<PAGE>   1



                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K

(MARK ONE)
                  ANNUAL REyPORT PURSUANT TO SECTION 13 OR 15(d) 
                  OF THE SECURITIES EXCHANGE ACT OF 1934 
                  [NO FEE REQUIRED, EFFECTIVE OCTOBER 7, 1996] 
                  [X] FOR THE FISCAL YEAR ENDED JUNE 30, 1998

                                       OR

                  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                  SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
                  [ ] FOR THE TRANSITION PERIOD FROM _________________________
                           TO ___________________

                         COMMISSION FILE NUMBER 0-27602

                              NCS HEALTHCARE, INC.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

                  DELAWARE                                 34-1816187
       (State or other jurisdiction of                  (I.R.S. Employer
       incorporation or organization)                  identification no.)

  3201 Enterprise Parkway, Beachwood, Ohio                   44122
  (Address of principal executive offices)                 (Zip code)

       Registrant's telephone number, including area code: (216) 378-6800

        Securities registered pursuant to Section 12(b) of the Act: None

        Securities registered pursuant to Section 12(g) of the Act: Class A
Common Stock, par value $.01 per share.

         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 [ ]

         Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]

         As of June 30, 1998, the registrant had 13,355,751 shares of Class A
Common Stock, par value $.01 per share, and 6,463,244 shares of Class B Common
Stock, par value $.01 per share, issued and outstanding. As of that date, the
aggregate market value of these shares, which together constitute all of the
voting stock of the registrant, held by non-affiliates was $410,828,555 (based
upon the closing price of $28.50 per share of Class A Common Stock on the NASDAQ
National Market on June 30, 1998). For purposes of this calculation, the
registrant deems the 221,912 shares of Class A Common Stock and the 5,079,632
shares of Class B Common Stock held by all of its Directors and executive
officers to be the shares of Class A Common Stock and Class B Common Stock held
by affiliates.


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                       DOCUMENTS INCORPORATED BY REFERENCE

         Portions of the registrant's definitive Proxy Statement to be used in
connection with its Annual Meeting of Stockholders to be held in 1998 are
incorporated by reference into Part III of this Form 10-K.

         Except as otherwise stated, the information contained in this Form 10-K
is as of June 30, 1998.








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                              NCS HEALTHCARE, INC.
                         1998 ANNUAL REPORT ON FORM 10-K

                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                     PART I

<S>               <C>                                                                           <C>
ITEM 1.           BUSINESS                                                                       1
ITEM 2.           PROPERTIES                                                                    10
ITEM 3.           LEGAL PROCEEDINGS                                                             10
ITEM 4.           SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                           10
ITEM 4A.          EXECUTIVE OFFICERS OF THE COMPANY                                             10

                                     PART II

ITEM 5.           MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED
                  STOCKHOLDER MATTERS                                                           12
ITEM 6.           SELECTED FINANCIAL DATA                                                       13
ITEM 7.           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
                  RESULTS OF OPERATIONS                                                         14
ITEM 7a.          QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                    17
ITEM 8.           FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                   17
ITEM 9.           CHANGES IN AND DISAGREEMENTS WITH AUDITORS ON ACCOUNTING AND
                  FINANCIAL DISCLOSURE                                                          42

                                    PART III

ITEM 10.          DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY                               42
ITEM 11.          EXECUTIVE COMPENSATION                                                        42
ITEM 12.          SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT                42
ITEM 13.          CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                                42

                                    PART IV

ITEM 14.          EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K              43
</TABLE>



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                                     PART I

ITEM 1. BUSINESS

GENERAL

         NCS HealthCare, Inc. (the "Company" or "NCS") is a leading independent
provider of pharmacy services to long-term care institutions including skilled
nursing facilities, assisted living facilities and other institutional health
care settings. The Company purchases and dispenses prescription and
non-prescription pharmaceuticals and provides client facilities with related
management services, automated medical record keeping, drug therapy evaluation
and regulatory assistance. The Company also provides a broad array of ancillary
health care services to complement its core pharmacy services, including
infusion therapy, physical, speech and occupational therapies, nutrition
management, mobile diagnostics and other services. The Company is considered to
operate principally in one business segment.

         NCS entered the long-term care pharmacy services industry in 1986 with
the acquisition of Modern Pharmacy Consultants, Inc. in Northeastern Ohio.
Through June 30, 1998, the Company had completed a total of 49 acquisitions
(other than fold-in acquisitions) including 11 acquisitions since the beginning
of fiscal 1998. As a result of these acquisitions, the Company has expanded its
geographic presence into 34 states serving approximately 248,000 residents.

         On February 14, 1996, the Company issued 4,476,000 shares of Class A
Common Stock at $16.50 per share in connection with its initial public offering.
A portion of the net proceeds from the stock issuance were used to repay
approximately $27,000,000 of outstanding indebtedness under long and short-term
borrowings. The remaining proceeds were used to fund business acquisitions.

         On October 4, 1996, the Company completed a public offering of
4,235,000 shares of Class A Common Stock at $31.00 per share in connection with
a public offering. A portion of the net proceeds were used to repay
approximately $7,000,000 of outstanding indebtedness under short-term
borrowings. The remaining proceeds were used to fund business acquisitions.

         On August 13, 1997, the Company issued $100,000,000 of convertible 
subordinated debentures due 2004. Net proceeds to the Company were approximately
$97,250,000 net of underwriting discounts and expenses. The debentures carry an
interest rate of 5-3/4 % and are convertible into shares of Class A Common Stock
at any time prior to maturity at $32.70 per share. A portion of the proceeds
from the debenture offering was used to repay approximately $21,000,000 of
outstanding indebtedness under short-term borrowings. The remaining proceeds
were used to fund business acquisitions.

MARKET OVERVIEW

         Institutional pharmacies purchase, repackage and distribute
pharmaceuticals to residents of long-term care facilities such as skilled
nursing facilities, assisted living facilities and other institutional health
care settings. Unlike hospitals, most long-term care facilities do not have
on-site pharmacies but depend instead on outside sources to provide the
necessary products and services. In response to a changing regulatory
environment and other factors, the sophistication and breadth of services
required by long-term care facilities have increased dramatically in recent
years. Today, in addition to providing pharmaceuticals, institutional pharmacies
provide consultant pharmacy services, which include monitoring the control,
distribution and administration of drugs within the long-term care facility and
assisting in compliance with applicable regulations, as well as therapeutic
monitoring and drug utilization review services. With the average long-term care
facility patient taking six to eight medications per day, high quality,
cost-efficient systems for dispensing and monitoring patient drug regimens are
critical. Providing these services places the institutional pharmacy in a
central role of influencing the effectiveness and cost of care.

         Based on data from industry sources, the Company estimates that the
U.S. market for pharmacy services (including consulting services and related
supplies) in long-term care and assisted living facilities will approximate $6
billion for 1998. The Company believes that the market is growing due primarily
to three factors. First, the number of long-term care facility residents is
rising as a result of demographic trends. According to the U.S. Bureau of the
Census, the number of persons over age 75 increased by approximately 30% from
1980 to 1990. In 1990, 6.1% of the population ages 75 to 84 and 24.5% of the
population ages 85 or older received care in long-term care facilities. The
segment of the population over age 85, which comprises the largest percentage of
residents at long-term care facilities, is the fastest growing segment of the
population and is expected to increase by more than 40% from 1990 to 2000.

         The second factor creating growth in the institutional pharmacy market
is the increasing number of medications taken per day by long-term care facility
residents. This increase is due to (i) advances in medical technology which have
resulted in the availability of new drug therapy regimens and (ii) the generally
higher acuity levels of residents as a result of both payors' efforts to have
care delivered in the lowest cost setting and the generally older, and
consequently sicker, population of long-term care facility residents.

         The third factor is that hospitals are discharging patients earlier due
to funding pressures and cost containment efforts. Therefore, an increasing
number of patients are now receiving care outside of traditional hospitals into
alternative settings such as long-term care facilities.



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         In addition, the cost containment pressures in the hospital sector are
also beginning to create opportunities for institutional pharmaceutical
companies among rural hospitals as evidenced by an increasing trend towards
outsourcing pharmaceutical services in this market. Based on data from industry
sources, the Company estimates that the U.S. institutional pharmaceutical market
for rural hospitals will approximate $3.6 billion for 1998.

         The Company believes that there are significant consolidation
opportunities in the institutional pharmacy market. Prior to the 1970's,
pharmacy needs of long-term care facilities were fulfilled by local retail
pharmacies. Since then, the pharmacy and information needs of long-term care
facilities have grown substantially and regulatory requirements and the
reimbursement environment have become more complex. Institutional pharmacy
companies, both independent and captive (those owned by an operator of long-term
care facilities), are better positioned to meet these changing market demands.
As a result, over the past 25 years the proportion of the market served by
retail pharmacies has steadily declined, and institutional pharmacies have
become the dominant providers of pharmacy services to the long-term care market.
Despite this shift, the independent institutional pharmacy market remains highly
fragmented. Faced with uncertainties related to health care reform, an
increasing need for capital resources and the necessity to provide a wide range
of specialized services, a growing number of retail and small institutional
pharmacies are seeking to affiliate with, or be acquired by, large institutional
pharmacies.

         There are several factors driving the consolidation among providers of
long-term care pharmaceutical services. All of these factors relate to the
advantages that large institutional providers have over retail and small
institutional providers.

                  Scale Advantages. Larger pharmacies are able to (i) realize
         advantages associated with size, including purchasing power, service
         breadth, more sophisticated sales and marketing programs and formulary
         management capabilities, (ii) achieve efficiencies in administrative
         functions and (iii) access the capital resources necessary to invest in
         critical computer systems and automation.

                  Ability to Serve Multi-site Customers and Managed Care Payors.
         As a result of their ability to serve long-term care customers with
         several physical locations, larger pharmacies possess a significant
         competitive advantage over their smaller counterparts. Additionally,
         the Company believes that there are significant opportunities for
         full-service institutional pharmacies with a comprehensive range of
         services and regional coverage to provide a spectrum of health care
         products and services to managed care payors.

                  Regulatory Expertise and Systems Capabilities. Long-term care
         facilities are demanding more sophisticated and specialized services
         from pharmacy providers due, in part, to the implementation in 1990 of
         the Omnibus Budget Reconciliation Act of 1987 ("OBRA"). The OBRA
         regulations, which were designed to upgrade and standardize care in
         nursing facilities, mandated strict new standards relating to planning,
         monitoring and reporting on the progress of patient care to include,
         among other things, prescription drug therapy. As a result, long-term
         care administrators increasingly seek experienced pharmacists and
         specialized providers with computerized information and documentation
         systems designed to monitor patient care and control the facilities'
         and payors' costs.

                  Changing Market. The long-term care market is undergoing
         change as health care reform proposals are considered, cost-containment
         initiatives are implemented, managed care organizations seek regional
         coverage and consolidation takes place. Smaller providers are more
         concerned with, and generally less capable of capitalizing on
         opportunities created by these changes.

BUSINESS STRATEGY

         NCS's strategy is to capitalize on industry trends and Company
expertise to strengthen its position as a leading provider of high quality,
integrated pharmacy and related services to institutional clients. The Company
intends to implement this strategy by continuing its acquisition and development
program, identifying and standardizing "best practices," cross marketing its
services across its customer base to generate internal growth, utilizing its
proprietary technology to deliver information and providing a broad array of
ancillary health care services to complement its core pharmacy services.

                  Acquisition and Development Program. NCS is continuing its
         acquisition program to capitalize on consolidation opportunities in the
         institutional pharmacy market. As of June 30, 1998, the Company had
         completed 49 acquisitions (other than fold-in acquisitions), including
         11 acquisitions since the beginning of fiscal 1998. Through
         consolidation, the Company believes it can achieve substantial
         economies of scale in areas such as drug purchasing and can create
         efficiencies by consolidating administrative functions, centralizing
         formulary management, providing management information systems support
         and otherwise streamlining operations. In addition, by identifying
         areas in which acquired companies outperform NCS and standardizing
         these "best practices" company-wide, the Company strives to provide its
         customers with the highest quality services possible.

                  In addition, NCS has developed the systems and competencies
         necessary to open new market locations that have the breadth of
         services and standards of quality of existing branches. To date, NCS
         has developed new sites in eight locations, and the Company intends to
         develop additional sites in markets in which competitive factors and
         economics make a start-up preferable to an acquisition.



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SERVICES

         The Company has traditionally provided institutional pharmacy and
infusion products and services to long-term care facility residents. In recent
years, NCS has developed an array of services which address the needs of
long-term care facilities to accommodate higher acuity admissions and manage
costs. NCS believes that it is one of the few companies capable of offering
customers the depth and breadth of these products and services. For the year
ended June 30, 1998, approximately 77% of the Company's revenues were derived
from providing pharmacy and consultant pharmacy services to long-term care
facilities. An additional 6% of revenues were derived from providing infusion
therapy services, 3% were derived from providing other therapy services and the
remaining 14% were primarily derived from providing various other products and
services, including nutrition management, oxygen and Medicare Part B services.

         Pharmacy Services. The Company's core business is providing
pharmaceutical dispensing services to residents of long-term care facilities and
other institutions. The Company purchases, repackages and dispenses prescription
and non-prescription medication in accordance with physician orders and delivers
such prescriptions at least daily to long-term care facilities for
administration to residents by the nursing staffs of these facilities. The
Company typically serves facilities within a two hour drive time of its
distribution facility and provides 24 hour coverage 365 days per year. As of
June 30, 1998, the Company provided its services from 89 sites in 34 states. NCS
also provides its services through the management of third party institutional
pharmacies.

         Upon receipt of a doctor's order, the information is entered into the
Company's management information system, which automatically reviews the order
for patient-specific allergies and potentially adverse interactions with other
medications the patient is receiving. Following this analysis, a report on each
order is produced for review by a Company pharmacist, who performs a prospective
drug utilization analysis of the order and, if appropriate, substitutes generic
drugs approved for equivalence by the U.S. Food and Drug Administration ("FDA").
In addition, subject to the prescribing physician's approval, the pharmacist may
make therapeutic substitutions based on guidelines established by the Company's
Therapeutic Formulary Committee.

         NCS provides pharmaceuticals to its clients through a unit dose
distribution system. The Company divides the pharmaceuticals received in bulk
form from its suppliers into unit dose packages for its customers. The unit dose
format is designed to reduce errors, improve control over the distribution of
pharmaceuticals and save nursing administration time relative to the bulk
systems traditionally used by retail pharmacies.

         At those sites at which Concord DX, the Company's proprietary computer
system, has been implemented, the Company utilizes its work flow control to
improve efficiencies and uses its bar-coding system to enhance safety. Under
this system, a bar code label is applied to each unit dose package. In most
cases, this step is executed by the Company. At the request of the Company,
certain manufacturers have begun to provide pharmaceuticals which are
pre-packaged and bar coded. Through bar coding, information relating to the
contents and destination of each unit dose package distributed can be
automatically entered into the Concord DX system. This bar code technology
enables the Company to monitor pharmaceuticals throughout the production and
distribution process, thereby reducing errors, improving pharmacy control and
enhancing production efficiency.

         As an additional service, NCS furnishes its clients with information
captured by its computerized medical records and documentation system. This
system captures patient care information which is used to create monthly
management and quality assurance reports. The Company believes that this system
of information management, combined with the unit dose delivery system, improves
the efficiency and controls in nursing administration and reduces the likelihood
of drug-related adverse consequences.

         Consultant Pharmacy Services. Federal and state regulations mandate
that long-term care facilities improve the quality of patient care by retaining
consultant pharmacist services to monitor and report on prescription drug
therapy. The OBRA legislation implemented in 1990 seeks to further upgrade and
standardize health care by setting forth more stringent standards relating to
planning, monitoring and reporting on the progress of prescription drug therapy
as well as facility-wide drug usage. Noncompliance with these regulations may
result in monetary sanctions as well as the potential loss of the facility's
ability to participate in Medicare and Medicaid reimbursement programs.

         NCS provides consulting services that help clients comply with federal
and state regulations applicable to long-term care facilities. The Company's
services include: (i) reviewing each patient's drug regimen to assess the
appropriateness and efficacy of drug therapies, including a review of the
patient's medical records, monitoring drug reactions to other drugs or food,
monitoring lab results and recommending alternate therapies or discontinuing
unnecessary drugs; (ii) participating on the Pharmacy and Therapeutics, Quality
Assurance and other committees of the Company's clients; (iii) inspecting
medication carts and storage rooms each month; (iv) monitoring and reporting
monthly on facility-wide drug usage and drug administration systems and
practices; (v) developing and maintaining the client's pharmaceutical policy and
procedure manuals; and (vi) assisting the long-term care facility in complying
with state and federal regulations as they pertain to patient care.




