JL HALSEY CORP - 10-Q Quarterly Report

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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, 2002

COMMISSION FILE NUMBER 1-10875

J.L. HALSEY CORPORATION
(Exact name of registrant as specified in its charter)

DELAWARE 01-0579490
(State of incorporation) (I.R.S. Employer Identification No.)

2325-B RENAISSANCE DRIVE, SUITE 21, LAS VEGAS, NEVADA 89119
(Address of principal executive office) (Zip code)

Registrant's telephone number: (702) 966-4246

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 November 1, 2002, J.L. Halsey Corporation had 84,214,280 shares of common
stock, $.01 par value, outstanding.

J.L. HALSEY CORPORATION AND SUBSIDIARIES

FORM 10-Q - QUARTER ENDED SEPTEMBER 30, 2002

INDEX

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J.L. HALSEY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 2002 AND JUNE 30, 2002
(In thousands)
(Unaudited)
(See Note 1)

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

1

J.L. HALSEY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
(See Note 1)

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

2

J.L. HASLEY CORORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, except per share data)
(Unaudited)
(See Note 1)

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

3

J.L. HALSEY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
(In thousands, except per share data)
(Unaudited)

1. BASIS OF PRESENTATION

J. L. Halsey Corporation, together with its subsidiaries, ("Halsey") is
the successor to NovaCare, Inc. ("NovaCare"), which was a national leader in
physical rehabilitation services and employee services prior to the sale of
all of its operating segments. In connection with the sale of its operating
segments, NovaCare changed its name to NAHC, Inc. ("NAHC"). On June 18, 2002,
in a transaction previously approved by NAHC's stockholders at a special
meeting, NAHC merged with and into Halsey, its wholly-owned subsidiary. As
used herein, the "Company" refers to Halsey, NAHC and NovaCare. The purpose
of the merger between NAHC and Halsey was to implement transfer restrictions
on the Company's common stock in order to preserve the Company's net
operating losses.

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, the Company has no operating
business.

Halsey 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 Board of Directors has abandoned the Plan of Restructuring, adopted
by the stockholders in 1999 (the "Plan"), and therefore there will be no
liquidation of the Company. Recent settlements and dismissals of certain
claims against the Company, as well as the recent receipt of a large tax
litigation settlement from the U.S. Government, have significantly enhanced
the outlook for the Company. Accordingly, the Board believes it to be in the
best interests of the Company and its stockholders to abandon the Plan and
not liquidate. For this reason, the Board of Directors exercised its
discretionary authority and terminated the Plan as of November 14, 2002.

While the Company works to resolve the pending litigation and explores
potential acquisition options, the Board has determined that it is in the
best interests of the Company to try to earn a higher return on the Company's
assets than can be earned in "cash investments." Accordingly, the Board may
determine to register the Company as an investment company pursuant to the
Investment Company Act of 1940 for one or more years so that the Company may
invest in securities with the potential for greater return.

All of the Company's financial assets currently remain in cash items as
defined under the Investment Company Act of 1940.

These statements have been prepared in accordance with the rules and
regulations of the SEC and should be read in conjunction with the Company's
consolidated financial statements and the notes thereto for the year ended
June 30, 2001. 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, consisting of only normal recurring 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
preparing for the Company's future course of action. 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 very substantial doubt about the Company's ability to continue
as a going concern. The principal conditions giving rise to that uncertainty
include the following:

THE AMOUNT OF NET ASSETS, IF ANY, AVAILABLE FOR INVESTMENT IS EXTREMELY
UNCERTAIN

The Company's assets consist primarily of cash, income tax receivables,
escrows subject to future insurance claims and accounts and notes receivables
remaining from discontinued operations. The Company has established
significant reserves against the accounts and notes receivable from
discontinued operations, however, all amounts owed are either subject to
litigation or are owed by companies with unknown financial resources and may
ultimately be uncollectible. Because the ultimate value of the Company's
non-cash assets are subject to unknown outcomes, there is no certainty that
these amounts will ever be collected by the Company. Furthermore, the Company
is a defendant in multiple significant litigation matters. See "Footnote 6."
The outcome of these matters is not possible to predict and the

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current reserves include only estimates of potential settlements of certain
material lawsuits, but do not include estimates of an adverse ruling or
judgment against the Company. If the Company suffers an adverse ruling or
judgment in these cases, it will have a material adverse effect on the
Company. It is possible that a judgment could be so large that the Company
may have little or no assets. Until these legal proceedings are settled or
concluded, the Company will not know the exact amount of assets that will be
available for re-deployment. The Company is continuing its efforts to realize
its remaining assets and to resolve its outstanding liabilities.

