<PAGE>   1

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K

                                   (MARK ONE)
                ANNUAL REPORT PURSUANT TO SECTION NO 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934
                   [X] FOR THE FISCAL YEAR ENDED JUNE 30, 2000

                                       OR

            TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934
          [ ] FOR THE TRANSITION PERIOD FROM _________________________
                             TO ___________________

                         COMMISSION FILE NUMBER 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 September 22, 2000, the registrant had 17,423,747 shares of Class
A Common Stock, par value $.01 per share, and 5,807,283 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 $5,027,682 (based
upon the closing price of $0.28125 per share of Class A Common Stock on the
NASDAQ SmallCap Market on September 22, 2000). For purposes of this calculation,
the registrant deems the 649,831 shares of Class A Common Stock and the
4,704,996 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 2000 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, 2000.



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                              NCS HEALTHCARE, INC.
                         2000 ANNUAL REPORT ON FORM 10-K

                                TABLE OF CONTENTS

                                     PART I
<TABLE>
<CAPTION>

<S>               <C>                                                                          <C>
ITEM 1.           BUSINESS                                                                        1
ITEM 2.           PROPERTIES                                                                     13
ITEM 3.           LEGAL PROCEEDINGS                                                              13
ITEM 4.           SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                            13
ITEM 4A.          EXECUTIVE OFFICERS OF THE COMPANY                                              14

                                     PART II

ITEM 5.           MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED
                  STOCKHOLDER MATTERS                                                            15
ITEM 6.           SELECTED FINANCIAL DATA                                                        16
ITEM 7.           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
                  RESULTS OF OPERATIONS                                                          17
ITEM 7a.          QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                     25
ITEM 8.           FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                    25
ITEM 9.           CHANGES IN AND DISAGREEMENTS WITH AUDITORS ON ACCOUNTING AND
                  FINANCIAL DISCLOSURE                                                           49

                                    PART III

ITEM 10.          DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY                                49
ITEM 11.          EXECUTIVE COMPENSATION                                                         49
ITEM 12.          SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT                 49
ITEM 13.          CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                                 49

                                     PART IV

ITEM 14.          EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K               50
</TABLE>



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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 various ancillary health
care services to complement its core pharmacy services, including infusion
therapy, nutrition management, software services, 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, 2000, the Company had completed a total of 49 acquisitions (other than
fold-in acquisitions). There were no significant acquisitions during fiscal
2000. As a result of these acquisitions, the Company has expanded its geographic
presence into 34 states serving approximately 227,000 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 issued 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 seven to nine 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 $8.0
billion for 2000. 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 Administration on
Aging, it is estimated that by the year 2030, the number of Americans who will
be 85 or older, the segment of the population that comprises the largest
percentage of residents at long-term care facilities, will triple.

      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 in
alternative settings such as long-term care facilities. More recently, the
implementation of Medicare's Prospective Payment System (PPS) has hindered
hospital discharges of Medicare A residents.



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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 $3.8 billion for 2000.

      The institutional pharmacy market has undergone significant consolidation
over the last few years. 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), have proven to be 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.

      There are several factors that drove 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. More recently, the
         implementation of Medicare's Prospective Payment System (PPS) has
         required that long-term care facilities estimate the total cost of stay
         of a resident prior to admission. The facilities, in turn, rely on
         their ancillary providers, such as institutional pharmacy vendors, to
         help them manage the costs of care of their Medicare Part A covered
         residents. 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 Reimbursement Environment. The long-term care market
         has undergone significant change over the last two years as Medicare's
         new Prospective Payment System has been implemented. This reimbursement
         change which was mandated by the Balanced Budget Act of 1997 pays
         nursing homes a flat rate for all services, a significant departure
         from the prior cost-based system. In order to assist long-term care
         customers with this new regulation, institutional pharmacy providers
         must offer sophisticated PPS contracts that include cost-effective
         formularies.

BUSINESS STRATEGY

      NCS' business strategy has three elements: first, to focus on strong
internal growth based on the Company's technology capabilities. Second, to
leverage its operating efficiencies by automating formerly manual processes such
as third party billing, purchasing compliance, cost compliance, claim
reconciliation, third party cash posting, and formulary interchanges. Finally,
to establish a technology foundation to add pharmaceutical manufacturers as
customers for sales of clinical data. Since its inception, the Company has
completed over 49 acquisitions (other than fold-in acquisitions). Having
established a solid management foundation and a network of operating businesses,
NCS is positioned to pursue internal growth opportunities by adding market
share, developing operating efficiencies and extending its business model to
data sales.

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 increasing 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, 2000, approximately 84% of the Company's revenues were derived
from providing pharmacy and consultant pharmacy services to long-term care
facilities. An additional 3% of revenues were derived from providing infusion
therapy services and the remaining 13% were


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primarily derived from providing various other products and services, including
nutrition management, hospital pharmacy 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, 2000, the Company provided its services from 72 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.

      As of June 30, 2000, approximately 83% of the Company's pharmacy customer
base was converted to the Concord DX system, the Company's proprietary computer
system. The Company utilizes the Concord DX system to control its work flow to
improve efficiencies. In most cases, the Company uses its bar-coding system.
Under this system, a bar code label is applied to each unit dose package.
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. At the request
of the Company, certain manufacturers have begun to provide pharmaceuticals that
are pre-packaged and bar coded.

      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; (iv) monitoring and reporting at least
quarterly 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.

      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 continuing education 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



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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 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.

      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 213 long-term care facility customers.

      Other. The Company 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
and Medicare Part B products and services. Finally, NCS offers specialized
educational services that aid facilities in the training of their staff. 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.

      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 one additional member. The Company believes that adherence to the NCS
formulary guidelines provides the most cost effective therapy to the resident
and strengthens the Company's purchasing power with pharmaceutical
manufacturers.

MANAGEMENT INFORMATION SYSTEMS

         An integral part of NCS' operations 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
the use of a bar-coding label system on unit dose packages, 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' customers. To date, Concord DX
has been implemented in 83% of NCS' pharmacy customer base.

         In 1997, the Company acquired Rescot Systems Group, Inc. ("Rescot").
For the past 12 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, in May 2000, the Company
introduced its web-based eASTRAL, which is an enhancement to its software
offerings and designed to perform the following: (1) improve a nursing home's
ability to adapt to PPS, (2) enhance the communication between nursing homes and
NCS, and (3) improve a nursing home's ability to conform to regulatory
requirements. NCS' eASTRAL modules follow:

         EMEDMANAGER allows on-line pre-fill edit reviews. These reviews give
the nursing home formulary recommendations, alternative medications and
potential savings. With access to this type of critical information they can
make more informed clinical and financial decisions.



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         PAYOR STATUS REPORTS have become critically important for nursing homes
to allow them to manage so they can minimize their Medicare Part A costs. Using
eASTRAL, NCS' customers can make adjustments to patient status through an
internet connection.

         ORDER STATUS REPORT provides information on the status of each
patient's medication orders, eliminating the need for the nursing staff to
contact the pharmacy for this information.

         NDC REPORT is available through the web. This report provides
information needed to complete Section U of the MDS for any long-term patient.

         EBILL offers on-line invoice reviews. This is an important feature,
especially for regional or national chains that perform facility to facility
cost comparisons.

         DRUG FACT provides detailed information on any medication, including
its use, side effects, storage, precautions, interactions and instructions for
use.

         REFILL ORDERS allows nursing homes to order refill on-line.

      Other software applications offered by NCS are:

          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 this 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 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.

      These capabilities continue to distinguish NCS from others in the
institutional pharmacy industry. As nursing homes become more sophisticated,
their interest in and need for these capabilities will increase. The Company
believes it is uniquely positioned to deliver on these requests.

SALES AND MARKETING

      In marketing to prospective customers, NCS has organized the selling
efforts of each formerly independent location into a single sales force
consisting of 20 Account Executives, seven National Account Managers and a Vice
President of Sales and Marketing. While the National Account Managers train and
oversee the Account Executives, they are also responsible for selling to
national chain accounts along with the Vice President of Sales and Marketing;
thus making up the national account team. Subsequently, 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 400 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. Additionally, in the PPS environment,
price competition is becoming an increasing factor. The marketing team is
comprised of a four-person team who reports to the Vice President of Sales and
Marketing. They are responsible for the overall branding of the Company through
trade advertising, direct telemarketing, educational seminars, industry press
releases, industry trade shows and competitive information.

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. More recently, the Company has formed a group purchasing
organization with two other large pharmaceutical buyers in the long-term care
and acute care industries. The Company anticipates that it will purchase the



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majority of its pharmaceuticals through this new organization. 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, 2000, NCS had contracts to provide services to approximately
227,000 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 two years, NCS has
expanded its customer base to also include rural hospitals and at June 30, 2000,
NCS had contracts to manage hospital pharmacies in 14 states. As of June 30,
2000, no individual customer or market group represented 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. The Company believes that it is one of the top
three national independent institutional pharmacies in the Country.
Institutional pharmacies compete principally on the basis of quality, cost
effectiveness and service level. In the geographic areas it serves, the Company
competes with local retail pharmacies, captive pharmacies and local, regional
and national institutional pharmacies. The Company competes with several other
companies with similar marketing strategies, some of which 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, 2000, the
Company's payor mix was approximately 42% Medicaid, 1% Medicare, 18% private
pay, 16% third-party insurance and other and 23% 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 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 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
certain 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. Additionally, any shift from Medicaid to state designated managed care
could adversely affect the Company's business due to historically lower
reimbursement rates for managed care.

      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


                                       6
<PAGE>   10
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 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.

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
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

                                       7
<PAGE>   11

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 that 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 receive a single per diem payment for all
Medicare Part A covered SNF services. The new single, per diem federal rate is
being phased in over a three-year period beginning July 1, 1998. Each Medicare
Part A covered patient is designated into one of 44 resource utilization group
(RUG), or case-mix categories, as defined by the Health Care Financing
Administration (HCFA). The per diem payment associated with each RUG category
encompass all costs of furnishing covered skilled nursing services including
routine, ancillary and capital-related costs. PPS incorporates payment for
pharmacy within the nursing component (as a non-therapy ancillary) of the
federal per diem and adjust costs by the nursing index.

         On November 29, 1999, Congress enacted the Balanced Budget
Reconciliation Act of 1999 (`BBRA') in response to concerns that the PPS rates
did not adequately reflect the high medication costs of high acuity patients.
The BBRA increases the federal per diem rates by 20% for 15 high acuity
categories (RUGs) under Extensive Services, Special Care, Clinically Complex and
High and Medium Rehab (effective October 1, 2000). In addition, it increases the
per diem payment by four percent for all acuity categories (calculated exclusive
of the 20% RUG increase) for the years commencing October 1, 2000 and 2001. BBRA
also allows SNFs to elect transition to full federal PPS rates on or after
December 15, 1999 instead of participating in the three-year transition period

      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



                                       8
<PAGE>   12

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 1998, federal and state government authorities sought and
obtained various documents and records from a Herrin, Illinois pharmacy operated
by a wholly-owned subsidiary of the Company. The Company has cooperated fully
and continues to cooperate fully with the government's inquiry. In June 1999,
representatives of the Company met with attorneys with the Civil and Criminal
Divisions of the Office of the United States Department of Justice, United
States Attorney for the Southern District of Illinois ("USA-Illinois") regarding
the government's investigation. The USA-Illinois informed the Company that it
had information that allegedly substantiated numerous violations of federal law,
but the Company has not received any written notification of these allegations.
Discussions regarding the government's investigation have ensued and are
currently proceeding between representatives of the USA-Illinois and the
Company.

EMPLOYEES

      As of June 30, 2000, the Company had approximately 3,100 full-time
employees. None of its 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
27,500 square feet of space in Beachwood, Ohio pursuant to a lease expiring in
2005 with an unaffiliated third party. NCS currently considers this space to be
sufficient for its corporate headquarters operations.

      As of June 30, 2000, the Company leased or owned 86 properties in 34
states with a total square footage of 738,000 square feet ranging in size from
approximately 500 square feet to approximately 38,000 square feet. The terms of
the leases relating to these properties vary in length remaining, from one month
to fourteen 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

      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 review identified inadequacies in inventory record keeping and
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 notified by the United States Department of Justice, United States
Attorney for the Southern District of Indiana ("USA-Indiana") that the United
States Drug Enforcement Administration had referred this matter to the Office of
the USA-Indiana for possible legal action involving certain numerous alleged
violations of federal law. The USA-Indiana invited the Company to contact the
Office of the USA-Indiana in an effort to resolve the matter. The Company
subsequently contacted the Office of the USA-Indiana and discussions regarding a
possible settlement of this matter ensued. During December 1999, the Company and
NCS HealthCare of Indiana, Inc. (NCS Indiana), a wholly-owned subsidiary of the
Company, reached a settlement with the USA-Indiana regarding the previously
disclosed federal investigation of the Company's facility in Indianapolis,
Indiana. Under the terms of the settlement, the Company paid $4,100,000 to the
USA-Indiana. The Company also agreed to maintain its current level of spending
in connection with its compliance systems and procedures for a period of three
years. If the Company does not comply with the terms of the accord, an
additional $1,500,000 will be payable to the USA-Indiana.

      In January 1998, federal and state government authorities sought and
obtained various documents and records from a Herrin, Illinois pharmacy operated
by a wholly-owned subsidiary of the Company. The Company has cooperated fully
and continues to cooperate fully with the government's inquiry. In June 1999,
representatives of the Company met with attorneys with the Civil and Criminal
Divisions of the Office of the United States Department of Justice, United
States Attorney for the Southern District of Illinois ("USA-Illinois") regarding
the government's investigation. The USA-Illinois informed the Company that it
had information that allegedly substantiated numerous violations of federal law,
but the Company has not received any written notification of these allegations.
Discussions regarding the government's investigation have ensued and are
currently proceeding between representatives of the USA-Illinois and the
Company. It is possible that the imposition of significant fines or other
remedies in connection with the resolution of this matter could have a material
effect on the Company's financial condition and results of operations.

