##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

|                                                  |  |                                                                                         
|------------------------------------------------- |  | ----------------------------------------------------------------------------------------
|(Box with an X)                                   |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
|                                                 
|                                                 
|                                                 
|                                                 
|For the Quarterly Period Ended September 30, 2001
|                                                 
|                                                 
|                                                 
|                                                 
|OR                                               
|                                                 
|                                                 
|                                                 
|                                                 
|(Empty Ballot Box)                                |  | 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
incorporation or organization) |  | (I.R.S. Employer Identification No.)

2100 West End Avenue, Suite 800, 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  (Box with an X)
     No  (Empty Ballot Box)

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 November 9, 2001
|                             |  |                                
|Common Stock, $.01 par value |  | 49,
192, 373                   





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TABLE OF CONTENTS



|                                     |                                                                                               |                                            |  |  |  |  |  | 
|------------------------------------ | --------------------------------------------------------------------------------------------- | ------------------------------------------ |  |  |  |  |  | 
|PART I  FINANCIAL INFORMATION      
|                                     | ITEM 1. FINANCIAL STATEMENTS                                                                 
|                                     |                                                                                               | Consolidated Balance Sheets               
|                                     |                                                                                               | Consolidated Income Statements            
|                                     |                                                                                               | Consolidated Statements of Cash Flows     
|                                     |                                                                                               | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                     | ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|                                     |                                                                                               | RISK FACTORS                              
|PART II  OTHER INFORMATION         
|                                     | ITEM 1. LEGAL PROCEEDINGS                                                                    
|                                     | ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K                                                     
|SIGNATURE                           
|STOCK OPTION AGREEMENT-SAM BROOKS   
|STOCK OPTION AGREEMENT-DIRK ALLISON 
|STOCK OPTION AGREEMENT-GARY BRUKARDT
|STOCK OPTION AGREEMENT-RAYMOND HAKIM



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##### Table of Contents



RENAL CARE GROUP, INC.

INDEX

|                               |                                                                                       |  |                                                                                                                     |    |          |    |  | 
|------------------------------ | ------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------- | -- | -------- | -- |  | 
|                               |                                                                                       |  |                                                                                                                     |    | Page No.
|                               |                                                                                       |  |                                                                                                                     |    |         
|PART I  FINANCIAL INFORMATION
|                              
|                              
|                              
|                              
|Item 1.                        | Financial Statements                                                                 
|                              
|                              
|                              
|                              
|                               |                                                                                       |  | Consolidated Balance Sheets
December 31, 2000 and September 30, 2001 (unaudited)                                    |    |          | 1 
|                              
|                              
|                              
|                              
|                               |                                                                                       |  | Consolidated Income Statements  (unaudited)
For the three months and nine months ended September 30, 2000 and
2001 |    |          | 2 
|                              
|                              
|                              
|                              
|                               |                                                                                       |  | Consolidated Statements of Cash Flows  (unaudited)
For the nine months ended September 30, 2000 and 2001           |    |          | 3 
|                              
|                              
|                              
|                              
|                               |                                                                                       |  | Notes to Consolidated Financial Statements 
(unaudited)                                                            |    |          | 4 
|                              
|                              
|                              
|                              
|Item 2.                        | Managements Discussion and Analysis of Financial Condition And
Results of Operations |  |                                                                                                                     | 8 
|                              
|                              
|                              
|                              
|                               |                                                                                       |  | Risk Factors                                                                                                        |    |          | 12
|                              
|                              
|                              
|                              
|PART II  OTHER INFORMATION   
|                              
|                              
|                              
|                              
|Item 1.                        | Legal Proceedings                                                                     |  |                                                                                                                     | 19
|                              
|                              
|                              
|                              
|Item 6.                        | Exhibits and Reports on Form 8-K                                                      |  |                                                                                                                     | 20

Note: Item 3 of Part I, and Items 2, 3, 4 and 5 of Part II are omitted because
they are not applicable

2



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##### Table of Contents



PART I  FINANCIAL INFORMATION




ITEM 1. FINANCIAL STATEMENTS




RENAL CARE GROUP, INC.
Consolidated Balance Sheets
(in thousands, except per share data)




|                                           |                                                                                                                                                                   |                                           |         |              |         |               |         |             |         | 
|------------------------------------------ | ----------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------- | ------- | ------------ | ------- | ------------- | ------- | ----------- | ------- | 
|                                           |                                                                                                                                                                   |                                           |         | December 31, |         | September 30,
|                                           |                                                                                                                                                                   |                                           |         | 2000         |         | 2001         
|                                           |                                                                                                                                                                   |                                           |         |              |         |              
|                                           |                                                                                                                                                                   |                                           |         |              |         |               |         | (unaudited)
|ASSETS                                     |                                                                                                                                                                   |                                           |         |              |         |               |         |            
|                                          
|                                          
|                                          
|                                          
|Current assets:                            |                                                                                                                                                                   |                                           |         |              |         |               |         |            
|                                          
|                                          
|                                          
|                                          
|                                           |                                                                                                                                                                   | Cash and cash equivalents                 |         | $            | 29,902  |               |         | $           | 39,659  | 
|                                          
|                                          
|                                          
|                                          
|                                           |                                                                                                                                                                   | Accounts receivable, net                  |         |              | 122,816 |               |         |             | 126,432 | 
|                                          
|                                          
|                                          
|                                          
|                                           |                                                                                                                                                                   | Inventories                               |         |              | 12,881  |               |         |             | 13,974  | 
|                                          
|                                          
|                                          
|                                          
|                                           |                                                                                                                                                                   | Prepaid expenses and other current assets |         |              | 24,613  |               |         |             | 20,271  | 
|                                          
|                                          
|                                          
|                                          
|                                           |                                                                                                                                                                   | Deferred income taxes                     |         |              | 26,125  |               |         |             | 26,125  | 
|                                           |                                                                                                                                                                   |                                           |         |              |         |               |         |            
|Total current assets                       |                                                                                                                                                                   |                                           | 216,337 |              |         |               | 226,461 |            
|                                          
|                                          
|                                          
|                                          
|Property, plant and equipment, net         |                                                                                                                                                                   |                                           | 139,573 |              |         |               | 160,921 |            
|                                          
|                                          
|                                          
|                                          
|Goodwill and other intangibles, net        |                                                                                                                                                                   |                                           | 228,227 |              |         |               | 242,590 |            
|                                          
|                                          
|                                          
|                                          
|Other assets                               |                                                                                                                                                                   |                                           | 5,365   |              |         |               | 4,068   |            
|                                           |                                                                                                                                                                   |                                           |         |              |         |               |         |            
|Total assets                               |                                                                                                                                                                   | $                                         | 589,502 |              |         | $             | 634,040 |            
|                                           |                                                                                                                                                                   |                                           |         |              |         |               |         |            
|LIABILITIES AND STOCKHOLDERS EQUITY       |                                                                                                                                                                   |                                           |         |              |         |               |         |            
|                                          
|                                          
|                                          
|                                          
|Current liabilities:                       |                                                                                                                                                                   |                                           |         |              |         |               |         |            
|                                          
|                                          
|                                          
|                                          
|                                           | Accounts payable                                                                                                                                                  |                                           | $       | 25,951       |         |               | $       | 20,649      |        
|                                          
|                                          
|                                          
|                                          
|                                           | Current portion of long-term debt                                                                                                                                 |                                           |         | 476          |         |               |         | 806         |        
|                                          
|                                          
|                                          
|                                          
|                                           | Other current liabilities                                                                                                                                         |                                           |         | 74,165       |         |               |         | 83,723      |        
|                                           |                                                                                                                                                                   |                                           |         |              |         |               |         |            
|Total current liabilities                  |                                                                                                                                                                   |                                           | 100,592 |              |         |               | 105,178 |            
|                                          
|                                          
|                                          
|                                          
|Long-term debt, net of current portion     |                                                                                                                                                                   |                                           | 58,316  |              |         |               | 6,927   |            
|                                          
|                                          
|                                          
|                                          
|Deferred income taxes                      |                                                                                                                                                                   |                                           | 20,470  |              |         |               | 20,470  |            
|                                          
|                                          
|                                          
|                                          
|Minority interest                          |                                                                                                                                                                   |                                           | 16,002  |              |         |               | 17,406  |            
|                                           |                                                                                                                                                                   |                                           |         |              |         |               |         |            
|Total liabilities                          |                                                                                                                                                                   |                                           | 195,380 |              |         |               | 149,981 |            
|                                           |                                                                                                                                                                   |                                           |         |              |         |               |         |            
|Stockholders equity:                      |                                                                                                                                                                   |                                           |         |              |         |               |         |            
|                                          
|                                          
|                                          
|                                          
|                                           | Preferred stock, $.01 par value, 10,000 shares
authorized, none issued                                                                                            |                                           |         |             |         |               |         |            |        
|                                          
|                                          
|                                          
|                                          
|                                           | Common stock, $.01 par value, 90,000 shares authorized,
47,091 and 48,840 shares issued and outstanding at
December 31, 2000 and September 30, 2001, respectively |                                           |         | 471          |         |               |         | 488         |        
|                                          
|                                          
|                                          
|                                          
|                                           | Additional paid-in capital                                                                                                                                        |                                           |         | 234,738      |         |               |         | 268,687     |        
|                                          
|                                          
|                                          
|                                          
|                                           | Retained earnings                                                                                                                                                 |                                           |         | 158,913      |         |               |         | 214,884     |        
|                                           |                                                                                                                                                                   |                                           |         |              |         |               |         |            
|Total stockholders equity                 |                                                                                                                                                                   |                                           | 394,122 |              |         |               | 484,059 |            
|                                           |                                                                                                                                                                   |                                           |         |              |         |               |         |            
|Total liabilities and stockholders equity |                                                                                                                                                                   | $                                         | 589,502 |              |         | $             | 634,040 |            
|                                           |                                                                                                                                                                   |                                           |         |              |         |               |         |            

