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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
 FORM 10-Q (Mark One) þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the Quarterly Period Ended March 31, 2005 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 No. 0-27640 RENAL CARE GROUP, INC.  Delaware
    
    62-1622383(State or other jurisdiction of
    
    (I.R.S. Employer Identification No.)incorporation or organization)
 2525 West End Avenue, Suite 600, Nashville, Tennessee 37203  Registrants telephone number, including area code: (615) 345-5500 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days). Yes þ No o Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange
Act Rule 12b-2). Yes þ No o Indicate the number of shares outstanding of each of the issuers classes of common stock as
of the latest practicable date. Class
    

Outstanding
at April 29, 2005Common Stock, $.01 par value
    
    67,997,913




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RENAL CARE GROUP, INC. INDEX Page No.PART I - FINANCIAL INFORMATIONItem 1. Financial StatementsCondensed Consolidated Balance Sheets - December 31, 2004 and March 31, 2005 (unaudited)
    
    
    1Condensed Consolidated Income Statements - (unaudited) For the three months ended March 31, 2004 and 2005
    
    
    2Condensed Consolidated Statements of Cash Flows - (unaudited) For the three months ended March 31, 2004 and 2005
    
    
    3Notes to Condensed Consolidated Financial Statements - (unaudited)
    
    
    4Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations Risk Factors
    
    
    15Risk Factors
    
    
    19Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    30Item 4. Controls and Procedures
    
    
    30PART II - OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    31Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    31Item 5.
Other Information
    
    
    31Item 6. Exhibits
    
    
    32Signature
    
    
    33Exhibit
Index
    
    
    34Note: Items
3 and 4 of Part II are omitted because they are not applicableEX-10.50 SUPPLEMENTAL EXECUTIVE RETIREMENT PLANEX-10.51 LIMITED LIABILITY COMPANY AGREEMENTEX-10.51.1 MANAGEMENT AGREEMENT 12/01/01EX-10.51.2 AMENDMENT TO LIMITED LIABILITY COMPANY AGREEMENTEX-10.52 LIMITED LIABILITY COMPANY AGREEMENTEX-10.52.1 MANAGEMENT AGREEMENT 03/31/01EX-10.52.2 AMENDMENT TO LIMITED LIABILITY COMPANY AGREEMENTEX-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




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PART I  FINANCIAL INFORMATION 
 ITEM 1. FINANCIAL STATEMENTS
 RENAL CARE GROUP, INC. 
 Condensed Consolidated Balance Sheets
 (in thousands, except per share data)
 December 31,
    
    
    March 31,2004
    
    
    2005(unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    17,931
    
    
    $
    12,900Accounts receivable, net
    
    
    275,373
    
    
    
    275,365Inventories
    
    
    23,359
    
    
    
    25,771Prepaid expenses and other current assets
    
    
    26,817
    
    
    
    23,033Deferred income taxes
    
    
    29,604
    
    
    
    33,435Total current assets
    
    
    373,084
    
    
    
    370,504Property, plant and equipment, net
    
    
    316,532
    
    
    
    332,361Intangible assets, net
    
    
    34,320
    
    
    
    35,407Goodwill
    
    
    694,264
    
    
    
    717,746Other assets
    
    
    10,780
    
    
    
    10,371Total assets
    
    $
    1,428,980
    
    
    $
    1,466,389LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable and accrued expenses
    
    $
    139,929
    
    
    $
    140,529Due to third-party payors
    
    
    80,007
    
    
    
    88,061Current portion of long-term debt
    
    
    23,969
    
    
    
    25,624Total current liabilities
    
    
    243,905
    
    
    
    254,214Long-term debt, net of current portion
    
    
    479,645
    
    
    
    474,909Deferred income taxes
    
    
    51,419
    
    
    
    45,815Other long-term liabilities
    
    
    16,271
    
    
    
    15,740Minority interest
    
    
    45,619
    
    
    
    48,028Total liabilities
    
    
    836,859
    
    
    
    838,706Commitments and contingenciesStockholders equity:Preferred stock, $0.01 par value, 10,000 shares authorized, none
issued
    
    
    
    
    
    
    Common stock, $0.01 par value, 150,000 shares authorized,
82,317 and 82,770 shares issued at December 31, 2004
and March 31, 2005, respectively
    
    
    823
    
    
    
    828Treasury stock, 14,514 and 14,766 shares of common stock at
December 31, 2004 and March 31, 2005, respectively
    
    
    (372,249
    )
    
    
    (381,635
    )Additional paid-in capital
    
    
    411,888
    
    
    
    421,945Retained earnings
    
    
    551,863
    
    
    
    585,495Accumulated other comprehensive (loss) income, net of tax
    
    
    (204
    )
    
    
    1,050Total stockholders equity
    
    
    592,121
    
    
    
    627,683Total liabilities and stockholders equity
    
    $
    1,428,980
    
    
    $
    1,466,389
 See accompanying notes to condensed consolidated financial statements. 1




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RENAL CARE GROUP, INC. 
 Condensed Consolidated Income Statements
 (in thousands, except per share data)
 (unaudited)
 Three Months EndedMarch 31,2004
    
    
    2005Net revenue
    
    $
    278,028
    
    
    $
    373,509Operating costs and expenses:Patient care costs
    
    
    179,372
    
    
    
    246,579General and administrative expenses
    
    
    22,676
    
    
    
    30,631Provision for doubtful accounts
    
    
    7,110
    
    
    
    8,203Depreciation and amortization
    
    
    12,163
    
    
    
    16,787Total operating costs and expenses
    
    
    221,321
    
    
    
    302,200Income from operations
    
    
    56,707
    
    
    
    71,309Interest expense, net
    
    
    965
    
    
    
    7,261Income before minority interest and income taxes
    
    
    55,742
    
    
    
    64,048Minority interest
    
    
    7,214
    
    
    
    9,362Income before income taxes
    
    
    48,528
    
    
    
    54,686Provision for income taxes
    
    
    18,441
    
    
    
