EVALUATING THE FINANCIAL ASPECTS OF DIALYSIS JOINT VENTURES MAY 2014 MATTHEW A. PHILLIPS, MANAGING DIRECTOR CITY CAPITAL ADVISORS, LLC

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1 EVALUATING THE FINANCIAL ASPECTS OF DIALYSIS JOINT VENTURES MAY 2014 MATTHEW A. PHILLIPS, MANAGING DIRECTOR CITY CAPITAL ADVISORS, LLC

2 OVERVIEW OF JOINT VENTURE MODELS How JV models are built A detailed set of projected (pro forma) financial statements (income statement, balance sheet and cash flows) with a significant number of assumptions relative to revenues, expenses, working capital, capital expenditures and other items How revenue is derived. May be projected by specific modality or on a blended basis Starting point may be treatments or patient census Prior Period Treatments x Assumed Growth Rate x Payor Mix x Revenue/Treatment (By Payor Type) How operating expenses are projected Majority of variable operating expenses are projected on a per treatment basis, with certain fixed items (like rent and other facility costs) projected on a annualized basis 2

3 OVERVIEW OF JOINT VENTURE MODELS (CONT D) Models will be most sensitive to Growth assumptions in patients and treatments How quickly is the center adding patients? Where will these new patients come from? Other facilities? CKD backlog? Payor mix assumptions how many commercial patients will you have? Revenue per treatment assumptions (especially commercial) Models become flawed if the assumptions are not based on actual experience or grounded in reality Being too optimistic about payor mix and commercial rates can have a big impact on profitability (or lack thereof) Modality mix: PD and home HD can offer more attractive profitability than in-center HD, but a shift in the modality mix needs to be supportable (based on your patient base and staffing resources/capabilities) 3

4 OVERVIEW OF JOINT VENTURE MODELS (CONT D) Developing or analyzing a JV financial model is not simply a financial exercise A large number of qualitative and quantitative factors (strategic as well as operational) should be considered as part of this process, including Competitive dynamics and principal competing clinics Physical condition of the clinic, expansion needs and major required capital improvements (existing clinics) Staff quality and turnover (or talent pool available to staff a new clinic) Primary outside referral sources to the clinic Primary competing nephrologists in the area, and the number of their patients dialyzing at the clinic (or likely to dialyze at a new clinic) Demographic changes in the surrounding community Prevalence of home modalities and opportunities for growth in HHD, PD Expectations for treatment and census growth looking ahead Backlog of CKD patients in the surrounding communities Drug utilization trends Payor mix changes 4

5 SAMPLE DE NOVO JOINT VENTURE MODEL Construction/Development Months Facility Opening Month Month 1 Month 2 Month 3 Month 4 Month 5 Month 6 Month 7 Month 8 Month 9 Month 10 Month 11 Month 12 Month 13 Month 14 Month 15 Month 16 Month 17 Month 18 Patient Count Capacity % 0% 0% 0% 0% 0% 0% 6.0% 6.0% 11.9% 15.5% 19.0% 22.6% 26.2% 29.8% 33.3% 36.9% 40.5% 44.0% Total Treatments Total Revenue $0 $0 $0 $0 $0 $0 $19,169 $19,169 $38,337 $49,838 $61,339 $72,840 $84,474 $95,993 $107,512 $119,031 $130,550 $142,069 Costs and Expenses Salaries and Wages $0 $10,000 $10,000 $10,000 $10,000 $10,000 $10,400 $10,192 $19,976 $25,450 $30,696 $35,723 $40,536 $45,143 $49,548 $53,760 $57,783 $61,624 Drug Expense ,940 4,891 9,683 12,463 15,185 17,852 20,464 23,022 25,785 28,547 31,310 34,073 Treatment Supplies ,820 1,820 3,640 4,732 5,824 6,916 8,008 9,100 10,192 11,284 12,376 13,468 Bad Debt Expense ,183 1,456 1,729 2,002 2,275 2,548 2,821 3,094 3,367 Other Facility Expenses ,500 14,500 14,500 14,500 14,500 14,500 14,863 14,863 14,863 14,863 14,863 14,863 Rent 0 12,500 12,500 12,500 12,500 12,500 12,000 12,000 12,000 12,000 12,000 12,000 12,300 12,300 12,300 12,300 12,300 12,300 