See accompanying notes to consolidated financial statements

1



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##### Table of Contents



RENAL CARE GROUP, INC.
Consolidated Income Statements
(in thousands, except per share data)(unaudited)




|                                                 |                                     |   |                    |         |                   |   |         |         |      |   |         |         |  |   |         |         | 
|------------------------------------------------ | ----------------------------------- | - | ------------------ | ------- | ----------------- | - | ------- | ------- | ---- | - | ------- | ------- |  | - | ------- | ------- | 
|                                                 |                                     |   | Three Months Ended |         | Nine Months Ended
|                                                 |                                     |   | September 30,      |         | September 30,    
|                                                 |                                     |   |                    |         |                  
|                                                 |                                     |   | 2000               |         | 2001              |   | 2000    |         | 2001
|                                                 |                                     |   |                    |         |                   |   |         |         |     
|Net revenue                                      |                                     | $ | 156,505            |         |                   | $ | 193,149 |         |      | $ | 460,314 |         |  | $ | 551,382 |        
|                                                
|                                                
|                                                
|                                                
|Operating costs and expenses:                    |                                     |   |                    |         |                   |   |         |         |      |   |         |         |  |   |         |        
|                                                
|                                                
|                                                
|                                                
|                                                 | Patient care costs                  |   |                    | 101,068 |                   |   |         | 125,020 |      |   |         | 295,922 |  |   |         | 357,166 | 
|                                                
|                                                
|                                                
|                                                
|                                                 | General and administrative expenses |   |                    | 13,984  |                   |   |         | 16,430  |      |   |         | 42,679  |  |   |         | 47,222  | 
|                                                
|                                                
|                                                
|                                                
|                                                 | Provision for doubtful accounts     |   |                    | 4,259   |                   |   |         | 5,215   |      |   |         | 12,512  |  |   |         | 14,885  | 
|                                                
|                                                
|                                                
|                                                
|                                                 | Depreciation and amortization       |   |                    | 8,154   |                   |   |         | 9,997   |      |   |         | 23,734  |  |   |         | 28,121  | 
|                                                
|                                                
|                                                
|                                                
|                                                 | Restructuring charge                |   |                    | 9,235   |                   |   |         |        |      |   |         | 9,235   |  |   |         |        | 
|                                                
|                                                
|                                                
|                                                
|                                                 | Merger expenses                     |   |                    |        |                   |   |         |        |      |   |         | 3,766   |  |   |         |        | 
|                                                 |                                     |   |                    |         |                   |   |         |         |      |   |         |         |  |   |         |        
|Total operating costs and expenses               |                                     |   | 136,700            |         |                   |   | 156,662 |         |      |   | 387,848 |         |  |   | 447,394 |        
|                                                 |                                     |   |                    |         |                   |   |         |         |      |   |         |         |  |   |         |        
|Income from operations                           |                                     |   | 19,805             |         |                   |   | 36,487  |         |      |   | 72,466  |         |  |   | 103,988 |        
|                                                
|                                                
|                                                
|                                                
|Interest expense, net                            |                                     |   | 1,126              |         |                   |   | 198     |         |      |   | 3,988   |         |  |   | 2,470   |        
|                                                 |                                     |   |                    |         |                   |   |         |         |      |   |         |         |  |   |         |        
|Income before minority interest and income taxes |                                     |   | 18,679             |         |                   |   | 36,289  |         |      |   | 68,478  |         |  |   | 101,518 |        
|                                                
|                                                
|                                                
|                                                
|Minority interest                                |                                     |   | 2,428              |         |                   |   | 4,104   |         |      |   | 6,855   |         |  |   | 10,956  |        
|                                                 |                                     |   |                    |         |                   |   |         |         |      |   |         |         |  |   |         |        
|Income before income taxes                       |                                     |   | 16,251             |         |                   |   | 32,185  |         |      |   | 61,623  |         |  |   | 90,562  |        
|                                                
|                                                
|                                                
|                                                
|Provision for income taxes                       |                                     |   | 6,449              |         |                   |   | 12,288  |         |      |   | 25,026  |         |  |   | 34,591  |        
|                                                 |                                     |   |                    |         |                   |   |         |         |      |   |         |         |  |   |         |        
|Net income                                       |                                     | $ | 9,802              |         |                   | $ | 19,897  |         |      | $ | 36,597  |         |  | $ | 55,971  |        
|                                                 |                                     |   |                    |         |                   |   |         |         |      |   |         |         |  |   |         |        
|Net income per share:                            |                                     |   |                    |         |                   |   |         |         |      |   |         |         |  |   |         |        
|                                                
|                                                
|                                                
|                                                
|                                                 | Basic                               |   | $                  | 0.21    |                   |   | $       | 0.41    |      |   | $       | 0.80    |  |   | $       | 1.17    | 
|                                                 |                                     |   |                    |         |                   |   |         |         |      |   |         |         |  |   |         |        
|                                                 | Diluted                             |   | $                  | 0.20    |                   |   | $       | 0.39    |      |   | $       | 0.77    |  |   | $       | 1.12    | 
|                                                 |                                     |   |                    |         |                   |   |         |         |      |   |         |         |  |   |         |        
|Weighted average shares outstanding:             |                                     |   |                    |         |                   |   |         |         |      |   |         |         |  |   |         |        
|                                                
|                                                
|                                                
|                                                
|                                                 | Basic                               |   |                    | 46,470  |                   |   |         | 48,518  |      |   |         | 45,760  |  |   |         | 47,791  | 
|                                                 |                                     |   |                    |         |                   |   |         |         |      |   |         |         |  |   |         |        
|                                                 | Diluted                             |   |                    | 48,100  |                   |   |         | 50,904  |      |   |         | 47,600  |  |   |         | 50,187  | 
|                                                 |                                     |   |                    |         |                   |   |         |         |      |   |         |         |  |   |         |        

