<PAGE>   1


                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549

                                    FORM 10-Q

(Mark One)

[X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
     ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED: SEPTEMBER 30, 1999

                                       OR

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

FOR THE TRANSITION PERIOD FROM ____________________TO__________________

                         COMMISSION FILE NUMBER: 1-3720

                      FRESENIUS MEDICAL CARE HOLDINGS, INC.
             ------------------------------------------------------
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

                New York                                        13-3461988
----------------------------------------------          ------------------------
(State or Other Jurisdiction of Incorporation)          (I.R.S. Employer ID No.)

Two Ledgemont Center, 95 Hayden Avenue, Lexington, MA              02420
-----------------------------------------------------            ----------
      (Address of Principal Executive Office)                    (Zip Code)

        Registrant's Telephone Number, Including Area Code: 781-402-9000
        ----------------------------------------------------------------

   __________________________________________________________________________
   (Former Name, Former Address and Former Fiscal Year, if Changed Since Last
                                    Report)

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


<PAGE>   2


                      APPLICABLE ONLY TO CORPORATE ISSUERS:

     Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: As of the date hereof,
90,000,000 shares of common stock, par value $1.00 per share, are outstanding,
all of which are held by Fresenius Medical Care AG.


                                       2
<PAGE>   3


       FRESENIUS MEDICAL CARE HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES

                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
PART I: FINANCIAL INFORMATION

     ITEM 1:  FINANCIAL STATEMENTS                                                                             PAGE

<S>                                                                                                            <C>
              Unaudited Consolidated Statements of Operations ..................................................4
              Unaudited Consolidated Statements of Comprehensive Income.........................................5
              Unaudited Consolidated Balance Sheets.............................................................6
              Unaudited Consolidated Statements of Cash Flows...................................................7
              Notes to Unaudited Consolidated Financial Statements..............................................9

     ITEM 2:  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
              CONDITION AND RESULTS OF OPERATIONS...............................................................26

     ITEM 3:  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
              MARKET RISK.......................................................................................35

PART II: OTHER INFORMATION

     ITEM 1:   Legal Proceedings................................................................................36
     ITEM 6:   Exhibits and Reports on Form 8-K.................................................................48
</TABLE>


                                       3
<PAGE>   4


                                     PART I

                              FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

             FRESENIUS MEDICAL CARE HOLDINGS, INC. AND SUBSIDIARIES

                UNAUDITED, CONSOLIDATED STATEMENTS OF OPERATIONS
                  (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
                                                                   THREE MONTHS ENDED                NINE MONTHS ENDED
                                                                      SEPTEMBER 30,                    SEPTEMBER 30,
                                                              ----------------------------     ----------------------------
                                                                 1999              1998            1999             1998
                                                                 ----              ----            ----             ----
<S>                                                           <C>              <C>             <C>              <C>
NET REVENUES
   Health care services ....................................  $   587,314      $   541,052     $ 1,714,051      $ 1,550,689
   Medical supplies ........................................      124,536          114,600         368,405          353,291
                                                              -----------      -----------     -----------      -----------
                                                                  711,850          655,652       2,082,456        1,903,980
                                                              -----------      -----------     -----------      -----------
EXPENSES
   Cost of health care services ............................      392,763          355,887       1,145,943        1,021,727
   Cost of medical supplies ................................       84,963           77,216         253,763          242,121
   General and administrative expenses .....................       71,328           62,500         204,880          186,816
   Provision for doubtful accounts .........................        5,669           16,308          25,398           50,187
   Depreciation and amortization ...........................       53,931           54,298         162,019          161,494
   Research and development ................................        1,067            1,294           3,104            3,102
   Interest expense, net and related financing cost
     including $23,250 and $21,730 for the three months
     and $64,795 and $59,315 for the nine months ended,
     respectively of interest with affiliates ..............       49,524           54,880         152,154          155,059
   Special charge for settlement of investigations and
     related costs .........................................      590,000               --         590,000               --
                                                              -----------      -----------     -----------      -----------

                                                                1,249,245          622,383       2,537,261        1,820,506
                                                              -----------      -----------     -----------      -----------

INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE
    INCOME TAXES AND CUMULATIVE EFFECT OF CHANGE IN
    ACCOUNTING FOR START UP COSTS ..........................     (537,395)          33,269        (454,805)          83,474
PROVISION (BENEFIT) FOR INCOME TAXES .......................     (150,190)          18,965        (106,631)          46,554
                                                              -----------      -----------     -----------      -----------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE
    CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING FOR
    START UP COSTS .........................................  $  (387,205)     $    14,304     $  (348,174)     $    36,920
                                                              -----------      -----------     -----------      -----------

DISCONTINUED OPERATIONS
   Loss from discontinued operations, net of income taxes...           --               --              --           (8,669)
   Loss on disposal of discontinued operations, net
     of income tax benefit .................................           --               --              --          (97,228)
                                                              -----------      -----------     -----------      -----------

   Loss from discontinued operations .......................  $        --      $        --     $        --      $  (105,897)
                                                              -----------      -----------     -----------      -----------

CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING
   FOR START UP COSTS, NET OF TAX BENEFIT ..................           --               --              --           (4,890)
                                                              -----------      -----------     -----------      -----------

NET INCOME (LOSS) ..........................................  $  (387,205)     $    14,304     $  (348,174)     $   (73,867)
                                                              ===========      ===========     ===========      ===========

Basic and fully dilutive earnings (loss) per share
   Continuing operations ...................................  $     (4.30)     $      0.16     $     (3.87)     $      0.41
   Discontinued operations .................................           --               --              --            (1.18)
   Cumulative effect of accounting change ..................           --               --              --            (0.05)
   Net Income (loss) .......................................  $     (4.30)     $      0.16     $     (3.87)     $     (0.82)
</TABLE>


     See accompanying Notes to Unaudited, Consolidated Financial Statements.


                                       4
<PAGE>   5


       FRESENIUS MEDICAL CARE HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES

           UNAUDITED, CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
                             (DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                   THREE MONTHS ENDED            NINE MONTHS ENDED
                                                      SEPTEMBER 30,                SEPTEMBER 30,
                                                ------------------------     ------------------------
                                                   1999           1998          1999           1998
                                                   ----           ----          ----           ----

<S>                                             <C>            <C>           <C>            <C>
NET INCOME (LOSS) ............................  $(387,205)     $  14,304     $(348,174)     $ (73,867)

Other comprehensive income
   Foreign currency translation adjustments...       (138)           226          (611)         1,921
                                                ---------      ---------     ---------      ---------
   Total other comprehensive income ..........       (138)           226          (611)         1,921
                                                ---------      ---------     ---------      ---------
COMPREHENSIVE INCOME (LOSS) ..................  $(387,343)     $  14,530     $(348,785)     $ (71,946)
                                                =========      =========     =========      =========
</TABLE>


                                       5
<PAGE>   6


       FRESENIUS MEDICAL CARE HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS
                             (DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                   SEPTEMBER 30,     DECEMBER 31,
                                                                                       1999              1998
                                                                                   -------------     ------------
                     ASSETS                                                         (UNAUDITED)

<S>                                                                                 <C>              <C>
                     Current Assets:
                        Cash and cash equivalents ..............................    $    27,120      $     6,579
                        Accounts receivable, less allowances of $59,550 and
                           $49,209 .............................................        281,095          254,783
                        Inventories ............................................        172,167          169,789
                        Deferred income taxes ..................................        285,746          139,653
                        Other current assets ...................................        122,249           93,912
                        Net assets of discontinued operations ..................        154,573          149,949
                                                                                    -----------      -----------
                           Total Current Assets ................................      1,042,950          814,665
                                                                                    -----------      -----------

                     Properties and equipment, net .............................        424,198          429,639
                                                                                    -----------      -----------

                     Other Assets:
                        Excess of cost over the fair value of net assets
                           acquired and other intangible assets, net of
                           accumulated amortization of $390,335 and $289,167 ...      3,285,913        3,317,424
                        Other assets and deferred charges ......................         49,814           51,675
                                                                                    -----------      -----------
                           Total Other Assets ..................................      3,335,727        3,369,099
                                                                                    -----------      -----------
                     Total Assets ..............................................    $ 4,802,875      $ 4,613,403
                                                                                    ===========      ===========

                     LIABILITIES AND EQUITY

                     Current Liabilities:
                        Current portion of long-term debt and capitalized lease
                           obligations .........................................    $   139,262      $    43,348
                        Current portion of borrowing from affiliates ...........         20,146           32,716
                        Short-term borrowings from affiliates ..................        310,321          154,471
                        Accounts payable .......................................        119,889          107,482
                        Accrued liabilities ....................................        856,354          306,333
                        Net accounts payable to affiliates .....................         21,004           17,966
                        Accrued income taxes ...................................         49,916           12,411
                                                                                    -----------      -----------
                           Total Current Liabilities ...........................      1,516,892          674,727

                     Long-term debt ............................................        710,715        1,010,880
                     Non-current borrowings from affiliates ....................        790,440          801,813
                     Capitalized lease obligations .............................          1,293            2,666
                     Deferred income taxes .....................................        139,490          144,605
                     Other liabilities .........................................         43,880           29,278
                                                                                    -----------      -----------
                        Total Liabilities ......................................      3,202,710        2,663,969
                                                                                    -----------      -----------

                     Equity:
                        Preferred stock, $100 par value ........................          7,412            7,412
                        Preferred stock, $.10 par value ........................          8,906            8,906
                     Common stock, $1 par value; 300,000,000 shares
                        authorized; outstanding 90,000,000 .....................         90,000           90,000
                     Paid in capital ...........................................      1,942,141        1,942,235
                     Retained deficit ..........................................       (448,720)        (100,156)
                     Accumulated comprehensive income ..........................            426            1,037
                                                                                    -----------      -----------
                        Total Equity ...........................................      1,600,165        1,949,434
                                                                                    -----------      -----------
                     Total Liabilities and Equity ..............................    $ 4,802,875      $ 4,613,403
                                                                                    ===========      ===========
</TABLE>


     See accompanying Notes to Unaudited, Consolidated Financial Statements.


                                       6
<PAGE>   7


       FRESENIUS MEDICAL CARE HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES

                UNAUDITED, CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                                        NINE MONTHS ENDED
                                                                                                          SEPTEMBER 30,
                                                                                                    ------------------------
                                                                                                       1999           1998
                                                                                                       ----           ----
<S>                                                                                                 <C>            <C>
                Cash Flows from Operating Activities:
                   Net loss .....................................................................   $(348,174)     $ (73,867)
                   Adjustments to reconcile net earnings to net cash from operating activities:
                      Depreciation and amortization .............................................     162,019        161,494
                      Loss from discontinued operations .........................................          --          8,669
                      Loss on disposition of businesses .........................................          --         97,228
                      Cumulative effect of change in accounting .................................          --          4,890
                      Provision for doubtful accounts ...........................................      25,398         50,187
                      Benefit of deferred income taxes ..........................................    (151,208)       (40,633)
                      Loss on disposal of properties and equipment ..............................         363             91

                Changes in operating assets and liabilities, net of effects of
                purchase acquisitions and foreign exchange:
                   Increase in accounts receivable ..............................................     (81,110)      (109,205)
                   Increase in inventories ......................................................      (1,739)       (34,060)
                   Increase in other current assets .............................................     (28,322)        (8,532)
                   Decrease (increase) in other assets and deferred charges .....................       1,832        (21,970)
                   Increase (decrease) in accounts payable ......................................      12,407        (12,394)
                   Increase in accrued income taxes .............................................      37,505         94,058
                   Increase (decrease) in accrued liabilities ...................................     550,021        (36,567)
                   Increase in other long-term liabilities ......................................      14,602          5,284
                   Net changes due to/from affiliates ...........................................       3,038         (8,346)
                   Other, net ...................................................................      (7,261)        24,032
                                                                                                    ---------      ---------
                Net cash provided by operating activities of continued operations ...............     189,371        100,359
                                                                                                    ---------      ---------
                Net cash used in operating activities of discontinued operations ................      (4,624)       (13,878)
                                                                                                    ---------      ---------
                Net cash provided by operating activities .......................................     184,747         86,481
                                                                                                    ---------      ---------

                Cash Flows from Investing Activities:
                   Capital expenditures .........................................................     (54,096)       (50,794)
                   Payments for acquisitions, net of cash acquired ..............................     (64,744)      (160,246)
                   Proceeds from disposition of businesses ......................................          --         82,500
                                                                                                    ---------      ---------
                Net cash used in investing activities of continued operations ...................    (118,840)      (128,540)
                                                                                                    ---------      ---------
                Net cash used in investing activities of discontinued operations ................          --         (8,925)
                                                                                                    ---------      ---------
                Net cash used in investing activities ...........................................    (118,840)      (137,465)
                                                                                                    ---------      ---------

                Cash Flows from Financing Activities:
                   Increase in borrowings from affiliates .......................................     131,907        442,835
                   Cash dividends paid ..........................................................        (390)          (390)
                   Proceeds on issuance of debt .................................................          37         16,086
                   Proceeds from receivable financing facility ..................................      29,400        125,000
                   Payments on debt and capitalized leases ......................................    (205,682)      (536,122)
                   Other net ....................................................................         (94)          (616)
                                                                                                    ---------      ---------

                Net cash (used in) provided by  financing activities of continued operations ....     (44,822)        46,793
                                                                                                    ---------      ---------
                Net cash used in financing activities of discontinued operations ................          --         (2,107)
                                                                                                    ---------      ---------
                Net cash (used in) provided by  financing activities ............................     (44,822)        44,686
                                                                                                    ---------      ---------

                Effects of changes in foreign exchange rates ....................................        (544)         2,041
                                                                                                    ---------      ---------
                Change in cash and cash equivalents .............................................      20,541         (4,257)
                                                                                                    ---------      ---------
                Cash and cash equivalents at beginning of period ................................       6,579         13,054
                                                                                                    ---------      ---------
                Cash and cash equivalents at end of period ......................................   $  27,120      $   8,797
                                                                                                    =========      =========
</TABLE>


     See accompanying Notes to Unaudited, Consolidated Financial Statements


                                       7
<PAGE>   8


             FRESENIUS MEDICAL CARE HOLDINGS, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (DOLLARS IN THOUSANDS)


<TABLE>
<CAPTION>
                                                                                        NINE MONTHS ENDED
                                                                                          SEPTEMBER 30,
                                                                                    -----------------------
                                                                                       1999          1998
                                                                                       ----          ----
<S>                                                                                 <C>           <C>
            Supplemental disclosures of cash flow information:
               Cash paid during the period for:
                  Interest ....................................................     $  88,355     $ 102,940
                  Income taxes paid/(received), net ...........................         7,968        (7,532)

            Details for Acquisitions:
               Assets acquired ................................................        64,765       162,621
               Liabilities assumed ............................................            21         2,375
                                                                                    ---------     ---------
               Payments for acquisitions, net of cash acquired ................     $  64,744     $ 160,246
                                                                                    =========     =========
</TABLE>

      See accompanying Notes to Unaudited Consolidated Financial Statements


                                       8
<PAGE>   9


       FRESENIUS MEDICAL CARE HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES

          NOTES TO UNAUDITED, CONSOLIDATED INTERIM FINANCIAL STATEMENTS
                             (DOLLARS IN THOUSANDS)

NOTE 1. THE COMPANY, AND BASIS OF PRESENTATION

THE COMPANY

     Fresenius Medical Care Holdings, Inc., a New York corporation (the
"Company"), formerly known as W.R. Grace & Co. ("Grace New York"), is a
subsidiary of Fresenius Medical Care AG, a German corporation ("FMC" or
"Fresenius Medical Care"). The Company conducts its operations through three
principal subsidiaries, National Medical Care, Inc., a Delaware corporation
("NMC"), Fresenius USA, Inc., a Massachusetts corporation ("FUSA"), and SRC
Holding Company, Inc., a Delaware corporation.

     The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries, NMC and FUSA and those financial statements
where the Company controls professional corporations in accordance with Emerging
Issues Task Force Issue 97-2.

     The Company is primarily engaged in (i) providing kidney dialysis services,
clinical laboratory testing and renal diagnostic services, and (ii)
manufacturing and distributing products and equipment for dialysis treatment.

     The Company's healthcare operations were acquired by FMC, effective
September 30, 1996, as a result of the culmination of the following
transactions: (1) NMC, which was a subsidiary of W. R. Grace & Co. -- Conn.
("Grace Chemicals"), a wholly-owned subsidiary of Grace New York, borrowed
$2,300,000 and paid a cash dividend of approximately $2,100,000 to Grace
Chemicals; (2) the stock of NMC was transferred to Grace New York, so that NMC
and Grace Chemicals became subsidiaries of Grace New York; (3) the stock of
Grace Chemicals was transferred to a newly formed Delaware subsidiary of Grace
New York ("New Grace") and the shares of New Grace were spun-off to the Grace
New York shareholders in a pro rata distribution; (4) Grace New York was
recapitalized such that each Grace New York shareholder received one share of
Class D Preferred Stock of Grace New York for each share of Grace New York
common stock held; and (5) Grace New York, with NMC as its sole business, merged
with a wholly-owned subsidiary of FMC, and Fresenius AG's worldwide dialysis
business (including its controlling interest in FUSA) ("FWD") was contributed as
separate subsidiaries of FMC with the result that 44.8% of the ordinary shares
of FMC were exchanged for the common stock held by Grace New York common
shareholders in the merger transaction and the balance of the ordinary shares of
FMC were received by Fresenius AG and the shareholders of FUSA, in consideration
of the contribution of FWD to FMC.

BASIS OF PRESENTATION

     BASIS OF CONSOLIDATION

     The consolidated financial statements in this report at September 30, 1999
and 1998 and for the three and nine month interim periods then ended are
unaudited and should be read in conjunction with the consolidated financial
statements in the Company's 1998 report on Form 10-K. Such interim financial
statements reflect all adjustments that, in the opinion of management, are
necessary for a fair presentation of the results of the interim periods
presented. Certain amounts in the prior periods' consolidated financial
statements have been reclassified to conform to the current periods' basis of
presentation.

     The results of operations for the three and nine month periods ended
September 30, 1999 are not necessarily indicative of the results of operations
for the fiscal year ending December 31, 1999.

     NEW STANDARDS

     In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative
Instruments and Hedging Activities, which establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts (collectively referred to as "derivatives") and for
hedging activities. This statement requires that an entity recognize all
derivatives as either assets or liabilities in the balance sheet and measure
those instruments at fair value. The statement also sets forth the criteria for
determining whether a derivative may


                                       9
<PAGE>   10


be specifically designated as a hedge of a particular exposure with the intent
of measuring the effectiveness of that hedge in the statement of operations.

     In June 1999, the Financial Accounting Standards Board issued SFAS No. 137,
Accounting for Derivative Instruments and Hedging Activities, which amended the
effective date of SFAS No. 133. The amended SFAS No. 133 is effective for all
fiscal quarters of fiscal years beginning after June 15, 2000.

NOTE 2. INVENTORIES

<TABLE>
<CAPTION>
                                                                         SEPTEMBER 30,                   DECEMBER 31,
                                                                             1999                            1998
                                                                         -------------                   ------------
<S>                                                                      <C>                            <C>
    Inventories:
      Raw materials...............................................       $      40,243                  $      35,199
      Manufactured goods in process...............................              17,666                         18,802
      Manufactured and purchased inventory available for sale.....              82,026                         86,615
                                                                         -------------                  -------------
                                                                               139,935                        140,616
       Health care supplies.......................................              32,232                         29,173
                                                                         -------------                  -------------
    Total.........................................................       $     172,167                  $     169,789
                                                                         =============                  =============
</TABLE>



NOTE 3. DEBT

<TABLE>
<CAPTION>
                                                                         SEPTEMBER 30,                   DECEMBER 31,
Long-term debt to outside parties consists of:                               1999                            1998
                                                                         -------------                   ------------

<S>                                                                      <C>                            <C>
NMC Credit Facility...............................................       $     833,100                  $   1,032,700
Third-party debt, primarily bank borrowings at
   variable interest rates (3% - 9%) with various maturities......              14,408                         16,215
                                                                          ------------                  -------------
                                                                               847,508                      1,048,915
Less amounts classified as current................................             136,793                         38,035
                                                                         -------------                  -------------
                                                                         $     710,715                  $   1,010,880
                                                                         =============                  =============
</TABLE>

<TABLE>
<CAPTION>
                                                                         SEPTEMBER 30,                   DECEMBER 31,
Non-current borrowings from affiliates consists of:                          1999                            1998
                                                                         -------------                   ------------

<S>                                                                      <C>                            <C>
Fresenius Medical Care Finance SA borrowings
   at interest rates approximating 6 - 6.5%.......................              20,146                         47,665
Fresenius Medical Care Trust Finance S.a.r.l. at interest
   rates of 8.43% and 9.25%.......................................             786,524                        786,524
Other.............................................................               3,916                            340
                                                                         -------------                  -------------
                                                                               810,586                        834,529
Less amounts classified as current................................              20,146                         32,716
                                                                         -------------                  -------------
Total.............................................................       $     790,440                  $     801,813
                                                                         =============                  =============
</TABLE>


<TABLE>
<CAPTION>
                                                                         SEPTEMBER 30,                   DECEMBER 31,
Short-term borrowings from affiliates consists of:                           1999                            1998
                                                                         -------------                   ------------

<S>                                                                      <C>                            <C>
Fresenius Medical Care AG borrowings
   at interest rates approximating  6 - 7%........................       $      40,321                  $      94,471
Fresenius AG borrowing at interest rates
   approximating  6 - 7%..........................................             270,000                         60,000
                                                                         -------------                  -------------
Total.............................................................       $     310,321                  $     154,471
                                                                         =============                  =============
</TABLE>


                                       10
<PAGE>   11


NOTE 4.  SPECIAL CHARGE FOR SETTLEMENT OF INVESTIGATIONS AND RELATED COSTS

     Since 1995, NMC and its subsidiaries have been the subject of criminal and
civil investigations (the "OIG Investigations") by the Office of Inspector
General ("OIG") of the United States Department of Health and Human Services,
the United States Attorney for the District of Massachusetts (the "U.S.
Attorney's Office") and other authorities concerning possible violations of
federal laws, including the anti-kickback statutes and the False Claims Act.

     NMC has reached a preliminary agreement (the "Preliminary Agreement") with
the United States Government to resolve the matters covered in the OIG
Investigation and NMC's administrative appeals of an estimated $150 million of
outstanding Medicare receivables for IDPN therapy rendered on and before
December 31, 1998 (collectively, the "Settlement"). Consummation of the
Settlement is subject to negotiation of certain material currently unresolved
terms of the Settlement, completion and execution of definitive Settlement
documents, satisfaction of certain conditions, and court approval. (See Note 6 -
"Commitments and Contingencies - Legal Proceedings").