      On June 7, 1999, a lawsuit was filed against the Company in the Superior
Court of Norfolk County, Massachusetts. Plaintiffs were certain selling
stockholders of the PharmaSource Group, Inc. ("PharmaSource"), which NCS
acquired on September 17, 1997. The complaint alleged breach of contract and
unfair business practices arising out of NCS' non-payment of certain amounts
allegedly payable under the terms of an earn-out provision included in the
acquisition agreement. On January 21, 2000, the Company reached a settlement of
this litigation. Under the terms of the settlement, the Company issued 1,750,000
Class A Common Shares and a $2,000,000 convertible subordinated debenture
maturing on August 15, 2004. The note and accrued "payment-in-kind" interest
will be convertible into a maximum of 200,000 Class A Common Shares at a
conversion price of $8.00 per share.

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

      None.



                                       10
<PAGE>   14


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                      64         Chairman of the Board of Directors
Kevin B. Shaw                       43         President, Chief Executive Officer and Director
Gerald D. Stethem                   36         Chief Financial Officer
William B. Byrum                    56         Executive Vice President and Chief Operating Officer
John P. DiMaggio                    37         Senior Vice President
Michael J. Mascali                  40         Senior Vice President
Thomas Bryant Mangum                49         Senior Vice President
A. Malachi Mixon III                60         Director
Richard L. Osborne                  62         Director
Boake A. Sells                      63         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.).

         Gerald D. Stethem, Chief Financial Officer, joined NCS in November,
1994 and served as Controller 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, Executive Vice President and Chief Operating Officer,
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.

         John P. DiMaggio, Senior Vice President, joined the Company in December
1992 and served as Management Information Systems Director of the Company until
December 1994. Mr. DiMaggio served as Vice President of Information Systems of
the Company from December 1994 to November 1998, at which time he assumed his
current position as Senior Vice President of Information Systems. Mr. DiMaggio
has an M.B.A. in Finance from the Katz Graduate School of Business and a B.S.
Degree in Computer Science from the University of Pittsburgh.

         Michael J. Mascali, Senior Vice President, joined the Company in
October 1995. Mr. Mascali was a Regional Vice President of Operations from
October 1995 to February 1998. From February 1998 to January 1999, he was Senior
Vice President of Compliance and from January 1999 to May 1999 he was Senior
Vice President of Operations, at which time he assumed his current position as
Senior Vice President of Compliance. From May 1989 to October 1995, Mr. Mascali
was a director of pharmacy for Synetic and Pharmacy Corporation of America in
Connecticut, a long term care pharmacy. Mr. Mascali graduated from St. John's
University with a B.S. in Pharmacy.

         Thomas Bryant Mangum, Senior Vice President, 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.



                                       11
<PAGE>   15


         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.).

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 SmallCap Market under
the symbol NCSS. Prior to December 8, 1999, the Company's Class A Common Stock
was traded on the Nasdaq National Market. The following table sets forth, for
the two fiscal years ended June 30, 2000, the high and low sale prices per share
for the Class A Common Stock, as reported on the Nasdaq SmallCap Market and the
Nasdaq National Market. These prices do not include retail markups, markdowns or
commissions.

                                         HIGH               LOW
                                         ----               ---

1999
First Quarter                          $  29.31         $  16.50
Second Quarter                            23.75            12.00
Third Quarter                             23.44             9.44
Fourth Quarter                            15.00             5.06

2000
First Quarter                           $  5.63          $  1.78
Second Quarter                             3.84             1.53
Third Quarter                              3.19             1.47
Fourth Quarter                             1.81             0.56

      The Company has been advised by the Nasdaq Listing Qualifications
Department that recent bid prices for its Class A Common Stock no longer meet
the criteria required (minimum bid price of $1.00 per share) for continued
inclusion on the Nasdaq SmallCap Market. If the Company is unable to meet the
criteria on or before October 9, 2000, its common stock will be traded on the
OTC Bulletin Board.

      On September 22, 2000, the last sale price of the Class A Common Stock
as reported by Nasdaq was $0.28125 per share. As of September 22, 2000, there
were approximately 238 holders of record of the Class A Common Stock, and
approximately 35 holders of record of Class B Common Stock. This figure does
not include stockholders with shares held under beneficial ownership in nominee
name or within clearinghouse positions of brokerage firms and banks.

      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. On August 3, 1999
the Company amended its line of credit agreement entering into several
restrictive covenants including a restriction on declaration and payment of cash
dividends to shareholders.

      There were no equity securities of the Company issued during the fourth
fiscal quarter that were not registered under the Securities Act of 1933, as
amended (the "Securities Act").



                                       12
<PAGE>   16

ITEM 6. SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>

                                                                     YEAR ENDED JUNE 30,
                                                                     -------------------
                                            1996             1997           1998                1999             2000
                                            ----             ----           ----                ----             ----
                                                           (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S>                                       <C>              <C>              <C>               <C>              <C>
STATEMENT OF OPERATIONS DATA:
Revenues                                  $113,281         $ 275,040        $ 509,064         $ 717,825        $ 694,530
Cost of revenues                            82,415           205,536          380,217           540,547          556,757
                                          --------         ---------        ---------         ---------        ---------
Gross profit                                30,866            69,504          128,847           177,278          137,773
Selling, general and
   administrative expenses (1)              22,236            51,153           93,895           139,522          126,969
Special charge to increase allowance
     for doubtful accounts (2)                   -                 -                -            32,384           44,623
Nonrecurring charges (2)                     2,811                 -            8,862             8,115           51,136
                                          --------         ---------        ---------         ---------        ---------
Operating income (loss)                      5,819            18,351           26,090            (2,743)         (84,955)
Interest (expense) income, net             (1,611)             1,576          (5,745)           (18,301)         (26,243)
                                          --------         ---------        ---------         ---------        ---------
Income (loss) before
   income taxes                              4,208            19,927           20,345           (21,044)        (111,198)
Income tax (expense) benefit               (1,852)           (8,655)          (9,014)             7,640           (3,326)
                                          --------         ---------        ---------         ---------        ---------
Income (loss) before accounting change       2,356            11,272           11,331           (13,404)        (114,524)
Cumulative effect of
     accounting change (1)                       -                 -                -            (2,921)               -
                                          --------         ---------        ---------         ---------        ---------
Net income (loss)                         $  2,356         $  11,272        $  11,331         $ (16,325)       $(114,524)
                                          ========         =========        =========         =========        =========
Net income (loss) per share - basic       $   0.28         $    0.70        $    0.59         $  ( 0.81)       $  ( 5.31)
                                          ========         =========        =========         =========        =========
Net income (loss) per share - diluted     $   0.26         $    0.69        $    0.58         $  ( 0.81)       $  ( 5.31)
                                          ========         =========        =========         =========        =========

Income (loss) before accounting
   change - basic                         $   0.28         $    0.70        $    0.59         $  ( 0.66)       $  ( 5.31)
                                          ========         =========        =========         =========        =========
Income (loss) before accounting
   change - diluted                       $   0.26         $    0.69        $    0.58         $  ( 0.66)       $  ( 5.31)
                                          ========         =========        =========         =========        =========
Weighted average common
   shares outstanding - basic                8,462            15,991           19,100            20,200           21,551
                                          ========         =========        =========         =========        =========
Weighted average common
   shares outstanding - diluted              8,995            16,843           19,372            20,200           21,551
                                          ========         =========        =========         =========        =========

                                                                      YEAR ENDED JUNE 30,
                                                                      -------------------
                                            1996             1997              1998              1999              2000
                                            ----             ----              ----              ----              ----
                                                                         (IN THOUSANDS)

BALANCE SHEET DATA:

Cash and cash equivalents               $   21,460        $    8,160        $  21,186         $  29,424        $  16,387
Working capital                             48,336            53,164          149,362           197,395          (93,865)
Total assets                               110,668           321,030          623,790           699,499          546,663
Line of credit                                   -            10,285          147,800           214,700          206,130
Long-term debt, excluding
   current portion                           1,961             8,043            3,879             1,936            1,291
Convertible subordinated debentures          6,549             4,813          102,753           100,000          102,000
Stockholders' equity                        91,100           253,226          287,334           276,434          169,705
</TABLE>

(1)      Selling, general and administrative expenses for 1999 include $11,503
         of pre-tax costs that would have been capitalized prior to the adoption
         of SOP 98-5, "Reporting on the Costs of Start-up Activities." The
         cumulative effect of accounting change represents start-up costs, net
         of tax, that were previously capitalized as of June 30, 1998.

(2)      For 1996, represents a nonrecurring 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. For 1999, represents a special charge to
         increase the allowance for doubtful accounts and other nonrecurring
         charges in association with the implementation and execution of
         strategic restructuring and consolidation initiatives of certain
         operations and other nonrecurring items. For 2000, represents a special
         charge to increase the allowance for doubtful accounts and
         nonrecurring, restructuring and other special charges associated with
         the continuing implementation and execution of strategic restructuring
         and consolidation activities, the planned disposition of certain
         non-core and/or non-strategic assets, impairment of certain assets 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 Operations, expressed as a percentage of total
revenues.

<TABLE>
<CAPTION>

                                                                                         YEAR ENDED JUNE 30,
                                                                                 1998            1999            2000
                                                                                 ----            ----            ----

<S>                                                                             <C>             <C>             <C>
Revenue                                                                         100.0%          100.0%          100.0%
Cost of revenues                                                                 74.7            75.3            80.2
                                                                                -----           -----           -----
Gross margin                                                                     25.3            24.7            19.8
Selling, general and administrative expenses                                     18.5            19.4            18.3
Special charge to increase allowance for doubtful accounts                          -             4.5             6.4
Nonrecurring charges                                                              1.7             1.2             7.3
                                                                                -----           -----           -----
Operating income (loss)                                                           5.1            (0.4)          (12.2)
Interest expense, net                                                            (1.1)           (2.6)           (3.8)
                                                                                -----           -----           -----
Income (loss) before income taxes                                                 4.0            (3.0)          (16.0)
Cumulative effect of accounting change                                              -            (0.4)              -
Income tax (expense) benefit                                                     (1.8)            1.1            (0.5)
                                                                                -----           -----           -----
Net income (loss)                                                                 2.2%           (2.3)%         (16.5)%
                                                                                ======          =====           =====
</TABLE>

YEARS ENDED JUNE 30, 2000 AND 1999

      The net loss for the year ended June 30, 2000 was $114.5 million or $5.31
per diluted share compared to a net loss of $16.3 million or $0.81 per diluted
share for the year ended June 30, 1999. The net loss for the year ended June 30,
1999 before the cumulative effect adjustment to adopt the Accounting Standards
Executive Committee Statement of Position 98-5 (SOP 98-5) "Reporting on the
Costs of Start-up Activities," was $13.4 million or $0.66 per diluted share.

      The net loss for the year ended June 30, 2000, excluding nonrecurring,
restructuring, other special charges and a non-cash charge related to a
valuation allowance recorded against the Company's net deferred tax assets, was
$9.5 million or $0.44 per diluted share compared to net income of $17.9 million
or $0.88 per share in the prior year, excluding special and nonrecurring charges
and the effect of adopting SOP 98-5.

         Operating results for the year ended June 30, 2000 continued to be
negatively impacted by the implementation of Medicare's Prospective Payment
System (PPS). The adverse impact of the implementation of PPS under the Balanced
Budget Act of 1997 for Medicare residents of skilled nursing facilities has been
significantly greater than anticipated resulting in a difficult operating
environment in the long-term care industry. PPS created numerous changes to
reimbursement policies applicable to skilled nursing facilities under Medicare
Part A. Prior to the implementation of PPS, Medicare reimbursed each skilled
nursing facility based on that facility's actual Medicare Part A costs plus a
premium. Under PPS, Medicare pays skilled nursing facilities a fixed fee per
Medicare Part A patient day based on the acuity level of the patient. The per
diem rate covers all items and services furnished during a covered stay for
which reimbursement was formerly made separately on a cost plus basis. This
change in reimbursement policies has resulted in a substantial reduction in
reimbursement for skilled nursing facilities. Consequently, the Company has
experienced revenue and margin pressure as a result of nursing facilities
attempting to manage pharmaceutical costs along with all other costs associated
with patient care under a simple per diem reimbursement amount. In addition,
there has been a significant reduction in the utilization of other therapies
such as speech, occupational and physical rehabilitation. With the
implementation of PPS, skilled nursing facilities have become increasingly more
reluctant to admit Medicare residents, especially those requiring complex care,
causing Medicare census in these facilities to weaken and reducing the average
length of stay for Medicare residents. Resident acuity level has also decreased
as these facilities have attempted to avoid high acuity patients, negatively
impacting the overall utilization of drugs, particularly those with higher costs
such as infusion therapy.

         These outcomes have negatively impacted nursing facilities and the
institutional pharmacy services industry as a whole. For Medicare certified
skilled nursing facilities, PPS has caused significant earnings and cash flow
pressure. Some facilities have sought bankruptcy protection or consolidation as
a method of reducing costs and increasing operating efficiencies causing the
Company to experience some bed loss as a result. For the Company, operating
processes for administering and executing PPS related activities were
significantly different than operating processes prior to the implementation of
PPS. Contracting processes, data gathering, and operational dispensing processes
for Medicare A residents all underwent significant change resulting in higher
costs and lower margins for the Company. These costs were in addition to the
impact of costs associated with customers bankruptcies and deteriorating
financial condition. On November 29, 1999, Congress enacted the Balanced Budget
Refinement Act in an attempt to provide relief to skilled nursing facilities by



                                       14
<PAGE>   18
providing a temporary increase in reimbursement rates effective April 1, 2000,
pending appropriate revisions to the PPS System, particularly for higher acuity
residents. Even with these changes, a very difficult operating environment
remains and management continues to react to pressures in the current PPS
environment. The Company is reducing operating and overhead expenses, has
accelerated efforts to consolidate and/or close pharmacy locations, is
terminating uneconomic accounts and applying stricter standards in accepting new
business.