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         Additionally, NCS offers a specialized line of consulting services
which help long-term care facilities enhance care and reduce and contain costs
as well as comply with state and federal regulations. Under this service line,
the Company provides: (i) data required for OBRA and other regulatory purposes,
including reports on psychotropic drug usage (chemical restraints), antibiotic
usage (infection control) and other drug usage; (ii) plan of care programs which
assess each patient's state of health upon admission and monitor progress and
outcomes using data on drug usage as well as dietary, physical therapy and
social service inputs; (iii) counseling related to appropriate drug usage and
implementation of drug protocols; (iv) on-site educational seminars for the
long-term care facilities' staff on topics such as drug information relating to
clinical indications, adverse drug reactions, drug protocols and special
geriatric considerations in drug therapy, information and training on
intravenous drug therapy and updates on OBRA and other regulatory compliance
issues; (v) mock regulatory reviews for nursing staffs; and (vi) nurse
consultant services and consulting for dietary, social services and medical
records.

         Infusion Therapy. Infusion therapy is the intravenous delivery of
medication. The Company's infusion therapy services include pain management,
antibiotic therapy and chemotherapy for long-term care residents and home care
patients. NCS received Joint Commission on the Accreditation of Healthcare
Organizations accreditation at four sites and accreditation with commendation at
another site. NCS prepares the product to be administered and delivers the
product to the long-term care facility for administration by the nursing staff.
Because the proper administration of infusion therapy requires a highly trained
nursing staff, the Company provides education and certification programs to its
clients in order to assure proper staff training and compliance with regulatory
requirements. NCS believes that, by enhancing the ability of client facilities
to administer infusion therapies, these programs have led to a greater use of
infusion therapies throughout the Company's long-term care facility customer
base.

         Other Therapies. In 1993, the Company began providing physical, speech
and occupational therapy services. The Company currently provides these services
to residents of 107 long-term care facilities.

         Nutrition Management. NCS assists long-term care facilities in menu
planning, purchasing and managing their dietary operations. Because the food
service area is typically one of the principal areas of regulatory violations,
this is an area of critical concern to long-term care facility operators.
Currently, NCS provides this service to over 300 long-term care facility
customers.

         Other. The Company also provides long-term care facilities with
assistance in complying with regulations concerning healthy and sanitary
environments. The Company also assists its customers with various regulatory
compliance matters and products and services relating to durable medical
equipment ("DME"), oxygen, mobile diagnostics and Medicare Part B products and
services. Finally, NCS offers specialized educational services that aid
facilities in the training of their staffs. These services include surveys to
prepare facilities for state reviews and training on appropriate nursing
techniques in infusion therapy, wound care management and restorative nursing.

FORMULARY MANAGEMENT

         NCS employs formulary management techniques designed to assist
physicians in making the best clinical choice of drug therapy for patients at
the lowest cost. Under the Company's formulary programs, NCS pharmacists assist
prescribing physicians in designating the use of particular drugs from among
therapeutic alternatives (including generic substitutions) and in the use of
more cost-effective delivery systems and dose forms. The formulary takes into
account such factors as pharmacology, safety and toxicity, efficacy, drug
administration, quality of life and other considerations specific to the elderly
population of long-term care facilities. The Company's formulary guidelines also
provide relative pharmaceutical cost information to residents, their insurers or
other payors of the pharmacy bill.

         Successful implementation of formulary guidelines is dependent upon
close interaction between the pharmacist and the prescribing physician. NCS
seeks to attract and retain highly trained clinical pharmacists and encourages
their active participation in the caring for residents of long-term care
facilities, including consultation with the facilities' medical staff and other
prescribing physicians, to increase the likelihood that the most efficacious,
safe and cost-effective drug therapy is prescribed. The Company's formulary
program is directed by the NCS Formulary Committee, which is comprised of eight
pharmacists and two additional members. The NCS Formulary Committee is
responsible for establishing protocols and procedures for evaluating alternative
drug therapies. To facilitate adherence to the Company's formulary guidelines,
NCS annually publishes the NCS Formulary Guide, which presents the findings and
recommendations of the NCS Formulary Committee as well as reimbursement
information. The Company believes that adherence to the NCS formulary guidelines
improves drug therapy results, lowers costs for residents and strengthens the
Company's purchasing power with pharmaceutical manufacturers.



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ACQUISITION PROGRAM

         The Company intends to continue to pursue a strategy of growth through
acquisitions and from internal growth through sales and marketing efforts to 
new and existing customers. Between 1986 and June 30, 1998, NCS completed 49
acquisitions (other than fold-in acquisitions), including 11 acquisitions since
the beginning of fiscal 1998. The Company believes that through consolidation of
other institutional pharmacies it can provide a broad array of high quality
pharmacy and related services in a cost effective manner. Acquisition and
effective integration can result in efficiencies in service delivery,
management, marketing, information systems and administrative functions,
substantial increases in purchasing leverage, particularly with respect to drug
purchases, the ability to provide a broad range of ancillary services
complementary to the Company's core pharmacy services and the geographic scope
necessary to service multi-facility customers and market to managed care payors.

         NCS targets acquisition candidates with strong management, a
demonstrated capacity for growth and opportunities to realize efficiencies
through consolidation and integration. The Company's philosophy is to create an
environment that maintains the importance of the entrepreneur in such key areas
as dispensing, consulting, marketing and customer service while consolidating
formulary management, purchasing, administration and information systems.
Central to the Company's integration strategy is implementation of NCS's
proprietary information systems, which improve communications between the
Company's sites and permit comparison of results, facilitating the
identification of "best practices." NCS further targets acquisition candidates
with management who intend to continue to participate in the operation of the
business but believe that there are more substantial opportunities in being
involved in a larger organization. The Company generally includes equity
in NCS as a component of the purchase price for an acquired company in order to
align the interests of the acquired company's management with those of NCS. The
Company typically values acquisition candidates based on number of beds served,
business mix, quality of management and whether the target is a regional hub or
a "fold-in."

         Through its acquisition program, the Company seeks to expand its
presence into new geographical areas and to achieve efficiencies through
consolidation in existing markets. The Company has traditionally targeted
candidates that the Company believes will increase its ability to provide high
quality core pharmacy and ancillary services to multi-facility and managed care
providers. The Company continues to examine opportunities to acquire
institutional pharmacies and independent ancillary service providers in both new
and existing geographical markets.

MANAGEMENT INFORMATION SYSTEMS

         An integral part of NCS's services mix is its proprietary management
information system called "Concord DX", which has extensive capabilities
designed to improve operating efficiencies and controls both internally and at
the customer level. In conjunction with the unit dose distribution system and
using a bar-coding label system on each unit dose package, Concord DX is able to
monitor pharmaceuticals within NCS throughout the production and distribution
process. At the customer level, Concord DX automatically screens prescription
orders received from physicians for patient-specific allergies and potentially
adverse reactions given other medications the patient may be receiving. Concord
DX is also used to create individual patient medical records and monthly
management and quality assurance reports for NCS's customers. To date, Concord
DX has been implemented in 40% of NCS's customer base.

         In 1997, the Company acquired Rescot Systems Group, Inc. ("Rescot"). 
For the past 10 years, Rescot has developed one of the premier pharmacy systems
used for managing patient and pharmacy data. Rescot has been instrumental in the
design and implementation of Concord DX.

         In addition to these internal capabilities, NCS has added a suite of
software applications named ASTRAL designed to address customers' needs. Each of
the Astral applications meets one of three goals: (1) improve the profitability
of the nursing home, (2) enhance the quality of care delivered, or (3) improve
the nursing home's ability to conform to regulatory requirements. NCS's current
ASTRAL modules are as follows:

         NCS ON-LINE is the core product in ASTRAL. It improves profitability by
         dramatically reducing nursing time associated with ordering medicines
         and printing pharmacy reports. NCS On-Line provides a real time
         connection to NCS for ordering, reviewing med sheets and generating
         reports. Patient care is enhanced by reducing the amount of nursing
         time associated with clerical functions.

         PROVIEW improves a nursing home's profitability by enhancing the
         facility's ability to make economic admission decisions. ProView
         analyzes the costs and revenues associated with a resident prior to
         admission. In the coming era of Prospective Pay, it is a valuable tool
         for ensuring that a customer prospectively evaluates all financial
         aspects related to admitting a resident.

         OSCAR is an on-line survey tool which compares a facility's state
         surveys over time and across regions. By using 




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         OSCAR, a nursing facility can quickly gain perspective as to how they
         are performing relative to their history and their state, regional or
         national competitors. NCS updates this quarterly and it has improved
         their customers' ability to conform to regulations.

         SURVEY ADVANTAGE anticipates possible enforcement remedies, tracks
         informal and formal appeals and creates management reports to analyze 
         survey and enforcement status. In addition, it replaces manuals and 
         printed regulations while offering an extensive search capability for 
         finding regulations related to a word, phrase or tag number.

         LIVEWELL is a clinical documentation and pharmacy ordering system
         designed for the assisted living market. It enhances care by
         electronically documenting the medical records and ordering functions.

         In addition to the innovations currently being used by NCS customers,
the Company believes that the integration of other information systems within
the nursing home is a critical future customer need. The Company believes that
access to both clinical and financial information is a key factor in improving
care and managing costs. The Company believes that the ASTRAL system will
facilitate a unified NCS culture through improved site-to-site communication and
will enhance the Company's ability to deliver high quality, standardized
services throughout its geographic market.

SALES AND MARKETING

         In marketing to existing customers, NCS has organized the selling
efforts of each formerly independent location into a single sales force
consisting of 49 field service representatives, eight sales managers. All field
sales representatives are trained in each of the Company's products and services
and sell these services throughout their respective geographic territories. A
typical territory consists of approximately 250 long-term care facilities, and
the salesperson follows an eight week call cycle. These individuals are paid
base salaries with commissions comprising up to 75% of a successful
salesperson's compensation. The Company believes that long-term care facilities
change institutional pharmacies fairly infrequently, but when a change is made,
it is generally the result of a competitor's ability to offer better service or
a broader array of products and services.

PURCHASING

         NCS purchases pharmaceuticals primarily through a national wholesale
distributor, with whom it has negotiated a prime vendor contract, and directly
from certain pharmaceutical manufacturers. The Company also is a member of
industry buying groups that contract with manufacturers for volume-based
discounted prices which are passed through to the Company by its wholesale
distributor. The Company has numerous sources of supply available to it and has
not experienced any difficulty in obtaining pharmaceuticals or other products
and supplies used in the conduct of its business.

CUSTOMERS

         At June 30, 1998, NCS had contracts to provide services to
approximately 248,000 residents in 34 states. These contracts, as is typical in
the industry, are generally for a period of one year but can be terminated by
either party for any reason upon thirty days written notice. Over the past
year, NCS has expanded its customer base to also include rural hospitals and at
June 30, 1998, NCS had contracts to manage hospital pharmacies in nineteen
states. As of June 30, 1998, no individual customer or market group represents
more than 5% of the total sales of the Company's institutional pharmacy
business.

COMPETITION

         Competition among providers of pharmacy services to long-term care
facilities is intense, both regionally and nationally. The Company believes that
it is one of the top three independent institutional pharmacies in the Country.
Institutional pharmacies compete principally on the basis of service levels and
service breadth. In its program of acquiring institutional pharmacy providers,
NCS competes with several other companies with similar acquisition strategies,
some of which may have greater resources than the Company.

REIMBURSEMENT AND BILLING

         As is generally the case for long-term care facility services, NCS
receives payments through reimbursement from Medicaid and Medicare programs and
directly from individual residents (private pay), private third-party insurers
and long-term care facilities. For the fiscal year ended June 30, 1998, the
Company's payor mix was approximately 37% Medicaid, 4% Medicare, 18% private
pay, 13% third-party insurance and other and 28% long-term care facilities,
including amounts for which the long-term care facility receives reimbursement
under Medicare Part A. Medicare and Medicaid are highly regulated. The failure
of NCS and/or its client institutions to comply with applicable reimbursement
regulations could adversely affect the Company's business.

         Private Pay. For those residents who are not covered by
government-sponsored programs or private insurance, NCS generally bills the
patient or the patient's insurer or other responsible party on a monthly basis.
Depending upon local market practices, NCS may alternatively bill private
residents through the long-term care facility. Pricing for private pay residents
is 



                                       6
<PAGE>   10
based on prevailing regional market rates or "usual and customary" charges.

         Medicaid. The Medicaid program is a federal-state cooperative program
designed to enable states to provide medical assistance to aged, blind or
disabled individuals, or to members of families with dependent children whose
income and resources are insufficient to meet the costs of necessary medical
services. State participation in the Medicaid program is voluntary. To become
eligible to receive federal funds, a state must submit a Medicaid "state plan"
to the Secretary of HHS for approval. The federal Medicaid statute specifies a
variety of requirements which the state plan must meet, including requirements
relating to eligibility, coverage of services, payment and administration. For
residents eligible for Medicaid, the Company bills the individual state Medicaid
program or, in certain circumstances state designated managed care or other
similar organizations. Medicaid programs are funded jointly by the federal
government and individual states and are administered by the states. The
reimbursement rates for pharmacy services under Medicaid are determined on a
state-by-state basis subject to review by the Health Care Financing
Administration and applicable federal law. Federal regulations and the
regulations of certain states establish "upper limits" for reimbursement for
prescription drugs under Medicaid. In most states pharmacy services are priced
at the lower of "usual and customary" charges or cost (which generally is
defined as a function of average wholesale price and may include a profit
percentage) plus a dispensing fee. In addition, most states establish a fixed
dispensing fee which is adjusted to reflect associated costs on an annual or
less frequent basis.

         State Medicaid programs generally have long-established programs for
reimbursement which have been revised and refined over time and have not had a
material adverse effect on the pricing policies or receivables collection for
long-term care facility pharmacy services. Any future changes in such
reimbursement programs or in regulations relating thereto, such as reductions in
the allowable reimbursement levels or the timing of processing of payments,
could adversely affect the Company's business. The annual increase in the
federal share would vary from state to state based on a variety of factors. Such
provisions, if ultimately signed into law, could adversely affect the Company's
business.

         Medicare. The Medicare program is a federally funded and administered
health insurance program for individuals age 65 and over or for certain
individuals who are disabled. The Medicare program consists of two parts:
Medicare Part A, which covers, among other things, inpatient hospital, skilled
long-term care facility, home health care and certain other types of health care
services; and Medicare Part B, which covers physicians' services, outpatient
services and certain items and services provided by medical suppliers. Medicare
Part B also covers a limited number of specifically designated prescription
drugs. Medicare Part A requires long-term care facilities to submit all of their
costs for patient care, including pharmaceutical costs, in a unified bill. Thus,
fees for pharmaceuticals provided to Medicare Part A patients are paid to the
Company by the long-term care facility on a monthly basis. Pricing is consistent
with that of private pay residents or is set between private pay rates and
Medicaid minimums. Medicare Part A has a cost-sharing arrangement under which
beneficiaries must pay a portion of their costs. These non-covered co-payments
are billed by the facility directly to residents or the state Medicaid plan, as
the case may be.

         Medicare Part B provides benefits covering, among other things,
outpatient treatment, physicians' services, durable medical equipment ("DME"),
orthotics, prosthetic devices and medical supplies. Products and services
covered for Medicare Part B eligible residents in the long-term care facility
include, but are not limited to, enteral feeding products, ostomy supplies,
urological products, orthotics, prosthetics, surgical dressings, tracheostomy
care supplies and a limited number of other medical supplies. All claims for
DME, prosthetics, orthotics, prosthetic devices, including enteral therapy and
medical supplies ("DMEPOS") are submitted to and paid by four regional carriers
known as Durable Medical Equipment Regional Carriers ("DMERCs"). The DMERCs
establish coverage guidelines, allowable utilization frequencies and billing
procedures for DMEPOS. Payment is based on a fee schedule, which varies
depending on the state in which the patient receiving the items resides.
Payments for Medicare Part B products to eligible suppliers, which include
long-term care facilities and suppliers such as NCS, are made on a per-item
basis directly to the supplier. In order to receive Medicare Part B
reimbursement payments, suppliers must meet certain conditions set by the
federal government. NCS, as an eligible supplier, either bills Medicare directly
for Part B covered products for each patient or, alternatively, assists the
long-term care facility in meeting Medicare Part B eligibility requirements and
prepares bills on behalf of the facility. For Part B services, such as physical,
speech and occupational therapy, long-term care facilities bill Medicare for
reimbursement of the amounts paid to NCS for these services. Medicare limits
such reimbursement to the reasonable amount that would have been paid if
provider employees had furnished the services. To date, Medicare has published
"salary equivalency guidelines" for physical and respiratory therapy services.
Medicare does not currently have salary equivalency guidelines for other therapy
services, but may disallow payment for rates that substantially exceed rates
paid for such services by other providers in the same area. Moreover, Medicare
is likely to issue salary equivalency guidelines for occupational and speech
therapy services in the near future. Medicare Part B also has an annual
deductible as well as a co-payment obligation on behalf of the patient, and the
portion not covered by Medicare is billed directly to the patient or appropriate
secondary payor.

