10-K

   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      
                  [NO FEE REQUIRED, EFFECTIVE OCTOBER 7, 1996]     
                  [X] FOR THE FISCAL YEAR ENDED JUNE 30, 1997

                                       OR

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

                         COMMISSION FILE NUMBER 0-27602

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

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

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

         Registrant's telephone number, including area code: (216) 514-3350

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

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

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

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

         As of June 30, 1997, the registrant had 11,313,638 shares of Class A
Common Stock, par value $.01 per share, and 6,742,742 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 $384,958,595 (based
upon the closing price of $30.375 per share of Class A Common Stock on the
NASDAQ National Market on June 30, 1997). For purposes of this calculation, the
registrant deems the 97,185 shares of Class A Common Stock and the 5,285,661
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 1997 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, 1997.


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                              NCS HEALTHCARE, INC.
                        1997 ANNUAL REPORT ON FORM 10-K

                                TABLE OF CONTENTS



                                     PART I

                                                                                      
ITEM 1.        BUSINESS                                                                      1
ITEM 2.        PROPERTIES                                                                   11
ITEM 3.        LEGAL PROCEEDINGS                                                            12
ITEM 4.        SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                          12
ITEM 4A.       EXECUTIVE OFFICERS OF THE COMPANY                                            13

                                     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                     
ITEM 8.        FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                  20
ITEM 9.        CHANGES IN AND DISAGREEMENTS WITH AUDITORS ON ACCOUNTING AND
               FINANCIAL DISCLOSURE                                                         36

                                    PART III

ITEM 10.       DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY                              36
ITEM 11.       EXECUTIVE COMPENSATION                                                       36
ITEM 12.       SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT               36
ITEM 13.       CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                               36

                                     PART IV

ITEM 14.       EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K             37



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                                     PART I

ITEM 1. BUSINESS

GENERAL

         NCS HealthCare, Inc. (the "Company" or "NCS") is a leading independent
provider of pharmacy services to long-term care institutions including skilled
nursing facilities, assisted living facilities and other institutional health
care settings. The Company purchases and dispenses prescription and
non-prescription pharmaceuticals and provides client facilities with related
management services, automated medical record keeping, drug therapy evaluation
and regulatory assistance. The Company also provides a broad array of ancillary
health care services to complement its core pharmacy services, including
infusion therapy, physical, speech and occupational therapies and nutrition
management 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, 1997, the Company had completed a total of 37 acquisitions
(other than fold-in acquisitions) including 22 acquisitions since the beginning
of fiscal 1997. As a result of these acquisitions, the Company has expanded its
geographic presence into 23 states serving approximately 152,000 residents.

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

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

MARKET OVERVIEW

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

         Based on data from industry sources, the Company estimates that the
U.S. market for pharmacy services (including consulting services and related
supplies) in long-term care facilities exceeded $3.5 billion in 1994. The
Company believes that the market is growing due primarily to two factors. First,
the number of long-term care facility residents is rising as a result of both
demographic trends and pressures faced by acute care hospitals to discharge
patients at earlier stages of recovery. According to the U.S. Bureau of the
Census, the number of persons over age 75 increased by approximately 30% from
1980 to 1990. In 1990, 6.1% of the population 




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ages 75 to 84 and 24.5% of the population ages 85 or older received care in
long-term care facilities. The segment of the population over age 85, which
comprises the largest percentage of residents at long-term care facilities, is
the fastest growing segment of the population and is expected to increase by
more than 40% from 1990 to 2000.

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

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

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

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

                  ABILITY TO SERVE MULTI-SITE CUSTOMERS AND MANAGED CARE PAYORS.
         As a result of their ability to serve long-term care customers with
         several physical locations, larger pharmacies possess a significant
         competitive advantage over their smaller counterparts. Additionally,
         the Company believes that there are significant opportunities for
         full-service institutional pharmacies with a comprehensive range of
         services and regional coverage to provide a spectrum of health care
         products and services to managed care payors.

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

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


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BUSINESS STRATEGY

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

                  ACQUISITION AND DEVELOPMENT PROGRAM. NCS is continuing its    
         aggressive acquisition program to capitalize on consolidation
         opportunities in the institutional pharmacy market. As of June 30,
         1997, the Company had completed 37 acquisitions (other than fold-in
         acquisitions), including 22 acquisitions since the beginning of fiscal
         1997. In addition, the Company completed 27 fold-in acquisitions in
         fiscal 1997. Through consolidation, the Company believes it can
         achieve substantial economies of scale in areas such as drug
         purchasing and can create efficiencies by consolidating administrative
         functions, centralizing formulary management, providing management
         information systems support and otherwise streamlining operations. In
         addition, by identifying areas in which acquired companies outperform
         NCS and standardizing these "best practices" Company-wide, the Company
         strives to provide its customers with the highest quality services
         possible.

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

SERVICES

         The Company has traditionally provided institutional pharmacy and
infusion products and services to long-term care facility residents. In recent
years, NCS has developed an array of services which address the needs of
long-term care facilities to accommodate higher acuity admissions and manage
costs. NCS believes that it is one of the few companies capable of offering
customers the depth and breadth of these products and services. For the year
ended June 30, 1997, approximately 75% of the Company's revenues were derived
from providing pharmacy and consultant pharmacy services to long-term care
facilities. An additional 7% of revenues were derived from providing infusion
therapy services, 3% were derived from providing other therapies and the
remaining 15% were primarily derived from providing various other products and
services, including nutrition management, oxygen and Medicare Part B.

         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, 1997, the Company provided its services from 52 sites in 23 states. NCS
also provides its services through the management of third party institutional
pharmacies.



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

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

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

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

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

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

         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 



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health upon admission and monitor progress and outcomes using data on drug usage
as well as dietary, physical therapy and social service inputs; (iii) counseling
related to appropriate drug usage and implementation of drug protocols; (iv)
on-site educational seminars for the long-term care facilities' staff on topics
such as drug information relating to clinical indications, adverse drug
reactions, drug protocols and special geriatric considerations in drug therapy,
information and training on intravenous drug therapy and updates on OBRA and
other regulatory compliance issues; (v) mock regulatory reviews for nursing
staffs; and (vi) nurse consultant services and consulting for dietary, social
services and medical records.

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

         OTHER THERAPIES. In 1993, the Company began providing physical, speech
and occupational therapy services. The Company currently provides these services
to residents of 62 long-term care facilities.

         NUTRITION MANAGEMENT. NCS assists long-term care facilities in menu
planning, purchasing and managing their dietary operations. Because the food
service area is typically one of the principal areas of regulatory violations,
this is an area of critical concern to long-term care facility operators.
Currently, NCS provides this service to over 185 long-term care facility
customers.

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

FORMULARY MANAGEMENT

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

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



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reimbursement information. The Company believes that adherence to the NCS
formulary guidelines improves drug therapy results, lowers costs for residents
and strengthens the Company's purchasing power with pharmaceutical
manufacturers.

ACQUISITION PROGRAM

         The Company intends to continue to pursue a strategy of growth through
acquisitions. Between 1986 and June 30, 1997, NCS completed 37 acquisitions
(other than fold-in acquisitions), including 22 acquisitions since the beginning
of fiscal 1997. The Company believes that through consolidation of other
institutional pharmacies it can provide a broad array of high quality pharmacy
and related services in a cost effective manner. Acquisition and effective
integration can result in efficiencies in service delivery, management,
marketing, information systems and administrative functions, substantial
increases in purchasing leverage, particularly with respect to drug purchases,
the ability to provide a broad range of ancillary services complementary to the
Company's core pharmacy services and the geographic scope necessary to service
multi-facility customers and market to managed care payors.

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

         NCS typically targets three classes of entities for acquisition, each
with its distinct economic profile and opportunities for value creation. The
first class of acquisitions consists of larger institutional pharmacies located
in markets not currently served by NCS. These acquisitions give the Company an
immediate point of entry into a new geographic market and provide a regional hub
for distribution. The second class consists of smaller companies that are
located near a current hub. These "fold-in" acquisitions are usually
consolidated with the larger hub, increasing market share without increasing
overhead. The third class consists of those companies that offer service
extension opportunities.

MANAGEMENT INFORMATION SYSTEMS

         The Company has developed a proprietary management information system,
Concord, which it employs as a pharmacy and information management system. Many
institutional pharmacy companies utilize noncustomized information systems with
limited capabilities while other companies maintain multiple systems as a result
of acquisitions of companies with different systems. NCS developed Concord to
integrate and support the Company's locations and achieve customer specific
functionality and flexibility while retaining the ability to generate
standardized information for use by the Company. NCS believes that by developing
a customized and uniform system, it is better able to provide detailed
information to its customers and third party payors. Concord provides the
Company's pharmacists with computerized access to medication administration
records, physician order sheets and treatment records for each long-term care
facility resident. Concord also improves the pharmacists' control over the
review of prescriptions for safety and the dispensing of patient doses by giving
pharmacists access to data regarding drug interactions and contraindications,
providing patient medication profiles and providing updated information on
allergies which the pharmacist can use to calculate accurately dosages for drugs
that have a high potential for toxicity and therefore cannot be given in
standard doses. Concord also is an integral part of the implementation of the
Company's bar code system. The Company believes that Concord's computerized
documentation system, in combination with NCS's unit dose drug delivery and bar
coding systems, result in greater 



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efficiency in nursing time, improved control, reduced waste in the facility and
lower error rates in both dispensing and administration. These benefits enhance
drug efficacy and result in fewer drug-related adverse consequences.

         In addition, Concord captures patient charges, manages drug purchasing
and coordinates formulary management, financial reporting and controls and work
flow analysis. The Company believes that through its centralized information
systems, "best practices" are more easily identified and standardized and
acquisitions are more readily integrated. NCS intends to use Concord's ability
to compile utilization, cost and outcome data as a competitive advantage in
marketing to managed care companies.

         Concord has been developed over a period of five years and is supported
by sixteen on-site programmers, a full-time corporate management information
system staff of 86 employees and several outside consultants. As of June 30,
1997, 11 of the Company's largest distribution facilities, representing
approximately 31% of the Company's pharmacy revenues, had been converted to
Concord. The Company has recently completed development of Concord DX, the
second generation of the Company's proprietary Concord system. Concord DX
combines features of NCS's Concord technology with those of the Rescot Systems
Group (acquired in January 1997). Concord DX has been developed to provide
customers with time savings and the ability to access the Company's pharmacy
information systems. NCS On-Line, a key feature of Concord DX, has been designed
to provide customers with the ability to reorder "on-line," view and print
various on-line reports and obtain other time saving information. The Company
believes that access to both clinical and financial information is a key factor
in improving care and managing costs. The Company also believes that this system
will facilitate a unified NCS culture through improved site-to-site
communication and will enhance the Company's ability to deliver high quality,
standardized services throughout its geographic market.

