Edgar Filing: RENAL CARE GROUP INC

Renal Care Group, Inc.

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


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

For the transition period from to

Commission File No. 0-27640

RENAL CARE GROUP, INC.

(Exact name of registrant as specified in its charter)


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

2525 West End Avenue, Suite 600, Nashville, Tennessee 37203
(Address of principal executive offices) (Zip code)

Registrant’s telephone number, including area code: (615) 345-5500

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days). Yes þ No

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes þ No o

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date.


Class		Outstanding at August 1, 2005

Common Stock, $.01 par value		68,090,945

RENAL CARE GROUP, INC.

INDEX


	Page No.
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets – December 31, 2004 and June 30, 2005 (unaudited)		1
Condensed Consolidated Income Statements — (unaudited) For the three months and six months ended June 30, 2004 and 2005		2
Condensed Consolidated Statements of Cash Flows — (unaudited) For the six months ended June 30, 2004 and 2005		3
Notes to Condensed Consolidated Financial Statements — (unaudited)		4
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		15
Risk Factors		20
Item 3. Quantitative and Qualitative Disclosures About Market Risk		30
Item 4. Controls and Procedures		30
PART II — OTHER INFORMATION
Item 1. Legal Proceedings		31
Item 4. Submission of Matters to a Vote of Security Holders		31
Item 6. Exhibits		32
Signature		33
Exhibit Index		34
EX-10.12.1 INCREMENTAL TERM LOAN AGREEMENT
Ex-31.1 Section 302 Certification of the CEO
Ex-31.2 Section 302 Certification of the CFO
Ex-32.1 Section 906 Certification of the CEO
Ex-32.2 Section 906 Certification of the CFO

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

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

RENAL CARE GROUP, INC.

Condensed Consolidated Balance Sheets
(in thousands, except per share data)


	December 31,			June 30,
	2004			2005
				(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	17,931		$	12,642
Accounts receivable, net		275,373			288,681
Inventories		23,359			30,795
Prepaid expenses and other current assets		26,817			30,431
Deferred income taxes		29,604			36,489

Total current assets		373,084			399,038
Property, plant and equipment, net		316,532			350,918
Intangible assets, net		34,320			38,845
Goodwill		694,264			807,352
Other assets		10,780			8,231

Total assets	$	1,428,980		$	1,604,384

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued expenses	$	139,929		$	154,654
Due to third-party payors		80,007			75,482
Current portion of long-term debt		23,969			31,104

Total current liabilities		243,905			261,240
Long-term debt, net of current portion		479,645			563,885
Deferred income taxes		51,419			51,054
Other long-term liabilities		16,271			16,727
Minority interest		45,619			53,451

Total liabilities		836,859			946,357

Commitments and contingencies
Stockholders’ 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			829
Treasury 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			424,422
Retained earnings		551,863			613,712
Accumulated other comprehensive (loss) income, net of tax		(204	)		699

Total stockholders’ equity		592,121			658,027

Total liabilities and stockholders’ equity	$	1,428,980		$	1,604,384

See accompanying notes to condensed consolidated financial statements.

RENAL CARE GROUP, INC.

Condensed Consolidated Income Statements
(in thousands, except per share data)
(unaudited)


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2004		2005		2004		2005
Net revenue	$	340,854	$	384,329	$	618,882	$	757,838
Operating costs and expenses:
Patient care costs		229,849		254,854		409,221		501,433
General and administrative expenses		27,341		36,061		50,017		66,692
Provision for doubtful accounts		8,049		8,947		15,159		17,150
Depreciation and amortization		14,900		17,775		27,063		34,562

Total operating costs and expenses		280,139		317,637		501,460		619,837

Income from operations		60,715		66,692		117,422		138,001
Interest expense, net		5,765		7,981		6,730		15,242

Income before minority interest and income taxes		54,950		58,711		110,692		122,759
Minority interest		7,690		9,132		14,904		18,494

Income before income taxes		47,260		49,579		95,788		104,265
Provision for income taxes		18,077		21,362		36,518		42,416

Net income	$	29,183	$	28,217	$	59,270	$	61,849

Net income per share:
Basic	$	0.44	$	0.41	$	0.87	$	0.91

Diluted	$	0.42	$	0.40	$	0.84	$	0.88

Weighted average shares outstanding:
Basic		66,832		68,037		67,871		67,950

Diluted		69,227		70,780		70,225		70,571

See accompanying notes to condensed consolidated financial statements.

RENAL CARE GROUP, INC.

Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)


	Six Months Ended
	June 30,
	2004			2005
OPERATING ACTIVITIES
Net income	$	59,270		$	61,849
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		27,063			34,562
Loss on sale of property and equipment		564			197
Distributions to minority shareholders		(9,906	)		(13,316	)
Income applicable to minority interest		14,904			18,494
Deferred income taxes		7,889			1,147
Changes in operating assets and liabilities, net of effects from acquisitions		(18,605	)		(9,964	)

Net cash provided by operating activities		81,179			92,969
INVESTING ACTIVITIES
Purchases 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	)		2,540

Net cash used in investing activities		(281,076	)		(188,717	)
FINANCING ACTIVITIES
Net proceeds from issuance of long-term debt		325,000			100,000
Payments on long-term debt		(4,063	)		(10,157	)
Net (payments) borrowings under line of credit and capital leases		(2,101	)		1,532
Net proceeds from issuance of common stock		12,793			8,470
Repurchase of treasury shares		(137,845	)		(9,386	)

Net cash provided by financing activities		193,784			90,459

Decrease in cash and cash equivalents		(6,113	)		(5,289	)
Cash and cash equivalents at beginning of period		50,295			17,931

Cash and cash equivalents at end of period	$	44,182		$	12,642

See accompanying notes to condensed consolidated financial statements.

RENAL CARE GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
(dollars in thousands, except per share data)
(unaudited)

1. Basis of Presentation

Overview

Renal Care Group, Inc. provides dialysis services to patients with chronic kidney failure, also known as end-stage renal disease. As of June 30, 2005, we provided dialysis and ancillary services to over 31,900 patients through more than 450 owned outpatient dialysis centers in 34 states, in addition to providing acute dialysis services at more than 210 hospitals.

Renal Care Group’s net revenue has been derived primarily from the following sources:

	•		outpatient hemodialysis services;

	•		ancillary services associated with dialysis, primarily the administration of Epogen® (erythropoietin alfa, 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.

Most patients with end-stage renal disease receive three dialysis treatments each week in an outpatient setting. Reimbursement for these services is provided primarily by the Medicare ESRD program based on rates established by the Centers for Medicare and Medicaid Services (CMS). For the six months ended June 30, 2005 and 2004, approximately 56% and 53%, respectively of our net revenue was derived from reimbursement under the Medicare and Medicaid programs. Medicare reimbursement is subject to rate and other legislative changes by Congress and periodic changes in regulations, including changes that may reduce payments under the ESRD program. Neither Congress nor CMS approved an increase in the composite rate for 2004. Congress approved an increase of 1.6% in the Medicare ESRD composite rate for 2005, as well as changes in the way we are paid for separately billable drugs.

The Medicare composite rate applies to a designated group of outpatient dialysis services, including the dialysis treatment, supplies used for the treatment, certain laboratory tests and medications, and most of the home dialysis services we provide. Renal Care Group receives separate reimbursement outside the composite rate for some other services, drugs, including specific drugs such as EPO and some physician-ordered tests, including laboratory tests, provided to dialysis patients.

Congress mandated a change in the way we are paid beginning in 2005 for some of the drugs, including EPO, that we bill for outside of the flat composite rate. This change results in lower reimbursement for these drugs and a higher composite rate. Under recently adopted regulations, in 2005 we are reimbursed for the top ten separately billable ESRD drugs at average acquisition cost, and we are reimbursed for other separately billable ESRD drugs at average sales price plus 6.0%. In addition, the composite rate was increased by 8.7% for 2005. These regulations also include a case-mix adjustment that became effective in April 2005, a geographic adjustment to the composite rate and a budget-neutrality adjustment. Management believes these changes coupled with the 1.6% increase in the Medicare composite rate in 2005 is slightly positive to Renal Care Group’s revenue per treatment and earnings.

On August 1, 2005, CMS issued its proposed rules that would revise payment for separately billable drugs and biologicals. Under the proposal, the payment rate will be set at average sales price plus 6 percent for all separately billable ESRD drugs. CMS has also proposed to change the drug add-on adjustment that took effect January 1, 2005, and to update the geographic designations and wage index for the composite rate. CMS has indicated that the government’s intent is to achieve revenue neutrality, however management believes that the proposed rules could result in a reduction in reimbursement. The proposed rules remain subject to a 60-day comment period and management will actively participate in this process.

If a patient is younger than 65 years old and has private health insurance, then that patient’s treatment is typically reimbursed at rates significantly higher than Medicare during the first 30 months of care. After that period, Medicare becomes the primary payor. Reimbursement for dialysis services provided pursuant to a hospital contract is negotiated with the individual hospital and is usually higher than the Medicare composite rate. Because dialysis is a life-sustaining therapy to treat a chronic disease, utilization is predictable and is not subject to seasonal fluctuations.

We derive a significant portion of our revenue and earnings from the administration of EPO. EPO is manufactured by a single company, Amgen, Inc. EPO is used to treat anemia, a medical complication frequently experienced by dialysis patients. Changes in our contract with Amgen for 2005 along with changes in Amgen’s packaging practices for EPO has resulted in a slight increase in our cost of EPO in 2005. The estimated impact of these changes was incorporated and communicated in Renal Care Group’s corporate goals for 2005. Net revenue from the administration of EPO was 24% and 27% of our net revenue for the six months ended June 30, 2005 and 2004, respectively.