See accompanying notes to consolidated financial statements

2



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##### Table of Contents



RENAL CARE GROUP, INC.
Consolidated Statements of Cash Flows
(in thousands)(unaudited)




|                                                                                  |                                                                              |                                           |         |                   |         |      |         |        |         |  
|--------------------------------------------------------------------------------- | ---------------------------------------------------------------------------- | ----------------------------------------- | ------- | ----------------- | ------- | ---- | ------- | ------ | ------- | -
|                                                                                  |                                                                              |                                           |         | Nine Months Ended
|                                                                                  |                                                                              |                                           |         | September 30,    
|                                                                                  |                                                                              |                                           |         |                  
|                                                                                  |                                                                              |                                           |         | 2000              |         | 2001
|                                                                                  |                                                                              |                                           |         |                   |         |     
|OPERATING ACTIVITIES                                                              |                                                                              |                                           |         |                   |         |      |         |       
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Net income                                                                        |                                                                              | $                                         | 36,597  |                   |         | $    | 55,971  |       
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Adjustments to reconcile net income to net cash
provided by operating activities: |                                                                              |                                           |         |                   |         |      |         |       
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  | Depreciation and amortization                                                |                                           |         | 23,734            |         |      |         | 28,121 |        
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  | Distributions to minority shareholders                                       |                                           |         | (3,905            | )       |      |         | (9,552 | )      
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  | Income applicable to minority interest                                       |                                           |         | 6,855             |         |      |         | 10,956 |        
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  | Deferred income taxes                                                        |                                           |         | (3,137            | )       |      |         |       |        
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  | Loss from restructuring                                                      |                                           |         | 9,235             |         |      |         |       |        
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  | Changes in operating assets and liabilities
net of effects from acquisitions |                                           |         | (3,592            | )       |      |         | 13,685 |        
|                                                                                  |                                                                              |                                           |         |                   |         |      |         |       
|                                                                                  |                                                                              | Net cash provided by operating activities |         |                   | 65,787  |      |         |        | 99,181  |  
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|INVESTING ACTIVITIES                                                              |                                                                              |                                           |         |                   |         |      |         |       
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Purchases of property and equipment                                               |                                                                              |                                           | (23,747 | )                 |         |      | (44,083 | )     
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Cash paid for acquisitions, net of cash acquired                                  |                                                                              |                                           | (1,189  | )                 |         |      | (21,403 | )     
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Change in other assets                                                            |                                                                              |                                           | (2,866  | )                 |         |      | 3,355   |       
|                                                                                  |                                                                              |                                           |         |                   |         |      |         |       
|                                                                                  |                                                                              | Net cash used in investing activities     |         |                   | (27,802 | )    |         |        | (62,131 | )
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|FINANCING ACTIVITIES                                                              |                                                                              |                                           |         |                   |         |      |         |       
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Net repayments under line of credit                                               |                                                                              |                                           | (37,285 | )                 |         |      | (51,285 | )     
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Proceeds from exercise of stock options                                           |                                                                              |                                           | 17,226  |                   |         |      | 23,992  |       
|                                                                                  |                                                                              |                                           |         |                   |         |      |         |       
|                                                                                  |                                                                              | Net cash used in financing activities     |         |                   | (20,059 | )    |         |        | (27,293 | )
|                                                                                  |                                                                              |                                           |         |                   |         |      |         |       
|Increase in cash and cash equivalents                                             |                                                                              |                                           | 17,926  |                   |         |      | 9,757   |       
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Cash and cash equivalents, at beginning of period                                 |                                                                              |                                           | 15,608  |                   |         |      | 29,902  |       
|                                                                                  |                                                                              |                                           |         |                   |         |      |         |       
|Cash and cash equivalents, at end of period                                       |                                                                              | $                                         | 33,534  |                   |         | $    | 39,659  |       
|                                                                                  |                                                                              |                                           |         |                   |         |      |         |       

See accompanying notes to consolidated financial statements

3



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RENAL CARE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2001(in thousands, except per share data)
(unaudited)




NOTE 1  Basis of Presentation

Overview

Renal Care Group, Inc. (Renal Care Group or the Company) provides
dialysis services to patients with chronic kidney failure, also known as
end-stage renal disease (ESRD). As of September 30, 2001, the Company
provided dialysis and ancillary services to approximately 17,900 patients
through 228 outpatient dialysis centers in 26 states, in addition to providing
acute dialysis services in 118 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 erythropoietin (also known as Epogen® or EPO) and
other drugs;
| 
| |  | home dialysis services;                                                                                                                    
| 
| |  | inpatient dialysis services provided to acute care hospitals and skilled nursing facilities;                                               
| 
| |  | laboratory services; and                                                                                                                   
| 
| |  | management contracts with hospital-based and medical university dialysis programs.                                                         

Patients with end-stage renal disease typically receive three dialysis
treatments each week, with reimbursement for services provided primarily by the
Medicare ESRD program based on rates established by the Centers for Medicare &
Medicaid Services (CMS), formerly known as the Health Care Financing
Administration. For the nine months ended September 30, 2001, approximately 57%
of the Companys net revenue was derived from reimbursement under the Medicare
and Medicaid programs. Medicare reimbursement is subject to rate and other
legislative changes by Congress and periodic changes in regulations, including
changes that may reduce payments under the ESRD program. Effective on both
January 1, 2000 and January 1, 2001, Congress increased the Medicare composite
rate by 1.2% each year. An additional increase of 1.2% took effect April 1,
2001. The April 1, 2001 increase included an adjustment factor that makes that
1.2% increase effective for all of 2001. Accordingly, the net result of the
1.2% increases on January 1, 2001 and April 1, 2001, plus the April adjustment
factor, is an effective increase of 2.4% for calendar year 2001. In light of
recommendations made by the Prospective Payment Assessment Commission to keep
the composite rate steady, management believes that an increase in the
composite rate for 2002 is unlikely.

The Medicare composite rate applies to a designated group of outpatient
dialysis services, including the dialysis treatment, supplies used for such
treatment, certain laboratory tests and medications, and most of the

4



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##### Table of Contents



home dialysis services provided by Renal Care Group. Certain other services,
laboratory tests, and drugs are eligible for separate reimbursement under
Medicare and are not part of the composite rate, including specific drugs such
as EPO and some physician-ordered tests provided to dialysis patients.

For patients with private health insurance, dialysis is typically
reimbursed at rates higher than Medicare during the first 30 months of
treatment. After that period Medicare becomes the primary payor. Reimbursement
for dialysis services provided pursuant to a hospital contract is negotiated
with the individual hospital and generally is higher on a per treatment
equivalent basis than the Medicare composite rate. Because dialysis is a
life-sustaining therapy used 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. In February 2000, Amgen implemented a 3.9% increase in its price for
EPO, which represented its first price increase since before Renal Care Group
was formed in February 1996. In May 2001, Amgen implemented an additional
increase of 3.9%. This May 2001 increase will not affect Renal Care Groups
results of operations in 2001 because Renal Care Groups current contract with
Amgen includes price protection for 2001. Management believes this 2001
increase will adversely affect earnings in 2002 by up to $0.05 per share, if
Renal Care Group is unable to mitigate the price increase through its contract
with Amgen or other means. Based on the status of discussions with Amgen,
management believes that Renal Care Group may be able to mitigate between 20%
and 25% of this adverse effect; however, no assurances can be given in this
regard.