     As a result of the Preliminary Agreement, the Company has recorded a
special pre-tax charge of $590 million ($412 million, net of income taxes) which
includes (i) a charge of approximately $485 million for tentative civil and
criminal settlement payment obligations to the government; (ii) a reserve of
approximately $80 million for the resolution of the Company's IDPN accounts
receivable; and (iii) a reserve for other related costs of $25 million.

NOTE 5.  DISCONTINUED OPERATIONS

     Effective June 1, 1998, the Company classified its non-renal diagnostic
services business ("Non-Renal Diagnostic Services") and homecare business
("Homecare") as discontinued operations. The Company disposed of its Non-Renal
Diagnostic Services division and its Homecare division on June 26, 1998 and July
29, 1998, respectively. In connection with the sale of Homecare, the Company
retained the assets and the operations associated with the delivery of IDPN and
records, for accounting purposes, its activity as part of discontinued
operations. The Company recorded a net after tax loss of $97 million on the sale
of these businesses. The net loss on the disposal of these businesses and their
results of operations have been accounted for as discontinued operations. The
remaining assets and liabilities of these discontinued operations at the balance
sheet date have been classified in the consolidated balance sheet as Net Assets
of Discontinued Operations. Included in net assets of discontinued operations is
approximately $150 million of IDPN receivables. These assets have not been sold
and will remain classified as discontinued operations until they have been
settled. See Note 4 - "Special Charge for Settlement of Investigations and
Related Costs" and Note 6 - "Commitments and Contingencies - Legal Proceedings."

Operating results and net assets of discontinued operations are presented below:

     Discontinued Operations - Results of Operations

     The revenues and results of operations of the discontinued operations of
Non-Renal Diagnostic Services and Homecare divisions were as follows:

<TABLE>
<CAPTION>
                                                       THREE MONTHS ENDED                NINE MONTHS ENDED
                                                          SEPTEMBER 30,                    SEPTEMBER 30,
                                                   ---------------------------     --------------------------
                                                      1999            1998             1999            1998
                                                      ----            ----             ----            ----
<S>                                                <C>            <C>              <C>              <C>
NET REVENUES ....................................  $      --      $         --     $         --     $ 120,940
                                                   ---------      ------------     ------------     ---------

Loss from operations before income tax benefit...                                                     (14,212)
Income tax benefit ..............................                                                      (5,543)
                                                   ---------      ------------     ------------     ---------
Loss from operations ............................         --                --               --        (8,669)
                                                   =========      ============     ============     =========

Loss on disposal before income tax benefit ......                                                    (140,000)
Income tax benefit ..............................                                                     (42,772)
                                                   ---------      ------------     ------------     ---------
Loss on disposal operations .....................         --                --               --       (97,228)
                                                   =========      ============     ============     =========

Total loss on discontinued operations ...........  $      --      $         --     $         --      (105,897)
                                                   =========      ============     ============     =========
</TABLE>


                                       11
<PAGE>   12


     Discontinued Operations - Consolidated Balance Sheet

     The net assets, excluding intercompany assets, of the discontinued
operations of the Non Renal Diagnostic Services and Homecare divisions, included
in the consolidated balance sheet at September 30, 1999 are as follows:

<TABLE>
<CAPTION>
                                                      TOTAL

<S>                                               <C>
Current assets...........................         $   169,099
Properties & equipment, net..............                 222
Other assets.............................                 595
                                                  -----------
   Total Assets..........................         $   169,916
                                                  ===========

Current liabilities......................              15,096
Other liabilities........................                 247
                                                  -----------
   Total Liabilities.....................              15,343
                                                  ===========

   Net Assets............................         $   154,573
                                                  ===========
</TABLE>


                                       12
<PAGE>   13


NOTE 6.  COMMITMENTS AND CONTINGENCIES

     Contingent Non-NMC Liabilities of Grace New York (Now Known as Fresenius
Medical Care Holdings, Inc.)

     In connection with the Merger, Grace Chemicals has agreed to indemnify the
Company and NMC against all liabilities of the Company and its successors,
whether relating to events occurring before or after the Merger, other than
liabilities arising from or relating to NMC operations. After the Merger the
Company will remain contingently liable for certain liabilities with respect to
pre-Merger matters that are not related to NMC operations. The Company believes
that in view of the nature of the non-NMC liabilities and the expected impact of
the Merger on Grace Chemicals' financial position, the risk of significant loss
from non-NMC liabilities is remote.

     Were events to violate the tax-free nature of the Merger, the resulting tax
liability would be the obligation of the Company. Subject to representations by
Grace Chemicals, the Company, and Fresenius AG, Grace Chemicals has agreed to
indemnify the Company for such a tax liability. If the Company was not able to
collect on the indemnity, the tax liability would have a material adverse effect
on the Company's business, the financial condition of the Company and the
results of operations.

LEGAL PROCEEDINGS

     OIG INVESTIGATION

     Since 1995, NMC and its subsidiaries have been the subject of criminal and
civil investigations (the "OIG Investigation") by the Office of Inspector
General ("OIG") of the United States Department of Health and Human Services,
the United States Attorney for the District of Massachusetts (the "U.S.
Attorney's Office") and other authorities concerning possible violations of
federal laws, including the anti-kickback statutes and the False Claims Act.

     NMC has reached a preliminary agreement (the "Preliminary Agreement") with
the United States Government (the "Government") to resolve the matters covered
in the OIG Investigation and NMC's administrative appeals of an estimated $150
million of outstanding Medicare receivables for IDPN therapy rendered on and
before December 31, 1998 (collectively, the "Settlement"). Consummation of the
Settlement is subject to negotiation of certain material currently unresolved
terms of the Settlement, completion and execution of definitive Settlement
documents, satisfaction of certain conditions, and court approval.

     If the Settlement is consummated, the net Settlement payment to the
Government is estimated to be approximately $415 million (the "Net Settlement
Amount"). The Net Settlement Amount is the result of an estimated payment to the
Government of approximately $485 million (the "Settlement Amount"), less an
estimated payment by the Government to the Company of approximately $70 million
for the above-mentioned IDPN receivable claims. The Company and the Government
have not yet agreed upon the payment terms of the Settlement Amount. The net
cash outflow resulting from the Preliminary Agreement is anticipated to be
approximately $260 million. This amount reflects receipt of the IDPN accounts
receivable payment from the Government and the tax effect of the special charge
but does not consider any payment terms in the final Net Settlement Amount. The
cash savings of the tax benefit are expected to be realized over time in
relation to the cash outflows of the settlement payment obligations to the
Government and expenditures for other related costs.

     As a result of the Preliminary Agreement, the Company has recorded a
special pre-tax charge against its consolidated earnings for the three month
period ended September 30, 1999 totaling $590 million ($412 million after tax).
This special pre-tax charge includes the $485 million estimated payment to the
Government, an $80 million reserve of the remaining IDPN receivables described
above, and $25 million for other related costs. If the Settlement is not
consummated and the Company and the Government eventually litigate the issues,
the Company currently believes that the special charge reasonably estimates the
costs and expenses arising from this litigation.

     If the Settlement is consummated, the Company anticipates that NMC's
subsidiaries, Lifechem, Inc. ("Lifechem"), NMC Homecare, Inc. and NMC Medical
Products, Inc. will plead guilty to violations of federal law. As a consequence
of their guilty pleas, these subsidiaries will be excluded from further
participation in federally funded health care programs, including Medicare,
Medicaid and TriCare. The Company believes that these exclusions will not
materially interrupt its provision of, or receipt of payment for, the products
and services formerly provided by the excluded subsidiaries because the Company
intends to continue to provide such products and services through other
subsidiaries which are qualified to participate in federal health care programs.


                                       13
<PAGE>   14

     The Settlement is not expected to extend to any current or former employees
of NMC or its subsidiaries who have been, or may be, indicted in connection with
the OIG Investigation.

     The Company believes that it will have sufficient cash flows from
continued operations and borrowing capacity under its revolving credit facility
to pay the Net Settlement Amount. The Company also believes that following such
payments, it will have sufficient funds available for both its day to day
operations and its anticipated growth.

     After giving effect to the special charge, the Company continues to be in
compliance with the financial covenants in its senior credit facility. The
Company believes that the final terms of the Settlement could cause the Company
to be out of compliance with the financial covenants, effective at the end of
the financial quarter in which a Settlement is consummated. The Company is in
discussions regarding the Settlement with the agent for the lenders under its
senior credit facility, and the agent has informed the lenders that it is
working with the Company to prepare an amendment to certain financial covenants
in the senior credit facility that will enable the Company to continue in
compliance with the financial covenants upon consummation of the Settlement. For
a further discussion see Part I, Item 2, "Management Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital
Resources."

     No assurance can be given that the Settlement will be consummated or that
the costs related to the Settlement or any litigated resolution of the OIG
Investigation will not exceed the amount of the above-described pre-tax charge
against earnings or that additional costs, claims and damages will not result
from the Settlement. If the Settlement is not consummated, the U.S. Attorney's
Office is expected to institute criminal and civil legal proceedings against,
and seek substantial civil and criminal financial damages and penalties from,
NMC and its subsidiaries. If the Government were successful in pursuing claims
arising from the OIG Investigation, NMC and one or more of its subsidiaries
would be subject to civil damages and criminal penalties, including substantial
fines, suspension of payments and exclusion from the Medicare, Medicaid and
TriCare programs, as well as other federally-funded health care benefit
programs. Such federal programs provide over 60% of NMC's consolidated revenues.
The occurrence of any of these events could have a material adverse effect on
the Company's business, financial condition and results of operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Contingencies."

     In addition, as discussed below, the Company has become aware that it and
one or more of its subsidiaries is the subject of qui tam or "whistleblower"
actions with respect to some or all of the issues raised by the OIG
Investigation, which whistleblower actions are filed under seal as a matter of
law in the first instance, thereby preventing disclosure to the Company and to
the public except by court order. In the process of unsealing federal
whistleblower complaints, it is not unusual for courts to allow the Government
to inform the Company and its counsel of a complaint prior to the time the
Company may be legally permitted to disclose it to the public. NMC may be the
subject of other "whistleblower" actions not known to the Company. Fresenius
Medical Care and the Company have guaranteed NMC's obligations relating to or
arising out of the OIG Investigation and the qui tam proceedings, and
indemnified Grace Chemicals for any such liabilities.

     The following is a description of the OIG Investigation.

     In October 1995, NMC received five investigative subpoenas from the OIG in
connection with the OIG Investigation. The subpoenas have resulted in extensive
document production relating to various aspects of NMC's business. The Company
has continued to receive additional subpoenas directed to NMC or the Company to
obtain supplemental information and documents relating to the subject matter of
the OIG Investigation, or to clarify the scope of the original subpoenas.

     The Company has cooperated with the OIG Investigation in providing
supplemental information and documents. As indicated above, the Government
continues, from time to time, to seek supplementing and/or clarifying
information from the Company. The Company understands that the Government has
utilized a grand jury to investigate these matters. The Company expects that
this process will continue while the Government completes its evaluation of the
documentation and issues or until the Settlement is consummated.

     The OIG Investigation covers the following areas: (a) NMC's dialysis
services business ("Dialysis Services"), principally relating to its Medical
Director contracts and compensation; (b) NMC's treatment of credit balances
resulting from overpayments received under the Medicare, Medicaid, TriCare and
other Government and commercial payors, NMC's billing for home dialysis
services, and its payment of supplemental medical insurance premiums on behalf
of indigent patients; (c) Lifechem's laboratory business, including testing
procedures, marketing, customer relationships, competition, overpayments
totaling approximately $4.9 million that were received by Lifechem from the
Medicare program with respect to laboratory services rendered between 1989 and
1993, a 1997 review of dialysis facilities' standing orders, and the provision
of discounts on products from NMC's products division, grants, equipment and
entertainment to Lifechem customers; and (d) Homecare and, in particular,
information concerning IDPN utilization, documentation of claims and billing
practices including various services, equipment and supplies and payments made
to third parties as compensation for administering IDPN therapy.

                                       14
<PAGE>   15


     The Government has indicated that the areas identified above are not
exclusive, and that it may pursue additional areas. The penalties applicable
under the anti-kickback statutes, the False Claims Act and other federal and
state statutes and regulations applicable to NMC's business could be
substantial. While NMC asserts that it is able to offer legal and/or factual
defenses with respect to many of the claims the Government has identified, it is
expected that the Government will assert that NMC has violated multiple
statutory and regulatory provisions. Also, as discussed below, qui tam actions
alleging that NMC submitted false claims to the Government have been filed under
seal by former or current NMC employees or other individuals who may have
familiarity with one or more of the issues under investigation. As noted, under
the False Claims Act, any such private plaintiff could pursue an action against
NMC in the name of the U.S. at his or her own expense if the Government declines
to do so.

     Under the terms of the Merger, any potential resulting monetary liability
has been retained by NMC, and the Company has indemnified Grace Chemicals
against all potential liability arising from or relating to the OIG
Investigation. The Company has provided the U.S. Government with a guarantee of
payment of the obligations, if any, arising from the OIG Investigation. In
support of this guarantee, the Company has delivered to the U.S. Government a
standby letter of credit in the amount of $150 million.

     MEDICAL DIRECTOR COMPENSATION

     The Government is investigating whether Dialysis Services' compensation
arrangements with its Medical Directors constitute payments to induce referrals,
which would be illegal under the anti-kickback statutes, rather than payment for
services rendered. Dialysis Services compensated the substantial majority of its
Medical Directors on the basis of a percentage of the earnings of the dialysis
center for which the Medical Director was responsible from the inception of
NMC's predecessor in 1972 until January 1, 1995, the effective date of Stark II.
Under the arrangements in effect prior to January 1, 1995, the compensation paid
to Medical Directors was adjusted to include "add backs," which represented a
portion of the profit earned by the Company on products purchased by the Medical
Director's facility from NMC Medical Products, Inc. and (until January 1, 1992)
a portion of the profit earned by Lifechem on laboratory services provided to
patients at the Medical Director's facility. These adjustments were designed to
allocate a profit factor to each dialysis center relating to the profits that
could have been realized by the center if it had provided the items and services
directly rather than through a subsidiary of NMC. The percentage of profits paid
to any specific Medical Director was reached through negotiation, and was
typically a provision of a multi-year consulting agreement.

     Under Stark II, if Designated Health Services are involved, Medical
Director compensation must not exceed fair market value and may not take into
account the volume or value of referrals or other business generated between the
parties. Since January 1, 1995, Dialysis Services has compensated its Medical
Directors on a fixed compensation arrangement intended to comply with the
requirements of Stark II. In renegotiating its Medical Director compensation
arrangements in connection with Stark II, Dialysis Services took and continues
to take account of the compensation levels paid to its Medical Directors in
prior years.

     Certain Government representatives have expressed the view in meetings with
counsel for NMC that arrangements where the Medical Director was or is paid
amounts in excess of the "fair market value" of the services rendered may
evidence illegal payments to induce referrals, and that hourly compensation is a
relevant measure for evaluating the "fair market value" of the services. The
Company's dialysis services division ("DSD" or Dialysis Services") does not
compensate its Medical Directors on an hourly basis and has asserted to the
Government that hourly compensation is not a determinative measure of fair
market value. Although the Company believes that the compensation paid to its
Medical Directors is generally reflective of fair market value, there can be no
assurances that the Government will agree with this position or that the Company
ultimately will be able to defend its position successfully. Because of the wide
variation in local market factors and in the profit percentage contractually
negotiated between Dialysis Services and its Medical Directors prior to January
1, 1995, there is a wide variation in the amounts that have been paid to Medical
Directors.

     As a result, the compensation that Dialysis Services has paid and is
continuing to pay to a material number of its Medical Directors could be viewed
by the Government as being in excess of "fair market value," both in absolute
terms and in terms of hourly compensation. NMC has asserted to the Government
that NMC's compensation arrangements do not constitute illegal payments to
induce referrals. NMC has also asserted to the Government that OIG auditors
repeatedly reviewed Dialysis Services' compensation arrangements with NMC's
Medical Directors in connection with their audits of the costs claimed by
Dialysis Services; that the OIG stated in its audit reports that, with the
exception of certain technical issues, Dialysis Services had complied with
applicable Medicare laws and regulations pertaining to the ESRD program; and
that Dialysis Services reasonably relied on these audit reports in concluding
that its program for compensating Medical Directors was lawful. There has been
no indication that the Government will


                                       15
<PAGE>   16


accept NMC's assertions concerning the legality of its arrangements generally or
NMC's assertion that it reasonably relied on OIG audits, or that the Government
will not focus on specific arrangements that DSD has made with one or more
Medical Directors and assert that those specific arrangements were or are
unlawful.

     The Government is also investigating whether Dialysis Services' profit
sharing arrangements with its Medical Directors influenced the Medical Directors
to order unnecessary ancillary services and items. NMC has asserted to the
Government that the rate of utilization of ancillary services and items by its
Medical Directors is reasonable and that it did not provide illegal inducements
to Medical Directors to order ancillary services and items and the practice of
profit-sharing has been discontinued.

     CREDIT BALANCES

     In the ordinary course of business, medical service providers like Dialysis
Services receive overpayments from Medicare intermediaries and other payors for
services that they provide to patients. Medicare intermediaries commonly direct
such providers to notify them of the overpayment and not remit such amounts to
the intermediary by check or otherwise unless specifically requested to do so.
In 1992, HCFA adopted a regulation requiring certain Medicare providers,
including dialysis centers, to file a quarterly form listing unrecouped
overpayments with the Medicare intermediary responsible for reimbursing the
provider. The first such filing was required to be made as of June 30, 1992 for
the period beginning with the initial date that the provider participated in the
Medicare program and ending on June 30, 1992.

     The Government is investigating whether DSD intentionally understated the
Medicare credit balance reflected on its books and records for the period ended
June 30, 1992 by reversing entries out of its credit balance account and taking
overpayments into income in anticipation of the institution of the new filing
requirement. Dialysis Services policy was to notify Medicare intermediaries in
writing of overpayments upon receipt and to maintain unrecouped Medicare
overpayments as credit balances on the books and records of Dialysis Services
for four years; overpayments not recouped by Medicare within four years would be
reversed from the credit balance account and would be available to be taken into
income. NMC asserts that Medicare overpayments that have not been recouped by
Medicare within four years are not subject to recovery under applicable
regulations. Accordingly, NMC's initial filing with the intermediaries disclosed
the credit balance on the books and records of Dialysis Services as shown in
accordance with its policy. There can be no assurance that the Government will
accept NMC's position. The Government has inquired whether other divisions
including Homecare, Lifechem, renal diagnostics services and non-renal
diagnostic services have appropriately treated Medicare credit balances as well
as credit balances of other payors.

     The Government is also investigating whether Dialysis Services failed to
disclose Medicare overpayments that resulted from Dialysis Services' obligation
to rebill commercial payors for amounts originally billed to Medicare under
HCFA's initial implementation of the OBRA 93 amendments to the secondary payor
provisions of the Medicare Act. Dialysis Services experienced delays in
reporting a material amount of overpayments after the implementation of the OBRA
93 amendments. NMC asserts that most of these delays were the result of the
substantial administrative burdens placed on Dialysis Services as a consequence
of the changing and inconsistent instructions issued by HCFA with respect to the
OBRA 93 amendments and were not intentional. Substantially all overpayments
resulting from the rebilling effort associated with the OBRA 93 amendments have
now been reported. Procedures are in place that are designed to ensure that
subsequent overpayments resulting from the OBRA 93 amendments will be reported
on a timely basis.

     SUPPLEMENTAL MEDICAL INSURANCE

     The Government has indicated that it is investigating the method by which
NMC made Medigap payments on behalf of its indigent patients. The impact, if
any, of this investigation on the Company, cannot be predicted at this time.

     OVERPAYMENTS FOR HOME DIALYSIS SERVICES

     NMC acquired Home Intensive Care, Inc. ("HIC"), an in-center and home
dialysis service provider, in 1993. At the time of the acquisition, HIC was the
subject of a claim by HCFA that HIC had received payments for home dialysis
services in excess of the Medicare reasonable charge for services rendered prior
to February 1, 1990. NMC settled the HCFA claim against HIC in 1994. The
Government is investigating whether the settlement concerning the alleged
overpayments made to HIC resolved all issues relating to such alleged
overpayments. The Government is also investigating whether NMC's subsidiary,
Home Dialysis Services, Inc. ("HDS"),


                                       16
<PAGE>   17


received payments similar to the payments that HIC received, and whether HDS
improperly billed for home dialysis services in excess of the monthly cost cap
for services rendered on or after February 1, 1990. The Government is
investigating whether NMC was overpaid for services rendered. NMC asserts that
the billings by HDS were proper, but there can be no assurance that the
Government will accept NMC's view.

     LIFECHEM

     Overpayments. On September 22, 1995, Lifechem voluntarily disclosed certain
billing problems to the Government that had resulted in Lifechem's receipt of
approximately $4.9 million in overpayments from the Medicare program for
laboratory services rendered between 1989 and 1993. Lifechem asserts that most
of these overpayments relate to errors caused by a change in Lifechem's computer
systems and that the remainder of the overpayments were the result of the
incorrect practice of billing for a complete blood count with differential when
only a complete blood count was ordered and performed, and of the incorrect
practice of billing for a complete blood count when only a hemoglobin or
hematocrit test was ordered. Lifechem asserts that the overpayments it received
were not caused by fraudulent activity, but there can be no assurance that the
Government will accept Lifechem's view.

     Lifechem made these disclosures to the Government as part of an application
to be admitted to a voluntary disclosure program begun by the Government in
mid-1995. At the time of the disclosures, Lifechem tendered repayment to the
Government of the $4.9 million in overpayments. After the OIG Investigation was
announced, the Government indicated that Lifechem had not been accepted into its
voluntary disclosure program. The Government has deposited the $4.9 million
check with NMC's approval. The matters disclosed in Lifechem's September 22,
1995 voluntary disclosure are a subject of the OIG Investigation.