Interim Financial Statements

Management believes the information contained in this quarterly report on Form 10-Q reflects all adjustments necessary to make the results of operations for the interim periods a fair representation of such operations. All such adjustments are of a normal recurring nature. Operating results for interim periods are not necessarily indicative of results that may be expected for the year as a whole. We suggest that you read these financial statements in conjunction with our consolidated financial statements and the related notes thereto included in our annual report on Form 10-K for the year ended December 31, 2004, as filed with the SEC on March 2, 2005.

Reclassifications

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

2. Acquisition by Fresenius Medical Care AG

On May 3, 2005 we entered into a definitive merger agreement with Fresenius Medical Care AG in which Fresenius Medical Care agreed to acquire all of Renal Care Group’s outstanding stock. Fresenius Medical Care will pay $48.00 for each of our outstanding shares of common stock. Fresenius Medical Care will acquire Renal Care Group subject to its outstanding indebtedness, which was approximately $595.0 million as of June 30, 2005. The transaction is expected to close in the fourth quarter of 2005. In connection with the Fresenius Medical Care transaction, we incurred general and administrative expenses of approximately $6.7 million pre-tax in the three-month period ended June 30, 2005.

Our Board of Directors and the management and supervisory boards of Fresenius Medical Care have approved the transaction. Completion of the transaction is subject to the approval of our stockholders as well as customary conditions to closing, including the termination or expiration of the waiting period under the Hart-Scott Rodino Antitrust Improvements Act of 1976, as amended. In June 2005, we received a request for additional information under the Hart-Scott Rodino Act from the Federal Trade Commission. We are gathering information to respond to this request. The Fresenius Medical Care transaction may not be completed before 30 days after certification by us and Fresenius Medical Care of substantial compliance with the Federal Trade Commission’s request for additional information or until earlier satisfaction by the Federal Trade Commission that the transactions will not raise anticompetitive concerns.

The plaintiffs in the first two cases dismissed them without prejudice in July 2005, and the third plaintiff filed an amended complaint. The amended complaint asserts the same grounds articulated in the original complaint adding more specific allegations regarding the termination fee, the no solicitation clause and the matching rights provision in the Merger Agreement and adds allegations that the Company’s Proxy Statement makes material misrepresentations and omissions regarding the process by which the Merger Agreement was negotiated. Specifically, the Amended Complaint asserts that the Proxy Statement makes material misstatements or omissions regarding: 1) the reason why Renal Care’s management and Board engaged in a closed process of negotiating a potential merger with Fresenius and did not solicit potential competing bids from alternative purchasers; 2) the reason why Renal Care’s Board did not appoint a special committee to evaluate the fairness of the merger; 3) the alternatives available to Renal Care, including potential alternative transactions and other strategic business opportunities, which purportedly were considered by the Renal Care Board during the strategic planning process the Board engaged in during the second half of 2004; 4) all information regarding conflicts of interest suffered by defendants and their financial and legal advisors as alleged herein; 5) all information regarding past investment banking services Bank of America has performed for Renal Care and Fresenius and the compensation Bank of America received for those services; 6) the forecasts and projections prepared by Renal Care’s management for fiscal years 2005 through 2008 that were referenced in the fairness opinions by Morgan Stanley; 7) the estimates of transaction synergies provided by Renal Care management that were referenced in the fairness opinions by Morgan Stanley; and 8) information concerning the amount of money Bank of America and Morgan Stanley will receive in connection with the Proposed Acquisition. Renal Care Group believes that the allegations in the pending complaint are without merit. Completion of the merger is subject to customary conditions, including the absence of any order or injunction prohibiting the closing. The pending complaint seeks to enjoin and prevent the parties from completing the Fresenius Medical Care transaction.

3. Business Acquisitions

2005 Acquisitions

During the first six months of 2005, we completed a number of acquisitions. The combined net assets acquired and resulting net cash purchase price paid in these acquisitions were $144,170. Each of the transactions involved the acquisition of the net assets of entities that provide care to ESRD patients through owned dialysis facilities. The acquired businesses either strengthened our existing market share within a specific geographic area or provided us with an entrance into one or more new markets. We began recording the results of operations for each of these acquired businesses at the effective dates of the respective transactions.

The following table summarizes the preliminarily estimated fair values of the assets acquired and liabilities assumed at the date of acquisition for the acquisitions completed during the first six months of 2005:


Accounts receivable, net	$	1,122
Inventory and other current assets		956
Property, plant and equipment, net		19,398
Intangible assets		6,711
Goodwill		122,275

Total assets acquired		150,462
Total liabilities assumed		6,292

Net assets acquired	$	144,170

Some of the estimated fair values of assets and liabilities are preliminary and may be adjusted. Items that may be adjusted include items such as deferred tax assets and liabilities, and the valuation of certain assets. Intangible assets primarily represent the value assigned to contracts such as non-competition agreements entered into in the transactions. Related amounts will be amortized over the lives of the contracts, which generally range from five to fifteen years.

Pro Forma Data

The following summary, prepared on a pro forma basis, combines our results of operations with those of the businesses we acquired in 2005. These pro forma results reflect the acquisitions as if consummated as of the beginning of the period presented, giving effect to adjustments such as amortization of intangibles, interest expense and related income taxes.


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2004		2005		2004		2005
Pro forma net revenue	$	353,010	$	389,947	$	643,194	$	773,390

Pro forma net income	$	29,849	$	28,371	$	60,597	$	62,318

Pro forma net income per share:
Basic	$	0.45	$	0.42	$	0.89	$	0.92

Diluted	$	0.43	$	0.40	$	0.86	$	0.88

The unaudited pro forma results of operations are not necessarily indicative of what actually would have occurred if the acquisitions had been completed prior to the beginning of the periods presented.

4. Long-Term Debt

Long-term debt consisted of the following as of December 31, 2004 and June 30, 2005:


	December 31,		June 30,
	2004		2005
Term loan facility, bearing interest at a variable rate (4.8% at June 30, 2005)	$	312,813	$	302,656
Incremental term loan, bearing interest at a variable rate (4.6% at June 30, 2005)		¾		100,000
9% senior subordinated notes		159,685		159,685
Obligations under capital leases		4,151		4,640
Other		3,357		5,781

Total indebtedness, excluding fair value premium		480,006		572,762
Add: 9% senior subordinated notes fair value premium		23,608		22,227

Total long-term debt		503,614		594,989
Less: current portion		23,969		31,104

	$	479,645	$	563,885

Credit Agreements

We are a party to a credit agreement (the 2004 Agreement) with a group of banks totaling up to $700,000. The 2004 agreement has a $150,000 revolving credit facility, a $325,000 term loan facility and a $225,000 incremental term loan facility. In May 2005, we completed an incremental term loan of $100,000 under the 2004 Agreement. We used the proceeds of this incremental term loan to finance some of our 2005 acquisitions. The revolving credit facility, the $325,000 term loan facility, and the $100,000 incremental term loan facility have a final maturity of February 10, 2009. Each of our wholly-owned subsidiaries has guaranteed all of our obligations under the 2004 Agreement. Further, our obligations under the 2004 Agreement, and our subsidiaries’ obligations under their guarantees, are secured by a pledge of the equity interests we hold in each of our subsidiaries. The 2004 Agreement includes financial covenants that are customary based on the amount and duration of the agreement.

The revolving credit facility under the 2004 Agreement may be used for acquisitions, repurchases of Company common stock, capital expenditures, working capital and general corporate purposes. All borrowings under the 2004 Agreement accrue interest at variable rates determined by the Company’s leverage ratio. Effective June 30, 2004, we entered into interest rate swap agreements to hedge interest rate risk on $150,000 of our term loan (See Interest Rate Swap below). The portion of our borrowings that is subject to variable rates carries a degree of interest rate risk. Specifically, the Company will face higher interest costs on this debt if interest rates rise.

9% Senior Subordinated Notes

With our acquisition of National Nephrology Associates, Inc., we assumed all of NNA’s outstanding debt including its 9% senior subordinated notes due 2011. We recorded the senior subordinated notes at the face value of $160,000 plus an additional $25,600 representing the difference between the fair value of the senior subordinated notes and the face amount on the date of acquisition. Accordingly, the senior subordinated notes were recorded at the estimated fair value of $185,600. As of June 30, 2005, the carrying value of the senior subordinated notes was $181,912.

The senior subordinated notes bear interest at the rate of 9% per annum on the face amount. The fair value premium is being recognized over the life of the senior subordinated notes using the effective interest method and is recorded as a reduction to interest expense. Accordingly, the effective interest rate on the senior subordinated notes as of June 30, 2005 was 6.4%. Each of our wholly-owned subsidiaries has guaranteed all of our obligations under these senior subordinated notes. The rights of the noteholders and our obligations under these senior subordinated notes are set forth in an indenture that NNA entered into in October 2003, which we assumed in connection with the NNA acquisition. The indenture includes customary financial covenants.

Interest Rate Swap

Effective June 30, 2004, we entered into interest rate swap agreements to hedge the interest rate risk on $150,000 of our term loan. Under these interest rate swap agreements we will exchange fixed and variable rate interest payments based on a $150,000 notional principal amount through March 30, 2007. The notional amount of $150,000 and interest payments of 3.5% are fixed in the agreements. We expect changes in cash flows under these agreements to offset the changes in interest rate payments attributable to fluctuations in LIBOR. The hedge is structured to qualify for the shortcut method as prescribed by Statement of Financial Accounting Standard (SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities; therefore, we record changes in the fair value of the agreement directly in other comprehensive income. As of June 30, 2005, the notional amount of the swap agreements was $150,000 and its fair value was $1,137, resulting in an unrealized gain of $903 during the six month period ended June 30, 2005 (net of a related tax expense of $565).

Obligations Under Capital Leases

Obligations under capital leases consist primarily of capital leases for buildings and equipment maturing at various times through August 2019.

Other

The other long-term debt consists primarily of notes maturing at various times through February 2009.

