<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, 1999

                                       OR

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

FOR THE TRANSITION PERIOD FROM ____________________TO__________________


                         COMMISSION FILE NUMBER: 1-3720

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


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

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


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


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

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


                                       1
<PAGE>   2
                      APPLICABLE ONLY TO CORPORATE ISSUERS:

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


                                       2
<PAGE>   3
       FRESENIUS MEDICAL CARE HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES

                                TABLE OF CONTENTS


<TABLE>
<CAPTION>
PART I: FINANCIAL INFORMATION

   ITEM 1:  FINANCIAL STATEMENTS                                            PAGE
<S>                                                                         <C>
            Consolidated Statements of Earnings ..........................     4
            Consolidated Statements of Comprehensive Income...............     5
            Consolidated Balance Sheets...................................     6
            Consolidated Statements of Cash Flows.........................     7
            Notes to Consolidated Financial Statements....................     9

   ITEM 2:  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
            CONDITION AND RESULTS OF OPERATIONS...........................    24

   ITEM 3:  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
            MARKET RISK...................................................    30

PART II: OTHER INFORMATION

   ITEM 1:  Legal Proceedings.............................................    31

   ITEM 5:  Other Information.............................................    45

   ITEM 6:  Exhibits and Reports on Form 8-K..............................    46
</TABLE>


                                       3
<PAGE>   4
                                     PART I

                              FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

       FRESENIUS MEDICAL CARE HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES

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

<TABLE>
<CAPTION>
                                                               THREE MONTHS ENDED
                                                                    MARCH 31,
                                                           --------------------------
                                                              1999             1998
                                                           ---------        ---------
<S>                                                        <C>              <C>
NET REVENUES
   Health care services ..............................     $ 553,457        $ 488,428
   Medical supplies ..................................       118,683          121,618
                                                           ---------        ---------
                                                             672,140          610,046
                                                           ---------        ---------

EXPENSES
   Cost of health care services ......................       368,808          323,055
   Cost of medical supplies ..........................        81,624           83,787
   General and administrative expenses ...............        63,987           63,452
   Provision for doubtful accounts ...................        15,058           18,588
   Depreciation and amortization .....................        53,934           53,184
   Research and development ..........................         1,024              989
   Interest expense, net, and related financing
   costs including $20,578 and  $16,059, of interest
   with affiliates ...................................        50,126           47,099
                                                           ---------        ---------
                                                             634,561          590,154
                                                           ---------        ---------
INCOME FROM CONTINUING OPERATIONS BEFORE
  INCOME TAXES AND CUMULATIVE EFFECT OF CHANGE
  IN ACCOUNTING FOR START UP COSTS ...................        37,579           19,892
PROVISION FOR INCOME TAXES ...........................        19,952           10,046
                                                           ---------        ---------

INCOME FROM CONTINUING OPERATIONS BEFORE 
  CUMULATIVE EFFECT OF CHANGE IN 
  ACCOUNTING FOR START UP COSTS ......................     $  17,627        $   9,846
                                                           ---------        ---------

DISCONTINUED OPERATIONS (NOTE 4)
   Loss from discontinued operations, net of
     income taxes ....................................            --           (4,429)
                                                           ---------        ---------
   Loss from discontinued operations .................     $      --        $  (4,429)
                                                           ---------        ---------
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
  FOR START UP COSTS, NET OF TAX BENEFIT .............            --           (4,890)
                                                           ---------        ---------
NET INCOME ...........................................     $  17,627        $     527
                                                           =========        =========

Basic and fully dilutive earnings per share
   Continuing operations .............................     $    0.19        $    0.11
   Discontinued operations ...........................     $      --        $   (0.05)
   Cumulative effect of accounting change ............     $      --        $   (0.05)
   Net Income ........................................     $    0.19        $    0.01
                                                                                      
</TABLE>


     See accompanying Notes to Unaudited, Consolidated Financial Statements


                                       4
<PAGE>   5
       FRESENIUS MEDICAL CARE HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES

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

<TABLE>
<CAPTION>
                                                     THREE MONTHS ENDED
                                                          MARCH 31,
                                                  ------------------------
                                                    1999            1998
                                                  --------        --------
<S>                                               <C>             <C>     
NET INCOME ..................................     $ 17,627        $    527

Other comprehensive income
   Foreign currency translation adjustments .         (392)          1,026
                                                  --------        --------
   Total other comprehensive income .........         (392)          1,026
                                                  --------        --------
COMPREHENSIVE INCOME ........................     $ 17,235        $  1,553
                                                  ========        ========
</TABLE>


                                       5
<PAGE>   6
       FRESENIUS MEDICAL CARE HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS
                             (DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                        MARCH 31,         DECEMBER 31,
                                                          1999               1998
                                                       -----------        -----------
                                                       (UNAUDITED)
<S>                                                    <C>                <C>
ASSETS

Current Assets:
  Cash and cash equivalents ........................   $    14,459        $     6,579
  Accounts receivable, less allowances of ..........       257,092            254,783
  $54,814 and $49,209
  Inventories ......................................       176,196            169,789
  Deferred income taxes ............................       134,794            139,653
  Other current assets .............................       103,913             93,912
  Net assets of discontinued operations (Note 4) ...       147,114            149,949
                                                       -----------        -----------
    Total Current Assets ...........................       833,568            814,665
                                                       -----------        -----------


Properties and equipment, net ......................       423,987            429,639
                                                       -----------        -----------

Other Assets:
  Excess of cost over the fair value of net
    assets acquired and other intangible assets,
    net of accumulated amortization of
    $321,897 and $289,167 ..........................     3,288,461          3,317,424
  Other assets and deferred charges ................        56,653             51,675
                                                       -----------        -----------
    Total Other Assets .............................     3,345,114          3,369,099
                                                       -----------        -----------
Total Assets .......................................   $ 4,602,669        $ 4,613,403
                                                       ===========        ===========

LIABILITIES AND EQUITY

Current Liabilities:
  Current portion of long-term debt and
    capitalized lease obligations ..................   $    43,263        $    43,348
  Current portion of borrowing from affiliates .....        18,288             32,716
  Accounts payable .................................       113,813            107,482
  Accrued liabilities ..............................       294,459            306,333
  Net accounts payable to affiliates ...............        17,942             17,966
  Accrued income taxes .............................        26,752             12,411
                                                       -----------        -----------
    Total Current Liabilities ......................       514,517            520,256

Long-term debt .....................................       978,701          1,010,880
Non-current borrowings from affiliates .............       958,800            956,284
Capitalized lease obligations ......................         1,786              2,666
Deferred income taxes ..............................       144,660            144,605
Other liabilities ..................................        37,760             29,278
                                                       -----------        -----------
    Total Liabilities ..............................     2,636,224          2,663,969
                                                       -----------        -----------

Equity:
  Preferred stock, $100 par value ..................         7,412              7,412
  Preferred stock, $.10 par value ..................         8,906              8,906
  Common stock, $1 par value; 300,000,000 shares
    authorized; outstanding 90,000,000 .............        90,000             90,000
  Paid in capital ..................................     1,942,141          1,942,235
  Retained deficit .................................       (82,659)          (100,156)
  Accumulated comprehensive income .................           645              1,037
                                                       -----------        -----------
    Total Equity ...................................     1,966,445          1,949,434
                                                       -----------        -----------
Total Liabilities and Equity .......................   $ 4,602,669        $ 4,613,403
                                                       ===========        ===========
</TABLE>

     See accompanying Notes to Unaudited, Consolidated Financial Statements.


                                       6
<PAGE>   7
       FRESENIUS MEDICAL CARE HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES
                UNAUDITED, CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                        THREE MONTHS ENDED
                                                                             MARCH 31,
                                                                    --------------------------
                                                                       1999             1998
                                                                    ---------        ---------
<S>                                                                 <C>              <C>
Cash Flows from Operating Activities:
  Net income ...................................................    $  17,627        $     527
  Adjustments to reconcile net income to net cash from
  Operating activities:
    Depreciation and amortization ..............................       53,934           53,184
    Loss from discontinued operations ..........................           --            4,429
    Cumulative effect of change in accounting ..................           --            4,890
    Provision for doubtful accounts ............................       15,058           18,588
    Deferred income taxes ......................................        4,914           (1,154)
    Loss on disposal of properties and equipment ...............          187             (120)

  Changes in operating assets and liabilities, net of effects
    of purchase acquisitions and foreign exchange:
    Increase  in accounts receivable ...........................      (20,869)         (53,954)
    Increase in inventories ....................................       (6,388)         (13,895)
    (Increase) decrease in other current assets ................      (10,001)          11,428
    Increase in other assets and deferred charges ..............       (4,991)          (5,269)
    Increase in accounts payable ...............................        6,331           14,881
    Increase in accrued income taxes ...........................       14,341           22,617
    Decrease in accrued liabilities ............................      (11,873)         (42,145)
    Increase in other long-term liabilities ....................        8,481            4,305
    Net changes due to/from affiliates .........................          (25)          (8,901)
    Other, net .................................................        2,768           (2,673)
                                                                    ---------        ---------
  Net cash provided by operating activities of
     continued operations ......................................       69,494            6,738
                                                                    ---------        ---------
  Net cash provided by (used in) operating
     activities of discontinued operations .....................        2,848           (2,093)
                                                                    ---------        ---------
  Net cash provided by operating activities ....................       72,342            4,645
                                                                    ---------        ---------