SALES AND MARKETING

         In marketing to existing customers, NCS has organized the selling
efforts of each formerly independent location into a single sales force
consisting of 39 field service representatives, four sales managers and six
internal sales personnel. All field sales representatives are trained in each of
the Company's products and services and sell these services throughout their
respective geographic territories. A typical territory consists of approximately
250 long-term care facilities, and the salesperson follows an eight week call
cycle. These individuals are paid base salaries with commissions comprising up
to 75% of a successful salesperson's compensation. The Company believes that
long-term care facilities change institutional pharmacies fairly infrequently,
but when a change is made, it is generally the result of a competitor's ability
to offer better service or a broader array of products and services.

PURCHASING

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

CUSTOMERS

         At June 30, 1997, NCS had contracts to provide services to
approximately 152,000 residents in 23 states. These contracts, as is typical in
the industry, are generally for a period of one year but are terminable by
either party for any reason upon thirty days' written notice. As of June 30,
1997, no individual customer or market group represents more than 5% of the
total sales of the Company's institutional pharmacy business.

           

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COMPETITION

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

REIMBURSEMENT AND BILLING

         As is generally the case for long-term care facility services, NCS
receives payments through reimbursement from Medicaid and Medicare programs and
directly from individual residents (private pay), private third-party insurers
and long-term care facilities. For the fiscal year ended June 30, 1997, the
Company's payor mix was approximately 36% Medicaid, 4% Medicare, 18% private
pay, 9% third party insurance and other and 33% long-term care facilities,
including amounts for which the long-term care facility receives reimbursement
under Medicare Part A. Medicare and Medicaid are highly regulated. The failure
of NCS and/or its client institutions to comply with applicable reimbursement
regulations could adversely affect the Company's business.

         PRIVATE PAY. For those residents who are not covered by
government-sponsored programs or private insurance, NCS generally bills the
patient or the patient's insurer or other responsible party on a monthly basis.
Depending upon local market practices, NCS may alternatively bill private
residents through the long-term care facility. Pricing for private pay residents
is 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. Medicaid programs are funded jointly by the federal government and
individual states and are administered by the states. The reimbursement rates
for pharmacy services under Medicaid are determined on a state-by-state basis
subject to review by the Health Care Financing Administration and applicable
federal law. Federal regulations and the regulations of certain states establish
"upper limits" for reimbursement for prescription drugs under Medicaid. In most
states pharmacy services are priced at the lower of "usual and customary"
charges or cost (which generally is defined as a function of average wholesale
price and may include a profit percentage) plus a dispensing fee. In addition,
most states establish a fixed dispensing fee which is adjusted to reflect
associated costs on an annual or less frequent basis.

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

         MEDICARE. The Medicare program is a federally funded and administered
health insurance program for individuals age 65 and over or for certain
individuals who are disabled. The Medicare program consists of two parts:
Medicare Part A, which covers, among other things, inpatient hospital, skilled
long-term care facility, home health care and certain other types of health care
services; and Medicare Part B, which covers physicians' services, outpatient
services and certain items and services provided by medical suppliers. Medicare
Part B also covers a limited number of specifically designated prescription
drugs. Medicare Part A requires long-term care 



                                       8
   12


facilities to submit all of their costs for patient care, including
pharmaceutical costs, in a unified bill. Thus, fees for pharmaceuticals provided
to Medicare Part A patients are paid to the Company by the long-term care
facility on a monthly basis. Pricing is consistent with that of private pay
residents or is set between private pay rates and Medicaid minimums. Medicare
Part A has a cost-sharing arrangement under which beneficiaries must pay a
portion of their costs. These non-covered co-payments are billed by the facility
directly to residents or the state Medicaid plan, as the case may be.

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

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

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

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 Medicaid or Medicaid
patients, must be 


                                       9
   13



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

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

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

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

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

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

         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 was originally
enacted in 1977 and amended in 1987, and 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 



                                       10
   14


state court decisions interpreting these statutes are limited, but have
generally construed the statutes to apply if "one purpose" of remuneration is to
induce referrals or other conduct within the 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.
Currently, there are no procedures for obtaining binding interpretations or
advisory opinions from the OIG on the application of the federal anti-kickback
statute to an arrangement or its qualification for a Safe Harbor upon which the
Company can rely. However, on August 21, 1996, the President signed into law the
Health Insurance Portability and Accountability Act of 1996 ("HIPAA"). Beginning
January 1, 1997, the Secretary of Health and Human Services will be required
under the HIPAA to issue written advisory opinions regarding the applicability
of certain aspects of the anti-kickback statute to specific arrangements or
proposed arrangements. Advisory opinions will be binding as to the Secretary and
the party requesting the opinion.

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

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

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

        General. In the ordinary course of its business, the Company is subject
to inspections, audits, inquiries and similar actions by governmental
authorities responsible for enforcing the laws and regulations to which the
Company is subject. In January 1997, governmental authorities requested
information from the Company in connection with an audit and investigation of
the circumstances surrounding the apparent drug-related homicide of a
non-management employee of one of the Company's pharmacies. The information
provided relates to the Company's inventory and the possible theft of
controlled substances from this pharmacy. The Company has cooperated fully with
the investigation. In addition, the Company has conducted an internal review
which identified inadequacies in record keeping and inventory control at this
pharmacy. In a meeting with the governmental authorities in August 1997, the
Company discussed its findings and those of the government and documented
corrective measures taken by the Company. The regulatory authorities have not
advised the Company as to what, if any, enforcement action they intend to take
with respect to this matter. The Company has also reviewed its procedures at
other pharmacies and believes that this matter represents an isolated incident.

EMPLOYEES

         As of June 30, 1997, the Company had approximately 2,350 full-time
employees. None of the employees are represented by a union. The Company
considers relations with its employees to be good.

ITEM 2. PROPERTIES

         The Company presently maintains its executive offices in approximately
6,000 square feet of space in Beachwood, Ohio pursuant to a lease expiring in
2000 with an 



                                       11
   15


unaffiliated third party. NCS currently considers this space to be sufficient 
for its corporate headquarters operations.

         As of June 30, 1997, the Company leased or owned 68 properties in 23
states with a total square footage of 543,000 square feet ranging in size from
approximately 700 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 ten years and, in some cases, include options to extend. For information
concerning the Company's rental obligations, see Note 5 (Operating Leases) of
the Notes to Consolidated Financial Statements, which is set forth at Item 8 
to this Form 10-K Annual Report.

ITEM 3. LEGAL PROCEEDINGS

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

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

         None.



                                       12
   16



ITEM 4A. EXECUTIVE OFFICERS OF THE COMPANY*

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



NAME                                       AGE             POSITION
- ----                                       ---             --------

                                                     
Jon H. Outcalt                              61             Chairman of the Board of Directors
Kevin B. Shaw                               40             President, Chief Executive Officer and
                                                           Director
Phyllis K. Wilson                           56             Executive Vice President and Director
Jeffrey R. Steinhilber                      40             Senior Vice President and Chief Financial Officer
Norman D. Leibow                            65             Senior Vice President
William B. Byrum                            53             Vice President - Corporate Development
Marvin R. Richardson                        40             Senior Vice President - Sales and Marketing
Patrick Morris                              37             Senior Vice President
A. Malachi Mixon III                        57             Director
James B. Naylor                             43             Director
Richard L. Osborne                          59             Director
Boake A. Sells                              60             Director


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


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

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

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

         Jeffrey R. Steinhilber, Senior Vice President and Chief Financial
Officer of the Company, joined NCS in August 1994. From 1988 to July 1994, Mr.
Steinhilber was the Chief Financial Officer of Austin Powder Company. He is a
graduate of Duke University (B.A.) and Northwestern Graduate School of Business
(M.B.A.).

         Norman D. Leibow, Senior Vice President of the Company since 1986, was
the founder of Modern Pharmacy Consultants, which was acquired by the Company in
1986. He is past President of the Ohio State Board of Pharmacy and served on the
Board from 1984 to 1992. Mr. Leibow graduated from Ohio State University with a
B.S. in Pharmacy.

         William B. Byrum, Vice President--Corporate Development of the Company,
joined the Company in September 1995. From April 1993 to September 1995, Mr.
Byrum was President and Chief Executive Officer of Corinthian Healthcare
Systems, Inc., 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 


                                       13
   17


in various management positions. Mr. Byrum is a graduate of Purdue University
with a B.S. in Pharmacy.

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

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

         A. Malachi Mixon III, a Director of the Company since December 1994,
has been the Chief Executive Officer and 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.).

         James B. Naylor, a Director of the Company since 1986, has been the
President of Federal Process Corporation, a manufacturer and distributor of
industrial products, since July 1993. From August 1986 to October 1995, Mr.
Naylor was Executive Vice President of Aberdeen Group, Inc. and from November
1986 to July 1995, he was Vice President of Modern Pharmacy Consultants. He was
formerly with Booz, Allen & Hamilton, Inc. and with Invacare Corporation, a
leading worldwide manufacturer and distributor of home health care products. Mr.
Naylor is a graduate of Dartmouth 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 the University of Iowa (B.A.) and the
Harvard Graduate School of Business (M.B.A.).



                                       14
   18



                                     PART II

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

         The Class A Common Stock is traded on the Nasdaq National Market under
the symbol NCSS. The Class A Common Stock was initially offered to the public on
February 14, 1996 at a price of $16.50 per share and commenced trading on The
two Nasdaq Stock Market, Inc. on that date. The following table sets forth, for
the two fiscal years ended June 30, 1997, the high and low sale prices per share
for the Class A Common Stock, as reported on the Nasdaq National Market. These
prices do not include retail markups, markdowns or commissions.



                                                    HIGH            LOW
                                                    ----            ---
                                                              
1996
Third Quarter (from February 19, 1996)              $26.50       $20.00
Fourth Quarter                                       34.50        24.50

1997
First Quarter                                        34.88        23.25
Second Quarter                                       35.00        26.00
Third Quarter                                        35.25        22.25
Fourth Quarter                                       30.50        19.25


         On July 31, 1997, the last sale price of the Class A Common Stock as
reported by Nasdaq was $28.125 per share. As of July 31, 1997, there were
approximately 267 holders of record of the Class A Common Stock.

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

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

(a) On April 7, 1997 the Company issued 9,519 shares of its Class A Common Stock
to five stockholders in connection with the acquisition of Loomis Enterprises,
Inc. Exemption from registration is claimed under Section 4(2) of the
Securities Act.