         Third-Party Insurance. Third-party insurance includes funding for
residents covered by private plans, veterans' benefits, workers' compensation
and other programs. The resident's individual insurance plan is billed monthly
and rates are consistent with those for other private pay residents.

         Long-Term Care Facilities. In addition to occasional private patient
billings and those related to drugs for Medicare eligible residents, long-term 
care facilities are billed directly for consulting services, certain 
over-the-counter medications and bulk house supplies.


                                       7
<PAGE>   11


GOVERNMENT REGULATION

         Institutional pharmacies, as well as the long-term care facilities they
service, are subject to extensive federal, state and local laws and regulations.
These laws and regulations cover required qualifications, day-to-day operations,
reimbursement and the documentation of activities. NCS continuously monitors the
effects of regulatory activity on its operations.

         Licensure, Certification and Regulation. States generally require that
companies operating a pharmacy within that state be licensed by the state board
of pharmacy. The Company currently has pharmacy licenses in each of the states
in which it operates a pharmacy. In addition, the Company's pharmacies are
registered with the appropriate state and federal authorities pursuant to
statutes governing the regulation of controlled substances.

         Long-term care facilities are also separately required to be licensed
in the states in which they operate and, if serving Medicare or Medicaid
patients, must be certified to ensure compliance with applicable program
participation requirements. Long-term care facilities are also subject to the
long-term care facility reforms of OBRA, which impose strict compliance
standards relating to the quality of care for long-term care operations,
including vastly increased documentation and reporting requirements. In
addition, pharmacists, nurses and other health professionals who provide
services on the Company's behalf are in most cases required to obtain and
maintain professional licenses and are subject to state regulation regarding
professional standards of conduct.

         Federal and State Laws Affecting The Repackaging, Labeling and
Interstate Shipping of Drugs. Federal and state laws impose certain repackaging,
labeling and package insert requirements on pharmacies that repackage drugs for
distribution beyond the regular practice of dispensing or selling drugs directly
to patients at retail. A drug repackager must register with the FDA. The Company
believes that it holds all required registrations and licenses and that its
repackaging operations are in compliance with applicable state and federal
requirements.

         Medicare and Medicaid. For an extensive period of time, the long-term
care facility pharmacy business has operated under regulatory and cost
containment pressures from state and federal legislation primarily affecting
Medicaid and, to a lesser extent, Medicare.

         The Medicare program establishes certain requirements for participation
of providers and suppliers in the Medicare program. Pharmacies are not subject
to such certification requirements. Skilled long-term care facilities and
suppliers of DMEPOS, however, are subject to specified standards. Failure to
comply with these requirements and standards may adversely affect an entity's
ability to participate in the Medicare program and receive reimbursement for
services provided to Medicare beneficiaries. See "--Reimbursement and Billing."

         Federal law and regulations contain a variety of requirements relating
to the furnishing of prescription drugs under Medicaid. First, states are given
broad authority, subject to certain standards, to limit or to specify conditions
as to the coverage of particular drugs. Second, federal Medicaid law establishes
standards affecting pharmacy practice. These standards include general
requirements relating to patient counseling and drug utilization review and more
specific requirements for long-term care facilities relating to drug regimen
reviews for Medicaid patients in such facilities. Recent regulations clarify
that, under federal law, a pharmacy is not required to meet the general
standards for drugs dispensed to long-term care facility residents if the
long-term care facility complies with the drug regimen review requirements.
However, the regulations indicate that states may nevertheless require
pharmacies to comply with the general standards, regardless of whether the
long-term care facility satisfies the drug regimen review requirement, and the
states in which the Company operates currently require its pharmacies to comply
therewith. Third, federal regulations impose certain requirements relating to
reimbursement for prescription drugs furnished to Medicaid residents. See
"--Reimbursement and Billing--Medicaid."

         In addition to requirements imposed by federal law, states have
substantial discretion to determine administrative, coverage, eligibility and
payment policies under their state Medicaid programs which may affect the
Company's operations. For example, some states have enacted "freedom of choice"
requirements which prohibit a long-term care facility from requiring its
residents to purchase pharmacy or other ancillary medical services or supplies
from particular providers that deal with the long-term care facility. Such
limitations may increase the competition which the Company faces in providing
services to long-term care facility patients.

         Prospective Payment System. The Balanced Budget Act of 1997 (BBA),
enacted on August 5, 1997, mandated the implementation of a prospective payment
system (PPS) for skilled nursing facilities (SNFs) providing care for Medicare
Part A patients, effective for all SNFs whose cost reporting period begins on or
after July 1, 1998.

         Under the new PPS, SNFs will receive a single per diem payment for all
Medicare Part A covered SNF services. These payment rates will encompass all
costs of furnishing covered skilled nursing services (routine, ancillary and
capital-



                                       8
<PAGE>   12

related costs) other than the costs of approved educational activities. Covered
SNF services include: 1) all items and services provided under Part A; and 2)
all items and services (except those specifically excluded by statute) which
were previously provided under Part B to SNF residents during a Part A stay. PPS
will incorporate payment for pharmacy within the nursing component (as a
non-therapy ancillary) of the federal per diem and adjust costs by the nursing
index.

         Referral Restrictions. The Company is subject to federal and state laws
which govern financial and other arrangements between health care providers.
These laws include the federal anti-kickback statute, which prohibits, among
other things, knowingly and willfully soliciting, receiving, offering or paying
any remuneration directly or indirectly in return for or to induce the referral
of an individual to a person for the furnishing of any item or service for which
payment may be made in whole or in part under Medicare or Medicaid. Many states
have enacted similar statutes which are not necessarily limited to items and
services for which payment is made by Medicare or Medicaid. Violations of these
laws may result in fines, imprisonment and exclusion from the Medicare and
Medicaid programs or other state-funded programs. Federal and state court
decisions interpreting these statutes are limited, but have generally construed
the statutes broadly. Recent Federal legislation has increased the enforcement
and penalties for violation of these statutes.

         Federal regulations establish "Safe Harbors," which give immunity from
criminal or civil penalties to parties in good faith compliance. While the
failure to satisfy all the criteria for a specific Safe Harbor does not
necessarily mean that an arrangement violates the federal statute, the
arrangement is subject to review by the HHS Office of Inspector General ("OIG"),
which is charged with administering the federal anti-kickback statute. Beginning
January 1, 1997, the Secretary of Health and Human Services began issuing
written advisory opinions regarding the applicability of certain aspects of the
anti-kickback statute to specific arrangements or proposed arrangements.
Advisory opinions will be binding as to the Secretary and the party requesting
the opinion.

         The OIG has issued "Fraud Alerts" identifying certain questionable
arrangements and practices which it believes may implicate the federal
anti-kickback statute. The OIG has issued a Fraud Alert providing its views on
certain joint venture and contractual arrangements between health care
providers. The OIG has recently issued a Fraud Alert concerning prescription
drug marketing practices that could potentially violate the federal
anti-kickback statute. Pharmaceutical marketing activities may implicate the
federal anti-kickback statute because drugs are often reimbursed under the
Medicaid program. According to the Fraud Alert, examples of practices that may
implicate the statute include certain arrangements under which remuneration is
made to pharmacists to recommend the use of a particular pharmaceutical product.
In addition, a number of states have recently undertaken enforcement actions
against pharmaceutical manufacturers involving pharmaceutical marketing
programs, including programs containing incentives to pharmacists to dispense
one particular product rather than another. These enforcement actions arise
under state consumer protection laws which generally prohibit false advertising,
deceptive trade practices and the like. Further, a number of the states involved
in these enforcement actions have requested that the FDA exercise greater
regulatory oversight in the area of pharmaceutical promotional activities by
pharmacists. It is not possible to determine whether the FDA will act in this
regard or what effect, if any, FDA involvement would have on the Company's
operations.

         The Company believes its contract arrangements with other health care
providers, its pharmaceutical suppliers and its pharmacy practices are in
compliance with these laws. There can be no assurance that such laws will not,
however, be interpreted in the future in a manner inconsistent with the
Company's interpretation and application.

         Environmental Matters. In operating its facilities, NCS makes every
effort to comply with environmental laws. No major difficulties have been
encountered in effecting compliance. In addition, no material capital
expenditures for environmental control facilities are expected. While the
Company cannot predict the effect which any future legislation, regulations or
interpretations may have upon its operations, it does not anticipate any changes
that would have a material adverse impact on its operations.

         General. In the ordinary course of its business, the Company is subject
to inspections, audits, inquiries and similar actions by governmental
authorities responsible for enforcing the laws and regulations to which the
Company is subject. In January 1997, governmental authorities requested
information from the Company in connection with an audit and investigation of
the circumstances surrounding the apparent drug-related homicide of a
non-management employee of one of the Company's pharmacies. The information
provided relates to the Company's inventory and the possible theft of controlled
substances from this pharmacy. The Company has cooperated fully with the
investigation. In addition, the Company has conducted an internal review which
identified inadequacies in record keeping and inventory control at this
pharmacy. In a meeting with governmental authorities in August 1997, the Company
discussed its findings and those of the government and documented corrective
measures taken by the Company. In September 1998, the Company was advised that a
matter had been referred to the United States Attorney for possible legal action
involving certain alleged unspecified violations of federal law and invited to
contact the responsible U.S. Attorney in an effort to resolve the matter. The
Company has not been informed of the nature of the alleged violations in
question or the amount of potentential monetary penalties that may be sought. 

         In January 1998, government authorities sought and obtained various 
documents and records from a Herrin, Illinois pharmacy operated by a 
wholly-owned subsidary of the Company. The Company was not informed of the 
purpose of the inquiry, and no other operating unit of the company has been 
contacted. The Company intends to cooperate fully with the government's inquiry.


EMPLOYEES

         As of June 30, 1998, the Company had approximately 3,900 full-time
employees. None of the employees are represented by a union. The Company
considers relations with its employees to be good.


                                       9
<PAGE>   13



ITEM 2. PROPERTIES

         The Company presently maintains its executive offices in approximately
10,500 square feet of space in Beachwood, Ohio pursuant to a lease expiring in
2000 with an unaffiliated third party. NCS currently considers this space to be
sufficient for its corporate headquarters operations.

         As of June 30, 1998, the Company leased or owned 106 properties in 34
states with a total square footage of 771,000 square feet ranging in size from
approximately 500 square feet to approximately 35,000 square feet. The terms of
the leases relating to these properties vary in length remaining, from one month
to ten years and, in some cases, include options to extend. For information
concerning the Company's rental obligations, see Note 5 (Operating Leases) of
the Notes to Consolidated Financial Statements, which is set forth at Item 8 of
this Annual Report on Form 10-K.

ITEM 3. LEGAL PROCEEDINGS

         The Company is involved in various legal proceedings incidental to the
conduct of its business. The Company does not expect that any such proceedings
will have a material adverse effect on the Company's financial position or
results of operations.

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

         None.

ITEM 4A. EXECUTIVE OFFICERS OF THE COMPANY*

         The name, age and positions of each of the Company's executive officers
are as follows:

<TABLE>
<CAPTION>
NAME                                AGE        POSITION
----                                ---        --------

<S>                                 <C>        <C>
Jon H. Outcalt                      62         Chairman of the Board of Directors
Kevin B. Shaw                       41         President, Chief Executive Officer and Director
Phyllis K. Wilson                   57         Executive Vice President and Director
Jeffrey R. Steinhilber              41         Executive Vice President and Chief Operating Officer
Gerald D. Stethem                   34         Chief Financial Officer
William B. Byrum                    54         Vice President - Corporate Development
Marvin R. Richardson                41         Senior Vice President - Sales and Marketing
Patrick Morris                      38         Senior Vice President
Thomas Bryant Mangum                47         Vice President - Materials and Procurement
A. Malachi Mixon III                58         Director
Richard L. Osborne                  60         Director
Boake A. Sells                      61         Director
</TABLE>

*Included pursuant to Instruction 3 to Item 401(b) of Regulation S-K.

         Jon H. Outcalt, Chairman of the Board, is a founding principal of NCS
and has served as Chairman of the Board since 1986. He was a Senior Vice
President of Alliance Capital Management L.P., a global investment management
company, from 1975 to December 1995. Mr. Outcalt serves on the Board of
Directors of Myers Industries, Inc., a manufacturer of plastic and rubber parts
for the automotive and other industries, and Ohio Savings Financial Corporation,
a savings and loan holding company. He is a graduate of Trinity College (B.A.)
and the Wharton Graduate School of Business (M.B.A.).

         Kevin B. Shaw, President, Chief Executive Officer and a Director of the
Company, is a founding principal of NCS and has served as President, Secretary
and a Director of the Company since 1986 and as Chief Executive Officer since
December 1995. Prior to joining the Company, he was employed by McKinsey &
Company and Owens Corning Fiberglas. Mr. Shaw is a graduate of Harvard College
(B.A.) and Stanford Graduate School of Business (M.B.A.).

         Phyllis K. Wilson, R.PH., Executive Vice President and a Director of
the Company since November, 1993, is the founder of NCS's Columbus, Ohio
operation. From 1989 to June 1995, she was responsible for corporate development
and oversaw the Company's Ohio and Michigan operations. She is past President of
the Ohio State Board of Pharmacy and served on the Board from 1977 to 1985. Ms.
Wilson is a founding member of the American Society of Consultant Pharmacists
and is a graduate of Ohio State University with a B.S. in Pharmacy.



                                       10
<PAGE>   14


         Jeffrey R. Steinhilber, Executive Vice President and Chief Operating
Officer, joined NCS in August 1994 and served as Chief Financial Officer of
the Company until February 1998, at which time he was named Chief Operating 
Officer. From 1988 to July 1994, Mr. Steinhilber was the Chief Financial 
Officer of Austin Powder Company, a manufacturer of explosives for mining and 
construction. He is a graduate of Duke University (B.A.) and Northwestern 
Graduate School of Business (M.B.A.).

         Gerald D. Stethem, Chief Financial Officer, joined NCS in November,
1994 and served as Controller of the Company until February 1998, at which time
he was named Chief Financial Officer. He was previously with Ernst & Young LLP 
an auditing and accounting firm, where he served as a Manager in the firm's 
Entrepreneurial Services Group. He is a graduate of Ohio State University with 
a B.A. in Accounting.

         William B. Byrum, Vice President--Corporate Development of the Company,
joined the Company in September 1995. From April 1993 to September 1995, Mr.
Byrum was President and Chief Executive Officer of Corinthian Healthcare
Systems, Inc., an institutional pharmacy, prior to its acquisition by the
Company. From 1991 to April 1993, he was Vice President of Development
(Acquisitions) for Hook-SupeRx, Inc. Prior to 1991, Mr. Byrum was Vice
President, Store Operations at the Hook Drug Division of Hook-SupeRx, Inc.,
serving in various management positions. Mr. Byrum is a graduate of Purdue
University with a B.S. in Pharmacy.

         Marvin R. Richardson, Senior Vice President - Sales and Marketing for
the Company since March 1997, joined NCS in June 1995 as a Regional Vice
President. From 1991 to 1995, Mr. Richardson was the founder and President of
Quality Health Care of Indiana, an institutional pharmacy, prior to its
acquisition by the Company. He is a graduate of Purdue University with a B.S. in
Pharmacy.

         Patrick Morris, Senior Vice President of the Company, joined the
Company in February 1997. Mr. Morris was with the law firm of Calfee, Halter &
Griswold LLP, Cleveland, Ohio from 1985 to February 1997, and was a partner in
such firm from 1993 to February 1997. Mr. Morris is a graduate of Trinity
College (B.A.) and Case Western Reserve University School of Law (J.D.).

         Thomas Bryant Mangum, Vice President-Materials and Procurement, joined
the Company in June 1998. From November 1996 to June 1998, Mr. Mangum was Senior
Director of Pharmacy for Tenet HealthCare System, an owner and manager of acute
care hospitals. From November 1995 to November 1996, he was Vice President of
Pharmacy Services for Premier, Inc., a group purchasing organization for acute
care hospitals, where he had responsibility for pharmaceutical contract
negotiations. From 1990 to November 1995, Mr. Mangum was Associate Vice
President of Pharmacy and Nutrition Services for SunHealth, a group purchasing
organization for acute care hospitals. He is a graduate of University of North 
Carolina Pharmacy School and currently serves on the Pharmacy School Board.

         A. Malachi Mixon III, a Director of the Company since December 1994,
has been the Chief Executive Officer and a Director of Invacare Corporation
since 1979 and, since 1983, its Chairman of the Board. Mr. Mixon also served as
President of Invacare Corporation from 1979 to 1996. Invacare Corporation is a
leading worldwide manufacturer and distributor of home health care products. He
serves as a Director of Lamson & Sessions Co., a supplier of engineered
thermoplastic products, and Sherwin-Williams Company, a producer and distributor
of coatings and related products, and is Chairman of the Board of Trustees of
The Cleveland Clinic Foundation, one of the world's leading health care
institutions. Mr. Mixon is a graduate of Harvard College (B.A.) and the Harvard
Graduate School of Business (M.B.A.).

