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UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 
 FORM 10-K FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934  þ
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2004 or  o
    TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______to________ Commission file number 0-27640 RENAL CARE GROUP, INC.  Delaware
    
    62-1622383(State or other Jurisdiction of
    
    (I.R.S. EmployerIncorporation or Organization)
    
    Identification No.)
 2525 West End Avenue, Suite 600
Nashville, Tennessee 37203
(Address, Including Zip Code, of Principal Executive Offices) Registrants Telephone Number, Including Area Code: (615) 345-5500 Securities Registered Pursuant to Section 12(b) of the Act: Title of Each Class
    
    Name of Exchange on Which RegisteredCommon Stock, $0.01 par value
    
    New York Stock Exchange
 Series A Junior Participating Preferred Stock Purchase Rights
    
    New York Stock Exchange
 Securities Registered Pursuant to Section 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 Company was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K is not contained herein, and will not be contained, to the best of the Companys knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. o Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange
Act Rule 12b-2). Yes þ No o    1




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The aggregate market value of the voting stock held by non-affiliates of the Company was
$2,194,540,211 as of June 30, 2004, based upon the closing price of such stock as reported on
the New York Stock Exchange on that day (assuming for purposes of this calculation, without
conceding, that all executive officers and directors are affiliates). There
were 67,823,008 shares of common stock, $0.01 par value, issued and outstanding at
February 25, 2005. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrants Proxy Statement for its 2005 Annual Meeting of Stockholders are
incorporated by reference in Part III of this annual report on Form 10-K. 2




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TABLE OF CONTENTS  PART IItem 1. BusinessItem 2. PropertiesItem 3. Legal ProceedingsItem 4. Submission of Matters to a Vote of Security HoldersPART IIItem 5. Market for Companys Common Equity and Related Stockholder MattersItem 6. Selected Financial DataItem 7. Managements Discussion and Analysis of Financial Condition and Results of OperationsItem 7a. Quantitative and Qualitative Disclosures About Market RiskItem 8. Financial Statements and Supplementary DataItem 9. Changes In and Disagreements with Accountants on Accounting and Financial DisclosureItem 9a. Controls and ProceduresPART IIIItem 10. Directors and Executive Officers of the CompanyItem 11. Executive CompensationItem 12. Security Ownership of Certain Beneficial Owners and ManagementItem 13. Certain Relationships and Related TransactionsItem 14. Principal Accountant Fees and ServicesPART IVItem 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-KSIGNATURESEXHIBIT INDEXEX-3.1.4 AMENDED CERTIFICATE OF INCORPORATIONEX-10.19.2 AMGEN INC. AGREEMENT NO. 200308361EX-10.19.3 AMENDMENT NO.1 TO AGREEMENTEX-10.49 EMPLOYMENT AGREEMENT DAVID MALONEYEX-21.1 SUBSIDIARIES OF THE REGISTRANTEX-23.1.1 CONSENT OF ERNST & YOUNG LLPEX-23.1.2 CONSENT OF ERNST & YOUNG LLPEX-31.1 SECTION 302 CERTIFICATION OF THE CEOEX-31.2 SECTION 302 CERTIFICATION OF THE CFOEX-32.1 SECTION 906 CERTIFICATION OF THE CEOEX-32.2 SECTION 906 CERTIFICATION OF THE CFO    Table of Contents  
 PART I FORWARD LOOKING STATEMENTS This report contains forward-looking statements. Forward-looking statements relate to our
expectations, beliefs, future plans and strategies, anticipated events or trends and similar
expressions concerning matters that are not historical facts or that necessarily depend upon future
events. In some cases, you can identify forward-looking statements by words like may, will,
should, could, would, expect, plan, anticipate, believe, estimate, project,
predict, potential and similar expressions. Specifically, this report contains, among others,
forward-looking statements about:  
    our expectations regarding financial condition or results of
operations for periods after December 31, 2004;
    our critical accounting policies;
    our business strategies and our ability to grow our business;
    the reimbursement levels of third-party payors; and
    our future sources of and needs for liquidity and capital resources. The forward-looking statements included in this report reflect our current views about future
events. They are based on assumptions and are subject to known and unknown risks and uncertainties.
Many factors could cause actual results or achievements to differ materially from future results or
achievements that may be expressed in or implied by our forward-looking statements. Many of the
factors that will determine future events or achievements are beyond our ability to control or
predict. Important factors that could cause actual results or achievements to differ materially
from the results or achievements reflected in our forward-looking statements include, among other
things, the factors discussed on pages 20 to 29 of this report under the heading Risk Factors. You should read this report, the information incorporated by reference into this report and
the documents filed as exhibits to this report completely and with the understanding that our
actual future results or achievements may be materially different from what we expect or
anticipate. The forward-looking statements contained in this report reflect our views and assumptions only
as of the date this report is filed with the Securities and Exchange Commission. Except as required
by law, we assume no responsibility to update any forward-looking statements. Before you invest in our common stock, you should understand that the occurrence of any of the
events described in the Risk Factors section, located elsewhere in this annual report on Form 10-K
or incorporated by reference into this annual report on Form 10-K and other events that we have not
predicted or assessed could have a material adverse effect on our earnings, financial condition and
business. If the events described in the Risk Factors or other unpredicted events occur, then the
trading price of our common stock could decline, and you may lose all or part of your investment. We qualify all of our forward-looking statements by these cautionary statements. In addition,
with respect to all of our forward-looking statements, we claim the protection of the safe harbor
for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Unless otherwise indicated, Renal Care Group, we, us, and the Company refer to Renal
Care Group, Inc. and our consolidated subsidiaries. 3




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Item 1. Business GENERAL Renal Care Group, Inc. provides dialysis services to patients with chronic kidney
failure, also known as end-stage renal disease (ESRD). As of December 31, 2004, we provided
dialysis and ancillary services to over 29,700 patients through 418 outpatient dialysis centers in
33 states, in addition to providing acute dialysis services to more than 200 hospitals. Renal Care
Group was formed in 1996 by leading nephrologists with the objective of creating a company with the
clinical and financial capability to manage the full range of care for ESRD patients on a
cost-effective basis. As of December 31, 2004, there were 1,015 nephrologists with privileges to
practice at one or more of our outpatient dialysis centers. In our dialysis facilities, ESRD patients receive dialysis treatments, generally three times a
week, in a technologically advanced outpatient setting. According to the Centers for Medicare &
Medicaid Services (CMS), there were more than 4,000 facilities providing outpatient dialysis
services in the United States at the end of 2002. Because of the critical role of dialysis in the
treatment of patients with ESRD, many outpatient dialysis facilities were, in the 1980s and
1990s, owned by practicing nephrologists and comprised an integral component of their practice.
The dialysis services industry has been consolidating since before we were formed. As a result, we
believe that as of December 31, 2004, approximately 67% of outpatient dialysis centers are now
owned by multi-center dialysis companies, approximately 15% are owned by independent physicians,
small chains and other small operators, and approximately 18% are hospital-based centers. Renal Care Group is a Delaware corporation; our principal executive offices are located at
2525 West End Avenue, Suite 600, Nashville, Tennessee 37203; and our telephone number is (615)
345-5500. INDUSTRY OVERVIEW End-Stage Renal Disease ESRD is a state of advanced kidney failure. ESRD is irreversible and, without a kidney
transplant, ultimately lethal. It is most commonly a result of complications associated with
diabetes, hypertension, certain renal and hereditary diseases, aging and other factors. In order to
sustain life, ESRD patients must receive either dialysis for the remainder of their lives or a
successful kidney transplant. By the end of 2002, dialysis was the primary treatment for
approximately 72% of all ESRD patients in the United States, and the remaining 28% of ESRD patients
had a functioning kidney transplant. According to United States Renal Data System estimates, direct medical payments for ESRD
totaled $25.2 billion during 2002. Of the total direct medical payments for ESRD, approximately
$17.0 billion was paid by the federal government through the Medicare program. As a result of
legislation enacted in 1972, the federal government provides Medicare benefits to patients who are
diagnosed with ESRD, if they are eligible for Social Security, regardless of their age or financial
circumstances. According to CMS data, the number of ESRD patients in the United States who need dialysis grew
from approximately 66,000 in 1982 to approximately 309,000 as of December 31, 2002. Based on data
from the United States Renal Data System, the rate of ESRD incidence among Medicare-eligible
patients was approximately 333 patients per million in 2002 as compared to 111 patients per million
in 1984. Based on these trends, United States Renal Data System forecasts indicate that the total
number of ESRD patients, including those with functioning transplants, will grow from approximately
431,000 in 2002 to 661,000 in 2010. The growth in the number of ESRD patients is expected to result
principally from the aging of the population along with better treatment of, and better survival
rates for, diabetes and other illnesses that lead to chronic kidney disease, reduced somewhat by
declines in incidence of ESRD among patients with high blood pressure as a result of the
availability of better treatments. In addition, as a result of improved technology, older patients
and patients who could not previously tolerate dialysis due to other illnesses can now receive
life-sustaining dialysis treatment. 4




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Treatment Options for End-Stage Renal Disease Currently, there are three treatment options for patients with ESRD:  
    hemodialysis performed in a hospital setting, an outpatient facility or a patients home,
    peritoneal dialysis, which is generally performed in the patients home, and
    kidney transplant surgery. According to CMS data, in 2002 approximately 92% of patients on dialysis in the United States
received hemodialysis in an outpatient setting, and approximately 8% received hemodialysis or
peritoneal dialysis in their homes. Hemodialysis is the most common form of ESRD treatment. It is generally performed in either a
freestanding center or a hospital. Hemodialysis uses a dialyzer, essentially an artificial kidney,
to remove toxins, fluid and chemicals from the patients blood, while the patient is connected to
another device that controls external blood flow and monitors the patients vital signs. The
dialysis process occurs across a semi-permeable membrane that divides the dialyzer into two
chambers. While the blood is circulated through one chamber, a pre-mixed dialysis fluid is
circulated through the adjacent chamber. The toxins and excess fluid contained in the patients
blood cross the membrane into the dialysis fluid. Hemodialysis usually takes about four hours and
is usually administered three times per week for the life of the patient or until the patient
receives a transplant. Peritoneal dialysis is typically performed by the patient at home and uses the patients
abdominal cavity to eliminate fluids and toxins in the patients blood. There are several forms of
peritoneal dialysis. Continuous ambulatory peritoneal dialysis and continuous cycling peritoneal
dialysis are the most common. Under each method, the patients blood is circulated across the
peritoneal membrane into a dialysis solution that removes toxins and excess fluid from the
patients blood. Patients treated at home are monitored monthly through either a visit from a staff
person from a designated outpatient dialysis center or a visit by the patient to a dialysis center
or home dialysis support facility. Kidney transplants, when successful, are the most desirable form of therapy for ESRD patients.
There is a shortage of donors that severely limits the availability of this procedure as a
treatment option. Only about 5% of ESRD patients received kidney transplants in 2002. OPERATIONS Location, Capacity and Use of Facilities As of December 31, 2004, Renal Care Group operated 418 outpatient dialysis centers in 33
states with 7,208 certified dialysis stations and provided inpatient dialysis services to more than
200 acute care hospitals. During 2004, we provided 4,240,440 dialysis treatments. We estimate that
on average our centers were operating at approximately 58% of capacity as of December 31, 2004,
based on the assumption that a dialysis center is able to provide up to three treatments a day per
station, six days a week. Operation of Facilities Our dialysis centers provide outpatient hemodialysis and related services to ESRD patients
using technologically advanced dialysis equipment to provide effective and efficient dialysis. Our
centers generally contain between 10 and 30 dialysis stations, one or more nurses stations, a
patient waiting area, examination rooms, a supply room, a water treatment space to purify water
used in hemodialysis treatments, a dialyzer reprocessing room, staff work areas, offices and a
staff lounge. Many of our centers are adjacent to areas used for training patients in home
dialysis. In order for our dialysis centers to be eligible to participate in the Medicare ESRD program,
a qualified physician or group of physicians must act as medical director for each center and must
supervise medical aspects of the centers operations. An administrator or manager manages each
center. The administrator or manager is typically a registered nurse who is responsible for the
day-to-day operations of the center and oversight of the staff. The staff of each center typically
includes registered nurses, licensed 5




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practical or vocational nurses, patient care technicians, social workers, registered
dietitians, a unit clerk and biomedical equipment technicians. We work to staff each center in a
manner that allows us to adjust to the scheduling of personnel according to the number of patients
receiving treatments. Home Dialysis All of our markets offer home dialysis, either home hemodialysis, peritoneal dialysis or both.
As of December 31, 2004, about 10% of the patients we were treating received home dialysis. In our
home dialysis services we provide equipment and supplies, training, patient monitoring and
follow-up assistance to patients who receive dialysis treatments in their homes. Management
believes that home dialysis is important to providing a full range of dialysis care, and we
continue to work to expand our home dialysis program. Inpatient Care We also provide inpatient dialysis services to hospitals in most of our markets. We often
refer to these services as acute dialysis services. As of December 31, 2004, we provided inpatient
services to more than 200 hospitals. Under these arrangements, we typically provide equipment,
supplies and personnel to perform hemodialysis and peritoneal dialysis in connection with a
hospitals inpatient services. Patients with acute renal failure resulting from accidents, medical
and surgical complications, patients in early stages of renal failure and ESRD patients who need to
be in the hospital for other reasons often require inpatient dialysis services. Most of our
hospital acute dialysis contracts specify predetermined fees per dialysis treatment. Management
believes that these fees will be subject to re-negotiation in the future as competition increases
among dialysis providers and as the health care industry becomes more influenced by managed care
and subject to capitated arrangements. University Programs We currently manage the dialysis programs at Vanderbilt University Medical Center and are the
owner or managing partner of programs at the Cleveland Clinic Foundation, MetroHealth (a hospital
affiliated with Case Western Reserve University), St. Louis University Hospital, Oregon Health
Sciences University, the University of Louisville, Froedtert Hospital (a hospital affiliated with
the Medical College of Wisconsin), Northwestern Memorial Hospital of Chicago, Elmhurst Memorial
Hospital, the University of Colorado and the University of Kentucky. Management believes these
affiliations provide access to outcomes research, as well as introductions to trained nephrologists
who may become attending physicians and medical directors at our centers or who may join the
practices of current medical directors and attending physicians. Nephrologists Caring for ESRD patients is typically the primary clinical activity of a physician
specializing in nephrology (a nephrologist). A nephrologists other clinical activities include the
post-surgical care of kidney transplant patients, the diagnosis and treatment of kidney diseases in
patients who are at risk for developing ESRD, and the diagnosis, treatment and management of
clinical disorders including hypertension, kidney stones and autoimmune diseases. While some
nephrologists practice independently or are members of multi-specialty groups, most nephrologists
practice in small single-specialty groups. A nephrology groups practice often covers a relatively
large geographic service area. Outside metropolitan areas, a large geographic area may be served by
only one nephrology group. Most nephrologists also have a significant office practice, consult on
numerous hospitalized patients who are not on dialysis and follow the clinical outcomes of kidney
transplant patients. A key factor in the success of a dialysis center is the local nephrologist. An ESRD patient
generally seeks treatment at a center where his or her nephrologist has privileges to admit
patients. Consequently, we rely on our ability to satisfy the needs of patients of local
nephrologists in order to gain new patients and to retain existing patients. As of December 31,
2004, there were 1,015 nephrologists with privileges to practice at one or more of our outpatient
dialysis centers. 6




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Medical Directors To satisfy the requirements of the Medicare ESRD program, we must engage a medical director
for each of our facilities. We generally engage practicing, board-certified or board-eligible
nephrologists to serve as medical directors for our centers. The medical director is an independent
contractor and provides services under an agreement with Renal Care Group. Medical directors are
responsible for administering and monitoring our patient care policies, including patient
education, administration of dialysis treatment, staff development and training programs, and
assessment of all patients. Medical directors play an important role in quality assurance
activities in our facilities and in coordinating the delivery of care to maintain dialysis
patients general level of health and to avoid medical complications that might require
hospitalization. Renal Care Groups typical medical director agreement has a term of between five and ten years
with renewal options. We pay medical directors fees that management believes are consistent with
the fair market value of the required services. These medical director fees are the result of
arms-length negotiations. Most of our medical director agreements also include non-competition
clauses with specific limitations on the medical directors ability to compete with us by owning,
or providing medical director services for, another dialysis facility for certain specified periods
of time and in specified geographic areas. Ancillary Services Renal Care Group provides a variety of ancillary services to treat ESRD patients in its
dialysis operations. The most significant ancillary service is the administration of erythropoietin
(also known as Epogen® or EPO). EPO is a bio-engineered protein that stimulates the production of
red blood cells. EPO is used in connection with all forms of dialysis to treat anemia, a
complication experienced by almost all ESRD patients. EPO is manufactured by a single supplier,
Amgen Inc. Through our RenaLab subsidiary, we also provide clinical laboratory services for our
dialysis operations. We also offer other ancillary services, depending on medical appropriateness,
including the administration of other drugs, tests for bone deterioration, electrocardiograms,
nerve conduction studies to test for deterioration of a patients nerves, Doppler flow testing to
measure the effectiveness of the patients vascular access for dialysis, and blood transfusions. QUALITY ASSURANCE Integral to our operating philosophy is the belief that providing high quality care is in the
best interest not only of patients but also of our shareholders. Better patient care results in
improved mortality and morbidity and a greater number of treatments, as patients life spans
increase and the number of days patients spend in hospitals declines. In order to optimize therapy
and improve outcomes, we maintain a vigorous quality assurance program. We establish, maintain and
monitor quality criteria for clinical operations and monitor patient outcomes in all of our
centers. Medical Advisory Board Our Medical Advisory Board oversees the review of patient outcomes and the development and
communication of clinical protocols. The Medical Advisory Board is chaired by Raymond Hakim, M.D.,
Ph.D., our Chief Medical Officer, and is composed of 12 nephrologists, each of whom is the medical
director of one or more of our centers. The Medical Advisory Board is responsible for establishing,
implementing and monitoring our quality assurance policies and procedures and for reviewing and
recommending protocols, policies and procedures for clinical treatment. The Medical Advisory Board
also works to identify deficiencies in treatment practices and to evaluate technological changes.
The Medical Advisory Boards ultimate objective is to assist Renal Care Group in developing and
communicating a protocol-driven clinical care model that will assist us in continuously improving
the care we provide to patients, with the goal of providing optimal care to all patients. 7




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Quality Criteria Continuous quality improvement is our primary clinical objective. We work to achieve this
objective by regularly evaluating dialysis treatments and patients key physiological parameters.
Our Quality Assurance Coordinator is a registered nurse who oversees our quality assurance program.
In addition, each of our dialysis centers has a quality assurance committee that monitors the
quality of care in the center and oversees compliance with applicable regulations. These committees
typically include the medical director, the center administrator, nurses and other technical
personnel. Outcomes Data We believe that an important factor in managing ESRD successfully is the development and
implementation of clinical pathways and treatment protocols. To develop, review and maintain these
pathways and protocols, we maintain a broad database of treatment-specific patient outcomes
information. The Quality Assurance Coordinator oversees the collection of patient outcomes and cost
data in our centers. We make these data available to the Medical Advisory Board and affiliated
physicians to assist in developing, implementing and evaluating clinical pathways to enhance
patient outcomes while working to control the cost of care. Management believes that the
implementation of clinical pathways will assist in improving the overall quality, while resulting
in operating efficiencies at our dialysis centers. CORPORATE COMPLIANCE PROGRAM We have developed and maintain a company-wide compliance program as part of our commitment to
comply fully with all laws and regulations applicable to our business and to maintain high
standards of ethical conduct by our associates. The primary purposes of the program are to heighten
associates and affiliated professionals awareness of the importance of complying with all laws
and regulations that apply to our business and to take steps to identify and promptly resolve
instances of non-compliance. The compliance program has been approved by our Board of Directors. The program addresses
general compliance issues and areas of particular sensitivity. Among the areas of particular
sensitivity covered by the compliance program are health care fraud and abuse issues, financial
reporting, conflicts of interest and antitrust. As part of the program we have published a code of
conduct setting forth standards of conduct and principles of business ethics that we will follow
and that we expect each employee and affiliated professional to follow. The code of conduct is
regularly reviewed and updated. A Compliance Committee comprised of some of our officers and senior
managers and our full-time Compliance Officer administer our corporate compliance program. The
Compliance Committee and Compliance Officer are authorized to report compliance issues directly to
the Audit and Compliance Committee of our Board of Directors. We also maintain a compliance program specific to RenaLab, our laboratory subsidiary. This
program mandates laboratory-specific compliance standards, policies and procedures. The laboratory
compliance program is administered by a Laboratory Compliance Committee, composed of officers and
senior managers of Renal Care Group and RenaLab. This committee includes the Renal Care Group
Compliance Officer and a part-time RenaLab Compliance Officer. This committee and the RenaLab
Compliance Officer are authorized to report compliance issues directly to the RenaLab Board of
Directors and to the Audit and Compliance Committee of Renal Care Groups Board of Directors. 8




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REIMBURSEMENT Sources of Net Revenue The following table sets forth information regarding the sources of our net revenue: Year Ended December 31,2002
    
    
    2003
    
    
    2004Medicare
    
    
    50
    %
    
    
    49
    %
    
    
    49
    %Medicaid
    
    
    7
    
    
    
    6
    
    
    
    4Commercial and other payors
    
    
    38
    
    
    
    40
    
    
    
    42Acute dialysis services
    
    
    5
    
    
    
    5
    
    
    
    5Total
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
 Medicare The Social Security Act provides that most U.S. citizens and resident aliens with ESRD are
entitled to Medicare coverage. If a physician diagnoses an eligible person with ESRD, then the
patient will be entitled to Medicare coverage (1) beginning the third month after the month in
which a regular course of dialysis is initiated, or (2) as early as the month in which a kidney
transplant candidate is hospitalized for the transplant if certain conditions are met. For Medicare purposes, ESRD is defined as kidney impairment that appears irreversible and
permanent and that requires a regular course of dialysis or a kidney transplant to maintain life.
For a period of 30 months, Medicare coverage is secondary for patients who have qualifying
employer-based health insurance. After this 30-month period, Medicare becomes the primary coverage
for patients, and the patients other health insurance generally pays applicable Medicare
coinsurance payments and deductibles. Under the Medicare ESRD program, Medicare reimbursement rates per outpatient dialysis
treatment are fixed under a composite rate structure. The Medicare ESRD composite rate may be
changed by legislation or rulemaking. Congress has approved an increase of 1.6% in the Medicare
ESRD composite rate for 2005 along with other changes in the way we are paid. Although Medicare
reimbursement limits the amount we receive for each treatment, it provides predictable and
recurring treatment revenue for our outpatient dialysis services that are covered by the composite
rate. We generally submit Medicare claims monthly and are usually paid within 30 days of the
submission. The Medicare ESRD composite rate for outpatient dialysis services averaged $131 per treatment
in freestanding facilities during 2004. The Medicare ESRD composite rate is subject to regional
differences based on a number of factors, including labor costs. CMS or Congress may periodically
adjust Medicare reimbursement rates, including the ESRD composite rate, based on many factors,
including legislation, executive and congressional budget reduction and control processes,
inflation and costs incurred in rendering the services. Historically, adjustments in the Medicare
ESRD composite rate have had little relationship to the cost of providing dialysis care. The Medicare ESRD composite rate applies to a designated group of outpatient dialysis
services, including dialysis treatment, supplies used for treatment, certain laboratory tests and
some medications, and most of the home dialysis services we provide. Some other services,
laboratory tests and drugs are eligible for separate reimbursement under Medicare and are not part
of the composite rate. These separately reimbursed items include specific drugs such as EPO, some
physician-ordered tests provided to dialysis patients and some home dialysis services. 9




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Changes in the Medicare ESRD Composite Rate Congress approved a 1.6% increase in the Medicare ESRD composite rate for 2005, following
increases of 1.2% in 2000 and 2.4% in 2001. Under the Medicare Prescription Drug, Improvement, and
Modernization Act of 2003, or MMA, beginning in 2005, Medicare will reimburse dialysis providers
for the ten most utilized ESRD drugs (including EPO) at an amount equal to the drugs acquisition
cost (as determined by the Inspector General of the Department of Health and Human Services (HHS)),
and Medicare will pay dialysis providers for all other ESRD drugs at an amount equal to the drugs
average sales price plus 6%, and the Medicare ESRD composite rate will be increased by an amount
estimated by HHS to be dialysis providers average profit on these drugs. To account for the
changes in drug reimbursement, CMS has determined that the composite rate will be increased by
approximately 8.7%, or $11, per treatment, while payments for most separately billable drugs will
be reduced. Management believes that the net effect of all of these changes in Medicare payments
(including the 1.6% increase in the composite rate, the increase in the composite rate intended to
offset reductions in drug reimbursements, and the reductions in drug reimbursements) will be
neutral to the Company in 2005 in terms of average Medicare revenue per treatment. Before 2000, the Medicare ESRD composite rate was unchanged from commencement of the program
in 1972 until 1983. From 1983 through December 1990, a series of congressional actions resulted in
net reductions of the average Medicare ESRD composite rate from approximately $138 per treatment in
1983 to approximately $125 per treatment in 1986. As a result of the 2000 and 2001 increases in the
Medicare ESRD composite rate, our average Medicare rate per dialysis treatment was $131 during
2004. The Medicare ESRD composite rate has been the subject of a number of reports and studies.
During 2000, Congress directed a study of the ESRD composite rate structure, which was delivered in
2003. The study reviewed items included in the composite rate and items that are currently
separately billable (such as EPO and certain laboratory services) and analyzed whether the
composite rate should be subject to an annual inflationary update. The study made preliminary
recommendations to expand the services covered by the Medicare ESRD composite rate. The study made
no final recommendations, and Congress has not acted on it. The MMA requires additional reports and studies relating to the Medicare ESRD composite rate.
The Secretary of HHS is required to submit a report to Congress by October 1, 2005 detailing the
elements and features for the design and implementation of a bundled prospective payment system for
services furnished by ESRD facilities including, to the extent feasible, bundling of drugs,
clinical laboratory tests and other items that are now separately billed by ESRD facilities. Also,
the Secretary of HHS is required to conduct a three-year demonstration project beginning on January
1, 2006 relating to the use of a payment system for ESRD services that bundles amounts for drugs
and biologicals furnished to ESRD patients, including EPO, and clinical laboratory tests relating
to such drugs and biologicals. During recent congressional sessions, there have been proposals to change numerous aspects of
Medicare, not all of which were included in the MMA. We are unable to predict what, if any, future
changes may occur in the Medicare ESRD composite rate. Any reductions in the Medicare ESRD
composite rate or change in the items covered by the composite rate (such as EPO or certain
laboratory services) could have a material adverse effect on our earnings, financial condition and
business. Medicare Reimbursement for EPO We derive a significant portion of our revenue and earnings from the administration of EPO.
Medicare reimbursement for EPO was fixed at $10 per 1,000 units from 1994 through 2004. Medicare
reimbursement for EPO will be reduced in 2005 to $9.76 as a result of the MMA. The Secretary of
HHS has the authority to determine the Medicare reimbursement rate for EPO, which will equal its
average acquisition cost for the years after 2005. We are unable to predict whether any further
changes in EPO reimbursement will occur. Approximately 26% of our revenue in 2004 was generated
from the administration of EPO; therefore, any further reduction in Medicare reimbursement for EPO
could have a material adverse effect on our earnings, financial condition and business. 10




