NAHC INC, 10-Q, 2000-11-14

NAHC INC
10-Q, 2000-11-14
MISC HEALTH & ALLIED SERVICES, NEC

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<PAGE> 1

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-Q

QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000

COMMISSION FILE NUMBER 1-10875

NAHC, INC.
(Exact name of registrant as specified in its charter)

DELAWARE 13-3247827
(State of incorporation) (I.R.S. Employer Identification No.)

1018 W. NINTH AVENUE, KING OF PRUSSIA, PA 19406
(Address of principal executive office) (Zip code)

Registrant's telephone number: (610) 992-7450

Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.

Yes __X__ No _____

As of October 31, 2000, NAHC, Inc. had 63,343,263 shares of common stock, $.01
par value, outstanding.

<PAGE> 2

NAHC, INC. AND SUBSIDIARIES

FORM 10-Q - QUARTER ENDED SEPTEMBER 30, 2000

INDEX

<TABLE>
<CAPTION>
PART NO. ITEM NO. DESCRIPTION PAGE NO.
-------- -------- ----------- --------
<S> <C> <C> <C>
I FINANCIAL INFORMATION

1 Financial Statements

- Condensed Consolidated Balance Sheets as of
September 30, 2000 and June 30, 2000 1

- Condensed Consolidated Statements of Operations for
the Three Months Ended September 30, 2000 and 1999 2

- Condensed Consolidated Statements of Cash Flows for
the Three Months Ended September 30, 2000 and 1999 3

- Notes to Condensed Consolidated Financial Statements 4

2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 13

3 Quantitative and Qualitative Disclosure About Market Risk 17

II OTHER INFORMATION

1 Legal Proceedings 18
2 Changes in Securities and Use of Proceeds 20
3 Defaults Upon Senior Securities 20
4 Submissions of Matters to a Vote of Security Holders 20
5 Other Information 20
6 Exhibits and Reports on Form 8-K 20

Signatures 21
</TABLE>

<PAGE> 3

NAHC, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 2000 AND JUNE 30, 2000
(In thousands, except per share data)
(Unaudited)
(See Note 1)

<TABLE>
<CAPTION>
SEPTEMBER 30, June 30,
2000 2000
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .................................... $ 6,997 $ 10,008
Escrow receivable ............................................ -- 4,506
Deferred income taxes ........................................ 2,164 2,210
Restricted cash - current portion ............................ 4,771 17,002
Other current assets, principally miscellaneous receivables .. 2,061 3,841
--------- ---------
Total current assets ..................................... 15,993 37,567
--------- ---------
$ 15,993 $ 37,567
========= =========

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses ........................ $ 3,345 $ 12,242
Net liabilities remaining from discontinued operations ....... 3,304 15,186
Income taxes payable ......................................... 1,685 2,226
--------- ---------
Total current liabilities ................................ 8,334 29,654
Deferred income taxes ........................................... 2,164 2,210

Note payable to officer ......................................... 60 --
--------- ---------
Total liabilities ........................................ 10,558 31,864
Commitments and contingencies
Shareholders' equity:
Common stock, $.01 par value; authorized 200,000 shares;
issued 68,672 shares at September 30, 2000 and June 30, 2000 687 687
Additional paid-in capital ................................... 274,646 274,646
Accumulated deficit .......................................... (227,224) (226,956)
--------- ---------
48,109 48,377
Less:Common stock in treasury (at cost), 5,308 shares at
September 30, 2000 and June 30, 2000 ..................... (42,674) (42,674)
--------- ---------
Total shareholders' equity ............................... 5,435 5,703
--------- ---------
$ 15,993 $ 37,567
========= =========
</TABLE>

The accompanying Notes to Condensed Consolidated Financial Statements
are an integral part of these statements.

1
<PAGE> 4

NAHC, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
(See Note 1)

<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
SEPTEMBER 30,
------------------------------
2000 1999
-------- ---------
<S> <C> <C>
Net revenues ..................................................... $ -- $ --
Cost of services ................................................. -- --
-------- ---------
Gross profit ................................................. -- --
Selling, general and administrative expenses ..................... 2,081 13,734
(Credit) provision for restructure ............................... -- (1,987)
-------- ---------
(Loss) from operations ....................................... (2,081) (11,747)
Investment and other income, net ................................. 248 406
Gain on sale of property and equipment ........................... -- 1,528
Interest expense ................................................. (54) (4,490)
-------- ---------
(Loss) before income taxes ................................... (1,887) (14,303)
Income taxes ..................................................... -- --
-------- ---------
(Loss) from continuing operations ............................ (1,887) (14,303)
Income from discontinued operations, net of tax .................. -- 11,448
Gain (loss) on disposal of discontinued operations ............... 1,619 (317,433)
-------- ---------
Net (loss) ....................................................... (268) (320,288)
======== =========
(Loss) per share from continuing operations - basic and
assuming dilution ............................................ (0.03) (0.23)
======== =========
(Loss) per share - basic and assuming dilution .................. -- (5.06)
======== =========
Weighted average number of shares outstanding - basic and
assuming dilution ............................................ 63,343 63,274
======== =========
</TABLE>

The accompanying Notes to Condensed Consolidated Financial Statements
are an integral part of these statements.

2
<PAGE> 5

NAHC, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, except per share data)
(Unaudited)
(See Note 1)

<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
SEPTEMBER 30,
------------------------------
2000 1999
-------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) ......................................................... $ (268) $(320,288)
Adjustments to reconcile net (loss) to net cash flows
from operating activities of continuing operations:
(Income) from discontinued operations, net of tax ................... -- (11,448)
(Gain) loss on disposal of discontinued operations ................. (1,619) 317,433
(Credit) provision for restructure .................................. -- (1,987)
(Gain) on sale of property and equipment ............................ -- (1,528)
Depreciation and amortization ..................................... -- 849
Changes in assets and liabilities, net of effects from acquisitions
and dispositions:
Other current assets, principally miscellaneous receivables .... 1,780 (1,609)
Accounts payable and accrued expenses .......................... (8,837) (6,638)
Income taxes payable ........................................... (541) (3,281)
Escrow receivable, net ......................................... 4,506 --
Other, net ..................................................... -- 3,611
-------- ---------
Net cash flows (used in) continuing operations ................. (4,979) (24,886)
Net cash flows (used in) discontinued operations ............... (10,263) (1,837)
-------- ---------
Net cash flows (used in) operating activities .................. (15,242) (26,723)
-------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Continuing operations - proceeds from sale of property and equipment -- 4,934
Discontinued operations:
Net proceeds from sales of businesses ........................... -- 392,695
Release of restricted cash ...................................... 12,231 --
Payments for businesses acquired, net of cash acquired .......... -- (5,321)
Additions to property and equipment ............................. -- (3,627)
-------- ---------
Net cash flows provided by investing activities ..................... 12,231 388,681
-------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of debt and credit arrangements - continuing operations ..... -- (347,879)
Proceeds from debt and credit arrangements - discontinued operations -- 1,528
Payment of debt and credit arrangements - discontinued operations ... -- (5,487)
Proceeds from common stock issued ................................... -- 100
-------- ---------
Net cash flows (used in) financing activities ................. -- (351,738)
-------- ---------

Net (decrease) increase in cash and cash equivalents ................ (3,011) 10,220
Cash and cash equivalents, beginning of period ...................... 10,008 17,110
-------- ---------
Cash and cash equivalents, end of period ............................ $ 6,997 $ 27,330
======== =========
</TABLE>

The accompanying Notes to Condensed Consolidated Financial Statements
are an integral part of these statements.