Interim Financial Statements

The accompanying unaudited consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States for interim financial information and with the instructions to
Form 10-Q and Article 10 of the Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by generally accepted
accounting principles in the United States for complete financial statements.
In the opinion of management, the information contained in this quarterly
report on Form 10-Q reflects all adjustments necessary to make the results of
operations for the interim periods a fair representation of such operations.
All such adjustments are of a normal recurring nature. Operating results for
interim periods are not necessarily indicative of results that may be expected
for the year as a whole. The Company suggests that persons read these financial
statements in conjunction with the consolidated financial statements and the
related notes thereto included in the Companys Form 10-K, as filed with the
SEC on April 2, 2001.

Reclassifications

Certain prior period balances have been reclassified to conform to the
current period presentation. Such reclassifications had no effect on the net
results of operations as previously reported.

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##### Table of Contents



NOTE 2  Earnings Per Share (in thousands, except per share data)

The following table sets forth the computation of basic and diluted income
per share in accordance with SFAS 128.

|                                                 |                                                                                                         |               |       |                    |       |                   |        |        |       |      |        |        |       |   |        |        |       | 
|------------------------------------------------ | ------------------------------------------------------------------------------------------------------- | ------------- | ----- | ------------------ | ----- | ----------------- | ------ | ------ | ----- | ---- | ------ | ------ | ----- | - | ------ | ------ | ----- | 
|                                                 |                                                                                                         |               |       | Three Months Ended |       | Nine months Ended
|                                                 |                                                                                                         |               |       | September 30,      |       | September 30,    
|                                                 |                                                                                                         |               |       |                    |       |                  
|                                                 |                                                                                                         |               |       | 2000               |       | 2001              |        | 2000   |       | 2001
|                                                 |                                                                                                         |               |       |                    |       |                   |        |        |       |     
|Numerator:                                       |                                                                                                         |               |       |                    |       |                   |        |        |       |      |        |        |       |   |        |       
|                                                
|                                                
|                                                
|                                                
|Numerator for basic and diluted income per share |                                                                                                         | $             | 9,802 |                    |       | $                 | 19,897 |        |       | $    | 36,597 |        |       | $ | 55,971 |       
|                                                
|                                                
|                                                
|                                                
|Denominator:                                     |                                                                                                         |               |       |                    |       |                   |        |        |       |      |        |        |       |   |        |       
|                                                
|                                                
|                                                
|                                                
|                                                 | Denominator for basic net income per share 
weighted-average shares                                    |               |       | 46,470             |       |                   |        | 48,518 |       |      |        | 45,760 |       |   |        | 47,791 |      
|                                                
|                                                
|                                                
|                                                
|                                                 | Effect of dilutive securities:                                                                          |               |       |                    |       |                   |        |        |       |      |        |        |       |   |        |        |      
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                                                         | Stock Options |       |                    | 1,232 |                   |        |        | 1,966 |      |        |        | 1,438 |   |        |        | 1,980 | 
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                                                         | Warrants      |       |                    | 398   |                   |        |        | 420   |      |        |        | 402   |   |        |        | 416   | 
|                                                 |                                                                                                         |               |       |                    |       |                   |        |        |       |      |        |        |       |   |        |       
|                                                 | Denominator for diluted net income per share 
adjusted weighted-average shares and assumed
conversions |               |       | 48,100             |       |                   |        | 50,904 |       |      |        | 47,600 |       |   |        | 50,187 |      
|                                                 |                                                                                                         |               |       |                    |       |                   |        |        |       |      |        |        |       |   |        |       
|Net income per share:                            |                                                                                                         |               |       |                    |       |                   |        |        |       |      |        |        |       |   |        |       
|                                                
|                                                
|                                                
|                                                
|                                                 | Basic                                                                                                   |               | $     | 0.21               |       |                   | $      | 0.41   |       |      | $      | 0.80   |       |   | $      | 1.17   |      
|                                                 |                                                                                                         |               |       |                    |       |                   |        |        |       |      |        |        |       |   |        |       
|                                                 | Diluted                                                                                                 |               | $     | 0.20               |       |                   | $      | 0.39   |       |      | $      | 0.77   |       |   | $      | 1.12   |      
|                                                 |                                                                                                         |               |       |                    |       |                   |        |        |       |      |        |        |       |   |        |       

NOTE 3  Contingencies (in thousands)

On August 30, 2000, nineteen patients were hospitalized and one patient died
shortly after becoming ill while receiving treatment at one of the Companys
dialysis centers in Youngstown, Ohio. One of the nineteen hospitalized
patients also died some time later. As of September 30, 2001, eleven lawsuits
related to this matter were pending. Other suits could be brought in the
future. Management believes Renal Care Groups insurance should be adequate to
cover these events and does not anticipate a material adverse effect on the
Companys consolidated financial position or results of operations.

On December 12, 2000, the Company reached an agreement in principle with the
U.S. Attorney for the Southern District of Mississippi to settle claims arising
out of alleged inadequacies in physician documentation related to lab tests
performed by its laboratory subsidiary, RenaLab, Inc. The terms of such
agreement provide that the Company will pay $1,980 to the Medicare program.
This amount was recorded during the fourth quarter of 2000 and remains accrued
for as of September 30, 2001. Although the Company expected to pay this amount
during the second quarter of 2001, a corporate integrity agreement has not been
finalized, and management now expects to pay such amount before the end of
2001.

The Company is involved in other litigation and regulatory investigations
arising in the ordinary course of business. In the opinion of management, after
consultation with legal counsel, these matters will be resolved without
material adverse effect on the Companys consolidated financial position or
results of operations.

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NOTE 4  Restructuring Charge (in thousands)

During the third quarter of 2000, the Company recorded a one-time restructuring
charge of $9,235 as a result of its plans to exit the wound care business. This
charge consisted of early contract termination costs of $1,377, goodwill and
property and equipment impairment charges of $5,973, severance costs of $1,200
and other administrative charges of $685. Management made the decision to exit
this business as part of a long-term strategy to focus on its core dialysis
business. Effective May 31, 2001, the Company sold certain assets and
transferred certain liabilities associated with the wound care business in a
transaction with a third party. Proceeds from this transaction equaled the net
book value of the assets sold less the liabilities transferred; accordingly,
no gain or loss was recognized. There are no remaining accrued expenses as of
September 30, 2001 that relate to this restructuring charge.

NOTE 5  Recent Accounting Pronouncements

On June 29, 2001, the Financial Accounting Standards Board approved the
issuance of Statements of Financial Accounting Standards No. 141, Business
Combinations(SFAS No. 141), and No. 142, Goodwill and Other Intangible Assets
(SFAS No. 142). SFAS No. 141 eliminates the pooling-of-interests method of
accounting for all business combinations except those initiated prior to July
1, 2001. Additionally, this statement changes the criteria to recognize
intangible assets apart from goodwill. SFAS No. 142 supersedes APB Opinion No.
17, Intangible Assets,that previously required goodwill and intangible assets
be amortized over a life not to exceed 40 years. Under SFAS No. 142, goodwill
and other intangible assets with indefinite lives will no longer be amortized
but must be reviewed at least annually for impairment. Separable intangible
assets that have finite lives will continue to be amortized over their useful
lives, for which SFAS No. 142 does not impose a limit. The provisions of SFAS
No. 142 apply currently to goodwill and intangible assets acquired after June
30, 2001 and upon adoption of the statement with respect to goodwill and
intangibles acquired prior to July 1, 2001. During 2001, the Company will
perform the first of the required impairment tests of goodwill and indefinite
lived intangible assets as of January 1, 2002 and has not yet determined what
the effect of these tests will be on the earnings and financial position of the
Company. Management believes the impact of the application of the
provisions of SFAS No. 142 relating to the amortization of
goodwill will favorably affect the Company's earnings in
2002 by up to $0.05 per share.