Total Operating Expenses $0 $22,500 $22,500 $22,500 $22,500 $22,500 $44,115 $43,858 $60,710 $70,327 $79,662 $88,720 $98,173 $106,702 $115,236 $123,575 $131,726 $139,694 Medical Director Fees ,750 3,750 3,750 3,750 3,750 3,750 3,750 3,750 3,750 3,750 3,750 3,750 Clinical EBITDA $0 ($22,500) ($22,500) ($22,500) ($22,500) ($22,500) ($28,697) ($28,439) ($26,123) ($24,239) ($22,072) ($19,630) ($17,449) ($14,459) ($11,474) ($8,294) ($4,926) ($1,375) Administrative Expenses Depreciation and Amortization 0 1,208 2,417 3,625 4,833 6,042 6,049 6,056 6,070 6,089 6,112 6,139 6,171 6,207 6,247 6,292 6,341 6,394 Management Fees (% of Net Revenues) ,310 1,310 2,620 3,406 4,192 4,978 5,773 6,560 7,347 8,135 8,922 9,709 Pre-Tax Income $0 ($23,708) ($24,917) ($26,125) ($27,333) ($28,542) ($36,055) ($35,805) ($34,813) ($33,734) ($32,376) ($30,747) ($29,393) ($27,227) ($25,069) ($22,721) ($20,189) ($17,479) Taxes 38.00% 0 (9,009) (9,468) (9,928) (10,387) (10,846) $ (13,701) (13,606) (13,229) (12,819) (12,303) (11,684) (11,169) (10,346) (9,526) (8,634) (7,672) (6,642) Net Income $0 ($14,699) ($15,448) ($16,198) ($16,947) ($17,696) ($22,354) ($22,199) ($21,584) ($20,915) ($20,073) ($19,063) ($18,224) ($16,881) ($15,543) ($14,087) ($12,517) ($10,837) Actual EBITDA ($22,500) ($22,500) ($22,500) ($22,500) ($22,500) ($30,006) ($29,749) ($28,743) ($27,645) ($26,264) ($24,607) ($23,222) ($21,020) ($18,821) ($16,429) ($13,848) ($11,084) Rate of growth in patients and treatments Operating Costs Per Tx (Incl. MD Fees) $736 $732 $496 $438 $401 $374 $356 $340 $327 $316 $307 $298 Clinical EBITDA Per Tx ($441) ($438) ($201) ($143) ($106) ($79) ($61) ($44) ($32) ($21) ($11) ($3) Actual EBITDA Per Tx ($462) ($458) ($221) ($164) ($126) ($100) ($81) ($65) ($52) ($41) ($31) ($23) Capital Expenditures $145,000 $145,000 $145,000 $145,000 $145,000 $431 $431 $863 $1,121 $1,380 $1,639 $1,901 $2,160 $2,419 $2,678 $2,937 $3,197 Assumptions / Drivers (Per Treatment) Stations Average Treatment/Patient Patient Count Payor Mix Medicare 77.0% 77.0% 77.0% 77.0% 77.0% 77.0% 77.0% 77.0% 77.0% 77.0% 77.0% 77.0% Medicaid Annual Changes 8.0% 8.0% 8.0% 8.0% 8.0% 8.0% 8.0% 8.0% 8.0% 8.0% 8.0% 8.0% Commercial Shift in Comm Payor Mix 0.0% 15.0% 15.0% 15.0% 15.0% 15.0% 15.0% 15.0% 15.0% 15.0% 15.0% 15.0% 15.0% No Insurance 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Payor mix and revenue Rates by Payor Medicare per treament Revenue/Tx % Increase 0.3% $ $ $ $ $ $ $ $ $ $ $ $ Medicaid $ $ $ $ $ $ $ $ $ $ $ $ Commercial assumptions are critical Revenue/Tx % Increase 0.0% $ $ $ $ $ $ $ $ $ $ $ $ No Insurance $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 Revenue/Treatment $ $ $ $ $ $ $ $ $ $ $ $ Salaries and Wages $ $ $ $ $ $ $ $ $ $ $ $ Drug Expense $76.00 $75.24 $74.49 $73.74 $73.01 $72.28 $71.55 $70.84 $70.84 $70.84 $70.84 $70.84 Treatment Supplies $28.00 $28.00 $28.00 $28.00 $28.00 $28.00 $28.00 $28.00 $28.00 $28.00 $28.00 $28.00 Bad Debt Expense $7.00 $7.00 $7.00 $7.00 $7.00 $7.00 $7.00 $7.00 $7.00 $7.00 $7.00 $7.00 Other Expenses Other Expense % Increase 3% $ $ $ $85.80 $69.71 $58.70 $51.97 $45.73 $40.83 $36.88 $33.63 $30.90 Facility Costs Facility % Increase 3% $ $ $92.31 $71.01 $57.69 $48.58 $43.01 $37.85 $33.79 $30.52 $27.83 $25.57 Medical Director Fees Per Month Amount (Yrs 1-2) $ 3, $57.69 $57.69 $28.85 $22.19 $18.03 $15.18 $13.11 $11.54 $10.30 $9.31 $8.48 $7.80 Per Month Amount (Yrs 3+) $ 5, Depreciation and Amortization $93.06 $93.17 $46.70 $36.03 $29.39 $24.86 $21.58 $19.10 $17.16 $15.61 $14.35 $13.29 Management Fees (% of Net Revenues) 7% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% Capital Expenditures Capital Expenditures as a % of Sales 2.3% 2.3% 2.3% 2.3% 2.3% 2.3% 2.3% 2.3% 2.3% 2.3% 2.3% 2.3% 5

