10-K 1 l95982ae10vk.txt NCS HEALTHCARE, INC. 10-K/FISCAL YEAR END 6-30-02 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (MARK ONE) ANNUAL REPORT PURSUANT TO SECTION NO 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [X] FOR THE FISCAL YEAR ENDED JUNE 30, 2002 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [ ] FOR THE TRANSITION PERIOD FROM _________________________ TO ___________________ COMMISSION FILE NUMBER 0-27602 NCS HEALTHCARE, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 34-1816187 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) identification no.) 3201 Enterprise Parkway, Beachwood, Ohio 44122 (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code: (216) 378-6800 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Class A Common Stock, par value $.01 per share. Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] As of August 15, 2002, the registrant had 18,461,599 shares of Class A Common Stock, par value $.01 per share, and 5,255,210 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 $46,191,958 (based upon the closing price of $2.49 per share of Class A Common Stock on the Pink Sheets Electronic Quotation Service on August 15, 2002). For purposes of this calculation, the registrant deems the 355,016 shares of Class A Common Stock and the 4,810,806 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. 1 DOCUMENTS INCORPORATED BY REFERENCE None. Except as otherwise stated, the information contained in this Form 10-K is as of June 30, 2002. 2 NCS HEALTHCARE, INC. 2002 ANNUAL REPORT ON FORM 10-K TABLE OF CONTENTS PART I ITEM 1. BUSINESS 4 ITEM 2. PROPERTIES 14 ITEM 3. LEGAL PROCEEDINGS 14 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 16 ITEM 4A. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY 16 PART II ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS 18 ITEM 6. SELECTED FINANCIAL DATA 19 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 21 ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 33 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 33 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH AUDITORS ON ACCOUNTING AND FINANCIAL DISCLOSURE 56 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY 56 ITEM 11. EXECUTIVE COMPENSATION 56 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 60 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 61 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K 62 3 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, repackages and dispenses prescription and non-prescription pharmaceuticals and provides customer facilities with related management services, automated medical record keeping, drug therapy evaluation and regulatory assistance. The Company also provides consultant pharmacist services, including monitoring the control, distribution and administration of drugs within the long-term care facility, assisting in compliance with applicable state and federal regulations, therapeutic monitoring and drug utilization review services. The Company also provides various ancillary health care services to complement its core pharmacy services, including infusion therapy, software services and other services. At June 30, 2002, the Company provides pharmacy services to approximately 203,000 long-term care beds in 33 states. The Company is considered to operate principally in one business segment. On July 28, 2002, the Company entered into a definitive merger agreement with Genesis Health Ventures, Inc. (Genesis). If the proposed merger is completed, each outstanding share of common stock of the Company will be converted into the right to receive 0.1 of a share of Genesis common stock. At the closing of the proposed merger, Genesis will repay in full the outstanding debt of NCS, including $206 million of senior debt, and will redeem $102 million of 5 3/4% convertible subordinated debentures, including accrued and unpaid interest and any applicable redemption premiums. The completion of the proposed merger is subject to regulatory approvals and other customary conditions, including the approval of the holders of a majority of the outstanding voting power of the Company's common stock. In connection with the merger agreement, on July 28, 2002, NCS and Genesis entered into agreements (voting agreements) with certain stockholders of NCS beneficially owning in the aggregate a majority of the outstanding voting power of NCS Common Stock. In the voting agreements, such stockholders agreed (1) to vote their shares of NCS Common Stock in favor of adoption and approval of the merger agreement and against proposals for certain other transactions and (2) not to transfer their shares of NCS Common Stock prior to the consummation of the proposed merger. Genesis provides healthcare services to America's elderly through a network of NeighborCare pharmacies and Genesis ElderCare skilled nursing and assisted living facilities. The merger will consolidate the operations of the Company and NeighborCare, Genesis' pharmacy subsidiary, creating the second largest long-term care pharmacy provider in the United States. On August 8, 2002, Omnicare, Inc. (Omnicare) commenced a cash tender offer to purchase all of the outstanding shares of Class A and Class B common stock of NCS for $3.50 per share. The effect of the Omnicare tender offer on the proposed merger between NCS and Genesis is not known at this time. 