    21,054Net income
    
    $
    30,087
    
    
    $
    33,632Net income per share:Basic
    
    $
    0.44
    
    
    $
    0.50Diluted
    
    $
    0.42
    
    
    $
    0.48Weighted average shares outstanding:Basic
    
    
    68,910
    
    
    
    67,863Diluted
    
    
    71,223
    
    
    
    70,361
 See accompanying notes to condensed consolidated financial statements. 2




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RENAL CARE GROUP, INC. 
 Condensed Consolidated Statements of Cash Flows
 (in thousands)
 (unaudited)
 Three Months EndedMarch 31,2004
    
    
    2005OPERATING ACTIVITIESNet income
    
    $
    30,087
    
    
    $
    33,632Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization
    
    
    12,163
    
    
    
    16,787Loss on sale of property and equipment
    
    
    154
    
    
    
    394Distributions to minority shareholders
    
    
    (3,561
    )
    
    
    (8,077
    )Income applicable to minority interest
    
    
    7,214
    
    
    
    9,362Deferred income taxes
    
    
    
    
    
    
    (1,257
    )Changes in operating assets and liabilities, net of effects from acquisitions
    
    
    (600
    )
    
    
    14,289Net cash provided by operating activities
    
    
    45,457
    
    
    
    65,130INVESTING ACTIVITIESPurchases of property and equipment
    
    
    (19,118
    )
    
    
    (22,161
    )Cash paid for acquisitions, net of cash acquired
    
    
    (55,768
    )
    
    
    (44,013
    )Change in other assets
    
    
    (3,173
    )
    
    
    1,388Net cash used in investing activities
    
    
    (78,059
    )
    
    
    (64,786
    )FINANCING ACTIVITIESNet proceeds from issuance of long-term debt
    
    
    120,000
    
    
    
    Payments on long-term debt
    
    
    
    
    
    
    (4,063
    )Net borrowings under line of credit and capital leases
    
    
    25,921
    
    
    
    982Net proceeds from issuance of common stock
    
    
    9,628
    
    
    
    7,092Repurchase of treasury shares
    
    
    (135,636
    )
    
    
    (9,386
    )Net cash provided by (used in) financing activities
    
    
    19,913
    
    
    
    (5,375
    )Decrease in cash and cash equivalents
    
    
    (12,689
    )
    
    
    (5,031
    )Cash and cash equivalents at beginning of period
    
    
    50,295
    
    
    
    17,931Cash and cash equivalents at end of period
    
    $
    37,606
    
    
    $
    12,900
 See accompanying notes to condensed consolidated financial statements. 3




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RENAL CARE GROUP, INC. 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 MARCH 31, 2005
   1. Basis of Presentation Overview Renal
Care Group, Inc. (the Company) provides dialysis services to patients with chronic kidney failure,
also known as end-stage renal disease. As of March 31, 2005, the Company provided dialysis and
ancillary services to over 30,400 patients through more than 425 owned outpatient dialysis centers
in 34 states, in addition to providing acute dialysis services at more than 210 hospitals. Renal Care Groups net revenue has been derived primarily from the following sources:  
    outpatient hemodialysis services;
    ancillary services associated with dialysis, primarily the administration of
Epogen® (erythropoietin alfa, which we refer to as EPO);
    home dialysis services;
    inpatient hemodialysis services provided to acute care hospitals and skilled nursing facilities;
    laboratory services; and
    management contracts with hospital-based and medical university dialysis programs. Most patients with end-stage renal disease 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 the Centers for Medicare and Medicaid Services (CMS). For the
three months ended March 31, 2005 and 2004, approximately 55% of the Companys 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 2003 or 2004. Congress approved an increase of 1.6%
in the Medicare ESRD composite rate for 2005, as well as changes in the way we are paid for
separately billable drugs. 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. Renal Care Group receives 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. Congress mandated a change in the way we are paid beginning in 2005 for some of the drugs,
including EPO, that we bill for outside of the flat composite rate. This change results in lower
reimbursement for these 4




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drugs and a higher composite rate. Under recently adopted regulations, in 2005 we are
reimbursed for the top ten separately billable ESRD drugs at average acquisition cost, and we are
reimbursed for other separately billable ESRD drugs at the rate of average sales price plus 6.0%.
In addition, the composite rate has increased by 8.7% in 2005. These regulations also include a
case-mix adjustment that became effective in April 2005, a geographic adjustment to the
composite rate and a budget-neutrality adjustment. Management believes these changes coupled with
the 1.6% increase in the Medicare composite rate in 2005 will be neutral to Renal Care Groups
revenue per treatment and earnings. If a patient is younger than 65 years old and has private health insurance, then that
patients treatment is typically reimbursed at rates significantly higher than 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 the Medicare composite rate. Because dialysis is a
life-sustaining therapy to treat a chronic disease, utilization is predictable and is not subject
to seasonal fluctuations. Renal Care Group derives a significant portion of our revenue and earnings from the
administration of EPO. EPO is manufactured by a single company, Amgen, Inc. EPO is used to treat
anemia, a medical complication frequently experienced by dialysis patients. Changes in
the Companys contract with Amgen for 2005 along with changes in Amgens packaging practices for
EPO may result in an increase in the Companys cost of EPO in 2005. The estimated impact of these
changes was incorporated and communicated in Renal Care Groups corporate goals for 2005. Net
revenue from the administration of EPO was 24% and 26% of the net revenue of the Company for the
three months ended March 31, 2005 and 2004, respectively. Interim Financial Statements Management believes the information contained in this quarterly report on Form 10-Q reflects
all adjustments necessary to make the results of operations for the interim periods a fair
representation of such operations. All such adjustments are of a normal recurring nature. Operating
results for interim periods are not necessarily indicative of results that may be expected for the
year as a whole. We suggest that you read these financial statements in conjunction with our
consolidated financial statements and the related notes thereto included in our annual report on
Form 10-K for the year ended December 31, 2004, as filed with the SEC on March 2, 2005. Reclassifications Certain prior year balances have been reclassified to conform to the current year
presentation. These reclassifications had no effect on the results of operations as previously
reported. 2. Business Acquisitions 2005 Acquisitions During the first quarter of 2005, we completed certain acquisitions. The combined net assets
acquired and resulting net cash purchase price paid in these acquisitions were $44,013. Each of the
transactions involved the acquisition of the net assets of entities that provide care to ESRD
patients through owned dialysis facilities. The acquired businesses either strengthened our
existing market share within a specific geographic area or provided us with an entrance into a new
market. We began recording the results of operations for each of these acquired businesses at the
effective dates of the respective transactions. 5




