<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: MARCH 31, 1998
                                --------------

                                       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            02173
-----------------------------------------------------            -----
       (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: 90,000,000 shares of common
stock, par value $1.00 per share, all of which are held by Fresenius Medical
Care AG.




                                       2
<PAGE>   3

             FRESENIUS MEDICAL CARE HOLDINGS, INC. AND SUBSIDIARIES

                                TABLE OF CONTENTS

PART I: FINANCIAL INFORMATION

   ITEM 1:   FINANCIAL STATEMENTS

             Consolidated Statements of Earnings
             Consolidated Statements of Comprehensive Income
             Consolidated Balance Sheets
             Consolidated Statements of Cash Flows
             Notes to Consolidated Financial Statements

   ITEM 2:   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND 
             RESULTS OF OPERATION

PART II: OTHER INFORMATION

   ITEM 1:   Legal Proceedings
   ITEM 5:   Other Information
   ITEM 6:   Exhibits and Reports on Form 8-K



                                       3
<PAGE>   4
                                     PART I

                              FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

             FRESENIUS MEDICAL CARE HOLDINGS, INC. AND SUBSIDIARIES

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

<TABLE>
<CAPTION>
                                                   THREE MONTHS ENDED
                                                        MARCH 31,
                                                 ----------------------
                                                   1998          1997
                                                 --------      --------

<S>                                              <C>           <C>     
NET REVENUES
     Health care services .................      $550,346      $478,481
     Medical supplies .....................       121,618       104,734
                                                 --------      --------
                                                  671,964       583,215
                                                 --------      --------

EXPENSES
     Cost of health care services .........       337,929       282,753
     Cost of medical supplies .............        82,937        83,537
     General and administrative expenses ..       108,645        82,628
     Provision for doubtful accounts ......        22,085        21,090
     Depreciation and amortization ........        60,086        55,903
     Research and development .............           489         1,133
     Interest expense, net, and related
       financing cost .....................        47,099        38,758
                                                 --------      --------
                                                  659,270       565,802
                                                 --------      --------
EARNINGS BEFORE INCOME TAXES ..............        12,694        17,413
PROVISION FOR INCOME TAXES ................         7,400         8,835
                                                 --------      --------
NET EARNINGS ..............................      $  5,294      $  8,578
                                                 ========      ========

Basic and fully dilutive earnings per share      $   0.06      $   0.09
</TABLE>

     See accompanying Notes to Unaudited, Consolidated Financial Statements



                                       4
<PAGE>   5


             FRESENIUS MEDICAL CARE HOLDINGS, INC. AND SUBSIDIARIES

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

<TABLE>
<CAPTION>
                                                  THREE MONTHS ENDED
                                                      MARCH 31,
                                                 -------------------
                                                  1998        1997
                                                 ------      -------
<S>                                              <C>         <C>    
NET EARNINGS ..............................      $5,294     $  8,578
Other comprehensive income
   Foreign currency translation adjustments       1,026      (11,130)
                                                 ------     --------
   Total other comprehensive income .......       1,026      (11,130)   
                                                 ------     --------
COMPREHENSIVE INCOME ......................      $6,320     $ (2,552)
                                                 ======     ========
</TABLE>


                                       5
<PAGE>   6


             FRESENIUS MEDICAL CARE HOLDINGS, INC. AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS
                             (DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                              MARCH 31,       DECEMBER 31,
                                                                1998              1997
                                                             ----------        ----------
                                                             (UNAUDITED)
<S>                                                          <C>               <C>       
ASSETS
Current Assets:
  Cash and cash equivalents ...........................      $   19,683        $   12,144
  Accounts receivable, less allowances of $153,671
   and $139,376 .......................................         444,533           526,026

  Inventories .........................................         162,865           147,697
  Deferred income taxes ...............................          95,718            94,905
  Other current assets ................................          80,977            91,511
  Net accounts receivable from affiliates .............          30,073            21,172
  Income taxes receivable .............................            --               8,405
                                                             ----------        ----------
      Total Current Assets ............................         833,849           901,860
                                                             ----------        ----------


Properties and equipment, net .........................         557,214           566,975
                                                             ----------        ----------

Other Assets:
  Excess of cost over the fair value of net assets
   Acquired and other intangible assets, net of
   accumulated amortization of $193,175 and $161,581 ..       3,438,339         3,316,271
  Other assets and deferred charges ...................          41,327            38,053
                                                             ----------        ----------
      Total Other Assets ..............................       3,479,666         3,354,324
                                                             ----------        ----------
Total Assets ..........................................      $4,870,729        $4,823,159
                                                             ==========        ==========

LIABILITIES AND EQUITY

Current Liabilities:
  Current portion of long-term debt and
   capitalized lease obligations ......................      $    9,407        $   21,612
  Accounts payable ....................................         141,426           132,377
  Accrued liabilities .................................         312,526           351,686
  Accrued income taxes ................................          14,212              --
                                                             ----------        ----------
      Total Current Liabilities .......................         477,571           505,674
Long-term debt ........................................       1,098,686         1,614,268
Non-current borrowings from affiliates ................       1,080,342           508,353
Capitalized lease obligations .........................           7,658             9,240
Deferred income taxes .................................         140,946           129,941
Other liabilities .....................................          30,023            25,718
                                                             ----------        ----------
      Total Liabilities ...............................       2,835,226         2,793,195
                                                             ----------        ----------

Equity:
  Preferred stocks, $100 par value ....................           7,412             7,412
  Preferred stocks, $.10 par value ....................           8,906             8,906
  Common stocks, $1 par value; 300,000,000 shares
   authorized; outstanding at March 31, 1998 and 1997,
   90,000,000 .........................................          90,000            90,000
  Paid in capital .....................................       1,967,710         1,967,914
  Retained earnings ...................................         (37,470)          (42,187)
  Accumulated comprehensive income ....................          (1,055)           (2,081)
                                                             ----------        ----------
      Total Equity ....................................       2,035,503         2,029,964
                                                             ----------        ----------
Total Liabilities and Equity ..........................      $4,870,729        $4,823,159
                                                             ==========        ==========
</TABLE>

     See accompanying Notes to Unaudited, Consolidated Financial Statements.



                                       6
<PAGE>   7

             FRESENIUS MEDICAL CARE HOLDINGS, INC. AND SUBSIDIARIES

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

<TABLE>
<CAPTION>
                                                                                   THREE MONTHS ENDED
                                                                                        MARCH 31,
                                                                               ---------------------------
                                                                                  1998             1997
                                                                               ---------       -----------
<S>                                                                            <C>             <C>        
Cash Flows from Operating Activities:
  Net earnings ..........................................................      $   5,294       $     8,578
  Adjustments to reconcile net earnings to net cash provided by
   Operating activities:
    Depreciation and amortization .......................................         60,087            55,903
    Provision for doubtful accounts .....................................         22,085            21,090
    Provision for (benefit of) deferred income taxes ....................         (1,238)               66
    (Loss) gain on disposal of properties and equipment .................            (67)                5

  Changes in operating assets and liabilities, net of effects of purchase
    Acquisitions and foreign exchange:
    Increase in accounts receivable .....................................        (61,750)          (29,552)
    Increase decrease in inventories ....................................        (14,453)             (627)
    Decrease (increase) in other current assets .........................         12,733            (9,275)
    Increase in other assets and deferred charges .......................         (4,355)           (1,643)
    Increase (decrease) in accounts payable .............................          8,929            (2,931)
    Increase in accrued income taxes ....................................         22,617             5,629
    Decrease in accrued liabilities .....................................        (41,374)          (40,276)
    Increase in other long-term liabilities .............................          4,305               530
    Net changes due to/from affiliates ..................................         (8,901)           (2,221)
    Other, net ..........................................................         (2,411)            3,798
                                                                               ---------       -----------
  Net cash provided by operating activities .............................          1,501             9,074
                                                                               ---------       -----------

Cash Flows from Investing Activities:
    Capital expenditures ................................................        (24,244)          (31,543)
    Payments for acquisitions, net of cash acquired .....................        (95,817)         (121,872)
                                                                               ---------       -----------
  Net cash used in investing activities .................................       (120,061)         (153,415)
                                                                               ---------       -----------

Cash Flows from Financing Activities:

    Increase in borrowings from affiliates ..............................        530,180           (34,510)
    Cash dividends paid .................................................           (130)             (130)
    Proceeds on issuance of debt ........................................         12,319           593,972
    Proceeds from receivable financing facility .........................        125,000            32,000
    Payments on debt and capitalized leases .............................       (541,690)         (447,441)
    Transfer of International operations ................................           (204)               --
    Other net ...........................................................           (447)            2,961
                                                                               ---------       -----------
  Net cash provided by financing activities .............................        125,028           146,852
                                                                               ---------       -----------
Effects of changes in foreign exchange rates ............................          1,071              (201)
                                                                               ---------       -----------
Increase in cash and cash equivalents ...................................          7,539             2,310
Cash and cash equivalents at beginning of period ........................         12,144            29,332
                                                                               ---------       -----------
Cash and cash equivalents at end of period ..............................      $  19,683       $    31,642
                                                                               =========       ===========

Supplemental disclosures of cash flow information:
  Cash paid during the period for:
    Interest ............................................................      $  37,787       $    30,625
    Income taxes (received)/ paid, net ..................................        (14,447)            3,788

Details for Acquisitions:
  Assets acquired .......................................................        139,960           122,794
  Liabilities assumed ...................................................          2,334               922
  Advances from affiliates ..............................................         41,809              --
                                                                               ---------       -----------
  Cash paid .............................................................         95,817           121,872
  Less cash acquired ....................................................           --                --
                                                                               ---------       -----------
  Net cash paid for acquisitions ........................................      $  95,817       $   121,872
                                                                               =========       ===========
</TABLE>

     See accompanying Notes to Unaudited, Consolidated Financial Statements



                                       7
<PAGE>   8

             FRESENIUS MEDICAL CARE HOLDINGS, INC. AND 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 ("FMCH or the
"Company"), is a subsidiary of Fresenius Medical Care AG, a German corporation.
("Fresenius Medical Care" or "FMC"). The Company conducts its operations through
two principal subsidiaries, National Medical Care, Inc., a Delaware Corporation
("NMC") and Fresenius USA, Inc., a Massachusetts corporation ("FUSA").

