##### Table of Contents



UNITED
STATESSECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
 (Mark One)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the Quarterly Period Ended September 30, 2005
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission File No. 0-27640
 RENAL CARE GROUP, INC.
  Delaware
    
    62-1622383(State or other jurisdiction of
    
    (I.R.S. Employer Identification No.)incorporation or organization)
 2525 West End Avenue, Suite 600, Nashville, Tennessee 37203
 Registrants telephone number, including area code: (615) 345-5500
 þ o
 þ o
 o þ
  Class
    
    Outstanding at
October 31, 2005Common Stock, $.01 par value
    
    68,329,507




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RENAL CARE GROUP, INC.
 INDEX
 Page No.PART I  FINANCIAL INFORMATIONItem 1. Financial StatementsCondensed Consolidated Balance Sheets  December 31, 2004 and September 30, 2005 (unaudited)
    
    
    1Condensed Consolidated Income Statements  (unaudited) For the three months and nine months ended September 30, 2004 and 2005
    
    
    2Condensed Consolidated Statements of Cash Flows  (unaudited) For the nine months ended September 30, 2004 and 2005
    
    
    3Notes to Condensed Consolidated Financial Statements  (unaudited)
    
    
    4Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    16Risk Factors
    
    
    20Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    29Item 4. Controls and Procedures
    
    
    29PART II  OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    30Item 4. Submission of Matters to a Vote of Security Holders
    
    
    31Item 6. Exhibits
    
    
    31Signature
    
    
    32Exhibit Index
    
    
    33EX-31.1  CERTIFICATION OF CEOEX-31.2  CERTIFICATION OF CFOEX-32.1  CERTIFICATION OF CEOEX-32.2  CERTIFICATION OF CFO




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##### Table of Contents



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 30,2004
    
    
    2005(unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    17,931
    
    
    $
    25,490Accounts receivable, net
    
    
    275,373
    
    
    
    286,773Inventories
    
    
    23,359
    
    
    
    33,953Prepaid expenses and other current assets
    
    
    26,817
    
    
    
    34,020Deferred income taxes
    
    
    29,604
    
    
    
    36,387Total current assets
    
    
    373,084
    
    
    
    416,623Property, plant and equipment, net
    
    
    316,532
    
    
    
    354,910Intangible assets, net
    
    
    34,320
    
    
    
    37,942Goodwill
    
    
    694,264
    
    
    
    824,022Other assets
    
    
    10,780
    
    
    
    8,331Total assets
    
    $
    1,428,980
    
    
    $
    1,641,828LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable and accrued expenses
    
    $
    139,929
    
    
    $
    151,368Due to third-party payors
    
    
    80,007
    
    
    
    62,535Current portion of long-term debt
    
    
    23,969
    
    
    
    36,597Total current liabilities
    
    
    243,905
    
    
    
    250,500Long-term debt, net of current portion
    
    
    479,645
    
    
    
    566,696Deferred income taxes
    
    
    51,419
    
    
    
    51,046Other long-term liabilities
    
    
    16,271
    
    
    
    15,495Minority interest
    
    
    45,619
    
    
    
    57,406Total liabilities
    
    
    836,859
    
    
    
    941,143Commitments and contingenciesStockholders equity:Preferred stock, $0.01 par value, 10,000 shares authorized, none issued
    
    
    
    
    
    
    Common stock, $0.01 par value, 150,000 shares authorized, 82,317 and
83,100 shares issued at December 31, 2004 and September 30, 2005,
respectively
    
    
    823
    
    
    
    831Treasury stock, 14,514 and 14,766 shares of common stock at December
31, 2004 and September 30, 2005, respectively
    
    
    (372,249
    )
    
    
    (381,635
    )Additional paid-in capital
    
    
    411,888
    
    
    
    431,278Retained earnings
    
    
    551,863
    
    
    
    648,943Accumulated other comprehensive (loss) income, net of tax
    
    
    (204
    )
    
    
    1,268Total stockholders equity
    
    
    592,121
    
    
    
    700,685Total liabilities and stockholders equity
    
    $
    1,428,980
    
    
    $
    1,641,828
  1




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##### Table of Contents



RENAL CARE GROUP, INC.
 
 Condensed Consolidated Income Statements
(in thousands, except per share data)
(unaudited)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2004
    
    
    2005
    
    
    2004
    
    
    2005Net revenue
    
    $
    356,111
    
    
    $
    402,230
    
    
    $
    974,993
    
    
    $
    1,160,068Operating costs and expenses:Patient care costs
    
    
    239,400
    
    
    
    267,889
    
    
    
    648,621
    
    
    
    769,322General and administrative expenses
    
    
    26,336
    
    
    
    34,275
    
    
    
    76,353
    
    
    
    100,967Provision for doubtful accounts
    
    
    8,464
    
    
    
    5,396
    
    
    
    23,623
    
    
    
    22,546Depreciation and amortization
    
    
    15,344
    
    
    
    18,173
    
    
    
    42,407
    
    
    
    52,735Total operating costs and expenses
    
    
    289,544
    
    
    
    325,733
    
    
    
    791,004
    
    
    
