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-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, M1hbmo1V7TWC3Mqytn+vItwwGXK6wNozomfq7RhSkt6u53zBngIH9HEWWDlMKNXe YZIIYWQ/4O8W7AnRdnCIBQ== 0000950144-02-011521.txt : 20021112 0000950144-02-011521.hdr.sgml : 20021111 20021112154042 ACCESSION NUMBER: 0000950144-02-011521 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20020930 FILED AS OF DATE: 20021112 FILER: COMPANY DATA: COMPANY CONFORMED NAME: RENAL CARE GROUP INC CENTRAL INDEX KEY: 0000920052 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MISC HEALTH & ALLIED SERVICES, NEC [8090] IRS NUMBER: 621622383 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-16733 FILM NUMBER: 02817150 BUSINESS ADDRESS: STREET 1: 2100 WEST END AVENUE STREET 2: SUITE 800 CITY: NASHVILLE STATE: TN ZIP: 37203 BUSINESS PHONE: 6153455500 10-Q 1 g79129e10vq.htm RENAL CARE GROUP, INC. RENAL CARE GROUP, INC.

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q


(Mark One)
x		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended September 30, 2002

OR

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________ to __________

Commission File No. 0-27640

RENAL CARE GROUP, INC.

(Exact name of registrant as specified in its charter)


Delaware (State or other jurisdiction of incorporation or organization)		62-1622383 (I.R.S. Employer Identification No.)

2525 West End Avenue, Suite 600, Nashville, Tennessee 37203
(Address of principal executive offices) (Zip code)
Registrant’s telephone number, including area code: (615) 345-5500

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days).

Yes x No o

Indicate 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 8, 2002

Common Stock, $0.01 par value		48,394,770

TABLE OF CONTENTS


	PART I FINANCIAL INFORMATION
	ITEM 1. FINANCIAL STATEMENTS
	Condensed Consolidated Balance Sheets
	Condensed Consolidated Income Statements
	Condensed Consolidated Statements Of Cash Flows
	NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
	ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
	ITEM 4. CONTROLS AND PROCEDURES
	PART II - OTHER INFORMATION
	ITEM 1. LEGAL PROCEEDINGS.
	ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
FORM OF STOCK OPTION AGREEMENT
FORM OF STOCK OPTION AGREEMENT

RENAL CARE GROUP, INC.

INDEX


		Page No.

PART I - FINANCIAL INFORMATION
Item 1.	Financial Statements
	Condensed Consolidated Balance Sheets December 31, 2001 and September 30, 2002 (unaudited)		1
	Condensed Consolidated Income Statements — (unaudited) For the three months and nine months ended September 30, 2001 and 2002		2
	Condensed Consolidated Statements of Cash Flows — (unaudited) For the nine months ended September 30, 2001 and 2002		3
	Notes to Condensed Consolidated Financial Statements — (unaudited)		4
Item 2.	Management’s Discussion and Analysis of Financial Condition And Results of Operations		9
	Risk Factors		14
Item 4.	Controls and Procedures		21
PART II - OTHER INFORMATION
Item 1.	Legal Proceedings		22
Item 6.	Exhibits and Reports on Form 8-K		22

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

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

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


		December 31,			September 30,
		2001			2002

					(unaudited)
ASSETS
Current assets:
	Cash and cash equivalents	$	27,423		$	39,802
	Accounts receivable, net		127,056			142,474
	Inventories		16,292			15,252
	Prepaid expenses and other current assets		18,584			15,045
	Income taxes receivable		7,058			—
	Deferred income taxes		16,894			16,894

Total current assets			213,307			229,467
Property, plant and equipment, net			175,925			198,038
Goodwill			243,530			262,798
Intangible assets, net			10,365			11,691
Other assets			7,922			5,423

Total assets		$	651,049		$	707,417

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
	Accounts payable	$	28,198		$	20,830
	Income taxes payable		—			7,141
	Current portion of long-term debt		726			123
	Other current liabilities		80,336			97,622

Total current liabilities			109,260			125,716
Long-term debt, net of current portion			3,776			2,805
Deferred income taxes			12,728			12,728
Minority interest			15,034			27,850

Total liabilities			140,798			169,099

Commitments and contingencies
Stockholders’ equity:
	Preferred stock, $0.01 par value, 10,000 shares authorized, none issued		—			—
	Common stock, $0.01 par value, 90,000 shares authorized, 49,597 and 50,632 shares issued at December 31, 2001 and September 30, 2002, respectively		496			507
	Treasury stock, 100 and 2,098 shares of common stock at December 31, 2001 and September 30, 2002, respectively		(3,059	)		(65,755	)
	Additional paid-in capital		277,300			300,487
	Retained earnings		235,514			303,079

Total stockholders’ equity			510,251			538,318

Total liabilities and stockholders’ equity		$	651,049		$	707,417

See accompanying notes to condensed consolidated financial statements.

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


		Three Months Ended				Nine Months Ended
		September 30,				September 30,

		2001		2002		2001		2002

Net revenue		$	193,149	$	231,542	$	551,382	$	660,389
Operating costs and expenses:
	Patient care costs		125,020		151,722		357,166		432,184
	General and administrative expenses		16,430		19,686		47,222		56,033
	Provision for doubtful accounts		5,215		6,008		14,885		17,228
	Depreciation and amortization		9,997		10,402		28,121		29,697

Total operating costs and expenses			156,662		187,818		447,394		535,142

Income from operations			36,487		43,724		103,988		125,247
Interest expense, net			198		569		2,470		880

Income before minority interest and income taxes			36,289		43,155		101,518		124,367
Minority interest			4,104		5,364		10,956		15,381

Income before income taxes			32,185		37,791		90,562		108,986
Provision for income taxes			12,288		14,361		34,591		41,421

Net income		$	19,897	$	23,430	$	55,971		67,565

Net income per share:
	Basic	$	0.41	$	0.48	$	1.17	$	1.37

	Diluted	$	0.39	$	0.46	$	1.12	$	1.32

Weighted average shares outstanding:
	Basic		48,518		48,672		47,791		49,190

	Diluted		50,904		50,518		50,187		51,036

See accompanying notes to condensed consolidated financial statements.

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


				Nine Months Ended
				September 30,

				2001			2002

OPERATING ACTIVITIES
Net income				$	55,971		$	67,565
Adjustments to reconcile net income to net cash provided by operating activities:
		Depreciation and amortization			28,121			29,697
		Distributions to minority shareholders			(9,552	)		(5,461	)
		Income applicable to minority interest			10,956			15,381
		Changes in operating assets and liabilities net of effects from acquisitions			13,685			20,183

			Net cash provided by operating activities		99,181			127,365
INVESTING ACTIVITIES
Purchases of property and equipment					(44,083	)		(49,413	)
Cash paid for acquisitions, net of cash acquired					(21,403	)		(19,904	)
Change in other assets					3,355			(843	)

	Net cash used in investing activities				(62,131	)		(70,160	)
FINANCING ACTIVITIES
Net payments of debt					(51,285	)		(1,574	)
Net proceeds from issuance of common stock					23,992			16,548
Investment by joint venture partner					—			2,896
Repurchase of treasury shares					—			(62,696	)

	Net cash used in financing activities				(27,293	)		(44,826	)

Increase in cash and cash equivalents					9,757			12,379
Cash and cash equivalents, at beginning of period					29,902			27,423

Cash and cash equivalents, at end of period				$	39,659		$	39,802

See accompanying notes to condensed consolidated financial statements.