     The Company is primarily engaged in (i) providing kidney dialysis services
and clinical laboratory testing, (ii) manufacturing and distributing products
and equipment for dialysis treatment and (iii) providing home infusion therapy,
home respiratory services, diagnostic services and other medical services.

BASIS OF PRESENTATION

     BASIS OF CONSOLIDATION

     The consolidated financial statements in this report at March 31, 1998 and
1997 and for the three month interim periods then ended are unaudited and should
be read in conjunction with the consolidated financial statements in the
Company's 1997 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-month period ended March 31, 1998
are not necessarily indicative of the results of operations for the fiscal year
ending December 31, 1998.

      NEW STANDARDS

     The Company adopted the provisions of SFAS No. 130, Reporting Comprehensive
Income, effective January 1, 1998. This statement requires that all items that
are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. This statement further
requires that the Company classify items of other comprehensive income by their
nature in a financial statement and display the accumulated balance of other
comprehensive income separately from retained earnings and additional paid-in
capital in the equity section of a statement of financial position.



                                       8
<PAGE>   9

NOTE 2. INVENTORIES

<TABLE>
<CAPTION>
                                            MARCH 31,    DECEMBER 31,
                                              1998          1997
                                            --------      --------
<S>                                         <C>           <C>     
Inventories:
  Raw materials ......................      $ 32,046      $ 37,782
  Manufactured goods in process ......        17,460        14,074
  Manufactured and purchased inventory
   available for sale ................        79,025        63,709
                                            --------      --------
                                             128,531       115,565
   Health care supplies ..............        34,334        32,132
                                            --------      --------
       Total .........................      $162,865      $147,697
                                            ========      ========
</TABLE>

NOTE 3. DEBT

     Long-term debt to outside parties consists of:

<TABLE>
<CAPTION>
                                                              MARCH 31,     DECEMBER 31,
                                                                1998            1997
                                                             ----------      ----------

<S>                                                          <C>             <C>      
Credit Agreement ......................................      $1,085,600      $1,613,300
Third-party debt, primarily bank borrowings at variable
 interest rates (3% - 14%) with various maturities ....          14,138          13,348
                                                             ----------      ----------
                                                              1,099,738       1,626,648
Less amounts classified as current ....................           1,052          12,380
                                                             ----------      ----------
                                                             $1,098,686      $1,614,268
                                                             ==========      ==========
</TABLE>

     On February 27, 1998, FMCH increased its existing receivable financing
facility with Nations Bank to $331,000 from $204,000. As of March 31, 1998,
proceeds of $325,000 have been drawn down under the Nations Bank Agreement.

NOTE 4.  INTERNATIONAL OPERATIONS

     Effective January 1, 1998, FMCH transferred legal ownership of
significantly all of its international operations to FMC. This transfer was
accounted for on the cost basis since the international subsidiaries remain
under control of a common parent. The consolidated financial statements in this
report at March 31, 1998 and for the three month interim period then ended do
not include the operating results and cash flows of the international operations
which were transferred. The consolidated financial statements at March 31, 1997
and for the three month interim period then ended have been restated to exclude
operating results and cash flows of the international operations and to conform
to the current period presentation. Total international assets of $261,820 and
liabilities of $335,110, which included $261,991 of intercompany obligations
were transferred at December 31, 1997.

     The following table shows the restatement to net revenues and net earnings
for the prior periods:

<TABLE>
<CAPTION>
                                       THREE MONTHS      TWELVE MONTHS        THREE MONTHS
                                           ENDED              ENDED               ENDED
                                      MARCH 31, 1997    DECEMBER 31, 1997   DECEMBER 31, 1996
                                      --------------    -----------------   -----------------
<S>                                      <C>               <C>                  <C>      
Net Revenues:                                                                  
  Consolidated FMCH ...............      $ 624,394         $ 2,621,300          $ 630,566
  Less International Transfer .....         41,179             172,415             43,838
                                         ---------         -----------          ---------
  Restated FMCH ...................      $ 583,215         $ 2,448,885          $ 586,728
                                         =========         ===========          =========
                                                                               
Net Earnings/(deficit)                                                         
  Consolidated FMCH ...............      $   6,637         $    20,923          $   6,046
  Less International Transfer .....         (1,941)                786                715
                                         ---------         -----------          ---------
  Restated FMCH ...................      $   8,578         $    20,137          $   5,331
                                         =========         ===========          =========
Restated basic and fully 
  dilutive earnings per share......          $0.09               $0.22              $0.06
</TABLE>
                                                                             
     The following table shows the restatement to the previously reported
December 31, 1997 stockholders equity and earnings per share:

<TABLE>
<CAPTION>
                                       CONSOLIDATED     LESS INTERNATIONAL       RESTATED
                                           FMCH             TRANSFER              FMCH
                                      --------------    -----------------   -----------------
<S>                                      <C>               <C>                  <C>      
Net Equity.........................      $1,968,979        $(60,985)            $2,029,964
</TABLE>


                                       9
<PAGE>   10



NOTE 5.  COMMITMENTS AND CONTINGENCIES

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

     The Company, formerly known as W. R. Grace & Co. ("Grace New York"),
together with its wholly owned subsidiaries, National Medical Care, Inc. and its
subsidiaries ("NMC") and Fresenius USA, Inc. and its subsidiaries ("FUSA"), was
formed as a result of the series of transactions pursuant to the Agreement and
Plan of Reorganization dated as of February 4, 1996 by and between Grace New
York and Fresenius AG (the "Merger") formerly known as the Reorganization. In
connection with the Merger, W. R. Grace & Co.-Conn. ("Grace Chemicals") has
agreed to indemnify Grace New York and NMC against all liabilities of Grace New
York 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 Grace New York will remain contingently liable for certain
liabilities with respect to pre-Merger matters that are not related to NMC
operations. FMCH 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 FMCH. Subject to representations by Grace
Chemicals, FMCH and Fresenius AG, Grace Chemicals has agreed to indemnify FMCH
for such a tax liability. Were FMCH not able to collect on the indemnity, the
tax liability would have a material adverse effect on FMCH's business, the
financial condition of FMCH and the results of operations.

LEGAL PROCEEDINGS

     Government Investigations

     OIG INVESTIGATIVE SUBPOENAS

     In October 1995, NMC received five investigative subpoenas from the OIG.
The subpoenas were issued in connection with an investigation being conducted by
the OIG, the U.S. Attorney for the District of Massachusetts and others
concerning possible violations of federal laws, including the anti-kickback
statutes and the False Claims Act. The subpoenas call for extensive document
production relating to various aspects of NMC's business.

    In connection with the OIG Investigation, the Company continues to receive
additional subpoenas directed to NMC or the Company to obtain supplemental
information and documents regarding the above-noted issues, or to clarify the
scope of the original subpoenas.

     The Company is cooperating with the OIG Investigation. The Company believes
that the government continues to review and evaluate the voluminous information
the Company has provided. As indicated above, the government continues, from
time to time, to seek supplementing and/or clarifying information from the
Company. The Company expects that this process will continue while the
government completes its evaluation of the issues.

     The OIG Investigation covers the following areas: (a) NMC's dialysis
services business, principally relating to its Medical Director contracts and
compensation; (b) NMC's treatment of credit balances resulting from overpayments
received under the Medicare ESRD program, its billing for home dialysis
services, and its payment of supplemental medical insurance premiums on behalf
of indigent patients; (c) LifeChem's laboratory business, including documents
relating to testing procedures, marketing, customers, competition and certain
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, and a 1997 review of dialysis facilities' standing orders; and
(d) Homecare and, in particular, information concerning IDPN 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. As noted, 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 can be
substantial. While NMC asserts that it is able to offer legal and/or factual
defenses with respect to many of the areas the government has identified, there
can be no assurance that the federal government and/or one or more state
agencies will not claim that NMC has violated statutory or regulatory
provisions. Additionally, eight and possibly other 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.