Maturities of Long-Term Debt

The aggregate maturities of long-term debt, excluding the fair value premium, at June 30, 2005 are as follows:


2005	$	13,767
2006		42,177
2007		79,759
2008		207,975
2009		67,143
Thereafter		161,941

	$	572,762

Guarantor Information

Our wholly-owned subsidiaries have guaranteed the 9% subordinated notes as well as our obligations under the 2004 Agreement. We conduct substantially all of our business through subsidiaries. Presented below is condensed consolidating financial information as of June 30, 2005 and December 31, 2004 and for the three months and six months ended June 30, 2005 and 2004, respectively. The information segregates Renal Care Group, Inc. (the parent company), the combined wholly-owned subsidiary guarantors and the combined non-guarantor subsidiaries and reflects consolidating adjustments. All of the subsidiary guarantees are both full and unconditional, and joint and several.

Condensed Consolidating Balance Sheets


	Parent			Guarantor			Non-Guarantor		Consolidating			Consolidated
	Company			Subsidiaries			Subsidiaries		Adjustments			Total
As of December 31, 2004
Cash and cash equivalents	$	¾		$	¾		$	31,945	$	(14,014	)	$	17,931
Accounts receivable, net		¾			198,778			76,595		¾			275,373
Other current assets		45,749			23,320			10,711		¾			79,780

Total current assets		45,749			222,098			119,251		(14,014	)		373,084
Property, plant and equipment, net		29,542			189,434			96,408		1,148			316,532
Goodwill		1,483			574,815			117,666		300			694,264
Other assets		10,828			99,033			7,436		(72,197	)		45,100

Total assets	$	87,602		$	1,085,380		$	340,761	$	(84,763	)	$	1,428,980

Current liabilities (including intercompany assets and liabilities)	$	(699,042	)	$	813,091		$	157,344	$	(27,488	)	$	243,905
Long-term debt		476,184			(259	)		3,720		¾			479,645
Long-term liabilities		64,976			2,253			461		¾			67,690
Minority interest		¾			39,610			5,989		20			45,619
Stockholders’ equity		245,484			230,685			173,247		(57,295	)		592,121

Total liabilities and stockholders’ equity	$	87,602		$	1,085,380		$	340,761	$	(84,763	)	$	1,428,980


	Parent			Guarantor			Non-Guarantor		Consolidating			Consolidated
	Company			Subsidiaries			Subsidiaries		Adjustments			Total
As of June 30, 2005
Cash and cash equivalents	$	¾		$	¾		$	25,066	$	(12,424	)	$	12,642
Accounts receivable, net		¾			201,735			86,946		¾			288,681
Other current assets		56,145			28,937			12,633		¾			97,715

Total current assets		56,145			230,672			124,645		(12,424	)		399,038
Property, plant and equipment, net		37,485			207,606			104,068		1,759			350,918
Goodwill		1,483			679,845			125,274		750			807,352
Other assets		2,403			104,821			7,425		(67,573	)		47,076

Total assets	$	97,516		$	1,222,944		$	361,412	$	(77,488	)	$	1,604,384

Current liabilities (including intercompany assets and liabilities)	$	(742,784	)		878,720		$	152,974	$	(27,670	)	$	261,240
Long-term debt		559,505			(295	)		4,675		¾			563,885
Long-term liabilities		57,799			7,858			987		1,137			67,781
Minority interest		¾			44,825			8,677		(51	)		53,451
Stockholders’ equity		222,996			291,836			194,099		(50,904	)		658,027

Total liabilities and stockholders’ equity	$	97,516		$	1,222,944		$	361,412	$	(77,488	)	$	1,604,384

Condensed Consolidating Income Statements


	Parent			Guarantor		Non-Guarantor		Consolidating			Consolidated
	Company			Subsidiaries		Subsidiaries		Adjustments			Total
For the three months ended June 30, 2004
Net revenue	$	747		$	241,216	$	100,123	$	(1,232	)	$	340,854
Total operating costs and expenses		15,845			188,368		77,158		(1,232	)		280,139

Income (loss) from operations		(15,098	)		52,848		22,965		—			60,715
Interest expense, net		5,765			—		—		—			5,765
Minority interest		—			7,434		256		—			7,690
Provision (benefit) for income taxes		(7,980	)		17,371		8,686		—			18,077

Net income (loss)	$	(12,883	)	$	28,043	$	14,023	$	—		$	29,183


	Parent			Guarantor			Non-Guarantor		Consolidating			Consolidated
	Company			Subsidiaries			Subsidiaries		Adjustments			Total
For the three months ended June 30, 2005
Net revenue	$	34		$	266,256		$	119,811	$	(1,772	)	$	384,329
Total operating costs and expenses		22,028			206,453			90,928		(1,772	)		317,637

Income (loss) from operations		(21,994	)		59,803			28,883		—			66,692
Interest expense, net		7,978			(35	)		38		—			7,981
Minority interest		—			8,339			793		—			9,132
Provision (benefit) for income taxes		(9,313	)		19,858			10,817		—			21,362

Net income (loss)	$	(20,659	)	$	31,641		$	17,235	$	—		$	28,217

Condensed Consolidating Income Statements


	Parent			Guarantor		Non-Guarantor		Consolidating			Consolidated
	Company			Subsidiaries		Subsidiaries		Adjustments			Total
For the six months ended June 30, 2004
Net revenue	$	934		$	428,870	$	191,509	$	(2,431	)	$	618,882
Total operating costs and expenses		26,151			329,491		148,249		(2,431	)		501,460

Income (loss) from operations		(25,217	)		99,379		43,260		—			117,422
Interest expense, net		6,730			—		—		—			6,730
Minority interest		—			14,020		884		—			14,904
Provision (benefit) for income taxes		(12,192	)		32,550		16,160		—			36,518

Net income (loss)	$	(19,755	)	$	52,809	$	26,216	$	—		$	59,270


	Parent			Guarantor			Non-Guarantor		Consolidating			Consolidated
	Company			Subsidiaries			Subsidiaries		Adjustments			Total
For the six months ended June 30, 2005
Net revenue	$	1,411		$	526,349		$	233,570	$	(3,492	)	$	757,838
Total operating costs and expenses		36,885			410,387			176,057		(3,492	)		619,837

Income (loss) from operations		(35,474	)		115,962			57,513		—			138,001
Interest expense, net		15,323			(338	)		257		—			15,242
Minority interest		—			16,821			1,673		—			18,494
Provision (benefit) for income taxes		(17,331	)		38,330			21,417		—			42,416

Net income (loss)	$	(33,466	)	$	61,149		$	34,166	$	—		$	61,849

Condensed Consolidating Statements of Cash Flows


	Parent			Guarantor			Non-Guarantor			Consolidating			Consolidated
	Company			Subsidiaries			Subsidiaries			Adjustments			Total
For the six months ended June 30, 2004
Cash flows from operating activities:
Net income (loss)	$	(19,755	)	$	52,809		$	26,216		$	—		$	59,270
Changes in operating and intercompany assets and liabilities and non-cash items included in net income		(82,613	)		43,692			17,415			43,415			21,909
Net cash provided by (used in) operating activities		(102,368	)		96,501			43,631			43,415			81,179
Net 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			—			50,295
Cash and cash equivalents, at end of period	$	—		$	9,473		$	38,178		$	(3,469	)	$	44,182


	Parent			Guarantor			Non-Guarantor			Consolidating			Consolidated
	Company			Subsidiaries			Subsidiaries			Adjustments			Total
For the six months ended June 30, 2005
Cash flows from operating activities:
Net income (loss)	$	(33,466	)	$	61,149		$	34,166		$	—		$	61,849
Changes in operating and intercompany assets and liabilities and non-cash items included in net income		(38,849	)		80,599			(6,889	)		(3,741	)		31,120
Net cash provided by (used in) operating activities		(72,315	)		141,748			27,277			(3,741	)		92,969
Net 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	)		17,931
Cash and cash equivalents, at end of period	$	—		$	—		$	25,066		$	(12,424	)	$	12,642

5. Net Income per Share

The following table sets forth the computation of basic and diluted net income per share (shares in thousands):


	Three Months Ended				Six Months Ended
	June 30				June 30
	2004		2005		2004		2005
Numerator:
Numerator for basic and diluted net income per share — net income	$	29,183	$	28,217	$	59,270	$	61,849
Denominator:
Denominator for basic net income per share — weighted-average shares		66,832		68,037		67,871		67,950
Effect of dilutive securities:
Stock options		2,395		2,743		2,354		2,621

Denominator for diluted net income per share — adjusted weighted-average shares and assumed conversions		69,227		70,780		70,225		70,571

Net income per share:
Basic	$	0.44	$	0.41	$	0.87	$	0.91

Diluted	$	0.42	$	0.40	$	0.84	$	0.88

6. Stockholders’ Equity

Stock-based Compensation

We account for stock-based compensation to employees and directors using the intrinsic value method in accordance with the provisions of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. Accordingly, we recognize no compensation expense when we grant fixed options to employees and directors, because the exercise price of the stock options equals or exceeds the market price of the underlying stock on the dates of grant. Option grants to medical directors and non-vested stock grants are expensed over their vesting periods.

The following table presents the pro forma effect on net income and net income per share as if we had applied the fair value based method and recognition provisions of SFAS No. 123, Accounting for Stock-Based Compensation, (SFAS No. 123) to stock-based compensation to employees and directors:


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2004			2005			2004			2005
Net income, as reported	$	29,183		$	28,217		$	59,270		$	61,849
Add: stock-based compensation expense, net of related tax effects, included in the determination of net income as reported		26			56			57			112
Less: 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		$	57,199

Net income per share:
Basic, as reported	$	0.44		$	0.41		$	0.87		$	0.91

Basic, pro forma	$	0.40		$	0.38		$	0.81		$	0.84

Diluted, as reported	$	0.42		$	0.40		$	0.84		$	0.88

Diluted, pro forma	$	0.39		$	0.37		$	0.78		$	0.81

The effects of applying SFAS No. 123 for providing pro forma disclosures are not likely to be representative of the effects on reported net income for future periods.