3
<PAGE> 6

NAHC, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
(In thousands, except per share data)
(Unaudited)

1. BASIS OF PRESENTATION

NAHC, Inc., formerly NovaCare, Inc. ("NAHC" or the "Company"), previously
operated in three business segments: long-term care services, outpatient
services and employee services. Long-term care services ("LTCS") consisted of
providing rehabilitation and healthcare consulting services on a contract basis
to health care institutions, primarily long-term care facilities. This segment
was disposed of on June 1, 1999. Outpatient services consisted of providing
orthotic and prosthetic ("O&P") and physical rehabilitation and occupational
health ("PROH") rehabilitation services through a national network of patient
care centers. The O&P and PROH businesses were sold on July 1, 1999 and November
19, 1999, respectively. Employee services were comprehensive, fully integrated
outsourcing solutions to human resource issues, including payroll management,
workers' compensation, risk management, benefits administration, unemployment
services and human resource consulting services, and are generally provided to
small and medium-sized businesses. This segment was disposed of on October 19,
1999.

The Company has disposed of all of its operating segments. The Company's
remaining activities consist of managing the legal proceedings against the
Company, attempting to realize its assets, general administrative matters and
the preparation for potential liquidation or investment. Accordingly, the
accompanying consolidated financial statements reflect all the Company's results
of operations and cash flows as discontinued operations, except for its
remaining general and administrative activities which are treated as continuing
operations. Management believes that the information in this Form 10-Q should be
read in conjunction with the information in the Company's Annual Report on Form
10-K for the year ended June 30, 2000, which is on file with the Securities and
Exchange Commission.

These statements have been prepared in accordance with the rules and
regulations of the Securities and Exchange Commission and should be read in
conjunction with the Company's consolidated financial statements and the notes
thereto for the year ended June 30, 2000. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. In the opinion of Company management,
the condensed consolidated financial statements for the unaudited interim
periods include all adjustments necessary for a fair statement of the results
for such interim periods.

2. RISKS AND UNCERTAINTIES AFFECTING THE COMPANY'S ABILITY TO CONTINUE AS A
GOING CONCERN

The Company has disposed of all its operating segments. The Company's
remaining activities consist of managing the legal proceedings against the
Company, attempting to realize its assets, general administrative matters and
the preparation for potential liquidation or investment. The accompanying
consolidated financial statements have been prepared on a going concern basis,
which contemplates the realization of assets and the satisfaction of liabilities
in the normal course of business. The environment confronting the Company raises
substantial doubt about the Company's ability to continue as a going concern.
The principal conditions giving rise to that uncertainty include the following:

4
<PAGE> 7

NAHC, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2000
(In thousands, except per share data)
(Unaudited)

Financial Restructuring.

Pursuant to a Plan of Restructuring (the "Plan") adopted by the Company's
stockholders at a Special Meeting of Stockholders held on September 21, 1999,
the Board of Directors has the authority to commence a liquidation of the
Company if suitable reinvestment opportunities are not identified by the Company
by December 31, 2000 (the "Liquidation Date"). The Plan also affords the Board
the discretion to adjust the Liquidation Date to a date earlier or later than
December 31, 2000 if it determines such action to be appropriate. At a meeting
held on September 27, 2000, the Board extended the Liquidation Date to June 30,
2001. In evaluating whether to reinvest the Company's remaining assets or to
liquidate the Company, a critical factor for the Board to consider is the value
of the Company's remaining assets after satisfaction of all actual and
contingent liabilities. Because the vast majority of the Company's remaining
assets consists of delinquent or disputed accounts receivable that are in
litigation proceedings and the Company's remaining liabilities include
contingent liabilities that may arise from pending legal actions against the
Company or for which the Company is responsible, the Company is unable to
determine the value of net assets, if any, that may be available for a potential
reinvestment until these legal proceedings are settled or concluded. During the
period prior to the Liquidation Date, the Company will continue its efforts to
realize its remaining assets and to resolve its outstanding contingent
liabilities.

There are a number of significant risks associated with the Company's
implementation of the Plan. Because of the factors cited above, the Company's
estimate of possible net assets available for distribution or investment is
extremely uncertain. Furthermore, due to the uncertainty of the amount and
timing with regard to cash flows, there can be no assurance that the Company
will have sufficient cash flow to satisfy obligations when they become due.
Under those circumstances, the Company may seek short-term financing, attempt to
negotiate lower settlement amounts with regard to its obligations or seek
protection under the bankruptcy laws. Furthermore, even if the Company has
sufficient net assets to pursue a business acquisition or combination in
accordance with the Plan, there can be no assurance that the Company will be
able to identify an opportunity on commercially acceptable terms or that the
Company could successfully operate any business that may ultimately be acquired.
In the event that the Company is unable to achieve a business combination or the
Board of Directors decides to liquidate the Company, all of the possible income
tax benefit of the Company's net operating loss carryforwards will be lost.

The Amount Of Net Assets, If Any, Available For Investment Or Distribution
In Liquidation Are Extremely Uncertain.

Since the Company first made estimates of its liquidation value in its
proxy statement dated August 13, 1999, management has from time to time
materially lowered those estimates, and there can be no assurance that such
estimates, including those estimates contained in this report on Form 10-Q, will
not be materially lowered in the future. The range of the estimate per share of
Common Stock reflects the inherent uncertainty of the Company's liquidation
value. This uncertainty is due, in general, to the nature of the Company's
assets and its contingent liabilities. The vast majority of the Company's assets
consist of delinquent or disputed accounts receivable which the Company is
attempting to collect through litigation. Counterclaims have been filed against
the Company in many of these actions. The results of these collection actions
are inherently uncertain.

The Outcome of Claims, Suits and Complaints Could Have an Adverse Effect
on the Company's Business, Financial Condition, Results of Operations and
Liquidity.

As discussed in Note 7, the Company is party to a number of claims, suits
and complaints which have arisen in the ordinary course of business and in the
course of selling its operating businesses. Furthermore, the Company is a
defendant in multiple litigation matters. The outcome of these matters is not
possible to predict. If the Company suffers an adverse ruling or judgment in any
of these cases, the Company will be forced to seek bankruptcy law protection.