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The following table summarizes the preliminarily estimated fair values of the assets acquired
and liabilities assumed at the date of acquisition for the acquisitions completed during the first
three months of 2005: Accounts receivable, net
    
    $
    820Inventory and other current assets
    
    
    302Property, plant and equipment, net
    
    
    9,922Intangible assets
    
    
    2,034Goodwill
    
    
    32,270Total assets acquired
    
    
    45,348Total liabilities assumed
    
    
    1,335Net assets acquired
    
    $
    44,013
 Some of the estimated fair values of assets and liabilities are preliminary and may be
adjusted. Items that may be adjusted include items such as deferred tax assets and liabilities, and
the valuation of certain assets. Intangible assets primarily
represent the value assigned to contracts such as non-competition 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. Pro Forma Data The following summary, prepared on a pro forma basis, combines our results of operations with
those of the businesses we acquired in 2005. These pro forma results reflect the acquisitions as
if consummated as of the beginning of the period presented, giving effect to adjustments such as
amortization of intangibles, interest expense and related income taxes. Three Months EndedMarch 31,2004
    
    
    2005Pro forma net revenue
    
    $
    281,756
    
    
    $
    374,568Pro forma net income
    
    $
    30,503
    
    
    $
    33,663Pro forma net income per share:Basic
    
    $
    0.44
    
    
    $
    0.50Diluted
    
    $
    0.43
    
    
    $
    0.48
 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. 6




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3. Long-Term Debt Long-term debt consisted of the following as of December 31, 2004 and March 31, 2005: December 31,
    
    
    March 31,2004
    
    
    2005Term loan facility, bearing interest at a variable
rate (4.7% at March 31, 2005)
    
    $
    312,813
    
    
    $
    308,7509% senior subordinated notes
    
    
    159,685
    
    
    
    159,685Obligations under capital leases
    
    
    4,151
    
    
    
    3,774Other
    
    
    3,357
    
    
    
    5,401Total indebtedness, excluding fair value premium
    
    
    480,006
    
    
    
    477,610Add: 9% senior subordinated notes fair value premium
    
    
    23,608
    
    
    
    22,923Total long-term debt
    
    
    503,614
    
    
    
    500,533Less: current portion
    
    
    23,969
    
    
    
    25,624$
    479,645
    
    
    $
    474,909
 Credit Agreements 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 National Nephrology Associates, Inc. (NNA), we assumed all of NNAs outstanding debt including its 9% senior
subordinated notes due 2011 (the Notes). 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 March 31, 2005, the carrying value of the Notes was $182,608. 7




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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
March 31, 2005 was 6.4%. 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. 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 record changes in the fair value of
the agreement directly in other comprehensive income. As of March 31, 2005, the notional amount of
the swap agreements was $150,000 and its fair value was $1,707, resulting in an unrealized gain of
$1,254 during 2005 (net of a related tax expense of $785). Obligations Under Capital Leases Obligations under capital leases consist primarily of capital leases for buildings and
equipment maturing at various times through August 2015. 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 March 31,
2005 are as follows: 2005
    
    $
    19,9562006
    
    
    30,8582007
    
    
    57,1952008
    
    
    156,6642009
    
    
    51,592Thereafter
    
    
    161,345$
    477,610
 8




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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 March 31,
2005 and December 31, 2004 and for the three months ended March
31, 2005 and 2004, respectively. 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, 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
    
    
    10,828
    
    
    
    99,033
    
    
    
    7,436
    
    
    
    (72,197
    )
    
    
    45,100Total assets
    
    $
    87,602
    
    
    $
    1,085,380
    
    
    $
    340,761
    
    
    $
    (84,763
    )
    
    $
    1,428,980Current liabilities
(including intercompany assets
and liabilities)
    
    $
    (699,042
    )
    
    $
    813,091
    
    
    $
    157,344
    
    
    $
    (27,488
    )
    
    $
    243,905Long-term debt
    
    
    476,184
    
    
    
    (259
    )
    
    
    3,720
    
    
    
    
    
    
    
    479,645Long-term liabilities
    
    
    64,976
    
    
    
    2,253
    
    
    
    461
    
    
    
    
    
    
    
    67,690Minority interest
    
    
    
    
    
    
    39,610
    
    
    
    5,989
    
    
    
    20
    
    
    
    45,619Stockholders equity
    
    
    245,484
    
    
    
    230,685
    
    
    
    173,247
    
    
    
    (57,295
    )
    
    
    592,121Total liabilities and
stockholders equity
    
    $
    87,602
    
    
    $
    1,085,380
    
    
    $
    340,761
    
    
    $
    (84,763
    )
    
    $
    1,428,980
 Parent
    
    
    Guarantor
    
    
    Non-Guarantor
    
    
    Consolidating
    
    
    ConsolidatedCompany
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Adjustments
    
    
    TotalAs of March 31, 2005Cash and cash equivalents
    
    $
    
    
    
    $
    
    
    
    $
    29,013
    
    
    $
    (16,113
    )
    
    $
    12,900Accounts receivable, net
    
    
    
    
    
    
    196,292
    
    
    
    79,073
    
    
    
    
    
    
    
    275,365Other current assets
    
    
    46,354
    
    
    
    24,203
    
    
    
    11,682
    
    
    
    
    
    
    
    82,239Total current assets
    
    
    46,354
    
    
    
    220,495
    
    
    
    119,768
    
    
    
    (16,113
    )
    
    
    370,504Property, plant and equipment, net
    
    
    37,678
    
    
    
    194,735
    
    
    
    99,594
    
    
    
    354
    
    
    
    332,361Goodwill
    
    
    1,483
    
    
    