    945,570Income from operations
    
    
    66,567
    
    
    
    76,497
    
    
    
    183,989
    
    
    
    214,498Interest expense, net
    
    
    6,869
    
    
    
    8,715
    
    
    
    13,599
    
    
    
    23,957Income before minority interest and income taxes
    
    
    59,698
    
    
    
    67,782
    
    
    
    170,390
    
    
    
    190,541Minority interest
    
    
    10,158
    
    
    
    9,915
    
    
    
    25,062
    
    
    
    28,409Income before income taxes
    
    
    49,540
    
    
    
    57,867
    
    
    
    145,328
    
    
    
    162,132Provision for income taxes
    
    
    19,072
    
    
    
    22,636
    
    
    
    55,590
    
    
    
    65,052Net income
    
    $
    30,468
    
    
    $
    35,231
    
    
    $
    89,738
    
    
    $
    97,080Net income per share:Basic
    
    $
    0.45
    
    
    $
    0.52
    
    
    $
    1.33
    
    
    $
    1.43Diluted
    
    $
    0.44
    
    
    $
    0.50
    
    
    $
    1.28
    
    
    $
    1.37Weighted average shares outstanding:Basic
    
    
    67,095
    
    
    
    68,167
    
    
    
    67,612
    
    
    
    68,022Diluted
    
    
    69,339
    
    
    
    71,023
    
    
    
    69,930
    
    
    
    70,721
  2




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RENAL CARE GROUP, INC.
 
 Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
 Nine Months EndedSeptember 30,2004
    
    
    2005OPERATING ACTIVITIESNet income
    
    $
    89,738
    
    
    $
    97,080Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization
    
    
    42,407
    
    
    
    52,735Loss on sale of property and equipment
    
    
    624
    
    
    
    661Distributions to minority shareholders
    
    
    (11,409
    )
    
    
    (15,807
    )Income applicable to minority interest
    
    
    25,062
    
    
    
    28,409Deferred income taxes
    
    
    10,734
    
    
    
    2,207Changes in operating assets and liabilities, net of effects from acquisitions
    
    
    (21,062
    )
    
    
    (28,506
    )Net cash provided by operating activities
    
    
    136,094
    
    
    
    136,779INVESTING ACTIVITIESPurchases of property and equipment
    
    
    (66,463
    )
    
    
    (67,507
    )Cash paid for acquisitions, net of cash acquired
    
    
    (274,644
    )
    
    
    (167,766
    )Change in other assets
    
    
    (7,185
    )
    
    
    3,062Net cash used in investing activities
    
    
    (348,292
    )
    
    
    (232,211
    )FINANCING ACTIVITIESNet proceeds from issuance of long-term debt
    
    
    325,000
    
    
    
    100,000Payments on long-term debt
    
    
    (8,125
    )
    
    
    (16,251
    )Net borrowings under line of credit and capital leases
    
    
    7,027
    
    
    
    15,930Net proceeds from issuance of common stock
    
    
    17,799
    
    
    
    12,698Repurchase of treasury shares
    
    
    (137,845
    )
    
    
    (9,386
    )Net cash provided by financing activities
    
    
    203,856
    
    
    
    102,991(Decrease) increase in cash and cash equivalents
    
    
    (8,342
    )
    
    
    7,559Cash and cash equivalents at beginning of period
    
    
    50,295
    
    
    
    17,931Cash and cash equivalents at end of period
    
    $
    41,953
    
    
    $
    25,490
  3




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RENAL CARE GROUP, INC.
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
 1. Basis of Presentation
 Overview
   
    
    outpatient hemodialysis services;
    
    ancillary services associated with dialysis, primarily the administration of
Epogen® (erythropoietin alfa, to which we refer as EPO);
    
    home dialysis services;
    
    inpatient hemodialysis services provided to acute care hospitals and skilled nursing facilities;
    
    laboratory services; and
    
    management contracts with hospital-based and medical university dialysis programs.
     4




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Change in Accounting Estimate
  Interim Financial Statements
  Reclassifications
  2. Acquisition by Fresenius Medical Care AG
   Plumbers Local #65 Pension Fund,
on behalf of itself and all others similarly situated, Plaintiff, vs. Renal Care Group, Inc.,
William P. Johnston, Gary Brukardt, Peter J. Grua, Joseph C. Hutts, Harry R. Jacobson, William V.
Lapham, Thomas A. Lowery, Stephen D. McMurray and C. Thomas Smith, Defendants Hawaii Structural Ironworkers Pension Trust Fund,
on behalf of itself and all others similarly situated, Plaintiff, vs. Renal Care Group, Inc.,
William P. Johnston, Gary Brukardt, Peter J. Grua, Joseph C. Hutts, Harry R. Jacobson, William V.
Lapham, Thomas A. Lowery, Stephen D. McMurray and C. Thomas Smith, Defendants.
 5




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Indiana State District Council of Laborers and Hod Carriers Pension Fund, on behalf of itself and
others similar situated, Plaintiff, vs. Renal Care Group, Inc., William P. Johnston, Gary Brukardt,
Peter J. Grua, Joseph C. Hutts, Harry R. Jacobson, William V. Lapham, Thomas A. Lowery, Stephen D.
McMurray and C. Thomas Smith, Defendants
  3. Business Acquisitions
 2005 Acquisitions
   Accounts receivable, net
    