5
<PAGE> 8

NAHC, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2000
(In thousands, except per share data)
(Unaudited)

The Company May Be Forced To Seek Protection Under Bankruptcy Laws.

If the Company's liabilities exceed its assets or the Company is unable to
pay its liabilities as they become due, the Company will be forced to seek
protection under bankruptcy laws. The Company would most likely be liquidated
under this circumstance, with the shareholders of the Company receiving no
proceeds in such liquidation.

Cash Flows May Be Inadequate To Carry Out The Affairs Of The Company In
The Normal Course.

During each of the last two fiscal years the Company has used cash in
continuing operations and in all operating activities. The Company's cash
position will vary based on the timing of cash flows. Cash inflows primarily
consist of collections of LTCS related receivables and the release of restricted
cash and the remaining escrowed funds. Cash outflows are principally related to
legal proceedings and claims in conjunction with the sale of the Company's
operating businesses and general and administrative expenses. Due to the
uncertainty of the amount and timing with regard to cash flows, there can be no
assurance that the Company will have sufficient cash flow in the future to
satisfy obligations when they become due. Under those circumstances, the Company
may seek short-term financing, negotiate lower settlement amounts with regard to
its obligations or seek protection under the bankruptcy laws.

Extension Of Liquidation Date May Increase Expenses And Further Reduce
Liquidation Value.

The Plan of Restructuring approved by the Company's stockholders gave the
Board of Directors discretion to extend the Company's search for possible
acquisition candidates or other investment opportunities, and thus delay the
Liquidation Date from December 31, 2000. The Board has chosen to exercise this
discretion, and it is now expected that the Company's liquidation will not
occur, if at all, until at least June 30, 2001. The decision to extend the
Liquidation Date could result in the further depletion of proceeds available to
stockholders should the Board later decide to proceed with the liquidation of
the Company.

The Company Is Losing Money And May Not Ever Be Profitable.

The Company incurred substantial net losses in each of the previous two
fiscal years. In addition, the Company currently has no operations and thus
there can be no assurance that it will ever be profitable. The Company's ability
to become profitable depends on (1) there being sufficient net assets to invest
and (2) management's ability to find a suitable business opportunity in which to
invest. There can be no assurance that there will be any, or sufficient, assets
to invest or that management will identify such an investment opportunity, or if
identified, that the Company will be able to reach an agreement and complete
such an investment. Furthermore, there can be no assurance that any investment
made by the Company will be profitable.

The Current Management Team Has Only Limited Knowledge Of The Company's
Operating History.

The financial constraints under which the Company is operating have made
it difficult to retain management personnel, virtually all of which have been
replaced during the past year. This high rate of management turnover, and the
resultant loss of institutional knowledge, makes it more difficult to both
defend claims being made against the Company and assert claims on its behalf.

6
<PAGE> 9

NAHC, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2000
(In thousands, except per share data)
(Unaudited)

The Company May Not Be Able To Find Or Successfully Operate A Business
Acquisition.

The Company contemplates seeking potential business opportunities if there
are sufficient assets. In doing so, the Company does not propose to restrict its
search to any particular industry or geographical area and may, therefore,
engage in essentially any business in any industry. The selection of a business
opportunity in which to participate is complex and risky. There can be no
assurance that the Company will be able to identify any business opportunity,
which will ultimately prove to be beneficial to the Company and its
shareholders. Additionally, as the Company has only limited financial resources,
it may be difficult to identify opportunities on commercially acceptable terms.
Furthermore, there can be no assurance that the Company could successfully
operate any business that may ultimately be acquired, or that any investment
will be profitable.

3. DISCONTINUED OPERATIONS

During fiscal 1999, the Company sold its LTCS business to Chance
Murphy, Inc. ("Chance Murphy"). In fiscal 2000, the Company sold its remaining
operating businesses: the O&P business was sold on July 1, 1999, the Company's
interest in NCES was sold on October 19, 1999 and the PROH business was sold on
November 19, 1999.

In conjunction with the sale of LTCS, the Company provided a working
capital guarantee of $30,000 and Chance Murphy agreed to pay to the Company the
amount, if any, of working capital as of June 1, 1999 in excess of $30,000 or to
transfer to the Company any remaining accounts receivable relating to periods
prior to June 1, 1999 once the working capital guarantee had been satisfied. On
November 11, 1999, the Company was released from the commitment under the
guarantee and the remaining accounts receivable reverted back to the Company.
These receivables, in addition to the remaining accounts receivable of the LTCS
Western operations which were closed in fiscal 1999, are included in the net
liabilities remaining from discontinued operations below.

In conjunction with the November 11, 1999 release, the Company and
Chance Murphy established an escrow account in support of indemnifications made
by the Company relating to potential cost report settlements with Medicare,
Medicaid and other third-party payers for the Company's services provided prior
to selling the business to Chance Murphy. The escrow account was funded by
Chance Murphy, up to a maximum of $3,000, from cash collections of receivables
due directly from these payers. Pursuant to the agreement, the funds will remain
in escrow until such time that the Company and Chance Murphy determine that all
indemnification obligations and any related third-party claims have been
resolved. The escrow agreement expires 30 days after the end of the period of
limitations for which the filed cost reports may be subject to audit. At that
time, or prior to that time, at the mutual agreement of Chance Murphy and the
Company, any funds in excess of outstanding claims will be released to the
Company. At September 30, 2000, the Company had $1,508 in escrow, net of
reserves, and approximately $2,068 of accounts receivable due from third-party
payers and Chance Murphy. The accounts receivable due from third-party payers
relate to outstanding cost report appeals. These receivables are contingent
assets and are not included in the accompanying balance sheet as the appeals
have not been finally settled.

7
<PAGE> 10

NAHC, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2000
(In thousands, except per share data)
(Unaudited)

Results of operations for all of the Company's discontinued operations
(consisting of the outpatient services, employee services and long-term care
services operating segments) were as follows for the three months ended
September 30, 2000 and 1999.

THREE MONTHS ENDED SEPTEMBER 30,
2000 1999
------- --------
Net revenues .................... $ -- $361,782
Income before income taxes ...... -- 4,953
Income tax benefit .............. -- 6,495
------- --------
Net income ...................... $ -- $ 11,448
======= ========

The income tax benefit for the three months ended September 30, 1999
results from a reversal of accrued income tax liabilities in conjunction with
the sales of the Company's operating businesses, net of state income taxes
provided.

The $1,619 gain on disposal of discontinued operations in the
accompanying statement of operations for the three months ended September 30,
2000, primarily relates to changes in estimates relating to the settlement of
certain legal claims and the settlements of third-party cost reports, and an
additional amount provided in respect of legal costs relating to outstanding
litigation during the three months ended September 30, 2000.

