongoing basis. In consideration for these services, the Company pays Centerbridge an annual advisory services fee (payable quarterly) for each fiscal year of the greater of (i) an amount equal to the greater of (x) $550 or (y) the advisory services fee of the previous fiscal year or (ii) an amount equal to 1.25% of EBITDA, minus a personnel expense deduction, if applicable. During the three and nine months ended September 30, 2012 and 2011, the Company recorded $0.3 million, $0.2 million, $1.0 million and $0.5 million, respectively, of expense related to this agreement. Centerbridge is also entitled to receive an additional fee equal to 1.0% of the enterprise value and/or aggregate value, as applicable, for any future fundamental or significant transactions in which Centerbridge is involved.

In March 2011, the Parent issued $135.0 million of aggregate Senior Pay-In-Kind Toggle Notes (the PIK Notes) in a private placement. The PIK Notes are due in March 2016 and bear interest at a rate of 9.75% if paid in cash or 10.50% if paid-in-kind. The net proceeds of the PIK Notes were used to pay a dividend to the equity holders of the Parent. In addition, the Parent made a dividend equivalent payment to certain option holders and modified all outstanding stock options. (See Note I for further information). The issuance of the PIK Notes did not change any guarantees or obligations of the Company as disclosed herein related to the Notes or the Credit Facility. The Company does not guarantee repayment of the PIK Notes nor do any of its assets serve as collateral for the PIK Notes.

As of September 30, 2012 the Company had a payable to the parent of $3.8 million, which is included in accrued expenses and other current liabilities in the accompanying balance sheet.

NOTE K—COMMITMENTS AND CONTINGENCIES

Healthcare provider 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. Management believes it has recorded adequate provisions to consider potential revenue adjustments that might result from any of these matters.

Professional Liability Coverage

The Company maintains professional liability insurance coverage on a claims-made basis. Under this type of policy, claims based on occurrences during its term, but reported subsequently, will be uninsured should the policy not be renewed or replaced with other coverage. Management expects to be able to obtain renewal or other coverage in future periods, and has accrued the estimated cost associated with coverage of past occurrences reported in subsequent periods.

AMERICAN RENAL HOLDINGS INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements – (Continued)

September 30, 2012

(dollars in thousands, except per share amounts)

Litigation

The Company and its subsidiaries are defendants in various legal actions in the normal course of business. In the opinion of the Company’s management, based in part on the advice of outside counsel, the resolution of these matters will not have a material effect on its financial position, results of operations or cash flows.

Regulatory

The healthcare industry is subject to numerous laws and regulations of federal, state, and local governments. Government activity has increased with respect to investigations and allegations concerning possible violations by healthcare providers of fraud and abuse statutes and regulations, which could result in the imposition of significant fines and penalties, as well as significant repayments for patient services previously billed. Compliance with such laws and regulations are subject to government review and interpretations, as well as regulatory actions unknown or unasserted at this time.

NOTE L—SUPPLEMENTAL INFORMATION

As set forth in Note G, the Notes are guaranteed, jointly and severally, by all wholly-owned current or future domestic subsidiaries of the Company and by American Renal Holdings Intermediate Company, LLC (the “Guarantors”).

The following tables present the unaudited condensed consolidating financial information for ARH, the Subsidiary Guarantors and the Non-Guarantors, together with eliminations, as of and for the periods indicated. As a result of the Merger, all of ARH’s issued and outstanding capital stock is owned by American Renal Holdings Intermediate Company, LLC which is American Renal Holdings Intermediate Company, LLC’s only asset. As such, the consolidated financial statements of American Renal Holdings Intermediate Company, LLC are identical to the consolidated financial statements of ARH.

The consolidating information may not necessarily be indicative of the financial position, results of operations or cash flows had ARH, Subsidiary Guarantors and Non-Guarantors operated as independent entities.

Condensed Consolidating Balance Sheet—September 30, 2012


	ARH		Subsidiary Guarantors		Non- Guarantors			Eliminations			Consolidated
Assets
Cash and cash equivalents	$	—	$	14,096	$	28,595		$	—		$	42,691
Accounts receivable		—		385		55,357			—			55,741
Inventories		—		82		2,345			—			2,427
Prepaid expenses and other current assets		1,322		14,817		4,999			(14,095	)		7,043
Deferred tax assets		8,912		—		—			—			8,912

Total current assets		10,234		29,379		91,296			(14,095	)		116,814
Property and equipment, net		—		3,673		77,490			—			81,163
Deferred financing costs, net		3,846		—		255			—			4,101
Intangible assets		—		24,484		11,234			—			35,718
Other long-term assets		—		21,898		2,273			(21,420	)		2,751
Receivables from subsidiaries		—		25,504		—			(25,504	)		—
Investment in subsidiaries		75,191		—		—			(75,191	)		—
Goodwill		387,105		—		31,229			113,533			531,867

Total assets	$	476,376	$	104,938	$	213,777		$	(22,677	)	$	772,414

Liabilities and Equity
Current liabilities	$	8,583	$	22,798	$	88,231		$	(39,903	)	$	79,709
Long-term debt, less current portion		244,338		—		28,667			(21,420	)		251,585
Capital lease obligations, less current portion		—		—		153			—			153
Other long-term liabilities		—		—		3,539			—			3,539
Deferred tax liabilities		16,233		—		—			—			16,233
Noncontrolling interests subject to put provisions		—		251		(274,390	)		327,258			53,119
Total American Renal Holdings Inc. equity		207,222		81,889		203,096			(288,612	)		203,595
Noncontrolling interests not subject to put provisions		—		—		164,481			—			164,481

Total equity		207,222		81,889		367,577			(288,612	)		368,076

Total liabilities and equity	$	476,376	$	104,938	$	213,777		$	(22,677	)	$	772,414

AMERICAN RENAL HOLDINGS INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements – (Continued)

September 30, 2012

(dollars in thousands, except per share amounts)

Condensed Consolidating Balance Sheet—December 31, 2011


	ARH		Subsidiary Guarantors		Non- Guarantors			Eliminations			Consolidated
Assets
Cash and cash equivalents	$	—	$	12,293	$	19,843		$	—		$	32,136
Accounts receivable		—		227		55,800			—			56,027
Inventories		—		51		2,159			—			2,210
Prepaid expenses and other current assets		1,322		17,138		3,767			(16,285	)		5,942
Deferred tax assets		8,271		—		—			—			8,271

Total current assets		9,593		29,709		81,569			(16,285	)		104,586
Property and equipment, net		—		3,025		69,391			—			72,416
Deferred financing costs, net		4,202		—		149			—			4,351
Intangible assets		—		25,357		10,059			—			35,416
Other long-term assets		—		21,468		1,674			(21,408	)		1,734
Receivables from subsidiaries		—		20,512		—			(20,512	)		—
Investment in subsidiaries		49,473		—		—			(49,473	)		—
Goodwill		390,830		—		3,407			109,808			504,045

Total assets	$	454,098	$	100,071	$	166,249		$	2,130		$	722,548

Liabilities and Equity
Current liabilities	$	2,192	$	14,114	$	82,795		$	(36,766	)	$	62,335
Long-term debt, less current portion		243,584		—		27,065			(21,409	)		249,240
Capital lease obligations, less current portion		—		—		111			—			111
Other long-term liabilities		—		141		3,221			—			3,362
Deferred tax liabilities		16,233		—		—			—			16,233
Noncontrolling interests subject to put provisions		—		200		(224,900	)		272,192			47,492
Total American Renal Holdings Inc. equity		192,089		85,616		123,881			(211,887	)		189,699
Noncontrolling interests not subject to put provisions		—		—		154,076			—			154,076

Total equity		192,089		85,616		277,957			(211,887	)		343,775

Total liabilities and equity	$	454,098	$	100,071	$	166,249		$	2,130		$	722,548

AMERICAN RENAL HOLDINGS INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements – (Continued)

September 30, 2012

(dollars in thousands, except per share amounts)

Condensed Consolidating Statement of Income—Three Months Ended September 30, 2012


	ARH			Subsidiary Guarantors			Non- Guarantors			Eliminations			Consolidated
Net patient service operating revenues	$	—		$	78		$	107,341		$	—		$	107,419
Total operating expenses		—			2,571			76,700			—			79,271

Operating (loss) income		—			(2,493	)		30,641			—			28,148
Interest expense, net		(4,876	)		—			(1,045	)		—			(5,921	)

Income (loss) before taxes		(4,876	)		(2,493	)		29,596			—			22,227
Income tax expense		4,503			—			223			—			4,726

(Loss) income before earnings in subsidiaries		(9,379	)		(2,493	)		29,373			—			17,501
Equity earnings in subsidiaries		13,711			16,204			—			(29,915	)		—

Net income		4,332			13,711			29,373			(29,915	)		17,501
Less: Net income attributable to noncontrolling interests		—			—			—			(13,169	)		(13,169	)

Net income attributable to American Renal Holdings Inc.	$	4,332		$	13,711		$	29,373		$	(43,084	)	$	4,332

Condensed Consolidating Statement of Income—Nine Months Ended September 30, 2012


	ARH			Subsidiary Guarantors			Non- Guarantors			Eliminations			Consolidated
Net patient service operating revenues	$	—		$	201		$	305,376		$	—		$	305,577
Total operating expenses		—			6,878			220,929			—			227,807

Operating (loss) income		—			(6,677	)		84,447			—			77,770
Interest expense, net		(14,582	)		—			(3,134	)		—			(17,716	)

Income (loss) before taxes		(14,582	)		(6,677	)		81,313			—			60,054
Income tax expense		9,889			—			867			—			10,756

(Loss) income before earnings in subsidiaries		(24,471	)		(6,677	)		80,446			—			49,298
Equity earnings in subsidiaries		37,847			44,525			—			(82,372	)		—