    593,117
    
    
    
    122,846
    
    
    
    300
    
    
    
    717,746Other assets
    
    
    5,604
    
    
    
    99,552
    
    
    
    7,720
    
    
    
    (67,098
    )
    
    
    45,778Total assets
    
    $
    91,119
    
    
    $
    1,107,899
    
    
    $
    349,928
    
    
    $
    (82,557
    )
    
    $
    1,466,389Current liabilities
(including intercompany assets
and liabilities)
    
    $
    (671,482
    )
    
    $
    799,131
    
    
    $
    156,598
    
    
    $
    (30,033
    )
    
    $
    254,214Long-term debt
    
    
    471,592
    
    
    
    (277
    )
    
    
    3,594
    
    
    
    
    
    
    
    474,909Long-term liabilities
    
    
    51,422
    
    
    
    7,661
    
    
    
    765
    
    
    
    1,707
    
    
    
    61,555Minority interest
    
    
    
    
    
    
    41,191
    
    
    
    6,869
    
    
    
    (32
    )
    
    
    48,028Stockholders equity
    
    
    239,587
    
    
    
    260,193
    
    
    
    182,102
    
    
    
    (54,199
    )
    
    
    627,683Total liabilities and
stockholders equity
    
    $
    91,119
    
    
    $
    1,107,899
    
    
    $
    349,928
    
    
    $
    (82,557
    )
    
    $
    1,466,389
 9




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##### Table of Contents



Condensed Consolidating Income Statements Parent
    
    
    Guarantor
    
    
    Non-Guarantor
    
    
    Consolidating
    
    
    ConsolidatedCompany
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Adjustments
    
    
    TotalFor the three months ended
March 31, 2004Net revenue
    
    $
    187
    
    
    $
    187,654
    
    
    $
    91,386
    
    
    $
    (1,199
    )
    
    $
    278,028Total operating costs and expenses
    
    
    10,306
    
    
    
    141,123
    
    
    
    71,091
    
    
    
    (1,199
    )
    
    
    221,321Income (loss) from operations
    
    
    (10,119
    )
    
    
    46,531
    
    
    
    20,295
    
    
    
    
    
    
    
    56,707Interest expense, net
    
    
    965
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    965Minority interest
    
    
    
    
    
    
    6,586
    
    
    
    628
    
    
    
    
    
    
    
    7,214Provision (benefit) for income taxes
    
    
    (4,212
    )
    
    
    15,179
    
    
    
    7,474
    
    
    
    
    
    
    
    18,441Net income (loss)
    
    $
    (6,872
    )
    
    $
    24,766
    
    
    $
    12,193
    
    
    $
    
    
    
    $
    30,087
 Parent
    
    
    Guarantor
    
    
    Non-Guarantor
    
    
    Consolidating
    
    
    ConsolidatedCompany
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Adjustments
    
    
    TotalFor the three months ended
March 31, 2005Net revenue
    
    $
    1,377
    
    
    $
    260,093
    
    
    $
    113,760
    
    
    $
    (1,721
    )
    
    $
    373,509Total operating costs and expenses
    
    
    14,857
    
    
    
    203,934
    
    
    
    85,130
    
    
    
    (1,721
    )
    
    
    302,200Income (loss) from operations
    
    
    (13,480
    )
    
    
    56,159
    
    
    
    28,630
    
    
    
    
    
    
    
    71,309Interest expense, net
    
    
    7,345
    
    
    
    (303
    )
    
    
    219
    
    
    
    
    
    
    
    7,261Minority interest
    
    
    
    
    
    
    8,482
    
    
    
    880
    
    
    
    
    
    
    
    9,362Provision (benefit) for income taxes
    
    
    (8,018
    )
    
    
    18,472
    
    
    
    10,600
    
    
    
    
    
    
    
    21,054Net income (loss)
    
    $
    (12,807
    )
    
    $
    29,508
    
    
    $
    16,931
    
    
    $
    
    
    
    $
    33,632
 10




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##### Table of Contents



Condensed Consolidating Statements of Cash Flows Parent
    
    
    Guarantor
    
    
    Non-Guarantor
    
    
    Consolidating
    
    
    ConsolidatedCompany
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Adjustments
    
    
    TotalFor the three months ended
March 31, 2004Cash flows from operating activities:Net income (loss)
    
    $
    (6,872
    )
    
    $
    24,766
    
    
    $
    12,193
    
    
    $
    
    
    
    $
    30,087Changes in operating and intercompany
assets and liabilities and non-cash
items included in net income
    
    
    (28,729
    )
    
    
    44,586
    
    
    
    6,197
    
    
    
    (6,684
    )
    
    
    15,370Net cash provided by (used in) operating
activities
    
    
    (35,601
    )
    
    
    69,352
    
    
    
    18,390
    
    
    
    (6,684
    )
    
    
    45,457Net cash (used in) provided by investing
activities
    
    
    (4,469
    )
    
    
    (66,291
    )
    
    
    (12,168
    )
    
    
    4,869
    
    
    
    (78,059
    )Net cash provided by financing activities
    
    
    19,913
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    19,913Increase (decrease) in cash and cash
equivalents
    
    
    (20,157
    )
    
    
    3,061
    
    
    
    6,222
    
    
    
    (1,815
    )
    
    
    (12,689
    )Cash and cash equivalents, at beginning
of period
    
    
    20,157
    
    
    
    2,646
    
    
    
    27,492
    
    
    
    
    
    
    
    50,295Cash and cash equivalents, at end of
period
    
    $
    
    
    
    $
    5,707
    
    
    $
    33,714
    
    
    $
    (1,815
    )
    
    $
    37,606
 Parent
    
    
    Guarantor
    
    
    Non-Guarantor
    
    
    Consolidating
    
    
    ConsolidatedCompany
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Adjustments
    
    
    TotalFor the three months ended
March 31, 2005Cash flows from operating activities:Net income (loss)
    
    $
    (12,808
    )
    
    $
    29,508
    
    
    $
    16,932
    
    
    $
    
    
    