    $
    1,122Inventory and other current assets
    
    
    982Property, plant and equipment, net
    
    
    20,067Intangible assets
    
    
    7,140Goodwill
    
    
    138,873Total assets acquired
    
    
    168,184Total liabilities assumed
    
    
    418Net assets acquired
    
    $
    167,766
 6




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##### Table of Contents



Pro Forma Data
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2004
    
    
    2005
    
    
    2004
    
    
    2005Pro forma net revenue
    
    $
    372,291
    
    
    $
    403,572
    
    
    $
    1,023,534
    
    
    $
    1,182,198Pro forma net income
    
    $
    32,704
    
    
    $
    35,692
    
    
    $
    96,472
    
    
    $
    100,626Pro forma net income per share:Basic
    
    $
    0.49
    
    
    $
    0.52
    
    
    $
    1.43
    
    
    $
    1.48Diluted
    
    $
    0.47
    
    
    $
    0.50
    
    
    $
    1.38
    
    
    $
    1.42
  Joint Ventures
  4. Long-Term Debt
  December 31,
    
    
    September 30,2004
    
    
    2005Term loan facility, bearing interest at a variable rate (5.3% at
September 30, 2005)
    
    $
    312,813
    
    
    $
    296,563Incremental term loan, bearing interest at a variable rate (5.1%
at September 30, 2005)
    
    
    
    
    
    
    100,0009% senior subordinated notes
    
    
    159,685
    
    
    
    159,685Obligations under capital leases
    
    
    4,151
    
    
    
    4,984Other, including amounts outstanding under the revolving credit facility
    
    
    3,357
    
    
    
    20,541Total indebtedness, excluding fair value premium
    
    
    480,006
    
    
    
    581,773Add: 9% senior subordinated notes fair value premium
    
    
    23,608
    
    
    
    21,520Total long-term debt
    
    
    503,614
    
    
    
    603,293Less: current portion
    
    
    23,969
    
    
    
    36,597$
    479,645
    
    
    $
    566,696
 Credit Agreements
  7




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##### Table of Contents



9% Senior Subordinated Notes
   Interest Rate Swap
 Accounting for Derivative Instruments and Hedging Activities
 Obligations Under Capital Leases
  Other
  8




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##### Table of Contents



Maturities of Long-Term Debt
  2005
    
    $
    7,4432006
    
    
    42,2732007
    
    
    79,8542008
    
    
    208,0682009
    
    
    82,143Thereafter
    
    
    161,992$
    581,773
 9




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##### Table of Contents



Guarantor Information
  Condensed Consolidating Balance Sheets
 Parent
    
    
    Guarantor
    
    
    Non-Guarantor
    
    
    Consolidating
    
    
    ConsolidatedCompany
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Adjustments
    
    
    TotalAs of December 31, 2004Cash and cash equivalents
    
    $
    
    
    
    $
    
    
    
    $
    31,945
    
    
    $
    (14,014
    )
    
    $
    17,931Accounts receivable, net
    
    
    
    
    
    
    198,778
    
    
    
    76,595
    
    
    
    
    
    
    
    275,373Other current assets
    
    
    45,749
    
    
    
    23,320
    
    
    
    10,711
    
    
    
    
    
    
    
    79,780Total current assets
    
    
    45,749
    
    
    
    222,098
    
    
    
    119,251
    
    
    
    (14,014
    )
    
    
    373,084Property, plant and equipment, net
    
    
    29,542
    
    
    
    189,434
    
    
    
    96,408
    
    
    
    1,148
    
    
    
    316,532Goodwill
    
    
    1,483
    
    
    
    574,815
    
    
    
    117,666
    
    
    
    300
    
    
    
    694,264Other assets
    
    
    10,828
    
    
    
    99,033
    
    
    
    7,436
    
    
    
    (72,197
    )
    
    
    45,100Total assets
    
    $
    87,602
    
    
    $
    1,085,380
    
    
    $
    340,761
    
    
    $
    (84,763
    )
    
    $
    1,428,980Current liabilities (including
intercompany assets and liabilities)
    
    $
    (699,042
    )
    
    $
    813,091
    
    
    $
    157,344
    
    
    $
    (27,488
    )
    
    $
    243,905Long-term debt
    
    
    476,184
    
    
    
    (259
    )
    
    
    3,720
    
    
    
    
    
    
    
    479,645Long-term liabilities
    
    
    64,976
    
    
    
    2,253
    
    
    
    461
    
    
    
    
    
    
    
    67,690Minority interest
    
    
    
    
    
    
    39,610
    
    
    
    5,989
    
    
    
    20
    
    
    
    45,619Stockholders equity
    
    
    245,484
    
    
    
    230,685
    
    
    
    173,247
    
    
    
    (57,295
    )
    
    
    592,121Total liabilities and stockholders equity
    
    $
    87,602
    
    
    $
    1,085,380
    
    
    $
    340,761
    
    
    $
    (84,763
    )
    