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 including monitoring the control, distribution and administration of drugs within the long-term care facility and assisting in compliance with applicable state and federal regulations, as well as therapeutic monitoring and drug utilization review services. With the average long-term care facility patient taking seven to nine medications per day, high quality, cost-efficient systems for dispensing and monitoring patient drug regimens are critical. Providing these services places the institutional pharmacy in a central role of influencing the effectiveness and cost of care. Based on data from industry sources, the Company estimates that the U.S. market for pharmacy services (including consulting services and related supplies) in long-term care and assisted living facilities will exceed $8.0 billion in fiscal 2003. The number of long-term care facility residents is rising as a result of demographic trends. According to the Administration on Aging, it is estimated that by the year 2030, the number of Americans who will be 85 or older, the segment of the population that comprises the largest percentage of residents at long-term care facilities, will triple. The number of medications taken per day by long-term care facility residents is also increasing due to (i) advances in medical technology which have resulted in the availability of new drug therapy regimens (ii) the increased utilization of recently introduced drug therapies and (iii) 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. 4 The institutional pharmacy market has undergone significant consolidation over the last few years. Prior to the 1970's, pharmacy needs of long-term care facilities were fulfilled by local retail pharmacies. Since then, the pharmacy and information needs of long-term care facilities have grown substantially and regulatory requirements and the reimbursement environment have become more complex. Institutional pharmacy companies, both independent and captive (those owned by an operator of long-term care facilities), have proven to be better positioned to meet these changing market demands. As a result, over the past 25 years the proportion of the market served by retail pharmacies has steadily declined, and institutional pharmacies have become the dominant providers of pharmacy services to the long-term care market. There are several factors that drove the consolidation among providers of long-term care pharmaceutical services. All of these factors relate to the advantages that large institutional providers have over retail and small institutional providers. Scale Advantages. Larger pharmacies are able to (i) realize advantages associated with size, including purchasing power, service breadth, more sophisticated sales and marketing programs and formulary management capabilities, (ii) achieve efficiencies in administrative functions and (iii) access the capital resources necessary to invest in critical computer systems and automation. Ability to Serve Multi-site Customers and Managed Care Payors. As a result of their ability to serve long-term care customers with several physical locations, larger pharmacies possess a significant competitive advantage over their smaller counterparts. Additionally, the Company believes that there are significant opportunities for full-service institutional pharmacies with a comprehensive range of services and regional coverage to provide a spectrum of health care products and services to managed care payors. Regulatory Expertise and Systems Capabilities. Long-term care facilities are demanding more sophisticated and specialized services from pharmacy providers due, in part, to the implementation in 1990 of the Omnibus Budget Reconciliation Act of 1987 ("OBRA"). The OBRA regulations, which were designed to upgrade and standardize care in nursing facilities, mandated strict new standards relating to planning, monitoring and reporting on the progress of patient care to include, among other things, prescription drug therapy. More recently, the implementation of Medicare's Prospective Payment System (PPS) has required that long-term care facilities estimate the total cost of stay of a resident prior to admission. The facilities, in turn, rely on their ancillary providers, such as institutional pharmacy vendors, to help them manage the costs of care of their Medicare Part A covered residents. As a result, long-term care administrators increasingly seek experienced pharmacists and specialized providers with computerized information and documentation systems designed to monitor patient care and control the facilities' and payors' costs. Changing Reimbursement Environment. The long-term care market has undergone significant change over the last three years as Medicare's new Prospective Payment System (PPS) has been implemented. This reimbursement change which was mandated by the Balanced Budget Act of 1997 pays nursing homes a flat rate for all services, a significant departure from the prior cost-based system. In order to assist long-term care customers with this new regulation, institutional pharmacy providers must be able to offer sophisticated PPS contracts that include cost-effective formularies. BUSINESS STRATEGY The Company expects that the evolution of the institutional pharmacy industry will follow the path taken by the retail pharmacy industry. Therefore, it is anticipated that prescription margins will continue to face incremental downward pressure over time. Institutional pharmacies that remain successful will need strong internal revenue growth to leverage increased volume over its existing cost base, the ability to leverage scale across all areas of purchasing contracts, a low cost production structure and the ability to leverage size and technology to establish pharmaceutical manufacturers as purchasers of clinical data. Over 80% of the skilled nursing home patient population can be accessed through the Company's 74 existing pharmacy sites. These sites served approximately 203,000 long-term care beds at June 30, 2002 in 33 states. Accordingly, NCS is positioned to pursue revenue growth opportunities through its existing infrastructure. The Company has developed an efficient operating structure and can significantly benefit by leveraging incremental volume through existing operational sites. In addition, the Company's investment in common information