Net (liabilities remaining from) assets of discontinued operations
consist of the following:

<TABLE>
<CAPTION>
SEPTEMBER 30, June 30,
2000 2000
-------- --------
<S> <C> <C>
Accounts receivable, net ............................................... 3,818 6,441
Medicare indemnification receivables, net .............................. 8,447 8,629
Other assets, principally notes and escrow receivables ................. 5,245 5,297
Accrued liabilities .................................................... (18,964) (30,433)
Note payable to Hanger due December, 2000 .............................. (1,850) (3,700)
Other liabilities ...................................................... -- (1,420)
-------- --------
Net (liabilities remaining from) assets of discontinued operations ..... (3,304) (15,186)
Less: current portion .................................................. 3,304 15,186
-------- --------
Net assets of discontinued operations - non-current portion ............ $ -- $ --
======== ========
</TABLE>

At September 30, 2000, the accounts receivable and Medicare
indemnification receivables are net of reserves amounting to $15,506 and
$13,591, respectively. It is at least reasonably possible that established
reserves may need to be adjusted based on the resolution of one or more future
events for which the eventual outcome is uncertain at this time.

Approximately $2,445 of the long-term care services accounts
receivable, net of reserves of $3,105, have been converted into notes
receivable and are included in other assets above. These notes are expected to
be repaid over the next two years.

Approximately 58% of the 3,818 of accounts receivable is due from 3
customers. The Company does not have any collateral with respect to the
outstanding accounts receivable and Medicare indemnification receivables.

8
<PAGE> 11

NAHC, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2000
(In thousands, except per share data)
(Unaudited)

Net (liabilities remaining from) assets of discontinued operations by
segment consists of the following:

<TABLE>
<CAPTION>
SEPTEMBER 30, June 30,
2000 2000
-------- --------
<S> <C> <C>
Long-term care services.............. $ 6,970 $ 6,480
Employee services.................... -- (1,780)
Outpatient services.................. (10,274) (19,886)
-------- --------
$ (3,304) $(15,186)
======== ========
</TABLE>

4. PROVISION FOR RESTRUCTURE

In the fourth quarter of fiscal 1999, the Company recorded a provision
for restructure of $12,260 related to a program to reduce its selling, general
and administrative costs incurred at its corporate headquarters. The program
involved the termination of 74 employees of which all affected employees have
been terminated as of September 30, 2000. This provision consisted of the
following:

<TABLE>
<S> <C>
Employee severance and related costs........................ $ 3,060
Lease and technology agreement mitigation................... 8,515
Write-down of property and equipment........................ 685
-------
Total....................................................... $12,260
=======
</TABLE>

In the first quarter of fiscal 2000, the Company reversed $1,987 of
this provision based on the current costs expected to complete this program. The
reversal is the net amount of additional severance and related costs of $2,400
and reduction of lease and technology agreement mitigation of $4,387.

Activity in the accrued liability for this provision consisted of the
following:

<TABLE>
<CAPTION>
FOR THE THREE
MONTHS ENDED For the year
SEPTEMBER 30, ended June 30,
2000 2000
------ -------
<S> <C> <C>
Balance, beginning of period.......................... $ 791 $11,575
Reversal of provision for restructure................. -- (1,987)
Payments and other reductions......................... (410) (8,797)
------ -------
Balance, end of period................................ $ 381 $ 791
====== =======
</TABLE>

The Company expects that all of these remaining costs, primarily benefits for
terminated employees, will be expended by June 30, 2001.

9
<PAGE> 12

NAHC, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2000
(In thousands, except per share data)
(Unaudited)

5. NET (LOSS) INCOME PER SHARE

The following table sets forth the computation and reconciliation of
net (loss) income per share-basic and net (loss) income per share-assuming
dilution:

<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
SEPTEMBER 30,
----------------------------
2000 1999
-------- ---------
<S> <C> <C>
(LOSS) FROM CONTINUING OPERATIONS ................... $ (1,887) $ (14,303)
INCOME FROM DISCONTINUED OPERATIONS,
NET OF TAX ....................................... -- 11,448
GAIN (LOSS) ON DISPOSAL OF DISCONTINUED
OPERATIONS ....................................... 1,619 (317,433)
-------- ---------
NET (LOSS) .......................................... $ (268) $(320,288)
======== =========

WEIGHTED AVERAGE SHARES OUTSTANDING:
WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC AND
ASSUMING DILUTION ............................... 63,343 63,274
======== =========

(LOSS) PER SHARE FROM CONTINUING OPERATIONS -
BASIC AND ASSUMING DILUTION ...................... $ (0.03) $ (0.23)

INCOME PER SHARE FROM DISCONTINUED OPERATIONS -
BASIC AND ASSUMING DILUTION ..................... -- 0.18
GAIN (LOSS) PER SHARE ON DISPOSAL OF
DISCONTINUED OPERATIONS - BASIC AND ASSUMING
DILUTION ........................................ 0.03 (5.01)
-------- ---------
NET (LOSS) PER SHARE - BASIC AND ASSUMING
DILUTION ........................................ $ -- $ (5.06)
======== =========
</TABLE>

The Company did not include the common stock equivalents of a $60
convertible subordinated note because its effects are antidilutive in all
periods. There were no transactions subsequent to September 30, 2000 that would
have materially changed the number of shares used in computing loss from
continuing operations per share - basic and assuming dilution.

6. NOTE PAYABLE TO OFFICER

On September 27, 2000, the Company issued a 10% convertible subordinated
note to the Chief Executive Officer in the amount of $60 as compensation for
services performed in the first quarter of fiscal 2001.

7. COMMITMENTS AND CONTINGENCIES

The Company is subject to legal proceedings and claims which have arisen in
the course of its business. Also, in conjunction with the sales of its
businesses, the Company has indemnified the purchasers for certain obligations.
Described below are certain claims, suits or complaints which, in the opinion of
management, would have a material adverse effect on the Company's business,
financial condition, results of operations and liquidity. Collectively, the
damages sought to be recovered from the Company in these cases are in the
hundreds of millions of dollars.

10
<PAGE> 13

NAHC, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2000
(In thousands, except per share data)
(Unaudited)

Brady v. NAHC, Inc., et al., in the United States District Court for
the Eastern District of Pennsylvania. This is a purported class action case
filed on behalf of all persons who purchased the common stock of NAHC
during the period between April 5, 1999 through and including November 22,
1999. Five similar actions have been filed in the Eastern District of
Pennsylvania, including one that alleges a class period from May 20, 1998
through November 22, 1999. The Company expects that all similar cases will
be consolidated into a single action. PricewaterhouseCoopers LLP is named
as a defendant in one of the cases.