(b) On May 1, 1997 the Company issued 13,186 shares of its Class A Common Stock 
to one stockholder in connection with the acquisition of certain assets of RX
Express Pharmacy Services, Inc. Exemption from registration is claimed under
Section 4(2) of the Securities Act.

(c) On May 5, 1997 the Company issued 19,202 shares of its Class A Common Stock
to three stockholders in connection with the acquisition of certain assets of
Advanced RX Services, Inc. Exemption from registration is claimed under Section
4(2) of the Securities Act.

(d) On May 28, 1997 the Company issued 179,281 shares of its Class B Common
Stock to three stockholders in connection with the merger of HLF Adult Home
Pharmacy Corp. Exemption from registration is claimed under Section 4(2) of the
Securities Act.

(e) On May 30, 1997 the Company issued 206,441 shares of its Class B Common
Stock to two stockholders in connection with the merger of Look Drug Stores,
Inc. Exemption from registration is claimed under Section 4(2) of the
Securities Act.

(f) On June 13, 1997 the Company issued 106,757 shares of its Class A Common
Stock to one stockholder in connection with the conversion of a Non-Negotiable
8% Convertible Promissory Note Exemption from registration is claimed under
Section 3(a)(9) of the Securities Act.

(g) On June 23, 1997 the Company issued 65,812 shares of its Class A Common
Stock to one shareholder in connection with the conversion of a Non-Negotiable
8% Convertible Promissory Note. Exemption from registration is claimed under
Section 3(a)(9) of the Securities Act.


                                       15
   19



ITEM 6. SELECTED FINANCIAL DATA



                                                                              YEAR ENDED JUNE 30,
                                                         1993           1994           1995         1996           1997
                                                         ----           ----           ----         ----           ----
                                                            (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

                                                                                                  
STATEMENT OF INCOME DATA:
Revenues                                               $ 33,620       $ 48,205       $ 65,602     $ 113,281      $ 275,040
Cost of revenues                                         24,646         34,288         46,570        82,415        205,536
                                                        -------        -------        -------     ---------      ---------
Gross profit                                              8,974         13,917         19,032        30,866         69,504
Selling, general and
  administrative expenses                                 7,037         10,531         14,539        22,236         51,153
Special compensation (1)                                     -               -              -         2,811              -
                                                        -------        -------        -------     ---------      ---------
Operating income                                          1,937          3,386          4,493         5,819         18,351
Interest expense (income), net                              428            525          1,089         1,611         (1,576)
                                                        -------        -------        -------     ---------      ---------
Income before income taxes                                1,509          2,861          3,404         4,208         19,927
Income tax expense                                          696          1,327          1,536         1,852          8,655
                                                        -------        -------        -------     ---------      ---------
Net income                                              $   813        $ 1,534        $ 1,868     $   2,356      $  11,272
                                                        =======        =======        =======     =========      =========

Net income per share                                    $  0.13        $  0.24        $  0.28      $   0.26      $    0.70
                                                        =======        =======        =======     =========      =========
Shares used in the computation                            6,303          6,424          6,764         8,971         16,191
                                                        =======        =======        =======     =========      =========




                                                                              YEAR ENDED JUNE 30,
                                                          1993           1994          1995          1996           1997
                                                          ----           ----          ----          ----           ----
                                                                                (IN THOUSANDS)

                                                                                                        
BALANCE SHEET DATA:
Cash and cash equivalents                                $  577        $   384        $   286      $ 21,460       $  8,160
Working capital                                           1,383          5,920         10,616        48,336         53,164
Total assets                                              8,651         15,556         38,595       110,668        321,030
Long-term debt, excluding
  current portion                                         1,575          4,608         18,505         1,961          8,043
Convertible subordinated
  debentures                                                  -              -          1,900         6,549          4,813
Stockholders' equity                                      1,426          4,173          8,117        91,100        253,226


(1)      Represents a one-time, non-recurring charge in connection with the
         termination of certain compensation arrangements with the prior owners
         of certain acquired businesses. See "Management's Discussion and
         Analysis of Financial Condition and Results of Operations."



                                       16
   20
ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS


RESULTS OF OPERATIONS

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



                                                                  YEAR ENDED JUNE 30,
                                                           ----------------------------------
                                                            1995           1996          1997
                                                            ----           ----          ----

                                                                               
Revenues                                                   100.0%        100.0%         100.0%
Cost of revenues                                            71.0          72.8           74.7
                                                           -----         -----          -----
Gross margin                                                29.0          27.2           25.3
Selling, general and administrative expenses                22.1          19.6           18.6
Special compensation                                          --           2.5             --
                                                           -----         -----          -----
Operating income                                             6.9           5.1            6.7
Interest expense (income), net                               1.7           1.4           (0.6)
                                                           -----         -----          -----
Income before income taxes                                   5.2           3.7            7.3
Income tax expense                                           2.3           1.6            3.2
                                                           -----         -----          -----
Net income                                                   2.9%          2.1%           4.1%
                                                           =====         =====          =====


         Years Ended June 30, 1997 and 1996

         Revenues for the year ended June 30, 1997 increased 142.7% to $275.0
million from $113.3 million for the year ended June 30, 1996. The increase in
revenues over the prior fiscal year is primarily attributable to two factors:
the Company's acquisition program and internal growth. Of the $161.7 million
increase in revenues for the year ended June 30, 1997, $107.7 million was due to
the acquisitions of Advanced Rx Services, Inc. in July 1996, IPAC Pharmacy,
Inc., Medical Arts Pharmacy, Northside Pharmacy Inc., Med-Equip, Thrifty Medical
Supply, Inc. and Thrifty Medical of Tulsa L.L.C. in August 1996, Hudson Pharmacy
of Wichita, Inc. in September 1996, Spectrum Health Services, Inc. in October
1996, Clinical Health Systems in November 1996, Rescot Systems Group, Inc., W.P.
Malone, Inc., Long Term Care Pharmacy Services and Eakles Drug Store, Inc. in
January 1997, Pharmacare, Advanced Pharmaceutical Services, Inc. and Dahlin
Pharmacy, Inc. in February 1997, Stoll Services, Inc., Cooper Hall Pharmacy,
Inc., Hammer Incorporated, Daven Drug, and Medi-Centre Pharmacy in March 1997,
Vanguard Labs, Inc. in April 1997, Long Term Care, Inc. in May 1997 and Look
Drug Store, Inc. and HLF Adult Home Pharmacy in June 1997. In addition, $34.9
million of the increase in revenues is attributable to revenues for the fiscal
year ended June 30, 1997 including a full period of operations for fiscal 1996
acquisitions. These fiscal 1996 acquisitions include Corinthian Healthcare
Systems, Inc., acquired in September 1995, The Apothecary, Inc. acquired in
November 1995, DeMoss Rexall Drugs, Inc., acquired in December 1995, Care Plus
Pharmacy acquired in April 1996, Uni-Care Health Services Inc. and Uni-Care
Health Services of Maine acquired in May 1996, and Family Care Nursing Home
Service, Inc. and Care Unlimited, Inc. acquired in June 1996. Internal growth
accounted for $19.1 million of the increase in revenues as the Company's
existing operations continued to grow through marketing efforts to new and
existing clients, increased drug utilization of long-term care facility
residents, and the growth and integration of new and existing products and
services. The total number of beds serviced by the Company as of June 30, 1997
increased 141.3% to 152,000 beds, from 63,000 beds at June 30, 1996.







                                      17




   21
         Cost of revenues for the year ended June 30, 1997 increased $123.1
million or 149.4% to $205.5 million from $82.4 million for the year ended June
30, 1996. Cost of revenues as a percentage of revenues for the year ended June
30, 1997 increased to 74.7% from 72.8% for the year ended June 30, 1996. The
increase in cost of revenues as a percentage of revenues was primarily the
result of two factors; acquisitions and a change in the State of Pennsylvania
Medicaid reimbursement rates. First, at the time of acquisition, the gross
margins of the acquired companies are typically lower than the Company as a
whole. This is the result of several factors, including less advantageous
purchasing terms, lack of formulary management and higher production costs.
Second, during the second quarter of fiscal 1996, the State of Pennsylvania
changed the reimbursement methodology under the State Medicaid program which
resulted in a lower reimbursement percentage for Company's sites located in
Pennsylvania.

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

         Special compensation of $2.8 million for the year ended June 30, 1996
represents a one-time, non-recurring charge resulting from the termination of
compensation and performance incentive arrangements with the prior owners of
certain acquired businesses.

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

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

Years Ended June 30, 1996 and 1995

         Revenues for the year ended June 30, 1996 rose $47.7 million or 72.7%
to $113.3 million from the $65.6 million recorded in the comparable period of
1995. This increase is attributable to $35.9 million of revenues generated by
acquisitions and $11.8 million of revenues relating to internal growth.

         Cost of revenues for the year ended June 30, 1996 grew to $82.4 million
from $46.6 million for the year ended June 30, 1995, representing an increase of
$35.8 million or 76.8%. Cost of revenues as a percentage of revenues increased
to 72.8% for the year ended June 30, 1996 from 71.0% for the year ended June 30,
1995. The increase in cost of revenues was primarily the result of acquisitions.
At the time of acquisition, the cost of revenues as a percentage of revenues of
the acquired companies was generally higher as a result of several factors,
including less advantageous purchase contracts, lack of formulary management and
higher production costs.

         Selling general and administrative expenses for the year ended June 30,
1996 was $22.2 million compared to $14.5 million for the year ended June 30,
1995, representing an increase of $7.7 million or 53.1%. Selling, general and
administrative expenses as a percentage of revenues decreased from 22.1% for the
year ended June 30, 1995 to 19.6% for the year ended June 30, 1996. The increase
in selling, general and administrative expenses in absolute terms was mainly
attributable to acquisitions completed since June 30, 1995. The decrease in
percentage terms was due to the relatively fixed nature of corporate general and
administrative expenses.

         Special compensation of $2.8 million for the year ended June 30, 1996
represents a one-time, non-recurring charge in connection with the termination
of certain compensation and performance incentive arrangements with the prior
owners of certain acquired businesses.



















         Operating income for the year ended June 30, 1996 was $5.8 million
compared to operating income of $4.5 million for the year ended June 30, 1995.
Excluding the one-time, non-recurring charge described above, operating income
for the year ended June 30, 1996 was $8.6 million or a 91.1% increase over the
$4.5 million for the year ended June 30, 1995. This improvement reflects
increased sales volume and the continued benefit of the Company's operating
leverage which is due to the higher rate of growth in revenues and gross profit
than in general and administrative expenses. As a percentage of total revenues,
operating income, excluding the one-time, non-recurring charge, increased to
7.6% for the year ended June 30, 1996 form 6.9% for the year ended June 30,
1995.