         Richard L. Osborne, a Director of the Company since 1986, has served as
the Executive Dean of the Weatherhead School of Management, Case Western Reserve
University, Cleveland, Ohio, since 1971. Mr. Osborne serves on the Board of
Directors of Myers Industries, Inc., a manufacturer of plastic and rubber parts
for the automotive and other industries, New Horizons Worldwide, Inc., a
provider of computer training services, and Ohio Savings Financial Corporation,
a savings and loan holding company. He is a graduate of Bowling Green State
University (B.S.) and Case Western Reserve University (M.S.).

         Boake A. Sells, a Director of the Company since November 1993, has been
a self-employed private investor since June 1992. He was Chairman of the Board,
President and Chief Executive Officer of Revco D.S., Inc. from September 1987 to
June 1992, and was formerly President and Chief Operating Officer of Dayton
Hudson Corporation and President and Chief Operating Officer of Cole National
Corporation. Mr. Sells is a Director of Harrah's Entertainment, Inc., a leading
casino gaming company. He is a graduate of University of Iowa (B.A.) and 
Harvard Graduate School of Business (M.B.A.).


                                       11

<PAGE>   15


                                     PART II

ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS

         The Class A Common Stock is traded on the Nasdaq National Market under
the symbol NCSS. The following table sets forth, for the two fiscal years ended
June 30, 1998, the high and low sale prices per share for the Class A Common
Stock, as reported on the Nasdaq National Market. These prices do not include
retail markups, markdowns or commissions.

<TABLE>
<CAPTION>
                                              HIGH              LOW
                                              ----              ---
<S>                                            <C>              <C>  
1997
First Quarter                                 $34.88           $23.25
Second Quarter                                 35.00            26.00
Third Quarter                                  35.25            22.25
Fourth Quarter                                 30.50            19.25

1998
First Quarter                                 $29.13           $22.38
Second Quarter                                 27.50            22.25
Third Quarter                                  33.50            24.13
Fourth Quarter                                 32.88            27.00
</TABLE>

         On September 25, 1998, the last sale price of the Class A Common Stock
as reported by Nasdaq was $19.00 per share. As of September 25, 1998, there were
approximately 266 holders of record of the Class A Common Stock.

         The Company has never declared or paid cash dividends on its Class A
Common Stock. The Company currently intends to retain any earnings for use in
its business and therefore does not anticipate paying any dividends in the
foreseeable future. Any determination to pay cash dividends in the future will
be at the discretion of the Board of Directors after taking into account various
factors, including the Company's financial condition, results of operations,
current and anticipated cash needs and plans for expansion.

         The following information is furnished as to all equity securities of
the Company sold during the fourth fiscal quarter that were not registered under
the Securities Act of 1933, as amended (the "Securities Act").

(a) On May 1, 1998 the Company issued 54,000 shares of its Class A Common Stock
to two stockholders in connection with the merger of JK Medical Services, Inc.
Exemption from registration is claimed under Section 4(2) of the Securities Act.

(b) On May 15, 1998 the Company issued 20,450 shares of its Class B Common
Stock to seven stockholders in connection with the merger of MedStar Pharmacy,
Inc. The Class B Common Stock is convertible into Class A Common Stock  without
additional consideration by the holder thereof on a share-for-share basis.
Exemption from registration is claimed under Section 4(2) of the Securities
Act.

(c) On May 21, 1998 the Company issued 128,691 shares of its Class A Common
Stock to one stockholder in connection with the conversion of a Promissory Note.
Exemption from registration is claimed under Section 3(a)(9) of the Securities
Act.



                                       12
<PAGE>   16
ITEM 6. SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>
                                                                         YEAR ENDED JUNE 30,
                                                                         -------------------
                                            1994              1995             1996             1997             1998
                                            ----              ----             ----             ----             ----
                                                                   (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<S>                                       <C>               <C>             <C>               <C>              <C>      
STATEMENT OF INCOME DATA:
Revenues                                  $ 48,205          $ 65,602        $ 113,281         $ 275,040        $ 509,064
Cost of revenues                            34,288            46,570           82,415           205,536          380,217
                                          --------          --------          -------       -----------        ---------
Gross profit                                13,917            19,032           30,866            69,504          128,847
Selling, general and
   administrative
   expenses                                 10,531            14,539           22,236            51,153           93,895
Nonrecurring charges (1)                         -                 -            2,811                 -            8,862
</TABLE>


<TABLE>
<S>                                       <C>               <C>             <C>               <C>              <C>      
                                         ---------          --------        ---------      ------------        ---------
Operating income                             3,386             4,493            5,819            18,351           26,090
Interest expense
   (income), net                               525             1,089            1,611           (1,576)            5,745
                                         ---------        ----------         --------       -----------         --------
Income before
   income taxes                              2,861             3,404            4,208            19,927           20,345
Income tax expense                           1,327             1,536            1,852             8,655            9,014
                                         ---------          --------         --------         ---------        ---------
Net income                               $   1,534          $  1,868         $  2,356         $  11,272        $  11,331
                                         =========          ========         ========         =========        =========
Net income per share - basic             $    0.28          $   0.32         $   0.28         $    0.70        $    0.59
                                         =========          ========         ========         =========        =========
Net income per share - diluted           $    0.24          $   0.28         $   0.26         $    0.69        $    0.58
                                         =========          ========         ========         =========        =========
Weighted average common
   shares outstanding - basic                5,478             5,818            8,462            15,991           19,100
                                         =========          ========         ========         =========        =========
Weighted average common
   shares outstanding - diluted              6,424             6,764            8,995            16,843           19,372
                                         =========          ========         ========         =========        =========
</TABLE>

<TABLE>
<CAPTION>
                                                                         YEAR ENDED JUNE 30,
                                                                         -------------------
                                            1994              1995           1996               1997              1998
                                            ----              ----           ----               ----              ----
                                                                         (IN THOUSANDS)

<S>                                     <C>                 <C>           <C>                   <C>             <C>     
BALANCE SHEET DATA:
Cash and cash
   equivalents                          $      384          $    286      $    21,460           $ 8,160         $ 21,186
Working capital                              5,920            10,616           48,336            53,164          149,362
Total assets                                15,556            38,595          110,668           321,030          623,790
Line of credit                                   -                 -                -            10,285          147,800
Long-term debt,
   excluding current
   portion                                   4,608            18,505            1,961             8,043            3,879
Convertible
   subordinated
   debentures                                    -             1,900            6,549             4,813          102,753
Stockholders'
   equity                                    4,173             8,117           91,100           253,226          287,334
</TABLE>

(1)      For 1996, represents a non recurring charge in connection with the 
         termination of certain compensation arrangements with the prior 
         owners of certain acquired businesses. For 1998, represents a 
         nonrecurring charge related to restructuring and other nonrecurring 
         expenses in connection with the implementation and execution of 
         strategic restructuring and consolidation initiatives of certain 
         operations and other nonrecurring items. See "Management's Discussion
         and Analysis of Financial Condition and Results of Operations."



                                       13
<PAGE>   17

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
               OF OPERATIONS

RESULTS OF OPERATIONS

         The following table sets forth, for the periods indicated, certain
items from the Company's Statements of Income, expressed as a percentage of
total revenues.

<TABLE>
<CAPTION>
                                                             YEAR ENDED JUNE 30,
                                                             -------------------
                                                     1996          1997           1998
                                                     ----          ----           ----

<S>                                                 <C>           <C>            <C>   
Revenues                                            100.0%        100.0%         100.0%
Cost of revenues                                     72.8          74.7           74.7
                                                    -----         -----          -----
Gross margin                                         27.2          25.3           25.3
Selling, general and administrative expenses         19.6          18.6           18.5
Nonrecurring charges                                  2.5            --            1.7
                                                    -----         -----          -----
Operating income                                      5.1           6.7            5.1
Interest expense (income), net                        1.4          (0.6)           1.1
                                                    -----         -----          -----
Income before income taxes                            3.7           7.3            4.0
Income tax expense                                    1.6           3.2            1.8
                                                    -----         -----          -----
Net income                                            2.1%          4.1%           2.2%
                                                    =====         =====          =====
</TABLE>

YEARS ENDED JUNE 30, 1998 AND 1997

         Revenues for the year ended June 30, 1998 increased 85.1% to $509.1
million from $275.0 million for the year ended June 30, 1997. The increase in
revenues over the prior fiscal year is primarily attributed to two factors: the
Company's acquisition program and internal growth. Of the $234.1 increase for
the year ended June 30, 1998, $69.2 million was due to the acquisitions of
Cheshire LTC Pharmacy, Inc. in August 1997, PharmaSource Healthcare, Inc. in
September 1997, Marco & Company, LLC in December 1997, MedStar Pharmacy, Inc. in
January 1998, Medical Pharmacy, Robcin Enterprises, Inc. and Greenwood Pharmacy
and Managed Pharmacy Services, affiliates of Eckerd Corporation in February
1998, Apple Institutional Services in March 1998 and the institutional pharmacy
assets of Walgreens Co. in June 1998. In addition, $87.8 million of the increase
is attributable to revenues for the fiscal year ended June 30, 1998 including a
full period of operations for fiscal 1997 acquisitions. These fiscal 1997
acquisitions include Advanced Rx Services, Inc. in July 1996, IPAC Pharmacy,
Inc., Medical Arts Pharmacy, Northside Pharmacy Inc., Med-Equip, Thrifty Medical
Supply, Inc. and Thrifty Medical of Tulsa L.L.C. in August 1996, Hudson Pharmacy
of Wichita, Inc. in September 1996, Spectrum Health Services, Inc. in October
1996, Clinical Health Systems in November 1996, Rescot Systems Group, Inc., W.P.
Malone, Inc., Long Term Care Pharmacy Services and Eakles Drug Store, Inc. in
January 1997, Pharmacare, Advanced Pharmaceutical Services, Inc. and Dahlin
Pharmacy, Inc. in February 1997, Stoll Services, Inc., Cooper Hall Pharmacy,
Inc., Hammer Incorporated, Daven Drug, and Medi-Centre Pharmacy in March 1997,
Vangard Labs, Inc. in April 1997, Long Term Care, Inc. in May 1997 and Look Drug
Store, Inc. and HLF Adult Home Pharmacy in June 1997. Internal growth accounted
for $77.1 million of the increase as the Company's existing operations continued
to grow through marketing efforts to new and existing clients, increased drug
utilization of long-term care facility residents, and the growth and integration
of new and existing products and services. The total number of beds serviced by
the Company as of June 30, 1998 increased 63% to 248,000 beds, from 152,000 beds
at June 30, 1997.

         Cost of revenues for the year ended June 30, 1998 increased $174.7
million or 85.0% to $380.2 million from $205.5 million for the year ended June
30, 1997. Cost of revenues as a percentage of revenues were 74.7% for the years
ended June 30, 1998 and June 30, 1997. The Company's leverage associated with
purchasing pharmaceuticals, formulary management program and the leveraging of
production costs positively impacted gross margins during the year ended June
30, 1998. However, these improvements were offset by the lower margins of
companies acquired during the year ended June 30, 1998. At the time of
acquisition, the gross margins of the acquired companies are typically lower
than the Company as a whole; however, the Company is typically able to increase
the gross margins of the acquired companies through more advantageous purchasing
terms and the use of formulary management.

          Selling, general and administrative expenses for the year ended June
30, 1998 increased $42.7 million or 83.4% to $93.9 million from $51.2 million
for the year ended June 30, 1997. Selling, general and administrative expenses
as a percentage of revenues decreased from 18.6% for the year ended June 30,
1997 to 18.4% for the year ended June 30, 1998. The percentage decrease for the
year ended June 30, 1998 is a result of creating operational efficiencies with
acquisitions and the ability to leverage overhead expenses over a larger revenue
base. At the time of acquisition, the selling, general and administrative
expenses of the acquired companies are typically higher than the Company as a
whole. The Company has been successful at 

                                       14
<PAGE>   18
\creating operational efficiencies with acquisitions as selling, general and
administrative expenses as a percentage of revenues has decreased six quarters
in a row. The increase in selling, general, and administrative expenses in
absolute dollars is mainly attributable to expenses associated with the
operations of businesses acquired during the current and prior fiscal year.

         Excluding the nonrecurring charge described below, operating income for
the year ended June 30, 1998 increased $16.6 million or 90.5% to $35.0 million
from $18.4 million for the year ended June 30, 1997. This improvement is
primarily attributable to increased sales volume generated during the year from
acquisitions and internal growth. Excluding the nonrecurring charge described
below, operating income as percentage of sales for the year ended June 30, 1998
increased slightly to 6.9% from 6.7% for the year ended June 30, 1997.

         During the fourth quarter of fiscal 1998, the Company recorded a
nonrecurring charge of $8.9 million ($5.3 million net of tax) related to 
restructuring and other nonrecurring expenses in connection with the 
implementation and execution of strategic restructuring and consolidation 
initiatives of certain operations and other nonrecurring items. As a result of 
the plans described below, the Company expects to remove $1.5 million from its 
cost structure in fiscal 1999. These savings are  predominantly due to reduced 
wage-related costs, reduced carrying costs of fixed assets, reduced rent 
charges and other miscellaneous savings. The components of the nonrecurring 
charge are described below.

         During the fourth quarter of fiscal 1998, the Company adopted a formal
plan of restructuring to consolidate certain pharmacy sites in similar
geographies. The plan will combine pharmacies in close proximity in order to
improve operating efficiencies. As a result of the exit plan, 17 pharmacy sites
will be consolidated into either a new or existing location. The Company
recorded nonrecurring charges of $5.3 million related to the site
consolidations during the year ended June 30, 1998, which consists of $0.5  
million related to employee severance costs in relation to the termination of
149 employees, $0.7 million related to lease termination costs and $4.1 million
related to asset impairments and other miscellaneous costs. As of June 30,
1998, five site consolidations had been completed with the remainder expected
to be completed by the end of fiscal 1999.

         Approximately $0.9 million of the nonrecurring charge relates to the
buyout of existing employment agreements with the prior owners of certain
acquired businesses.

         In June 1998 the Company entered into a new $150 million revolving 
credit facility and a $50 million bridge facility (June 1998 facilities) that
replaced the existing $135 million revolving credit facility. The June 1998
facilities were replaced in July 1998 by a $245 million revolving credit
facility. Approximately $1.3 million of the nonrecurring charge relates to the
write-off of deferred financing fees on the $135 million revolving credit
facility and certain financing fees associated with the June 1998 facilities.

         The remaining $1.4 million of the nonrecurring charge primarily 
relates to additional acquisition related expenses.

         Details of the nonrecurring charge are as follows:
<TABLE>
<CAPTION>
                                                                   Restructuring                         Reserve
        Description                  Cash/Non-Cash                     Charge         Activity          At /30/98
        -----------                  -------------                     ------         --------          ---------
                                                                                    (In Millions)
<S>                                    <C>                            <C>            <C>                 <C>   
Site Consolidations                                                   
     Severance packages                cash                           $   .5         $     --            $   .5
                                                                                             
     Lease terminations                cash                               .7               --                .7
     Asset impairments                 non-cash                          3.5            (3.5)                --
     Other                             cash                               .6             (.4)                .2

Buyout of employment agreements        cash                               .9             (.2)                .7

Write-off financing fees               non-cash                          1.3            (1.3)                --

Other                                                                        
     Cash                                                                1.0             (.8)                .2
     Non-cash                                                             .4             (.4)                --
                                                                      ------         -------             ------

Total                                                                 $  8.9         $  (6.6)            $  2.3
                                                                      ======         =======             ======
</TABLE>


         The Company had net interest expense of $5.7 million for the year ended
June 30, 1998, compared to net interest income of $1.6 million during the year
ended June 30, 1997. The increase in expense in due to increased borrowings on
the line of credit and the issuance of $100 million of convertible subordinated
debentures in August 1997. These funds were used primarily for acquisitions. 
The net interest income position in fiscal 1997 is primarily attributable to the
reduction of long-term debt with funds from the Company's initial public
offering completed on February 14, 1996 and interest income earned on funds from
a secondary public offering completed by the Company on October 4, 1996.