Cash Flows from Investing Activities:
    Capital expenditures .......................................      (17,457)         (19,755)
    Payments for acquisitions, net of cash acquired ............       (4,926)        (137,626)
                                                                    ---------        ---------
  Net cash used in investing activities of
    continued operations .......................................      (22,383)        (157,381)
                                                                    ---------        ---------
  Net cash used in investing activities of
    discontinued operations ....................................          (10)          (4,489)
                                                                    ---------        ---------
  Net cash used in investing activities ........................      (22,393)        (161,870)
                                                                    ---------        ---------

Cash Flows from Financing Activities:
    (Decrease) increase in borrowings from affiliates ..........      (11,912)         571,989
    Cash dividends paid ........................................         (130)            (130)
    Proceeds from issuance of debt .............................           37           12,319
    Proceeds from receivable financing facility ................        3,500          125,000
    Payments on debt and capitalized leases ....................      (33,181)        (540,744)
    Other net ..................................................          (94)            (651)
                                                                    ---------        ---------

  Net cash provided by (used in) financing activities of
    continued operations .......................................      (41,780)         167,783
                                                                    ---------        ---------
  Net cash used in financing activities of
     discontinued operations ...................................           --             (946)
                                                                    ---------        ---------
  Net cash provided by (used in) financing activities ..........      (41,780)         166,837
                                                                    ---------        ---------
Effects of changes in foreign exchange rates ...................         (289)           1,071
                                                                    ---------        ---------
Change in cash and cash equivalents ............................        7,880           10,683
Cash and cash equivalents at beginning of period ...............        6,579           12,437
                                                                    ---------        ---------
Cash and cash equivalents at end of period .....................    $  14,459        $  23,120
                                                                    =========        =========
</TABLE>

     See accompanying Notes to Unaudited, Consolidated Financial Statements


                                       7
<PAGE>   8
             FRESENIUS MEDICAL CARE HOLDINGS, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (DOLLARS IN THOUSANDS)


<TABLE>
<CAPTION>
                                                             THREE MONTHS ENDED
                                                                  MARCH 31,
                                                         --------------------------
                                                            1999             1998
                                                         ---------        ---------
<S>                                                      <C>              <C>
Supplemental disclosures of cash flow information:
  Cash paid during the period for:
    Interest .........................................   $  29,297        $  37,787
    Income taxes (received)/paid, net ................         924          (14,447)

Details for Acquisitions:
  Assets acquired ....................................       4,926          139,960
  Liabilities assumed ................................          --            2,334
                                                         ---------        ---------
  Net cash paid for acquisitions .....................   $   4,926        $ 137,626
                                                         =========        =========
                                                                                    
</TABLE>

           See accompanying Notes to Consolidated Financial Statements


                                       8
<PAGE>   9
      FRESENIUS MEDICAL CARE HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES

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

NOTE 1. THE COMPANY, AND BASIS OF PRESENTATION

THE COMPANY

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

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

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

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

BASIS OF PRESENTATION

     BASIS OF CONSOLIDATION

     The consolidated financial statements in this report at March 31, 1999 and
1998 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 1998 report on Form 10-K. Such interim financial statements reflect
all adjustments that, in the opinion of management, are necessary for a fair
presentation of the results of the interim periods presented. Certain amounts in
the prior periods' consolidated financial statements have been reclassified to
conform to the current periods' basis of presentation.

     The results of operations for the three month period ended March 31, 1999
are not necessarily indicative of the results of operations for the fiscal year
ending December 31, 1999.

      NEW STANDARDS

     In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative
Instruments and Hedging Activities, which establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts (collectively referred to as "derivatives") and for
hedging activities. This statement requires that an entity recognize all
derivatives as either assets or liabilities in the balance sheet and measure
those instruments at fair value. The statement also sets forth the criteria for
determining whether a derivative may be specifically designated as a hedge of a
particular exposure with the intent of measuring the effectiveness of that hedge
in the statement of operations. SFAS No. 133 is effective for all fiscal
quarters of fiscal years beginning after June 15, 1999. The Company is currently
analyzing the complexities of SFAS 133 and its effect on the consolidated
financial statements.


                                       9
<PAGE>   10
NOTE 2. INVENTORIES

<TABLE>
<CAPTION>
                                                                MARCH 31,    DECEMBER 31,
                                                                  1999           1998
                                                                --------     ------------
<S>                                                             <C>          <C>
Inventories:
  Raw materials ............................................    $ 37,585       $ 35,199
  Manufactured goods in process ............................      18,800         18,802
  Manufactured and purchased inventory available for sale         90,621         86,615
                                                                --------       --------
                                                                 147,006        140,616
   Health care supplies ....................................      29,190         29,173
                                                                --------       --------
       Total ...............................................    $176,196       $169,789
                                                                ========       ========
</TABLE>


NOTE 3. DEBT

<TABLE>
<CAPTION>
                                                                    MARCH 31,      DECEMBER 31,
                                                                      1999            1998
                                                                   ----------      ------------
<S>                                                                <C>             <C>
Long-term debt to outside parties consists of:

NMC Credit Facility ............................................   $1,000,800       $1,032,700
Third-party debt, primarily bank borrowings at
   variable interest rates (3% -14%) with various maturities ...       16,492           16,215
                                                                   ----------       ----------
                                                                    1,017,292        1,048,915
Less amounts classified as current .............................       38,591           38,035
                                                                   ----------       ----------
                                                                   $  978,701       $1,010,880
                                                                   ==========       ==========
</TABLE>


      Non current borrowings from affiliates consists of:

<TABLE>
<CAPTION>
                                                                MARCH 31,    DECEMBER 31,
                                                                  1999           1998
                                                                --------     ------------
<S>                                                             <C>          <C>
Fresenius Medical Care AG non-current borrowings
    primarily at interest rates approximating  6 - 9.25% ...    $ 95,321       $ 94,471

Fresenius AG non-current borrowing at interest rates
    approximating  6 - 7% ..................................      60,000         60,000
Fresenius Medical Care Finance SA  borrowings
    primarily at interest rates approximating 6.5% .........      33,236         47,665
Fresenius Medical Care Trust Finance S.a.r.l. at interest
    rate of 8.43% and 9.25% ................................     786,524        786,524
Other ......................................................       2,007            340
                                                                --------       --------
                                                                 977,088        989,000
Less amounts classified as current .........................      18,288         32,716
                                                                --------       --------
Total ......................................................    $958,800       $956,284
                                                                ========       ========
</TABLE>


                                       10
<PAGE>   11
NOTE 4.  DISCONTINUED OPERATIONS

     Effective June 1, 1998, the Company classified its non-renal diagnostic
services business ("Non-Renal Diagnostic Services") and homecare business
("Homecare") as discontinued operations. The Company disposed of its Non Renal
Diagnostic Services division and its Homecare division on respectively, June 26,
1998 and July 29, 1998. In connection with the sale of Homecare, the Company
retained the assets and the operations associated with the delivery of IDPN and
records, for accounting purposes, its activity as part of discontinued
operations. The Company recorded a net after tax loss of $97 million on the sale
of these businesses. The net loss on the disposal of these businesses and their
results of operations have been accounted for as discontinued operations. The
remaining assets and liabilities of these discontinued operations at the balance
sheet date have been classified in the consolidated balance sheet as Net Assets
of Discontinued Operations. Included in net assets of discontinued operations is
approximately $150 million of IDPN receivables. These assets have not been sold
and will remain classified as discontinued operations until they have been
settled. See Note 5 - "Commitments and Contingencies - Legal Proceedings."

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

     Discontinued Operations - Results of Operations

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

<TABLE>
<CAPTION>
                                           THREE MONTHS ENDED
                                                MARCH 31,
                                        ------------------------
                                          1999            1998
                                        --------        --------
<S>                                     <C>             <C>     
NET REVENUES .......................    $     --        $ 61,918
                                        --------        --------

Loss before income tax benefit .....          --          (6,991)
Income tax benefit .................          --          (2,562)
                                        --------        --------
Loss from discontinued operations ..    $     --        $ (4,429)
                                        ========        ========
                                                                 
</TABLE>

     Discontinued Operations - Consolidated Balance Sheet

     The net assets, excluding intercompany assets, of the discontinued
operations of the Non Renal Diagnostic Services and Homecare divisions, included
in the consolidated balance sheet at March 31, 1999 are as follows:

<TABLE>
<CAPTION>
                                    Total
<S>                               <C>     
Current assets ...............    $164,766
Properties & equipment, net ..         211
Other assets .................         594
                                  --------
   Total Assets ..............    $165,571
                                  ========

Current liabilities ..........      18,210
Other liabilities ............         247
                                  --------
   Total Liabilities .........      18,457
                                  ========
   Net assets ................    $147,114
                                  ========
</TABLE>


                                       11
<PAGE>   12
NOTE 5.  COMMITMENTS AND CONTINGENCIES

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

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

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

LEGAL PROCEEDINGS

     Government Investigations

     OIG INVESTIGATIVE SUBPOENAS

     In October 1995, NMC received five investigative subpoenas from the Office
of the Inspector General ("OIG") of the Department of Health and Human Services.
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 "OIG Investigation"). 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 understands that the government has utilized a grand jury
to investigate these matters. The Company expects that this process will
continue while the government completes its evaluation of the issues.