    $
    1,428,980
 Parent
    
    
    Guarantor
    
    
    Non-Guarantor
    
    
    Consolidating
    
    
    ConsolidatedCompany
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Adjustments
    
    
    TotalAs of September 30, 2005Cash and cash equivalents
    
    $
    
    
    
    $
    
    
    
    $
    34,615
    
    
    $
    (9,125
    )
    
    $
    25,490Accounts receivable, net
    
    
    
    
    
    
    212,032
    
    
    
    74,741
    
    
    
    
    
    
    
    286,773Other current assets
    
    
    55,756
    
    
    
    32,919
    
    
    
    15,685
    
    
    
    
    
    
    
    104,360Total current assets
    
    
    55,756
    
    
    
    244,951
    
    
    
    125,041
    
    
    
    (9,125
    )
    
    
    416,623Property, plant and equipment, net
    
    
    36,771
    
    
    
    222,178
    
    
    
    94,833
    
    
    
    1,128
    
    
    
    354,910Goodwill
    
    
    1,483
    
    
    
    699,929
    
    
    
    122,310
    
    
    
    300
    
    
    
    824,022Other assets
    
    
    9,165
    
    
    
    105,419
    
    
    
    6,748
    
    
    
    (75,059
    )
    
    
    46,273Total assets
    
    $
    103,175
    
    
    $
    1,272,477
    
    
    $
    348,932
    
    
    $
    (82,756
    )
    
    $
    1,641,828Current liabilities (including
intercompany assets and liabilities)
    
    $
    (731,456
    )
    
    $
    890,292
    
    
    $
    125,546
    
    
    $
    (33,882
    )
    
    $
    250,500Long-term debt
    
    
    561,830
    
    
    
    193
    
    
    
    4,673
    
    
    
    
    
    
    
    566,696Long-term liabilities
    
    
    58,700
    
    
    
    6,211
    
    
    
    1,630
    
    
    
    
    
    
    
    66,541Minority interest
    
    
    
    
    
    
    48,029
    
    
    
    9,428
    
    
    
    (51
    )
    
    
    57,406Stockholders equity
    
    
    214,101
    
    
    
    327,752
    
    
    
    207,655
    
    
    
    (48,823
    )
    
    
    700,685Total liabilities and stockholders equity
    
    $
    103,175
    
    
    $
    1,272,477
    
    
    $
    348,932
    
    
    $
    (82,756
    )
    
    $
    1,641,828
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##### Table of Contents



Condensed Consolidating Income Statements
 Parent
    
    
    Guarantor
    
    
    Non-Guarantor
    
    
    Consolidating
    
    
    ConsolidatedCompany
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Adjustments
    
    
    TotalFor the three months ended September 30, 2004Net revenue
    
    $
    1,718
    
    
    $
    245,757
    
    
    $
    110,181
    
    
    $
    (1,545
    )
    
    $
    356,111Total operating costs and expenses
    
    
    12,402
    
    
    
    198,053
    
    
    
    80,634
    
    
    
    (1,545
    )
    
    
    289,544Income (loss) from operations
    
    
    (10,684
    )
    
    
    47,704
    
    
    
    29,547
    
    
    
    
    
    
    
    66,567Interest expense (income), net
    
    
    6,850
    
    
    
    (92
    )
    
    
    111
    
    
    
    
    
    
    
    6,869Minority interest
    
    
    
    
    
    
    9,300
    
    
    
    858
    
    
    
    
    
    
    
    10,158Provision (benefit) for income taxes
    
    
    (6,750
    )
    
    
    14,821
    
    
    
    11,001
    
    
    
    
    
    
    
    19,072Net income (loss)
    
    $
    (10,784
    )
    
    $
    23,675
    
    
    $
    17,577
    
    
    $
    
    
    
    $
    30,468
 Parent
    
    
    Guarantor
    
    
    Non-Guarantor
    
    
    Consolidating
    
    
    ConsolidatedCompany
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Adjustments
    
    
    TotalFor the three months ended September 30, 2005Net revenue
    
    $
    916
    
    
    $
    291,743
    
    
    $
    111,218
    
    
    $
    (1,647
    )
    
    $
    402,230Total operating costs and expenses
    
    
    18,216
    
    
    
    224,727
    
    
    
    84,437
    
    
    
    (1,647
    )
    
    
    325,733Income (loss) from operations
    
    
    (17,300
    )
    
    
    67,016
    
    
    
    26,781
    
    
    
    
    
    
    
    76,497Interest
expense (income), net
    
    
    8,669
    
    
    
    (117
    )
    
    
    163
    
    
    
    
    
    
    
    8,715Minority interest
    
    
    
    
    
    
    9,164
    
    
    
    751
    
    
    
    
    
    
    
    9,915Provision (benefit) for income taxes
    
    
    (9,234
    )
    
    
    22,051
    
    
    
    9,819
    
    
    
    
    
    
    
    22,636Net income (loss)
    
    $
    (16,735
    )
    
    $
    35,918
    
    
    $
    16,048
    
    
    $
    
    
    