YEARS ENDED JUNE 30, 1997 AND 1996

         Revenues for the year ended June 30, 1997 increased 142.7% to $275.0
million from $113.3 million for the year ended 

                                       15
<PAGE>   19
June 30, 1996. The increase in revenues over the prior fiscal year is primarily
attributable to two factors: the Company's acquisition program and internal
growth. Of the $161.7 million increase in revenues for the year ended June 30,
1997, $107.7 million was due to the acquisitions of Advanced Rx Services, Inc.
in July 1996, IPAC Pharmacy, Inc., Medical Arts Pharmacy, Northside Pharmacy
Inc., Med-Equip, Thrifty Medical Supply, Inc. and Thrifty Medical of Tulsa
L.L.C. in August 1996, Hudson Pharmacy of Wichita, Inc. in September 1996,
Spectrum Health Services, Inc. in October 1996, Clinical Health Systems in
November 1996, Rescot Systems Group, Inc., W.P. Malone, Inc., Long Term Care
Pharmacy Services and Eakles Drug Store, Inc. in January 1997, Pharmacare,
Advanced Pharmaceutical Services, Inc. and Dahlin Pharmacy, Inc. in February
1997, Stoll Services, Inc., Cooper Hall Pharmacy, Inc., Hammer Incorporated,
Daven Drug, and Medi-Centre Pharmacy in March 1997, Vanguard Labs, Inc. in April
1997, Long Term Care, Inc. in May 1997 and Look Drug Store, Inc. and HLF Adult
Home Pharmacy in June 1997. In addition, $34.9 million of the increase in
revenues is attributable to revenues for the fiscal year ended June 30, 1997
including a full period of operations for fiscal 1996 acquisitions. These fiscal
1996 acquisitions include Corinthian Healthcare Systems, Inc., acquired in
September 1995, The Apothecary, Inc. acquired in November 1995, DeMoss Rexall
Drugs, Inc., acquired in December 1995, Care Plus Pharmacy acquired in April
1996, Uni-Care Health Services Inc. and Uni-Care Health Services of Maine
acquired in May 1996, and Family Care Nursing Home Service, Inc. and Care
Unlimited, Inc. acquired in June 1996. Internal growth accounted for $19.1
million of the increase in revenues as the Company's existing operations
continued to grow through marketing efforts to new and existing clients,
increased drug utilization of long-term care facility residents, and the growth
and integration of new and existing products and services. The total number of
beds serviced by the Company as of June 30, 1997 increased 141.3% to 152,000
beds, from 63,000 beds at June 30, 1996.

         Cost of revenues for the year ended June 30, 1997 increased $123.1
million or 149.4% to $205.5 million from $82.4 million for the year ended June
30, 1996. Cost of revenues as a percentage of revenues for the year ended June
30, 1997 increased to 74.7% from 72.8% for the year ended June 30, 1996. The
increase in cost of revenues as a percentage of revenues was primarily the
result of two factors; acquisitions and a change in the State of Pennsylvania
Medicaid reimbursement rates. First, at the time of acquisition, the gross
margins of the acquired companies are typically lower than the Company as a
whole. This is the result of several factors, including less advantageous
purchasing terms, lack of formulary management and higher production costs.
Second, during the second quarter of fiscal 1996, the State of Pennsylvania
changed the reimbursement methodology under the State Medicaid program which
resulted in a lower reimbursement percentage for Company's sites located in
Pennsylvania.

         Selling, general and administrative expenses for the year ended June
30, 1997 increased $28.9 million or 130.2% to $51.1 million from $22.2 million
for the year ended June 30, 1996. Selling, general and administrative expenses
as a percentage of revenues for the year ended June 30, 1997 decreased to 18.6%
from 19.6% for the year ended June 30, 1996. The percentage decrease for the
year ended June 30, 1997 is the result of operational efficiencies and
continuing efforts to leverage corporate overhead over a larger revenue base.
The increase in selling, general, and administrative expenses in absolute
dollars is mainly attributable to expenses associated with the operations of
businesses acquired during fiscal year ended June 30, 1997.

         A nonrecurring charge of $2.8 million for the year ended June 30, 1996
represents special compensation resulting from the termination of
compensation and performance incentive arrangements with the prior owners of
certain acquired businesses.

         Operating income for the year ended June 30, 1997 increased $12.5
million or 215.4% to $18.4 million from $5.8 million for the year ended June 30,
1996. Excluding the one-time, nonrecurring charge described above, operating
income for the year ended June 30, 1997 increased $9.7 million or 112.6% from
$8.6 million for the year ended June 30, 1996. This improvement is attributable
to increased sales volume generated during the year from acquisitions and
internal growth. Operating income as percentage of sales for the year ended June
30, 1997 decreased slightly to 6.7% from 7.6% for the year ended June 30, 1996,
excluding the one-time nonrecurring charge.

         The Company had net interest income of $1.6 million for the year ended
June 30, 1997, compared to net interest expense of $1.6 million during the year
ended June 30, 1996. This change is primarily attributable to the reduction of
long-term debt with funds from the Company's initial public offering completed
on February 14, 1996 and interest income earned on funds from a secondary public
offering completed by the Company on October 4, 1996.


LIQUIDITY AND CAPITAL RESOURCES

         Net cash provided by (used in) operating activities was $(2.1) million,
$8.3 million and $(14.8) million in fiscal 1996, 1997 and 1998, respectively. 
Cash provided by operating activities decreased in 1998 due to increases in 
trade accounts receivable and inventories primarily associated with internal 
sales growth. These cash flow decreases were partially offset by increases in 
trade accounts payable and accrued expenses. Cash provided by operating 
activities increased during fiscal 1997 due to increased profitability and an 
increase in trade accounts payable and accrued expenses. The increase in
accrued expenses resulted primarily from an increase in accrued expenses 
associated with new acquisitions and the timing of payment of certain accruals.
These cash 


                                       16
<PAGE>   20
flow increases were offset by increases in trade accounts receivable and
inventory.

         Net cash used in investing activities increased from $26.8 million in
fiscal 1996 to $150.0 million in fiscal 1997 to $202.8 million in fiscal 1998.
The increase is primarily the result of acquisitions, as well as an increase in
capital expenditures.

         The Company made capital expenditures of $4.7 million in fiscal 1996, 
$9.9 million in fiscal 1997 and $24.0 million in fiscal 1998. Significant 
capital expenditures during the year ended June 30, 1998 included computer and
information systems equipment, computer software, furniture and fixtures at new
facilities in Pinellas Park, Florida and Van Nuys, California, leasehold
improvements, medication carts and delivery vehicles. The Company continues to
invest in converting all sites to a common operating system.

         Net cash provided by financing activities increased from $50.0 million
in fiscal 1996 to $128.4 million in fiscal 1997 to $230.7 million in fiscal
1998. The increase in fiscal 1998 is primarily the result of funds received 
from an offering of convertible subordinated debentures completed by the 
Company on August 7, 1997 and an increase in funds borrowed under its revolving
credit facility. These funds were primarily utilized for acquisitions in fiscal
1998. The increase during fiscal 1997 is primarily the result of funds received
from a secondary public offering completed by the Company on October 4, 1996.

         In August 1997, the Company issued $100 million of convertible
subordinated debentures due 2004. The debentures carry an interest rate of 
5-3/4%. The debentures are obligations of the Company. The operations of the
Company are currently conducted principally through subsidiaries, which are
separate and distinct legal entities. The Company's ability to make payments of
principal and interest on the debentures will depend on its ability to receive
distributions of cash from its subsidiaries. Each of the Company's wholly-owned
subsidiaries has guaranteed the Company's payment obligations under the
debentures, so long as such subsidiary is member of an affiliated group (within
the meaning of sections 279(g) of the Internal Revenue Code of 1986, as
amended) which includes the Company. The satisfaction by the Company's  
subsidiaries of their contractual guarantees, as well as the payment of
dividends and certain loans and advances to the Company by such subsidiaries,
may be subject to certain statutory or contractual restrictions, are contingent
upon the earnings of such subsidiaries and are subject to various business
considerations.

         The Company expects to meet future financing needs principally through
the use of its revolving credit facility. In June 1998, the Company entered into
a four-year, $150 million revolving credit facility (new credit facility) with
a bank, which replaced the existing $135 million revolving credit facility.
Under the new credit facility, the Company also has available a $10 million
swing line revolving facility (swing line). Also in June 1998, the Company
entered into a $50 million bridge facility agreement (bridge facility) due
December 31 1998. The new credit facility contains certain debt covenants
including Interest Coverage Ratio and minimum consolidated net worth. As of
June 30, 1998 the Company had $94 million outstanding under the new credit
facility, $50 million outstanding under the bridge facility and $3.8 million 
outstanding under the swing line. Effective July 13, 1998, the new credit 
facility was amended increasing the total commitment from $150 million to $245 
million and was syndicated to a consortium of 11 banks. This credit facility 
bears interest at a variable rate based upon the Eurodollar rate plus a spread 
of 37.5 to 162.5 basis points, dependent upon the Company's Interest Coverage 
Ratio. Also effective July 13, 1998, the bridge facility was paid with funds 
under the amended credit facility and was terminated. The Company believes that
its cash and available sources of capital, including funds available under the 
its revolving credit facility, are sufficient to meet its normal operating 
requirements. 

The Company's effective tax rates were 44.0%, 43.4% and 44.3% for the years 
ended June 30, 1996, 1997 and 1998, respectively. The tax rates differ from the
federal statutory rate primarily as a result of state and local income taxes and
the non-deductibility of certain acquisition costs. 

YEAR 2000 COMPLIANCE

         Computer systems in use after the beginning of the year 2000 will need
to accept four-digit entries in the date code field in order to distinguish 21st
century dates from 20th century dates. Consequently, many companies face
significant uncertainties because of the need to upgrade or replace their
currently installed computer systems to comply with such "Year 2000"
requirements. Various systems could be affected ranging from complex information
technology (IT) computer systems to non-IT devices such as an individual
machine's programmable logic controller.

         The Company has reviewed all internal systems and believes its
currently installed information systems are Year 2000 compliant. However, there
can be no assurance that coding errors or other defects will not be discovered
in the future. The total cost of the systems review has been immaterial to the
financial results of the Company. Future costs related to Year 2000 issues are
also expected to be immaterial to the financial results of the Company.

         The Company is currently determining the extent to which it may be
impacted by any third parties' failure to remediate their own Year 2000 issues
The Company has initiated formal communications with all significant customers,
suppliers, payors and other third parties to determine the extent, if any, to
which the Company's interface systems could be impacted by those third-parties'
failure to remediate their own Year 2000 issues. The Company will continue these
communications throughout fiscal 1999. Although the Company currently does not
anticipate any material adverse impact on its operations as a result of Year
2000 issues of third parties, at this stage of the review no assurance can be
given that the failure by one or more third parties to become Year 2000
compliant will not have a material adverse impact on its operations.

         Management of the Company believes it has an effective program in place
to resolve the Year 2000 issue in a timely manner. Nevertheless, since it is not
possible to anticipate all possible future outcomes, especially when third
parties are involved, there could be circumstances in which the Company's
operations could be interrupted. In addition, disruptions in the economy in
general resulting from Year 2000 issues could also adversely impact the Company.

         The Company has contingency plans for certain critical applications and
are working on plans for others.

DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

       Certain statements contained in or incorporated by reference into this
Annual Report on Form 10-K, including, but not limited to, those regarding the
Company's financial position, business strategy and other plans and objectives
for future operations and any other statements that are not historical facts
constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Such forward-looking statements
involve known and unknown risks, uncertainties and other important factors that
could cause the actual results, performance or achievements of the Company, or
industry results, to differ materially from any future results, performance or
achievements expressed or implied by such forward-looking statements. Although
the Company believes that the expectations reflected in these forward-looking
statements are reasonable, there can be no assurance that the actual results or
developments anticipated by the Company will be realized or, even if
substantially realized, that they will have the expected effects on its business
or operations. Among the factors that could cause actual results to differ
materially from the Company's expectations include the availability and cost of
attractive acquisition candidates, continuation of various trends in the
long-term care market (including the trend toward consolidation), competition
among providers of long-term care pharmacy services, the availability of capital
for acquisitions and capital requirements, changes in regulatory requirements
and reform of the health care delivery system and other factors.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

         Not applicable.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Consolidated Financial Statements
Report of Independent Auditors                                               18
Consolidated Balance Sheets at June 30, 1997 and 1998                        19
Consolidated Statements of Income for each of the three years
   in the period ended June 30, 1998                                         21
Consolidated Statements of Stockholders' Equity for each of the
   three years in the period ended June 30, 1998                             22
Consolidated Statements of Cash Flows for each of the three years
   in the period ended June 30, 1998                                         24
Notes to Consolidated Financial Statements                                   25



                                       17
<PAGE>   21




                         REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Stockholders
NCS HealthCare, Inc.

         We have audited the accompanying consolidated balance sheets of NCS
HealthCare, Inc. and subsidiaries as of June 30, 1997 and 1998, and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the three years in the period ended June 30, 1998. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.

         We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

         In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
NCS HealthCare, Inc. and subsidiaries at June 30, 1997 and 1998, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended June 30, 1998, in conformity with generally
accepted accounting principles.

                                             Ernst & Young LLP


August 6, 1998
Cleveland, Ohio



                                       18
<PAGE>   22



                      NCS HEALTHCARE, INC. AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS
                    (IN THOUSANDS, EXCEPT SHARE INFORMATION)

                                     ASSETS

<TABLE>
<CAPTION>
                                                                    JUNE 30,
                                                                    --------
                                                              1997            1998
                                                              ----            ----

<S>                                                         <C>             <C>     
CURRENT ASSETS
   Cash and cash equivalents                                $  8,160        $ 21,186
   Trade accounts receivable, less allowance for
      doubtful accounts of $13,275 and $18,427 as of
      June 30, 1997 and 1998                                  70,476         142,325
   Inventories                                                22,281          43,784
   Deferred income taxes                                       5,582          10,458
   Prepaid expenses and other current assets                     988           3,766
                                                            --------        --------
              Total current assets                           107,487         221,519
PROPERTY, PLANT AND EQUIPMENT
   Land                                                           78             129
   Buildings                                                   1,606           2,090
   Machinery, equipment and vehicles                          17,937          27,498
   Computer equipment                                         10,133          22,340
   Furniture, fixtures and leasehold improvements             11,074          17,502
                                                            --------        --------
                                                              40,828          69,559
   Less accumulated depreciation and amortization             17,519          25,966
                                                            --------        --------
                                                              23,309          43,593
Goodwill, less accumulated amortization of $5,119
   and $12,317 as of June 30, 1997 and 1998                  180,723         340,209
Other assets, less accumulated amortization of
   $888 and $2,117 as of June 30, 1997 and 1998                9,511          18,469
                                                            --------        --------
TOTAL ASSETS                                                $321,030        $623,790
                                                            ========        ========
</TABLE>


                             See accompanying notes



                                       19
<PAGE>   23



                      NCS HEALTHCARE, INC. AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS
                    (IN THOUSANDS, EXCEPT SHARE INFORMATION)

                      LIABILITIES AND STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                                                         JUNE 30,
                                                                         --------
                                                                   1997             1998
                                                                   ----             ----

<S>                                                              <C>             <C>     
CURRENT LIABILITIES
   Line of credit                                                $ 10,285        $     --
   Trade accounts payable                                          15,054          34,131
   Accrued compensation and related expenses                       12,332          17,360
   Other accrued expenses                                          15,249          19,118
   Current portion of long-term debt                                1,403           1,548
                                                                 --------        --------
              Total current liabilities                            54,323          72,157
   Line of credit                                                      --         147,800
   Long-term debt, excluding current portion                        8,043           3,879
   Convertible subordinated debentures                              4,813         102,753
   Deferred income taxes                                               --           9,127  
   Other long-term liabilities                                        625             740

STOCKHOLDERS' EQUITY
   Preferred stock, $.01 par value per share; 1,000,000
      shares authorized; none issued                                   --              --
   Common stock, $.01 par value per share:
      Class A -- 50,000,000 shares authorized; 11,313,638
        and 13,334,639 shares issued and outstanding at
        June 30, 1997 and 1998,respectively                           113             133
      Class B -- 20,000,000 shares authorized; 6,742,742
        and 6,463,244 shares issued and outstanding
        at June 30, 1997 and 1998,respectively                         67              65
   Paid-in capital                                                235,703         258,462
   Retained earnings                                               17,343          28,674
                                                                 --------        --------
                                                                  253,226         287,334
                                                                 --------        --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                       $321,030        $623,790
                                                                 ========        ========
</TABLE>


                             See accompanying notes


                                       20
<PAGE>   24



                      NCS HEALTHCARE, INC. AND SUBSIDIARIES

                        CONSOLIDATED STATEMENTS OF INCOME
                      (IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
                                                                  YEAR ENDED JUNE 30,
                                                                  -------------------
                                                       1996              1997              1998
                                                       ----              ----              ----

<S>                                                 <C>               <C>               <C>      
Revenues                                            $ 113,281         $ 275,040         $ 509,064
Cost of revenues                                       82,415           205,536           380,217
                                                    ---------         ---------         ---------
Gross profit                                           30,866            69,504           128,847
Selling, general and administrative expenses           22,236            51,153            93,895
Nonrecurring charges                                    2,811                --             8,862
                                                    ---------         ---------         ---------
Operating income                                        5,819            18,351            26,090
Interest expense                                       (2,282)           (1,143)           (8,199)
Interest income                                           671             2,719             2,454
                                                    ---------         ---------         ---------
Income before income taxes                              4,208            19,927            20,345
Income tax expense                                      1,852             8,655             9,014
                                                    ---------         ---------         ---------
Net income                                          $   2,356         $  11,272         $  11,331
                                                    =========         =========         =========
Earnings per share data:
Earnings per common share - basic                   $    0.28         $    0.70         $    0.59
                                                    =========         =========         =========
Earnings per common share - diluted                 $    0.26         $    0.69         $    0.58
                                                    =========         =========         =========
Weighted average number of common
  shares outstanding - basic                            8,462            15,991            19,100
                                                    =========         =========         =========
Weighted average number of common
  shares outstanding - diluted                          8,995            16,843            19,372
                                                    =========         =========         =========
</TABLE>