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

     The government has indicated that the areas identified above are not
exclusive, and that it may pursue additional areas. As noted, the penalties
applicable under the anti-kickback statutes, the U.S. Federal False Claims Act
(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, it is expected that the government will assert


                                       12
<PAGE>   13
that NMC has violated multiple statutory and regulatory provisions.
Additionally, ten 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.

    During the approximately three and one-half years since the initial
subpoenas were served NMC and the government have met periodically to discuss
issues in connection with the OIG Investigation, including theories of
liability. Recently, NMC and the government have begun to explore the
possibility of settling the matters which are encompassed by the OIG
Investigation and, as referenced below, have reached an agreement in principle
in connection with the diagnostics investigation matter. There can be no
assurance that any of the other matters subject to the OIG Investigation will be
settled. If however, one or more of the matters encompassed by the OIG
Investigation is settled, it may result in NMC acknowledging that its past
practices violated federal statutes, as well as NMC incurring substantial civil
and criminal financial penalties which could have a material adverse effect on
the Company. If one or more of these matters is not settled, the government may
be expected to initiate litigation in which it would seek substantial civil and
criminal financial penalties and other sanctions that could result in the
exclusion of NMC and its subsidiaries from the Medicare program, Medicaid
program and other federal health care programs. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Contingencies."


     DIAGNOSTICS SUBPOENA

     In October 1996, Biotrax International, Inc. ("Biotrax") and NMC
Diagnostics, Inc., ("DSI") 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 has made extensive document production in response to the subpoena.
The Company and the government have been negotiating a resolution to this
matter, and negotiations have progressed to the point of a possible settlement.
The Company and the government have reached an agreement in principle in which,
among other things, the government has agreed to release the Company from
liability in this matter in exchange for a payment of approximately $16.5
million from the Company. The Company and the government are currently
negotiating the terms of a settlement agreement. The agreement is not final. For
this reason, the eventual outcome of this matter, its duration, and its effect,
if any, on NMC or the Company cannot be predicted at this time. The Company
divested Non-Renal Diagnostic Services on June 26, 1998. See Note 4 -
"Discontinued Operations."

     MEDICAL DIRECTOR COMPENSATION

     The government is investigating whether Dialysis Services compensation
arrangements with its Medical Directors constitute payments to induce referrals,
which would be illegal under the anti-kickback statutes, rather than payment for
services rendered. Dialysis Services compensated the substantial majority of its
Medical Directors on the basis of a percentage of the earnings of the dialysis
center for which the Medical Director was responsible from the inception of
NMC's predecessor in 1972 until January 1, 1995, the effective date of Stark II.
Under the arrangements in effect prior to January 1, 1995, the compensation paid
to Medical Directors was adjusted to include "add backs," which represented a
portion of the profit earned by NMC's 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 provisions of OBRA 93 (as hereafter defined) known as "Stark
II" if Designated Health Services (as defined in Stark II) are involved, Medical
Director compensation must not exceed fair market value and may not take into
account the volume or value of referrals or other business generated between the
parties. Since January 1, 1995, Dialysis Services has compensated its 


                                       13
<PAGE>   14
Medical Directors on a fixed compensation arrangement intended to comply with
the requirements of Stark II. In renegotiating its Medical Director compensation
arrangements in connection with Stark II, Dialysis Services took and continues
to take account of the compensation levels paid to its Medical Directors in
prior years.

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

     As a result, the compensation that Dialysis Services has paid and is
continuing to pay to a material number of its Medical Directors could be viewed
by the government as being in excess of "fair market value," both in absolute
terms and in terms of hourly compensation. NMC has asserted to the government
that 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 Dialysis Services 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 Dialysis Services has made with one or
more Medical Directors and assert that those specific arrangements were or are
unlawful.

     The government is also investigating whether Dialysis Services profit
sharing arrangements with its Medical Directors influenced 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, medical service providers like Dialysis
Services receive overpayments from Medicare intermediaries and other payors for
services that they provide to patients. Medicare intermediaries commonly direct
such providers to notify them of the overpayment and not remit such amounts to
the intermediary by check or otherwise unless specifically requested to do so.
In 1992, the Health Care Financing Administration ("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 Dialysis Services 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. Dialysis Services policy was to notify Medicare
intermediaries in writing of overpayments upon receipt and to maintain
unrecouped Medicare overpayments as credit balances on the books and records of
Dialysis Services for four years; overpayments not recouped by Medicare within
four years would be reversed from the credit balance account and would be
available to be taken into income. NMC asserts that Medicare overpayments that
have not been recouped by Medicare within four years are not subject to recovery
under applicable regulations and that its initial filing with the intermediaries
disclosed the credit balance on the books and records of Dialysis Services 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 as well as credit balances of other payors.

     The government is also investigating whether Dialysis Services failed to
disclose Medicare overpayments that resulted from


                                       14
<PAGE>   15
Dialysis Services obligation to rebill commercial payors for amounts originally
billed to Medicare under HCFA's initial implementation of the Omnibus Budget
Reconciliation Act of 1993 ("OBRA 93") amendments to the secondary payor
provisions of the Medicare Act. Dialysis Service experienced delays in reporting
a material amount of overpayments after the implementation of the OBRA 93
amendments. NMC asserts that most of these delays were the result of the
substantial administrative burdens placed on Dialysis Services as a consequence
of the changing and inconsistent instructions issued by HCFA with respect to the
OBRA 93 amendments and were not intentional. Substantially all overpayments
resulting from the rebilling effort associated with the OBRA 93 amendments have
now been reported. Procedures are in place that are designed to ensure that
subsequent overpayments resulting from the OBRA 93 amendments will be reported
on a timely basis.

SUPPLEMENTAL MEDICAL INSURANCE

         Dialysis Services 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 HIPAA,
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. In addition, the
government has indicated that it is investigating the method by which NMC made
Medigap payments on behalf of its indigent patients.

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 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


                                       15
<PAGE>   16
a "billing rules" program designed to eliminate requests for payments for
laboratory tests that are included in the Composite Rate and that were not
eligible for separate reimbursement. LifeChem also advised the government that
there may have been additional instances during the period from 1990 to 1992
when other overpayments were received as a result of the submission of computer
billing tapes containing similar errors and that it was in the process of
determining whether such additional overpayments were received. On June 21,
1996, LifeChem advised the government that the 1991 billing problem disclosed on
June 7, 1996 resulted in an overpayment of approximately $112,000. LifeChem also
advised the government that certain records suggested instances in July 1990 and
August 31 through September 11, 1990, when billing tapes may have been processed
without rules processing. LifeChem continued its effort to determine whether any
other overpayments occurred relating to the "billing rules" problem and, in
March 1997, advised the government that an additional overpayment of
approximately $260,000 was made by Medicare.

     On April 6, 1999, LifeChem voluntarily disclosed an additional billing
problem to the government that resulted in LifeChem's receipt of overpayments
for laboratory services rendered between 1994 and 1999. In 1994, as a result of
the advice of a billing consultant, LifeChem began to bill for platelet testing
performed in connection with complete blood counts. This advice was confirmed by
the consultant in 1997 as part of a review performed by the consultant under the
auspices of LifeChem's then outside counsel. In 1999, however, an internal
inquiry resulted in a reexamination of this advice and LifeChem determined that
the prior advice was incorrect. As a result LifeChem voluntarily disclosed the
overpayment to the Medicare carrier. LifeChem also has notified the government
of the disclosure. The Company is still reviewing its records to determine an
estimated aggregate amount of the overpayments. There can be no assurances that
the government will agree that LifeChem's disclosure should not result in a
sanction beyond repayment of the overpayment amount.

     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 payment method (the "Composite Rate") at a price below fair
market value, coupled with an agreement by a dialysis center to refer all or
most of its non-Composite Rate tests to the laboratory, violates the
anti-kickback statutes. In response to this alert, LifeChem changed its
practices with respect to testing covered by the Composite Rate to increase the
amount charged to both Dialysis Services and third-party dialysis centers and
reduce the number of tests provided for the fixed rate. The government is
investigating LifeChem's practices with respect to these tests.

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

     Business and testing practices. As noted above, the government has
identified a number of specific categories of documents that it is requiring NMC
to produce in connection with LifeChem business and testing practices. In
addition to documents relating to the areas discussed above, the government has
also required LifeChem to produce documents relating to the equipment and
systems used by LifeChem in performing and billing for clinical laboratory blood
tests, the design of the test panels offered and requisition forms used by
LifeChem, the utilization rate for certain tests performed by LifeChem,
recommendations concerning diagnostic codes to be used in ordering tests for
patients with given illnesses or conditions, internal and external audits and
investigations relating to LifeChem's billing and testing. Subsequently, the
government served an investigative subpoena for documents concerning the
Company's 1997 review of dialysis facilities' standing orders, and responsive
documents were provided. Recently the government served investigative subpoenas
requiring NMC to update its production on the above issues and to produce
contract files for twenty-three identified dialysis clinic customers. The
government is investigating each of these areas, and asserts that LifeChem
and/or NMC have violated the False Claims Act and/or the Anti-Kickback Statute
through the test ordering, paneling, requisitioning, utilization, coding,
billing and auditing practices described above.

