##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
 (Mark One)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the Quarterly Period Ended June 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
(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
 Registrants telephone number, including area code: (615) 345-5500
 þ
 þ o
  Class
    
    Outstanding at August 1, 2005Common Stock, $.01 par value
    
    68,090,945




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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 June 30, 2005 (unaudited)
    
    
    1Condensed Consolidated Income Statements  (unaudited) For the three months and six
months ended June 30, 2004 and 2005


    
    
    2Condensed Consolidated Statements of Cash Flows  (unaudited) For the six months ended
June 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
    
    
    15Risk Factors
    
    
    20Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    30Item 4. Controls and Procedures
    
    
    30PART II  OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    31Item 4. Submission of Matters to a Vote of Security Holders
    
    
    31Item 6. Exhibits
    
    
    32Signature
    
    
    33Exhibit Index
    
    
    34EX-10.12.1 INCREMENTAL TERM LOAN AGREEMENTEx-31.1  Section 302 Certification of the CEOEx-31.2  Section 302 Certification of the CFOEx-32.1  Section 906 Certification of the CEOEx-32.2  Section 906 Certification of the CFO




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##### 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,
    
    June 30,2004
    
    2005(unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    17,931
    
    
    $
    12,642Accounts receivable, net
    
    
    275,373
    
    
    
    288,681Inventories
    
    
    23,359
    
    
    
    30,795Prepaid expenses and other current assets
    
    
    26,817
    
    
    
    30,431Deferred income taxes
    
    
    29,604
    
    
    
    36,489Total current assets
    
    
    373,084
    
    
    
    399,038Property, plant and equipment, net
    
    
    316,532
    
    
    
    350,918Intangible assets, net
    
    
    34,320
    
    
    
    38,845Goodwill
    
    
    694,264
    
    
    
    807,352Other assets
    
    
    10,780
    
    
    
    8,231Total assets
    
    $
    1,428,980
    
    
    $
    1,604,384LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable and accrued expenses
    
    $
    139,929
    
    
    $
    154,654Due to third-party payors
    
    
    80,007
    
    
    
    75,482Current portion of long-term debt
    
    
    23,969
    
    
    
    31,104Total current liabilities
    
    
    243,905
    
    
    
    261,240Long-term debt, net of current portion
    
    
    479,645
    
    
    
    563,885Deferred income taxes
    
    
    51,419
    
    
    
    51,054Other long-term liabilities
    
    
    16,271
    
    
    
    16,727Minority interest
    
    
    45,619
    
    
    
    53,451Total liabilities
    
    
    836,859
    
    
    
    946,357Commitments and contingenciesStockholders equity:Preferred stock, $0.01 par value, 10,000 shares authorized, none issued
    
    
    
    
    
    
    Common stock, $0.01 par value, 150,000 shares authorized, 82,317 and
82,868 shares issued at December 31, 2004 and June 30, 2005,
respectively
    
    
    823
    
    
    
    829Treasury stock, 14,514 and 14,766 shares of common stock at December
31, 2004 and June 30, 2005, respectively
    
    
    (372,249
    )
    
    
    (381,635
    )Additional paid-in capital
    
    
    411,888
    
    
    
    424,422Retained earnings
    
    
    551,863
    
    
    
    613,712Accumulated other comprehensive (loss) income, net of tax
    
    
    (204
    )
    
    
    699Total stockholders equity
    
    
    592,121
    
    
    
    658,027Total liabilities and stockholders equity
    
    $
    1,428,980
    
    
    $
    1,604,384
  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
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2005
    
    2004
    
    2005Net revenue
    
    $
    340,854
    
    
    $
    384,329
    
    
    $
    618,882
    
    
    $
    757,838Operating costs and expenses:Patient care costs
    
    
    229,849
    
    
    
    254,854
    
    
    
    409,221
    
    
    
    501,433General and administrative expenses
    
    
    27,341
    
    
    
    36,061
    
    
    
    50,017
    
    
    
    66,692Provision for doubtful accounts
    
    
    8,049
    
    
    