                             See accompanying notes



                                       21
<PAGE>   25


                      NCS HEALTHCARE, INC. AND SUBSIDIARIES

                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                    (IN THOUSANDS, EXCEPT SHARE INFORMATION)

<TABLE>
<CAPTION>
                                    CLASS A        CLASS B
                                     COMMON         COMMON          PAID-IN        RETAINED        STOCKHOLDERS'
                                     STOCK          STOCK           CAPITAL        EARNINGS          EQUITY
                                     -----          -----           -------        --------          ------

<S>                                <C>             <C>              <C>             <C>             <C>     
Balance at June 30, 1995           $      1        $     60         $  4,341        $  3,715        $  8,117
Issuance of 7,467 shares
   of Class A Common Stock               --              --               57              --              57
Exercise of stock options
   (890,333 shares of Class
   B Common Stock)                       --               9            3,366              --           3,375
Conversion of 263,167
   shares of Class B
   Common Stock to 263,167
   shares of Class A
   Common Stock                           3              (3)              --              --              --
Issuance of 4,476,000
   shares of Class A
   Common Stock                          45              --           67,039              --          67,084
Issuance of 124,088 shares
   of Class A Common Stock
   for purchases of
   businesses                             1              --            1,835              --           1,836
Conversion of convertible
   subordinated debentures
   (682,309 shares of Class
   A Common Stock)                        6              --            8,269              --           8,275
Net income                               --              --               --           2,356           2,356
                                   --------        --------         --------        --------        --------
Balance at June 30, 1996                 56              66           84,907           6,071          91,100
Issuance of 4,235,000
   shares of Class A
   Common Stock                          42              --          123,584              --         123,626
Issuance of 1,099,369
   shares of Class A
   Common Stock and
   385,722 shares of
   Class B Common Stock
   for business
   combinations                          11               3           25,478              --          25,492
</TABLE>



                                       22
<PAGE>   26



<TABLE>
<CAPTION>
                                    CLASS A        CLASS B
                                     COMMON         COMMON           PAID-IN         RETAINED      STOCKHOLDERS'
                                     STOCK          STOCK            CAPITAL         EARNINGS         EQUITY
                                     -----          -----            -------         --------         ------

<S>                                 <C>             <C>              <C>             <C>             <C>     
Conversion of 246,208
   shares of Class B
   Common Stock to
   246,208 shares of
   Class A Common Stock                    2              (2)              --              --              --
Conversion of convertible
   subordinated debentures
   (172,569 shares of Class
   A Common Stock)                         2              --            1,734              --           1,736
Net income                                --              --               --          11,272          11,272
                                    --------        --------         --------        --------        --------
Balance at June 30, 1997                 113              67          235,703          17,343         253,226
Exercise of stock options
   (2,637 shares of Class
   A Common Stock)                        --              --               20              --              20
Issuance of 796,608
   shares of Class A
   Common Stock and
   563,879 shares of
   Class B Common Stock
   for business combinations               8               6           16,798              --          16,812
Conversion of 843,377
   shares of Class B
   Common Stock to
   843,377 shares of
   Class A Common Stock                    8              (8)              --              --              --
Conversion of convertible
   subordinated debentures
   and notes payable
   (378,379 shares of Class
   A Common Stock)                         4              --            5,941              --           5,945
Net income                                --              --               --          11,331          11,331
                                    --------        --------         --------        --------        --------
Balance at June 30, 1998            $    133        $     65         $258,462        $ 28,674        $287,334
                                    ========        ========         ========        ========        ========
</TABLE>


                             See accompanying notes



                                       23
<PAGE>   27


                      NCS HEALTHCARE, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                         YEAR ENDED JUNE 30,
                                                                         -------------------
                                                               1996             1997               1998
                                                               ----             ----               ----

<S>                                                         <C>               <C>               <C>      
OPERATING ACTIVITIES
Net income                                                  $   2,356         $  11,272         $  11,331
Adjustments to reconcile net income to net
   cash provided by (used in) operating
   activities:
      Non-cash portion of nonrecurring charges                  2,811                --             5,229
      Depreciation and amortization                             3,217             8,885            16,454
      Provision for doubtful accounts                             841             1,325             2,279
      Deferred income taxes                                        11             1,147                47
      Changes in assets and liabilities, net of
         effects of assets and liabilities acquired:
            Trade accounts receivable                          (8,834)          (22,932)          (55,086)
            Inventories                                           109            (3,796)          (12,098)
            Trade accounts payable                             (2,069)            2,447            18,040
            Accrued expenses                                     (239)            9,762             1,543
            Prepaid expenses and other                           (260)              162            (2,585)
                                                            ---------         ---------         ---------
Net cash provided by (used in) operating
   activities                                                  (2,057)            8,272           (14,846)

INVESTING ACTIVITIES
Capital expenditures for property, plant
   and equipment                                               (4,701)           (9,893)          (24,019)
Proceeds from sales of assets                                      40               247             1,183
Purchases of businesses                                       (19,983)         (137,080)         (171,083)
Other                                                          (2,172)           (3,237)           (8,872)
                                                            ---------         ---------         ---------
Net cash used in investing activities                         (26,816)         (149,963)         (202,791)

FINANCING ACTIVITIES
Proceeds from issuance of long-term debt                           --               159                13
Repayment of long-term debt                                    (3,398)           (5,679)           (4,135)
Borrowings on line-of-credit                                   31,400            34,236           169,299
Payments on line-of-credit                                    (48,900)          (23,951)          (31,784)
Proceeds from convertible subordinated debentures               5,000                --            97,250
Proceeds from issuance of common stock and
   exercise of stock options                                   68,878           123,626                20
Other                                                          (2,933)               --                --
                                                            ---------         ---------         ---------
Net cash provided by financing activities                      50,047           128,391           230,663
                                                            ---------         ---------         ---------
Net (decrease) increase in cash and
   cash equivalents                                            21,174           (13,300)           13,026
Cash and cash equivalents at beginning of period                  286            21,460             8,160
                                                            ---------         ---------         ---------
Cash and cash equivalents at end of period                  $  21,460         $   8,160         $  21,186
                                                            =========         =========         =========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
   Interest                                                 $   2,282         $   1,116         $   5,076
                                                            =========         =========         =========
   Income taxes                                             $   1,724         $   6,925         $   8,533
                                                            =========         =========         =========
</TABLE>


                             See accompanying notes



                                       24
<PAGE>   28

                      NCS HEALTHCARE, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                FOR THE YEARS ENDED JUNE 30, 1996, 1997 AND 1998
                    (IN THOUSANDS, EXCEPT SHARE INFORMATION)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

DESCRIPTION OF BUSINESS

         NCS HealthCare, Inc. (the Company) operates in one primary business 
segment providing a broad range of health care services primarily to long-term 
care institutions including skilled nursing facilities, assisted living 
facilities and other institutional health care settings. The Company purchases 
and dispenses prescription and non-prescription pharmaceuticals and provides 
client facilities with related management services, automated medical record 
keeping, drug therapy evaluation and regulatory assistance. The Company also 
provides a broad array of ancillary health care services to complement its core
pharmacy services, including infusion therapy, physical, speech and occupational
therapies, nutrition management and mobile diagnostics.

PRINCIPLES OF CONSOLIDATION

         The consolidated financial statements include the accounts of the
Company and its wholly-owned and majority-owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in consolidation.

REVENUE RECOGNITION

         Revenue is recognized when products or services are provided to the
customer. A significant portion of the Company's revenues from sales of
pharmaceutical and related products are reimbursable from Medicaid and Medicare
programs. The Company monitors its receivables from these and other third-party
payor programs and reports such revenues at the net realizable amount expected
to be received from third-party payors. Revenue from Medicaid and Medicare
programs accounted for 37% and 4%, respectively, of the Company's net patient
service revenue for the year ended June 30, 1998.

         Movement of the allowance for doubtful accounts is as follows:


<TABLE>
<CAPTION>
                Balance at   Provision                  Write-offs   Balance
                Beginning  for Doubtful                   Net of     at End
                of Period    Accounts    Acquisitions   Recoveries  of Period
                ---------  ------------  ------------   ----------  ---------
Fiscal year 
Ended June 30,

<S>              <C>          <C>           <C>        <C>         <C> 
   1998          $13,275      $2,279        $6,354     $(3,481)    $18,427

   1997            3,629       1,325         9,846      (1,525)     13,275

   1996            1,478         841         1,635        (325)      3,629

</TABLE>


CASH EQUIVALENTS

         The Company considers all investments in highly liquid instruments with
original maturities of three months or less at the date purchased to be cash
equivalents. Investments in cash equivalents are carried at cost which
approximates market value.

INVENTORIES

         Inventories for all business units consist primarily of purchased
pharmaceuticals and medical supplies and are stated at the lower of cost or
market. Cost is determined by using the last-in, first-out (LIFO) method for 8%
of the June 30, 1998 net inventory balance and by using the first-in, first-out
(FIFO) method for the remaining 92%. If the FIFO inventory valuation method had
been used, inventories would have been $627 and $619 higher at June 30, 1997 and
1998, respectively.

PROPERTY, PLANT AND EQUIPMENT

         Property, plant and equipment are stated at cost. Depreciation on
property, plant and equipment is computed using the straight-line method over
the estimated useful lives of the assets which are as follows:

<TABLE>
<S>                                                                         <C>     
                  Buildings                                                     30 years
                  Machinery, equipment and vehicles                         5 - 10 years
                  Computer equipment                                        3 - 5 years
                  Furniture, fixtures and leasehold improvements            3 - 10 years
</TABLE>

         Depreciation expense was $2,197, $4,347 and $7,813 for the years ended
June 30, 1996, 1997 and 1998, respectively.

GOODWILL, INTANGIBLES AND OTHER ASSETS
        
         Intangible assets consist primarily of goodwill. Costs in excess of 
the fair value of net assets acquired in purchase transactions are classified 
as goodwill and amortized using the straight-line method over periods up to 40 
years.

         The carrying value of goodwill is evaluated if circumstances indicate a
possible impairment in value. If undiscounted cash flows over the remaining
amortization period indicate that goodwill may not be recoverable, the carrying
value of goodwill will be reduced by the estimated shortfall of cash flows on a
discounted basis. 

         Debt issuance costs as of June 30, 1998 are included in other assets
and are amortized using the affective interest rate method over the life of the
related debt.

                                       25
<PAGE>   29



INCOME TAXES

         The Company follows Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes." This accounting standard requires that the
liability method be used in accounting for income taxes. Under this accounting
method, deferred tax assets and liabilities are determined based on the
differences between the financial reporting basis and the tax basis of assets
and liabilities and are measured using the enacted tax rates and laws that apply
in the periods in which the deferred tax asset or liability is expected to be
realized or settled.

STOCK OPTIONS

         The Company has elected to follow Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations in accounting for its employee stock options because, as
discussed in Note 9, the alternative fair value accounting provided under FASB
Statement No. 123, "Accounting for Stock-Based Compensation," (SFAS No. 123)
requires use of option valuation models that were not developed for use in
valuing employee stock options. Under APB 25, when the exercise price of the
Company's employee stock options equals the market price of the underlying stock
on the date of grant, no compensation expense is recognized.

EARNINGS PER SHARE

         The Company has adopted Statement of Financial Accounting Standards No.
128, "Earnings per Share" (SFAS No. 128) which replaces the previously reported
primary and fully diluted earnings per share with basic and diluted earnings per
share. All share and per share information included in the accompanying
financial statements have been restated to conform to the requirements of SFAS
No. 128.

         Basic earnings per share are computed based on the weighted average 
number of shares of Class A and Class B shares outstanding during the period.
Diluted earnings per share include the dilutive effect of stock options and
subordinated convertible debentures. Stock options granted within a twelve-month
period preceding the Company's initial public offering in February, 1996 are
included in the calculation of earnings per share as if they were outstanding
for all periods presented prior to the Company's initial public offering, using
the treasury stock method (at the initial public offering price of $16.50 per
share).

         On December 13, 1995, the Board of Directors approved an amendment to
the Company's Certificate of Incorporation to effect a corporate
recapitalization, including a 46-for-1 stock split of the Class A Common Stock
and Class B Common Stock. All share and per share information included in the
accompanying financial statements have been retroactively adjusted to give
effect to the stock split.

FAIR VALUE OF FINANCIAL INSTRUMENTS

         The fair value of all financial instruments of the Company approximates
the amounts presented on the consolidated balance sheet.

RECENTLY ISSUED ACCOUNTING STANDARDS

         The Financial Accounting Standards Board recently issued SFAS No. 131, 
"Disclosures About Segments of an Enterprise and Related Information". This
statement establishes standards for the reporting of financial information about
reportable segments in annual and interim financial statements. SFAS No. 131
also requires disclosure of revenues from each group of products and services,
geographic areas and major customers. Currently, the Company does not expect the
adoption of SFAS No. 131 to have a significant impact on the Company's 
reporting and disclosures.

         In April 1998, the Accounting Standards Executive Committee (AcSEC)
issued Statement of Position (SOP) 98-5, "Reporting on the Costs of Start-Up
Activities."  This SOP is effective for fiscal 2000 and requires that start-up
costs and organization costs be expensed as incurred and that such costs
capitalized previously be expensed as a cumulative effect of change in
accounting principle. The Company has not completed its evaluation of the
impact SOP 98-5 will have on its fiscal 2000 financial statements.

USE OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS

         The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results can differ from these estimates.



                                       26
<PAGE>   30


2.  LINE OF CREDIT

          In June 1998, the Company entered into a four-year, $150 million
revolving credit facility (new credit facility) with a bank, which replaced the
existing $135 million revolving credit facility. Under the new credit facility,
the Company also has available a $10 million swing line revolving facility
(swing line). Also in June 1998, the Company entered into a $50 million bridge
facility agreement (bridge facility) due December 31, 1998. The new credit
facility and bridge facility bear interest at a variable rate 7.152% and
7.652%, respectively, at June 30, 1998, based upon the Eurodollar rate plus a
spread of 37.5 to 162.5 basis points, dependent upon the Company's Interest
Coverage Ratio The swing line bears interest at a money market rate (7.625% at
June 30, 1998). The new credit facility contains certain debt covenants
including Interest Coverage Ratio and minimum consolidated net worth. As of
June 30, 1998 the Company had $94,000 outstanding under the new credit
facility, $50,000 outstanding under the bridge facility and $3,800 outstanding
under the swing line.

         Effective July 13, 1998, the new credit facility was amended
increasing the total commitment from $150 million to $245 million and was
syndicated to a consortium of 11 banks. Also effective July 13, 1998, the bridge
facility was paid with funds under the amended credit facility and was 
terminated.