     INTRADIALYTIC PARENTERAL NUTRITION

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


                                       16
<PAGE>   17
patient was on an IDPN treatment program during the billing period, which
typically represented the entire month, as opposed to the number of days the
treatment was actually administered. During the period from April 1991 to June
1992, Homecare had an average of approximately 1,200 IDPN patients on service.

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

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

     Infusion Pumps and IV Poles. During the time period covered by the
subpoenas, Medicare regulations permitted IDPN providers to bill Medicare for
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 the Company
cannot represent that Homecare followed this policy in every instance. The
government is investigating the propriety of Homecare's billings for infusion
pumps and IV poles and asserts that Homecare's billings violate the False Claims
Act.

     As noted above, under the new policies published by HCFA with respect to
IDPN therapy, the Company 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 Dialysis
Services dialysis centers, the fee was $30 per administration, based upon
internal Dialysis Services cost calculations. For third-party dialysis centers,
the fee was negotiated with each center, typically pursuant to a written
contract, and ranged from $15 to $65 per administration. The Company has
identified instances in which other payments and amounts beyond that reflected
in a contract were paid to these third-party centers. The Company has stopped
paying "hang fees" to both Dialysis Services and third-party facilities.

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

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


                                       17
<PAGE>   18
responded to the drop in the approval rate for new Medicare IDPN patients by
abandoning the Medicare IDPN business, cutting back on the number of Medicare
patients to whom they provide IDPN, or declining to add new Medicare patients.
Beginning in 1994 the number of patients to whom NMC provided IDPN increased as
a result.

     The government is investigating the utilization rate of IDPN therapy among
NMC patients, whether NMC submitted IDPN claims to Medicare for patients who
were not eligible for coverage, and whether documentation of eligibility was
adequate. NMC asserts that the utilization rate of IDPN therapy among its
dialysis patients, which, in 1995, averaged less than 3.5%, is the result of the
factors discussed above and that it is the policy of Homecare to seek Medicare
reimbursement for IDPN therapy prescribed by the 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. The government
asserts that Homecare submitted IDPN claims for individuals who were not
eligible for coverage and/or with inadequate documentation of eligibility.

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

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

     QUI TAM ACTIONS

     The Company and NMC have become aware that ten 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 U.S. Securities and Exchange Commission (the
"SEC" or the "Commission") and New York Stock Exchange ("NYSE") periodically
required filings.

     The first qui tam action was filed in the United States District Court for
the Southern District of Florida in June 1994, amended on July 8, 1996 and
disclosed to the Company on July 10, 1996. It alleges, among other things, that
Grace Chemicals and NMC violated the False Claims Act in connection with certain
billing practices regarding IDPN and the administration of EPO and that as a
result of this allegedly wrongful conduct, the United States suffered actual
damages in excess of $200 million. 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 Southern District of Florida in December 1994 and disclosed to the Company
on April 16, 1999. It alleges, among other things, that NMC violated the False
Claims Act in connection with certain billing practices regarding IDPN and the
cost relating thereto. The second qui tam was filed by the same relator which
filed the first qui tam and covers the same services covered by the first qui
tam complaint.

     The third 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 fourth 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
asserts 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 asserts 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 


                                       18
<PAGE>   19
complaint dismissed without prejudice.

     The fifth 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 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 sixth 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 seventh 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 eighth 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 ninth 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.

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

     Each of the qui tam complaints asserts 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, the Company 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.

     Pursuant to the OIG Agreements, upon consummation of the Merger, Fresenius
Medical Care, the Company and NMC provided the United States with a joint and
several unconditional guarantee of payment when due of all Obligations (the
"Primary Guarantee"). As credit support for 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 


                                       19
<PAGE>   20
from or relating to the OIG Investigation.

     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. Neither the entering into of the OIG Agreements nor the
providing of the Primary Guarantee and the $150 million letter of credit is an
admission of liability by any party with respect to the OIG Investigation, nor
does it indicate the liability, if any, which may result therefrom.

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

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

     OMNIBUS BUDGET RECONCILIATION ACT OF 1993

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

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

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

     On May 5, 1995, NMC filed a complaint in the U.S. District Court for the
District of Columbia (National Medical Care, Inc. and Bio-Medical Applications
of Colorado, Inc. d/b/a Northern Colorado Kidney Center v. Shalala, C.A. No.
95-0860 (WBB)) seeking to preclude HCFA from retroactively enforcing its April
24, 1995 implementation of the OBRA 93 provisions relating to the coordination
of benefits for dual eligible ESRD patients. On May 9, 1995, NMC moved for a
preliminary injunction to preclude HCFA from enforcing its new policy
retroactively, that is, to billings for services provided between August 10,
1993 and April 23, 1995. On June 6, 1995, the court granted NMC's request for a
preliminary injunction and in December of 1996, NMC moved for partial summary
judgment seeking a declaration from the Court that HCFA's retroactive
application of the April 1995 rule was legally invalid. HCFA cross-moved for
summary judgment on the grounds that the April 1995 rule was validly applied
prospectively. In 


                                       20
<PAGE>   21
January 1998, the court granted NMC's motion for partial summary judgment and
entered a declaratory judgment in favor of NMC, holding HCFA's retroactive
application of the April 1995 rule legally invalid, and based on its finding,
the Court also permanently enjoined HCFA from enforcing and applying the April
1995 rule retroactively against NMC. The Court took no action on HCFA's motion
for summary judgment pending completion of outstanding discovery. On October 5,
1998 NMC filed it's own motion for summary judgment requesting that the Court
declare HCFA's prospective application of the April 1995 rule invalid and
permanently enjoin HCFA from prospectively enforcing and applying the April 1995
rule. The Court has not yet ruled on the parties' motions. HCFA elected not to
appeal from the Court's June 1995 and January 1998 orders. HCFA may, however,
appeal all rulings at the conclusion of the litigation. If HCFA should
successfully appeal so that the revised interpretation would be applied
retroactively, Dialysis Services may be required to refund the payments received
from employer health plans for services provided after August 10, 1993 under
HCFA's original implementation, and to re-bill Medicare for the same services,
which would result in a net loss to Dialysis Services of approximately $120
million attributable to all periods prior to December 31, 1995. Also, in such
event, the Company's business, financial position and results of operations
would be materially adversely affected.

     INTRADIALYTIC PARENTERAL NUTRITION COVERAGE ISSUES

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

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

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

     Prior to the July hearing date, the United States Attorney for the District
of Massachusetts requested that the hearing be stayed pending resolution of the
OIG Investigation, on the basis that proceeding could adversely effect the
government's investigation as well as the government's efforts to confirm its
belief that these claims are false. Prior to the ALJ issuing a decision on the
stay request, the U.S. Attorney's Office requested that NMC agree to a stay in
the proceedings in order to achieve a potential resolution of the IDPN claims
subject to the OIG Investigation as well as those which are subject to the
administrative appeals process. NMC agreed to this request, and together with
the U.S. Attorney's Office requested a stay. The ALJ agreed to this request in
order to allow the parties the opportunity to resolve both the IDPN claims which
are the subject of the OIG Investigation and the IDPN claims which are the
subject of the administrative proceedings. In March 1999 negotiations between
NMC and the U.S. Attorney's Office failed to progress and NMC requested that the
stay be lifted. The ALJ agreed to NMC's request and on April 19, 1999 the ALJ
hearing began. The hearing process is expected to proceed for several months. At
the same time, NMC and the U.S. Attorney's Office are continuing to discuss
potential settlement of both the claims relating to the OIG Investigation and
the claims which are subject to administrative appeals. At this time, it is not
possible to determine whether NMC and the government will be able to resolve
issues surrounding the IDPN claims. Further proceedings on other administrative
appeals related to unpaid claims remain stayed.

     Although NMC management believes that those unpaid IDPN claims were
consistent with published Medicare coverage guidelines and ultimately will be
approved for payment, there can be no assurance that the claims on appeal will
be approved for payment or, to the extent approved, collected in full. Such
claims represent substantial accounts receivable of NMC, amounting to
approximately $150 million as of March 31, 1999.

     If NMC is unable to collect its IDPN receivable, either through the
administrative appeal process or through negotiation, or if 


                                       21
<PAGE>   22
IDPN coverage is reduced or eliminated, depending on the amount of the
receivable that is not collected and/or the nature of the coverage change, the
Company's business, financial condition and results of operations could be
materially adversely affected. NMC's IDPN receivables are included in the net
assets of the Company's discontinued operations. However, these receivables have
not been sold and will remain classified as discontinued operations until they
have been settled. See Notes to Consolidated Financial Statements Note 4
-"Discontinued Operations."