Net income		13,376			37,848			80,446			(83,372	)		49,298
Less: Net income attributable to noncontrolling interests		—			—			—			(35,924	)		(35,924	)

Net income attributable to American Renal Holdings Inc.	$	13,376		$	37,848		$	80,446		$	(118,296	)	$	13,374

Condensed Consolidating Statement of Income—Three Months Ended September 30, 2011


	ARH			Subsidiary Guarantors			Non- Guarantors			Eliminations			Consolidated
Net patient service operating revenues	$	—		$	98		$	92,568		$	—		$	92,666
Total operating expenses		—			1,658			68,592			—			70,250

Operating (loss) income		—			(1,560	)		23,976			—			22,416
Interest expense, net		(4,762	)		(8	)		(1,046	)		—			(5,816	)

Income (loss) before taxes		(4,762	)		(1,568	)		22,930			—			16,600
Income tax expense		2,524			—			78			—			2,602

Net (loss) income before earnings in subsidiaries		(7,286	)		(1,568	)		22,852			—			13,998
Equity earnings in subsidiaries		11,234			12,802			—			(24,036	)		—

Net income		3,948			11,234			22,852			(24,036	)		13,998
Less: Net income attributable to noncontrolling interests		—			—			—			(10,050	)		(10,050	)

Net income attributable to American Renal Holdings Inc.	$	3,948		$	11,234		$	22,852		$	(34,086	)	$	3,948

AMERICAN RENAL HOLDINGS INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements – (Continued)

September 30, 2012

(dollars in thousands, except per share amounts)

Condensed Consolidating Statement of Income—Nine Months Ended September 30, 2011


	ARH			Subsidiary Guarantors			Non- Guarantors			Eliminations			Consolidated
Net patient service operating revenues	$	—		$	618		$	266,357		$	—		$	266,975
Total operating expenses		222			7,461			201,168			—			208,851

Operating (loss) income		(222	)		(6,843	)		65,189			—			58,124
Interest expense, net		(14,195	)		(25	)		(3,174	)		—			(17,394	)

Income (loss) before taxes		(14,417	)		(6,868	)		62,015			—			40,730
Income tax expense		4,914			—			466			—			5,380

Net (loss) income before earnings in subsidiaries		(19,331	)		(6,868	)		61,549			—			35,350
Equity earnings in subsidiaries		27,495			34,363			—			(61,858	)		—

Net income		8,164			27,495			61,549			(61,858	)		35,350
Less: Net income attributable to noncontrolling interests		—			—			—			(27,186	)		(27,186	)

Net income attributable to American Renal Holdings Inc.	$	8,164		$	27,495		$	61,549		$	(89,044	)	$	8,164

Condensed Consolidating Statement of Cash Flows—Nine Months Ended September 30, 2012


	ARH			Subsidiary Guarantors			Non- Guarantors			Eliminations			Consolidated
Operating Activities
Net income	$	13,374		$	37,845		$	80,446		$	(82,367	)	$	49,298
Change in operating assets and liabilities and noncash items included in net income		9,241			12,042			19,821			(7,717	)		33,387

Net cash provided by operating activities		22,615			49,887			100,267			(90,084	)		82,685

Investing Activities
Purchases of property and equipment		(197	)		(1,108	)		(19,277	)		—			(20,582	)
Cash paid for acquisitions		(19,312	)		—			(1,929	)		—			(21,241	)
Other		(1,517	)		(4,991	)		—			4,991			(1,517	)

Net cash used in investing activities		(21,026	)		(6,099	)		(21,206	)		4,991			(43,340	)

Financing Activities
Proceeds from term loans		—			—			14,216			(9,868	)		4,348
Payments on long-term debt obligations		—			(464	)		(14,112	)		12,254			(2,322	)
Other		(1,589	)		(41,521	)		(70,413	)		82,707			(30,816	)

Net cash used in financing activities		(1,589	)		(41,985	)		(70,309	)		85,093			(28,790	)

Net increase in cash		—			1,803			8,752			—			10,555
Cash, at beginning of year		—			12,293			19,843			—			32,136

Cash, at end of period	$	—		$	14,096		$	28,595		$	—		$	42,691

AMERICAN RENAL HOLDINGS INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements – (Continued)

September 30, 2012

(dollars in thousands, except per share amounts)

Condensed Consolidating Statement of Cash Flows— Nine Months Ended September 30, 2011


	ARH			Subsidiary Guarantors			Non- Guarantors			Eliminations			Consolidated
Operating Activities
Net income	$	8,164		$	27,495		$	61,549		$	(61,858	)	$	35,350
Change in operating assets and liabilities and noncash items included in net income		4,977			21,084			16,785			(14,293	)		28,553

Net cash provided by operating activities		13,141			48,579			78,334			(76,151	)		63,903

Investing Activities
Purchases of property and equipment		—			(980	)		(13,579	)		—			(14,559	)
Other		(2,646	)		(7,586	)		(2,692	)		7,470			(5,454	)

Net cash used in investing activities		(2,646	)		(8,566	)		(16,271	)		7,470			(20,013	)

Financing Activities
Proceeds from term loans		—			—			3,219			(2,215	)		1,004
Payments on long-term debt obligations		168			(16	)		(11,856	)		9,491			(2,213	)
Other		(10,663	)		(23,025	)		(51,072	)		61,405			(23,355	)

Net cash used in financing activities		(10,495	)		(23,041	)		(59,709	)		68,681			(24,564	)

Net increase (decrease) in cash		—			16,972			2,354			—			19,326
Cash, at beginning of year		—			(1,781	)		20,020			—			18,239

Cash, at end of period	$	—		$	15,191		$	22,374		$	—		$	37,565

ITEM 2 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-looking statements

This Quarterly Report on Form 10-Q contains statements that are forward-looking statements within the meaning of the federal securities laws. All statements that do not concern historical facts are forward-looking statements and include, among other things, statements about our expectations, beliefs, intentions and/or strategies for the future. These forward-looking statements include statements regarding our future operations, financial condition and prospects, expectations for treatment growth rates, revenue per treatment, expense growth, levels of the provision for bad debt accounts receivable, operating income, cash flow, operating cash flow, estimated tax rates, capital expenditures, the development of new centers and center acquisitions, government and commercial payment rates, revenue estimating risk and the impact of our related level of indebtedness on our financial performance. These statements involve substantial known and unknown risks and uncertainties that could cause our actual results to differ materially from those described in the forward-looking statements, including, but not limited to, risks resulting from the regulatory environment in which we operate, economic and market conditions, competitive activities, other business conditions, accounting estimates, the variability of our cash flows, the concentration of profits generated from commercial payor plans, continued downward pressure on average realized payment rates from commercial payors, which may result in the loss of revenue or patients, a reduction in the number of patients under higher-paying commercial plans, a reduction in government payment rates or changes to the structure of payments under the Medicare ESRD program or other government-based programs, changes in pharmaceutical or anemia management practice patterns, payment policies, or pharmaceutical pricing, our ability to maintain contracts with physician medical directors, legal compliance risks, including our continued compliance with complex government regulations, continued increased competition from large and medium sized dialysis providers that compete directly with us, our ability to complete any acquisitions, mergers or dispositions that we might be considering or announce, or integrate and successfully operate any business we may acquire and the risk factors we have identified in Item 1A of Part I of our Annual Report on Form 10-K for the year ended December 31, 2011. We base our forward-looking statements on information currently available to us, and we undertake no obligation to update or revise these statements, whether as a result of changes in underlying factors, new information, future events or otherwise.

The following should be read in conjunction with our consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.

Merger and Presentation

On March 22, 2010, ARH entered into the Merger Agreement with the Company, American Renal Holdings, Intermediate Company, LLC, C.P. Atlas Acquisition Corp., certain of ARH’s stockholders party thereto and the Sellers’ Representative pursuant to which ARH agreed that C.P. Atlas Acquisition Corp. merge with and into ARH (the “Merger”) and, after which, ARH became the surviving entity and a wholly owned subsidiary of American Renal Holdings Intermediate Company, LLC, which is in turn a wholly owned subsidiary of the Parent. The parties agreed to consummate the Merger, subject to the terms and conditions set forth in the Merger Agreement, for an aggregate purchase price of $415 million, subject to adjustments, including, without limitation, for working capital, indebtedness, certain specified liabilities and certain tax savings. ARH agreed that $2.5 million of the purchase price was to be placed into a third-party escrow account as security for working capital adjustments and that $27.5 million of the purchase price was to be placed into a third-party escrow account as security for indemnification claims. In July 2010, the $2.5 million was released and in 2011, $26.2 million was released with $1.3 million remaining in a third-party escrow for tax indemnification. No additional amounts have been released in 2012.

The aggregate purchase price of approximately $415 million for the Merger, plus related fees and expenses, was funded by the equity investment by Centerbridge as well as from certain members of management and the net proceeds from the offering of $250.0 million of Senior Secured Notes (the “Senior Secured Notes”) due 2018 which bear interest at 8.375%. The Merger and the financing transaction described above are collectively referred to herein as the “Transactions.”

Executive Overview

We are a national provider of kidney dialysis services for patients suffering from chronic kidney failure, also known as end stage renal disease, or ESRD. As of September 30, 2012, we owned and operated 125 dialysis clinics treating 8,312 patients in 21

states and the District of Columbia. Our operating model is based on shared ownership of our facilities with physicians, known as nephrologists, who specialize in kidney-related diseases in the local market served by the clinic. Each clinic is maintained as a separate joint venture in which we own a controlling interest and our local nephrologist partners own noncontrolling interests. The results of operations for all of our clinics are currently included in our consolidated financial statements.

We endeavor to provide our nephrologist partners with comprehensive management and operational tools in order to enable them (and other referring physicians) to focus on providing quality care to patients.