Stock Split

On April 27, 2004, we announced a three-for-two stock split in the form of a stock dividend distributed to shareholders of record as of May 7, 2004. On May 24, 2004 we issued one share for every two shares held by shareholders as of the record date. The par value of our common stock remained unchanged at $0.01.

Authorized Shares (shares in thousands)

On June 9, 2004, our shareholders approved an amendment to the certificate of incorporation increasing the number of authorized shares of common stock from 90,000 to 150,000.

7. Contingencies

On October 25, 2004, we received a subpoena from the office of the United States Attorney for the Eastern District of New York. The subpoena requires the production of documents related to numerous aspects of our business and operations, including those of RenaLab, Inc., our laboratory. The subpoena includes specific requests for documents related to testing for parathyroid hormone (PTH) levels and vitamin D therapies. To our knowledge no proceedings have been initiated against Renal Care Group at this time, although we cannot predict whether or when proceedings might be initiated. We intend to cooperate with the government’s investigation. Compliance with the subpoena will require us to incur legal expenses and will require management attention. We cannot predict whether legal proceedings will be initiated against it in connection with this investigation or, if initiated, the outcome of any proceedings.

Laws and regulations governing the Medicare and Medicaid programs are complex and subject to interpretation. We believe that we are in compliance with all applicable laws and regulations governing the Medicare and Medicaid programs. We are not aware of any pending or threatened investigations involving allegations of potential noncompliance with applicable laws or regulations. While no regulatory inquiries have been made, compliance with such laws and regulations can be subject to future government review and interpretation as well as significant regulatory action including fines, penalties, and exclusion from the Medicare and Medicaid programs.

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

8. Recent Accounting Pronouncements

In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123 (revised 2004), Share-Based Payment (SFAS No. 123(R), which is a revision of SFAS No. 123. SFAS No. 123(R) supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and amends SFAS No. 95, Statement of Cash Flows. Generally, the approach in SFAS No. 123(R) is similar to the approach described in SFAS No. 123. However, SFAS No. 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative. On April 14, 2005, the United States Securities and Exchange Commission announced it would permit most registrants subject to its oversight, including Renal Care Group, additional time to implement the requirements in SFAS No. 123(R). As announced, the SEC will permit companies to implement SFAS No. 123(R) at the beginning of their next fiscal year (instead of their next reporting period) that begins after June 15, 2005. We are evaluating the requirements of SFAS No. 123(R) and expect that the adoption of SFAS No. 123(R), effective January 1, 2006, will have an impact on our consolidated results of operations and earnings per share. We have not yet determined the method of adoption or the potential financial impact of adopting SFAS No. 123(R).

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. Net revenue increased from $340.9 million for the three months ended June 30, 2004 to $384.3 million for the three months ended June 30, 2005, an increase of $43.4 million, or 12.8%. This increase resulted primarily from a 9.4% increase in the number of treatments we performed from 1,095,250 in the 2004 period to 1,198,595 in the 2005 period. This growth in treatments is the result of acquisitions we completed after July 1, 2004 along with a 2.5% increase in same-market treatments for the 2005 period over the 2004 period. In addition, average patient revenue per treatment increased 2.9% from $311 in 2004 to $320 in 2005. The increase was largely due to the impact of our annual price increase implemented in the fourth quarter of 2004, favorable renegotiations of some of our managed care contracts, the net impact of Medicare’s 1.6% composite rate increase and changes in its reimbursement for separately billable drugs, along with the case mix adjustment that became effective in April 2005 resulting from the Medicare Modernization Act. Revenue per treatment declined from $324 during the first quarter of 2005 to $320 during the second quarter of 2005. This decrease was the result of changes in the utilization of some separately billable ancillary drugs, unfavorable changes in the Company’s payor mix and the impact of some of our recent acquisitions where acquired entities had lower revenue per treatment.

Patient Care Costs. Patient care costs consist of costs directly related to the care of patients, including direct labor, drugs and other medical supplies, and operational costs of facilities. Patient care costs increased from $229.8 million for the three months ended June 30, 2004, to $254.9 million for the three months ended June 30, 2005, an increase of 10.9%. This increase was due principally to the increase in the number of treatments we performed during the period, which resulted in corresponding increases in the use of labor, drugs and supplies. Patient care costs as a percentage of revenue decreased from 67.4% in the 2004 period to 66.3% in the 2005 period. This decrease is generally due to a higher revenue growth rate as compared to the patient care costs growth rate. Patient care costs per treatment increased 1.4% from $210 in the 2004 period to $213 in the 2005 period primarily as a result of higher labor costs. Management believes that Renal Care Group will continue to face increases in the cost of labor through the remainder of 2005.

General and Administrative Expenses. General and administrative expenses include corporate office costs and other costs not directly related to the care of patients, including facility administration, accounting, billing and information systems. General and administrative expenses increased from $27.3 million for the three months ended June 30, 2004 to $36.1 million for the three months ended June 30, 2005, an increase of 31.9%. The increase in general and administrative expenses over 2004 was primarily attributable to $6.7 million of transaction costs in connection with the agreement by Fresenius Medical Care to acquire Renal Care Group. General and administrative expenses as a percentage of net revenue increased from 8.0% in the 2004 period to 9.4% in the 2005 period; however, excluding the effect of the $6.7 million of costs, general and administrative costs as a percentage of revenue decreased to 7.6% in the 2005 period, as we leveraged our corporate functions over a larger base of revenue as a result of our recent acquisitions.

Provision for Doubtful Accounts. Management determines the provision for doubtful accounts as a function of payor mix, billing practices and other factors. We reserve for doubtful accounts in the period when we recognize revenue based upon a variety of factors. These factors include, but are not limited to, analysis of the revenues generated from payor sources, performing subsequent collection testing and regularly reviewing detailed accounts receivable agings. Management makes adjustments to the allowance for doubtful accounts as necessary based on the results of management’s reviews of the net collectibility of accounts receivable. The provision for doubtful accounts increased from $8.0 million for the three months ended June 30, 2004 to $8.9 million for the three months ended June 30, 2005, an increase of $900,000, or 11.2%. The provision for doubtful accounts as a percentage of net revenue decreased slightly from 2.4% in the 2004 period to 2.3% in the 2005 period. The decrease in the provision for doubtful accounts as a percentage of net revenue was due to continued improvements in the Company’s collection experience which is partially attributable to improvements in the amount of self-pay balances. Our provision for doubtful accounts increased from 2.2% in the first quarter of 2005 to 2.3% in the second quarter, as we experienced a slow-down in collections during the current quarter.

Depreciation and Amortization. Depreciation and amortization increased from $14.9 million for the three months ended June 30, 2004 to $17.8 million for the three months ended June 30, 2005, an increase of 19.3%. This increase was due to the start-up of dialysis facilities, the normal replacement costs of dialysis facilities and equipment, purchase of information systems, and the amortization of separately identifiable intangible assets associated with acquisitions. Depreciation and amortization as a percentage of net revenue increased from 4.4% in 2004 to 4.6% in 2005.

Income from Operations. Income from operations increased from $60.7 million for the three months ended June 30, 2004 to $66.7 million for the three months ended June 30, 2005, an increase of 9.8%. Income from operations as a percentage of net revenue decreased from 17.8% in the 2004 period to 17.4% in the 2005 period principally as a result of the $6.7 million of transaction costs incurred in connection with the agreement by Fresenius Medical Care to acquire Renal Care Group, which were partially offset by the operating improvements described above.

Interest Expense, Net. Interest expense increased from $5.8 million for the three months ended June 30, 2004 to $8.0 million for the three months ended June 30, 2005. This increase was due to higher average borrowings outstanding during the quarter, which were primarily associated with our acquisitions completed after July 1, 2004 and increases in the Company’s weighted average borrowing rate under the term loan.

Minority Interest. Minority interest represents the proportionate equity interest of other owners in consolidated entities that we do not wholly own. The financial results of those entities are included in the Company’s consolidated results. Minority interest as a percentage of net revenue increased slightly from 2.3% in the 2004 period to 2.4% in the 2005 period. The change in minority interest expense as a percentage of revenue was the result of an increase in the profitability of our facilities that operate as joint ventures. As of June 30, 2005, we were the majority and controlling owner in 74 joint ventures, as compared to 64 as of June 30, 2004.

Provision for Income Taxes. Income tax expense increased from $18.1 million for the three months ended June 30, 2004 to $21.4 million for the three months ended June 30, 2005, an increase of $3.3 million or 18.2%. The increase is a result of higher pre-tax earnings described above. Our effective tax rate increased from 38.3% for the 2004 period to 43.1% in the 2005 period principally because almost all of the $6.7 million of costs associated with the Fresenius Medical Care transaction will not be deductible for income tax purposes.

Net Income. Net income decreased from $29.2 million for the three months ended June 30, 2004 to $28.2 million for the three months ended June 30, 2005, a decrease of $966,000 or 3.3%. The decrease is a result of $6.7 million ($6.4 million after-tax) of costs incurred in connection with the Fresenius Medical Care transaction. Excluding those costs, our net income would have increased by approximately $5.4 million or 18.5%.