RENAL CARE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2002
(Dollar amounts in thousands, except per share data)
(unaudited)

1. Basis of Presentation

Overview

Renal Care Group, Inc. provides dialysis services to patients with chronic kidney failure, also known as end-stage renal disease (ESRD). As of September 30, 2002, the Company provided dialysis and ancillary services to nearly 20,000 patients through 260 outpatient dialysis centers in 26 states, in addition to providing acute dialysis services in more than 120 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 hemodialysis 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 Congress or the Centers for Medicare & Medicaid Services (CMS). For the nine months ended September 30, 2002, approximately 58% 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 January 1, 2001, Congress increased the Medicare composite rate by 1.2%. An additional increase of 1.2% took effect April 1, 2001. The April 1, 2001 increase included an adjustment factor that made 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, was an effective increase of 2.4% for calendar year 2001. Neither Congress nor CMS approved an increase in the composite rate for 2002. Although a Medicare spending bill has not been approved as of the date of this quarterly report, neither Congress nor CMS has approved an increase in the Medicare composite rate for 2003, and management believes that the likelihood that Congress or CMS will approve an increase in the dialysis composite rate for 2003 is no better than 50% as of the date of this quarterly report.

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

dialysis services 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 significantly 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 than the Medicare composite rate on a per treatment equivalent basis. Because dialysis is a life-sustaining therapy to treat a chronic disease, utilization is predictable and is not subject to seasonal fluctuations.

Renal Care Group derives a significant portion of its net revenue and net income from the administration of EPO. EPO is manufactured by a single company, Amgen Inc. In April 2002, Amgen implemented its third EPO price increase of 3.9% in as many years. This increase will not affect Renal Care Group’s results of operations in 2002 because Renal Care Group’s contract with Amgen included price protection for all of 2002. The Company is currently engaged in negotiations with Amgen concerning its contract for 2003. Renal Care Group and Amgen have agreed in principle that the Company’s current pricing formula will remain in effect for 2003. As a result, the Company believes, although it can give no assurances, that it will be able to mitigate a substantial portion of the 2002 price increase in 2003. This agreement in principle is conditioned on negotiating and finalizing a written amendment to the contract between the Company and Amgen.

Interim 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 March 29, 2002.

2. Reclassifications

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

3. Goodwill and Intangible Assets

On January 1, 2002, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 142, Goodwill and Other Intangible Assets, which addresses the financial accounting and reporting standards for the acquisition of intangible assets and for goodwill and other intangible assets subsequent to the acquisition. This accounting standard requires that goodwill be disclosed separately from other intangible assets in the balance sheet and that goodwill no longer be amortized; instead, goodwill will be tested for impairment on a periodic basis. The provisions of this accounting standard required the Company to complete a transitional impairment test within six months of the Company’s adoption of this standard, with any identified impairments treated as a cumulative effect of a change in accounting principle. The Company has completed its transitional impairment test, and it has identified no impairments.

In accordance with SFAS No. 142, the Company discontinued the amortization of goodwill effective January 1, 2002. A reconciliation of previously reported net income and earnings per share to the pro forma amounts adjusted for the exclusion of goodwill amortization net of the related income tax effect follows:


	Three Months Ended				Nine Months Ended
	September 30,				September 30,

	2001		2002		2001		2002

Reported net income	$	19,897	$	23,430	$	55,971	$	67,565
Add: goodwill amortization, net of tax		1,031		—		2,925		—

Pro forma adjusted net income	$	20,928	$	23,430	$	58,896	$	67,565

Reported basic earnings per share	$	0.41	$	0.48	$	1.17	$	1.37
Add: goodwill amortization, net of tax		0.02		—		0.06		—

Pro forma adjusted basic earnings per share	$	0.43	$	0.48	$	1.23	$	1.37

Reported diluted earnings per share	$	0.39	$	0.46	$	1.12	$	1.32
Add: goodwill amortization, net of tax		0.02		—		0.05		—

Pro forma adjusted diluted earnings per share	$	0.41	$	0.46	$	1.17	$	1.32

Changes in the carrying amount of goodwill for the nine months ended September 30, 2002, are as follows:


Balance as of December 31, 2001	$	243,530
Goodwill acquired during the period		19,268

Balance as of September 30, 2002	$	262,798

The Company’s separately identifiable intangible assets, which consist of noncompete agreements and acute dialysis services agreements, are as follows:


	December 31,			September 30,
	2001			2002

Carrying amount	$	16,090		$	18,757
Accumulated amortization		(5,725	)		(7,066	)

Net	$	10,365		$	11,691

Separately identifiable intangible assets are being amortized over their useful lives, ranging from four to ten years. Amortization expense for the nine months ended September 30, 2002 was approximately $1,341. Estimated amortization expense for each of the five succeeding fiscal years is as follows:


Year ending December 31,	Amount

2002	$	2,010
2003		2,139
2004		2,139
2005		2,122
2006		2,067

4. Earnings Per Share (in thousands, except per share data)

The following table sets forth the computation of basic and diluted income per share:


			Three Months Ended				Nine months Ended
			September 30,				September 30,

			2001		2002		2001		2002

Numerator:
	Numerator for basic and diluted income per share		$	19,897	$	23,430	$	55,971	$	67,565
Denominator:
	Denominator for basic net income per share – weighted-average shares			48,518		48,672		47,791		49,190
	Effect of dilutive securities:
		Stock options		1,966		1,749		1,980		1,749
		Warrants		420		97		416		97

	Denominator for diluted net income per share – adjusted weighted-average shares and assumed conversions			50,904		50,518		50,187		51,036

Net income per share:
	Basic		$	0.41	$	0.48	$	1.17	$	1.37

	Diluted		$	0.39	$	0.46	$	1.12	$	1.32

5. Contingencies

On August 30, 2000, 19 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 19 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, 2002, a total of 11 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 that 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. 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.

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 provided that the Company pay $1,980 to the Medicare program. This amount was recorded during the fourth quarter of 2000 and was paid in January 2002, when the Company and the government finalized the terms of a corporate integrity agreement.

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

The Company generally engages practicing board-certified or board-eligible nephrologists to serve as medical directors for its centers. Medical directors are responsible for the administration and monitoring of the Company’s patient care policies, including patient education, administration of dialysis treatment, development programs and assessment of all patients. The Company pays medical director fees that are consistent with the fair market value of the required supervisory services. Such medical director agreements typically have a term of seven years with a three-year renewal option.

6. Recent Accounting Pronouncements

On June 30, 2001, the Company adopted SFAS No. 141, Business Combinations, which eliminated the pooling-of-interests method of accounting for all business combinations initiated after June 30, 2001 and addressed the initial recognition and measurement of goodwill and other intangible assets acquired in a business combination.

As discussed in detail in Note 3, the Company adopted SFAS No. 142 on January 1, 2002.

Effective January 1, 2002, the Company adopted SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which addresses the accounting and reporting for the impairment or disposal of long-lived assets. SFAS No. 144 did not have an effect on the Company’s results of operations in the nine months ended September 30, 2002.

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

Results of Operations

Three Months Ended September 30, 2001 Compared to Three Months Ended September 30, 2002

Net Revenue. Net revenue increased from $193.1 million for the three months ended September 30, 2001 to $231.5 million for the three months ended September 30, 2002, an increase of $38.4 million, or 19.9%. This increase resulted primarily from a 14.5% increase in the number of treatments performed by Renal Care Group from approximately 675,000 in the 2001 period to approximately 773,000 in the 2002 period. This growth in treatments is the result of the acquisition and development of various dialysis facilities and a 5.9% increase in same-market treatments for 2002 over 2001. In addition, average net revenue per dialysis treatment increased 5.7% from $282 in 2001 to $298 in 2002. The increase in revenue per treatment was largely due to a rate increase to private payors that Renal Care Group implemented in the fourth quarter of 2001 and an increase in utilization of certain ancillary drugs.

For convenience, the Company has historically referred to internal growth in its existing markets, as opposed to growth through acquisition or development activities in new markets, as “same-center” growth. This “same-center” growth has included increases in the number of new patients in existing dialysis centers as well as net new patients added when the Company opened a new dialysis center in an existing market. To describe this internal market growth more accurately, Renal Care Group will now use the term “same-market” growth instead of “same-center” growth.