                                       27
<PAGE>   31



3. LONG-TERM DEBT

         Long-term debt consists of the following:

<TABLE>
<CAPTION>
                                                                     JUNE 30,
                                                                     --------
                                                               1997          1998
                                                               ----          ----

<S>                                                           <C>           <C>   
Notes payable to former owners of acquired companies
   maturing through July, 2001, at interest rates
   ranging from 5% to 8%                                      $7,552        $3,666
2% note payable to Pennsylvania Industrial Development
   Authority due in monthly installments through
   June, 2010, and secured through an interest
   in a building of the Company                                  582           543
Collateralized lease obligations with interest ranging
   from 6% to 16% due monthly through February, 2002             557           685
Other                                                            755           533
                                                              ------        ------
Total long-term debt                                           9,446         5,427
Less current portion                                           1,403         1,548
                                                              ------        ------
Long-term debt, excluding current portion                     $8,043        $3,879
                                                              ======        ======
</TABLE>

         The aggregate maturities of the long-term debt for each of the five
years subsequent to June 30, 1998 are as follows:

<TABLE>
<CAPTION>
FISCAL YEAR ENDING JUNE 30,                                 AMOUNT
--------------------                                        ------

<S>                                                         <C>   
1999                                                        $1,548
2000                                                         3,116
2001                                                           149
2002                                                            61
2003                                                            58
Thereafter                                                     495
                                                            ------
                                                            $5,427
                                                            ======
</TABLE>






                                       28
<PAGE>   32



4. INCOME TAX EXPENSE

         Income tax expense (benefit) for each of the three years ended
June 30, 1998 consists of:

<TABLE>
<CAPTION>
                                  1996                                1997                               1998
                                  ----                                ----                               ----
                    CURRENT     DEFERRED     TOTAL      CURRENT     DEFERRED     TOTAL      CURRENT     DEFERRED     TOTAL
                    -------     --------     -----      -------     --------     -----      -------     --------     -----

<S>                 <C>         <C>         <C>         <C>         <C>         <C>         <C>         <C>          <C>    
Federal             $ 1,439     $     8     $ 1,447     $ 5,614     $   887     $ 6,501     $ 6,792     $    55      $ 6,847
State and local         402           3         405       1,894         260       2,154       2,175          (8)       2,167
                    -------     -------     -------     -------     -------     -------     -------     -------      -------
                    $ 1,841     $    11     $ 1,852     $ 7,508     $ 1,147     $ 8,655     $ 8,967     $    47      $ 9,014
                    =======     =======     =======     =======     =======     =======     =======     =======      =======
</TABLE>

         Reconciliations of income taxes at the United States Federal statutory
rate to the effective income tax rate for the three years ended June 30, 1998
are as follows:

<TABLE>
<CAPTION>
                                                      1996         1997          1998
                                                      ----         ----          ----

<S>                                                  <C>          <C>          <C>    
Income taxes at the United States statutory rate     $ 1,473      $ 6,974      $ 7,121
State and local income taxes                             221        1,231        1,414
Goodwill amortization                                    203          521          604
Tax exempt interest                                      (81)         (13)          --
Other -- net                                              36          (58)        (125)
                                                     -------      -------      -------
                                                     $ 1,852      $ 8,655      $ 9,014
                                                     =======      =======      =======
</TABLE>



                                       29
<PAGE>   33


         The tax effects of temporary differences that give rise to significant
portions of the net deferred tax assets are as follows:

<TABLE>
<CAPTION>
                                                                         JUNE 30,
                                                                         --------
                                                                  1997             1998
                                                                  ----             ----

<S>                                                              <C>           <C>      
                  Deferred tax assets (liabilities):
                     Allowance for doubtful accounts             $4,537        $   6,872
                     Accrued expenses and other                   2,137            7,205
                     Depreciable assets and other                  (134)            (551)
                     Intangibles                                   (958)         (12,195)
                                                                 ------        ---------
                  Net deferred tax assets                        $5,582        $   1,331
                                                                 ======        ========= 
</TABLE>



                                       30
<PAGE>   34



5. OPERATING LEASES

         The Company is obligated under operating leases primarily for
office facilities and equipment. Future minimum lease payments under
noncancelable operating leases as of June 30, 1998 are as follows:

<TABLE>
<CAPTION>
FISCAL YEAR ENDING JUNE 30,                                          AMOUNT
--------------------                                                 ------

<S>                                                                 <C>   
1999                                                                $ 4,443
2000                                                                  3,983
2001                                                                  2,807
2002                                                                  2,302
2003                                                                  1,562
Thereafter                                                            2,940
                                                                     ------
                                                                    $18,037
                                                                     ======
</TABLE>

         Total rent expense under all operating leases for the years ended June
30, 1996, 1997 and 1998 was $1,196, $2,338 and $6,577, respectively.



                                       31
<PAGE>   35



6. PROFIT-SHARING PLAN

         The Company maintains a profit sharing plan with an Internal Revenue
Code Section 401(k) feature covering substantially all of its employees. Under
the terms of the plan, the Company will match up to 20% of the first 10% of
eligible employee contributions.

         The Company's aggregate contributions to the plan and related expense
were $192, $437 and $740 for the years ended June 30, 1996, 1997 and 1998,
respectively.



                                       32
<PAGE>   36



7. RELATED PARTY TRANSACTIONS

         The Company leases 14 of its facilities from entities affiliated with
former owners of certain businesses acquired, who are employees of the Company.
The buildings are used for operations of the Company. Rent expense of $559,
$1,004 and $1,128 was incurred under these leasing arrangements in the years
ended June 30, 1996, 1997 and 1998, respectively.



                                       33
<PAGE>   37



8. STOCKHOLDER'S EQUITY

         On February 14, 1996, the Company issued 4,476,000 shares of Class A
Common Stock at $16.50 per share in connection with an initial public offering.
A portion of the net proceeds from the stock issuance were used to repay
approximately $27,000 of outstanding indebtedness under long and short-term
borrowings.

         On October 4, 1996, the Company completed a public offering of
4,235,000 shares of Class A Common Stock at $31 per share. The offering raised
approximately $123,600 (net of underwriting discounts and expenses). A portion
of the net proceeds from the stock issuance was used to repay approximately
$7,000 of outstanding indebtedness under short-term borrowings.

         Holders of Class A Common Stock and holders of Class B Common Stock are
entitled to one and ten votes, respectively, in corporate matters requiring
approval of the shareholders of the Company. No dividend may be declared or paid
on the Class B Common Stock unless a dividend of equal or greater amount is
declared or paid on the Class A Common Stock.

         During fiscal 1995, the Company issued $1,900 of 8% convertible
subordinated debentures (1995 debentures) due 1997. The 1995 debentures were
converted into 188,952 shares of Class A Common Stock during fiscal 1996. During
fiscal 1996, the Company issued $7,000 of 8% and $925 of 7% convertible
subordinated debentures due 1998 and $5,000 of 10% convertible subordinated
debentures due 1996 (collectively, 1996 debentures). During fiscal 1996, 
$6,375 of the 1996 debentures were converted into 493,357 shares of Class A
Common Stock. During fiscal 1997, $1,736 of the 1996 debentures were converted
into 172,569 shares of Class A Common Stock. During fiscal 1998, $2,061 of the
1996 debentures were converted into 204,880 shares of Class A Common Stock. The
remaining $2,753 of the 1996 debentures were converted into 273,833 shares of
Class A Common Stock during July 1998.

         On August 13, 1997, the Company issued $100,000 of convertible
subordinated debentures (1998 debentures) due 2004. Net proceeds to the Company
were approximately $97,250, net of underwriting discounts and expenses. The
debentures carry an interest rate of 5 3/4% and are convertible into shares of
Class A Common Stock at any time prior to maturity at $32.70 per share. A
portion of the proceeds from the debenture offering was used to repay
approximately $21,000 of outstanding indebtedness under short-term borrowings.

         The debentures are obligations of the Company. The operations of the
Company are currently conducted principally through subsidiaries, which are
separate and distinct legal entities. Each of the Company's wholly-owned
subsidiaries has unconditionally guaranteed, jointly and severally, the
Company's payment obligations under the 1998 debentures. Accordingly, summarized
financial information regarding the guarantor subsidiaries has not been
presented because management of the Company believes that such information would
not be meaningful to investors.

         During fiscal 1998, notes payable due to former owners of $3,884 were
exchanged for 173,499 shares of Class A Common Stock.



                                       34
<PAGE>   38



9. STOCK OPTIONS

         During the period from 1987 through 1995, the Company granted stock
options to certain directors and key employees which provide for the purchase of
1,054,890 common shares in the aggregate, at exercise prices ranging from $0.71
to $6.19 per share, which represented fair market values on the dates the grants
were made. For options granted in 1987 with a tax-offset cash bonus feature, the
Company recognized compensation expense of $175 for the year ended June 30,
1996. 
         During fiscal 1995, the Company adopted an Employee Stock Purchase and
Option Plan. Under the terms and provision of this plan, the Company authorized
100,000 shares of Class A Common Stock and granted options to certain key
employees for the purchase of a total of 18,978 common shares at exercise prices
ranging from $6.19 to $7.33 per share, which prices represented fair market
values on the dates the grants were made.

         In January 1996, the Company adopted a Long Term Incentive Plan (the
Plan) to provide up to 700,000 shares of Class A Common Stock for awards of
incentive and nonqualified stock options to officers and key employees of the
Company. During fiscal 1996 the Company granted 56,500 nonqualified stock
options and 27,540 incentive stock options, all at $16.50 per share, the price
at the initial public offering. The nonqualified stock options have a term of
five years and become exercisable in thirds on February 1, 1998, 1999 and 2000.
The incentive stock options have a term of six years and become exercisable in
fifths of each year on February 1, 1997, 1998, 1999, 2000 and 2001. During
fiscal 1997 the Company granted 301,250 nonqualified stock options at an
exercise price of $20.00 per share, the market value of the stock on the date
of the grant. These nonqualified stock options have a term of five years and
become exercisable in thirds on April 1, 1999, 2000 and 2001. 

         The Company's stock option activity and related information for the
years ended June 30 is summarized as follows:

<TABLE>
<CAPTION>
                                   1996                          1997                              1998
                                   ----                          ----                              ----
                                                 WEIGHTED                       WEIGHTED                         WEIGHTED
                                                  AVERAGE                        AVERAGE                          AVERAGE
                                 OPTIONS         EXERCISE       OPTIONS         EXERCISE         OPTIONS         EXERCISE
                                 (000'S)           PRICE        (000'S)           PRICE          (000'S)           PRICE
                                 -------           -----        -------           -----          -------           -----

<S>                               <C>               <C>          <C>            <C>              <C>              <C>   
Outstanding at
  beginning of
  year                            176,077           $ 5.24       267,575        $   8.84         566,825          $14.74
Granted                            91,498            15.75       301,250           20.00              --              --
Exercised                              --               --            --              --          (2,637)           7.49
Forfeited                              --               --        (2,000)          16.50         (29,000)          19.64
                                ---------           ------       -------        --------         -------          ------
Outstanding at
  end of year                     267,575           $ 8.84       566,825        $  14.74         535,188          $14.64
                                =========           ======       =======        ========         =======          ======
Exercisable at
  end of year                      97,110                        141,658                         185,804
                                =========                        =======                         =======
</TABLE>

         The weighted average fair value of options granted during fiscal 1996
and 1997 was $7.59 and $8.89 per share, respectively. Exercise prices for
options outstanding as of June 30, 1997 ranged from $7.33 to $20.00 for the
options granted in fiscal 1996 and 1997, and from $4.09 to $6.19 for the options
granted during the period from 1987 through 1995. The weighted-average remaining
contractual life of those options is 3.6 years for the options granted during
the fiscal years 1996 and 1997, and 4.6 years for the options granted during the
fiscal years 1987 through 1995.

         Pro forma information regarding net income and earnings per share is
required by SFAS No. 123, and has been determined as if the Company had
accounted for its employee stock options under the fair value method of that
Statement. The fair value for these options was estimated at the date of grant
using a Black-Scholes option pricing model with the following weighted average
assumptions: risk-free interest rates of 6.00%; a dividend yield of 0.00%; a
volatility factor of the expected market price of the Company's Class A Common
Stock of .482; and a weighted-average expected option life of 4 years.

         The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially 



                                       35
<PAGE>   39


affect the fair value estimate, in management's opinion, the existing models do
not necessarily provide a reliable single measure of the fair value of its
employee stock options.

          For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information for the three years ended June 30, 1998 is as follows (in
thousands except for earnings per share information):

<TABLE>
<CAPTION>
                                  1996        1997        1998
                                  ----        ----        ----        

<S>                              <C>         <C>         <C>
Net income                       $ 2,325     $11,120     $10,876
Earnings per share - basic       $  0.27     $  0.70     $  0.57
Earnings per share - diluted     $  0.26     $  0.68     $  0.56
</TABLE>

                                       36
<PAGE>   40
10. ACQUISITIONS

         During fiscal 1996, the Company acquired Corinthian Healthcare Systems,
Inc. located in Indiana, The Apothecary, Inc. in Scranton, Pennsylvania, Demoss
Rexall Drugs, Inc. in Evansville, Indiana, Valu Pharmacy, Inc. (d/b/a/ Care Plus
Pharmacy) in Decatur, Illinois, Uni-Care Health Services, Inc. in Londonderry,
New Hampshire and Uni-Care Health Services of Maine, in Wells, Maine, Family
Care Nursing Home Service, Inc. and Care Unlimited, Inc. in Herrin, Illinois.

         Significant acquisitions completed by the Company during fiscal 1997
include Advanced Rx Services, Inc. in Northfield, New Jersey, IPAC Pharmacy,
Inc. in Portland, Oregon, Medical Arts Pharmacy in Grand Rapids, Michigan,
Northside Pharmacy, Inc. and Thrifty Medical Supply, Inc. in Oklahoma City,
Oklahoma, Thrifty Medical of Tulsa L.L.C. in Tulsa, Oklahoma, Hudson Pharmacy of
Wichita, Inc. in Wichita, Kansas, Spectrum Health Services, Inc. in Tampa,
Florida, Clinical Health Systems in Vancouver, Washington, Rescot Systems Group,
Inc. in Philadelphia, Pennsylvania, W.P. Malone, Inc. in Arkadelphia, Arkansas,
Long Term Care Pharmacy Services in East Greenwich, Rhode Island, Eakles Drug
Store, Inc. in Hagerstown, Maryland, Pharmacare in Glendale, California,
Advanced Pharmaceutical Services, Inc. in Tujunga, California, Dahlin Pharmacy,
Inc. in Paramount, California, Stoll Services, Inc. in Modesto, California,
Cooper Hall Pharmacy, Inc. in Mount Pleasant, South Carolina, Hammer
Incorporated in Des Moines, Iowa, Daven Drug in Los Angeles, California,
Medi-Centre Pharmacy in Lansing, Michigan, Vangard Labs, Inc. in Glasgow,
Kentucky, Long Term Care, Inc. in Williston, Vermont, Look Drug Store, Inc. in
Kaukauna, Wisconsin and HLF Adult Home Pharmacy in Rochester, New York.

         Significant acquisitions completed by the Company during fiscal 1998
include Cheshire LTC Pharmacy, Inc. in Cheshire, Connecticut, PharmaSource
Healthcare, Inc. in Norcross, Georgia, Marco & Company, LLC in Billings,
Montana, MedStar Pharmacy, Inc. in Benson, North Carolina, Greenwood Pharmacy
and Managed Pharmacy Services, affiliates of Eckerd Corporation based in Sharon,
Pennsylvania, Medical Pharmacy in Bakersfield, California, Robcin Enterprises,
Inc. in Independence, Missouri, Apple Institutional Services in Salisbury,
Maryland and the institutional pharmacy assets of Walgreen Co., an Illinois
corporation.

         The Look Drug Store, Inc., HLF Adult Home Pharmacy, Cheshire LTC
Pharmacy, Inc. and MedStar Pharmacy, Inc. acquisitions were accounted for as
pooling of interests transactions, however the impact of these transactions on
the Company's historical financial statements is not material; consequently,
prior period financial statements have not been restated for these transactions.
All other acquisitions have been accounted for as purchase transactions.

The following table summarizes the aggregate purchase price for all businesses
acquired:

<TABLE>
<CAPTION>
                                     YEAR ENDED JUNE 30,
                                     -------------------
                              1996         1997           1998
                              ----         ----           ----

<S>                         <C>           <C>           <C>     
Cash                        $ 19,983      $137,080      $171,083
Convertible debentures         7,925            --            --
Debt                              --         3,804           959
Class A Common Stock           1,836        25,492        16,812
                            --------      --------      --------
Total                       $ 29,744      $166,376      $188,854
                            ========      ========      ========
</TABLE>

         The results of operations of all businesses acquired have been included
in the consolidated financial statements of the Company from the dates of the
respective acquisitions. All of the businesses acquired provide substantially
similar services as the existing company.

         Unaudited pro forma data as though the Company had completed its
secondary public offering and had purchased all businesses at the beginning of
each of the fiscal years ended June 30, 1997 and 1998 are set forth below:

<TABLE>
<CAPTION>
                                      1997            1998*
                                      ----            -----

<S>                               <C>              <C>        
Revenues                          $   527,040      $   608,186
Net income                        $     9,993      $    10,433
Earnings per share - basic        $      0.52      $      0.53
Earnings per share - diluted      $      0.51      $      0.52
</TABLE>

*        Includes a one time nonrecurring charge of $8,862 ($5,317 net of tax).
         (See Note 11) 
         
         The pro forma information does not intend to be indicative of operating
results which would have occurred had the 



                                       37
<PAGE>   41


acquisitions been made at the beginning of the respective periods or of results
which may occur in the future. The primary pro forma adjustments reflect
amortization of goodwill acquired and interest costs. The pro forma information
does not give effect to any potential synergies anticipated by the Company as a
result of the acquisitions such as improvements in gross margin attributable to
the Company's purchasing leverage and increased operating efficiencies.








                                       38
<PAGE>   42


11. NONRECURRING CHARGES

         During the fourth quarter of fiscal 1998, the Company recorded a
nonrecurring charge of $8,900 ($5,300 net of tax) related to restructuring and 
other nonrecurring expenses in connection with the implementation and execution
of strategic restructuring and consolidation initiatives of certain operations
and other nonrecurring items. The components of the 1998 nonrecurring charge 
are described below.

         During the fourth quarter of fiscal 1998, the Company adopted a formal
plan of restructuring to consolidate certain pharmacy sites in similar
geographies. The plan will combine pharmacies in close proximity in order to
improve operating efficiencies. As a result of the exit plan, 17 pharmacy sites
will be consolidated into either a new or existing location. The Company
recorded nonrecurring charges of $5,300 related to the site consolidations
which consists of $500 related to employee severance costs in relation to the
termination of 149 employees, $700 related to lease termination costs and $4,100
related to asset impairments and other miscellaneous costs. As of June 30, 1998,
five site consolidations had been completed with the remainder expected to be
completed by the end of fiscal 1999.