    8,947
    
    
    
    15,159
    
    
    
    17,150Depreciation and amortization
    
    
    14,900
    
    
    
    17,775
    
    
    
    27,063
    
    
    
    34,562Total operating costs and expenses
    
    
    280,139
    
    
    
    317,637
    
    
    
    501,460
    
    
    
    619,837Income from operations
    
    
    60,715
    
    
    
    66,692
    
    
    
    117,422
    
    
    

    138,001Interest expense, net
    
    
    5,765
    
    
    
    7,981
    
    
    
    6,730
    
    
    
    15,242Income before minority interest and income taxes
    
    
    54,950
    
    
    
    58,711
    
    
    
    110,692
    
    
    
    122,759Minority interest
    
    
    7,690
    
    
    
    9,132
    
    
    
    14,904
    
    
    
    18,494Income before income taxes
    
    
    47,260
    
    
    
    49,579
    
    
    
    95,788
    
    
    
    104,265Provision for income taxes
    
    
    18,077
    
    
    
    21,362
    
    
    
    36,518
    
    
    
    42,416Net income
    
    $
    29,183
    
    
    $
    28,217
    
    
    $
    59,270
    
    
    $
    61,849Net income per share:Basic
    
    $
    0.44
    
    
    $
    0.41
    
    
    $
    0.87
    
    
    $
    0.91Diluted
    
    $
    0.42
    
    
    $
    0.40
    
    
    $
    0.84
    
    
    $
    0.88Weighted average shares outstanding:Basic
    
    
    66,832
    
    
    
    68,037
    
    
    
    67,871
    
    
    
    67,950Diluted
    
    
    69,227
    
    
    
    70,780
    
    
    
    70,225
    
    
    
    70,571
  2




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##### Table of Contents



RENAL CARE GROUP, INC.
 
 Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
 Six Months EndedJune 30,2004
    
    2005OPERATING ACTIVITIESNet income
    
    $
    59,270
    
    
    $
    61,849Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization
    
    
    27,063
    
    
    
    34,562Loss on sale of property and equipment
    
    
    564
    
    
    
    197Distributions to minority shareholders
    
    
    (9,906
    )
    
    
    (13,316
    )Income applicable to minority interest
    
    
    14,904
    
    
    
    18,494Deferred income taxes
    
    
    7,889
    
    
    
    1,147Changes in operating assets and liabilities, net of effects from acquisitions
    
    
    (18,605
    )
    
    
    (9,964
    )Net cash provided by operating activities
    
    
    81,179
    
    
    
    92,969INVESTING ACTIVITIESPurchases of property and equipment
    
    
    (45,031
    )
    
    
    (47,087
    )Cash paid for acquisitions, net of cash acquired
    
    
    (230,746
    )
    
    
    (144,170
    )Change in other assets
    
    
    (5,299
    )
    
    
    2,540Net cash used in investing activities
    
    
    (281,076
    )
    
    
    (188,717
    )FINANCING ACTIVITIESNet proceeds from issuance of long-term debt
    
    
    325,000
    
    
    
    100,000Payments on long-term debt
    
    
    (4,063

    )
    
    
    (10,157
    )Net (payments) borrowings under line of credit and capital leases
    
    
    (2,101
    )
    
    
    1,532Net proceeds from issuance of common stock
    
    
    12,793
    
    
    
    8,470Repurchase of treasury shares
    
    
    (137,845
    )
    
    
    (9,386
    )Net cash provided by financing activities
    
    
    193,784
    
    
    
    90,459Decrease in cash and cash equivalents
    
    
    (6,113
    )
    
    
    (5,289
    )Cash and cash equivalents at beginning of period
    
    
    50,295
    
    
    
    17,931Cash and cash equivalents at end of period
    
    $
    44,182
    
    
    $
    12,642
  3




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##### Table of Contents



RENAL CARE GROUP, INC.
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 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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##### Table of Contents



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. 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
 5