We derive our patient service operating revenues from providing both outpatient and inpatient dialysis treatments as well as from ancillary services such as administering dialysis-related pharmaceuticals, but not including services that we outsource to third-party vendors. The sources of these patient service operating revenues are principally government-based programs, including Medicare, Medicaid and Medicare-certified HMO plans as well as commercial insurance plans.

The Competitive Strength of Our JV Model

We operate our clinics exclusively through our JV model, in which we share the ownership and operational responsibility of our dialysis clinics with physicians known as nephrologists who specialize in kidney-related diseases. In each of our JVs, we own a controlling interest in the clinic and our nephrologist partners own noncontrolling interests. 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.

Clinic Development

We have experienced significant growth since opening our first clinic in December 2000. Since that date, we have developed 97 new clinics, commonly referred to as de novo clinics. The following chart shows the number of de novo and acquired clinics over the periods indicated:


	Nine Months Ended September 30,		Years Ended December 31,
	2012		2011		2010		2009
De novo clinics (1)		14		12		8		7
Acquired clinics (2)		4		3		3		3

Total new clinics		18		15		11		10

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

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

Selective recruitment of new nephrologist partners who have an established practice is critical in achieving our growth objectives. We also believe we enjoy a strong and growing reputation among the nephrologist community, ensuring that nephrologists who contemplate a migration to the shared-ownership model strongly consider us.

We also believe that the return earned by our nephrologist partners on the clinic investment can drive organic growth by enabling our nephrologist partners to reinvest in their practices, including by adding new nephrologists, which provides us with the opportunity to expand existing clinics, develop new clinics or acquire competing clinics in the same market.

We will continue to incur start-up losses associated with the opening of de novo clinics. It has been our experience that newly established dialysis centers, although contributing to increased revenues, have adversely affected our results of operations in the short term due to start-up fixed operating expenses and a smaller patient base. We consider new dialysis centers to be “start-up centers” through their initial six months of operations, or when they achieve consistent profitability, whichever is sooner.

Effect of the Transactions

In connection with the Transactions, we incurred significant additional indebtedness, including $250.0 million aggregate principal amount of the Senior Secured Notes and $25.0 million of borrowing availability under our Credit Facility (the

“Revolving Credit Facility”). On August 27, 2012, ARH amended the Revolving Credit Facility in order to increase its borrowing availability from $25.0 million to $37.5 million and decrease the applicable rate of interest. As of September 30, 2012, we had $251.0 million aggregate principal amount of indebtedness outstanding including approximately $1.0 million of third-party debt owed by our clinic subsidiaries.

After the Transactions, we are highly leveraged. Significant additional liquidity requirements, resulting primarily from increased interest expense, and other factors related to the Transactions, such as increased amortization of identified intangible assets as a result of the application of acquisition accounting will continue to significantly affect our financial condition, results of operations and liquidity going forward.

Results of Operations

Three months ended September 30, 2012 as compared with the three months ended September 30, 2011

(Dollars in thousands)


	Three Months Ended September 30,						Increase (Decrease)
	2012			2011			Amount			Percentage Change
Patient service operating revenues	$	108,288		$	92,666		$	15,622			16.9	%
Provision for uncollectible accounts		(869	)		(1,118	)		249			(22.3	)%

Net patient service operating revenues		107,419			91,548			15,871			17.3	%

Operating expenses:
Patient care costs		62,245			54,922			7,323			13.3	%
General and administrative		11,693			9,701			1,992			20.5	%
Merger related costs		—			—			—			—
Depreciation and amortization		5,333			4,509			824			18.3	%

Total operating expenses		79,271			69,132			10,139			14.7	%

Operating income		28,148			22,416			5,732			25.6	%
Interest expense, net		5,921			5,816			105			1.8	%

Income before income taxes		22,227			16,600			5,627			33.9	%
Income tax expense		4,726			2,602			2,124			81.6	%

Net income		17,501			13,998			3,503			25.0	%
Less: Net income attributable to noncontrolling interests		(13,169	)		(10,050	)		(3,119	)		31.0	%

Net income attributable to ARH	$	4,332		$	3,948		$	384			9.7	%

Net Patient Service Operating Revenues

Patient service operating revenues Patient service operating revenues for the three months ended September 30, 2012 were $108.3 million, an increase of 16.9% from $92.7 million for the three months ended September 30, 2011. The increase in patient service operating revenues was primarily due to an increase of approximately 15.7% in the number of dialysis treatments and a 1.0% increase in the average revenue per treatment. The increase in treatments resulted from both non-acquired treatment growth from existing clinics and de novo clinics as well as treatments at acquired clinics. Patient service operating revenues per treatment for the three months ended September 30, 2012 were $359, compared with $355 for the three months ended September 30, 2011. The increase in revenue per treatment was primarily due to an increase in our Medicare reimbursements rates. The following table summarizes the sources of our treatment growth for the period indicated:


	Three Months Ended September 30,
	2012			2011
Source of Treatment Growth:
Existing clinics (1)		4.1	%		11.3	%
De novo clinics opened (2)		4.4	%		5.2	%

Non-acquired treatment growth		8.5	%		16.5	%
Clinics acquired (3)		7.2	%		2.5	%

Total treatment growth		15.7	%		19.0	%

(1)	Represents net growth in treatments at clinics operating at end of the period that were also open at the end of the prior period.

(2)	Represents additional treatments provided at clinics opened since the end of the prior period, compared to the total number.

(3)	Represents treatments performed at clinics acquired since the end of the prior period.

Our patient service operating revenues per treatment are principally driven by our mix of commercial and government (principally Medicare and Medicaid) 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 covered by Medicare or Medicaid. Patients covered by employer group health plans transition to Medicare coverage after a maximum of 33 months. 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 their patient care costs. 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. Additionally, as a patient transitions from commercial coverage to Medicare coverage, the payment rates typically decline substantially.

The following table summarizes our patient service operating revenues and treatments by source for each of the periods indicated. These numbers are largely driven by the nephrologist partners we choose to partner with and the overall economic environment, particularly unemployment.


	Three Months Ended September 30,
	2012			2011
Source of revenues:
Government-based programs and other		59.0	%		58.7	%
Commercial payors		41.0	%		41.3	%

		100.0	%		100.0	%
Source of treatments:
Government-based programs and other		86.8	%		86.9	%
Commercial payors		13.2	%		13.1	%

		100.0	%		100.0	%

Provision for uncollectible accounts Provision for uncollectible accounts represents reserves established for amounts for which patients are primarily responsible which we believe will not be collectible. Provision for uncollectible accounts for the three months ended September 30, 2012 was $0.9 million, or 0.8% of patient service operating revenues as compared to $1.1 million, or 1.2% of patient service operating revenues for the same period in 2011. The decrease in provision for uncollectible accounts is primarily due to the timing of Medicare bad debt recoveries. Our accounts receivable, net of the bad debt allowance, represented approximately 47 days of patient service operating revenues as of September 30, 2012 compared to 55 days as of September 30, 2011.

Operating Expenses

Patient care costs Patient care costs for the three months ended September 30, 2012 were $62.2 million, an increase of 13.3% from $54.9 million for the three months ended September 30, 2011. 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 57.5% for the three months ended September 30, 2012 compared to 59.3% for the three months ended September 30, 2011. Patient care costs per treatment for the three months ended September 30, 2012 were $206, compared to $210 for the three months ended September 30, 2011. The decrease in patient care costs per treatment is primarily due to a decline in prescribed pharmaceuticals.

General and administrative expenses General and administrative expenses for the three months ended September 30, 2012 and 2011 were $11.7 million and $9.7 million, respectively. As a percentage of patient service operating revenues, general and

administrative expenses were approximately 10.9% for the three months ended September 30, 2012 compared to 10.5% for the three months ended September 30, 2011. General and administrative costs per treatment for the three months ended September 30, 2012 were $39, compared to $37 for the three months ended September 30, 2011. This increase in general and administrative per treatment cost is primarily related to an increase in professional fees and increased personnel costs associated with our growth.

Depreciation and amortization Depreciation and amortization expense is attributable to our clinics’ equipment and leasehold improvements and amortizing intangible assets. We calculate depreciation and amortization expense using a straight-line method over the assets’ estimated useful lives. Depreciation and amortization expense for the three months ended September 30, 2012 was $5.3 million, an increase of 18.3% from $4.5 million for the three months ended September 30, 2011 primarily related to new clinics. As a percentage of patient service operating revenues, depreciation and amortization expense was approximately 4.9% for the three months ended September 30, 2012 and 2011.

Interest Expense, net Interest expense represents charges for interest associated with our corporate level debt and credit facilities entered into by our dialysis clinics. Interest expense, net for the three months ended September 30, 2012 was $5.9 million, consistent with $5.8 million for the three months ended September 30, 2011

Income Tax Expense The provision for income taxes for the three months ended September 30, 2012 represented an effective tax rate of 21.3% compared with 15.7% in 2011. The variation from the statutory federal rate of 35% on our share of pre-tax income during the three months ended September 30, 2012 and 2011, is primarily due to the tax impact of the noncontrolling interest and the change in the estimated amount due to sellers.

Net income attributable to noncontrolling interests Noncontrolling interests represent the equity interests in our consolidated entities, which are primarily the equity interests of our nephrologist partners in our JV clinics. Net income attributable to noncontrolling interests for the three months ended September 30, 2012 was $13.2 million, an increase of 31.0% from $10.1 million for the three months ended September 30, 2011. The increase was primarily due to the addition of clinics with non-controlling interests and growth in the earnings of our existing JVs.