6 SAMPLE DE NOVO JOINT VENTURE MODEL (CONT D) Construction/Development Months Month 1 Month 2 Month 3 Month 4 Month 5 Month 6 Month 7 Month 8 Month 9 Month 10 Month 11 Month 12 Month 13 Month 14 Month 15 Month 16 Month 17 Month 18 Cash $1,375,000 $1,235,484 $1,077,453 $919,880 $762,767 $586,113 $578,660 $542,700 $492,423 $428,883 $388,712 $383,590 $348,409 $313,856 $280,425 $248,072 $216,920 $187,088 Accounts Receivable ,169 38,337 76, , , , , , , , , ,138 Inventories ,000 9,584 9,584 19,169 24,919 30,670 36,420 42,237 47,996 53,756 59,515 65,275 71,035 Prepaid & Other ,075 1,190 1,306 1,421 Total Current Assets 1,375,000 1,235,484 1,077, , , , , , , , , , , , , , , ,681 PP&E, net 0 143, , , , , , , , , , , , , , , , ,863 Total Assets $1,375,000 $1,379,276 $1,363,828 $1,347,630 $1,330,683 $1,312,988 $1,308,862 $1,286,446 $1,279,074 $1,266,269 $1,254,068 $1,242,644 $1,232,392 $1,222,704 $1,214,358 $1,207,304 $1,201,661 $1,197,545 Accounts Payable $0 $18,750 $18,750 $18,750 $18,750 $18,750 $36,763 $36,548 $50,591 $58,606 $66,385 $73,933 $81,811 $88,918 $96,030 $102,979 $109,772 $116,412 Other Current Liabilities ,067 1,152 1,236 1,317 1,397 Total Liabilities 0 18,975 18,975 18,975 18,975 18,975 37,204 36,987 51,199 59,309 67,181 74,820 82,792 89,985 97, , , ,809 Total Equity 1,375,000 1,360,301 1,344,853 1,328,655 1,311,708 1,294,013 1,271,658 1,249,459 1,227,875 1,206,960 1,186,886 1,167,823 1,149,600 1,132,719 1,117,176 1,103,090 1,090,573 1,079,736 Total Liabilities and Equity $1,375,000 $1,379,276 $1,363,828 $1,347,630 $1,330,683 $1,312,988 $1,308,862 $1,286,446 $1,279,074 $1,266,269 $1,254,068 $1,242,644 $1,232,392 $1,222,704 $1,214,358 $1,207,304 $1,201,661 $1,197,545 Working capital assumptions Balance Sheet Assumptions DSO During Medicare Certification DSO (Normalized, After Month 5) Inventory Days 15.0 A/P Days (Operating Expenses) 25.0 $ 19,169 $38,337 $76,674 $126,512 $187,851 Prepaids as % of Revenue 1.0% Other Current Liabilities as % of Op. Exp. 1.0% $ 57,506 $ 57,506 $ 115,011 $ 149,514 $ 153,348 Declining cash balances due to initial monthly losses and delay in ability to bill Medicare Construction/Development Months Month 1 Month 2 Month 3 Month 4 Month 5 Month 6 Month 7 Month 8 Month 9 Month 10 Month 11 Month 12 Month 13 Month 14 Month 15 Month 16 Month 17 Month 18 Operating Activities Net Income ($14,699) ($15,448) ($16,198) ($16,947) ($17,696) ($22,354) ($22,199) ($21,584) ($20,915) ($20,073) ($19,063) ($18,224) ($16,881) ($15,543) ($14,087) ($12,517) ($10,837) Depreciation & Amortization 1,208 2,417 3,625 4,833 6,042 6,049 6,056 6,070 6,089 6,112 6,139 6,171 6,207 6,247 6,292 6,341 6,394 Change in Working Capital 18, (20,000) 9,284 (19,386) (33,901) (47,593) (24,830) 9,441 (21,228) (21,720) (21,716) (21,880) (22,039) (22,193) Cash Flow from Operating Activities: 5,484 (13,032) (12,573) (12,113) (31,654) (7,021) (35,529) (49,415) (62,419) (38,791) (3,483) (33,280) (32,393) (31,012) (29,675) (28,215) (26,635) Investing Activities Capital Expenditures (145,000) (145,000) (145,000) (145,000) (145,000) (431) (431) (863) (1,121) (1,380) (1,639) (1,901) (2,160) (2,419) (2,678) (2,937) (3,197) Cash Flow from Investing Activities: (145,000) (145,000) (145,000) (145,000) (145,000) (431) (431) (863) (1,121) (1,380) (1,639) (1,901) (2,160) (2,419) (2,678) (2,937) (3,197) Cash Flow Available For Financing Activities (139,516) (158,032) (157,573) (157,113) (176,654) (7,453) (35,960) (50,277) (63,540) (40,171) (5,121) (35,181) (34,553) (33,431) (32,353) (31,152) (29,832) Net Change in Cash (139,516) (158,032) (157,573) (157,113) (176,654) (7,453) (35,960) (50,277) (63,540) (40,171) (5,121) (35,181) (34,553) (33,431) (32,353) (31,152) (29,832) Beginning Cash Balance 1,375,000 1,235,484 1,077, , , , , , , , , , , , , , ,920 Ending Cash Balance $1,375,000 $1,235,484 $1,077,453 $919,880 $762,767 $586,113 $578,660 $542,700 $492,423 $428,883 $388,712 $383,590 $348,409 $313,856 $280,425 $248,072 $216,920 $187,088 6