         Revenues for the year ended June 30, 2000 decreased $23.3 million or
3.2% to $694.5 million from $717.8 million for the year ended June 30, 1999.
Approximately $20.5 million of the decrease in revenue from the prior fiscal
year is attributable to a decrease in revenue from the Company's allied and
ancillary services. This decrease is due to decisions by management to terminate
uneconomic accounts and the shutdown or sale of certain non-strategic or
unprofitable operations. During April 2000, the Company disposed of two
ancillary operations that were not contributing to the overall financial
performance of the Company. The remaining $2.8 million of the revenue decrease
is attributable to the Company's pharmacy operations and is related to net bed
loss during the period. Although the Company added new customers during the year
ended June 30, 2000 through its sales and marketing efforts, the number of beds
served by the Company declined due to decisions by management to terminate
uneconomic accounts as well as general bed loss typically experienced in a
competitive environment.

      Cost of revenues for the year ended June 30, 2000 increased $16.2 million
or 3.0% to $556.8 million from $540.6 million for the year ended June 30, 1999.
Cost of revenues as a percentage of revenues increased to 80.2% for the year
ended June 30, 2000 from 75.3% for the year ended June 30, 1999. Gross margins
during the year ended June 30, 2000 were significantly affected by the impact of
the PPS reimbursement system. The margin pressure resulted from continued
Medicare Part A pricing pressure, lower than anticipated gross margins on PPS
related contracts and reduced acuity levels at customer facilities. In addition,
the Company's payor mix has continued to shift towards lower margin payors,
including Medicaid and insurance.

      Selling, general and administrative expenses for the year ended June 30,
2000 decreased $12.5 million or 9.0% to $127.0 million from $139.5 million for
the year ended June 30, 1999. Selling, general and administrative expenses as a
percentage of revenues decreased from 19.4% for the year ended June 30, 1999 to
18.3% for the year ended June 30, 2000. The decrease in expenses from the prior
fiscal year is a result of efforts by the Company to reduce operating and
overhead costs by accelerating the consolidation and/or closing of pharmacy
locations and continuing its employee reduction plan.

      Excluding the effects of the nonrecurring, restructuring and special
charges described below, operating income for the year ended June 30, 2000
decreased $27.0 million or 71.4% to $10.8 million from $37.8 million for the
year ended June 30, 1999. Excluding the effects of the nonrecurring,
restructuring and special charges, operating income as percentage of sales was
1.6% for the year ended June 30, 2000 and 5.3% for the year ended June 30, 1999.
The decrease is related to the implementation of PPS as discussed above.

      During fiscal 2000, the Company recorded nonrecurring, restructuring and
special charges of $95.8 million. A special charge of $44.6 million was recorded
to increase the allowance for doubtful accounts, and nonrecurring, restructuring
and other special charges of $51.2 million were recorded in connection with the
implementation and execution of strategic restructuring and consolidation
initiatives of certain operations, the planned disposition of certain non-core
and/or non-strategic assets, impairment of certain assets and other nonrecurring
items.

      The special charge to increase the allowance for doubtful accounts
resulted from the continuing negative changes observed in industry and customer
trends during the year ended June 30, 2000, and a change in the method of
estimating the allowance necessary for accounts receivable. The financial
condition of the Company's primary customer base and general industry trends
continued to deteriorate throughout the year. Due to the negative trends that
the Company's customers are facing, management re-evaluated the method of
estimating the allowances necessary for these and other customers. The total
provision for doubtful accounts, including the amounts included in the special
charge, was $53.8 million for the year ended June 30, 2000.

      The Company continued its plan of restructuring to consolidate certain
pharmacy sites in order to improve operating efficiencies. During the year ended
June 30, 2000, the Company decided to consolidate thirteen additional pharmacy
sites into either a new or existing location. The Company also decided to
shutdown locations associated with certain ancillary services. During the year
ended June 30, 2000, the Company recorded nonrecurring charges of $9.7 million
related to these site consolidations and location shutdowns, inclusive of $ 1.1
million of additional costs incurred on site consolidations previously
announced. As of June 30, 2000, twelve pharmacy sites and six ancillary service
locations were consolidated into either a new or existing location or shutdown.
The remaining site consolidations and location shutdowns were completed as of
August 2000.

      During the year ended June 30, 2000 the Company adopted a formal exit
plan to dispose of certain non-core and/or non-strategic assets. The Company
recorded nonrecurring charges of $30.7 million related to the planned
disposition of assets primarily consisting of impairment to goodwill and
property and equipment. Total revenue and operating income of the related
business units was $59.3 million and $1.5 million, respectively, for the year
ended June 30, 2000. During April 2000, the Company disposed of two ancillary
operations. The carrying amount of assets held for sale at June 30, 2000 was
$7.6 million.

                                       15
<PAGE>   19

      The remaining $10.8 million of the nonrecurring charge primarily relates
to severance incurred during the year associated with the Company's expense
reduction initiatives, additional asset impairments, costs related to a
settlement with federal authorities regarding the investigation of the Company's
Indianapolis, Indiana facility and other nonrecurring expenses.

      During December 1999, the Company reached a settlement with the U.S.
Attorney's office in the Southern District of Indiana regarding the federal
investigation of the Company's facility in Indianapolis, Indiana. As a result,
the Company recorded the settlement amount as a nonrecurring charge. Under the
terms of the settlement, the Company paid $4.1 million to the U.S. Attorney's
office. The Company also agreed to maintain its current level of spending in
connection with its compliance systems and procedures for a period of three
years. If the Company does not comply with the terms of the accord, an
additional $1.5 million will be payable to the U.S. Attorney's office. See
"Certain Regulatory Investigations and Legal Proceedings".

      Employee severance costs included in the nonrecurring charges relate to
the termination of 472 employees. As of June 30, 2000, 404 employees have been
terminated.

      Details of the fiscal 2000 nonrecurring, restructuring and special charges
and related activity are as follows:

<TABLE>
<CAPTION>


                                                             Nonrecurring              Reserve
           Description               Cash/non-cash             Charge     Activity   At 6/30/00
           -----------               -------------             ------     --------   ----------
                                                            (In millions)
<S>                                  <C>                     <C>          <C>        <C>
Site Consolidations
     Severance/compensation related      Cash                   $ 1.3      $ (1.0)      $  .3
     Lease terminations                  Cash                     2.8         (.4)        2.4
     Asset impairments                   Non-cash                 4.4        (4.4)         --
     Other                               Cash                     1.2         (.6)         .6

Special increase to allowance
     for doubtful accounts               Non-cash                44.6       (44.6)         --

Disposition of Assets
     Asset impairment                    Non-cash                30.2       (30.2)         --
     Other                               Cash                      .5         (.2)         .3

Other
     Cash                                                         6.6        (6.2)         .4
     Non-cash
                                                                  4.2        (4.2)         --
                                                                -----      ------       -----
Total                                                           $95.8      $(91.8)      $ 4.0
                                                                =====      ======       =====
</TABLE>

      The Company had net interest expense of $26.2 million for the year ended
June 30, 2000, compared to net interest expense of $18.3 million for the year
ended June 30, 1999. The increase is primarily attributable to increased average
borrowings on the Company's revolving credit facility, an increase in interest
rates and other finance related charges during fiscal 2000 as compared to the
prior year. The additional funds borrowed in fiscal 1999 were primarily used for
working capital purposes, to fund internal growth and capital expenditures for
infrastructure improvement.

YEARS ENDED JUNE 30, 1999 AND 1998

      The net loss for the year ended June 30, 1999 was $16.3 million or $0.81
per diluted share compared to net income of $11.3 million or $0.59 per diluted
share for the year ended June 30, 1998. The net loss for the year ended June 30,
1999 before the cumulative effect adjustment to adopt the Accounting Standards
Executive Committee Statement of Position 98-5 (SOP 98-5) "Reporting on the
Costs of Start-up Activities," was $13.4 million or $0.66 per diluted share
compared to net income of $11.3 million or $0.59 per diluted share in the prior
year.

      Net income for the year ended June 30, 1999, excluding the special and
nonrecurring charges described below, and the effect of adopting SOP 98-5,
increased to $17.9 million or $0.88 per diluted share, from $16.6 million or
$0.86 per diluted share, excluding nonrecurring charges, in the prior year.



                                       16
<PAGE>   20

      Revenues for the year ended June 30, 1999 increased 41.0% to $717.8
million from $509.1 million for the year ended June 30, 1998. 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 $208.7 increase for
the year ended June 30, 1999, $113.4 million of the increase is attributable to
revenues for the fiscal year ended June 30, 1999 including a full period of
operations for fiscal 1998 acquisitions. These fiscal 1998 acquisitions include
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. Internal growth accounted for $95.3
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, 1999 increased 5.6% to 262,000 beds, from 248,000
beds at June 30, 1998.

      Cost of revenues for the year ended June 30, 1999 increased $160.3 million
or 42.2% to $540.5 million from $380.2 million for the year ended June 30, 1998.
Cost of revenues as a percentage of revenues increased to 75.3% for the year
ended June 30, 1999 from 74.7% for the year ended June 30, 1998. 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, 1999. However, these improvements were offset by
gross margin reductions as a result of pricing pressures and a reduction in
higher margin services as more facilities served by the Company were subject to
the phased in implementation of the PPS reimbursement system during the last
three months of the fiscal year ended June 30, 1999.

      Selling, general and administrative expenses for the year ended June 30,
1999 increased $45.6 million or 48.6% to $139.5 million from $93.9 million for
the year ended June 30, 1998. Selling, general and administrative expenses as a
percentage of revenues increased from 18.5% for the year ended June 30, 1998 to
19.4% for the year ended June 30, 1999.

      Excluding the $11.5 million pre-tax increase for costs which would
otherwise have been capitalized prior to early adoption of SOP 98-5 during the
year ended June 30, 1999, selling, general and administrative expenses increased
$34.1 million or 36.3% to $128.0 million from $93.9 million for the year ended
June 30, 1998. Excluding the effects of early adoption of SOP 98-5, selling,
general and administrative expenses as a percentage of revenues decreased from
18.5% for the year ended June 30, 1998 to 17.8% for the year ended June 30,
1999. The percentage decrease for the year ended June 30, 1999 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 increase in selling, general,
and administrative expenses in absolute dollars is mainly attributable to
expenses associated with the operations of businesses acquired during the prior
fiscal year.

      Excluding the effects of the early adoption of SOP 98-5 and the special
and nonrecurring charges as described below, operating income for the year ended
June 30, 1999 increased $14.3 million or 40.6% to $49.3 million from $35.0
million for the year ended June 30, 1998. This improvement is primarily
attributable to increased sales volume generated during the year from
acquisitions and internal growth. Excluding the effects of the early adoption of
SOP 98-5 during the year ended June 30, 1999 and the special and nonrecurring
charges, operating income as percentage of sales for the years ended June 30,
1999 and 1998 was 6.9% .

      During the fourth quarter of fiscal 1999 the Company recorded special and
nonrecurring charges of $40.5 million before tax ($24.3 million net of tax). A
special charge of $32.4 million before tax was recorded to increase the
allowance for doubtful accounts, and nonrecurring charges of $8.1 million before
tax were recorded in connection with the implementation and execution of
strategic restructuring and consolidation initiatives of certain operations and
other nonrecurring items.

      The special charge to increase the allowance for doubtful accounts
resulted from significant changes observed in industry and customer trends
during the last three months of the fiscal year ended June 30, 1999, and items
encountered from recent acquisitions. The circumstances of the customer and
industry trends primarily relate to increased bankruptcies and significant
financial difficulties recently experienced by the Company's customers primarily
as a result of the implementation of the Medicare Prospective Payment System.
The acquisition related items primarily pertain to specific receivable
collectibility issues relating to previous utilization of "legacy" systems, and
other nonrecurring issues which have resulted in potentially uncollectible
accounts receivable.

      During the fourth quarter of fiscal 1999, the Company adopted a plan of
restructuring to consolidate certain pharmacy sites in similar geographies. The
plan is a continuation of the plan adopted in fiscal 1998 to combine pharmacies
in close proximity in order to improve operating efficiencies. As a result of
the new exit plan, four additional pharmacy sites were consolidated into either
a new or existing location. During the year ended June 30, 1999, the Company
recorded nonrecurring charges of $4.7 million before tax related to the new site
consolidations, inclusive of $0.2 million of additional costs incurred on the
site consolidations announced in the prior year. These costs consist of $2.1
million related to employee severance and other compensation related expenses,
$0.6 million related to lease termination costs and $2.0 million related to
asset impairments and other miscellaneous costs.



                                       17
<PAGE>   21

      The remaining $3.4 million before tax of the nonrecurring charge primarily
relates to severance incurred during the fourth quarter of fiscal 1999
associated with the Company's expense reduction initiatives, additional
acquisition related and other expenses.

      Employee severance costs included in the nonrecurring charge relate to the
termination of 120 employees. As of June 30, 2000 all 120 employees have been
terminated.