Nine months ended September 30, 2012 as compared with the nine months ended September 30, 2011

(Dollars in thousands)


	Nine Months Ended September 30,						Increase (Decrease)
	2012			2011			Amount			Percentage Change
Patient service operating revenues	$	307,324		$	266,975		$	40,349			15.1	%
Provision for uncollectible accounts		(1,747	)		(3,492	)		1,745			(50.0	)%

Net patient service operating revenues		305,577			263,483			42,094			16.0	%

Operating expenses:
Patient care costs		179,117			162,497			16,620			10.2	%
General and administrative		33,539			29,418			4,121			14.0	%
Merger related costs		—			222			(222	)		(100.0	)%
Depreciation and amortization		15,151			13,222			1,929			14.6	%

Total operating expenses		227,807			205,359			22,448			10.9	%

Operating income		77,770			58,124			19,646			33.8	%
Interest expense, net		17,716			17,394			322			1.9	%

Income before income taxes		60,054			40,730			19,324			47.4	%
Income tax expense		10,756			5,380			5,376			99.9	%

Net income		49,298			35,350			13,948			39.5	%
Less: Net income attributable to noncontrolling interests		(35,924	)		(27,186	)		(8,738	)		32.1	%

Net income attributable to ARH	$	13,374		$	8,164		$	5,210			63.8	%

Net Patient Service Operating Revenues

Patient service operating revenues Patient service operating revenues for the nine months ended September 30, 2012 were $307.3 million, an increase of 15.1% from $267.0 million for the nine months ended September 30, 2011. The increase in patient service operating revenues was primarily due to an increase of approximately 13.9% in the number of dialysis treatments and a 1.0% increase in the average revenue per treatment. The increase in treatments resulted principally from non-acquired treatment growth from existing clinics and de novo clinics. Patient service operating revenues per treatment for the nine months ended September 30, 2012 were $356, compared with $353 for the nine months ended September 30, 2011. The increase in revenue per treatment was primarily due to an increase in our Medicare reimbursements rates. The following table summarizes the sources of our treatment growth for the period indicated:


	Nine Months Ended September 30,
	2012			2011
Source of Treatment Growth:
Existing clinics (1)		7.1	%		13.7	%
De novo clinics opened (2)		2.7	%		3.1	%

Non-acquired treatment growth		9.8	%		16.8	%
Clinics acquired (3)		4.1	%		2.9	%

Total treatment growth		13.9	%		19.7	%

(1)	Represents net growth in treatments at clinics operating at end of the period that were also open at the end of the prior period.

(2)	Represents additional treatments provided at clinics opened since the end of the prior period, compared to the total number.

(3)	Represents treatments performed at clinics acquired since the end of the prior period.


	Nine Months Ended September 30,
	2012			2011
Source of revenues:
Government-based programs and other		59.3	%		59.1	%
Commercial payors		40.7	%		40.9	%

		100.0	%		100.0	%
Source of treatments:
Government-based programs and other		87.0	%		86.9	%
Commercial payors		13.0	%		13.1	%

		100.0	%		100.0	%

Provision for uncollectible accounts Provision for uncollectible accounts represents reserves established for amounts for which patients are primarily responsible which we believe will not be collectible. Provision for uncollectible accounts for the nine months ended September 30, 2012 was $1.8 million, or 0.6% of patient service operating revenues as compared to $3.5 million, or 1.3% of patient service operating revenues for the same period in 2011. The decrease in provision for uncollectible accounts is primarily due to the timing of Medicare bad debt recoveries. Our accounts receivable, net of the allowance for doubtful accounts, represented approximately 47 days of patient service operating revenues as of September 30, 2012 compared to 55 days as of September 30, 2011.

Operating Expenses

Patient care costs Patient care costs for the nine months ended September 30, 2012 were $179.1 million, an increase of 10.2% from $162.5 million for the nine months ended September 30, 2011. 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 58.3% for the nine months ended September 30, 2012 compared to 60.9% for the nine months ended September 30, 2011. Patient care costs per

treatment for the nine months ended September 30, 2012 were $208, compared to $215 for the nine months ended September 30, 2011. The decrease in patient care costs per treatment is primarily due to a decline in prescribed pharmaceuticals and a $0.7 million decrease in stock-based compensation.

General and administrative expenses General and administrative expenses for the nine months ended September 30, 2012 and 2011 were $33.5 million and $29.4 million, respectively. As a percentage of patient service operating revenues, general and administrative expenses were approximately 10.9% for the nine months ended September 30, 2012 compared to 11.0% for the nine months ended September 30, 2011. General and administrative costs per treatment for both the nine months ended September 30, 2012 and 2011 were $39.

Depreciation and amortization Depreciation and amortization expense is attributable to our clinics’ equipment and leasehold improvements and amortizing intangible assets. We calculate depreciation and amortization expense using a straight-line method over the assets’ estimated useful lives. Depreciation and amortization expense for the nine months ended September 30, 2012 was $15.2 million, an increase of 14.6% from $13.2 million for the nine months ended September 30, 2011 primarily related to new clinics. As a percentage of patient service operating revenues, depreciation and amortization expense was approximately 4.9% for the nine months ended September 30, 2012 compared to 5.0% for the nine months ended September 30, 2011.

Interest Expense, net Interest expense, net for the nine months ended September 30, 2012 was $17.7 million, consistent with $17.4 million for the nine months ended September 30, 2011.

Income Tax Expense The provision for income taxes for the nine months ended September 30, 2012 represented an effective tax rate of 17.9% compared with 13.2% in 2011. The variation from the statutory federal rate of 35% on our share of pre-tax income during the nine months ended September 30, 2012 and 2011, is primarily due to the tax impact of the noncontrolling interest and the change in the estimated amount due to sellers.

Net income attributable to noncontrolling interests Noncontrolling interests represent the equity interests in our consolidated entities, which are primarily the equity interests of our nephrologist partners in our JV clinics. Net income attributable to noncontrolling interests for the nine months ended September 30, 2012 was $35.9 million, an increase of 32.1% from $27.2 million for the nine months ended September 30, 2011. The increase was primarily due to the addition clinics with non-controlling interests and growth in the earnings of our existing JVs.

Liquidity and Capital Resources

We own controlling interests in our JV clinics and our nephrologist partners own noncontrolling interests, typically between 20% and 49%. Except as otherwise indicated, the following discussion of our liquidity and capital resources presents information on a consolidated basis, without giving effect to any noncontrolling interests in our JV clinics.

Cash Flows

Cash Flows from Operations:


(Dollars in thousands)
	Nine Months Ended September 30,
	2012			2011
Source / (Use)
Net income	$	49,298		$	35,350
Depreciation and amortization		15,151			13,222
Other non-cash items		1,777			4,684
Increase (decrease) in cash resulting in changes from:
Accounts receivable		286			(5,103	)
Inventories		104			(90	)
Other assets		(2,121	)		733
Accounts payable and accrued expenses		11,881			14,964
Other liabilities		6,309			143

Net cash provided by operating activities	$	82,685		$	63,903

The increase in our net cash provided by operating activities is primarily attributable to an increase in net income and accrued interest on debt agreements partially offset by a smaller increase in accounts payable and accrued expenses. Accounts receivable, net of the allowance for doubtful accounts was substantially unchanged since the prior year-end despite a 15.1% increase in revenues, represented approximately 47 days of patient service operating revenues as of September 30, 2012 compared to 55 days as of September 30, 2011.

Cash Flows from Investing Activities:


(Dollars in thousands)
	Nine Months Ended September 30,
	2012			2011
Source / (Use)
Purchases of property and equipment	$	(20,582	)	$	(14,559	)
Cash paid for acquisitions		(21,241	)		(2,563	)
Cash paid for predecessor entity, net of cash acquired		(1,517	)		(2,891	)

Net cash used in investing activities	$	(43,340	)	$	(20,013	)

The increase in our net cash used in investing activities is primarily due to the purchase of property and equipment and acquisitions.

Cash Flows from Financing Activities:


(Dollars in thousands)
	Nine Months Ended September 30,
	2012			2011
Source / (Use)
Payments on long-term debt	$	(2,322	)	$	(2,213	)
Proceeds from term loans		4,348			—
Issuance of debt, net of issuance costs		—			3,300
Distributions to noncontrolling interests		(33,937	)		(25,717	)
Other, net		3,121			66

Net cash used in financing activities	$	(28,790	)	$	(24,564	)

The increase in our net cash used by financing activities is primarily due to the increase in distributions to noncontrolling interests.

Capital Resources

Our future needs for liquidity will arise primarily from funding the acquisition and development of new clinics, operating expenses, capital expenditures, payment of the advisory fee and other expenses payable under the management agreement with Centerbridge and to service our debt, including our Revolving Credit Facility and the Senior Secured Notes. Our primary sources of liquidity will be funds generated from our operations, short-term borrowing under our Revolving Credit Facility and borrowings of long-term debt.

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 the 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.

As of September 30, 2012, we have outstanding $251.0 million in aggregate principal amount of indebtedness, with an additional $37.5 million of borrowing capacity available under our Revolving Credit Facility (not giving effect to any outstanding letters of credit, which would reduce the amount available under our Revolving Credit Facility).

Our liquidity requirements are significant, primarily due to debt service requirements in connection with the Transactions. In addition, we pay Centerbridge a yearly advisory services fee of the greater of (i) an amount equal to the greater of (x) $550,000 and (y) the amount of the previous fiscal year’s advisory fee, and (ii) an amount equal to 1.25% of our EBITDA for that fiscal year.

Historically, our principal needs for liquidity have been to fund the development and acquisition of new clinics, to pay our operating expenses, to fund capital expenditures and to service our debt. Our primary sources of liquidity are funds generated from our operations and from borrowings of long-term debt.


	September 30, 2012		December 31, 2011
	(in thousands)
Cash and cash equivalents at issuer and guarantor subsidiaries	$	14,096	$	12,293
Cash and cash equivalents at non-guarantor subsidiaries		28,595		19,843
Consolidated cash and cash equivalents	$	42,691	$	32,136

At September 30, 2012, our subsidiary level long-term loans, on an aggregated basis, consisted of term loans and mortgages totaling $1.0 million with maturities ranging from October 2012 to April 2017 and interest rates ranging from 3.35% to 7.0%.