     On June 7, 1996, Lifechem voluntarily disclosed an additional billing
problem to the Government that had resulted in Lifechem's receipt of between
$40,000 and $160,000 in overpayments for laboratory services rendered in 1991.
Lifechem advised the Government that this overpayment resulted from the
submission for payment of a computer billing tape that had not been subjected to
a "billing rules" program designed to eliminate requests for payments for
laboratory tests that are included in the Composite Rate and that were not
eligible for separate reimbursement. Lifechem also advised the Government that
there may have been additional instances during the period from 1990 to 1992
when other overpayments were received as a result of the submission of computer
billing tapes containing similar errors and that it was in the process of
determining whether such additional overpayments were received. On June 21,
1996, Lifechem advised the Government that the 1991 billing problem disclosed on
June 7, 1996 resulted in an overpayment of approximately $112,000. Lifechem also
advised the Government that certain records suggested instances in July 1990 and
August 31 through September 11, 1990, when billing tapes may have been processed
without rules processing. Lifechem continued its effort to determine whether any
other overpayments occurred relating to the "billing rules" problem and, in
March 1997, advised the Government that an additional overpayment of
approximately $260,000 was made by Medicare.

     On April 6, 1999, Lifechem voluntarily disclosed an additional billing
problem to the Government that resulted in Lifechem's receipt of overpayments
for laboratory services rendered between 1994 and 1999. In 1994, as a result of
the advice of a billing consultant, Lifechem began to bill for platelet testing
performed in connection with complete blood counts. This advice was confirmed by
the consultant in 1997 as part of a review performed by the consultant under the
auspices of Lifechem's then outside counsel. In 1999, however, an internal
inquiry resulted in a reexamination of this advice and Lifechem determined that
the prior advice was incorrect. As a result, Lifechem voluntarily disclosed the
overpayment and repaid to the Government the amount of $8.6 million.

     Capitation for routine tests and panel design. In October 1994, the OIG
issued a special fraud alert in which it stated its view that the industry
practice of offering to perform or performing the routine tests covered by the
Composite Rate at a price below fair market value, coupled with an agreement by
a dialysis center to refer all or most of its non-Composite Rate tests to the
laboratory, violates the anti-kickback statutes. In response to this alert,
Lifechem changed its practices with respect to testing covered by the Composite
Rate to increase the amount charged to both Dialysis Services and third-party
dialysis centers and reduce the number of tests provided for the fixed rate. The
Government is investigating Lifechem's practices with respect to these tests.

     Benefits provided to dialysis centers and persons associated with dialysis
centers. The Government is investigating whether Dialysis Services or any
third-party dialysis center or any person associated with any such center was
provided with benefits in order to induce them to use Lifechem services. Such
benefits could include, for example, discounts on products or supplies, the
provision of computer equipment, the provision of money for the purchase of
computer equipment, the provision of research grants and the provision of
entertainment to customers. NMC has identified certain instances in which
benefits were provided to customers who


                                       17
<PAGE>   18


purchased medical products from NMC Medical Products, Inc., NMC's products
company, and used Lifechem's laboratory services. The Government claims that the
provision of such benefits violates, among other things, the anti-kickback
statutes. In December 1998, the former Vice President of Sales responsible for
NMC's laboratory and products divisions pled guilty to the payment of illegal
kickbacks to obtain laboratory business for Lifechem. In February 1999, the
former President of NMC Medical Products, Inc., was indicted by the Government
for the payment of these same and/or similar kickbacks.

     Business and testing practices. As noted above, the Government has
identified a number of specific categories of documents that it is requiring NMC
to produce in connection with Lifechem business and testing practices. In
addition to documents relating to the areas discussed above, the Government has
also required Lifechem to produce documents relating to the equipment and
systems used by Lifechem in performing and billing for clinical laboratory blood
tests, the design of the test panels offered and requisition forms used by
Lifechem, the utilization rate for certain tests performed by Lifechem,
recommendations concerning diagnostic codes to be used in ordering tests for
patients with given illnesses or conditions, internal and external audits and
investigations relating to Lifechem's billing and testing. Subsequently, the
Government served an investigative subpoena for documents concerning the
Company's 1997 review of dialysis facilities' standing orders, and responsive
documents were provided. The Government has served investigative subpoenas
requiring NMC to update its production on the above issues and to produce
contract files for twenty-three identified dialysis clinic customers. The
Government is investigating each of these areas, and asserts that Lifechem
and/or NMC have violated the False Claims Act and/or the anti-kickback statutes
through the test ordering, paneling, requisitioning, utilization, coding,
billing and auditing practices described above. In June 1999, a former Vice
President of Marketing of NMC Medical Products, Inc. pled guilty to a charge of
conspiracy to defraud Medicare in connection with the marketing of certain
hepatitis tests. In August 1999, the former President and the then Director of
Marketing of Lifechem were indicted by the Government for defrauding Medicare in
connection with marketing the same hepatitis and laboratory tests.

     IDPN

     Administration kits. One of the activities of Spectra Renal Management
("SRM") is to provide IDPN therapy to dialysis patients at both NMC-owned
facilities and at facilities owned by other providers. IDPN therapy was provided
by Homecare prior to its divestiture. IDPN therapy is typically provided to the
patient 12-13 times per month during dialysis treatment. Bills are submitted to
Medicare on a monthly basis and include separate claims for reimbursement for
supplies, including, among other things, nutritional solutions, administration
kits and infusion pumps. In February 1991, the Medicare carrier responsible for
processing Homecare's IDPN claims issued a Medicare advisory to all parenteral
and enteral nutrition suppliers announcing a coding change for reimbursement of
administration kits provided in connection with IDPN therapy for claims filed
for items provided on or after April 1, 1991. The Medicare allowance for
administration kits during this period was approximately $625 per month per
patient. The advisory stated that IDPN providers were to indicate the "total
number of actual days" when administration kits were "used," instead of
indicating that a one-month supply of administration kits had been provided. In
response, Homecare billed for administration kits on the basis of the number of
days that the patient was on an IDPN treatment program during the billing
period, which typically represented the entire month, as opposed to the number
of days the treatment was actually administered. During the period from April
1991 to June 1992, Homecare had an average of approximately 1,200 IDPN patients
on service.

     In May 1992, the carrier issued another Medicare advisory to all PEN
suppliers in which it stated that it had come to the carrier's attention that
some IDPN suppliers had not been prorating their billing for administration kits
used by IDPN patients and that providers should not bill for administration kits
on the basis of the number of days that the patient was on an IDPN treatment
program during the billing period. The advisory stated further that the carrier
would be conducting "a special study to determine whether or not overpayments
have occurred as a result of incorrect billing" and that "if overpayments have
resulted, providers that have incorrectly billed" would "be contacted so that
refunds can be recovered." Homecare revised its billing practices in response to
this advisory for claims filed for items provided on or after July 1, 1992.
Homecare was not asked to refund any amounts relating to its billings for
administration kits following the issuance of the second advisory.

     The Government asserts that NMC submitted false claims for administration
kits during the period from 1988 to June 30, 1996, and that Homecare's billing
for administration kits during this period violated, among other things, the
False Claims Act.

     Infusion Pumps and IV Poles. During the time period covered by the
subpoenas, Medicare regulations permitted IDPN providers to bill Medicare for
infusion pumps and, until 1992, for IV poles provided to IDPN patients in
connection with the administration of IDPN treatments. These regulations do not
expressly specify that a particular pump and IV pole be dedicated to a specific
patient, and NMC asserts that these regulations permitted Homecare to bill
Medicare for an infusion pump and IV pole so


                                       18
<PAGE>   19


long as the patient was infused using a pump and IV pole. Despite the absence of
an express regulatory specification, Homecare developed a policy to deliver to a
dialysis center a dedicated infusion pump and IV pole for each patient, although
the Company cannot represent that Homecare followed this policy in every
instance. The Government is investigating the propriety of Homecare's billings
for infusion pumps and IV poles and asserts that Homecare's billings violate the
False Claims Act.

     As noted above, under the new policies published by HCFA with respect to
IDPN therapy, the Company was not able to bill for infusion pumps after July 1,
1996. The Government discontinued reimbursement for IV poles in 1992.

     "Hang fees" and other payments. IDPN therapy is typically provided to the
patient during dialysis by personnel employed by the dialysis center treating
the patient with supplies provided and billed to Medicare by Homecare in
accordance with the Medicare parenteral nutrition supplier rules. In order to
compensate dialysis centers for the costs incurred in administering IDPN therapy
and monitoring the patient during therapy, Homecare followed the practice common
in the industry of paying a "hang fee" to the center. Dialysis centers are
responsible for reporting such fees to HCFA on their cost reports. For Dialysis
Services dialysis centers, the fee was $30 per administration, based upon
internal Dialysis Services cost calculations. For third-party dialysis centers,
the fee was negotiated with each center, typically pursuant to a written
contract, and ranged from $15 to $65 per administration. The Company has
identified instances in which other payments and amounts beyond that reflected
in a contract were paid to these third-party centers. The Company has stopped
paying "hang fees" to both Dialysis Services and third-party facilities.

     In July 1993, the OIG issued a management advisory alert to HCFA in which
it stated that "hang fees" and other payments made by suppliers of IDPN to
dialysis centers "appear to be illegal as well as unreasonably high." The
Government is investigating the nature and extent of the "hang fees" and other
payments made by Homecare as well as payments by Homecare to physicians whose
patients have received IDPN therapy. The Government asserts that the payments by
Homecare to dialysis centers violate, among other things, the anti-kickback
statutes.

     Utilization of IDPN. Since 1984, when HCFA determined that Medicare should
cover IDPN and other parenteral nutrition therapies, the Company has been an
industry leader in identifying situations in which IDPN therapy is beneficial to
ESRD patients. It is the policy of the Company to seek Medicare reimbursement
for IDPN therapy only when it is prescribed by a patient's treating physician
and when it believes that the circumstances satisfy the requirements published
by HCFA and its carrier agents. Prior to 1994, HCFA and its carriers approved
for payment more than 90% of the IDPN claims submitted by Homecare. After 1993,
the rate of approval for Medicare reimbursement for IDPN claims submitted by
Homecare for new patients, and by the infusion industry in general, fell to
approximately 9%. The Company contends that the reduction in rates of approval
occurred because HCFA and its carriers implemented an unauthorized change in
coverage policy without giving notice to providers. While NMC continued to offer
IDPN to patients pursuant to the prescription of the patients' treating
physicians and to submit claims for Medicare reimbursement when it believed the
requirements stated in HCFA's published regulations were satisfied, other
providers responded to the drop in the approval rate for new Medicare IDPN
patients by abandoning the Medicare IDPN business, cutting back on the number of
Medicare patients to whom they provide IDPN, or declining to add new Medicare
patients. Beginning in 1994 the number of patients to whom NMC provided IDPN
increased as a result.

     The Government is investigating the utilization rate of IDPN therapy among
NMC patients, whether NMC submitted IDPN claims to Medicare for patients who
were not eligible for coverage, and whether documentation of eligibility was
adequate. NMC asserts that the utilization rate of IDPN therapy among its
dialysis patients, which, in 1995, averaged less than 3.5%, is the result of the
factors discussed above and that it is the policy of Homecare to seek Medicare
reimbursement for IDPN therapy prescribed by the patient's treating physician in
accordance with the requirements published by HCFA and its carrier agents. There
can be no assurance that the Government will accept the NMC's view. The
Government asserts that Homecare submitted IDPN claims for individuals who were
not eligible for coverage and/or with inadequate documentation of eligibility.

     The Company believes that it has presented to the Government substantial
defenses which support NMC's interpretation of coverage rules of IDPN as HCFA
and its carriers published and explained them, and which demonstrated that HCFA
and its carriers improperly implemented unpublished, more restrictive criteria
after 1993. Nevertheless, the Government is expected to assert in the OIG
Investigation that, on a widespread basis, NMC submitted and received payments
on claims for IDPN to Medicare for patients who were not eligible for coverage,
and for whom the documentation of eligibility was inadequate.


                                       19
<PAGE>   20


     In addition, the Government asserts that, in a substantial number of cases,
documentation of eligibility was false or inaccurate. With respect to some
claims, the Company has determined that false or inaccurate documentation was
submitted, deliberately or otherwise. The Government continues to investigate
the IDPN claims.

     As indicated above, if the Settlement is consummated, the Company
anticipates receiving an estimated $70 million payment to the Company from the
Government that is reflected in the Net Settlement Amount in exchange for a
release of the Company's IDPN receivable claims against the Government for IDPN
therapy administered on or before December 31, 1998. The Company continues to
pursue appeals of certain denied claims for IDPN therapy rendered after December
31, 1998 which the Company anticipates will clarify the coverage criteria for
IDPN therapy on a prospective basis.

     QUI TAM ACTIONS

     The Company is aware that it and/or certain of its subsidiaries are the
subject of qui tam or "whistleblower" actions with respect to some or all of the
issues raised by the OIG Investigation, which whistleblower actions are filed
under seal as a matter of law in the first instance, thereby preventing
disclosure to the Company and to the public except by court order. The Company
and/or certain of its subsidiaries may be the subject of other "whistleblower"
actions not yet known to the Company. Each of these actions is under seal and in
each action, pursuant to court order the seal has been modified to permit the
Company, NMC and other affiliated defendants to disclose the complaint to any
relevant investors, financial institutions and/or underwriters, their successors
and assigns and their respective counsel and to disclose the allegations in the
complaints in their respective reports filed with the U.S. Securities and
Exchange Commission (the "SEC" or the "Commission").

     A qui tam action was filed in the United States District Court for the
Southern District of Florida in June 1994, amended on July 8, 1996 and disclosed
to the Company on July 10, 1996. It alleges, among other things, that Grace
Chemicals and NMC violated the False Claims Act in connection with certain
billing practices regarding IDPN and the administration of EPO and that as a
result of this allegedly wrongful conduct, the United States suffered actual
damages in excess of $200 million.

     A qui tam action was filed in the United States District Court for the
Southern District of Florida in December 1994 and disclosed to the Company on
April 16, 1999. It alleges, among other things, that NMC violated the False
Claims Act in connection with certain billing practices regarding IDPN and the
cost relating thereto. The second qui tam was filed by the same relator which
filed the first qui tam and covers the same services covered by the first qui
tam complaint.

     A qui tam action was filed in the United States District Court for the
Middle District of Florida in 1995 and disclosed to the Company on or before
November 7, 1996. It alleges, among other things, that NMC and certain NMC
subsidiaries violated the False Claims Act in connection with the alleged
retention of over-payments made under the Medicare program, the alleged
submission of claims in violation of applicable cost caps and the payment of
supplemental Medicare insurance premiums as an alleged inducement to patients to
obtain dialysis products and services from NMC. The complaint alleges that as a
result of this allegedly wrongful conduct, the United States suffered damages in
excess of $10 million, including applicable fines.

     A qui tam action was filed in the United States District Court for the
District of Massachusetts in 1994 and was disclosed to the Company in February
1999. It alleges among other things that NMC violated the False Claims Act and
the anti-kickback statutes in connection with certain billing and documentation
practices regarding IDPN therapy, home oxygen therapy and certain medical
billings in NMC's Chicago office.

     A qui tam action was filed in the United States District Court for the
Middle District of Tennessee on December 15, 1994, transferred to the United
States District Court for the District of Massachusetts in 1995, and
subsequently was disclosed to the Company in September 1999. It alleges, among
other things, that Lifechem violated the False Claims Act in connection with the
submission of claims for laboratory tests which already had been billed by the
Company, and that Lifechem manipulated its chemistry panels to increase its
Medicare and Medicaid billings. The Complaint alleges that as a result of this
illegal action, the United States suffered damages in excess of $25,000,000.
Sometime after 1996, the Complaint was amended to add Spectra Laboratories,
Inc., the Company and FMC as defendants, and added the allegation that the
defendants violated the Medicare and Medicaid Anti-Kickback Statute by providing
discounted hemodialysis products to induce the purchase of laboratory services.

     Each of the qui tam complaints asserts that as a result of the allegedly
wrongful conduct, the Government suffered damages and


                                       20
<PAGE>   21


that the defendants are liable to the Government for three times the amount of
the alleged damages plus civil penalties of up to $10,000 per false claim. An
adverse result in any of the qui tam actions could have a material adverse
effect on the Company's business, financial condition or results of operations.

     OIG AGREEMENTS

     As a result of discussions with representatives of the United States in
connection with the OIG Investigation, certain agreements (the "OIG Agreements")
have been entered into to guarantee the payment of any obligations of NMC to the
United States (an "Obligation") relating to or arising out of the OIG
Investigation and the qui tam action filed in the Southern District of Florida
(the "Government Claims"). For the purposes of the OIG Agreements, an Obligation
is (a) a liability or obligation of NMC to the United States in respect of a
Government Claim pursuant to a court order (i) which is final and nonappealable
or (ii) the enforcement of which has not been stayed pending appeal or (b) a
liability or obligation agreed to be an Obligation in a settlement agreement
executed by Fresenius Medical Care, the Company or NMC, on the one hand, and the
United States, on the other hand. As stated elsewhere herein if the Settlement
is not consummated, the outcome of the OIG Investigation cannot be predicted.

     Pursuant to the OIG Agreements, upon consummation of the Merger, Fresenius
Medical Care, the Company and NMC provided the United States with a joint and
several unconditional guarantee of payment when due of all Obligations (the
"Primary Guarantee"). As credit support for the Primary Guarantee, NMC delivered
an irrevocable standby letter of credit in the amount of $150 million. The
United States will return such letter of credit (or any renewal or replacement)
for cancellation when all Obligations have been paid in full or it is determined
that NMC has no liability in respect of the Government Claims. Under the terms
of the Merger, any potential resulting monetary liability has been retained by
NMC, and the Company has indemnified Grace Chemicals against all potential
liability arising from or relating to the OIG Investigation.

     FMC and the Company and the United States state in the OIG Agreements that
they will negotiate in good faith to attempt to arrive at a consensual
resolution of the Government Claims and, in the context of such negotiations,
will negotiate in good faith as to the need for any restructuring of the payment
of any Obligations arising under such resolution, taking into account the
ability of FMC and the Company to pay the Obligations. The OIG Agreements state
that the foregoing statements shall not be construed to obligate any person to
enter into any settlement of the Government Claims or to agree to a structured
settlement. Moreover, the OIG Agreements state that the statements described in
the first sentence of this paragraph are precatory and statements of intent only
and that (a) compliance by the United States with such provisions is not a
condition of or defense to the obligations of FMC and the Company under the OIG
Agreements and (b) breach of such provisions by the Government cannot and will
not be raised by FMC and the Company to excuse performance under the OIG
Agreements. Neither the entering into of the OIG Agreements nor the providing of
the Primary Guarantee and the $150 million letter of credit is an admission of
liability by any party with respect to the OIG Investigation, nor does it
indicate the liability which may result therefrom.

     The foregoing describes the material terms of the OIG Agreements, copies of
which were previously filed with the Commission and copies of which may be
examined without charge at the public reference facilities maintained by the
Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at
the Regional Offices of the Commission located at Suite 1400, Citicorp Center,
500 West Madison Street, Chicago, Illinois 60661-2551 and Room 1300, 7 World
Trade Center, New York, New York 10048. Copies of such material will also be
made available by mail from the Public Reference Branch of the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The foregoing
description does not purport to be complete and is qualified in its entirety by
reference to such agreements.

     An adverse determination with respect to any of the issues addressed by the
subpoenas, or any of the other issues that have been or may be identified by the
Government, could result in the payment of substantial fines, penalties and
forfeitures, the suspension of payments or exclusion of the Company or one or
more of its subsidiaries from the Medicare program and other federal programs,
and changes in billing and other practices that could adversely affect the
Company's revenues. Any such result could have a material adverse effect on the
Company's business, financial condition and results of operations.

     OMNIBUS BUDGET RECONCILIATION ACT OF 1993

     OBRA 93 affected the payment of benefits under Medicare and employer health
plans for certain eligible ESRD patients. In July


                                       21
<PAGE>   22


1994, HCFA issued an instruction to Medicare claims processors to the effect
that Medicare benefits for the patients affected by OBRA 93 would be subject to
a new 18-month "coordination of benefits" period. This instruction had a
positive impact on NMC's dialysis revenues because, during the 18-month
coordination of benefits period, patients' employer health plans were
responsible for payment, which was generally at rates higher than that provided
under Medicare.

     In April 1995, HCFA issued a new instruction, reversing its original
instruction in a manner that would substantially diminish the positive effect of
the original instruction on NMC's dialysis business. HCFA further proposed that
its new instruction be effective retroactive to August 1993, the effective date
of OBRA 93.

     NMC ceased to recognize the incremental revenue realized under the original
Program Memorandum as of July 1, 1995, but it continued to bill employer health
plans as primary payors for patients affected by OBRA 93 through December 31,
1995. As of January 1, 1996, NMC commenced billing Medicare as primary payor for
dual eligible ESRD patients affected by OBRA 93, and then began to rebill in
compliance with the revised policy for services rendered between April 24 and
December 31, 1995.

     On May 5, 1995, NMC filed a complaint in the U.S. District Court for the
District of Columbia (National Medical Care, Inc. and Bio-Medical Applications
of Colorado, Inc. d/b/a Northern Colorado Kidney Center v. Shalala, C.A. No.
95-0860 (WBB)) seeking to preclude HCFA from retroactively enforcing its April
24, 1995 implementation of the OBRA 93 provisions relating to the coordination
of benefits for dual eligible ESRD patients. On May 9, 1995, NMC moved for a
preliminary injunction to preclude HCFA from enforcing its new policy
retroactively, that is, to billings for services provided between August 10,
1993 and April 23, 1995. On June 6, 1995, the court granted NMC's request for a
preliminary injunction and in December of 1996, NMC moved for partial summary
judgment seeking a declaration from the Court that HCFA's retroactive
application of the April 1995 rule was legally invalid. HCFA cross-moved for
summary judgment on the grounds that the April 1995 rule was validly applied
prospectively. In January 1998, the court granted NMC's motion for partial
summary judgment and entered a declaratory judgment in favor of NMC, holding
HCFA's retroactive application of the April 1995 rule legally invalid, and based
on its finding, the Court also permanently enjoined HCFA from enforcing and
applying the April 1995 rule retroactively against NMC. The Court took no action
on HCFA's motion for summary judgment pending completion of outstanding
discovery. On October 5, 1998 NMC filed it's own motion for summary judgment
requesting that the Court declare HCFA's prospective application of the April
1995 rule invalid and permanently enjoin HCFA from prospectively enforcing and
applying the April 1995 rule. The Court has not yet ruled on the parties'
motions. HCFA elected not to appeal from the Court's June 1995 and January 1998
orders. HCFA may, however, appeal all rulings at the conclusion of the
litigation. If HCFA should successfully appeal so that the revised
interpretation would be applied retroactively, Dialysis Services may be required
to refund the payments received from employer health plans for services provided
after August 10, 1993 under HCFA's original implementation, and to re-bill
Medicare for the same services, which would result in a net loss to Dialysis
Services of approximately $120 million attributable to all periods prior to
December 31, 1995. Also, in such event, the Company's business, financial
position and results of operations would be materially adversely affected. The
Settlement would not affect these proceedings.