7 DE NOVO JOINT VENTURE CONSIDERATIONS Timeline for center to reach breakeven on a monthly basis Not unusual for a de novo to take 18 months or even longer from date of opening to achieve breakeven Be skeptical if de novo model shows profitability within a very short period of time Initial upfront capital requirement Can vary significantly based on size (# of stations, square footage) and location of the center (urban, suburban or rural) A typical de novo may require $ million (assuming leased property) Can be significantly higher if JV plans to purchase / own the land and building Leasing versus purchasing equipment outright can also reduce upfront capital requirement Working capital also a big component of the upfront investment 3-5 month delay from time of opening to date of receipt of Medicare certification, which means that the center will not be paid by Medicare over that period Also funding monthly operating losses until center reaches breakeven 7

8 JOINT VENTURES INVOLVING EXISTING DIALYSIS CENTERS The financial models for JVs involving existing dialysis centers are largely the same, but Availability of historical operating and financial data to validate/benchmark assumptions in model Annual vs. monthly projections Valuation Negotiated (based on traditional valuation metrics) vs. investing at cost Applicable discounts for lack of control / minority interest Stark considerations relative to physician group buy-ins Availability of financing Distributable cash flow expectations based on historical experience Capital expenditure requirements Expansion needs if facility is at or near capacity Potential deferred capex issues (i.e., RO systems) 8

9 SAMPLE EXISTING CENTER JV MODEL FY2010 FY2011 FY2012 YTD Apr-12 YTD Apr-13 LTM Apr-13 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Income Statement Patients by Service Line Total In-Center (HD) Total Peritoneal Dialysis (PD) Total Home Hemodialysis (HHD) Total Patients % YoY Growt h - (5.3%) (6.0%) - 0.5% - 2.7% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% Capacity Utilization % (HD) 95.6% 91.7% 83.3% 90.0% 86.7% 86.7% 91.9% 94.7% 86.0% 88.6% 91.3% 94.0% 96.8% Treatments by Service Line Total In-Center (HD) 22,560 22,597 22,805 7,397 6,908 22,316 22,985 23,675 24,385 25,117 25,870 26,646 27,446 Total Peritoneal Dialysis (PD) 6,574 6,529 6,652 2,211 2,343 6,784 6,988 7,197 7,413 7,635 7,865 8,100 8,343 Total Home Hemodialysis (HHD) Total Treatments 29,706 30,058 30,130 9,878 9,391 29,643 30,532 31,448 32,392 33,363 34,364 35,395 36,457 % YoY Growt h - 1.2% 0.2% - (4.9%) - 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% Capacity Utilization % (HD) 80.3% 80.5% 81.2% 79.2% 74.6% 79.5% 81.9% 84.3% 76.6% 78.9% 81.3% 83.7% 86.2% Longer Term (Annual) Model vs. Shorter Term Monthly Model Gross Revenue by Service Line: Total In-Center (HD) - $8,204,402 $8,369, $8,480,104 $8,799,867 $9,199,821 $9,617,953 $10,055,089 $10,512,092 $10,989,867 Total Peritoneal Dialysis (PD) - 2,370,516 2,441, ,577,927 2,675,134 2,796,719 2,923,830 3,056,718 3,195,646 3,340,888 Total Home Hemodialysis (HHD) - 338, , , , , , , , ,409 Other Revenue - (235,690) 59, Total Gross Revenue $11,597,307 $10,677,613 $11,117,359 $3,652,826 $3,603,677 $11,068,210 $11,264,373 $11,689,122 $12,220,393 $12,775,810 $13,356,470 $13,963,522 $14,598,164 % YoY Growt h - (7.9%) 4.1% - (1.3%) 3.6% 1.8% 3.8% 4.5% 4.5% 4.5% 4.5% 4.5% Historical Operating and Financial Data Provides Guidance to Project Future Performance Operating Expenses: Salaries and Wages 2,470,327 2,610,057 2,664, , ,232 2,729,783 2,867,911 3,013,027 3,165,486 3,325,660 3,493,938 3,670,731 3,856,470 Treatment Supplies 1,055,677 1,151,953 1,084, , , ,127 1,035,230 1,076,950 1,120,351 1,165,501 1,212,471 1,261,334 1,312,165 Drug and Lab Related Costs 2,200,053 2,009,831 1,691, , ,614 1,552,895 1,599,482 1,647,467 1,696,891 1,747,797 1,800,231 1,854,238 1,909,865 Other Medical Expense 182, , ,843 66,185 57, , , , , , , , ,136 Rent and Property Expense 275, , ,092 88, , , , , , , , , ,804 Other Facility Expense 127, , ,276 52,778 54, , , , , , , , ,673 Bad Debt Expense 251, , ,093 (6,231) 160, , , , , , , , ,249 Other Administrative / Operating Expenses 399, , , , , , , , , , , , ,517 Depreciation