Senior Secured Notes

In connection with the Transactions, we issued $250.0 million of Senior Secured Notes (the notes) at an offering price of 99.28%. The notes are secured, subject to certain exceptions, by (i) all of the our capital stock and (ii) substantially all of our assets of our wholly owned subsidiary guarantors. The notes are guaranteed by the our direct parent, American Renal Holding Intermediate Company, LLC and all of our existing and future wholly owned domestic subsidiaries. The notes mature on May 15, 2018. Interest is payable semi-annually at 8.375% per annum.

On or after May 15, 2015, we may redeem the notes at our option, subject to certain notice periods, at a price equal to 100% of the principal amount of the notes. Prior to May 15, 2013, we have the option to redeem during each 12-month period commencing on the issue date of May 7, 2010 up to 10% of the aggregate principal amount of the notes at 103% of the aggregate principal amount of the notes redeemed plus accrued and unpaid interest to the date of redemption. In addition, we may redeem up to 35% of the notes before May 15, 2013, with the net cash proceeds from certain equity offerings. We may also redeem some or all of the notes before May 15, 2013 at a redemption price of 100% of the principal amount thereof plus accrued and unpaid interest, if any, to the redemption date, plus a “make-whole” premium. Upon a change in control, we must offer to purchase the notes at 101% of the principal amount, plus accrued interest to the purchase date.

Revolving Credit Facility

In connection with the Transactions, we entered into a $25.0 million senior secured revolving credit facility (the Revolving Credit Facility). On August 27, 2012, ARH amended the Revolving Credit Facility in order to increase the combined commitments from $25.0 million to $37.5 million and decrease the applicable rate of interest. As of September 30, 2012, there were no borrowings outstanding under the Revolving Credit Facility. The Revolving Credit Facility expires on May 7, 2015. Borrowings under the Revolving Credit Facility bear interest at a rate equal to, at our option, either (a) an alternate base rate determined by reference to the higher of (1) the prime rate in effect on such day, (2) the federal funds effective rate plus 0.50% and (3) the Eurodollar rate applicable for an interest period of one month plus 1.00% or (b) the LIBOR rate, plus an applicable margin. The initial applicable margin for borrowings under the Revolving Credit Facility is 3.50% with respect to alternate base rate borrowings and 4.50% with respect to LIBOR borrowings. In addition to paying interest on outstanding principal under the Revolving Credit Facility, we are required to pay a commitment fee, initially 0.75% per annum, in respect of the unutilized revolving credit commitments thereunder.

Earnings before Interest, Taxes, Depreciation and Amortization and other Adjustments

We believe earnings before interest, taxes, depreciation and amortization and other adjustments, which we refer to as Adjusted EBITDA, provides information useful for evaluating our businesses and understanding our operating performance in a manner similar to management. We define Adjusted EBITDA as net income attributable to ARH before income taxes, interest expense, depreciation and amortization, and we further adjust for non-cash charges, non-recurring charges and pro forma amounts for acquisitions as if they had been consummated on the first day of each period. We believe Adjusted EBITDA is helpful in highlighting trends because Adjusted EBITDA excludes the results of decisions that are outside the control of operating 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. In addition, we present Adjusted EBITDA because it is one of the components used in the calculations under the covenants contained in our revolving credit facility. Adjusted EBITDA is not a measure 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 statements of income or cash flow data prepared in conformity with GAAP, or as measures of profitability or liquidity. In addition, Adjusted EBITDA may not be comparable to similarly titled measures of other companies. Adjusted EBITDA 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 has limitations as an analytical tool, and you should not consider this item in isolation, or as a substitute for an analysis of our results as reported under GAAP. Some of these limitations are that Adjusted EBITDA:

•

does 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;

•

does 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;

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does not include stock-based compensation expense;

•

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

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

You should not consider Adjusted EBITDA as an alternative to income from operations or net income, determined in accordance with GAAP, as an indicator of our operating performance, or as an alternative to cash flows from operating activities, determined in accordance with GAAP, as an indicator of cash flows or as a measure of liquidity.

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


	Three Months Ended September 30,						Nine Months Ended September 30,
(in thousands)	2012			2011			2012			2011

Net income	$	17,501		$	13,998		$	49,298		$	35,350
Interest expense		5,921			5,816			17,716			17,394
Income tax expense		4,726			2,602			10,756			5,380
Depreciation and amortization		5,333			4,509			15,151			13,222
Stock-based compensation		221			257			664			3,419
Merger related expenses		—			—			—			222
Management fee		338			172			953			516

Adjusted EBITDA (including noncontrolling interests)	$	34,040		$	27,354		$	94,538		$	75,503
Less: Net income attributable to noncontrolling interests		(13,169	)		(10,050	)		(35,924	)		(27,186	)

Adjusted EBITDA	$	20,871		$	17,304		$	58,614		$	48,317

Covenant Compliance

Under the Revolving Credit Facility, certain limitations, restrictions and defaults could occur if we are not able to satisfy and remain in compliance with specified financial ratios. We have agreed that we will not permit the Consolidated Net Debt to Consolidated EBITDA (both as defined in the agreement) Ratio for any 12 month period (last four fiscal quarters) ending during a period set forth below to be greater than the ratio set forth below opposite such period:


Period	Ratio
December 31, 2011 through September 30, 2012		5.50:1.00
December 31, 2012 through September 30, 2013		5.00:1.00
December 31, 2013 through September 30, 2014		4.75:1.00
December 31, 2014 and thereafter		4.25:1.00

We have also agreed that we will not permit the Consolidated EBITDA to Fixed Charges (both as defined in the agreement) Ratio for any 12 month period (last four fiscal quarters) ending during a period set forth below to be lower than the ratio set forth below opposite such period:


Period	Ratio
December 31, 2011 through September 30, 2012		1.80:1.00
December 31, 2012 through September 30, 2013		2.00:1.00
December 31, 2013 through September 30, 2014		2.25:1.00
December 31, 2014 and thereafter		2.50:1.00

The breach of these covenants could result in a default under the Credit Facility and the lenders could elect to declare all amounts borrowed due and payable. As of September 30, 2012, we are in compliance with our covenants.

In determining Consolidated EBITDA, EBITDA is calculated by reference to net income plus interest and other financing costs, provision for income taxes, depreciation and amortization and stock-based compensation. Consolidated EBITDA as defined in the agreement is calculated by adjusting EBITDA to exclude unusual items and other adjustments permitted in calculating covenant compliance under the indentures and the credit facilities. The adjustments made in determining Consolidated EBITDA include those used in determining Adjusted EBITDA, and further include adjustments for net income attributable to noncontrolling interests with clinic-level debt and certain specified other adjustments. We believe that the inclusion of supplementary adjustments to EBITDA applied in presenting Consolidated EBITDA are appropriate to provide additional information to investors to demonstrate our ability to comply with the financial covenants of the Credit Facility. The calculation of Consolidated EBITDA under the Credit Facility is as follows (in thousands):


	Last Twelve Months Ended September 30, 2012
Net income attributable to American Renal Holdings Inc.	$	16,325
Interest expense, net (1)		23,518
Income tax expense		14,956
Depreciation and amortization		19,794
Stock-based compensation		894
Transaction expenses (2)		50
Management fee (3)		1,126

Adjusted EBITDA (5)	$	76,663
Net income attributable to noncontrolling interests with clinic-level debt (4)		5,015

Consolidated EBITDA (5)	$	81,678

(1)	Includes interest expense and interest income.

(2)	Reflects expenses related to the Transactions.

(3)	Represents minimum management fees payable to Centerbridge.

(4)	Reflects net income attributable to noncontrolling interests at those clinics with $1.0 million of third-party debt as of September 30, 2012. The agreement permits this adjustment up to the amount of third-party debt that is included in certain coverage and leverage ratios.

(5)

Adjusted EBITDA is defined as net income plus net interest expense, income taxes, depreciation and amortization, stock-based compensation, transaction expenses, and specified legal costs. Adjusted EBITDA is not a recognized term under GAAP and does not purport to be an alternative to net income as a measure of operating performance or to cash flows from operating activities as a measure of liquidity. Additionally, Adjusted EBITDA is not intended to be a measure of free cash flow available for management’s discretionary use as it does not consider certain cash requirements such as interest payments, tax payments and debt service requirements. The presentation of Adjusted EBITDA has limitations as an analytical tool and should not be considered in isolation or as a substitute for analysis of the Company’s results as reported under GAAP. Management believes Adjusted EBITDA is helpful in highlighting trends because Adjusted EBITDA excludes the results of decisions that are outside the control of operating 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. In addition, Adjusted EBITDA provides more comparability between our predecessor results and our successor results that reflect acquisition accounting and our new capital structure. Management compensates for the limitations of using non-GAAP financial measures by using them to supplement GAAP results to provide a more complete understanding of the factors and trends affecting the business than GAAP results alone.

Consolidated EBITDA (or debt covenant EBITDA) is defined as Adjusted EBITDA plus net income attributable to noncontrolling interests with clinic-level debt and other adjustments. Consolidated EBITDA, not Adjusted EBITDA, is used in calculating covenant compliance under the agreements governing the Revolving Credit Facility. The Company believes that the inclusion of supplementary adjustments to Adjusted EBITDA are appropriate to provide additional information to investors about items that will impact the calculation of EBITDA that is used to determine covenant compliance under the agreements governing the Revolving Credit Facility. Since not all companies use identical calculations, this presentation of Consolidated EBITDA may not be comparable to other similarly titled measures of other companies.

Off Balance Sheet Arrangements, Contractual Obligations and Commitments

The following is a summary of historical contractual obligations and commitments as of September 30, 2012:


Scheduled payments under contractual obligations (in thousands)	Total		2012 & 2013		2014 & 2015		2016		After 2016
Clinic level third-party long-term debt and capital lease obligations (including current portion)	$	1,025	$	602	$	368	$	47	$	8
Senior Secured Notes (1)		250,000		—		—		—		250,000
Operating leases (3)		84,538		16,199		23,627		10,789		33,923
Interest payments (4)		123,008		31,406		41,875		20,938		28,789
Management fee (5)		6,774		1,106		1,786		893		2,989

Total	$	465,345	$	49,313	$	67,656	$	32,667	$	315,709

(1)	Bear interest at 8.375% with interest payment dates of May 15 and November 15. As of September 30, 2012, accrued interest totaled approximately $7.9 million.