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 $125.0 million for the three months ended September 30, 2001, to $151.7 million for the three months ended September 30, 2002, an increase of 21.4%. 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 64.7% in the 2001 period to 65.5% in the 2002 period. Patient care costs per treatment increased 5.9% from $185 in the 2001 period to $196 in the 2002 period. These increases were due to increases in the price of EPO, increased labor costs to address wage pressures in many of the Company’s markets, increases in the cost of insurance, the increase in utilization of certain ancillary drugs and the increased cost of the drug Heparin following a recall by its manufacturer. Management believes that the Company will continue to face increases in the cost of EPO, insurance and labor in the remainder of 2002 and throughout 2003. Management believes that the cost of the drug Heparin will return to historic levels over the next two quarters as production of the drug returns to normal levels.

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 $16.4 million for the three months ended September 30, 2001 to $19.7 million for the three months ended September 30, 2002, an increase of 19.8%. General and administrative expenses as a percentage of net revenue remained consistent at 8.5% in the 2001 and 2002 periods.

include, but are not limited to, analyzing revenues generated from payor sources, performing subsequent collection testing and regularly reviewing detailed accounts receivable agings. Based on the results of management’s estimated net collectibility of accounts receivable adjustments to the allowance for doubtful accounts are recorded as necessary. The provision for doubtful accounts increased from $5.2 million for the three months ended September 30, 2001 to $6.0 million for the three months ended September 30, 2002, an increase of approximately $793,000, or 15.2%. The provision for doubtful accounts as a percentage of net revenue decreased slightly from 2.7% in 2001 to 2.6 % in 2002.

Depreciation and Amortization. Depreciation and amortization increased from $10.0 million for the three months ended September 30, 2001 to $10.4 million for the three months ended September 30, 2002, an increase of 4.1%. This increase was due to the start-up of dialysis facilities, the normal replacement costs of dialysis facilities and equipment, the purchase of information systems, and the amortization of separately identifiable intangible assets associated with acquisitions. Depreciation and amortization as a percentage of net revenue decreased from 5.2% in the 2001 period to 4.5% in the 2002 period, primarily as a result of the implementation of SFAS No. 142, under which the Company stopped amortizing goodwill effective January 1, 2002.

Income from Operations. Income from operations increased from $36.5 million for the three months ended September 30, 2001 to $43.7 million for the three months ended September 30, 2002, an increase of 19.8%. Income from operations as a percentage of net revenue remained consistent at 18.9% in the 2001 and 2002 periods.

Interest Expense, Net. Interest expense increased from approximately $198,000 for the three months ended September 30, 2001 to approximately $569,000 for the three months ended September 30, 2002, an increase of 187.4%. This increase was principally the result of expensing some loan origination costs associated with the Company’s line of credit, which was substantially amended in the quarter, and borrowings made and repaid during the three months ended September 30, 2002 to fund repurchases of Company common stock.

Minority Interest. Minority interest represents the proportionate equity interest of other partners in the Company’s consolidated entities that are not wholly-owned. Minority interest as a percentage of net revenue increased to 2.3% in the 2002 period from 2.1% in the 2001 period. This increase was the result of continued operational improvements in Renal Care Group’s joint ventures, primarily those in Ohio, Oregon and Washington, as well as an increase in the number of facilities operated as joint ventures.

Provision for Income Taxes. Income tax expense increased from $12.3 million for the three months ended September 30, 2001 to $14.4 million for the three months ended September 30, 2002, an increase of $2.1 million or 16.9%. The increase is a result of pre-tax earnings increasing by approximately 17.4%. The effective tax rate of the Company decreased slightly from 38.2% in the 2001 period to 38.0% in the 2002 period. This decrease was primarily the result of the implementation of SFAS No. 142.

Net Income. Net income increased from $19.9 million for the three months ended September 30, 2001 to $23.4 million for the three months ended September 30, 2002, an increase of $3.5 million or 17.8%. 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, 2002

Net revenue. Net revenue increased from $551.4 million for the nine months ended September 30, 2001 to $660.4 million for the nine months ended September 30, 2002, an increase of $109.0 million, or 19.8%. This increase resulted primarily from a 12.7% increase in the number of treatments from approximately 2.0 million in the 2001 period to approximately 2.2 million in the 2002 period. This growth in treatments is the result of the

acquisition and development of various dialysis facilities and a 5.8% increase in same-market treatments for the 2001 period over the 2002 period. In addition, average net revenue per dialysis treatment increased 6.9% from $275 in the 2001 period to $294 in the 2002 period. The increase in revenue per treatment was due in part to the implementation of the 2001 Medicare composite rate increase and an increase in the utilization of certain ancillary drugs. Renal Care Group also implemented a rate increase to private payors in the fourth quarter of 2001.

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 $357.2 million for the nine months ended September 30, 2001, to $432.2 million for the nine months ended September 30, 2002, an increase of 21.0%. 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 64.8% in the 2001 period to 65.4% in the 2002 period. Patient care costs per treatment increased 7.2% from $181 in the 2001 period to $194 in the 2002 period. These increases were due to the 2001 EPO price increase, increased labor costs to address wage pressures in many of the Company’s markets, increases in the cost of insurance, the increase in utilization of certain ancillary drugs and the increased cost of the drug Heparin following a recall by its manufacturer. Management believes that the Company will continue to face increases in the cost of EPO, insurance and labor in the remainder of 2002 and throughout 2003. Management believes that the cost of the drug Heparin will return to historic levels over the next two quarters as production of the drug returns to normal levels.

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 $47.2 million for the nine months ended September 30, 2001 to $56.0 million for the nine months ended September 30, 2002, an increase of 18.7%. General and administrative expenses as a percentage of revenue decreased slightly from 8.6% in the 2001 period to 8.5% in the 2002 period.

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 $14.9 million for the nine months ended September 30, 2001 to $17.2 million for the nine months ended September 30, 2002, an increase of $2.3 million, or 15.7%. The provision for doubtful accounts as a percentage of net revenue decreased slightly from 2.7% in the 2001 period to 2.6% in the 2002 period.

Depreciation and Amortization. Depreciation and amortization increased from $28.1 million for the nine months ended September 30, 2001 to $29.7 million for the nine months ended September 30, 2002, an increase of $1.6 million, or 5.6%. 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 separately identifiable intangible assets associated with acquisitions. Depreciation and amortization as a percentage of net revenue decreased from 5.1% in the 2001 period to 4.5% in the 2002 period, primarily as a result of the implementation of SFAS No. 142, under which the Company stopped amortizing goodwill effective January 1, 2002.

Income from Operations. Income from operations increased from $104.0 million for the nine months ended September 30, 2001 to $125.2 million for the nine months ended September 30, 2002, an increase of $21.3

million, or 20.4%. Income from operations as a percentage of net revenue increased slightly from 18.9% in the 2001 period to 19.0% in the 2002 period as a result of the factors discussed above.

Interest Expense, Net. Interest expense decreased from $2.5 million for the nine months ended September 30, 2001 to approximately $880,000 for the nine months ended September 30, 2002. The decrease was the result of lower average borrowings during 2002. The Company had generally retired all debt outstanding under its credit facilities, and has recognized interest expense in 2002 primarily on short-term borrowings to fund repurchases of Renal Care Group common stock, capital leases and equipment notes payable, commitment fees and amortization of debt issuance costs. In addition, in 2002 the Company expensed some loan origination costs associated with its line of credit, which was substantially amended in the quarter ended September 30, 2002.

Minority Interest. Minority interest represents the proportionate equity interest of other partners in the Company’s consolidated subsidiaries that are not wholly-owned. Minority interest as a percentage of net revenue increased to 2.3% in 2002 from 2.0% in 2001. This increase was the result of the continued operational improvements in 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 $34.6 million for the nine months ended September 30, 2001 to $41.4 million for the nine months ended September 30, 2002, an increase of $6.8 million or 19.7%. The increase is a result of pre-tax earnings increasing $18.4 million, representing an increase of 20.3% over the 2001 period.