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##### Table of Contents



3. Business Acquisitions
 2005 Acquisitions
   Accounts receivable, net
    
    $
    1,122Inventory and other current assets
    
    
    956Property, plant and equipment, net
    
    
    19,398Intangible assets
    
    
    6,711Goodwill
    
    
    122,275Total assets acquired
    
    
    150,462Total liabilities assumed
    
    
    6,292Net assets acquired
    
    $
    144,170
  6




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##### Table of Contents



Pro Forma Data
  Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2005
    
    2004
    
    2005Pro forma net revenue
    
    $
    353,010
    
    
    $
    389,947
    
    
    $
    643,194
    
    
    $
    773,390Pro forma net income
    
    $
    29,849
    
    
    $
    28,371
    
    
    $
    60,597
    
    
    $
    62,318Pro forma net income per share:Basic
    
    $
    0.45
    
    
    $
    0.42
    
    
    $
    0.89
    
    
    $
    0.92Diluted
    
    $
    0.43
    
    
    $
    0.40
    
    
    $
    0.86
    
    
    $
    0.88
  4. Long-Term Debt
  December 31,
    
    June 30,2004
    
    2005Term loan facility, bearing interest at a variable rate (4.8% at June 30, 2005)
    
    $
    312,813
    
    
    $
    302,656Incremental term loan, bearing interest at a variable rate (4.6% at June 30, 2005)
    
    
    3⁄4
    
    
    
    100,0009% senior subordinated notes
    
    
    159,685
    
    
    
    159,685Obligations under capital leases
    
    
    4,151
    
    
    
    4,640Other
    
    
    3,357
    
    
    
    5,781Total indebtedness, excluding fair value premium
    
    
    480,006
    
    
    
    572,762Add: 9% senior subordinated notes fair value premium
    
    
    23,608
    
    
    
    22,227Total long-term debt
    
    
    503,614
    
    
    
    594,989Less: current portion
    
    
    23,969
    
    
    
    31,104$
    479,645
    
    
    $
    563,885
 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
  Maturities of Long-Term Debt
  2005
    
    $
    13,7672006
    
    
    42,1772007
    
    
    79,7592008
    
    
    207,9752009
    
    
    67,143Thereafter
    
    
    161,941$
    572,762
 8




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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
    
    $
    3⁄4
    
    
    $
    3⁄4
    
    
    $
    31,945
    
    
    $
    (14,014
    )
    
    $
    17,931Accounts receivable, net
    
    
    3⁄4
    
    
    
    198,778
    
    
    
    76,595
    
    
    
    3⁄4
    
    
    
    275,373Other current assets
    
    
    45,749
    
    
    
    23,320
    
    
    
    10,711
    
    
    
    3⁄4
    
    
    
    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
    
    
    
    3⁄4
    
    
    
    479,645Long-term liabilities
    
    
    64,976
    
    
    
    2,253
    
    
    
    461
    
    
    
    3⁄4
    
    
    
    67,690Minority interest
    
    
    3⁄4
    
    
    
    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 June 30, 2005Cash and cash equivalents
    
    $
    3⁄4
    
    
    $
    3⁄4
    
    
    $
    25,066
    
    
    $
    (12,424
    )
    
    $
    12,642Accounts receivable, net
    
    
    3⁄4
    
    
    
    201,735
    
    
    
    86,946
    
    
    
    3⁄4
    
    
    
    288,681Other current assets
    
    
    56,145
    
    
    
    28,937
    
    
    
    12,633
    
    
    
    3⁄4
    
    
    
    97,715Total current assets
    
    
    56,145
    
    
    
    230,672
    
    
    
    124,645
    
    
    
    (12,424
    )
    
    
    399,038Property, plant and equipment, net
    
    
    37,485
    
    
    
    207,606
    
    
    
    104,068
    
    
    
    1,759
    
    
    
    350,918Goodwill
    
    
    1,483
    
    
    
    679,845
    
    
    
    125,274
    
    
    
    750
    
    
    
    807,352Other assets
    
    
    2,403
    
    
    
    104,821
    
    
    
    7,425
    
    
    
    (67,573
    )
    