The case is subject to the provisions of the Private Securities
Litigation Reform Act of 1995 ("PSLRA"). After the lead plaintiff and lead
counsel are appointed by the Court, Defendants expect to file a motion to
dismiss. Under the PSLRA, discovery is stayed until the motion to dismiss
is resolved.

The Plaintiffs asserted that the Company and certain of its directors
and officers violated Section 10(b) of the Securities Exchange Act of 1934
(the "Exchange Act") and Rule 10b-5 by making false and misleading
statements and omissions regarding the prospects of NAHC's business and
NAHC's liquidation value and by failing timely to disclose the impact of
the Balanced Budget Act of 1997 on the long term care services business.
The Plaintiffs allege that these statements and omissions artificially
inflated the value of the Company's stock during the class period. The
Plaintiffs also assert a violation of Section 14(a) of the Exchange Act and
Rule 14a-9 against the Company and individual Defendants as well as against
Wasserstein Perella & Co. in connection with the Company's proxy statements
dated August 13, 1999, as amended through September 10, 1999. The
Plaintiffs allege that the Defendants were negligent in disseminating the
proxy statements, which allegedly contained materially false and misleading
statements. Wasserstein Perella & Co. has notified the Company that it will
seek indemnification from the Company in connection with this action,
pursuant to its engagement agreement with the Company.

The Defendants intend to vigorously defend the action. Because of the
early stage of this litigation, the Company is conducting an assessment of
the merits of this case. The Company has notified its insurance carriers of
this action. If the Defendants suffer an adverse judgment which the Company
is required to pay, it will likely result in there being no assets for
investment or liquidation; in such event, the Company will file for
bankruptcy law protection.

United States of America, ex rel., Saul Epstein v. NovaCare, Inc., et
al., Civil Action No. 98-CV-4185. This qui tam action was filed on or about
August 10, 1998 by Saul R. Epstein on behalf of the United States
government, in camera and under seal in the United States District Court
for the Eastern District of Pennsylvania, asserting claims against the
Company for violations of the False Claims Act. On October 12, 1999, the
United States Attorney for the Eastern District of Pennsylvania elected not
to intervene in the matter and not to prosecute the complaint on behalf of
the United States. On October 21, 1999 the complaint was unsealed. On
November 26, 1999 an amended complaint was filed and subsequently served on
the Company. The amended complaint alleges that the Company submitted false
or fraudulent bills in connection with the provision of physical therapy to
individuals covered by various health insurance programs that were provided
to certain employees of the United States government. The complaint seeks
to recover, on behalf of the federal government, treble damages for each
violation of the False Claims Act and a civil penalty of $5 to $10 for each
violation, plus attorneys' fees, experts' fees and costs of the suit. This
matter currently is in discovery. The relator plaintiff recently made a
motion to the court to add as defendants Select Medical Corporation
("Select") and certain of the subsidiary corporations acquired by Select
from the Company as part of the PROH transaction. That motion is before the
court. Pursuant to the purchase and sale agreement for the sale of the
Company's PROH division to Select, the Company has indemnified Select and
the PROH subsidiaries acquired by Select for any damages that any of those
entities sustain arising from this action relating to conduct prior to the
sale to Select. The Company may not have sufficient assets to try this case
should it proceed to trial. In the event that the plaintiff obtains an
adverse judgment, there will be no assets for investment or liquidation and
the Company will file for bankruptcy law protection.

11
<PAGE> 14

NAHC, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2000
(In thousands, except per share data)
(Unaudited)

Sabolich, Inc., Sabolich Prosthetics Center of Wichita, Inc., Sabolich
Tri-State Prosthetics, Inc., Sabolich of Florida, Inc. and John A. Sabolich
v. NovaCare, Inc. and NovaCare Orthotics and Prosthetics East, Inc. This
action was filed on May 18, 1999 in the United States District Court for
the Western District of Oklahoma, Case No. CIV-99-670-T. The complaint
alleges that the defendants breached a 1994 Agreement of Purchase and Sale
involving the acquisition of the plaintiffs' orthotics and prosthetics
business. Plaintiffs allege that the defendants breached the agreement by
failing to pay certain sums allegedly due them under the agreement.
Plaintiffs also allege that defendants tortiously breached an alleged
implied covenant of good faith and fair dealing in the agreement.
Plaintiffs have claimed $5,000 of compensatory damages and $5,000 for
punitive damages. As part of the Company's Stock Purchase Agreement, dated
as of April 2, 1999 and amended May 19, 1999 and June 30, 1999, with Hanger
Orthopedic Group, Inc. ("Hanger") for the sale of the Company's orthotics
and prosthetics business, the Company and Hanger agreed that each entity
would be responsible for 50% of any damages arising from this action,
including all costs and expenses associated with the matter. This matter
currently is in discovery. In the event that the plaintiff obtains an
adverse judgment, there will be no assets for investment or liquidation and
the Company would likely file for bankruptcy law protection.

Healthsouth Corporation v. NovaCare, Inc. and NC Resources, Inc.,
Montgomery County Court of Common Pleas, No. 99-17155 (filed September 28,
1999). The complaint in this action alleges that, pursuant to a February 3,
1995 stock purchase agreement involving the sale of the Company's medical
rehabilitation hospital subsidiary Rehab Systems Company ("RSC") to
Healthsouth Corporation ("Healthsouth"), the Company agreed to reimburse
Healthsouth for any payments that Healthsouth was obligated to pay
Medicare, Medicaid or other cost-based reimbursement systems as a result of
RSC's indebtedness to such payors. The complaint seeks damages in the
amount of $12,600. Initial pleadings in this matter have been completed and
it is expected that the parties will proceed to discovery in the near
future. In the event that the plaintiff obtains an adverse judgment, there
will be no assets for investment or liquidation and the Company will file
for bankruptcy law protection.

Continental Orthopedic Appliances, Inc. v. Health Insurance Plan of
Greater New York, et al., 95 Civ. 4041 (ADS). The complaint in this action
was filed in the United States District Court for the Eastern District of
New York as a class action, alleging that the Company's former orthotics
and prosthetics subsidiary, together with the Health Insurance Plan of
Greater New York and others, participated in a conspiracy to violate
federal and state antitrust laws prior to the Company's acquisition of such
subsidiary. The complaint seeks to recover monetary damages in excess of
$500, together with costs and attorneys fees, and punitive damages.
Discovery in this case has ended. The case has not been certified as a
class action. Pursuant to the purchase and sale agreements under which the
Company acquired and later sold the former subsidiaries that are involved
in this action, the Company is responsible for defending this action.