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In the past CMS has placed limits on EPO reimbursement based on patients hematocrit levels.
Hematocrit is a measure of a patients anemia. In 2004, CMS proposed, and subsequently withdrew, a
national medical review policy to limit EPO reimbursement based on hematocrit levels. CMS has
indicated that it intends to propose another review policy in this area in 2005. Medicares
contractors often conduct medical necessity reviews of claims involving high doses of EPO for
patients with relatively high hematocrits. We are unable to predict whether any changes in EPO
reimbursement based on hematocrit levels will occur. Any reduction in Medicare reimbursement for
EPO could have a material adverse effect on our earnings, financial condition and business. Medicaid Reimbursement Medicaid programs are health care programs partially funded by the federal government that are
administered by the states. These programs generally provide coverage for uninsured patients whose
income and assets are below levels determined by the states. The programs also serve as
supplemental insurance programs for the Medicare co-insurance portion and provide coverage for some
items (for example, oral medications) that are not covered by Medicare. State regulations generally
follow Medicare reimbursement levels and coverage without any coinsurance amounts. Some states,
however, require beneficiaries to pay a share of the cost based upon their income or assets. We are
a licensed ESRD Medicaid provider in all of the states in which we do business. Some of the states in which we do business have dialysis reimbursement rates for Medicaid
patients that are higher than Medicare rates. Representatives of CMS and some of these states have
indicated that the states should consider reducing these higher reimbursement levels, and, as a
result, several states have implemented reductions in Medicaid reimbursement. We currently do
business in two states in which Medicaid reimbursement is substantially higher than Medicare rates
 Alaska and New Mexico. Reductions in Medicaid reimbursement in these states could have an
adverse effect on our earnings, financial condition and business. In addition, under the Balanced Budget Act of 1997, state Medicaid programs are not required
to pay the patients Medicare cost-sharing amounts for dialysis treatment if the state Medicaid
dialysis payment rates are at or below the Medicare composite rate. In such cases, the patient is
not liable for the cost-sharing amounts. Since the effect of the MMA will be to increase the
Medicare composite rate by dialysis providers average profit on separately billable drugs, nearly
all state dialysis payment rates will fall below the new Medicare composite rate. Thus, if states
exercise their option not to pay applicable patient cost-sharing amounts, Medicaid reimbursement in
these states could be further reduced. Private Reimbursement/Acute Care Contracts Before Medicare becomes a patients primary payor, if a patient has private health insurance
coverage, then the patients own insurance plan or other health care coverage pays for his or her
ESRD treatments. We estimate that Medicare and Medicaid are the primary payors for approximately
80% of the patients to whom we provide care. Therefore, reimbursement from private payors,
including acute dialysis payors, cover the other 20% of the patients to whom we provide care;
however, that private reimbursement usually represents 40% or more of our net revenue.
Reimbursement rates from these private payors are generally significantly higher than the rates
paid by Medicare. We have negotiated contracts with most managed care payors in our markets at
rates that are higher than the Medicare ESRD composite rate. Rates under these managed care
contracts are, however, generally lower than those we charge other private payors. After Medicare
becomes a patients primary payor, private secondary payors generally reimburse us for the
patients copayment which is 20% of the applicable Medicare rate. We also receive payments from hospitals under acute care contracts. Rates under these
contracts are generally higher than the Medicare ESRD composite rate. Rates under these acute care
contracts are the result of arms-length negotiations between the hospital and us, and management
believes they approximate fair market value of the services we provide. 11




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GOVERNMENT REGULATION General Federal, state, and local governments regulate Renal Care Groups operations extensively,
including the dialysis centers and laboratory we own. Applicable federal and state
statutes and regulations require us to meet various standards relating, among other things, to
licensure, billing and reimbursement, management of dialysis centers, patient care personnel,
maintenance of proper records, confidentiality of medical records, equipment and quality assurance
programs, and the treatment and disposal of biomedical waste. In addition, our laboratory
operations are subject, among other laws, to the federal Clinical Laboratory Improvement Amendments
of 1988, also known as CLIA. Our dialysis centers and laboratory are subject to periodic inspection
by state and federal agencies to determine if they satisfy applicable requirements. In addition,
through certificate of need, or permit of approval programs, some states regulate the development
or expansion of health care facilities and services, including dialysis centers. Our operations
also are subject to regulations of the Occupational Safety and Health Administration, also known as
OSHA, concerning workplace safety and employee exposure to blood and other potentially infectious
materials. We are subject to federal and state laws governing, among other things, our relationships with
physicians and other health care providers, patient referrals, and false claims. See Government
RegulationAnti-Kickback Statute, Government RegulationStark Law and Government
RegulationCivil Monetary Penalties. The federal government, many states and some private
third-party payors have made combating fraud and abuse in the health care industry a high priority.
As a result, scrutiny and investigation of health care providers and their relationships with
physicians and other referral sources has increased significantly. We believe our operations substantially comply with applicable federal and state laws.
However, if a state or the federal government finds that we have not complied with these laws, then
we could be required to change our operations. Any changes could have a negative impact on us. To
date, our dialysis centers have maintained their licenses and Medicare and Medicaid certifications.
Any loss of certification to participate in the Medicare and Medicaid programs or loss of any
required state or federal licenses or certifications would have a negative effect on us. Management
believes that the health care services industry will continue to be subject to extensive regulation
at the federal, state and local levels. We cannot predict the scope and effect of future regulation
of our business and cannot predict whether health care reform will require us to change our
operations or whether such reform will have a negative impact on us. We
cannot predict whether we will be held responsible for actions previously taken by acquired
companies or facilities before we purchased them. We also cannot predict whether our operations, or
the previous operations of acquired companies or facilities, will be reviewed or challenged by the
government. Any review or challenge of our operations could have a negative impact on us. Medicare and Medicaid Certification and Reimbursement To receive reimbursement from federal health care programs for dialysis and laboratory
services, our dialysis centers and laboratory must be certified by one or more government agencies.
For example, to receive Medicare reimbursement, our dialysis centers and laboratory must be
certified by CMS. All of our dialysis centers and our laboratory operations are certified under the
Medicare program and applicable state Medicaid programs. In connection with our participation in
Medicare, we must comply with conditions for coverage, including requirements concerning personnel,
management, patient care, patient rights, medical records and physical environment. We must also
comply with extensive billing rules governing, among other things, medical necessity and
documentation. See Government RegulationFalse Claims Act and Government RegulationCivil
Monetary Penalties. HHS has recently issued proposed regulations to adopt new Medicare conditions for coverage for
ESRD services. Although they are not final, if CMS adopts the new conditions for coverage
substantially as proposed, we cannot predict whether we will be able to meet the new conditions for
coverage. The 12




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proposed changes to the Medicare conditions for coverage for ESRD facilities could require us
to change our operations and may have a negative effect on our business and profitability. The HHS Office of Inspector General, also known as the OIG, issued reports in the summer of
2000 recommending greater oversight of the quality of care in dialysis facilities. In January of
2003, the United States General Accounting Office (now the Government Accountability Office), known
as the GAO, issued a report finding that efforts by CMS to ensure quality care at certain
facilities including kidney dialysis facilities continue to be jeopardized by problems in the
performance of state inspections, complaint investigations and enforcement of federal standards.
Any increased oversight could lead to increased requirements and greater scrutiny of dialysis
facilities, including those owned by Renal Care Group. The Anti-Kickback Statute Under Medicare, Medicaid and other government-funded health care programs, such as the
CHAMPUS/Tri-Care program, federal and state governments enforce provisions of the Social Security
Act of 1965 that are commonly referred to as the Anti-Kickback Statute. The Anti-Kickback Statute
prohibits any person from offering, paying, soliciting or receiving any type of benefit (1) in
exchange for the referral of a patient covered by Medicare, Medicaid or other federal health care
programs, or (2) for the leasing, purchasing, ordering or arranging for or recommending the lease,
purchase or order of any item, good, facility or service covered by the programs. Remuneration
prohibited by the Anti-Kickback Statute includes the payment or transfer of anything of value. Many
states have similar anti-kickback statutes that are not necessarily limited to items or services
paid for by a federal or state health care program. Any person or entity that violates the Anti-Kickback Statute may be penalized. These penalties
include criminal fines of up to $25,000 per violation and imprisonment. In addition, the government
may impose civil penalties of up to $50,000 per violation, plus three times total remuneration
offered, paid, solicited or received. Further, the Secretary of HHS has the authority to exclude or
bar individuals or entities who violate the Anti-Kickback Statute from participating in Medicare
and Medicaid. The Anti-Kickback Statute is a broad law. Courts have stated that, under certain
circumstances, the Anti-Kickback Statute is violated when just one purpose, as opposed to the
primary purpose, of a payment is to induce referrals. To clarify what acts or arrangements will not
be subject to prosecution by the OIG or the United States Attorney, HHS has adopted a set of safe
harbor regulations and continues to publish clarifications to these safe harbors. If an arrangement
meets all of the requirements of a safe harbor, it will not violate the
Anti-Kickback Statute. The types of arrangements covered by safe harbors include certain investments in companies
whose stock is traded on a national exchange, certain small company investments in which physician
ownership is limited, rental of space, rental of equipment, personal services and management
contracts, sales of physician practices, physician referral services, warranties, discounts,
payments to employees, group purchasing organizations, and waivers of beneficiary deductibles and
co-payments. Each type of arrangement must meet a number of specific requirements in order to enjoy
the benefits of the applicable safe harbor. Meeting the requirements of a safe harbor will protect
an arrangement from enforcement action by the government. However, the fact that an arrangement
does not meet the requirements of a safe harbor does not mean that the arrangement is necessarily
illegal or will be prosecuted under the Anti-Kickback Statute. The OIG has issued a Special Fraud Alert concerning the pricing of laboratory testing at ESRD
centers. Medicare pays for laboratory tests provided to ESRD patients in two different ways. Some
laboratory tests are considered routine, and Medicare includes payment for those tests in the
Medicare ESRD composite rate paid to the dialysis center. Some laboratory testing is not included
in the composite rate, and these tests are billed by the laboratory directly to Medicare. In the
Special Fraud Alert, the OIG stated it is aware of cases where a laboratory offers to perform tests
included in the composite rate at a price below fair market value. In exchange, the dialysis
facility agrees to refer all or most of its non-composite rate tests to the laboratory. The OIG
identified such an arrangement as raising issues under the 13




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Anti-Kickback Statute. Management believes that our arrangements with laboratories reflect
fair market value and comply with the Anti-Kickback Statute. We seek to satisfy as many safe harbor requirements as possible when we are structuring
business arrangements. However, not all of our arrangements satisfy all elements of a safe harbor.
Management believes that we have a reasonable basis for concluding we substantially comply with the
Anti-Kickback Statute and other applicable related federal and state laws and regulations.
Management believes that our current arrangements with physicians including nephrologists owning
our common stock, medical directors, laboratories, suppliers, hospitals, and other sources of
referrals to our dialysis centers and our arrangements with hospitals to provide acute dialysis
materially comply with the Anti-Kickback Statute. However, a government agency might take a
position contrary to our interpretations or may require us to change our practices. If an agency
were to take such a position, it could materially and adversely affect Renal Care Group. The Stark Law Congress has also passed significant prohibitions against some physician referrals of patients
for health care services. These prohibitions are commonly known as the Stark Law. The Stark Law
prohibits a physician from making referrals for particular health care services (called designated
health services) to entities with which the physician, or an immediate family member of the
physician, has a financial relationship. If an arrangement is covered by the Stark Law, the
requirements of a Stark Law exception must be met for the physician to be able to make referrals to
the entity for designated health services. Under the Stark Law, the term financial relationship is defined very broadly to include most
types of ownership or compensation relationships. The Stark Law also prohibits the entity receiving
the referral from seeking payment under the Medicare and Medicaid programs for services rendered
pursuant to a prohibited referral. If an entity is paid for services rendered pursuant to a
prohibited referral, it may incur civil penalties or could be excluded from participating in
Medicare or Medicaid. The Stark Law restricts referrals for clinical laboratory services; physical therapy services;
occupational therapy services; radiology services, including magnetic resonance imaging (MRI),
computerized axial tomography (CAT) scans, and ultrasound services; radiation therapy services and
supplies; durable medical equipment and supplies; parenteral and enteral nutrients, equipment, and
supplies; prosthetics, orthotics, and prosthetic devices and supplies; home health services;
outpatient prescription drugs; and inpatient and outpatient hospital services. The Stark Law defines a financial relationship to include (1) a physicians ownership or
investment interest in an entity and (2) a compensation relationship between a physician and an
entity. Under the Stark Law, financial relationships include both direct and indirect
relationships. We have compensation arrangements with medical directors or the professional
practices of the medical directors. The medical directors or their practices may also own shares,
and options to purchase shares, of our common stock. In addition, other physicians who refer
patients to our centers may own our stock. If so, the medical directors and other physicians would
have a financial relationship with us. Accordingly, these physicians would not be able to refer
patients to our dialysis centers for designated health services unless a Stark Law exception
applies. Dialysis is not listed as a designated health service under the Stark Law. However, the
definition of designated health services includes some items and services that are components of
dialysis or that we may provide to patients in connection with their receipt of dialysis services.
On March 26, 2004, CMS issued Phase II of its regulations under the Stark Law (referred to as the
Stark II Regulations). The Stark II Regulations exclude from the definition of covered designated
health services those services that are reimbursed by Medicare as part of a composite rate. They
also contain an exception under the Stark Law for clinical laboratory services that are included in
the Medicare ESRD composite rate. Therefore, services that are included in the Medicare ESRD
composite rate are not covered by the Stark Law. Further, the Stark II Regulations exclude from the referral prohibition EPO and certain other
dialysis-related drugs if certain requirements are met. The list of drugs eligible for this
exception is 14




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published and updated from time to time by CMS. If the requirements are met, this exception
applies whether or not these drugs are included in the Medicare ESRD composite rate. The final regulations also exclude from the definition of inpatient hospital services any
dialysis services provided by a hospital that is not certified by CMS to provide outpatient
dialysis services. This rule would have the effect of excluding from the Stark Law prohibition, any
dialysis services we provide under an acute dialysis contract with a hospital, if that hospital is
not certified to provide outpatient dialysis. The Stark II Regulations exclude from the definition
of durable medical equipment all equipment and supplies used in connection with home dialysis
that are reimbursable under a composite rate. These Stark II Regulations exclude most of the items
and services connected with dialysis from the Stark Law prohibitions. If the Stark Law applies to our relationships with referring physicians, there are exceptions
to the Stark Law, which, if certain requirements are met, would permit such physicians to refer
patients to us for designated health services. The Stark Law contains exceptions for certain
physician ownership or investment interests in entities and certain physician compensation
arrangements with entities. The exceptions for compensation arrangements include employment
relationships, personal services contracts, and space and equipment leases. If a compensation
arrangement between a physician, or immediate family member of a physician, and an entity satisfies
all requirements for a Stark Law exception, then the Stark Law will not prohibit the physician from
referring patients to the entity for designated health services. The Stark II Regulations establish
a safe harbor for compensation to physicians providing that hourly payments set under either of two
methodologies will constitute fair market value, qualifying the arrangement for the fair market
value exception under the Stark Law. The preamble to the Stark II Regulations contains a
discussion indicating CMSs view that the hourly rate methodologies could be applicable to
compensation under an ESRD facility medical director agreement. Our medical director agreements do
not provide for compensation to our medical directors based on an hourly rate. However, we believe
that our agreements with medical directors or their professional practices provide for fair market
value compensation and materially satisfy the Stark Law exception for personal service
arrangements. The Stark Law also includes an exception for a physicians ownership or investment interest in
certain entities through the ownership of stock. If a physician owns stock in an entity, and the
stock is listed on a national exchange or is quoted on the Nasdaq Stock Market and the ownership
meets certain other requirements, then the Stark Law will not apply to prohibit the physician from
referring to the entity for designated health services. The requirements for this Stark Law
exception include a requirement that the entity issuing the stock have at least $75.0 million in
stockholders equity at the end of its most recent fiscal year or on average during the previous
three fiscal years. As of December 31, 2004, we had stockholders equity of more than $592.0
million. Management believes that physician ownership of our stock satisfies this Stark Law
exception. If an entity violates the Stark Law, it could be subject to civil penalties of up to $15,000
per prohibited claim and may be excluded from Medicare and Medicaid. If the Stark Law applies to
our relationships with referring physicians and no exceptions under the Stark Law are available,
then we would be required to restructure these relationships or refuse to accept referrals for
designated health services from these physicians. If we were found to have submitted claims to
Medicare for services provided pursuant to a referral prohibited by the Stark Law, then we would be
required to repay amounts we received from Medicare for those services and could be subject to
civil monetary penalties. If we were required to repay amounts to Medicare or were subject to
fines, our business and profits could be harmed. Many states have physician relationship and referral statutes that are similar to the Stark
Law. Management believes we are in substantial compliance with applicable state laws with respect
to physician relationships and referrals. However, any finding that we are not in compliance with
these state laws could require us to change our operations and could have a negative impact on us. The Health Insurance Portability and Accountability Act of 1996 In an effort to combat health care fraud, Congress included several anti-fraud measures in the
Health Insurance Portability and Accountability Act of 1996, also called HIPAA. Among other things, 15




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HIPAA broadened the scope of certain fraud and abuse laws, extended criminal penalties for
Medicare and Medicaid fraud to other federal health care programs, and expanded the authority of
the OIG to exclude persons and entities from participating in the Medicare and Medicaid programs.
HIPAA also extended the Medicare and Medicaid civil monetary penalty provisions to other federal
health care programs, increased the amounts of civil monetary penalties, and established a criminal
health care fraud statute. Federal health care offenses under HIPAA include health care fraud and making false statements
relating to health care matters. Under HIPAA, among other things, any person or entity that
knowingly and willfully defrauds or attempts to defraud a health care benefit program is subject to
a fine, imprisonment or both. Also under HIPAA, any person or entity that knowingly and willfully
falsifies, conceals or covers up a material fact, or makes any materially false or fraudulent
statements in connection with the delivery of or payment for health care services by a health care
benefit plan is subject to a fine, imprisonment or both. HIPAA also required the OIG to issue advisory opinions to outside parties regarding the
interpretation and applicability of the Anti-Kickback Statute and other OIG health care fraud and
abuse sanctions. An OIG advisory opinion only applies to the people or entities that requested it.
However, advisory opinions are published and made available to the public, and they provide
guidance on practices the OIG believes may violate federal law. We have not requested any advisory
opinions from the OIG. However, the OIG has issued several advisory opinions addressing practices
of companies owning ESRD centers. In advisory opinions addressing practices of companies owning ESRD centers, the OIG has
advised ESRD companies that they may not pay policy premiums for Medicare supplemental insurance
for patients, even patients with proven financial hardship. Prior to the adoption of HIPAA and the
issuance of these OIG opinions, we had paid premiums for Medicare supplemental insurance for some
patients with demonstrated financial need. We stopped making such payments following the adoption
of HIPAA. Consistent with the OIGs advisory opinions, we have made donations to charitable
foundations that may, but are not required to, make premium payments on behalf of ESRD patients. We
believe, but cannot make assurances, that our current practices regarding supplemental insurance
substantially comply with the general principles expressed by the OIG in these advisory opinions. HHS has adopted regulations governing electronic transactions by certain entities involving
health information. These regulations are part of the administrative simplification provisions of
HIPAA. These regulations are commonly referred to as the Transaction Standards rule. The rule
establishes standards for eight of the most common health care transactions by reference to
technical standards promulgated by recognized standards publishing organizations. Under the new
standards, any party transmitting or receiving health transactions electronically must send and
receive data in a prescribed format, rather than the large number of different data formats
previously used. This rule applies to Renal Care Group in connection with submitting and processing
health claims. The Transaction Standards rule also applies to many of our payors and to our
relationships with those payors. HHS has also adopted regulations implementing HIPAA that adopted standards for privacy of
individually identifiable health information. These regulations cover health care providers, health
care clearinghouses and health plans. The privacy regulations, among other things, require
companies covered by the regulations:  
    to obtain patient authorization prior to certain uses or disclosures of protected health
information,
    to provide notice of privacy practices to patients and obtain an acknowledgement that the
patient has received the notice,
    to respond to requests from patients for access to or to obtain a copy of their information,
    to respond to patient requests for amendments of their information,
    to designate a privacy officer, 16




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
    to use and disclose only the minimum necessary information to accomplish a particular
purpose, and
    to establish policies and procedures with respect to uses and disclosures of protected
health information. These regulatory requirements impose significant administrative and financial obligations on
companies that use or disclose individually identifiable information relating to the health of a
patient. We have implemented policies and procedures to maintain patient privacy and comply with
HIPAAs privacy requirements. The privacy regulations are extensive, and we may need to change some
of our practices to comply with them as they are interpreted and as we deal with issues that arise. HHS has also published regulations implementing HIPAA that govern the security of health
information that is maintained or transmitted electronically. The regulations generally require the
implementation of administrative, physical and technical safe guards to ensure the confidentiality,
integrity and availability of electronic health information. Most covered entities, including
Renal Care Group, will be required to comply with these regulations by April 21, 2005. Management
believes we will be in compliance with these regulations when they become effective. The False Claims Act The federal False Claims Act gives the federal government an additional way to police false
bills or requests for payment for health care services. Under the False Claims Act, the government
may fine any person who knowingly submits, or participates in submitting, claims for payment to the
federal government that are false or fraudulent, or that contain false or misleading information.
Any person who knowingly makes or uses a false record or statement to avoid paying the federal
government may also be subject to fines under the False Claims Act. Under the False Claims Act, the
term person means an individual, company or corporation. The federal government has used the
False Claims Act widely to prosecute fraud against Medicare and other governmental programs in
areas such as coding errors, billing for services not provided and submitting false cost reports.
The False Claims Act has also been used to prosecute people or entities that bill services at a
higher reimbursement rate than is allowed and billing for care that is not medically necessary. The penalty for violation of the False Claims Act ranges from $5,500 to $11,000 for each
fraudulent claim plus up to three times the amount of damages caused to the government as a result
of each fraudulent claim. In addition to the False Claims Act, the federal government may use
several criminal statutes to prosecute the submission of false or fraudulent claims for payment to
the federal government. Many states have similar false claims statutes that impose liability for
the types of acts prohibited by the False Claims Act. Civil Monetary Penalties The Secretary of HHS may impose civil monetary penalties on any person or entity that presents
or causes to be presented certain ineligible claims for medical items or services. The amount of
penalties varies, depending on the offense, from $2,000 to $50,000 per violation. HHS can impose
penalties for false or fraudulent claims and those that include services not provided as claimed.
In addition, HHS may impose penalties on claims:  
    for physician services the person or entity knew or should have known
were rendered by a person who was unlicensed, or misrepresented either
(1) his or her qualifications in obtaining his or her license or (2)
his or her certification in a medical specialty;
    that were furnished by a person who was, at the time the claim was
made, excluded from the program to which the claim was made; or
    that show a pattern of medically unnecessary items or services. 17




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Penalties also may be imposed on a person or entity that violates rules regarding the
assignment of payments, that knowingly gives false or misleading information that could reasonably
influence the discharge of patients from a hospital, or that offers inducements to beneficiaries
for program services. Persons who have been excluded from the program and who retain ownership in a
participating entity, or who contract with excluded persons, may be penalized. Penalties also are
applicable in certain other cases, including violations of the federal Anti-Kickback Statute,
payments to limit certain patient services and improper execution of statements of medical
necessity. Government Investigations Last year, the federal government continued to investigate practices of health care providers,
including providers of dialysis. We expect that the number of government investigations of dialysis
providers will continue to increase in 2005. The OIG has indicated in its Fiscal Year 2005 Work
Plan that it will be focusing this year on a number of areas of ESRD services, including the level
of CMS oversight of ESRD facilities, especially regarding quality of care. The federal government
also continues to investigate practices of laboratories. Each of the laboratories owned and
operated by the major dialysis providers, including our laboratory, has been the subject of a
government investigation. These laboratories, including our laboratory, could be the subject of
future investigations. On October 25, 2004, we received a subpoena from the office of the United States Attorney for
the Eastern District of New York. The subpoena requires the production of documents related to
numerous aspects of our business and operations, including those of our RenaLab subsidiary. The
subpoena includes specific requests for documents related to testing for parathyroid hormone (PTH)
levels and vitamin D therapies. Our competitors, DaVita, Inc., Fresenius Medical Care AG, Gambro
Healthcare, Inc., as well as other participants in the dialysis industry, have announced their
receipt of similar subpoenas. Renal Care Group maintains a compliance program that is designed to prevent violations of the
law. The existence of an effective compliance program may reduce the severity of civil and criminal
penalties for certain offenses. We believe our compliance program is effective. Health Care Legislation and Regulatory Developments Congress may enact legislation and/or CMS may promulgate regulations in the future that may
significantly change the Medicare ESRD program or reduce the amount that Medicare and Medicaid will
pay for our services. For instance, CMS has indicated that in 2005 they will propose regulations to
update the increase in the composite rate intended to offset reductions in drug reimbursements
pursuant to the MMA. In addition, federal and state statutes or regulations may be enacted to
impose additional requirements on us to continue to provide services to ESRD patients, to provide
new services, or to maintain eligibility to participate in federal and state payment programs. Any
new legislation or regulations, or new interpretations of existing statutes and regulations,
governing reimbursement of dialysis providers or the manner in which dialysis companies provide
services to patients could have a material impact on us and could adversely affect our
profitability. Joint Ventures A number of the dialysis centers we operate are owned by joint ventures in which we own a
controlling interest and one or more physicians or physician practice groups own a minority
interest. The physician owners also may provide medical director services to those centers and/or
to other centers we own and operate. Because our relationships with physicians are governed by the
Anti-Kickback Statute, we have sought to satisfy as many safe harbor requirements as possible in
structuring these joint venture arrangements. However, our joint venture arrangements do not
satisfy all elements of a safe harbor. Management believes that we have a reasonable basis for
concluding that we substantially comply with the Anti-Kickback Statute. Also, we believe we have
structured the physician relationships in these joint ventures in a way that substantially complies
with the Stark Law or meets applicable exceptions under the Stark Law. If the joint ventures were
found to be in violation of the Anti-Kickback Statute or the Stark Law, we could be required to
restructure them or refuse to accept referrals for designated health services from the physicians
with whom the joint venture centers have a relationship. We also could be required to 18




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repay to Medicare amounts received by the joint ventures pursuant to prohibited referrals, and
we could be subject to monetary penalties. If the joint venture centers are subject to any of these
penalties, our business and profits could be damaged. Recent Regulatory Developments In addition to the other matters discussed in this section, in June of 2004, the GAO issued a
report, Medicare Dialysis Facilities: Beneficiary Access Stable and Problems in Payment System
Being Addressed. The GAO found, among other things, that in 2001, the total number of dialysis
facilities nationwide increased at about the same rate as the Medicare dialysis population, and
that providers have an incentive to maximize the use of profitable separately billable drugs to
compensate for inadequate payments under the composite rate. COMPETITION The dialysis industry is highly competitive. Competition for qualified physicians to act as
medical directors is also intense. According to CMS, there were more than 4,000 outpatient
facilities providing dialysis in the United States at the end of 2002. We believe that as of
December 31, 2004, approximately 67% of these facilities were owned by multi-center dialysis
companies, approximately 15% were owned by independent physicians, small chains and other small
operators, and approximately 18% were hospital-based centers. The largest multi-center dialysis
company is Fresenius Medical Care, Inc., which also manufactures and sells dialysis equipment and
supplies. As a vertically integrated provider, Fresenius may have some competitive advantages.
Other large competitors include DaVita, Inc. and Gambro Healthcare, Inc. In December 2004 DaVita
and Gambro announced a definitive agreement under which DaVita will acquire Gambros United States
dialysis business. There are also a number of other health care providers that have entered or may decide to
enter the dialysis business. Some of our competitors have substantially greater financial resources
than ours, and they may compete with us for acquisitions, development and/or management of dialysis
centers and nephrology practices. We believe that competition for acquisitions has, over time,
increased the cost of acquiring dialysis centers. We may also experience competition from centers
established by former medical directors or other referring physicians. There can be no assurance
that we will compete effectively with any of our competitors. INSURANCE We maintain professional liability insurance and general liability insurance policies for all
of our operations. We also maintain insurance in amounts management deems adequate to cover
property and casualty risks, workers compensation, and directors and officers liability. During
2002 and 2003, our cost for most types of insurance, particularly professional liability insurance,
general liability insurance, and directors and officers liability insurance, increased
substantially, both in terms of premiums and deductibles. These trends moderated somewhat in 2004,
and management believes they may moderate further in 2005. There can be no assurance that the
aggregate amount and types of our insurance are adequate to cover all risks we may incur or that
insurance will be available in the future. EMPLOYEES At December 31, 2004, we employed 7,352 full-time employees and 1,251 part-time employees. Of
the total employees, 68 were employed at our headquarters and 8,535 were employed at our dialysis
facilities, laboratory or regional business offices. In managements opinion, employee relations
are good. INTERNET WEBSITE Our internet website can be found at www.renalcaregroup.com.We make available free of charge
on or through our internet website, access to our annual report on Form 10-K, quarterly reports on
Form 10-Q, current reports on Form 8-K, and amendments to those reports filed pursuant to the
Exchange Act as soon as reasonably practicable after such material is filed with, or furnished to,
the Securities and 19