    $
    35,231
 11




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##### Table of Contents



Condensed Consolidating Income Statements
 Parent
    
    
    Guarantor
    
    
    Non-Guarantor
    
    
    Consolidating
    
    
    ConsolidatedCompany
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Adjustments
    
    
    TotalFor the nine months ended September 30, 2004Net revenue
    
    $
    2,652
    
    
    $
    674,627
    
    
    $
    301,690
    
    
    $
    (3,976
    )
    
    $
    974,993Total operating costs and expenses
    
    
    38,553
    
    
    
    527,544
    
    
    
    228,883
    
    
    
    (3,976
    )
    
    
    791,004Income (loss) from operations
    
    
    (35,901
    )
    
    
    147,083
    
    
    
    72,807
    
    
    
    
    
    
    
    183,989Interest expense (income), net
    
    
    13,580
    
    
    
    (92
    )
    
    
    111
    
    
    
    
    
    
    
    13,599Minority interest
    
    
    
    
    
    
    23,320
    
    
    
    1,742
    
    
    
    
    
    
    
    25,062Provision (benefit) for income taxes
    
    
    (18,942
    )
    
    
    47,371
    
    
    
    27,161
    
    
    
    
    
    
    
    55,590Net income (loss)
    
    $
    (30,539
    )
    
    $
    76,484
    
    
    $
    43,793
    
    
    $
    
    
    
    $
    89,738
 Parent
    
    
    Guarantor
    
    
    Non-Guarantor
    
    
    Consolidating
    
    
    ConsolidatedCompany
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Adjustments
    
    
    TotalFor the nine months ended September 30, 2005Net revenue
    
    $
    2,327
    
    
    $
    818,092
    
    
    $
    344,788
    
    
    $
    (5,139
    )
    
    $
    1,160,068Total operating costs and expenses
    
    
    55,101
    
    
    
    635,114
    
    
    
    260,494
    
    
    
    (5,139
    )
    
    
    945,570Income (loss) from operations
    
    
    (52,774
    )
    
    
    182,978
    
    
    
    84,294
    
    
    
    
    
    
    
    214,498Interest
expense (income), net
    
    
    23,992
    
    
    
    (455
    )
    
    
    420
    
    
    
    
    
    
    
    23,957Minority interest
    
    
    
    
    
    
    25,985
    
    
    
    2,424
    
    
    
    
    
    
    
    28,409Provision (benefit) for income taxes
    
    
    (26,565
    )
    
    
    60,381
    
    
    
    31,236
    
    
    
    
    
    
    
    65,052Net income (loss)
    
    $
    (50,201
    )
    
    $
    97,067
    
    
    $
    50,214
    
    
    $
    
    
    
    $
    97,080
 12




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##### Table of Contents



Condensed Consolidating Statements of Cash Flows
 Parent
    
    
    Guarantor
    
    
    Non-Guarantor
    
    
    Consolidating
    
    
    ConsolidatedCompany
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Adjustments
    
    
    TotalFor the nine months ended September 30, 2004Cash flows from operating activities:Net income (loss)
    
    $
    (30,539
    )
    
    $
    76,484
    
    
    $
    43,793
    
    
    $
    
    
    
    $
    89,738Changes in operating and intercompany assets and
liabilities and non-cash items included in net
income
    
    
    (87,188
    )
    
    
    74,728
    
    
    
    26,476
    
    
    
    32,340
    
    
    
    46,356Net cash provided by (used in) operating activities
    
    
    (117,727
    )
    
    
    151,212
    
    
    
    70,269
    
    
    
    32,340
    
    
    
    136,094Net cash (used in) provided by investing activities
    
    
    (167,259
    )
    
    
    (153,167
    )
    
    
    (30,233
    )
    
    
    2,367
    
    
    
    (348,292
    )Net cash provided by (used in) financing activities
    
    
    264,829
    
    
    
    (691
    )
    
    
    (12,415
    )
    
    
    (47,867
    )
    
    
    203,856(Decrease) increase in cash and cash equivalents
    
    
    (20,157
    )
    
    
    (2,646
    )
    
    
    27,621
    
    
    
    (13,160
    )
    
    
    (8,342
    )Cash and cash equivalents, at beginning of period
    
    
    20,157
    
    
    
    2,646
    
    
    
    27,492
    
    
    
    
    
    
    
    50,295Cash and cash equivalents, at end of period
    
    $
    
    
    
    $
    
    
    
    $
    55,113
    
    
    $
    (13,160
    )
    
    $
    41,953
 Parent
    
    
    Guarantor
    
    
    Non-Guarantor
    
    
    Consolidating
    
    
    ConsolidatedCompany
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Adjustments
    
    
    TotalFor the nine months ended September 30, 2005Cash flows from operating activities:Net income (loss)
    
    $
    (50,201
    )
    
    $
    97,067
    
    
    $
    50,214
    
    
    $
    
    
    
    $
    97,080Changes in operating and intercompany assets and
liabilities and non-cash items included in net
income
    
    
    (30,842
    )
    
    
    93,255
    
    
    
    (19,111
    )
    
    
    (3,603
    )
    
    
    39,699Net cash provided by (used in) operating activities
    
    
    (81,043
    )
    