In addition to the foregoing legal proceedings, the Company is a defendant
in a number of other legal actions seeking monetary damages, which singularly
and in the aggregate may have a material adverse effect on the Company's
business, financial condition, results of operations and liquidity if such
actions are adversely concluded. Also, in connection with many of the collection
actions brought by the Company against third parties to collect outstanding
accounts receivable, counterclaims have been made against the Company which, in
many cases, exceed the amount sought by the Company in the underlying actions.
In the event that any of the material actions are concluded in a manner that is
adverse to the Company, there will be no assets for investment or liquidation
and the Company would likely file for bankruptcy law protection.

After September 30, the Company settled three claims that were in
litigation or arbitration; Complete Care v. NovaCare, U.S. ex. rel. Gublo v.
NovaCare, and an action brought by a former employee.

12
<PAGE> 15

NAHC, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

OVERVIEW

NAHC, Inc. ("NAHC" or the "Company"), formed in 1985, was a national
leader in physical rehabilitation services and employee services prior to the
sale of all of its operating segments. In order to satisfy its indebtedness, the
Company sold each of its operating segments in a series of divestiture
transactions commencing June 1, 1999 and ending on November 19, 1999. As a
result of the completion of these transactions, the Company currently has no
operating business.

NAHC is a company in transition, attempting to manage its liabilities
and realize its remaining assets. Any investment in the Company should be
considered extremely speculative and risky. The Company's current estimate of
net proceeds available for distribution per outstanding share upon liquidation
of the Company is between ($0.30) and $0.01. See "Liquidity and Capital
Resources - Liquidation Analysis and Estimates." There is a substantial risk
that the Company will be forced to seek bankruptcy law protection.

On July 1, 1999, the Company completed the sale of its orthotic and
prosthetic ("O&P") business to Hanger Orthopedic Group, Inc. ("Hanger").

On September 21, 1999, the stockholders of the Company approved three
proposals submitted as part of a Special Meeting of Stockholders. The first
proposal recommended the sale of the Company's Physical Rehabilitation and
Occupational Health ("PROH") division, the second proposal recommended the sale
of the Company's 64% interest in NovaCare Employee Services, Inc. ("NCES") and
the third proposal recommended the adoption of a plan to restructure the
Company. Under the third proposal, a Plan of Restructuring was adopted whereby
if, by the designated liquidation date, currently June 30, 2001, the Company is
unable to find suitable acquisition candidates to reinvest any remaining net
assets, it will liquidate, unless the Board of Directors, in its discretion,
determines otherwise.

On October 19, 1999, the Company completed the sale of its 64% interest
in NCES to a subsidiary of Plato Holdings, Inc. as part of a tender offer by
Plato for all of NCES's outstanding shares.

On November 19, 1999, the Company completed the sale of the PROH
business to Select Medical Corporation. In conjunction with the PROH sale, the
"NovaCare" name was also sold and the Company changed its name to NAHC, Inc.
effective March 28, 2000.

The Company's former long-term care services segment was disposed in
fiscal 1999 with the closing of certain of its operations in the Western United
States during the third fiscal quarter and the sale of the remaining operations
on June 1, 1999. The Company's former employee services segment was disposed
through the Company's sale of its interest in NCES. The Company's former
outpatient services segment was disposed through the sales of O&P and PROH. As a
result of these transactions, the Company has disposed of all of its operating
segments. The Company's remaining activities consist of managing the litigation
against the Company, attempting to realize its remaining assets, general
administrative matters and the preparation for potential liquidation or
investment.

Accordingly, the Company has reflected substantially all of its results
of operations and cash flows, for the current and all prior periods as
discontinued operations except for its remaining general and administrative
activities which are treated as continuing operations.

<PAGE> 16

NAHC, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(CONTINUED)

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000 VS.
SEPTEMBER 30, 1999

Continuing Operations

The loss before income taxes from continuing operations was $1.9
million for the three months ended September 30, 2000 compared to $14.3 million
for the same period last year, reflecting the wind-down of the Company's
administrative functions as a result of the sale of its businesses. The primary
reasons for the decrease in the loss were (i) a decrease in selling, general and
administrative costs of approximately $11.7 million, principally as a result of
the reduction of the Company's employee base and (ii) interest expense decreased
by approximately $4.4 million as a result of the payment of the Company's line
of credit and convertible debentures.

There is no provision for or benefit from income taxes for the three
months ended September 30, 2000 as the Company could not utilize, for income tax
purposes, the loss incurred in the period. The Company has net operating loss
carryforwards ("NOLs") in the range of approximately $110.0 million to $170.0
million as of September 30, 2000. The ultimate amount of the NOLs is dependent
on future actions and it is reasonably possible that the actual amount may be
outside the range noted above. The Company will not recognize an income
statement benefit for any previously incurred or future operating losses or
future tax deductions until such time as management believes it is more likely
than not that the Company's future operations will generate sufficient taxable
income to be able to realize such benefits. Accordingly, the Company has
provided a full valuation allowance against the entire net deferred tax asset at
September 30, 2000. For the same period last year, the Company recognized no tax
benefit.

Discontinued Operations

There was no loss from discontinued operations for the three months
ended September 30, 2000 because all the Company's businesses were sold prior to
December 31, 1999. The income from discontinued operations, net of tax, for the
three months ended September 30, 1999 was $11.4 million due primarily to the
results of the PROH and NCES business and the reversal of accrued income tax
liabilities in conjunction with the sales of the Company's operating businesses.
During the three months ended September 30, 2000, the Company recorded a gain on
disposal of discontinued operations of $1.6 million primarily as a result of
settlements of certain legal claims and settlements of third-party cost report
liabilities.

LIQUIDITY AND CAPITAL RESOURCES

Cash Flows

At September 30, 2000, cash and cash equivalents totaled $7.0 million
compared to $10.0 million at June 30, 2000. The net decrease in cash and cash
equivalents from June 30, 2000 of $3.0 million resulted principally from the
payment of accrued liabilities related to the PROH, NCES and O&P dispositions,
partially offset by the release of restricted cash.

The Company's cash position, after satisfaction of its contractual
obligations and operating expenses, will vary based on the amount and timing of
cash flows. Cash inflows primarily consist of collections of LTCS related
receivables and the release of restricted cash and the remaining LTCS sale
escrow. As discussed elsewhere, cash inflows and outflows from litigation are
inherently extremely uncertain. The Company's assumptions with respect to
incoming and outgoing cash flows include, without limitation, assumptions that
certain litigation will be settled and not actually litigated, that the
settlements will be for certain minimum amounts and that the settlements will
occur within certain timeframes. These assumptions are uncertain and actual
timing and amounts may differ materially from amounts assumed herein. If certain
of the lawsuits do not settle and instead proceed to trial, or if certain of the
lawsuits do not settle for the amounts that the Company has assumed, this will
have a material adverse impact on the Company's liquidity and cash flow and will
likely require the Company to seek bankruptcy law protection. Furthermore, if
certain of these lawsuits are not settled within the timeframes assumed by the
Company, the Company will be required to incur additional costs and expenses,
which would likely force the Company to seek bankruptcy law protection.