and Amortization 325, , ,736 95,154 91, , , , , , , , ,367 Medical Director Fees 309, , , , , , , , , , , , ,197 Total Operating Expenses 7,597,079 7,918,313 7,393,358 2,376,414 2,412,945 7,429,888 7,739,689 8,071,003 8,342,100 8,461,557 8,808,498 9,170,239 9,547,445 Clinical Operating Profit $4,000,228 $2,759,300 $3,724,001 $1,276,412 $1,190,733 $3,638,322 $3,524,684 $3,618,120 $3,878,293 $4,314,253 $4,547,972 $4,793,282 $5,050,719 Plus: Depreciation & Amortization 325, , ,736 95,154 91, , , , , , , , ,367 Clinical EBITDA $4,325,457 $3,075,560 $4,008,737 $1,371,566 $1,282,594 $3,919,766 $3,840,702 $3,978,649 $4,211,022 $4,454,908 $4,710,840 $4,979,372 $5,261,086 Other Expenses: Management Fees , , , , , , , ,457 Pre-tax Income $4,000,228 $2,759,300 $3,724,001 $1,276,412 $1,190,733 $3,089,926 $2,959,836 $3,036,327 $3,279,047 $3,697,029 $3,912,231 $4,138,469 $4,376,262 Income Taxes Net Income $4,000,228 $2,759,300 $3,724,001 $1,276,412 $1,190,733 $3,089,926 $2,959,836 $3,036,327 $3,279,047 $3,697,029 $3,912,231 $4,138,469 $4,376,262 Actual EBITDA $4,325,457 $3,075,560 $4,008,737 $1,371,566 $1,282,594 $3,371,370 $3,275,855 $3,396,856 $3,611,776 $3,837,684 $4,075,099 $4,324,559 $4,586,629 Capital Expenditures (Maintenance) ,747 99, , , , , ,084 Capital Expenditures (Expansion) , , Increase (Decrease) in Net Working Capital ,249 48,481 71,888 88,027 74,596 78,063 81,687 Per Treatment Metrics Total Gross Revenue $ $ $ $ $ $ $ $ $ $ $ $ $ Total Net Revenue (net of Bad Debt Expense) $ $ $ $ $ $ $ $ $ $ $ $ $ Salaries and Wages $83.16 $86.83 $88.43 $86.54 $97.99 $92.09 $93.93 $95.81 $97.73 $99.68 $ $ $ Treatment Supplies $35.54 $38.32 $36.00 $38.87 $31.34 $33.57 $33.91 $34.25 $34.59 $34.93 $35.28 $35.64 $35.99 Drug and Lab Related Costs $74.06 $66.87 $56.14 $59.55 $47.88 $52.39 $52.39 $52.39 $52.39 $52.39 $52.39 $52.39 $52.39 Other Medical Expense $6.14 $6.61 $6.53 $6.70 $6.16 $6.36 $6.29 $6.23 $6.16 $6.10 $6.03 $5.97 $5.90 Rent and Property Expense $9.28 $8.41 $10.86 $8.99 $11.93 $11.82 $11.82 $11.82 $11.82 $11.82 $11.82 $11.82 $11.82 Other Facility Expense $4.30 $6.61 $5.88 $5.34 $5.80 $6.04 $5.95 $5.86 $5.78 $5.69 $5.61 $5.53 $5.45 Bad Debt Expense $8.46 $15.43 $7.01 ($0.63) $17.13 $12.76 $12.95 $13.14 $13.34 $13.54 $13.74 $13.95 $14.16 Other Administrative / Operating Expenses $13.44 $13.38 $14.61 $15.06 $17.77 $15.46 $15.23 $15.01 $14.79 $14.58 $14.36 $14.15 $13.95 Depreciation and Amortization $10.95 $10.52 $9.45 $9.63 $9.78 $9.49 $10.35 $11.46 $10.27 $4.22 $4.74 $5.26 $5.77 Medical Director Fees $10.42 $10.44 $10.47 $10.52 $11.16 $10.68 $10.68 $10.68 $10.68 $10.68 $10.68 $10.68 $10.68 Total Operating Expenses $ $ $ $ $ $ $ $ $ $ $ $ $ Clinical EBITDA $ $ $ $ $ $ $ $ $ $ $ $ $ Management Fees $18.50 $18.50 $18.50 $18.50 $18.50 $18.50 $18.50 $18.50 Actual EBITDA $ $ $ $ $ $ $ $ $ $ $ $ $

10 SAMPLE EXISTING CENTER JV MODEL (CONT D) FY2010 FY2011 FY2012 YTD Apr-12 YTD Apr-13 LTM Apr-13 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Income Statement (Inputs / Drivers / Assumptions) Capacity: Stations Weekly Shifts Weekly Treatments / Patient Number of W eeks Capacity (In-Center Treatments) 28,080 28,080 28,080 9,334 9,257 28,080 28,080 28,080 31,824 31,824 31,824 31,824 31,824 Capacity Utilization % 80.3% 80.5% 81.2% 79.2% 74.6% 79.5% 81.9% 84.3% 76.6% 78.9% 81.3% 83.7% 86.2% Capacity (In-Center Patients) Capacity Utilization % 95.6% 91.7% 83.3% 90.0% 86.7% 86.7% 91.9% 94.7% 86.0% 88.6% 91.3% 94.0% 96.8% Patients end of period: In-Center (HD) Peritoneal Dialysis (PD) Home Hemodialysis (HHD) Total Patients Treatments: In-Center (HD) Commercial - 4,018 3, ,814 3,929 4,047 4,168 4,293 4,422 4,555 Medicare - 13,124 12, ,749 13,132 13,526 13,931 14,349 14,780 15,223 Medicare Advantage - 3,212 3, ,371 3,472 3,576 3,684 3,794 3,908 4,025 Medicaid - 2,200 2, ,811 2,896 2,982 3,072 3,164 3,259 3,357 Medicaid Managed Care Self Pay Other Total In-Center (HD) 22,560 22,597 22,805 7,397 6,908 22,316 22,985 23,675 24,385 25,117 25,870 