     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 narrowed the issues with
respect to which the government has previously expressed concerns and recently
have conducted discussions 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 1997, the Company, NMC and certain named NMC subsidiaries, were served
with a civil complaint filed by Aetna Life Insurance Company in the U.S.
District Court for the Southern District of New York (Aetna Life Insurance
Company v. National Medical Care, Inc. et al, 97-Civ-9310). In April 1999, Aetna
amended its complaint to include its affiliate, Aetna U.S. Healthcare, Inc., as
an additional plaintiff, and to make certain other limited changes in its
pleading. Based in large part on information contained in prior securities
filings, the lawsuit alleges inappropriate billing practices for nutritional
therapy, diagnostic and clinical laboratory tests and misrepresentations. The
amended complaint seeks unspecified damages and costs. This matter is at a
relatively early stage in the litigation process, with substantial discovery
just beginning and its outcome and impact on the Company cannot be predicted at
this time. However, the Company, NMC and its subsidiaries believe that they have
substantial defenses to the claims asserted, and intend to continue to
vigorously defend the lawsuit. It is also possible that one or more other
private payors may assert 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.

     ADMINISTRATIVE APPEALS

     The Company regularly pursues various administrative appeals relating to
reimbursement issues in connection with its dialysis facilities. One such appeal
consists of a challenge to the Medicare regulation which capped reimbursement
for the bad debts incurred by dialysis facilities. In 1998, the United States
Court of Appeals for the District of Columbia ruled in favor of the Company in
connection with the bad debt issue, holding that the Secretary of Health & Human
Services had not adequately justified the bad debt regulation, and ruling that
the government's order adopting the rule was arbitrary and capricious. The Court
of Appeals remanded the matter to the Secretary to provide a more adequate
explanation of the bad debt cap or to abandon it. Subsequently, the Court
modified its holding to continue the bad debt regulation in effect pending
remand. The Company is continuing settlement discussions with the government in
an attempt to recover reimbursement for disallowed bad debt expenses. The
Company cannot predict the outcome of these discussions.



                                       22
<PAGE>   23
NOTE 6. INDUSTRY SEGMENTS INFORMATION

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

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

The table below provides information for the three months ended March 31, 1999
and 1998 pertaining to the Company's two industry segments.


<TABLE>
<CAPTION>
                                                                           LESS
                                        DIALYSIS         DIALYSIS       INTERSEGMENT        TOTAL
                                        SERVICES         PRODUCTS          SALES
                                       ----------       ----------      ------------      ----------
<S>                      <C>           <C>              <C>             <C>               <C>
NET REVENUES
Three Months Ended       3/31/99       $  562,358       $  168,307       $   58,525       $  672,140
Three Months Ended       3/31/98          498,230          164,749           52,933          610,046

OPERATING EARNINGS
Three Months Ended       3/31/99           86,378           30,480               --          116,858
Three Months Ended       3/31/98           71,831           22,180               --           94,011

Assets                      1999        1,835,996          638,043               --        2,474,039
                            1998        1,817,751          644,112               --        2,461,863
</TABLE>

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

<TABLE>
<CAPTION>
                                                                                    THREE MONTHS ENDED
               SEGMENT RECONCILIATION                                                    MARCH 31,
                                                                                --------------------------
                                                                                  1999             1998
                                                                                ---------        ---------
<S>                                                                             <C>              <C>
INCOME FROM CONTINUING OPERATIONS BEFORE
  INCOME TAXES AND CUMULATIVE EFFECT OF CHANGE
  IN ACCOUNTING FOR START UP COSTS:
     Total operating earnings for reportable segments                           $ 116,858        $  94,011
     Corporate G&A (including foreign exchange)                                   (28,129)         (26,031)
     Research and development expense                                              (1,024)            (989)
     Net interest expense                                                         (50,126)         (47,099)
                                                                                ---------        ---------

     Income Before Income Taxes and and Cumulative effect of
     change in accounting for Start Up Costs                                    $  37,579        $  19,892
                                                                                =========        =========
     



</TABLE>


                                       23
<PAGE>   24
ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
         RESULTS OF OPERATIONS

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

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


OVERVIEW

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

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

    The Company'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 the Company
of changes effected by Medicare in approving reimbursement claims relating to
the administration of IDPN or the adoption in 1996 of a new coverage policy that
has changed IDPN coverage prospectively. The Company's business, financial
position and results of operations 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.

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


                                       24
<PAGE>   25
RESULTS OF OPERATIONS

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


<TABLE>
<CAPTION>
                                              THREE MONTHS ENDED
                                                   MARCH 31,
                                              ------------------
                                             (DOLLARS IN MILLIONS)
                                               1999         1998
                                              -----        -----
<S>                                          <C>           <C>
NET REVENUES
    Dialysis Services                         $ 562        $ 498
    Dialysis Products                           168          165
    Intercompany Eliminations                   (58)         (53)
                                              -----        -----
Total Net Revenues                            $ 672        $ 610
                                              =====        =====

Operating Earnings:
    Dialysis Services                         $  86        $  72
    Dialysis Products                            31           22
                                              -----        -----
Total Operating Earnings                        117           94
                                              -----        -----

Other Expenses:
    General Corporate                         $  28        $  26
    Research & Development                        1            1
    Interest Expense, Net                        50           47
                                              -----        -----
Total Other Expenses                             79           74
                                              -----        -----

Earnings Before Income Taxes and 
  cumulative effect of change in
  accounting for start up costs                  38           20
Provision for income taxes                       20           10
                                              -----        -----
Net Earnings from Continuing Operations       
  before cumulative effect of change
  in accounting for start up costs            $  18        $  10
                                              -----        -----

Discontinued Operations:
    Net Revenues                              $  --        $  62
                                              =====        =====

    Loss Before Income Taxes                     --           (7)
    Benefit for Income Taxes                     --           (3)
                                              -----        -----
    Loss from Operations                         --           (4)
                                              -----        -----
Total Loss on Discontinued Operations         $  --        $  (4)
                                              =====        =====
Cumulative effect of change in 
  accounting for start up costs, net
  of tax benefit                                 --           (5)
                                              -----        -----
Net Income                                    $  18        $   1
                                              =====        =====
</TABLE>


                                       25
<PAGE>   26
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED MARCH 31, 1998

      Net revenues from continuing operations for the first three months of 1999
increased by 10% ($62 million) over the comparable period in 1998. Net earnings
from continuing operations for the first three months of 1999 increased by 80%
($8 million) over the comparable period in 1998 as a result of increased
operating earnings, partially offset by higher interest expenses and increased
general corporate expenses.

      DIALYSIS SERVICES

      Dialysis Services net revenues for the first three months of 1999
increased by 13% ($64 million) over the comparable period in 1998, primarily as
a result of a 9% increase in the number of treatments provided, the beneficial
impact of the extension of the Medicare Secondary Payor (MSP) provision, and
higher EPO utilization relative to the comparable 1998 period, partially offset
by decreased laboratory testing revenues. The treatment increase was a result of
base business growth and the impact of 1998 acquisitions. The laboratory testing
revenue decrease was primarily due to the decreased number of patients of other
dialysis providers serviced by the Company, during the first quarter of 1999, as
competitors consolidate lab activity.

      Dialysis Services operating earnings for the first three months of 1999
increased by 19% ($14 million) over the comparable period of 1998 primarily due
to the increase in treatment volume, the beneficial impact of the extension of
the MSP provision and higher EPO utilization relative to the comparable 1998
period, partially offset by decreased operating earnings in laboratory testing.

      DIALYSIS PRODUCTS

      Dialysis Products net revenues for the first three months of 1999
increased by 2% ($3 million) over the comparable period of 1998. This is due to
increased sales of dialyzers ($8 million), and machines ($5 million), partially
offset by decreased sales of bloodlines ($2 million) and peritoneal products ($8
million).

      Dialysis Products operating earnings for the first three months of 1999
increased by 41% ($9 million) over the comparable period of 1998. This is
primarily due to revenue growth and improvements in gross margin resulting from
manufacturing efficiencies from increased production volume and a reduction in
freight and distribution expenses.

      OTHER EXPENSES

      The Company's other expenses for the first three months of 1999 increased
by 7% ($5 million) over the comparable period of 1998. General corporate
expenses increased by $2 million and interest expense increased by $3 million
primarily due to the change in the mix of debt instruments at March 31, 1999
versus March 31, 1998.

      INCOME TAX RATE

      The effective tax rate from continuing operations for the first three
months of 1999 (53.1%) is higher than the rate for the comparable period of 1998
(50.6%), due primarily to a rate reduction in the comparable period of 1998
related to the permanent tax benefit from the transfer of international
operations to Fresenius Medical Care AG.

      DISCONTINUED OPERATIONS

      On June 1, 1998, the Company classified its Non-Renal Diagnostic Services
and Homecare businesses as discontinued operations. The Company sold both its
Non-Renal Diagnostic Services business and its Homecare business on, June 26,
1998 and July 29, 1998, respectively. In connection with the sale of Homecare,
the Company retained the assets and the operations associated with the delivery
of IDPN and records, for accounting purposes, its activities as part of
discontinued operations. A net after tax loss of $97 million was recorded in
1998 on the sale of these businesses. The discontinued operations revenues for
its Non- Renal Diagnostic Services and Homecare divisions for the first three
months of 1998 was $62 million with a net after tax loss of $4 million.


                                       26
<PAGE>   27
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY AND CAPITAL RESOURCES

            The Company's cash requirements have historically been funded by
cash generated from operations. Cash generated from continued operations was $69
million and $7 million for the first three months of 1999 and 1998,
respectively. This increase is primarily due to the Company's improved profit
levels as well as working capital improvements.