(2)	Net of estimated sublease proceeds of $1.0 million per year from 2012 to 2016 and $5.3 million thereafter

(3)	Represents interest payments on debt obligations with fixed interest rates, including the Senior Secured Notes.

(4)	Represents minimum management fees payable to Centerbridge.

We also have potential acquisition obligations for some of our non-wholly-owned subsidiaries in the form of put provisions, which are exercisable at our nephrologist partners’ future discretion within specified periods (“time-based puts”) or upon the occurrence of certain events (“event-based puts”) as set forth in each specific put provision. See Note F—Noncontrolling Interests Subject to Put Provisions in the Notes to Unaudited Consolidated Financial Statements, included elsewhere in this Form 10-Q, for discussion of these put provisions. These put obligations are not customary in the operating agreements with our JV partners. Although no assurance can be given, we do not expect a significant increase in the number of future JV arrangements that contain put provisions.

Since our inception, $26.4 million of time-based obligations have become exercisable by our nephrologist partners, but only $2.7 million of these puts have been exercised. 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 September 30, 2012 (in thousands) and reflects the payments that would be made, assuming (a) all vested puts as of September 30, 2012 are exercised on October 1, 2012 and paid accordingly and (b) all puts exercisable thereafter are exercised as soon as they vest and are paid accordingly.


(in thousands)
Year	Amount Exercisable
2012 (remainder)	$	18,152
2013		9,829
2014		4,741
2015		1,440
2016		1,135
Thereafter		4,845

We do not have any off balance sheet arrangements.

Recent Accounting Pronouncements

Effective January 1, 2012, we adopted the Financial Accounting Standards Board’s (“FASB”) ASU 2011-07: “Health Care Entities: Presentation and Disclosure of Patient Services Revenue, Provision for Bad Debts, and the Allowance for Doubtful Accounts for certain Health Care Entities.” ASU 2011-07 requires healthcare entities to present the provision for bad debts as a component of net revenues within the revenue section of their statement of income on a retrospective basis. The statements of income for the three and nine months ended September 30, 2011 has been reclassified to account for this retrospective application. The adoption resulted in a reduction of our net patient service operating revenues and total operating expenses but did not have an impact on our financial position, results of operations or cash flows.

Critical Accounting Policies and Estimates

Management’s Discussion and Analysis of Financial Condition and Results of Operations is based upon the consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and the rules and regulations of the SEC for interim financial reporting. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We base our estimates and judgments on historical experience, knowledge of current conditions, and beliefs of what could occur in the future given available information.

There have been no changes in our critical accounting policies as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2011. For more information regarding our critical accounting policies, we encourage you to read the discussion contained in Item 7 under the heading “Critical Accounting Policies and Estimates” and Note B. “Significant Accounting Policies” included in the notes to the Consolidated Financial Statements contained in our Annual Report on Form 10-K for the year ended December 31, 2011.

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk represents the risk of loss that may affect us due to adverse changes in financial market prices and rates. Our market risk exposure is primarily related to fluctuations in interest rates. To date we have not entered into derivative or hedging transactions to manage risk in connection with such fluctuation.

There were no significant changes to our quantitative and qualitative disclosures about market risk during the nine months ended September 30, 2012. Please refer to Part II, Item 7A. Quantitative and Qualitative Disclosures about Market Risk included in our Annual Report on Form 10-K for the year ended December 31, 2011 for a more complete discussion of our market risk exposure.

ITEM 4.

CONTROLS AND PROCEDURES

(a) Evaluation of Disclosure Controls and Procedures.

Our management, with the participation of our Chief Executive Officer, or CEO, and Chief Financial Officer, or CFO, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act) as of September 30, 2012. In designing and evaluating our disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and our management necessarily applied its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on this evaluation, our CEO and CFO concluded that our disclosure controls and procedures were effective as of September 30, 2012.

(b) Changes in Internal Control over Financial Reporting.

There have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act) during the quarter ended September 30, 2012 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II

OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS

We are also subject to various claims and legal actions in the ordinary course of our business. Some of these matters include professional liability, employee-related matters and inquiries by governmental agencies regarding our employment practices. While we cannot predict the outcome of these incidental matters, we believe that any liability arising from them will not have a material adverse effect on our financial position, results of operations or cash flows.

ITEM 1A.

RISK FACTORS

We encourage you to carefully consider the risk factors identified in Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2011 and the risk factors set forth below. These risk factors could materially affect our business, financial condition and future results and could cause our actual business and financial results to differ materially from those contained in forward-looking statements made in this Quarterly Report on Form 10-Q or elsewhere by management from time to time. There have been no material changes during the quarter ended September 30, 2012 to the risk factors disclosed in our Annual Report on Form 10-K for the year ended December 31, 2011, other than as set forth below.

If the number of patients with commercial insurance declines, or if the average rates paid by commercial payors decline, our operating results and financial condition would be adversely affected.

Commercial payors pay us on terms and at rates that are generally significantly higher than Medicare rates. For both the three and nine months ended September 30, 2012, we derived approximately 41% of our patient service operating revenues from commercial payors, even though these payors were the source of reimbursement for approximately 13% of the treatments performed. Medicare payment rates may be insufficient to cover our total operating expenses allocable to providing dialysis treatments for Medicare patients, although in some circumstances they are sufficient to cover their patient care costs. The dialysis services industry is experiencing a growing number of commercial payors seeking to reduce payment rates and impose limitations on out-of-network access and rates. The downward pressure on commercial payment rates is a result of general conditions in the market, recent and future consolidations among commercial payors, increased focus on dialysis services and other factors. Decreases in the number of patients covered by commercial plans, reductions in commercial payor rates and decreases in out-of-network rates or increases in restrictions on out-of-network access could result in a significant decrease in our overall revenues derived from commercial payors.

We are continuously in the process of negotiating agreements with our commercial payors, who are increasingly aggressive in their negotiations with us. 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 financial results. Consolidations have significantly increased the negotiating leverage of commercial payors. Our negotiations with payors are also influenced by competitive pressures. It is possible that some of our contracted rates with commercial payors may decrease or that we may experience decreases in patient volume as our negotiations with commercial payors continue. In addition to increasing downward pressure on contracted commercial payor rates, payors have been attempting to impose restrictions and limitations on non-contracted or out-of-network providers. Commercial payors may restructure their benefits to create disincentives for patients to select or remain with out-of-network providers or may decrease payment rates for out-of-network providers. Because some of our clinics are currently designated as out-of-network providers for our current commercial payors, decreases in out-of-network rates and restrictions on out-of-network access combined with decreases in contracted rates could result in a significant decrease in our overall revenue derived from commercial payors. If the average rates that commercial payors pay us decline significantly, it would have a material adverse effect on our revenues, earnings and cash flows.

Additionally, our revenues are sensitive to the percentage 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. Currently, for a patient covered by an employer group health plan, Medicare generally becomes the primary payor after 33 months, including a 3-month coordination of benefits period. When Medicare becomes the primary payor, the payment rate we receive for that patient shifts from the employer group health plan rate to the usually lower Medicare payment rate. If there is a significant reduction in the number of patients under higher-paying commercial plans relative to government-based programs, our revenues, earnings and cash flows would be adversely affected.

We have seen an increase in the number of patients who have government-based programs as their primary payors which we believe is largely due to the current economic recession which has reduced the percentage of patients covered under

employer-sponsored insurance plans. To the extent there are sustained or increased job losses in the United States as a result of current economic conditions, we could experience a decrease in the number of patients under commercial plans. We could also experience a further decrease if changes to the healthcare regulatory system result in fewer patients covered under employer-sponsored commercial plans. In addition, our continued negotiations with commercial payors could result in a decrease in the number of patients under commercial 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 under higher-paying commercial plans relative to government-based programs that pay at lower rates, it would have a material adverse effect on our revenues, earnings and cash flows

Changes in the structure of, and payment rates under, state Medicaid programs and the Medicare ESRD program could adversely affect our operating results and financial condition.

During both the three and nine months ended September 30, 2012, we derived approximately 59% of our revenues from reimbursement from federal programs, such as Medicare and Medicaid.

Medicare, as required by the Medicare Improvements for Patients and Providers Act of 2008 (“MIPPA”, Pub. L. No. 110-275), modified its method for calculating payments to outpatient dialysis facilities, effective January 1, 2011. A final rule implementing this legislation was issued on August 12, 2010. See 75 Fed. Reg. 49030. Prior to January 2011, under the previous method known as the composite rate methodology, Medicare paid a single composite rate for each dialysis treatment, adjusted based upon geography and individual patient characteristics. The composite rate included the supplies used in those treatments, specified laboratory tests and certain pharmaceuticals. This Medicare ESRD program did not provide for regular percentage increases in the composite rate. Accordingly, the amounts by which we were reimbursed for our services were not adjusted to keep pace with inflation, even if our operating costs, which include labor and supply costs, increased. Other services and pharmaceuticals, vitamin D analogs, and iron supplements, were separately billed. These separately-billable pharmaceuticals included erythropoietin (“EPO”), a pharmaceutical used to treat anemia, a common complication associated with ESRD.