     INTRADIALYTIC PARENTERAL NUTRITION COVERAGE ISSUES

     SRM administers IDPN therapy to chronic dialysis patients who suffer from
severe gastrointestinal malfunctions. IDPN therapy was provided by Homecare
prior to its divestiture. After 1993, Medicare claims processors sharply reduced
the number of IDPN claims approved for payment as compared to prior periods. NMC
believes that the reduction in IDPN claims represented an unauthorized policy
coverage change. Accordingly, NMC and other IDPN providers pursued various
administrative and legal remedies, including administrative appeals, to address
this reduction.

     In November 1995, NMC filed a complaint in the U.S. District Court for the
Middle District of Pennsylvania seeking a declaratory judgment and injunctive
relief to prevent the implementation of this policy coverage change. (National
Medical Care, Inc. v. Shalala, 3:CV-95-1922 (RPC)). Subsequently, the District
Court affirmed a prior report of the magistrate judge dismissing NMC's
complaint, without considering any substantive claims, on the grounds that the
underlying cause of action should be submitted fully to the administrative
review processes available under the Medicare Act. NMC decided not to appeal the
Court's decision, but rather, to pursue the claims through the available
administrative processes.

     NMC was successful in pursuing these claims through the administrative
process, receiving favorable decisions from Administrative Law Judges in more
than 80% of its cases. In early 1998, a group of claims which had been ruled on
favorably were


                                       22
<PAGE>   23


remanded by the Medicare Appeals Council to a single Administrative Law Judge
(the "ALJ") with extensive instructions concerning the review of these
decisions. A hearing was scheduled on the remanded claims to take place in July,
but later postponed until October 1998.

     Prior to the July hearing date, the U.S. Attorney's Office requested that
the hearing be stayed pending resolution of the OIG Investigation, on the basis
that proceeding could adversely effect the Government's investigation as well as
the Government's efforts to confirm its belief that these claims are false.
Prior to the ALJ issuing a decision on the stay request, the U.S. Attorney's
Office requested that NMC agree to a stay in the proceedings in order to achieve
a potential resolution of the IDPN claims subject to the OIG Investigation as
well as those which are subject to the administrative appeals process. NMC
agreed to this request, and together with the U.S. Attorney's Office requested a
stay. The ALJ agreed to this request in order to allow the parties the
opportunity to resolve both the IDPN claims which are the subject of the OIG
Investigation and the IDPN claims which are the subject of the administrative
proceedings. In March 1999 negotiations between NMC and the U.S. Attorney's
Office failed to progress and NMC requested that the stay be lifted. In
connection with the settlement discussions described above (which, if
consummated, would resolve all pending IDPN coverage appeals for services
rendered prior to 1999), the Government renewed its motion to stay proceedings
before the ALJ. The Company opposed the stay. On November 10, 1999, the ALJ
agreed to reschedule certain hearings that had been scheduled for the week of
November 29, 1999, but denied the motion for a stay and scheduled further
hearings to begin January 10, 2000. It is not possible to determine whether, if
the Settlement is not consummated, NMC and the Government will be able to
resolve issues surrounding the IDPN claims. Further proceedings on other
administrative appeals related to unpaid claims remain stayed.

     Although NMC management believes that those unpaid IDPN claims were
consistent with published Medicare coverage guidelines, if the settlement is not
consummated and the Company resumes its appeals of the IDPN claims there can be
no assurance that the claims on appeal will be approved for payment or, to the
extent approved, collected in full. Such claims represent substantial accounts
receivable of NMC, amounting to approximately $150 million as of September 30,
1999.

     If NMC is unable to collect its IDPN receivable, either through the
administrative appeal process or through negotiation, or if IDPN coverage is
reduced or eliminated, depending on the amount of the receivable that is not
collected and/or the nature of the coverage change, the Company's business,
financial condition and results of operations could be materially adversely
affected. NMC's IDPN receivables are included in the net assets of the Company's
discontinued operations. However, these receivables have not been sold and will
remain classified as discontinued operations until they have been settled. See
Note 5 -"Discontinued Operations."

     OTHER LEGAL PROCEEDINGS

     DISTRICT OF NEW JERSEY INVESTIGATION

NMC had received multiple subpoenas from a federal grand jury in the District of
New Jersey investigating, among other things, whether NMC sold defective
products, the manner in which NMC handled customer complaints and certain
matters relating to the development of a new dialyzer product line. NMC
cooperated with this investigation and provided the grand jury with extensive
documents. In February, 1996, NMC received a letter from the U.S. Attorney's
Office for the District of New Jersey indicating that it was the target of a
federal grand jury investigation into possible violations of criminal law in
connection with its efforts to persuade the FDA to lift a January 1991 import
hold issued with respect to NMC's Dublin, Ireland manufacturing facility. In
June 1996, NMC received a letter from the U.S. Attorney for the District of New
Jersey indicating that the U.S. Attorney had declined to prosecute NMC with
respect to a submission related to NMC's effort to lift the import hold. The
letter added that NMC remains a subject of a federal grand jury's investigation
into other matters. NMC also produced documents in response to a June 1996
subpoena from the federal grand jury requesting certain documents in connection
with NMC's imports of the FOCUS(R) dialyzer from January 1991 to November 1995.
In November 1999, NMC's subsidiary, NMC Medical Products, Inc. ("NMC Medical
Products") and the U.S. Attorney's Office for the District of New Jersey
executed a plea agreement (the "New Jersey Agreement") pursuant to which NMC
Medical Products will plead guilty to two misdemeanor violations of the Federal
Food, Drug and Cosmetic Act, pay the United States Government $3.8 million and
be released, together with NMC and its related entities and their present
officers, directors and employees, from any further civil or criminal liability
with respect to all matters investigated by the U.S. Attorney's Office for the
District of New Jersey, including the matters described above, or arising out of
Food and Drug Administration inspections of NMC Medical Products' facilities
prior to October 20, 1995. The terms of the New Jersey Agreement are subject to
court approval. The


                                       23
<PAGE>   24


$3.8 million to be paid pursuant to the Plea Agreement does not constitute part
of the Net Settlement Amount.

   COMMERCIAL INSURER LITIGATION

     In 1997, the Company, NMC, and certain named NMC subsidiaries, were served
with a civil complaint filed by Aetna Life Insurance Company in the U.S.
District Court for the Southern District of New York (Aetna Life Insurance
Company v. National Medical Care, Inc. et al, 97-Civ-9310). In April 1999, Aetna
amended its complaint to include its affiliate, Aetna U.S. Healthcare, Inc., as
an additional plaintiff, and to make certain other limited changes in its
pleading. Based in large part on information contained in prior securities
filings, the lawsuit alleges inappropriate billing practices for nutritional
therapy, diagnostic and clinical laboratory tests and misrepresentations. The
amended complaint seeks unspecified damages and costs. This matter is at a
relatively early stage in the litigation process, with substantial discovery
just beginning, and its outcome and impact on the Company cannot be predicted at
this time. However, the Company, NMC and its subsidiaries believe that they have
substantial defenses to the claims asserted, and intend to continue to
vigorously defend the lawsuit. Other private payors have contacted the Company
and may assert that NMC received excess payments and similarly, may join the
lawsuit or file their own lawsuits seeking reimbursement and other damages from
NMC. An adverse result could have a material adverse effect on the Company's
business, financial condition or results of operations.

     In May 1999, the Company filed counterclaims against Aetna Life Insurance
Company and Aetna U.S. Healthcare, Inc. based on inappropriate claim denials and
delays in claim payments. The Company is also investigating similar
counterclaims against other private payors that have contacted the Company. The
Settlement would not resolve these proceedings and claims.

     ADMINISTRATIVE APPEALS

     The Company regularly pursues various administrative appeals relating to
reimbursement issues in connection with its dialysis facilities. One such appeal
consists of a challenge to the Medicare regulation which capped reimbursement
for the bad debts incurred by dialysis facilities. In 1998, the United States
Court of Appeals for the District of Columbia ruled in favor of the Company in
connection with the bad debt issue, holding that the Secretary of Health & Human
Services had not adequately justified the bad debt regulation, and ruling that
the Government's order adopting the rule was arbitrary and capricious. The Court
of Appeals remanded the matter to the Secretary to provide a more adequate
explanation of the bad debt cap or to abandon it. Subsequently, the Court
modified its holding to continue the bad debt regulation in effect pending
remand. Accordingly, the Company has revised its estimate of recoveries for the
previously disallowed bad debt expense associated with the regulation. The
Company has reached a preliminary agreement with the Department of Health and
Human Services with respect to certain material terms to resolve this matter
which, if approved by the Department of Justice, will require payment to the
Company of approximately $20 million.

     STATE OF FLORIDA

     In October 1999, NMC received an Antitrust Civil Investigative Demand
("CID") from the Attorney General of the State of Florida ("Florida AG"). The
CID was issued by the Florida AG in the course of an investigation to determine
whether there is, has been, or may be a violation of federal and Florida laws
resulting from the possible monopolization of, or the entering into agreements
in restraint of, trade relating to the provision of dialysis products and
services in Florida.

     The Company is cooperating with the Florida AG's investigation by providing
documents and other information to the Florida AG. The impact of this
investigation on the Company, if any, cannot be determined at this time.


                                       24
<PAGE>   25


NOTE 7. INDUSTRY SEGMENTS INFORMATION

     The Company adopted SFAS No. 131, Disclosure about Segments of an
Enterprise and Related Information during the fourth quarter of 1998. SFAS No.
131 established the standards for reporting information about operating
statements in annual financial statements and requires selected information
about operating segments in interim financial reports issued to stockholders.

     The Company's reportable segments are Dialysis Services and Dialysis
Products. For purposes of segment reporting, the Dialysis Services Division and
Spectra Renal Management are combined and reported as Dialysis Services. These
divisions are aggregated because of their similar economic classifications.
These include the fact that they are both health care service providers whose
services are provided to a common patient population, and both receive a
significant portion of their net revenue from Medicare and other government and
non-government third party payors. The Dialysis Products segment reflects the
activity of the Dialysis Products Division only.

     The table below provides information for the three and nine months ended
September 30, 1999 and 1998 pertaining to the Company's two industry segments.

<TABLE>
<CAPTION>
                                                                                              LESS
                                                              DIALYSIS       DIALYSIS     INTERSEGMENT
                                                              SERVICES       PRODUCTS         SALES          TOTAL
                                                              --------       --------     ------------       -----
<S>                                              <C>         <C>            <C>            <C>            <C>
         NET REVENUES
         Three Months Ended                      9/30/99     $  590,778     $  180,176     $   59,104     $  711,850
         Three Months Ended                      9/30/98        544,318        164,977         53,643        655,652

         Nine Months Ended                       9/30/99     $1,724,749     $  526,017     $  168,310     $2,082,456
         Nine Months Ended                       9/30/98      1,563,266        493,876        153,162      1,903,980


         OPERATING EARNINGS
         Three Months Ended                      9/30/99     $  100,684     $   31,176             --     $  131,860
         Three Months Ended                      9/30/98         88,284         28,960             --        117,244

         Nine Months Ended                       9/30/99     $  284,150     $   90,851             --     $  375,001
         Nine Months Ended                       9/30/98        246,410         75,132             --        321,542

         TOTAL ASSETS                            9/30/99     $1,921,546     $  649,797             --     $2,571,343
                                                12/31/98      1,817,751        644,112             --      2,461,863
</TABLE>


The table below provides the reconciliations of reportable segment operating
earnings to the Company's consolidated totals.

<TABLE>
<CAPTION>
                                                                THREE MONTHS ENDED             NINE MONTHS ENDED
                   SEGMENT RECONCILIATION                          SEPTEMBER 30,                 SEPTEMBER 30,
                   ----------------------                    ------------------------      ------------------------
                                                                1999           1998           1999           1998
                                                                -----          ----           ----           ----
<S>                                                          <C>            <C>            <C>            <C>
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME
TAXES AND CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
FOR START UP COSTS:

     Total operating earnings for reportable segments ....   $ 131,860      $ 117,244      $ 375,001      $ 321,542
     Corporate G&A (including foreign exchange) ..........     (28,664)       (27,801)       (84,548)       (79,907)
     Research and development expense ....................      (1,067)        (1,294)        (3,104)        (3,102)
     Net interest expense ................................     (49,524)       (54,880)      (152,154)      (155,059)
     Special charge for settlement of investigations and
        related costs ....................................    (590,000)            --       (590,000)            --
                                                             ---------      ---------      ---------      ---------

     Income (loss) from continuing operations before
        income taxes and cumulative effect of change in
        accounting for start up costs ....................   $(537,395)     $  33,269      $(454,805)     $  83,474
                                                             =========      =========      =========      =========
</TABLE>


                                       25
<PAGE>   26


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

     The following is a discussion of the financial condition and results of
operations of the Company. The discussion should be read in conjunction with the
financial statements included elsewhere in this document.

     This section contains certain forward-looking statements that are subject
to various risks and uncertainties. Such statements include, without limitation,
discussions concerning the outlook of the Company, government reimbursement,
future plans and management's expectations regarding future performance. Actual
results could differ materially from those contained in these forward-looking
statements due to certain factors including, without limitation, changes in
business, economic and competitive conditions, regulatory reforms, foreign
exchange rate fluctuations, uncertainties in litigation or investigative
proceedings, the realization of anticipated tax deductions, and the availability
of financing. These and other risks and uncertainties, which are more fully
described elsewhere in this Item 2 and in the Company's reports filed from time
to time with the Commission, could cause the Company's results to differ
materially from the results that have been or may be projected by or on behalf
of the Company.

OVERVIEW

     The Company is primarily engaged in (a) providing kidney dialysis services,
clinical laboratory testing and renal diagnostic services and (b) manufacturing
and distributing products and equipment for dialysis treatment. Throughout the
Company's history, a significant portion of the Company's growth has resulted
from the development of new dialysis centers and the acquisition of existing
dialysis centers, as well as from the acquisition and development of
complementary businesses in the health care field.

     The Company derives a significant portion of its health care services net
revenues from Medicare, Medicaid and other government health care programs
(approximately 60% in 1998). The reimbursement rates under these programs,
including the Composite Rate, the reimbursement rate for EPO, and the
reimbursement rate for other dialysis and non-dialysis related services and
products, as well as other material aspects of these programs, have in the past
and may in the future be changed as a result of deficit reduction and health
care reform measures.

     The discussion of the Company's financial condition and results of
operations included herein reflects the Preliminary Agreement and the resulting
special charge. If the Settlement is not consummated and the Company and the
Government eventually litigate the issues that are the subject of the OIG
Investigation, the Company currently believes that the special charge reasonably
estimates the costs and expenses that would arise from this litigation. No
assurance, however, can be given that the Settlement will be consummated or that
the costs related to the Settlement or any litigated resolution of the OIG
Investigation will not exceed the amount of the special charge or that
additional costs, claims and damages will not result from the Settlement. The
Company's business, financial position and results of operations also could be
materially adversely affected by an adverse outcome in the OIG Investigation,
any whistleblower action, the pending challenge by the Company of changes
effected by Medicare in approving reimbursement claims relating to the
administration of IDPN or the adoption in 1996 of a new coverage policy that has
changed IDPN coverage prospectively. The Company's business, financial position
and results of operations could be materially adversely affected by an adverse
outcome in the pending litigation concerning the implementation of certain
provisions of OBRA 93 relating to the coordination of benefits between Medicare
and employer health plans in the case of certain dual eligible ESRD patients.

     The Company also derives a significant portion of its net revenues from
reimbursement by non-government payors. Historically, reimbursement rates paid
by these payors generally have been higher than Medicare and other government
program rates. However, non-government payors are imposing cost containment
measures that are creating significant downward pressure on reimbursement levels
that the Company receives for its services and products.


                                       26
<PAGE>   27


RESULTS OF OPERATIONS

     The following table summarizes certain operating results of the Company by
principal business unit for the periods indicated. Intercompany eliminations
primarily reflect sales of medical supplies by Dialysis Products to Dialysis
Services. 1998 information has been reorganized to distinguish between continued
and discontinued operations (dollars in millions).

<TABLE>
<CAPTION>
                                                                      THREE MONTHS ENDED               NINE MONTHS ENDED
                                                                         SEPTEMBER 30,                   SEPTEMBER 30,
                                                                    -----------------------         -----------------------
                                                                      1999            1998            1999            1998
                                                                      ----            ----            ----            ----

<S>                                                                 <C>             <C>             <C>             <C>
       NET REVENUES
          Dialysis services ................................        $   591         $   544         $ 1,725         $ 1,563
          Dialysis products ................................            180             165             526             494
          Intercompany eliminations ........................            (59)            (53)           (169)           (153)
                                                                    -------         -------         -------         -------
       Total net revenues ..................................        $   712         $   656         $ 2,082         $ 1,904
                                                                    =======         =======         =======         =======

       Operating earnings:
          Dialysis services ................................        $   101         $    88         $   284         $   246
          Dialysis products ................................             31              29              91              75
                                                                    -------         -------         -------         -------
       Total operating earnings ............................            132             117             375             321
                                                                    -------         -------         -------         -------

       Other expenses:
          General corporate ................................        $    28         $    28         $    85         $    80
          Research and development .........................              1               1               3               3
          Interest expense, net ............................             50              55             152             155
          Special charge for settlement of investigations
              and related costs ............................            590              --             590              --
                                                                    -------         -------         -------         -------
       Total other expenses ................................            669              84             830             238
                                                                    -------         -------         -------         -------

       Earnings before income taxes and cumulative effect
          of change in accounting for start up costs .......           (537)             33            (455)             83
       Provision (benefit) for  income taxes ...............           (150)             19            (107)             46
                                                                    -------         -------         -------         -------
       Net earnings from continuing operations before
          cumulative effect of change in accounting for
          start up costs ...................................        $  (387)        $    14         $  (348)        $    37
                                                                    -------         -------         -------         -------

       Discontinued operations:
          Net revenues .....................................        $    --         $    --         $    --         $   121
                                                                    =======         =======         =======         =======

          Loss on discontinued operations
             Loss before income taxes ......................             --              --              --             (14)
             Benefit  for income taxes .....................             --              --              --              (5)
                                                                    -------         -------         -------         -------
             Loss from operations ..........................             --              --              --              (9)
                                                                    -------         -------         -------         -------

          Loss on disposal of discontinued operations
             Loss before income taxes ......................             --              --              --            (140)
             Benefit  for income taxes .....................             --              --              --             (43)
                                                                    -------         -------         -------         -------
             Loss from operations ..........................             --              --              --             (97)
                                                                    -------         -------         -------         -------
          Total loss on  discontinued operations ...........        $    --         $    --         $    --         $  (106)

       Cumulative effect of change in accounting for
          start up costs, net of tax benefit ...............             --              --              --              (5)
                                                                    -------         -------         -------         -------

       Net income (loss) ...................................        $  (387)        $    14         $  (348)        $   (74)
                                                                    =======         =======         =======         =======
</TABLE>


                                       27
<PAGE>   28


THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1998

     Net revenues from continuing operations for the third quarter of 1999
increased by 9% ($56 million) over the comparable period in 1998. Net earnings
from continuing operations for the third quarter of 1999 decreased by ($401
million) over the comparable period in 1998 as a result of the special charge
for settlement of investigations and related costs ($412 million, after income
taxes), partially offset by the increased operating earnings ($11 million).

     DIALYSIS SERVICES

     Dialysis Services net revenues for the third quarter of 1999 increased by
9% ($47 million) over the comparable period in 1998, primarily as a result of a
7% increase in the number of treatments provided, the beneficial impact of the
extension of the Medicare Secondary Payor (MSP) provision, higher EPO
utilization relative to the comparable 1998 period and increased laboratory
testing revenues. The treatment increase was a result of base business growth
and the impact of 1998 and 1999 acquisitions. The laboratory testing revenue
increase was primarily due to higher testing volume.

     Dialysis Services operating earnings for the third quarter of 1999
increased by 15% ($13 million) over the comparable period of 1998 primarily due
to the increase in treatment volume, the beneficial impact of the extension of
the MSP provision and the decrease in the provision for doubtful accounts. The
provision for doubtful accounts decreased ($11 million) due to additional bad
debt cost report recoveries for the years 1985 and 1988 through 1997, partially
offset by additional provisions. These recoveries are the result of the
Company's successful challenge of the Medicare regulation which capped
reimbursement for the bad debts incurred by dialysis facilities in those years.
Accordingly, the Company has revised its estimate of recoveries for the
previously disallowed bad debt expense associated with this regulation.

     DIALYSIS PRODUCTS

     Dialysis Products net revenues for the third quarter of 1999 increased by
9% ($15 million) over the comparable period of 1998. This is due to increased
sales of dialyzers ($4 million), machines ($6 million), concentrates ($4
million) and other products ($5 million), offset by decreased sales of
peritoneal products ($4 million).

     Dialysis Products operating earnings for the third quarter of 1999
increased by 7% ($2 million) over the comparable period of 1998. This is
primarily due to revenue growth, changes in product mix, and improvements in
manufacturing efficiencies from increased production volume, partially offset by
increased freight and distribution costs.

     SPECIAL CHARGE FOR SETTLEMENT OF INVESTIGATIONS AND RELATED COSTS

     Since 1995, NMC and its subsidiaries have been the subject of criminal and
civil investigations (the "OIG Investigations") by the Office of Inspector
General ("OIG") of the United States Department of Health and Human Services,
the United States Attorney for the District of Massachusetts (the "U.S.
Attorney's Office") and other authorities concerning possible violations of
federal laws, including the anti-kickback statutes and the False Claims Act.

     NMC has reached a preliminary agreement (the "Preliminary Agreement") with
the United States Government to resolve the matters covered in the OIG
Investigation and NMC's administrative appeals of an estimated $150 million of
outstanding Medicare receivables for IDPN therapy rendered on and before
December 31, 1998 (collectively, the "Settlement"). Consummation of the
Settlement is subject to negotiation of certain material currently unresolved
terms of the Settlement, completion and execution of definitive Settlement
documents, satisfaction of certain conditions, and court approval. (See Note 4 -
"Special Charge for Settlement of Investigations and Related Costs" and Note 6 -
"Commitments and Contingencies - Legal Proceedings").

     As a result of the Preliminary Agreement, the Company has recorded a
special pre-tax charge of $590 million ($412 million, net of income taxes) which
includes (i) a charge of approximately $485 million for settlement payment
obligations to the government; (ii) a reserve of approximately $80 million for
the resolution of the Company's IDPN accounts receivable; and (iii) a reserve
for other related costs of $25 million.

                                       28
<PAGE>   29


     OTHER EXPENSES

      The Company's other expenses for the third quarter of 1999 decreased by 6%
($5 million) over the comparable period of 1998 entirely due to decreased
interest expense associated with the Company's reduction in funded debt.