Six Months Ended June 30, 2004 Compared to Six Months Ended June 30, 2005

Net Revenue. Net revenue increased from $618.9 million for the six months ended June 30, 2004 to $757.8 million for the six months ended June 30, 2005, an increase of $138.9 million or 22.5%. This increase resulted primarily from a 19.9% increase in the number of treatments performed by Renal Care Group from 1,955,499 in the 2004 period to 2,344,828 in the 2005 period. This growth in treatments was the result of our acquisition of National Nephrology Associates, Inc. and other dialysis facilities along with a 2.7% increase in same-market treatments for the 2005 period over the 2004 period. In addition, average net revenue per dialysis treatment increased 1.9% from $316 in 2004 to $322 in 2005. The increase in net revenue per treatment was largely due to the impact of our annual price increase implemented in the fourth quarter of 2004, the effect of which was partially offset by the favorable resolution of several contractual issues with payors during the first quarter 2004. In addition, net revenue per dialysis treatment increased as a result of the net impact of Medicare’s 1.6% composite rate increases and changes in its reimbursement for separately billable drugs, along with the case max adjustment that became effective in April 2005 resulting from the Medicare Modernization Act.

increase of 22.5%. This increase was due principally to the 19.9% increase in the number of treatments performed during the period, which resulted in corresponding increases in the use of labor, drugs and supplies. Patient care costs as a percentage of net revenue increased slightly from 66.1% in 2004 to 66.2% in 2005. Patient care costs per treatment increased 2.4% from $209 in 2004 to $214 in 2005. This increase was generally due to increases in the utilization of ancillary drugs, as well as the higher cost structure in the former NNA facilities.

General and Administrative Expenses. General and administrative expenses include corporate office costs and other costs not directly related to the care of patients, including facility administration, accounting, billing and information systems. General and administrative expenses increased from $50.0 million for the six months ended June 30, 2004 to $66.7 million for the six months ended June 30, 2005, an increase of 33.3%. General and administrative expenses as a percentage of net revenue increased from 8.1% in 2004 to 8.8% in 2005. This increase was primarily attributable to $6.7 million of transaction costs we have incurred in connection with the agreement by Fresenius Medical Care to acquire Renal Care Group. Excluding those costs, general and administrative costs as a percentage of revenue would have decreased to 7.9% of net revenue during the six months ended June 30, 2005, as we leveraged our corporate functions over a larger base of revenue as a result of recent acquisitions.

Provision for Doubtful Accounts. We determine the provision for doubtful accounts as a function of payor mix, billing practices and other factors. We reserve for doubtful accounts in the period in which the revenue is recognized. Management establishes these reserves based on its estimates of the net collectibility of accounts receivable while considering a variety of factors. These factors include, but are not limited to, analysis of revenues generated from payor sources, subsequent collection testing and regular reviews of detailed accounts receivable agings. We make adjustments to the allowance for doubtful accounts as necessary based on the results of management’s ongoing reviews of the net collectibility of accounts receivable. The provision for doubtful accounts increased from $15.2 million for the six months ended June 30, 2004 to $17.2 million for the six months ended June 30, 2005, an increase of $2.0 million, or 13.1%. The provision for doubtful accounts as a percentage of net revenue decreased slightly from 2.4% in 2004 to 2.3% in 2005. The decrease in the provision for doubtful accounts as a percentage of net revenue was due to improvements in our experience collecting co-payments and deductible amounts from patients.

Depreciation and Amortization. Depreciation and amortization increased from $27.1 million for the six months ended June 30, 2004 to $34.6 million for the six months ended June 30, 2005, an increase of $7.5 million, or 27.7%. This net increase was due to increases in plant and equipment and separately identifiable assets associated with our recent acquisitions, start-up of dialysis facilities, normal replacement costs of dialysis facilities and equipment, and purchases of information systems. Depreciation and amortization as a percentage of net revenue increased from 4.4% in 2004 to 4.6% in 2005.

Income from Operations. Income from operations increased from $117.4 million for the six months ended June 30, 2004 to $138.0 million for the six months ended June 30, 2005, an increase of $20.6 million, or 17.5%. Income from operations as a percentage of net revenue decreased from 19.0% in the 2004 period to 18.2% in the 2005 period principally as a result of the $6.7 million of transaction costs incurred in connection with the agreement by Fresenius Medical Care to acquire Renal Care Group, which were partially offset by the operating results described above.

Interest Expense, Net. Interest expense increased from $6.7 million for the six months ended June 30, 2004 to $15.2 million for the six months ended June 30, 2005. The increase was the result of higher average borrowings in 2005, as a result of additional borrowings associated with the completion of our program to repurchase $250.0 million in common stock between November 2003 and March 2004 and our recent acquisitions.

Provision for Income Taxes. Income tax expense increased from $36.5 million for the six months ended June 30, 2004 to $42.4 million for the six months ended June 30, 2005, an increase of $5.9 million or 16.2%. The increase is

a result of higher pre tax earnings described above. The Company’s effective tax rate increased from 38.1% for the 2004 period to 40.7% for the 2005 period principally because almost all of the $6.7 million of costs associated with the Fresenius Medical Care transaction will not be deductible for income tax purposes.

Net Income. Net income increased from $59.3 million for the six months ended June 30, 2004 to $61.8 million for the six months ended June 30, 2005, an increase of $2.5 million or 4.4%. The increase is a result of the items discussed above.

Liquidity and Capital Resources

We require capital primarily to acquire and develop dialysis centers, to purchase property and equipment for existing centers, to repurchase shares of our common stock and to finance working capital needs. At June 30, 2005, our working capital was $137.8 million, cash and cash equivalents were $12.6 million, and our current ratio was approximately 1.5 to 1.0.

Net cash provided by operating activities was $93.0 million for the six months ended June 30, 2005. Cash provided by operating activities consists of net income before depreciation and amortization expense and income applicable to minority interest, adjusted for changes in components of working capital. Net cash used in investing activities was $188.7 million for the six months ended June 30, 2005. Net cash used in investing activities consisted of $144.2 million cash paid for acquisitions, net of cash acquired, and $47.1 million in purchases of property and equipment. Net cash provided by financing activities was $90.5 million for the six months ended June 30, 2005. Net cash provided by financing activities primarily reflects net proceeds of $100.0 million from the issuance of long-term debt, partially offset by $10.2 million in payments on long-term debt.

We are a party to a credit agreement (the 2004 Agreement) with a group of banks totaling up to $700.0 million. The 2004 Agreement has a $150.0 million revolving credit facility, a $325.0 million term loan facility and a $225.0 million incremental term loan facility. Borrowings under the incremental term loan facility are subject to obtaining commitments from the banks and finalizing specific terms. In May 2005, we finalized the terms of a $100.0 million incremental term loan under the 2004 Agreement. We used the proceeds of this incremental term loan to finance some of our 2005 acquisitions. The revolving credit facility, the $325.0 million term loan facility and the $100.0 million incremental term loan have a final maturity of February 10, 2009. Each of our wholly-owned subsidiaries has guaranteed all of our obligations under the 2004 Agreement. Further, our obligations under the 2004 Agreement, and our subsidiaries’ obligations under their guarantees, are secured by a pledge of the equity interests we hold in each of our subsidiaries. The 2004 Agreement includes financial covenants that are customary based on the amount and duration of the agreement.

Borrowings under the $150.0 million revolving credit facility may be used for acquisitions, repurchases of our stock, capital expenditures, working capital and general corporate purposes. As of June 30, 2005, we can borrow up to $150.0 million under the revolving credit facility but cannot borrow any additional amounts under the $325.0 million term loan facility. At June 30, 2005, our outstanding indebtedness was $595.0 million, including a remaining balance of $302.7 million under the term loan facility, $100.0 million under the incremental term loan, $5.1 million under the revolving credit facility, $181.9 million of 9.0% senior subordinated notes assumed in our acquisition of NNA and $5.3 million of other indebtedness, primarily capital leases.

Borrowings under the 2004 Agreement bear interest at variable rates determined by our leverage ratio. These variable rate debt instruments carry a degree of interest rate risk, and we will face higher interest costs on this debt if interest rates rise.

Effective June 30, 2004, we entered into interest rate swap agreements to hedge the interest rate risk on $150.0 million of our term loan. Under these interest rate swap agreements we exchange fixed and variable rate interest payments based on a $150.0 million notional principal amount through March 30, 2007. The notional amount of $150.0 million and the interest rate of 3.5% are fixed in the agreements. The changes in cash flows under these agreements are expected to offset the changes in interest rate payments attributable to fluctuations in LIBOR. The hedge is structured to qualify for the shortcut method; therefore, we record changes in the fair value of the agreement directly in other comprehensive income. The interest payments under this agreement are settled on a net basis each calendar quarter.

The 9% senior subordinated notes we assumed in the NNA transaction bear interest at the rate of 9% per annum on the face amount. As of June 30, 2005 these notes have a remaining face value of $159.7 million and are recorded at their carrying value of $181.9 million. These notes do not provide for scheduled principal amortization and are scheduled to mature on November 1, 2011. Each of our wholly-owned subsidiaries has guaranteed all of our obligations under these notes. The rights of the noteholders and our obligations under these notes are set forth in an indenture that NNA entered into in October 2003, which we assumed in connection with the NNA acquisition. The indenture includes customary financial covenants.

As a result of our indebtedness, we will incur substantial interest expense in 2005. Based on our outstanding indebtedness of $572.8 million, excluding the unamortized fair value premium of $22.2 million on the 9% senior subordinated notes, the aggregate maturities of our borrowings are as follows: 2005 — $13.8 million; 2006 — $42.2 million; 2007 — $79.8 million; 2008 — $208.0 million; 2009 — $67.1 million; and thereafter — $161.9 million.

We plan to make capital expenditures of between $85.0 million and $95.0 million in 2005, primarily for equipment replacement, expansion of existing dialysis facilities and construction of de novo facilities. As of June 30, 2005, we had made approximately $47.1 million of capital expenditures for these purposes in 2005. We expect to fund these capital expenditures with cash provided by operating activities and our existing credit facilities. Management believes that capital resources available to us will be sufficient to meet the needs of our business, both on a short- and long-term basis.