Under the new prospective payment methodology, known as the bundled payment system, each outpatient dialysis facility receives a single all-inclusive payment. Under the new methodology, beginning in January 2011, the bundled payment rate provides a fixed rate for all goods and services provided during the dialysis treatment, including laboratory services, the administration of pharmaceuticals and payments for pharmaceuticals such as EPO that were separately billed under the previous methodology. Further the bundled payment system requires dialysis facilities to provide new services within the payment bundle such as oral vitamin D medications and an expanded list of laboratory tests. If EPO utilization, for instance, increases beyond that contemplated when the bundled rate was set by CMS, then that could have a significant adverse effect on a facility’s profitability. With regard to the expanded list of case-mix adjustors, these are difficult for our dialysis clinics or billing and other systems to document and track which results in an increased risk in a reduction in the amounts of the payments that we would otherwise be entitled to receive. Historically these services were separately billable; now the dialysis facility is at risk for utilization with reimbursement set at a fixed rate. The per-treatment base-bundled rate payable to each facility is adjusted by an inflation factor and for geographic variations in wage rates, may be adjusted upward if the treatment volume at a given facility falls below certain thresholds, and may further be adjusted to accommodate each facility’s case-mix (e.g., patient age, body surface, body mass index co-morbidities). With regard to the expanded list of case-mix adjustors, these are difficult for our dialysis clinics or billing and other systems to document and track which results in an increased risk in a reduction in the amounts of the payments that we would otherwise be entitled to receive. The rule also requires the new single bundled payment base rate to be adjusted annually for inflation based upon the market basket index, less a productivity adjustment, beginning in 2012. Facilities may also receive additional payments for so-called outliers, cases where the cost of treatment significantly exceeds the imputed Medicare payment for that patient. In addition, beginning in 2012, the rule provides for up to a 2% withholding that can be earned back by facilities that meet certain defined clinical performance standards. To the extent our facilities do not fully meet the established benchmarks, however, we may not earn back all (or any) of the dollars withheld.

Given the limited timeframe in which the bundled payment system has been in effect, at this time we cannot predict whether we will be able to sustain reductions in our operating costs to a level that will fully offset any reduction in overall reimbursement for services we provide to Medicare patients. In addition, we may experience increases in operating costs, such as labor and supply costs, which may not fully be off-set by inflation-based increases in Medicare payments.

Further, to ensure budget neutrality during the four-year transition, Medicare reduced each facility’s payments by 3.1% based on the assumption that more than half of the dialysis facilities nationwide would opt to participate in the transition. The actual percentage of facilities which elected to forego the transition and be paid fully under the blended rate methodology effective January 1, 2011, was about 87%. As a result, CMS announced in 76 Fed. Reg. 18930 that for services furnished April 1, 2011 through December 31, 2011, it would eliminate the 3.1% payment reduction.

On November 1, 2011, CMS released the final rule for the updates and adjustments to Medicare payments to dialysis facilities for ESRD beneficiaries for 2012. Under the final rule, payment rates for dialysis treatments increased by 2.1% in 2012, representing a market basket increase of 3.0% less a productivity adjustment of 0.9%, as required by statute. The final rule also modified the factors that will be used in the new ESRD Quality Incentive Program (“QIP”). Under the QIP, beginning in 2012, 2% of a facility’s CMS payments are withheld, but can be earned back if a facility meets certain clinical benchmarks. The initial ESRD QIP was finalized earlier this year and will affect payments to individual facilities in 2012 based on performance standards with respect to two anemia management measures and one measure of dialysis adequacy. Of note, the final rule eliminates the anemia management measure of hemoglobin level less than 10 grams per deciliter measure from the initial measure set. CMS indicated they made this decision in order to be consistent with new medical evidence regarding the safety of administration of ESAs, and to be consistent with the recent labeling for ESAs approved by the U.S Food and Drug Administration (FDA). CMS and the FDA have been concerned that ESAs may increase the risk of a heart attack and other side effects. Under the final rule, for 2013, CMS will give equal weight to the two finalized measures: (1) an anemia management measure of hemoglobin levels greater than 12 grams per deciliter and (2) a hemodialysis adequacy measure as measured by a Urea Reduction Ratio (URR) of at least 65%. It is unclear what impact this modification to the QIP performance measures will have on our operations or finances. On the one hand, it may reduce costs by lowering the volume of EPO used and purchased, but on the other hand it may adversely affect our facilities’ QIP scores. Further, reduced usage of EPO may reduce payments from private insurers that reimburse separately for EPO.

Beginning January 1, 2012, certain oral-only ESRD drugs (currently paid separately to pharmacies under Medicare Part D) are included in the ESRD bundled payment to dialysis facilities. CMS delayed the inclusion of these oral only ESRD drugs until 2014 in order to assess whether the pricing mechanism used for oral drugs with injectable equivalents (included in the bundle beginning January 1, 2011) could be applied to oral only drugs. It is currently unclear how CMS will “price” the oral-only drugs for inclusion in the ESRD bundle in 2014. In adequate pricing could have a significant negative financial impact on our dialysis facilities given the volume and value of these drugs.

On July 2, 2012, CMS issued a proposed rule that would update Medicare policies and payment rates for ESRD facilities paid under the ESRD Prospective Payment System (PPS) for 2013. The proposed rule would also strengthen incentives for improved quality of care and better outcomes for patients through improvements to the ESRD Quality Incentive Program (QIP). Performance scores on the QIP measures during a proposed 2013 performance period would affect payments to dialysis facilities in 2015.

In addition to other updates, base payment rates for outpatient maintenance dialysis treatments are proposed to increase by 2.5% in 2013. This reflects the ESRD bundled market basket increase of 3.2% reduced by a productivity adjustment of 0.7%, as required by statute. CMS estimates that Medicare payments to ESRD facilities in 2013 will total $8.7 billion. When all policy changes are considered together, payments to ESRD facilities would be expected to increase by 3.1% in 2013 were the proposed rule adopted without change.

This proposed rule would also codify provisions of The Middle Class Tax Extension and Job Creation Act of 2012 that require reductions in bad debt reimbursement to all providers eligible to receive bad debt reimbursement; these provisions are specifically prescribed by Congress and thus, are generally self-implementing. The Company is in the process of evaluating the impact of this proposed rule on our operations.

We derived approximately 2.5% of our revenues for both the three and nine months ended September 30, 2012 from patients who have Medicaid as their primary coverage. 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, Medicaid eligibility requirements mandate that citizen 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, including undocumented patients living in the United States. If state governments reduce the rates paid by Medicaid programs for dialysis and related services, delay the timing of payment for services provided, or further limit eligibility for Medicaid coverage or adopt changes to the Medicaid payment structure which reduces our overall payments from Medicaid, then our revenues, earnings, and cash flows could be adversely affected.

On December 17, 2010, the Department of Veterans Affairs published a final rule, (75 Fed. Reg. 78901) effective in February 2011, which materially changed the payment methodology and ultimately the amount paid for dialysis services furnished to veterans in non-VA centers such as ours. In the final rule, the VA adopted the bundled payment system implemented by Medicare and estimated a reduction of 39% in payments for dialysis services to veterans at non-VA centers. The new VA payment methodology has had a negative impact on our net operating revenues and cash flows as a result of the reduction in

rates or as a result of the decrease in the number of VA patients we serve. Given the limited timeframe in which the bundled payment system has been in effect, at this time we cannot predict whether we will be able to sustain reductions in our operating costs to a level that will fully offset any reduction in overall reimbursement for services we provide to VA patients.

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 so-called “debt ceiling”) and reduce the federal government’s projected operating deficit. To implement this legislation, President Obama and members of the U.S. Congress have 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. Under the agreement reached to allow the federal government to raise the debt ceiling in August, a twelve-member, bipartisan committee was given a deadline of November 23, 2011 to develop recommendations for reducing the federal budget deficit by a total of at least $1.2 trillion over ten years. However, the committee was not able to agree on a plan and, therefore, $1.2 trillion in automatic spending cuts, including a two-percent reduction in Medicare payments to dialysis facilities are expected to be put into effect on January 1, 2013. These measures and any future federal legislation relating to the debt ceiling or deficit reduction could have a material adverse effect on us.

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

On March 30, 2010, President Obama signed into law the Health Care and Education Reconciliation Act that modified the newly enacted Patient Protection and Affordable Care Act, commonly and jointly referred to as the Affordable Care Act (“ACA”). This culmination of a year-long legislative process will have a significant impact on the health care delivery system. Much of that impact, specifically as related to dialysis services, is unknown.

The ACA, among other things, sets out a plan for expanded health care coverage. A number of states, including California, Colorado, Connecticut, Massachusetts, New York and Pennsylvania, are also contemplating significant reform of their health insurance markets. Other states have mounted legal challenges to the implementation of certain aspects of the ACA. The ACA, along with possible changes at the state level, will affect both public programs and privately-financed health insurance arrangements. Both the new federal law and the state proposals increase the number of insured persons by expanding eligibility for public programs or assistance, and compelling individuals and employers to purchase health coverage. At the same time, these laws seek to reform the underwriting and marketing practices of health plans. These laws could further increase pricing pressure on existing commercial payors. As a result, commercial payors may likely seek to lower their rates of reimbursement for the services we provide.

On June 28, 2012, the Supreme Court of the United States upheld the constitutionality of the so-called “individual mandate,” a key provision of ACA. However, the Court invalidated a provision in the law that would have required states that participate in Medicaid to extend their Medicaid coverage to individuals earning up to 133 per cent of the federal poverty level. States, however, can voluntarily extend coverage to include those earning up to 133 percent of the federal poverty level. Certain states have indicated that they do not intend to extend their Medicaid coverage to that group, while other states indicated that they will extend their coverage to that group. The Company is still in process of analyzing the impact of the Court’s decision on the Company’s operations.

Given the recent enactment of the ACA, and taking into account proposed state reforms and the Supreme Court’s decision invalidate the Medicaid coverage provision, we cannot predict how our business will be affected by the full implementation of these and future actions. The ACA, in connection with state initiatives, may increase our costs, decrease our revenues, expose us to expanded liability or require us to revise the ways in which we conduct our business, any of which could adversely affect our operating results and financial condition.

ITEM 6.