26,646 27,446 % Growt h - 0.2% 0.9% - (6.6%) (0.7%) 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% Peritoneal Dialysis (PD) Commercial - 1,161 1, ,160 1,194 1,230 1,267 1,305 1,344 1,385 Medicare - 3,792 3, ,876 3,992 4,112 4,235 4,362 4,493 4,628 Medicare Advantage ,025 1,056 1,087 1,120 1,153 1,188 1,224 Medicaid ,020 Medicaid Managed Care Self Pay Other Total Peritoneal Dialysis (PD) 6,574 6,529 6,652 2,211 2,343 6,784 6,988 7,197 7,413 7,635 7,865 8,100 8,343 % Growt h - (0.7%) 1.9% - 6.0% 2.4% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% Home Hemodialysis (HHD) Commercial Medicare Medicare Advantage Medicaid Medicaid Managed Care Self Pay Other Total Home Hemodialysis (HHD) % Growt h % (27.8%) - (48.1%) (35.6%) 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% A capacity constrained facility must add stations in order to continue to grow its in-center volumes More mature centers will have growth rates that reflect overall ESRD population growth Total Treatments 29,706 30,058 30,130 9,878 9,391 29,643 30,532 31,448 32,392 33,363 34,364 35,395 36,457 % Growt h - 1.2% 0.2% - (4.9%) - 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 10

11 SAMPLE EXISTING CENTER JV MODEL (CONT D) FY2010 FY2011 FY2012 YTD Apr-12 YTD Apr-13 LTM Apr-13 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Revenue Build: In-Center (HD) Payor Mix by Treatments % Commercial 17.8% 16.6% % 16.6% 16.6% 16.6% 16.6% 16.6% 16.6% Medicare 58.1% 55.5% % 55.5% 55.5% 55.5% 55.5% 55.5% 55.5% Medicare Advantage 14.2% 14.7% % 14.7% 14.7% 14.7% 14.7% 14.7% 14.7% Medicaid 9.7% 12.2% % 12.2% 12.2% 12.2% 12.2% 12.2% 12.2% Medicaid Managed Care 0.1% 0.5% % 0.5% 0.5% 0.5% 0.5% 0.5% 0.5% Self Pay 0.0% 0.4% % 0.4% 0.4% 0.4% 0.4% 0.4% 0.4% Other - 0.1% % 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% Average Revenue / Treatment (HD) Commercial $ $ $ $ $ $ $ $ $1, Medicare $ $ $ $ $ $ $ $ $ Medicare Advantage $ $ $ $ $ $ $ $ $ Medicaid $ $ $ $ $ $ $ $ $ Medicaid Managed Care $ $ $ $ $ $ $ $ $ Self Pay ($274.54) $ $4.61 $4.67 $4.74 $4.82 $4.89 $4.96 $5.04 Other - $ $ $ $ $ $ $ $ Revenue by Payor Commercial - $3,252,523 $3,441, $3,520,945 $3,680,972 $3,848,272 $4,023,176 $4,206,029 $4,397,193 $4,597,046 Medicare - $3,468,622 $3,316, $3,311,275 $3,396,114 $3,550,467 $3,711,836 $3,880,539 $4,056,909 $4,241,296 Medicare Advantage - $932,609 $974, $997,127 $1,042,446 $1,089,825 $1,139,358 $1,191,142 $1,245,279 $1,301,877 Medicaid - $541,033 $594, $608,091 $635,728 $664,622 $694,829 $726,409 $759,425 $793,941 Medicaid Managed Care - 12,092 36, ,284 38,978 40,750 42,602 44,538 46,563 48,679 Self Pay - (2,477) Other - - 4, ,909 5,132 5,366 5,609 5,864 6,131 6,410 Total HD Revenue - $8,204,402 $8,369, $8,480,104 $8,799,867 $9,199,821 $9,617,953 $10,055,089 $10,512,092 $10,989,867 % of Revenue % 75.3% % 75.3% 75.3% 75.3% 75.3% 75.3% 75.3% Average Blended Revenue / Treatment (HD) - $ $ $ $ $ $ $ $ $ Peritoneal Dialysis (PD) Payor Mix by Treatments % Commercial 17.8% 16.6% % 16.6% 16.6% 16.6% 16.6% 16.6% 16.6% Medicare 58.1% 55.5% % 55.5% 55.5% 55.5% 55.5% 55.5% 55.5% Medicare Advantage 14.2% 14.7% % 14.7% 14.7% 14.7% 14.7% 14.7% 14.7% Medicaid 9.7% 12.2% % 12.2% 12.2% 12.2% 12.2% 12.2% 12.2% Medicaid Managed Care 0.1% 0.5% % 0.5% 0.5% 0.5% 0.5% 0.5% 0.5% Self Pay 0.0% 0.4% % 0.4% 0.4% 0.4% 0.4% 0.4% 0.4% Other - 0.1% % 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% Average Revenue / Treatment (PD) Payor mix and rev/treatment trends going forward will likely look very similar to what the center has experienced historically Commercial $ $ $ $ $ $ $ $ $1, Medicare $ $ $ $ $ $ $ $ $ Medicare Advantage $ $ $ $ $ $ $ $ $ Medicaid $ $ $ $ $ $ $ $ $ Medicaid Managed Care $ $ $ $ $ $ $ $ $ Self Pay ($274.54) $ $4.61 $4.67 $4.74 $4.82 $4.89 $4.96 $5.04 Other - $ $ $ $ $ $ $ $ Revenue by Payor Commercial - $939,758 $1,003, $1,070,357 $1,119,005 $1,169,864 $1,223,034 $1,278,621 $1,336,734 $1,397,489 Medicare - $1,002,196 $967, $1,006,618 $1,032,409 $1,079,332 $1,128,387 $1,179,673 $1,233,289 $1,289,342 Medicare Advantage - $269,461 $284, $303,124 $316,901 $331,304 $346,362 $362,104 $378,561 $395,767 Medicaid - $156,322 $173, $184,858 $193,260 $202,043 $211,226 $220,826 $230,863 $241,356 Medicaid Managed Care - 3,494 10, ,334 11,849 12,388 12,951 13,540 14,155 14,798 Self Pay - (716) Other - - 1, ,492 1,560 1,631 1,705 1,783 1,864 1,948 Total PD Revenue - $2,370,516 $2,441, $2,577,927 $2,675,134 $2,796,719 $2,923,830 $3,056,718 $3,195,646 $3,340,888 % of Revenue % 22.0% % 22.9% 22.9% 22.9% 22.9% 22.9% 22.9% Average Blended Revenue / Treatment (PD) - $ $ $ $ $ $ $ $ $

12 SAMPLE EXISTING CENTER JV MODEL (CONT D) FY2010 FY2011 FY2012 YTD Apr-12 YTD Apr-13 LTM Apr-13 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Operating Expenses: Salaries and Wages $2,470,327 $2,610,057 $2,664,421 $854,870 $920,232 $2,729,783 $2,867,911 $3,013,027 $3,165,486 $3,325,660 $3,493,938 $3,670,731 $3,856,470 Salaries and Wages (In-Center) 1,576,034 1,678,298 1,758, , ,617 1,748,192 1,836,650 1,929,585 2,027,222 2,129,799 2,237,567 2,350,788 2,469,738 Average Cost / Treatment (HD) Salaries and Wages (Home) 297, , ,403 92, , , , , , , , , ,515 Average Cost / Treatment (PD, HHD) Personnel Benefits 596, , , , , , , , , , , , ,217 Average Cost / Treatment (HD, PD, HHD) Treatment Supplies $1,055,677 $1,151,953 $1,084,778 $383,990 $294,339 $995,127 $1,035,230 $1,076,950 $1,120,351 $1,165,501 $1,212,471 $1,261,334 $1,312,165 Medical Supplies (In-Center) 446, , , , , , , , , , , , ,290 Average Cost / Treatment (HD) Medical Supplies (PD) 523, , , , , , , , , , , , ,730 Average Cost / Treatment (PD) Medical Supplies (Home) 85, ,623 61,251 23,205 18,185 56,231 58,497 60,855 63,307 65,858 68,512 71,273 74,146 Average Cost / Treatment (HHD) Labor expense and drug costs will typically be the largest line item in the P&L EPO utilization and costs may have trended down in recent years due to revised EPO protocols. These assumptions, however, should be carefully scrutinized given the high cost of EPO. Drug and Lab Related Costs $2,200,053 $2,009,831 $1,691,476 $588,194 $449,614 $1,552,895 $1,599,482 $1,647,467 $1,696,891 $1,747,797 $1,800,231 $1,854,238 $1,909,865 EPO (In-Center) 1,223,801 1,168,368 1,066, , , , ,044 1,017,685 1,048,216 1,079,662 1,112,052 1,145,414 1,179,776 Average Cost / Treatment (HD) EPO (Home) 303, ,324 37,781 11,706 11,768 37,847 38,983 40,152 41,357 42,597 43,875 45,192 46,547 Average Cost / Treatment (PD, HHD) Other Ancillary Expenses 672, , , , , , , , , , , , ,542 Average Cost / Treatment (HD, PD, HHD) Other Medical Expense $182,259 $198,767 $196,843 $66,185 $57,834 $188,492 $192,151 $195,859 $199,617 $203,424 $207,280 $211,184 $215,136 Equipment Leasing 63,484 82,573 85,633 29,755 26,757 82,635 83,118 83,555 83,944 84,281 84,563 84,785 84,945 Average Cost / Treatment (HD, PD, HHD) Other Medical 118, , ,210 36,430 31, , , , , , , , ,191 Average Cost / Treatment (HD, PD, HHD) Rent and Property Expense $275,701 $252,895 $327,092 $88,851 $112,041 $350,283 $360,791 $371,615 $382,764 $394,247 $406,074 $418,256 $430,804 Rent and Property Expense 275, , ,092 88, , , , , , , , , ,804 % Increase / (Decrease) - (8.3%) 29.3% % - 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% Other Facility Expense $127,882 $198,677 $177,276 $52,778 $54,512 $179,010 $181,695 $184,420 $187,187 $189,994 $192,844 $195,737 $198,673 Housekeeping - Utilities 42,638 81,364 74,326 22,331 22,586 74,581 75,700 76,835 77,988 79,158 80,345 81,550 82,773 % Increase / (Decrease) % (8.7%) - 1.1% - 1.5% 1.5% 1.5% 1.5% 1.5% 1.5% 1.5% Housekeeping - Other 85, , ,950 30,448 31, , , , , , , , ,900 % Increase / (Decrease) % (12.2%) - 4.9% - 1.5% 1.5% 1.5% 1.5% 1.5% 1.5% 1.5% Bad Debt Expense $251,231 $463,837 $211,093 ($6,231) $160,889 $378,213 $395,403 $413,374 $432,162 $451,803 $472,338 $493,806 $516,249 Bad Debt Expense 251, , ,093 (6,231) 160, , , , , , , , ,249 Average Cost / Treatment (HD, PD, HHD) (0.63) Other