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Exchange Commission. We will also provide a copy of these documents free of charge to
shareholders upon request. CODE OF ETHICS We have adopted a code of ethics that applies to all of our directors, officers and employees.
This code is publicly available in the investor relations area of our website at
www.renalcaregroup.com. This code of ethics is not incorporated in this report by reference.
Copies of our code of ethics may also be requested in print by writing to Investor Relations at
2525 West End Avenue, Suite 600, Nashville, Tennessee 37203. RISK FACTORS You should carefully consider the risks described below before investing in Renal Care Group.
The risks and uncertainties described below are not the only ones facing Renal Care Group. Other
risks and uncertainties that we have not predicted or assessed may also adversely affect us. If any of the following risks occurs, our earnings, financial condition or business could be
materially harmed, and the trading price of our common stock could decline, resulting in the loss
of all or part of your investment. Our profits are dependent on the services we provide to a small portion of our patients who are
covered by private insurance. In
recent reviews of dialysis reimbursement, the Medicare Payment Advisory
Commission, also known as MedPAC, determined that Medicare payments for dialysis services are less
than the average costs that providers incur to provide the services. Since Medicaid rates are
comparable to those of Medicare and because Medicare only pays us 80%
of the Medicare allowable amount (the patient or secondary insurance
being responsible for the remaining 20%), the amount we receive from
Medicare and Medicaid is less than our average cost per treatment. As a result, the payments we receive from private payors both
subsidize the losses we incur on services for Medicare and Medicaid patients and generate all the
profits we report. In fact, much of our profit is generated from private-pay patients for whom we
are paid at amounts equal to several times Medicare rates. We estimate that Medicare and Medicaid
are the primary payors for approximately 80% of the patients to whom we provide care but that 43%
of our net revenue in 2002, 45% of our net revenue in 2003 and 47% of our net revenue for 2004 was
derived from sources other than Medicare and Medicaid. Therefore, if the private payors who pay
for the care of the other 20% of our patients reduce their payments for our services, or if we
experience a shift in our revenue mix toward Medicare or Medicaid reimbursement, then our revenue,
cash flow and earnings would decrease, and our cash flow and profits would be disproportionately
impacted. We have been able to implement annual price increases for private insurers and managed care
organizations, but government reimbursement has remained flat or has been increased only modestly.
Management believes that health insurance pricing is cyclical and that we may be at or near the top
of the cycle. As a result, management believes that our ability to maintain or raise rates to
private insurers and managed care companies may be more limited over the next several years than it
has been in the recent past. Management believes that the reductions in reimbursement by commercial
insurers, along with pricing pressure from other commercial insurers and managed care organizations
could adversely impact our revenue per treatment and earnings per share in 2005. Any of the
following events could have a material adverse effect on our revenue and earnings:  
    any number of economic or demographic factors could cause private
insurers, hospitals or managed care companies to reduce the rates they
pay us or to refuse to pay price increases or work to reduce the rate
of our price increases;
    a portion of our business that is currently reimbursed by private
insurers or hospitals may become reimbursed by managed care
organizations, which generally have lower rates for our services; or 20




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
    a portion of our business that is currently reimbursed by private
insurers at rates based on our billed charges may become reimbursed
under a contract at lower rates. If Congress or CMS changes the Medicare or Medicaid programs for dialysis, then our net revenue and
earnings could decrease. If the government changes the Medicare, Medicaid or similar government programs or the rates
those programs pay for our services, then our revenue and earnings may decline. We estimate that
approximately 57% of our net revenue for 2002, 55% of our net revenue for 2003, and 53% of our net
revenue for 2004 consisted of reimbursements from Medicare, Medicaid and comparable state programs,
including reimbursement for the administration of EPO. Any of the following actions in connection
with government programs could cause our revenue and earnings to decline:  
    a reduction of the amount paid to us under government programs;
    an increase in the costs associated with performing our services that
are subject to inflation, such as labor and supply costs, without a
corresponding increase in reimbursement rates;
    the inclusion of some or all ancillary services, for which we are now
reimbursed separately, in the flat composite rate for a dialysis
treatment; or
    changes in laws, or the interpretations of laws, which could cause us
to modify our operations. Specifically, the Presidents proposed budget for fiscal 2006 proposes substantial cuts in
federal Medicaid spending. We cannot predict whether any of the proposed cuts will be made or how they will
affect us. In addition, Congress and CMS have proposed expanding the drugs and services that are
included in the flat composite rate. CMS has indicated that it believes such a mechanism would be
fairer and easier to administer. In addition, Congress mandated a change in the way we will be paid
beginning in 2005 for some of the drugs, including EPO, that we bill for outside of the flat
composite rate. This change will result in lower reimbursement for these drugs and a higher
composite rate. Under recently adopted regulations, in 2005 we will be reimbursed for the top ten
separately billable ESRD drugs (including EPO) at an average acquisition cost, and we will be
reimbursed for other separately billable ESRD drugs at average sales price plus 6%. In addition,
the composite rate will be increased by 8.7% in 2005. These regulations also include a case-mix
adjustment that will become effective in April 2005 and a geographic adjustment to the composite
rate as well as a budget-neutrality adjustment. Management believes these changes coupled with the
1.6% increase in the Medicare composite rate approved for 2005 will have a neutral effect on our
Medicare revenue per treatment in 2005. The implementation of the case-mix adjustment could adversely affect our cash flow and working
capital. Under the regulations adopted pursuant to the MMA, CMS has adopted a case-mix adjustment for
the ESRD composite rate, under which the Medicare composite rate will be adjusted based on a
patients age, body mass index and body surface area. These regulations are scheduled to become
effective in April 2005. Management believes implementing these case-mix adjustments will require
significant systems changes for the Medicare fiscal intermediaries that process and pay Medicare
claims. If the required systems changes are not made on a timely basis, then the Medicare fiscal
intermediaries may delay the payment of claims or may not pay claims correctly, either of which
could have an adverse effect on our cash flow and working capital. If states lower Medicaid reimbursement, then we would be less profitable. The Medicaid programs in Alaska and New Mexico, two states in which we operate, currently
reimburse us at rates higher than those paid by Medicare. These programs may reduce payment levels
to be at or close to Medicare rates. In addition, a number of the states in which we operate are
experiencing budget shortfalls, and some of these states may consider reducing Medicaid
reimbursement, changing their Medicaid programs or not paying claims to address these shortfalls
and cut costs. We are unable to predict 21




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whether and, if so, when any
reductions in Medicaid reimbursement might occur and what their precise effect will be. If reimbursement for EPO decreases, then we could be less profitable. If government or private payors reduce reimbursement rates for EPO, for which we are currently
reimbursed separately outside of the flat composite rate, then our revenue and earnings will
decline. Revenues from the administration of EPO were approximately 23% of our net revenue for
2002, 24% of our net revenue for 2003 and 26% of our net revenue for 2004. Most of our payments for
EPO come from government programs. For the year ended December 31, 2004, Medicare and Medicaid
reimbursement represented approximately 53% of the total revenue we derived from EPO. A reduction
in the reimbursement rate for EPO or the inclusion of EPO in the list of items covered by the flat
composite rate could materially and adversely affect our net revenue and earnings. As discussed
above, Congress has mandated a change in the way we will be reimbursed for EPO, and CMS has adopted
regulations to implement the change. If Amgen raises the price for EPO or if EPO becomes in short supply, then we could be less
profitable. EPO is produced by a single manufacturer, Amgen, Inc. In April 2002, Amgen announced a 3.9%
increase in the price of EPO. This price increase adversely affected our earnings in 2003, and
changes in the rebate structure under our current contract with Amgen adversely affected our
earnings in 2004. Changes in the rebate structure under our current contract with Amgen or in
Amgens packaging process for EPO, may adversely affect our earnings in 2005. If Amgen imposes
additional EPO price increases or if Amgen or other factors interrupt the supply of EPO, then our
net revenue and earnings will decline. If Amgen markets Aranesp®for ESRD patients, then we could be less profitable. Amgen has developed and obtained FDA approval for a new drug to treat anemia that is marketed
as Aranesp® (darbepoetin alfa). Aranesp® is a longer acting form of
bio-engineered protein that, like EPO, can be used to treat anemia. EPO is usually administered in
conjunction with each dialysis treatment. Aranesp® can remain effective for two to three
weeks. If Amgen markets Aranesp® for the treatment of dialysis patients, then our
earnings could be materially and adversely affected by either of the following factors:  
    our margins realized from the administration of Aranesp®
could be lower than the margins realized on the administration of EPO;
or
    physicians could decide to administer Aranesp® in their
offices, and we would not recognize net revenue or profit from the
administration of EPO or Aranesp®. 22




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Changes in our clinical practices or reimbursement rules for EPO and other drugs could
substantially reduce our revenue and earnings. The administration of EPO and other drugs accounts for approximately 39% of our net revenue in
2004. Changes in physician practices or prescription patterns, changes in private and governmental
reimbursement criteria or the introduction of new drugs or new types of drug administration could
materially reduce our net revenue and profits. For example, some Medicare fiscal intermediaries
have implemented or may implement local medical review policies for EPO and other drugs that would
effectively limit reimbursement for those drugs. In 2004, CMS proposed a national policy that
would establish limits on reimbursement for EPO, but this proposal has not yet been finalized. We
are unable to predict whether and, if so, when any such changes may occur, but if they do, they
will likely have an adverse impact on our net revenue and earnings. If our business is alleged or found to violate heath care or other applicable laws, our net revenue
and earnings could decrease. We are subject to extensive federal, state and local regulation. The laws that apply to our
operations include, but are not limited to, the following:  
    fraud and abuse prohibitions under state and federal health care laws;
    prohibitions and limitations on patient referrals;
    billing and reimbursement rules, including false claims prohibitions
under health care reimbursement laws;
    rules regarding the collection, use, storage and disclosure of patient
health information, including HIPAA, and state law equivalents of
HIPAA;
    facility licensure;
    health and safety requirements;
    environmental compliance; and
    medical and toxic waste disposal. Much of the regulation of our business, particularly in the areas of fraud and abuse and
patient referral, is complex and open to differing interpretations. Due to the broad application of
the statutory provisions and the absence in many instances of regulations or court decisions
addressing the specific arrangements by which we conduct our business, including our arrangements
with medical directors, physician stockholders and physician joint venture partners, governmental
agencies could challenge some of our practices under these laws. New regulations governing electronic transactions and the collection, use, storage, and
disclosure of health information impose significant administrative and financial obligations on our
business. If, after the required compliance date, we are found to have violated these regulations,
we could be subject to:  
    criminal or civil penalties, including significant fines;
    claims by people who believe their health information has been
improperly used or disclosed; and
    administrative penalties by payors. Government investigations of health care providers, including dialysis providers, have
continued to increase. We have been the subject of investigations in the past, and the government
may investigate our business in the future. One of our competitors, DaVita, Inc., has announced
that it is the subject of an investigation by the U.S. Attorney for the Eastern District of
Pennsylvania. Another competitor, Gambro 23




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Healthcare, Inc., recently settled matters related to an investigation by the U.S. Attorneys
Office in St. Louis, Missouri and paid approximately $350.0 million in connection with the
settlement. On October 25, 2004, we received a subpoena from the office of the United States Attorney for
the Eastern District of New York. The subpoena requires the production of documents related to
numerous aspects of our business and operations, including those of RenaLab, Inc., our laboratory.
The subpoena includes specific requests for documents related to testing for parathyroid hormone
(PTH) levels and vitamin D therapies. Our competitors DaVita, Inc., Fresenius Medical Care AG,
Gambro Healthcare, Inc., as well as other participants in the dialysis industry, have announced
that they have received similar subpoenas. If any of our operations is found to violate applicable
laws, then we may be subject to severe sanctions, or we could be required to alter or discontinue
the challenged conduct or both. If we are required to alter our practices, we may not be able to do
so successfully. If any of these events occurs, our revenue and earnings could decline. If our joint ventures violate the law, our business could be damaged. A number of the dialysis centers we operate are owned by joint ventures in which we hold a
controlling interest and one or more physicians or physician practice groups maintain a minority
interest. The physician owners may also provide medical director services to those centers or other
centers we own and operate. Our joint venture arrangements do not satisfy all elements of any safe
harbor under the Anti-Kickback statutes. If one or more of our joint ventures were found to be in
violation of the Anti-Kickback Statute or the Stark Law, we could be required to restructure them
or refuse to accept referrals for designated health services from the physicians with whom those
particular joint venture centers have a relationship. We also could be required to repay to
Medicare amounts received by the joint ventures pursuant to prohibited referrals, and we could be
subject to monetary penalties. If we are subject to any of these penalties, our business could be
damaged. Changes in the health care delivery, financing or reimbursement systems could adversely affect our
business. The health care industry in the United States may be entering a period of change and
uncertainty. Health care organizations, public or private, may dramatically change the way they
operate and pay for services. Our business is designed to function within the current health care
financing and reimbursement system. During the past several years, the health care industry has
been subject to increasing levels of government regulation of, among other things, reimbursement
rates and relationships with referring physicians. In addition, proposals to reform the health care
system have been considered by Congress. In light of the continued increases in the cost of health
care and the current economic situation coupled with the federal budget deficit, there may be new
proposals to change the health care system and control costs. These proposals, if enacted, could
further increase the governments oversight role and involvement in health care, lower
reimbursement rates and otherwise change the operating environment for health care companies. We
cannot predict the likelihood of those events or what impact they may have on our business. If local physicians stop sending patients to our centers or were prohibited from doing so for
regulatory reasons, then our revenue and earnings would decline. Our dialysis centers depend on local nephrologists sending patients to the centers. Typically,
one or a few physicians patients make up all or a significant portion of the patient base at each
of our dialysis centers, and the loss of the patient base of one or more of these physicians could
have a material adverse effect on the operations of that center. The loss of the patient base of a
significant number of local physicians could cause our revenue and earnings to decline. In many
instances, the primary referral sources for our centers are physicians who also serve as medical
directors of our centers and may be shareholders. If the medical director relationship or stock
ownership were found to violate applicable federal or state law, including fraud and abuse laws and
laws prohibiting self-referrals, then the physicians acting as medical directors or owning our
stock could be forced to stop referring patients to our centers. A number of our medical director agreements will expire over the next three years, unless they
are renewed or renegotiated. We did not renew or renegotiate a small number of our medical director 24




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agreements that expired in 2004, and we may not be able to renew or renegotiate expiring
medical director agreements successfully, or we may not be able to enforce the non-competition
provisions of some of our medical director or other agreements. Any of these factors could result
in a loss of patients, since dialysis patients are typically treated at a center where their
physician, or a member of his or her practice group serves as medical director. We believe that our
future success will depend in part on our ability to attract and retain qualified physicians to
serve as medical directors of our dialysis centers. The dialysis business is highly competitive. If we do not compete effectively in our markets, then
we could lose market share and our rate of growth could slow. The dialysis industry is largely consolidated, and the consolidation trend continues as large
providers acquire other providers. In December 2004, DaVita, Inc. and Gambro Healthcare, Inc.
announced a definitive agreement under which DaVita will acquire Gambros United States dialysis
services business. If that transaction closes as agreed, then there will be three large dialysis
companies (including Renal Care Group) that compete for the acquisition of outpatient dialysis
centers and the development of relationships with referring physicians. The other two competitors
will be significantly larger companies, which may enable them to pay more or otherwise compete more
effectively for acquisitions. In addition, Fresenius Medical Care also manufactures dialysis
equipment, which may allow them to benefit from lower equipment costs. We also face competition
from new entrants into the market, including centers established by former medical directors or
other referring physicians. We cannot assure you that we will be able to compete effectively with
any of our competitors. If we are unable to make acquisitions in the future, then our rate of growth will slow. Much of our historical growth has come from acquisitions. Although we intend to continue to
pursue growth through the acquisition of dialysis centers, we may be unable to identify and
complete suitable acquisitions at prices we are willing to pay, or we may be unable to obtain the
necessary financing. Further, due to the increased size of our business, the amount that acquired
businesses contribute to our revenue and profits will continue to be smaller on a percentage basis.
Also, as a result of consolidation in the dialysis industry, if DaVitas acquisition of Gambro is
completed, we believe the three largest providers of outpatient dialysis services (including Renal
Care Group) will own approximately 67% of the outpatient dialysis facilities in the United States.
We compete with these other companies to identify and complete suitable acquisitions. We believe
this competition has intensified in light of the smaller pool of available acquisition candidates
and other market forces. As a result, we believe it will be more difficult for us to acquire
suitable companies on favorable terms. Further, the businesses we acquire may not perform well
enough to justify our investment. If we are unable to make additional acquisitions on suitable
terms, then we may not meet our growth expectations. If we fail to integrate acquired companies, then we will be less profitable. We have grown significantly by acquisitions of other dialysis providers since our formation.
We recently acquired National Nephrology Associates (NNA), Midwest Kidney Centers, and dialysis
programs in Des Moines, Iowa; Las Vegas, Nevada; Tampa, Florida; Pittsburgh, Pennsylvania; and
Danville, Virginia. We intend to pursue acquisitions of more dialysis businesses in the future. We
are unable to predict the number and size of any future acquisitions. We face significant
challenges in integrating an acquired companys management and other personnel, clinical
operations, and financial and operating systems with ours, often without the benefit of continued
services from key personnel of the acquired company, particularly in larger acquisitions. We may be
unable to integrate the businesses we acquire successfully or to achieve anticipated benefits from
an acquisition in a timely manner, which could lead to substantial costs and delays or other
operational, technical or financial problems, including diverting managements attention from our
existing business. Any of these results could damage our profitability and our prospects for future
growth. 25




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If acquired businesses have unknown liabilities, then we could be exposed to liabilities that could
harm our business and profitability. Businesses we acquire may have unknown or contingent liabilities, including liabilities for
failure to comply with health care laws. Although we generally attempt to identify practices that
may give rise to unknown or contingent liabilities and conform them to our standards after the
acquisition, private plaintiffs or governmental agencies may still assert claims. Even though we
generally seek to obtain indemnification from the sellers of businesses we buy, unknown and
contingent liabilities may not be covered by indemnification or may exceed contractual limits or
the financial capacity of the indemnifying party. We may not have sufficient cash flow from our business to pay our substantial debt. As of December 31, 2004, we had total consolidated debt of approximately $503.6 million,
including a $23.6 million fair value premium on the 9.0% senior subordinated notes, and cash of
approximately $17.9 million. Also, subject to limitations, including those in our credit facility
and those included in the indenture for the 9.0% senior subordinated notes we assumed in the NNA
acquisition, we are not and will not be prohibited from incurring additional debt. Due to the large amount of our consolidated debt, we may not generate enough cash from our
operations to meet these obligations or to fund other liquidity needs. Our ability to generate cash
in the future is, to some extent, subject to risks and uncertainties that are beyond our control,
including those described in this Risk Factors section. If we are unable to meet our debt
obligations, we may need to refinance all or a portion of our indebtedness, sell assets or raise
funds in the capital markets. However, we cannot assure you that, if we are unable to pay our debt,
we will be able to refinance it, obtain additional equity capital or sell assets, in each case on
commercially reasonable terms, or at all, or otherwise be able to fund our liquidity needs. If for any reason we are unable to meet our debt obligations, we would be in default under the
terms of the agreements governing our outstanding debt. If such a default were to occur, the
lenders under our credit facility could elect to declare all amounts outstanding under the credit
facility immediately due and payable, and the lenders would not be obligated to continue to advance
funds to us under our credit facility. In addition, if such a default were to occur, the 9.0%
senior subordinated notes would become immediately due and payable. If these debt obligations are
accelerated, we cannot assure you that our assets will be sufficient to repay the money we owe to
banks and other debt holders. The large amount and terms of our outstanding debt may prevent us from taking actions we would
otherwise consider in our best interest. The indenture governing our 9.0% senior subordinated notes and our credit facility contain
numerous financial and operating covenants that limit our ability to engage in activities such as:  
    incurring additional debt;
    acquiring and developing new dialysis centers;
    making investments;
    creating liens;
    creating restrictions on the ability of our subsidiaries to pay dividends or other amounts to us;
    disposing of assets;
    paying dividends on our capital stock;
    repurchasing our capital stock; 26




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
    engaging in transactions with our affiliates; or
    consolidating, merging or selling all or substantially all of our assets. Our credit facility also requires us to comply with financial covenants, including a net worth
test, a leverage ratio test and a fixed charge coverage ratio test. Our ability to comply with
these covenants may be affected by events beyond our control, including those described in this
Risk Factors section. A breach of any of the covenants contained in our credit facility or our
inability to comply with the required financial covenants could result in an event of default,
which would allow the lenders under our credit facility to declare all borrowings outstanding to be
due and payable, and triggering an event of default under the indenture governing our 9.0% senior
subordinated notes. In addition, our lenders could require us to apply all of our available cash to
repay our borrowings or they could prevent us from making debt service payments on our 9.0% senior
subordinated notes. If the amounts outstanding under our credit facility or these notes are
accelerated, we cannot assure you that our assets would be sufficient to repay in full the money we
owe the banks and our other debt holders. The large amount of our outstanding debt and the limitations our credit facility impose on us
could have adverse consequences, including:  
    having to use much of our cash flow for scheduled debt service rather than for
operations, future business opportunities or other purposes, such as funding working
capital and capital expenditures;
    being unable to increase our borrowings under our credit facility or obtain other
debt financing for future working capital, capital expenditures, acquisitions or
other corporate purposes;
    being less able to take advantage of significant business opportunities, including
acquisitions or divestitures;
    difficulty satisfying our obligations under our 9.0% senior subordinated notes;
    increasing our vulnerability to general adverse economic and industry conditions; and
    causing us to be at a competitive disadvantage to competitors with less debt. If a change of control occurs, we may have to spend a substantial amount of cash or incur
additional indebtedness to satisfy our obligation to repurchase our 9.0% senior subordinated notes
from holders who choose to tender their notes pursuant to certain procedures in the indenture. Upon specified change of control events the holders of our 9.0% senior subordinated notes have
the right to require us to repurchase all or any part (equal to $1,000 or an integral multiple
thereof) of the notes they hold at an offer price in cash equal to 101.0% of the aggregate
principal amount of the notes plus accrued and unpaid interest thereon, if any, to the date of
purchase. Should a change of control occur, we may be unable to pay the purchase price for all of
the notes tendered for repurchase. Our failure to purchase tendered notes would constitute an event
of default under the indenture governing the 9.0% senior subordinated notes, which would constitute
a default under our credit facility. In addition, the terms of our credit facility restrict our
ability to purchase the 9.0% senior subordinated notes. Future credit agreements or other
agreements relating to debt may contain similar or more restrictive provisions. We may not be able
to secure the consent of our lenders to repurchase the 9.0% senior subordinated notes or refinance
the borrowings that prohibit us from repurchasing the notes. If we do not obtain consent or repay
the borrowings, we would be unable to repurchase the notes. Alternatively, even if we were able to pay the purchase price for the notes tendered for
repurchase, we might have to use a substantial amount of cash to do so, which would deplete our
funds to meet our other cash obligations or cause us to incur additional indebtedness to repurchase
the notes. These repurchase requirements may also delay or make it harder for others to obtain control of
Renal Care Group. 27




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If our costs of insurance and claims increase, then our earnings could decrease. We currently maintain programs of general and professional liability insurance and directors
and officers insurance with significant deductible or self-insured retention amounts on each
claim. In addition, we generally self-insure our employee health plan and workers compensation
program, while maintaining excess insurance for some very large claims. We have accepted higher
deductibles and self-insurance exposure in each of the last several years to offset part of the
increases in premiums for the programs. These deductibles and premiums increased substantially in
2002 and 2003. The rate of increase in deductibles and premiums moderated somewhat in 2004, but
there were some increases, and there may be larger increases in the future. Our earnings could be
materially and adversely affected by any of the following:  
    further increases in premiums, deductibles and self-insurance retentions;
    increases in the number of liability claims against us or the cost of
settling or trying cases related to those claims; and
    an inability to obtain one or more types of insurance on acceptable terms. If our board of directors does not approve an acquisition or change in control, then our
shareholders may not realize the full value of their stock. Our certificate of incorporation and bylaws contain a number of provisions that may delay,
deter or inhibit a future acquisition or change in control that is not first approved by our board
of directors. This could occur even if our shareholders receive an attractive offer for their
shares or if a substantial number or even a majority of our shareholders believe the takeover is in
their best interest. These provisions are intended to encourage any person interested in acquiring
us to negotiate with and obtain approval from our board of directors before pursuing a transaction.
Provisions that could delay, deter or inhibit a future acquisition or change in control include the
following:  
    a staggered board of directors that would require two annual meetings to replace
a majority of the board of directors;
    restrictions on calling special meetings at which an acquisition or change in
control might be brought to a vote of the shareholders;
    blank check preferred stock that may be issued by our board of directors without
shareholder approval and that may be substantially dilutive or contain
preferences or rights objectionable to an acquiror; and
    a poison pill that would substantially dilute the interest sought by an acquiror. These provisions could also discourage bids for our common stock at a premium and cause the
market price of our common stock to decline. Our stock price is volatile and as a result, the value of your investment may go down for reasons
unrelated to the performance of our business. Our common stock is traded on the New York Stock Exchange. The market price of our common
stock has been volatile, ranging from a low closing price of $27.55 per share to a high closing
price of $36.10 per share during the year ended December 31, 2004. The market price for our common
stock could fluctuate substantially based on a variety of factors, including the following:  
    future announcements concerning us, our competitors or the health care market;
    the threat, commencement or outcome of litigation or government investigation;
    changes in government regulations; and 28




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
    changes in earnings estimates by analysts. Furthermore, stock prices for many companies fluctuate widely for reasons that may be
unrelated to their operating results. These fluctuations, coupled with changes in demand or
reimbursement levels for our services and general economic, political and market conditions, could
cause the market price of our common stock to decline. Forward-Looking Statements Some of the information in this annul report on Form 10-K represents forward-looking
statements that involve substantial risks and uncertainties. You can identify these statements by
forward-looking words such as may, will, expect, anticipate, believe, intend,
estimate and continue or similar words. You should read statements that contain these words
carefully for the following reasons:  
    the statements discuss our future expectations;
    the statements contain projections of our future earnings or of our financial condition; and
    the statements state other forward-looking information. We believe it is important to communicate our expectations to our investors. There may,
however, be events in the future that we are not able to predict accurately or over which we have
no control. The risk factors discussed above, as well as any cautionary language in or incorporated
by reference into this annul report on Form 10-K, provide examples of risks, uncertainties and
events that may cause our actual results to differ materially from the expectations we describe in
our forward-looking statements. The SEC allows us to incorporate by reference the information we
file with them, which means we can disclose important information to you by referring you to those
documents. Before you invest in our common stock, you should be aware that the occurrence of any of
the events described in the above risk factors, elsewhere in or incorporated by reference into this
annual report on Form 10-K and other events that we have not predicted or assessed could have a
material adverse effect on our earnings, financial condition and business. If the events described
above or other unpredicted events occur, then the trading price of our common stock could decline
and you may lose all or part of your investment. 29




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Item 2. Properties PROPERTIES As of December 31, 2004, we operated 418 outpatient dialysis centers in 33 states, of
which 373 are located in leased facilities and 45 are owned. The following is a summary of our
outpatient dialysis centers by state: OUTPATIENT FACILITIES BY STATE Alabama
    
    
    19Alaska
    
    
    4Arizona
    
    
    31Arkansas
    
    
    10Colorado
    
    
    2Florida
    
    
    14Georgia
    
    
    9Idaho
    
    
    2Illinois
    
    
    33Indiana
    
    
    25Iowa
    
    
    1Kansas
    
    
    13Kentucky
    
    
    9Louisiana
    
    
    7Massachusetts
    
    
    2Michigan
    
    
    8Mississippi
    
    
    35Missouri
    
    
    22Nebraska
    
    
    3Nevada
    
    
    3New Jersey
    
    
    14New Mexico
    
    
    3Ohio
    
    
    27Oklahoma
    
    
    6Oregon
    
    
    9Pennsylvania
    
    
    16Rhode Island
    
    
    2South Carolina
    
    
    3Tennessee
    
    
    20Texas
    
    
    50Virginia
    
    
    4Washington
    
    
    10Wisconsin
    
    
    2TOTAL
    
    
    418
 Our leases generally have terms ranging from one to 15 years and typically contain renewal
options. The size of our centers ranges from approximately 1,000 to 25,000 square feet. We lease
office space in Nashville, Tennessee for our corporate headquarters under a lease that expires in
2009. We lease other office space in and around Nashville, Tennessee for certain billing and
computer operations. We consider our physical properties to be in good operating condition and
suitable for the purposes for which they are being used. Expansion or relocation of our dialysis centers is subject to compliance with conditions
relating to participation in the Medicare ESRD program. In states that require a certificate of
need or permit of 30




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##### Table of Contents



approval, approval of the required application is usually necessary for expansion of an
existing dialysis center or development of a new center. We typically own the equipment used in our outpatient centers. We consider our equipment
generally to be in good operating condition and suitable for the purposes for which it is being
used. 
 Item 3. Legal Proceedings On
October 25, 2004, we received a subpoena from the office of the United States
Attorney for the Eastern District of New York. The subpoena requires the production of documents
related to numerous aspects of our business and operations, including those of RenaLab,
Inc., the Companys laboratory. The subpoena includes specific requests for documents related to
testing for parathyroid hormone (PTH) levels and vitamin D
therapies. To our knowledge no
proceedings have been initiated against us at this time, although we cannot
predict whether or when proceedings might be initiated. We intend to cooperate with the
governments investigation. Compliance with the subpoena will require us to incur legal expenses
and will require management attention. We cannot predict whether legal proceedings will be
initiated against us in connection with this investigation or, if initiated, the outcome of any
proceedings. We are involved in litigation and regulatory investigations arising in the ordinary
course of business. In the opinion of management, after consultation with legal counsel, management
believes these matters will be resolved without material adverse effect on Renal Care Groups
consolidated financial position or results of operations. Laws and regulations governing the Medicare and Medicaid programs are complex and subject to
interpretation. We believe that we are in compliance with all applicable laws and regulations
governing the Medicare and Medicaid programs. 
 Item 4. Submission of Matters to a Vote of Security Holders We did not submit any matter to a vote of our shareholders during the fourth quarter
of 2004. 31




