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UNITED STATESSECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
 FORM 10-Q (Mark One) x
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the Quarterly Period Ended March 31, 2004 OR o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from __________ to __________ Commission File No. 0-27640 RENAL CARE GROUP, INC. (Exact name of registrant as specified in its charter) 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
(Address of principal executive offices) (Zip code)
 
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 x No o Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes x 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 May 6, 2004Common Stock, $.01 par value
    
    44,524,934




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RENAL CARE GROUP, INC. INDEX Page No.PART I  FINANCIAL INFORMATIONItem 1.
    
    Financial StatementsCondensed Consolidated Balance Sheets  December 31, 2003 and March 31, 2004 (unaudited)
    
    
    1Condensed Consolidated Income Statements  (unaudited) For the three months ended March 31, 2003 and 2004
    
    
    2Condensed Consolidated Statements of Cash Flows  (unaudited) For the three months ended March 31, 2003 and 2004
    
    
    3Notes to Condensed Consolidated Financial Statements  (unaudited)
    
    
    4Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    12Risk Factors
    
    
    15Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    24Item 4.
    
    Controls and Procedures
    
    
    25PART II  OTHER INFORMATIONItem 2.
    
    Changes in Securities and Use of Proceeds
    
    
    25Item 6.
    
    Exhibits and Reports on Form 8-K
    
    
    26Signature
    
    
    
    
    27Exhibit
Index
    
    
    28EX-31.1 SECTION 302 CERTIFICATION OF THE CEOEX-31.2 SECTION 302 CERTIFICATION OF THE CFOEX-32.1 SECTION 1350 CERTIFICATION OF THE CEOEX-32.2 SECTION 1350 CERTIFICATION OF THE CFO
  Note: Items 1, 3, 4, and 5 of Part II are omitted because they are not
applicable




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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 31,2003
    
    2004(unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    50,295
    
    
    $
    37,606Accounts receivable, net
    
    
    173,679
    
    
    
    188,729Inventories
    
    
    26,345
    
    
    
    18,314Prepaid expenses and other current assets
    
    
    28,050
    
    
    
    14,537Income tax receivable
    
    
    1,910
    
    
    
    2,413Deferred income taxes
    
    
    11,825
    
    
    
    11,825Total current assets
    
    
    292,104
    
    
    
    273,424Property, plant and equipment, net
    
    
    224,397
    
    
    
    236,008Intangible assets, net
    
    
    14,046
    
    
    
    18,154Goodwill
    
    
    286,578
    
    
    
    331,093Other assets
    
    
    2,748
    
    
    
    5,223Total assets
    
    $
    819,873
    
    
    $
    863,902LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable and accrued expenses
    
    $
    123,206
    
    
    $
    104,826Due to third-party payors
    
    
    46,049
    
    
    
    50,244Current portion of long-term debt
    
    
    182
    
    
    
    6,150Total current liabilities
    
    
    169,437
    
    
    
    161,220Long-term debt, net of current portion
    
    
    2,652
    
    
    
    143,171Deferred income taxes
    
    
    38,390
    
    
    
    38,390Other long-term liabilities
    
    
    5,898
    
    
    
    6,093Minority interest
    
    
    32,651
    
    
    
    36,304Total liabilities
    
    
    249,028
    
    
    
    385,178Commitments and contingenciesStockholders equity:Preferred stock, $0.01 par value, 10,000 shares authorized,
none issued
    
    
    
    
    
    
    Common stock, $0.01 par value, 90,000 shares authorized,
53,643 and 54,136 shares issued at December 31, 2003
and March 31, 2004, respectively
    
    
    536
    
    
    
    541Treasury stock, 6,641 and 9,628 shares of common stock at
December 31, 2003 and March 31, 2004, respectively
    
    
    (234,404
    )
    
    
    (370,040
    )Additional paid-in capital
    
    
    374,683
    
    
    
    388,106Retained earnings
    
    
    430,030
    
    
    
    460,117Total stockholders equity
    
    
    570,845
    
    
    
    478,724Total liabilities and stockholders equity
    
    $
    819,873
    
    
    $
    863,902
 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 31,2003
    
    2004Net revenue
    
    $
    242,143
    
    
    $
    278,028Operating costs and expenses:Patient care costs
    
    
    157,477
    
    
    
    179,372General and administrative expenses
    
    
    26,288
    
    
    
    22,676Provision for doubtful accounts
    
    
    6,412
    
    
    
    7,110Depreciation and amortization
    
    
    10,298
    
    
    
    12,163Total operating costs and expenses
    
    
    200,475
    
    
    
    221,321Income from operations
    
    
    41,668
    
    
    
    56,707Interest expense, net
    
    
    285
    
    
    
    965Income before minority interest and income taxes
    
    
    41,383
    
    
    
    55,742Minority interest
    
    
    6,308
    
    
    
    7,214Income before income taxes
    
    
    35,075
    
    
    
    48,528Provision for income taxes
    
    
    13,323
    
    
    
    18,441Net income
    
    $
    21,752
    
    
    $
    30,087Net income per share:Basic
    
    $
    0.45
    
    
    $
    0.65Diluted
    
    $
    0.44
    
    
    $
    0.63Weighted average shares outstanding:Basic
    
    
    48,182
    
    
    
    45,940Diluted
    
    
    49,430
    
    
    
    47,482
 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 31,2003
    
    2004OPERATING ACTIVITIESNet income
    
    $
    21,752
    
    
    $
    30,087Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization
    
    
    10,298
    
    
    
    12,163Loss on disposal of property and equipment
    
    
    136
    
    
    
    154Distributions to minority shareholders
    
    
    (9,620
    )
    
    
    (3,561
    )Income applicable to minority interest
    
    
    6,308
    
    
    
    7,214Changes in operating assets and liabilities, net of effects from acquisitions
    
    
    3,306
    
    
    
    (600
    )Net cash provided by operating activities
    
    
    32,180
    
    
    
    45,457INVESTING ACTIVITIESPurchases of property and equipment
    
    
    (17,896
    )
    
    
    (19,118
    )Cash paid for acquisitions, net of cash acquired
    
    
    
    
    
    
    (55,768
    )Change in other assets
    
    
    225
    
    
    
    (3,173
    )Net cash used in investing activities
    
    
    (17,671
    )
    
    
    (78,059
    )FINANCING ACTIVITIESNet
(payments) borrowings under line of credit and capital leases
    
    
    (7,420
    )
    
    
    25,921Proceeds from issuance of long-term debt
    
    
    
    
    
    
    120,000Net proceeds from issuance of common stock
    
    
    3,047
    
    
    
    9,628Repurchase of treasury shares
    
    
    (4,380
    )
    
    
    (135,636
    )Net cash (used in) provided by financing activities
    
    
    (8,753
    )
    
    
    19,913Increase (decrease) in cash and cash equivalents
    
    
    5,756
    
    
    