     INCOME TAXES

     The Company has recorded an income tax benefit of $150 million for the
third quarter of 1999 as compared to an income tax provision of $19 million in
the third quarter of 1998. The income tax benefit in 1999 is lower than the
statutory tax rate primarily due to the tax effect of the special charge for the
Settlement and related costs. The provision for income taxes in 1998 is higher
than the statutory tax rate primarily due to the non-deductible merger goodwill.

NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1998

     Net revenues from continuing operations for the first nine months of 1999
increased by 9% ($178 million) over the comparable period in 1998. Net earnings
from continuing operations for the first nine months of 1999 decreased by ($385
million) over the comparable period in 1998 as a result of the special charge
for settlement of investigations and related costs (net of tax $412 million) and
increases to general corporate expenses, partially offset by increased operating
earnings.

     DIALYSIS SERVICES

     Dialysis Services net revenues for the first nine months of 1999 increased
by 10% ($162 million) over the comparable period in 1998, primarily as a result
of a 8% increase in the number of treatments provided, the beneficial impact of
the extension of the Medicare Secondary Payor (MSP) provision, and higher EPO
utilization relative to the comparable 1998 period, partially offset by
decreased laboratory testing revenues. The treatment increase was a result of
base business growth and the impact of 1998 and 1999 acquisitions. The
laboratory testing revenue decrease was primarily due to lower testing volume
during the first nine months of 1999, as competitors consolidate lab activity.

     Dialysis Services operating earnings for the first nine months of 1999
increased by 15% ($38 million) over the comparable period of 1998 primarily due
to the increase in treatment volume, the beneficial impact of the extension of
the MSP provision, higher EPO utilization, and the decrease in the provision for
doubtful, partially offset by decreased operating earnings in laboratory
testing. The provision for doubtful accounts decreased due to revisions of
estimates for bad debt cost report recoveries. These recoveries include the
result of the Company's successful challenge of the Medicare regulation which
capped reimbursement for the bad debts incurred by dialysis facilities in those
years. Accordingly, the Company has revised its estimate of recoveries for the
previously disallowed bad debt expense associated with this regulation in the
third quarter.

     DIALYSIS PRODUCTS

     Dialysis Products net revenues for the first nine months of 1999 increased
by 7% ($32 million) over the comparable period of 1998. This is due to increased
sales of dialyzers ($18 million), machines ($18 million), concentrates ($5
million) and other products ($12 million), partially offset by decreased sales
of bloodlines ($3 million) and peritoneal products ($18 million).

     Dialysis Products operating earnings for the first nine months of 1999
increased by 21% ($16 million) over the comparable period of 1998. This is
primarily due to revenue growth, changes in product mix, and improvements in
manufacturing efficiencies from increased production volume.

     SPECIAL CHARGE FOR SETTLEMENT OF INVESTIGATIONS AND RELATED COSTS

     Since 1995, NMC and its subsidiaries have been the subject of criminal and
civil investigations (the "OIG Investigations") by the Office of Inspector
General ("OIG") of the United States Department of Health and Human Services,
the United States Attorney for the District of Massachusetts (the "U.S.
Attorney's Office") and other authorities concerning possible violations of
federal laws, including the anti-kickback statutes and the False Claims Act.

                                       29
<PAGE>   30
     NMC has reached a preliminary agreement (the "Preliminary Agreement") with
the United States Government to resolve the matters covered in the OIG
Investigation and NMC's administrative appeals of an estimated $150 million of
outstanding Medicare receivables for IDPN therapy rendered on and before
December 31, 1998 (collectively, the "Settlement"). Consummation of the
Settlement is subject to negotiation of certain material currently unresolved
terms of the Settlement, completion and execution of definitive Settlement
documents, satisfaction of certain conditions, and court approval. (See Note 4 -
"Special Charge for Settlement of Investigations and Related Costs" and Note 6 -
"Commitments and Contingencies - Legal Proceedings").

     As a result of the Preliminary Agreement, the Company has recorded a
special pre-tax charge of $590 million ($412 million, net of income taxes) which
includes (i) a charge of approximately $485 million for settlement payment
obligations to the government; (ii) a reserve of approximately $80 million for
the resolution of the Company's IDPN accounts receivable; and (iii) a reserve
for other related costs of $25 million.

     OTHER EXPENSES

     The Company's other expenses for the first nine months of 1999 increased by
1% ($2 million) over the comparable period of 1998. General corporate expenses
increased by $5 million due to increases in casualty and insurance expenses.
Interest expense decreased by $3 million primarily due to the reduction of the
Company's funded debt.

     INCOME TAXES

     The Company has recorded an income tax benefit of $107 million for the
third quarter of 1999 as compared to an income tax provision of $46 million in
the third quarter of 1998. The income tax benefit in 1999 is lower than the
statutory tax rate primarily due to the tax effect of the special charge for the
Settlement and related costs. The provision for income taxes in 1998 is higher
than the statutory tax rate primarily due to the non-deductible merger goodwill.

     DISCONTINUED OPERATIONS

     On June 1, 1998, the Company classified its Non-Renal Diagnostic Services
and Homecare businesses as discontinued operations. The Company sold both its
Non-Renal Diagnostic Services business and its Homecare business on June 26,
1998 and July 29, 1998, respectively. In connection with the sale of Homecare,
the Company retained the assets and the operations associated with the delivery
of IDPN and, for accounting purposes, records its activities as part of
discontinued operations. A net after tax loss of $97 million was recorded in
1998 on the sale of these businesses. The discontinued operations revenues for
its Non- Renal Diagnostic Services and Homecare divisions for the first nine
months of 1998 was $121 million with a net after tax loss of $105 million.


                                       30
<PAGE>   31


LIQUIDITY AND CAPITAL RESOURCES

LIQUIDITY AND CAPITAL RESOURCES

     The Company's cash requirements have historically been funded by cash
generated from operations. Cash generated from continued operations was $189
million and $100 million for the first nine months of 1999 and 1998,
respectively. This increase is primarily due to the Company's improved operating
profit levels as well as working capital improvements.

     NMC has reached a Preliminary Agreement with the United States Government
to resolve the matters covered in the Settlement. Consummation of the Settlement
is subject to negotiation of certain material currently unresolved terms of the
Settlement, completion and execution of definitive Settlement documents,
satisfaction of certain conditions, and court approval. The Company has recorded
a special pre-tax charge against its consolidated earnings totaling $590 million
($412 million after tax). It is anticipated that the Settlement of the
Investigation if consummated, will require payments totaling approximately $485
million. As part of the Settlement, the Company also expects to resolve the
Company's administrative appeals outstanding accounts receivable from Medicare
for IDPN therapy rendered on or before December 31, 1998.

     The net cash obligations of the Company, related to the special charge is
anticipated to approximate $260 million. This amount reflects the special charge
of $590 million reduced for the resolution of the Company's IDPN receivable
claims (approximately $150 million), and the estimated cash savings for the tax
effect of the special charge ($178 million). The Company and the Government
have not yet agreed upon the payment terms of the Settlement Amount.

     The net cash effect, described above, does not consider any payment terms
in the final Net Settlement Amount. The cash savings of the tax benefit are
expected to be realized over time in relation to the cash outflows of the
settlement payment obligations to the Government and expenditures for other
related costs.

     The Company believes that it will have sufficient cash flows from continued
operations and borrowing capacity under its revolving credit facility to pay the
entire settlement amount as it becomes due. The Company also believes that
following such payments, it will have sufficient funds available for both its
day to day operations and its anticipated growth.

     After giving effect to the special charge, the Company continues to be in
compliance with the financial covenants in its senior credit facility. The
Company believes that the final terms of the Settlement could cause the Company
to be out of compliance with the financial covenants, effective at the end of
the financial quarter in which a Settlement is consummated. The company is in
discussions regarding the Settlement with the agent for the lenders under its
senior credit facility, and the agent has informed the lenders that it is
working with the Company to prepare an amendment to certain financial covenants
in the senior credit facility that will enable the Company to continue in
compliance with the financial covenants upon consummation of the Settlement.

     If cash flows from operations or availability under existing banking
arrangements fall below expectations, or if the company is unsuccessful in
amending existing banking agreements, the Company may be required to consider
other alternatives to maintain sufficient liquidity.

     The Company made acquisitions totaling $65 million and $160 million for the
first nine months of 1999 and 1998, respectively. The Company made capital
expenditures for internal expansion, improvements, new furnishings and equipment
of $54 million and $51 million for the first nine months of 1999 and 1998,
respectively. The Company intends to continue to enhance its presence in the
U.S. by focusing its expansion on the acquisition of individual or small groups
of clinics, expansion of existing clinics, and opening of new clinics.

     During the first nine months of 1999, the Company funded its acquisitions
and capital expenditures primarily through cashflows from operations. In
addition, the Company reduced its total borrowings by approximately $45 million.
During the first nine months of 1998, the Company funded its acquisitions and
capital expenditures primarily through proceeds from external short and
long-term debt, proceeds from a receivable financing facility, and proceeds from
the sale of the Non-Renal Diagnostics and Homecare divisions. Additionally in
1998, acquisitions were also funded through the issuance of investment
securities by Fresenius Medical Care Finance, S.A., a Luxembourg subsidiary of
FMC ("FMC Finance"). In exchange for such financing, an intercompany account was
established between FMC Finance and the Company with payables due to FMC Finance
of $42 million at September 30, 1998.


                                       31
<PAGE>   32
     Effective July 1, 1995, the Company ceased to recognize the incremental
revenue provided under HCFA's initial instruction under OBRA 93, although the
Company continued to bill private third-party payors for these amounts through
December 31, 1995. The Company began billing Medicare as the primary payor for
the dual eligible ESRD patients affected by OBRA 93 effective January 1, 1996.
If HCFA's revised instruction under OBRA 93 is permanently enjoined on a
prospective basis, or if such revised instruction is sustained but given an
effective date of later than September 30, 1995, the Company may be able to
rebill such services to third-party payors and, as a result, the Company's
future results of operations and financial position would be favorably affected
by the incremental revenue that the Company would recognize. For further
discussion see Notes to Consolidated Financial Statements Note 5, "Commitments
and Contingencies - Omnibus Budget Reconciliation Act of 1993."

CONTINGENCIES

     The Company is the subject of investigations by several federal agencies
and authorities, including the OIG Investigation. As a result of the Preliminary
Agreement in respect of the OIG Investigation, the Company has recorded a
special pre-tax charge against its consolidated earnings for the three month
period ended September 30, 1999 totaling $590 million ($412 million after tax).
No assurance can be given that the Settlement will be consummated or that the
costs related to the Settlement or any litigated resolution of the OIG
Investigation will not exceed the amount of the above-described pre-tax charge
against earnings or that additional costs, claims and damages will not result
from the Settlement. If the Settlement is not consummated, the U.S. Attorney's
Office is expected to institute criminal and civil legal proceedings against,
and seek substantial civil and criminal financial damages and penalties from,
NMC and its subsidiaries. If the Government is successful in pursuing claims
arising from the OIG Investigation, NMC and one or more of its subsidiaries
would be subject to civil damages and criminal penalties, including substantial
fines, suspension of payments and exclusion from the Medicare, Medicaid and
TriCare programs, as well as other federally-funded health care benefit
programs. Such federal programs provide over 60% of NMC's consolidated revenues.
The occurrence of any of these events could have a material adverse effect on
the Company's business, financial condition and results of operations.

     The Company is also a plaintiff in litigation against the federal
government with respect to the implementation of OBRA 93 and coverage for IDPN
therapy, is seeking to change a proposed revision to IDPN coverage policies, and
is a defendant in significant commercial insurance litigation. An adverse
outcome in any of these matters, could have a material adverse effect on the
Company's business, financial condition and results of operations. Because of
the significant complexities and uncertainties associated with the above
referenced governmental investigations and proceedings, except for the
above-described pre-tax charge against earnings, neither an estimate of the
possible loss or range of loss the Company may incur in respect of such matters
nor a reserve based on any such estimate can be reasonably made. See Item 1 -
Notes to Unaudited Consolidated Financial Statements - Note 6 "Commitments and
Contingencies."

     The Company believes that its existing credit facilities, cash generated
from operations and other current sources of financing are sufficient to meet
its foreseeable needs. If cash flows from operations or availability under
existing banking arrangements fall below expectations, or if the Company is
unsuccessful in amending its existing banking agreements, the Company may be
required to consider other alternatives to maintain sufficient liquidity. There
can be no assurance that the Company will be able to do so on satisfactory
terms, if at all. See Part I, Item 1I "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital
Resources."

IMPACT OF INFLATION

     A substantial portion of the Company's net revenue is subject to
reimbursement rates which are regulated by the federal government and do not
automatically adjust for inflation. Non-governmental payors also are exerting
downward pressure on reimbursement levels. Increased operating costs that are
subject to inflation, such as labor and supply costs, without a compensating
increase in reimbursement rates, may adversely affect the Company's business and
results of operations.

YEAR 2000 ISSUES

     The "Year 2000 problem" is the result of computer programs using two digits
rather than four to define the applicable years. Such software may recognize a
date using "00" as the year 1900 rather than the year 2000. These programs are
present in software applications running on desktop computers and network
servers. These programs are also present in microchips and microcontrollers
incorporated into equipment. Certain of the Company's computer hardware and
software, building infrastructure components (e.g., alarm systems, HVAC systems,
etc.) and medical devices that are date sensitive may contain programs with the
Year 2000 problem. If uncorrected, the problem could result in computer system
and program failures or equipment and medical device malfunctions or
miscalculations that could result in a disruption of business operations or
affect patient treatment. If the Company, its significant customers,
reimbursement sources or suppliers fail to make necessary modifications and
conversions on a timely basis, the Year 2000 problem could have a material
adverse effect on the Company's operations and financial results. The Company
believes that its competitors face a similar risk.

     The Company has been working on identifying and addressing potential Year
2000 risks since March 1997. In an effort to more comprehensively monitor and
assess its progress in addressing Year 2000 issues, the Company established a
Year 2000 Steering Committee in August 1998. The committee is comprised of
senior company executives who meet regularly and provide status updates to the
Company's management committee on a regular basis.

     Regarding information technology ("IT") systems, the Company has
inventoried substantially all IT systems (e.g., clinical, supply chain
management, financial, etc.) and has assessed Year 2000 compliance for those
systems. The Company has developed specific plans and timetables to remediate or
replace critical non-compliant systems and is in the process of completing these
changes. The Company believes it has resolved such issues for a significant
number of IT systems and anticipates that substantially all of the


                                       32
<PAGE>   33


remaining changes will be completed prior to the end of 1999.

     Regarding non-IT equipment that may be dependent upon embedded software
(e.g., medical, manufacturing/distribution, etc.), the Company has inventoried
and assessed Year 2000 compliance for substantially all of this equipment. The
Company has developed specific plans to remediate or replace substantially all
non-compliant non-IT equipment and is in the process of completing these
changes. The Company believes it has resolved such issues for a significant
number of non-IT systems and anticipates that substantially all of the remaining
changes will be completed prior to the end of 1999.

     Although there can be no assurance that the Company will successfully
complete implementation of its remediation efforts for IT systems and non-IT
equipment by the dates critical for Year 2000 compliance, the Company's Year
2000 program is currently progressing in accordance with the Company's
completion timetables.

     The Company relies heavily on third parties in operating its business. In
addition to its reliance on systems and non-IT equipment vendors to verify Year
2000 compliance of their products, the Company also depends on 1) fiscal
intermediaries which process claims and make payments for their Medicare and
Medicaid programs, 2) insurance companies, HMOs, and other private payors, 3)
utilities which provide electricity, water, natural gas, and telephone services,
and 4) vendors of medical supplies and pharmaceuticals used in patient care.

     The Company has successfully tested and placed into production Year 2000
formats for its systemic interfaces with the Medicare fiscal intermediaries. The
Company continues to work with Medicare, Medicaid, and significant private
payors to ensure that these payors will be able to process and make any
remittances for billed services.

     The Company has contacted substantially all significant vendors and service
providers to seek assurances from these third parties that the services and
products they provide will not be interrupted or malfunction due to the Year
2000 problem. Although no method exists for achieving certainty that any third
party's organization will be Year 2000 compliant, the Company's goal is to
obtain as much detailed information as possible about its significant vendors
and service providers and to identify those companies which appear to pose a
significant risk of failure to perform their obligations to the Company as a
result of the Year 2000 problem. Failure of significant third parties to resolve
their Year 2000 issues could have a material adverse effect on the Company's
results of operations and ability to provide health care services and
manufacture products.

     Costs related to the Year 2000 issue are funded through operating cash
flows. The Company expects to spend a total of approximately $6.5 million in
remediation and replacement efforts, including new software and hardware, costs
to modify existing software, and consultant fees. The Company does not
separately track the internal costs incurred for the Year 2000 remediation
effort; such costs are principally related to the compensation costs for certain
members of the Company's IT Department. The Company estimates remaining costs to
be approximately $500,000, substantially all of which relate to non-critical
Year 2000 efforts. IT expenditures for Year 2000 are covered as part of the
normal IT budget (the Year 2000 efforts are taking priority over other
discretionary IT projects). Non-IT expenditures for Year 2000 are similarly
being covered as part of the normal non-IT budget. The Company presently
believes that the incremental cost of achieving Year 2000 compliant systems and
equipment will not be material to the Company's financial condition, liquidity,
or results of operation.

     Time and cost estimates are based on currently available information.
Developments that could affect estimates include, but are not limited to: 1) the
availability and cost of trained personnel, 2) the ability to locate and correct
all relevant computer code and systems, and 3) remediation success of the
Company's customers and suppliers.

     Based on its assessments to date, the Company believes it will not
experience any material disruption as a result of Year 2000 issues in its
internally manufactured medical devices, its internal manufacturing and
distribution processes, and its internal information processing. However, if
certain critical third party providers, such as those supplying electricity or
water, experience difficulties resulting in disruption of service to the
Company, a shutdown of the Company's operations at individual facilities could
occur for the duration of the disruption.

     The Year 2000 Steering Committee has reviewed and updated its existing,
standard contingency plans with the potential Year 2000 issues in mind. At this
point in time, the Company has not identified any risk areas that appear to have
a reasonable likelihood to cause a material disruption to the Company's
operations. Additional contingency plans will be developed on a case-by-case
basis


                                       33
<PAGE>   34


if new risks are identified. Despite these efforts, judgments regarding
contingency plans such as to what extent they should be developed are themselves
subject to many variables and uncertainties. There can be no assurance that the
Company will correctly anticipate the level, impact, or duration of
non-compliance by third party vendors or suppliers that provide inadequate
information in respect to their Year 2000 status. As a result, there can be no
assurance that any contingency plan developed by the Company will be sufficient
to mitigate the impact of non-compliance by third party vendors and service
providers, and some material adverse effect to the Company could result
regardless of such contingency plans.


                                       34
<PAGE>   35


ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     The Company is exposed to market risks due to changes in interest rates and
foreign currency rates. The Company uses derivative financial instruments,
including interest rate swaps and foreign exchange contracts, as part of its
market risk management strategy. These instruments are used as a means of
hedging exposure to interest rate and foreign currency fluctuations in
connection with debt obligations and purchase commitments. The Company does not
hold or issue derivative instruments for trading or speculative purposes.

     Hedge accounting is applied if the derivative reduces the risk of the
underlying hedged item and is designated at inception as a hedge. Additionally,
changes in the value of the derivative must result in payoffs that are highly
correlated to the changes in value of the hedged item. Derivatives are measured
for effectiveness both at inception and on an ongoing basis.

     The Company enters into foreign exchange contracts that are designated, and
effective as hedges for firmly committed purchases. Also, since the Company
carries a substantial amount of floating rate debt, the Company uses interest
rate swaps to synthetically change certain variable-rate debt obligations to
fixed-rate obligations, as well as options to mitigate the impact of interest
rate fluctuations.

     Gains and losses on foreign exchange contracts accounted for as hedges are
deferred as other current assets or liabilities. The deferred gains and losses
are recognized as adjustments to the underlying hedged transaction when the
future sales or purchases are recognized. Interest rate swap payments and
receipts are recorded as part of interest expense. The fair value of the swap
contracts is not recognized in the financial statements. Cash flows from
derivatives are recognized in the consolidated statement of cash flows in the
same category as the item being hedged.

     If a derivative instrument ceases to meet the criteria for deferral, any
subsequent gains or losses are recognized in operations. If a firm commitment
does not occur, the foreign exchange contract is terminated and any gain or loss
is recognized in operations. If a hedging instrument is sold or terminated prior
to maturity, gains or losses continue to be deferred until the hedged item is
recognized. Should a swap be terminated while the underlying obligation remains
outstanding, the gain or loss is capitalized as part of the underlying
obligation and amortized into interest expense over the remaining term of the
obligation.

     The Company's hedging strategy vis-a-vis the above-mentioned market risks
has not changed significantly from 1998 to 1999. For additional information, see
also the Company's 1998 Annual Report on Form 10-K "Notes to Consolidated
Financial Statements - Note 2. Summary of Significant Accounting Policies -
Derivative Financial Instruments and Notes to Consolidated Financial Statements
- Note 15. Financial Instruments."


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<PAGE>   36


                                     PART II

                                OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

     OIG INVESTIGATION

     Since 1995, NMC and its subsidiaries have been the subject of criminal and
civil investigations (the "OIG Investigation") by the Office of Inspector
General ("OIG") of the United States Department of Health and Human Services,
the United States Attorney for the District of Massachusetts (the "U.S.
Attorney's Office") and other authorities concerning possible violations of
federal laws, including the anti-kickback statutes and the False Claims Act.

     NMC has reached a preliminary agreement (the "Preliminary Agreement") with
the United States Government (the "Government") to resolve the matters covered
in the OIG Investigation and NMC's administrative appeals of an estimated $150
million of outstanding Medicare receivables for IDPN therapy rendered on and
before December 31, 1998 (collectively, the "Settlement"). Consummation of the
Settlement is subject to negotiation of certain material currently unresolved
terms of the Settlement, completion and execution of definitive Settlement
documents, satisfaction of certain conditions, and court approval.

     If the Settlement is consummated, the net Settlement payment to the
Government is estimated to be approximately $415 million (the "Net Settlement
Amount"). The Net Settlement Amount is the result of an estimated payment
million to the Government of approximately $485 million, less an estimated
payment by the Government to the Company of approximately $70 million for the
above-mentioned IDPN receivable claims. The Company and the Government have not
yet agreed upon the payment terms of the Net Settlement Amount. The net cash
outflow resulting from the Preliminary Agreement is anticipated to be
approximately $260 million. This amount reflects receipt of the IDPN accounts
receivable payment from the Government and the tax effect of the special charge
but does not consider any payment terms in the final Net Settlement Amount. The
cash savings of the tax benefit are expected to be realized in relation to the
cash outflows of the settlement obligation to the Government and expenditures
for other related costs.