                                       10
<PAGE>   11

     DIAGNOSTICS SUBPOENA

     In October 1996, Biotrax International, Inc. and NMC Diagnostics, Inc.,
both of which are subsidiaries of NMC, received an investigative subpoena from
the OIG. The subpoena calls for the production of extensive documents and was
issued in connection with an investigation being conducted by the OIG in
conjunction with the U.S. Attorney for the Eastern District of Pennsylvania
concerning the possible submission of false or improper claims to, and their
payment by, the Medicare program. The subpoena calls for the production of
documents on corporate organization, business plans, document retention,
personnel files, sales and marketing and Medicare billing issues relating to
certain procedures offered by the prior owner of the Biotrax business before its
assets were acquired by NMC in March 1994 and by DSI following the acquisition.
The Company has reviewed the subpoena with its legal counsel and is making
extensive document production in response to the subpoena. The outcome of this
investigation, its duration, and its effect, if any, on NMC or the Company
cannot be predicted at this time.

     MEDICAL DIRECTOR COMPENSATION

     The government is investigating whether DSD's 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. DSD 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 Medical Products Group ("MPG") on products purchased by the
Medical Director's facility from MPG 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.

     To comply with 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, DSD 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, DSD 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. DSD
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 DSD 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 DSD 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 its compensation
arrangements do not constitute illegal payments to induce referrals. NMC has
also asserted to the government that OIG auditors repeatedly reviewed NMC's
compensation arrangements with its Medical Directors in connection with their
audits of the costs claimed by DSD; that the OIG stated in its audit reports
that, with the exception of certain technical issues, NMC had complied with
applicable Medicare laws and regulations pertaining to the ESRD program; and
that NMC 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 claim that those specific
arrangements were or are unlawful.



                                       11
<PAGE>   12

     The government is also investigating whether DSD's profit sharing
arrangements with its Medical Directors influenced them 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.

     CREDIT BALANCES

     In the ordinary course of business, Medicare providers like DSD receive
overpayments from Medicare intermediaries for services that they provide to
Medicare 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 ending
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. DSD's 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 DSD 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 and that its initial
filing with the intermediaries disclosed the credit balance on the books and
records of DSD as shown in accordance with its policy, but there can be no
assurance that the government will accept NMC's views. The government has
inquired whether other divisions including Homecare, LifeChem and DSI have
appropriately treated Medicare credit balances.

     The government is also investigating whether DSD failed to disclose
Medicare overpayments that resulted from DSD's 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. DSD 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 DSD 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.

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 an NMC 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 



                                       12
<PAGE>   13

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.

     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 DSD 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 DSD 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 RPD supplies, the provision of computer equipment, the
provision of money for the purchase of computer equipment, and the provision of
research grants. NMC has identified certain instances in which benefits were
provided to MPG customers who purchased medical products from RPD and used
LifeChem's laboratory services. The government may claim that the provision of
such benefits violates, among other things, the anti-kickback statutes.

     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 at this time. 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.
Recently, the government served an investigative subpoena for documents
concerning the Company's 1997 review of dialysis facilities' standing orders,
and responsive documents were provided.

     INTRADIALYTIC PARENTERAL NUTRITION

     Administration kits. One of the principal activities of Homecare is to
provide IDPN therapy to dialysis patients at both NMC-owned facilities and at
facilities owned by other providers. 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 



                                       13
<PAGE>   14

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 is investigating whether NMC submitted false claims for
administration kits during the period from April 1, 1991 to June 30, 1992. NMC
asserts that the claims submitted in connection with billing for administration
kits were proper, but there can be no assurance that the government will accept
NMC's view. The government may claim that Homecare's billing for administration
kits during this period violates, 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
the 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 NMC cannot
represent that it followed this policy in every instance. The government is
investigating the propriety of Homecare's billings for infusion pumps and IV
poles.

     As noted above, under the new policies published by HCFA with respect to
IDPN therapy, the Company has not been 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 DSD
dialysis centers, the fee was $30 per administration, based upon internal DSD
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. NMC has identified instances in which other payments and
amounts beyond that reflected in a contract were paid to these third-party
centers. NMC has stopped paying "hang fees" to both DSD 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 may claim 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, NMC has been an industry
leader in identifying situations in which IDPN therapy is beneficial to ESRD
patients. It is the policy of Homecare 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 



                                       14
<PAGE>   15

approximately 9%. NMC 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. 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 patients' treating physician in
accordance with the requirements published by HCFA and its carrier agents. There
can be no assurance that the government will accept NMC's view or that the
government will not claim that Homecare submitted IDPN claims for individuals
who were not eligible for coverage or with inadequate documentation of
eligibility.

     In addition, the government is investigating whether, in certain
circumstances, documentation of eligibility was false or inaccurate. With
respect to some claims, the Company determined that false or inaccurate
documentation was submitted, deliberately or otherwise. The Company understands
that the government has recently utilized a grand jury to investigate this
matter.

     QUI TAM ACTIONS

     The Company and NMC have become aware that eight qui tam actions have been
filed in various jurisdictions. 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 SEC and NYSE periodically required filings.

     The first qui tam action was filed in the United States District Court for
the Southern District of Florida in 1996, 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. The Amended Complaint also seeks the
imposition of a constructive trust on the proceeds of the NMC dividend to Grace
Chemicals for the benefit of the United States on the ground that the Merger
constitutes a fraudulent conveyance that will render NMC unable to satisfy the
claims asserted in the Amended Complaint.

     The second 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.

     The third qui tam action was filed in the United States District Court for
the Eastern District of Pennsylvania in February 1996 and was disclosed to the
Company in November 1996. It alleges, among other things, that a pharmaceutical
manufacturer, an unaffiliated dialysis provider and NMC violated the False
Claims Act in connection with the submission of claims to the Medicare program
for a nonsterile intravenous drug and for intravenous drugs which were allegedly
billed in excess of permissible Medicare reimbursement rates. The complaint also
claims that the defendants violated the Medicare and Medicaid anti-kickback
statutes in connection with the receipt of discounts and other in kind payments
as alleged inducements to purchase intravenous drugs. The complaint is focused
on the business relationship between the pharmaceutical manufacturer and several
providers, one of which is NMC. The complaint claims that as a result of this
allegedly wrongful conduct, the United States suffered damages. On June 28,
1997, in response to relator's motion to dismiss and the United States'
declination to intervene, the District Court ordered the complaint dismissed
without prejudice.



                                       15
<PAGE>   16

     The fourth qui tam action was filed in the United States District Court for
the Eastern District of Pennsylvania in May 1995 and was disclosed to the
Company in August 1997. It alleges, among other things, that Biotrax
International, Inc., a subsidiary of NMC, violated the False Claims Act in
connection with its submission of claims to the Medicare program for diagnostic
tests and induced overutilization of such tests in the medical community through
improper marketing practices also in violation of the False Claims Act.

     The fifth qui tam action was filed in the United States District Court for
the Eastern District of Pennsylvania in August 1996 and was disclosed to the
Company in August 1997. It alleges, among other things, that Biotrax and NMC
Diagnostic Services induced overutilization of diagnostic tests by several named
and unnamed physician defendants in the local medical community, through
improper marketing practices and fee arrangements, in violation of the False
Claims Act.

     The sixth qui tam action was filed in the United States District Court for
the Eastern District of Pennsylvania in November 1996 and was disclosed to the
Company in August 1997. It alleges, among other things, that NMC, DSI and
Biotrax violated the False Claims Act in connection with the submission of
claims to the Medicare program by improperly upcoding and otherwise billing for
various diagnostic tests.

     The seventh qui tam action was filed in the United States District Court
for the District of Delaware in January 1997 and was disclosed to the Company in
September 1997. It alleges, among other things, that NMC and Biotrax violated
the False Claims Act in connection with the submission of claims to the Medicare
program for diagnostic tests, and induced overutilization of such tests through
improper marketing practices which provided impermissible incentives to health
care providers to order these tests.

     The eighth qui tam action was filed in the United States District Court for
the District of New Jersey in February 1997 and was disclosed to the Company in
September 1997. It alleges, among other things, that DSI and NMC violated the
False Claims Act in connection with the submission of claims to the Medicare
program for reimbursement for diagnostic tests, by causing unnamed physicians to
overutilize these tests though a variety of fee arrangements and other
impermissible inducements.

     Each of the qui tam complaints claims that as a result of the allegedly
wrongful conduct, the United States suffered damages and that the defendants are
liable to the United States 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 affect on the Company's
business, financial condition or results of operations.

     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, FMCH or NMC, on the one hand, and the United
States, on the other hand. As stated elsewhere herein, the outcome of the OIG
Investigation cannot be predicted. The entering into of the OIG Agreements is
not an admission of liability by any party with respect to the OIG
Investigation, nor does it indicate the liability, if any, which may result
therefrom.

     Pursuant to the OIG Agreements, upon consummation of the Merger, Fresenius
Medical Care, FMCH 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 this 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.

     FMCH 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
Fresenius Medical Care 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) 



                                       16
<PAGE>   17

compliance by the United States with such provisions is not a condition or
defense to the obligations of Fresenius Medical Care under the OIG Agreements
and (b) breach of such provisions by the United States cannot and will not be
raised by Fresenius Medical Care to excuse performance under the OIG Agreements.