Liquidity and Capital Resources

         Net cash provided by (used in) operating activities was $1.3 million,
$(2.1) million and $8.3 million in 1995, 1996 and 1997, respectively. Cash
provided by operating activities increased during 1997 due to increased
profitability and an increase in trade accounts payable and accrued expenses.
The increase in accrued expenses resulted primarily from an increase in accrued
expenses associated with new acquisitions and the timing of payment of certain
accruals. These cash flow increases were offset by increases in trade accounts
receivable and inventory. Cash provided by operating activities decreased during
1996 primarily due to an increase in trade accounts receivable and a decrease
in accounts payable.
                                      18
   22
         Net cash used in investing activities increased from $16.7 million in
1995 to $26.8 million in 1996 to $150.0 million in 1997. The increase is
primarily the result of acquisitions, as well as an increase in capital
expenditures.

         The Company made capital expenditures of $2.8 million in 1995, $4.7
million in 1996 and $9.9 million in 1997. The increase is primarily attributable
to purchases of computer and information systems equipment, computer software,
furniture and fixtures at a new facility in Eastlake, Ohio, leasehold
improvements and medication carts for new and existing customers.

         Net cash provided by financing activities increased from $15.3 million
in 1995 to $50.0 million in 1996 to $128.4 million in 1997. The increase 
during 1997 is primarily the result of funds received from a secondary public
offering completed by the Company on October 4, 1996. The increase during 1996
is primarily the result of funds received from an initial public offering
completed by the Company on February 14, 1996.

The Company's future cash requirements and cash flow expectations are
closely related to its expansion plans. The Company generally expects to meet
future financing needs principally through proceeds from the issuance of
convertible subordinated debentures and bank borrowings. The Company has
executed a purchase agreement to sell up to $115 million of convertible
subordinated debentures (debentures) due 2004. The debentures carry an interest
rate of 5 3/4% and are convertible into Class A Common Stock. The Company
currently has the ability to borrow up to $30 million under a demand bank note
and is in the process of negotiating a new $150 million credit facility. This
proposed credit facility, which may be secured by a pledge of the stock of the
Company's subsidiaries, is subject to satisfactory completion of the lenders'
due diligence, negotiation of a definitive credit agreement and other
conditions precedent. There can be no assurance that these conditions will be
satisfied or as to the timing of any new credit facility. The Company believes
that its cash and available sources of capital, including funds anticipated to
be available under the new credit facility and the proceeds from the sale of
the debentures, will be sufficient to meet its normal operating requirements
and acquisition needs through June 30, 1999.

The Company's effective tax rates were 45.1%, 44.0% and 43.4% for 1995, 1996 and
1997, respectively. The tax rates differ from the federal statutory rate
primarily as a result of state and local income taxes and the non-deductibility
of certain acquisition costs.

Factors That May Affect Future Results

Except for historical financial information contained in this Form 10-K, the
statements made in this report are forward-looking statements. Factors that may
cause actual results to differ materially from those in the forward-looking
statements include the availability and cost of attractive acquisition
candidates, continuation of various trends in the long-term care market
(including the trend toward consolidation), competition among providers of
long-term care pharmacy services, the availability of capital for acquisitions
and capital requirements, changes in regulatory requirements and reform of the 
health care delivery system and other factors.



                                      19
   23


ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

         None.

ITEM  8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 
                                                                                     
Financial Statements
Report of Independent Auditors........................................................    21
Consolidated Balance Sheets at June 30, 1996 and 1997.................................    22
Consolidated Statements of Income for each of the three years in the period ended June    
  30, 1997............................................................................    24
Consolidated Statements of Stockholders' Equity for each of the three years in the        
  period ended June 30, 1997..........................................................    25
Consolidated Statements of Cash Flows for each of the three years in the period ended     
  June 30, 1997.......................................................................    26
Notes to Consolidated Financial Statements............................................    27







                                      20





   24
 
                         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, 1996 and 1997, and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the three years in the period ended June 30, 1997. 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, 1996 and 1997, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended June 30, 1997, in conformity with generally
accepted accounting principles.
 
                                               Ernst & Young LLP



August 1, 1997                                 
Cleveland, Ohio
 

                                      21
   25
 
                     NCS HEALTHCARE, INC. AND SUBSIDIARIES
 
                          CONSOLIDATED BALANCE SHEETS
                    (IN THOUSANDS, EXCEPT SHARE INFORMATION)
 
                                     ASSETS
 


                                                                               JUNE 30,
                                                                         ---------------------
                                                                           1996         1997
                                                                         --------     --------
                                                                                
CURRENT ASSETS
  Cash and cash equivalents............................................  $ 21,460     $  8,160
  Trade accounts receivable, less allowance for doubtful accounts of
     $3,629 and $13,275 as of June 30, 1996 and 1997...................    27,762       70,476
  Inventories..........................................................     7,487       22,281
  Deferred income taxes................................................     1,644        5,582
  Prepaid expenses.....................................................       840          988
                                                                         --------     --------
          Total current assets.........................................    59,193      107,487
PROPERTY, PLANT AND EQUIPMENT
  Land.................................................................        64           78
  Building.............................................................     1,334        1,606
  Machinery, equipment and vehicles....................................     8,632       17,937
  Computer equipment...................................................     4,759       10,133
  Furniture, fixtures and leasehold improvements.......................     4,544       11,074
                                                                         --------     --------
                                                                           19,333       40,828
  Less accumulated depreciation and amortization.......................     9,050       17,519
                                                                         --------     --------
                                                                           10,283       23,309
Goodwill, less accumulated amortization of $1,041 and $5,119 as of June
  30, 1996 and 1997....................................................    39,101      180,723
Other assets, less accumulated amortization of $367 and $888 as of June
  30, 1996 and 1997....................................................     2,091        9,511
                                                                         --------     --------
TOTAL ASSETS...........................................................  $110,668     $321,030
                                                                         ========     ========

 
                             See accompanying notes
 


                                      22
   26
 
                     NCS HEALTHCARE, INC. AND SUBSIDIARIES
 
                          CONSOLIDATED BALANCE SHEETS
                    (IN THOUSANDS, EXCEPT SHARE INFORMATION)
 
                      LIABILITIES AND STOCKHOLDERS' EQUITY
 


                                                                               JUNE 30,
                                                                         ---------------------
                                                                           1996         1997
                                                                         --------     --------
                                                                                
CURRENT LIABILITIES
  Line of credit.......................................................  $     --     $ 10,285
  Trade accounts payable...............................................     4,968       15,054
  Accrued compensation and related expenses............................     2,813       12,332
  Other accrued expenses...............................................     2,275       15,249
  Current portion of long-term debt....................................       801        1,403
                                                                         --------     --------
          Total current liabilities....................................    10,857       54,323
Long-term debt, excluding current portion..............................     1,961        8,043
Convertible subordinated debentures....................................     6,549        4,813
Other long-term liabilities............................................       201          625
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; 5,560,492 and 11,313,638
      shares issued and outstanding at June 30, 1996 and 1997,
      respectively.....................................................        56          113
     Class B -- 20,000,000 shares authorized; 6,603,228 and 6,742,742
      shares issued and outstanding at June 30, 1996 and 1997,
      respectively.....................................................        66           67
  Paid-in capital......................................................    84,907      235,703
  Retained earnings....................................................     6,071       17,343
                                                                         --------     --------
                                                                           91,100      253,226
                                                                         --------     --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.............................  $110,668     $321,030
                                                                         ========     ========

 
                             See accompanying notes
 


                                      23
   27
 
                     NCS HEALTHCARE, INC. AND SUBSIDIARIES
 
                       CONSOLIDATED STATEMENTS OF INCOME
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)
 


                                                                     YEAR ENDED JUNE 30,
                                                              ---------------------------------
                                                                1995        1996         1997
                                                              -------     --------     --------
                                                                              
Revenues....................................................  $65,602     $113,281     $275,040
Cost of revenues............................................   46,570       82,415      205,536
                                                              -------     --------     --------
Gross profit................................................   19,032       30,866       69,504
Selling, general and administrative expenses................   14,539       22,236       51,153
Special compensation........................................       --        2,811           --
                                                              -------     --------     --------
Operating income............................................    4,493        5,819       18,351
Interest expense............................................   (1,089)      (2,282)      (1,143)
Interest income.............................................       --          671        2,719
                                                              -------     --------     --------
Income before income taxes..................................    3,404        4,208       19,927
Income tax expense..........................................    1,536        1,852        8,655
                                                              -------     --------     --------
Net income..................................................  $ 1,868     $  2,356     $ 11,272
                                                              =======     ========     ========
Earnings per share data:
Earnings per common share...................................  $  0.28     $   0.26     $   0.70
                                                              =======     ========     ========
Weighted average number of common shares outstanding........    6,764        8,971       16,191
                                                              =======     ========     ========

 
                             See accompanying notes
 


                                      24
   28
 
                     NCS HEALTHCARE, INC. AND SUBSIDIARIES
 
                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                    (IN THOUSANDS, EXCEPT SHARE INFORMATION)
 


                                        CLASS A    CLASS B
                                        COMMON     COMMON     PAID-IN      RETAINED     STOCKHOLDERS'
                                        STOCK      STOCK      CAPITAL      EARNINGS        EQUITY
                                        ------     ------     --------     --------     -------------
                                                                         
Balance at July 1, 1994...............   $ --       $ 57      $  2,269     $  1,847       $   4,173
Issuance of 7,467 shares of Class A
  Common Stock for purchases of
  businesses and 323,247 shares of
  Class B Common Stock................      1          3         2,072           --           2,076
Net income............................     --         --            --        1,868           1,868
                                         ----       ----      --------      -------        --------
Balance at June 30, 1995..............      1         60         4,341        3,715           8,117
Issuance of 7,461 shares of Class A
  Common Stock........................     --         --            57           --              57
Exercise of stock options (890,333
  shares of Class B Common Stock).....     --          9         3,366           --           3,375
Conversion of 263,167 shares of Class
  B Common Stock to 263,167 shares of
  Class A Common Stock................      3         (3)           --           --              --
Issuance of 4,476,000 shares of Class
  A Common Stock......................     45         --        67,039           --          67,084
Issuance of 124,088 shares of Class A
  Common Stock for purchases of
  businesses..........................      1         --         1,835           --           1,836
Conversion of convertible subordinated
  debentures (682,309 shares of Class
  A Common Stock).....................      6         --         8,269           --           8,275
Net income............................     --         --            --        2,356           2,356
                                         ----       ----      --------      -------        --------
Balance at June 30, 1996..............     56         66        84,907        6,071          91,100
Issuance of 4,235,000 shares of Class
  A Common Stock......................     42         --       123,584           --         123,626
Issuance of 1,099,369 shares of Class
  A Common Stock and 385,722 shares of
  Class B Common Stock for business
  combinations........................     11          3        25,478           --          25,492
Conversion of 246,208 shares of Class
  B Common Stock to 246,208 shares of
  Class A Common Stock................      2         (2)           --           --              --
Conversion of convertible subordinated
  debentures (172,569 shares of Class
  A Common Stock).....................      2         --         1,734           --           1,736
Net income............................     --         --            --       11,272          11,272
                                         ----       ----      --------      -------        --------
Balance at June 30, 1997..............   $113       $ 67      $235,703     $ 17,343       $ 253,226
                                         ====       ====      ========      =======        ========