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##### Table of Contents



PART II 
 Item 5. Market for Companys Common Equity and Related Stockholder Matters PRICE RANGE OF COMMON STOCK Our common stock is traded on the New York Stock Exchange under the symbol RCI. The
following table sets forth the quarterly high and low closing sales prices as reported on the New
York Stock Exchange for the last two fiscal years. 2003
    
    High
    
    
    LowFirst quarter
    
    $
    21.07
    
    
    $
    18.70Second quarter
    
    $
    23.47
    
    
    $
    20.00Third quarter
    
    $
    25.07
    
    
    $
    22.70Fourth quarter
    
    $
    27.75
    
    
    $
    22.03
 2004
    
    High
    
    
    LowFirst quarter
    
    $
    31.43
    
    
    $
    27.55Second quarter
    
    $
    34.29
    
    
    $
    29.93Third quarter
    
    $
    33.24
    
    
    $
    30.09Fourth quarter
    
    $
    36.10
    
    
    $
    30.00
 HOLDERS As of February 25, 2005, the approximate number of registered stockholders was 152, and we had
approximately 40,500 beneficial owners. DIVIDEND POLICY We have never paid any cash dividend on our capital stock. We currently anticipate that all of
our earnings will be retained to finance the growth and development of our business or to
repurchase common stock. We currently do not anticipate that any cash dividend will be declared or
paid on the common stock in the foreseeable future. Any future declaration of dividends will be
subject to the discretion of our Board of Directors and its review of our earnings, financial
condition, capital requirements and surplus, contractual restrictions to pay such dividends and
other factors the Board of Directors deems relevant. 32




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##### Table of Contents



Item 6. Selected Financial Data The selected financial data for the years ended December 31, 2000, 2001, 2002, 2003 and
2004 are derived from the audited consolidated financial statements of the Company and its
subsidiaries. The consolidated financial statements and related notes for the years ended December
31, 2002, 2003 and 2004, together with the related Reports of Independent Registered Public
Accounting Firm are included elsewhere in this annual report on Form 10-K. Please read the
following data in conjunction with the financial statements and related notes and Managements
Discussion and Analysis of Financial Condition and Results of Operations that appear elsewhere in
this annual report on Form 10-K. Selected Financial Data
(in thousands, except per share data) Year Ended December 31,2000
    
    
    2001
    
    
    2002
    
    
    2003
    
    
    2004INCOME STATEMENT DATA:Net revenue
    
    $
    622,575
    
    
    $
    755,082
    
    
    $
    903,387
    
    
    $
    1,005,319
    
    
    $
    1,345,047Patient care costs
    
    
    402,009
    
    
    
    489,271
    
    
    
    589,696
    
    
    
    653,307
    
    
    
    893,478General and administrative expenses
    
    
    57,104
    
    
    
    64,530
    
    
    
    78,079
    
    
    
    90,249
    
    
    
    106,823Provision for doubtful accounts
    
    
    16,949
    
    
    
    20,290
    
    
    
    23,501
    
    
    
    26,200
    
    
    
    32,550Depreciation and amortization
    
    
    32,321
    
    
    
    38,945
    
    
    
    40,432
    
    
    
    44,905
    
    
    
    58,349Restructuring charge
    
    
    9,235
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Merger expenses
    
    
    3,766
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total operating costs and expenses
    
    
    521,384
    
    
    
    613,036
    
    
    
    731,708
    
    
    
    814,661
    
    
    
    1,091,200Income from operations
    
    
    101,191
    
    
    
    142,046
    
    
    
    171,679
    
    
    
    190,658
    
    
    
    253,847Interest expense, net
    
    
    5,015
    
    
    
    2,636
    
    
    
    1,140
    
    
    
    629
    
    
    
    20,628Income before minority interest and income
taxes
    
    
    96,176
    
    
    
    139,410
    
    
    
    170,539
    
    
    
    190,029
    
    
    
    233,219Minority interest
    
    
    10,011
    
    
    
    15,478
    
    
    
    21,410
    
    
    
    25,431
    
    
    
    35,169Income before income taxes
    
    
    86,165
    
    
    
    123,932
    
    
    
    149,129
    
    
    
    164,598
    
    
    
    198,050Provision for income taxes
    
    
    34,706
    
    
    
    47,331
    
    
    
    56,669
    
    
    
    62,542
    
    
    
    76,217Net income
    
    $
    51,459
    
    
    $
    76,601
    
    
    $
    92,460
    
    
    $
    102,056
    
    
    $
    121,833Basic net income per share
    
    $
    0.75
    
    
    $
    1.06
    
    
    $
    1.26
    
    
    $
    1.40
    
    
    $
    1.80Basic weighted average shares outstanding
    
    
    69,072
    
    
    
    72,170
    
    
    
    73,467
    
    
    
    72,719
    
    
    
    67,581Diluted net income per share
    
    $
    0.72
    
    
    $
    1.01
    
    
    $
    1.21
    
    
    $
    1.37
    
    
    $
    1.74Diluted weighted average shares outstanding
    
    
    71,922
    
    
    
    75,650
    
    
    
    76,151
    
    
    
    74,753
    
    
    
    69,892
 December 31,2000
    
    
    2001
    
    
    2002
    
    
    2003
    
    
    2004BALANCE SHEET DATA:Working capital
    
    $
    108,915
    
    
    $
    104,047
    
    
    $
    110,481
    
    
    $
    122,667
    
    
    $
    126,965Total assets
    
    
    582,672
    
    
    
    651,049
    
    
    
    740,123
    
    
    
    819,873
    
    
    
    1,429,585Long-term debt
    
    
    58,316
    
    
    
    3,776
    
    
    
    10,161
    
    
    
    2,652
    
    
    
    479,645Stockholders equity
    
    
    394,122
    
    
    
    510,251
    
    
    
    543,888
    
    
    
    570,845
    
    
    
    592,121
 33




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Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis contains forward-looking statements about our plans
and expectations of what may happen in the future. Forward-looking statements are based on a number
of assumptions and estimates that are inherently subject to significant risks and uncertainties,
and our results could differ materially from the results anticipated by our forward-looking
statements as a result of many known or unknown factors, including, but not limited to, those
factors discussed on pages 20 to 29 under the heading Risk Factors. Also, please read the
cautionary notice regarding forward-looking statements set forth at the beginning of this annual
report. Please read the following discussion in conjunction with our consolidated financial statements
and the related notes contained elsewhere in this annual report onForm 10-K. Overview Renal Care Group provides dialysis services to patients with chronic kidney failure. As of
December 31, 2004, we provided dialysis and ancillary services to over 29,700 patients through 418
outpatient dialysis centers in 33 states, in addition to providing acute dialysis services to more
than 200 hospitals. Our net revenue has been derived primarily from the following sources:  
    outpatient hemodialysis services;
    ancillary services associated with outpatient dialysis, primarily the
administration of EPO and other drugs;
    home dialysis services;
    inpatient hemodialysis services provided to acute care hospitals and skilled
nursing facilities;
    laboratory services; and
    management contracts with hospital-based medical university dialysis programs. Most patients with ESRD receive three dialysis treatments each week in an outpatient setting.
Reimbursement for these services is provided primarily by the Medicare ESRD program based on rates
established by CMS. For the year ended December 31, 2004, approximately 53% of our net revenue was
derived from reimbursement under the Medicare and Medicaid programs. Medicare reimbursement is
subject to rate and other legislative changes by Congress and periodic changes in regulations,
including changes that may reduce payments under the ESRD program. Neither Congress nor CMS
approved an increase in the composite rate for 2002, 2003 or 2004. The average revenue per
treatment we receive from Medicare and Medicaid is less than our average cost per treatment.
Management expects this situation to continue. Any reduction in Medicare and Medicaid payments or
shift in our revenue mix toward Medicare or Medicaid reimbursement could materially adversely
affect our business and financial condition. The Medicare composite rate applies to a designated group of outpatient dialysis services,
including the dialysis treatment, supplies used for the treatment, certain laboratory tests and
medications, and most of the home dialysis services we provide. We receive separate reimbursement
outside the composite rate for some other services, drugs (including specific drugs such as EPO)
and some physician-ordered tests, including laboratory tests, provided to dialysis patients. If a patient has private health insurance, then that patients treatment is typically
reimbursed at rates significantly higher than those paid by Medicare during the first 30 months of
care. After that period, Medicare becomes the primary payor. Reimbursement for dialysis services
provided pursuant to a hospital contract is negotiated with the individual hospital and is usually
higher than Medicare rates. Because 34




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dialysis is a life-sustaining therapy to treat a chronic disease, utilization is predictable
and is not subject to seasonal fluctuations. We derive a significant portion of our net revenue and net income from the administration of
EPO. EPO is manufactured by a single company, Amgen, Inc. In April 2002, Amgen implemented its
third EPO price increase of 3.9% in as many years. Because we were already under contract with
Amgen through 2002, this price increase did not affect our results of operations during 2002. Key
components of the 2002 pricing formula were maintained in our 2003 contract with Amgen. Therefore,
while the 2002 price increase had an adverse effect on our 2003 results of operations, we were able
to mitigate approximately 80% of the increase. Amgen did not implement a price increase in 2003,
but changes in our contract with Amgen for 2004 resulted in an increase in our cost of EPO. Changes
in our contract with Amgen for 2005 along with changes in Amgens packaging practices for EPO may
result in an increase in our cost of EPO in 2005. The estimated impact of these changes was
incorporated and communicated in our corporate goals for 2005. In addition, Congress mandated a change in the way we will be paid beginning in 2005 for some
of the drugs, including EPO, that we bill for outside of the flat composite rate. This change will
result in lower reimbursement for these drugs and a higher composite rate. Under recently adopted
regulations, in 2005 we will be reimbursed for the top ten separately billable ESRD drugs at
average acquisition cost, and we will be reimbursed for other separately billable ESRD drugs at the
rate of average sales price plus 6.0%. In addition, the composite rate will be increased by 8.7%
in 2005. These regulations also include a case-mix adjustment that will become effective in April
2005 and a geographic adjustment to the composite rate as well as a budget-neutrality adjustment.
We believe these changes coupled with the 1.6% increase in the Medicare composite rate approved for
2005 will have a neutral effect on our revenue per treatment and earnings in
2005. Critical Accounting Policies In December 2001, the SEC issued a financial reporting release, FR-60, Cautionary Advice
Regarding Disclosure About Critical Accounting Policies. In accordance with that release, we have
identified accounting policies that we consider critical to our business. Management identified
these policies based on their importance to our Consolidated Financial Statements and on the
degrees of subjectivity and complexity involved in these policies. In addition to these critical
policies, a summary of significant accounting policies is included in our consolidated financial
statements and related notes, contained elsewhere in this annual report on Form 10-K. Our discussion and analysis of our financial condition and results of operations are based
upon our Consolidated Financial Statements, which have been prepared in accordance with accounting
principles generally accepted in the United States. The preparation of these financial statements
requires us to make estimates and judgments that affect the reported amounts of assets,
liabilities, net revenues and expenses, and related disclosures of contingent assets and
liabilities. We regularly evaluate our critical accounting policies and estimates, including those
related to net revenue and contractual provisions and provision for doubtful accounts. We base our
estimates on historical experience and upon assumptions that we believe are reasonable under the
circumstances. The results of these estimates form the basis for making judgments about the
carrying values of assets and liabilities that are not readily apparent from other sources. Actual
results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies require significant judgments and
estimates in the preparation of our consolidated financial statements. Net Revenue and Contractual Provisions We recognize revenue net of contractual provisions as services are provided and invoices for
those services are issued. Contractual provisions represent the difference between our gross billed
charges and the amount we expect to receive. Under the Medicare ESRD program, Medicare
reimbursement rates for outpatient dialysis treatments are fixed under a composite rate structure.
The composite rate applies to a designated group of outpatient dialysis services, including
dialysis treatment, supplies, some laboratory 35




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tests and some medications. There are other drugs, laboratory tests and services that are
eligible for separate reimbursement outside the composite rate. Most state Medicaid plans follow
reimbursement methodologies that are similar to the Medicare program, but other payors,
particularly private insurance plans and managed care payors, reimburse us under contractual
arrangements or based on our charges. Each of these payor sources presents unique challenges to the
process of recording contractual provisions. We have made significant investments in human resources and information systems to enable us
to estimate the appropriate amount of contractual provisions as we provide services. Actual levels
of reimbursement, however, are sometimes difficult to determine due to the complexity of the
applicable regulations or contracts. As a result, we may in fact collect more or less than the
amount we expected when we provided and billed for the services. In addition, regulations and
contracts may be changed, making system updates and maintenance necessary for estimating net
revenue accurately. As a result, management may make adjustments to the contractual provisions
estimated by the system based on actual collection experience and other factors. Provision for Doubtful Accounts Collecting outstanding accounts receivable is critical to our success. Our primary source of
collection risk is related to the portion of our charges for which the patient is responsible. For
Medicare patients, the patients responsibility is 20% of Medicare allowable charges, and for other
patients, the patients responsibility varies based on their health coverage. We record an
estimate of the provision for doubtful accounts in the period in which the revenue is recognized
based on managements estimate of the net collectibility of the accounts receivable. Management
estimates and monitors the net collectibility of accounts receivable based upon a variety of
factors, including the analysis of payor mix, subsequent collection analysis and review of detailed
agings of accounts receivable. Significant changes in our payor mix or business office operations
could have a significant impact on our results of operations and cash flows. Self-Insurance Accruals From time to time, we are subject to professional liability, general liability and workers
compensation claims or lawsuits in the ordinary course of business. To mitigate a portion of this
risk, we maintain insurance for professional liability and general liability claims exceeding
certain individual amounts and for workers compensation claims exceeding certain individual and
aggregate amounts. We estimate the self-insured retention portion of professional liability,
general liability and workers compensation risks using third-party actuarial calculations that
include historical claims data, demographic factors and other assumptions. The estimated accrual
for professional liability, general liability and workers compensation claims could be
significantly affected if current and future occurrences differ from historical claims trends.
While management monitors current claims closely and considers outcomes when estimating its
self-insurance accruals, the complexity of the claims, the wide range of potential outcomes and
changes in the legal climate often complicate our ability to make precise estimates. Impairment of Goodwill and Long-Lived Assets Pursuant
to SFAS No. 142, Goodwill and Other Intangible Assets, we review goodwill
for impairment at a reporting unit level at least annually. Goodwill
is tested for impairment between annual tests if an event occurs or
circumstances change that would more likely than not reduce the fair
value of a reporting unit below its carrying amount. Goodwill is
assigned to each reporting unit based on the geographic location of
assets acquired. If the fair value of a reporting unit is determined
to be less than its carrying amount, then the Company compares the
implied fair value of the goodwill to its carrying value. If the
implied fair value of the goodwill is less than its carrying value,
then an impairment loss is recognized for that difference. No
goodwill impairment losses were recognized during 2004, 2003 or 2002. In
accordance with SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets, when events, circumstances or
operating results indicate that the carrying value of certain
long-lived assets and related identifiable intangible assets
(excluding goodwill) that are expected to be held and used, might be
impaired, we evaluate such assets for impairment based on estimated
undiscounted cash flows expected to result from the use and eventual
disposition of the assets. If related long-lived assets are
identified as impaired, the impairment is equal to the amount by
which the carrying value of the assets exceeds the fair value of
those assets as determined by independent appraisals or estimates of
discounted future cash flows. Long-lived assets to be disposed
of are reported at the lower of the carrying amount or fair value less
costs to sell. Income Taxes We account for income taxes under the asset and liability method and recognize deferred tax
assets and liabilities for the future tax consequences attributable to differences between the
financial 36




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statement carrying amounts of existing assets and liabilities and their respective tax bases
and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in which these temporary
differences are expected to be recovered or settled. The effect of a change in tax rates on
deferred tax assets and liabilities is recognized in income in the period that includes the
enactment date for the change. Management identifies deferred tax assets that more likely than
not will not be realized and records a valuation allowance. We also establish accruals for tax
uncertainties that we deem to be probable of loss and that can be reasonably estimated. Results of Operations The following table sets forth results of operations (in thousands) for the periods indicated
and the percentage of net revenue represented by the respective financial line items: Year Ended December 31,2002
    
    
    2003
    
    
    2004Net revenue
    
    $
    903,387
    
    
    
    100.0
    %
    
    $
    1,005,319
    
    
    
    100.0
    %
    
    $
    1,345,047
    
    
    
    100.0
    %Patient care costs
    
    
    589,696
    
    
    
    65.3
    
    
    
    653,307
    
    
    
    65.0
    
    
    
    893,478
    
    
    
    66.4General and
administrative
expenses
    
    
    78,079
    
    
    
    8.6
    
    
    
    90,249
    
    
    
    9.0
    
    
    
    106,823
    
    
    
    7.9Provision for
doubtful accounts
    
    
    23,501
    
    
    
    2.6
    
    
    
    26,200
    
    
    
    2.6
    
    
    
    32,550
    
    
    
    2.4Depreciation and
amortization
    
    
    40,432
    
    
    
    4.5
    
    
    
    44,905
    
    
    
    4.4
    
    
    
    58,349
    
    
    
    4.3Total operating costs
and expenses
    
    
    731,708
    
    
    
    81.0
    
    
    
    814,661
    
    
    
    81.0
    
    
    
    1,091,200
    
    
    
    81.1Income from operations
    
    
    171,679
    
    
    
    19.0
    
    
    
    190,658
    
    
    
    19.0
    
    
    
    253,847
    
    
    
    18.9Interest expense, net
    
    
    1,140
    
    
    
    0.1
    
    
    
    629
    
    
    
    0.1
    
    
    
    20,628
    
    
    
    1.5Minority interest
    
    
    21,410
    
    
    
    2.4
    
    
    
    25,431
    
    
    
    2.5
    
    
    
    35,169
    
    
    
    2.6Income before income
taxes
    
    
    149,129
    
    
    
    16.5
    
    
    
    164,598
    
    
    
    16.4
    
    
    
    198,050
    
    
    
    14.7Provision for income
taxes
    
    
    56,669
    
    
    
    6.3
    
    
    
    62,542
    
    
    
    6.2
    
    
    
    76,217
    
    
    
    5.7Net income
    
    $
    92,460
    
    
    
    10.2
    %
    
    $
    102,056
    
    
    
    10.2
    %
    
    $
    121,833
    
    
    
    9.1
    %
 37




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Year Ended December 31, 2004 Compared to Year Ended December 31, 2003 Net Revenue.Net revenue increased from $1,005.3 million for the year ended December 31,
2003 to $1,345.0 million for the year ended December 31, 2004, an increase of $339.7 million, or
33.8%. This increase resulted primarily from a 30.3% increase in the number of treatments we
performed from 3,254,447 in 2003 to 4,240,440 in 2004 and a 2.6% increase in the average patient
revenue per dialysis treatment from $308 in 2003 to $316 in 2004. This growth in treatments was
largely the result of our acquisition of NNA in April 2004 and our other 2004 acquisitions, along
with a 3.3% increase in same-market treatments for 2004 over 2003. The increase in patient revenue
per treatment from 2003 was largely due to the impact of our annual price increase implemented in
the fourth quarter of 2003 along with favorable renegotiations of some of our managed care
contracts, increased utilization of some ancillary drugs, primarily EPO, and the favorable
resolution of several contractual issues with payors during 2004. This increase was partially
offset by lower revenue per treatment in the former NNA operations. We expect our 2005 patient revenue per dialysis treatment to increase by between 2% and 3% in
2005 as a result of the price increase we implemented during the fourth quarter of 2004,
potentially offset by decreases in the utilization of certain ancillary drugs and changes in the
Medicare reimbursement process as a result of MMA. In addition, we
expect a small net positive effect of renegotiating some of our managed care contracts. Patient Care Costs.Patient care costs consist of costs directly related to the care of
patients, including direct labor, drugs and other medical supplies, and operational costs of
facilities. Patient care costs increased from $653.3 million for the year ended December 31, 2003
to $893.5 million for the year ended December 31, 2004, an increase of 36.8%. This increase was due
principally to the increase in the number of treatments performed during the period, which was
reflected in corresponding increases in the use of labor, drugs and supplies. Patient care costs as
a percentage of net revenue increased from 65.0% in 2003 to 66.4% in 2004. This increase was due to
generally higher salary and benefit costs, lease costs and routine supply costs experienced in the
former NNA facilities. Patient care costs per treatment increased 5.0% from $201 in 2003 to $211
in 2004. The increase in patient care costs per treatment was due to increases in the price and
utilization of EPO, increased labor costs, increases in the cost of insurance, increases in
self-insurance accruals, and changes in the utilization of certain ancillary drugs, as well as the
higher cost structure in the former NNA facilities. Management believes that the Company will
continue to face increases in the cost of labor and insurance in 2005. General and Administrative Expenses.General and administrative expenses include corporate
office costs and other costs not directly related to the care of patients, including facility
administration, accounting, billing and information systems. General and administrative expenses
increased from $90.2 million for the year ended December 31, 2003 to $106.8 million for the year
ended December 31, 2004, an increase of 18.4%. The increase in general and administrative expenses
over 2003 was due to increased costs associated with the acquisitions that we closed in 2004.
General and administrative expenses as percentage of revenue decreased from 9.0% in 2003 to 7.9% in
2004 as we leveraged our corporate functions over a larger base of revenue as a result of our
acquisitions in 2004 and because general and administrative expenses for 2004 did not include the
$5.4 million charge we incurred in the first quarter of 2003 for a retirement benefit plan for our
former chairman, chief executive officer and president. General and administrative expenses in the
fourth quarter of 2004 included write-offs of expenses incurred in connection with several
acquisitions that were not completed and the cost of complying with the subpoena we received from
the United States Attorneys Office for the Eastern District of New York. Provision for Doubtful Accounts.Management determines the provision for doubtful accounts as
a function of payor mix, billing practices and other factors. We reserve for doubtful accounts in
the period when the revenue is recognized based on managements estimate of the net collectibility
of the accounts receivable. Management estimates the net collectibility of accounts receivable
based upon a variety of factors. These factors include, but are not limited to, analyzing revenues
generated from payor sources, performing subsequent collection testing and regularly reviewing
detailed accounts receivable agings. Management makes adjustments to the allowance for doubtful
accounts as necessary based on the results of managements reviews of the net collectibility of
accounts receivable. The provision for doubtful accounts 38




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increased from $26.2 million in 2003 to $32.6 million in 2004, an increase of $6.4 million, or
24.2%. The provision for doubtful accounts as a percentage of net revenue decreased in 2004 to 2.4%
from 2.6% in 2003 principally as a result of our improved collection experience. Depreciation and Amortization.Depreciation and amortization increased from $44.9 million for
the year ended December 31, 2003 to $58.3 million for the year ended December 31, 2004, an increase
of 29.9%. This increase was due to the start-up of dialysis facilities, the normal replacement
costs of dialysis facilities and equipment, the purchase of information systems and the
amortization of separately identifiable intangible assets associated with acquisitions.
Depreciation and amortization as a percentage of net revenue decreased from 4.4% in 2003 to 4.3% in
2004 principally as a result of NNAs practice of leasing dialysis equipment under operating
leases, which resulted in lower depreciation and amortization and higher patient care costs. Income from Operations.Income from operations increased from $190.7 million for the year
ended December 31, 2003 to $253.8 million for the year ended December 31, 2004, an increase of
33.1%. Income from operations as a percentage of net revenue decreased slightly from 19.0% in 2003
to 18.9% in 2004 period principally as a result of the acquisition of NNA, which had generally
lower margins than the Company as a result of NNAs lower revenue per treatment and higher patient
care costs and other factors discussed above. Interest Expense, Net.Interest expense increased from $629,000 for the year-ended December
31, 2003 to $20.6 million for the year ended December 31, 2004. This increase was the result of
substantially higher average borrowings in 2004, which were associated with the completion of our
program to repurchase $250.0 million in common stock between November 2003 and March 2004, our 2004
acquisitions and the assumption of NNAs $160.0 million 9.0% senior subordinated notes. Minority Interest.Minority interest represents the proportionate equity interest of other
owners of entities that are not wholly owned but the financial results of which are included in our
consolidated results. Minority interest as a percentage of net revenue increased to 2.6% in 2004
from 2.5% in 2003. The change in minority interest expense as a percentage of revenue occurred as
our recent acquisitions increased the percentage of our facilities that operate as joint ventures.
As of December 31, 2004, we were the majority and controlling owner in 70 joint ventures, as
compared to 50 as of December 31, 2003. Provision for Income Taxes.Income tax expense increased from $62.5 million in 2003 to $76.2
million in 2004, an increase of $13.7 million or 21.9%. The increase is a result of increases in
pre-tax earnings and our effective tax rate. Our effective tax rate was 38.0% for the 2003 period
compared to 38.5% for the 2004 period. The increase reflects a higher overall effective rate
associated with the operations acquired from NNA. Net Income.Net income increased from $102.1 million in 2003 to $121.8 million in 2004, an
increase of $19.8 million or 19.4%. This increase was a result of the items discussed above. Year Ended December 31, 2003 Compared to Year Ended December 31, 2002 Net Revenue.Net revenue increased from $903.4 million for the year ended December 31, 2002 to
$1,005.3 million for the year ended December 31, 2003, an increase of $101.9 million, or 11.3%.
This increase resulted primarily from a 7.8% increase in the number of treatments we performed from
3,019,675 in 2002 to 3,254,447 in 2003 and a 3.7% increase in the average patient revenue per
dialysis treatment from $297 in 2002 to $308 in 2003. The growth in treatments was the result of
the acquisition and development of various dialysis facilities and a 4.7% increase in same-market
treatments for 2003 over 2002. We estimate that approximately $10 of the $11 increase in revenue
per treatment in 2003 was attributable to the rate increase to private payors that we implemented
during the fourth quarter of 2002. The remaining $1 per treatment increase was the net result of
both favorable and unfavorable payor contract resolutions. During 2003 we experienced favorable
payor contract resolutions of $5 per treatment, which was offset by $4 per treatments of
unfavorable payor resolutions a portion of which relates to reduced reimbursement experienced with
certain managed care contracts and reduced reimbursement in certain state Medicaid programs. 39




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Patient Care Costs.Patient care costs increased from $589.7 million for the year ended
December 31, 2002 to $653.3 million for the year ended December 31, 2003, an increase of 10.8%.
This increase was due principally to the increase in the number of treatments performed during the
period, which was reflected in corresponding increases in the use of labor, drugs and supplies.
Patient care costs as a percentage of net revenue decreased from 65.3% in 2002 to 65.0% in 2003.
Patient care costs per treatment increased 3.1% from $195 in 2002 to $201 in 2003. The increase in
patient care costs per treatment was due to increases in the price of EPO, labor costs, the cost of
insurance, increases in self-insurance accruals, and the utilization of certain ancillary drugs. General and Administrative Expenses.General and administrative expenses increased from $78.1
million for the year ended December 31, 2002 to $90.2 million for the year ended December 31, 2003,
an increase of 15.6%. This increase was due primarily to a $5.4 million charge recorded in the
first quarter of 2003 for a retirement benefit plan for our former chairman, chief executive
officer and president that was adopted in January 2003. General and administrative expenses as
percentage of revenue increased from 8.6% in 2002 to 9.0% in 2003. The charge for the retirement
package accounted for substantially all of the increase in general and administrative expenses as a
percentage of net revenue. Provision for Doubtful Accounts.The provision for doubtful accounts increased from $23.5
million in 2002 to $26.2 million in 2003, an increase of $2.7 million, or 11.5%. The provision for
doubtful accounts as a percentage of net revenue remained consistent in 2002 and 2003 at 2.6%. Depreciation and Amortization.Depreciation and amortization increased from $40.4 million for
the year ended December 31, 2002 to $44.9 million for the year ended December 31, 2003, an increase
of 11.1%. This increase was due to the start-up of dialysis facilities, the normal replacement
costs of dialysis facilities and equipment, the purchase of information systems and the
amortization of separately identifiable intangible assets associated with acquisitions.
Depreciation and amortization as a percentage of net revenue decreased slightly from 4.5% in 2002
to 4.4% in 2003. Income from Operations.Income from operations increased from $171.7 million for the year
ended December 31, 2002 to $190.7 million for the year ended December 31, 2003, an increase of
11.1%. Income from operations as a percentage of net revenue remained consistent in 2002 and 2003
at 19.0%. Interest Expense, Net.Interest expense decreased from $1.1 million for the year ended
December 31, 2002 to $629,000 for the year ended December 31, 2003. This decrease was the result of
lower average borrowings in 2003. Minority Interest.Minority interest represents the proportionate equity interest of other
owners of entities that are not wholly owned whose financial results are included in our
consolidated results. Minority interest as a percentage of net revenue increased to 2.5% in 2003
from 2.4% in 2002. This increase was the result of continued financial improvements of our larger
joint ventures, primarily those in Ohio, Oregon and Washington, as well as an increase in the
number of facilities operated as joint ventures. As of December 31, 2003, we were the majority and
controlling owner in 50 joint ventures, as compared to 36 as of December 31, 2002. Provision for Income Taxes.Income tax expense increased from $56.7 million in 2002 to $62.5
million in 2003, an increase of $5.9 million or 10.4%. The increase is a result of pre-tax earnings
increasing by 10.4%. Our effective tax rate was 38.0% in both 2002 and 2003. Net Income.Net income increased from $92.5 million in 2002 to $102.1 million in 2003, an
increase of $9.6 million or 10.4%. This increase was a result of the items discussed above. Liquidity and Capital Resources We require capital primarily to acquire and develop dialysis centers, to purchase property and
equipment for existing centers, to repurchase shares of our common stock and to finance working
capital needs. At December 31, 2004, our working capital was $127.0 million; cash and cash
equivalents were $17.9 million; and our current ratio was 1.5 to 1.0. 40