     The foregoing describes the material terms of the OIG Agreements, copies of
which were previously filed with the U.S. Securities and Exchange Commission
(the "SEC" or 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 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. Under the new instruction,
no 18-month coordination of benefits period would arise, and Medicare would
remain the primary payor. HCFA further proposed that its new instruction be
effective retroactive to August 1993, the effective date of OBRA 93.

     If HCFA's reversal of its original implementation of the provisions of OBRA
93 that relate to ESRD patients for whom Medicare is the secondary payor is
upheld, 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 DSD of approximately $120 million as of December 31,
1995. 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. The litigation is continuing with respect to NMC's
request to enjoin HCFA's new policy, both retroactively and prospectively, and
NMC filed significant discovery requests concerning how HCFA developed the April
1995 rule. 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. Based on its finding, the Court also
ordered that HCFA is permanently enjoined from enforcing and applying the April
1995 rule retroactively against NMC and granted NMC's outstanding discovery
motions. The



                                       17
<PAGE>   18

Court took no action on HCFA's motion for summary judgment pending completion
of the outstanding discovery. The Court's favorable rulings provide a stronger
legal basis for NMC to collect outstanding amounts from commercial payors on the
retroactive portion of the case during the first half of 1998. HCFA elected not
to appeal from the Court's June 1995 and January 1998 orders and has agreed to a
schedule for providing discovery under the Court's January 1998 order. 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, FMCH's business, financial position and results of operations
would be materially adversely affected.

     INTRADIALYTIC PARENTERAL NUTRITION COVERAGE ISSUES

     NMC administers intradialytic parenteral nutrition ("IDPN")therapy to
chronic dialysis patients who suffer from severe gastrointestinal malfunctions.
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.

    Although NMC management believes that those IDPN claims were consistent with
published Medicare coverage guidelines and ultimately will be approved for
payment, there can be no assurance that the claims on appeal will be approved
for payment. Such claims represent substantial accounts receivable of NMC,
amounting to approximately $152 million as of December 31, 1997.

     If NMC is unable to collect its IDPN receivable 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, FMCH's business, financial
condition and results of operations could be materially adversely affected.

     OTHER LEGAL PROCEEDINGS

     DISTRICT OF NEW JERSEY INVESTIGATION

     NMC has 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
is cooperating with this investigation and has provided the grand jury with
extensive documents. In February, 1996, NMC received a letter from the U.S.
Attorney for the District of New Jersey indicating that it is 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 has 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.
The government investigators and the Company have been attempting to further
narrow the issues with respect to which the government has previously expressed
concerns in order to resolve this investigation. However, the outcome and
impact, if any, of these discussions and potential resolution on the Company's
business, financial condition or results of operations cannot be predicted at
this time.

     COMMERCIAL INSURER LITIGATION

     In December 1997, FMCH, NMC, and certain named NMC subsidiaries, as well as
Grace Chemicals, 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). Based in large part on information contained in prior 



                                       18
<PAGE>   19


securities filings, the lawsuit alleges inappropriate billing practices for
nutritional therapy, diagnostic and clinical laboratory tests and
misrepresentations. The complaint seeks unspecified damages and costs. Grace
Chemicals has sought indemnification from the Company pursuant to the terms of
an indemnification agreement between Grace and the Company for any liability,
costs and expenses that Grace may incur as a result of the lawsuit. The Company
has moved to dismiss the complaint on the grounds that it does not state a claim
against FMCH, NMC or their affiliates. This action is at an early stage 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 vigorously defend the lawsuit. It is also
possible that one or more other private payors may claim that NMC received
excess payments and similarly, may seek 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.






                                       19
<PAGE>   20




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 FMCH. The discussion should be read in conjunction with the
financial statements included elsewhere in this document.

     This section contains certain forward-looking statements. These
forward-looking statements are made based on management's expectations and
beliefs concerning future events impacting FMCH, but no assurance can be given
that such events will occur or that the results will be as anticipated. Such
statements include, without limitation, discussions concerning the outlook of
FMCH, government reimbursement, future plans and management's expectations
regarding future performance.

     The Company's businesses operate in highly competitive markets and are
subject to changes in general economic conditions, intense competition, foreign
exchange rate fluctuations, the degree of acceptance of a new product
introductions, the uncertainties of litigation, as well as other risks and
uncertainties detailed from time to time in the Company's Securities and
Exchange Commission filings.

     Developments in any of these areas, which are more fully described
elsewhere in Part I, Item 2, Part II, Item 1 and in Management's Discussion and
Analysis of Financial Condition and Results of Operations in the Company's 1997
Annual Report to stockholders, each of which is incorporated into this section
by reference, 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

     FMCH is primarily engaged in (a) providing kidney dialysis services and
clinical laboratory testing, (b) manufacturing and distributing products and
equipment for dialysis treatment, and (c) providing home infusion therapy, home
respiratory services, diagnostic services and other medical services. Throughout
FMCH's history, a significant portion of FMCH'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.

     FMCH derives a significant portion of its net revenues from Medicare,
Medicaid and other government health care programs (approximately 64% in 1997).
The reimbursement rates under these programs, including the Composite Rate, the
reimbursement rate for EPO (which accounted for approximately 23% of dialysis
service's domestic net revenues in 1997), 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.

     FMCH's business, financial position and results of operations also could be
materially adversely effected by an adverse outcome in the OIG investigations,
any whistleblower action, the pending challenge by FMCH 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 will change IDPN
coverage prospectively. FMCH's business, financial position and results of
operations would also 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.

     FMCH 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 in all areas except for certain services provided by NMC Homecare.
However, non-government payors are imposing cost containment measures that are
creating significant downward pressure on reimbursement levels that FMCH
receives for its services and products.

     Dialysis Services operated or managed dialysis centers in 3 foreign
countries at March 31, 1998. In certain countries, FMCH experiences lower
reimbursement rates per treatment for dialysis services than are generally
realized in the U.S. FMCH's international dialysis services operations currently
generate less operating profit per treatment than domestic dialysis operations
due to both the lower reimbursement rates in some countries and the start-up
nature of many of the centers in foreign countries.


                                       20
<PAGE>   21



RESULTS OF OPERATIONS

     The following table summarizes certain unaudited operating results of FMCH
by principal business unit for the periods indicated. Intercompany eliminations
primarily reflect sales of medical supplies by Dialysis Products to Dialysis
Services. This information has been reorganized and prior periods have been
reclassified to conform with the business unit report of FMC.

<TABLE>
<CAPTION>
                                             THREE MONTHS ENDED
                                                  MARCH 31,
                                           ----------------------
                                             1998          1997
                                           ---------    ---------
                                            (dollars in millions)

<S>                                           <C>         <C> 
Net Revenues:
     Dialysis Services .................      $498        $409
     Dialysis Products .................       172         151
     Homecare/Diagnostics ..............        62          80
     Intercompany Eliminations .........       (60)        (57)
                                              ----        ----
Total Net Revenues .....................      $672        $583
                                              ====        ====

Operating Earnings:
      Dialysis Services ................      $ 73        $ 60
      Dialysis Products ................        21          19
      Homecare/Diagnostics .............        (7)          3
                                              ----        ----
Total Operating Earnings ...............      $ 87        $ 82
                                              ====        ====

Other Expenses:
      General Corporate ................      $ 27        $ 24
      Research & Development ...........         1           1
      Interest Expense, Net ............        47          39
                                              ----        ----

Total Other Expenses: ..................      $ 75        $ 64
                                              ----        ----
Earnings Before Income Taxes ...........        12          18
Provision for Income Taxes .............         7           9
                                              ----        ----
Net Earnings ...........................      $  5        $  9
                                              ====        ====
</TABLE>


                                       21
<PAGE>   22


THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 31, 1997

     Net revenues for the first quarter of 1998 increased by 15% ($89 million)
over the comparable period of 1997, with Dialysis Services and Dialysis Products
accounting for most of the increase. Net earnings for the first quarter of 1998
decreased 44% ($4 million) over the comparable period of 1997 as a result of
higher interest expenses, partially offset by increased operating earnings of
Dialysis Services and Dialysis Products.

     DIALYSIS SERVICES.

     Dialysis Services net revenues for the first quarter of 1998 increased by
22% ($89 million) over the comparable period of 1997, primarily as a result of a
19% increase in the number of treatments provided and the beneficial impact of
the extension of the Medicare Secondary Payor (MSP) provision. Laboratory
testing revenues for the first quarter of 1998 increased by $10 million over the
comparable period of 1997. This was primarily due to the first quarter results
of Spectra Laboratories ($13 million), acquired by FMCH in June 1997, partially
offset by decreased testing volume of Renal Diagnostics ($2 million) and
LifeChem ($1 million).

     Dialysis Services operating earnings for the first quarter of 1998
increased by 22% ($13 million) over the comparable period of 1997 primarily due
to the increase in treatment volume, the beneficial impact of the extension of
the MSP provision, and reductions in laboratory testing expenses.

     DIALYSIS PRODUCTS.