      The Company made acquisitions totaling $5 million and $138 million for the
first three months of 1999 and 1998, respectively. The Company made capital
expenditures for internal expansion, improvements, new furnishings and equipment
of $17 million and $20 million for the first three months of 1999 and 1998,
respectively. The Company intends to enhance its presence in the U.S. by
focusing its expansion on the acquisition of individual or small groups of
clinics, expansion of existing clinics, and opening of new clinics.

      During the first three months of 1999 and 1998, the Company funded its
acquisitions and capital expenditures primarily through proceeds from external
short and long-term debt and the proceeds from the receivable financing facility
and proceeds from the sale of the Non-Renal Diagnostics and Homecare divisions.
In the first quarter of 1998, acquisitions were also funded through the issuance
of investment securities by Fresenius Medical Care Finance, S.A., a Luxembourg
subsidiary of FMC ("FMC Finance"). In exchange for such financing, an
intercompany account was established between FMC Finance and the Company with
payables due to FMC Finance of $42 million at March 31, 1998.

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

CONTINGENCIES

      The Company is the subject of investigations by several federal agencies
and authorities, 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 and is a
defendant in significant commercial insurance litigation. An adverse outcome in
any of these matters, could have a material adverse effect on the Company's
business, financial condition and results of operations. Because of the
significant complexities and uncertainties associated with the above referenced
governmental investigations and proceedings, neither an estimate of the possible
loss or range of loss the Company may incur in respect of such matters nor a
reserve based on any such estimate can be reasonably made. See Part II, Item 1 -
Legal Proceedings and Notes to Consolidated Financial Statements - Note 5
"Commitments and Contingencies".

      The Company believes that its existing credit facilities, cash generated
from operations and other current sources of financing are sufficient to meet
its foreseeable needs. If existing sources of funds are not sufficient to
provide liquidity, the Company may need to sell assets or obtain debt or equity
financing from external sources. There can be no assurance that the Company will
be able to do so on satisfactory terms, if at all.


                                       27
<PAGE>   28

IMPACT OF INFLATION

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

YEAR 2000 ISSUES

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

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

      Regarding information technology ("IT") systems, the Company has
inventoried substantially all IT systems (e.g., clinical, supply chain
management, financial, etc.) and has assessed Year 2000 compliance for those
systems. The Company has developed specific plans and timetables to remediate or
replace critical non-compliant systems and is in the process of completing these
changes. Based on continued progress in addressing Year 2000 compliance issues,
the Company is on the course to resolve such issues for all critical systems by
September 30, 1999.

      Regarding non-IT equipment that may be dependent upon embedded software
(e.g., medical, manufacturing/distribution, etc.), the Company has inventoried
and assessed Year 2000 compliance for substantially all of this equipment. The
Company has developed specific plans to remediate or replace substantially all
non-compliant non-IT equipment and is in the process of completing these
changes. Based on continued progress addressing Year 2000 compliance issues, the
Company is on course to resolve such issues for substantially all non-IT
equipment by September 30, 1999.

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

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

      In conjunction with the fiscal intermediaries which process many of the
claims submitted to Medicare and Medicaid, the Company has successfully tested
its systemic interfaces to ensure that it will be able to bill these
intermediaries before and after 


                                       28
<PAGE>   29
January 1, 2000. The Company is also working with these intermediaries and
significant private payors to ensure that these payors will be able to process
and make remittances for billed services.

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

      Costs related to the Year 2000 issue are funded through operating cash
flows. The Company expects to spend a total of approximately $5 million in
remediation and replacement efforts, including new software and hardware, costs
to modify existing software, and consultant fees. The Company does not
separately track internal costs incurred for the Year 2000 remediation effort;
such costs are principally related to compensation costs for certain members of
the Company's IT Department. The Company estimates remaining costs to be
approximately $3 million. IT expenditures for Year 2000 are covered as part of
the normal IT budget (the Year 2000 efforts are taking priority over other
discretionary IT projects). Non-IT expenditures for Year 2000 are similarly
being covered as part of the normal non-IT budget. The Company presently
believes that the incremental cost of achieving Year 2000 compliant systems and
equipment will not be material to the Company's financial condition, liquidity,
or results of operation.

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

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

            The Year 2000 Steering Committee is completing its review of the
various risk areas which might require a contingency plan. The committee is
considering the need to develop contingency plans for certain key risk areas. At
this point in time, the committee has not identified any risk areas which appear
to have a reasonable likelihood to cause a material disruption to the Company's
operations. Contingency plans will be developed on a case-by-case basis if new
risks are identified or the Company's remediation/replacement efforts do not
progress satisfactorily. Despite these efforts, judgements regarding contingency
plans such as to what extent they should be developed are themselves subject to
many variables and uncertainties. There can be no assurance that the Company
will correctly anticipate the level, impact or duration of noncompliance by
third party vendors or suppliers that provide inadequate information in respect
to their Year 2000 status. As a result, there can be no assurance that any
contingency plan developed by the Company will be sufficient to mitigate the
impact of non-compliance by third-party vendors and service providers, and some
material adverse effect to the Company could result regardless of such
contingency plans. Nonetheless, the Company will continue to track its progress
and will develop additional contingency plans if new risks are identified or the
Company's remediation/replacement efforts do not progress satisfactorily.


                                       29
<PAGE>   30
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

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

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

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

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

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


                                       30
<PAGE>   31
                                     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 and 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. Fresenius Medical Care and the Company have
guaranteed NMC's obligations relating to or arising out of the OIG Investigation
and the qui tam proceedings, and indemnified Grace Chemicals for any such
liabilities.

      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.


                                       31
<PAGE>   32
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 understands that the government has
utilized a grand jury to investigate these matters. The Company expects that
this process will continue while the government completes its evaluation of the
issues.

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

      The government has indicated that the areas identified above are not
exclusive, and that it may pursue additional areas. 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, it is
expected that the government will assert that NMC has violated multiple
statutory and regulatory provisions. Additionally, ten 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.

      During the approximately three and one-half years since the initial
subpoenas were served NMC and the government have met periodically to discuss
issues in connection with the OIG Investigation, including theories of
liability. Recently, NMC and the government have begun to explore the
possibility of settling the matters which are encompassed by the OIG
Investigation and, as referenced below, have reached an agreement in principle
in connection with the diagnostics investigation matter. There can be no
assurance that any of the other matters subject to the OIG Investigation will be
settled. If, however, one or more of the matters encompassed by the OIG
Investigation is settled, it may result in NMC acknowledging that its past
practices violated federal statutes, as well as NMC incurring substantial civil
and criminal financial penalties which could have a material adverse effect on
the Company. If one or more of these matters is not settled, the government may
be expected to initiate litigation in which it would seek substantial civil and
criminal financial penalties and other sanctions that could result in the
exclusion of NMC and its subsidiaries from the Medicare program, Medicaid
program and other federal health care programs. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Contingencies."

      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. Under the
terms of the Merger, any potential 


                                       32
<PAGE>   33
resulting monetary liability has been retained by NMC, and the Company has
indemnified Grace Chemicals against all potential liability arising from or
relating to the OIG Investigation. The Company has provided the U.S. government
with a guarantee of payment of the obligations, if any, arising from the OIG
Investigation. In support of this guarantee, the Company has delivered to the
U.S. government a standby letter of credit in the amount of $150 million.

      MEDICAL DIRECTOR COMPENSATION

      The government is investigating whether Dialysis Services' compensation
arrangements with its Medical Directors constitute payments to induce referrals,
which would be illegal under the anti-kickback statutes, rather than payment for
services rendered. Dialysis Services compensated the substantial majority of its
Medical Directors on the basis of a percentage of the earnings of the dialysis
center for which the Medical Director was responsible from the inception of
NMC's predecessor in 1972 until January 1, 1995, the effective date of Stark II.
Under the arrangements in effect prior to January 1, 1995, the compensation paid
to Medical Directors was adjusted to include "add backs," which represented a
portion of the profit earned by 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, Dialysis Services has compensated
its Medical Directors on a fixed compensation arrangement intended to comply
with the requirements of Stark II. In renegotiating its Medical Director
compensation arrangements in connection with Stark II, Dialysis Services took
and continues to take account of the compensation levels paid to its Medical
Directors in prior years.

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

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

      The government is also investigating whether Dialysis Services' profit
sharing arrangements with its Medical Directors influenced 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.


                                       33
<PAGE>   34
      CREDIT BALANCES

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

      The government is investigating whether DSD intentionally understated the
Medicare credit balance reflected on its books and records for the period 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. Dialysis Services policy was to notify Medicare intermediaries in
writing of overpayments upon receipt and to maintain unrecouped Medicare
overpayments as credit balances on the books and records of Dialysis Services
for four years; overpayments not recouped by Medicare within four years would be
reversed from the credit balance account and would be available to be taken into
income. NMC asserts that Medicare overpayments that have not been recouped by
Medicare within four years are not subject to recovery under applicable
regulations and that its initial filing with the intermediaries disclosed the
credit balance on the books and records of Dialysis Services 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 as well as credit balances of other payors.

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

      SUPPLEMENTAL MEDICAL INSURANCE

      Dialysis Services 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 HIPAA, 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. In addition, the
government has indicated that it is investigating the method by which NMC made
Medigap payments on behalf of its indigent patients.