    $
    33,632Changes in operating and
intercompany assets and liabilities
and non-cash items included in net
income
    
    
    32,261
    
    
    
    5,038
    
    
    
    189
    
    
    
    (5,990
    )
    
    
    31,498Net cash provided by (used in)
operating activities
    
    
    19,453
    
    
    
    34,546
    
    
    
    17,121
    
    
    
    (5,990
    )
    
    
    65,130Net cash (used in) provided by
investing activities
    
    
    (19,578
    )
    
    
    (34,236
    )
    
    
    (11,766
    )
    
    
    794
    
    
    
    (64,786
    )Net cash provided by (used in)
financing activities
    
    
    125
    
    
    
    (310
    )
    
    
    (8,287
    )
    
    
    3,097
    
    
    
    (5,375
    )Decrease in cash and cash equivalents
    
    
    
    
    
    
    
    
    
    
    (2,932
    )
    
    
    (2,099
    )
    
    
    (5,031
    )Cash and cash equivalents, at
beginning of period
    
    
    
    
    
    
    
    
    
    
    31,945
    
    
    
    (14,014
    )
    
    
    17,931Cash and cash equivalents, at end of
period
    
    $
    
    
    
    $
    
    
    
    $
    29,013
    
    
    $
    (16,113
    )
    
    $
    12,900
 11




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##### Table of Contents



4. Net Income per Share The following table sets forth the computation of basic and diluted net income per share (shares in
thousands): Three Months EndedMarch 312004
    
    
    2005Numerator:Numerator for basic and diluted net
income per share  net income
    
    $
    30,087
    
    
    $
    33,632Denominator:Denominator for basic net income per
share  weighted-average shares
    
    
    68,910
    
    
    
    67,863Effect of dilutive securities:Stock options
    
    
    2,313
    
    
    
    2,498Denominator for diluted net income per
share  adjusted weighted-average shares and assumed conversions
    
    
    71,223
    
    
    
    70,361Net income per share:Basic
    
    $
    0.44
    
    
    $
    0.50Diluted
    
    $
    0.42
    
    
    $
    0.48
 5. Stockholders Equity Stock-based Compensation We account for stock-based compensation to employees and directors using the intrinsic value
method in accordance with the provisions of Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees,and related Interpretations. Accordingly, we recognize no
compensation expense when we grant fixed options to employees and directors, because the exercise
price of the stock options equals or exceeds the market price of the underlying stock on the dates
of grant. Option grants to medical directors and non-vested stock grants are expensed over their
vesting periods. The following table presents the pro forma effect on net income and net income per share as if
we had applied the fair value based method and recognition provisions of Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation,(SFAS No. 123) to
stock-based compensation to employees and directors: Three Months EndedMarch 31,2004
    
    
    2005Net income, as reported
    
    $
    30,087
    
    
    $
    33,632Add: stock-based compensation expense,
net of related tax effects, included in
the determination of net income as
reported
    
    
    31
    
    
    
    56Less: stock-based compensation expense,
net of related tax effects, determined by
the fair value-based method
    
    
    (2,387
    )
    
    
    (2,479
    )Pro forma net income
    
    $
    27,731
    
    
    $
    31,209Net income per share:Basic, as reported
    
    $
    0.44
    
    
    $
    0.50Basic, pro forma
    
    $
    0.40
    
    
    $
    0.46Diluted, as reported
    
    $
    0.42
    
    
    $
    0.48Diluted, pro forma
    
    $
    0.39
    
    
    $
    0.44
 The effects of applying SFAS No. 123 for providing pro forma disclosures are not likely
to be representative of the effects on reported net income for future periods. 12




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##### Table of Contents



Stock Split On April 27, 2004, we 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 we 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. 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. 6. 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. 7. Subsequent Event On
May 3, 2005 the Company entered into a definitive merger
agreement with Fresenius Medical Care AG in which Fresenius Medical
Care will acquire all of the Companys outstanding stock.
Fresenius Medical Care will pay $48.00 for each share of outstanding
common stock of the Company. Fresenius Medical Care will acquire the
Company subject to its outstanding indebtedness of approximately
$500.5 million. The transaction is expected to close in the
second half of 2005. The
Board of Directors of the Company and the management and supervisory
boards of Fresenius Medical Care have approved the transaction.
Completion of the transaction is subject to the approval of the
Companys stockholders as well as customary conditions to
closing, including the termination or expiration of the waiting
period under the Hart-Scott Rodino Antitrust Improvements Act of
1976, as amended. 8. Recent Accounting Pronouncements 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 13




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##### Table of Contents



Issued to Employees,
and amends 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. On April 14, 2005, the United States Securities and Exchange Commission announced it
would permit most registrants subject to its oversight additional time to implement the
requirements in SFAS No. 123(R). As announced, the SEC will permit companies to implement SFAS No.
123(R) at the beginning of their next fiscal year (instead of their next reporting period) that
begins after June 15, 2005. The Company is evaluating the requirements of SFAS No. 123(R) and
expects that the adoption of SFAS No. 123(R), effective January 1, 2006, will have an impact on its
consolidated results of operations and earnings per share. The Company has not yet determined the
method of adoption or the potential financial impact of adopting SFAS No. 123(R). 14