     Dialysis Products net revenues for the first quarter of 1998 increased by
14% ($21 million) over the comparable period of 1997. This is due to increased
sales of dialyzers ($5 million), concentrates ($4 million), peritoneal products
($3 million), machines ($3 million), bloodlines ($2 million), and other products
($4 million).

     Dialysis Products operating earnings for the first quarter of 1998
increased by 10% ($2 million) over the comparable period of 1997. This is
primarily due to improvements in Gross Margin, particularly in dialyzers,
partially offset by increases to freight and distribution expenses.

     HOMECARE/DIAGNOSTICS

     Homecare/Diagnostics net revenues for the first quarter of 1998 decreased
by 22% ($18 million) as compared to the first quarter of 1997. This is primarily
due to decreases in infusion therapy revenues mainly due to continued price
compression from managed care ($7 million), decreased volume related to changes
in Medicare qualification procedures for IDPN patients ($8 million), the effect
of the sale of Home Health business ($3 million), and decreases in the number of
diagnostic services primary care tests ($3 million). These decreases were
partially offset by increases in respiratory therapy revenues ($3 million).

     Homecare/Diagnostics operating earnings for the first quarter of 1998
decreased by $10 million as compared to the first quarter of 1997, primarily due
to continued pricing pressure resulting from managed care, the decline in the
number of Medicare patients who receive IDPN treatments, and decreases in the
volume of diagnostic services tests.

     OTHER EXPENSES.

     FMCH's other expenses for the first quarter of 1998 increased by 17% ($11
million) over the comparable period of 1997. General corporate expenses
increased by $3 million due to a reduction in foreign exchange gains. Research
and development expenses for the first quarter of 1998 were essentially the same
as the comparable period of 1997. Interest expense for the first quarter of 1998
increased by $8 million over the comparable period of 1997 mainly due to an
increase in debt to finance acquisitions..

     INCOME TAX RATE.

     The effective tax rate for the first quarter 1998 (58.3%) is significantly
higher than the rate for the comparable period of 1997 (50.7 %) due primarily to
a first quarter 1997 rate reduction related to the loss carryover of FUSA.



                                       22
<PAGE>   23
LIQUIDITY AND CAPITAL RESOURCES

     FMCH made acquisitions totaling $138 million (including $42 million
issuance of investment securities) and $122 million, during the first three
months of 1998 and 1997, respectively. FMCH made capital expenditures for
internal expansion, improvements, new furnishings and equipment of $24 million
and $32 million during the first three months of 1998 and 1997, respectively.
The Company intends to capitalize on the continuing shift in the U.S. from
physician-owned and hospital-based dialysis clinics to multi-center providers by
acquiring existing dialysis centers and the establishment of new or expanded
centers and, accordingly, will require significant capital resources to pursue
its growth strategy in the dialysis marketplace. FMCH may also make other
strategic acquisitions in the future.

     FMCH also requires capital resources for working capital purposes. FMCH
used cash to fund increases in accounts receivable of $62 million and $30
million during the first three months of 1998 and 1997, respectively. The
increases in accounts receivable reflect growth in NMC's business operations
and, beginning in 1994, the sharp reduction in IDPN claims approved for payment.

     During the first three months of 1998, FMCH funded its acquisitions and
capital expenditures primarily through proceeds from external short and
long-term debt and the proceeds from the receivable financing facility. In
addition, acquisitions were also funded through issuance of investment
securities by a Luxemborg subsidiary ("FMC Finance"), of Fresenius Medical Care
AG ("FMC). An intercompany payable ($42 million) has been established between
FMC Finance and FMCH. During the first three months of 1998, FMCH increased
borrowings from affiliates ($530 million), which were used primarily in
connection with repayment of external debt.

     Effective July 1, 1995, FMCH ceased to recognize the incremental revenue
provided under HCFA's initial instruction under OBRA 93, although it continued
to bill private third-party payors for these amounts through December 31, 1995.
FMCH 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
June 30, 1995, FMCH may be able to rebill such services to third-party payors
and, as a result, FMCH's future results of operations and financial position
would be favorably affected by the incremental revenue that FMCH would
recognize. 

     On February 27, 1998, FMCH increased its existing financing facility to
$331 million. As of March 31, 1998, proceeds of $325 million have been drawn
down under the Nations Bank agreement, an increase of $125 million from December
31, 1997.

     The liquidity of FMCH is contingent upon a number of factors, principally
FMCH's future operating results and the contingencies referred to below. FMCH
believes that its current levels of liquidity, including availability under the
NMC Credit Agreement, are sufficient to meet its foreseeable needs. If existing
sources of funds are not sufficient to provide liquidity, FMCH may need to sell
assets or obtain debt or equity financing from additional external sources.
There can be no assurance that FMCH will be able to do so on satisfactory terms,
if at all.


                                       23
<PAGE>   24

IMPACT OF INFLATION

     A substantial portion of FMCH'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 FMCH's business and results of
operations, possibly materially.

CONTINGENCIES

     FMCH is the subject of investigations by several federal agencies and
authorities, is a plaintiff in litigation against the federal government with
respect to the implementation of OBRA 93 and coverage for IDPN therapy, and is
seeking to change a proposed revision to IDPN coverage policies. An adverse
outcome in any of these matters, beyond the reserves which have established,
could have a material adverse effect on FMCH's business, financial condition and
results of operations



                                       24
<PAGE>   25
                                    PART II

                               OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

    As discussed in greater detail below, most aspects of NMC's U.S. businesses
are the subject of criminal or civil investigations by several federal agencies
and authorities, the outcome of which cannot be predicted. If the government
were successfully to pursue claims arising from any of these investigations, NMC
or one or more of its subsidiaries could be subject to civil or criminal
penalties, including substantial fines, suspension of payments or exclusion from
the Medicare and Medicaid programs as well as other federal health care benefit
programs, which provide over 60% of NMC's revenues. In addition, NMC could be
required to change billing or other practices which could adversely affect NMC's
revenues. In addition, as discussed below, NMC has become aware that it is the
subject of qui tam or "whistleblower" actions with respect to some or all of the
issues raised by the government investigations, 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. The Company and FMCH 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. See "--OIG Agreements."

     An adverse result in any of such governmental investigations or
"whistleblower" proceedings could have a material adverse effect on the
Company's business, financial condition and results of operations.

     OIG INVESTIGATION

     In October 1995, NMC received five investigative subpoenas from the OIG.
The subpoenas were issued in connection with an investigation being conducted by
the OIG, the U.S. Attorney for the District of Massachusetts and others
concerning possible violations of federal laws, including the anti-kickback
statutes and the False Claims Act. The subpoenas call for extensive document
production relating to various aspects of NMC's business.

     In connection with the OIG Investigation, the Company continues to receive
additional subpoenas directed to NMC or the Company to obtain supplemental
information and documents regarding the above-noted issues, or to clarify the
scope of the original subpoenas.

     The Company is cooperating with the OIG Investigation. The Company believes
that the government continues to review and evaluate the voluminous information
the Company has provided. As indicated above, the government continues, from
time to time, to seek supplementing and/or clarifying information from the
Company. The Company expects that this process will continue while the
government completes its evaluation of the issues.

     The OIG Investigation covers the following areas: (a) NMC's dialysis
services business, principally relating to its Medical Director contracts and
compensation; (b) NMC's treatment of credit balances resulting from overpayments
received under the Medicare ESRD program, its billing for home dialysis
services, and its payment of supplemental medical insurance premiums on behalf
of indigent patients; (c) LifeChem's laboratory business, including documents
relating to testing procedures, marketing, customers, competition and certain
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, and a 1997 review of dialysis facilities' standing orders; and
(d) Homecare and, in particular, information concerning IDPN 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. As noted, 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 can be
substantial. While NMC asserts that it is able to offer legal and/or factual
defenses with respect to many of the areas the government has identified, there
can be no assurance that the federal government and/or one or more state
agencies will not claim that NMC has violated statutory or regulatory
provisions. Additionally, eight and possibly other 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.

     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



                                       25
<PAGE>   26

adverse effect on the Company's business, financial condition and results of
operations. 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 DSD's 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. DSD 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 Medical Products Group ("MPG") on products purchased by the
Medical Director's facility from MPG 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.

     To comply with 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, DSD 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, DSD 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. DSD
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 DSD 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 DSD 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 its compensation
arrangements do not constitute illegal payments to induce referrals. NMC has
also asserted to the government that OIG auditors repeatedly reviewed NMC's
compensation arrangements with its Medical Directors in connection with their
audits of the costs claimed by DSD; that the OIG stated in its audit reports
that, with the exception of certain technical issues, NMC had complied with
applicable Medicare laws and regulations pertaining to the ESRD program; and
that NMC 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 claim that those specific
arrangements were or are unlawful.

     The government is also investigating whether DSD's profit sharing
arrangements with its Medical Directors influenced them 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.