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Net cash provided by operating activities was $178.1 million for the year ended December 31,
2004. Cash provided by operating activities consists of net income before depreciation and
amortization expense, adjusted for changes in components of working capital, primarily accounts
receivable. Net cash used in investing activities was $408.4 million for the year ended December
31, 2004. Cash used in investing activities consisted primarily of $103.4 million of purchases of
property and equipment and $297.9 million of cash paid for acquisitions, net of cash acquired. Net
cash provided by financing activities was $197.9 million for the year ended December 31, 2004. Cash
provided by financing activities primarily reflects proceeds from the issuance of long-term debt of
$325.0 million, net proceeds of $24.8 million from the issuance of common stock, offset by $137.8
million in repurchases of our common stock. On February 10, 2004, we entered into a new credit agreement (the 2004 Agreement) with a group
of banks totaling up to $700.0 million. The 2004 Agreement replaced our prior facilities.
The 2004 agreement has a $150.0 million revolving credit facility, a $325.0 million term loan
facility and a $225.0 million incremental term loan facility. Borrowings under the incremental term
loan facility are subject to obtaining commitments from the banks and finalizing specific terms.
The revolving credit facility and the $325.0 million term loan facility have a final maturity of
February 10, 2009. Each of our wholly-owned subsidiaries has guaranteed all of our obligations
under the 2004 Agreement. Further, our obligations under the 2004 Agreement, and our subsidiaries
obligations under their guarantees, are secured by a pledge of the equity interests we hold in each
of our subsidiaries. The 2004 Agreement includes financial covenants that are customary based on
the amount and duration of the agreement. Borrowings under the $150.0 million revolving credit facility may be used for acquisitions,
repurchases of our stock, capital expenditures, working capital and general corporate purposes. As
of December 31, 2004, we can borrow up to $150.0 million under the revolving credit facility but
cannot borrow any additional amounts under either the $325.0 million term loan facility or the
$225.0 million incremental term loan facility. At December 31, 2004, our outstanding indebtedness
was $503.6 million, including an outstanding balance of $312.8 million under the term loan
facility, $2.4 million under the revolving credit facility,
$183.3 million of 9.0% senior
subordinated notes assumed in the NNA transaction and $5.1 million of other indebtedness, primarily
capital leases. Borrowings under the 2004 Agreement bear interest at variable rates determined by our leverage
ratio. These variable rate debt instruments carry a degree of interest rate risk, and we will face
higher interest costs on this debt if interest rates rise. Effective June 30, 2004, we entered into interest rate swap agreements to hedge the interest
rate risk on $150.0 million of our term loan. Under these interest rate swap agreements we will
exchange fixed and variable rate interest payments based on a $150.0 million notional principal
amount through March 30, 2007. The notional amount of
$150.0 million and an interest rate of 3.5% are fixed in the agreements. The changes in
cash flows under these agreements are expected to offset the changes in interest rate payments
attributable to fluctuations in LIBOR. The hedge is structured to qualify for the shortcut method;
therefore, we record changes in the fair value of the agreement directly in other comprehensive
income (loss). The interest payments under this agreement are settled on a net basis each calendar
quarter. The senior subordinated notes we assumed in the NNA transaction bear interest at the rate of
9.0% per annum on the face amount that was $160.0 million at the date of acquisition. As of
December 31, 2004 these notes have a remaining face value of $159.7 million and are recorded at
their carrying value of $183.3 million including the unamortized premium of $23.6 million. These
notes do not provide for scheduled principal amortization and are scheduled to mature on November
1, 2011. Each of our wholly-owned subsidiaries has guaranteed all of our obligations under these
notes. The rights of the noteholders and our obligations under these notes are set forth in an
indenture that NNA entered into in October 2003, which we assumed in connection with the NNA
acquisition. The indenture includes customary financial covenants. As a result of our indebtedness, we will incur substantial interest expense in and after 2005.
Based on our outstanding funded indebtedness of $480.0 million, excluding the unamortized fair
value premium of $23.6 million on the 9.0% Senior Subordinated Notes, the aggregate maturities of our
borrowings are as 41




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follows: 2005  $24.4 million; 2006  $30.9 million; 2007  $57.2 million; 2008  $156.7
million; 2009  $49.4 million; and thereafter  $161.4 million. A significant component of our growth strategy is the acquisition and development of dialysis
facilities. There can be no assurance that we will be able to identify suitable acquisition
candidates or to close acquisition transactions with them on acceptable terms. Management believes
that existing cash and funds from operations, together with funds available under our credit
facility, will be sufficient to meet our acquisition, expansion, capital expenditure and working
capital needs for the foreseeable future. However, in order to finance certain large strategic
acquisition opportunities, we may need to incur additional short- and long-term bank indebtedness
or to issue equity or debt securities. The availability and terms of any future financing will
depend on market and other conditions. There can be no assurance that we will be able to secure
additional financing, if required, on acceptable terms. We plan to make capital expenditures of between $90.0 million and $100.0 million in 2005,
primarily for equipment replacement, expansion of existing dialysis facilities and construction of
de novo facilities. We expect that these capital expenditures will be funded with cash provided by
operating activities and our existing credit facility. Management believes that capital resources
available to us will be sufficient to meet the needs of our business, both on a short- and
long-term basis. Management, from time to time, determines the appropriateness of repurchasing common stock in
accordance with a repurchase plan initially authorized by the Board of Directors in October 2000.
In 2001, we began repurchasing shares of our common stock by purchasing 150,000 shares of common
stock for approximately $3.1 million. In 2002, we repurchased 4.3 million shares of our common
stock for approximately $90.9 million. In October 2003, we announced that the Board of Directors
had approved an increase in the repurchase plan to allow the purchase of up to a total of $450.0
million in common stock, and we announced that we intended to repurchase $250.0 million in common
stock between November 1, 2003 and March 31, 2004. During 2003 we repurchased 5.5 million shares of
common stock for $140.5 million. During 2004 we repurchased 4.6 million shares for $137.8 million.
As of December 31, 2004, we had repurchased an aggregate of 14.5 million shares under the plan, for
a total of approximately $372.2 million. In January 2002, the SEC issued a financial reporting release, FR-61, Commission Statement
about Managements Discussion and Analysis of Financial Condition and Results of Operations. This
release encourages public companies to give investors additional information about funds that will
be required to operate their businesses in the future under agreements that are in place today. In
accordance with FR-61, the following table gives information about our existing contractual
obligations. At December 31, 2004, we had no significant contingent commitments. Payments Due by Period (in thousands)Less than 1Contractual Obligations
    
    Total
    
    
    year
    
    
    1 - 3 years
    
    
    3 - 5 years
    
    
    After 5 yearsLong-term debt
    
    $
    475,855
    
    
    $
    23,279
    
    
    $
    87,344
    
    
    $
    205,547
    
    
    $
    159,685Capital leases
    
    
    6,415
    
    
    
    1,746
    
    
    
    1,146
    
    
    
    844
    
    
    
    2,679Operating leases
    
    
    261,572
    
    
    
    40,039
    
    
    
    72,652
    
    
    
    57,307
    
    
    
    91,574Medical director fee obligations
    
    
    150,265
    
    
    
    24,239
    
    
    
    45,896
    
    
    
    38,144
    
    
    
    41,986Total contractual cash obligations
    
    $
    894,108
    
    
    $
    89,303
    
    
    $
    207,038
    
    
    $
    301,843
    
    
    $
    295,924
 Newly Issued Accounting Standards In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123 (revised
2004), Share-Based Payment(SFAS No. 123(R)), which is a revision of SFAS No. 123, Accounting for
Stock-Based Compensation(SFAS No. 123). SFAS No. 123(R) supersedes APB Opinion No. 25, Accounting
for Stock Issued to Employees, and amended SFAS No. 95, Statement of Cash Flows. Generally, the
approach in SFAS No. 123(R) is similar to the approach described in SFAS No. 123. However, SFAS No.
123(R) requires all share-based payments to employees, including grants of employee 42




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stock options, to be recognized in the income statement based on their fair values. Pro forma
disclosure is no longer an alternative. SFAS No. 123(R) must be adopted no later than July 1,
2005. Early adoption will be permitted in periods in which financial statements have not yet been
issued. We expect to adopt SFAS No. 123(R) on July 1, 2005. As permitted by SFAS No. 123, the Company currently accounts for share-based payments to
employees using APB Opinion No. 25s intrinsic value method and, as such, generally recognizes no
compensation cost for employee stock options. The impact of adopting of SFAS No. 123(R) cannot be
predicted at this time because it will depend on levels of share-based payments granted in the
future. However, had we adopted SFAS No. 123(R) in prior periods, the impact of that standard
would have approximated the impact of SFAS No. 123 as described in the disclosure of pro forma net
income and earnings per share in Note 8 to our consolidated financial statements. SFAS No. 123(R)
also requires the benefits of tax deductions in excess of recognized compensation cost to be
reported as a financing cash flow, rather than as an operating cash flow as required under current
literature. This requirement will reduce net operating cash flows and increase net financing cash
flows in periods after adoption. While the Company cannot estimate what those amounts will be in
the future (because they depend on, among other things, when employees exercise stock options), the
amount of operating cash flows recognized in prior periods for such excess tax deductions were
$11.3 million, $13.6 million and $9.9 million in 2004, 2003, and 2002, respectively. Impact of Inflation A substantial portion of our net revenue is subject to reimbursement rates that are regulated
by the federal government and do not automatically adjust for inflation. We are unable to increase
the amount we receive for the services provided by our dialysis business that are reimbursed under
or by reference to the Medicare composite rate. Increased operating costs due to inflation, such as
labor and supply costs (including the cost of EPO), without a corresponding increase in
reimbursement rates, may adversely affect our results of operations, financial condition and
business. Off-Balance Sheet Arrangements We have no off-balance sheet arrangements that have or are reasonably likely to have a current
or future effect on our financial condition, changes in financial condition, revenues or expenses,
results of operations, liquidity, capital expenditures or capital resources. 
 Item 7a. Quantitative and Qualitative Disclosures About Market Risk Cash Balances We
maintain all cash in United States dollars in highly liquid,
interest-bearing, investment grade instruments with maturities of
less than three months, which we consider cash equivalents;
therefore, the Company has no market risk sensitive
instruments. Outstanding Debt As
of December 31, 2004, we had outstanding debt of
$503.6 million, including a $23.6 million fair value
premium on the 9.0% senior subordinated notes. This debt consisted of
$312.8 million outstanding under the term facility in our 2004
credit agreement, $183.3 million of indebtedness relating to the
9.0% senior subordinated notes due 2011 and approximately
$7.5 million outstanding under various capital leases and notes
payable. Borrowings of $162.8 million under the term loan bear
interest at variable rates based on LIBOR rates or the prime rate that
are determined by our leverage ratio. The remaining
$150.0 million under the term loan are fixed at a rate of 3.5%
plus an additional spread based on the Companys leverage ratio under
interest rate swap agreements that became effective on June 30,
2004. Our weighted average borrowing rate under the term loan as of
December 31, 2004, was 4.4%. We expect this rate to rise in the
future if interest rates rise on the portion that bears interest at
floating rates. Outstanding senior subordinated notes bear nominal
interest at 9.0% on the $159.7 million outstanding face amount of
the notes. The unamortized $23.6 million fair value premium is
being recognized over the life of the notes using the effective
interest method and is recorded as a reduction to interest expense.
Accordingly, the effective interest rate on the notes as of
December 31, 2004 was 6.3%. At December 31, 2004, the fair
value of our indebtedness under the credit facility and senior
subordinated notes approximated carrying value. At the
December 31, 2004 borrowing levels and giving effect to the
impact of our interest rate swap agreements, if there had been a 1%
increase in the variable interest rates, then our pre-tax income
would have decreased by approximately $1.7 million for the year
ended December 31, 2004. 
 Item 8. Financial Statements and Supplementary Data The consolidated financial statements and financial statement schedule in Part IV, Item
15(a) (1) and (2) of the report are incorporated by reference into this Item 8. 43




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Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure None. 
 Item 9a. Controls and Procedures Our Chief Executive Officer and Chief Financial Officer evaluated the effectiveness of
the design and operation of our disclosure controls and procedures as of the end of the period
covered by this report. Our Chief Executive Officer and Chief Financial Officer concluded that, as
of the end of the period covered by this report, we maintain disclosure controls and procedures
that provide reasonable assurance that information that we are required to disclose in the reports
that we file or submit under the Securities Exchange Act of 1934, as amended, is recorded,
processed, summarized and reported within the time periods specified in the SECs rules and forms,
and that such information is accumulated and communicated to our management, including our Chief
Executive Officer and our Chief Financial Officer, as appropriate to allow timely decisions
regarding required disclosure. There were no changes in our internal control over financial reporting that occurred during
the year ended December 31, 2004 that materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting. Managements Report on Internal Control Over Financial Reporting set forth on Page F-1 in Part
IV, Item 15(a) of this report and the Attestation Report of the Registered Public Accounting Firm
set forth on Page F-3 are incorporated by reference into this Item 9a. 44




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PART III 
 Item 10. Directors and Executive Officers of the Company The information required by this item will appear in, and is incorporated by reference
from, the sections entitled Proposals for Stockholder Action  Proposal 1. Election of Directors
and Management  Directors and Executive Officers included in the Companys definitive Proxy
Statement relating to the 2005 Annual Meeting of Stockholders. 
 Item 11. Executive Compensation The information required by this item will appear in the section entitled Executive
Compensation included in the Companys definitive Proxy Statement relating to the 2005 Annual
Meeting of Stockholders, which information, other than the Compensation Committee Report and
Performance Graph required by Items 402(k) and (l) of Regulation S-K, is incorporated herein by
reference. 
 Item 12. Security Ownership of Certain Beneficial Owners and Management Sales Of Unregistered Securities There were no sales of unregistered securities during the year ended December 31, 2004. Securities Authorized for Issuance Under Equity Compensation Plans(number of shares in thousands) The following table summarizes our equity compensation plans as of December 31, 2004: Number of SharesRemaining AvailableNumber of Shares to
    
    
    Weighted-Average
    
    
    For Future IssuanceBe Issued Upon
    
    
    Exercise Price of
    
    
    Under EquityExercise of
    
    
    Outstanding
    
    
    Compensation PlansOutstanding
    
    
    Options,
    
    
    (ExcludingOptions, Warrants
    
    
    Warrants and
    
    
    Securities ReflectedAnd Rights
    
    
    Rights
    
    
    In Column (a))Plan Category (1)
    
    (a)
    
    
    (b)
    
    
    (c)Equity
compensation plans
approved by
stockholders
    
    
    8,643
    
    
    $
    20.92
    
    
    
    7,006Equity compensation
plans not approved
by stockholders (2)
    
    
    307
    
    
    $
    6.97
    
    
    
    Total
    
    
    8,950
    
    
    $
    20.44
    
    
    
    7,006
   (1)
    
    Renal Care Group currently has three option plans that were assumed in connection with a
merger, acquisition or other transaction. The first such plan was adopted by Renal Disease
Management by Physicians, Inc. in 1997, and there are 9 options issued and outstanding to purchase
shares at a weighted average exercise price of $15.16. The second plan was adopted by Dialysis
Centers of America, Inc. in 1995, and there are 18 options issued and outstanding to purchase
shares at a weighted average exercise price of $17.05. The third plan was adopted in 1994, and
there are 13 options issued and outstanding under such plan to purchase shares at a weighted
average exercise price of $2.22.(2)
    
    These options were issued outside of our existing stock option plans to certain employees,
officers, directors, and other key persons. These options vest over various periods up to five
years and have a term of 10 years from the date of issuance. 45




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Further information concerning these plans is incorporated by reference to Note 8 in the
Consolidated Financial Statements included in this annual report on Form 10-K. The other information required by this item will appear in, and is incorporated by reference
from, the section entitled Security Ownership of Directors, Officers and Principal Stockholders
included in the Companys definitive Proxy Statement relating to the 2005 Annual Meeting of
Stockholders. 
 Item 13. Certain Relationships and Related Transactions The information required by this item will appear in, and is incorporated by reference
from, the sections entitled Compensation Committee Interlocks and Insider Participation and
Certain Relationships and Related Transactions included in the Companys definitive Proxy
Statement relating to the 2005 Annual Meeting of Stockholders. 
 Item 14. Principal Accountant Fees and Services The information required by this item will appear in, and is incorporated by reference
from, the section entitled Auditors included in the Companys definitive Proxy Statement relating
to the 2005 Annual Meeting of Stockholders. 46




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PART IV 
 Item 15.Exhibits, Financial Statement Schedules, and Reports on Form 8-K Page(a)
    
    
    
    
    
    Documents filed as part of this Report:(1
    )
    
    Consolidated Financial StatementsManagements Report on Internal Control over Financial
Reporting
    
    F-1Report of Independent Registered Public Accounting Firm
    
    F-2Report of Independent Registered Public Accounting Firm
    
    F-3Consolidated Balance Sheets at December 31, 2003 and 2004
    
    F-4Consolidated Income Statements for the years ended
December 31, 2002, 2003, and 2004
    
    F-6Consolidated Statements of Stockholders Equity for the
years ended December 31, 2002, 2003, and 2004
    
    F-7Consolidated Statements of Cash Flows for the years
ended December 31, 2002, 2003, and 2004
    
    F-8Notes to Consolidated Financial Statements
    
    F-10(2
    )
    
    Consolidated Financial Statement SchedulesSchedule II  Consolidated Schedule-Valuation and
Qualifying Accounts
    
    F-32(3
    )
    
    The Exhibits are listed in the Index of Exhibits
Required by Item 601 of Regulation S-K included
herewith, which is incorporated by reference.(b)
    
    
    
    
    
    None.
 47




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MANAGEMENTS REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING Management of Renal Care Group, Inc. is responsible for establishing and maintaining adequate
internal control over financial reporting, as such term is defined in Exchange Act rules 13a-15(f).
The Companys internal control over financial reporting is a process designed under the
supervision of the Companys chief executive officer and chief financial officer to provide
reasonable assurance about the reliability of financial reporting and the preparation of the
Companys financial statements for external reporting purposes in accordance with U.S. generally
accepted accounting principles. As of December 31, 2004, management conducted an assessment of the effectiveness of the
Companys internal control over financial reporting based on the framework established in Internal
ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). Based on this assessment, management has determined that the Companys internal
control over financial reporting as of December 31, 2004 is effective. The Companys internal control over financial reporting includes policies and procedures that
(1) pertain to the maintenance of records that accurately and fairly reflect transactions and
dispositions of assets in reasonable detail; (2) provide reasonable assurances that the Company
records transactions as necessary to permit preparation of financial statements in accordance with
U.S. generally accepted accounting principles, and that the Company makes receipts and expenditures
only in accordance with authorizations of management of the Company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition
of the Companys assets that could have a material effect on the Companys financial statements. Managements assessment of the effectiveness of the Companys internal control over financial
reporting as of December 31, 2004 has been audited by Ernst & Young LLP, an independent registered
public accounting firm, as stated in that firms report appearing on page F-3. /s/ Gary A.
Brukardt  President and Chief Executive Officer
 /s/ David M. Dill  Executive Vice President and Chief  Financial Officer
 F-1




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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To The Board of Directors and Shareholders of 
Renal Care Group, Inc. We have audited the accompanying consolidated balance sheets of Renal Care Group, Inc. as of
December 31, 2003 and 2004, and the related consolidated income statements, statements of
stockholders equity, and statements of cash flows for each of the three years in the period ended
December 31, 2004. Our audits also included the financial statement schedule listed in the Index at
Item 15(a). These financial statements and schedule are the responsibility of the Companys
management. Our responsibility is to express an opinion on these financial statements and schedule
based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material
respects, the consolidated financial position of Renal Care Group, Inc. at December 31, 2003 and
2004 and the consolidated results of its operations and its cash flows for each of the three years
in the period ended December 31, 2004, in conformity with U. S. generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly in all material
respects the information set forth therein. We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the effectiveness of Renal Care Group, Inc.s internal control over
financial reporting as of December 31, 2004, based on criteria established in Internal
ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission, and our report dated
March 1, 2005 expressed an unqualified opinion thereon. Nashville, Tennessee
    
    /s/ ERNST & YOUNG LLPMarch 1, 2005
 F-2




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Shareholders of
Renal Care Group, Inc. We have audited managements assessment, included in the accompanying Managements Report on
Internal Control Over Financial Reporting, that Renal Care Group, Inc. maintained effective
internal control over financial reporting as of December 31, 2004, based on criteria established in
Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (the COSO criteria). The Companys management is responsible for maintaining
effective internal control over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting. Our responsibility is to express an opinion on
managements assessment and an opinion on the effectiveness of the Companys internal control over
financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating managements assessment, testing and evaluating the
design and operating effectiveness of internal control, and performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable basis
for our opinion. A companys internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
companys internal control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the Company
are being made only in accordance with authorizations of management and directors of the company;
and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the Companys assets that could have a material effect on the
financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate. In our opinion, managements assessment that Renal Care Group, Inc. maintained effective internal
control over financial reporting as of December 31, 2004, is fairly stated, in all material
respects, based on the COSO criteria. Also, in our opinion, Renal Care Group, Inc. maintained, in
all material respects, effective internal control over financial reporting as of December 31, 2004,
based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated balance sheets as of December 31, 2003 and 2004, and the
related consolidated income statements, statements of stockholders equity, and statements of cash
flows for each of the three years in the period ended December 31, 2004 of Renal Care Group, Inc.,
and our report dated March 1, 2005 expressed an unqualified opinion thereon. Nashville, Tennessee
    
    /s/ ERNST & YOUNG LLPMarch 1, 2005
 F-3




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##### Table of Contents



Renal Care Group, Inc. Consolidated Balance Sheets
(in thousands) December 312003
    
    
    2004ASSETSCurrent assets:Cash and cash equivalents
    
    $
    50,295
    
    
    $
    17,931Accounts receivable, less allowance for
doubtful accounts of $32,161 in 2003 and
$45,131 in 2004
    
    
    173,679
    
    
    
    275,373Inventories
    
    
    26,345
    
    
    
    23,359Prepaid expenses and other current assets
    
    
    28,050
    
    
    
    26,817Income taxes receivable
    
    
    1,910
    
    
    
    Deferred income taxes
    
    
    11,825
    
    
    
    29,604Total current assets
    
    
    292,104
    
    
    
    373,084Property, plant and equipment, net
    
    
    224,397
    
    
    
    316,532Intangible assets, net
    
    
    14,046
    
    
    
    34,320Goodwill
    
    
    286,578
    
    
    
    694,264Other assets
    
    
    2,748
    
    
    
    11,385Total assets
    
    $
    819,873
    
    
    $
    1,429,585
 See accompanying notes to consolidated financial statements. F-4




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##### Table of Contents



Renal Care Group, Inc. Consolidated Balance Sheets
(in thousands, except per share data) December 312003
    
    
    2004LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    36,795
    
    
    $
    29,075Accrued compensation
    
    
    40,619
    
    
    
    54,129Due to third-party payors
    
    
    46,049
    
    
    
    80,007Income taxes payable
    
    
    
    
    
    
    399Accrued expenses and other current liabilities
    
    
    45,792
    
    
    
    58,540Current portion of long-term debt
    
    
    182
    
    
    
    23,969Total current liabilities
    
    
    169,437
    
    
    
    246,119Long-term debt, net of current portion
    
    
    2,652
    
    
    
    479,645Deferred income taxes
    
    
    38,390
    
    
    
    51,419Other long-term liabilities
    
    
    5,898
    
    
    
    14,662Minority interest
    
    
    32,651
    
    
    
    45,619Total liabilities
    
    
    249,028
    
    
    
    837,464Commitments and contingenciesStockholders equity:Preferred stock, $0.01 par value, 10,000 shares authorized, none issued
    
    
    
    
    
    
    Common stock, $0.01 par value, 90,000 and 150,000 shares authorized, 80,465 and
82,317 shares issued at December 31, 2003 and 2004, respectively
    
    
    805
    
    
    
    823Treasury stock, 9,962 and 14,514 shares of common stock at December 31, 2003 and
2004, respectively
    
    
    (234,404
    )
    
    
    (372,249
    )Additional paid-in capital
    
    
    374,414
    
    
    
    411,888Retained earnings
    
    
    430,030
    
    
    
    551,863Accumulated other comprehensive loss, net of tax
    
    
    
    
    
    
    (204
    )Total stockholders equity
    
    
    570,845
    
    
    
    592,121Total liabilities and stockholders equity
    
    $
    819,873
    
    
    $
    1,429,585
 See accompanying notes to consolidated financial statements. F-5




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##### Table of Contents



Renal Care Group, Inc. Consolidated Income Statements
(in thousands, except per share data) Year Ended December 312002
    
    
    2003
    
    
    2004Net revenue
    
    $
    903,387
    
    
    $
    1,005,319
    
    
    $
    1,345,047Operating costs and expenses:Patient care costs
    
    
    589,696
    
    
    
    653,307
    
    
    
    893,478General and administrative expenses
    
    
    78,079
    
    
    
    90,249
    
    
    
    106,823Provision for doubtful accounts
    
    
    23,501
    
    
    
    26,200
    
    
    
    32,550Depreciation and amortization
    
    
    40,432
    
    
    
    44,905
    
    
    
    58,349Total operating costs and expenses
    
    
    731,708
    
    
    
    814,661
    
    
    
    1,091,200Income from operations
    
    
    171,679
    
    
    
    190,658
    
    
    
    253,847Interest expense, net
    
    
    1,140
    
    
    
    629
    
    
    
    20,628Income before minority interest and income taxes
    
    
    170,539
    
    
    
    190,029
    
    
    
    233,219Minority interest
    
    
    21,410
    
    
    
    25,431
    
    
    
    35,169Income before income taxes
    
    
    149,129
    
    
    
    164,598
    
    
    
    198,050Provision for income taxes
    
    
    56,669
    
    
    
    62,542
    
    
    
    76,217Net income
    
    $
    92,460
    
    
    $
    102,056
    
    
    $
    121,833Net income per share:Basic
    
    $
    1.26
    
    
    $
    1.40
    
    
    $
    1.80Diluted
    
    $
    1.21
    
    
    $
    1.37
    
    
    $
    1.74Weighted average shares outstanding:Basic
    
    
    73,467
    
    
    
    72,719
    
    
    
    67,581Diluted
    
    
    76,151
    
    
    
    74,753
    
    
    
    69,892
 See accompanying notes to consolidated financial statements. F-6




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##### Table of Contents



Renal Care Group, Inc. Consolidated Statements of Stockholders Equity
(in thousands) AccumulatedOtherAdditional
    
    
    
    
    
    
    Comprehensive
    
    
    TotalCommon Stock
    
    
    Treasury Stock
    
    
    Paid-In
    
    
    Retained
    
    
    Loss,
    
    
    StockholdersShares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Capital
    
    
    Earnings
    
    
    Net of Tax
    
    
    EquityBalance at
December 31, 2001
    
    
    74,396
    
    
    $
    744
    
    
    
    150
    
    
    $
    (3,059
    )
    
    $
    277,052
    
    
    $
    235,514
    
    
    $
    
    
    
    $
    510,251Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    92,460
    
    
    
    
    
    
    