Net Income. Net income increased from $56.0 million for the nine months ended September 30, 2001 to $67.6 million for the nine months ended September 30, 2002, an increase of $11.6 million or 20.7%. 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, to repurchase shares of its common stock and to finance working capital needs. At September 30, 2002, the Company’s working capital was $103.8 million, cash and cash equivalents were $39.8 million, and the Company’s current ratio was approximately 1.8 to 1.

Net cash provided by operating activities was $127.4 million for the nine months ended September 30, 2002. Cash provided by operating activities consists of net income before depreciation and amortization expense, adjusted for changes in components of working capital, primarily accounts receivable. Net cash used in investing activities was $70.2 million for the nine months ended September 30, 2002. Cash used in investing activities consisted primarily of $49.4 million of purchases of property and equipment and $19.9 million of cash paid for acquisitions, net of cash acquired. Net cash used in financing activities was approximately $44.8 million for the nine months ended September 30, 2002. Cash used in financing activities primarily reflects repurchases of Renal Care Group common stock of $62.7 million offset by a $2.9 million investment by a joint venture partner and $16.5 million in net proceeds from the issuance of common stock as stock options were exercised.

Effective July 1, 2002, Renal Care Group entered into two credit agreements with a group of banks totaling $150.0 million consisting of a $100.0 million Second Amended and Restated Loan Agreement (the “Multi-Year Facility”) and a $50.0 Loan Agreement (the “364-day Facility”). The Multi-Year Facility has a final maturity of July 1, 2005 and the 364-day Facility has a final maturity of June 30, 2003. The Multi-Year Facility replaced the Company’s First Amended and Restated Loan Agreement. Borrowings under the credit agreements may be used for

acquisitions, capital expenditures, working capital and general corporate purposes. No more than $25.0 million of either credit agreement may be used for any single acquisition without the consent of the lenders. Under the Multi-Year Facility, the Company may borrow up to $10.0 million in swingline loans for working capital purposes. These variable rate debt instruments 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 wholly-owned subsidiaries has guaranteed all of Renal Care Group’s obligations under the loan agreements. 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 believes that existing cash and funds from operations, together with funds available under existing credit facilities, 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 need to incur additional short and long-term bank indebtedness or to issue equity or debt securities. The availability and terms of any future financing will depend on market and other conditions. There can be no assurance that any additional financing, if required, will be available on terms acceptable to Renal Care Group.

Capital expenditures of approximately $65.0 million, primarily for equipment replacement, expansion of existing dialysis facilities and construction of de novo facilities, are planned in 2002. The Company has made capital expenditures of approximately $49.4 million through September 30, 2002. The Company expects that remaining capital expenditures in 2002 will be funded with cash provided by operating activities and the Company’s existing credit facilities. 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.

Management, from time to time, determines the appropriateness of repurchasing its common stock in accordance with a repurchase plan initially authorized by the Board of Directors in October 2000. In the fourth quarter of 2001, Renal Care Group began repurchasing shares of its common stock by purchasing 100,000 shares of common stock for approximately $3.1 million. In the first and second quarters of 2002, Renal Care Group repurchased 700,000 shares of common stock for approximately $22.2 million. In July 2002, the Company announced that its Board of Directors had approved an increase in the repurchase plan from $50.0 million to $100.0 million. In the third quarter of 2002, the Company repurchased 1.3 million shares of common stock for approximately $40.4 million. Subsequent to September 30, 2002 and through November 8, 2002, therefore, the Company repurchased an additional 354,000 shares of common stock for approximately $11.4 million. Through November 8, 2002, the Company had repurchased an aggregate of 2,454,000 shares under the plan, for a total of approximately $77.1 million. Management expects to continue to repurchase additional shares of common stock during the remainder of 2002, possibly using all of the remaining amount approved by the Board of Directors by the end of the year.

Critical Accounting Policies

On December 12, 2001, the Securities and Exchange Commission issued a financial reporting release, FR-60, Cautionary Advice Regarding Disclosure About Critical Accounting Policies. In accordance with FR-60, management has identified accounting policies that it considers critical to the business of Renal Care Group. Those policies include net revenue and contractual provisions, provision for doubtful accounts, self-insurance

accruals, and impairment of long-lived assets and long-lived assets to be disposed of. These policies were identified as critical based on their importance to the consolidated financial statements as well as on the degree of subjectivity and complexity involved in these policies. There have been no changes in Renal Care Group’s critical accounting policies or in the application of those policies from those described in the annual report on Form 10-K, as filed with the SEC on March 29, 2002.

RISK FACTORS

You should carefully consider the risks described below before investing in Renal Care Group. The risks and uncertainties described below are not the only ones facing Renal Care Group. Other risks and uncertainties that we have not predicted or assessed may also adversely affect 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 Congress or CMS Changes the Medicare or Medicaid Programs for Dialysis, Then Our Revenue and Earnings Could Decrease

If the government changes the Medicare, Medicaid or similar government programs or the rates paid by those programs for our services, then our revenue and earnings may decline. We estimate that approximately 53% of our net revenue for 2000, 49% of our net revenue for 2001 and 51% of our net revenue for the nine months ended September 30, 2002 consisted of reimbursements from Medicare, including the administration of EPO to treat anemia. We also estimate that approximately 5% of our net revenue for 2000, 6% of our net revenue for 2001 and 7% of our net revenue for the nine months ended September 30, 2002 consisted of reimbursements from Medicaid or comparable state programs. Any of the following actions in connection with government programs could cause our revenue and earnings to decline:

• 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, have proposed reviewing and potentially recalculating the average wholesale prices of certain drugs, including some drugs for which we bill 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.

In addition, the Medicaid programs in some of the states in which we operate reimburse us at rates higher than those paid by Medicare. Some of these state programs have approved reductions in reimbursement, proposed reductions or have announced that they are considering reductions. Any action to reduce those higher Medicaid reimbursement rates would adversely affect our revenue and earnings.

If Reimbursement for Epogen 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 2000, 25% of our net revenue for 2001 and 23% of our net revenue for the nine months ended September 30, 2002. Most of our payments for EPO come from government programs. For the nine months ended September 30, 2002, Medicare and Medicaid reimbursement represented approximately 58% of the total revenue we derived from EPO. A reduction in the reimbursement rate for EPO could materially and adversely affect our revenue and earnings.

If Amgen Raises the Price for EPO or if EPO Becomes in Short Supply, Then We Could Be Less Profitable

EPO is produced by a single manufacturer, Amgen Inc., and there are no substitute products currently marketed to dialysis providers in the United States. In April 2002, Amgen announced a 3.9% increase in the price of EPO. This price increase will not affect our earnings in 2002 because our contract with Amgen has pricing protection through 2002. In addition, Amgen implemented a 3.9% increase in the price of EPO in May 2001. That price increase will adversely affect our earnings in 2002. 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.

If Amgen Markets Aranesp® for ESRD Patients, Then We Could Be Less Profitable

Amgen has developed and obtained FDA approval for a new drug to treat anemia marketed as Aranesp® (darbepoetin alfa). Aranesp® is a longer acting form of bio-engineered protein that, like EPO, can be used to treat anemia. EPO is usually administered in conjunction with each dialysis treatment. Aranesp® can remain effective for between two and three weeks. If Amgen markets Aranesp® for the treatment of dialysis patients, then our earnings could be materially and adversely affected by either of the following factors:

• our margins realized from the administration of Aranesp® could be lower than the margins realized on the administration of EPO; or

• physicians could decide to administer Aranesp® in their offices, and we would not recognize revenue or profit from the administration of EPO or Aranesp® .