    (12,689
    )Cash and cash equivalents at beginning of period
    
    
    38,359
    
    
    
    50,295Cash and cash equivalents at end of period
    
    $
    44,115
    
    
    $
    37,606
 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, 2004
(dollars in thousands, except per share data)
(unaudited) 1. Basis of Presentation Overview Renal Care Group, Inc. provides dialysis services to patients with chronic
kidney failure, also known as end-stage renal disease (ESRD). As of March 31,
2004, we provided dialysis and ancillary services to over 22,600 patients
through more than 300 owned outpatient dialysis centers in 27 states, in
addition to providing acute dialysis services at more than 140 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, 2004 and 2003, approximately 55%
and 56%,
respectively, of our net revenue was derived from reimbursement under
the Medicare and Medicaid programs. Medicare reimbursement is subject to rate
and other legislative changes by Congress and periodic changes in regulations,
including changes that may reduce payments under the ESRD program. Neither
Congress nor CMS approved an increase in the composite rate for 2003 or
2004. Congress has approved an increase of 1.6% in the Medicare ESRD composite
rate for 2005. 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, laboratory tests and drugs,
including specific drugs such as EPO and some physician-ordered tests provided
to dialysis patients. Congress and CMS have considered expanding the drugs and
services that are included in the composite rate. Congress also mandated a
change in the way we will be paid beginning in 2005 for some of the drugs
(including EPO) billed for outside the composite rate. This change will result
in lower reimbursement for these drugs and a higher composite rate. 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 4




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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 its net revenue and net
income from the administration of EPO. EPO is manufactured by a single
company, Amgen Inc. The Company administers EPO to most of its patients to
treat anemia, a medical complication frequently experienced by dialysis
patients. 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, 2003 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
of these 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 current report on Form 8-K, as filed with the SEC on
April 19, 2004. 2. Business Acquisitions 2004 Acquisitions During the first quarter of 2004, we completed certain acquisitions that
were accounted for under the purchase method of accounting. The combined
purchase price paid in these acquisitions was $55,768 and consisted primarily
of cash. 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. The following table summarizes the estimated fair values of the assets
acquired and liabilities assumed at the date of acquisition for the
acquisitions completed during the first quarter of 2004: Accounts receivable, net
    
    $
    774Inventory and other current assets
    
    
    831Property, plant and equipment, net
    
    
    7,367Intangible assets
    
    
    4,256Goodwill
    
    
    44,438Total assets acquired
    
    
    57,666Total liabilities assumed
    
    
    1,898Net assets acquired
    
    $
    55,768
 We began recording the results of operations for each of these acquired
businesses at the effective date of the respective transactions. Goodwill
resulting from these transactions amounted to $44,438 and is expected to be
deductible for tax purposes. Intangible assets typically represent the value
assigned to certain contracts such as non-competition agreements and acute
dialysis service agreements entered into in the transactions. We will amortize
these amounts over the lives of the contracts, which generally range from five
to twelve years. 5




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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 2003. 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. Each acquisition in
the first quarter of 2004 was effective as of January 1, 2004; therefore, no
pro forma data are presented for the 2004 period. Three months endedMarch 31, 2003Pro forma net revenue
    
    $
    252,220Pro forma net income
    
    $
    22,251Pro forma net income per share:Basic
    
    $
    0.46Diluted
    
    $
    0.45
 The unaudited pro forma results of operations are not necessarily indicative of
what actually would have occurred if the acquisitions had been completed as of
the beginning of the periods presented. 3. 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 31,2003
    
    2004Numerator:Numerator for basic and diluted net
income per share  net income
    
    $
    21,752
    
    
    $
    30,087Denominator:Denominator for basic net income per
share  weighted-average shares
    
    
    48,182
    
    
    
    45,940Effect of dilutive securities:Stock options
    
    
    1,248
    
    
    
    1,542Denominator for diluted net income per
share  adjusted weighted-average shares
 and assumed conversions
    
    
    49,430
    
    
    
    47,482Net income per share:Basic
    
    $
    0.45
    
    
    $
    0.65Diluted
    
    $
    0.44
    
    
    $
    0.63
 6




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4. 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 31,2003
    
    2004Net income, as reported
    
    $
    21,752
    
    
    $
    30,087Add: stock-based compensation expense,
net of related tax effects, included in
the determination of net income as
reported
    
    
    61
    
    
    
    31Less: stock-based compensation expense,
net of related tax effects, determined by
the fair value-based method
    
    
    (2,487
    )
    
    
    (2,387
    )Pro forma net income
    
    $
    19,326
    
    
    $
    27,731Net income per share:Basic, as reported
    
    $
    0.45
    
    
    $
    0.65Basic, pro forma
    
    $
    0.40
    
    
    $
    0.60Diluted, as reported
    
    $
    0.44
    
    
    $
    0.63Diluted, pro forma
    
    $
    0.39
    
    
    $
    0.58
 The effect of applying SFAS No. 123 for providing pro forma disclosures
is not likely to be representative of the effects on reported net income for
future periods. Stock Split On April 27, 2004, we announced a three-for-two stock split in the form of
a stock dividend to be distributed on or about May 24, 2004 to shareholders of
record as of May 7, 2004. We will issue one share for every two shares held by
shareholders as of the record date. The par value of our common stock will
remain unchanged at $0.01. 5. Contingencies On August 30, 2000, 19 patients were hospitalized and one patient died
shortly after becoming ill while receiving treatment at one of our dialysis
centers in Youngstown, Ohio. One of the 19 hospitalized patients also died some
time later. In March 2001, one of the affected patients sued the Company in
Mahoning County, Ohio for injuries related to the August 30, 2000 incident.
Additional suits have been filed, and as of March 31, 2004, a total of five
suits were pending. The suits allege negligence, medical malpractice and
product liability. Additional defendants are named in each of the suits.
Additional defendants in some of the suits include the water system vendors who
installed and maintained the water system in the dialysis center. We have
denied the allegations and have filed cross-claims against the water system
vendors. We intend to pursue these cross-claims vigorously. 7