    92,460Common stock issued
and related income
tax benefit
    
    
    2,368
    
    
    
    24
    
    
    
    
    
    
    
    
    
    
    
    32,047
    
    
    
    
    
    
    
    
    
    
    
    32,071Repurchase of
common stock held in treasury
    
    
    
    
    
    
    
    
    
    
    4,325
    
    
    
    (90,894
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (90,894
    )Balance at
December 31, 2002
    
    
    76,764
    
    
    
    768
    
    
    
    4,475
    
    
    
    (93,953
    )
    
    
    309,099
    
    
    
    327,974
    
    
    
    
    
    
    
    543,888Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    102,056
    
    
    
    
    
    
    
    102,056Common stock issued
and related income
tax benefit
    
    
    3,701
    
    
    
    37
    
    
    
    
    
    
    
    
    
    
    
    65,315
    
    
    
    
    
    
    
    
    
    
    
    65,352Repurchase of
common stock held in treasury
    
    
    
    
    
    
    
    
    
    
    5,487
    
    
    
    (140,451
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (140,451
    )Balance at
December 31, 2003
    
    
    80,465
    
    
    
    805
    
    
    
    9,962
    
    
    
    (234,404
    )
    
    
    374,414
    
    
    
    430,030
    
    
    
    
    
    
    
    570,845Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    121,833
    
    
    
    
    
    
    
    121,833Other comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (204
    )
    
    
    (204
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    121,833
    
    
    
    (204
    )
    
    
    121,629Common stock issued
and related income
tax benefit
    
    
    1,852
    
    
    
    18
    
    
    
    
    
    
    
    
    
    
    
    37,474
    
    
    
    
    
    
    
    
    
    
    
    37,492Repurchase of
common stock held in treasury
    
    
    
    
    
    
    
    
    
    
    4,552
    
    
    
    (137,845
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (137,845
    )Balance at
December 31, 2004
    
    
    82,317
    
    
    $
    823
    
    
    
    14,514
    
    
    $
    (372,249
    )
    
    $
    411,888
    
    
    $
    551,863
    
    
    $
    (204
    )
    
    $
    592,121
 See accompanying notes to consolidated financial statements. F-7




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##### Table of Contents



Renal Care Group, Inc. Consolidated Statements of Cash Flows
(in thousands) Year Ended December 312002
    
    
    2003
    
    
    2004OPERATING ACTIVITIESNet income
    
    $
    92,460
    
    
    $
    102,056
    
    
    $
    121,833Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization
    
    
    40,432
    
    
    
    44,905
    
    
    
    58,349Loss on sale of property and equipment
    
    
    1,167
    
    
    
    886
    
    
    
    1,123Income applicable to minority interest
    
    
    21,410
    
    
    
    25,431
    
    
    
    35,169Distributions to minority shareholders
    
    
    (7,934
    )
    
    
    (24,634
    )
    
    
    (26,073
    )Deferred income taxes
    
    
    11,214
    
    
    
    19,517
    
    
    
    15,923Changes in operating assets and liabilities, net of effects from acquisitions:Accounts receivable
    
    
    (23,814
    )
    
    
    (20,253
    )
    
    
    (56,284
    )Inventories
    
    
    (6,587
    )
    
    
    (2,754
    )
    
    
    8,762Prepaid expenses and other current assets
    
    
    (902
    )
    
    
    (8,564
    )
    
    
    4,208Accounts payable
    
    
    5,369
    
    
    
    3,140
    
    
    
    (18,265
    )Accrued compensation
    
    
    18
    
    
    
    8,553
    
    
    
    1,646Due to third-party payors
    
    
    4,712
    
    
    
    13,313
    
    
    
    26,741Accrued expenses and other current liabilities
    
    
    12,747
    
    
    
    8,838
    
    
    
    (13,459
    )Income taxes
    
    
    18,331
    
    
    
    10,217
    
    
    
    13,696Other long-term liabilities
    
    
    
    
    
    
    5,898
    
    
    
    4,762Net cash provided by operating activities
    
    
    168,623
    
    
    
    186,549
    
    
    
    178,131INVESTING ACTIVITIESProceeds from sale of property and equipment
    
    
    218
    
    
    
    2,270
    
    
    
    4,569Cash paid for acquisitions, net of cash acquired
    
    
    (40,495
    )
    
    
    (14,154
    )
    
    
    (297,885
    )Purchases of property and equipment
    
    
    (61,551
    )
    
    
    (63,762
    )
    
    
    (103,363
    )Change in other assets
    
    
    4,408
    
    
    
    (2,858
    )
    
    
    (11,763
    )Net cash used in investing activities
    
    
    (97,420
    )
    
    
    (78,504
    )
    
    
    (408,442
    )FINANCING ACTIVITIESNet proceeds from issuance of long-term debt
    
    
    
    
    
    
    
    
    
    
    325,000Payments on long-term debt
    
    
    (1,884
    )
    
    
    (380
    )
    
    
    (12,188
    )Net borrowings (payments) under line of credit
    
    
    7,394
    
    
    
    (7,080
    )
    
    
    (1,831
    )Net proceeds from issuance of common stock
    
    
    22,221
    
    
    
    51,802
    
    
    
    24,811Repurchase of treasury shares
    
    
    (90,894
    )
    
    
    (140,451
    )
    
    
    (137,845
    )Proceeds from sale of minority interest investment
    
    
    2,896
    
    
    
    
    
    
    
    Net cash (used in) provided by financing activities
    
    
    (60,267
    )
    
    
    (96,109
    )
    
    
    197,947Increase (decrease) in cash and cash equivalents
    
    
    10,936
    
    
    
    11,936
    
    
    
    (32,364
    )Cash and cash equivalents, at beginning of year
    
    
    27,423
    
    
    
    38,359
    
    
    
    50,295Cash and cash equivalents, at end of year
    
    $
    38,359
    
    
    $
    50,295
    
    
    $
    17,931
 See accompanying notes to consolidated financial statements. F-8




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##### Table of Contents



Renal Care Group, Inc. Consolidated Statements of Cash Flows
(in thousands) Year Ended December 312002
    
    
    2003
    
    
    2004DISCLOSURES OF CASH FLOW INFORMATION:Cash paid during the year for:Interest
    
    $
    782
    
    
    $
    922
    
    
    $
    19,198Income taxes
    
    $
    27,126
    
    
    $
    32,808
    
    
    $
    47,588DISCLOSURES OF BUSINESS ACQUISITIONS:Fair value of assets acquired
    
    $
    41,478
    
    
    $
    14,388
    
    
    $
    567,576Liabilities assumed
    
    
    983
    
    
    
    234
    
    
    
    269,691Cash paid for acquisitions, net of cash acquired
    
    $
    40,495
    
    
    $
    14,154
    
    
    $
    297,885
 See accompanying notes to consolidated financial statements. F-9




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##### Table of Contents



Renal Care Group, Inc. Notes to Consolidated Financial Statements
(dollars in thousands, except per share data)
December 31, 2004 1. ORGANIZATION Renal Care Group, Inc. (the Company) provides dialysis services to patients with chronic kidney
failure, also known as end-stage renal disease (ESRD). As of December 31, 2004, the Company
provided dialysis and ancillary services to over 29,700 patients through 418 outpatient dialysis
centers in 33 states. In addition to its outpatient dialysis center operations, as of December 31,
2004, the Company provided acute dialysis services through contractual relationships with more than
200 hospitals. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation and Consolidation The consolidated financial statements include the accounts of the Company, its wholly-owned
subsidiaries and its majority-owned subsidiaries and joint venture entities over which the Company
exercises majority-voting control and for which control is other than temporary. All significant
intercompany transactions and accounts are eliminated in consolidation. Use of Estimates Management has made a number of estimates and assumptions relating to the reporting of assets and
liabilities and the disclosure of contingent assets and liabilities to prepare these financial
statements in conformity with U. S. generally accepted accounting principles. Actual results could
differ from those estimates. Cash Equivalents The Company considers all highly-liquid investments with original maturities of three months or
less to be cash equivalents. The Company places its cash in financial institutions that are
federally insured and limits the amount of credit exposure with any one financial institution. Inventories Inventories consist of drugs, supplies and parts used in dialysis treatments and are stated at the
lower of cost or market. Cost is determined using either the first-in, first-out method or the
average cost method. Property, Plant and Equipment Property, plant and equipment are stated at cost less accumulated depreciation. Routine maintenance
and repairs are charged to expense as incurred. Depreciation is calculated on the straight-line
method over the useful lives of the related assets, ranging from
three to thirty years. Leasehold
improvements are amortized using the straight-line method over the shorter of the related lease
terms or the useful lives. Goodwill and Other Intangibles The Company accounts for goodwill and other intangible assets in accordance with Statement of
Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets(SFAS No. 142). For
all periods presented, the Company did not amortize goodwill or intangible assets with indefinite
lives in accordance with SFAS No. 142. As of December 31, 2003 and 2004, the carrying amount of
goodwill was $286,578 and $694,264, respectively. For all periods presented, all separately identifiable intangible assets with definite lives were
amortized over their respective useful lives. F-10




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##### Table of Contents



Due to Third-Party Payors Amounts reflected as due to third-party payors include amounts received in excess of revenue
recognized for specific billed charges. These amounts are commonly referred to as overpayments.
Overpayments received from federally funded programs are reported to the federal program in
accordance with the programs established procedures. For overpayments received from non-federally
funded payors, the Company uses various procedures to communicate and refund such amounts to the
payors. These amounts remain in due to third-party payors until either a refund or recoupment is
made or the amount is otherwise recognized based on final resolution with the payor. Minority Interest Minority interest represents the proportionate equity interest of other owners in the Companys
consolidated entities that are not wholly owned. As of December 31, 2004, the Company was the
majority and controlling owner in 70 joint ventures. Stock Based Compensation In December 2002, the Financial Accounting Standards Board issued SFAS No. 148, Accounting for
Stock-Based Compensation-Transition and Disclosure(SFAS No. 148), which amended SFAS No. 123,
Accounting for Stock-Based Compensation(SFAS No. 123). SFAS No. 148 provides alternative methods
of transition for a voluntary change to the fair value-based method of accounting for stock-based
employee compensation and amends the disclosure requirements of SFAS No. 123 to require more
prominent and more frequent disclosures in financial statements about the effects of stock-based
compensation. These consolidated financial statements and related notes include the disclosure
requirements of SFAS No. 148. However, the Company has elected to account for its stock-based
compensation plans under the intrinsic value-based method of accounting prescribed by APB Opinion
No. 25, Accounting for Stock Issued to Employees(APB Opinion No. 25),and does not utilize the
fair value method. On December 16, 2004, the Financial Accounting Standards Board
(FASB) issued SFAS No. 123 (revised
2004), Share-Based Payment(SFAS No. 123(R)), which is a revision of SFAS No. 123.
SFAS No. 123(R) supersedes APB Opinion No. 25 and amended SFAS No. 95, Statement of Cash Flows. Generally, the approach in
SFAS No. 123(R) is similar to the approach described in SFAS
No. 123. However, SFAS No. 123(R)
requires all share-based payments to employees, including grants of employee stock options, to be
recognized in the income statement based on their fair values. Pro forma disclosure is no longer
an alternative. SFAS No. 123(R) must be adopted no later than July 1, 2005. Early adoption will
be permitted in periods in which financial statements have not yet been issued. We expect to adopt
SFAS No. 123(R) on July 1, 2005. As permitted by SFAS No. 123, the Company currently accounts for share-based payments to employees
using APB Opinion No. 25s intrinsic value method and, as such, generally recognizes no
compensation cost for employee stock options. The impact of adopting
of SFAS No. 123(R) cannot be
predicted at this time because it will depend on levels of share-based payments in the future.
However, had we adopted SFAS No. 123(R) in prior periods, the impact of that standard would have
approximated the impact of SFAS No. 123 as described in the disclosure of pro forma net income and
earnings per share in Note 8 to our consolidated financial
statements. SFAS No. 123(R) also
requires the benefits of tax deductions in excess of recognized compensation cost to be reported as
a financing cash flow, rather than as an operating cash flow as required under current literature.
This requirement will reduce net operating cash flows and increase net financing cash flows in
periods after adoption. While the Company cannot estimate what those amounts will be in the future
(because they depend on, among other things, when employees exercise stock options), the amount of
operating cash flows recognized in prior periods for such excess tax deductions were $11,300,
$13,550 and $9,850 in 2004, 2003, and 2002, respectively. F-11




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##### Table of Contents



Net Revenue Net revenue is recognized as services are provided and invoiced at the estimated net realizable
amount from Medicare, Medicaid, commercial insurers and other third-party payors. The Companys net
revenue is largely derived from the following sources:  
    Outpatient hemodialysis;
    Ancillary services associated with outpatient dialysis, primarily the administration of
erythropoietin (EPO) and other drugs;
    Home dialysis services;
    Inpatient hemodialysis services provided to acute care hospitals and skilled nursing facilities;
    Laboratory services; and
    Management contracts with hospital-based medical university dialysis programs. The Medicare and Medicaid programs, along with certain third-party payors, reimburse the Company at
amounts that are different from the Companys established rates. Contractual adjustments represent
the difference between the amounts billed for these services and the amounts that are reimbursable
by third-party payors. A summary of the basis for reimbursement with these payors follows: Medicare The Company is reimbursed by the Medicare program predominantly on a prospective payment system for
dialysis services. Under the prospective payment system, each facility receives a composite rate
per treatment. The composite rate is subject to regional differences based on various factors,
including labor costs. Some drugs and other ancillary services are reimbursed on a fee for service
basis. Medicaid Medicaid is a program funded by the federal and state governments. It is administered by the
states, with reimbursements varying by state. The Medicaid programs are separately administered in
each state in which the Company operates, and the state Medicaid programs reimburse the Company
predominantly on a prospective payment system for dialysis services rendered. Other Payments from commercial insurers, other third-party payors and patients are received pursuant to a
variety of reimbursement arrangements. Generally payments from commercial insurers and other
third-party payors are greater than those received from the Medicare and Medicaid programs. Reimbursements from Medicare and Medicaid approximated 57%, 55% and 53% of net revenue for the
years ended December 31, 2002, 2003 and 2004, respectively. Provision for Doubtful Accounts The provision for doubtful accounts is determined as a function of payor mix, billing practices and
other factors. The Company reserves for doubtful accounts in the period in which the revenue is
recognized based on managements estimate of the net collectibility of the accounts receivable.
Management estimates and monitors the net collectibility of accounts receivable based upon a
variety of factors. These factors include, but are not limited to, analyzing revenues generated from payor sources, performing
subsequent collection testing and regularly reviewing detailed accounts receivable agings. F-12




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##### Table of Contents



Income Taxes The Company accounts for income taxes under the asset and liability method. The Company recognizes
deferred tax assets and liabilities for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable income in the years
in which these temporary differences are expected to be recovered or settled. The effect of a
change in tax rates on deferred tax assets and liabilities is recognized in income in the period
that includes the enactment date for the change. The Company identifies deferred tax assets that
more likely than not will not be realized and records a valuation allowance. The Company also
establishes accruals for tax uncertainties that we deem to be probable of loss and that can be
reasonably estimated. Self Insurance The Company is subject to professional liability, general liability and workers compensation claims
or lawsuits in the ordinary course of business. Accordingly, the Company maintains insurance for
professional liability and general liability claims exceeding certain individual amounts.
Similarly, the Company maintains workers compensation insurance for claims exceeding certain
individual and aggregate amounts. The Company estimates its self-insured retention portion of
professional liability, general liability and workers compensation risks using third party
actuarial calculations that include historical claims data, demographic factors and other
assumptions. Fair Value of Financial Instruments Cash and Cash Equivalents The carrying amounts reported in the consolidated balance sheets for cash and cash equivalents
approximate fair value. Accounts Receivable, Accounts Payable and Accrued Liabilities The carrying amounts reported in the consolidated balance sheets for accounts receivable, accounts
payable and accrued liabilities approximate fair value. Accounts receivable are generally
unsecured. Long-Term Debt Based upon the borrowing rates currently available to the Company, the carrying amounts reported in
the consolidated balance sheets for long-term debt approximate fair value. Concentration of Credit Risks The Companys primary concentration of credit risk exists within accounts receivable, which consist
of amounts owed by various governmental agencies, insurance companies and private patients.
Receivables from Medicare and Medicaid represented 46% and 45% of gross accounts receivable at
December 31, 2003 and 2004, respectively. Concentration of credit risk relating to accounts
receivable is limited to some extent by the diversity of the number of patients and payors and the
geographic dispersion of the Companys operations. The Company administers EPO to most of its patients to treat anemia, a medical complication
frequently experienced by dialysis patients. Revenue from the administration of EPO was 23% of the
net revenue of the Company for the year ended December 31, 2002, 24% of the net revenue of the Company for the
year ended December 31, 2003 and 26% of the net revenue of the Company for the year ended December
31, 2004. EPO is produced by a single manufacturer. Impairment of Goodwill and Long-Lived Assets to be Disposed Of Pursuant to SFAS
No. 142, Goodwill and Other Intangible Assets, the
Company reviews goodwill for impairment at a reporting unit level at
least annually. Goodwill is tested for impairment between annual
tests if an event occurs or circumstances change that would more
likely than not reduce the fair value of a reporting unit below its
carrying amount. Goodwill is assigned to each reporting unit based on
the geographic location of assets acquired. If the fair value of a
reporting unit is determined to be less than its carrying amount,
then the Company compares the implied fair value of the goodwill to
its carrying value. If the implied fair value of the goodwill is less
than its carrying value, then an impairment loss is recognized for
that difference. No goodwill impairment losses were recognized during
2004, 2003 or 2002. In accordance with SFAS
No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets,when events, circumstances or operating
results indicate that the carrying value of certain long-lived assets
and related identifiable intangible assets (excluding goodwill) that
are expected to be held and used, might be impaired, the Company
evaluates such assets for impairment based on estimated undiscounted
cash flows expected to result from the use and eventual disposition
of the assets. If related long-lived assets are identified as
impaired, the impairment is equal to the amount by which the carrying
value of the assets exceeds the fair value of those assets as
determined by independent appraisals or estimates of discounted future cash flows. Long-lived assets to be disposed of are reported
at the lower of the carrying amount or fair value less costs to sell. F-13




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##### Table of Contents



Derivative Financial Instruments The Company manages its interest rate risk by using interest rate swaps to achieve an overall
desired position on floating interest rates. Effective June 30, 2004, the Company entered into an
interest rate swap agreement to hedge the interest rate risk on $150,000 of our term loan. These
derivative financial instruments are not held or issued for trading purposes. The derivatives are
recognized as either assets or liabilities in the statement of financial position and measured at
fair value. The hedge is structured to qualify for the shortcut method; therefore, changes in the
fair value of the agreement are recorded as other comprehensive income (loss). During 2004 the
fair value of the interest rate swaps, net of a tax benefit of $127, decreased by approximately
$204 and was recognized as other comprehensive loss. 3. BUSINESS ACQUISITIONS 2004 Acquisitions During 2004, we completed eight acquisitions. The combined net assets acquired and resulting net
cash purchase price paid in these acquisitions were $297,885. Our largest acquisition was the
purchase of National Nephrology Associates, Inc. (NNA) on April 2, 2004. The purchase price of
NNA consisted of a net cash payment of approximately $163,000 and an assumption of all of NNAs
outstanding debt, including its $160,000, 9% senior subordinated notes. NNA provided dialysis
services to approximately 5,600 patients and operated 87 outpatient dialysis facilities in 15
states, as well as providing acute dialysis services to more than 50 hospitals. Each of the eight transactions involved the acquisition of one or more entities that provide care
to ESRD patients through owned dialysis facilities. The acquired businesses either strengthened
existing market share within a specific geographic area or provided an entrance into a new market.
We began recording the results of operations for each of these acquired businesses at the effective
date of the respective transaction. Goodwill resulting from these transactions amounted to
$407,686, and the Company expects that approximately $225,856 of that
goodwill will be deductible for income tax purposes. The following table summarizes the preliminarily estimated fair values of the assets acquired and
liabilities assumed at the date of acquisition for the eight acquisitions completed during 2004: Accounts receivable, net
    
    $
    45,410Inventory and other current assets
    
    
    23,778Property, plant and equipment, net
    
    
    50,713Intangible assets
    
    
    20,646Goodwill
    
    
    407,686Other Assets
    
    
    19,343Total assets acquired
    
    
    567,576Total liabilities assumed
    
    
    (269,691
    )Net assets acquired
    
    $
    297,885
 F-14




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##### Table of Contents



Some of the estimated fair values of assets and liabilities are preliminary and may be adjusted. As
of December 31, 2004, items that may be adjusted primarily include deferred tax assets and
liabilities, as the Company is awaiting additional information to complete its analysis.
Intangible assets primarily represent the value assigned to contracts such as non-competition
agreements and acute dialysis service agreements entered into in the transactions. Related amounts
will be amortized over the lives of the contracts, which generally range from five to fifteen
years. The Company recorded estimated employee severance costs of $1,000 and estimated contract
termination costs of $1,500 associated with the NNA acquisition. As of December 31, 2004 $256
remains outstanding pending the employee terminations, and there is no amount of estimated contract
termination cost outstanding. 2003 Acquisitions During 2003, the Company completed three acquisitions, which were accounted for under the purchase
method of accounting. The combined purchase price paid in these acquisitions was $14,154 and
consisted exclusively of cash. Each of the transactions involved the acquisition of assets of
entities that provide care to ESRD patients through owned dialysis facilities. The acquired
businesses either strengthened the Companys existing market share within a specific geographic
area or provided the Company with an entrance into a new market. The following table summarizes the estimated fair values of the assets acquired and liabilities
assumed at the date of acquisition for the acquisitions completed in 2003: Accounts receivable, net
    
    $
    986Inventory
    
    
    255Property, plant and equipment, net
    
    
    1,579Intangible assets
    
    
    656Goodwill
    
    
    10,912Total assets acquired
    
    
    14,388Total liabilities assumed
    
    
    234Net assets acquired
    
    $
    14,154
 The Company began recording the results of operations for each of these acquired businesses at the
effective date of the transaction. Goodwill resulting from these transactions amounted to
$10,912, and the Company
expects that all of that goodwill will be deductible for income tax purposes. Intangible assets
typically represent the value assigned to certain contracts such as non-competition agreements and
acute dialysis service agreements entered into in the transactions. These amounts are amortized
over the lives of the contracts, which generally range from five to ten years. 2002 Acquisitions  During 2002, the Company completed eight acquisitions, which were accounted for under the purchase
method of accounting. The combined purchase price paid in these acquisitions was $40,495 and
consisted exclusively of cash. Each of the transactions involved the acquisition of assets of
entities that provide care to ESRD patients through owned dialysis facilities. The acquired
businesses either strengthened the Companys existing market share within a specific geographic
area or provided the Company with an entrance into a new market. F-15




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##### Table of Contents



The following table summarizes the estimated fair values of the assets acquired and liabilities
assumed at the date of acquisition for the acquisitions completed in 2002: Accounts receivable, net
    
    $
    1,570Inventory
    
    
    457Property, plant and equipment, net
    
    
    3,329Intangible assets
    
    
    3,986Goodwill
    
    
    32,136Total assets acquired
    
    
    41,478Total liabilities assumed
    
    
    983Net assets acquired
    
    $
    40,495
 The Company began recording the results of operations for each of these acquired businesses at the
effective date of the transaction. Goodwill resulting from these transactions amounted to $32,136
and was not amortized during 2002 in accordance with the requirements of SFAS No. 142. The Company
expects that all of that goodwill will be deductible for income tax purposes. Intangible assets
typically represent the value assigned to certain contracts such as non-competition agreements and
acute dialysis service agreements entered into in the transactions. These amounts are amortized
over the lives of the contracts, which generally range from five to ten years. Pro Forma Data (unaudited) The following summary, prepared on a pro forma basis, combines the results of operations of the
Company and the acquired businesses, as if each of the 2004 acquisitions had been consummated as of
the beginning of each year below, giving effect to adjustments such as amortization of intangibles,
interest expense and related income taxes. 2003
    
    
    2004Pro forma net revenue
    
    $
    1,328,327
    
    
    $
    1,436,881Pro forma net income
    
    $
    110,929
    
    
    $
    125,606Pro forma net income per shareBasic
    
    $
    1.53
    
    
    $
    1.86Diluted
    
    $
    1.48
    
    
    $
    1.80
 The unaudited pro forma results of operations are not necessarily indicative of what actually would
have occurred if the acquisitions had been completed prior to the beginning of the periods
presented. F-16




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##### Table of Contents



4. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consist of the following (including assets recorded under capital
leases): December 31,2003
    
    
    2004Medical equipment
    
    $
    143,758
    
    
    $
    190,267Computer software and equipment
    
    
    57,718
    
    
    
    69,072Furniture and fixtures
    
    
    27,027
    
    
    
    34,011Leasehold improvements
    
    
    101,113
    
    
    
    145,882Buildings
    
    
    23,511
    
    
    
    45,132Construction-in-progress
    
    
    15,058
    
    
    
    16,341368,185
    
    
    
    500,705Less accumulated depreciation
    
    
    (143,788
    )
    
    
    (184,173
    )$
    224,397
    
    
    $
    316,532
 Depreciation expense was $38,191, $42,561 and $53,538 for the years ended December 31, 2002, 2003
and 2004, respectively. 5. GOODWILL AND INTANGIBLE ASSETS In accordance with the requirements of SFAS No. 142, the Company discontinued amortizing goodwill
effective January 1, 2002, and it is required to disclose goodwill separately from other intangible
assets in the balance sheet. Additionally, the Company must test goodwill for impairment on a
periodic basis. The Company completed its annual impairment testing and identified no impairments
as of December 31, 2004. Changes in the carrying amount of goodwill for the years ended December 31, 2003 and 2004, are as
follows: Balance as of December 31, 2002
    
    $
    275,666Goodwill acquired during the period
    
    
    10,912Balance as of December 31, 2003
    
    
    286,578Goodwill acquired during the period
    
    
    407,686Balance as of December 31, 2004
    
    $
    694,264
 The Companys separately-identifiable intangible assets, which consist of non-competition
agreements and acute dialysis services agreements, are as follows: December 31,2003
    
    
    2004Carrying amount
    
    $
    24,113
    
    
    $
    49,012Accumulated amortization
    
    
    (10,067
    )
    
    
    (14,692
    )Net
    
    $
    14,046
    
    
    $
    34,320
 F-17




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##### Table of Contents



Separately-identifiable intangible assets are being amortized over their useful lives, ranging
from five to fifteen years. Amortization expense was $2,241, $2,344 and $4,811 for the years ended December
31, 2002, 2003 and 2004, respectively. Estimated amortization expense for each of the next five
fiscal years is as follows: Year ending December 31,
    
    Amount2005
    
    $
    5,3052006
    
    
    5,3052007
    
    
    4,8502008
    
    
    4,6202009
    
    
    2,751
 6. LONG-TERM DEBT Long-term debt consisted of the following as of December 31, 2003 and December 31, 2004: December 31,
    
    
    December 31,2003
    
    
    2004Term loan facility, bearing interest at a
variable rate (4.4% at December 31, 2004)
    
    $
    
    
    
    $
    312,8139% senior subordinated notes
    
    
    
    
    
    
    159,685Obligations under capital leases
    
    
    2,553
    
    
    
    4,151Other
    
    
    281
    
    
    
    3,357Total indebtedness, excluding fair value premium
    
    
    2,834
    
    
    
    480,006Add: 9% senior subordinated notes fair value premium
    
    
    
    
    
    
    23,608Total long-term debt
    
    
    2,834
    
    
    
    503,614Less: current portion
    
    
    182
    
    
    
    23,969$
    2,652
    
    
    $
    479,645
 Credit Agreements As of December 31, 2003, we had two credit agreements with a group of banks totaling $150,000. On
February 10, 2004, we entered into a new credit agreement (the
2004 Agreement) with a group of
banks totaling up to $700,000. The 2004 Agreement replaced both of our prior facilities. The 2004
agreement has a $150,000 revolving credit facility, a $325,000 term loan facility and a $225,000
incremental term loan facility. Borrowings under the incremental term loan facility are subject to
obtaining commitments from the banks and finalizing specific terms. The revolving credit facility
and the $325,000 term loan facility have a final maturity of February 10, 2009. Each of our
wholly-owned subsidiaries has guaranteed all of our obligations under the 2004 Agreement. Further,
our obligations under the 2004 Agreement, and our subsidiaries obligations under their guarantees,
are secured by a pledge of the equity interests we hold in each of our subsidiaries. The 2004
Agreement includes financial covenants that are customary based on the amount and duration of the
agreement. The revolving credit facility under the 2004 Agreement may be used for
acquisitions, repurchases of Company common stock, capital expenditures, working capital and
general corporate purposes. Borrowings under the 2004 Agreement accrue interest at variable rates
determined by the Companys leverage ratio. Effective June 30, 2004, we entered into interest rate
swap agreements to hedge interest rate risk on $150,000 of our term loan (See Interest Rate Swap
below). The portion of our borrowings that is subject to variable rates carries a degree of
interest rate risk. Specifically, the Company will face higher interest costs on this debt if
interest rates rise. 9% Senior Subordinated Notes With the acquisition of NNA, we assumed all of NNAs outstanding debt including its 9% senior
subordinated notes (the Notes), due 2011. We recorded the Notes at the face value of $160,000 plus
an additional $25,600 representing the difference between the fair value of the Notes and the face
amount on the date of acquisition. Accordingly, the Notes were recorded at the estimated fair value
of $185,600. As of December 31, 2004, the carrying value of the Notes was $183,293. The Notes bear interest at the rate of 9% per annum on the face amount. The fair value premium is
being recognized over the life of the Notes using the effective interest method and is recorded as
a reduction to interest expense. Accordingly, the effective interest rate on the Notes as of
December 31, 2004 was 6.3%. Each of our wholly-owned F- 18