 
                             See accompanying notes
 


                                      25
   29
 
                     NCS HEALTHCARE, INC. AND SUBSIDIARIES
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)
 


                                                                           YEAR ENDED JUNE 30,
                                                                  -------------------------------------
                                                                    1995          1996           1997
                                                                  --------      --------      ---------
                                                                                     
OPERATING ACTIVITIES
Net income.....................................................   $  1,868      $  2,356      $  11,272
Adjustments to reconcile net income to net cash provided by
  (used in) operating activities:
  Special compensation.........................................         --         2,811             --
  Depreciation and amortization................................      1,222         3,217          8,885
  Provision for doubtful accounts..............................        530           841          1,325
  Other........................................................         57            --             --
  Deferred income taxes........................................       (557)           11          1,147
  Changes in assets and liabilities, net of effects of assets
    and liabilities acquired:
       Trade accounts receivable...............................     (3,240)       (8,834)       (22,932)
       Inventories.............................................        262           109         (3,796)
       Trade accounts payable..................................        293        (2,069)         2,447
       Accrued expenses........................................      1,283          (239)         9,762
       Prepaid expenses and other..............................       (390)         (260)           162
                                                                  --------      --------      ---------
Net cash provided by (used in) operating activities............      1,328        (2,057)         8,272
INVESTING ACTIVITIES
Capital expenditures for property, plant and equipment.........     (2,832)       (4,701)        (9,893)
Proceeds from sales of property, plant and equipment...........         37            40            247
Purchases of businesses........................................    (13,919)      (19,983)      (137,080)
Other..........................................................         --        (2,172)        (3,237)
                                                                  --------      --------      ---------
Net cash used in investing activities..........................    (16,714)      (26,816)      (149,963)
FINANCING ACTIVITIES
Proceeds from issuance of long-term debt.......................        847            --            159
Repayment of long-term debt....................................     (5,060)       (3,398)        (5,679)
Borrowings on line-of-credit...................................     26,500        31,400         34,236
Payments on line-of-credit.....................................     (9,000)      (48,900)       (23,951)
Proceeds from convertible subordinated debentures..............         --         5,000             --
Proceeds from issuance of common stock and exercise of stock
  options......................................................      2,001        68,878        123,626
Other..........................................................         --        (2,933)            --
                                                                  --------      --------      ---------
Net cash provided by financing activities......................     15,288        50,047        128,391
                                                                  --------      --------      ---------
Net (decrease) increase in cash and cash equivalents...........        (98)       21,174        (13,300)
Cash and cash equivalents at beginning of period...............        384           286         21,460
                                                                  --------      --------      ---------
Cash and cash equivalents at end of period.....................   $    286      $ 21,460      $   8,160
                                                                  ========      ========      =========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
  Interest.....................................................   $  1,008      $  2,282      $   1,116
                                                                  ========      ========      =========
  Income taxes.................................................   $  2,192      $  1,724      $   6,925
                                                                  ========      ========      =========

 
                             See accompanying notes
 


                                      26
   30
 
                     NCS HEALTHCARE, INC. AND SUBSIDIARIES
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                FOR THE YEARS ENDED JUNE 30, 1995, 1996 AND 1997
                    (IN THOUSANDS, EXCEPT SHARE INFORMATION)
 
1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
DESCRIPTION OF BUSINESS
 
     NCS HealthCare, Inc. (the Company) operates in one business segment
providing a broad range of health care services primarily to long-term care
institutions including skilled nursing facilities, assisted living facilities 
and other institutional health care settings. The Company purchases and
dispenses prescription and non-prescription pharmaceuticals and provides client
facilities with related management services, automated medical record keeping,
drug therapy evaluation and regulatory assistance. The Company also provides a
broad array of ancillary health care services to complement its core pharmacy
services, including infusion therapy, physical, speech and occupational
therapies and nutrition management.
 
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 reimbursement sources
and reports such revenues at the net realizable amount expected to be received
from these third-party payers.
 
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 11%
of the June 30, 1997 net inventory balance and by using the first-in, first-out
(FIFO) method for the remaining 89%. If the FIFO inventory valuation method had
been used, inventories would have been $585 and $627 higher at June 30, 1996 and
1997, 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:
 
                                                     
            Building.............................................      30   years
            Machinery, equipment and vehicles....................  5 - 10   years
            Computer equipment...................................   3 - 5   years
            Furniture, fixtures and leasehold improvements.......  3 - 10   years

            
 
     Depreciation expense was $1,051, $2,197 and $4,347 for the years ended June
30, 1995, 1996 and 1997, respectively.
 


                                      27
   31
 
                     NCS HEALTHCARE, INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
                    (IN THOUSANDS, EXCEPT SHARE INFORMATION)
 
1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

GOODWILL
 
     The Company has classified as goodwill the cost, in excess of fair value,
of the net assets acquired in purchase transactions. Goodwill is being amortized
over 30-year periods using the straight-line method.
 
     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.
 
INCOME TAXES
 
     The Company follows Statement of Financial Accounting Standards No. 109,
Accounting for Income Taxes. This accounting standard requires that the
liability method be used in accounting for income taxes. Under this accounting
method, deferred tax assets and liabilities are determined based on the
differences between the financial reporting basis and the tax basis of assets
and liabilities and are measured using the enacted tax rates and laws that apply
in the periods in which the deferred tax asset or liability is expected to be
realized or settled.
 
STOCK OPTIONS
 
     The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations in accounting for its employee stock options because, as
discussed in Note 9, the alternative fair value accounting provided under FASB
Statement No. 123, "Accounting for Stock-Based Compensation," (SFAS No. 123)
requires use of option valuation models that were not developed for use in
valuing employee stock options. Under APB 25, because 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
 
     Earnings per share are computed based on the weighted average number of
Class A and B shares and common stock equivalents outstanding, which gives
retroactive effect to the stock split as discussed below. Common stock
equivalents include stock options outstanding as discussed in Note 9. Stock
options granted within a twelve-month period preceding the Company's initial
public offering in February, 1996 are included as if they were outstanding for
all periods presented prior to the Company's initial public offering, using the
treasury stock method (at the initial public offering price of $16.50 per
share).
 
     On December 13, 1995, the Board of Directors approved an amendment to the
Company's Certificate of Incorporation to effect a corporate recapitalization,
including a 46-for-1 stock split of the Class A Common Stock and Class B Common
Stock. All share and per share information included in the accompanying
financial statements have been retroactively adjusted to give effect to the
stock split.
 
     In February 1997, the Financial Accounting Standards Board issued Statement
No. 128 "Earnings Per Share" (SFAS No. 128), which is required to be adopted on
December 31, 1997. At that time, the Company will be required to change the
method currently used to compute earnings per share and restate all prior
periods. Under the new requirements for calculating basic (primary) earnings per
share, the dilutive effect of stock options will be excluded. The effect of the
adoption of SFAS No. 128 will not materially change earnings per share as
reported for the year ended June 30, 1997.
 


                                      28
   32
 
                     NCS HEALTHCARE, INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
                    (IN THOUSANDS, EXCEPT SHARE INFORMATION)
 
1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

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.
 
2.  LINE OF CREDIT
 
     As of June 30, 1997 the Company had $10,285 outstanding under a line of
credit arrangement with a bank, bearing interest at prime (8.50% at June 30,
1997). Subsequent to June 30, 1997, these borrowings were refinanced with a $30
million demand bank note bearing interest at a variable rate based on LIBOR
(6.325% at July 31, 1997).
 
3.  LONG-TERM DEBT
 
     Long-term debt consists of the following:
 


                                                                                 JUNE 30,
                                                                            ------------------
                                                                              1996       1997
                                                                            -------     ------
                                                                                  
Notes payable to former owners of acquired companies maturing through
  December, 2004, at interest rates ranging from 5% to prime plus 2%
  (10.50% at June 30, 1997)...............................................   $1,410     $7,552
2% note payable to Pennsylvania Industrial Development Authority due in
  monthly installments through June, 2001, and secured through an interest
  in a building of the Company............................................      612        582
Collateralized lease obligations with interest ranging from 6% to 13% due
  monthly through October, 2000...........................................      405        557
Other.....................................................................      335        755
                                                                             ------     ------
Total long-term debt......................................................    2,762      9,446
Less current portion......................................................      801      1,403
                                                                             ------     ------
Long-term debt, excluding current portion.................................   $1,961     $8,043
                                                                             ======     ======

 
     The aggregate maturities of the long-term debt for each of the five years
subsequent to June 30, 1997 are as follows:
 


          YEAR ENDING JUNE 30,            AMOUNT
- ----------------------------------------  ------
                                       
     1998...............................  $1,403
     1999...............................   3,541
     2000...............................   3,729
     2001...............................      99
     2002...............................      45
     Thereafter.........................     629
                                          ------
                                          $9,446
                                          ======

 

                                      29
   33
 
                     NCS HEALTHCARE, INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
                    (IN THOUSANDS, EXCEPT SHARE INFORMATION)
 
4.  INCOME TAX EXPENSE
 
     Income tax expense (benefit) for each of the three fiscal years ended June
30, 1997 consists of:
 


                                 1995                              1996                              1997
                    -------------------------------   -------------------------------   -------------------------------
                    CURRENT     DEFERRED     TOTAL    CURRENT     DEFERRED     TOTAL    CURRENT     DEFERRED     TOTAL
                    -------     --------     ------   -------     --------     ------   -------     --------     ------
                                                                                      
Federal...........  $1,537       $ (466)     $1,071   $1,439       $    8      $1,447   $5,614       $  887      $6,501
State and local...     556          (91)        465      402            3         405    1,894          260       2,154
                    ------       ------      ------   ------       ------      ------   ------       ------      ------
                    $2,093       $ (557)     $1,536   $1,841       $   11      $1,852   $7,508       $1,147      $8,655
                    ======       ======      ======   ======       ======      ======   ======       ======      ======

 
     Reconciliations of income taxes at the United States Federal statutory rate
to the effective income tax rate for the three years ended June 30, 1997 are as
follows:
 


                                                                1995       1996       1997
                                                               ------     ------     ------
                                                                            
     Income taxes at the United States statutory rate........  $1,157     $1,473     $6,974
     State and local income taxes............................     238        221      1,231
     Goodwill amortization...................................      49        203        521
     Tax exempt interest.....................................      --        (81)       (13)
     Other -- net............................................      92         36        (58)
                                                               -------    -------    -------
                                                               $1,536     $1,852     $8,655
                                                               =======    =======    =======

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


                                                                     JUNE 30,
                                                                 -----------------
                                                                  1996       1997
                                                                 ------     ------
                                                                      
            Deferred tax assets (liabilities):
              Allowance for doubtful accounts..................  $  780     $4,537
              Accrued expenses and other.......................   1,190      2,137
              Depreciable assets and other.....................    (330)      (134)
              Intangibles......................................       4       (958)
                                                                 -------    -------
            Net deferred tax assets............................  $1,644     $5,582
                                                                 =======    =======

 
5.  OPERATING LEASES
 
     The Company is obligated under several operating leases primarily for
office facilities and equipment. Future minimum lease payments under
noncancelable operating leases as of June 30, 1997 are as follows:
 


          YEAR ENDING JUNE 30,            AMOUNT
- ----------------------------------------  ------
                                       
1998....................................  $2,520
1999....................................   2,069
2000....................................   1,561
2001....................................     832
2002....................................     468
Thereafter..............................   1,722
                                          ------
                                          $9,172
                                          ======

 
     Rent expense for the years ended June 30, 1995, 1996 and 1997 was $600,
$1,196 and $2,338, respectively.
 