We have a stock repurchase program. Pending the completion of the Fresenius Medical Care transaction we do not plan to repurchase shares under this program. During 2004, we repurchased 4.6 million shares for $137.8 million, and in the first quarter of 2005, we repurchased 252,000 shares of common stock for approximately $9.4 million. As of June 30, 2005, we had repurchased an aggregate of 14.8 million shares under our stock repurchase plan, for a total of approximately $381.6 million.

Critical Accounting Policies

Management has identified accounting policies that it considers critical to the business of Renal Care Group. Those policies include net revenue and contractual provisions, provision for doubtful accounts, self-insurance accruals, impairment of goodwill and long-lived assets, and income taxes. These policies were identified as critical based on their importance to the consolidated financial statements as well as on the degrees of subjectivity and complexity involved in these policies. There have been no changes in Renal Care Group’s critical accounting policies or in the application of those policies from those described in the annual report on Form 10-K for the year ended December 31, 2004, as filed with the SEC on March 2, 2005.

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 completion of the acquisition of Renal Care Group by Fresenius Medical Care is subject to various conditions, including the following:

	•		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.

Because of these conditions, the transaction with Fresenius Medical Care may not be completed. If our shareholders do not approve the merger agreement or if the transaction is not completed for any other reason, then our current management, under the direction of our Board of Directors, will continue to manage 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.

If the transaction with Fresenius Medical Care is not completed for any reason, we will be subject to a number of material risks, including:

•

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 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.

If the merger agreement is terminated and our Board of Directors seeks another transaction or business combination, then our shareholders cannot be certain that we will be able to find an acquirer willing to pay an equivalent or better price than the price to be paid by Fresenius Medical Care under the merger agreement.

Our profits are dependent on the services we provide to a small portion of our patients who are covered by private insurance.

In recent reviews of dialysis reimbursement, the Medicare Payment Advisory Commission, also known as MedPAC, determined that Medicare payments for dialysis services are less than the average costs that providers incur to provide the services. Since Medicaid rates are comparable to those of Medicare and because Medicare only pays us 80% of the Medicare allowable amount (the patient, Medicaid or secondary insurance being responsible for the remaining 20%), the amount we receive from Medicare and Medicaid is less than our average cost per treatment. As a result, the payments we receive from private payors both subsidize the losses we incur on services for Medicare and Medicaid patients and generate all the profits we report. In fact, much of our profit is generated from private-pay patients for whom we are paid at amounts equal to several times Medicare rates. We estimate that Medicare and Medicaid are the primary payors for approximately 80% of the patients to whom we provide care but that 45% of our net revenue in 2003, 47% of our net revenue in 2004 and 44% of our net revenue for the six months ended June 30, 2005 were derived from sources other than Medicare and Medicaid. Therefore, if the private payors who pay for the care of the other 20% of our patients reduce their payments for our services, or if we experience a shift in our revenue mix toward Medicare or Medicaid reimbursement, then our revenue, cash flow and earnings would decrease, and our cash flow and profits would be disproportionately impacted.

We have been able to implement annual price increases for private insurers and managed care organizations, but government reimbursement has remained flat or has been increased only modestly. Management believes that health insurance pricing is cyclical and that we may be at or near the top of the cycle. As a result, management believes that our ability to maintain or raise rates to private insurers and managed care companies may be more limited over the next several years than it has been in the recent past. Management believes that the reductions in reimbursement by commercial insurers, along with pricing pressure from other commercial insurers and managed care organizations could adversely impact our revenue per treatment and earnings per share in 2005. Any of the following events could have a material adverse effect on our revenue and earnings:

	•		any number of economic or demographic factors could cause private insurers, hospitals or managed care companies to reduce the rates they pay us or to refuse to pay price increases or 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.

If the government changes the Medicare, Medicaid or similar government programs or the rates those programs pay for our services, then our revenue and earnings may decline. We estimate that approximately 55% of our net revenue for 2003, 53% of our net revenue for 2004, and 56% of our net revenue for the six months ended June 30, 2005 consisted of reimbursements from Medicare, Medicaid and comparable state programs, including reimbursement for the administration of EPO. Any of the following actions in connection with government programs could cause our revenue and earnings to decline:

	•		a reduction of the amount paid to us under government programs;

	•		an increase in the costs associated with performing our services that are subject to inflation, such as labor and supply costs, without a corresponding increase in reimbursement rates;

	•		the inclusion of some or all ancillary services, for which we are now reimbursed separately, in the flat composite rate for a dialysis treatment; or

	•		changes in laws, or the interpretations of laws, which could cause us to modify our operations.

Specifically, the President’s proposed budget for fiscal 2006 proposes substantial cuts in federal Medicaid spending. We cannot predict whether any of the proposed cuts will be made or how they will affect us. In addition, Congress and CMS have proposed expanding the drugs and services that are included in the flat composite rate. CMS has indicated that it believes such a mechanism would be fairer and easier to administer. In addition, Congress mandated a change in the way we are paid beginning in 2005 for some of the drugs, including EPO, that we bill for outside of the flat composite rate. This change has resulted in lower reimbursement for these drugs and a higher composite rate. Under recently adopted regulations, in 2005 we are reimbursed for the top ten separately billable ESRD drugs (including EPO) at average acquisition cost, and we are reimbursed for other separately billable ESRD drugs at average sales price plus 6.0%. In addition, the composite rate has been increased by 8.7% in 2005. These regulations also include a case-mix adjustment that became effective in April 2005, a geographic adjustment to the composite rate and a budget-neutrality adjustment. Management believes these changes coupled with the 1.6% increase in the Medicare composite rate in 2005 will be neutral to our Medicare revenue per treatment.

On August 1, 2005, CMS issued its proposed rules that would revise payment for separately billable drugs and biologicals furnished by ESRD facilities. Under the proposal, the payment rate will be set at average sales price plus 6 percent, consistent with payment rates for most other drugs under Medicare Part B. CMS proposed to change the drug add-on adjustment that took effect January 1, 2005, and to update the geographic designations and wage index for the composite rate. Although we believe that the government’s intent is to achieve revenue neutrality as required by the original MMA legislation, it appears that the proposed rules could result in a reduction in our reimbursement. The proposed rules are complex and lengthy, and we continue to review all related information. As of the date of this filing we are unable to accurately quantify the potential impact to our reimbursement for 2006.

The implementation of the case-mix adjustment could adversely affect our cash flow and working capital.

Under the regulations adopted pursuant to the MMA, CMS has adopted a case-mix adjustment for the ESRD composite rate, under which the Medicare composite rate will be adjusted based on a patient’s age, body mass index and body surface area. These regulations became effective April 1, 2005. Management believes implementing these case-mix adjustments will require significant systems changes for the Medicare fiscal intermediaries that process and pay Medicare claims. If the required systems changes are not made on a timely basis, then the Medicare fiscal intermediaries may delay the payment of claims or may not pay claims correctly, either of which could have an adverse effect on our cash flow and working capital.

If states lower Medicaid reimbursement, then we would be less profitable.

The Medicaid programs in Alaska and New Mexico, two states in which we operate, currently reimburse us at rates higher than those paid by Medicare. These programs may reduce payment levels to be at or close to Medicare rates. In addition, a number of the states in which we operate are experiencing budget shortfalls, and some of these states may consider reducing Medicaid reimbursement, changing their Medicaid programs or not paying claims to address these shortfalls and cut costs. We are unable to predict whether and, if so, when any reductions in Medicaid reimbursement might occur and what their precise effect will be.

If reimbursement for EPO decreases, then we could be less profitable.

If government or private payors reduce reimbursement rates for EPO, for which we are currently reimbursed separately outside of the flat composite rate, then our revenue and earnings will decline. Revenues from the administration of EPO were approximately 24% of our net revenue for 2003, 26% of our net revenue for 2004 and 24% of our net revenue for the six months ended June 30, 2005. Most of our payments for EPO come from government programs. For the six months ended June 30, 2005, Medicare and Medicaid reimbursement represented approximately 56% of the total revenue we derived from EPO. A reduction in the reimbursement rate for EPO or the inclusion of EPO in the list of items covered by the flat composite rate could materially and adversely affect our net revenue and earnings. As discussed above, as part of the Medicare Modernization Act, Congress mandated a change in the way we are reimbursed for EPO, and CMS has adopted regulations to implement the change. MedPAC has recommended that CMS propose further changes in the way we will be reimbursed for EPO in 2006. In 2005 we have been reimbursed for EPO at an average acquisition price. MedPAC’s recommendation is that CMS pay for EPO at average sales price plus 6%. On August 1, 2005, CMS published its proposed rules for reimbursement which did include EPO reimbursement at average sales price plus 6%. This average sales price plus 6% would likely be substantially less than the current average acquisition price. Therefore, to the extent CMS does not change the composite rate to offset this reduction in EPO payments, our revenue and profits will be adversely affected by this proposed change in EPO payments.

If Amgen raises the price for EPO or if EPO becomes in short supply, then we could be less profitable.

EPO is produced by a single manufacturer, Amgen, Inc. In April 2002, Amgen announced a 3.9% increase in the price of EPO. This price increase adversely affected our earnings in 2003, and changes in the rebate structure under our current contract with Amgen adversely affected our earnings in 2004. Changes in the rebate structure under our current contract with Amgen or in Amgen’s packaging process for EPO, may adversely affect our earnings in 2005. In June 2005, Amgen implemented a 4.9% increase in the price of EPO. This price increase will not affect us in 2005, as our contract with Amgen includes price protection through January 1, 2006, but this increase will adversely affect our earnings in 2006. If Amgen imposes additional EPO price increases or if Amgen or other factors interrupt the supply of EPO, then our net revenue and earnings will decline.

If Amgen markets Aranesp® for ESRD patients, then we could be less profitable.

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

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

	•		physicians could decide to administer Aranesp® in their offices, and we would not recognize 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.