CASH FLOW MAY BE INSUFFICIENT TO SATISFY OBLIGATIONS.

The Company's cash position will vary based on the timing and amount of
expected cash inflows and outflows. Expected cash inflows primarily consist
of collections from certain escrows, tax refunds and accounts and notes
receivable from discontinued operations. The collection of accounts
receivables from discontinued operations is dependent upon the successful
litigation of claims to enforce those receivables. Cash outflows are
principally related to legal proceedings and claims against the Company and
general and administrative expenses. The outcome of litigation and
arbitration proceedings is extremely uncertain. 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 a large
judgment against the company in the event the Company loses in certain of the
material lawsuits against the Company. 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.

THE COMPANY'S PROFESSIONAL LIABILITY INSURER IS UNABLE TO PAY CLAIMS ON
BEHALF OF THE COMPANY.

On February 2, 2002, a Pennsylvania court authorized state insurance
regulators to liquidate the insolvent PHICO Insurance Company, which had
provided professional liability insurance policies to the Company. As a result,
PHICO will not be permitted to pay any claims on behalf of the Company. The
Company believes, however that various state insurance guaranty funds will pay
claims on the Company's behalf. Based on its discussion with the state guaranty
funds and its review of claims, the Company believes that no payments that are
required to settle professional liability claims will exceed the amounts
available to the Company under the applicable state's guaranty fund limits.
There is no assurance, however, that each claim will settle within those limits
and there is no excess insurance policy in place that would pay settlements or
awards in excess of those limits. Therefore, in the event that the Company's
current assessment is wrong, and the amounts required to pay on these claims are
in excess of any amounts paid by guaranty funds, the Company will be required to
fund these claims.

THE COMPANY MAY NOT EVER BE PROFITABLE FROM OPERATIONS.

Although the Company earned net income for the three month period ended
September 30, 2002, the Company incurred substantial net losses in three of the
previous four fiscal years. The net income in the three month period ended
September 30, 2002 was primarily due to the release of reserves no longer
necessary as a result of the affirmation of the dismissal of the Brady lawsuit
by the US Court of Appeals and adjustments to reserves for workers' compensation
and professional liability claims. The Company currently has no operations and
thus there can be no assurance that it will be profitable in future periods. The
Company's ability to become profitable depends on management's ability to find
suitable investment opportunities. Furthermore, there can be no assurance that
any investment made by the Company will be profitable.

THE COMPANY MAY BE DEEMED, OR MAY BECOME AN INVESTMENT COMPANY.

The Investment Company Act of 1940 requires registration as an investment
company for companies that are engaged primarily in the business of investing,
reinvesting, owning, holding or trading securities. Unless an exclusion or safe
harbor applies, a company may be deemed to be an investment company if it owns
"investment securities" with a value exceeding 40% of the value of its total
assets on an unconsolidated basis, excluding government securities and cash
items. A general exclusion is provided for companies that are engaged primarily
in a business other than investing.

From the time of its public offering until November 19, 1999, the Company
continued to operate one or more of its healthcare or professional employment
businesses and, therefore, was not an investment company because it was
primarily engaged in a business other than investing. Since November 1999, the
Company has been engaged in litigation, arbitration and other activities as part
of winding down the various liabilities and assets from its operating

5

businesses. The Company believes it has been involved primarily in a business
other than investing since November 1999. There is a risk that the Securities
and Exchange Commission ("SEC") may take a contrary view.

The Company believes that there are several exclusions from the definition
of investment company available to it. First, the Company does not meet the 40%
test with respect to the composition of its assets. Fewer than 40% of its assets
are in categories that the Company believes could be considered to be
"investment securities." Second, the Company has placed assets that could be
considered "investment securities" into "cash items." All of the company's
financial assets are in cash items. Cash items are excluded from the calculation
to determine whether a company meets the 40% test.