    
    47,076Total assets
    
    $
    97,516
    
    
    $
    1,222,944
    
    
    $
    361,412
    
    
    $
    (77,488
    )
    
    $
    1,604,384Current liabilities (including
intercompany assets and
liabilities)
    
    $
    (742,784
    )
    
    
    878,720
    
    
    $
    152,974
    
    
    $
    (27,670
    )
    
    $
    261,240Long-term debt
    
    
    559,505
    
    
    
    (295
    )
    
    
    4,675
    
    
    
    3⁄4
    
    
    
    563,885Long-term liabilities
    
    
    57,799
    
    
    
    7,858
    
    
    
    987
    
    
    
    1,137
    
    
    
    67,781Minority interest
    
    
    3⁄4
    
    
    
    44,825
    
    
    
    8,677
    
    
    
    (51
    )
    
    
    53,451Stockholders equity
    
    
    222,996
    
    
    
    291,836
    
    
    
    194,099
    
    
    
    (50,904
    )
    
    
    658,027Total liabilities and
stockholders equity
    
    $
    97,516
    
    
    $
    1,222,944
    
    
    $
    361,412
    
    
    $
    (77,488
    )
    
    $
    1,604,384
 9




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##### Table of Contents



Condensed Consolidating Income Statements
 Parent
    
    Guarantor
    
    Non-Guarantor
    
    Consolidating
    
    ConsolidatedCompany
    
    Subsidiaries
    
    Subsidiaries
    
    Adjustments
    
    TotalFor the three months ended
June 30, 2004Net revenue
    
    $
    747
    
    
    $
    241,216
    
    
    $
    100,123
    
    
    $
    (1,232
    )
    
    $
    340,854Total operating costs and expenses
    
    
    15,845
    
    
    
    188,368
    
    
    
    77,158
    
    
    
    (1,232
    )
    
    
    280,139Income (loss) from operations

    
    
    (15,098
    )
    
    
    52,848
    
    
    
    22,965
    
    
    
    
    
    
    
    60,715Interest expense, net
    
    
    5,765
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,765Minority interest
    
    
    
    
    
    
    7,434
    
    
    
    256
    
    
    
    
    
    
    
    7,690Provision (benefit) for income taxes
    
    
    (7,980
    )
    
    
    17,371
    
    
    
    8,686
    
    
    
    
    
    
    
    18,077Net income (loss)
    
    $
    (12,883
    )
    
    $
    28,043
    
    
    $
    14,023
    
    
    $
    
    
    
    $
    29,183
 Parent
    
    Guarantor
    
    Non-Guarantor
    
    Consolidating
    
    ConsolidatedCompany
    
    Subsidiaries
    
    Subsidiaries
    
    Adjustments
    
    TotalFor the three months ended
June 30, 2005Net revenue
    
    $
    34
    
    
    $
    266,256
    
    
    $
    119,811
    
    
    $
    (1,772
    )
    
    $
    384,329Total operating costs and expenses
    
    
    22,028
    
    
    
    206,453
    
    
    
    90,928
    
    
    
    (1,772
    )
    
    
    317,637Income (loss) from operations
    
    
    (21,994
    )
    
    
    59,803
    
    
    
    28,883
    
    
    
    
    
    
    
    66,692Interest expense, net
    
    
    7,978
    
    
    
    (35
    )
    
    
    38
    
    
    
    
    
    
    
    7,981Minority interest
    
    
    
    
    
    
    8,339
    
    
    
    793
    
    
    
    
    
    
    
    9,132Provision (benefit) for income taxes
    
    
    (9,313
    )
    
    
    19,858
    
    
    
    10,817
    
    
    
    
    
    
    
    21,362Net income (loss)
    
    $
    (20,659
    )
    
    $
    31,641
    
    
    $
    17,235
    
    
    $
    
    
    