                                      30
   34
 
                     NCS HEALTHCARE, INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
                    (IN THOUSANDS, EXCEPT SHARE INFORMATION)
 
6.  PROFIT-SHARING PLAN
 
     The Company maintains a profit sharing plan with an Internal Revenue Code
Section 401(k) feature covering substantially all of its employees. Under the
terms of the plan, the Company will match up to 20% of the first 10% of eligible
employee contributions.
 
     The Company's aggregate contributions to the plan and related expense were
$94, $192 and $437 for the years ended June 30, 1995, 1996 and 1997,
respectively.
 
7.  RELATED PARTY TRANSACTIONS
 
     The Company leases 15 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 $32, $559
and $1,004 was paid under these leasing arrangements in the years ended June 30,
1995, 1996 and 1997, respectively.
 
8.  STOCKHOLDER'S EQUITY
 
     On February 14, 1996, the Company issued 4,476,000 shares of Class A Common
Stock at $16.50 per share in connection with an initial public offering. A
portion of the net proceeds from the stock issuance were used to repay
approximately $27,000 of outstanding indebtedness under long and short-term
borrowings.
 
     On October 4, 1996, the Company completed a public offering of 4,235,000
shares of Class A Common Stock at $31 per share. The offering raised
approximately $123,600 (net of underwriting discounts and expenses). A portion
of the net proceeds from the stock issuance was used to repay approximately
$7,000 of outstanding indebtedness under short-term borrowings.
 
     Holders of Class A Common Stock and holders of Class B Common Stock are
entitled to one and ten votes, respectively, in corporate matters requiring
approval of the shareholders of the Company. No dividend may be declared or paid
on the Class B Common Stock unless a dividend of equal or greater amount is
declared or paid on the Class A Common Stock.
 
     The Company had issued and outstanding at June 30, 1995, $1,900 of 8%
convertible subordinated debentures, due in 1997, which are convertible into
188,952 shares of Class A Common Stock. During the year ended June 30, 1996, the
Company issued an additional: $7,000 of 8% convertible subordinated debentures,
due in 1998, which are convertible into 696,140 shares of Class A Common Stock,
$925 of 7% convertible subordinated debentures, due in 1998, which are
convertible into 91,990 shares of Class A Common Stock; and $5,000 of 10%
convertible subordinated debentures, due in 1996, which are convertible into
356,499 shares of Class A Common Stock. During fiscal 1996, $1,900 of 8%
convertible subordinated debentures due in 1997, $1,375 of 8% convertible
subordinated debentures due in 1998, and $5,000 of 10% convertible subordinated
debentures due in 1996 were converted into 682,309 shares of Class A Common
Stock. During fiscal 1997, $1,736 of 8% convertible subordinated debentures due
in 1998 were converted into 172,569 shares of Class A Common Stock. In July
1997, $1,135 of 8% convertible subordinated debentures due in 1998 were
converted into 112,890 shares of Class A Common Stock.
 
9.  STOCK OPTIONS
 
     During the period from 1987 through 1995, the Company granted stock options
to certain directors and key employees which provide for the purchase of
1,054,890 common shares in the aggregate, at exercise prices ranging from $0.71
to $6.19 per share, which represented fair market values on the dates the grants
were made. For options granted in 1987 with a tax-offset cash bonus feature, the
Company recognized compensation expense of $320 in fiscal 1995 and $175 for the
year ended June 30, 1996. During the year ended June 30, 1996, options were
exercised for the purchase of 890,333 shares of Class B Common Stock.
 


                                      31
   35
 
                     NCS HEALTHCARE, INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
                    (IN THOUSANDS, EXCEPT SHARE INFORMATION)
 
9.  STOCK OPTIONS (CONTINUED)
     During fiscal 1995, the Company adopted an Employee Stock Purchase and
Option Plan. Under the terms and provision of this plan, the Company authorized
100,000 shares of Class A Common Stock and granted options to certain key
employees for the purchase of a total of 18,984 common shares at exercise prices
ranging from $6.19 to $7.33 per share, which prices represented fair market
values on the dates the grants were made.
 
     In January 1996, the Company adopted a Long Term Incentive Plan (the Plan)
to provide up to 700,000 shares of Class A Common Stock for awards of incentive
and nonqualified stock options to officers and key employees of the Company.
During fiscal 1996 the Company granted 56,500 nonqualified stock options and
27,540 incentive stock options, all at $16.50 per share, the price at the
initial public offering. The nonqualified stock options have a term of five
years and become exercisable in thirds on February 1, 1998, 1999 and 2000. The
incentive stock options have a term of six years and become exercisable in
fifths of each year on February 1, 1997, 1998, 1999, 2000 and 2001. During
fiscal 1997 the Company granted 301,250 nonqualified stock options at an
exercise of $20.00 per share, the market value of the stock on the date of the
grant. These nonqualified stock options have a term of five years and become
exercisable in thirds on April 22, 1998, 1999 and April 23, 2000. In addition,
all the nonqualified stock options will not vest unless the trading price of the
Company's Class A Common Stock reaches certain targeted levels.
 
     The Company's stock option activity and related information for the years
ended June 30 is summarized as follows:
 


                                                         1995                  1996                 1997
                                                 --------------------   ------------------   ------------------
                                                             WEIGHTED             WEIGHTED             WEIGHTED
                                                             AVERAGE              AVERAGE              AVERAGE
                                                  OPTIONS    EXERCISE   OPTIONS   EXERCISE   OPTIONS   EXERCISE
                                                  (000'S)     PRICE     (000'S)    PRICE     (000'S)    PRICE
                                                 ---------   --------   -------   --------   -------   --------
                                                                                     
Outstanding at beginning of year...............  1,054,890    $ 1.87    183,541    $ 5.71    267,581    $ 9.10
Granted........................................     18,984      6.64     84,040     16.50    301,250     20.00
Exercised......................................   (890,333)     1.18         --        --         --        --
Forfeited......................................         --        --         --        --     (2,000)    16.50
                                                 ---------     -----    -------    ------    -------    ------
Outstanding at end of year.....................    183,541    $ 5.71    267,581    $ 9.10    566,831    $14.87
                                                 =========     =====    =======    ======    =======    ======
Exercisable at end of year.....................     43,343               67,367               96,567
                                                 =========              =======              =======

 
     The weighted average fair value of options granted during fiscal 1996 and
1997 was $7.56 and $8.31 per share, respectively. Exercise prices for options
outstanding as of June 30, 1997 ranged from $16.50 to $20.00 for the options
granted in fiscal 1996 and 1997, and from $4.09 to $7.33 for the options granted
during the period from 1987 through 1995. The weighted-average remaining
contractual life of those options is 4.6 years for the options granted during
the fiscal years 1996 and 1997, and 5.5 years for the options granted during the
fiscal years 1987 through 1995.
 
     Pro forma information regarding net income and earnings per share is
required by SFAS No. 123, and has been determined as if the Company had
accounted for its employee stock options under the fair value method of that
Statement. The fair value for these options was estimated at the date of grant
using a Black-Scholes option pricing model with the following weighted average
assumptions: risk-free interest rates of 6.00%; a dividend yield of 0.00%; a
volatility factor of the expected market price of the Company's Class A Common
Stock of .482; and a weighted-average expected option life of 4 years.
 
     The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the
 


                                      32
   36
 
                     NCS HEALTHCARE, INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
                    (IN THOUSANDS, EXCEPT SHARE INFORMATION)
 
9.  STOCK OPTIONS (CONTINUED)

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.
 
     Because the effect of applying SFAS No. 123's fair value method to the
Company's stock options results in net income and earnings per share that are
not materially different from amounts reported in the consolidated statements of
income, pro forma information has not been provided. The effects of applying
SFAS No. 123 for providing pro forma disclosures are not likely to be
representative of the effects on reported net income for future years.
 
10.  ACQUISITIONS
 
     During fiscal 1995, the Company completed acquisitions including TeleRx,
Inc. in Detroit, Michigan, Hunsicker's Pharmacy, Long-Term Care Division, Inc.
and Hunsicker's HealthCare, Inc. in Souderton, Pennsylvania, Laurel Extended
Care Pharmacy, Inc. in Ebensburg, Pennsylvania, and Quality HealthCare of
Indiana in Indianapolis, Indiana.
 
     During fiscal 1996, the Company acquired Corinthian Healthcare Systems,
Inc. located in Indiana, The Apothecary, Inc. in Scranton, Pennsylvania, Demoss
Rexall Drugs, Inc. in Evansville, Indiana, Valu Pharmacy, Inc. (d/b/a/ Care Plus
Pharmacy) in Decatur, Illinois, Uni-Care Health Services, Inc. in Londonderry,
New Hampshire and Uni-Care Health Services of Maine, in Wells, Maine, Family
Care Nursing Home Service, Inc. and Care Unlimited, Inc. in Herrin, Illinois.
 