In the event that the SEC disagrees with the Company's analysis, the
Company may be required to register as an investment company under the
Investment Company Act of 1940 or seek an exemption from the SEC that would
exclude us from the definition of an investment company.

As noted above, the Company is considering registering under the
Investment Company Act of 1940. If the Company is successful in registering
as an Investment Company, the Company will seek to invest in securities with
the potential for greater return. Investments in securities with the
potential for higher returns will entail greater risk.

THE CURRENT MANAGEMENT TEAM HAS ONLY LIMITED KNOWLEDGE OF THE COMPANY'S
OPERATING HISTORY.

The financial constraints under which the Company is, and has been,
operating have made it difficult to retain management personnel, virtually
all of which were replaced subsequent to the disposal of the Company's
operating business segments. This high percentage 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.

3. DISCONTINUED OPERATIONS

During fiscal 1999, the Company sold its long-term care services
("LTCS") business to Chance Murphy, Inc. ("Chance Murphy"). In fiscal 2000,
the Company sold its remaining operating businesses: the orthotic and
prosthetic ("O&P") business was sold on July 1, 1999, the Company's 64%
interest in NovaCare Employee Services, Inc. ("NCES") was sold on October 19,
1999 and the physical rehabilitation and occupational health ("PROH")
business was sold on November 19, 1999.

In connection with the sale of these businesses, the Company retained
certain assets and liabilities of these businesses that were not assumed by
the respective buyers. The Company has managed these assets and liabilities
from its discontinued operations under its Plan of Restructuring. Since the
Plan of Restructuring has now been terminated and the Company will continue
to operate, the remaining assets and liabilities from discontinued operations
have been reflected separately in the balance sheet and prior year amounts
have been reclassified.

At September 30, 2002 and June 30, 2002, the accounts and notes
receivables remaining from discontinued operations of $2,932 (net of reserves
of $6,889) and $3,683 (net of reserves of $8,479), respectively, consisted
primarily of accounts and notes receivable and Medicare indemnification
receivables, substantially all of which are in litigation or arbitration and
are in excess of three years old. The decrease from $3,683 to $2,932 at June
30, 2002 and September 30, 2002, respectively, was primarily due to the
collection of outstanding receivables. The Company does not have any
collateral with respect to the outstanding accounts receivable and
indemnification receivables. It is reasonably likely that the amounts of
accrued liabilities and the established reserves against these receivables
will need to be adjusted based on the resolution of one or more future events
for which the eventual outcome is uncertain at this time.

At September 30, 2002 and June 30, 2002, the accrued expenses remaining
from discontinued operations consisted primarily of accrued expenses to wind
down the disposed operations. These costs include accrued workers' compensation
claims, accrued professional liability claims, payroll, legal fees, estimated
litigation or litigation settlement expenses, and other liabilities. The
decrease from $8,028 to $5,203 at June 30, 2002 and September 30, 2002,
respectively, was primarily due to the release of reserves no longer necessary
as a result of the affirmation of the dismissal of the Brady lawsuit by the US
Court of Appeals (See Note 6) and reductions in reserves for accrued workers
compensation and professional liability claims. It is reasonably possible that
the amounts of accrued liabilities 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.

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In conjunction with the sale of LTCS, the Company and Chance Murphy
established an escrow account in support of indemnifications made by the
Company relating to cost report settlements with Medicare, Medicaid and other
third party payers for the Company's services provided prior to selling the
LTCS 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 would 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. At September 30, 2002, the Company had $50 remaining in escrow, net
of reserves, which is included in accounts and notes receivables remaining
from discontinued operations on the Company's balance sheet. This amount is
expected to be collected sometime in fiscal 2003.

4. NET INCOME (LOSS) PER SHARE

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

For the three month periods ended September 30, 2002 and 2001, options to
purchase 3,876 shares of common stock were not included in the computation of
diluted weighted shares outstanding since their inclusion would be
anti-dilutive.

7

There were no transactions subsequent to September 30, 2002 that would have
materially changed the number of shares used in computing loss from continuing
operations per share - basic and assuming dilution.