14
<PAGE> 17

NAHC, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(CONTINUED)

Finally, if there is an adverse judicial finding in any of the litigation listed
in Note 7 to the Company's consolidated condensed financial statements filed as
part of this report, the Company may be forced to seek bankruptcy law
protection. Due to the uncertainty of the amount and timing with regard to cash
flows, there can be no assurance that the Company will have sufficient cash flow
in the future to satisfy obligations when they become due. Under those
circumstances, the Company may seek short-term financing, attempt to negotiate
lower settlement amounts with regard to its obligations or seek bankruptcy law
protection. In particular, the Company has assumed that several large payments
due and owing from certain third-parties will, in fact, be paid within the next
several months. If these payments are not received as currently anticipated, the
Company is likely to seek protection from its creditors.

Liquidation Analysis and Estimates

For purposes of determining the available assets, if any, that may be
distributed to stockholders, in the event of a liquidation of the Company,
management made the following estimates of the assets and liabilities of the
Company, as of September 30, 2000. Stockholders should note that the current
minimum estimate (i.e., the least amount available for stockholders) is a
negative number - approximately negative $18.9 million or negative thirty
cents (($.30)) per share. If the assumptions made by management in estimating
the minimum estimated liquidation amount come true, management estimates that
the Company's liabilities will exceed its assets by approximately $18.9 million,
in which case there would be no assets available for distribution to
stockholders. Furthermore, the current minimum estimate includes only estimates
of potential settlements of the pending lawsuits against the Company, but does
not include estimates of an adverse ruling or judgment against the Company in
any of these lawsuits. If the Company suffers an adverse ruling or judgment in
any of these cases, the Company will be forced to seek bankruptcy law
protection.

Any estimate of the Company's possible net assets, if any, available for
distribution is extremely uncertain. This uncertainty, in general, is due to the
fact that the Company's assets consist primarily of delinquent or disputed
accounts receivable that are in litigation and the Company's liabilities consist
of certain fixed obligations and many contingent liabilities that depend upon
the outcome of legal proceedings against the Company. In connection with many of
the collection actions brought by the Company against third parties to collect
outstanding accounts receivable, counterclaims have been made against the
Company which, in many cases, exceed the amount sought by the Company in the
underlying actions. Moreover, some of the cases brought against the Company are
fairly recent and, therefore, management is unable to assess the likely outcome
of the proceeding. In establishing these estimates, management has made certain
assumptions regarding the outcome of these cases and there can be no assurances
that these assumptions will prove to be accurate. Other significant assumptions
that have been made by management in establishing these estimates include (i)
certain large payments being made to the Company over the next several months,
(ii) certain assumptions regarding the buyer of NCES continuing to satisfy
certain workers compensation funding obligations over the next four to five
years relating to former Company employees, which obligations are collateralized
by Company deposits, and (iii) certain assumptions regarding the extent of
indemnification claims made against the escrow account established by the
Company with Chance Murphy, Inc. for Medicare settlements in connection with the
LTCS sale.

15
<PAGE> 18

NAHC, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(CONTINUED)

The estimated operating costs during liquidation for the period
from October 1, 2000 through June 30, 2001, the assumed liquidation date, have
been based on the Company's internal estimates. It is possible that the actual
liquidation date, if any, could be later if the Board of Directors, in its
discretion, deems it appropriate and that the actual operating costs may differ
materially from the estimates included herein.

<TABLE>
<CAPTION>
($ IN MILLIONS, EXCEPT PER
SHARE AMOUNTS)
MINIMUM MAXIMUM
------- -------
<S> <C> <C>
(i) ESTIMATED REALIZABLE VALUES OF ASSETS OF THE COMPANY
Cash and cash equivalents at September 30, 2000..................... $ 7.0 $ 7.0
Restricted cash..................................................... 4.8 4.8
Other current assets................................................ 2.0 2.0
----------- ---------
Total estimated assets.............................................. 13.8 13.8
----------- ---------

(ii) ESTIMATED LIABILITIES OF THE COMPANY
Accounts payable and accrued expenses............................... (3.4) (3.4)
Tax liabilities..................................................... (1.7) (1.7)
Net liabilities of discontinued operations.......................... (21.3) (3.3)
----------- ---------
Total estimated liabilities......................................... (26.4) (8.4)
----------- ---------

(iii) ESTIMATED OPERATING COSTS DURING LIQUIDATION
Investment income during liquidation................................ -- 0.1
Payroll and benefits for liquidation personnel...................... (1.5) (1.2)
Legal, audit and other professional costs........................... (3.6) (2.4)
Other costs......................................................... (1.2) (1.0)
----------- ---------
Total estimated operating costs during liquidation.................. (6.3) (4.5)
----------- ---------
ESTIMATED NET PROCEEDS AVAILABLE FOR DISTRIBUTION
TO STOCKHOLDERS................................................... $ (18.9) $ 0.9
=========== =========
ESTIMATED NET PROCEEDS AVAILABLE FOR DISTRIBUTION
PER OUTSTANDING COMMON SHARE...................................... $ (0.30) $ 0.01
=========== =========
</TABLE>

The following table sets forth a reconciliation of the low end
of the range of the estimates set forth above under "Liquidation Analysis and
Estimates" with the Company's shareholders' equity, as set forth in its
unaudited Consolidated Balance Sheet as of September 30, 2000:

<TABLE>
<CAPTION>
($ IN MILLIONS)
---------------
<S> <C>
Total shareholders' equity as of September 30, 2000.................... $ 5.4
Additional contingent costs............................................ (18.0)
Estimated operating costs during liquidation........................... (6.3)
---------
ESTIMATED NET PROCEEDS AVAILABLE FOR DISTRIBUTION
TO STOCKHOLDERS..................................................... $ (18.9)
=========
</TABLE>

IN DETERMINING THE ESTIMATED NET PROCEEDS AVAILABLE FOR DISTRIBUTION PER
OUTSTANDING COMMON SHARE UPON THE LIQUIDATION OF THE COMPANY OF ($0.30) TO
$0.01, THE METHODS USED BY MANAGEMENT IN ESTIMATING THE VALUES AND VALUE RANGES
OF THE COMPANY'S ASSETS WERE INEXACT AND MAY NOT APPROXIMATE VALUES ACTUALLY
REALIZED. THESE ESTIMATES ARE SUBJECT TO NUMEROUS UNCERTAINTIES AND ALSO DO NOT
REFLECT ALL CONTINGENT LIABILITIES THAT MAY MATERIALIZE. FOR THESE REASONS,
THERE CAN BE NO ASSURANCE THAT THE ACTUAL NET PROCEEDS DISTRIBUTED TO
STOCKHOLDERS IN LIQUIDATION WILL NOT BE SIGNIFICANTLY LESS THAN THE AMOUNT
ESTIMATED. MOREOVER, NO ASSURANCE CAN BE GIVEN THAT ANY AMOUNTS TO BE RECEIVED
BY THE COMPANY'S STOCKHOLDERS IN

16
<PAGE> 19

NAHC, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(CONTINUED)

LIQUIDATION WILL EQUAL OR EXCEED THE PRICE OR PRICES AT WHICH THE COMMON STOCK
HAS RECENTLY TRADED OR MAY TRADE IN THE FUTURE.