      Details of the fourth quarter fiscal 1999 special and nonrecurring charge
and related activity are as follows:

<TABLE>
<CAPTION>

                                                          Nonrecurring                     Reserve                    Reserve
    Description                  Cash/non-cash               Charge      Activity       At 6/30/99   Activity       At 6/30/00
    -----------                  -------------               ------      --------       ----------   --------       ----------
                                                         (In millions)
<S>                             <C>                       <C>           <C>            <C>           <C>            <C>
Site Consolidations
     Severance/compensation related    Cash                    $ 2.1        $(1.5)          $ .6        $ (.6)          $ --
     Lease terminations                Cash                       .6          (.1)            .5          (.4)            .1
     Asset impairments                 Non-cash                  1.5         (1.5)            --            --            --
     Other                             Cash                       .5          (.5)            --            --            --

Special increase to allowance
     For doubtful accounts             Non-cash                 32.4        (32.4)            --            --            --
Other                                  Cash                      3.4         (2.7)            .7          (.5)            .2
                                                               -----       ------          -----       ------           ----


Total                                                          $40.5       $(38.7)         $ 1.8       $ (1.5)          $ .3
                                                               =====       =======         =====       =======          ====
</TABLE>


      The Company had net interest expense of $18.3 million for the year ended
June 30, 1999, compared to net interest expense of $5.7 million during the year
ended June 30, 1998. The increase in expense is 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.

      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 combined pharmacies in close proximity in order to improve
operating efficiencies. As a result of the exit plan, 15 pharmacy sites were
consolidated into either a new or existing location as of June 30, 2000. 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. All of the employee
terminations under the plan have occurred as of June 30, 2000.

      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 fourth quarter fiscal 1998 nonrecurring charge and related
activity are as follows:

<TABLE>
<CAPTION>


                                                            Nonrecurring                  Reserve                        Reserve
     Description                  Cash/non-cash                Charge      Activity      At 6/30/99      Activity       At 6/30/00
     -----------                  -------------                ------      --------      ----------      --------       ----------
                                                            (In millions)
<S>                             <C>                         <C>           <C>            <C>            <C>             <C>
Site Consolidations
     Severance packages                Cash                     $ .5        $ (.5)          $ --          $ --           $ --
     Lease terminations                Cash                       .7          (.4)            .3          (.3)             --
     Asset impairments                 Non-cash                  3.5         (3.5)            --            --             --
     Other                             Cash                       .6          (.6)            --            --             --

</TABLE>


                                       18

<PAGE>   22

<TABLE>
<CAPTION>


<S>                               <C>                       <C>           <C>           <C>             <C>            <C>
Buyout of employment agreements        Cash                       .9          (.8)            .1          (.1)             --

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

Other
     Cash                                                        1.0          (.9)            .1          (.1)             --
     Non-cash                                                     .4          (.4)            --           --              --
                                                                -----       -----           ----       ------            ----

Total                                                           $8.9        $(8.4)          $ .5       $ (.5)            $ --
                                                                ====        ======          ====       ======            ====
</TABLE>




                                       19
<PAGE>   23


LIQUIDITY AND CAPITAL RESOURCES

      Net cash provided by (used in) operating activities was $(14.8) million,
$(24.0) million and $10.8 million in fiscal 1998, 1999 and 2000, respectively.
The increase in net cash provided by operating activities during fiscal 2000 was
primarily due to a slower growth rate in accounts receivable, a decrease in
inventory and refunds received from federal and state income tax authorities
offset by a decrease in accounts payable and accrued expenses. The slower growth
rate in accounts receivable from June 30, 1999 is mainly attributable to slower
internal sales growth during the year ended June 30, 2000 and increased
collection efforts by the Company. However, the Company continues to experience
slower payment trends by customers as a result of the implementation of PPS.
Cash used in operating activities increased in fiscal 1999 due to increases in
trade accounts receivable, other current assets and inventories. The growth in
accounts receivable and inventory was primarily associated with internal sales
growth. Additionally, some accounts receivable growth is attributable to slower
payment trends by customers as a result of PPS implementation and other accounts
receivable issues previously described above. The increase in other current
assets primarily results from income tax refunds receivable at June 30, 1999.
These cash flow decreases were partially offset by increases in trade accounts
payable and accrued expenses. A majority of the trade accounts payable increase
is attributable to longer negotiated payment terms under a new primary
pharmaceutical supplier agreement implemented in June 1999. The Company
purchases the majority of its inventory through a primary pharmaceutical
supplier, and the terms of the related contracts are an integral part of the
Company's future liquidity.

      Net cash used in investing activities was $202.8 million, $35.0 million
and $11.8 million in fiscal 1998, 1999 and 2000, respectfully. The decrease in
fiscal 2000 is primarily a result of a decrease in capital expenditures. The
decrease in fiscal 1999 is primarily the result of fewer business acquisitions
during 1999 as compared to the prior year.

      The Company made capital expenditures of $24.0 million, $29.4 million and
$6.7 million in fiscal 1998, 1999 and 2000, respectfully. Significant capital
expenditures made during the year ended June 30, 2000 include capitalized
software costs associated with the Concord DX operating system, computer
equipment, leasehold improvements and medication carts. Significant capital
expenditures during the year ended June 30, 1999 primarily included computer and
information systems equipment and computer software as the Company continued to
invest in converting all pharmacy sites to the Concord DX system. Additionally,
other capital expenditures during 1999 were made for furniture and fixtures,
leasehold improvements, medication carts and delivery vehicles.

      Net cash provided by (used in) financing activities was $230.7 million,
$67.2 million and $(12.0) million in fiscal 1998, 1999 and 2000, respectfully.
Cash used in financing activities in fiscal 2000 is a result of the Company's
efforts to pay down the outstanding revolving credit facility balance. The
decrease in cash provided by financing activities during fiscal 1999 primarily
results from reduced financing needs resulting from a significant reduction in
acquisition activity during 1999. The net proceeds during 1999 were primarily
obtained from the revolving credit agreement to fund working capital needs
resulting from internal growth and infrastructure investments in a common
operating system. During fiscal 1998, cash provided by financing activities was
primarily the result of funds received from an offering of convertible
subordinated debentures completed by the Company on August 13, 1997 and an
increase in funds borrowed under the revolving credit facility. These funds were
primarily utilized for acquisitions in fiscal 1998.

      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 a member of an affiliated group
(within the meaning of Section 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.

      In June 1998, the Company entered into a four-year, $150 million revolving
credit facility (the "Credit Facility") with a bank, which replaced the existing
$135 million revolving agreement. Effective July 13, 1998, the Credit Facility
was amended increasing the total commitment from $150 million to $245 million
and was syndicated to a consortium of 11 banks. Effective August 3, 1999, the
Credit Facility was amended to reduce the available commitment from $245 million
to $235 million, provide all of the Company assets as security, limit the
availability of the facility to use for working capital only, require Lender
approval on future acquisitions, and modify covenants and the variable interest
rate basis. The amended Credit Facility bears interest at a variable rate based
upon the Eurodollar rate plus a spread of 150 to 275 basis points, dependent
upon the Company's ratio of Total Funded Debt to EBITDA.

      At June 30, 2000 the Company is in violation of certain financial
covenants of the credit agreement related to its revolving credit facility. On
April 21, 2000, the Company received a formal notice of default from the bank
group. As a result of the notice of default, the interest rate on the revolving
credit facility increased to the Prime Rate plus 2.25% (11.75% at June 30,
2000). In addition, the Company will not be permitted to obtain any further
funds under the credit facility until the defaults have been waived by the bank
group. The Company is currently in discussions to obtain waivers of the covenant
violations and to amend the credit agreement. Until the amendment to the credit
agreement is obtained, the borrowings of $206.1 million under the credit
facility will be classified as a current liability. Failure to obtain the waiver
and amendment could have a material adverse effect on the Company. If the waiver
and amendment are not obtained, the Company's lenders may accelerate the
maturity of the Company's obligations and/or exercise other remedies under the
credit agreement including exercising their rights with respect to the



                                       20
<PAGE>   24
pledged collateral. Such action could also result in the acceleration of the
maturity of the Company's convertible subordinated debentures. Subject to
obtaining the necessary waivers and amendments, the Company expects to meet
future financing needs principally through the use of its revolving credit
facility and cash generated from operations. The Company has implemented
measures to improve cash flows generated from operating activities, including
reductions in operating and overhead costs by accelerating the consolidation
and/or closing of pharmacy locations and continuing its employee reduction plan,
and more aggressive collection and inventory reduction efforts. However, the
Company may require additional capital resources for internal working capital
needs and may need to incur additional indebtedness to meet these requirements.
Additional funds are currently not available under the revolving credit facility
as described above and there can be no assurances that additional funds will be
available.

      The Company has engaged financial advisors and legal counsel to assist in
exploring various capital restructuring and strategic alternatives with third
parties. At this time, no decision has been made to enter into a transaction
or as to what form a transaction might take. There is no assurance that any such
transaction will be consummated.

      The Company's effective income tax expense (benefit) rates were 44.3%,
(36.3)% and 3.0% for the years ended June 30, 1998, 1999 and 2000, respectively.
During fiscal 1998 and 1999, 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. During fiscal 2000, the tax rate
differs from the federal statutory rate primarily as a result of the recording
of a full valuation allowance against the Company's net deferred tax assets
consisting primarily of net operating loss carryforwards.

CERTAIN REGULATORY INVESTIGATIONS AND LEGAL PROCEEDINGS

      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 review identified inadequacies in inventory record keeping and
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 notified by the United States Department of Justice, United States
Attorney for the Southern District of Indiana ("USA-Indiana") that the United
States Drug Enforcement Administration had referred this matter to the Office of
the USA-Indiana for possible legal action involving certain numerous alleged
violations of federal law. The USA-Indiana invited the Company to contact the
Office of the USA-Indiana in an effort to resolve the matter. The Company
subsequently contacted the Office of the USA-Indiana and discussions regarding a
possible settlement of this matter ensued. During December 1999, the Company and
NCS HealthCare of Indiana, Inc. (NCS Indiana), a wholly-owned subsidiary of the
Company, reached a settlement with the USA-Indiana regarding the previously
disclosed federal investigation of the Company's facility in Indianapolis,
Indiana. Under the terms of the settlement, the Company paid $4.1 million to the
USA-Indiana. The Company also agreed to maintain its current level of spending
in connection with its compliance systems and procedures for a period of three
years. If the Company does not comply with the terms of the accord, an
additional $1.5 million will be payable to the USA-Indiana.

      In January 1998, federal and state government authorities sought and
obtained various documents and records from a Herrin, Illinois pharmacy operated
by a wholly-owned subsidiary of the Company. The Company has cooperated fully
and continues to cooperate fully with the government's inquiry. In June 1999,
representatives of the Company met with attorneys with the Civil and Criminal
Divisions of the Office of the United States Department of Justice, United
States Attorney for the Southern District of Illinois ("USA-Illinois") regarding
the government's investigation. The USA-Illinois informed the Company that it
had information that allegedly substantiated numerous violations of federal law,
but the Company has not received any written notification of these allegations.
Discussions regarding the government's investigation have ensued and are
currently proceeding between representatives of the USA-Illinois and the
Company. It is possible that the imposition of significant fines or other
remedies in connection with the resolution of this matter could have a material
effect on the Company's financial condition and results of operations.

      On June 7, 1999, a lawsuit was filed against the Company in the Superior
Court of Norfolk County, Massachusetts. Plaintiffs were certain selling
stockholders of the PharmaSource Group, Inc. ("PharmaSource"), which NCS
acquired on September 17, 1997. The complaint alleged breach of contract and
unfair business practices arising out of NCS' non-payment of certain amounts
allegedly payable under the terms of an earn-out provision included in the
acquisition agreement. On January 21, 2000, the Company reached a settlement of
this litigation. Under the terms of the settlement, the Company issued 1,750,000
Class A Common Shares and a $2,000,000 convertible subordinated debenture
maturing on August 15, 2004. The note and accrued "payment-in-kind" interest
will be convertible into a maximum of 200,000 Class A Common Shares at a
conversion price of $8.00 per share.

YEAR 2000 READINESS DISCLOSURE

      In prior years, the Company discussed the nature and progress of its plans
to become Year 2000 ready. In late 1999, the Company completed its remediation
and testing of systems. As a result of those planning and implementation
efforts, the

                                       21
<PAGE>   25

Company experienced no significant disruptions in mission critical information
technology and non-information technology systems and believes those systems
successfully responded to the Year 2000 date change. Costs related to Year 2000
readiness issues have been expensed as incurred and have been immaterial to the
financial results of the Company. The Company is not aware of any material
problems resulting from Year 2000 issues, either with its internal systems or
the products and services of third parties. The Company will continue to monitor
its mission critical computer applications and those of its customers, suppliers
and vendors throughout the year 2000 to ensure that any latent Year 2000 matters
that may arise are addressed promptly.

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, Year 2000 readiness disclosure
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
expected effects on its business or operations. These forward-looking statements
are made based on management's expectations and beliefs concerning future events
impacting the Company and are subject to uncertainties and factors (including,
but not limited to, those specified below) which are difficult to predict and,
in many instances, are beyond the control of the Company. As a result, actual
results of the Company may differ materially from those expressed or implied by
any such forward-looking statements. Among the factors that could cause actual
results to differ materially from the Company's expectations include
continuation of various trends in the long-term care market (including the trend
toward consolidation and the impact of the Balanced Budget Act of 1997),
competition among providers of long-term care pharmacy services, the Company's
negotiations with its bank group related to the waiver and amendment of its
credit facility, changes in regulatory requirements, reform of the health care
delivery system, litigation matters, other factors and risks and uncertainties
described in the Company's SEC reports.

ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

      The Company is exposed to certain market risks from transactions that are
entered into during the normal course of business. The Company has not entered
into derivative financial instruments for trading purposes. The Company's
primary market risk exposure relates to interest rate risk. The Company has
managed its interest rate risk by balancing its exposure between fixed and
variable rates while attempting to minimize its interest costs. The Company has
a balance of $206.1 million on its revolving credit facility at June 30, 2000,
which is subject to a variable rate of interest based on the Prime rate.
Assuming borrowings at June 30, 2000, a one-hundred basis point change in
interest rates would impact net interest expense by approximately $2.1 million
per year.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Consolidated Financial Statements
Report of Independent Auditors                                             26
Consolidated Balance Sheets at June 30, 1999 and 2000                      27
Consolidated Statements of Operations for each of the three years
   in the period ended June 30, 2000                                       29
Consolidated Statements of Stockholders' Equity for each of the
   three years in the period ended June 30, 2000                           30
Consolidated Statements of Cash Flows for each of the three years
   in the period ended June 30, 2000                                       33
Notes to Consolidated Financial Statements                                 33



                                       22
<PAGE>   26


                         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, 1999 and 2000, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended June 30, 2000. 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, 1999 and 2000, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended June 30, 2000, in conformity with generally
accepted accounting principles.