    $
    28,217
 10




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##### Table of Contents



Condensed Consolidating Income Statements
 Parent
    
    Guarantor
    
    Non-Guarantor
    
    Consolidating
    
    ConsolidatedCompany
    
    Subsidiaries
    
    Subsidiaries
    
    Adjustments
    
    TotalFor the six months ended June
30, 2004Net revenue
    
    $
    934
    
    
    $
    428,870
    
    
    $
    191,509
    
    
    $
    (2,431
    )
    
    $
    618,882Total operating costs and expenses
    
    
    26,151
    
    
    
    329,491
    
    
    
    148,249
    
    
    
    (2,431
    )
    
    
    501,460Income (loss) from operations
    
    
    (25,217
    )
    
    
    99,379
    
    
    
    43,260
    
    
    
    
    
    
    
    117,422Interest expense, net
    
    
    6,730
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,730Minority interest
    
    
    
    
    
    
    14,020
    
    
    
    884
    
    
    
    
    
    
    
    14,904Provision (benefit) for income taxes
    
    
    (12,192
    )
    
    
    32,550
    
    
    
    16,160
    
    
    
    
    
    
    
    36,518Net income (loss)
    
    $
    (19,755
    )
    
    $
    52,809
    
    
    $
    26,216
    
    
    $
    
    
    
    $
    59,270
 Parent
    
    Guarantor
    
    Non-Guarantor
    
    Consolidating
    
    ConsolidatedCompany
    
    Subsidiaries
    
    Subsidiaries
    
    Adjustments
    
    TotalFor the six months ended June
30, 2005Net revenue
    
    $
    1,411
    
    
    $
    526,349
    
    
    $
    233,570
    
    
    $
    (3,492
    )
    
    $
    757,838Total operating costs and expenses
    
    
    36,885
    
    
    
    410,387
    
    
    
    176,057
    
    
    
    (3,492
    )
    
    
    619,837Income (loss) from operations
    
    
    (35,474
    )
    
    
    115,962
    
    
    
    57,513
    
    
    
    
    
    
    
    138,001Interest expense, net
    
    
    15,323
    
    
    
    (338
    )
    
    
    257
    
    
    
    
    
    
    
    15,242Minority interest
    
    
    
    
    
    
    16,821
    
    
    
    1,673
    
    
    
    
    
    
    
    18,494Provision (benefit) for income taxes
    
    
    (17,331
    )
    
    
    38,330
    
    
    
    21,417
    
    
    
    
    
    
    
    42,416Net income (loss)
    
    $
    (33,466
    )
    
    $
    61,149
    
    
    $
    34,166
    
    
    $
    
    
    
    $
    61,849
 11




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##### Table of Contents



Condensed Consolidating Statements of Cash Flows
 Parent
    
    Guarantor
    
    Non-Guarantor
    
    Consolidating
    
    ConsolidatedCompany
    
    Subsidiaries
    
    Subsidiaries
    
    Adjustments
    
    TotalFor the six months ended June 30, 2004Cash flows from operating activities:Net income (loss)
    
    $
    (19,755
    )
    
    $
    52,809
    
    
    $
    26,216
    
    
    $
    
    
    
    $
    59,270Changes in operating and intercompany assets
and liabilities and non-cash items included
in net income
    
    
    (82,613
    )
    
    
    43,692
    
    
    
    17,415
    
    
    
    43,415
    
    
    
    21,909Net cash provided by (used in) operating
activities
    
    
    (102,368
    )
    
    
    96,501
    
    
    
    43,631
    
    
    
    43,415
    
    
    
    81,179Net cash (used in) provided by investing
activities
    
    
    (170,723
    )
    
    
    (89,375
    )
    
    
    (22,246
    )
    
    
    1,268
    
    
    
    (281,076
    )Net cash provided by (used in) financing
activities
    
    
    252,934
    
    
    
    (299
    )
    
    

    (10,699
    )
    
    
    (48,152
    )
    
    
    193,784(Decrease) increase in cash and cash equivalents
    
    
    (20,157
    )
    
    
    6,827
    
    
    
    10,686
    
    
    
    (3,469
    )
    
    
    (6,113
    )Cash and cash equivalents, at beginning of period
    
    
    20,157
    
    
    