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Management believes that Renal Care Groups insurance should be adequate to
cover these illnesses and does not anticipate a material adverse effect on our
consolidated financial position or results of operations. We are involved in other litigation and regulatory investigations arising
in the ordinary course of business. In the opinion of management, after
consultation with legal counsel, management believes these matters will be
resolved without material adverse effect on Renal Care Groups consolidated
financial position or results of operations. Laws and regulations governing the Medicare and Medicaid programs are
complex and subject to interpretation. We believe that we are in compliance
with all applicable laws and regulations governing the Medicare and Medicaid
programs. We are 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, and non-compliance or alleged non-compliance could result in
significant regulatory action including fines, penalties, and exclusion from
the Medicare and Medicaid programs. We generally engage practicing board-certified or board-eligible
nephrologists to serve as medical directors for our centers. Medical directors
are responsible for the administration and monitoring of patient care policies,
including patient education, administration of dialysis treatment, development
programs and assessment of all patients in our dialysis centers. We pay medical
director fees that are consistent with the fair market value of the required
supervisory services. Our medical director agreements typically have
terms of
seven years with three-year renewal options. 6. Defined Benefit Plan Effective
January 29, 2003, we implemented a retirement benefit plan for
our former Chairman, Chief Executive Officer and President who died March 20, 2003. The plan provides that we will make 120 monthly
payments of $54 each to our former Chairmans beneficiary, beginning in April 2003. As a
result, we recorded a $5,350 charge included in general and administrative
expenses representing the pre-tax net present value of such payments during the
first quarter of 2003. As of March 31, 2004, we have accrued liabilities
totaling $4,906 related to this defined benefit plan. 7. Subsequent Event On April 2, 2004, we completed our acquisition of National Nephrology
Associates, Inc. (NNA). Prior to the acquisition, NNA provided dialysis
services to approximately 5,600 patients and operated 87 outpatient dialysis
facilities in 15 states, as well as providing acute dialysis services at
approximately 55 hospitals. The aggregate consideration paid for NNA was approximately $345,000, which
included a cash payment of approximately $167,000 to NNAs equity holders and
the assumption or payment by Renal Care Group of NNAs outstanding debt,
including its $160,000 of 9% senior subordinated notes due 2011 (the Notes),
and other indebtedness, including capital leases. As required by the
indenture governing the Notes, we have made an offer to repurchase
the notes at 101% of their face principal amount and have filed a
registration statement with the SEC to register an exchange of
registered notes for the Notes, which were not originally registered
under the Securities Act of 1933. We conduct substantially all of our business through subsidiaries. Our
wholly-owned subsidiaries have guaranteed the Notes we assumed in the acquisition
of NNA, as well as our senior credit facility. Presented below is condensed
consolidating financial information as of March 31, 2004 and December 31, 2003
and for the three months ended March 31, 2004 and 2003, respectively. The
information segregates Renal Care Group, Inc. (the parent company), the
combined wholly-owned subsidiary guarantors, the combined non-guarantor
subsidiaries and consolidating adjustments. All of the subsidiary guarantees
are both full and unconditional, and joint and several. 8




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Condensed Consolidating Balance Sheets Parent
    
    Guarantor
    
    Non-Guarantor
    
    Consolidating
    
    ConsolidatedCompany
    
    Subsidiaries
    
    Subsidiaries
    
    Adjustments
    
    TotalAs of March 31, 2004Cash and cash
equivalents
    
    $
    
    
    
    $
    5,707
    
    
    $
    33,714
    
    
    $
    (1,815
    )
    
    $
    37,606Accounts
receivable, net
    
    
    
    
    
    
    130,394
    
    
    
    58,335
    
    
    
    
    
    
    
    188,729Other current assets
    
    
    22,331
    
    
    
    16,398
    
    
    
    8,360
    
    
    
    
    
    
    
    47,089Total current assets
    
    
    22,331
    
    
    
    152,499
    
    
    
    100,409
    
    
    
    (1,815
    )
    
    
    273,424Property, plant and
equipment, net
    
    
    26,831
    
    
    
    134,696
    
    
    
    74,765
    
    
    
    (284
    )
    
    
    236,008Goodwill
    
    
    1,483
    
    
    
    228,253
    
    
    
    101,057
    
    
    
    300
    
    
    
    331,093Other assets
    
    
    9,273
    
    
    
    81,233
    
    
    
    5,962
    
    
    
    (73,091
    )
    
    
    23,377Total assets
    
    $
    59,918
    
    
    $
    596,681
    
    
    $
    282,193
    
    
    $
    (74,890
    )
    
    $
    863,902Current liabilities
(including
intercompany assets
and liabilities)
    
    $
    (361,780
    )
    
    $
    405,325
    
    
    $
    130,395
    
    
    $
    (12,720
    )
    
    $
    161,220Long-term
liabilities
    
    
    183,518
    
    
    
    1,376
    
    
    
    2,760
    
    
    
    
    
    
    
    187,654Minority interest
    
    
    
    
    
    
    32,696
    
    
    
    3,395
    
    
    
    213
    
    
    
    36,304Stockholders equity
    
    
    238,180
    
    
    
    157,284
    
    
    
    145,643
    
    
    
    (62,383
    )
    
    
    478,724Total liabilities
and stockholders
equity
    
    $
    59,918
    
    
    $
    596,681
    
    
    $
    282,193
    
    
    $
    (74,890
    )
    
    $
    863,902
 Parent
    
    Guarantor
    
    Non-Guarantor
    
    Consolidating
    
    ConsolidatedCompany
    
    Subsidiaries
    
    Subsidiaries
    
    Adjustments
    
    TotalAs of December 31, 2003Cash and cash equivalents
    
    $
    20,157
    
    
    $
    2,646
    
    
    $
    27,492
    
    
    $
    
    
    
    $
    50,295Accounts receivable, net
    
    
    
    
    
    
    117,209
    
    
    
    56,470
    
    
    
    
    
    
    
    173,679Other current assets
    
    
    35,329
    
    
    
    21,467
    
    
    
    11,334
    
    
    
    
    
    
    
    68,130Total current assets
    
    
    55,486
    
    
    
    141,322
    
    
    
    95,296
    
    
    
    
    
    
    
    292,104Property, plant and
equipment, net
    
    
    27,841
    
    
    
    123,894
    
    
    
    69,924
    
    
    
    2,738
    
    
    
    224,397Goodwill
    
    
    1,483
    
    
    
    187,848
    
    
    
    96,947
    
    
    
    300
    
    
    
    286,578Other assets
    
    
    10,637
    
    
    
    25,926
    
    
    
    5,940
    
    
    
    (25,709
    )
    
    
    16,794Total assets
    
    $
    95,447
    
    
    $
    478,990
    
    
    $
    268,107
    
    
    $
    (22,671
    )
    
    $
    819,873Current liabilities
(including
intercompany assets
and liabilities)
    
    $
    (261,412
    )
    
    $
    315,138
    
    
    $
    126,004
    
    
    $
    (10,293
    )
    
    $
    169,437Long-term liabilities
    
    
    42,951
    
    
    
    1,243
    
    
    
    2,746
    
    
    
    
    
    
    
    46,940Minority interest
    
    
    
    
    
    
    30,091
    
    
    
    2,347
    
    
    
    213
    
    
    
    32,651Stockholders equity
    
    
    313,908
    
    
    
    132,518
    
    
    
    137,010
    
    
    
    (12,591
    )
    
    
    570,845Total liabilities
and stockholders equity
    
    $
    95,447
    
    
    $
    478,990
    
    
    $
    268,107
    
    
    $
    (22,671
    )
    