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

If private insurers, hospitals or managed care organizations reduce their rates or if we experience a significant shift in our revenue mix toward additional Medicare or Medicaid reimbursement, then our revenue and earnings will decline. We estimate that approximately 42% of our net revenue for 2000, 45% of our net revenue for 2001 and 42% of our net revenue for the nine months ended September 30, 2002 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 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 generally 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 Our Referring Physicians Stop Referring To Our Centers or Were Prohibited From Referring for Regulatory Reasons, Then 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 also serve as medical directors of our centers and may be shareholders. If the medical director relationship or stock ownership were deemed to violate applicable federal or state law, including fraud and abuse laws and laws prohibiting self-referrals, then the physicians acting as medical directors or owning our stock could be forced to stop referring patients to our centers. 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 or a member of his or her practice group serves as a medical director.

If Our Business Is Alleged or Found To Violate Heath Care or Other Applicable Laws, Then 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, including the federal Health Insurance Portability and Accountability Act of 1996, referred to as HIPAA, and state law equivalents of HIPAA;

• facility licensure;

• health and safety requirements;

• environmental compliance; and

• medical and toxic waste disposal.

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

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

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, could 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, Then We Could Lose Market Share and Our Rate of Growth Could Slow

The dialysis industry is largely consolidated, and the consolidation trend continues as large providers acquire smaller providers. There is a small number of large dialysis companies that compete for the acquisition of outpatient dialysis centers and the development of relationships with referring physicians. Two of our major competitors are part of larger companies that also manufacture dialysis equipment, which allows them to benefit from lower equipment costs. Several of our competitors, including these equipment manufacturers, are significantly larger than we are and have greater financial resources and more established operations. 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 Nurses and Medical Directors, Then Our Ability To Run Our Business Could Be Adversely Affected, and Our Revenue and Earnings Could Decline

We depend on the services of our executive officers Sam A. Brooks, Jr., our Chairman, Chief Executive Officer and President, 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 nurses to provide services in our facilities, 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.

If We are Unable to Make Acquisitions in the Future, Then Our Rate of Growth Will Slow

Much of our historical growth has come from acquisitions. Although we intend to continue to pursue growth through the acquisition of dialysis centers, we may be unable to 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 most acquired businesses contribute to our revenue and profits will continue to be smaller on a percentage basis. Also, as a result of consolidation in the dialysis industry, the four largest providers of outpatient dialysis services own approximately 65% of the total number of outpatient dialysis facilities in the United States. We compete with these other companies to identify and complete suitable acquisitions. We expect this competition to intensify in light of the smaller pool of available acquisition candidates and other market forces. As a result, we believe it will be more difficult for us to acquire suitable companies on favorable terms. Further, the businesses we acquire may not perform well enough to justify our investment. If we are unable to make additional acquisitions on suitable terms, then we may not meet our growth expectations.

If We Complete Future Acquisitions, We May Dilute Existing Stockholders by Issuing More of Our Common Stock or We May Incur Expenses Related to Debt and Goodwill, Which Could Reduce Our Earnings

We may issue equity securities in future acquisitions that could be dilutive to our shareholders. We also may incur additional debt in future acquisitions. Interest expense on additional debt incurred to fund our acquisitions may significantly reduce our profitability. On June 29, 2001, the Financial Accounting Standards Board approved rules that eliminate the pooling-of-interests accounting method. The elimination of the pooling-of-interests method results in recording goodwill for all acquisitions after June 30, 2001. Under these new rules

goodwill and other intangible assets with indefinite lives are not amortized to expense; however, we are required to review all of these assets at regular intervals for impairment and to charge an appropriate amount to expense when impairment is identified. If impairment is identified and we are required to write off a significant portion of our intangible assets at one time, then there could be a material adverse impact on our stock price.

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

We have grown significantly by acquisitions of other dialysis providers since our formation in February 1996. We have completed some of our acquisitions as recently as June 2002. 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 management’s attention from our existing business. Any of these results could damage our profitability and our prospects for future growth.

If Acquired Businesses Have Unknown Liabilities, Then We Could Be Exposed to Liabilities That Could Harm Our Business and Profitability

Businesses we acquire may have unknown or contingent liabilities, including liabilities for failure to comply with health care laws. Although we generally attempt to identify practices that may give rise to unknown or contingent liabilities and conform them to our standards after the acquisition, private plaintiffs or governmental agencies may still assert claims. Even though we generally seek to obtain indemnification from the sellers of businesses we buy, unknown and contingent liabilities may not be covered by indemnification or may exceed contractual limits or the financial capacity of the indemnifying party.

If Our Costs of Insurance and Claims Increase, Then Our Earnings Could Decrease

Renal Care Group currently maintains a program of general and professional liability insurance as well as directors’ and officers’ insurance with significant deductible amounts on each claim. We have accepted higher deductibles in each of the last several years to offset in part increases in premiums for the program. However, the deductibles and premiums increased substantially in 2002, and management believes they are likely to increase again in 2003. Our earnings could be materially and adversely affected by any of the following:

• further increases in premiums and deductibles;

• increases in the number of liability claims against us or the cost of settling or trying cases related to those claims; and

• an inability to obtain one or more types of insurance on acceptable terms.

If Our Board of Directors Does Not Approve an Acquisition or Change in Control of Renal Care Group, Then Our Shareholders May Not Realize the Full Value of Their Stock

Our certificate of incorporation and bylaws contain a number of provisions that may delay, deter or inhibit a future acquisition or change in control 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 New York Stock Exchange. The market price of our common stock has been volatile, ranging from a low of $27.72 per share to a high of $33.65 per share during the three months ended September 30, 2002. The market price for our common stock could fluctuate substantially based on a variety of factors, including the following:

• future announcements concerning us, our competitors or the health care market;

• the threat of litigation or government investigation;

• changes in government regulations; and

• changes in earnings estimates by analysts.

Furthermore, stock prices for many companies fluctuate widely for reasons that may be unrelated to their operating results. These fluctuations, coupled with changes in demand or reimbursement levels for our services and general economic, political and market conditions, could cause the market price of our common stock to decline.

Forward Looking Statements

Some of the information in this quarterly report on Form 10-Q represents forward-looking statements that involve substantial risks and uncertainties. You can identify these statements by forward-looking words such as “may,” “will,” “expect,” “anticipate,” “believe,” “intend,” “estimate” and “continue” or similar words. You should read statements that contain these words carefully for the following reasons:

• the statements discuss our future expectations;

• the statements contain projections of our future earnings or of our financial condition; and

• the statements state other “forward-looking” information.

We believe it is important to communicate our expectations to our investors. There may, however, be events in the future that we are not accurately able to predict or over which we have no control. The risk factors listed above, as well as any cautionary language in or incorporated by reference into this quarterly report on Form 10-Q, provide examples of risks, uncertainties and events that may cause our actual results to differ materially from the expectations we describe in our forward-looking statements. The SEC allows us to “incorporate by reference” the information we file with them, which means we can disclose important information to you by referring you to those documents. Before you invest in our common stock, you should be aware that the occurrence of any of the events described in the above risk factors, elsewhere in or incorporated by reference into this quarterly report on Form 10-Q and other events that we have not predicted or assessed could have a material adverse effect on our earnings, financial condition and business. If the events described above or other unpredicted events occur, then the trading price of our common stock could decline and you may lose all or part of your investment.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

The chief executive officer and chief financial officer of the Company have evaluated Renal Care Group’s disclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934, as amended), within 90 days prior to the filing of this quarterly report and concluded, as of the date of that evaluation, that Renal Care Group maintains disclosure controls and procedures that provide reasonable assurance that information required to be disclosed in Renal Care Group’s reports under the Exchange Act is recorded, processed, summarized and reported within the periods specified in the SEC’s rules and forms.

Changes in Internal Controls

There have been no significant changes in the Company’s internal controls or other factors that could significantly affect these controls subsequent to the date last evaluated.