In August 2001, the FASB issued Statement of Financial Accounting Standards No.
144, Accounting for the Impairment or Disposal of Long-Lived Assets(SFAS
144), which supersedes SFAS 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of, and the accounting and
reporting provisions of APB Opinion No. 30, Reporting the Effects of Disposal
of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions. SFAS 144 removes goodwill from its scope
and clarifies other implementation issues related to SFAS 121. SFAS 144 also
provides a single framework for evaluating long-lived assets to be disposed of
by sale. The Company does not expect SFAS 144 to have a material effect on its
results of operations or financial position.

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




Results of Operations

Three Months Ended September 30, 2000 Compared to Three Months Ended September
30, 2001

Net Revenue.Net revenue increased from $156.5 million for the three
months ended September 30, 2000 to $193.1 million for the three months ended
September 30, 2001, an increase of $36.6 million, or 23.4%. This increase
resulted primarily from an 11.8% increase in the number of treatments from
approximately 604,000 performed in the 2000 period to approximately 675,000
performed in the 2001 period. This growth in treatments is the result of the
acquisition and development of various dialysis facilities and a 5.1% increase
in same-center treatments for 2001 over 2000. In addition, average net revenue
per dialysis treatment increased 11.5% from $253 in 2000 to $282 in 2001. The
increase in revenue per treatment was generally due to the
implementation of price increases to commercial payors implemented
beginning in the fourth quarter of 2000, a stronger payor mix in two
businesses acquired in the fourth quarter of 2000, the effect of the 2.4%
increase in the Medicare ESRD composite rate and increases in the utilization
of certain drugs.

Patient Care Costs.Patient care costs consist of costs directly related
to the care of patients, including direct labor, drugs and other medical
supplies, and operational costs of facilities. Patient care costs increased
from $101.1 million for the three months ended September 30, 2000, to $125.0
million for the three months ended September 30, 2001, an increase of 23.6%.
This increase was due principally to the increase in the number of treatments
performed during the period, which was reflected in corresponding increases in
the use of labor, drugs and supplies. Patient care costs as a percentage of net
revenue increased from 64.6% in 2000 to 64.7% in 2001. Patient care costs per
treatment increased 10.8% from $167 in 2000 to $185 in 2001. These increases
were due to increased labor costs to address wage pressures in many of the
Companys markets, the increase in utilization of certain drugs and generally
higher patient care costs in two businesses acquired in the fourth quarter of
2000.

General and Administrative Expenses.General and administrative expenses
include corporate office costs and facility costs not directly related to the
care of patients, including facility administration, accounting, billing and
information systems. General and administrative expenses increased from $14.0
million for the three months ended September 30, 2000 to $16.4 million for the
three months ended September 30, 2001, an increase of 17.1%. General and
administrative expenses as a percentage of net revenue decreased from 8.9% in
2000 to 8.5% in 2001, primarily as the result of an increase in net revenue
for 2001.

Provision for Doubtful Accounts.The provision for doubtful accounts is
determined as a function of payor mix, billing practices, and other factors.
Renal Care Group reserves for doubtful accounts in the period in which the
revenue is recognized based on managements estimate of the net collectibility
of the accounts receivable. Management estimates the net collectibility of
accounts receivable based upon a variety of factors. These factors include, but
are not limited to, analyzing revenues generated from payor sources, performing
subsequent collection testing and regularly reviewing detailed accounts
receivable agings. The provision for doubtful accounts increased from $4.3
million for the three months ended September 30, 2000 to $5.2 million for the
three months ended September 30, 2001, an increase of approximately $900,000,
or 20.9%. The provision for doubtful accounts as a percentage of net revenue
remained consistent at 2.7% in 2000 and 2001.

Depreciation and Amortization.Depreciation and amortization increased
from $8.2 million for the three months ended September 30, 2000 to $10.0
million for the three months ended September 30, 2001, an increase of

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22.0%.
This increase was due to the start-up of dialysis facilities, the normal
replacement costs of dialysis facilities and equipment, the purchase of information systems, and the amortization of the
goodwill and other intangible assets associated with acquisitions prior to June
30, 2001, that are accounted for as purchases.

Restructuring Charge.The Company recorded a restructuring charge of $9.2
million during the three months ended September 30, 2000. The
charge resulted
from the Companys decision to cease providing wound care services, and to focus on its core dialysis business. The restructuring
charge principally represents impairment charges for goodwill and property and
equipment associated with the wound care business along with severance costs, contract termination costs and other associated charges.

Income from Operations.Income from operations increased from $19.8
million for the three months ended September 30, 2000 to $36.5 million for the
three months ended September 30, 2001, an increase of 84.3%. Income from operations as a percentage
of net revenue increased from 12.7% in 2000 to 18.9% in 2001 as a result of the
factors discussed above.

Interest Expense, Net.Interest expense decreased from $1.1 million for
the three months ended September 30, 2000 to approximately $200,000 for the
three months ended September 30, 2001, a decrease of 81.8%. The decrease was
the result of lower average borrowings during 2001.

Minority Interest.Minority interest represents the proportionate equity
interest of other partners in the Companys consolidated entities that are not
wholly-owned, whose financial results are included in the Companys
consolidated results. Minority interest as a percentage of net revenue
increased to 2.1% in 2001 from 1.6% in 2000. This increase was the result of
the continued expansion of the operations of Renal Care Groups joint ventures,
primarily those in Ohio, Washington and Oregon, as well as an increase in the
number of facilities operated as joint ventures.

Provision for Income Taxes. Income tax expense increased from $6.4
million for the three months ended September 30, 2000 to $12.3 million for the
three months ended September 30, 2001, an increase of $5.9 million or 92.2%.
The increase is a result of pre-tax earnings increasing by approximately 98.0%.
The effective tax rate of the Company decreased from 39.7% for the three
months ended September 30, 2000 to 38.2% for the three months ended September
30, 2001. This decrease is primarily the result of certain non-deductible costs
associated with the restructuring charge described above.

Net Income. Net income increased from $9.8 million for the three months
ended September 30, 2000 to $19.9 million for the three months ended September
30, 2001, an increase of $10.1 million or 103.1%. The increase is a result of
the items discussed above.

Results of Operations

Nine months Ended September 30, 2001 Compared to Nine months Ended September
30, 2000

Net revenue. Net revenue increased from $460.3 million for the nine months
ended September 30, 2000 to $551.4 million for the nine months ended September
30, 2001, an increase of $91.1 million, or 19.8%. This increase resulted
primarily from an 11.1% increase in the number of treatments from approximately
1.8 million in 2000 to approximately 2.0 million, in 2001. This growth in
treatments is the result of the acquisition and development of various dialysis
facilities and a 5.4% increase in same-center treatments for 2001 over 2000. In
addition, average net revenue per dialysis treatment increased 10.4% from $249
in 2000 to $275 in 2001. The increase in revenue per

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treatment was generally
due to the implementation of price increases to commercial payors
implemented beginning in the fourth quarter of 2000, a
stronger payor mix in two businesses acquired in the fourth quarter of 2000, the effect
of the 2.4% increase in the Medicare ESRD composite rate and increases in the
utilization of certain drugs.

Patient Care Costs.Patient care costs consist of costs directly related
to the care of patients, including direct labor, drugs and other medical
supplies, and operational costs of facilities. Patient care costs increased
from $295.9 million for the nine months ended September 30, 2000, to $357.2
million for the nine months ended September 30, 2001, an increase of 20.7%.
This increase was due principally to the increase in the number of treatments
performed during the period, which was reflected in corresponding increases in
the use of labor, drugs and supplies. Patient care costs as a percentage of net
revenue increased from 64.3% in 2000 to 64.8% in 2001. Patient care costs per
treatment increased 9.7% from $165 in 2000 to $181 in 2001. These increases
were due to increased labor costs to address wage pressures in many of the
Companys markets, the increase in utilization of certain drugs and generally
higher patient care costs in two businesses acquired in the fourth quarter of
2000.