     CREDIT BALANCES

     In the ordinary course of business, Medicare providers like DSD receive
overpayments from Medicare intermediaries for services that they provide to
Medicare 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 ending
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. DSD's policy was to notify Medicare intermediaries in writing 



                                       26
<PAGE>   27

of overpayments upon receipt and to maintain unrecouped Medicare overpayments as
credit balances on the books and records of DSD 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 and that its initial
filing with the intermediaries disclosed the credit balance on the books and
records of DSD as shown in accordance with its policy, but there can be no
assurance that the government will accept NMC's views. The government has
inquired whether other divisions including Homecare, LifeChem and DSI have
appropriately treated Medicare credit balances.

     The government is also investigating whether DSD failed to disclose
Medicare overpayments that resulted from DSD's 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. See "--OBRA 93." DSD 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 DSD 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

     DSD provided grants or loans for the payment of premiums for supplemental
medical insurance (under which Medicare Part B coverage is provided) on behalf
of a small percentage of its patients who are financially needy. The practice of
providing loans or grants for the payment of supplemental medical insurance
premiums by NMC was one of the subjects of review by the government as part of
the OIG investigation. 

     The Government, however, advised the Company orally that it is no longer
pursuing this issue. Furthermore, as a result of the passage of HIPPA, the
Company terminated making such payments on behalf of its patients. Instead, the
Company, together with other representatives of the industry, obtained an
advisory opinion from the OIG, whereby, consistent with specified conditions,
the Company and other similarly situated providers may make contributions to a
non-profit organization that has volunteered to make these payments on behalf of
indigent ESRD patients, including patients of the Company.

     OVERPAYMENTS FOR HOME DIALYSIS SERVICES

     NMC acquired 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 an NMC 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 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 



                                       27
<PAGE>   28

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.

     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 DSD 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 DSD 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 RPD supplies, the provision of computer equipment, the
provision of money for the purchase of computer equipment, and the provision of
research grants. NMC has identified certain instances in which benefits were
provided to MPG customers who purchased medical products from RPD and used
LifeChem's laboratory services. The government may claim that the provision of
such benefits violates, among other things, the anti-kickback statutes.

     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 at this time. 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.
Recently, the government served an investigative subpoena for documents
concerning the Company's 1997 review of dialysis facilities' standing orders,
and responsive documents were provided.

     IDPN

     Administration kits. As discussed above, one of the principal activities of
Homecare is to provide IDPN therapy to dialysis patients at both NMC-owned
facilities and at facilities owned by other providers. 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 is investigating whether NMC submitted false claims for
administration kits during the period from April 1, 1991 to June 30, 1992. NMC
asserts that the claims submitted in connection with billing for administration
kits were proper, but there can be no assurance that the government will accept
NMC's view. The government may claim that Homecare's billing for administration
kits during this period violates, 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
the 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 NMC cannot




                                       28
<PAGE>   29

represent that it followed this policy in every instance. The government is
investigating the propriety of Homecare's billings for infusion pumps and IV
poles.

     As noted above, under the new policies published by HCFA with respect to
IDPN therapy, the Company has not been 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 DSD
dialysis centers, the fee was $30 per administration, based upon internal DSD
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. NMC has identified instances in which other payments and
amounts beyond that reflected in a contract were paid to these third-party
centers. NMC has stopped paying "hang fees" to both DSD 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 may claim 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, NMC has been an industry
leader in identifying situations in which IDPN therapy is beneficial to ESRD
patients. It is the policy of Homecare 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%.
NMC 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. See "--IDPN Coverage Issues." 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. 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 patients' treating physician in
accordance with the requirements published by HCFA and its carrier agents. There
can be no assurance that the government will accept NMC's view or that the
government will not claim that Homecare submitted IDPN claims for individuals
who were not eligible for coverage or with inadequate documentation of
eligibility.

     In addition, the government is investigating whether, in certain
circumstances, 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 Company understands
that the government recently has utilized a grand jury to investigate this
matter.

     QUI TAM ACTIONS

     The Company and NMC have become aware that eight qui tam actions have been
filed in various jurisdictions. 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 SEC and NYSE periodically required filings.

     The first qui tam action was filed in the United States District Court for
the Southern District of Florida in 1996, 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. The Amended Complaint also seeks the
imposition of a constructive trust on the proceeds of the NMC dividend to Grace
Chemicals for the benefit of the United States on the ground that the Merger
constitutes a fraudulent conveyance that will render NMC unable to satisfy the
claims asserted in the Amended Complaint.

     The second qui tam action was filed in the United States District Court for
the Middle District of Florida in 1995 and 



                                       29
<PAGE>   30

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.

     The third qui tam action was filed in the United States District Court for
the Eastern District of Pennsylvania in February 1996 and was disclosed to the
Company in November 1996. It alleges, among other things, that a pharmaceutical
manufacturer, an unaffiliated dialysis provider and NMC violated the False
Claims Act in connection with the submission of claims to the Medicare program
for a nonsterile intravenous drug and for intravenous drugs which were allegedly
billed in excess of permissible Medicare reimbursement rates. The complaint also
claims that the defendants violated the Medicare and Medicaid anti-kickback
statutes in connection with the receipt of discounts and other in kind payments
as alleged inducements to purchase intravenous drugs. The complaint is focused
on the business relationship between the pharmaceutical manufacturer and several
providers, one of which is NMC. The complaint claims that as a result of this
allegedly wrongful conduct, the United States suffered damages. On June 28,
1997, in response to relator's motion to dismiss and the United States'
declination to intervene, the District Court ordered the complaint dismissed
without prejudice.

     The fourth qui tam action was filed in the United States District Court for
the Eastern District of Pennsylvania in May 1995 and was disclosed to the
Company in August 1997. It alleges, among other things, that Biotrax
International, Inc., a subsidiary of NMC, violated the False Claims Act in
connection with its submission of claims to the Medicare program for diagnostic
tests and induced overutilization of such tests in the medical community through
improper marketing practices also in violation of the False Claims Act.

     The fifth qui tam action was filed in the United States District Court for
the Eastern District of Pennsylvania in August 1996 and was disclosed to the
Company in August 1997. It alleges, among other things, that Biotrax and NMC
Diagnostic Services induced overutilization of diagnostic tests by several named
and unnamed physician defendants in the local medical community, through
improper marketing practices and fee arrangements, in violation of the False
Claims Act.

     The sixth qui tam action was filed in the United States District Court for
the Eastern District of Pennsylvania in November 1996 and was disclosed to the
Company in August 1997. It alleges, among other things, that NMC, DSI and
Biotrax violated the False Claims Act in connection with the submission of
claims to the Medicare program by improperly upcoding and otherwise billing for
various diagnostic tests.

     The seventh qui tam action was filed in the United States District Court
for the District of Delaware in January 1997 and was disclosed to the Company in
September 1997. It alleges, among other things, that NMC and Biotrax violated
the False Claims Act in connection with the submission of claims to the Medicare
program for diagnostic tests, and induced overutilization of such tests through
improper marketing practices which provided impermissible incentives to health
care providers to order these tests.

     The eighth qui tam action was filed in the United States District Court for
the District of New Jersey in February 1997 and was disclosed to the Company in
September 1997. It alleges, among other things, that DSI and NMC violated the
False Claims Act in connection with the submission of claims to the Medicare
program for reimbursement for diagnostic tests, by causing unnamed physicians to
overutilize these tests though a variety of fee arrangements and other
impermissible inducements.

     Each of the qui tam complaints claims that as a result of the allegedly
wrongful conduct, the United States suffered damages and that the defendants are
liable to the United States 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 affect 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, FMCH or NMC, on the one hand, and the United
States, on the other hand. As stated elsewhere herein, the outcome of the OIG
Investigation cannot be predicted. The entering into of the OIG Agreements is
not an admission of liability by any party with respect to the OIG
Investigation, nor does it indicate the liability, if any, which may result
therefrom.

     Pursuant to the OIG Agreements, upon consummation of the Merger, Fresenius
Medical Care, FMCH 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 this 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.



                                       30
<PAGE>   31

     Fresenius Medical Care 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 Fresenius Medical Care 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 or defense to the obligations of Fresenius Medical Care under
the OIG Agreements and (b) breach of such provisions by the United States cannot
and will not be raised by Fresenius Medical Care to excuse performance under the
OIG Agreements.

     The foregoing describes the material terms of the OIG Agreements, copies of
which were previously filed with the U.S. Securities and Exchange Commission
(the "SEC" or 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.

     DIAGNOSTICS SUBPOENA

     In October 1996, Biotrax International, Inc. and NMC Diagnostics, Inc.,
both of which are subsidiaries of NMC, received an investigative subpoena from
the OIG. The subpoena calls for the production of extensive documents and was
issued in connection with an investigation being conducted by the OIG in
conjunction with the U.S. Attorney for the Eastern District of Pennsylvania
concerning the possible submission of false or improper claims to, and their
payment by, the Medicare program. The subpoena calls for the production of
documents on corporate organization, business plans, document retention,
personnel files, sales and marketing and Medicare billing issues relating to
certain procedures offered by the prior owner of the Biotrax business before its
assets were acquired by NMC in March 1994 and by DSI following the acquisition.
The Company has reviewed the subpoena with its legal counsel and is making
extensive document production in response to the subpoena. The outcome of this
investigation, its duration, and its effect, if any, on NMC or the Company
cannot be predicted at this time.