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

As disclosed in Renal Care Group’s annual report on Form 10-K filed with the SEC on March 29, 2002, we are subject to a number of lawsuits arising out of events on August 30, 2000. On that day 19 patients were hospitalized and one patient died shortly after becoming ill while receiving treatment at one of Renal Care Group’s dialysis centers in Youngstown, Ohio. One of the 19 hospitalized patients also died some time later. There have been no material developments in these lawsuits in the quarter ended September 30, 2002. 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.

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

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 12, 2002	BY:	/s/ R. Dirk Allison

		R. Dirk Allison Executive Vice President, Chief Financial Officer, and Principal Financial Officer and Principal Accounting Officer

CERTIFICATION

I, SAM A. BROOKS, CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER OF RENAL CARE GROUP, INC., CERTIFY THAT:

1. I have reviewed this quarterly report on Form 10-Q of Renal Care Group, Inc. (the “registrant”);

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

(a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

(b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

(c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):

(a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6. The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.


Date:		November 12, 2002		/s/ Sam A. Brooks Sam A. Brooks Chairman, President and Chief Executive Officer

CERTIFICATION

I, R. DIRK ALLISON, EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER OF RENAL CARE GROUP, INC., CERTIFY THAT:

1. I have reviewed this quarterly report on Form 10-Q of Renal Care Group, Inc. (the “registrant”);

(b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

(c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and


Date:		November 12, 2002		/s/ R. Dirk Allison R. Dirk Allison Executive Vice President and Chief Financial Officer

RENAL CARE GROUP, INC.

EXHIBIT INDEX


Number and
Description of Exhibit

10.62		Form of Stock Option Agreement for stock option grants to executive employees under the Company’s 1999 Long-Term Incentive Plan.
10.63		Form of Stock Option Agreement for stock option grants to non-management directors under the Company’s 1996 Stock Option Plan for Outside Directors.