    2,646
    
    
    
    27,492
    
    
    
    
    
    
    
    50,295Cash and cash equivalents, at end of period
    
    $
    
    
    
    $
    9,473
    
    
    $
    38,178
    
    
    $
    (3,469
    )
    
    $
    44,182
 Parent
    
    Guarantor
    
    Non-Guarantor
    
    Consolidating
    
    ConsolidatedCompany
    
    Subsidiaries
    
    Subsidiaries
    
    Adjustments
    
    TotalFor the six months ended June 30, 2005Cash flows from operating activities:Net income (loss)
    
    $
    (33,466
    )
    
    $
    61,149
    
    
    $
    34,166
    
    
    $
    
    
    
    $
    61,849Changes in operating and intercompany assets
and liabilities and non-cash items
included in net income
    
    
    (38,849
    )
    
    
    80,599
    
    
    
    (6,889
    )
    
    
    (3,741
    )
    
    
    31,120Net cash provided by (used in) operating
activities
    
    
    (72,315
    )
    
    
    141,748
    
    
    
    27,277
    
    
    
    (3,741
    )
    
    
    92,969Net cash used in investing activities
    
    
    (24,149
    )
    
    
    (141,712
    )
    
    
    (21,795
    )
    
    
    (1,061
    )
    
    
    (188,717
    )Net cash provided by (used in) financing
activities
    
    
    96,464
    
    
    
    (36
    )
    
    
    (12,361
    )
    
    
    6,392
    
    
    
    90,459(Decrease) increase in cash and cash equivalents
    
    
    
    
    
    
    
    
    
    
    (6,879
    )
    
    
    1,590
    
    
    
    (5,289
    )Cash and cash equivalents, at beginning of
period
    
    
    
    
    
    
    
    
    
    
    31,945
    
    
    
    (14,014
    )
    
    
    17,931Cash and cash equivalents, at end of period
    
    $
    
    
    
    $
    
    
    
    $
    25,066
    
    
    $
    (12,424
    )
    
    $
    12,642
 12




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##### Table of Contents



5. Net Income per Share
  Three Months Ended
    
    Six Months EndedJune 30
    
    June 302004
    
    2005
    
    2004
    
    2005Numerator:Numerator for basic and diluted net income per share  net income
    
    $
    29,183
    
    
    $
    28,217
    
    
    $
    59,270
    
    
    $
    61,849Denominator:Denominator for basic net income per share  weighted-average
shares
    
    
    66,832
    
    
    
    68,037
    
    
    
    67,871
    
    
    
    67,950Effect of dilutive securities:Stock options
    
    
    2,395
    
    
    
    2,743
    
    
    
    2,354
    
    
    
    2,621Denominator for diluted net income per share  adjusted
weighted-average shares and assumed conversions
    
    
    69,227
    
    
    
    70,780
    
    
    
    70,225
    
    
    
    70,571Net income per share:Basic
    
    $
    0.44
    
    
    $
    0.41
    
    
    $
    0.87
    
    
    $
    0.91Diluted
    
    $
    0.42
    
    
    $
    0.40
    
    
    $
    0.84
    
    
    $
    0.88
 6. Stockholders Equity
 Stock-based Compensation
 Accounting
for Stock Issued to Employees,
 Accounting
for Stock-Based Compensation,
 Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2005
    
    2004
    
    2005Net income, as reported
    
    $
    29,183
    
    
    $
    28,217
    
    
    $
    59,270
    
    
    $
    61,849Add: stock-based
compensation expense, net
of related tax effects,
included in the
determination of net income
as reported
    
    
    26
    
    
    
    56
    
    
    
    57
    
    
    
    112Less: stock-based
compensation expense, net
of related tax effects,
determined by the fair
value-based method
    
    
    (2,155
    )
    
    
    (2,283
    )
    
    
    (4,542
    )
    