      The accompanying consolidated financial statements have been prepared
assuming the Company will continue as a going concern. As discussed in Note 1 to
the consolidated financial statements, the Company is in violation of certain
financial covenants under its revolving credit facility. As a result of the
covenant violations, the Company's lenders may accelerate the maturity of the
Company's obligations under the revolving credit facility. This factor raises
substantial doubt about the Company's ability to continue as a going concern.
Management's plan in regard to this matter is also described in Note 1. The
consolidated financial statements do not include any adjustments to reflect the
possible future effects on the recoverability and classification of assets or
the amounts or classifications of liabilities that may result from the outcome
of this uncertainty.

      As discussed in Note 1 to the consolidated financial statements, effective
July 1, 1998, the Company changed its method of accounting for start-up costs.

August 18, 2000                                       Ernst & Young LLP
Cleveland, Ohio




                                       23
<PAGE>   27

                      NCS HEALTHCARE, INC. AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS
                    (IN THOUSANDS, EXCEPT SHARE INFORMATION)

                                     ASSETS

<TABLE>
<CAPTION>

                                                                                                       JUNE 30,
                                                                                                       --------
                                                                                                 1999           2000
                                                                                                 ----           ----
<S>                                                                                       <C>                <C>
CURRENT ASSETS
   Cash and cash equivalents                                                              $    29,424        $    16,387
   Trade accounts receivable, less allowance for
      doubtful accounts of $38,880 and $53,926 as of
      June 30, 1999 and 2000                                                                  160,168            120,849
   Inventories                                                                                 49,244             37,086
   Deferred income taxes                                                                       19,901                 --
   Prepaid expenses and other current assets                                                   26,496              5,322
                                                                                             --------           --------
              Total current assets                                                            285,233            179,644

PROPERTY, PLANT AND EQUIPMENT

   Land                                                                                           204                204
   Buildings                                                                                    2,206              2,212
   Machinery, equipment and vehicles                                                           31,129             29,212
   Computer equipment and software                                                             37,458             39,025
   Furniture, fixtures and leasehold improvements                                              23,394             21,775
                                                                                             --------           --------
                                                                                               94,391             92,428
   Less accumulated depreciation and amortization                                              35,275             47,264
                                                                                             --------           --------
                                                                                               59,116             45,164
Goodwill, less accumulated amortization of $22,803
   and $33,620 as of June 30, 1999 and 2000                                                   343,247            311,876
Other assets, less accumulated amortization of
   $3,286 and $5,250 as of June 30, 1999 and 2000                                              11,903              9,979
                                                                                            ---------         ----------
TOTAL ASSETS                                                                                 $699,499           $546,663
                                                                                             ========           ========
</TABLE>


                             See accompanying notes



                                       24
<PAGE>   28

                      NCS HEALTHCARE, INC. AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS
                    (IN THOUSANDS, EXCEPT SHARE INFORMATION)

                      LIABILITIES AND STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>

                                                                                                      JUNE 30,
                                                                                                      --------
                                                                                               1999              2000
                                                                                             --------           --------
<S>                                                                                          <C>                <C>
CURRENT LIABILITIES

   Line of credit in default                                                                 $     --           $206,130
   Trade accounts payable                                                                      50,061             44,857
   Accrued compensation and related expenses                                                   15,798              7,115
   Other accrued expenses                                                                      18,499             14,756
   Current portion of long-term debt                                                            3,480                651
                                                                                             --------           --------
              Total current liabilities                                                        87,838            273,509

   Line of credit                                                                             214,700                 --
   Long-term debt, excluding current portion                                                    1,936              1,291
   Convertible subordinated debentures                                                        100,000            102,000
   Deferred income taxes                                                                       18,209                  -
   Other long-term liabilities                                                                    382                158

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; 14,277,492
        and 17,176,486 shares issued and outstanding at
        June 30, 1999 and 2000, respectively                                                      143                172
      Class B -- 20,000,000 shares authorized; 6,005,280
        and 5,807,283 shares issued and outstanding
        at June 30, 1999 and 2000, respectively                                                    60                 58
   Paid-in capital                                                                            263,882            271,650
   Retained earnings (deficit)                                                                 12,349           (102,175)
                                                                                             --------           ---------
                                                                                              276,434            169,705
                                                                                             --------           --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                                   $699,499           $546,663
                                                                                             ========           ========
</TABLE>


                             See accompanying notes



                                       25
<PAGE>   29

                      NCS HEALTHCARE, INC. AND SUBSIDIARIES

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

<TABLE>
<CAPTION>

                                                                                           YEAR ENDED JUNE 30,
                                                                                           -------------------
                                                                                 1998            1999               2000
                                                                                 ----            ----               ----
<S>                                                                          <C>             <C>              <C>
Revenues                                                                       $509,064        $717,825         $694,530
Cost of revenues                                                                380,217         540,547          556,757
                                                                               --------        --------          -------
Gross profit                                                                    128,847         177,278          137,773
Selling, general and administrative expenses                                     93,895         139,522          126,969
Special charge to increase allowance for doubtful accounts                           --          32,384           44,623
Nonrecurring charges                                                              8,862           8,115           51,136
                                                                               --------        --------          -------
Operating income (loss)                                                          26,090          (2,743)         (84,955)
Interest expense                                                                 (8,199)        (19,864)         (29,808)
Interest income                                                                   2,454           1,563            3,565
                                                                               --------        --------          -------
Income (loss) before income taxes                                                20,345         (21,044)        (111,198)
Income tax (expense) benefit                                                     (9,014)          7,640           (3,326)
Cumulative effect of accounting change, net of taxes                                 --          (2,921)              --
                                                                               --------        --------          -------
Net income (loss)                                                             $  11,331       $ (16,325)       $(114,524)
                                                                              =========       =========        ==========
Earnings (loss) per share data:
Earnings (loss) per common share - basic                                       $   0.59      $   (0.81)       $   (5.31)
                                                                               ========      ==========       ==========
Earnings (loss) per common share - diluted                                     $   0.58      $  ( 0.81)       $   (5.31)
                                                                               ========      ==========       ==========
Weighted average number of common
  shares outstanding - basic                                                     19,100          20,200           21,551
                                                                                =======         =======          =======
Weighted average number of common
  shares outstanding - diluted                                                   19,372          20,200           21,551
                                                                                =======         =======           ======
</TABLE>



                             See accompanying notes



                                       26
<PAGE>   30

                      NCS HEALTHCARE, INC. AND SUBSIDIARIES

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

<TABLE>
<CAPTION>

                                              CLASS A          CLASS B                           RETAINED
                                              COMMON           COMMON        PAID-IN             EARNINGS      STOCKHOLDERS'
                                               STOCK            STOCK        CAPITAL             (DEFICIT)        EQUITY
                                               -----            -----        -------             --------         ------
<S>                                             <C>              <C>        <C>                <C>             <C>
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
Exercise of stock options
   (3,545 shares of Class
   A Common Stock and
   69,692 shares of Class
   B Common Stock)                                 --              --             823                --              823
Issuance of 114,134
   shares of Class A
   Common Stock and
   payback of 7,572 shares of
   Class B Common Stock
   for business combinations                        1              --           1,397                --            1,398
Issuance of 31,383
   shares of Class A
   Common Stock
   for profit sharing plan                          1              --             449                --              450
Conversion of 520,084
   shares of Class B
   Common Stock to
   520,084 shares of
   Class A Common Stock                             5              (5)             --                --               --
Conversion of convertible
   subordinated debentures
   (273,707 shares of Class
   A Common Stock)                                  3              --           2,751                --            2,754
Net (loss)                                         --              --              --           (16,325)         (16,325)
                                                -----            ----        --------          --------         --------
Balance at June 30, 1999                         $143            $ 60        $263,882          $ 12,349         $276,434
                                                =====            ====        ========          ========         ========
</TABLE>





                                       27
<PAGE>   31


                      NCS HEALTHCARE, INC. AND SUBSIDIARIES

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

<TABLE>
<CAPTION>

                                              CLASS A          CLASS B                         RETAINED
                                              COMMON           COMMON        PAID-IN           EARNINGS       STOCKHOLDERS'
                                               STOCK            STOCK        CAPITAL           (DEFICIT)         EQUITY
                                              -------          -------       -------           --------       ------------

<S>                                            <C>             <C>           <C>               <C>              <C>
Balance at June 30, 1999                         $143            $ 60        $263,882          $ 12,349         $276,434
Issuance of 2,203,844
   shares of Class A
   Common Stock
   for business combinations                       22              --           6,811                --            6,833
Issuance of 497,153
   shares of Class A
   Common Stock
   for profit sharing plan                          5              --             957                --              962
Conversion of 197,997
   shares of Class B
   Common Stock to
   197,997 shares of
   Class A Common Stock                             2              (2)             --                --               --
Net (loss)                                         --              --              --          (114,524)        (114,524)
                                                 ----            ----        --------         ---------         --------
Balance at June 30, 2000                         $172            $ 58        $271,650         $(102,175)        $169,705
                                                 ====            ====        ========         ==========        ========
</TABLE>



                             See accompanying notes



                                       28
<PAGE>   32


                      NCS HEALTHCARE, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>

                                                                                            YEAR ENDED JUNE 30,
                                                                                            -------------------
                                                                                    1998           1999            2000
                                                                                    ----           ----            ----
<S>                                                                           <C>            <C>                <C>
OPERATING ACTIVITIES
Net income (loss)                                                             $  11,331      $  (16,325)        (114,524)
Adjustments to reconcile net income (loss) to net
   cash provided by (used in) operating
   activities:
      Non-cash portion of nonrecurring charges                                    5,229           1,486           38,555
      Depreciation and amortization                                              16,454          23,512           28,678
      Provision for doubtful accounts                                             2,279          35,568           53,825
      Deferred income taxes                                                          47          (3,665)           2,937
      Cumulative effect of accounting change, net of taxes                           --           2,921               --
      Non-cash profit sharing expense                                                --             450              962
      Changes in assets and liabilities, net of
         effects of assets and liabilities acquired:
            Trade accounts receivable                                           (55,086)        (58,702)         (10,309)
            Inventories                                                         (12,098)         (5,759)          12,151
            Trade accounts payable                                               18,040          15,930           (5,204)
            Accrued expenses                                                      1,543          (2,366)         (11,251)
            Prepaid expenses and other                                           (2,585)        (17,042)          14,948
                                                                              ---------      ----------       ----------
Net cash provided by (used in) operating
   activities                                                                   (14,846)        (23,992)          10,768

INVESTING ACTIVITIES
Capital expenditures for property, plant
   and equipment                                                                (24,019)        (29,400)          (6,616)
Proceeds from sales of assets                                                     1,183             300              621
Purchases of businesses                                                        (171,083)           (653)              --
Other                                                                            (8,872)         (5,264)          (5,766)
                                                                              ---------      ----------       ----------
Net cash used in investing activities                                          (202,791)        (35,017)         (11,761)

FINANCING ACTIVITIES

Proceeds from issuance of long-term debt                                             13           1,664               --
Repayment of long-term debt                                                      (4,135)         (1,675)          (3,474)
Borrowings on line-of-credit                                                    169,299         108,325           91,300
Payments on line-of-credit                                                      (31,784)        (41,425)         (99,870)
Proceeds from convertible subordinated debentures                                97,250              --               --
Proceeds from issuance of common stock and
   exercise of stock options                                                         20             358               --
                                                                              ---------      ----------       ----------
Net cash provided by (used in) financing activities                             230,663          67,247          (12,044)
                                                                              ---------      ----------       ----------
Net (decrease) increase in cash and
   cash equivalents                                                              13,026           8,238          (13,037)
Cash and cash equivalents at beginning of period                                  8,160          21,186           29,424
                                                                              ---------      ----------       ----------
Cash and cash equivalents at end of period                                    $  21,186      $   29,424       $   16,387
                                                                              =========      ==========       ==========

Supplemental disclosure of cash flow information:
Cash paid during the year for:
   Interest                                                                   $   5,076      $   20,179       $   28,975
                                                                              =========      ==========       ==========
   Income taxes                                                               $   8,533      $    1,792       $      404
                                                                              =========      ==========       ==========
</TABLE>


                             See accompanying notes



                                       29
<PAGE>   33


                      NCS HEALTHCARE, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                FOR THE YEARS ENDED JUNE 30, 1998, 1999 AND 2000
                    (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, regulatory assistance and certain ancillary
health care services including infusion therapy and nutrition management.

MANAGEMENT'S PLAN TO CONTINUE AS A GOING CONCERN

          The accompanying consolidated financial statements have been prepared
on a going concern basis, which contemplates the realization of assets and
satisfaction of liabilities in the ordinary course of business. As shown in the
accompanying consolidated financial statements, the Company has incurred net
losses of $16,325 and $114,524 for the years ended June 30, 1999 and 2000,
respectively. At June 30, 2000 the Company's working capital was $(93,865),
primarily as a result of classifying borrowings of $206,130 under the revolving
credit facility as a current liability. As discussed in Note 2 of Notes to the
Consolidated Financial Statements, as of June 30, 2000, the Company is in
violation of certain financial covenants of the credit agreement related to its
revolving credit facility and has received a formal notice of default from its
bank group. The Company will not be permitted to obtain any further funds under
the credit facility until the defaults have been waived by the bank group or an
amendment to the credit agreement is obtained. All borrowings under the credit
agreement have been classified as a current liability. These factors, among
others, raise substantial doubt about the Company's ability to continue as a
going concern.