General and Administrative Expenses.General and administrative expenses
increased from $42.7 million for the nine months ended September 30, 2000 to
$47.2 million for the nine months ended September 30, 2001, an increase of
10.5%. General and administrative expenses as a percentage of revenue decreased
from 9.3% in 2000 to 8.6% in 2001, primarily as the result of an increase in
net revenue for 2001.

Provision for Doubtful Accounts.The provision for doubtful accounts
increased from $12.5 million for the nine months ended September 30, 2000 to
$14.9 million for the nine months ended September 30, 2001, an increase of $2.4
million, or 19.2%. The provision for doubtful accounts as a percentage of net
revenue remained consistent at 2.7% in 2000 and 2001.

Depreciation and Amortization. Depreciation and amortization increased
from $23.7 million for the nine months ended September 30, 2000 to $28.1
million for the nine months ended September 30, 2001, an increase of $4.4
million, or 18.6%. This increase was due to the start-up of dialysis
facilities, the normal replacement costs of dialysis facilities and equipment,
the purchase of information systems, and the amortization of the goodwill and
other intangible assets associated with the acquisitions prior to June 30,
2001, that are accounted for as purchases.

Restructuring Charge.The Company recorded a restructuring charge of $9.2
million during the nine months ended September 30, 2000. The
charge resulted
from the Companys decision to cease providing wound care services, and to focus on its core dialysis business. The restructuring
charge principally represents impairment charges for goodwill and property and
equipment associated with the wound care business along with severance costs, contract termination costs and other associated charges.

Merger Expenses.Merger expenses of $3.8 million for the nine months ended
September 30, 2000 represent legal, accounting, employee severance costs and
related benefits and other costs associated with the assimilation and
transition of the Company's merger with Renal Disease Management by
Physicians in April 2000.

Income from Operations. Income from operations increased from $72.5
million for the nine months ended September 30, 2000 to $104.0 million for the
nine months ended September 30, 2001, an increase of $31.5 million, or 43.4%.
Income from operations as a percentage of
net revenue increased from 15.7% in the 2000 period to 18.9% in the 2001 period
as a result of the factors discussed above.

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Interest Expense, Net.Interest expense decreased from $4.0 million for
the nine months ended September 30, 2000 to $2.5 million for the nine months
ended September 30, 2001. The decrease was the result of
lower average borrowings during 2001, offset by a charge of $700,000
recorded in the second quarter of 2001, resulting from the anticipated
settlements of Federal, state and local tax audits.

Minority Interest. Minority interest represents the proportionate equity
interest of other partners in the Companys consolidated entities that are not
wholly-owned, whose financial results are included in the Companys
consolidated results. Minority interest as a percentage of net revenue
increased to 2.0% in 2001 from 1.5% in 2000. This increase was the result of
the continued expansion of the operations of Renal Care Groups joint ventures,
primarily those in Ohio, Washington and Oregon, as well as an
increase in the number of facilities operated as joint ventures.

Provision for Income Taxes. Income tax expense increased from $25.0
million for the nine months ended September 30, 2000 to $34.6 million for the
nine months ended September 30, 2001, an increase of $9.6 million or 38.4%.
The increase is a result of pre-tax earnings increasing by 47.0%. The
effective tax rate of the Company decreased from 40.6% for the nine months
ended September 30, 2000 to 38.2% for the nine months ended September 30, 2001.
This decrease is the result of significant non-deductible merger and
restructuring costs
recorded in the 2000 period.

Net Income. Net income increased from $36.6 million for the nine months
ended September 30, 2000 to $56.0 million for the nine months ended September
30, 2001, an increase of $19.4 million or 53.0%. The increase is a result of
the items discussed above.

Liquidity and Capital Resources

Renal Care Group requires capital primarily to acquire and develop
dialysis centers, to purchase property and equipment for existing centers, and
to finance working capital needs. At September 30, 2001, the Companys working
capital was $121.3 million, cash and cash equivalents were $39.7 million, and
the Companys current ratio was approximately 2.2 to 1.

Net cash provided by operating activities was $99.2 million for the nine
months ended September 30, 2001. Cash provided by operating activities consists
of net income before depreciation and amortization expense, adjusted for
changes in components of working capital, primarily related to the timing of
the Companys third quarter estimated tax payment. Net cash used in investing
activities was $62.1 million for the nine months ended September 30, 2001. Cash
used in investing activities consisted primarily of $44.1 million of purchases
of property and equipment and $21.4 million of cash paid for acquisitions, net
of cash acquired. Net cash used in financing activities was $27.3 million for
the nine months ended September 30, 2001. Cash used in financing activities
primarily reflects $51.3 million in net payments under Renal Care Groups line
of credit partially offset by $24.0 million in net proceeds from the issuance
of common stock.

The Company has executed a Second Amendment to its First
Amended and Restated Loan Agreement with a group of banks. The Second Amendment
provided for an increase in the credit facility from $125.0 million to $185.0
million through August 2000 at which point the lender commitments were reduced
to $157.3 million. Lender commitments were further reduced to $129.5 million in
August 2001. Borrowings under the credit facility may be used for
acquisitions, capital expenditures, working capital and general corporate
purposes. No more than $25.0 million of the credit facility may be used for
working capital purposes. Within the working capital sublimit, Renal Care Group
may borrow up to $5.0 million in swing line loans.

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The Company has negotiated loan pricing based on a LIBO rate margin
pursuant to leverage tiers. These leverage tiers extend from 0.75 to 2.25 times
and are priced at a LIBO rate margin of 0.60% to 1.35%. Commitment fees are
also priced pursuant to leverage ratio tiers. Commitment fees range from 0.20%
to 0.30% pursuant to leverage ratios ranging between 0.75 and 2.25. Under the loan agreement,
commitments range in amounts and dates through August
2003. Lender commitments will remain at $129.5 million through August 2002, and will
then be reduced to $101.8 million through August 2003. All loans under the loan
agreement are due and payable on August 4, 2003. As of September 30, 2001,
there was $3.0 million outstanding under this agreement. These variable rate
debt instruments of the Company carry a degree of interest rate risk.
Specifically variable rate debt may result in higher costs to the Company if
interest rates rise.

Each of Renal Care Groups subsidiaries has guaranteed all of Renal Care
Groups obligations under the loan agreement. Further, Renal Care Groups
obligations under the loan agreement, and the obligations of each of its
subsidiaries under its guaranty, are secured by a pledge of the equity
interests held by Renal Care Group in each of the subsidiaries. Financial
covenants are customary based on the amount and duration of this commitment.

A significant component of Renal Care Groups growth strategy is the
acquisition and development of dialysis facilities. There can be no assurance
that Renal Care Group will be able to identify suitable acquisition candidates
or to close acquisition transactions with them on acceptable terms. Management
of Renal Care Group believes that existing cash and funds from operations,
together with funds available under the line of credit, will be sufficient to
meet Renal Care Groups acquisition, expansion, capital expenditure and working
capital needs for the foreseeable future. However, in order to finance certain
large strategic acquisition opportunities, Renal Care Group may from time to
time incur additional short and long-term bank indebtedness and may 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 any
additional financing, if required, will be available on terms acceptable to
Renal Care Group.

Renal Care Group plans to make capital expenditures of between $45.0
million to $50.0 million in 2001, primarily for equipment replacement,
expansion of existing dialysis facilities and construction of de novo
facilities. The Company has made capital expenditures of $44.1 million through
September 30, 2001. The Company expects that remaining capital expenditures in
2001 will be funded with cash provided by operating activities and the
Companys existing credit facility. Management believes that capital resources
available to Renal Care Group will be sufficient to meet the needs of its
business, both on a short- and long-term basis.