      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 HDS received payments similar to the payments that HIC
received, and whether HDS 


                                       34
<PAGE>   35
improperly billed for home dialysis services in excess of the monthly cost cap
for services rendered on or after February 1, 1990. The government is
investigating whether NMC was overpaid for services rendered. NMC asserts that
the billings by HDS were proper, but there can be no assurance that the
government will accept NMC's view.

      LIFECHEM

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

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

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

     On April 6, 1999, LifeChem voluntarily disclosed an additional billing
problem to the government that resulted in LifeChem's receipt of overpayments
for laboratory services rendered between 1994 and 1999. In 1994, as a result of
the advice of a billing consultant, LifeChem began to bill for platelet testing
performed in connection with complete blood counts. This advice was confirmed by
the consultant in 1997 as part of a review performed by the consultant under the
auspices of LifeChem's then outside counsel. In 1999, however, an internal
inquiry resulted in a reexamination of this advice and LifeChem determined that
the prior advice was incorrect. As a result LifeChem voluntarily disclosed the
overpayment to the Medicare carrier. LifeChem also has notified the government
of the disclosure. The Company is still reviewing its records to determine an
estimated aggregate amount of the overpayments. There can be no assurances that
the government will agree that LifeChem's disclosure should not result in a
sanction beyond repayment of the overpayment amount.

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

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

      Business and testing practices. As noted above, the government has
identified a number of specific categories of documents that it is requiring NMC
to produce in connection with LifeChem business and testing practices. In
addition to documents relating to 


                                       35
<PAGE>   36
the areas discussed above, the government has also required LifeChem to produce
documents relating to the equipment and systems used by LifeChem in performing
and billing for clinical laboratory blood tests, the design of the test panels
offered and requisition forms used by LifeChem, the utilization rate for certain
tests performed by LifeChem, recommendations concerning diagnostic codes to be
used in ordering tests for patients with given illnesses or conditions, internal
and external audits and investigations relating to LifeChem's billing and
testing. Subsequently, the government served an investigative subpoena for
documents concerning the Company's 1997 review of dialysis facilities' standing
orders, and responsive documents were provided. Recently the government served
investigative subpoenas requiring NMC to update its production on the above
issues and to produce contract files for twenty-three identified dialysis clinic
customers. The government is investigating each of these areas, and asserts that
LifeChem and/or NMC have violated the False Claims Act and/or the Anti-Kickback
Statute through the test ordering, paneling, requisitioning, utilization,
coding, billing and auditing practices described above.

      IDPN

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

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

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

      Infusion Pumps and IV Poles. During the time period covered by the
subpoenas, Medicare regulations permitted IDPN providers to bill Medicare for
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 the Company
cannot represent that Homecare followed this policy in every instance. The
government is investigating the propriety of Homecare's billings for infusion
pumps and IV poles and asserts that Homecare's billings violate the False Claims
Act.

      As noted above, under the new policies published by HCFA with respect to
IDPN therapy, the Company 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 


                                       36
<PAGE>   37
parenteral nutrition supplier rules. In order to compensate dialysis centers for
the costs incurred in administering IDPN therapy and monitoring the patient
during therapy, Homecare followed the practice common in the industry of paying
a "hang fee" to the center. Dialysis centers are responsible for reporting such
fees to HCFA on their cost reports. For Dialysis Services dialysis centers, the
fee was $30 per administration, based upon internal Dialysis Services cost
calculations. For third-party dialysis centers, the fee was negotiated with each
center, typically pursuant to a written contract, and ranged from $15 to $65 per
administration. The Company has identified instances in which other payments and
amounts beyond that reflected in a contract were paid to these third-party
centers. The Company has stopped paying "hang fees" to both Dialysis Services
and third-party facilities.

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

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

      The government is investigating the utilization rate of IDPN therapy among
the NMC patients, whether the 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 the NMC's view. The
government asserts that Homecare submitted IDPN claims for individuals who were
not eligible for coverage and/or with inadequate documentation of eligibility.

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

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

      QUI TAM ACTIONS

      The Company and NMC have become aware that ten 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.


                                       37
<PAGE>   38
      The first qui tam action was filed in the United States District Court for
the Southern District of Florida in June 1994, amended on July 8, 1996 and
disclosed to the Company on July 10, 1996. It alleges, among other things, that
Grace Chemicals and NMC violated the False Claims Act in connection with certain
billing practices regarding IDPN and the administration of EPO and that as a
result of this allegedly wrongful conduct, the United States suffered actual
damages in excess of $200 million. 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 the 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 Southern District of Florida in December 1994 and disclosed to the Company
on April 16, 1999. It alleges, among other things, that NMC violated the False
Claims Act in connection with certain billing practices regarding IDPN and the
cost relating thereto. The second qui tam was filed by the same relator which
filed the first qui tam and covers the same services covered by the first qui
tam complaint.

      The third 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 fourth 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 asserts 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 asserts
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 fifth 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 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 sixth 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 seventh 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 eighth 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 ninth 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.

      The tenth qui tam was filed in the United States District Court for the
District of Massachusetts in 1994 and was disclosed to the Company in February
1999. It alleges among other things that NMC violated the False Claims Act and
the Anti-Kickback Statute in connection with certain billing and documentation
practices regarding IDPN therapy, home oxygen therapy and certain medical


                                       38
<PAGE>   39
billings in NMC's Chicago office.

      Each of the qui tam complaints asserts 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, the Company 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.

      Pursuant to the OIG Agreements, upon consummation of the Merger, Fresenius
Medical Care, the Company and NMC provided the United States with a joint and
several unconditional guarantee of payment when due of all Obligations (the
"Primary Guarantee"). As credit support for 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.

      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. Neither the entering into of the OIG Agreements nor the
providing of the Primary Guarantee and the $150 million letter of credit is an
admission of liability by any party with respect to the OIG Investigation, nor
does it indicate the liability which may result therefrom.

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

      DIAGNOSTICS SUBPOENA

      In October 1996, Biotrax International, Inc., ("Biotrax") and NMC
Diagnostics, Inc., ("DSI") 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 


                                       39
<PAGE>   40
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 has made
extensive document production in response to the subpoena. The Company and the
government have been negotiating a resolution to this matter, and negotiations
have progressed to the point of a possible settlement. The Company and the
government have reached an agreement in principle in which, among other things,
the government has agreed to release the Company from liability in this matter
in exchange for a payment of approximately $16.5 million from the Company. The
Company and the government are currently negotiating the terms of a settlement
agreement. The agreement is not final. For this reason, the eventual outcome of
this matter, its duration, and its effect, if any, on NMC or the Company cannot
be predicted at this time. The Company divested Non Renal Diagnostic Services on
June 26, 1998. See "Management Discussion and Analysis of Financial Condition
and Results of Operations - Divestitures."

      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 narrowed the issues with
respect to which the government has previously expressed concerns and have
recently conducted discussions 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 Dialysis Product's facilities in the 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 Dialysis Product's manufacturing facilities in the U.S. Under the Consent
Decree, Dialysis Product's committed to maintaining ongoing compliance with GMP
and 


                                       40
<PAGE>   41
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 1997, the Company, NMC, and certain named NMC subsidiaries, were served
with a civil complaint filed by Aetna Life Insurance Company in the U.S.
District Court for the Southern District of New York (Aetna Life Insurance
Company v. National Medical Care, Inc. et al, 97-Civ-9310). In April 1999, Aetna
amended its complaint to include its affiliate, Aetna U.S. Healthcare, Inc., as
an additional plaintiff, and to make certain other limited changes in its
pleading. Based in large part on information contained in prior securities
filings, the lawsuit alleges inappropriate billing practices for nutritional
therapy, diagnostic and clinical laboratory tests and misrepresentations. The
amended complaint seeks unspecified damages and costs This matter is at a
relatively early stage in the litigation process, with substantial discovery
just beginning, and its outcome and impact on the Company cannot be predicted at
this time. However, the Company, NMC and its subsidiaries believe that they have
substantial defenses to the claims asserted, and intend to continue to
vigorously defend the lawsuit. 


                                       41
<PAGE>   42
It is also possible that one or more other private payors may assert 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.

      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. HCFA further proposed that
its new instruction be effective retroactive to August 1993, the effective date
of OBRA 93.

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

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

      SECURITIES AND EXCHANGE COMMISSION INVESTIGATION

      In 1996, the Company (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, the
Company has produced documents pursuant to subpoenas from the Southeast Regional
Office of the Commission relating to reserves (net of applicable taxes)
established by the Company and NMC during the period from January 1, 1990 to the
date of the subpoena and certain corporate records and personnel material. On
December 22, 1998, the Commission, in respect of the above-mentioned
investigation, (a) filed a civil complaint against Grace in the United States
District Court in Miami, Florida, alleging that from 1991 through 1995, Grace
inappropriately used certain accounting reserves to report inaccurate results
for Grace and its Health Care Group, 


                                       42
<PAGE>   43
the bulk of which was comprised of Grace's then wholly owned subsidiary NMC, and
(b) instituted in respect of substantially similar allegations public
administrative and cease-and-desist proceedings against seven former personnel
of Grace and NMC. NMC and the Company are neither defendants (or otherwise
parties) in the Commission's above-mentioned civil action nor respondents (or
otherwise parties) in the Commission's above-mentioned administrative
proceedings. While there can be no assurance, the Company believes that the
outcome of this investigation will have no material adverse effect on the
business, financial condition and results of operations of the Company.