The administration of EPO and other drugs accounted for approximately 36% of our net revenue during the first six months of 2005. Changes in physician practices or prescription patterns, changes in private and governmental reimbursement criteria or the introduction of new drugs or new types of drug administration could materially reduce our net revenue and profits. For example, some Medicare fiscal intermediaries have implemented or may implement local medical review policies for EPO and other drugs that would effectively limit reimbursement for those drugs. In 2004, CMS proposed a national policy that would establish limits on reimbursement for EPO, but this proposal has not yet been finalized. We are unable to predict whether and, if so, when any such changes may occur, but if they do, they will likely have an adverse impact on our net revenue and earnings.

If our business is alleged or found to violate heath care or other applicable laws, our net revenue and earnings could decrease.

We are subject to extensive federal, state and local regulation. The laws that apply to our operations include, but are not limited to, the following:

	•		fraud and abuse prohibitions under state and federal health care laws;

	•		prohibitions and limitations on patient referrals;

	•		billing and reimbursement rules, including false claims prohibitions under health care reimbursement laws;

	•		rules regarding the collection, use, storage and disclosure of patient health information, including HIPAA, and state law equivalents of HIPAA;

	•		facility licensure;

	•		health and safety requirements;

	•		environmental compliance; and

	•		medical and toxic waste disposal.

Much of the regulation of our business, particularly in the areas of fraud and abuse and patient referral, is complex and open to differing interpretations. Due to the broad application of the statutory provisions and the absence in many instances of regulations or court decisions addressing the specific arrangements through which we conduct our business, including our arrangements with medical directors, physician stockholders and physician joint venture partners, governmental agencies could challenge some of our practices under these laws.

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

	•		criminal or civil penalties, including significant fines;

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

	•		administrative penalties by payors.

Government investigations of health care providers, including dialysis providers, have continued to increase. We have been the subject of investigations in the past, and the government may investigate our business in the future. One of our competitors, DaVita, Inc., has announced that it is the subject of an investigation by the U.S. Attorney for the Eastern District of Pennsylvania. In December 2004, another competitor, Gambro Healthcare, Inc., settled matters related to an investigation by the U.S. Attorney’s Office in St. Louis, Missouri and paid approximately $350.0 million in connection with the settlement. In addition, each of DaVita and Fresenius Medical Care AG has announced that it is the subject of an investigation by the U.S. Attorney’s Office in St. Louis, Missouri.

On October 25, 2004, we received a subpoena from the office of the United States Attorney for the Eastern District of New York. The subpoena requires us to provide documents related to numerous aspects of our business and operations, including those of RenaLab, Inc., our laboratory. The subpoena includes specific requests for documents related to testing for parathyroid hormone (PTH) levels and vitamin D therapies. Our competitors DaVita, Inc., Fresenius Medical Care AG, and Gambro Healthcare, Inc., as well as other participants in the dialysis industry, have announced that they have received similar subpoenas. If any of our operations is found to violate applicable laws, then we may be subject to severe sanctions, or we could be required to alter or discontinue the challenged conduct or both. If we are required to alter our practices, we may not be able to do so successfully. If any of these events occurs, our revenue and earnings could decline.

If our joint ventures violate the law, our business could be damaged.

A number of the dialysis centers we operate are owned by joint ventures in which we hold a controlling interest and one or more physicians or physician practice groups maintain a minority interest. The physician owners may also provide medical director services to those centers or other centers we own and operate. Our joint venture arrangements do not satisfy all elements of any safe harbor under the Anti-Kickback statutes. If one or more of our joint ventures were found to be in violation of the Anti-Kickback Statute or the Stark Law, we could be required to restructure them or refuse to accept referrals for designated health services from the physicians with whom those particular joint venture centers have a relationship. We also could be required to repay to Medicare amounts received by the joint ventures pursuant to prohibited referrals, and we could be subject to monetary penalties. If we are subject to any of these penalties, our business could be damaged.

Changes in the health care delivery, financing or reimbursement systems could adversely affect our business.

The health care industry in the United States may be entering a period of change and uncertainty. Health care organizations, public or private, may dramatically change the way they operate and pay for services. Our business is designed to function within the current health care financing and reimbursement system. During the past several years, the health care industry has been subject to increasing levels of government regulation of, among other things, reimbursement rates and relationships with referring physicians. In addition, proposals to reform the health care system have been considered by Congress. In light of the continued increases in the cost of health care and the current economic situation coupled with the federal budget deficit, there may be new proposals to change the health care system and control costs. These proposals, if enacted, could further increase the government’s oversight role and involvement in health care, lower reimbursement rates and otherwise change the operating environment for health care companies. We cannot predict the likelihood of those events or what impact they may have on our business.

If local physicians stop sending patients to our centers or were prohibited from doing so for regulatory reasons, then our revenue and earnings would decline.

Our dialysis centers depend on local nephrologists sending patients to the centers. Typically, one or a few physicians’ patients make up all or a significant portion of the patient base at each of our dialysis centers, and the loss of the patient base of one or more of these physicians could have a material adverse effect on the operations of that center. The loss of the patient base of a significant number of local physicians could cause our revenue and earnings to decline. In many instances, the primary referral sources for our centers are physicians who also serve as medical directors of our centers and may be shareholders. If the medical director relationship or stock ownership were found to violate applicable federal or state law, including fraud and abuse laws and laws prohibiting self-referrals, then the physicians acting as medical directors or owning our stock could be forced to stop referring patients to our centers.

A number of our medical director agreements will expire over the next three years, unless they are renewed or renegotiated. We did not renew or renegotiate a small number of our medical director agreements that expired in 2004, and we may not be able to renew or renegotiate expiring medical director agreements successfully, or we may not be able to enforce the non-competition provisions of some of our medical director or other agreements. Any of these factors could result in a loss of patients, since dialysis patients are typically treated at a center where their physician, or a member of his or her practice group serves as medical director. We believe that our future success will depend in part on our ability to attract and retain qualified physicians to serve as medical directors of our dialysis centers.

The dialysis business is highly competitive. If we do not compete effectively in our markets, then we could lose market share and our rate of growth could slow.

The dialysis industry is largely consolidated, and the consolidation trend continues as large providers acquire other providers. In December 2004, DaVita, Inc. and Gambro Healthcare, Inc. announced a definitive agreement under which DaVita will acquire Gambro’s United States dialysis services business, and in May 2005 we and Fresenius Medical Care announced the agreement under which Fresenius Medical Care will acquire Renal Care

Group. If the DaVita/Gambro transaction closes as agreed, then there will be three large dialysis companies (including Renal Care Group) that compete for the acquisition of outpatient dialysis centers and the development of relationships with referring physicians. We also face competition from new entrants into the market, including centers established by former medical directors or other referring physicians. We cannot assure you that we will be able to compete effectively with any of our competitors.

If we are unable to make acquisitions in the future, then our rate of growth will slow.

Much of our historical growth has come from acquisitions. In May 2005 we announced the definitive agreement under which Fresenius Medical Care has agreed to acquire Renal Care Group, subject to several conditions. While this transaction is pending it is unlikely that we will be able to complete acquisitions consistent with our historical practices, because of uncertainty concerning Renal Care Group and restrictions in the merger agreement. Although we intend to continue to pursue growth through the acquisition of dialysis centers, we may be unable to identify and complete suitable acquisitions at prices we are willing to pay, or we may be unable to obtain the necessary financing. Further, due to the increased size of our business, the amount that acquired businesses contribute to our revenue and profits will continue to be smaller on a percentage basis. Also, we believe competition for acquisitions has intensified in light of the smaller pool of available acquisition candidates and other market forces. As a result, we believe it will be more difficult for us to acquire suitable companies on favorable terms. Further, the businesses we acquire may not perform well enough to justify our investment. If we are unable to make additional acquisitions on suitable terms, then we may not meet our growth expectations.

If we fail to integrate acquired companies, then we will be less profitable.

We have grown significantly by acquisitions of other dialysis providers since our formation. We are unable to predict the number and size of any future acquisitions. We face significant challenges in integrating an acquired company’s management and other personnel, clinical operations, and financial and operating systems with ours, often without the benefit of continued services from key personnel of the acquired company, particularly in larger acquisitions. We may be unable to integrate the businesses we acquire successfully or to achieve anticipated benefits from an acquisition in a timely manner, which could lead to substantial costs and delays or other operational, technical or financial problems, including diverting management’s attention from our existing business. Any of these results could damage our profitability and our prospects for future growth.

If acquired businesses have unknown liabilities, then we could be exposed to liabilities that could harm our business and profitability.

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

We may not have sufficient cash flow from our business to pay our substantial debt.

As of June 30, 2005, we had total consolidated debt of approximately $595.0 million, including a $22.2 million fair value premium on the 9.0% senior subordinated notes, and cash of approximately $12.6 million. Also, subject to limitations, including those in our credit facility and those included in the indenture for our 9.0% senior subordinated notes, we are not and will not be prohibited from incurring additional debt.

Due to the large amount of our consolidated debt, we may not generate enough cash from our operations to meet these obligations or to fund other liquidity needs. Our ability to generate cash in the future is, to some extent, subject to risks and uncertainties that are beyond our control, including those described in this “Risk Factors” section. If we are unable to meet our debt obligations, we may need to refinance all or a portion of our indebtedness, sell assets or raise funds in the capital markets. However, we cannot assure you that, if we are unable to pay our debt, we will be able to refinance it, obtain additional equity capital or sell assets, in each case on commercially reasonable terms, or at all, or otherwise be able to fund our liquidity needs.

If for any reason we are unable to meet our debt obligations, we would be in default under the terms of the agreements governing our outstanding debt. If such a default were to occur, the lenders under our credit facility could elect to declare all amounts outstanding under the credit facility immediately due and payable, and the lenders would not be obligated to continue to advance funds to us under our credit facility. In addition, if such a default were to occur, the 9.0% senior subordinated notes would become immediately due and payable. If these debt obligations are accelerated, we cannot assure you that our assets will be sufficient to repay the money we owe to banks and other debt holders.