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##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations Three Months Ended March 31, 2004 Compared to Three Months Ended March 31, 2005 Net Revenue.Net revenue increased from $278.0 million for the three months ended March 31,
2004 to $373.5 million for the three months ended March 31, 2005, an increase of $95.5 million, or
34.3%. This increase resulted primarily from a 33.2% increase in the number of treatments we
performed from 860,249 in the 2004 period to 1,146,233 in the 2005 period. This growth in
treatments is the result of our acquisition of NNA on April 2, 2004 and other dialysis facilities
along with a 3.0% increase in same-market treatments for the 2005 period over the 2004 period. In
addition, average patient revenue per treatment increased slightly from $323 in 2004 to $324 in
2005. During the first quarter of 2004 we resolved several contractual issues with payors that
increased our net revenue per treatment by approximately $6 per treatment. Excluding the impact of
these contractual issues with payors, the average patient revenue per treatment increased 2.2% from
$317 in 2004 to $324 in 2005. The increase was largely due to the impact of our annual price
increase implemented in the fourth quarter of 2004, favorable renegotiations of some of our managed
care contracts, the net impact of Medicares 1.6% composite rate increase and changes in its
reimbursement for separately billable drugs, along with an increase in the utilization of certain
ancillary drugs. 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 $179.4 million for the three months ended March 31,
2004, to $246.6 million for the three months ended March 31, 2005, an increase of 37.5%. This
increase was due principally to the increase in the number of treatments we performed during the
period, which resulted in corresponding increases in the use of labor, drugs and supplies. Patient
care costs as a percentage of revenue increased from 64.5% in the 2004 period to 66.0% in the 2005
period. This increase is due to generally higher salary and benefit costs and routine supply costs
experienced in the former NNA facilities. Patient care costs per treatment increased 2.9% from
$209 in the 2004 period to $215 in the 2005 period. This increase was largely due to the higher
cost structure in the former NNA facilities. Management believes that the Company will continue
to face increases in the cost of labor through the remainder of 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 $22.7 million for the three months ended March 31, 2004 to $30.6 million for the
three months ended March 31, 2005, an increase of 35.1%. The increase in general and administrative
expenses over 2004 was due to increased costs associated with acquisitions closed subsequent to the
first quarter of 2004. General and administrative expenses as a percentage of net revenue remained
unchanged at 8.2% in 2005. 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 we recognize revenue based upon a variety of factors. These factors include, but
are not limited to, analysis of the 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 increased from $7.1 million for the three months ended March 31, 2004 to $8.2
million for the three 15




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##### Table of Contents



months ended March 31, 2005, an increase of $1.1 million, or 15.4%. The
provision for doubtful accounts as a percentage of net revenue decreased from 2.6% in the 2004
period to 2.2% in the 2005 period. The decrease in the
provision for doubtful accounts as a percentage of net revenue was due to continued improvements in
the Companys collection experience which is partially
attributable to improvements in the amount of self-pay
balances. Depreciation and Amortization.Depreciation and amortization increased from $12.2 million for
the three months ended March 31, 2004 to $16.8 million for the three months ended March 31, 2005,
an increase of 38.0%. This increase was due to the start-up of dialysis facilities, the normal
replacement costs of dialysis facilities and equipment, purchase of information systems, and the
amortization of separately identifiable intangible assets associated with acquisitions.
Depreciation and amortization as a percentage of net revenue increased slightly from 4.4% in 2004
to 4.5% in 2005. Income from Operations.Income from operations increased from $56.7 million for the three
months ended March 31, 2004 to $71.3 million for the three months ended March 31, 2005, an increase
of 25.7%. Income from operations as a percentage of net revenue decreased from 20.4% in the 2004
period to 19.1% in the 2005 period principally as a result of the acquisition of NNA, which had
generally lower margins than the remainder of our operations as a result of NNAs lower revenue per
treatment, higher patient care costs and other factors discussed above. Interest Expense, Net.Interest expense increased from $965,000 for the three months ended
March 31, 2004 to $7.3 million for the three months ended March 31, 2005. This increase was due to
higher average borrowings outstanding during the quarter, which were primarily associated with the
completion of our program to repurchase $250.0 million in common stock between November 2003 and
March 2004, our acquisitions after January 1, 2004 and the assumption of NNAs $160.0 million of 9%
senior subordinated notes. Minority Interest.Minority interest represents the proportionate equity interest of other
owners in the consolidated entities that we do not wholly own. The financial results of those
entities are included in the Companys consolidated results. Minority interest as a percentage of
net revenue decreased from 2.6% in the 2004 period to 2.5% in the 2005 period. The change in
minority interest expense as a percentage of revenue occurred based on a slight decline in the
overall profitability of our facilities that operate as joint ventures. As of March 31, 2005, we
were the majority and controlling owner in 70 joint ventures, as compared to 53 as of March 31,
2004. Provision for Income Taxes. Income tax expense increased from $18.4 million for the three
months ended March 31, 2004 to $21.1 million for the three months ended March 31, 2005, an increase
of $2.6 million or 14.2%. The increase is a result of higher pre-tax earnings described above.
Our effective tax rate increased from 38.0% for the 2004 period to 38.5% in the 2005 period. Net Income. Net income increased from $30.1 million for the three months ended March 31, 2004
to $33.6 million for the three months ended March 31, 2005, an increase of $3.5 million or 11.8%.
The increase is 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 March 31, 2005, our working capital was $116.3 million, cash and cash equivalents
were $12.9 million, and our current ratio was approximately 1.5 to 1.0. Net cash provided by operating activities was $65.1 million for the three months ended March
31, 2005. Cash provided by operating activities consists of net income before depreciation and
amortization expense and 16




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##### Table of Contents



income applicable to minority interest, adjusted for changes in components
of working capital. Net cash used in investing activities was $64.8 million for the three months
ended March 31, 2005. Net cash used in investing activities consisted primarily of $44.0 million
cash paid for acquisitions, net of cash acquired, as well as $22.2
million in purchases of property and equipment. Net cash used in financing activities was $5.4
million for the three months ended March 31, 2005. Net cash used in financing activities primarily
reflects net proceeds of $7.1 million from the issuance of common stock, offset by $9.4 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 both of 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 March 31, 2005, we can borrow up to $150.0 million under the revolving credit facility but
cannot borrow any additional amounts under the $325.0 million term loan facility. At March 31,
2005, our outstanding indebtedness was $500.5 million, including a remaining balance of $308.8
million under the term loan facility, $4.6 million under the revolving credit facility, $182.6
million of 9.0% senior subordinated notes assumed in the NNA transaction and $4.5 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 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 the 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. The interest payments under this agreement
are settled on a net basis each calendar quarter. The 9% senior subordinated notes we assumed in the NNA transaction bear interest at the rate
of 9% per annum on the face amount that was $160.0 million at the date of acquisition. As of March
31, 2005 these notes have a remaining face value of
$159.7 million and are recorded at their carrying value of $182.6 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 2005. Based on
our outstanding indebtedness of $477.6 million, excluding the unamortized fair value premium of
$22.9 million on 17