5. INCOME TAXES

The Company has net operating loss carryforwards available to offset its
taxable income for the three months ended September 30, 2002. The Company,
therefore, has not recorded a provision for income taxes for this period. The
Company has Federal net operating loss carryforwards of approximately
$197,000 and a capital loss carryforward of approximately $39,000. If the
Company experiences a change of ownership within the meaning of Section 382
of the Internal Revenue Code, the Company will not be able to realize the
benefit of its net operating loss, capital loss and tax credit carryforwards.
The ultimate amounts and future realization of the NOLs are dependent on
future actions and it is reasonably possible that the actual amounts may
differ from the amount 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. For the same period last
year, the Company recognized no tax benefit.

6. COMMITMENTS AND CONTINGENCIES

Halsey is party to certain claims, suits and complaints, which have arisen
in the ordinary course of business and in the course of selling its operating
businesses. Described below are certain claims, suits or complaints, which, in
the opinion of management, could have a material adverse effect on the Company's
business, financial condition, results of operations and liquidity.

The financial statements reflect management's best estimate of the cost
to litigate and settle these cases. The Company's reserves assume that none
of the cases goes all the way to trial and assumes that there will not be an
adverse ruling or judgment in any of these matters; if the Company suffers an
adverse ruling or judgment, there will be a material adverse effect on the
Company and its financial condition.

During the quarter ended September 30, 2002, reserves for legal fees and
estimated litigation settlement expenses decreased by $467, principally as a
result of the reversal of reserves established for the Brady lawsuit noted
below.

BRADY V. NAHC, INC., et al., in the United States District Court for the
Eastern District of Pennsylvania. This was a purported class action case
filed on behalf of all persons who purchased the common stock of the Company
during the period between April 5, 1999 through and including November 22,
1999. Five similar actions were filed in the Eastern District of
Pennsylvania, including one that alleged a class period from May 20, 1998
through November 22, 1999. They were consolidated into a single action.
PricewaterhouseCoopers LLP was named as a defendant in the case.

The case was subject to the provisions of the Private Securities
Litigation Reform Act of 1995 ("PSLRA").

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 the Company's business and the
Company'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 alleged that these statements and omissions artificially inflated
the value of the Company's stock during the class period. The Plaintiffs also
asserted 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. notified the Company that it would seek indemnification from
the Company in connection with this action, pursuant to its engagement
agreement with the Company.

On October 17, 2001, the U.S. District Court for the Eastern District of
Pennsylvania dismissed the Brady case against the Company and
PricewaterhouseCoopers LLP with prejudice.

On October 3, 2002, The U.S. Court of Appeals for the Third District
affirmed the dismissal.

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

8

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. Pursuant to the purchase and sale agreement
for the sale of the Company's PROH division to Select Medical Corporation,
the Company has, in certain circumstances, indemnified Select and the PROH
subsidiaries acquired by Select for damages relating to those entities
arising from this action relating to conduct prior to the sale to Select.
This action has been re-sealed in the district court. During the second
quarter of fiscal 2002, an order relating to this case was filed in the
district court. The effect of this order has been reflected within these
financial statements. The Company expects that it will not incur any
additional financial liability as a result of this case.

PIACENTILE V. NAHC, INC. During the second quarter of fiscal 2002, the
Company was served with another qui tam suit. The relator/plaintiffs in this
suit allege violations of the federal False Claims Act by the Company. The
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. The Company has completed its initial
review of this case (including appropriate accruals for handling this matter)
and plans to vigorously defend this matter.

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., CASE NO.
CIV-99-G70-T. THIS ACTION WAS FILED ON MAY 18, 1999 IN THE UNITED STATES
DISTRICT COURT FOR THE WESTERN DISTRICT OF OKLAHOMA. The complaint alleges
that the defendants breached a 1994 Agreement of Purchase and Sale involving
the acquisition of the plaintiffs' O&P 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 million of compensatory
damages and $5 million 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 O&P 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.

WALMSLEY AND SULLIVAN V. NAHC, INC. et. al. During the third quarter of
fiscal 2002, this action was filed in the Court of Common Pleas for the County
of Philadelphia, PA by two former employees against the Company and its officer
and directors. The suit seeks damages in excess of $3,000 as a result of alleged
breaches of contracts to pay certain bonuses, and other claims. The Company
strongly disagrees with the allegations in the complaint and intends to
vigorously defend this action.