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##### Table of Contents



subsidiaries has guaranteed all of our
obligations under these notes. The rights of the noteholders and our obligations under these notes
are set forth in an indenture that NNA entered into in October 2003, which we assumed in connection
with the NNA acquisition. The indenture includes customary financial covenants. Interest Rate Swap Effective June 30, 2004, the Company entered into interest rate swap agreements to hedge the
interest rate risk on $150,000 of our term loan. Under these interest rate swap agreements we will
exchange fixed and variable rate interest payments based on a $150,000 notional principal amount
through March 30, 2007. The notional amount of $150,000 and interest payments of 3.5% are fixed in
the agreements. The interest payments are subject to adjustment based on our leverage ratio. The
changes in cash flows under these agreements are expected to offset the changes in interest rate
payments attributable to fluctuations in LIBOR. The hedge is structured to qualify for the shortcut
method as prescribed by Statement of Financial Accounting Standard No. 133, Accounting for
Derivative Instruments and Hedging Activities; therefore, we will record changes in the fair value
of the agreement directly in comprehensive income. As of December 31, 2004, the notional amount of
the swap agreements was $150,000 and its fair value was a $331 liability, resulting in an other
comprehensive loss during 2004 of $204 (net of a related tax benefit of $127). Obligations Under Capital Leases Obligations under capital leases consist primarily of capital leases for buildings and equipment
maturing at various times through August 2015. See the maturity schedule for capital leases
included at Note 9. Other The other long-term debt consists primarily of notes maturing at various times through February
2009. Maturities of Long-Term Debt The aggregate maturities of long-term debt, excluding the fair value premium, at December 31, 2004
are as follows: 2005
    
    $
    24,4092006
    
    
    30,8762007
    
    
    57,2092008
    
    
    156,6752009
    
    
    49,418Thereafter
    
    
    161,419$
    480,006
 F- 19




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##### Table of Contents



Guarantor Information Our wholly-owned subsidiaries have guaranteed the Notes as well as our obligations under the 2004
Agreement. We conduct substantially all of our business through subsidiaries. Presented below is
condensed consolidating financial information as of December 31, 2003 and 2004 and for each of the
three years in the period ended December 31, 2004. The information segregates Renal Care Group,
Inc. (the parent company), the combined wholly-owned subsidiary guarantors and the combined
non-guarantor subsidiaries and reflects consolidating adjustments. All of the subsidiary guarantees
are both full and unconditional, and joint and several. Condensed Consolidating Balance Sheets Parent
    
    
    Guarantor
    
    
    Non-Guarantor
    
    
    Consolidating
    
    
    ConsolidatedCompany
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Adjustments
    
    
    TotalAs of December 31, 2003Cash and cash equivalents
    
    $
    20,157
    
    
    $
    2,646
    
    
    $
    27,492
    
    
    $
    
    
    
    $
    50,295Accounts receivable, net
    
    
    
    
    
    
    117,209
    
    
    
    56,470
    
    
    
    
    
    
    
    173,679Other current assets
    
    
    35,329
    
    
    
    21,467
    
    
    
    11,334
    
    
    
    
    
    
    
    68,130Total current assets
    
    
    55,486
    
    
    
    141,322
    
    
    
    95,296
    
    
    
    
    
    
    
    292,104Property, plant and equipment, net
    
    
    27,841
    
    
    
    123,894
    
    
    
    69,924
    
    
    
    2,738
    
    
    
    224,397Goodwill
    
    
    1,483
    
    
    
    187,848
    
    
    
    96,947
    
    
    
    300
    
    
    
    286,578Other assets
    
    
    10,637
    
    
    
    25,926
    
    
    
    5,940
    
    
    
    (25,709
    )
    
    
    16,794Total assets
    
    $
    95,447
    
    
    $
    478,990
    
    
    $
    268,107
    
    
    $
    (22,671
    )
    
    $
    819,873Current liabilities
(including intercompany assets
and liabilities)
    
    $
    (261,412
    )
    
    $
    315,138
    
    
    $
    126,004
    
    
    $
    (10,293
    )
    
    $
    169,437Long-term debt
    
    
    
    
    
    
    
    
    
    
    2,652
    
    
    
    
    
    
    
    2,652Long-term liabilities
    
    
    42,951
    
    
    
    1,243
    
    
    
    94
    
    
    
    
    
    
    
    44,288Minority interest
    
    
    
    
    
    
    30,091
    
    
    
    2,347
    
    
    
    213
    
    
    
    32,651Stockholders equity
    
    
    313,908
    
    
    
    132,518
    
    
    
    137,010
    
    
    
    (12,591
    )
    
    
    570,845Total liabilities and
stockholders equity
    
    $
    95,447
    
    
    $
    478,990
    
    
    $
    268,107
    
    
    $
    (22,671
    )
    
    $
    819,873
 Parent
    
    
    Guarantor
    
    
    Non-Guarantor
    
    
    Consolidating
    
    
    ConsolidatedCompany
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Adjustments
    
    
    TotalAs of December 31, 2004Cash and cash equivalents
    
    $
    
    
    
    $
    
    
    
    $
    31,945
    
    
    $
    (14,014
    )
    
    $
    17,931Accounts receivable, net
    
    
    
    
    
    
    198,778
    
    
    
    76,595
    
    
    
    
    
    
    
    275,373Other current assets
    
    
    45,749
    
    
    
    23,320
    
    
    
    10,711
    
    
    
    
    
    
    
    79,780Total current assets
    
    
    45,749
    
    
    
    222,098
    
    
    
    119,251
    
    
    
    (14,014
    )
    
    
    373,084Property, plant and equipment, net
    
    
    29,542
    
    
    
    189,434
    
    
    
    96,408
    
    
    
    1,148
    
    
    
    316,532Goodwill
    
    
    1,483
    
    
    
    574,815
    
    
    
    117,666
    
    
    
    300
    
    
    
    694,264Other assets
    
    
    11,433
    
    
    
    99,033
    
    
    
    7,436
    
    
    
    (72,197
    )
    
    
    45,705Total assets
    
    $
    88,207
    
    
    $
    1,085,380
    
    
    $
    340,761
    
    
    $
    (84,763
    )
    
    $
    1,429,585Current liabilities
(including intercompany assets
and liabilities)
    
    $
    (696,828
    )
    
    $
    813,091
    
    
    $
    157,344
    
    
    $
    (27,488
    )
    
    $
    246,119Long-term debt
    
    
    476,184
    
    
    
    (259
    )
    
    
    3,720
    
    
    
    
    
    
    
    479,645Long-term liabilities
    
    
    63,367
    
    
    
    2,253
    
    
    
    461
    
    
    
    
    
    
    
    66,081Minority interest
    
    
    
    
    
    
    39,610
    
    
    
    5,989
    
    
    
    20
    
    
    
    45,619Stockholders equity
    
    
    245,484
    
    
    
    230,685
    
    
    
    173,247
    
    
    
    (57,295
    )
    
    
    592,121Total liabilities and
stockholders equity
    
    $
    88,207
    
    
    $
    1,085,380
    
    
    $
    340,761
    
    
    $
    (84,763
    )
    
    $
    1,429,585
 F-20




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Condensed Consolidating Income Statements Parent
    
    
    Guarantor
    
    
    Non-Guarantor
    
    
    Consolidating
    
    
    ConsolidatedCompany
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Adjustments
    
    
    TotalFor the year ended December 31,
2002Net revenue
    
    $
    1,045
    
    
    $
    646,080
    
    
    $
    261,587
    
    
    $
    (5,325
    )
    
    $
    903,387Total operating costs and expenses
    
    
    35,116
    
    
    
    496,254
    
    
    
    205,563
    
    
    
    (5,225
    )
    
    
    731,708Income (loss) from operations
    
    
    (34,071
    )
    
    
    149,826
    
    
    
    56,024
    
    
    
    (100
    )
    
    
    171,679Interest expense, net
    
    
    1,140
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,140Minority interest
    
    
    
    
    
    
    17,827
    
    
    
    3,683
    
    
    
    (100
    )
    
    
    21,410Provision (benefit) for income taxes
    
    
    (13,379
    )
    
    
    50,159
    
    
    
    19,889
    
    
    
    
    
    
    
    56,669Net income (loss)
    
    $
    (21,832
    )
    
    $
    81,840
    
    
    $
    32,452
    
    
    $
    
    
    
    $
    92,460
 Parent
    
    
    Guarantor
    
    
    Non-Guarantor
    
    
    Consolidating
    
    
    ConsolidatedCompany
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Adjustments
    
    
    TotalFor the year ended December 31,
2003Net revenue
    
    $
    1,524
    
    
    $
    688,379
    
    
    $
    319,680
    
    
    $
    (4,264
    )
    
    $
    1,005,319Total operating costs and expenses
    
    
    43,611
    
    
    
    520,870
    
    
    
    254,444
    
    
    
    (4,264
    )
    
    
    814,661Income (loss) from operations
    
    
    (42,087
    )
    
    
    167,509
    
    
    
    65,236
    
    
    
    
    
    
    
    190,658Interest expense, net
    
    
    629
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    629Minority interest
    
    
    
    
    
    
    23,853
    
    
    
    1,578
    
    
    
    
    
    
    
    25,431Provision (benefit) for income taxes
    
    
    (16,231
    )
    
    
    54,584
    
    
    
    24,189
    
    
    
    
    
    
    
    62,542Net income (loss)
    
    $
    (26,485
    )
    
    $
    89,072
    
    
    $
    39,469
    
    
    $
    
    
    
    $
    102,056
 Parent
    
    
    Guarantor
    
    
    Non-Guarantor
    
    
    Consolidating
    
    
    ConsolidatedCompany
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Adjustments
    
    
    TotalFor the year ended December 31,
2004Net revenue
    
    $
    2,224
    
    
    $
    926,046
    
    
    $
    422,419
    
    
    $
    (5,642
    )
    
    $
    1,345,047Total operating costs and expenses
    
    
    48,077
    
    
    
    731,419
    
    
    
    317,346
    
    
    
    (5,642
    )
    
    
    1,091,200Income (loss) from operations
    
    
    (45,853
    )
    
    
    194,627
    
    
    
    105,073
    
    
    
    
    
    
    
    253,847Interest expense (income), net
    
    
    16,966
    
    
    
    2,630
    
    
    
    1,032
    
    
    
    
    
    
    
    20,628Minority interest
    
    
    
    
    
    
    32,418
    
    
    
    2,751
    
    
    
    
    
    
    
    35,169Provision (benefit) for income taxes
    
    
    (24,174
    )
    
    
    61,411
    
    
    
    38,980
    
    
    
    
    
    
    
    76,217Net income (loss)
    
    $
    (38,645
    )
    
    $
    98,168
    
    
    $
    62,310
    
    
    $
    
    
    
    $
    121,833
 F-21




---



##### Table of Contents



Condensed Consolidating Statements of Cash Flows Parent
    
    
    Guarantor
    
    
    Non-Guarantor
    
    
    Consolidating
    
    
    ConsolidatedCompany
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Adjustments
    
    
    TotalFor the year
ended December 31,
2002Cash flows from
operating
activities:Net income (loss)
    
    $
    (21,832
    )
    
    $
    81,840
    
    
    $
    32,452
    
    
    $
    
    
    
    $
    92,460Changes in
operating and
intercompany
assets and
liabilities and
non-cash items
included in net
income
    
    
    84,530
    
    
    
    (32,809
    )
    
    
    21,106
    
    
    
    3,336
    
    
    
    76,163Net cash
provided by
operating
activities
    
    
    62,698
    
    
    
    49,031
    
    
    
    53,558
    
    
    
    3,336
    
    
    
    168,623Net cash used in
investing
activities
    
    
    (7,960
    )
    
    
    (54,095
    )
    
    
    (31,713
    )
    
    
    (3,652
    )
    
    
    (97,420
    )Net cash (used in)
provided by
financing
activities
    
    
    (63,163
    )
    
    
    2,896
    
    
    
    
    
    
    
    
    
    
    
    (60,267
    )Increase
(decrease) in cash
and cash
equivalents
    
    
    (8,425
    )
    
    
    (2,168
    )
    
    
    21,845
    
    
    
    (316
    )
    
    
    10,936Cash and cash
equivalents, at
beginning of period
    
    
    8,425
    
    
    
    4,652
    
    
    
    14,346
    
    
    
    
    
    
    
    27,423Cash and cash
equivalents, at end
of period
    
    $
    
    
    
    $
    2,484
    
    
    $
    36,191
    
    
    $
    (316
    )
    
    $
    38,359
 Parent
    
    
    Guarantor
    
    
    Non-Guarantor
    
    
    Consolidating
    
    
    ConsolidatedCompany
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Adjustments
    
    
    TotalFor the year
ended December 31,
2003Cash flows from
operating
activities:Net income (loss)
    
    $
    (26,485
    )
    
    $
    89,072
    
    
    $
    39,469
    
    
    $
    
    
    
    $
    102,056Changes in
operating and
intercompany
assets and
liabilities and
non-cash items
included in net
income
    
    
    136,739
    
    
    
    (53,679
    )
    
    
    10,517
    
    
    
    (9,084
    )
    
    
    84,493Net cash
provided by
operating
activities
    
    
    110,254
    
    
    
    35,393
    
    
    
    49,986
    
    
    
    (9,084
    )
    
    
    186,549Net cash used in
investing
activities
    
    
    (9,985
    )
    
    
    (35,231
    )
    
    
    (34,052
    )
    
    
    764
    
    
    
    (78,504
    )Net cash (used in)
provided by
financing
activities
    
    
    (80,112
    )
    
    
    
    
    
    
    (24,633
    )
    
    
    8,636
    
    
    
    (96,109
    )Increase
(decrease) in cash
and cash
equivalents
    
    
    20,157
    
    
    
    162
    
    
    
    (8,699
    )
    
    
    316
    
    
    
    11,936Cash and cash
equivalents, at
beginning of period
    
    
    
    
    
    
    2,484
    
    
    
    36,191
    
    
    
    (316
    )
    
    
    38,359Cash and cash
equivalents, at end
of period
    
    $
    20,157
    
    
    $
    2,646
    
    
    $
    27,492
    
    
    $
    
    
    
    $
    50,295
 Parent
    
    
    Guarantor
    
    
    Non-Guarantor
    
    
    Consolidating
    
    
    ConsolidatedCompany
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Adjustments
    
    
    TotalFor the year
ended December 31,
2004Cash flows from
operating
activities:Net income (loss)
    
    $
    (38,645
    )
    
    $
    98,168
    
    
    $
    62,310
    
    
    $
    
    
    
    $
    121,833Changes in
operating and
intercompany
assets and
liabilities and
non-cash items
included in net
income
    
    
    (82,851
    )
    
    
    100,204
    
    
    
    9,845
    
    
    
    29,100
    
    
    
    56,298Net cash
provided by
operating
activities
    
    
    (121,496
    )
    
    
    198,372
    
    
    
    72,155
    
    
    
    29,100
    
    
    
    178,131Net cash used in
investing
activities
    
    
    (168,486
    )
    
    
    (200,068
    )
    
    
    (41,478
    )
    
    
    1,590
    
    
    
    (408,442
    )Net cash (used in)
provided by
financing
activities
    
    
    269,825
    
    
    
    (950
    )
    
    
    (26,224
    )
    
    
    (44,704
    )
    
    
    197,947Increase
(decrease) in cash
and cash
equivalents
    
    
    (20,157
    )
    
    
    (2,646
    )
    
    
    4,453
    
    
    
    (14,014
    )
    
    
    (32,364
    )Cash and cash
equivalents, at
beginning of period
    
    
    20,157
    
    
    
    2,646
    
    
    
    27,492
    
    
    
    
    
    
    
    50,295Cash and cash
equivalents, at end
of period
    
    $
    
    
    
    $
    
    
    
    $
    31,945
    
    
    $
    (14,014
    )
    
    $
    17,931
 F-22




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##### Table of Contents



7. INCOME TAXES The provision for income taxes consists of the following: Year Ended December 31,2002
    
    
    2003
    
    
    2004Current:Federal
    
    $
    40,205
    
    
    $
    38,716
    
    
    $
    52,274State and local
    
    
    5,250
    
    
    
    4,309
    
    
    
    8,02045,455
    
    
    
    43,025
    
    
    
    60,294Deferred:Federal
    
    
    10,079
    
    
    
    17,152
    
    
    
    14,062State and local
    
    
    1,135
    
    
    
    2,365
    
    
    
    1,86111,214
    
    
    
    19,517
    
    
    
    15,923Provision for income taxes
    
    $
    56,669
    
    
    $
    62,542
    
    
    $
    76,217
 At December 31, 2004, the Company has net operating loss carryforwards of approximately $318,000
for state income tax purposes that expire in years 2005 through 2022, and a capital loss
carryforward of approximately $2,200 that expires in 2006. The utilization of the state net
operating loss carryforwards in future years is dependent upon the profitability of certain
subsidiary corporations. The utilization of the capital loss carryforward requires capital gain
income in the future. Therefore, the Company has recorded a valuation allowance of $10,359 against
the deferred tax asset attributable to the state net operating loss carryforwards and the capital
loss carryforward, which represents an increase in the valuation allowance of $2,603 in 2004. Deferred income taxes reflect the net tax effects of temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and the amounts used for income
tax purposes. F-23




---



##### Table of Contents



Components of the Companys deferred tax liabilities and assets are as follows: December 31,2003
    
    
    2004Deferred tax assets:Net operating loss carryforwards
    
    $
    6,928
    
    
    $
    9,531Capital loss carryforward
    
    
    828
    
    
    
    828Allowance for doubtful accounts
    
    
    2,840
    
    
    
    6,973Accrued vacation and other accrued liabilities
    
    
    11,770
    
    
    
    28,243Notes revaluation
    
    
    
    
    
    
    8,971Investment in partnerships
    
    
    
    
    
    
    226Other
    
    
    53
    
    
    
    781Less: valuation allowance
    
    
    (7,756
    )
    
    
    (10,359
    )14,663
    
    
    
    45,194Deferred tax liabilities:Depreciation
    
    
    17,851
    
    
    
    25,967Amortization
    
    
    22,629
    
    
    
    41,042Investments in partnerships
    
    
    748
    
    
    
    41,228
    
    
    
    67,009Net deferred tax liability
    
    $
    26,565
    
    
    $
    21,815
 On April 2, 2004, the Company acquired approximately $20,571 of net deferred tax assets from NNA.
In addition to the provision for income taxes included in the accompanying income statements, a
deferred tax benefit of $127 related to the interest rate swap agreement has been reflected in the
accumulated other comprehensive loss as reported in the accompanying statement of stockholders
equity for the year ended December 31, 2004. The following is a reconciliation of the statutory federal and state income tax rates to the
effective rates as a percentage of income before provision for income taxes as reported in the
consolidated financial statements: Year Ended December 31,2002
    
    
    2003
    
    
    2004U.S. federal income tax rate
    
    
    35.0
    %
    
    
    35.0
    %
    
    
    35.0
    %State income tax, net of federal
income tax benefit
    
    
    1.2
    
    
    
    1.7
    
    
    
    2.5Increase in valuation allowances
    
    
    1.8
    
    
    
    1.0
    
    
    
    0.7Other
    
    
    
    
    
    
    0.3
    
    
    
    0.3Effective income tax rate
    
    
    38.0
    %
    
    
    38.0
    %
    
    
    38.5
    %
 F-24




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##### Table of Contents



8. STOCKHOLDERS EQUITY (numbers of shares in thousands) Stock Option Plans As of December 31, 2004, the Company had seven stock option plans. The Company has also issued
options, referred to in these financial statements as Free Standing Options outside of these plans.
Options issued as Free Standing Options are for employees, officers, directors, and other key
persons. Free Standing Options vest over various periods up to five years and have a term of ten
years from the date of issuance. Options issued under the 2004, 1999 and 1996 Employee Plans have similar terms and purposes.
Specifically, options under each of these plans are available for grant to eligible employees and
other key persons, the options generally vest over four to five years and have a term of ten years
from the date of issuance. These plans were adopted in 2004, 1999 and 1996, and have 6,750, 11,250,
and 9,000 shares of common stock reserved for issuance, respectively. Options issued under the Equity Compensation Plan (Equity Plan) are for eligible employees and
other key persons. The options vest over periods up to three years and have a term of ten years
from the date of issuance. This plan was adopted by Dialysis Centers of America, Inc. (DCA) in
1995, and there are 525 shares of common stock reserved for issuance. The Company merged with DCA
in a pooling-of-interests transaction in February 1999. Options issued under the 1994 Stock Option Plan (1994 Plan) are for directors, officers and other
key persons. These options vest over four years, and have a term of ten years from the date of
issuance. This plan was adopted in 1994, and there are 1,080 shares of common stock reserved for
issuance. Options issued under the Directors Plan are for non-management directors. These options vest
immediately, and have a term of ten years from the date of issuance. The plan was adopted in 1996,
and there are 337 shares of common stock reserved for issuance. Options issued under the RDM Plan are for directors, officers, and other key persons. These options
vest immediately upon grant and have a term of 5 to 10 years from the date of issuance. The plan
was adopted by Renal Disease Management by Physicians, Inc. (RDM) in 1997, and there are 163
shares of common stock reserved for issuance. The Company merged with RDM in a pooling-of-interests
transaction in April 2000. The Company has adopted the disclosure-only provisions of SFAS No. 123 and SFAS No. 148, but
applies APB Opinion No. 25 and related interpretations in accounting for its plans. Therefore,
compensation expense would generally be recorded only if on the date of grant the then-current
market price of the underlying stock exceeded the exercise price. F-25




---



##### Table of Contents



The following is a summary of option transactions during the period from January 1, 2002
through December 31, 2004: Weighted2004
    
    
    1999
    
    
    1996
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    AverageFree
    
    
    Employee
    
    
    Employee
    
    
    Employee
    
    
    Equity
    
    
    1994
    
    
    Directors
    
    
    RDM
    
    
    Exercise Price
    
    
    ExerciseStanding
    
    
    Plan
    
    
    Plan
    
    
    Plan
    
    
    Plan
    
    
    Plan
    
    
    Plan
    
    
    Plan
    
    
    Range
    
    
    PriceBalance at
December 31, 2001
    
    
    1,337
    
    
    
    
    
    
    
    4,545
    
    
    
    4,035
    
    
    
    25
    
    
    
    13
    
    
    
    100
    
    
    
    29
    
    
    $
    2.22$19.75
    
    
    $
    12.18Granted
    
    
    
    
    
    
    
    
    
    
    2,880
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    17
    
    
    
    
    
    
    
    18.87  21.80
    
    
    
    18.94Exercised
    
    
    (410
    )
    
    
    
    
    
    
    (729
    )
    
    
    (1,056
    )
    
    
    
    
    
    
    
    
    
    
    (7
    )
    
    
    (9
    )
    
    
    2.22  19.75
    
    
    
    10.15Forfeited
    
    
    (1
    )
    
    
    
    
    
    
    (96
    )
    
    
    (83
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9.37  18.93
    
    
    
    12.75Balance at
December 31, 2002
    
    
    926
    
    
    
    
    
    
    
    6,600
    
    
    
    2,896
    
    
    
    25
    
    
    
    13
    
    
    
    110
    
    
    
    20
    
    
    
    2.22  21.80
    
    
    
    14.44Granted
    
    
    
    
    
    
    
    
    
    
    2,868
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    43
    
    
    
    
    
    
    
    20.00  25.21
    
    
    
    22.97Exercised
    
    
    (344
    )
    
    
    
    
    
    
    (1,986
    )
    
    
    (1,200
    )
    
    
    (1
    )
    
    
    
    
    
    
    
    
    
    
    (7
    )
    
    
    2.22  19.35
    
    
    
    13.87Forfeited
    
    
    (52
    )
    
    
    
    
    
    
    (817
    )
    
    
    (92
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10.63  23.10
    
    
    
    18.35Balance at
December 31, 2003
    
    
    530
    
    
    
    
    
    
    
    6,665
    
    
    
    1,604
    
    
    
    24
    
    
    
    13
    
    
    
    153
    
    
    
    13
    
    
    
    2.22  25.21
    
    
    
    17.13Granted
    
    
    
    
    
    
    1,639
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    93
    
    
    
    
    
    
    
    27.92  33.16
    
    
    
    31.57Exercised
    
    
    (189
    )
    
    
    
    
    
    
    (847
    )
    
    
    (546
    )
    
    
    (6
    )
    
    
    
    
    
    
    (34
    )
    
    
    (4
    )
    
    
    2.22  23.10
    
    
    
    14.02Forfeited
    
    
    (34
    )
    
    
    (5
    )
    
    
    (114
    )
    
    
    (5
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10.63  31.57
    
    
    
    20.94Balance at
December 31, 2004
    
    
    307
    
    
    
    1,634
    
    
    
    5,704
    
    
    
    1,053
    
    
    
    18
    
    
    
    13
    
    
    
    212
    
    
    
    9
    
    
    $
    2.22$33.16
    
    
    $
    20.44Available for grant at
December 31, 2004
    
    
    
    
    
    
    5,116
    
    
    
    1,533
    
    
    
    289
    
    
    
    
    
    
    
    
    
    
    
    68
    
    
    
    Exercisable at
December 31, 2002
    
    
    642
    
    
    
    
    
    
    
    1,824
    
    
    
    2,580
    
    
    
    25
    
    
    
    13
    
    
    
    110
    
    
    
    20Exercisable at
December 31, 2003
    
    
    441
    
    
    
    
    
    
    
    1,560
    
    
    
    1,499
    
    
    
    24
    
    
    
    13
    
    
    
    152
    
    
    
    14Exercisable at
December 31, 2004
    
    
    289
    
    
    
    25
    
    
    
    2,499
    
    
    
    1,038
    
    
    
    18
    
    
    
    13
    
    
    
    212
    
    
    
    9
 The weighted-average fair value of options granted during 2002, 2003 and 2004 is $7.70, $8.99
and $12.12, respectively. F-26




---



##### Table of Contents



The following table summarizes information about stock options outstanding at December 31, 2004: Number
    
    
    Weighted
    
    
    
    
    
    
    NumberOutstanding as
    
    
    Average
    
    
    Weighted
    
    
    Exercisable as
    
    
    Weightedof
    
    
    Remaining
    
    
    Average
    
    
    of
    
    
    AverageRange of
    
    December 31,
    
    
    Contractual
    
    
    Exercise
    
    
    December 31,
    
    
    ExerciseExercise Prices
    
    2004
    
    
    Life
    
    
    Price
    
    
    2004
    
    
    Price$2.22 - $18.68
    
    
    2,917
    
    
    
    4.37
    
    
    $
    12.57
    
    
    
    2,640
    
    
    $
    11.96$18.87 - $23.10
    
    
    3,978
    
    
    
    8.04
    
    
    
    21.01
    
    
    
    1,242
    
    
    
    20.40$23.26 - $32.95
    
    
    1,993
    
    
    
    9.46
    
    
    
    30.46
    
    
    
    159
    
    
    
    26.48$33.16 - $33.16
    
    
    62
    
    
    
    9.44
    
    
    
    33.16
    
    
    
    62
    
    
    
    33.16$2.22 - $33.16
    
    
    8,950
    
    
    
    7.17
    
    
    $
    20.44
    
    
    
    4,103
    
    
    $
    15.39
 Pro forma information regarding net income and net income per share is required by SFAS No. 123 and
SFAS No. 148, and has been determined as if the Company had accounted for its employee stock
options under the fair value method of that Statement. The fair value for these options was
estimated at the date of grant using a Black-Scholes option pricing model with the following
weighted-average assumptions: Year Ended December 31,2002
    