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 our company.

If any of the following risks occur, 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 Medicare or Medicaid Changes its Programs for Dialysis, Our Revenue and
Earnings Could Decrease

If the government changes the Medicare, Medicaid or similar government
programs or the rates paid by those programs for our services, then our revenue
and earnings may decline. We estimate that approximately 57% of our net
revenue for 1999, 53% of our net revenue for 2000 and 50% of our net revenue
for the nine months ended September 30, 2001 consisted of reimbursements from
Medicare, including the administration of EPO to treat

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anemia. We also estimate
that approximately 4% of our net revenue for 1999, 5% of our net revenue for
2000 and 7% of our net revenue for the nine months ended September 30, 2001
consisted of reimbursements from Medicaid or comparable state
programs. Some of the Medicaid programs reimburse us at rates higher
than those paid by Medicare, and any action to reduce those rates
would adversely affect our revenue and earnings. Any of
the following actions in connection with government programs could cause our
revenue and earnings to decline:



| |  | a reduction of the amount paid to us under government
programs;                                                                                                                         
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | an increase in the costs associated with performing our
services that are subject to inflation, such as labor and
supply costs, without a corresponding increase in reimbursement
rates;
| 
| |  | the inclusion of some or all ancillary services, for
which we are now reimbursed separately, in the flat composite
rate for a standard dialysis treatment; or                           
| 
| |  | changes in laws, or the interpretations of laws, which
could cause us to modify our operations.                                                                                         

Specifically, Congress and the Centers for Medicare & Medicaid Services,
or CMS (formerly known as the Health Care Financing Administration), have
proposed reviewing and potentially recalculating the average wholesale prices
of certain drugs, including some drugs that we bill for outside of the flat
composite rate. CMS has indicated that it believes the average wholesale
prices on which it currently bases reimbursement are too high and that Medicare
reimbursement for these drugs is, therefore, too high. Because we are unable
to predict accurately whether reimbursement will be changed and, if so, by how
much, we are unable to quantify what the net effect of changes in reimbursement
for these drugs would have on our revenue and earnings.

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, our revenue and earnings will decline. EPO is a bio-engineered hormone
that is used to treat anemia. Revenues from the administration of EPO were
approximately 26% of our net revenue for 1999, 2000 and for the nine months
ended September 30, 2001. Most of our payments for EPO come from government
programs. For the nine months ended September 30, 2001, Medicare and Medicaid
reimbursement represented approximately 57% of the total revenue we derived
from EPO. A reduction in the reimbursement rate for EPO could materially and
aversely 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 marketed to dialysis providers in the United States. In
May 2001, Amgen announced a 3.9% increase in the price of EPO. This price
increase will not affect our earnings in 2001 because our contract with Amgen
has pricing protection through 2001. This price increase will, however,
adversely affect our earnings in 2002 by up to $0.05 per share. In addition,
Amgen implemented a 3.9% increase in the price of EPO in February 2000. That
price increase adversely affected our earnings in 2000. 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. Amgen is also
developing a new product that may replace EPO or reduce its use. We cannot
predict when, or whether, Amgen will seek to introduce this product into the
dialysis market or how it will impact our revenue or earnings if it is
introduced.

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If Payments by Private Insurers, Hospitals or Managed Care Organizations
Decrease, Then Our Revenue and Earnings Could Decrease

If private insurers, hospitals or managed care organizations reduce their
rates or 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 39% of our net revenue for 1999, 42% of our net
revenue for 2000 and 43% of our net revenue for the nine months ended September
30, 2001, were 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.
Additionally, payments we receive from managed care organizations are typically
at rates higher than Medicare and Medicaid rates but lower than those paid by
private insurers. As a result, 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;                                                    
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | a portion of our business that is currently reimbursed by
private insurers or hospitals may become reimbursed by managed
care organizations, which currently have lower rates for our
services; 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.

If We are Unable to Make Acquisitions in the Future, 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 continue 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 Company since
its formation, the amount that acquired businesses contribute to our revenue
and profits will likely be smaller on a percentage basis. Also, as a result of
consolidation in the dialysis industry, the four largest providers of
outpatient dialysis services own more than 60% of the total 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, we may not meet our
growth expectations.

If We Fail to Integrate Acquired Companies, We Will Be Less Profitable

We have grown significantly by acquisitions of other dialysis providers
since our formation in February 1996. We have completed some of our
acquisitions as recently as September 2001. 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
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

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managements attention from our existing business. Any of these results could
damage our profitability and our prospects for future growth.

If We Complete Future Acquisitions, We May Dilute Existing Stockholders by
Issuing More of Our Common Stock or We May Incur Additional 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. We have used the pooling-of-interests accounting method for many
of our acquisitions, and as a result we have not recorded goodwill (the excess
of acquisition cost over identifiable tangible assets) in these acquisitions.
In those instances where we have used the purchase accounting method in
acquisitions, we have recorded goodwill and other intangible assets, which are
then amortized yearly against our earnings at a blended average life of 35
years. We had approximately $242.6 million of goodwill and other intangibles,
net, as of September 30, 2001. The Financial Accounting Standards Board
announced the finalization of rules that eliminate the pooling-of-interests
method. The elimination of the pooling-of-interests method will likely result
in the recording of goodwill for all acquisitions subsequent to September 30,
2001. Under these new rules goodwill and other intangible assets with
indefinite lives will not be amortized to expense; however, we will be required
to review all such assets at regular intervals and to charge an appropriate
amount to expense when impairment is identified. Interest expense on additional
debt incurred to fund our acquisitions may significantly reduce our
profitability.

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 an acquisition,
private plaintiffs or governmental agencies may still assert claims. Even
though we generally seek to obtain indemnification from prospective sellers,
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 Referring Physicians Stop Referring To Our Centers or Were Prohibited
From Referring for Regulatory Reasons, Our Revenue and Earnings Would Decline

Our dialysis centers depend on referrals from local nephrologists.
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 referring physicians could have a material
adverse effect on the operations of that center. The loss of the patient base
of a significant number of referring physicians could cause our revenue and
earnings to decline. In many instances, the primary referral sources for our
centers are physicians who are also stockholders and serve as medical directors
of our centers. If stock ownership or the medical director relationship were
deemed to violate applicable federal or state law, including fraud and abuse
laws and laws prohibiting self-referrals, the physicians owning our stock or
acting as medical directors could be forced to stop referring patients to our
centers. Further, we may not be able to renew or renegotiate our medical
director agreements successfully, which could result in a loss of patients
since dialysis patients are typically treated at a center where their physician
serves as a medical director.

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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 regarding
the following:



| |  | fraud and abuse prohibitions under health care reimbursement laws;                                  
|- |  | ----------------------------------------------------------------------------------------------------
| 
| |  | prohibitions and limitations on patient referrals;                                                  
| 
| |  | billing and reimbursement, including false claims
prohibitions under health care reimbursement laws;
| 
| |  | collection, use, storage and disclosure of patient health information;                              
| 
| |  | facility licensure;                                                                                 
| 
| |  | health and safety requirements;                                                                     
| 
| |  | environmental compliance; and                                                                       
| 
| |  | medical and toxic waste disposal.                                                                   

Much of this regulation, 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 shareholders and physician joint venture partners, governmental
agencies could challenge some of our practices under these laws.

New regulations governing electronic transactions and the collection, use,
storage and disclosure of health information impose significant administrative
and financial obligations on our business. If, after the required compliance
date, we are found to have violated these restrictions, we could be subject to:



| |  | criminal or civil penalties;                                                                     
|- |  | -------------------------------------------------------------------------------------------------
| 
| |  | claims by persons 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. For example, the OIG has indicated that it is focusing on a number
of areas related to ESRD in its 2001 work plan. In addition, 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, we
may be subject to severe sanctions or 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 occur, our revenue
and earnings could decline.