    $
    819,873
 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, 2003Net revenue
    
    $
    
    
    
    $
    169,575
    
    
    $
    73,568
    
    
    $
    (1,000
    )
    
    $
    242,143Total operating costs and
expenses
    
    
    14,313
    
    
    
    128,446
    
    
    
    58,716
    
    
    
    (1,000
    )
    
    
    200,475Income (loss) from
operations
    
    
    (14,313
    )
    
    
    41,129
    
    
    
    14,852
    
    
    
    
    
    
    
    41,668Interest expense, net
    
    
    285
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    285Minority interest
    
    
    
    
    
    
    5,580
    
    
    
    728
    
    
    
    
    
    
    
    6,308Provision (benefit) for
income taxes
    
    
    (5,545
    )
    
    
    13,503
    
    
    
    5,365
    
    
    
    
    
    
    
    13,323Net income (loss)
    
    $
    (9,053
    )
    
    $
    22,046
    
    
    $
    8,759
    
    
    $
    
    
    
    $
    21,752
 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 year
    
    
    20,157
    
    
    
    2,646
    
    
    
    27,492
    
    
    
    
    
    
    
    50,295Cash and cash equivalents, at end
of year
    
    $
    
    
    
    $
    5,707
    
    
    $
    33,714
    
    
    $
    (1,815
    )
    
    $
    37,606
 Parent
    
    Guarantor
    
    Non-Guarantor
    
    Consolidating
    
    ConsolidatedCompany
    
    Subsidiaries
    
    Subsidiaries
    
    Adjustments
    
    TotalFor the three months ended March
31, 2003Cash flows from operating
Activities:Net income (loss)
    
    $
    (9,055
    )
    
    $
    22,048
    
    
    $
    8,759
    
    
    $
    
    
    
    $
    21,752Changes in
operating and
intercompany assets
and liabilities and
non-cash items
included in net income
    
    
    45,440
    
    
    
    (18,608
    )
    
    
    (12,472
    )
    
    
    (3,932
    )
    
    
    10,428Net cash provided by (used in)
operating activities
    
    
    36,385
    
    
    
    3,440
    
    
    
    (3,713
    )
    
    
    (3,932
    )
    
    
    32,180Net cash (used in) provided by
investing activities
    
    
    (5,996
    )
    
    
    (5,924
    )
    
    
    (6,880
    )
    
    
    1,129
    
    
    
    (17,671
    )Net cash (used in) financing
activities
    
    
    (8,753
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8,753
    )Increase (decrease) in cash and
cash equivalents
    
    
    21,636
    
    
    
    (2,484
    )
    
    
    (10,593
    )
    
    
    (2,803
    )
    
    
    5,756Cash and cash equivalents, at
beginning of year
    
    
    
    
    
    
    2,484
    
    
    
    36,191
    
    
    
    (316
    )
    
    
    38,359Cash and cash equivalents, at end
of year
    
    $
    21,636
    
    
    $
    
    
    
    $
    25,598
    
    
    $
    (3,119
    )
    
    $
    44,115
 11




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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations Three Months Ended March 31, 2003 Compared to Three Months Ended March 31, 2004 Net Revenue.Net revenue increased from $242.1 million for the three
months ended March 31, 2003 to $278.0 million for the three months ended March
31, 2004, an increase of $35.9 million, or 14.8%. This increase resulted
primarily from a 9.7% increase in the number of treatments we performed from
783,841 in the 2003 period to 860,249 in the 2004 period. This growth in
treatments is the result of the acquisition and development of various dialysis
facilities and a 3.5% increase in same-market treatments for 2004 over 2003. In
addition, average net revenue per dialysis treatment increased 4.9% from $308
in 2003 to $323 in 2004. The increase in net revenue per treatment is largely
attributable to the resolution of several contractual issues with payors, which
increased our net revenue per treatment by approximately $6 during the quarter
ended March 31, 2004. Although
we regularly evaluate and resolve contractual issues with certain payors, we
can not precisely determine the timing or magnitude of similar resolutions in
the future. Substantially all of the remaining $9 increase in net revenue per
treatment was the result of higher utilization of certain ancillary drugs and
the annual price increase that we implemented in the fourth quarter of 2003.
In light of the nature of the resolutions of the payor contract issues in the
first quarter of 2004 and the fact that our price increase has been effective
for almost all payors for at least a quarter, we expect net revenue per
treatment to decline in the second quarter of 2004 from the $323 we experienced
this quarter. We also expect net revenue per treatment to remain flat or
increase slightly from the second quarter 2004 level through the rest of 2004. 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 $157.5 million for the three months ended March 31, 2003, to $179.4
million for the three months ended March 31, 2004, an increase of 13.9%. 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
decreased from 65.0% in the 2003 period to 64.5% in the 2004 period. Patient
care costs per treatment increased 4.0% from $201 in the 2003 period to $209 in
the 2004 period. This increase in patient care costs per treatment was due to
increases in the utilization of certain ancillary drugs discussed above, labor
and benefit costs and the cost of insurance. 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 decreased from $26.3
million for the three months ended March 31, 2003 to $22.7 million for the
three months ended March 31, 2004, a decrease of 13.7%. This decrease is
primarily attributable to a $5.4 million charge recorded in the first quarter
of 2003 for a retirement benefit plan for our former chairman, chief executive
officer and president that was adopted in January 2003. General and
administrative expenses as a percentage of net revenue decreased from 10.9% in
2003 to 8.2% in 2004. The absence in 2004 of the 2003 charge for the retirement package and changes
within our organizational structure accounted for almost all of the decrease in
general and administrative expenses as a percentage of net revenue. Provision for Doubtful Accounts.We determine 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 the revenue based
on our estimate of the net collectibility of the accounts receivable.
Management estimates the net collectibility of accounts receivable based upon a
variety of factors. These factors include, but are not limited to, analyzing
revenues generated from payor sources, performing subsequent collection testing
and regularly reviewing 12