     EASTERN DISTRICT OF VIRGINIA

     In December 1994, a subsidiary of NMC received a subpoena from a federal
grand jury in the Eastern District of Virginia investigating the contractual
relationships between subsidiaries of NMC that provide dialysis services and
third parties that provide medical directorship and related services to those
subsidiaries. There has been no communication from the government since a
January 1995 document production and the outcome of this investigation and its
effect, if any, on NMC cannot be predicted at this time.

     DISTRICT OF NEW JERSEY INVESTIGATION

     NMC has 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
is cooperating with this investigation and has provided the grand jury with
extensive documents. In February, 1996, NMC received a letter from the U.S.
Attorney for the District of New Jersey indicating that it is 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 has 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.
The government investigators and the Company have been attempting to further
narrow the issues with respect to which the government has previously expressed
concerns in order to resolve this investigation. However, the outcome and
impact, if any, of these discussions and potential resolution on the Company's
business, financial condition or results of operations cannot be predicted at
this time.

     FDA MATTERS

     Since 1993, NMC has engaged in a number of voluntary recalls of products
that it manufactured or that were manufactured by third parties and distributed
by NMC. None of these product recalls has resulted in fines or penalties for
NMC. In 1995, Fresenius USA completed a voluntary action with respect to the
Optum(R) exchange device that Fresenius USA acquired from Abbott, which was
classified by the FDA as a recall. The FDA reviewed Fresenius USA's actions with
respect to this device and determined that they were adequate.

     During the period from 1991 through 1993, the FDA issued warning letters
concerning four of the six RPD facilities in the 

                                       31






<PAGE>   32
U.S., as well as import alerts concerning hemodialysis bloodlines manufactured
at NMC's Reynosa, Mexico facility and Focus(R) brand hemodialyzers manufactured
at NMC's Dublin, Ireland facility. As a result of the import alerts, NMC was
prohibited from importing the products covered by the alerts into the U.S. until
the FDA confirmed compliance with GMP requirements at the facilities where such
products were manufactured.

     In January 1994, NMC and certain members of its senior management entered
into the Consent Decree providing that the importation of bloodlines and
hemodialyzers could resume upon certification by NMC that the relevant
manufacturing facility complied with GMP requirements and successful completion
of an FDA inspection at the relevant facility to confirm compliance. The Consent
Decree also required NMC to certify, and be inspected for, GMP compliance at all
of RPD's manufacturing facilities in the U.S. Under the Consent Decree, RPD
committed to maintaining ongoing compliance with GMP and related requirements at
both U.S. and non-U.S. manufacturing facilities. As a result of the Consent
Decree, NMC's U.S. facilities were required to undertake significant GMP
improvements.

     NMC submitted all required certifications for its U.S. and non-U.S.
facilities in accordance with timetables specified in the Consent Decree, and
the bloodline import alert was lifted in March 1994. During the course of 1994
and 1995, NMC also worked with the FDA and demonstrated that its other
manufacturing facilities in the U.S. were in compliance with GMP requirements.
The hemodialyzer manufacturing facility in Dublin, Ireland was inspected by the
FDA in April and December 1994 but did not pass inspection. NMC completed all
remaining corrective actions, and in December 1995 the FDA determined that the
Dublin facility was in compliance with GMP requirements and lifted the import
alert. No fines or penalties have been imposed on NMC as a result of the FDA's
actions or in connection with the Consent Decree. By policy, however, the FDA
generally will undertake more frequent and more rigorous inspections of
facilities that have been subject to consent decrees. The Consent Decree was
lifted in January 1997. In February 1997, the Company closed its Dublin, Ireland
facility. 

     On January 24, 1995, the FDA issued a warning letter and import alert
relating to NMC's manufacture of Diafilter(R) products at its Limerick, Ireland
facility. That facility was not expressly named in the Consent Decree described
above. Because NMC voluntarily ceased importing Diafilters(R) into the U.S. in
December 1994, and, for business reasons, decided to shut down the Diafilter(R)
business at the Limerick facility on January 23, 1995, no subsequent compliance
review was deemed necessary by the FDA. NMC was not restricted from importing
into the U.S. the other products manufactured at the Limerick facility.

     In 1994 and 1995, the FDA inspected Fresenius USA's manufacturing
facilities in Maumee, Ohio, Ogden, Utah and Walnut Creek, California. At each
location, violations of certain GMPs were found. At the Walnut Creek facility,
violations of pre-market notification filing requirements were also found,
although these findings were subsequently reversed when the devices in question
were determined to be covered by appropriate filings. The FDA issued warning
letters with respect to each facility, as a result of which the issuance of new
510(k) notices and new export clearances was placed on administrative hold.
Fresenius USA responded to the inspection findings at Maumee in a manner it
believes addresses the FDA's findings. Fresenius USA subsequently closed the
Maumee facility in connection with the relocation of production from that
facility to a facility in Lewisberry, Pennsylvania. Fresenius USA undertook an
exhaustive review of the FDA's findings relating to Walnut Creek and submitted a
detailed response to those findings. The Ogden plant was reinspected in 1995 and
the administrative holds have been lifted from both Ogden and Walnut Creek. The
Walnut Creek facility was inspected again in January and February of 1996 and
Fresenius USA was advised that all GMP issues raised by the FDA have been
resolved. Fresenius USA believes that its facilities are currently in compliance
in all material respects with applicable state, local and federal requirements.

     In August 1996, Fresenius USA undertook a voluntary North American recall
of certain lots of its peritoneal dialysis solutions which were associated with
aseptic peritonitis. This condition is an inflammation of the abdominal cavity
not caused by infection. The patients affected in the episode recovered quickly
after using non-suspect product lots. In the recall, Fresenius USA notified
hospitals and dialysis centers that received the recalled lots as well as
individual patients. Patients with recalled lots were provided with replacement
solution, and a toll free telephone number for patient inquiries was
established. Fresenius USA cooperated with the FDA and other government agencies
in resolving the matter.

     In addition, the FDA may inspect facilities in the ordinary course of
business to ensure compliance with GMP and other applicable regulations. The
Company intends to address expeditiously any FDA findings resulting from such
inspections.

     COMMERCIAL INSURER LITIGATION

     In December 1997, FMCH, NMC, and certain named NMC subsidiaries, as well as
Grace, 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). 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 complaint seeks
unspecified damages and costs. Grace has sought indemnification from the Company
pursuant to the terms of an indemnification agreement between Grace and the
Company for any liability, costs and expenses that Grace may incur as a result
of the lawsuit. The Company has moved to dismiss the complaint on the grounds
that it does not state a claim against FMCH, NMC or their affiliates. This
action is at an early stage 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
vigorously defend the lawsuit. It is also possible that one or more other
private payors may claim that NMC received excess payments and similarly, may
seek reimbursement

                                       32
<PAGE>   33
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.

     INTERNATIONAL LEGAL PROCEEDINGS AND REGULATORY CLAIMS

     As discussed above, as a general matter, licenses and certifications are
required in connection with the operation of dialysis clinics outside the United
States, and the Company is dependent upon NMC's ability to obtain and maintain
such licenses and certifications. NMC lacks certain licenses and certifications
technically required to operate its facilities in Portugal. However, based on
discussions with regulatory officials in Portugal, NMC management does not
believe that the absence of such licenses will have a material adverse effect on
NMC or materially affect its ability to operate such facilities.

     The Company has conducted an investigation regarding suspected fraudulent
activity of the General Manager of the Company's dialysis and laboratory
operations in Portugal. The Company recently completed an analysis of the effect
of such activities and expensed approximately $10 million related to the fraud
and FMCH increased reserves by $10 million related to uncollectible accounts and
tax matters, none of which was material to any prior year, during the third
quarter 1996. The Company is pursuing actions against the responsible
individuals and possible recovery of such losses under insurance coverage.
Additionally, FMCH has written off $9 million related to franchise fees for its
operations in Brazil.



                                       33
<PAGE>   34
     MEDICARE CERTIFICATION ISSUES

     As discussed above, licenses and certification for participation in the
Medicare and Medicaid programs are regulated at the federal, state and local
levels. The Medicare carriers serving Florida, New Jersey, Pennsylvania, South
Carolina, West Virginia and Ohio, have implemented or are considering the
implementation of coverage policies that may restrict the ability of
nuclear-imaging providers, such as DSI, to qualify as a provider for this
service. If DSI is not permitted to bill for these services as a Medicare
provider, it may be able to bill physicians for the services DSI provides.

     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 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. Under the new instruction,
no 18-month coordination of benefits period would arise, and Medicare would
remain the primary payor. HCFA further proposed that its new instruction be
effective retroactive to August 1993, the effective date of OBRA 93.