     Significant acquisitions completed by the Company during fiscal 1997
include Advanced Rx Services, Inc. in Northfield, New Jersey, IPAC Pharmacy,
Inc. in Portland, Oregon, Medical Arts Pharmacy in Grand Rapids, Michigan,
Northside Pharmacy, Inc. and Thrifty Medical Supply, Inc. in Oklahoma City,
Oklahoma, Thrifty Medical of Tulsa L.L.C. in Tulsa, Oklahoma, Hudson Pharmacy of
Wichita, Inc. in Wichita, Kansas, Spectrum Health Services, Inc. in Tampa,
Florida, Clinical Health Systems in Vancouver, Washington, Rescot Systems Group,
Inc. in Philadelphia, Pennsylvania, W.P. Malone, Inc. in Arkadelphia, Arkansas,
Long Term Care Pharmacy Services in East Greenwich, Rhode Island, Eakles Drug
Store, Inc. in Hagerstown, Maryland, Pharmacare in Glendale, California,
Advanced Pharmaceutical Services, Inc. in Tujunga, California, Dahlin Pharmacy,
Inc. in Paramount, California, Stoll Services, Inc. in Modesto, California,
Cooper Hall Pharmacy, Inc. in Mount Pleasant, South Carolina, Hammer
Incorporated in Des Moines, Iowa, Daven Drug in Los Angeles, California,
Medi-Centre Pharmacy in Lansing, Michigan, Vangard Labs, Inc. in Glasgow,
Kentucky, Long Term Care, Inc. in Williston, Vermont, Look Drug Store, Inc. in
Kaukauna, Wisconsin and HLF Adult Home Pharmacy in Rochester, New York.
 
     The Look Drug Store, Inc. and HLF Adult Home Pharmacy acquisitions were
accounted for as pooling of interests transactions, however the impact of these
transactions on the Company's historical financial statements is not
significant; consequently, prior period financial statements have not been
restated for these
 
                                      33
   37
\ 
                     NCS HEALTHCARE, INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
                    (IN THOUSANDS, EXCEPT SHARE INFORMATION)
 
10.  ACQUISITIONS (CONTINUED)

transactions. All other acquisitions have been accounted for as purchase
transactions. The following table summarizes the aggregate purchase price for
all businesses acquired:
 


                                                                       YEAR ENDED JUNE 30,
                                                                 ------------------------------
                                                                  1995       1996        1997
                                                                 -------    -------    --------
                                                                              
     Cash......................................................  $13,919    $19,983    $137,080
     Convertible debentures....................................    1,900      7,925          --
     Debt......................................................      545         --       3,804
     Class A Common Stock......................................       75      1,836      25,492
                                                                 -------    -------    --------
     Total.....................................................  $16,439    $29,744    $166,376
                                                                 =======    =======    ========

 
     The convertible subordinated debentures bear interest at 7%-8% and are
convertible into Class A Common Stock at $10.06 per share.
 
     Effective September 30, 1995, the company terminated certain compensation
arrangements with the prior owners of certain acquired businesses which resulted
in special compensation expense and a related increase in debt of $2,811.
 
     The results of operations of all businesses acquired have been included in
the consolidated financial statements of the Company from the dates of the
respective acquisitions. All of the businesses acquired provide substantially
similar services as the existing company.
 
     Unaudited pro forma data as though the Company had completed its initial
and secondary public offerings and had purchased all businesses at the beginning
of each of the fiscal years ended June 30, 1996 and 1997 are set forth below:
 


                                                                           1996*        1997
                                                                          --------    --------
                                                                                
     Revenues...........................................................  $318,751    $359,188
     Net income.........................................................     7,047      12,072
     Earnings per share.................................................      0.40        0.67

 
     * Includes a one time nonrecurring charge of $2,811 in connection with the
       termination of certain compensation arrangements with the prior owners of
       certain acquired businesses.
 
11.  QUARTERLY DATA (UNAUDITED)
 
     Selected quarterly data for the years ended June 30, 1996 and 1997:
 


                                                            YEAR ENDED JUNE 30, 1996
                                              -----------------------------------------------------
                                               FIRST      SECOND      THIRD     FOURTH
                                              QUARTER*    QUARTER    QUARTER    QUARTER     TOTAL*
                                              --------    -------    -------    -------    --------
                                                                            
     Revenues...............................  $ 22,428    $27,599    $30,209    $33,045    $113,281
     Gross profit...........................     6,216      7,825      8,012      8,813      30,866
     Operating income (loss)................    (1,294)     2,096      2,396      2,621       5,819
     Net income (loss)......................    (1,049)       725      1,121      1,559       2,356
     Net income (loss) per share............     (0.15)      0.10       0.12       0.13        0.26

 

                                      34
   38
 
                     NCS HEALTHCARE, INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
                    (IN THOUSANDS, EXCEPT SHARE INFORMATION)
 
11.  QUARTERLY DATA (UNAUDITED) (CONTINUED)
 


                                                            YEAR ENDED JUNE 30, 1997
                                              -----------------------------------------------------
                                               FIRST      SECOND      THIRD     FOURTH
                                              QUARTER     QUARTER    QUARTER    QUARTER     TOTAL
                                              --------    -------    -------    -------    --------
                                                                            
     Revenues...............................  $ 43,042    $59,323    $78,539    $94,136    $275,040
     Gross profit...........................    11,188     15,031     19,672     23,613      69,504
     Operating income.......................     3,534      3,856      4,954      6,007      18,351
     Net income.............................     1,910      2,889      3,091      3,382      11,272
     Net income per share...................      0.15       0.17       0.18       0.19        0.70

 
     * Includes a one time nonrecurring charge of $2,811 in connection with the
       termination of certain compensation arrangements with the prior owners of
       certain acquired businesses.
 
12.  SUBSEQUENT EVENT
 
     On July 17, 1997 the Company issued a preliminary offering memorandum to
sell up to $115 million of convertible subordinated debentures due 2004
(Debentures). The Debentures offering is expected to close in August 1997.
 

                                      35
   39
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 1997 (the
"1997 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 1997
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 1997 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 1997
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 1997 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.



                                      36
   40



                                     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 1997 Consolidated Financial Statements of NCS HealthCare,
                  Inc. are included in Part II, Item 8.

         2.       Financial Statement Schedule
                  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

                  During the quarter ended June 30, 1997, the Company did not 
                  file any Report on Form 8-K.


                                       37
   41



                                   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: August 8, 1997

         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
              ---------                                              -----

                                                  
/s/ Jon H. Outcalt                                   Chairman of the Board of Directors
- ----------------------------------
Jon H. Outcalt

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

/s/ Jeffrey R. Steinhilber                           Chief Financial Officer (Principal Financial and
- ----------------------------------                   Accounting Officer)
Jeffrey R. Steinhilber            

/s/ James B. Naylor                                  Director
- ----------------------------------                           
James B. Naylor                                              
                                                             
/s/ Phyllis K. Wilson                                Director
- ----------------------------------                           
Phyllis K. Wilson                                            

                                                     Director
- ----------------------------------
A. Malachi Mixon III

                                                     Director
- ----------------------------------
Boake A. Sells         

                                                     Director                 
- ----------------------------------
Richard L. Osborne

Date: August 8, 1997




                                       38
   42



                              INDEX OF EXHIBITS



                                                                                                                   SEQUENTIAL
EXHIBIT NO.                             DESCRIPTION                                                                    PAGE
- -----------                             -----------                                                                    ----

                                                                                                                 
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)

3.1               Amended and Restated Certificate of Incorporation of the
                  Company                                                                                              (C)

3.2               Amended By-Laws of the Company                                                                       (C)

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

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

4.3               Demand Master Promissory Note dated June 20, 1997                                                    
                                                                                                                          
* 10.1            Deferred Compensation Agreement, dated as of January 1, 1994,                                        
                  by and between Modern Pharmacy Consultants, Inc. and
                  Phyllis K. Wilson                                                                                    (C)

* 10.2            1996 Long Term Incentive Plan                                                                        (C)

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

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

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.                                                                  (C)


                     
                     
                     
                                     E-1
   43





                                                                                                                   SEQUENTIAL
EXHIBIT NO.                               DESCRIPTION                                                                 PAGE
- -----------                               -----------                                                                 ----

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

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

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

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

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

11.1              Statement regarding computation of earnings per
                  common share

21.1              Subsidiaries of the Company

27.1              Financial Data Schedule


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

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

(B)      Incorporated herein by reference to 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 Registration Statement on Form S-1 declared effective on
         February 13, 1996 (Reg. No. 333-8045).




                                       E-2

EX-4.3

   1
                                                                    EXHIBIT 4.3

Large Corporate
Unsecured Demand Note

                         DEMAND MASTER PROMISSORY NOTE
                              (Money Market Rate)

$30,000,000                                                     Cleveland, Ohio
                                                                  June 20, 1997



        On demand, Borrower promises to pay to the order of Bank, at any of its
offices, the unpaid principal amount of each Advance, together with interest
(calculated on the basis of a year of 360 days for the actual number of days
elapsed) on the daily unpaid principal balance of such Advance from the date
upon which such Advance is made at a rate per annum equal to the Interest Rate
applicable to such Advance payable on the earlier of (1) the date of demand of
payment of such Advance, or (2) the Interest Period Termination Date of such
Advance. After the earlier of demand or the Interest Period Termination Date of
any Advance, the unpaid principal and accrued interest of each such Advance
shall, until paid, bear interest at a rate per annum equal to the Default
Interest Rate. In no event shall the interest rate hereon exceed the highest
rate permitted by law.

        The aggregate unpaid principal amount of all loan Advances pursuant to
this line facility shall not at any one time exceed Thirty Million Dollars
($30,000,000). No Advance may be prepaid prior to the Interest Period
Termination Date applicable to such Advance without the prior written consent
of the Bank, except upon demand by the Bank. This note shall serve as a master
note to evidence all Advances. Bank's records as to (a) the principal amount,
the Interest Period Termination Date, and the Interest Rate applicable to each
Advance, and (b) each payment of principal and interest received by Bank
applicable to each Advance, shall be rebuttably presumed to be accurate.

        Borrower waives presentment, demand, notice, protest, and all other
demands and notices in connection with delivery, acceptance, performance,
default, or enforcement of this Note. Borrower understands and agrees that this
Note is subject to and shall be construed according to the laws of the State of
Ohio.

        Upon demand of payment of the Advances and at all times thereafter, at
the option of Bank, all sums owed hereunder shall become immediately due and
payable, in addition to any other rights and remedies Bank may have pursuant to
law, this Note, or any other instruments or agreements, which rights and
remedies shall be cumulative.

        No delay or omission on the part of Bank in exercising any right or
remedy hereunder or in connection herewith shall operate as a waiver of such
right or remedy or of any other right or remedy hereunder or in connection
herewith. Any waiver of Bank's rights or remedies hereunder or in connection
herewith must be in writing and signed by Bank. A waiver on any one occasion
shall not be construed as a bar to or waiver of any such right or remedy on a
future occasion.