         Approximately $900 of the nonrecurring charge relates to the buyout of
existing employment agreements with the prior owners of certain acquired
businesses.

         In June, 1998 the Company's new credit facility and bridge facility 
replaced the existing $135 million revolving credit facility. The new credit
facility and bridge facility were replaced in July 1998 by a $245 million
revolving credit facility (see Note 2). Approximately $1,300 of the nonrecurring
charge relates to the write-off of deferred financing fees on the $135 million
revolving credit facility and certain financing fees associated with the bridge
facility.

         The remaining $1,400 of the 1998 nonrecurring charge primarily 
relates to additional acquisition related expenses.

         Details of the nonrecurring charge are as follows:

<TABLE>
<CAPTION>
                                                                   Nonrecurring                         Reserve
          Description                Cash/Non-Cash                    Charge        Activity        At June 30, 1998
          -----------                -------------                    ------        --------          ----------

<S>                                    <C>                          <C>            <C>                 <C>     
Site Consolidations                                        
     Severance packages                cash                         $    500       $      --           $    500
     Lease terminations                cash                              700              --                700
     Asset impairments                 non-cash                        3,500          (3,500)                --
     Other                             cash                              600            (400)               200

Buyout of employment agreements        cash                              900            (200)               700

Write-off financing fees               non-cash                        1,300          (1,300)                --

Other                                                                            
     Cash                                                              1,000            (800)               200
     Non-cash                                                            400            (400)                --
                                                                    --------       ---------           --------
Total                                                               $  8,900       $  (6,600)          $  2,300
                                                                    ========       =========           ========       
</TABLE>

         Effective September 30, 1995, the Company terminated certain 
compensation arrangements with the prior owners of certain acquired businesses
which resulted in a special compensation expense and a related increase in debt
of $2,811.



                                       39
<PAGE>   43


12. EARNINGS PER SHARE

         The following table sets forth the computation of basic and diluted
earnings per share:



<TABLE>
<CAPTION>
                                                              1996          1997        1998
                                                              ----          ----        ----


<S>                                                          <C>          <C>          <C>    
Numerator:
    Numerator for basic earnings per share - net income      $ 2,356      $11,272      $11,331
     Effect of dilutive securities:
        Convertible debentures                                    --          280           --
                                                             -------      -------      -------

        Numerator for diluted earnings per share             $ 2,356      $11,552      $11,331
                                                             =======      =======      =======

Denominator:
    Denominator for basic earnings per share -
        weighted average common shares                         8,462       15,991       19,100
    Effect of dilutive securities:
        Stock options                                            533          207          272
        Convertible debentures                                    --          645           --
                                                             -------      -------      -------

    Dilutive potential common shares                             533          852          272
                                                             -------      -------      -------

        Denominator for diluted earnings per share             8,995       16,843       19,372
                                                             =======      =======      =======


Basic earnings per share                                     $  0.28      $  0.70      $  0.59
                                                             =======      =======      =======
Diluted earnings per share                                   $  0.26      $  0.69      $  0.58
                                                             =======      =======      =======
</TABLE>


The Company has $102,753 of convertible subordinated debentures outstanding at
June 30, 1998 that are convertible into 3,331,937 shares of Class A Common Stock
that were not included in the computation of diluted earnings per share as their
effect would be antidilutive. The Company had $6,549 of convertible subordinated
debentures outstanding at June 30, 1996 that were convertible into 651,284
shares of Class A Common Stock that were not included in the computation of
diluted earnings per share as their effect would be antidilutive.





                                       40
<PAGE>   44




13. QUARTERLY DATA (UNAUDITED)

         Selected quarterly data for the years ended June 30, 1997 and 1998:


<TABLE>
<CAPTION>
                                                          YEAR ENDED JUNE 30, 1997
                                                          ------------------------
                                        FIRST          SECOND         THIRD         FOURTH
                                       QUARTER        QUARTER        QUARTER        QUARTER          TOTAL
                                       -------        -------        -------        -------          -----

<S>                                   <C>            <C>            <C>            <C>             <C>      
Revenues                              $  43,042      $  59,323      $  78,539      $  94,136       $ 275,040
Gross profit                             11,188         15,031         19,672         23,613          69,504
Operating income                          3,534          3,856          4,954          6,007          18,351
Net income                            $   1,910      $   2,889      $   3,091      $   3,382       $  11,272
Earnings per share - basic            $    0.15      $    0.17      $    0.18      $    0.19       $    0.70
Earnings per share - diluted          $    0.15      $    0.17      $    0.18      $    0.19       $    0.69
</TABLE>

<TABLE>
<CAPTION>
                                                         YEAR ENDED JUNE 30, 1998
                                                         ------------------------
                                        FIRST          SECOND         THIRD         FOURTH
                                       QUARTER        QUARTER        QUARTER        QUARTER          TOTAL
                                       -------        -------        -------        -------          -----

<S>                                   <C>            <C>            <C>            <C>             <C>      
Revenues                              $ 103,711      $ 114,508      $ 137,669      $ 153,177       $ 509,064
Gross profit                             26,226         29,039         34,857         38,725         128,847
Nonrecurring charge (b)                      --             --             --          8,862           8,862
Operating income                          6,873          7,810          9,467          1,940          26,090
Net income (loss)                     $   3,632      $   4,022      $   4,365      $    (689)      $  11,331
Earnings per share - basic (a)        $    0.20      $    0.21      $    0.22      $   (0.03)      $    0.59
Earnings per share - diluted (a)      $    0.20      $    0.21      $    0.22      $   (0.03)      $    0.58
</TABLE>

(a)  Earnings per share is calculated independently for each quarter and the sum
     of the quarters may not necessarily be equal to the full year earnings per
     share amount.
(b)  A nonrecurring charge of $8,862 before taxes and $5,317 after taxes, or
     $0.28 per basic share and $0.72 per diluted share, was recorded during the 
     fourth quarter of 1998 related to restructuring and other nonrecurring 
     expenses in connection with the implementation and execution of strategic 
     restructuring and consolidation initiatives of certain operations and 
     other nonrecurring items. For the year ended June 30, 1998, net income, 
     excluding this nonrecurring charge, was $16,648 or $0.87 per basic share 
     and $0.86 per diluted share.





                                       41
<PAGE>   45



ITEM 9. CHANGES IN AND DISAGREEMENTS WITH AUDITORS ON ACCOUNTING AND FINANCIAL
        DISCLOSURE

         None.

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY

         The information regarding Directors appearing under the caption
"Election of Directors" in the Company's Definitive Proxy Statement to be used
in connection with the Annual Meeting of Stockholders to be held in 1998 (the
"1998 Proxy Statement") is incorporated herein by reference, since such Proxy
Statement will be filed with the Securities and Exchange Commission not later
than 120 days after the end of the Company's fiscal year pursuant to Regulation
14A. Information required by this item as to the executive officers of the
Company is included as Item 4A of Part I of this Annual Report on Form 10-K as
permitted by Instruction 3 to Item 401(b) of Regulation S-K. Information
required by Item 405 of Regulation S-K is set forth in the 1998 Proxy Statement
under the heading "Section 16(a) Beneficial Ownership Reporting Compliance,"
which information is incorporated herein by reference.

ITEM 11. EXECUTIVE COMPENSATION

         The information required by this item is incorporated herein by
reference to "Executive Compensation" in the 1998 Proxy Statement, since such
Proxy Statement will be filed with the Securities and Exchange Commission not
later than 120 days after the end of the Company's fiscal year pursuant to
Regulation 14A.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The information required by this item is incorporated herein by
reference to "Stock Ownership of Principal Holders and Management" in the 1998
Proxy Statement, since such Proxy Statement will be filed with the Securities
and Exchange Commission not later than 120 days after the end of the Company's
fiscal year pursuant to Regulation 14A.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         To the extent applicable the information required by this item is
incorporated herein by reference to "Compensation Committee Interlocks and
Insider Participation" and "Certain Transactions" in the 1998 Proxy Statement,
since such Proxy Statement will be filed with the Securities and Exchange
Commission not later than 120 days after the end of the Company's fiscal year
pursuant to Regulation 14A.



                                       42
<PAGE>   46



                                    PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a)      Documents filed as part of this Form 10-K:

         1.       Financial Statements

                  The 1998 Consolidated Financial Statements of NCS HealthCare, 
                  Inc. are included in Part II, Item 8.

         2.       Financial Statement Schedules. All financial statement 
                  schedules for the Company and its subsidiaries have been 
                  included in the consolidated financial statements or the 
                  related footnotes, or they are either inapplicable or not 
                  required.

         3.       Exhibits

                  See the Index to Exhibits at page E-1 of this Form 10-K.

(b)      Reports on Form 8-K

         1.       On April 10, 1998, the Company filed a Current Report on Form 
                  8-K relating to the execution of a definitive agreement to 
                  acquire the long-term care pharmacy assets of Walgreen Co.

         2.       On June 1, 1998, the Company filed a Current Report on Form 
                  8-K relating to the acquisition of certain assets of the 
                  Extended Care Division of Walgreens Advance Care, Inc., a 
                  wholly-owned subsidiary of Walgreen Co.
          


                                       43
<PAGE>   47



                                   SIGNATURES

         PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) 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.

                                             NCS HEALTHCARE, INC.

                                             By: /s/ Jon H. Outcalt
                                             Jon H. Outcalt
                                             Chairman of the Board of Directors

Date: September 28, 1998

         PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934,
THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.

Signature                       Title


                                
Jon H. Outcalt                  /s/ Jon H. Outcalt      
                                Chairman of the Board of Directors             
                                                                               
                                                                               
Kevin B. Shaw                   /s/ Kevin B. Shaw            
                                President, Chief Executive Officer and Director
                                (Principal Executive Officer)                  
                                                                               
Gerald D. Stethem               /s/ Gerald D. Stethem                
                                Chief Financial Officer (Principal Financial   
                                and Accounting Officer)                        
                                                                               
Phyllis K. Wilson               /s/ Phyllis K. Wilson
                                Director                                       
                                                                               
                                                                               
A. Malachi Mixon III            /s/ A. Malachi Mixon III
                                Director                                       
                                                                               
                                                                               
Boake A. Sells                  /s/ Boake A. Sells     
                                Director                                       
                                                                               
                                                                               
Richard L. Osborne              /s/ Richard L. Osborne                     
                                Director                                       
Date: September 28, 1998



                                       44
<PAGE>   48







                                INDEX OF EXHIBITS


<TABLE>
<CAPTION>
                                        SEQUENTIAL
EXHIBIT NO.                             DESCRIPTION                                                                PAGE
-----------                             -----------                                                                ----

<S>               <C>                                                                                               <C>
2.1               Asset Purchase Agreement, dated as of July 31, 1996, by and
                  among the Company, NCS HealthCare of Oregon, Inc., IPAC
                  Pharmacy, Inc. and Prestige Care, Inc.                                                            (A)

2.2               Agreement of Merger, dated August 13, 1996, by and among the
                  Company, Northside Pharmacy, Inc., Willis V. Smith, The
                  Willis Vernon Smith Unitrust, dated as of August 8, 1996,
                  Charles Oliver and NCS HealthCare of Oklahoma, Inc.                                               (B)

2.3               Asset Purchase Agreement, dated August 13, 1996, by an among
                  NCS HealthCare of Oklahoma, Inc., an Oklahoma corporation,
                  Med-Equip Homecare Equipment Service, Inc., an Oklahoma
                  corporation, Gail Benjamin, Willis V. Smith and John Tarr                                         (B)

2.4               Asset Purchase Agreement, dated August 13, 1996, by and
                  among Thrifty Medical of Tulsa, L.L.C., an Oklahoma limited
                  liability company, Willis V. Smith, Charles Oliver and NCS
                  HealthCare of Oklahoma, Inc., an Oklahoma corporation                                             (B)

2.5               Stock Purchase Agreement, dated August 13, 1996, by and among
                  the Willis Vernon Smith Unitrust Dated August 8, 1996,
                  Charles Oliver, Willis V. Smith and the Registrant                                                (B)

2.6               Asset Purchase Agreement, dated December 29, 1997, by and                                         (C)
                  among the Company, NCS HealthCare of New York, Inc., Thrift
                  Drug, Inc., Fay's Incorporated and Eckerd Corporation

2.7               Asset Purchase Agreement, dated April 10, 1998, among the                                         (D)
                  Company, NCS Acqusisiton Sub, Inc., Walgreens Advance Care, Inc.
                  and Walgreen Co. 
                  
3.1               Amended and Restated Certificate of Incorporation of the
                  Company                                                                                           (E)

3.2               Amended By-Laws of the Company                                                                    (E)

4.1               Specimen certificate of the Company's Class A Common Stock                                        (E)

4.2               Specimen certificate of the Company's Class B Common Stock                                        (E)

4.3               Form of 5-3/4% Convertible Subordinated Debentures due 2004                                       (F)

4.4               Indenture, dated August 13, 1997, between the Company and                                              
                  National City Bank, as Trustee                                                                    (F)

* 10.1            Deferred Compensation Agreement, dated as of January 1, 1994,
                  by and between Modern Pharmacy Consultants, Inc. and
                  Phyllis K. Wilson                                                                                 (E)

* 10.2            1996 Long Term Incentive Plan                                                                     (E)

* 10.3            Aberdeen Group, Inc. 1995 Amended and Restated Employee Stock
                  Purchase and Option Plan                                                                          (E)

* 10.4            Amended and Restated Stock Option Agreement, dated as of
                  December 3, 1993, by and between Aberdeen Group, Inc. and
                  Richard L. Osborne                                                                                (E)

* 10.5            Amended and Restated Stock Option Agreement, dated as of
                  December 29, 1994, by and between Aberdeen Group, Inc. and
                  Jeffrey R. Steinhilber                                                                            (E)

10.6              Lease Agreement, dated as of July 16, 1990, by and among
                  Crow-O'Brien-Woodhouse I Limited Partnership, Aberdeen Group,
                  Inc. and Van Cleef Properties, Inc.                                                               (E)
</TABLE>



                                       E-1
<PAGE>   49




<TABLE>
<CAPTION>
                                          SEQUENTIAL
EXHIBIT NO.                               DESCRIPTION                                                              PAGE
-----------                               -----------                                                              ----

<S>               <C>                                                                                               <C>
10.7              Lease Agreement, dated as of January 1, 1996, by and between
                  PR Realty and Nursing Center Services, Inc.                                                       (E)

10.8              Industrial Lease Agreement dated as of May 28, 1993 by and
                  between Industrial Developments International, Inc. and
                  Corinthian Pharmaceutical Systems, Inc.                                                           (E)

10.9              Lease Agreement, dated as of January 17, 1995, by and among
                  Calvin Hunsicker, Brenda Hunsicker and Aberdeen Group, Inc.                                       (E)

10.10             Form of Indemnity Agreement by and between the Company and
                  each of its Directors and Executive Officers                                                      (E)

*10.11            Employment and Noncompetition Agreement, dated as of
                  September 1, 1996, by and between Aberdeen Group, Inc. and
                  William B. Bryum                                                                                  (E)

10.12             Credit Agreement, dated as of June 1, 1998, among the Company, 
                  the lending institutions named therein and KeyBank National 
                  Association, as the Swing Line Lender, Letter of Credit Issuer 
                  and Administrative Agent.

10.13             Letter Agreement, dated June 1, 1998, between the Company and
                  KeyBank National Association regarding Capital Markets Bridge 
                  Facility

10.14             Amendment No. 1, dated as of July 13, 1998, to the Credit
                  Agreement, dated as of June 1, 1998, among the Company, the
                  lending institutions named therein and KeyBank National
                  Association, as the Swing Line Lender, Letter of Credit Issuer
                  and Administrative Agent

21.1              Subsidiaries of the Company

23.1              Consent of Ernst & Young LLP

27.1              Financial Data Schedule (including restated schedules for
                  adoption of SFAS No. 128)
</TABLE>

*        Management contract or compensatory plan or arrangement identified 
         pursuant to Item 14(c) of this Form 10-K.

(A)      Incorporated herein by reference to the appropriate exhibit to the
         Company's Current Report on Form 8-K, dated August 1, 1996.

(B)      Incorporated herein by reference to the appropriate exhibit to the
         Company's Current Report on Form 8-K, dated August 15, 1996.

(C)      Incorporated herein by reference to the appropriate exhibit to the
         Company's Current Report on Form 8-K, dated January 30, 1998.

(D)      Incorporated herein by reference to the appropriate exhibit to the
         Company's Current Report on Form 8-K, dated June 1, 1998.

(E)      Incorporated herein by reference to the appropriate exhibit to the
         Company's Registration Statement on Form S-1 declared effective on
         February 13, 1996 (Reg. No. 33-80455).

(F)      Incorporated herein by reference to the appropriate exhibit to the 
         Company's Registration Statement on Form S-3, as amended (Reg. No. 
         333-35551).



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