          The Company is currently in discussions with its bank group regarding
the default under its credit facility. The Company has been and continues to
focus on reducing overhead and operating costs by accelerating efforts to
consolidate and/or close pharmacy and ancillary service locations, the shutdown
or sale of certain non-strategic and/or unprofitable operations, and continuing
its employee reduction plan. In addition, the Company continues to review the
profitability of its customer base and is terminating uneconomic accounts as
well as applying stricter standards in accepting new business. The Company has
made considerable efforts in these areas over the past eighteen months. The
Company has also engaged financial advisors and legal counsel to assist in
exploring various capital restructuring and strategic alternatives with third
parties. At this time, no decision has been made to enter into a transaction
or as to what form a transaction might take. There is no assurance that any
such transaction will be consummated. Given the foregoing, no assurances can be
given that the Company will be able to maintain its current level of
operations, or that its financial condition and prospects will not be
materially and adversely effected over the next twelve months. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.

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 39% and 3%, respectively, of the Company's net patient
revenue for the year ended June 30, 1999 and 42% and 1%, respectively, for the
year ended June 30, 2000.



                                       30
<PAGE>   34

      Movement of the allowance for doubtful accounts is as follows:

<TABLE>
<CAPTION>

                          Balance at    Provision for                        Write-offs      Balance at
                        Beginning of         Doubtful                            Net of          End of
                              Period         Accounts       Acquisitions     Recoveries          Period
                              ------         --------       ------------     ----------      ----------
<S>                        <C>              <C>                   <C>        <C>              <C>
Fiscal Year Ended
June 30,

       2000                 $ 38,880         $ 53,825              $  --     $ (38,779)        $ 53,926

       1999                   18,427           35,568                 --       (15,115)          38,880


       1998                   13,275            2,279              6,354        (3,481)          18,427
</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 5%
of the June 30, 2000 net inventory balance and by using the first-in, first-out
(FIFO) method for the remaining 95%. If the FIFO inventory valuation method had
been used exclusively, inventories would have been $764 and $827 higher at June
30, 1999 and 2000, 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:

        Buildings                                                  30 years
        Machinery, equipment and vehicles                      5 - 10 years
        Computer equipment and software                        3 -  5 years
        Furniture, fixtures and leasehold improvements         3 - 10 years

      Depreciation expense, including amortization of capital leased assets, was
$7,813, $11,420 and $15,110 for the years ended June 30, 1998, 1999 and 2000,
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 are included in other assets and are amortized using
the effective interest method over the life of the related debt.

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 expected 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.



                                       31
<PAGE>   35


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 follows Statement of Financial Accounting Standards No. 128,
"Earnings per Share". Under this accounting standard, 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.

FAIR VALUE OF FINANCIAL INSTRUMENTS

      The fair value of all financial instruments of the Company approximates
the amounts presented on the consolidated balance sheet with the exception of
the $100 million convertible subordinated debt. As of June 30, 1999 and 2000,
the fair value of the $100 million convertible subordinated debt was $45 million
and $12 million, respectively, based on quoted market prices.

START-UP COSTS

      In April 1998, the AcSEC issued Statement of Position 98-5 ("SOP 98-5"),
"Reporting on the Costs of Start-Up Activities," which requires the Company to
expense start-up costs as incurred. The Company early adopted SOP 98-5 effective
as of July 1, 1998 and has reported the initial adoption as a cumulative effect
of a change in accounting principle in the Consolidated Statement of Operations
for the year ended June 30, 1999.

RECENTLY ISSUED ACCOUNTING STANDARDS

      In June 1998, Statement of Financial Standards (SFAS) No. 133,
"Accounting for Derivative Financial Instruments and Hedging Activities,"
establishes accounting and reporting standards for derivative instruments and
hedging activities and requires recognition of all derivatives as either assets
or liabilities measured at fair value. The accounting for changes in the fair
value of a derivative depends on the intended use of the derivative and the
resulting designation. SFAS No. 137, "Accounting for Derivative Instruments and
Hedging Activities - Deferral of the Effective Date of the FASB Statement No.
133," amended Statement No. 133 to be effective for all fiscal years beginning
after June 15, 2000. The adoption of SFAS No. 133 is not expected to have a
material effect on the Company's consolidated financial statements.

      In December 1999, the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements." The objective of SAB No. 101 is to provide further guidance on
revenue recognition issues in the absence of authoritative literature addressing
a specific arrangement or a specific industry. The Company is required to follow
the guidance in SAB No. 101 no later than the fourth quarter of its fiscal year
2001. The SEC has recently indicated that it intends to issue further guidance
with respect to adoption of specific issues addressed by SAB No. 101. Until such
time as this additional guidance is issued, the Company is unable to address the
impact, if any, it may have. However, based on current guidance, the Company
believes the adoption of SAB No. 101 will not have a material impact on the
Company's financial position or results of operations. The Company will adopt
SAB No. 101 in the fourth quarter of fiscal 2001.



                                       32
<PAGE>   36



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.

MATERIAL RISKS AND UNCERTAINTIES

      The Company has observed significant negative industry and customer trends
during the fiscal year ended June 30, 2000. These trends primarily relate to
increased bankruptcies and significant financial difficulties recently
experienced by the Company's skilled nursing facility customers primarily as a
result of greater than expected adverse impact with regard to implementation of
the Medicare Prospective Payment System (PPS) under the Balanced Budget Act of
1997. As a result of these negative trends, the Company has substantially
increased its allowance for doubtful accounts as of June 30, 2000 (see Note 11
Special and Nonrecurring Charges). Should the negative trends continue in future
periods at levels significantly exceeding those estimated by the Company,
additional provisions for accounts receivable recorded as of June 30, 2000 could
be required.

      The Company purchases the majority of its inventory through one primary
pharmaceutical supplier representing a concentration of risk to the Company.

2.  LINE OF CREDIT

      In June 1998, the Company entered into a four-year, $150 million revolving
credit facility (the credit facility) with a bank, which replaced the existing
$135 million revolving credit facility. Under the 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. Effective July 13, 1998, the
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. The 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. The swing line bears
interest at a money market rate. The credit facility contains certain debt
covenants including an Interest Coverage Ratio and minimum consolidated net
worth requirements.

      Effective August 3, 1999, the credit facility was amended to reduce the
available commitment from $245 million to $235 million, provide all of the
Company assets as security, limit the availability of the facility to use for
working capital only, require Lender approval on future acquisitions, and modify
covenants and the variable interest rate basis. The amended credit facility
bears interest at a variable rate based upon the Eurodollar rate plus a spread
of 150 to 275 basis points, dependent upon the Company's ratio of Total Funded
Debt to EBITDA.

      At June 30, 2000, the Company is in violation of certain financial
covenants of the credit agreement related to its revolving credit facility. On
April 21, 2000, the Company received a formal notice of default from the bank
group. As a result of the notice of default, the interest rate on the revolving
credit facility increased to the Prime Rate plus 2.25% (11.75% at June 30,
2000). In addition, the Company will not be permitted to obtain any further
funds under the credit facility until the defaults have been waived by the bank
group. The Company is currently in discussions to obtain waivers of the covenant
violations and to amend the credit agreement. Until the amendment to the credit
agreement is obtained, the borrowings of $206,130 under the credit facility will
be classified as a current liability.



                                       33
<PAGE>   37


3. LONG-TERM DEBT

      Long-term debt consists of the following:

<TABLE>
<CAPTION>

                                                                                                          JUNE 30,
                                                                                                          --------
                                                                                                  1999               2000
                                                                                                  ----               ----
<S>                                                                                             <C>            <C>
Notes payable to former owners of acquired companies
   maturing through July, 2001, at interest rates
   ranging from 5% to 8%                                                                         $2,788         $     17
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                                                                     505              468
Collateralized lease obligations with interest ranging
   from 7% to 16% due monthly through April 2004                                                  1,709            1,226
Other                                                                                               414              231
                                                                                                 ------            -----
Total long-term debt                                                                              5,416            1,942
Less current portion                                                                              3,480              651
                                                                                                 ------           ------
Long-term debt, excluding current portion                                                        $1,936           $1,291
                                                                                                 ======           ======
</TABLE>

      The aggregate maturities of the long-term debt for each of the five years
subsequent to June 30, 2000 are as follows:

FISCAL YEAR ENDING JUNE 30,                       AMOUNT
---------------------------                       ------

2001                                              $  651
2002                                                 472
2003                                                 253
2004                                                 136
2005                                                  25
Thereafter                                           405
                                                  ------
                                                  $1,942
                                                  ======


                                       34
<PAGE>   38


4. INCOME TAX EXPENSE

      Income tax expense (benefit), including the income tax benefit related to
the cumulative effect of accounting change, for each of the three years ended
June 30, 2000 consists of:

<TABLE>
<CAPTION>

                                1998                                  1999                              2000
                                ----                                  ----                              ----
                    CURRENT   DEFERRED       TOTAL      CURRENT     DEFERRED    TOTAL      CURRENT    DEFERRED    TOTAL
                    -------   --------       -----      -------     --------    -----      -------    --------    -----

<S>                <C>       <C>            <C>        <C>         <C>        <C>         <C>         <C>        <C>
Federal             $6,792    $   55         $6,847     $(3,994)    $(3,218)   $(7,212)    $   (56)    $2,505     $2,449

State and local      2,175        (8)         2,167      (1,929)       (447)    (2,376)        445        432        877
                    ------    ------         ------     -------     -------    -------     -------     ------     ------

                    $8,967    $   47         $9,014     $(5,923)    $(3,665)   $(9,588)    $   389     $2,937     $3,326
                    ======    ======         ======     =======     =======    =======     =======     ======     ======
</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, 2000
are as follows:

<TABLE>
<CAPTION>

                                                                                   1998            1999            2000
                                                                                   ----            ----            ----

<S>                                                                              <C>           <C>              <C>
Income taxes (benefit) at the United States statutory rate                       $7,121        $(9,070)         $(37,807)
State and local income taxes                                                      1,414         (1,544)           (2,989)
Amortization of nondeductible intangible assets                                     604            640               561
Valuation allowance increase                                                          0              0            35,993
Nondeductible nonrecurring charges (See Note 11)                                      0              0             6,725
Other - net                                                                        (125)           386               843
                                                                                 ------        -------          --------
Total provision for income tax expense (benefit)                                  9,014         (9,588)            3,326
Income tax benefit from cumulative effect of accounting change                       --          1,948                --
                                                                                 ------        -------          --------
Net provision (benefit) excluding benefit related to cumulative
     effect of accounting change                                                 $9,014        $(7,640)       $   3,326
                                                                                 ======         =======        =========
</TABLE>


      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,
                                                                           --------
                                                                     1999             2000
                                                                     ----             ----
<S>                                                              <C>               <C>
                  Deferred tax assets (liabilities):
                     Allowance for doubtful accounts             $ 15,440          $22,087
                     Accrued expenses and other                     6,090            5,464
                     Loss carryforwards                             1,963           33,765
                     Depreciable assets and other                  (3,122)          (1,662)
                     Intangibles                                  (18,678)         (23,661)
                     Valuation allowance                               --          (35,993)
                                                                 ---------         -------
                  Net deferred tax assets                        $  1,693          $    --
                                                                 =========         =======
</TABLE>


      The evaluation of the realizability of the Company's net deferred tax
assets in future periods is made based upon historical and projected operating
performance and other factors for generating future taxable income, such as
intent and ability to sell assets. At this time, the Company has concluded that
the realization of deferred tax assets is not deemed to be "more likely than
not" and, consequently, established a valuation allowance during the year ended
June 30, 2000 for its net deferred tax asset.

         At June 30, 2000 the Company has net operating loss carryforwards of
$83.5 million for income tax purposes that expire in years 2010 through 2020.
U.S. tax laws limit the annual utilization of tax loss carryforwards of acquired
businesses.



                                       35
<PAGE>   39

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, 2000 are as follows:

FISCAL YEAR ENDING JUNE 30,                         AMOUNT
---------------------------                         ------

2001                                              $  6,026
2002                                                 4,843
2003                                                 3,638
2004                                                 2,247
2005                                                 3,051
Thereafter                                           3,458
                                                    ------
                                                   $23,263
                                                   =======

      Total rent expense under all operating leases for the years ended June 30,
1998, 1999 and 2000 was $6,577, $9,214 and $9,762, respectively.

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 compensation. Effective January 1, 1999 the Company amended the profit
sharing plan to provide for the Company match to be contributed as the Company's
common stock.

      The Company's aggregate contributions to the plan and related expense were
$740, $1,035 and $962 for the years ended June 30, 1998, 1999 and 2000,
respectively.

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 $1,128,
$1,340 and $1,197 was incurred under these leasing arrangements in the years
ended June 30, 1998, 1999 and 2000, respectively.

8. STOCKHOLDERS' EQUITY/CONVERTIBLE SUBORDINATED DEBENTURES

      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 1998, $2,061 of the Company's convertible subordinated
debentures were converted into 204,880 shares of Class A Common Stock. During
fiscal 1999, $2,754 of the Company's convertible subordinated debentures were
converted into 273,707 shares of Class A Common Stock.

         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 1998
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.

      On August 3, 1999 the Company amended its line of credit agreement
entering into several restrictive covenants including a restriction on the
declaration and payment of cash dividends to shareholders.



                                       36
<PAGE>   40

         During fiscal 2000, in connection with an acquisition agreement, the
Company issued a $2,000 convertible subordinated debenture maturing on August
15, 2004. The note and accrued "payment-in-kind" interest will be convertible
into a maximum of 200,000 Class A Common Shares at a conversion price of $8.00
per share.