   2
Large Corporate
Unsecured Demand Note



        In the event Borrower voluntarily repays or prepays any Advance, in
whole or in part, prior to the Interest Period Termination Date therefor, other
than as a result of a demand for payment by Bank hereunder, Borrower shall
reimburse Bank on demand for any resulting loss or expense incurred by Bank as
a result of such repayment or prepayment of such Advance including, without
limitation, any loss incurred in obtaining, liquidating, or employing deposits
from third parties, but excluding loss of margin on the amount of principal
repaid or prepaid for the period after any such repayment or prepayment.

        In the event Bank incurs, directly or indirectly, any additional cost
in making, maintaining or allocating capital to any Advance as a result of
complying with any charge, cost, reserve or other requirement imposed from time
to time by any United States regulatory agency or law or regulation applicable
to Bank, except for income taxes, Borrower will pay to Bank promptly upon
Bank's written notice such amount as in the reasonable judgment of Bank will
compensate it for such additional cost.

        Borrower represents that it has legal power and right to execute and
deliver this Note and to perform and observe the provisions of this Note. By
executing and delivering this Note and by performing and observing the
provisions of this Note, Borrower will not violate any existing provision of
its articles of incorporation, code of regulations or bylaws or any applicable
law or violate or otherwise become in default under any existing contract,
including any agreements for borrowed money or otherwise evidencing or relating
to any Indebtedness, or other obligation binding upon Borrower. The officer or
officers executing and delivering this Note on behalf of Borrower have been
duly authorized to do so, and this Note, when executed, is legally binding upon
Borrower in every respect.

        For the purposes of this Note:

        "ADVANCES" collectively means all loan advances made by Bank to Borrower
    at the sole discretion and option of the Bank. Borrower acknowledging that
    the line facility evidenced by this Note is purely discretionary and Bank
    may, without prior notice to Borrower refuses to honor any request by
    Borrower for borrowing hereunder, and "ADVANCE" means any of the Advances.

        "BANK" means KEYBANK NATIONAL ASSOCIATION, a national banking
    association with its main office located at 127 Public Square, Cleveland,
    Ohio 44114, and its successors and assigns.

        "BORROWER" means NCS HealthCare, Inc. and its successors and assigns;
    PROVIDED, HOWEVER, that Borrower may not assign or otherwise transfer any of
    its rights under this Note without the express written consent of Bank.

        "DEFAULT INTEREST RATE" means, as to any Advance, that fixed rate per
    annum (calculated on the basis of a year of 360 days for the actual number
    of days elapsed) equal to the Interest Rate plus two percent (2%) per annum.



                                      -2-
   3
Large Corporate
Unsecured Demand Note



        "INDEBTEDNESS" shall mean for any Person (i) all obligations to repay
    borrowed money, direct or indirect, incurred, assumed, or guaranteed, (ii)
    all obligations for the deferred purchase price of capital assets excluding
    trade payables, (iii) all obligations under conditional sales or other title
    retention agreements, and (iv) and all lease obligations which have been or
    should be capitalized on the books of such Person.

        "INTEREST RATE" means, as to any Advance, that fixed rate per annum
    determined by Bank and mutually agreed upon by Bank and Borrower.

        "INTEREST PERIOD TERMINATION DATE" means, as to any Advance, that date
    determined by Bank and mutually agreed upon by Bank and Borrower which is
    the last day of the period selected in order to determine the Interest Rate
    and which shall not be more than three months days from the date of such
    Advance.

        "PERSON" shall mean any natural person, corporation (which shall be
    deemed to include business trust), association, limited liability company,
    partnership, joint venture, political entity, or political subdivision
    thereof.

        BORROWER, TO THE EXTENT PERMITTED BY LAW, WAIVES ANY RIGHT TO HAVE A
JURY PARTICIPATE IN RESOLVING ANY DISPUTE, WHETHER SOUNDING IN CONTRACT, TORT,
OR OTHERWISE, BETWEEN BANK AND BORROWER ARISING OUT OF, IN CONNECTION WITH,
RELATED TO, OR INCIDENTAL TO THE RELATIONSHIP ESTABLISHED BETWEEN BORROWER AND
BANK IN CONNECTION WITH THIS NOTE OR ANY OTHER AGREEMENT, INSTRUMENT OR
DOCUMENT EXECUTED OR DELIVERED IN CONNECTION THEREWITH OR THE TRANSACTIONS
RELATED THERETO.

        IN WITNESS WHEREOF, BORROWER HAS DULY EXECUTED AND DELIVERED THIS NOTE
ON THE DATE FIRST ABOVE WRITTEN.

                                       BORROWER:


                                       NCS HealthCare, Inc.

                                       By: /s/Jeffrey R. Steinhilber
                                          --------------------------
                                              Jeffrey R. Steinhilber
                                              Senior Vice President and
                                              Chief Financial Officer

EX-11.1

   1


                                                                    EXHIBIT 11.1

                      NCS HEALTHCARE, INC. AND SUBSIDIARIES
                    COMPUTATION OF EARNINGS PER COMMON SHARE
                  (IN THOUSANDS, EXCEPT PER SHARE INFORMATION)



                                                                                              YEAR ENDED JUNE 30,
                                                                                        1995          1996        1997
                                                                                        ----          ----        ----
                                                                                  
                                                                                                      
Net income used in calculation of primary                                         
  earnings per share                                                                   $1,868        $2,356     $11,272
Add impact of assumed conversion of subordinated                                  
  debentures                                                                               31           364         280
                                                                                       ------        ------     -------
Net income used in calculation of fully diluted                                   
  earnings per share                                                                   $1,899        $2,720     $11,552
                                                                                       ======        ======     =======
                                                                                  
Weighted average common shares outstanding                                              5,818         8,462      15,996
                                                                                  
Net effect of dilutive stock options - Note A                                             946           509         195
                                                                                       ------        ------     -------
Shares used in calculation of primary earnings                                    
  per share                                                                             6,764         8,971      16,191
Add impact of assumed conversion of subordinated                                  
  debentures                                                                               68           775         645
Additional effect of dilutive stock options                                       
  using end of period stock price                                                           -            24           7
                                                                                       ------        ------     -------
Shares used in calculation of fully diluted                                       
  earnings per share                                                                    6,832         9,770      16,843
                                                                                       ======        ======     =======
                                                                                  
Primary net income per share                                                           $  .28        $  .26     $   .70
                                                                                       ======        ======     =======
                                                                                  
Fully diluted net income per share - Note B                                            $  .28        $  .28     $   .69
                                                                                       ======        ======     =======


NOTE A -          Stock options granted within a twelve-month period preceding 
                  the filing date of the Company's initial public offering on 
                  February 14, 1996 are included as if they were outstanding 
                  for all periods presented prior to the Company's initial
                  public offering. The dilutive effect of all options 
                  outstanding was calculated using the treasury stock method.

NOTE B -          Fully dilutive net income per share has not been presented in 
                  the Consolidated Statements of Income because the effect is
                  either immaterial or anti-dilutive.

                                      E-3

EX-21.1

   1





                                  EXHIBIT 21.1

                         SUBSIDIARIES OF THE REGISTRANT
                         ------------------------------

                           Advanced Rx Services, Inc.                    
                     Cheshire Long Term Care Pharmacy, Inc.              
                          HLF Adult Home Pharmacy Corp.                  
                          IV-A-Care of Wisconsin, Inc.                   
                             Kinetic Services, Inc.                      
                             Look Drug Stores, Inc.                      
                            Loomis Enterprises, Inc.                     
                       Management & Network Services, Inc.               
                      Marlowe Nursing Center Services L.P.
                                Medi Centre, Inc.                        
                              NCS Daven Drug, Inc.                       
                        NCS HealthCare of Arkansas, Inc.                 
                       NCS HealthCare of California, Inc.                
                         NCS HealthCare of Florida, Inc.                 
                        NCS HealthCare of Illinois, Inc.                 
                         NCS HealthCare of Indiana, Inc.                 
                          NCS HealthCare of Iowa, Inc.                   
                         NCS HealthCare of Kansas, Inc.                  
                        NCS HealthCare of Kentucky, Inc.                 
                        NCS HealthCare of Maryland, Inc.                 
                        NCS HealthCare of Michigan, Inc.                 
                         NCS HealthCare of Modesto, Inc.                 
                          NCS HealthCare of Ohio, Inc.                   
                        NCS HealthCare of Oklahoma, Inc.                 
                         NCS HealthCare of Oregon, Inc.                  
                       NCS HealthCare of Pennsylvania, Inc.               
                     NCS HealthCare of South Carolina, Inc.
                         NCS HealthCare of Vermont, Inc.                 
                       NCS HealthCare of Washington, Inc.               
                         NCS Quality Care Pharmacy, Inc.                 
                               NCS Services, Inc.                        
                               NCS Unlimited, Inc.                       
                           Rescot Systems Group, Inc.                    
                          Thrifty Medical Supply, Inc.                
                    Uni-Care Health Services of Maine, Inc.             
                         Uni-Care Health Services, Inc.                  
      


                                     E-4

EX-27

 

<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
       
                             
<PERIOD-TYPE>                   YEAR
<FISCAL-YEAR-END>                          JUN-30-1997
<PERIOD-START>                             JUL-01-1996
<PERIOD-END>                               JUN-30-1997
<EXCHANGE-RATE>                                      1
<CASH>                                           8,160
<SECURITIES>                                         0
<RECEIVABLES>                                   83,751
<ALLOWANCES>                                    13,275
<INVENTORY>                                     22,281
<CURRENT-ASSETS>                               107,487
<PP&E>                                          40,828
<DEPRECIATION>                                  17,519
<TOTAL-ASSETS>                                 321,030
<CURRENT-LIABILITIES>                           54,323
<BONDS>                                         14,259
<COMMON>                                           180
<PREFERRED-MANDATORY>                                0
<PREFERRED>                                          0
<OTHER-SE>                                     253,046
<TOTAL-LIABILITY-AND-EQUITY>                   321,030
<SALES>                                        275,040
<TOTAL-REVENUES>                               275,040
<CGS>                                          205,536
<TOTAL-COSTS>                                  205,536
<OTHER-EXPENSES>                                     0
<LOSS-PROVISION>                                 1,325
<INTEREST-EXPENSE>                               1,143
<INCOME-PRETAX>                                 19,927
<INCOME-TAX>                                     8,655
<INCOME-CONTINUING>                             11,272
<DISCONTINUED>                                       0
<EXTRAORDINARY>                                      0
<CHANGES>                                            0
<NET-INCOME>                                    11,272
<EPS-PRIMARY>                                      .70
<EPS-DILUTED>                                      .69