28 EX-10.62 3 g79129exv10w62.txt FORM OF STOCK OPTION AGREEMENT EXHIBIT 10.62 [OFFICERS/EMPLOYEES/CONSULTANTS] RENAL CARE GROUP, INC. NON-QUALIFIED STOCK OPTION AGREEMENT (1999 PLAN) --------------------------- THIS AGREEMENT is made as of the Date of Grant, by RENAL CARE GROUP, INC., a corporation organized and existing under the laws of the State of Delaware (the "Company"), to ___________________ (the "Optionee"). Upon and subject to the Additional Terms and Conditions attached hereto and incorporated herein by reference as part of this Agreement, the Company hereby awards as of the Date of Grant to Optionee an option (the "Option"), as described below, to purchase the Option Shares. A. DATE OF GRANT: B. TYPE OF OPTION: Non-Qualified Stock Option. C. EXERCISE PRICE PER SHARE: D. OPTION SHARES: __________ shares of the Company's Common Stock, $.01 par value. E. VESTING SCHEDULE: The Vesting Schedule shall be as follows:
Schedule Percentage of Option Shares Vested -------- ----------------------------------
[OFFICERS/EMPLOYEES/CONSULTANTS] F. EXPIRATION DATE: This Option may be exercised at any time after the Date of Grant through 5:00 p.m., Nashville, Tennessee time, on the 10th anniversary of the Date of Grant, provided that this Option may be exercised as to no more than the vested Option Shares, determined pursuant to the Vesting Schedule or as modified as provided herein. IN WITNESS WHEREOF, the Company has executed this Agreement the _______ day of __________, _________. RENAL CARE GROUP, INC. By: -------------------------------------- ATTEST: - -------------------------------------- OPTIONEE: -------------------------------------- WITNESS: - -------------------------------------- 2 [OFFICERS/EMPLOYEES/CONSULTANTS] ADDITIONAL TERMS AND CONDITIONS RENAL CARE GROUP, INC. NON-QUALIFIED STOCK OPTION AGREEMENT FOR _________________ 1. Exercise of Option. This Option may be exercised in whole or in part, but in no less than one hundred (100) share lots, by written notice, in substantially the form as Exhibit 1 hereto, directed to the Secretary of the Company at its principal place of business, accompanied by payment of the Exercise Price for the number of shares purchased. Payment shall be made in cash, by check, or in shares of Common Stock already held by the Optionee prior to the exercise of the Option. In the event that all or part of the Exercise Price is paid in shares of Common Stock, the value of such shares shall be equal to the Fair Market Value of such shares on the date of exercise of the Option, and the Optionee shall deliver to the Company a certificate or certificates for such shares. 2. Issuance of Option Shares. Upon a valid exercise of this Option, the Company shall, or shall direct its transfer agent to, make delivery of the Option Shares as soon as reasonably possible; provided, however, that the Company shall not be required to issue or deliver any certificates for Option Shares pursuant to this Option prior to (a) the completion of any registration or qualification of such shares under any federal or state law, or any ruling or regulation of any governmental body which the Board shall, in its sole discretion, determine to be necessary or advisable, and/or (b) the Optionee making at the time of exercise any reasonable representations and warranties requested by the Company in order to qualify the issuance of the Option Shares for exemptions from registration under state or federal securities laws. The Option Shares issued on the exercise of this Option, when paid for as herein provided, will be fully paid and non-assessable. 3. Termination of Employment or Death. (a) In the event of a termination of Optionee's employment or consulting services for any reason (other than a termination of an Optionee employee by his or her death or disability), (i) except as provided in clause (ii) of this sentence this Option shall terminate as of the day of notice of such termination by either party, but in no event later than the Expiration Date, and (ii) any unexercised portion of this Option which is otherwise exercisable on the date of termination may be exercised by Optionee at any time within three (3) months following the date of such termination, unless Optionee dies during such three (3) month period, but in no event later than the Expiration Date. If Optionee is an employee, whether military, government or other service by Optionee or other leave of absence granted to Optionee shall constitute such a termination shall be determined in each case by the Board at its discretion, and any determination by the Board shall be final and conclusive. If the Board determines that such absence does not constitute such a termination, however, Optionee may exercise his or her option only with the consent of the Board. 3 [OFFICERS/EMPLOYEES/CONSULTANTS] (b) If Optionee is an employee, upon termination of Optionee's employment with the Company (including its subsidiaries) as result of a permanent disability (as defined by Section 22(e)(3) of the Code), (i) except as provided in clause (ii) of this sentence, this Option shall terminate and be unexercisable on the date of such termination, but in no event later than the Expiration Date, and (ii) any unexercised portion of this Option which is otherwise exercisable on the date of such termination may be exercised by Optionee at any time within six (6) months following the date of such termination, unless Optionee dies during such six (6) month period, but in no event later than the Expiration Date. (c) If Optionee is an employee, upon termination of his or her employment by the Company without Cause, if there is a written employment agreement between Optionee and the Company, this Option shall cease to vest in accordance with the Vesting Schedule regardless of any salary continuation specified by such employment agreement as a result of such termination. Upon termination of his or her employment with the Company, (i) except as provided in clause (ii) of this sentence, this Option shall terminate and be unexercisable as to unvested options on the date of termination, but in no event later than the Expiration Date, and (ii) any unexercised portion of this Option which is otherwise exercisable as of such termination date may be exercised by Optionee at any time within three (3) months following such termination date, unless Optionee dies during such three (3) month period such option may be exercised pursuant to subparagraph (d) below, but in no event later than the Expiration Date. If there is no written employment agreement between Optionee and the Company, upon termination of his or her employment by the Company without Cause any unexercised portion of this Option shall terminate in accordance with Section 3(a) above, but in no event later than the Expiration Date. (d) If Optionee dies, (i) except as provided in clause (ii) of this sentence, this Option shall terminate and be unexercisable on the date of death, and (ii) any unexercised portion of this Option, if otherwise exercisable at the date of death, may be exercised by his or her personal representatives, heirs, or legatees at any time prior to the expiration of one (1) year after the date of Optionee's death, but in no event later than the Expiration Date. 4. Full Information. Optionee represents that he or she is familiar with the business and affairs of the Company and realizes that the receipt of the Option and Option Shares is a speculative investment and that any possible profit therefrom is uncertain. Optionee further represents that he or she has had the opportunity to ask questions of and receive answers from the Company and any person acting on its behalf and to obtain all information available with respect to the Company and its affairs, and has received all information and data with respect to the Company that he or she has requested and which he or she has deemed relevant in connection with his or her receipt of the Option and the Option Shares subject to the Option. 5. No Rights in Option Stock. Optionee shall have no rights as a stockholder with respect to any of the Option Shares prior to the date of issuance to the Optionee of a certificate or certificates for such shares. Optionee shall have no rights with respect to such shares not expressly conferred by this Agreement. 4 [OFFICERS/EMPLOYEES/CONSULTANTS] 6. Stock Reserved. The Company shall at all times during the term of this Agreement reserve and keep available such number of shares of the Common Stock as will be sufficient to satisfy the requirements of this Agreement, and shall pay all original issue taxes on the exercise of this Option, and all other fees and expenses necessarily incurred by the Company in connection therewith. 7. Nonassignability. This Option shall not be encumbered or transferred in whole or in part except by will or the laws of descent and distribution and is exercisable during the lifetime of the Optionee only by the Optionee. 8. No Employment. This Agreement shall not give Optionee a right to employment by, or membership on the board of directors of, the Company or its subsidiaries. 9. Non-Qualified Option. It is the intent of the parties hereto that this Option be a non-qualified stock option and subject to all of the applicable provisions of the Internal Revenue Code of 1986, as amended. The Company recognizes that the Optionee may be subject to restrictions regarding his or her right to trade Common Stock under applicable securities laws. Accordingly, the Optionee may want to consider making an election to be taxed upon exercise of this Option under Section 83(b) of the Code. The Optionee shall have sole discretion to make such an election and shall be solely responsible for complying with the Code and all relevant rules and regulations in connection with such election. The Optionee shall provide written notice to the Company of such election immediately after making such election. 10. Share Adjustments. If the Company's outstanding shares of Common Stock are increased or decreased or changed into or exchanged for a different number or kind of shares or other securities of the Company by reason of any recapitalization, reclassification, stock split, combination of shares, stock dividend, or transaction having similar effect, the Board shall proportionately and appropriately adjust the number and kind of shares that are subject to this Option and the Exercise Price Per Share, without any change in the aggregate price to be paid therefor upon exercise of this Option. 5 [OFFICERS/EMPLOYEES/CONSULTANTS] 11. Changes in Control. (a) Change in Control. Subject to Section 12, in the event that a Change in Control shall occur, then (i) this Option (whether vested or not vested) shall automatically become one hundred percent (100%) vested immediately, and (ii) no other terms, conditions, restrictions or limitations shall be imposed upon this Option after such date, and in no circumstance shall this Option be forfeited on or after such date. (b) Automatic Acceleration and Cash-Out. Subject to Section 12, upon a Change in Control that results directly or indirectly in the Common Stock (or the stock of any successor the Company received in exchange for Common Stock) ceasing to be publicly traded on a national securities market at any time, (i) this Option shall automatically become one hundred percent (100%) vested immediately with respect to the Option Shares, (ii) no other terms, conditions, restrictions or limitations shall be imposed upon this Option after such date, and in no circumstance shall this Option be forfeited on or after such date, and (iii) this Option shall be valued and cashed out on the basis of the Change in Control Price. (c) Section 16 Insider. Notwithstanding anything herein to the contrary, if the Optionee is subject to the reporting requirements of Section 16 of the Exchange Act with respect to the Company, and on the date of the Change in Control this Option has not been outstanding for a period of at least six months from the Date of Grant, the Optionee shall not be paid the consideration described in this Section 11 above until the first day next following the end of such six-month period. 12. Modification, Extension and Renewal. The Board may modify, renew or accept the surrender of this Option, including the acceleration or waiver of any vesting or other restrictions or limitations, or the conversion of this Option (with appropriate adjustments) to be applicable to the securities of any successor corporation to the Company or parent of any such successor, and the Board may authorize new options in substitution for the Option. Any substituted, modified or converted options may bear such different or additional terms and conditions as the Board shall deem appropriate. The determination of the Board as to the terms of any of the foregoing may be made without regard to whether a Change in Control has or has not occurred (or whether the Board has determined that any event shall not be considered to be a Change in Control) and shall be conclusive and binding notwithstanding the provisions hereof regarding exercisability. Any fractional shares resulting from any of the foregoing adjustments under this Section shall be disregarded and eliminated. However, no modification of this Option shall, without the consent of the Optionee, adversely affect the rights or obligations of the Optionee with respect to this Option. 13. Administration. This Agreement shall be administered, construed and interpreted by the Board. 14. Definitions. "Board" means the Board of Directors of the Company. 6 [OFFICERS/EMPLOYEES/CONSULTANTS] "Change in Control" means a change in control of the Company of a nature that would be required to be reported (assuming such event has not been "previously reported") in response to Item 1(a) of a Current Report on Form 8-K pursuant to Section 13 or 15(d) of the Exchange Act; provided that, without limitation, a Change in Control shall also be deemed to have occurred at such time as: (i) any "person" within the meaning of Section 14(d) of the Exchange Act, other than the Company, a Subsidiary, or any employee benefit plan(s) sponsored by the Company or any Subsidiary, is or has become the "beneficial owner," as defined in Rule l3d-3 under the Exchange Act, directly or indirectly, of 25% or more of the combined voting power of the outstanding securities of the Company ordinarily having the right to vote at the election of directors; (ii) individuals who constitute the Board immediately prior to any meeting of stockholders (the "Incumbent Board") have ceased for any reason to constitute at least a majority thereof after such shareholder meeting, provided that any person becoming a director whose election, or nomination for election by the Company's stockholders, was approved by a vote of at least three-quarters (3/4) of the directors comprising the Incumbent Board (either by a specific vote or by approval of the proxy statement of the Company in which such person is named as a nominee for director without objection to such nomination) shall be, for purposes of this Agreement, considered as though such person were a member of the Incumbent Board; (iii) upon approval by the Company's stockholders of a reorganization, merger, share exchange or consolidation, other than one with respect to which those persons who were the beneficial owners, immediately prior to such reorganization, merger, share exchange or consolidation, of outstanding securities of the Company ordinarily having the right to vote in the election of directors own, immediately after such transaction, more than 75% of the outstanding securities of the resulting corporation ordinarily having the right to vote in the election of directors; or (iv) upon approval by the Company's stockholders of a complete liquidation and dissolution of the Company or the sale or other disposition of all or substantially all of the assets of the Company other than to a Subsidiary. Notwithstanding the occurrence of any of the foregoing, the Board may determine, if it deems it to be in the best interest of the Company, that an event or events otherwise constituting a Change in Control shall not be so considered. Such determination shall be effective if it is made by the Board prior to the occurrence of an event that otherwise would be or probably will lead to a Change in Control or after such event if made by the Board a majority of which is composed of directors who were members of the Board immediately prior to the event that otherwise would be or probably will lead to a Change in Control. Upon such determination, such event or 7 [OFFICERS/EMPLOYEES/CONSULTANTS] events shall not be deemed to be a Change in Control for any purposes hereunder, including but not limited to, Section 12. "Code" means the Internal Revenue Code of 1986, as amended. "Common Stock" means the Common Stock, $.01 par value, of the Company. "Exchange Act" means the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder. "Fair Market Value" means the closing price of the shares of Common Stock on a national securities exchange on the day on which such value is to be determined or, if no shares were traded on such day, on the next preceding day on which shares were traded, as reported by the National Quotation Bureau, Inc. or other national quotation service. If the shares are not traded on an exchange but are traded in the over-the-counter market, on the day on which such value is to be determined or, if such "asked" price is not available, the last sales price on such day or, if no shares were traded on such day, on the next preceding day on which the shares were traded, as reported by the National Association of Securities Dealers Automatic Quotation System (NASDAQ) or other national quotation service. "Subsidiary" means any corporation that qualifies as a subsidiary of a corporation under the definition of "subsidiary corporation" contained in Section 424(f) of the Code. * * * * * 8 [OFFICERS/EMPLOYEES/CONSULTANTS] EXHIBIT 1 NOTICE OF EXERCISE OF STOCK OPTION TO PURCHASE COMMON STOCK OF RENAL CARE GROUP, INC. Name: ------------------------------- Address: ---------------------------- Date: ------------------------------- Renal Care Group, Inc. Attention: [Secretary] 2525 West End, Suite 600 Nashville, Tennessee 37203 Re: Exercise of Non-Qualified Stock Option Ladies and Gentlemen: Subject to acceptance hereof in writing by Renal Care Group, Inc. (the "Company"), I hereby give at least ten days but not more than thirty (30) days prior notice of my election to exercise options granted to me to purchase _____________ shares of Common Stock of the Company under the Renal Care Group, Inc. Non-Qualified Stock Option Agreement granted on ______________________, ______. The purchase shall take place as of ______________________, ______ (the "Exercise Date"). On or before the Exercise Date, I will pay the applicable purchase price by delivery of a certified check for $__________ for the full purchase price payable to the order of Renal Care Group, Inc. The required federal, state and local income tax withholding, if any, on the exercise of the option shall be paid on or before the Exercise Date. I hereby reaffirm that the representations made in Additional Terms and Conditions of the Agreement are true and correct as of the date of exercising this Option. 9 As soon as the stock certificate is registered in my name, please deliver it to me at the above address. Very truly yours, AGREED TO AND ACCEPTED: RENAL CARE GROUP, INC. By: --------------------------------------- Title: ----------------------------------- Number of Shares Exercised: ------------------------ Number of Shares Remaining: ------------------------ Date: -------------------- 10 EX-10.63 4 g79129exv10w63.txt FORM OF STOCK OPTION AGREEMENT EXHIBIT 10.63 STOCK OPTION AGREEMENT under the RENAL CARE GROUP, INC. 1996 STOCK OPTION PLAN FOR OUTSIDE DIRECTORS Grantee: Number of Shares Subject to Option: Option Price per Share: Date of Grant: 1. Grant of Option. Renal Care Group, Inc. (the "Corporation") hereby grants to the Grantee named above (the "Grantee"), under the Renal Care Group, Inc. 1996 Stock Option Plan for Outside Directors (the "Plan"), a non-qualified stock option to purchase, upon the terms and conditions set forth in this agreement (this "Stock Option Agreement"), the number of shares indicated above of the Corporation's $.01 par value common stock (the "Common Stock"), at the option price per share set forth above, which is the Fair Market Value per share of Common Stock on the date of grant. Capitalized terms used herein and not otherwise defined shall have the meanings assigned such terms in the Plan. 2. Period of Option and Limitations on Right to Exercise. The option granted hereby will, to the extent not previously exercised, expire on the date ten (10) years after the date of grant of the option (the "Expiration Date"), unless sooner terminated in whole or in part as follows: (a) Termination of Directorship. Upon termination of the Grantee's membership on the Board of Directors of the Corporation for any reason (other than death), the option granted hereby shall terminate as of the date of termination of the Grantee's membership on the Board, but in no event later than the date of expiration of the option as provided above in this Section 2, provided that any unexpired portion of the option granted hereby which is otherwise exercisable on the date of such termination may be exercised by the Grantee at any time within three (3) months following the date of such termination, unless the Grantee dies during such three (3) month period, but in no event later than the date of expiration of this option as provided above in this Section 2. Such exercise otherwise shall be subject to the terms and conditions of the Plan and this Stock Option Agreement. (b) Death. Upon death of the Grantee, the option granted hereby shall terminate and be unexercisable on the date of death, provided that any unexercised portion of the option granted hereby which is otherwise exercisable at the date of death may be exercised by his or her personal representatives, heirs, or legatees ("Grantee's Successors") at any time prior to the expiration of one (1) year after the Grantee's death, but in no event later than the date of expiration of this option as provided above in this Section 2. Such exercise otherwise shall be subject to the terms and conditions of the Plan and this Stock Option Agreement. 3. Exercise of Option. The terms, times and conditions of exercise of the option granted hereby are as follows: The option shall be immediately exercisable, in whole or in part. The option price shall be payable in full upon the exercise of the option in cash, by check, in shares of Common Stock, or in any combination thereof. The option granted hereby shall be exercised by an irrevocable written notice directed to the Secretary of the Corporation at the Corporation's principal place of business. In addition, the terms contained in the Plan are incorporated into and made a part of this Stock Option Agreement and this Stock Option Agreement shall be governed by and construed in accordance with the Plan. 4. Nontransferability. The option granted hereby is not assignable or transferable by the Grantee except by will, the laws of descent and distribution, or pursuant to a qualified domestic relations order as defined in Title I of the Employee Retirement Income Security Act of 1974, as amended, and the Internal Revenue Code of 1986, as amended. The option may be exercised during the lifetime of the Grantee only by the Grantee. 5. Limitation of Rights. Neither the Grantee nor the Grantee's Successors shall have rights as a stockholder of the Corporation with respect to shares of Common Stock covered by this option until the Grantee or the Grantee's Successors become the holder of record of such shares. 6. Common Stock Reserve. The Corporation shall at all times during the term of this Stock Option Agreement reserve and keep available such number of shares of Common Stock as will be sufficient to satisfy the requirements of this Stock Option Agreement. 7. Plan Controls. In the event of any actual or alleged conflict between the provisions of the Plan and the provisions of this Stock Option Agreement, the provisions of the Plan shall be controlling and determinative. 8. Successors. This Stock Option Agreement shall be binding upon any successor of the Corporation, in accordance with the terms of this Stock Option Agreement and the Plan. -2- IN WITNESS WHEREOF, Renal Care Group, Inc., acting by and through its duly authorized officers, has caused this Stock Option Agreement to be executed, and the Grantee has executed this Stock Option Agreement, all as of the day and year first above written. RENAL CARE GROUP, Inc. By: ------------------------------------ GRANTEE: - ------------------------------------ -3- -----END PRIVACY-ENHANCED MESSAGE-----