                                       37
<PAGE>   41

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.

      During fiscal 1995, the Company adopted an Employee Stock Purchase and
Option Plan which authorized 100,000 shares of Class A Common Stock for awards
of stock options to certain key employees. During fiscal 1995 and 1996 the
Company granted 11,520 and 7,458 options, respectively, at an exercise price of
$6.19 and $7.33 per share, respectively, under the provisions of this plan.
These exercise 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 nonqualified stock
options have a term of five years and became 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 and 1999 the Company granted 301,250 and 345,250
nonqualified stock options, respectively, at an exercise price of $20.00 and
$15.00 per share, respectively, the market values of the stock on the dates of
the grant. The fiscal 1997 nonqualified stock options have a term of five years
and become exercisable in thirds on April 1, 1999, 2000 and 2001. The fiscal
1999 non qualified stock options have a term of five years and become
exercisable in thirds on November 1, 2000, 2001, and 2002.

      In October 1998, the Company adopted the 1998 Performance Plan (the
Performance Plan) to provide up to 1,200,000 shares of Class A Common Stock for
awards of incentive and nonqualified options to directors, officers, and key
employees of the Company. During fiscal 1999 the Company granted 85,000
nonqualified stock options at an exercise price of $18.50 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 January 1, 2001,
2002 and 2003. During fiscal 2000 the Company granted 494,250 and 290,500
nonqualified stock options at an exercise price of $4.25 and $1.47 per share
respectively, the market values of the stock on the date of the grants. The
494,250 nonqualified stock options have a term of five years and become
exercisable in thirds on August 1 2001, 2002 and 2003. The 290,500 nonqualified
stock options have a term of five years and become exercisable in halves on
January 28, 2001 and 2002.

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

<TABLE>
<CAPTION>

                                   1998                          1999                              2000
                                   ----                          ----                              ----
                                                 WEIGHTED                       WEIGHTED                         WEIGHTED
                                                  AVERAGE                        AVERAGE                          AVERAGE
                                                 EXERCISE                       EXERCISE                         EXERCISE
                                 OPTIONS           PRICE        OPTIONS           PRICE          OPTIONS           PRICE
                                ---------        --------       --------        --------        --------         --------

<S>                             <C>             <C>            <C>             <C>             <C>              <C>
Outstanding at
  beginning of
  year                            566,825         $  14.74       535,188         $ 14.64         846,694         $ 15.82
Granted                                --               --       430,250           15.69         784,750            3.22
Exercised                          (2,637)            7.49      (73,237)            4.87              --              --
Forfeited                         (29,000)           19.64       (45,507)          18.63        (334,335)          12.32
                                ---------           ------      ---------        -------        ---------          -----
Outstanding at
  end of year                     535,188         $  14.64       846,694          $15.82       1,297,109         $  9.14
                                  -------         ========       -------          ======       ---------         =======
Exercisable at
  end of year                     185,604                        237,872                         266,441
                                 ========                       ========                         =======
</TABLE>

        Information regarding stock options outstanding as of June 30, 2000 is
summarized as follows:

<TABLE>
<CAPTION>
                                        OPTIONS OUTSTANDING                                          OPTIONS EXERCISABLE
            ----------------------------------------------------------------------------      -----------------------------------
                                                                           WEIGHTED
                                                                           AVERAGE
                                    NUMBER               WEIGHTED          REMAINING             NUMBER              WEIGHTED
                RANGE OF         OUTSTANDING AT           AVERAGE         CONTRACTUAL         EXERCISABLE AT          AVERAGE
            EXERCISE PRICES      JUNE 30, 2000        EXERCISE PRICE     LIFE (IN YEARS)      JUNE 30, 2000        EXERCISE PRICE
            ---------------      --------------       --------------     ---------------      --------------       --------------
<S>                               <C>                  <C>                  <C>                   <C>                <C>
            $ 1.47 - $ 1.47          259,250            $  1.47                 4.58                   --            $    --
              4.25 -   7.33          515,085               4.61                 4.22               96,085               6.20
             15.00 -  16.50          261,274              15.29                 2.84               48,652              16.50
             18.50 -  20.00          261,500              19.51                 2.35              121,704              20.00
            ---------------          -------             ------             --------              -------             ------

            $ 1.47 - $20.00        1,297,109            $  9.14                 3.64              266,441            $ 14.39
            ===============        =========            =======             ========            =========            =======
</TABLE>


      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 ranging from .482 to 1.964; and a weighted-average expected option life
ranging from 4 to 4.5 years. The weighted average fair value of options granted
during fiscal 1999 and 2000 was $7.65 and $1.97 per share, respectively.



                                       38
<PAGE>   42


      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 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, 1999 is as follows (in
thousands except for earnings per share information):

<TABLE>
<CAPTION>
                                            1998                 1999                  2000
                                            ----                 ----                  ----
<S>                                  <C>                  <C>                   <C>
Net income (loss) - basic              $    10,876          $   (17,029)          $  (115,577)
Net income (loss) - diluted            $    10,876          $   (17,029)          $  (115,577)
Earnings per share - basic             $      0.57          $     (0.84)          $     (5.36)
Earnings per share - diluted           $      0.56          $     (0.84)          $     (5.36)
</TABLE>

10. ACQUISITIONS

         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 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.

      Certain of the Company's acquisition agreements provide for contingent
purchase price arrangements under which the purchase price paid may be
subsequently increased upon the achievement of specific operating performance
targets during post acquisition periods. The additional purchase price, payable
in cash or Company stock is recorded, if earned, upon resolution of the
contingent factors. The Company issued 2,203,844 shares of Class A Common Stock
valued at $6,833 and a $2,000 convertible subordinated debenture maturing on
August 15, 2004 under contingent purchase price arrangements during fiscal 2000.
As of June 30, 2000, no material contingencies remain from the Company's
acquisition agreements.

      There were no significant acquisitions during the fiscal year ended June
30, 2000 and 1999.

11. SPECIAL AND NONRECURRING CHARGES

      During fiscal 2000, the Company recorded nonrecurring, restructuring and
special charges of $95,800. A special charge of $44,600 was recorded to increase
the allowance for doubtful accounts and nonrecurring, restructuring and other
special charges of $51,200 were recorded in connection with the implementation
and execution of strategic restructuring and consolidation initiatives of
certain operations, the planned disposition of certain non-core and/or
non-strategic assets, impairment of certain assets and other nonrecurring items.

      The special charge to increase the allowance for doubtful accounts
resulted from continuing negative changes observed in industry and customer
trends during the year ended June 30, 2000, and a change in the method of
estimating the allowance necessary for accounts receivable. The financial
condition of the Company's primary customer base and negative industry trends
continued to deteriorate throughout the year. Due to the negative trends that
the Company's customers are facing, management re-evaluated the method of
estimating the allowances necessary for these and other customers. The total
provision for doubtful accounts, including the amounts included in the special
charge, was $53,825 for the year ended June 30, 2000.

      The Company continued its plan of restructuring to consolidate certain
pharmacy sites in order to improve operating efficiencies. During the year ended
June 30, 2000, the Company decided to consolidate thirteen additional pharmacy
sites into either a new or existing location. The Company also decided to
shutdown locations associated with certain ancillary services. During the year
ended June 30, 2000, the Company recorded nonrecurring charges of $9,700 related
to these site consolidations and location shutdowns, inclusive of $1,100 of
additional costs incurred on site consolidations previously announced. As of
June

                                       39
<PAGE>   43

30, 2000 twelve pharmacy sites and six ancillary service locations were
consolidated into either a new or existing location or shutdown. The remaining
site consolidations and location shutdowns were completed as of August 2000.

      During the year ended June 30, 2000, the Company adopted a formal exit
plan to dispose of certain non-core and/or non-strategic assets. The Company
recorded nonrecurring charges of $30,700 related to the planned disposition of
assets primarily consisting of impairment to goodwill and property and
equipment. Total revenue and operating income of the related business units was
$59,300 and $1,500, respectively, for the year ended June 30, 2000. During
April 2000, the Company disposed of two ancillary operations. The carrying
amount of assets held for sale as of June 30, 2000 was $7,600.

      The remaining $10,800 of the nonrecurring charge primarily relates to
severance incurred during the year associated with the Company's expense
reduction initiatives, additional asset impairments, costs related to a
settlement with federal authorities regarding the investigation of the Company's
Indianapolis, Indiana facility and other nonrecurring expenses.

      During December 1999, the Company reached a settlement with the U.S.
Attorney's office in the Southern District of Indiana regarding the federal
investigation of the Company's facility in Indianapolis, Indiana. As a result,
the Company recorded the settlement amount as a nonrecurring charge. Under the
terms of the settlement, the Company paid $4,100 to the U.S. Attorney's office.
The Company also agreed to maintain its current level of spending in connection
with its compliance systems and procedures for a period of three years. If the
Company does not comply with the terms of the accord, an additional $1,500 will
be payable to the U.S. Attorney's office. See Note 13.

      Employee severance costs included in the nonrecurring charges relate to
the termination of 472 employees. As of June 30, 2000, 404 employees have been
terminated.

      Details of the fiscal 2000 nonrecurring, restructuring and special charges
and related activity are as follows:

<TABLE>
<CAPTION>
                                                           Nonrecurring                   Reserve
         Description                     Cash/Non-cash       Charge        Activity      At 6/30/00
         -----------                     -------------       ------        --------      ----------
<S>                                     <C>                   <C>            <C>            <C>
Site Consolidations
     Severance/compensation related          Cash          $  1,300       $ (1,000)      $    300
     Lease terminations                      Cash             2,800           (400)         2,400
     Asset impairments                       Non-cash         4,400         (4,400)            --
     Other                                   Cash             1,200           (600)           600

Special increase to allowance
     for doubtful accounts                   Non-cash        44,600        (44,600)            --

Disposition of Assets

     Asset impairment                        Non-cash        30,200        (30,200)            --
     Other                                   Cash               500          (,200)           300

Other

     Cash                                                     6,600         (6,200)           400
     Non-cash                                                 4,200         (4,200)            --
                                                           --------       --------       --------
Total                                                      $ 95,800       $(91,800)      $  4,000
                                                           ========       ========       ========
</TABLE>

      During the fourth quarter of fiscal 1999 the Company recorded special and
nonrecurring charges of $40,500. A special charge of $32,400 was recorded to
increase the allowance for doubtful accounts, and nonrecurring charges of $8,100
were recorded in connection with the implementation and execution of strategic
restructuring and consolidation initiatives of certain operations and other
nonrecurring items.

      The special charge to increase the allowance for doubtful accounts
resulted from significant changes observed in industry and customer trends
during the last three months of the fiscal year ended June 30, 1999, and items
encountered from recent acquisitions. The circumstances of the customer and
industry trends primarily relate to increased bankruptcies and significant
financial difficulties recently experienced by the Company's customers primarily
as a result of the implementation of the Medicare Prospective Payment System.
The acquisition related items primarily pertain to specific receivable
collectibility issues relating to previous utilization of "legacy" systems, and
other nonrecurring issues which have resulted in potentially uncollectible
accounts receivable.

                                       40
<PAGE>   44

      During the fourth quarter of fiscal 1999, the Company adopted a plan of
restructuring to consolidate certain pharmacy sites in similar geographies. The
plan is a continuation of the plan adopted in fiscal 1998 to combine pharmacies
in close proximity in order to improve operating efficiencies. As a result of
the new exit plan, four additional pharmacy sites were consolidated into either
a new or existing location. During the year ended June 30, 1999, the Company
recorded nonrecurring charges of $4,700 related to the new site consolidations,
inclusive of $200 of additional costs incurred on the site consolidations
announced in the prior year. These costs consist of $2,100 related to employee
severance and other compensation related expenses, $600 related to lease
termination costs and $2,000 related to asset impairments and other
miscellaneous costs.

      The remaining $3,400 of the nonrecurring charge primarily relates to
severance incurred during the fourth quarter of fiscal 1999 associated with the
Company's expense reduction initiatives, additional acquisition related and
other expenses.

      Employee severance costs included in the nonrecurring charge relate to the
termination of 120 employees. As of June 30, 2000 all 120 employees have been
terminated.

      Details of the fourth quarter fiscal 1999 special and nonrecurring charge
and related activity are as follows:

<TABLE>
<CAPTION>
                                                      Nonrecurring                    Reserve                        Reserve
     Description                     Cash/Non-cash      Charge        Activity       At 6/30/99      Activity      At 6/30/00
     -----------                     -------------      ------        --------       ----------      --------      ----------
<S>                                   <C>                 <C>            <C>            <C>            <C>            <C>
Site Consolidations
     Severance/compensation related      Cash          $  2,100       $ (1,500)      $    600       $   (600)      $     --
     Lease terminations                  Cash               600           (100)           500           (400)           100
     Asset impairments                   Non-cash         1,500         (1,500)            --             --             --
     Other                               Cash               500           (500)            --             --             --

Special increase to allowance
     For doubtful accounts               Non-cash        32,400        (32,400)            --             --             --
Other                                    Cash             3,400         (2,700)           700           (500)           200
                                                       --------       --------       --------       --------       --------
Total                                                  $ 40,500       $(38,700)      $  1,800       $ (1,500)      $    300
                                                       ========       ========       ========       ========       ========
</TABLE>


      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 combined pharmacies in close proximity in order to improve
operating efficiencies. As a result of the exit plan, 15 pharmacy sites were
consolidated into either a new or existing location. The Company recorded
nonrecurring charges of $5,300 related to the site consolidations during the
year ended June 30, 1998, 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. All of the employee terminations under the plan have
occurred as of June 30, 2000.

      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 entered into a new $150,000 revolving credit
facility and a $50,000 bridge facility (June 1998 facilities) that replaced the
existing $135,000 revolving credit facility. The June 1998 facilities were
replaced in July 1998 by a $245,000 revolving credit facility. Approximately
$1,300 of the nonrecurring charge relates to the write-off of deferred financing
fees on the $135,000 revolving credit facility and certain financing fees
associated with the June 1998 facilities.