NAHC, INC. V. UNITED STATES. In this case, the Company was seeking a
refund of taxes paid. The Company originally filed this action in the United
States Court of Federal Claims in 1996 to seek a refund of approximately
$35,000 paid by the Company to the IRS/United States as a result of 2
transactions: first, the purchase of Rehab Systems Corporation in 1992 and
the subsequent sale of that business and related businesses to HealthSouth in
1995. In 1998, both the Company and the IRS/United States moved for summary
judgment on the record. A hearing was held on these motions in September
2000. In March 2002, the judge issued an order denying summary judgment to
both parties. Since that time, the parties were involved in significant
discussions concerning a compromise settlement that might be acceptable to
both parties. The Company was recently notified by the Tax Division of the
U.S. Department of Justice that a settlement in the amount of $8.7 million,
plus interest, was accepted. The interest amount is expected to total
approximately $3 - $4 million. The U.S. Department of Justice has reserved
the right to deduct from the amount due any other tax or other payment that
it determines is otherwise due. The IRS is conducting an audit of one of the
Company's benefit plans. The Company does not believe that the results of
this audit will have a material impact on its financial statement. On
October 18, 2002, the Company received approximately $12.6 million from the
IRS/United States, but believes that it is still owed approximately $500
thousand, which it will continue to pursue from the IRS/United States.

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UNINSURED PROFESSIONAL LIABILITY CLAIMS

The Company is a defendant in approximately thirty professional
liability lawsuits and had previously purchased professional liability
insurance policies from PHICO Insurance Company. On February 2, 2002, a
Pennsylvania court authorized state insurance regulators to liquidate the
insolvent PHICO Insurance Company, which had provided professional liability
insurance policies to the Company. As a result, PHICO will not be permitted
to pay any claims on behalf of the Company. The Company believes, however
that various state insurance guaranty funds will pay claims on the Company's
behalf. Based on its discussion with the state guaranty funds and its review
of claims, the Company believes that no payments that are required to settle
professional liability claims will exceed the amounts available to the
Company under the applicable state guaranty fund limits. There is no
assurance, however, that each claim will settle within those limits and there
is no excess insurance policy in place that would pay settlements or awards
in excess of those limits. Therefore, in the event that the Company's current
assessment is wrong, and the amounts required to pay on these claims are in
excess of any amounts paid by guaranty funds, the Company will be required to
fund these claims.

WORKERS' COMPENSATION LOSS PAYMENTS

During the three months ended September 30, 2002, the NovaCare workers'
compensation insurance carrier has notified the Company that the purchaser of
NCES ("the Purchaser") who is responsible for making certain claim payments
required by NovaCare's insurance policy deductibles has defaulted on those
payment obligations. The Purchaser has funds that have been prepaid to this
insurance carrier for claim payments under deductibles on the NovaCare
policies as well as other unrelated workers' compensation policies of the
Purchaser. In management's opinion, the funds held by the insurance carrier
are sufficient to pay deductible obligations on the unrelated workers'
compensation policies as well as the NovaCare policies. If the funds held by
the insurance carrier are insufficient to pay all claims or if those funds
are otherwise not available to pay the Company's claims, the Company will be
required to increase reserves for future NovaCare workers' compensation loss
payments.

OTHER LEGAL ACTIONS

The Company is a defendant in a number of additional legal actions
seeking monetary damages, which 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 (including
counterclaims in the millions of dollars) have been made against the Company,
which in many cases, exceed the amount sought by the Company in the
underlying actions.

On November 14, 2002, the Company received notification of a lawsuit
against the Company by Ronald Shostack. The suit seeks monetary damages of
$10 million. The Company is currently evaluating this lawsuit.

10

J. L. HALSEY CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(IN THOUSANDS)

OVERVIEW

J. L. Halsey Corporation, together with its subsidiaries, ("Halsey") is
the successor to NovaCare, Inc. ("NovaCare"), which was a national leader in
physical rehabilitation services and employee services prior to the sale of
all of its operating segments. In connection with the sale of its operating
segments, NovaCare changed its name to NAHC, Inc. ("NAHC"). On June 18, 2002,
in a transaction previously approved by NAHC's stockholders at a special
meeting, NAHC merged with and into Halsey, its wholly-owned subsidiary. As
used herein, the "Company" refers to Halsey, NAHC and NovaCare. The purpose
of the merger between NAHC and Halsey was to implement transfer restrictions
on the Company's common stock in order to preserve the Company's net
operating losses.