    
    190,322
    
    
    
    31,103
    
    
    
    (3,603
    )
    
    
    136,779Net cash
(used in) provided by investing activities
    
    
    (27,877
    )
    
    
    (190,774
    )
    
    
    (13,580
    )
    
    
    20
    
    
    
    (232,211
    )Net cash provided by (used in) financing activities
    
    
    108,920
    
    
    
    452
    
    
    
    (14,853
    )
    
    
    8,472
    
    
    
    102,991Increase in cash and cash equivalents
    
    
    
    
    
    
    
    
    
    
    2,670
    
    
    
    4,889
    
    
    
    7,559Cash and cash equivalents, at beginning of period
    
    
    
    
    
    
    
    
    
    
    31,945
    
    
    
    (14,014
    )
    
    
    17,931Cash and cash equivalents, at end of period
    
    $
    
    
    
    $
    
    
    
    $
    34,615
    
    
    $
    (9,125
    )
    
    $
    25,490
 13




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##### Table of Contents



5. Net Income per Share
  Three Months Ended
    
    
    Nine Months EndedSeptember 30
    
    
    September 302004
    
    
    2005
    
    
    2004
    
    
    2005Numerator:Numerator for basic and diluted net income per share  net income
    
    $
    30,468
    
    
    $
    35,231
    
    
    $
    89,738
    
    
    $
    97,080Denominator:Denominator for basic net income per share  weighted-average
shares
    
    
    67,095
    
    
    
    68,167
    
    
    
    67,612
    
    
    
    68,022Effect of dilutive securities:Stock options
    
    
    2,244
    
    
    
    2,856
    
    
    
    2,318
    
    
    
    2,699Denominator for diluted net income per share  adjusted
weighted-average shares and assumed conversions
    
    
    69,339
    
    
    
    71,023
    
    
    
    69,930
    
    
    
    70,721Net income per share:Basic
    
    $
    0.45
    
    
    $
    0.52
    
    
    $
    1.33
    
    
    $
    1.43Diluted
    
    $
    0.44
    
    
    $
    0.50
    
    
    $
    1.28
    
    
    $
    1.37
 6. Stockholders Equity
 Stock-based Compensation
 Accounting
for Stock Issued to Employees,
  Accounting
for Stock-Based Compensation,
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2004
    
    
    2005
    
    
    2004
    
    
    2005Net income, as reported
    
    $
    30,468
    
    
    $
    35,231
    
    
    $
    89,738
    
    
    $
    97,080Add: stock-based
compensation expense, net
of related tax effects,
included in the
determination of net income
as reported
    
    
    131
    
    
    
    319
    
    
    
    188
    
    
    
    431Less: stock-based
compensation expense, net
of related tax effects,
determined by the fair
value-based method
    
    
    (2,889
    )
    
    
    (18,474
    )
    
    
    (7,431
    )
    
    
    (23,236
    )Pro forma net income
    
    $
    27,710
    
    
    $
    17,076
    
    
    $
    82,495
    
    
    $
    74,275Net income per share:Basic, as reported
    
    $
    0.45
    
    
    $
    0.52
    
    
    $
    1.33
    
    
    $
    1.43Basic, pro forma
    
    $
    0.41
    
    
    $
    0.25
    
    
    $
    1.22
    
    
    $
    1.09Diluted, as reported
    
    $
    0.44
    
    
    $
    0.50
    
    
    $
    1.28
    
    
    $
    1.37Diluted, pro forma
    
    $
    0.40
    
    
    $
    0.24
    
    
    $
    1.18
    
    
    $
    1.05
 14




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##### Table of Contents



Stock Split
  Authorized Shares
  7. Contingencies
     8. Recent Accounting Pronouncements
 Share-Based Payment Accounting for Stock Issued to Employees Statement of Cash Flows
 15




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##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 Results of Operations
 Three Months Ended September 30, 2004 Compared to Three Months Ended September 30, 2005
 Net Revenue.
 Patient Care Costs.
 General and Administrative Expenses.
 Provision for Doubtful Accounts.
  16




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Depreciation and Amortization.
 Income from Operations.
 Interest Expense, Net.
 Minority Interest.
 Provision for Income Taxes
 Net Income
 Nine Months Ended September 30, 2004 Compared to Nine Months Ended September 30, 2005
 Net Revenue.
 17




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##### Table of Contents



Patient Care Costs.
 General and Administrative Expenses.
 Provision for Doubtful Accounts.
  Depreciation and Amortization.
 Income from Operations.
 Interest Expense, Net.
 18




---



##### Table of Contents



Minority Interest.
 Provision for Income Taxes.
 Net Income.
 Liquidity and Capital Resources
       19




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##### Table of Contents



Critical Accounting Policies
  
 RISK FACTORS
 You should carefully consider the risks described below before investing in Renal Care Group.
The risks and uncertainties described below are not the only ones facing Renal Care Group. Other
risks and uncertainties that we have not predicted or assessed may also adversely affect us.
 If any of the following risks occurs, our earnings, financial condition or business could be
materially harmed, and the trading price of our common stock could decline, resulting in the loss
of all or part of your investment.
 Completion of the Fresenius Medical Care transaction is subject to various conditions; as a result
we can not assure you that our transaction with Fresenius Medical Care will be completed.
  