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Changes In the Health Care Delivery, Financing or Reimbursement Systems Could
Adversely Affect Our Business

The health care industry in the United States remains in 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 capital expenditures. In addition, proposals to reform
the health care system have been considered by Congress. These proposals, if
enacted, may further increase government regulation of or other 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.

The Dialysis Business Is Highly Competitive. If We Do Not Compete Effectively
in Our Markets, We Could Lose Market Share and Our Rate of Growth Could Slow

The dialysis industry is rapidly consolidating. 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. Several of our competitors are part of larger companies that also
manufacture dialysis equipment, which allows them to realize lower equipment
costs. Several of our competitors, including these equipment manufacturers,
are much larger than we are and have substantially greater financial resources
and more established operations and infrastructure than us. We also experience
competition from nephrologists who open their own dialysis centers. 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, or Are Unable To Attract and Retain
Qualified Management Personnel and Medical Directors, Our Ability To Run Our
Business Could Be Adversely Affected, and Our Revenue and Earnings Could
Decline

We are dependent upon the services of our executive officers Sam A.
Brooks, Jr., our Chairman, Chief Executive Officer and President, and Raymond
Hakim, M.D., Ph.D., R. Dirk Allison and Gary Brukardt, each an Executive Vice
President. Mr. Brooks, Dr. Hakim and Mr. Brukardt have each been with Renal
Care Group since its formation. The services of Mr. Brooks and these three
Executive Vice Presidents would be very difficult to replace. We do not carry
key-man life insurance on any of our officers. Further, our growth will depend
in part upon our ability to attract and retain skilled employees, for whom
competition is intense. We also believe that our future success will depend on
our ability to attract and retain qualified physicians to serve as medical
directors of our dialysis centers. We have entered into medical director
agreements with the physicians serving as medical directors of our dialysis
centers, most of which contain noncompetition covenants of varying durations.

If We Are Liable for Damages in Litigation, Our Insurance May Not be Sufficient
to Cover Such Potential Damages

On August 30, 2000, nineteen 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 nineteen hospitalized
patients also died some time later. Eleven lawsuits had been filed against us
as of September 30, 2001, and other suits could be brought in the future.
While management believes Renal Care Groups insurance should be

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adequate to
cover these events, if we are found liable for damages in litigation stemming
from these illnesses, our present insurance coverage may not be sufficient to
cover such damages.

If Our Board of Directors Does Not Approve an Acquisition or Change in Control
of Renal Care Group, 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 of
Renal Care Group 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 may be in their best interest. These provisions are
intended to encourage any person interested in acquiring Renal Care Group to
negotiate with and obtain approval from our board of directors prior to
pursuing the transaction. Provisions that could delay, deter or inhibit a
future acquisition or change in control of Renal Care Group 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 Nasdaq National Market. The market
price of our common stock has ranged from a low of $26.80 per share to a high
of $33.89 per share during the three months ended September 30, 2001. 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;                                                     
| 
| |  | 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

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and general
economic, political and market conditions, could cause the market price of our
common stock to decline.

Forward Looking Statements

Some of the information in this quarterly report on Form 10-Q contains
forward-looking statements that involve substantial risks and uncertainties.
You can identify these statements by forward-looking words like 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 be events in the future, however, that we are not able to
predict accurately 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.

PART II  OTHER INFORMATION




ITEM 1. LEGAL PROCEEDINGS.




On August 30, 2000, nineteen patients were hospitalized and one patient
died shortly after becoming ill while receiving treatment at one of the
Companys dialysis centers in Youngstown, Ohio. One of the nineteen
hospitalized patients also died some time later.

In March 2001, the Company was sued in Mahoning County, Ohio by one of the
affected patients for injuries related to the August 30, 2000 illnesses.
Additional suits have been filed, and as of September 30, 2001, a total of
eleven 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. Renal Care
Group has denied the allegations and has filed cross-claims against the water
system vendors. Renal Care Group intends to pursue these cross-claims
vigorously.

|                        |  |                                                                        
|----------------------- |  | -----------------------------------------------------------------------
|These suits are styled: |  | Mary E. Beaumier v. Physicians Dialysis Centers, Inc., et al.          
|                       
|                       
|                       
|                       
|                        |  | Renee Chesney, et al. v. Physicians Dialysis Centers, Inc., et al.     
|                       
|                       
|                       
|                       
|                        |  | Connie M. Dukes v. Physicians Dialysis Centers, Inc., et al.           
|                       
|                       
|                       
|                       
|                        |  | Clifford Hickson v. Physicians Dialysis Centers, Inc., et al.          
|                       
|                       
|                       
|                       
|                        |  | Joanne Hight, et al. v. Physicians Dialysis Centers, Inc., et al.      
|                       
|                       
|                       
|                       
|                        |  | Andrew Kraynack, et al. v. Physicians Dialysis Centers, Inc., et al.   
|                       
|                       
|                       
|                       
|                        |  | Kay F. Lingo v. Physicians Dialysis Centers, Inc., et al.              
|                       
|                       
|                       
|                       
|                        |  | Charles J. Lowry, Sr. v. Physicians Dialysis Centers, Inc., et al.     
|                       
|                       
|                       
|                       
|                        |  | Lawrence Payne v. Physicians Dialysis Centers, Inc., et al.            
|                       
|                       
|                       
|                       
|                        |  | William E. Repasky, et al. v. Physicians Dialysis Centers, Inc., et al.
|                       
|                       
|                       
|                       
|                        |  | James Thomas v. Physicians Dialysis Centers, Inc., et al.              

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Additional suits arising out of these illnesses may be filed in the
future. Management believes that Renal Care Groups insurance should be
adequate to cover these illnesses and does not anticipate a material adverse
effect on the Companys consolidated financial position or results of
operation.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.




|    |  |                                 |  |                                                                                    
|--- |  | ------------------------------- |  | -----------------------------------------------------------------------------------
|(a) |  | Exhibits:                      
|   
|   
|   
|   
|    |  | 10.53                           |  | Stock Option Agreement dated August 2, 2001 between the Company and Sam A. Brooks  
|   
|   
|   
|   
|    |  | 10.54                           |  | Stock Option Agreement dated August 2, 2001 between the Company and R. Dirk Allison
|   
|   
|   
|   
|    |  | 10.55                           |  | Stock Option Agreement dated August 2, 2001 between the Company and Gary Brukardt  
|   
|   
|   
|   
|    |  | 10.56                           |  | Stock Option Agreement dated August 2, 2001 between the Company and Raymond Hakim  
|   
|   
|   
|   
|(b) |  | Reports on Form 8-K:           
|   
|   
|   
|   
|    |  | Form 8-K filed August 23, 2001.
|   
|   
|   
|   
|    |  |                                

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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.                                                                                             
|                 
|November 14, 2001 |  | BY: /s/ R. Dirk Allison                                                                                            
|                  |  |                                                                                                                    
|                  |  | R. Dirk Allison                                                                                                    
|                  |  | Executive Vice President,
Chief Financial Officer, and Principal
Financial Officer and Principal
Accounting Officer

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RENAL CARE GROUP, INC.

EXHIBIT INDEX

|                                 |  |                                                                                     | 
|-------------------------------- |  | ----------------------------------------------------------------------------------- | 
|Number andDescription of Exhibit
|                                
|10.53                            |  | Stock Option Agreement dated August 2, 2001 between the Company and Sam A. Brooks  
|10.54                            |  | Stock Option Agreement dated August 2, 2001 between the Company and R. Dirk Allison
|10.55                            |  | Stock Option Agreement dated August 2, 2001 between the Company and Gary Brukardt  
|10.56                            |  | Stock Option Agreement dated August 2, 2001 between the Company and Raymond Hakim  

22