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, the Company has no operating
business.

Halsey 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 Board of Directors has abandoned the Plan of Restructuring, adopted
by the stockholders in 1999 (the "Plan"), and therefore there will be no
liquidation of the Company. Recent settlements and dismissals of certain
claims against the Company, as well as the recent receipt of a large tax
litigation settlement from the U.S. Government, have significantly enhanced
the outlook for the Company. Accordingly, the Board believes it to be in the
best interests of the Company and its stockholders to abandon the Plan and
not liquidate. For this reason, the Board of Directors exercised its
discretionary authority and terminated the Plan as of November 14, 2002.

While the Company works to resolve the pending litigation and explores
potential acquisition options, the Board has determined that it is in the
best interests of the Company to try to earn a higher return on the Company's
assets than can be earned in "cash investments." Accordingly, the Board may
determine to register the Company as an investment company pursuant to the
Investment Company Act of 1940 for one or more years so that the Company may
invest in securities with the potential for greater return.

All of the Company's financial assets currently remain in cash items as
defined under the Investment Company Act of 1940.

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2002 VS.
SEPTEMBER 30, 2001

CONTINUING OPERATIONS

The loss from continuing operations was $28 for the three months ended
September 30, 2002 compared to $482 for the same period last year. The
decrease of approximately $454 is primarily due to reductions in legal and
general operating costs of the Company and the release of $617 of reserves
that are no longer necessary as a result of the affirmation of the Brady
lawsuit appeal. The release of these reserves has been recorded as an offset
to selling, general and administrative expense for the three months ended
September 30, 2002.

Net income of $1,331 for the three month period ended September 30, 2002
will be offset by utilization of the Company's NOLs; therefore, no provision for
income taxes for the three months ended September 30, 2002 has been recorded.

DISCONTINUED OPERATIONS

During the three month period ended September 30, 2002, the Company
recorded a gain on disposal of discontinued operations of $1,359. This gain
primarily relates to reductions in reserves for accrued workers compensation and
professional liability claims.

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During the three month period ended September 30, 2001, the Company
recorded a loss on disposal of discontinued operations of $169. This loss was
primarily attributable to the increase in the estimated legal and collection
expenses related to the disposal of the Company's long-term care services
business.

LIQUIDITY AND CAPITAL RESOURCES

CASH FLOWS

At September 30, 2002, cash and cash equivalents totaled approximately
$10,700 compared to approximately $11,600 at June 30, 2002. The decrease in cash
was mainly attributable to cash used for legal proceedings and general
operations of the Company.

The Company's cash position is uncertain and risky. 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 (through litigation and arbitration)
of LTCS related receivables, Medicare related receivables, notes receivables
and tax items. Cash outflows primarily relate to lawsuits against the
Company, legal collection costs and operating expenses. The costs of
defending and prosecuting these lawsuits are substantial and may increase
materially. 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 the actual
timing and amounts will likely differ materially from amounts assumed herein
because of the inherent uncertainty involved in estimating the outcomes and
costs of legal and arbitration proceedings.

In the event that the Company registers under the Investment Company Act
of 1940, the Company intends to invest its assets in securities with
potential for higher returns than it is currently earning on assets invested
in "cash items" as defined under the Investment Company Act of 1940.
Investors should take note that any investment with the potential for greater
returns also carries greater risks. The Company is continuing to gather
information relating to possible registration under the Investment Company
Act of 1940.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The Company has identified the accounting principles critical to our
business and results of operations. We determined the critical principles to be
those that involve the most complex or subjective decisions or assessments. We
believe our most critical accounting policies include the following:

RESERVES

The Company maintains allowances for the collection of receivables
remaining from discontinued operations. These allowances are the result of the
inability or unwillingness of many of the Company's former customers to make
payments. Several of the key industries in which the Company operated have been
severely impacted by the Balanced Budget Act of 1998. As a result of the
provisions of this Act, many of the Company's former customers went bankrupt and
many are nearly insolvent. Accordingly, the Company has maintained significant
allowances against it accounts and notes receivables from these customers.