     As a result of the Preliminary Agreement, the Company has recorded a
special pre-tax charge against its consolidated earnings for the three month
period ended September 30, 1999 totaling $590 million ($412 million after tax).
This special pre-tax charge includes the $485 million estimated payment to the
Government, an $80 million reserve of the remaining IDPN receivables described
above, and $25 million for other related costs. If the Settlement is not
consummated and the Company and the Government eventually litigate the issues,
the Company currently believes that the special charge reasonably estimates the
costs and expenses arising from this litigation.

     If the Settlement is consummated, the Company anticipates that NMC's
subsidiaries, Lifechem, Inc. ("Lifechem"), NMC Homecare, Inc. and NMC Medical
Products, Inc. will plead guilty to violations of federal law. As a consequence
of their guilty pleas, these subsidiaries will be excluded from further
participation in federally funded health care programs, including Medicare,
Medicaid and TriCare. The Company believes that these exclusions will not
materially interrupt its provision of, or receipt of payment for, the products
and services formerly provided by the excluded subsidiaries because the Company
intends to continue to provide such products and services through other
subsidiaries which are qualified to participate in federal health care programs.

     The Settlement is not expected to extend to any current or former employees
of NMC or its subsidiaries who have been, or may be, indicted in connection with
the OIG Investigation.

     The Company believes that it will have sufficient cash flows from continued
operations and borrowing capacity under its revolving credit facility to pay the
Net Settlement Amount. The Company also believes that following such payments,
it will have sufficient funds available for both its day to day operations and
its anticipated growth.

     After giving effect to the special charge, the Company continues to be in
compliance with the financial covenants in its senior credit facility.  The
Company believes that the final terms of the Settlement could cause the Company
to be out of compliance with the financial covenants, effective at the end of
the financial quarter in which a Settlement is consummated. The Company is in
discussions regarding the Settlement with the agent for the lenders under its
senior credit facility, and the agent has informed the lenders that it is
working with the Company to prepare an amendment to certain financial covenants
in the senior credit facility that will enable the Company to continue in
compliance with the financial covenants upon consummation of the Settlement.
For a further discussion see Part I, Item 2, "Management Discussion and Analysis
of Financial Condition and Results of Operations - Liquidity and Capital
Resources."


                                       36
<PAGE>   37


     No assurance can be given that the Settlement will be consummated or that
the costs related to the Settlement or any litigated resolution of the OIG
Investigation will not exceed the amount of the above-described pre-tax charge
against earnings or that additional costs, claims and damages will not result
from the Settlement. If the Settlement is not consummated, the U.S. Attorney's
Office is expected to institute criminal and civil legal proceedings against,
and seek substantial civil and criminal financial damages and penalties from,
NMC and its subsidiaries. If the Government were successful in pursuing claims
arising from the OIG Investigation, NMC and one or more of its subsidiaries
would be subject to civil damages and criminal penalties, including substantial
fines, suspension of payments and exclusion from the Medicare, Medicaid and
TriCare programs, as well as other federally-funded health care benefit
programs. Such federal programs provide over 60% of NMC's consolidated revenues.
The occurrence of any of these events could have a material adverse effect on
the Company's business, financial condition and results of operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Contingencies."

     In addition, as discussed below, the Company has become aware that it and
one or more of its subsidiaries is the subject of qui tam or "whistleblower"
actions with respect to some or all of the issues raised by the OIG
Investigation, which whistleblower actions are filed under seal as a matter of
law in the first instance, thereby preventing disclosure to the Company and to
the public except by court order. In the process of unsealing federal
whistleblower complaints, it is not unusual for courts to allow the Government
to inform the Company and its counsel of a complaint prior to the time the
Company may be legally permitted to disclose it to the public. NMC may be the
subject of other "whistleblower" actions not known to the Company. Fresenius
Medical Care and the Company have guaranteed NMC's obligations relating to or
arising out of the OIG Investigation and the qui tam proceedings, and
indemnified Grace Chemicals for any such liabilities.

     The following is a description of the OIG Investigation.

     In October 1995, NMC received five investigative subpoenas from the OIG in
connection with the OIG Investigation. The subpoenas have resulted in extensive
document production relating to various aspects of NMC's business. The Company
has continued to receive additional subpoenas directed to NMC or the Company to
obtain supplemental information and documents relating to the subject matter of
the OIG Investigation, or to clarify the scope of the original subpoenas.

     The Company has cooperated with the OIG Investigation in providing
supplemental information and documents. As indicated above, the Government
continues, from time to time, to seek supplementing and/or clarifying
information from the Company. The Company understands that the Government has
utilized a grand jury to investigate these matters. The Company expects that
this process will continue while the Government completes its evaluation of the
documentation and issues or until the Settlement is consummated.

     The OIG Investigation covers the following areas: (a) NMC's dialysis
services business ("Dialysis Services"), principally relating to its Medical
Director contracts and compensation; (b) NMC's treatment of credit balances
resulting from overpayments received under the Medicare, Medicaid, Tri-Care and
other Government and commercial payors, NMC's billing for home dialysis
services, and its payment of supplemental medical insurance premiums on behalf
of indigent patients; (c) Lifechem's laboratory business, including testing
procedures, marketing, customer relationships, competition, overpayments
totaling approximately $4.9 million that were received by Lifechem from the
Medicare program with respect to laboratory services rendered between 1989 and
1993, a 1997 review of dialysis facilities' standing orders, and the provision
of discounts on products from NMC's products division, grants, equipment and
entertainment to Lifechem customers; and (d) Homecare and, in particular,
information concerning IDPN utilization, documentation of claims and billing
practices including various services, equipment and supplies and payments made
to third parties as compensation for administering IDPN therapy.

     The Government has indicated that the areas identified above are not
exclusive, and that it may pursue additional areas. The penalties applicable
under the anti-kickback statutes, the False Claims Act and other federal and
state statutes and regulations applicable to NMC's business could be
substantial. While NMC asserts that it is able to offer legal and/or factual
defenses with respect to many of the claims the Government has identified, it is
expected that the Government will assert that NMC has violated multiple
statutory and regulatory provisions. Also, as discussed below, qui tam actions
alleging that NMC submitted false claims to the Government have been filed under
seal by former or current NMC employees or other individuals who may have
familiarity with one or more of the issues under investigation. As noted, under
the False Claims Act, any such private plaintiff could pursue an action against
NMC in the name of the U.S. at his or her own expense if the Government declines
to do so.

     Under the terms of the Merger, any potential resulting monetary liability
has been retained by NMC, and the Company has


                                       37

<PAGE>   38


indemnified Grace Chemicals against all potential liability arising from or
relating to the OIG Investigation. The Company has provided the U.S. Government
with a guarantee of payment of the obligations, if any, arising from the OIG
Investigation. In support of this guarantee, the Company has delivered to the
U.S. Government a standby letter of credit in the amount of $150 million.

     MEDICAL DIRECTOR COMPENSATION

     The Government is investigating whether Dialysis Services' compensation
arrangements with its Medical Directors constitute payments to induce referrals,
which would be illegal under the anti-kickback statutes, rather than payment for
services rendered. Dialysis Services compensated the substantial majority of its
Medical Directors on the basis of a percentage of the earnings of the dialysis
center for which the Medical Director was responsible from the inception of
NMC's predecessor in 1972 until January 1, 1995, the effective date of Stark II.
Under the arrangements in effect prior to January 1, 1995, the compensation paid
to Medical Directors was adjusted to include "add backs," which represented a
portion of the profit earned by the Company on products purchased by the Medical
Director's facility from NMC Medical Products, Inc. and (until January 1, 1992)
a portion of the profit earned by Lifechem on laboratory services provided to
patients at the Medical Director's facility. These adjustments were designed to
allocate a profit factor to each dialysis center relating to the profits that
could have been realized by the center if it had provided the items and services
directly rather than through a subsidiary of NMC. The percentage of profits paid
to any specific Medical Director was reached through negotiation, and was
typically a provision of a multi-year consulting agreement.

     Under Stark II, if Designated Health Services are involved, Medical
Director compensation must not exceed fair market value and may not take into
account the volume or value of referrals or other business generated between the
parties. Since January 1, 1995, Dialysis Services has compensated its Medical
Directors on a fixed compensation arrangement intended to comply with the
requirements of Stark II. In renegotiating its Medical Director compensation
arrangements in connection with Stark II, Dialysis Services took and continues
to take account of the compensation levels paid to its Medical Directors in
prior years.

     Certain Government representatives have expressed the view in meetings with
counsel for NMC that arrangements where the Medical Director was or is paid
amounts in excess of the "fair market value" of the services rendered may
evidence illegal payments to induce referrals, and that hourly compensation is a
relevant measure for evaluating the "fair market value" of the services. The
Company's dialysis services division ("DSD" or "Dialysis Services") does not
compensate its Medical Directors on an hourly basis and has asserted to the
Government that hourly compensation is not a determinative measure of fair
market value. Although the Company believes that the compensation paid to its
Medical Directors is generally reflective of fair market value, there can be no
assurances that the Government will agree with this position or that the Company
ultimately will be able to defend its position successfully. Because of the wide
variation in local market factors and in the profit percentage contractually
negotiated between Dialysis Services and its Medical Directors prior to January
1, 1995, there is a wide variation in the amounts that have been paid to Medical
Directors.

     As a result, the compensation that Dialysis Services has paid and is
continuing to pay to a material number of its Medical Directors could be viewed
by the Government as being in excess of "fair market value," both in absolute
terms and in terms of hourly compensation. NMC has asserted to the Government
that NMC's compensation arrangements do not constitute illegal payments to
induce referrals. NMC has also asserted to the Government that OIG auditors
repeatedly reviewed Dialysis Services' compensation arrangements with NMC's
Medical Directors in connection with their audits of the costs claimed by
Dialysis Services; that the OIG stated in its audit reports that, with the
exception of certain technical issues, Dialysis Services had complied with
applicable Medicare laws and regulations pertaining to the ESRD program; and
that Dialysis Services reasonably relied on these audit reports in concluding
that its program for compensating Medical Directors was lawful. There has been
no indication that the Government will accept NMC's assertions concerning the
legality of its arrangements generally or NMC's assertion that it reasonably
relied on OIG audits, or that the Government will not focus on specific
arrangements that DSD has made with one or more Medical Directors and assert
that those specific arrangements were or are unlawful.

     The Government is also investigating whether Dialysis Services' profit
sharing arrangements with its Medical Directors influenced the Medical Directors
to order unnecessary ancillary services and items. NMC has asserted to the
Government that the rate of utilization of ancillary services and items by its
Medical Directors is reasonable and that it did not provide illegal inducements
to Medical Directors to order ancillary services and items and the practice of
profit-sharing has been discontinued.

     CREDIT BALANCES


                                       38
<PAGE>   39


     In the ordinary course of business, medical service providers like Dialysis
Services receive overpayments from Medicare intermediaries and other payors for
services that they provide to patients. Medicare intermediaries commonly direct
such providers to notify them of the overpayment and not remit such amounts to
the intermediary by check or otherwise unless specifically requested to do so.
In 1992, HCFA adopted a regulation requiring certain Medicare providers,
including dialysis centers, to file a quarterly form listing unrecouped
overpayments with the Medicare intermediary responsible for reimbursing the
provider. The first such filing was required to be made as of June 30, 1992 for
the period beginning with the initial date that the provider participated in the
Medicare program and ending on June 30, 1992.

     The Government is investigating whether DSD intentionally understated the
Medicare credit balance reflected on its books and records for the period ended
June 30, 1992 by reversing entries out of its credit balance account and taking
overpayments into income in anticipation of the institution of the new filing
requirement. Dialysis Services policy was to notify Medicare intermediaries in
writing of overpayments upon receipt and to maintain unrecouped Medicare
overpayments as credit balances on the books and records of Dialysis Services
for four years; overpayments not recouped by Medicare within four years would be
reversed from the credit balance account and would be available to be taken into
income. NMC asserts that Medicare overpayments that have not been recouped by
Medicare within four years are not subject to recovery under applicable
regulations. Accordingly, NMC's initial filing with the intermediaries disclosed
the credit balance on the books and records of Dialysis Services as shown in
accordance with its policy. There can be no assurance that the Government will
accept NMC's position. The Government has inquired whether other divisions
including Homecare, Lifechem, renal diagnostic services and non-renal diagnostic
services have appropriately treated Medicare credit balances as well as credit
balances of other payors.

     The Government is also investigating whether Dialysis Services failed to
disclose Medicare overpayments that resulted from Dialysis Services' obligation
to rebill commercial payors for amounts originally billed to Medicare under
HCFA's initial implementation of the OBRA 93 amendments to the secondary payor
provisions of the Medicare Act. Dialysis Services experienced delays in
reporting a material amount of overpayments after the implementation of the OBRA
93 amendments. NMC asserts that most of these delays were the result of the
substantial administrative burdens placed on Dialysis Services as a consequence
of the changing and inconsistent instructions issued by HCFA with respect to the
OBRA 93 amendments and were not intentional. Substantially all overpayments
resulting from the rebilling effort associated with the OBRA 93 amendments have
now been reported. Procedures are in place that are designed to ensure that
subsequent overpayments resulting from the OBRA 93 amendments will be reported
on a timely basis.

     SUPPLEMENTAL MEDICAL INSURANCE

     The Government has indicated that it is investigating the method by which
NMC made Medigap payments on behalf of its indigent patients. The impact, if
any, of this investigation on the Company, cannot be predicted at this time.

     OVERPAYMENTS FOR HOME DIALYSIS SERVICES

     NMC acquired Home Intensive Care, Inc. ("HIC"), an in-center and home
dialysis service provider, in 1993. At the time of the acquisition, HIC was the
subject of a claim by HCFA that HIC had received payments for home dialysis
services in excess of the Medicare reasonable charge for services rendered prior
to February 1, 1990. NMC settled the HCFA claim against HIC in 1994. The
Government is investigating whether the settlement concerning the alleged
overpayments made to HIC resolved all issues relating to such alleged
overpayments. The Government is also investigating whether NMC's subsidiary,
Home Dialysis Services, Inc. ("HDS"), received payments similar to the payments
that HIC received, and whether HDS improperly billed for home dialysis services
in excess of the monthly cost cap for services rendered on or after February 1,
1990. The Government is investigating whether NMC was overpaid for services
rendered. NMC asserts that the billings by HDS were proper, but there can be no
assurance that the Government will accept NMC's view.

     LIFECHEM

     Overpayments. On September 22, 1995, Lifechem voluntarily disclosed certain
billing problems to the Government that had resulted in Lifechem's receipt of
approximately $4.9 million in overpayments from the Medicare program for
laboratory services rendered between 1989 and 1993. Lifechem asserts that most
of these overpayments relate to errors caused by a change in Lifechem's computer
systems and that the remainder of the overpayments were the result of the
incorrect practice of billing for a complete blood count with differential when
only a complete blood count was ordered and performed, and of the incorrect
practice of billing for a


                                       39
<PAGE>   40


complete blood count when only a hemoglobin or hematocrit test was ordered.
Lifechem asserts that the overpayments it received were not caused by fraudulent
activity, but there can be no assurance that the Government will accept
Lifechem's view.

     Lifechem made these disclosures to the Government as part of an application
to be admitted to a voluntary disclosure program begun by the Government in
mid-1995. At the time of the disclosures, Lifechem tendered repayment to the
Government of the $4.9 million in overpayments. After the OIG Investigation was
announced, the Government indicated that Lifechem had not been accepted into its
voluntary disclosure program. The Government has deposited the $4.9 million
check with NMC's approval. The matters disclosed in Lifechem's September 22,
1995 voluntary disclosure are a subject of the OIG Investigation.

     On June 7, 1996, Lifechem voluntarily disclosed an additional billing
problem to the Government that had resulted in Lifechem's receipt of between
$40,000 and $160,000 in overpayments for laboratory services rendered in 1991.
Lifechem advised the Government that this overpayment resulted from the
submission for payment of a computer billing tape that had not been subjected to
a "billing rules" program designed to eliminate requests for payments for
laboratory tests that are included in the Composite Rate and that were not
eligible for separate reimbursement. Lifechem also advised the Government that
there may have been additional instances during the period from 1990 to 1992
when other overpayments were received as a result of the submission of computer
billing tapes containing similar errors and that it was in the process of
determining whether such additional overpayments were received. On June 21,
1996, Lifechem advised the Government that the 1991 billing problem disclosed on
June 7, 1996 resulted in an overpayment of approximately $112,000. Lifechem also
advised the Government that certain records suggested instances in July 1990 and
August 31 through September 11, 1990, when billing tapes may have been processed
without rules processing. Lifechem continued its effort to determine whether any
other overpayments occurred relating to the "billing rules" problem and, in
March 1997, advised the Government that an additional overpayment of
approximately $260,000 was made by Medicare.

     On April 6, 1999, Lifechem voluntarily disclosed an additional billing
problem to the Government that resulted in Lifechem's receipt of overpayments
for laboratory services rendered between 1994 and 1999. In 1994, as a result of
the advice of a billing consultant, Lifechem began to bill for platelet testing
performed in connection with complete blood counts. This advice was confirmed by
the consultant in 1997 as part of a review performed by the consultant under the
auspices of Lifechem's then outside counsel. In 1999, however, an internal
inquiry resulted in a reexamination of this advice and Lifechem determined that
the prior advice was incorrect. As a result, Lifechem voluntarily disclosed the
overpayment and repaid to the Government the amount of $8.6 million.

     Capitation for routine tests and panel design. In October 1994, the OIG
issued a special fraud alert in which it stated its view that the industry
practice of offering to perform or performing the routine tests covered by the
Composite Rate at a price below fair market value, coupled with an agreement by
a dialysis center to refer all or most of its non-Composite Rate tests to the
laboratory, violates the anti-kickback statutes. In response to this alert,
Lifechem changed its practices with respect to testing covered by the Composite
Rate to increase the amount charged to both Dialysis Services and third-party
dialysis centers and reduce the number of tests provided for the fixed rate. The
Government is investigating Lifechem's practices with respect to these tests.

     Benefits provided to dialysis centers and persons associated with dialysis
centers. The Government is investigating whether Dialysis Services or any
third-party dialysis center or any person associated with any such center was
provided with benefits in order to induce them to use Lifechem services. Such
benefits could include, for example, discounts on products or supplies, the
provision of computer equipment, the provision of money for the purchase of
computer equipment, the provision of research grants and the provision of
entertainment to customers. NMC has identified certain instances in which
benefits were provided to customers who purchased medical products from NMC
Medical Products, Inc., NMC's products company, and used Lifechem's laboratory
services. The Government claims that the provision of such benefits violates,
among other things, the anti-kickback statutes. In December 1998, the former
Vice President of Sales responsible for NMC's laboratory and products divisions
pled guilty to the payment of illegal kickbacks to obtain laboratory business
for Lifechem. In February 1999, the former President of NMC Medical Products,
Inc., was indicted by the Government for the payment of these same and/or
similar kickbacks.

     Business and testing practices. As noted above, the Government has
identified a number of specific categories of documents that it is requiring NMC
to produce in connection with Lifechem business and testing practices. In
addition to documents relating to the areas discussed above, the Government has
also required Lifechem to produce documents relating to the equipment and
systems used by Lifechem in performing and billing for clinical laboratory blood
tests, the design of the test panels offered and requisition forms used by
Lifechem, the utilization rate for certain tests performed by Lifechem,
recommendations concerning diagnostic codes to be used in ordering tests for
patients with given illnesses or conditions, internal and external audits and
investigations relating to


                                       40
<PAGE>   41


Lifechem's billing and testing. Subsequently, the Government served an
investigative subpoena for documents concerning the Company's 1997 review of
dialysis facilities' standing orders, and responsive documents were provided.
The Government has served investigative subpoenas requiring NMC to update its
production on the above issues and to produce contract files for twenty-three
identified dialysis clinic customers. The Government is investigating each of
these areas, and claims that Lifechem and/or NMC have violated the False Claims
Act and/or the anti-kickback statutes through the test ordering, paneling,
requisitioning, utilization, coding, billing and auditing practices described
above. In June 1999, a former Vice President of Marketing of NMC Medical
Products, Inc. pled guilty to a charge of conspiracy to defraud Medicare in
connection with the marketing of certain hepatitis tests. In August 1999, the
former President and the then Director of Marketing of Lifechem were indicted by
the Government for defrauding Medicare in connection with marketing the same
hepatitis and laboratory tests.

     IDPN

     Administration kits. One of the activities of Spectra Renal Management
("SRM") is to provide IDPN therapy to dialysis patients at both NMC-owned
facilities and at facilities owned by other providers. IDPN therapy was provided
by Homecare prior to its divestiture. IDPN therapy is typically provided to the
patient 12-13 times per month during dialysis treatment. Bills are submitted to
Medicare on a monthly basis and include separate claims for reimbursement for
supplies, including, among other things, nutritional solutions, administration
kits and infusion pumps. In February 1991, the Medicare carrier responsible for
processing Homecare's IDPN claims issued a Medicare advisory to all parenteral
and enteral nutrition suppliers announcing a coding change for reimbursement of
administration kits provided in connection with IDPN therapy for claims filed
for items provided on or after April 1, 1991. The Medicare allowance for
administration kits during this period was approximately $625 per month per
patient. The advisory stated that IDPN providers were to indicate the "total
number of actual days" when administration kits were "used," instead of
indicating that a one-month supply of administration kits had been provided. In
response, Homecare billed for administration kits on the basis of the number of
days that the patient was on an IDPN treatment program during the billing
period, which typically represented the entire month, as opposed to the number
of days the treatment was actually administered. During the period from April
1991 to June 1992, Homecare had an average of approximately 1,200 IDPN patients
on service.

     In May 1992, the carrier issued another Medicare advisory to all PEN
suppliers in which it stated that it had come to the carrier's attention that
some IDPN suppliers had not been prorating their billing for administration kits
used by IDPN patients and that providers should not bill for administration kits
on the basis of the number of days that the patient was on an IDPN treatment
program during the billing period. The advisory stated further that the carrier
would be conducting "a special study to determine whether or not overpayments
have occurred as a result of incorrect billing" and that "if overpayments have
resulted, providers that have incorrectly billed" would "be contacted so that
refunds can be recovered." Homecare revised its billing practices in response to
this advisory for claims filed for items provided on or after July 1, 1992.
Homecare was not asked to refund any amounts relating to its billings for
administration kits following the issuance of the second advisory.