      IDPN COVERAGE ISSUES

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

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

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

      Prior to the July hearing date, the United States Attorney for the
District of Massachusetts requested that the hearing be stayed pending
resolution of the OIG Investigation, on the basis that proceeding could
adversely effect the government's investigation as well as the government's
efforts to confirm it belief that these claims are false. Prior to the ALJ
issuing a decision on the stay request, the U.S. Attorney's Office requested
that NMC agree to a stay in the proceedings in order to achieve a potential
resolution of the IDPN claims subject to the OIG Investigation as well as those
which are subject to the administrative appeals process. NMC agreed to this
request, and together with the U.S. Attorney's Office requested a stay. The ALJ
agreed to this request in order to allow the parties the opportunity to resolve
both the IDPN claims which are the subject of the OIG Investigation and the IDPN
claims which are the subject of the administrative proceedings. In March 1999
negotiations between NMC and the U.S. Attorney's Office failed to progress and
NMC requested that the stay be lifted. The ALJ agreed to NMC's request and on
April 19, 1999 the ALJ hearing began. The hearing process is expected to proceed
for several months. At the same time, NMC and the U.S. Attorney's Office are
continuing to discuss potential settlement of both the claims relating to the
OIG Investigation and the claims which are subject to administrative appeals. At
this time, it is not possible to determine whether NMC and the government will
be able to resolve issues surrounding the IDPN claims. Further proceedings on
other administrative appeals related to unpaid claims remain stayed.

      Although NMC management believes that those unpaid IDPN claims were
consistent with published Medicare coverage guidelines and ultimately will be
approved for payment, there can be no assurance that the claims on appeal will
be approved for payment or, to the extent approved, collected in full. Such
claims represent substantial accounts receivable of NMC, amounting to
approximately $150 million as of March 31, 1999.

      If NMC is unable to collect its IDPN receivable, either through the
administrative appeal process or through negotiation, or if IDPN coverage is
reduced or eliminated, depending on the amount of the receivable that is not
collected and/or the nature of the coverage change, NMC's business, financial
condition and results of operations could be materially adversely affected.
NMC's IDPN receivables are included in the net assets of the Company's
discontinued operations. However, these receivables have not been sold and will
remain classified as discontinued operations until they have been settled. See
Notes to Consolidated Financial Statements, Note 4 "Discontinued Operations."


                                       43
<PAGE>   44

      ADMINISTRATIVE APPEALS

      The Company regularly pursues various administrative appeals relating to
reimbursement issues in connection with its dialysis facilities. One such appeal
consists of a challenge to the Medicare regulation which capped reimbursement
for the bad debts incurred by dialysis facilities. In 1998, the United States
Court of Appeals for the District of Columbia ruled in favor of the Company in
connection with the bad debt issue, holding that the Secretary of Health & Human
Services had not adequately justified the bad debt regulation, and ruling that
the government's order adopting the rule was arbitrary and capricious. The Court
of Appeals remanded the matter to the Secretary to provide a more adequate
explanation of the bad debt cap or to abandon it. Subsequently, the Court
modified its holding to continue the bad debt regulation in effect pending
remand. The Company is continuing settlement discussions with the government in
an attempt to recover reimbursement for disallowed bad debt expenses. The
Company cannot predict the outcome of these discussions.

      SPECTRA CORPORATE INTEGRITY AGREEMENT

      Spectra was acquired by the Company in June 1997. Prior to Spectra's
acquisition by the Company, Spectra settled an investigation by the government
and entered into a Corporate Integrity Agreement (the "Agreement"). In February
1999 the government advised Spectra that it may be in breach of the Agreement
and on March 15, 1999 issued a subpoena to Spectra requesting certain documents
related to the Agreement. Spectra has complied with the subpoena and is
currently working with the government to determine if any corrective action is
necessary. While there can be no assurances, the Company does not believe the
outcome of this matter will have a material adverse effect on the Company.

      OTHER LITIGATION AND POTENTIAL EXPOSURES

      In recent years, physicians, hospitals and other participants in the
health care industry have become subject to an increasing number of lawsuits
alleging professional negligence, malpractice, product liability, workers'
compensation or related claims, many of which involve large claims and
significant defense costs. The Company and NMC and their subsidiaries have been,
and the Company can be expected to continue from time to time to be, subject to
such suits due to the nature of the Company's business. Although the 


                                       44
<PAGE>   45
Company maintains insurance at a level which it believes to be prudent, there
can be no assurance that the coverage limits will be adequate or that all
asserted claims will be covered by insurance. In addition, there can be no
assurance that liability insurance will continue to be available at acceptable
costs. A successful claim against the Company or any of its subsidiaries in
excess of insurance coverage could have a material adverse effect upon the
Company and the results of its operations. Any claims, regardless of their merit
or eventual outcome, also may have a material adverse effect on the reputation
and business of the Company. The Company, NMC and their subsidiaries operate a
large number and wide variety of facilities throughout the U.S. In such a
decentralized system it is often difficult to maintain the desired level of
oversight and control over the thousands of individuals employed by many
affiliate companies. The Company relies upon its management structure,
regulatory and legal resources, and the effective operation of its compliance
program to direct, manage and monitor the activities of these employees.
However, on occasion, the Company, NMC and their subsidiaries have identified
instances where employees, deliberately or inadvertently, have submitted
inadequate or false billings while employed by an affiliated company. The
illegal actions of such persons may subject NMC to liability under the False
Claims Act, among other laws, and the Company cannot predict whether such law
enforcement authorities may use such information to initiate further
investigations of the business practices disclosed or any other business
activities of the Company. In addition, the Company asserts claims and suits
arising in the ordinary course of business, the ultimate resolution of which
would not, in the opinion of the Company, have a material adverse effect on its
financial condition. 

ITEM 5: OTHER INFORMATION

     CERTAIN CHANGES IN THE BOARD OF DIRECTORS AND MANAGEMENT

     Hans-Ulrich Sutter resigned from his position as a director of the Company
effective April 30, 1999.

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<PAGE>   46
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a)  Exhibits

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

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

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

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

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

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

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

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

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

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


                                       46
<PAGE>   47
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       Amendment No. 6 dated effective June 30, 1998 to the Credit
                  Agreement dated as of September 27, 1996, among National
                  Medical Care, Inc. and Certain Subsidiaries and Affiliates, as
                  Borrowers, Certain Subsidiaries and Affiliates, as Guarantors,
                  the Lenders named therein, NationsBank, N.A., as paying agent
                  and the Bank of Nova Scotia, the Chase Manhattan Bank, N.A.,
                  Dresdner Bank AG and NationsBank, N.A. as Managing Agents, as
                  previously amended (incorporated herein by reference to the
                  Form 10-Q of Registrant filed with Commission on November 12,
                  1998).

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

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

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


                                       47
<PAGE>   48
Exhibit 4.12      Senior Subordinated Indenture dated as of February 19, 1998,
                  among Fresenius Medical Care AG, State Street Bank and Trust
                  Company as Trustee and Fresenius Medical Care Holdings, Inc.,
                  and Fresenius Medical Care AG, as Guarantors with respect to
                  the issuance of 7 7/8% Senior Subordinated Notes due 2008
                  (incorporated herein by reference to the Form 10-K of
                  Registrant filed with Commission on March 23, 1998).

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

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

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

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

Exhibit 10.4*     Product Purchase Agreement, effective January 1, 1999, between
                  Amgen, Inc. and National Medical Care, Inc., including
                  addendum thereto.

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

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

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

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

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

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

Exhibit 10.11     Amendment No. 2 dated as of August 25, 1998 to Transfer and
                  Administration Agreement dated us of August 28, 1997 among NMC
                  Funding Corporation as Transferor, National Medical Care,
                  Inc., as Collection Agent, Enterprise Funding Corporation, and
                  Nations Bank, N.A. as agent for Enterprise Funding Corporation
                  and the Bank Investors (incorporated herein by reference to
                  the Form 10-Q of Registrant filed with Commission on November
                  12, 1998).


                                       48
<PAGE>   49
Exhibit 10.12     Amendment No. 3 dated as of September 28, 1998 to Transfer and
                  Administration Agreement dated as of August 28, 1997 among NMC
                  Funding Corporation as Transferor, National Medical Care,
                  Inc., as Collection Agent, Enterprise Funding Corporation, and
                  Nations Bank, N.A. as agent for Enterprise Funding Corporation
                  and the Bank Investors (incorporated herein by reference to
                  the Form 10-Q of Registrant filed with Commission on November
                  12, 1998).

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

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

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

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

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

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

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

Exhibit 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 have been filed with the Commission during the three
months ended March 31, 1999.

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

                                       49
<PAGE>   50
                                   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, 1999                  /s/ Ben J. Lipps
                                    -----------------------------------------
                                    NAME: Ben J. Lipps
                                    TITLE: President (Chief Executive Officer)


DATE: May 14, 1999                  /s/ Jerry A. Schneider
                                    -----------------------------------------
                                    NAME: Jerry Schneider
                                    TITLE: Chief Financial Officer


                                       50