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##### Table of Contents



detailed accounts receivable agings. We make 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 $6.4 million for the three months ended March 31, 2003
to $7.1 million for the three months ended March 31, 2004, an increase of
$698,000, or 10.9%. This increase was principally the result of the
increase in revenue. The provision for doubtful accounts as a percentage of net
revenue was 2.6% in both the 2003 and 2004 periods. Depreciation and Amortization.Depreciation and amortization increased
from $10.3 million for the three months ended March 31, 2003 to $12.2 million
for the three months ended March 31, 2004, an increase of 18.1%. This increase
was due to the start-up of dialysis facilities, the normal replacement costs of
dialysis facilities and equipment, the purchases 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 4.3% in 2003 to 4.4% in 2004. Income from Operations.Income from operations increased from $41.7
million for the three months ended March 31, 2003 to $56.7 million for the
three months ended March 31, 2004, an increase of 36.1%. Income from operations
as a percentage of net revenue increased from 17.2% in the 2003 period to 20.4%
in the 2004 period as a result of the favorable resolutions with payors
discussed above, the impact in 2003 of the retirement package for our
former chairman, chief executive officer, and president, and the operational improvements
described above. Interest Expense, Net.Interest expense increased from $285,000 for the
three months ended March 31, 2003 to $965,000 for the three months ended March
31, 2004. This increase was due to higher average borrowings outstanding
during the quarter, which resulted largely from our repurchases of common
stock. We expect substantially higher interest expense in 2004 as a result of
additional borrowings associated with our acquisition of National Nephrology
Associates, Inc. effective April 2, 2004 and the assumption of
NNAs outstanding debt, including its $160.0 million of 9% senior subordinated
notes due 2011. Minority Interest.Minority interest represents the proportionate equity
interest of other owners in the Companys consolidated entities that are not
wholly-owned. The financial results of those entities are included in the
Companys consolidated results. Minority interest as a percentage of net
revenue was 2.6% in both the 2003 and 2004 periods. A large portion of our
minority interest expense is attributable to some of our larger joint ventures,
including those in Ohio, Oregon and Washington. As of March 31, 2004, we were
the majority and controlling owner in 53 joint ventures. Provision for Income Taxes. Income tax expense increased from $13.3
million for the three months ended March 31, 2003 to $18.4 million for the
three months ended March 31, 2004, an increase of $5.1 million or 38.4%. The
increase is a result of the increase in pre-tax earnings described above. Our
effective tax rate remained consistent at 38.0% in the 2003 and 2004 periods. Net Income. Net income increased from $21.8 million for the three months
ended March 31, 2003 to $30.1 million for the three months ended March 31,
2004, an increase of $8.3 million or 38.3%. 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, 2004, our
working capital was $112.2 million, cash and cash equivalents were $37.6
million, and our current ratio was approximately 1.7 to 1.0. Net cash provided by operating activities was $45.5 million for the three
months ended March 31, 2004. Cash provided by operating activities consists of
net income before depreciation and amortization expense and 13




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income applicable to minority interest, adjusted for changes in components of
working capital. Net cash used in investing activities was $78.1 million for
the three months ended March 31, 2004. Cash used in investing activities
consisted primarily of $19.1 million of purchases of property and equipment and
$55.8 million of cash paid for acquisitions, net of cash acquired. Net cash
provided by financing activities was $19.9 million for the three months ended
March 31, 2004. Cash provided by financing activities primarily reflects net
borrowings under our line of credit of $25.9 million, proceeds from issuance of
long-term debt of $120.0 million, net proceeds of $9.6 million from the
issuance of common stock, offset by $135.6 million in repurchases of our common
stock. As of December 31, 2003, we had two credit agreements with a group of
banks totaling $150.0 million consisting of a $100.0 million Second Amended and
Restated Loan Agreement (the Multi-Year Facility) and a $50.0 million Loan
Agreement (the 364-day Facility). The Multi-Year Facility had a final maturity
of July 1, 2005, and the 364-day facility had a final maturity of June 30,
2004. 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 the Multi-Year Facility and the 364-day Facility discussed
above. This credit agreement has a $150.0 million revolving credit facility, a
committed $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 finalizing specific terms. All
of these committed facilities have a final maturity of February 10, 2009. The
credit agreement provides that $175.0 million of the committed term loan
facility may only be used to finance our acquisition of NNA. Borrowings under the revolving credit facility and $150.0 million of the
committed term loan facility may be used for acquisitions, repurchases of our
stock, capital expenditures, working capital and general corporate purposes.
Borrowings under the 2004 Agreement bear interest at variable rates determined
by our leverage ratio. This variable rate debt instrument carries a degree of
interest rate risk. Specifically, we will face higher interest costs on this
debt if interest rates rise. 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. We have used funds available under the 2004 Agreement to substantially
complete our previously announced $250.0 million share repurchase program and
our acquisition of NNA. We completed our acquisition of NNA in April 2004 and
used $175.0 million in term borrowings under this facility. As a result, we
have borrowed the entire $325.0 million of the committed term loan facility and
approximately $10.0 million under the revolving credit facility. After the
acquisition of NNA, therefore, we had approximately $502.1 million in
outstanding indebtedness. This indebtedness includes $160.0 million in senior
subordinated notes of NNA that we assumed in the acquisition. These notes bear
interest at the rate of 9% per annum. Each of our wholly-owned
subsidiaries is required to guarantee 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 was entered into by
NNA in October 2003 and assumed by us in connection with the NNA
acquisition. The indenture includes customary financial covenants. As a result of this indebtedness, we will
incur substantial interest expense in 2004. Based on our outstanding
indebtedness of $502.1 million the aggregate maturities of our
borrowings are as follows: 2004 - $19.3 million; 2005 - $22.3 million;
2006 - $30.5 million; 2007 - $56.9 million; 2008 - $156.4 million and
thereafter - $216.7 million. A significant component of our growth strategy is the acquisition and
development of dialysis facilities. There can be no assurance that we will be
able to identify suitable acquisition candidates or to close acquisition
transactions with them on acceptable terms. Management believes that existing
cash and funds from operations, together with funds available under
the 2004 Agreement, 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. 14




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We plan to make capital expenditures of between $85.0 million and $95.0
million in 2004, primarily for equipment replacement, expansion of existing
dialysis facilities and construction of de novo facilities. We expect that
these capital expenditures will be funded with cash provided by operating
activities and the 2004 Agreement. 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 of Renal Care Group 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 100,000 shares of common
stock for approximately $3.1 million. In 2002, we repurchased 2.9 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 3.7 million shares of common stock for $140.5 million. In the first
quarter of 2004, we repurchased 3.0 million shares for $135.6 million. Through
March 31, 2004, we had repurchased an aggregate of 9.6 million shares under the
plan, for a total of approximately $370.0 million. The indenture
governing the 9% senior subordinated notes we assumed in the NNA
acquisition includes covenants that limit our ability to repurchase
our common stock or declare dividends. 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, and
impairment of long-lived assets and long-lived assets to be disposed of. 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, as filed with the SEC
on March 4, 2004 and in the current report on Form 8-K, as filed with the SEC
on April 19, 2004. 
 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. If Congress or CMS changes the Medicare or Medicaid programs for dialysis, then
our 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 50% of our net revenue for
2002, 49% of our net revenue for 2003, and 49% of our net revenue for the three
months ended March 31, 2004 consisted of reimbursements from Medicare,
including reimbursement for the administration of EPO. We also estimate that
approximately 7% of our net revenue for 2002, 6% of our net revenue for 2003
and 6% of our net revenue for the three months ended March 31, 2004 consisted
of reimbursements from Medicaid or comparable state programs. Any of the
following actions in connection with government programs could cause our
revenue and earnings to decline: 15