EXHIBITS

The following is a list of all exhibits filed as part of this Report:


EXHIBIT NUMBER		EXHIBIT DESCRIPTION

2.1		Contribution and Merger Agreement, dated as of March 22, 2010, by and among American Renal Holdings Inc., the rollover stockholders named therein, Wachovia Capital Partners GP I, LLC, C.P. Atlas Holdings, Inc., C.P. Atlas Intermediate Holdings, LLC and C.P. Atlas Acquisition Corp. (incorporated by reference to the registration statement on Form S-4 filed by American Renal Holdings Inc. on November 4, 2010).

3.1		Restated Certificate of Incorporation of American Renal Holdings Inc., as amended (incorporated by reference to the registration statement on Form S-4 filed by American Renal Holdings Inc. on November 4, 2010).



3.2		American Renal Associates Inc. By-Laws (incorporated by reference to the registration statement on Form S-4 filed by American Renal Holdings Inc. on November 4, 2010).

3.3		Form of Joint Venture Operating Agreement (incorporated by reference to Amendment No. 1 to the registration statement on Form S-4 filed by American Renal Holdings Inc. on December 6, 2010)

4.1		Indenture, dated as May 7, 2010, among American Renal Holdings Inc., the guarantors named therein and Wilmington Trust FSB, as trustee (incorporated by reference to the registration statement on Form S-4 filed by American Renal Holdings Inc. on November 4, 2010).

4.2		Registration Rights Agreement, dated as May 7, 2010, among American Renal Holdings Inc., the guarantors named therein, and Banc of America Securities LLC, Barclays Capital Inc. and Wells Fargo Securities, LLC, as representatives to the several initial purchasers (incorporated by reference to the registration statement on Form S-4 filed by American Renal Holdings Inc. on November 4, 2010).

4.3		Form of 8.375% Senior Secured Note due 2018 (included in Exhibit 4.1).

4.4		Security Agreement dated as May 7, 2010, among American Renal Holdings Inc., the guarantors named therein and Wilmington Trust FSB, as collateral agent (incorporated by reference to the registration statement on Form S-4 filed by American Renal Holdings Inc. on November 4, 2010).

4.5		Trademark Security Agreement, dated as of May 7, 2010, between American Renal Associates LLC and Wilmington Trust FSB, as collateral agent (incorporated by reference to the registration statement on Form S-4 filed by American Renal Holdings Inc. on November 4, 2010).

4.6		Intercreditor Agreement among American Renal Holdings Inc., C.P. Atlas Acquisition Corp., the guarantors named therein, Bank of America, N.A., as credit agreement administrative agent, and Wilmington Trust FSB, as collateral agent (incorporated by reference to the registration statement on Form S-4 filed by American Renal Holdings Inc. on November 4, 2010).

10.1		Credit Agreement, dated as of May 7, 2010, among C.P. Atlas Acquisition Corp. (to be merged with and into American Renal Holdings Inc.), C.P. Intermediate Holdings, LLC, Bank of America, N.A. and the other lenders party thereto (incorporated by reference to the registration statement on Form S-4 filed by American Renal Holdings Inc. on November 4, 2010).

10.2*		Amendment No. 2 dated August 27, 2012, to Credit Agreement, dated as of May 7, 2010, among American Renal Holdings Intermediate Company, LLC, American Renal Holdings Inc., Bank of America, N.A. and the other lenders party thereto.

10.3		Guaranty, dated as of May 7, 2010, among C.P. Atlas Acquisition Corp. (to be merged with and into American Renal Holdings Inc.), the guarantors named therein, Bank of America, N.A. and the other secured parties named therein (incorporated by reference to the registration statement on Form S-4 filed by American Renal Holdings Inc. on November 4, 2010).

10.4		Security Agreement, dated as of May 7, 2010, among C.P. Atlas Acquisition Corp. (to be merged with and into American Renal Holdings Inc.), the guarantors party thereto and Bank of America, N.A., as administrative agent (incorporated by reference to the registration statement on Form S-4 filed by American Renal Holdings Inc. on November 4, 2010).

10.5		Employment Agreement, dated as of March 22, 2010, among American Renal Management LLC, American Renal Holdings Inc. and Syed T. Kamal (incorporated by reference to the registration statement on Form S-4 filed by American Renal Holdings Inc. on November 4, 2010).

10.6		Employment Agreement, dated as of March 22, 2010, among American Renal Management LLC, American Renal Holdings Inc. and Joseph A. Carlucci (incorporated by reference to the registration statement on Form S-4 filed by American Renal Holdings Inc. on November 4, 2010).

10.7		First Amendment to Employment Agreement among American Renal Management, LLC, American Renal Holdings Inc., American Renal Associates Holdings, Inc. and Joseph A. Carlucci effective as of May 15, 2012 (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed by American Renal Associates Holdings, Inc. on June 6, 2012).

10.8		Employment Agreement, dated as of March 22, 2010, among American Renal Management LLC, American Renal Holdings Inc. and John J. McDonough (as amended) (incorporated by reference to the registration statements on Form S-4 filed by American Renal Holdings Inc. on November 4, 2010, and by American Renal Associates Holdings, Inc. on July 22, 2011).

10.9		2010 American Renal Associates Holdings, Inc. Stock Incentive Plan (incorporated by reference to the registration statement on Form S-4 filed by American Renal Associates Holdings Inc. on July 22, 2011).



10.10		Subscription Agreement, dated as of May 7, 2010, by and between C.P. Atlas Holdings, Inc., Centerbridge Capital Partners, L.P., Centerbridge Capital Partners SBS, L.P., Centerbridge Capital Partners Strategic, L.P., AFOS Equity LLC, Black Diamond Partners LLC, JJ Bark LLC and Tribeca Investments LLC (incorporated by reference to the registration statement on Form S-4 filed by American Renal Holdings Inc. on November 4, 2010).

10.11		Equity Contribution, Exchange and Subscription Agreement, dated as of March 22, 2010, by and between C.P. Atlas Holdings, Inc. and Joseph A. Carlucci (incorporated by reference to the registration statement on Form S-4 filed by American Renal Holdings Inc. on November 4, 2010).

10.12		Equity Contribution, Exchange and Subscription Agreement, dated as of March 22, 2010, by and between C.P. Atlas Holdings, Inc. and Christopher T. Ford 2005 Grantor Retained Annuity Trust (incorporated by reference to the registration statement on Form S-4 filed by American Renal Holdings Inc. on November 4, 2010).

10.13		Equity Contribution, Exchange and Subscription Agreement, dated as of March 22, 2010, by and between C.P. Atlas Holdings, Inc. and Christopher T. Ford 2008 Grantor Retained Annuity Trust (incorporated by reference to the registration statement on Form S-4 filed by American Renal Holdings Inc. on November 4, 2010).

10.14		Equity Contribution, Exchange and Subscription Agreement, dated as of April 30, 2010, by and between C.P. Atlas Holdings, Inc. and Wesley V. Forgue (incorporated by reference to the registration statement on Form S-4 filed by American Renal Holdings Inc. on November 4, 2010).

10.15		Equity Contribution, Exchange and Subscription Agreement, dated as of March 22, 2010, by and between C.P. Atlas Holdings, Inc. and Syed T. Kamal (incorporated by reference to the registration statement on Form S-4 filed by American Renal Holdings Inc. on November 4, 2010).

10.16		Equity Contribution, Exchange and Subscription Agreement, dated as of March 22, 2010, by and between C.P. Atlas Holdings, Inc. and John McDonough (incorporated by reference to the registration statement on Form S-4 filed by American Renal Holdings Inc. on November 4, 2010).

10.17		Equity Contribution, Exchange and Subscription Agreement, dated as of April 29, 2010, by and between C.P. Atlas Holdings, Inc. and LakhanSaha (incorporated by reference to the registration statement on Form S-4 filed by American Renal Holdings Inc. on November 4, 2010).

10.18		Transaction Fee and Advisory Services Agreement, dated as of May 7, 2010, by and among C.P. Atlas Holdings, Inc., C.P. Atlas Intermediate Holdings, LLC, American Renal Holdings Inc. and Centerbridge Advisors, LLC (incorporated by reference to the registration statement on Form S-4 filed by American Renal Holdings Inc. on November 4, 2010).

10.19		2011 American Renal Associates Holdings, Inc. Stock Option Plan for Nonemployee Directors (incorporated by reference to the registration statement on Form S-4 filed by American Renal Holdings Inc. on November 4, 2010).

10.20		Employment Agreement, dated as of October 13, 2011, among American Renal Management LLC, American Renal Holdings Inc. and Michael R. Costa (incorporated by reference to the Current Report on Form 8-K filed by American Renal Holdings Inc. on October 14, 2011).

10.21		Employment Agreement, dated as of October 13, 2011, among American Renal Management LLC, American Renal Holdings Inc. and Jon Wilcox (incorporated by reference to the Current Report on Form 8-K filed by American Renal Holdings Inc. on October 14, 2011).

10.22		Amended and Restated Stockholders Agreement dated June 28, 2010 (incorporated by reference to Exhibit 10.21 to the Current Report on Form 8-K filed by American Renal Associates Holdings, Inc. on May 18, 2012).

31.1*		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2*		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1*		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2*		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101*		The following financial information from the Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2012, formatted in XBRL (Extensible Business Reporting Language) and furnished electronically herewith: (i) the Consolidated Balance Sheets; (ii) the Consolidated Statements of Operations (iii) the Consolidated Statements of Changes in Equity; (iv) the Consolidated Statements of Cash Flows; and (iv) the Notes to the Consolidated Financial Statements.

*	Filed herein

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


AMERICAN RENAL HOLDINGS INC.
(Registrant)

/s/ Jon Wilcox
Name:		Jon Wilcox
Title:		Chief Financial Officer

November 9, 2012

(Date)

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Accelerated filer

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American Renal Holdings Inc. 10-Q