Form of Stock Option Agreement for stock option grants to executive employees under the Company’s 1999 Long-Term Incentive Plan.

Form of Stock Option Agreement for stock option grants to non-management directors under the Company’s 1996 Stock Option Plan for Outside Directors.

Reports on Form 8-K:

	•		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 hemodialysis services provided to acute care hospitals and skilled nursing facilities;

	•		laboratory services; and

	•		management contracts with hospital-based and medical university dialysis programs.

	•		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.

	•		our margins realized from the administration of Aranesp® could be lower than the margins realized on the administration of EPO; or

	•		physicians could decide to administer Aranesp® in their offices, and we would not recognize revenue or profit from the administration of EPO or Aranesp® .

	•		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 generally 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.

	•		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, including the federal Health Insurance Portability and Accountability Act of 1996, referred to as HIPAA, and state law equivalents of HIPAA;

	•		facility licensure;

	•		health and safety requirements;

	•		environmental compliance; and

	•		medical and toxic waste disposal.

	•		criminal or civil penalties;

	•		claims by persons who believe their health information has been improperly used or disclosed; and

	•		administrative penalties by payors.

	•		further increases in premiums and deductibles;

	•		increases in the number of liability claims against us or the cost of settling or trying cases related to those claims; and

	•		an inability to obtain one or more types of insurance on acceptable terms.

	•		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.

	•		future announcements concerning us, our competitors or the health care market;

	•		the threat of litigation or government investigation;

	•		changes in government regulations; and

	•		changes in earnings estimates by analysts.

	•		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.