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##### Table of Contents




    
    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, Congress and CMS have proposed expanding the drugs and
services that are included in the flat composite rate. CMS has indicated that
it believes such a mechanism would be fairer and easier to administer. In
addition, Congress mandated a change in the way we will be paid beginning in
2005 for some of the drugs, including EPO, that we bill for outside of the flat
composite rate. This change will result in lower reimbursement for these drugs
and a higher composite rate. Congress stated that these changes are not
intended to reduce overall reimbursement to dialysis providers, but until
actual rates are set, we do not know how the changes will affect us. If states lower Medicaid reimbursement, then we would be less profitable. The Medicaid programs in some of the states in which we operate have
formerly reimbursed us, or currently reimburse us, at rates higher than those
paid by Medicare. Some of these programs, like Washingtons and Wisconsins,
have approved and implemented reductions in reimbursement. Other programs have
proposed reductions or have announced that they are considering reductions. In
addition, a number of the states where we operate are experiencing budget
shortfalls, and some of these states may consider reducing Medicaid
reimbursement or changing their Medicaid programs to cut costs. We are unable
to predict whether and, if so, when any reductions in Medicaid reimbursement,
other than those approved and implemented in Washington and Wisconsin, 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 decrease reimbursement rates for EPO, for
which we are currently reimbursed separately outside of the flat composite
rate, then our revenue and earnings will decline. Revenues from the
administration of EPO were approximately 23% of our net revenue for 2002, 24%
of our net revenue for 2003 and 26% of our net revenue for the three months
ended March 31, 2004. Most of our payments for EPO come from government
programs. For the three months ended March 31, 2004, Medicare and Medicaid
reimbursement represented approximately 55% of the total revenue we derived
from EPO. A reduction in the reimbursement rate for EPO could materially and
adversely affect our revenue and earnings. 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., and there are no
substitute products currently marketed to dialysis providers in the United
States. In April 2002, Amgen announced a 3.9% increase in the price of EPO.
This price increase did not affect our earnings in 2002 because our contract
with Amgen had pricing protection through 2002, but did adversely affect our
earnings in 2003. If Amgen imposes additional EPO price increases or if Amgen
or other factors interrupt the supply of EPO, then our revenue and earnings
will decline. 16




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If Amgen markets Aranesp®for ESRD patients, then we could be less profitable. Amgen has developed and obtained FDA approval for a new drug to treat
anemia that is marketed as Aranesp® (darbepoetin alfa). Aranesp® is a longer
acting form of bio-engineered protein that, like EPO, can be used to treat
anemia. EPO is usually administered in conjunction with each dialysis
treatment. Aranesp® can remain effective for between two and 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 revenue or profit from the administration of
EPO or Aranesp®. If payments by private insurers, hospitals or managed care organizations
decrease, then our revenue and earnings could decrease. If private insurers, managed care organizations or hospitals reduce their
rates or if we experience a significant shift in our revenue mix toward
additional Medicare or Medicaid reimbursement, then our revenue and earnings
will decline. We estimate that approximately 43% of our net revenue for 2002,
45% of our net revenue for 2003, and 45% of our net revenue for the three
months ended March 31, 2004 was derived from sources other than Medicare and
Medicaid. In general, payments we receive from private insurers and hospitals
for our services are at rates significantly higher than the Medicare or
Medicaid rates. Payments we receive from managed care organizations are also at
rates higher than Medicare and Medicaid rates but lower than those paid by
private insurers. In addition, we have been able to implement annual price
increases for these private payors that we have not been able to implement for
federal programs. 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 will likely be more limited over the next several years
than it has been in the recent past. We have recently experienced reductions in
reimbursement from two commercial insurers, and management believes that the
reductions in reimbursement by these two commercial insurers along with pricing
pressure from other commercial insurers and managed care organizations will
likely adversely impact our revenue per treatment and earnings per share in
2004. Any of the following events could have a material adverse effect on our
revenue and earnings:  
    
    any number of economic or demographic factors could cause private
insurers, hospitals or managed care companies to reduce the rates they
pay us or to refuse to pay price increases or work to reduce the rate
of our price increases;  
    
    a portion of our business that is currently reimbursed by private
insurers or hospitals may become reimbursed by managed care
organizations, which generally have lower rates for our services;  
    
    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; or  
    
    the scope of coverage by Medicare or Medicaid under the flat composite
rate could expand and, as a result, reduce the extent of our services
being reimbursed at the higher private-insurance rates. 17




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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 were not able to renew
or renegotiate a small number of our medical director agreements that expired
in 2003, and we may not be able to renew or renegotiate expiring medical
director agreements successfully, or we may not be able to enforce the
non-competition provisions of some of our medical director or other agreements.
Any of these factors could result in a loss of patients, since dialysis
patients are typically treated at a center where their physician or a member of
his or her practice group serves as medical director. We believe that our
future success will depend in part on our ability to attract and retain
qualified physicians to serve as medical directors of our dialysis centers. If our business is alleged or found to violate heath care or other applicable
laws, our revenue and earnings could decrease. We are subject to extensive federal, state and local regulation. The laws
that apply to our operations include, but are not limited to, the following:  
    
    fraud and abuse prohibitions under state and federal health care laws;  
    
    prohibitions and limitations on patient referrals;  
    
    billing and reimbursement rules, including false claims prohibitions
under health care reimbursement laws;  
    
    rules regarding the collection, use, storage and disclosure of patient
health information, including the federal Health Insurance Portability
and Accountability Act of 1996, referred to as HIPAA, and state law
equivalents of HIPAA;  
    
    facility licensure;  
    
    health and safety requirements;  
    
    environmental compliance; and  
    
    medical and toxic waste disposal. Much of the regulation of our business, particularly in the areas of fraud
and abuse and patient referral, is complex and open to differing
interpretations. Due to the broad application of the statutory provisions and
the absence in many instances of regulations or court decisions addressing the
specific arrangements by which we conduct our business, including our
arrangements with medical directors, physician stockholders and physician joint
venture partners, governmental agencies could challenge some of our practices
under these laws. 18




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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, and another competitor, Gambro Healthcare, Inc., has announced
that it is the subject of an investigation by the U.S. Attorneys Office in St.
Louis, Missouri. If any of our operations are found to violate applicable laws,
then we may be subject to severe sanctions, or we could be required to alter or
discontinue the challenged conduct or both. If we are required to alter our
practices, we may not be able to do so successfully. If any of these events
occurs, our revenue and earnings could decline. If our joint ventures are found to violate the law, our business could be
damaged. A number of the dialysis centers we operate are owned by joint ventures in
which we own a controlling interest and one or more physicians or physician
practice groups maintain a minority interest. The physician owners may also
provide medical director services to those centers or other centers we own and
operate. Because our relationships with physicians are governed by the
Anti-Kickback Statute, we have sought to satisfy as many safe harbor
requirements as possible in structuring these joint venture arrangements.
However, our joint venture arrangements do not satisfy all elements of a safe
harbor. Also, we believe we have structured the physician relationships in
these joint ventures in a way that meets applicable exceptions under the Stark
Law or that otherwise complies with the Stark Law. If the joint ventures were
found to be in violation of the Anti-Kickback Statute or the Stark Law, we
could be required to restructure them or refuse to accept referrals for
designated health services from the physicians with whom the joint venture
centers have a relationship. We also could be required to repay to Medicare
amounts received by the joint ventures pursuant to prohibited referrals, and we
could be subject to monetary penalties. If the joint venture centers are
subject to any of these penalties, our business 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 weakness, 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. 19