THERE IS A SIGNIFICANT RISK, AS CAN BE SEEN IN THE CURRENT ESTIMATES,
THAT THERE WILL BE NO ASSETS FOR DISTRIBUTION TO STOCKHOLDERS OR TO INVEST AND
THAT THE COMPANY WILL BE FORCED TO SEEK BANKRUPTCY LAW PROTECTION.

THE METHODS USED BY MANAGEMENT IN ESTIMATING THE VALUES AND VALUE
RANGES OF THE COMPANY'S ASSETS ARE INEXACT AND MAY NOT APPROXIMATE VALUES
ACTUALLY REALIZED. THESE ESTIMATES ARE SUBJECT TO NUMEROUS UNCERTAINTIES BEYOND
THE COMPANY'S CONTROL AND ALSO DO NOT REFLECT ALL CONTINGENT LIABILITIES THAT
MAY MATERIALIZE. FOR ALL THESE REASONS, THERE CAN BE NO ASSURANCE THAT THE
ACTUAL NET PROCEEDS DISTRIBUTABLE TO STOCKHOLDERS IN LIQUIDATION WILL NOT BE
LESS THAN THE ESTIMATED AMOUNTS SHOWN. MOREOVER, NO ASSURANCE CAN BE GIVEN THAT
ANY AMOUNTS TO BE RECEIVED BY THE COMPANY'S STOCKHOLDERS IN LIQUIDATION WILL
EQUAL OR EXCEED THE PRICE OR PRICES AT WHICH THE COMMON STOCK HAS RECENTLY
TRADED OR MAY TRADE IN THE FUTURE.

CAUTIONARY STATEMENT

Except for historical information, matters discussed above including,
but not limited to, statements concerning future operations and estimates of
values to be received in liquidation, are forward-looking statements that are
based on management's estimates, assumptions and projections. Important factors
that could cause results to differ materially from those expected by management
include the outcome and costs of pending legal actions against the Company,
potential claims related to businesses sold, the ability of the Company to
realize its remaining assets in cash, the cost to wind up the Company's affairs
in preparation for a potential liquidation or investment and the Company's
ability to retain management and professional employees during its transition
period.

Management's estimate of the Company's possible net assets, if any,
available for distribution is extremely uncertain. This uncertainty, in general,
is due to the fact that the Company's assets consist primarily of delinquent or
disputed accounts receivable that are in litigation and the Company's
liabilities consist of certain fixed liabilities and many contingent liabilities
that depend upon the outcome of legal proceedings against the Company. All legal
proceedings are inherently uncertain. Any investment in the Company should be
considered extremely speculative and risky. Prior to making any investment
decision regarding the Company, stockholders and prospective stockholders are
urged to read in its entirety the Company's Annual Report on Form 10-K for the
year ended June 30, 2000, which is on file with the Securities and Exchange
Commission, in conjunction with this Form 10-Q.

ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

The Company does not engage in trading market risk sensitive
instruments and does not purchase as investments, as hedges or for purposes
"other than trading" instruments that are likely to expose the Company to market
risk, whether it be from interest rate, foreign currency exchange or commodity
price risk. The Company has entered into no forward or futures contracts,
purchased no options and entered into no swap arrangements.

17
<PAGE> 20

NAHC, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION

ITEM 1 - LEGAL PROCEEDINGS

The Company is subject to legal proceedings and claims which have
arisen in the course of its business. Also, in conjunction with the sales of its
businesses, the Company has indemnified the purchasers for certain obligations.
Described below are certain claims, suits or complaints which, in the opinion of
management, would have a material adverse effect on the Company's business,
financial condition, results of operations and liquidity. Collectively, the
damages sought to be recovered from the Company in these cases are in the
hundreds of millions of dollars.

18
<PAGE> 21

NAHC, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
(CONTINUED)

arising from this action relating to conduct prior to the sale to Select.
The Company may not have sufficient assets to try this case should it
proceed to trial. In the event that the plaintiff obtains an adverse
judgment, there will be no assets for investment or liquidation and the
Company will file for bankruptcy law protection.

In addition to the foregoing legal proceedings, the Company is a
defendant in a number of other legal actions seeking monetary damages, which
singularly and in the aggregate may have a material adverse effect on the
Company's business, financial condition, results of operations and liquidity if
such actions are adversely concluded. Also, in connection with many of the
collection actions brought by the Company against third parties to collect
outstanding accounts receivable, counterclaims have been made against the
Company which, in many cases, exceed the amount sought by the Company in the
underlying actions. In the event that any of the material actions are concluded
in a manner that is adverse to the Company, there will be no assets for
investment or liquidation and the Company would likely file for bankruptcy law
protection.

After September 30, the Company settled three claims that were in
litigation or arbitration: Complete Care v. NovaCare, U.S. ex. rel. Gublo v.
NovaCare, and an action brought by a former employee.

19
<PAGE> 22

NAHC, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
(CONTINUED)

ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS

NONE

ITEM 3- DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4 - SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS

NONE

ITEM 5 - OTHER INFORMATION

None

ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K

<TABLE>
<CAPTION>
(A) Exhibit
Number Exhibit Description Page Number
------ ------------------- -----------
<S> <C> <C>
10(k)(i) Amended and Restated Employment Agreement dated as of --
September 27, 2000 between the Company and David R. Burt
(incorporated by reference to Exhibit 10(k)(i) to the Company's
Annual Report on Form 10-K dated September 28, 2000).

10(k)(ii) Convertible Subordinated Note dated as of September 27, 2000 --
issued by the Company to David R. Burt (incorporated by reference
to Exhibit 10(k)(ii) to the Company's Annual Report on Form 10-K
dated September 28, 2000).

27 Financial Data Schedule. --

(B) Reports on Form 8-K
</TABLE>

There were no reports on Form 8-K during the three months ended
September 30, 2000.

20
<PAGE> 23

SIGNATURES

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE
REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED THEREUNTO DULY AUTHORIZED.

NAHC, INC.
-------------------------
(REGISTRANT)

NOVEMBER 14, 2000 BY /S/ DAVID R. BURT
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DAVID R. BURT
CHIEF EXECUTIVE OFFICER, PRINCIPAL FINANCIAL
AND ACCOUNTING OFFICER AND DIRECTOR