    
    the termination or expiration of the waiting period under the Hart-Scott Rodino Antitrust
Improvements Act of 1976, as amended, or the approval of the transaction under that act;
    
    there existing no temporary restraining order, preliminary or permanent injunction or
other order issued by any court or other legal restraint or prohibition preventing the
consummation of the transaction;
    
    the accuracy of the representations and warranties of Renal Care Group and Fresenius
Medical Care in the merger agreement;
 20




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##### Table of Contents




    
    the performance in all material respects by Renal Care Group and Fresenius Medical Care
of all obligations required to be performed by each of them under the merger agreement at or
prior to the effective time of the transaction;
    
    the absence of an event, change, effect or development that, individually or in the
aggregate, has had or would reasonably be expected to have, a material adverse effect on
Renal Care Group as defined in the merger agreement; or
    
    the satisfaction or waiver by the lenders of the conditions precedent to the initial
funding of Fresenius Medical Cares financing commitments that are related to the delivery
of releases of liens encumbering the assets of Renal Care Group and the delivery of
financial statements of Renal Care Group.
  Failure to complete the Fresenius Medical Care transaction could negatively impact the market price
of our common stock and our ability to operate our business.
  
    
    the market price of our common stock could decline;
    
    costs related to the transaction, such as legal and accounting fees and a portion of the
investment banking fees and, in specified circumstances, termination fees and expense
reimbursement payments, must be paid even if the transaction is not completed and will be
expensed in the fiscal period in which termination occurs;
    
    the diversion of managements attention from our day-to-day business and the unavoidable
disruption to our associates and our relationships with patients, medical directors,
attending physicians and suppliers, during the period before completion of the transaction,
may make it difficult for us to regain our financial and market position if the transaction
does not occur; and
    
    the loss of key management, clinical and technical personnel who may be uncertain about
their future roles and relationships with Renal Care Group following the completion of the
transaction with Fresenius Medical Care could make it difficult for us to operate our
business effectively and profitably if we are unable to replace these employees if the
transaction with Fresenius Medical Care is not completed.
  Our profits are dependent on the services we provide to a small portion of our patients who are
covered by private insurance.
  21




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##### Table of Contents




    
    any number of economic or demographic factors could cause private insurers, hospitals or
managed care companies to reduce the rates they pay us or to refuse to pay price increases
or to work to reduce the rate of our price increases;
    
    a portion of our business that is currently reimbursed by private insurers or hospitals
may become reimbursed by managed care organizations, which generally have lower rates for
our services; or
    
    a portion of our business that is currently reimbursed by private insurers at rates based
on our billed charges may become reimbursed under a contract at lower rates.
 If Congress or CMS changes the Medicare or Medicaid programs for dialysis, then our net revenue and
earnings could decrease.
  
    
    a reduction of the amount paid to us under government programs;
    
    an increase in the costs associated with performing our services that are subject to
inflation, such as labor and supply costs, without a corresponding increase in reimbursement
rates;
    
    the inclusion of some or all ancillary services, for which we are now reimbursed
separately, in the flat composite rate for a dialysis treatment; or
    
    changes in laws, or the interpretations of laws, which could cause us to modify our
operations.
   22




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##### Table of Contents



If states lower Medicaid reimbursement, then we would be less profitable.
  If reimbursement for EPO decreases, then we could be less profitable.
  If Amgen raises the price for EPO or if EPO becomes in short supply, then we could be less
profitable.
  If Amgen markets Aranesp® for ESRD patients, then we could be less profitable.
  
    
    our margins realized from the administration of Aranesp® could be lower than the margins
realized on the administration of EPO; or
    
    physicians could decide to administer Aranesp® in their offices, and we would not
recognize net revenue or profit from the administration of EPO or Aranesp®.
 Changes in our clinical practices or reimbursement rules for EPO and other drugs could
substantially reduce our revenue and earnings.
  23




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##### Table of Contents



If our business is alleged or found to violate heath care or other applicable laws, our net revenue
and earnings could decrease.
  
    
    fraud and abuse prohibitions under state and federal health care laws;
    
    prohibitions and limitations on patient referrals;
    
    billing and reimbursement rules, including false claims prohibitions under health care reimbursement laws;
    
    rules regarding the collection, use, storage and disclosure of patient health
information, including HIPAA, and state law equivalents of HIPAA;
    
    facility licensure;
    
    health and safety requirements;
    
    environmental compliance; and
    
    medical and toxic waste disposal.
   
    
    criminal or civil penalties, including significant fines;
    
    claims by people who believe their health information has been improperly used or disclosed; and
    
    administrative penalties by payors.
   24




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##### Table of Contents



If our joint ventures violate the law, our business could be damaged.
  Changes in the health care delivery, financing or reimbursement systems could adversely affect our
business.
  If local physicians stop sending patients to our centers or were prohibited from doing so for
regulatory reasons, then our revenue and earnings would decline.
   25