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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 smaller providers. There is a small number
of large dialysis companies that compete for the acquisition of outpatient
dialysis centers and the development of relationships with referring
physicians. Two of our major competitors are part of larger companies that also
manufacture dialysis equipment, which allows them to benefit from lower
equipment costs. Several of our competitors, including these equipment
manufacturers, are larger than we are and have greater financial resources and
more established operations. We may 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 lose any of our executive officers, then our ability to run our business
could be adversely affected, and our revenue and earnings could decline. We depend on the services of our executive officers William P. Johnston,
our chairman of the board, Gary A. Brukardt, our president and chief executive
officer, Raymond M. Hakim, M.D., Ph.D., David M. Dill and Timothy P. Martin,
each an executive vice president, and Douglas B. Chappell, our general counsel.
Mr. Brukardt and Dr. Hakim have each been with us since 1996. The services of
our executive officers would be difficult to replace. 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 and giving effect to our acquisition of National Nephrology
Associates (NNA), we believe the four largest providers of outpatient dialysis
services now own approximately 66% of the outpatient dialysis facilities in the
United States. We compete with these other companies to identify and complete
suitable acquisitions. We expect this competition to intensify 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 complete future acquisitions, we may dilute existing stockholders by
issuing more of our common stock or we may incur expenses related to debt and
goodwill, which could reduce our earnings. We may issue equity securities in future acquisitions that could be
dilutive to our shareholders. We also may incur additional debt in future
acquisitions. Interest expense on debt incurred to fund our acquisitions may
significantly reduce our profitability. While goodwill and other intangible
assets with indefinite lives are not amortized to expense under generally
accepted accounting principles, we are required to review all of these assets
at regular intervals for impairment and to charge an appropriate amount to
expense when we identify impairment. If we identify impairment and are required
to write off a significant portion of our intangible assets at one time, then
there could be a material adverse impact on our stock price. We may not have sufficient cash flow from our business to pay our substantial
debt. After we closed our acquisition of NNA, we and our subsidiaries had total
consolidated debt of approximately $502.1 million and cash of approximately
$52.6 million. Also, subject to limitations, including 20




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those included in our credit facility and those contained included in the
indenture for the 9% 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. 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 can not 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 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 our 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 under our credit facility. In addition, if such a default were to occur,
the 9% senior subordinated notes would become immediately due and payable. If
the amounts outstanding under these debt agreements are accelerated, we cannot
assure you that our assets will be sufficient to repay in full the money owed
to the banks or to our other debt holders.  If a change of control occurs, such as our
    acquisition of NNA, we may have to spend a substantial amount of
    cash or incur additional indebtedness to satisfy our obligation
    to repurchase the notes we assumed in the NNA acquisition from holders who choose to tender their
    notes pursuant to certain procedures in the
    indenture. Upon specified change of control events the
holders of the notes we assumed in the NNA acquisition 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% of the aggregate principal amount of the notes plus
accrued and unpaid interest thereon, if any, to the date of
purchase. Our acquisition of NNA qualified as a change of
control under the terms of the indenture governing the notes, so
the holders of the notes have the right to require us to
repurchase their notes at these terms. We cannot predict how
many holders will require us to repurchase their notes. When a change of control, such as our acquisition
of NNA, occurs, we may not be able 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 notes we assumed in the NNA
acquisition, which in turn would constitute a default
under our credit facility. In addition, the terms of our credit
facility restrict our ability to purchase 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 notes or
refinance the borrowings that prohibit us from repurchasing the
notes. If we do not obtain a consent or repay the borrowings, we
could not repurchase the notes. Alternatively, even if we are able to pay the
purchase price for the notes tendered for repurchase, we may
have to use a substantial amount of cash to do so, which will
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.  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 the notes we assumed in the
NNA acquisition and our credit
facility contain numerous financial and operating covenants that
limit our ability to engage in activities such as:  
    incurring additional debt;
    acquiring and developing new dialysis centers;
    making investments;
    creating liens;
    creating restrictions on the ability of our
    subsidiaries to pay dividends or other amounts to us;
    disposing of assets; 21




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
    paying dividends on our capital stock;
    repurchasing our capital stock;
    engaging in certain 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,
which would, in turn, trigger an event of default under the
indenture governing the notes we assumed in the
NNA acquisition. 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 the notes we assumed in the
NNA acquisition. 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 owed to the banks or to 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:  
    we will have 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;
    we may not be able to increase our borrowings
    under our credit facility or obtain other debt financing for
    future working capital, capital expenditures, acquisitions or
    other corporate purposes;
    we could be less able to take advantage of
    significant business opportunities, including acquisitions or
    divestitures;
    it may be difficult for us to satisfy our
    obligations under the notes we assumed in the NNA acquisition;
    our vulnerability to general adverse economic and
    industry conditions could be increased; and
    we could be at a competitive disadvantage to
    competitors with less debt. 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 Midwest Kidney Centers and NNA, and
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. We face these challenges particularly in larger acquisitions
like the acquisition of NNA. 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. If acquired businesses have unknown liabilities, then we could be exposed to
liabilities that could harm our business and profitability. Businesses we acquire may have unknown or contingent liabilities,
including liabilities for failure to comply with health care laws. Although we
generally attempt to identify practices that may give rise to unknown or
contingent liabilities and conform them to our standards after the acquisition,
private plaintiffs or governmental agencies may still assert claims. Even
though we generally seek to obtain indemnification from the sellers of
businesses we buy, unknown and contingent liabilities may not be covered by
indemnification or may exceed contractual limits or the financial capacity of
the indemnifying party. 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 has moderated somewhat in 2004, but there
have been increases, and there may be larger increases in the future. Our
earnings could be materially and adversely affected by any of the following: 22