Administrative / Operating Expenses $399,238 $402,170 $440,111 $148,755 $166,832 $458,188 $465,061 $472,037 $479,117 $486,304 $493,598 $501,002 $508,517 Other Administrative / Operating Expenses 399, , , , , , , , , , , , ,517 % Increase / (Decrease) - 0.7% 9.4% % - 1.5% 1.5% 1.5% 1.5% 1.5% 1.5% 1.5% Depreciation and Amortization $325,229 $316,260 $284,736 $95,154 $91,861 $281,444 $316,018 $360,529 $332,729 $140,655 $162,867 $186,089 $210,367 Depreciation 325, , ,736 95,154 91, , , , , , , , ,367 % Increase / (Decrease) - (2.8%) (10.0%) - (3.5%) % 14.1% (7.7%) (57.7%) 15.8% 14.3% 13.0% Amortization % Increase / (Decrease) Medical Director Fees $309,481 $313,867 $315,532 $103,868 $104,789 $316,453 $325,947 $335,725 $345,797 $356,171 $366,856 $377,862 $389,197 Medical Director Fees 309, , , , , , , , , , , , ,197 % Increase / (Decrease) - 1.4% 0.5% - 0.9% - 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% Total Operating Expenses $7,597,079 $7,918,313 $7,393,358 $2,376,414 $2,412,945 $7,429,888 $7,739,689 $8,071,003 $8,342,100 $8,461,557 $8,808,498 $9,170,239 $9,547,445 Average Cost / Treatment (HD, PD, HHD) $ $ $ $ $ $ $ $ $ $ $ $ $ Clinical Operating Income (EBIT) $4,000,228 $2,759,300 $3,724,001 $1,276,412 $1,190,733 $3,638,322 $3,524,684 $3,618,120 $3,878,293 $4,314,253 $4,547,972 $4,793,282 $5,050,719 Income per Treatment (HD, PD, HHD) $ $91.80 $ $ $ $ $ $ $ $ $ $ $ Other Expenses: $548,396 $564,847 $581,793 $599,247 $617,224 $635,741 $654,813 $674,457 Management Fees , , , , , , , ,457 % Increase / (Decrease) % 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 12

13 SAMPLE EXISTING CENTER JV MODEL (CONT D) FY2010 FY2011 FY2012 YTD Apr-12 YTD Apr-13 LTM Apr-13 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Net W orking Capital Current Assets Accounts Receivable, net $1,834,435 $1,785,174 $1,750,791 $2,072,134 $1,268,265 $1,268,265 $1,851,678 $1,921,500 $2,008,832 $2,100,133 $2,195,584 $2,295,373 $2,399,698 Inventory 254, , , , , , , , , , , , ,466 Prepaid & Other 228, , , , , , , , , , , , ,393 Total Current Assets 2,317,944 2,248,960 2,015,639 2,324,400 1,549,768 1,549,768 2,142,003 2,223,622 2,322,625 2,422,600 2,531,897 2,646,141 2,765,557 Current Liabilities: Accounts Payable 415, , , , , , , , , , , , ,936 Total Current Liabilities 415, , , , , , , , , , , , ,936 Ratios and assumptions Accounts Receivable (DSO) (1) Inventory (DIO) (2) Prepaid & Other (As a % of Revenue) 2.0% 3.3% 1.0% 1.3% 1.1% 1.1% 1.1% 1.1% 1.1% 1.1% 1.1% 1.1% 1.1% Accounts Payable (DPO) (3) Net W orking Capital 1,902,579 1,633,346 1,181,456 1,433, , ,631 1,367,879 1,416,360 1,488,248 1,576,275 1,650,871 1,728,934 1,810,621 Change In NW C - (269,233) (451,890) - (626,434) (626,434) 561,249 48,481 71,888 88,027 74,596 78,063 81,687 (1) Days Sales Outstanding (DSO) = (Net Accounts Receivable / LTM Total Gross Revenue) * 365 (2) Days Inventory Outstanding (DIO) = (Inventory / LTM Total Operating Expenses) * 365 (3) Days Payable Outstanding (DPO) = (Accounts Payable / LTM Total Operating Expenses) * 365 Capital Expenditures Maintenance Capital Expenditures $95,747 $99,358 $103,873 $108,594 $113,530 $118,690 $124,084 % of Gross Revenue 0.9% 0.9% 0.9% 0.9% 0.9% 0.9% 0.9% Expansion Capital Expenditures $500,000 - $200, % of Gross Revenue 4.4% - 1.6% Total Capital Expenditures $595,747 $99,358 $303,873 $108,594 $113,530 $118,690 $124,084 Expansionary capital expenditures unique to the center and required to alleviate incenter station constraints 13

14 CONCLUSIONS Opportunities for Nephrologists and Physician Groups Significant paradigm changes in the healthcare industry broadly as well as in the ESRD sector more specifically have brought more attention to the opportunities associated with dialysis JVs Evolution of the JV Model in Dialysis Once uncommon, the JV is now mainstream and the preferred business model for dialysis providers Increased Legal and Financial Complexity Necessitates careful planning and analysis and experienced advisors 14