     The Government asserts that NMC submitted false claims for administration
kits during the period from 1988 to June 30, 1996, and that Homecare's billing
for administration kits during this period violated, among other things, the
False Claims Act.

     Infusion Pumps and IV Poles. During the time period covered by the
subpoenas, Medicare regulations permitted IDPN providers to bill Medicare for
infusion pumps and, until 1992, for IV poles provided to IDPN patients in
connection with the administration of IDPN treatments. These regulations do not
expressly specify that a particular pump and IV pole be dedicated to a specific
patient, and NMC asserts that these regulations permitted Homecare to bill
Medicare for an infusion pump and IV pole so long as the patient was infused
using a pump and IV pole. Despite the absence of an express regulatory
specification, Homecare developed a policy to deliver to a dialysis center a
dedicated infusion pump and IV pole for each patient, although the Company
cannot represent that Homecare followed this policy in every instance. The
Government is investigating the propriety of Homecare's billings for infusion
pumps and IV poles and asserts that Homecare's billings violate the False Claims
Act.

     As noted above, under the new policies published by HCFA with respect to
IDPN therapy, the Company was not able to bill for infusion pumps after July 1,
1996. The Government discontinued reimbursement for IV poles in 1992.

     "Hang fees" and other payments. IDPN therapy is typically provided to the
patient during dialysis by personnel employed by the dialysis center treating
the patient with supplies provided and billed to Medicare by Homecare in
accordance with the Medicare parenteral nutrition supplier rules. In order to
compensate dialysis centers for the costs incurred in administering IDPN therapy
and monitoring the patient during therapy, Homecare followed the practice common
in the industry of paying a "hang fee" to the center.


                                       41

<PAGE>   42


Dialysis centers are responsible for reporting such fees to HCFA on their cost
reports. For Dialysis Services dialysis centers, the fee was $30 per
administration, based upon internal Dialysis Services cost calculations. For
third-party dialysis centers, the fee was negotiated with each center, typically
pursuant to a written contract, and ranged from $15 to $65 per administration.
The Company has identified instances in which other payments and amounts beyond
that reflected in a contract were paid to these third-party centers. The Company
has stopped paying "hang fees" to both Dialysis Services and third-party
facilities.

     In July 1993, the OIG issued a management advisory alert to HCFA in which
it stated that "hang fees" and other payments made by suppliers of IDPN to
dialysis centers "appear to be illegal as well as unreasonably high." The
Government is investigating the nature and extent of the "hang fees" and other
payments made by Homecare as well as payments by Homecare to physicians whose
patients have received IDPN therapy. The Government asserts that the payments by
Homecare to dialysis centers violate, among other things, the anti-kickback
statutes.

     Utilization of IDPN. Since 1984, when HCFA determined that Medicare should
cover IDPN and other parenteral nutrition therapies, the Company has been an
industry leader in identifying situations in which IDPN therapy is beneficial to
ESRD patients. It is the policy of the Company to seek Medicare reimbursement
for IDPN therapy only when it is prescribed by a patient's treating physician
and when it believes that the circumstances satisfy the requirements published
by HCFA and its carrier agents. Prior to 1994, HCFA and its carriers approved
for payment more than 90% of the IDPN claims submitted by Homecare. After 1993,
the rate of approval for Medicare reimbursement for IDPN claims submitted by
Homecare for new patients, and by the infusion industry in general, fell to
approximately 9%. The Company contends that the reduction in rates of approval
occurred because HCFA and its carriers implemented an unauthorized change in
coverage policy without giving notice to providers. While NMC continued to offer
IDPN to patients pursuant to the prescription of the patients' treating
physicians and to submit claims for Medicare reimbursement when it believed the
requirements stated in HCFA's published regulations were satisfied, other
providers responded to the drop in the approval rate for new Medicare IDPN
patients by abandoning the Medicare IDPN business, cutting back on the number of
Medicare patients to whom they provide IDPN, or declining to add new Medicare
patients. Beginning in 1994 the number of patients to whom NMC provided IDPN
increased as a result.

     The Government is investigating the utilization rate of IDPN therapy among
NMC patients, whether NMC submitted IDPN claims to Medicare for patients who
were not eligible for coverage, and whether documentation of eligibility was
adequate. NMC asserts that the utilization rate of IDPN therapy among its
dialysis patients, which, in 1995, averaged less than 3.5%, is the result of the
factors discussed above and that it is the policy of Homecare to seek Medicare
reimbursement for IDPN therapy prescribed by the patient's treating physician in
accordance with the requirements published by HCFA and its carrier agents. There
can be no assurance that the Government will accept the NMC's view. The
Government asserts that Homecare submitted IDPN claims for individuals who were
not eligible for coverage and/or with inadequate documentation of eligibility.

     The Company believes that it has presented to the Government substantial
defenses which support NMC's interpretation of coverage rules of IDPN as HCFA
and its carriers published and explained them, and which demonstrated that HCFA
and its carriers improperly implemented unpublished, more restrictive criteria
after 1993. Nevertheless, the Government is expected to assert in the OIG
Investigation that, on a widespread basis, NMC submitted and received payments
on claims for IDPN to Medicare for patients who were not eligible for coverage,
and for whom the documentation of eligibility was inadequate.

     In addition, the Government asserts that, in a substantial number of cases,
documentation of eligibility was false or inaccurate. With respect to some
claims, the Company has determined that false or inaccurate documentation was
submitted, deliberately or otherwise. The Government continues to investigate
the IDPN claims.

     As indicated above, if the Settlement is consummated, the Company
anticipates receiving an estimated $70 million payment to the Company from the
Government that is reflected in the Net Settlement Amount in exchange for a
release of the Company's IDPN receivable claims against the Government for IDPN
therapy administered on or before December 31, 1998. The Company continues to
pursue appeals of certain denied claims for IDPN therapy rendered after December
31, 1998 which it anticipates will clarify the coverage criteria for IDPN
therapy on a prospective basis.

     QUI TAM ACTIONS

     The Company is aware that it and/or certain of its subsidiaries are the
subject of qui tam or "whistleblower" actions with


                                       42
<PAGE>   43


respect to some or all of the issues raised by the OIG Investigation, which
whistleblower actions are filed under seal as a matter of law in the first
instance, thereby preventing disclosure to the Company and to the public except
by court order. The Company and/or certain of its subsidiaries may be the
subject of other "whistleblower" actions not yet known to the Company. Each of
these actions is under seal and in each action, pursuant to court order the seal
has been modified to permit the Company, NMC and other affiliated defendants to
disclose the complaint to any relevant investors, financial institutions and/or
underwriters, their successors and assigns and their respective counsel and to
disclose the allegations in the complaints in their respective reports filed
with the U.S. Securities and Exchange Commission (the "SEC" or the
"Commission").

     A qui tam action was filed in the United States District Court for the
Southern District of Florida in June 1994, amended on July 8, 1996 and disclosed
to the Company on July 10, 1996. It alleges, among other things, that Grace
Chemicals and NMC violated the False Claims Act in connection with certain
billing practices regarding IDPN and the administration of EPO and that as a
result of this allegedly wrongful conduct, the United States suffered actual
damages in excess of $200 million.

     A qui tam action was filed in the United States District Court for the
Southern District of Florida in December 1994 and disclosed to the Company on
April 16, 1999. It alleges, among other things, that NMC violated the False
Claims Act in connection with certain billing practices regarding IDPN and the
cost relating thereto. The second qui tam was filed by the same relator which
filed the first qui tam and covers the same services covered by the first qui
tam complaint.

     A qui tam action was filed in the United States District Court for the
Middle District of Florida in 1995 and disclosed to the Company on or before
November 7, 1996. It alleges, among other things, that NMC and certain NMC
subsidiaries violated the False Claims Act in connection with the alleged
retention of over-payments made under the Medicare program, the alleged
submission of claims in violation of applicable cost caps and the payment of
supplemental Medicare insurance premiums as an alleged inducement to patients to
obtain dialysis products and services from NMC. The complaint alleges that as a
result of this allegedly wrongful conduct, the United States suffered damages in
excess of $10 million, including applicable fines.

     A qui tam action was filed in the United States District Court for the
District of Massachusetts in 1994 and was disclosed to the Company in February
1999. It alleges among other things that NMC violated the False Claims Act and
the federal anti-kickback statutes in connection with certain billing and
documentation practices regarding IDPN therapy, home oxygen therapy and certain
medical billings in NMC's Chicago office.

     A qui tam action was filed in the United States District Court for the
Middle District of Tennessee on December 15, 1994, transferred to the United
States District Court for the District of Massachusetts in 1995, and
subsequently was disclosed to the Company in September 1999. It alleges, among
other things, that Lifechem violated the False Claims Act in connection with the
submission of claims for laboratory tests which already had been billed by the
Company, and that Lifechem manipulated its chemistry panels to increase its
Medicare and Medicaid billings. The Complaint alleges that as a result of this
illegal action, the United States suffered damages in excess of $25,000,000.
Sometime after 1996, the Complaint was amended to add Spectra Laboratories,
Inc., the Company and FMC as defendants, and added the allegation that the
defendants violated the Medicare and Medicaid Anti-Kickback Statute by providing
discounted hemodialysis products to induce the purchase of laboratory services.

     Each of the qui tam complaints asserts that as a result of the allegedly
wrongful conduct, the Government suffered damages and that the defendants are
liable to the Government for three times the amount of the alleged damages plus
civil penalties of up to $10,000 per false claim. An adverse result in any of
the qui tam actions could have a material adverse effect on the Company's
business, financial condition or results of operations.

     OIG AGREEMENTS

     As a result of discussions with representatives of the United States in
connection with the OIG Investigation, certain agreements (the "OIG Agreements")
have been entered into to guarantee the payment of any obligations of NMC to the
United States (an "Obligation") relating to or arising out of the OIG
Investigation and the qui tam action filed in the Southern District of Florida
(the "Government Claims"). For the purposes of the OIG Agreements, an Obligation
is (a) a liability or obligation of NMC to the United States in respect of a
Government Claim pursuant to a court order (i) which is final and nonappealable
or (ii) the enforcement of which has not been stayed pending appeal or (b) a
liability or obligation agreed to be an Obligation in a settlement agreement
executed by Fresenius Medical Care, the Company or NMC, on the one hand, and the
United States, on the other hand. As stated elsewhere herein if the Settlement
is not consummated, the outcome of the OIG Investigation cannot be predicted.


                                       43
<PAGE>   44
     Pursuant to the OIG Agreements, upon consummation of the Merger, Fresenius
Medical Care, the Company and NMC provided the United States with a joint and
several unconditional guarantee of payment when due of all Obligations (the
"Primary Guarantee"). As credit support for the Primary Guarantee, NMC delivered
an irrevocable standby letter of credit in the amount of $150 million. The
United States will return such letter of credit (or any renewal or replacement)
for cancellation when all Obligations have been paid in full or it is determined
that NMC has no liability in respect of the Government Claims. Under the terms
of the Merger, any potential resulting monetary liability has been retained by
NMC, and the Company has indemnified Grace Chemicals against all potential
liability arising from or relating to the OIG Investigation.

     FMC and the Company and the United States state in the OIG Agreements that
they will negotiate in good faith to attempt to arrive at a consensual
resolution of the Government Claims and, in the context of such negotiations,
will negotiate in good faith as to the need for any restructuring of the payment
of any Obligations arising under such resolution, taking into account the
ability of FMC and the Company to pay the Obligations. The OIG Agreements state
that the foregoing statements shall not be construed to obligate any person to
enter into any settlement of the Government Claims or to agree to a structured
settlement. Moreover, the OIG Agreements state that the statements described in
the first sentence of this paragraph are precatory and statements of intent only
and that (a) compliance by the United States with such provisions is not a
condition of or defense to the obligations of FMC and the Company under the OIG
Agreements and (b) breach of such provisions by the Government cannot and will
not be raised by FMC and the Company to excuse performance under the OIG
Agreements. Neither the entering into of the OIG Agreements nor the providing of
the Primary Guarantee and the $150 million letter of credit is an admission of
liability by any party with respect to the OIG Investigation, nor does it
indicate the liability which may result therefrom.

     The foregoing describes the material terms of the OIG Agreements, copies of
which were previously filed with the Commission and copies of which may be
examined without charge at the public reference facilities maintained by the
Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at
the Regional Offices of the Commission located at Suite 1400, Citicorp Center,
500 West Madison Street, Chicago, Illinois 60661-2551 and Room 1300, 7 World
Trade Center, New York, New York 10048. Copies of such material will also be
made available by mail from the Public Reference Branch of the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The foregoing
description does not purport to be complete and is qualified in its entirety by
reference to such agreements.

     An adverse determination with respect to any of the issues addressed by the
subpoenas, or any of the other issues that have been or may be identified by the
Government, could result in the payment of substantial fines, penalties and
forfeitures, the suspension of payments or exclusion of the Company or one or
more of its subsidiaries from the Medicare program and other federal programs,
and changes in billing and other practices that could adversely affect the
Company's revenues. Any such result could have a material adverse effect on the
Company's business, financial condition and results of operations.

     OTHER LEGAL PROCEEDINGS

     DISTRICT OF NEW JERSEY INVESTIGATION

     NMC had received multiple subpoenas from a federal grand jury in the
District of New Jersey investigating, among other things, whether NMC sold
defective products, the manner in which NMC handled customer complaints and
certain matters relating to the development of a new dialyzer product line. NMC
cooperated with this investigation and provided the grand jury with extensive
documents. In February, 1996, NMC received a letter from the U.S. Attorney's
Office for the District of New Jersey indicating that it was the target of a
federal grand jury investigation into possible violations of criminal law in
connection with its efforts to persuade the FDA to lift a January 1991 import
hold issued with respect to NMC's Dublin, Ireland manufacturing facility. In
June 1996, NMC received a letter from the U.S. Attorney for the District of New
Jersey indicating that the U.S. Attorney had declined to prosecute NMC with
respect to a submission related to NMC's effort to lift the import hold. The
letter added that NMC remains a subject of a federal grand jury's investigation
into other matters. NMC also produced documents in response to a June 1996
subpoena from the federal grand jury requesting certain documents in connection
with NMC's imports of the FOCUS(R) dialyzer from January 1991 to November 1995.
In November 1999, NMC's subsidiary, NMC Medical Products, Inc. ("NMC Medical
Products") and the U.S. Attorney's Office for the District of New Jersey
executed a plea agreement (the "New Jersey Agreement") pursuant to which NMC
Medical Products will plead guilty to two misdemeanor violations of the Federal
Food, Drug and Cosmetic Act, pay the United States Government $3.8 million and
be released, together with NMC and its related entities and their present
officers, directors and employees, from any further civil or criminal liability
with respect to all matters investigated by the U.S. Attorney's Office for the
District of New Jersey, including the matters described above, or arising out of
Food and Drug Administration inspections of NMC Medical Products' facilities
prior to October 20, 1995. The terms of the New Jersey Agreement are subject to
court approval. The $3.8 million to b paid pursuant to the Plea Agreement does
not constitute part of the Settlement Amount.

     COMMERCIAL INSURER LITIGATION


                                       44
<PAGE>   45


     In 1997, the Company, NMC, and certain named NMC subsidiaries, were served
with a civil complaint filed by Aetna Life Insurance Company in the U.S.
District Court for the Southern District of New York (Aetna Life Insurance
Company v. National Medical Care, Inc. et al, 97-Civ-9310). In April 1999, Aetna
amended its complaint to include its affiliate, Aetna U.S. Healthcare, Inc., as
an additional plaintiff, and to make certain other limited changes in its
pleading. Based in large part on information contained in prior securities
filings, the lawsuit alleges inappropriate billing practices for nutritional
therapy, diagnostic and clinical laboratory tests and misrepresentations. The
amended complaint seeks unspecified damages and costs. This matter is at a
relatively early stage in the litigation process, with substantial discovery
just beginning, and its outcome and impact on the Company cannot be predicted at
this time. However, the Company, NMC and its subsidiaries believe that they have
substantial defenses to the claims asserted, and intend to continue to
vigorously defend the lawsuit. Other private payors have contacted the Company
and may assert that NMC received excess payments and similarly, may join the
lawsuit or file their own lawsuits seeking reimbursement and other damages from
NMC. An adverse result could have a material adverse effect on the Company's
business, financial condition or results of operations.

     In May 1999, the Company filed counterclaims against Aetna Life Insurance
Company and Aetna U.S. Healthcare, Inc. based on inappropriate claim denials and
delays in claim payments. The Company is also investigating similar
counterclaims against other private payors that have contacted the Company. The
Settlement would not resolve these proceedings and claims.

    OBRA 93

     OBRA 93 affected the payment of benefits under Medicare and employer health
plans for certain eligible ESRD patients. In July 1994, HCFA issued an
instruction to Medicare claims processors to the effect that Medicare benefits
for the patients affected by OBRA 93 would be subject to a new 18-month
"coordination of benefits" period. This instruction had a positive impact on
NMC's dialysis revenues because, during the 18-month coordination of benefits
period, patients' employer health plans were responsible for payment, which was
generally at rates higher than those provided under Medicare.

     In April 1995, HCFA issued a new instruction, reversing its original
instruction in a manner that would substantially diminish the positive effect of
the original instruction on NMC's dialysis business. HCFA further proposed that
its new instruction be effective retroactive to August 1993, the effective date
of OBRA 93.

     NMC ceased to recognize the incremental revenue realized under the original
Program Memorandum as of July 1, 1995, but it continued to bill employer health
plans as primary payors for patients affected by OBRA 93 through December 31,
1995. As of January 1, 1996, NMC commenced billing Medicare as primary payor for
dual eligible ESRD patients affected by OBRA 93, and then began to rebill in
compliance with the revised policy for services rendered between April 24 and
December 31, 1995.

     On May 5, 1995, NMC filed a complaint in the U.S. District Court for the
District of Columbia (National Medical Care, Inc. and Bio-Medical Applications
of Colorado, Inc. d/b/a Northern Colorado Kidney Center v. Shalala, C.A. No.
95-0860 (WBB)) seeking to preclude HCFA from retroactively enforcing its April
24, 1995 implementation of the OBRA 93 provisions relating to the coordination
of benefits for dual eligible ESRD patients. On May 9, 1995, NMC moved for a
preliminary injunction to preclude HCFA from enforcing its new policy
retroactively, that is, to billings for services provided between August 10,
1993 and April 23, 1995. On June 6, 1995, the court granted NMC's request for a
preliminary injunction and in December of 1996, NMC moved for partial summary
judgment seeking a declaration from the Court that HCFA's retroactive
application of the April 1995 rule was legally invalid. HCFA cross-moved for
summary judgment on the grounds that the April 1995 rule was validly applied
prospectively. In January 1998, the court granted NMC's motion for partial
summary judgment and entered a declaratory judgment in favor of NMC, holding
HCFA's retroactive application of the April 1995 rule legally invalid, and based
on its finding, the Court also permanently enjoined HCFA from enforcing and
applying the April 1995 rule retroactively against NMC. The Court took no action
on HCFA's motion for summary judgment pending completion of the outstanding
discovery. On October 5, 1998, NMC filed it's own motion for summary judgment
requesting that the Court declare HCFA's prospective application of the April
1995 rule invalid and permanently enjoin HCFA from prospectively enforcing and
applying the April 1995 rule. The Court has not yet ruled on the parties'
motions. HCFA elected not to appeal the Court's June 1995 and January 1998
orders. HCFA may, however, appeal all rulings at the conclusion of the
litigation. If HCFA should successfully appeal so that the revised
interpretation would be applied retroactively NMC may be required to refund the
payments received from employer health plans for services provided after August
10, 1993 under HCFA's original implementation, and to re-bill Medicare for the
same services, which would result in a net loss to NMC of approximately $120
million attributable to all periods prior to December 31, 1995. Also, in such
event, the Company's business,


                                       45
<PAGE>   46


financial position and results of operations would be materially adversely
affected. The Settlement would not resolve these proceedings and claims.

IDPN COVERAGE ISSUES

     SRM administers IDPN therapy to chronic dialysis patients who suffer from
severe gastrointestinal malfunctions. IDPN therapy was provided by Homecare
prior to its divestiture. After 1993, Medicare claims processors sharply reduced
the number of IDPN claims approved for payment as compared to prior periods. NMC
believes that the reduction in IDPN claims represented an unauthorized policy
coverage change. Accordingly, NMC and other IDPN providers pursued various
administrative and legal remedies, including administrative appeals, to address
this reduction.

     In November 1995, NMC filed a complaint in the U.S. District Court for the
Middle District of Pennsylvania seeking a declaratory judgment and injunctive
relief to prevent the implementation of this policy coverage change. (National
Medical Care, Inc. v. Shalala, 3:CV-95-1922 (RPC)). Subsequently, the District
Court affirmed a prior report of the magistrate judge dismissing NMC's
complaint, without considering any substantive claims, on the grounds that the
underlying cause of action should be submitted fully to the administrative
review processes available under the Medicare Act. NMC decided not to appeal the
Court's decision, but rather, to pursue the claims through the available
administrative processes.

     NMC was successful in pursuing these claims through the administrative
process, receiving favorable decisions from Administrative Law Judges in more
than 80% of its cases. In early 1998, a group of claims which had been ruled on
favorably were remanded by the Medicare Appeals Council to a single
Administrative Law Judge (the "ALJ") with extensive instructions concerning the
review of these decisions. A hearing was scheduled on the remanded claims to
take place in July, but later postponed until October 1998.

     Prior to the July hearing date, the United States Attorney for the District
of Massachusetts requested that the hearing be stayed pending resolution of the
OIG Investigation, on the basis that proceeding could adversely affect the
Government's investigation as well as the Government's efforts to confirm it
belief that these claims are false. Prior to the ALJ's issuing a decision on the
stay request, the U.S. Attorney's Office requested that NMC agree to a stay in
the proceedings in order to achieve a potential resolution of the IDPN claims
subject to the OIG Investigation as well as those which are subject to the
administrative appeals process. NMC agreed to this request, and together with
the U.S. Attorney's Office requested a stay. The ALJ agreed to this request in
order to allow the parties the opportunity to resolve both the IDPN claims which
are the subject of the OIG Investigation and the IDPN claims which are the
subject of the administrative proceedings. In March 1999 negotiations between
NMC and the U.S. Attorney's Office failed to progress and NMC requested that the
stay be lifted. In connection with the settlement discussions described above
(which, if consummated, would resolve all pending IDPN coverage appeals for
services rendered prior to 1999), the Government renewed its motion to stay
proceedings before the ALJ. The Company opposed the stay. On November 10, 1999,
the ALJ agreed to reschedule certain hearings that had been scheduled for the
week of November 29, 1999, but denied the motion for a stay and scheduled
further hearings to begin January 10, 2000. It is not possible to determine
whether, if the Settlement is not consummated, NMC and the Government will be
able to resolve issues surrounding the IDPN claims. Further proceedings on other
administrative appeals related to unpaid claims remain stayed.