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##### Table of Contents



the 9% senior subordinated notes, the aggregate maturities of our borrowings are
as follows: 2005  $20.0 million; 2006  $30.9 million; 2007  $57.2 million; 2008  $156.6
million; 2009  $51.6 million; and thereafter  $161.3 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 acquisitions 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 $85.0 million and $95.0 million in 2005,
primarily for equipment replacement, expansion of existing dialysis facilities and construction of
de novo facilities. As of March 31, 2005, we had made approximately $22.2 million of capital
expenditures for these purposes in 2005. We expect to fund these capital expenditures with cash
provided by operating activities and our existing credit facilities. 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 and in the first quarter of 2005 we repurchased 252,000
shares of common stock for approximately $9.4 million. As of March 31, 2005, we had repurchased an aggregate of 14.8 million shares under the
plan, for a total of approximately $381.6 million. Critical Accounting Policies The Securities and Exchange Commission (SEC) issued a financial reporting release, FR-60,
Cautionary Advice Regarding Disclosure About Critical Accounting Policies. In accordance with that
release, management has identified accounting policies that it considers critical to the business
of Renal Care Group. Those policies include net revenue and contractual provisions, provision for
doubtful accounts, self-insurance accruals, impairment of goodwill
and long-lived assets, and income taxes. These policies were identified as critical based on their importance to
the consolidated financial statements as well as on the degrees of subjectivity and complexity
involved in these policies. There have been no changes in Renal Care Groups critical accounting
policies or in the application of those policies from those described in the annual report on Form
10-K for the year ended December 31, 2004, as filed with the SEC on March 2, 2005. 18




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RISK FACTORS You should carefully consider the risks described below before investing in Renal Care Group.
The risks and uncertainties described beloware notthe 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 45% of our net revenue in 2003, 47% of our net revenue in 2004 and 45% of our
net revenue for the three months ended March 31, 2005 were 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 to 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
    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 55% of our net revenue for 2003, 53% of our net revenue for 2004, and 55% of our net
revenue for the three months ended March 31, 2005 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: 19




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
    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
are paid beginning in 2005 for some of the drugs, including EPO, that we bill for outside of
the flat composite rate. This change results in lower reimbursement for these drugs and a
higher composite rate. Under recently adopted regulations, in 2005 we
are reimbursed for the
top ten separately billable ESRD drugs (including EPO) at the rate of
average acquisition cost, and we are 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 became effective in April 2005, a geographic adjustment to the
composite rate and a budget-neutrality adjustment. Management believes these changes coupled
with the 1.6% increase in the Medicare composite rate in 2005 will be neutral to our
Medicare revenue per treatment. 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 became effective April 1,
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 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 24% of our net revenue for
2003, 26% of our net revenue for 2004 and 24% of our net revenue for the three months ended March
31, 2005. Most of our payments for EPO 20




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come from government programs. For the three months ended
March 31, 2005, Medicare and Medicaid reimbursement represented approximately 55% 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 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®. 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 accounted for approximately 35% of our net revenue
in the first quarter of 2005. 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; 21




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
    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 through 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 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. In addition, each of DaVita and Fresenius Medical Care
AG has announced that it is the subject of an investigation by the U.S. Attorneys Office in
St. Louis, Missouri. 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, and 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 22




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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
agreements that expired in 2004, and we may not be able to renew or renegotiate expiring medical
director agreements 23




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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 dialysis programs in Cape Girardeau, Missouri; Lansing, Michigan; and
Beaverton, Oregon. 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. 24




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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 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 March 31, 2005, we had total consolidated debt of approximately $500.5 million,
including a $22.9 million fair value premium on the 9.0% senior subordinated notes, and cash of
approximately $12.9 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; 25




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
    disposing of assets;
    paying dividends on our capital stock;
    repurchasing our capital stock;
    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 26




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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. 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; 27




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
    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 $35.60 per share to a high closing
price of $40.00 per share for the three months ended March 31, 2005. 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
    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 quarterly report on Form 10-Q 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 accurately able to predict or over which we have
no control. The risk factors listed above, as well as any cautionary language in or incorporated by
reference into this quarterly report on Form 10-Q, provide examples of risks, uncertainties and
events that may cause our actual results to differ materially from the 28




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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
quarterly report on Form 10-Q 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 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The following discusses our exposure to market risk related to changes in interest rates. 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 March 31, 2005, we had outstanding debt of $500.5 million, including a $22.9 million
fair value premium on the 9.0% senior subordinated notes. This debt consisted of $308.8 million
outstanding under the term facility in our 2004 credit agreement, $182.6 million of indebtedness
relating to the 9.0% senior subordinated notes due 2011 and approximately $9.1 million outstanding
under various capital leases and notes payable. Borrowings of $158.8 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
March 31, 2005, was 4.7%. 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 $22.9
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 March 31, 2005 was 6.4%. At March 31, 2005, the fair value of our
indebtedness under the credit facility and senior subordinated notes approximated carrying value.
At the March 31, 2005 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 $420,000 for the three months ended March 31, 2005. 
 ITEM 4. CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures (a) Our chief executive officer and chief financial officer evaluated our disclosure controls
and procedures as of the end of the period covered by this report. Based on that evaluation, the
chief executive officer and chief financial officer have concluded that as of the end of the period
covered by this report Renal Care Group maintains disclosure controls and procedures that are
effective to provide reasonable assurance that information required to be disclosed in our reports
under the Exchange Act is recorded, processed, summarized and reported within the periods specified
in the SECs rules and forms. (b) There have been no changes in our internal control over financial reporting during the
period covered by this report that have materially affected, or are reasonably likely materially to
affect, our internal control over financial reporting. 30




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PART II  OTHER INFORMATION 
 ITEM 1. LEGAL PROCEEDINGS 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. 
 ITEM 2. UNREGISTERED SALES
OF EQUITY SECURITIES AND USE OF PROCEEDS During the quarter ended
March 31, 2005, we purchased shares of our common stock as part of a
publicly announced program as follows: Number ofSharesPurchased as
    