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

      Details of the fourth quarter fiscal 1998 nonrecurring charge and related
activity are as follows:

<TABLE>
<CAPTION>
                                                  Nonrecurring                  Reserve                    Reserve
    Description                    Cash/Non-cash   Charge         Activity     At 6/30/99    Activity    At 6/30/00
    -----------                    -------------   ------         --------     ----------    --------    ----------
<S>                                <C>                 <C>           <C>           <C>           <C>           <C>
Site Consolidations
     Severance packages              Cash          $   500       $  (500)      $    --       $    --       $ --
     Lease terminations              Cash              700          (400)          300          (300)        --
     Asset impairments               Non-cash        3,500        (3,500)           --            --         --
     Other                           Cash              600          (600)           --            --         --
</TABLE>


                                       41

<PAGE>   45

<TABLE>
<CAPTION>
<S>                                <C>            <C>           <C>           <C>           <C>           <C>
Buyout of employment agreements      Cash              900          (800)          100          (100)        --
Write-off financing fees             Non-cash        1,300        (1,300)           --            --         --
Other
  Cash                                               1,000          (900)          100          (100)        --
  Non-Cash                                             400          (400)           --            --         --
                                                   -------       -------       -------       -------       ----
Total                                              $ 8,900       $(8,400)      $   500       $  (500)      $ --
                                                   =======       =======       =======       =======       ====
</TABLE>


                                       42
<PAGE>   46



12. EARNINGS PER SHARE

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

<TABLE>
<CAPTION>
                                                                        1998        1999               2000
                                                                        ----        ----               ----
<S>                                                                 <C>          <C>              <C>
Numerator:
    Numerator for basic earnings per share - net income (loss)      $    11,331  $   (16,325)     $  (114,524)
     Effect of dilutive securities:
        Convertible debentures                                               --           --               --
                                                                    -----------  -----------      -----------

        Numerator for diluted earnings per share                    $    11,331  $   (16,325)     $  (114,524)
                                                                    ===========  ===========      ===========

Denominator:
    Denominator for basic earnings per share -
        weighted average common shares                                   19,100       20,200           21,551
    Effect of dilutive securities:
        Stock options                                                       272           --               --
        Convertible debentures                                               --           --               --
                                                                    -----------  -----------      -----------

    Dilutive potential common shares                                        272           --               --
                                                                    -----------  -----------      -----------

        Denominator for diluted earnings per share                       19,372       20,200           21,551
                                                                    ===========  ===========      ===========

Basic earnings per share:
    Income (loss) before accounting change                          $      0.59  $     (0.66)     $     (5.31)
    Cumulative effect of change in accounting principle                      --        (0.15)              --
                                                                    -----------  -----------      -----------
    Net income (loss) per share                                     $      0.59  $     (0.81)     $     (5.31)
                                                                    ===========  ===========      ===========

Diluted earnings per share:
    Income (loss) before accounting change                          $      0.58  $     (0.66)     $     (5.31)
    Cumulative effect of change in accounting principle                      --        (0.15)              --
                                                                    -----------  -----------      -----------
    Net income (loss) per share                                     $      0.58  $     (0.81)     $     (5.31)
                                                                    ===========  ===========      ===========
</TABLE>

At June 30, 2000, the Company has $102,000 of convertible subordinated
debentures outstanding that are convertible into 3,258,104 shares of Class A
Common Stock and 1,297,109 of employee stock options that are potentially
dilutive that were not included in the computation of diluted earnings per share
as their effect would be antidilutive. At June 30, 1999 the Company has $100,000
of convertible subordinated debentures outstanding that are convertible into
3,058,104 shares of Class A Common Stock and 846,694 of employee stock options
that are potentially dilutive that were not included in the computation of
diluted earnings per share as their effect would be antidilutive. The Company
had $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.

13. CONTINGENCIES

      During December 1999, the Company and NCS HealthCare of Indiana, Inc. (NCS
Indiana), a wholly-owned subsidiary of the Company, reached a tentative
settlement with the U.S. Attorney's office in the Southern District of Indiana
(USA-Indiana) regarding the previously disclosed federal investigation of the
Company's facility in Indianapolis, Indiana. Under the terms of the settlement,
the Company paid $4,100 to the USA-Indiana. The Company also agreed to maintain
its current level of spending in connection with its compliance systems and
procedures for a period of three years. If the Company does not comply with the
terms of the accord, an additional $1,500 will be payable to the USA-Indiana.

      The Company's facility in Herrin, Illinois has been the subject of an
investigation by federal authorities, and the Company has engaged in discussions
with representatives of the U.S. Attorney's office concerning the alleged
violations of federal law at that facility. It is possible that the imposition
of significant fines or other remedies in connection with the Illinois matter
could have a material effect on the Company's financial condition and results of
operations.

                                       43
<PAGE>   47

      On January 21, 2000, the Company reached a settlement related to
litigation with certain selling shareholders of the PharmaSource Group, Inc.
regarding amounts payable under the terms of an earn-out provision in the
acquisition agreement. Under the terms of the tentative settlement, the Company
issued 1,750,000 Class A Common Shares and a $2,000 convertible subordinated
debenture maturing on August 15, 2004. The note and accrued "payment-in-kind"
interest will be convertible into a maximum of 200,000 Class A Common Shares at
a conversion price of $8.00 per share.

                                       44
<PAGE>   48


14. QUARTERLY DATA (UNAUDITED)

      Selected quarterly data for the years ended June 30, 1999 and 2000:

<TABLE>
<CAPTION>
                                                                   YEAR ENDED JUNE 30, 1999
                                                                   ------------------------
                                                  FIRST         SECOND              THIRD           FOURTH
                                                 QUARTER        QUARTER            QUARTER          QUARTER          TOTAL
                                                 -------        -------            -------          -------          -----
<S>                                             <C>             <C>               <C>             <C>             <C>
Revenues                                        $ 172,846       $ 178,030         $ 184,611       $ 182,338       $ 717,825
Gross profit                                       43,856          45,400            47,444          40,578         177,278
Special charge to increase allowance
    for doubtful accounts (c)                          --              --                --          32,384          32,384
Nonrecurring charge (c)                                --              --                --           8,115           8,115
Operating income (loss)                            11,055          11,111            11,354         (36,263)         (2,743)
Cumulative effect of accounting change (b)         (2,921)             --                --              --          (2,921)
Net income (loss)                               $     827       $   3,915         $   3,959       $ (25,026)      $ (16,325)
Earnings per share - basic (a)                  $    0.04       $    0.19         $    0.20       $   (1.23)      $   (0.81)
Earnings per share - diluted (a)                $    0.04       $    0.19         $    0.20       $   (1.23)      $   (0.81)
</TABLE>



<TABLE>
<CAPTION>
                                                                   YEAR ENDED JUNE 30, 2000
                                                                   ------------------------
                                                  FIRST         SECOND              THIRD           FOURTH
                                                 QUARTER        QUARTER            QUARTER          QUARTER          TOTAL
                                                 -------        -------            -------          -------          -----
<S>                                             <C>             <C>               <C>             <C>             <C>
Revenues                                        $ 184,191       $ 179,323         $ 170,462       $ 160,554       $ 694,530
Gross profit                                       40,300          37,424            31,419          28,630         137,773
Special charge to increase allowance (d)
    for doubtful accounts                              --          11,885                --          32,738          44,623
Nonrecurring charge (d)                                --          27,952             5,462          17,722          51,136
Operating income (loss)                             8,260         (34,715)           (4,376)        (54,124)        (84,955)
Net income (loss) (e)                           $   1,528       $ (31,307)        $ (22,938)      $ (61,807)      $(114,524)
Earnings per share - basic (a)                  $    0.08       $   (1.51)        $   (1.03)      $   (2.70)      $   (5.31)
Earnings per share - diluted (a)                $    0.08       $   (1.51)        $   (1.03)      $   (2.70)      $   (5.31)
</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)  Effective July 1, 1998, the Company adopted SOP 98-5, "Reporting on the
     Costs of Start-up Activities." The $2,921 cumulative effect of accounting
     change represents start-up costs, net of tax, that were previously
     capitalized as of June 30, 1998.

(c)  Special and nonrecurring charges of $40,499 before taxes and $24,299 after
     taxes, or $1.20 per both basic and diluted share, were recorded during the
     fourth quarter of 1999. The special charges consists of an increase to the
     allowance for doubtful accounts, and other nonrecurring charges in
     association with the implementation and execution of strategic
     restructuring and consolidation initiatives of certain operations and other
     nonrecurring items. For the year ended June 30, 1999, net income, excluding
     these nonrecurring charges and the cumulative effect of adopting SOP 98-5,
     was $10,895 or $0.54 per both basic and diluted share.

(d)  Nonrecurring, restructuring and special charges of $95,759 were recorded
     during the fiscal year ended June 30, 2000. The charges consist of a
     special charge to increase the allowance for doubtful accounts and
     nonrecurring, restructuring and other special charges associated with the
     continuing implementation and execution of strategic restructuring and
     consolidation activities, the planned disposition of certain non-core
     and/or non-strategic assets, impairment of certain assets and other
     nonrecurring items.

(e)  Net loss for the year ended June 30, 2000 excluding nonrecurring,
     restructuring and special charges and a non-cash charge to record a full
     valuation allowance against the Company's net deferred tax assets was
     $9,505 or $0.44 per basic and diluted share.

                                       45
<PAGE>   49



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 2000 (the "2000
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 2000 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 2000 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 2000 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 2000 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.

                                       46
<PAGE>   50



                                                      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 2000 Consolidated Financial Statements of NCS
                           HealthCare, Inc. and subsidiaries 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

                           No reports on Form 8-K were filed during the quarter
                           ended June 30, 2000.



                                       47
<PAGE>   51



                                   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, 2000

      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
<TABLE>
<S>                                                 <C>
/s/ JON H. OUTCALT                                   Chairman of the Board of Directors
Jon H. Outcalt

/s/ KEVIN B. SHAW                                    President, Chief Executive Officer and Director
Kevin B. Shaw                                        (Principal Executive Officer)

/s/  WILLIAM B. BYRUM                                Chief Operating Officer
William B. Byrum                                     (Principal Executive Officer)

/s/ GERALD D. STETHEM                                Chief Financial Officer
Gerald D. Stethem                                    (Principal Financial Officer)

/s/ A. MALACHI MIXON III
A. Malachi Mixon III                                 Director

/s/ BOAKE A. SELLS
Boake A. Sells                                       Director

/s/ RICHARD L. OSBORNE
Richard L. Osborne                                   Director

Date: September 28, 2000
</TABLE>



                                       48

<PAGE>   52


<TABLE>
<CAPTION>
                                                 INDEX OF EXHIBITS

                                          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
                  among the Company, NCS HealthCare of New York, Inc., Thrift
                  Drug, Inc., Fay's Incorporated and Eckerd Corporation                        (C)

2.7               Asset Purchase Agreement, dated April 10, 1998, among the
                  Company, NCS Acquisition Sub, Inc., Walgreens Advance Care,
                  Inc. and Walgreen Co. Incorporated and Eckerd Corporation                    (D)

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 (C)

* 10.3            Aberdeen Group, Inc. 1995 Amended and Restated Employee Stock
                  Purchase and Option Plan (C)
</TABLE>


                                      E-1
<PAGE>   53

<TABLE>
<CAPTION>

                                              SEQUENTIAL
EXHIBIT NO.                                   DESCRIPTION                               PAGE
-----------                                   -----------                               ----
<S>              <C>                                                                 <C>
* 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)

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,        (G)
                  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             (G)
                  and KeyBank national Association regarding Capital Markets
                  Bridge Facility

10.14             Amendment No. 1, dated as of July 13, 1998, to the Credit             (G)
                  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

10.15             Amendment No. 2, dated March 3, 1999, to the Credit Agreement         (H)
                  dated as of June 1, 1998 among the Company and the Lenders
                  named therein, NBD Bank and National City Bank, as co-agents,
                  and KeyBank National Association , as a Lender, the Swing Line
                  Lender, the Letter of Credit Issuer and as Administrative
                  Agent

10.16             Amendment No. 3, dated August 3, 1999, to the Credit Agreement        (I)
                  dated as of June 1, 1998 among the Company and the Lenders
                  named therein, NBD Bank and National City Bank, as co-agents,
                  and KeyBank National Association , as a Lender, the Swing Line
                  Lender, the Letter of Credit Issuer and as Administrative
                  Agent

10.17             Security Agreement, dated August 3, 1999, among the Company,          (I)
                  its subsidiaries and KeyBank National Association

*10.18            Separation Agreement, effective June 11, 1999, between                (I)
                  Jeffrey R. Steinhilber and the Company
</TABLE>

                                      E-2
<PAGE>   54



21.1              Subsidiaries of the Company

23.0              Consent of Independent Auditors

27.1              Financial Data Schedule

*        Management contract or compensatory plan or arrangement

(A)      Incorporated herein by reference to the appropriate exhibit to the
         Company's Current Report in Form 8-K, dated August 1, 1996 (File No.
         0-027602).

(B)      Incorporated herein by reference to the appropriate exhibit to the
         Company's Current Report on Form 8-K, dated August 15, 1996 (File No.
         0- 027602).

(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).

(G)      Incorporated herein by reference to the appropriate exhibit to the
         Company's Annual Report on Form 10-K for the year ended June 30, 1998.

(H)      Incorporated herein by reference to the appropriate exhibit to the
         Company's Quarterly Report on Form 10-Q for the quarterly period ended
         March 31, 1999.

(I)      Incorporated herein by reference to the appropriate exhibit to the
         Company's Annual Report on Form 10-K for the year ended June 30, 1999.

                                      E-3