    
    (4,762
    )Pro forma net income
    
    $
    27,054
    
    
    $
    25,990
    
    
    $
    54,785
    
    
    $
    57,199Net income per share:Basic, as reported
    
    $
    0.44
    
    
    $
    0.41
    
    
    $
    0.87
    
    
    $
    0.91Basic, pro forma
    
    $
    0.40
    
    
    $
    0.38
    
    
    $
    0.81
    
    
    $
    0.84Diluted, as reported
    
    $
    0.42
    
    
    $
    0.40

    
    
    $
    0.84
    
    
    $
    0.88Diluted, pro forma
    
    $
    0.39
    
    
    $
    0.37
    
    
    $
    0.78
    
    
    $
    0.81
 13




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##### Table of Contents



Stock Split
  Authorized
Shares (shares in thousands)
  7. Contingencies
    8. Recent Accounting Pronouncements
 Share-Based Payment Accounting for Stock Issued to Employees Statement of Cash Flows
 14




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##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 Results of Operations
 Three Months Ended June 30, 2004 Compared to Three Months Ended June 30, 2005
 Net Revenue.
 Patient Care Costs.
 General and Administrative Expenses.
 Provision for Doubtful Accounts.
 15




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##### Table of Contents



Depreciation and Amortization.
 Income from Operations.
 Interest Expense, Net.
 Minority Interest.
 Provision for Income Taxes
 Net Income
 Six Months Ended June 30, 2004 Compared to Six Months Ended June 30, 2005
 Net Revenue.
 Patient Care Costs.
 16




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##### Table of Contents



General and Administrative Expenses.
 Provision for Doubtful Accounts.
 Depreciation and Amortization.
 Income from Operations.
 Interest Expense, Net.
 Minority Interest.
 Provision for Income Taxes.
 17




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##### Table of Contents



Net Income.
 Liquidity and Capital Resources
       18




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Critical Accounting Policies
  19




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RISK FACTORS
 You should carefully consider the risks described below before investing in Renal Care Group.
The risks and uncertainties described 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 adoption of the agreement providing for the transaction by holders of a majority of
the shares of Renal Care Group common stock outstanding on July 1, 2005 at a special
meeting of shareholders scheduled for August 24, 2005; we refer to the agreement governing
the Fresenius Medical Care transaction as the merger agreement;
    
    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;
    
    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;
 20




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##### Table of Contents




    
    costs related to the transaction, such as legal and accounting fees and a portion of the
investment banking fees and, in specified circumstances, termination and expense
reimbursement fees, 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 effectively
and profitably operate our business if we are unable to replace these
employees in the event 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.
   
    
    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.
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##### Table of Contents



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.
   The implementation of the case-mix adjustment could adversely affect our cash flow and working
capital.
  If states lower Medicaid reimbursement, then we would be less profitable.
  22




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##### Table of Contents



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.
   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.
  25




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##### Table of Contents



If we are unable to make acquisitions in the future, then our rate of growth will slow.
  If we fail to integrate acquired companies, then we will be less profitable.
  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;
 27




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##### Table of Contents




    
    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.
  
    
    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.
  28




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##### Table of Contents



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.
  29




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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
   30




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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
 
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  1.
    
    To elect Peter J. Grua, William P. Johnston, and C. Thomas Smith as Class III
Directors, each to serve for a term of three years and until his successor is elected:
 FOR
    
    
    ABSTAINElection of Peter J. Grua
    
    
    60,607,525
    
    
    
    1,532,930Election of William P. Johnston
    
    
    58,973,304
    
    
    
    3,167,151Election of C. Thomas Smith
    
    
    60,358,213
    
    
    
    1,782,242
  31




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##### Table of Contents



2.
    