The large amount and terms of our outstanding debt may prevent us from taking actions we would otherwise consider in our best interest.

The indenture governing our 9.0% senior subordinated notes and our credit facility contain numerous financial and operating covenants that limit our ability to engage in activities such as:

	•		incurring additional debt;

	•		acquiring and developing new dialysis centers;

	•		making investments;

	•		creating liens;

	•		creating restrictions on the ability of our subsidiaries to pay dividends or other amounts to us;

	•		disposing of assets;

	•		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.

Our credit facility also requires us to comply with financial covenants, including a net worth test, a leverage ratio test and a fixed charge coverage ratio test. Our ability to comply with these covenants may be affected by events beyond our control, including those described in this “Risk Factors” section. A breach of any of the covenants contained in our credit facility or our inability to comply with the required financial covenants could result in an event of default, which would allow the lenders under our credit facility to declare all borrowings outstanding to be due and payable, and triggering an event of default under the indenture governing our 9.0% senior subordinated notes. In addition, our lenders could require us to apply all of our available cash to repay our borrowings or they could prevent us from making debt service payments on our 9.0% senior subordinated notes. If the amounts outstanding under our credit facility or these notes are accelerated, we cannot assure you that our assets would be sufficient to repay in full the money we owe the banks and our other debt holders.

The large amount of our outstanding debt and the limitations our credit facility impose on us could have adverse consequences, including:

	•		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.

We currently maintain programs of general and professional liability insurance and directors’ and officers’ insurance with significant deductible or self-insured retention amounts on each claim. In addition, we generally self-insure our employee health plan and workers’ compensation program, while maintaining excess insurance for some very large claims. We have accepted higher deductibles and self-insurance exposure in each of the last several years to offset part of the increases in premiums for the programs. These deductibles and premiums increased substantially in 2002 and 2003. The rate of increase in deductibles and premiums moderated somewhat in 2004 and 2005, but there were some increases, and there may be larger increases in the future. Our earnings could be materially and adversely affected by any of the following:

	•		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.

We have agreed to be acquired by Fresenius Medical Care, subject to a number of conditions, including the approval of our shareholders. The merger agreement includes provisions that would make it more difficult for a competing bidder to acquire Renal Care Group. These provisions include our agreements not to solicit other offers and not to provide information to a potential bidder unless our Board of Directors determines that a superior proposal could be made by the person to whom we provide the information, as well as our agreement to pay a termination fee to Fresenius Medical Care if we terminate the merger agreement and complete another transaction. In addition, our certificate of incorporation and bylaws contain a number of provisions that may delay, deter or inhibit a future acquisition or change in control that is not first approved by our board of directors. This could occur even if our shareholders receive an attractive offer for their shares or if a substantial number or even a majority of our shareholders believe the takeover is in their best interest. These provisions are intended to encourage any person interested in acquiring us to negotiate with and obtain approval from our board of directors before pursuing a transaction. Provisions that could delay, deter or inhibit a future acquisition or change in control include the following:

	•		a staggered board of directors that would require two annual meetings to replace a majority of the board of directors;

	•		restrictions on calling special meetings at which an acquisition or change in control might be brought to a vote of the shareholders;

	•		blank check preferred stock that may be issued by our board of directors without shareholder approval and that may be substantially dilutive or contain preferences or rights objectionable to an acquirer; and

	•		a poison pill that would substantially dilute the interest sought by an acquirer.

These provisions could also discourage bids for our common stock at a premium and cause the market price of our common stock to decline.

Forward-Looking Statements

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

	•		the statements discuss our future expectations;

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

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

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The following discusses our exposure to market risk related to changes in interest rates.

Cash balances

We maintain all cash in United States dollars in highly liquid, interest-bearing, investment grade instruments with maturities of less than three months, which we consider cash equivalents; therefore, the Company has no “market risk sensitive instruments.”

Outstanding debt

As of June 30, 2005, we had outstanding debt of $595.0 million, including a $22.2 million fair value premium on the 9.0% senior subordinated notes. This debt consisted of $302.7 million outstanding under the term facility in our 2004 credit agreement, $100.0 million under the incremental term loan, $181.9 million of indebtedness relating to the 9.0% senior subordinated notes due 2011 and approximately $10.4 million outstanding under various capital leases and notes payable. Borrowings of $252.7 million under the term loan bear interest at variable rates based on LIBOR rates or the prime rate that are determined by our leverage ratio. The remaining $150.0 million under the term loan are fixed at a rate of 3.5% plus an additional spread based on the Company’s leverage ratio under interest rate swap agreements that became effective on June 30, 2004. Our weighted average borrowing rate under the term loan as of June 30, 2005, was 4.8%. We expect this rate to rise in the future if interest rates rise on the portion that bears interest at floating rates. Outstanding senior subordinated notes bear nominal interest at 9.0% on the $159.7 million outstanding face amount of the notes. The unamortized $22.2 million fair value premium is being recognized over the life of the notes using the effective interest method and is recorded as a reduction to interest expense. Accordingly, the effective interest rate on the notes as of June 30, 2005 was 6.4%. At June 30, 2005, the fair value of our indebtedness under the credit facility and senior subordinated notes approximated carrying value. At the June 30, 2005 borrowing levels and giving effect to the impact of our interest rate swap agreements, if there had been a 1% increase in the variable interest rates, then our pre-tax income would have decreased by approximately $1.1 million for the six months ended June 30, 2005.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

(a) Our chief executive officer and chief financial officer evaluated our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the chief executive officer and chief financial officer have concluded that as of the end of the period covered by this report Renal Care Group maintains disclosure controls and procedures that are effective to provide reasonable assurance that information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized and reported within the periods specified in the SEC’s rules and forms.

(b) There have been no changes in our internal control over financial reporting during the period covered by this report that have materially affected, or are reasonably likely materially to affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

On May 11, 2005, Renal Care Group was served with a complaint in the Chancery Court for the State of Tennessee Twentieth Judicial District at Nashville styled 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. On May 26, 2005, Renal Care Group was served with a complaint in the Chancery Court for the State of Tennessee Twentieth Judicial District at Nashville styled 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. On May 31, 2005, Renal Care Group was served with a complaint in the Chancery Court for the State of Tennessee Twentieth Judicial District at Nashville styled 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. The original complaints in these three lawsuits were substantially identical. Each complaint was brought by the plaintiff shareholder as a purported class action on behalf of all shareholders similarly situated. The complaints allege that Renal Care Group and its directors engaged in self-dealing and breached their fiduciary duties to the Renal Care Group shareholders in connection with the merger agreement between Renal Care Group and Fresenius Medical Care because, among other things, Renal Care Group used a flawed process, the existence of the previously disclosed subpoena from the Department of Justice, the lack of independence of one of Renal Care Group’s financial advisors and the existence of Renal Care Group’s supplemental executive retirement plan. Renal Care Group removed these cases to federal court in June 2005. The plaintiffs in the first two cases dismissed them without prejudice in July 2005, and the third plaintiff filed an amended complaint. The amended complaint asserts the same grounds articulated in the original complaint adding more specific allegations regarding the termination fee, the no solicitation clause and the matching rights provision in the Merger Agreement and adds allegations that the Company’s Proxy Statement makes material misrepresentations and omissions regarding the process by which the Merger Agreement was negotiated. Specifically, the Amended Complaint asserts that the Proxy Statement makes material misstatements or omissions regarding: 1) the reason why Renal Care’s management and Board engaged in a closed process of negotiating a potential merger with Fresenius and did not solicit potential competing bids from alternative purchasers; 2) the reason why Renal Care’s Board did not appoint a special committee to evaluate the fairness of the merger; 3) the alternatives available to Renal Care, including potential alternative transactions and other strategic business opportunities, which purportedly were considered by the Renal Care Board during the strategic planning process the Board engaged in during the second half of 2004; 4) all information regarding conflicts of interest suffered by defendants and their financial and legal advisors as alleged herein; 5) all information regarding past investment banking services Bank of America has performed for Renal Care and Fresenius and the compensation Bank of America received for those services; 6) the forecasts and projections prepared by Renal Care’s management for fiscal years 2005 through 2008 that were referenced in the fairness opinions by Morgan Stanley; 7) the estimates of transaction synergies provided by Renal Care management that were referenced in the fairness opinions by Morgan Stanley; and 8) information concerning the amount of money Bank of America and Morgan Stanley will receive in connection with the Proposed Acquisition. Renal Care Group believes that the allegations in the pending complaint are without merit. Completion of the merger is subject to customary conditions, including the absence of any order or injunction prohibiting the closing. The pending complaint seeks to enjoin and prevent the parties from completing the Fresenius Medical Care transaction.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

On June 8, 2005, we held our annual meeting of shareholders in Nashville, Tennessee for the following purposes and with the following results:

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		ABSTAIN
Election of Peter J. Grua		60,607,525		1,532,930
Election of William P. Johnston		58,973,304		3,167,151
Election of C. Thomas Smith		60,358,213		1,782,242

Directors whose terms continued following the meeting but who were not subject to election at the meeting are: Gary A. Brukardt, Joseph C. Hutts, Harry R. Jacobson, M.D., William V. Lapham, Thomas A. Lowery, M.D., and Stephen D. McMurray, M.D.

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		ABSTAIN
51,966,445		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 2002

31.2		Certification pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1*		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2*		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.

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


		RENAL CARE GROUP, INC.
		(Registrant)

August 4, 2005	BY:	/s/ David M. Dill

		David M. Dill
		Executive Vice President,
		Chief Financial Officer (Principal Financial
		Officer and Principal Accounting Officer)

RENAL CARE GROUP, INC.

EXHIBIT INDEX


Number and
Description of Exhibit
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 2002

31.2		Certification pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1*		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2*		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.

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