     If HCFA's reversal of its original implementation of the provisions of OBRA
93 that relate to ESRD patients for whom Medicare is the secondary payor is
upheld, 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 DSD of approximately $120 million as of December 31,
1995. 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. The litigation is continuing with respect to NMC's
request to enjoin HCFA's new policy, both retroactively and prospectively, and
NMC filed significant discovery requests concerning how HCFA developed the April
1995 rule. 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. Based on its finding, the Court also
ordered that HCFA is permanently enjoined from enforcing and applying the April
1995 rule retroactively against NMC and granted NMC's outstanding discovery
motions. The Court took no action on HCFA's motion for summary judgment pending
completion of the outstanding discovery. The Court's favorable rulings provide a
stronger legal basis for NMC to collect outstanding amounts from commercial
payors on the retroactive portion of the case during the first half of 1998.
HCFA elected not to appeal from the Court's June 1995 and January 1998 orders
and has agreed to a schedule for providing discovery under the Court's January
1998 order. 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, FMCH's business, financial
position and results of operations would be materially adversely affected.

     SECURITIES AND EXCHANGE COMMISSION INVESTIGATION

     In April 1996, FMCH (then called W.R. Grace & Co.) received a formal order
of investigation issued by the Commission directing an investigation into, among
other things, whether Grace violated the federal securities laws by filing
periodic reports with the Commission that contained false and misleading
financial information. Pursuant to this formal order of investigation, FMCH has
produced documents pursuant to subpoenas from the Southeast Regional Office of
the Commission relating to reserves (net of applicable taxes) established by
FMCH and NMC during the period from January 1, 1990 to the date of the subpoena
(the "Covered Period") and certain corporate records and personnel material.
FMCH believes that all financial statements filed by FMCH with the Commission
during the Covered Period, including the financial statements of NMC included in
the NMC Form 10 filed with the Commission on September 25, 1995, and the
consolidated financial statements of Grace filed in Grace's Annual Report on
Form 10-K for the year ended December 31, 1995 (all of which financial
statements, other than unaudited quarterly financial statements, were covered by
unqualified opinions issued by Price Waterhouse LLP, independent certified
public accountants), have been fairly stated, in all material respects, in
conformity with U.S. GAAP. FMCH and NMC have been cooperating with the
Commission. While there can be no assurance, FMCH believes that the outcome of
this investigation will have no material adverse effect on the business,


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<PAGE>   35
financial condition and results of operations of FMCH.

     IDPN COVERAGE ISSUES

     The Company administers IDPN therapy to chronic dialysis patients who
suffer from severe gastrointestinal malfunctions. 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. The Company decided not to
appeal the Court's decision, but rather, to pursue the claims through the
available administrative processes.

     Although NMC management believes that those IDPN claims were consistent
with published Medicare coverage guidelines and ultimately will be approved for
payment, there can be no assurance that the claims on appeal will be approved
for payment. Such claims represent substantial accounts receivable of NMC,
amounting to approximately $152 million as of December 31, 1997.

     If NMC is unable to collect its IDPN receivable 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. 

     SHAREHOLDER LITIGATION

     In 1995, nine purported class action lawsuits were brought against FMCH
(prior to the Merger, when it was Grace) and certain of its then officers and
directors in various federal courts. These lawsuits have been consolidated in a
case entitled Murphy, et al. v. W.R. Grace & Co., et al. No. 95-CV-9003(JFK)
(the "Murphy Action"), which is pending in the U.S. District Court for the
Southern District of New York. The first amended class action complaint in this
lawsuit, which purports to be a class action on behalf of all persons and
entities who purchased publicly traded securities of FMCH during the period from
March 13, 1995 through October 17, 1995, generally alleges that the defendants
violated federal securities laws by concealing information and issuing
misleading public statements and reports concerning NMC's financial position and
business prospects, a proposed spin-off of NMC, and the matters that are the
subject of the OIG Investigation and the investigation by the federal grand jury
in the District of New Jersey. See "-- OIG Investigation" and "-- District of
New Jersey Investigation." The Murphy Action seeks unspecified damages,
attorneys' and experts' fees and costs and such other relief as the court deems
proper. Plaintiffs and their counsel have agreed to compromise and settle the
Murphy Action upon the terms of a Stipulation of Settlement executed on or about
January 13, 1998 and preliminarily approved by the Court on January 28, 1998.
The Stipulation of Settlement remains subject to the approval of the Court. If
approved, the settlement agreement calls for the establishment of a settlement
fund consisting of amounts contributed by Grace and insurance carriers for the
individual defendants. The Company, FMCH and NMC are not required to make any
contribution to the settlement fund.

     In October 1995, a purported derivative lawsuit was filed in the U.S.
District Court for the Southern District of Florida, Northern Division against
FMCH (prior to the Merger, when it was known as Grace), certain of its then
directors and its former President and Chief Executive Officer, alleging, inter
alia, that such individuals breached their fiduciary duties by failing to
properly supervise the activities of NMC in the conduct of its business (Bennett
v. Bolduc, et al. 95-8638-CIV-MORENO). In December 1995, the plaintiff in this
action filed a new action, based on similar allegations, in the U.S. District
Court for the Southern District of New York (Bennett v. Bolduc, et al.
95-CV-10737 (AGS)) (the "Bennett Action"). The action in Florida has been
dismissed in favor of the Bennett Action. A second action making similar
allegations was filed in October 1995 in New York State Supreme Court, New York
County (Bauer v. Bolduc, et al. 95-125751). This action has been stayed in favor
of the Bennett Action, which has been consolidated, for discovery purposes only,
with the Murphy Action described above. The complaint in the Bennett Action
seeks unspecified damages, attorneys' and experts' fees and costs and such other
relief as the court deems proper. Pursuant to a case management order issued by
the Court in February 1996, the parties in the consolidated litigation have
begun discovery, including the exchange of documents. Plaintiff and his counsel
have agreed to compromise and settle the Bennett Action upon the terms of a
Stipulation of Settlement executed on or about January 12, 1998. The Stipulation
of Settlement remains subject to the approval of the Court. The Company, FMCH
and NMC are not required to make any payment in connection with this settlement.

     The outcomes of these lawsuits cannot be predicted, although FMCH, NMC and
the individual defendants believe that they have substantial defenses to the
claims asserted. The stipulations of settlement in both the Murphy Action and
the Bennett Action contain denials of liability on the part of the defendants.

     In February 1996, a purported class action was filed in New York State
Supreme Court, New York County, against FMCH (prior to the Merger, when it was
known as Grace) and certain of Grace's then current and former directors,
alleging that the defendants breached their fiduciary duties, principally by
failing to provide internal financial data concerning NMC and by failing to

                                       35
<PAGE>   36

negotiate with certain other companies that had made proposals for business
combinations involving NMC (Rosman v. W. R. Grace, et al. 96-102347). The
lawsuit seeks injunctive relief ordering defendants to carry out their fiduciary
duties and preventing or rescinding the Merger or any related transactions with
Fresenius AG, unspecified monetary damages, an award of plaintiff's attorneys'
and experts' fees and costs, and such other relief as the court may deem just
and proper. The plaintiff has not taken any steps to prosecute the action since
it was filed. The defendants believe this lawsuit is without merit.

     Grace Chemicals has indemnified the Company and its affiliates for any
losses related to these lawsuits.

     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. FMCH 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 Fresenius Medical Care 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 Fresenius
Medical Care. FMCH, 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, FMCH, 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 Fresenius Medical Care, have a material
adverse effect on its financial condition.


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<PAGE>   37

ITEM 5. OTHER INFORMATION

     On June 12, 1997, the Company amended its Certificate of Incorporation to
     change Company's name to "Fresenius Medical Care Holdings, Inc."

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, 



                                       35
<PAGE>   38

                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, 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     Fresenius Medical Care AG 1998 Stock Incentive Plan adopted
                effective as of April 6, 1998.

Exhibit 10.1    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).

Exhibit 10.2    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 10.3    Senior Subordinated Indenture dated as of February 19, 1998
                among FMC Trust Finance S.A. 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 10.4    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, 



                                       36
<PAGE>   39

                1996 and the exhibits thereto).

Exhibit 10.5    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 10.6    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 10.7    Product Purchase Agreement, effective January 1, 1996, between
                Amgen, Inc. and National Medical Care, Inc. (incorporated by
                reference to the Form SE of Fresenius Medical Care dated July
                29, 1996 and the exhibits thereto).

Exhibit 10.8    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 10.9    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 10.10   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 10.11   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 10.12   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 10.13   Modification to FUSA Employment Agreement effective as of
                January 1, 1998 by and between Ben J. Lipps and Fresenius
                Medical Care AG.

Exhibit 10.14   Employment Agreement dated July 1, 1997 by and between Jerry A.
                Schneider and the Company.

Exhibit 10.15   Addendum to Employment Agreement dated as of September 18, 1997
                by and between Jerry A. Schneider and the Company.

Exhibit 11      Statement re: Computation of Per Share Earnings.

Exhibit 27       Financial Data Schedule

(b)  Reports on Form 8-K

     No reports on Form 8-K were filed during the quarter for which this report
is filed.



                                       37
<PAGE>   40


                                   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: May 14, 1998                    /s/Ben J. Lipps
     --------------                   ------------------------------------------
                                      NAME: Ben J. Lipps
                                      TITLE: President (Chief Executive Officer)




DATE: May 14, 1998                    /s/Jerry A. Schneider
     --------------                   ------------------------------------------
                                      NAME: Jerry Schneider
                                      TITLE: Chief Financial Officer




                                       38