On a quarterly basis, the Company reviews the value of the reserves and
adjusts the net value of the receivables to the estimated amount that management
expects to realize. When facts and circumstance indicate that an account has
been impaired below its current carrying value, the Company will adjust the
reserve accordingly. When a customer files for bankruptcy or other facts and
circumstance dictate that no reasonable hope exists that the associated
receivable will be collectible at any future period, the Company writes off the
accounts receivable balance. Generally when the Company estimates that the net
receivable remaining from discontinued operations has increased, the Company
will release the associated reserves only when there has been a significant
change in facts or circumstances to support the Company's change in estimate.

Many of the Company's accounts and notes receivable are fully reserved
because the Company believes it is highly unlikely that it will collect any
portion of these accounts. Of the accounts that are only partially reserved,
there are five accounts that make up approximately 78% of the net balance. As a
result it is inherently difficult to estimate the

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amount that the Company will realize upon collection. If the financial condition
of the Company's former customers were to deteriorate, resulting in an
impairment of their ability to make any payments owed to the Company,
significant changes to our reserves may be required

INCOME TAXES

The Company has net operating loss carryforwards. The realization of any
benefit of these loss carryforwards is dependent on future actions and the
actual amount of these loss carryforwards may change over time. The Company does
not recognize any benefit on its financial statements for any previously
incurred losses and will not until it determines that it is more likely than not
that it will have taxable income to realize these benefits.

LOSS CONTINGENCIES

The Company records estimated loss contingencies when information is
available that indicates that it is probable that an asset has been impaired or
a liability has been incurred and the amount of the loss can be reasonably
estimated. When no accrual is made for a loss contingency because one or both of
these conditions are not met, or if an exposure to loss exists in excess of the
amount accrued, the Company discloses such contingencies when there is at least
a reasonable possibility that a loss or an additional loss may have been
incurred. If the Company had used different assumptions, there may have been a
material adverse impact to the financial statements. In particular, the Company
has estimated that all of the material litigation will be settled and that none
of the cases will result in a judgment against the Company. If the Company's
assumptions are incorrect and there are one or more material judgments against
the Company, there will be a material adverse effect on the Company.

13

J. L. HALSEY CORPORATION AND SUBSIDIARIES
PART I - OTHER INFORMATION

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.

ITEM 4 - CONTROLS AND PROCEDURES

(a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. Within 90 days
prior to the filing date of this report, the Company's principal executive
officer and acting financial officer carried out an evaluation of the
effectiveness of the Company's disclosure controls and procedures. Based on that
evaluation, the Company's principal executive officer and acting principal
financial officer believes (i) that the Company's disclosure controls and
procedures are designed to ensure that information required to be disclosed by
the Company in the reports it files under the Securities Exchange Act of 1934 is
recorded, processed, summarized and reported within the periods specified in the
SEC's rules and forms and that such information is accumulated and communicated
to the Company's management as appropriate to allow timely decisions required
disclosure, and (ii) that the Company's disclosure controls and procedures are
effective.

(b) CHANGES IN INTERNAL CONTROLS. There have been no significant changes
in the Company's internal controls or in other factors that could significantly
affect the Company's internal controls subsequent to the evaluation referred to
in Item 4(a) above, nor have there been any corrective actions with regard to
significant deficiencies or material weaknesses.

14

J. L. HALSEY CORPORATION AND SUBSIDIARIES
PART II - OTHER INFORMATION

ITEM 1 - LEGAL PROCEEDINGS

See Note 6 of Notes to Condensed Consolidated Financials Statements
included in "Item 1. Financial Statements."

ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS

None

ITEM 3 - DEFAULTS UPON SENIOR SECURITIES

None

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

ITEM 5 - OTHER INFORMATION

None

ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

None

(b) Reports on Form 8-K

None

15

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.

J. L. HALSEY CORPORATION
-----------------------------------
(Registrant)

Date: November 14, 2002 By /s/ David R. Burt
--------------------------
David R. Burt
Chief Executive Officer, Principal
Financial and Accounting Officer and
Director

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CERTIFICATION

I, David R. Burt, certify that:

1. I have reviewed this quarterly report on Form 10-Q of J. L. Halsey
Corporation;

2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;

3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:

a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;

b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and

c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):

a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and

b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and

6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.

/s/ David R. Burt
-----------------------------------
David R. Burt
Chief Executive Officer and
acting Chief Financial Officer

Date: November 14, 2002

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