    
    ApproximatePart of
    
    
    Dollar Value ofPublicly
    
    
    Shares that MayTotal Number
    
    
    Average Price
    
    
    Announced
    
    
    Yet Be Purchasedof Shares
    
    
    Paid per
    
    
    Plans or
    
    
    Under the Plans orPeriod
    
    Purchased
    
    
    Share
    
    
    Programs
    
    
    ProgramsJanuary 1, 2005 to January 31, 2005
    
    
    252,000
    
    
    $
    37.21
    
    
    
    252,000
    
    
    $
    68,364,671February 1, 2005 to February 28, 2005
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    68,364,671March 1, 2005 to March 31, 2005
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    68,364,671Total
    
    
    252,000
    
    
    $
    37.21
    
    
    
    252,000
 The Registrants share
repurchase program was originally announced on October 2, 2000,
and was amended by announcements on July 9, 2002, November 18, 2002, August 12, 2003
and October 28, 2003. The program permits repurchases of up to $450.0 million of common
stock. The program expires December 31, 2005. No share repurchase plan or program expired
during the period covered by this quarterly report. 
 ITEM 5. OTHER INFORMATION On February 3, 2005, the
Company entered into an employment agreement with David M. Maloney,
whereby Mr. Maloney was employed as Executive Vice President and
Chief Information Officer of the Company effective as of that date
for an initial term ending on December 31, 2007 (the Initial
Period), subject to earlier termination by Mr. Maloney or the
Company as provided in the agreement. The agreement automatically
renews for additional 12-month terms unless either party provides
notice of non-renewal. The base compensation under the agreement is
$300,000 per year and may be adjusted as provided for in the
agreement. In addition, Mr. Maloney is entitled to an annual bonus of
up to 75% of the base compensation for such year. The actual amount
of the annual bonus paid will be determined based on the
Companys and Mr. Maloneys achievement of performance
goals reasonably established by the Compensation Committee. If the
employment agreement is terminated by the Company without cause, or
if Mr. Maloney terminates the agreement for good reason, as defined
therein, then the Company will pay to Mr. Maloney, after the
effective date of such termination, (1) an amount equal to (A) the
base compensation (as then in effect) plus an amount of annual bonus
equal to the target percentage of base compensation (as then in
effect) multiplied by (B) two (or three if the termination occurs
within 12 months following a Change in Control, as defined in the
agreement), and (2) any unpaid bonus payable for the most recently
completed calendar year. In addition, the employment agreement
contains certain non-compete provisions during employment and for a
period of 12 months thereafter within a 75-mile radius of any renal
dialysis center, unit or facility owned or operated by the Company or
an affiliate of the Company. 31




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ITEM 6. EXHIBITS 10.49
    
    Employment Agreement, effective as
of February 3, 2005, between the Company and David M. Maloney
(incorporated by reference to Exhibit 10.49 to the Companys
Annual Report on Form 10-K for the year ended December 31, 2004)10.50
    
    Supplemental Executive Retirement Plan for certain executive
officers effective January 1, 200510.51
    
    Limited Liability Company Agreement
for Maumee Dialysis Services, LLC effective December 1, 200110.51.1
    
    Management Agreement dated December 1,
2001 between Maumee Dialysis Services, LLC and DMN of Indiana
Corporation10.51.2
    
    Amendment Number 1 to Limited
Liability Company Agreement dated July 1, 2002 between Maumee
Dialysis Services, LLC, RCG Indiana, LLC and Indiana
Dialysis Management, P.C.10.52
    
    Limited Liability Company Agreement
for Three Rivers Dialysis Services, LLC effective March 31, 200110.52.1
    
    Management Agreement dated March 31, 2001
between Three Rivers Dialysis Services, LLC and DMN of Indiana
Corporation10.52.2
    
    Amendment Number 1 to Limited
Liability Company Agreement dated July 1, 2002 between Three Rivers
Dialysis Services, LLC, RCG Indiana, LLC and Indiana
Dialysis Management, P.C.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
   *
    
    In accordance with Release No. 34-47551, this exhibit is 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
the document will not be deemed incorporated by reference into any filing under the
Securities Act of 1933. 32




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##### Table of Contents



SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized. RENAL CARE GROUP, INC. (Registrant)May 4, 2005
    BY:

/s/ David M. DillDavid M. DillExecutive Vice President,
        Chief Financial Officer (Principal
        Financial Officer and Principal
        Accounting Officer) 33




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RENAL CARE GROUP, INC. 
 EXHIBIT INDEX Number
andDescription of Exhibit10.49
    
    
    Employment Agreement, effective as
of February 3, 2005, between the Company and David M. Maloney
(incorporated by reference to Exhibit 10.49 to the Companys
Annual Report on Form 10-K for the year ended December 31, 2004)10.50
    
    
    Supplemental Executive Retirement Plan for certain executive
officers effective January 1, 200510.51
    
    
    Limited Liability Company Agreement
for Maumee Dialysis Services, LLC effective December 1, 200110.51.1
    
    
    Management Agreement dated December
1, 2001 between Maumee Dialysis Services, LLC and DMN of Indiana
Corporation10.51.2
    
    
    Amendment Number 1 to Limited
Liability Company Agreement dated July 1, 2002 between Maumee
Dialysis Services, LLC, RCG Indiana, LLC and Indiana
Dialysis Management, P.C.10.52
    
    
    Limited Liability Company Agreement
for Three Rivers Dialysis Services, LLC effective March 31, 200110.52.1
    
    
    Management Agreement dated March
31, 2001 between Three Rivers Dialysis Services, LLC and DMN of Indiana
Corporation10.52.2
    
    
    Amendment Number 1 to Limited
Liability Company Agreement dated July 1, 2002 between Three Rivers Dialysis Services, LLC, RCG Indiana, LLC and Indiana
Dialysis Management, P.C.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
   *
    
    In accordance with Release No. 34-47551, this exhibit is 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
the document will not be deemed incorporated by reference into any filing under the
Securities Act of 1933. 34