    
    2003
    
    
    2004Expected volatility
    
    
    40
    %
    
    
    39
    %
    
    
    37
    %Expected dividend yield
    
    None
    
    None
    
    NoneRisk-free interest rate
    
    
    3.75
    %
    
    
    3.25
    %
    
    
    3.70
    %Expected life of options
    
    5 years
    
    5 years
    
    4 years
 The Black-Scholes option valuation model was developed for use in estimating the fair value of
traded options, which have no vesting restrictions and are fully transferable. In addition, option
valuation models require the input of highly subjective assumptions including the expected stock
price volatility. Because the Companys employee stock options have characteristics that are
significantly different from those of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in managements opinion, the existing
models do not necessarily provide a reliable single measure of the fair value of its employee stock
options. F-27




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##### Table of Contents



For purposes of pro forma disclosure, the estimated fair value of the options is amortized to
expense over the options vesting period. The Companys pro forma information follows: Year Ended December 312002
    
    
    2003
    
    
    2004Net income, as reported
    
    $
    92,460
    
    
    $
    102,056
    
    
    $
    121,833Add: stock-based compensation expense,
net of related tax effects, included in
the determination of net income as
reported
    
    
    380
    
    
    
    424
    
    
    
    244Less: stock-based compensation expense,
net of related tax effects, determined
by the fair value-based method
    
    
    (8,028
    )
    
    
    (8,663
    )
    
    
    (10,365
    )Pro forma net income
    
    $
    84,812
    
    
    $
    93,817
    
    
    $
    111,712Net income per share:Basic, as reported
    
    $
    1.26
    
    
    $
    1.40
    
    
    $
    1.80Basic, pro forma
    
    $
    1.15
    
    
    $
    1.29
    
    
    $
    1.65Diluted, as reported
    
    $
    1.21
    
    
    $
    1.37
    
    
    $
    1.74Diluted, pro forma
    
    $
    1.11
    
    
    $
    1.26
    
    
    $
    1.60
 The effect of applying SFAS No. 123 and SFAS No. 148 for providing pro forma disclosure is not
likely to be representative of the effect on reported net income for future years. Stock Split On April 27, 2004, the Company announced a three-for-two stock split in the form of a stock
dividend distributed to shareholders of record as of May 7, 2004. On May 24, 2004 the Company
issued one share for every two shares held by shareholders as of the record date. The par value of
our common stock remained unchanged at $0.01. All share amounts in
these financial statements have been restated to reflect the stock
split. Authorized Shares On June 9, 2004, our shareholders approved an amendment to the certificate of incorporation
increasing the number of authorized shares of common stock from 90,000 to 150,000. 9.      LEASES The Company rents office and space for its dialysis facilities under lease agreements that are
classified as operating leases for financial statement purposes. The Companys capital leases are
primarily for buildings and equipment. At December 31, 2004, future minimum rental payments for
non-cancelable operating leases with terms of one year or more, and
capital leases consisted of the
following: F-28




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##### Table of Contents



Operating
    
    
    CapitalLeases
    
    
    Leases2005
    
    $
    40,039
    
    
    $
    1,7462006
    
    
    37,286
    
    
    
    6292007
    
    
    35,366
    
    
    
    5172008
    
    
    31,389
    
    
    
    4162009
    
    
    25,918
    
    
    
    428Thereafter
    
    
    91,574
    
    
    
    2,679Less: portion representing interest
    
    
    
    
    
    
    (2,264
    )$
    261,572
    
    
    $
    4,151
 Certain leases of the Company contain escalating payments and are recorded on a straight-line
basis. Rent expense was $27,074, $30,729 and $45,055 for the years ended December 31, 2002, 2003
and 2004, respectively. 10.     EMPLOYEE BENEFIT PLANS Defined Contribution Plans The Company has qualified defined contribution plans covering substantially all employees that
permit participants to make voluntary contributions. The Company pays all general and
administrative expenses of the plans and makes matching contributions on behalf of the employees.
The Company made contributions relating to these plans totaling $2,518, $2,978 and $3,294 for the
years ended December 31, 2002, 2003 and 2004, respectively. Defined Benefit Plans Effective January 29, 2003, the Company implemented a retirement benefit plan for Sam A. Brooks,
the Companys former Chairman, Chief Executive Officer and President. Mr. Brooks died March 20,
2003. The plan provides that the Company will make 120 monthly payments of $54 each to Mr. Brooks
beneficiary, beginning in April 2003. As a result, the Company recorded a $5,350 charge
representing the pre-tax net present value of such payments during the first quarter of 2003. As of
December 31, 2004 the Company has accrued liabilities totaling $4,561 related to this defined
benefit plan. On January 1, 2005, the Company adopted a Supplemental Executive Retirement Plan (SERP) that
provides retirement benefits to the Companys executive officers. The SERP will be accounted for
as a defined benefit plan under SFAS No. 87, Employers Accounting for Pensions. Employee Stock Purchase Plan The Company has an Employee Stock Purchase Plan (Stock Purchase Plan) that provides substantially
all employees an opportunity to purchase shares of its common stock in amounts not to exceed 10% of
eligible compensation or $25 of common stock each calendar year. Annually, the participants
December 31 account balance is used to purchase shares of stock at the lesser of 85% of the fair
market value of shares at the beginning of the year or December 31. At December 31, 2003 and
2004, $3,055 and $4,511, respectively, were included in accrued wages and benefits relating to the
Stock Purchase Plan. 11.     EARNINGS PER SHARE Basic net income per share is based on the weighted average number of common shares outstanding
during the periods. Diluted net income per share is based on the weighted average number of common
shares outstanding during the periods plus the effect of dilutive stock options and warrants
calculated using the treasury stock method. F-29




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##### Table of Contents



The following table sets forth the computation of basic and diluted net income per share. 2002
    
    
    2003
    
    
    2004Numerator:Numerator for basic and diluted net income per share
    
    $
    92,460
    
    
    $
    102,056
    
    
    $
    121,833Denominator:Denominator for basic net income per share
weighted-average shares
    
    
    73,467
    
    
    
    72,719
    
    
    
    67,581Effect of dilutive securities:Stock options
    
    
    2,568
    
    
    
    2,034
    
    
    
    2,311Warrants
    
    
    116
    
    
    
    
    
    
    
    Denominator for diluted net income per share-adjusted
weighted-average shares and assumed conversions
    
    
    76,151
    
    
    
    74,753
    
    
    
    69,892Basic net income per share
    
    $
    1.26
    
    
    $
    1.40
    
    
    $
    1.80Diluted net income per share
    
    $
    1.21
    
    
    $
    1.37
    
    
    $
    1.74
 12.     COMMITMENTS AND CONTINGENCIES On October 25, 2004, the Company received a subpoena from the office of the United States Attorney
for the Eastern District of New York. The subpoena requires the production of documents related to
numerous aspects of the Companys business and operations, including those of RenaLab, Inc., the
Companys laboratory. The subpoena includes specific requests for documents related to testing for
parathyroid hormone (PTH) levels and vitamin D therapies. To the Companys knowledge no proceedings
have been initiated against the Company at this time, although the Company cannot predict whether
or when proceedings might be initiated. The Company intends to cooperate with the governments
investigation. Compliance with the subpoena will require the Company to incur legal expenses and
will require management attention. The Company cannot predict whether legal proceedings will be
initiated against it in connection with this investigation or, if initiated, the outcome of any
proceedings. Laws and regulations governing the Medicare and Medicaid programs are complex and subject to
interpretation. The Company believes that it is in compliance with all applicable laws and
regulations governing the Medicare and Medicaid programs. The Company is not aware of any pending
or threatened investigations involving allegations of potential noncompliance with applicable laws
or regulations. While no regulatory inquiries have been made, compliance with such laws and
regulations can be subject to future government review and interpretation as well as significant
regulatory action including fines, penalties, and exclusion from the Medicare and Medicaid
programs. The Company is involved in other litigation and regulatory investigations arising in the ordinary
course of business. In the opinion of management, after consultation with legal counsel, these
matters will be resolved without material adverse effect on the Companys consolidated financial
position or results of operations. The Company generally engages practicing board-certified or board-eligible nephrologists to serve
as medical directors for its centers. Medical directors are responsible for the administration and
monitoring of the Companys patient care policies, including patient education, administration of
dialysis treatment, development programs and assessment of all patients. The Company pays medical
director fees that are consistent with the fair market value of the required supervisory services.
Such medical director agreements typically have a term of five to ten years with renewal options of
two or three years. As of December 31, 2004, estimated commitments for medical director fees for
the year 2005 are $24,239 and are $126,026 over the remaining lives of the agreements. F-30




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##### Table of Contents



13.     SELECTED QUARTERLY FINANCIAL DATA (unaudited) The following tables include, for 2003 and 2004, certain selected quarterly financial data. In the
opinion of the Companys management, this unaudited information has been prepared on the same basis
as the audited information and includes all adjustments necessary to present fairly the information
included therein. The operating results for any quarter are not necessarily indicative of results
for any future period. 2003First
    
    
    Second
    
    
    Third
    
    
    FourthQuarter
    
    
    Quarter
    
    
    Quarter
    
    
    QuarterNet revenue
    
    $
    242,143
    
    
    
    247,061
    
    
    
    253,835
    
    
    
    262,280Operating expenses
    
    
    190,177
    
    
    
    187,653
    
    
    
    192,743
    
    
    
    199,183Depreciation and amortization
    
    
    10,298
    
    
    
    11,579
    
    
    
    11,365
    
    
    
    11,663Income from operations
    
    
    41,668
    
    
    
    47,829
    
    
    
    49,727
    
    
    
    51,434Interest expense, net
    
    
    285
    
    
    
    165
    
    
    
    76
    
    
    
    103Minority interest
    
    
    6,308
    
    
    
    6,029
    
    
    
    6,837
    
    
    
    6,257Income before income taxes
    
    
    35,075
    
    
    
    41,635
    
    
    
    42,814
    
    
    
    45,074Provision for income taxes
    
    
    13,323
    
    
    
    15,822
    
    
    
    16,269
    
    
    
    17,128Net income
    
    $
    21,752
    
    
    
    25,813
    
    
    
    26,545
    
    
    
    27,946Net income per share:Basic
    
    $
    0.30
    
    
    $
    0.35
    
    
    $
    0.36
    
    
    $
    0.39Diluted
    
    $
    0.29
    
    
    $
    0.34
    
    
    $
    0.35
    
    
    $
    0.38
 2004First
    
    
    Second
    
    
    Third
    
    
    FourthQuarter
    
    
    Quarter
    
    
    Quarter
    
    
    QuarterNet revenue
    
    $
    278,028
    
    
    $
    340,854
    
    
    $
    356,111
    
    
    $
    370,054Operating expenses
    
    
    209,158
    
    
    
    265,239
    
    
    
    274,200
    
    
    
    284,254Depreciation and amortization
    
    
    12,163
    
    
    
    14,900
    
    
    
    15,344
    
    
    
    15,942Income from operations
    
    
    56,707
    
    
    
    60,715
    
    
    
    66,567
    
    
    
    69,858Interest expense, net
    
    
    965
    
    
    
    5,765
    
    
    
    6,869
    
    
    
    7,029Minority interest
    
    
    7,214
    
    
    
    7,690
    
    
    
    10,158
    
    
    
    10,107Income before income taxes
    
    
    48,528
    
    
    
    47,260
    
    
    
    49,540
    
    
    
    52,722Provision for income taxes
    
    
    18,441
    
    
    
    18,077
    
    
    
    19,072
    
    
    
    20,627Net income
    
    
    30,087
    
    
    $
    29,183
    
    
    $
    30,468
    
    
    $
    32,095Net income per share:Basic
    
    $
    0.43
    
    
    $
    0.44
    
    
    $
    0.45
    
    
    $
    0.48Diluted
    
    $
    0.42
    
    
    $
    0.42
    
    
    $
    0.44
    
    
    $
    0.46
 F-31




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##### Table of Contents



Schedule II Renal Care Group, Inc.
Consolidated Schedule  Valuation and Qualifying Accounts
(in thousands) Balance
    
    
    
    
    
    
    Amount
    
    
    
    
    
    
    BalanceBeginning
    
    
    Allowances
    
    
    Charged to
    
    
    
    
    
    
    At End ofOf Period
    
    
    Acquired
    
    
    Expense
    
    
    Write-Offs
    
    
    PeriodAllowance for doubtful accounts:Year ended December 31, 2002
    
    $
    45,260
    
    
    $
    
    
    
    $
    23,501
    
    
    $
    (25,084
    )
    
    $
    43,677Year ended December 31, 2003
    
    $
    43,677
    
    
    $
    
    
    
    $
    26,200
    
    
    $
    (37,716
    )
    
    $
    32,161Year ended December 31, 2004
    
    $
    32,161
    
    
    $
    19,651
    
    
    $
    32,550
    
    
    $
    (39,231
    )
    
    $
    45,131
 F-32




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##### Table of Contents



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 on Form 10-K to be signed on its behalf by the
undersigned, thereunto duly authorized in the City of Nashville, State of Tennessee, on the
1st day of March, 2005. RENAL CARE GROUP, INC. By:
    
    /s/
    Gary A. BrukardtGary A. BrukardtPresident and Chief Executive Officer
 KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and
appoints Gary A. Brukardt and David M. Dill and either of them (with full power in each to act
alone) as true and lawful attorneys-in-fact with full power of substitution, for him and in his
name, place and stead, in any and all capacities, to sign any and all amendments to this Annual
Report on Form 10-K, and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming
all that said attorneys-in-fact, or their substitute or substitutes, may lawfully do or cause to be
done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report on
Form 10-K has been signed by the following persons in the capacities and on the dates indicated. /s/ Gary A. Brukardt
    
    President, Chief Executive
    
    March 1, 2005Officer and DirectorGary A. Brukardt
    
    (Principal Executive Officer)/s/ David M. Dill
    
    Executive Vice President,
    
    March 1, 2005Chief Financial Officer andDavid M. Dill
    
    Treasurer (Principal Financialand Accounting Officer)/s/ Peter J. Grua
    
    
    
    March 1, 2005DirectorPeter J. Grua/s/ Joseph C. Hutts
    
    
    
    March 1, 2005DirectorJoseph C. HuttsMarch __, 2005DirectorHarry R. Jacobson, M.D./s/ William P. Johnston
    
    Chairman of the Board
    
    March 1, 2005DirectorWilliam P. Johnston/s/ William V. Lapham
    
    
    
    March 1, 2005DirectorWilliam V. Lapham/s/ Thomas A. Lowery, M.D.
    
    
    
    March 1, 2005DirectorThomas A. Lowery, M.D./s/ Stephen D. McMurray, M.D.
    
    
    
    March 1, 2005DirectorStephen D. McMurray, M.D./s/ C. Thomas Smith
    
    
    
    March 1, 2005DirectorC. Thomas Smith
 47




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##### Table of Contents



EXHIBIT INDEX ExhibitNumber
    
    Description of Exhibits2.1
    
    Agreement and Plan of Merger dated February 2, 2004 by and among Renal Care Group, Inc.,
Titan Merger Subsidiary, Inc., National Nephrology Associates, Inc. and certain equity
holders of National Nephrology Associates, Inc.(24)3.1
    
    Amended and Restated Certificate of Incorporation of the Company (1)3.1.1
    
    Certificate of Amendment of Certificate of Incorporation of the Company(2)3.1.2
    
    Certificate of Designation, Preferences, and Rights of Series A Junior Participating
Preferred Stock of the Company (2)3.1.3
    
    Certificate of Amendment of Amended and Restated Certification of Incorporation of the
Company(10)3.1.4
    
    Certificate of Amendment of Amended and Restated Certificate of Incorporation of the
Company3.2
    
    Amended and Restated Bylaws of the Company (1)4.1
    
    Indenture, dated as of October 22, 2003, by and among National Nephrology Associates,
Inc., the Guarantors named therein, and Wells Fargo Bank Minnesota, N.A.(24)4.2
    
    First Supplemental Indenture, dated as of April 2, 2004, by and among Renal Care Group,
Inc., the Guarantors named therein and Wells Fargo Bank, N.A.(24)4.3
    
    Reserved4.4
    
    Purchase Agreement, dated as of October 16, 2003, by and among National Nephrology
Associates, Inc., the Guarantors named therein and the Initial Purchasers named
therein(24)4.5
    
    Registration Rights Agreement dated as of October 22, 2003, by and among National
Nephrology Associates, Inc., the Guarantors named herein and the Initial Purchasers
named herein(24)4.6
    
    Form of 9% Senior Subordinated Note Due 2011, including Form of Guarantee (included in
Exhibit 4.1)10.1
    
    Employment Agreement, effective as of December 15, 2003, between the Company and Raymond
Hakim, M.D.(22)*10.2
    
    Medical Director Services Agreement, dated February 12, 1996, between the Company and
Indiana Dialysis Management, P.C. (4)10.2.1
    
    Amendment Number 1, to Medical Director Services Agreement, effective as of January 1,
1999, between the Company and Indiana Dialysis Management, P.C.(22)10.2.2
    
    Amendment Number 2 to Medical Director Services Agreement, effective as of February 12,
2002, between the Company and Indiana Dialysis Management.(22)10.3
    
    Medical Director Services Agreement, effective as of February 12, 2003, between the
Company and Tyler Nephrology Associates, P.A.(22)10.4
    
    Lease Agreement, dated February 12, 1996, among the Company and Thomas A. Lowery, M.D.,
James R. Cotton, M.D., Roy D. Gerard, M.D. and Kevin A. Curran, M.D., relating to
property in Carthage, Texas (4)
 48




---



##### Table of Contents



ExhibitNumber
    
    Description of Exhibits10.5
    
    Lease Agreement, dated February 12, 1996, among the Company and Thomas A. Lowery, M.D.,
James R. Cotton, M.D., Roy D. Gerard, M.D., and Kevin A. Curran, M.D., relating to
property in Tyler, Texas (4)10.6
    
    Sublease Agreement, dated February 12, 1996, with Tyler Nephrology Associates, Inc. (4)10.7
    
    Dialysis Center Management Agreement, effective as of July 1, 2001, between Renal Group, Inc. and Vanderbilt University (23)10.8
    
    1996 Stock Option Plan for Outside Directors (1)*10.9
    
    Fourth Amended and Restated 1996 Stock Incentive Plan (5)*10.10
    
    Amended and Restated Employee Stock Purchase Plan (2)*10.11
    
    Employment Agreement, April 28, 2003, between the Company and Gary Brukardt (20)*10.12
    
    Credit Agreement, dated as of February 10, 2004, by and among Renal Care Group, Inc.,
the Guarantors (as defined therein), the Lenders (as defined therein) and Bank of
America, N.A. as Administrative Agent (16)10.13
    
    Stock Option Agreement, dated April 30, 1997, between the Company and Gary Brukardt (2)*10.14
    
    Asset Purchase Agreement with an effective date of February 1, 1997 among the Company,
RCG Indiana, LLC, Eastern Indiana Kidney Center, Indiana Kidney Center, Indiana Kidney
Center South, LLC, St. Vincent Dialysis Center, Saint Joseph Dialysis Center and Indiana
Dialysis Services PC and Community Hospitals of Indiana, Inc., Seton Health Corporation
of Central Indiana, Inc., Reid Hospital & Health Care Services, Inc., and Saint Joseph
Hospital and Health Care Center of Kokomo, Indiana, Inc. and Indiana Dialysis Services,
PC, Reid Hospital Physicians, Greenwood Dialysis Services, PC and certain individuals
named on the signature pages thereto and Indiana Nephrology & Internal Medicine, P.C.
(6)10.15
    
    Stock Option Agreement, dated May 22, 1998, between the Company and Gary A. Brukardt (7)*10.16
    
    Stock Option Agreement, dated May 22, 1998, between the Company and Raymond Hakim, M.D.
(7)*10.17
    
    Stock Option Agreement, dated June 5, 1998, between the Company and Joseph C. Hutts (7)*10.18
    
    Stock Option Agreement, dated June 5, 1998, between the Company and Harry R. Jacobson,
M.D. (7)*10.19
    
    Agreement No. 20010240, between Renal Care Group, Inc. and Amgen Inc. effective January
1, 2002 (The Company has requested confidential treatment of certain portions of this
Exhibit.)(15)10.19.1
    
    Amendment #2 dated February 10, 2003 to Agreement No. 200010240 between Renal Care
Group, Inc. and Amgen Inc. (The Company has requested confidential treatment of certain
portions of this Exhibit.)(21)10.19.2
    
    Agreement No. 200308361, between Renal Care Group, Inc. and Amgen Inc. effective January
1, 2004 (The Company has requested confidential treatment of certain portions of this
Exhibit.)10.19.3
    
    Amendment No. 1 to Agreement
No. 200308361, between Renal Care Group, Inc. and Amgen Inc.
(The Company has requested confidential treatment of certain portions of this Exhibit.)
 49




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##### Table of Contents



ExhibitNumber
    
    Description of Exhibits10.20
    
    Restricted Stock Award Agreement, dated January 25, 1999, between the Company and Harry
R. Jacobson (8)*10.21
    
    Restricted Stock Award Agreement, dated January 25, 1999, between the Company and
Stephen D. McMurray (8)*10.22
    
    Renal Care Group, Inc. 1999 Long-Term Incentive Plan (9)*10.22.1
    
    Amendment to the Renal Care Group, Inc. 1999 Long-Term Incentive Plan (12)*10.22.2
    
    Amended and Restated Renal Care Group, Inc. 1999 Long-Term Incentive Plan (19)*10.23
    
    Stock Option Agreement, dated August 30, 1999, between the Company and Gary A. Brukardt
(11)*10.24
    
    Stock Option Agreement, dated August 30, 1999, between the Company and Raymond Hakim,
M.D. (11)*10.25
    
    Stock Option Agreement, dated June 2, 1999, between the Company and Joseph C. Hutts (11)*10.26
    
    Stock Option Agreement, dated June 2, 1999, between the Company and Harry R. Jacobson,
M.D. (11)*10.27
    
    Stock Option Agreement, dated July 22, 1999, between the Company and William V. Lapham
(11)*10.28
    
    Stock Option Agreement, dated June 8, 2000, between the Company and Joseph C. Hutts (13)*10.29
    
    Stock Option Agreement, dated June 8, 2000, between the Company and Harry R. Jacobson,
M.D.(13)*10.30
    
    Stock Option Agreement, dated June 8, 2000, between the Company and William V.
Lapham(13)*10.31
    
    Stock Option Agreement, dated September 19, 2000, between the Company and Gary A.
Brukardt(13)*10.32
    
    Stock Option Agreement, dated September 19, 2000, between the Company and Raymond Hakim,
M.D.(13)*10.33
    
    Stock Option Agreement dated August 2, 2001 between the Company and Gary Brukardt(14)*10.34
    
    Stock Option Agreement dated August 2, 2001 between the Company and Raymond Hakim(14)*10.35
    
    Stock Option Agreement dated June 7, 2001 between the Company and Joseph C. Hutts(15)*10.36
    
    Stock Option Agreement dated June 7, 2001 between the Company and William V. Lapham(15)*10.37
    
    Form of Stock Option Agreement for stock option grants to executive employees under the
Companys 1999 Long-Term Incentive Plan(17)10.38
    
    Form of Stock Option Agreement for stock option grants to non-management directors under
the Companys 1996 Stock Option Plan for Outside Directors(17)10.39
    
    Medical Director Services Agreement, dated May 1, 2002, between the Company and Tyler
Nephrology Associates, P.A.(18)
 50




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##### Table of Contents



ExhibitNumber
    
    Description of Exhibits10.40
    
    Medical Director Services Agreement, dated July 11, 2002 between the Company and Tyler
Nephrology Associates, P.A.(18)10.41
    
    Renal Care Group Supplemental Benefit Plan(19)*10.42
    
    Plan Agreement dated February 25, 2003 between Renal Care Group, Inc. and Sam A.
Brooks(19)*10.42.1
    
    Amendment #1 to Plan Agreement under the Renal Care Group, Inc. Supplemental Benefit
Plan dated as of May 29, 2003(20)*10.43
    
    Form of Indemnity Agreement between the Company and directors and certain officers(19)10.44
    
    Employment Agreement, effective as of November 3, 2003, between the Company and David M.
Dill(22)*10.45
    
    Employment Agreement, effective as of November 30, 2003, between the Company and Timothy
P. Martin(22)*10.46
    
    Employment Agreement effective as of December 31, 2003 between the Company and Douglas
B. Chappell(22)*10.47
    
    2004 Stock and Incentive Compensation Plan(23)10.48
    
    Form of Stock Option Agreement for stock option grants to executive employees under the
Companys 2004 Stock and Incentive Compensation Plan(25)10.49
    
    Employment Agreement, effective as of February 3, 2005, between the Company and David M.
Maloney*21.1
    
    List of subsidiaries of the Company23.1.1
    
    Consent of Ernst & Young LLP23.1.2
    
    Consent of Ernst & Young LLP24.1
    
    Power of Attorney (contained on the signature page of this report)31.1
    
    Certification pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302
of the Sarbanes-Oxley Act of 200231.2
    
    Certification pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302
of the Sarbanes-Oxley Act of 200232.1* *
    
    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 200232.2* *
    
    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
 (1)
    
    Incorporated by reference to the Companys Registration Statement on Form S-1 (Reg. No. 333-80221) effective February 6, 1996.(2)
    
    Incorporated by reference to the Companys Form 10-Q for the quarter ended June 30, 1997 (Commission File No. 0-27640).(3)
    
    Incorporated by reference to the Companys Current Report on Form 8-K filed May 5, 1997 (Commission File No. 0-27640).
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(4)
    
    Incorporated by reference to the Companys Form 10-Q for the quarter ended March 31, 1996 (Commission File No. 0-27640).(5)
    
    Incorporated by reference to Appendix A to the Companys definitive Proxy Statement filed April 27, 1998 relating to the 1998
Annual Meeting of Stockholders (Commission File No. 0-27640).(6)
    
    Incorporated by reference to the Companys Form 10-K for the year ended December 31, 1996 (Commission File No. 0-27640).(7)
    
    Incorporated by reference to the Companys Form 10-Q for the quarter ended June 30, 1998 (Commission File No. 0-27640).(8)
    
    Incorporated by reference to the Companys Form 10-Q for the quarter ended March 31, 1999 (Commission File No. 0-27640).(9)
    
    Incorporated by reference to Appendix A to the Companys definitive Proxy Statement filed April 27, 1999 relating to the 1999
Annual Meeting of Stockholders (Commission File No. 0-27640).(10)
    
    Incorporated by reference to the Companys Form 10-Q for the quarter ended June 30, 1999 (Commission File No. 0-27640).(11)
    
    Incorporated by reference to the Companys Form 10-Q for the quarter ended September 30, 1999 (Commission File No. 0-27640).(12)
    
    Incorporated by reference to the Companys definitive Proxy Statement filed April 28, 2000 relating to the 2001 Annual Meeting
of Stockholders (Commission File No. 0-27640).(13)
    
    Incorporated by reference to the Companys Form 10-K for the year ended December 31, 2000 (Commission File No. 0-27640).(14)
    
    Incorporated by reference to the Companys Form 10-Q for the quarter ended September 30, 2001 (Commission File No. 0-27640).(15)
    
    Incorporated by reference to the Companys Form 10-K for the year ended December 31, 2001 (Commission File No. 0-27640).(16)
    
    Incorporated by reference to the Companys Form 10-Q for the quarter ended June 30, 2002 (Commission File No. 0-27640).(17)
    
    Incorporated by reference to the Companys Form 10-Q for the quarter ended September 30, 2002 (Commission File No. 0-27640).(18)
    
    Incorporated by reference to the Companys Form 10-K for the year ended December 31, 2002 (Commission File No. 0-27640).(19)
    
    Incorporated by reference to the Companys Form 10-Q for the quarter ended March 31, 2003 (Commission File No. 0-27640).(20)
    
    Incorporated by reference to the Companys Form 10-Q for the quarter ended June 30, 2003 (Commission File No. 0-27640).(21)
    
    Incorporated by reference to the Companys Form 10-Q for the quarter ended September 30, 2003 (Commission File No. 0-27640).(22)
    
    Incorporated by reference to the Companys Form 10-K for the year ended December 31, 2003
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(Commission File No. 0-27640).(23)
    
    Incorporated by reference to the Companys definitive Proxy Statement filed
May 6, 2004 relating to the 2004 Annual
Meeting of Stockholders (Commission File No. 0-27640).(24)
    
    Incorporated by reference to the Companys Form 8-K dated as of April 26, 2004 (Commission File No. 0-27640).(25)
    
    Incorporated by reference to the Companys Form 10-Q for the quarter ended September 30, 2004 (Commission File No. 0-27640).*
    
    Management contract or executive compensation plan or arrangement.**
    
    In accordance with Release No. 34-47551, this exhibit is hereby furnished to the SEC as an accompanying document and is not
deemed to be filed for purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liabilities
of that Section, and it shall not be deemed incorporated by reference into any filing under the Securities Act of 1933.
 53