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
    
    further increases in premiums, deductibles and self-insurance retentions;  
    
    increases in the number of liability claims against us or the cost of
settling or trying cases related to those claims; and  
    
    an inability to obtain one or more types of insurance on acceptable terms. If our board of directors does not approve an acquisition or change in control,
then our shareholders may not realize the full value of their stock. Our certificate of incorporation and bylaws contain a number of provisions
that may delay, deter or inhibit a future acquisition or change in control that
is not first approved by our board of directors. This could occur even if our
shareholders receive an attractive offer for their shares or if a substantial
number or even a majority of our shareholders believe the takeover is in their
best interest. These provisions are intended to encourage any person interested
in acquiring us to negotiate with and obtain approval from our board of
directors before pursuing a transaction. Provisions that could delay, deter or
inhibit a future acquisition or change in control include the following:  
    
    a staggered board of directors that would require two annual meetings to replace
a majority of the board of directors;  
    
    restrictions on calling special meetings at which an acquisition or change in
control might be brought to a vote of the shareholders;  
    
    blank check preferred stock that may be issued by our board of directors without
shareholder approval and that may be substantially dilutive or contain
preferences or rights objectionable to an acquiror; and  
    
    a poison pill that would substantially dilute the interest sought by an acquiror. These provisions could also discourage bids for our common stock at a
premium and cause the market price of our common stock to decline. Our stock price is volatile and as a result, the value of your investment may
go down for reasons unrelated to the performance of our business. Our common stock is traded on the New York Stock Exchange. The market
price of our common stock has been volatile, ranging from a low closing price
of $41.33 per share to a high closing price of $47.15 per share during the
three months ended March 31, 2004. The market price for our common stock could
fluctuate substantially based on a variety of factors, including the following:  
    
    future announcements concerning us, our competitors or the health care market;  
    
    the threat 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. 23




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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 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. 
 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, 2004, we had outstanding debt of $149.3 million, of which
$120.0 million was outstanding under our term facility, $26.8 million was
outstanding under our revolving credit facility and the remaining $2.5 million
was outstanding under various capital leases and notes payable. Borrowings
under the term and revolving credit facilities bear interest at variable rates
that are determined by our leverage ratio. Our weighted average borrowing rate
under the term and revolving credit facilities as of March 31,
2004 was 2.4%.
At March 31, 2004, the fair value of our indebtedness under these facilities
approximated carrying value. At the March 31, 2004 borrowing levels, if there
had been a 1% increase in these variable interest rates, then there would not
have been a significant impact on our net income or cash flows for the three
months ended March 31, 2004. If interest rates were to begin increase
significantly, we expect to take actions to mitigate our exposure to
substantial increases in interest rates. We do not currently use derivatives
to alter the interest rate characteristics of our debt instruments. 24




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On April 2, 2004, we significantly increased our indebtedness with the
acquisition of National Nephrology Associates which included a cash payment of
$165.0 million and the assumption, or payment, of NNAs outstanding debt,
including its $160.0 million of 9% senior subordinated notes due 2011. After
the acquisition, our total debt was approximately $502.1 million, which
included $325 million under our term facility, $10 million under our revolving
credit facility, the $160 million of 9% senior subordinated notes and
approximately $7.1 million in capitalized leases and notes payable. 
 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 such 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
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 controls over financial
reporting during the period covered by this report that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting. 
 PART II  OTHER INFORMATION 
 ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS During the quarter ended March 31, 2004, 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, 2004 to
January 31, 2004
    
    
    555,200
    
    
    $
    41.75
    
    
    
    555,200
    
    
    $
    192,396,128February 1, 2004 to
February 29, 2004
    
    
    1,282,200
    
    
    
    45.99
    
    
    
    1,282,200
    
    
    
    133,378,452March 1, 2004 to
March 31, 2004
    
    
    1,150,300
    
    
    
    46.40
    
    
    
    1,150,300
    
    
    
    79,959,735Total
    
    
    2,987,700
    
    
    $
    45.36
    
    
    
    2,987,700
 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 25




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repurchases of up to $450.0 million of common stock. The program expires
December 31, 2004. No share repurchase plan or program expired during the
period covered by this quarterly report. 
 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: 2.1
    
    Agreement and Plan of Merger, dated
February 2, 2004, by and among Renal Care Group, Inc., Titan Merger
Subsidiary, Inc., National Nephrology Associates, Inc. and certain
equity holders of National Nephrology Associates, Inc.*4.1
    
    Indenture, dated as of October 22,
2003, by and among National Nephrology Associates, Inc., the
Guarantors named therein and Wells Fargo Bank, N.A.*4.2
    
    First Supplemental Indenture, dated
April 2, 2004, by and among Renal Care Group, Inc., the Guarantors
named therein and Wells Fargo Bank, N.A.*4.3
    
    Registration Rights Agreement,
dated October 22, 2003, by and among National Nephrology Associates,
Inc., the Guarantors named therein and the Initial Purchasers named
therein.*4.4
    
    Purchase Agreement, dated October
16, 2003, by and among National Nephrology Associates, Inc., the
Guarantors named therein and the Initial Purchasers named therein.*10.1
    
    Credit Agreement, dated February
10, 2004, by and among Renal Care Group, Inc., the Guarantors (as
defined therein), the Lenders (as defined therein) and Bank of
America, N.A., as Administrative Agent and the other lenders
identified therein.*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
 *
Incorporated by reference to the Registrants current report on
Form 8-K filed with the SEC on April 16, 2004. ** 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.  (b)
    
    Reports on Form 8-KForm 8-K filed January 12, 2004
Form 8-K filed February 4, 2004
Form 8-K filed February 25, 2004
Form 8-K filed February 27, 2004 26




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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 10, 2004
    
    BY:
    
    /s/ David M. DillDavid M. DillExecutive Vice President,Chief Financial Officer (PrincipalFinancial Officer and PrincipalAccounting Officer)
 27




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##### Table of Contents



RENAL CARE GROUP,
INC.EXHIBIT INDEX Number andDescription
ofExhibit2.1
    
    Agreement and Plan of Merger, dated
February 2, 2004, by and among Renal Care Group, Inc., Titan Merger
Subsidiary, Inc., National Nephrology Associates, Inc. and certain
equity holders of National Nephrology Associates, Inc.*4.1
    
    Indenture, dated as of October 22,
2003, by and among National Nephrology Associates, Inc., the
Guarantors named therein and Wells Fargo Bank, N.A.*4.2
    
    First Supplemental Indenture, dated
April 2, 2004, by and among Renal Care Group, Inc., the Guarantors
named therein and Wells Fargo Bank, N.A.*4.3
    
    Registration Rights Agreement,
dated October 22, 2003, by and among National Nephrology Associates,
Inc., the Guarantors named therein and the Initial Purchasers named
therein.*4.4
    
    Purchase Agreement, dated October
16, 2003, by and among National Nephrology Associates, Inc., the
Guarantors named therein and the Initial Purchasers named therein.*10.1
    
    Credit Agreement, dated February
10, 2004, by and among Renal Care Group, Inc., the Guarantors (as
defined therein), the Lenders (as defined therein) and Bank of
America, N.A., as Administrative Agent and the other lenders
identified therein.*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
 *
Incorporated by reference to the Registrants current report on
Form 8-K filed with the SEC on April 16, 2004. ** 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. 28