    To approve an amendment to the Renal Care Group, Inc. Amended and Restated Employee
Stock Purchase Plan (the Employee Stock Purchase Plan) to increase the number of shares
available under the Employee Stock Purchase Plan:
 FOR
    
    AGAINST
    
    
    ABSTAIN51,966,445
    
    
    4,442,260
    
    
    
    96,473
 
 ITEM 6. EXHIBITS
 2.1.1
    
    Agreement, dated May 3, 2005, by
and among Renal Care Group, Inc., Fresenius Medical Care AG,
Fresenius Medical Care Holdings, Inc. and Florence Acquisition, Inc.
(incorporated by reference from Exhibit 2.1.1 to the Companys
Form 8-K filed on May 3, 2005)2.1.2
    
    Letter Agreement among Fresenius
AG, Fresenius Medical Care AG, Fresenius Medical Care Holdings, Inc.
and Renal Care Group, Inc., dated May 3, 2005 (incorporated by
reference from Exhibit 2.1.2 to the Companys Form 8-K filed on
May 3, 2005)4.1
    
    First Amendment, dated as of May 3,
2005, to the Shareholder Protection Rights Agreement dated as of May
2, 1997, between Renal Care Group, Inc. and Wachovia Bank, National
Association, as rights agent (incorporated by reference from Exhibit
4.1 to the Companys Form 8-K filed on May 3, 2005)10.12.1
    
    Incremental Term Loan Commitment Agreement, dated as of May 27,
2005, by and among Renal Care Group, Inc., the Guarantors (as
defined therein) and Bank of America, N.A.31.1
    
    Certification pursuant to Rule 13a-14(a)/15d-14(a), as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    Certification pursuant to Rule 13a-14(a)/15d-14(a), as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1*
    
    Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 200232.2*
    
    Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 *
    
    In accordance with Release No. 34-47551, this exhibit is furnished to the SEC as an
accompanying document and is not deemed to be filed for purposes of Section 18 of the
Securities Exchange Act of 1934 or otherwise subject to the liabilities of that Section, and
the document will not be deemed incorporated by reference into any filing under the Securities
Act of 1933. 32




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##### Table of Contents



SIGNATURE
  RENAL CARE GROUP, INC.(Registrant)August 4, 2005
    
    BY:
    
    /s/ David M. DillDavid M. DillExecutive Vice President,Chief Financial Officer (Principal FinancialOfficer and Principal Accounting Officer)
 33




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##### Table of Contents



RENAL CARE GROUP, INC.
 
 EXHIBIT INDEX
 Number andDescription of Exhibit2.1.1
    
    Agreement, dated May 3, 2005, by
and among Renal Care Group, Inc., Fresenius Medical Care AG,
Fresenius Medical Care Holdings, Inc. and Florence Acquisition, Inc.
(incorporated by reference from Exhibit 2.1.1 to the Companys
Form 8-K filed on May 3, 2005)2.1.2
    
    Letter Agreement among Fresenius
AG, Fresenius Medical Care AG, Fresenius Medical Care Holdings, Inc.
and Renal Care Group, Inc., dated May 3, 2005 (incorporated by
reference from Exhibit 2.1.2 to the Companys Form 8-K filed on
May 3, 2005)4.1
    
    First Amendment, dated as of May 3,
2005, to the Shareholder Protection Rights Agreement dated as of May
2, 1997, between Renal Care Group, Inc. and Wachovia Bank, National
Association, as rights agent (incorporated by reference from Exhibit
4.1 to the Companys Form 8-K filed on May 3, 2005)10.12.1
    
    Incremental Term Loan Commitment
Agreement, dated as of May 27, 2005,
by and among Renal Care Group, Inc.,
the Guarantors (as defined therein)
and Bank of America, N.A.31.1
    
    Certification pursuant to Rule
13a-14(a)/15d-14(a), as adopted
pursuant to Section 302 of the
Sarbanes-Oxley Act of 200231.2
    
    Certification pursuant to Rule
13a-14(a)/15d-14(a), as adopted
pursuant to Section 302 of the
Sarbanes-Oxley Act of 200232.1*
    
    Certification pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley
Act of 200232.2*
    
    Certification pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley
Act of 2002
 
 *
    
    In accordance with Release No. 34-47551, this exhibit is furnished to the SEC as an
accompanying document and is not deemed to be filed for purposes of Section 18 of the
Securities Exchange Act of 1934 or otherwise subject to the liabilities of that Section, and
the document will not be deemed incorporated by reference into any filing under the Securities
Act of 1933. 34