     Although NMC management believes that those unpaid IDPN claims were
consistent with published Medicare coverage guidelines, if the Settlement is not
consummated and the Company resumes its appeals of the IDPN claims, there can be
no assurance that the claims on appeal will be approved for payment in full or,
to the extent approved, collected in full. Such claims represent substantial
accounts receivable of NMC, amounting to approximately $150 million as of
September 30, 1999.

     If NMC is unable to collect its IDPN receivable, either through the
administrative appeal process or through negotiation, or if IDPN coverage is
reduced or eliminated, depending on the amount of the receivable that is not
collected and/or the nature of the coverage change, NMC's business, financial
condition and results of operations could be materially adversely affected.
NMC's IDPN receivables are included in the net assets of the Company's
discontinued operations. However, these receivables have not been sold and will
remain classified as discontinued operations until they have been settled. See
Notes to Consolidated Financial Statements, Note 5 - "Discontinued Operations."


                                       46
<PAGE>   47


     ADMINISTRATIVE APPEALS

     The Company regularly pursues various administrative appeals relating to
reimbursement issues in connection with its dialysis facilities. One such appeal
consists of a challenge to the Medicare regulation which capped reimbursement
for the bad debts incurred by dialysis facilities. In 1998, the United States
Court of Appeals for the District of Columbia ruled in favor of the Company in
connection with the bad debt issue, holding that the Secretary of Health & Human
Services had not adequately justified the bad debt regulation, and ruling that
the government's order adopting the rule was arbitrary and capricious. The Court
of Appeals remanded the matter to the Secretary to provide a more adequate
explanation of the bad debt cap or to abandon it. Subsequently, the Court
modified its holding to continue the bad debt regulation in effect pending
remand. Accordingly, the Company has revised its estimate of recoveries for the
previously disallowed bad debt expense associated with the regulation. The
Company has reached a preliminary agreement with the Department of Health and
Human Services with respect to certain material terms to resolve this matter
which, if approved by the Department of Justice, will require payment to the
Company of $20.9 million.

     SPECTRA CORPORATE INTEGRITY AGREEMENT

     Spectra was acquired by the Company in June 1997. Prior to Spectra's
acquisition by the Company, Spectra settled an investigation by the Government
and entered into a Corporate Integrity Agreement (the "Spectra Agreement"). In
February 1999 the Government advised Spectra that it may be in breach of the
Spectra Agreement and on March 15, 1999 issued a subpoena to Spectra requesting
certain documents related to the Spectra Agreement. The Government recently
advised the Company that the Government's review of Spectra's operations and
documents did not disclose any breach of the Spectra Agreement.

     STATE OF FLORIDA

     In October 1999, NMC received an Antitrust Civil Investigative Demand
("CID") from the Attorney General of the State of Florida ("Florida AG"). The
CID was issued by the Florida AG in the course of an investigation to determine
whether there is, has been, or may be a violation of federal and Florida laws
resulting from the possible monopolization of, or the entering into agreements
in restraint of, trade relating to the provision of dialysis products and
services in Florida.

     The Company is cooperating with the Florida AG's investigation by providing
documents and other information to the Florida AG. The impact of this
investigation on the Company, if any, cannot be determined at this time.

     OTHER LITIGATION AND POTENTIAL EXPOSURES

     In recent years, physicians, hospitals and other participants in the health
care industry have become subject to an increasing number of lawsuits alleging
professional negligence, malpractice, product liability, workers' compensation
or related claims, many of which involve large claims and significant defense
costs. The Company and NMC and their subsidiaries have been, and the Company can
be expected to continue from time to time to be, subject to such suits due to
the nature of the Company's business. Although the Company maintains insurance
at a level which it believes to be prudent, there can be no assurance that the
coverage limits will be adequate or that all asserted claims will be covered by
insurance. In addition, there can be no assurance that liability insurance will
continue to be available at acceptable costs. A successful claim against the
Company or any of its subsidiaries in excess of insurance coverage could have a
material adverse effect upon the Company and the results of its operations. Any
claims, regardless of their merit or eventual outcome, also may have a material
adverse effect on the reputation and business of the Company. The Company, NMC
and their subsidiaries operate a large number and wide variety of facilities
throughout the U.S. In such a decentralized system it is often difficult to
maintain the desired level of oversight and control over the thousands of
individuals employed by many affiliate companies. The Company relies upon its
management structure, regulatory and legal resources, and the effective
operation of its compliance program to direct, manage and monitor the activities
of these employees. However, on occasion, the Company, NMC and their
subsidiaries have identified instances where employees, deliberately or
inadvertently, have submitted inadequate or false billings while employed by an
affiliated company. The illegal actions of such persons may subject NMC to
liability under the False Claims Act, among other laws, and the Company cannot
predict whether such law enforcement authorities may use such information to
initiate further investigations of the business practices disclosed or any other
business activities of the Company. In addition, the Company asserts claims and
suits arising in the ordinary course of business, the ultimate resolution of
which would not, in the opinion of the Company, have a material adverse effect
on its financial condition.


                                       47
<PAGE>   48


ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a)  Exhibits

Exhibit 2.1         Agreement and Plan of Reorganization dated as of February 4,
                    1996 between W. R. Grace & Co. and Fresenius AG
                    (incorporated herein by reference to Appendix A to the Joint
                    Proxy Statement-Prospectus of Fresenius Medical Care AG, W.
                    R. Grace & Co. and Fresenius USA, Inc. dated August 2, 1996
                    and filed with the Commission on August 5, 1996).

Exhibit 2.2         Distribution Agreement by and among W. R. Grace & Co., W. R.
                    Grace & Co.-Conn. and Fresenius AG dated as of February 4,
                    1996 (incorporated herein by reference to Exhibit A to
                    Appendix A to the Joint Proxy Statement-Prospectus of
                    Fresenius Medical Care AG, W. R. Grace & Co. and Fresenius
                    USA, Inc. dated August 2, 1996 and filed with the Commission
                    on August 5, 1996).

Exhibit 2.3         Contribution Agreement by and among Fresenius AG,
                    Sterilpharma GmbH and W. R. Grace & Co.-Conn. dated February
                    4, 1996 (incorporated herein by reference to Exhibit E to
                    Appendix A to the Joint Proxy-Statement Prospectus of
                    Fresenius Medical Care AG, W. R. Grace & Co. and Fresenius
                    USA, Inc. dated August 2, 1996 and filed with the Commission
                    on August 5, 1996).

Exhibit 3.1         Certificate of Incorporation of Fresenius Medical Care
                    Holdings, Inc. (f/k/a W. R. Grace & Co.) under Section 402
                    of the New York Business Corporation Law dated March 23,
                    1988 (incorporated herein by reference to the Form 8-K of
                    the Company filed on May 9, 1988).

Exhibit 3.2         Certificate of Amendment of the Certificate of Incorporation
                    of Fresenius Medical Care Holdings, Inc. (f/k/a W. R. Grace
                    & Co.) under Section 805 of the New York Business
                    Corporation Law dated May 25, 1988 (changing the name to W.
                    R. Grace & Co., incorporated herein by reference to the Form
                    8-K of the Company filed on May 9, 1988).

Exhibit 3.3         Certificate of Amendment of the Certificate of Incorporation
                    of Fresenius Medical Care Holdings, Inc. (f/k/a W. R. Grace
                    & Co.) under Section 805 of the New York Business
                    Corporation Law dated September 27, 1996 (incorporated
                    herein by reference to the Form 8-K of the Company filed
                    with the Commission on October 15, 1996).

Exhibit 3.4         Certificate of Amendment of the Certificate of Incorporation
                    of Fresenius Medical Care Holdings, Inc. (f/k/a W. R. Grace
                    & Co.) under Section 805 of the New York Business
                    Corporation Law dated September 27, 1996 (changing the name
                    to Fresenius National Medical Care Holdings, Inc.,
                    incorporated herein by reference to the Form 8-K of the
                    Company filed with the Commission on October 15, 1996).

Exhibit 3.5         Certificate of Amendment of the Certificate of Incorporation
                    of Fresenius Medical Care Holdings, Inc. under Section 805
                    of the New York Business Corporation Law dated June 12, 1997
                    (changing name to Fresenius Medical Care Holdings, Inc.,
                    incorporated herein by reference to the Form 10-Q of the
                    Company filed with the Commission on August 14, 1997).

Exhibit 3.6         Amended and Restated By-laws of Fresenius Medical Care
                    Holdings, Inc. (incorporated herein by reference to the Form
                    10-Q of the Company filed with the Commission on August 14,
                    1997).

Exhibit 4.1         Credit Agreement dated as of September 27, 1996 among
                    National Medical Care, Inc. and Certain Subsidiaries and
                    Affiliates, as Borrowers, Certain Subsidiaries and
                    Affiliates, as Guarantors, the Lenders named therein,
                    Nationsbank, N.A., as paying agent and the Bank of Nova
                    Scotia, The Chase Manhattan Bank, Dresdner Bank AG and
                    Nationsbank, N.A., as Managing Agents (incorporated herein
                    by reference to the Form 6-K of Fresenius Medical Care AG
                    filed with the Commission on October 15, 1996).

Exhibit 4.2         Amendment dated as of November 26, 1996 (amendment to the
                    Credit Agreement dated as of September 27, 1996,


                                       48
<PAGE>   49


                    incorporated herein by reference to the Form 8-K of
                    Registrant filed with the Commission on December 16, 1996).

Exhibit 4.3         Amendment No. 2 dated December 12, 1996 (second amendment to
                    the Credit Agreement dated as of September 27, 1996,
                    incorporated herein by reference to the Form 10-K of
                    Registrant filed with the Commission on March 31, 1997).

Exhibit 4.4         Amendment No. 3 dated June 13, 1997 to the Credit Agreement
                    dated as of September 27, 1996 , among National Medical
                    Care, Inc. and Certain Subsidiaries and Affiliates , as
                    Borrowers, Certain Subsidiaries and Affiliates, as
                    Guarantors, the Lenders named therein, NationsBank, N.A., as
                    paying agent and the Bank of Nova Scotia, the Chase
                    Manhattan Bank, N.A., Dresdner Bank AG and NationsBank, N.A.
                    as Managing Agents, as previously amended (incorporated
                    herein by reference to the Form 10-Q of the Registrant filed
                    with the Commission on November 14, 1997).

Exhibit 4.5         Amendment No. 4, dated August 26, 1997 to the Credit
                    Agreement dated as of September 27, 1996, among National
                    Medical Care, Inc. and Certain Subsidiaries and Affiliates,
                    as Borrowers, Certain Subsidiaries and Affiliates, as
                    Guarantors, the Lenders named therein, NationsBank, N.A., as
                    paying agent and the Bank of Nova Scotia, the Chase
                    Manhattan Bank, N.A., Dresdner Bank AG and NationsBank, N.A.
                    as Managing Agents, as previously amended (incorporated
                    herein by reference to the Form 10-Q of Registrant filed
                    with Commission on November 14, 1997).

Exhibit 4.6         Amendment No. 5 dated December 12, 1997 to the Credit
                    Agreement dated as of September 27, 1996, among National
                    Medical Care, Inc. and Certain Subsidiaries and Affiliates,
                    as Borrowers, Certain Subsidiaries and Affiliates, as
                    Guarantors, the Lenders named therein, NationsBank, N.A., as
                    paying agent and the Bank of Nova Scotia, the Chase
                    Manhattan Bank, N.A., Dresdner Bank AG and NationsBank, N.A.
                    as Managing Agents, as previously amended (incorporated
                    herein by reference to the Form 10-K of Registrant filed
                    with Commission on March 23, 1998).

Exhibit 4.7         Form of Consent to Modification of Amendment No. 5 dated
                    December 12, 1997 to the Credit Agreement dated as of
                    September 27, 1996 among National Medical Care, Inc. and
                    Certain Subsidiaries and Affiliates, as Borrowers, Certain
                    Subsidiaries and Affiliates, as Guarantors, the Lenders
                    named therein, NationsBank, N.A., as paying agent and the
                    Bank of Nova Scotia, the Chase Manhattan Bank, N.A.,
                    Dresdner Bank AG and NationsBank, N.A. as Managing Agents
                    (incorporated herein by reference to the Form 10-K of
                    Registrant filed with Commission on March 23, 1998).

Exhibit 4.8         Amendment No. 6 dated effective September 30, 1998 to the
                    Credit Agreement dated as of September 27, 1996, among
                    National Medical Care, Inc. and Certain Subsidiaries and
                    Affiliates, as Borrowers, Certain Subsidiaries and
                    Affiliates, as Guarantors, the Lenders named therein,
                    NationsBank, N.A., as paying agent and the Bank of Nova
                    Scotia, the Chase Manhattan Bank, N.A., Dresdner Bank AG and
                    NationsBank, N.A. as Managing Agents, as previously amended
                    (incorporated herein by reference to the Form 10-Q of
                    Registrant filed with Commission on November 12, 1998).

Exhibit 4.9         Amendment No. 7 dated as of December 31, 1998 to the Credit
                    Agreement dated as of September 27, 1996 among National
                    Medical Care, Inc. and Certain Subsidiaries and Affiliates,
                    as Borrowers, Certain Subsidiaries and Affiliates Guarantors
                    , the Lendors named therein, Nations Bank, N.A. as paying
                    agent and the Bank of Nova Scotia, the Chase Manhattan Bank,
                    Dresdner Bank A. G. and Nations Bank, N.A. as Managing
                    Agents (incorporated herein by reference to the Form 10-K of
                    registrant filed with Commission on March 9, 1999).

Exhibit 4.10        Fresenius Medical Care AG 1998 Stock Incentive Plan as
                    amended effective as of August 3, 1998 (incorporated herein
                    by reference to the Form 10-Q of Registrant filed with
                    Commission on May 14, 1998).

Exhibit 4.11        Senior Subordinated Indenture dated November 27, 1996, among
                    Fresenius Medical Care AG, State Street Bank and Trust
                    Company, as successor to Fleet National Bank, as Trustee and
                    the Subsidiary Guarantors named therein (incorporated herein
                    by reference to the Form 10-K of Registrant filed with the
                    Commission on March 31, 1997).


                                       49
<PAGE>   50


Exhibit 4.12        Senior Subordinated Indenture dated as of February 19, 1998,
                    among Fresenius Medical Care AG, State Street Bank and Trust
                    Company as Trustee and Fresenius Medical Care Holdings,
                    Inc., and Fresenius Medical Care AG, as Guarantors with
                    respect to the issuance of 7 7/8% Senior Subordinated Notes
                    due 2008 (incorporated herein by reference to the Form 10-K
                    of Registrant filed with Commission on March 23, 1998).

Exhibit 4.13        Senior Subordinated Indenture dated as of February 19, 1998
                    among FMC Trust Finance S.a.r.l. Luxemborg, as Insurer,
                    State Street Bank and Trust Company as Trustee and Fresenius
                    Medical Care Holdings, Inc., and Fresenius Medical Care AG,
                    as Guarantors with respect to the issuance of 7 3/8% Senior
                    Subordinated Notes due 2008 (incorporated herein by
                    reference to the Form 10-K of Registrant filed with
                    Commission on March 23, 1998).

Exhibit 10.1        Employee Benefits and Compensation Agreement dated September
                    27, 1996 by and among W. R. Grace & Co., National Medical
                    Care, Inc., and W. R. Grace & Co.-- Conn. (incorporated
                    herein by reference to the Registration Statement on Form
                    F-1 of Fresenius Medical Care AG, as amended (Registration
                    No. 333-05922), dated November 22, 1996 and the exhibits
                    thereto).

Exhibit 10.2        Purchase Agreement, effective January 1, 1995, between
                    Baxter Health Care Corporation and National Medical Care,
                    Inc., including the addendum thereto (incorporated by
                    reference to the Form SE of Fresenius Medical Care dated
                    July 29, 1996 and the exhibits thereto).

Exhibit 10.3        Agreement, dated November 25, 1992 between Bergen Brunswig
                    Drug Company and National Medical Care, Inc., including the
                    addendum thereto (incorporated by reference to the Form SE
                    of Fresenius Medical Care dated July 29, 1996 and the
                    exhibits thereto).

Exhibit 10.4*       Product Purchase Agreement, effective January 1, 1999,
                    between Amgen, Inc. and National Medical Care, Inc.,
                    including addendum thereto (incorporated by reference to the
                    Form 10-Q of the Registrant filed with the Commission on May
                    14, 1999).

Exhibit 10.5        Primary Guarantee dated July 31, 1996 (incorporated by
                    reference to the Registrant's Registration Statement on Form
                    S-4 (Registration No. 333-09497) dated August 2, 1996 and
                    the exhibits thereto).

Exhibit 10.6        Secondary Guarantee dated July 31, 1996 (incorporated by
                    reference to the Registrant's Registration Statement on Form
                    S-4 (Registration No. 333-09497) dated August 2, 1996 and
                    the exhibits thereto).

Exhibit 10.7        Receivables Purchase Agreement dated August 28, 1997 between
                    National Medical Care, Inc. and NMC Funding Corporation
                    (incorporated herein by reference to the Form 10-Q of the
                    Registrant filed with the Commission on November 14, 1997).

Exhibit 10.8        Amendment dated as of September 28, 1998 to the Receivables
                    Purchase Agreement dated as of August 28, 1997, by and
                    between NMC Funding Corporation, as Purchaser and National
                    Medical Care, Inc., as Seller (incorporated herein by
                    reference to the Form 10-Q of Registrant filed with
                    Commission on November 12, 1998).

Exhibit 10.9        Transfer and Administration Agreement dated August 28, 1997
                    among NMC Funding Corporation, National Medical Care, Inc.,
                    Enterprise Funding Corporation, the Bank Investors listed
                    therein and NationsBank, N.A., as agent (incorporated herein
                    by reference to the Form 10-Q of the Registrant filed with
                    the Commission on November 14, 1997).

Exhibit 10.10       Amendment No. 1 dated as of February 27, 1998 to Transfer
                    and Administration Agreement dated as of August 28, 1997
                    among NMC Funding Corporation, National Medical Care, Inc.,
                    Enterprise Funding Corporation, the Bank Investors listed
                    herein and NationsBank, N.A., as agent (incorporated herein
                    by reference to the Form 10-K of Registrant filed with
                    Commission on March 23, 1998).

Exhibit 10.11       Amendment No. 2 dated as of August 25, 1998 to Transfer and
                    Administration Agreement dated us of August 28, 1997 among
                    NMC Funding Corporation as Transferor, National Medical
                    Care, Inc., as Collection Agent, Enterprise Funding
                    Corporation, and Nations Bank, N.A. as agent for Enterprise
                    Funding Corporation and the Bank Investors


                                       50
<PAGE>   51


                    (incorporated herein by reference to the Form 10-Q of
                    Registrant filed with Commission on November 12, 1998).

Exhibit 10.12       Amendment No. 3 dated as of September 28, 1998 to Transfer
                    and Administration Agreement dated as of August 28, 1997
                    among NMC Funding Corporation as Transferor, National
                    Medical Care, Inc., as Collection Agent, Enterprise Funding
                    Corporation, and Nations Bank, N.A. as agent for Enterprise
                    Funding Corporation and the Bank Investors (incorporated
                    herein by reference to the Form 10-Q of Registrant filed
                    with Commission on November 12, 1998).

Exhibit 10.13       Employment agreement dated January 1, 1992 by and between
                    Ben J. Lipps and Fresenius USA, Inc. (incorporated herein by
                    reference to the Annual Report on Form 10-K of Fresenius
                    USA, Inc., for the year ended December 31, 1992).

Exhibit 10.14       Modification to FUSA Employment Agreement effective as of
                    January 1, 1998 by and between Ben J. Lipps and Fresenius
                    Medical Care AG (incorporated herein by reference to the
                    Form 10-Q of Registrant filed with Commission on May 14,
                    1998).

Exhibit 10.15       Employment Agreement dated July 1, 1997 by and between Jerry
                    A. Schneider and the Company (incorporated herein by
                    reference to the Form 10-Q of Registrant filed with
                    Commission on May 14, 1998).

Exhibit 10.16       Addendum to Employment Agreement dated as of September 18,
                    1997 by and between Jerry A. Schneider and the Company
                    (incorporated herein by reference to the Form 10-Q of
                    Registrant filed with Commission on May 14, 1998).

Exhibit 10.17       Separation Agreement dated as of July 21, 1998 by and
                    between Geoffrey W. Swett and National Medical Care, Inc.,
                    (incorporated herein by reference to the Form 10-Q of
                    Registrant filed with Commission on November 12, 1998).

Exhibit 10.18       Employment Agreement dated October 23, 1998 by and between
                    Roger G. Stoll and National Medical Care, Inc. (incorporated
                    herein by reference to the Form 10-K of Registrant filed
                    with Commission on March 9, 1999).

Exhibit 10.19       Employment Agreement dated November 11, 1998 by and between
                    William F. Grieco and National Medical Care, Inc.,
                    (incorporated herein by reference to the Form 10-K of
                    Registrant filed with Commission on March 9, 1999).

Exhibit 10.20       Separation Agreement dated as of September 30, 1999 by and
                    among William F. Grieco and Fresenius Medical Care Holdings,
                    Inc. and Fresenius Medical Care AG (incorporated herein by
                    reference to the Form 10-K of Registrant filed with
                    Commission on August 3, 1999).

Exhibit 10.21       Subordinated Loan Note dated as of May 18, 1999, among
                    National Medical Care, Inc. and Certain Subsidiaries with
                    Fresenius AG as lender (filed herein).

Exhibit 11          Statement re: Computation of Per Share Earnings.

Exhibit 27          Financial Data Schedule

(b)  Reports on Form 8-K

     On November 2, 1999, FMCH filed a report on Form 8-K showing preliminary
     results from operations of FMC, the parent corporation of the registrant,
     for the three months ended September 30, 1999.

*Confidential treatment has been granted as to certain portions of this Exhibit.


                                       51
<PAGE>   52


                                   SIGNATURES

     Pursuant to the requirement 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.


                                         Fresenius Medical Care Holdings, Inc.



DATE: November 22, 1999                  /s/ Ben J. Lipps
    -------------------                  ----------------
                                         NAME:  Ben J. Lipps
                                         TITLE: President (Chief Executive
                                                 Officer)



DATE: November 22, 1999                  /s/ Jerry A. Schneider
     ------------------                  ----------------------
                                         NAME:  Jerry Schneider
                                         TITLE: Chief Financial Officer


                                       52