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##### Table of Contents



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.
  If we are unable to make acquisitions in the future, then our rate of growth will slow.
  If acquired businesses have unknown liabilities, then we could be exposed to liabilities that could
harm our business and profitability.
  We may not have sufficient cash flow from our business to pay our substantial debt.
    26




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##### Table of Contents



The large amount and terms of our outstanding debt may prevent us from taking actions we would
otherwise consider in our best interest.
  
    
    incurring additional debt;
    
    acquiring and developing new dialysis centers;
    
    making investments;
    
    creating liens;
    
    creating restrictions on the ability of our subsidiaries to pay dividends or other amounts to us;
    
    disposing of assets;
    
    paying dividends on our capital stock;
    
    repurchasing our capital stock;
    
    engaging in transactions with our affiliates; or
    
    consolidating, merging or selling all or substantially all of our assets.
   
    
    having to use much of our cash flow for scheduled debt service rather than for
operations, future business opportunities or other purposes, such as funding working capital
and capital expenditures;
    
    being unable to increase our borrowings under our credit facility or obtain other debt
financing for future working capital, capital expenditures, acquisitions or other corporate
purposes;
    
    being less able to take advantage of significant business opportunities, including acquisitions or divestitures;
    
    difficulty satisfying our obligations under our 9.0% senior subordinated notes;
    
    increasing our vulnerability to general adverse economic and industry conditions; and
    
    causing us to be at a competitive disadvantage to competitors with less debt.
 If our costs of insurance and claims increase, then our earnings could decrease.
  27




---



##### Table of Contents




    
    further increases in premiums, deductibles and self-insurance retentions;
    
    increases in the number of liability claims against us or the cost of settling or trying cases related to those claims; and
    
    an inability to obtain one or more types of insurance on acceptable terms.
 If our board of directors does not approve an acquisition or change in control, then our
shareholders may not realize the full value of their stock
  
    
    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 acquirer; and
    
    a poison pill that would substantially dilute the interest sought by an acquirer.
  Forward-Looking Statements
  
    
    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.
  28




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##### Table of Contents



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  Cash balances
  Outstanding debt
  
 ITEM 4. CONTROLS AND PROCEDURES
 Evaluation of Disclosure Controls and Procedures
   29




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##### Table of Contents



PART II  OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
  Plumbers Local #65 Pension Fund,
on behalf of itself and all others similarly situated, Plaintiff, vs. Renal Care Group, Inc.,
William P. Johnston, Gary Brukardt, Peter J. Grua, Joseph C. Hutts, Harry R. Jacobson, William V.
Lapham, Thomas A. Lowery, Stephen D. McMurray and C. Thomas Smith, Defendants Hawaii Structural Ironworkers Pension Trust Fund,
on behalf of itself and all others similarly situated, Plaintiff, vs. Renal Care Group, Inc.,
William P. Johnston, Gary Brukardt, Peter J. Grua, Joseph C. Hutts, Harry R. Jacobson, William V.
Lapham, Thomas A. Lowery, Stephen D. McMurray and C. Thomas Smith, Defendants. Indiana State District Council of Laborers and Hod
Carriers Pension Fund, on behalf of itself and others similar situated, Plaintiff, vs. Renal Care
Group, Inc., William P. Johnston, Gary Brukardt, Peter J. Grua, Joseph C. Hutts, Harry R. Jacobson,
William V. Lapham, Thomas A. Lowery, Stephen D. McMurray and C. Thomas Smith, Defendants
  30




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##### Table of Contents



ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
   FOR
    
    AGAINST
    
    ABSTAIN52,531,601
    
    
    
    94,045
    
    
    
    466,086
 
 ITEM 6. EXHIBITS
 31.1
    
    Certification pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
200231.2
    
    Certification pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
200232.1*
    
    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 200232.2*
    
    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 *
    
    In accordance with Release No. 34-47551, this exhibit is furnished to the SEC as an
accompanying document and is not deemed to be filed for purposes of Section 18 of the
Securities Exchange Act of 1934 or otherwise subject to the liabilities of that Section, and
the document will not be deemed incorporated by reference into any filing under the Securities
Act of 1933. 31




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##### Table of Contents



SIGNATURE
  RENAL CARE GROUP, INC.
(Registrant)November 2, 2005
    BY:
    /s/ David M. DillDavid M. DillExecutive Vice President,
Chief Financial Officer (Principal Financial
Officer and Principal Accounting Officer) 32




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##### Table of Contents



RENAL CARE GROUP, INC.
 
 EXHIBIT INDEX
 Number andDescription of Exhibit31.1
    
    Certification pursuant to Rule
13a-14(a)/15d-14(a), as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    Certification pursuant to Rule
13a-14(a)/15d-14(a), as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 200232.1*
    
    Certification pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 200232.2*
    
    Certification pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
 
 *
    
    In accordance with Release No. 34-47551, this exhibit is furnished to the SEC as an
accompanying document and is not deemed to be filed for purposes of Section 18 of the
Securities Exchange Act of 1934 or otherwise subject to the liabilities of that Section, and
the document will not be deemed incorporated by reference into any filing under the Securities
Act of 1933. 33