systems has established a platform to diversify its revenue stream by assisting drug manufacturers in better understanding prescribing trends and changes in the competitive landscape across the long-term care and assisted living population. SERVICES The Company primarily provides institutional pharmacy products and services to long-term care facility residents. The Company also provides various ancillary health care services to complement its core pharmacy service, including infusion 5 therapy, software services, and other services. For the year ended June 30, 2002, approximately 89% of the Company's revenues were derived from providing pharmacy and consultant pharmacy services to long-term care facilities. An additional 4% of revenues were derived from providing infusion therapy services and the remaining 7% were primarily derived from providing various other products and services, including hospital pharmacy management, software services, oxygen and Medicare Part B services. Pharmacy Services. The Company's core business is providing pharmaceutical dispensing services to residents of long-term care facilities and other institutions. The Company purchases, repackages and dispenses prescription and non-prescription medication in accordance with physician orders and delivers such prescriptions at least daily to long-term care facilities to be administered to residents by the nursing staffs of these facilities. The Company typically serves facilities within a two-hour drive time of its distribution facilities and provides 24-hour coverage 365 days per year. As of June 30, 2002, the Company provided its services from 74 sites in 33 states. Upon receipt of a doctor's order, the information is entered into the Company's management information system, which automatically reviews the order for patient-specific allergies and potentially adverse interactions with other medications the patient is receiving. Following this analysis, a report on each order is produced for review by a Company pharmacist, who performs a prospective drug utilization analysis of the order and, if appropriate, substitutes generic drugs approved for equivalence by the U.S. Food and Drug Administration ("FDA"). In addition, subject to the prescribing physician's approval, the pharmacist may make therapeutic substitutions based on guidelines established by the Company's Therapeutic Formulary Committee. NCS provides pharmaceuticals to its clients through a unit dose distribution system. The Company divides the pharmaceuticals received in bulk form from its suppliers into unit dose packages for its customers. The unit dose format is designed to reduce errors, improve control over the distribution of pharmaceuticals and save nursing administration time relative to the bulk systems traditionally used by retail pharmacies. As of June 30, 2002, 93% of the Company's pharmacy operating facilities were converted to the Concord DX system, the Company's proprietary computer system. The Company utilizes the Concord DX system to control its work flow and improve operating efficiencies. In most cases, the Company uses its bar-coding system where a bar code label is applied to each unit dose package. Through bar coding, information relating to the contents and destination of each unit dose package distributed can be automatically entered into the Concord DX system. This bar code technology enables the Company to monitor pharmaceuticals throughout the production and distribution process, thereby reducing errors, improving pharmacy control and enhancing production efficiency. 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 attempted to further upgrade and standardize health care by mandating 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 interactions with other drugs or food, monitoring lab results and recommending alternate therapies or discontinuing unnecessary drugs; (ii) participating on the Pharmacy and Therapeutics, Quality Assurance and other committees of the Company's clients; (iii) inspecting medication carts and storage rooms; (iv) monitoring and reporting at least quarterly on facility-wide drug usage and drug administration systems and practices; (v) developing and maintaining the client's pharmaceutical policy and procedure manuals; and (vi) assisting the long-term care facility in complying with state and federal regulations as they pertain to patient care. Additionally, NCS offers a specialized line of consulting services which help long-term care facilities enhance care and reduce and contain costs as well as comply with state and federal regulations. Under this service line, the Company provides: (i) data required for OBRA and other regulatory purposes, including reports on psychotropic drug usage (chemical restraints), antibiotic usage (infection control) and other drug usage; (ii) plan of care programs that assess each patient's state of health upon admission and monitor progress and outcomes using data on drug usage as well as dietary, physical therapy and social service inputs; (iii) counseling related to appropriate drug usage and implementation of drug protocols; (iv) on-site continuing education seminars for the long-term care facilities' staff on topics such as drug information relating to clinical indications, adverse drug 6 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, hydration, antibiotic therapy and chemotherapy for long-term care residents and home care patients. NCS prepares the product and delivers it to the long-term care facility to be administered to the patient by the nursing staff. Since 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. Other. The Company provides long-term care facilities with assistance in complying with regulations concerning healthy and sanitary environments. The Company also assists its customers with various regulatory compliance matters and products and services relating to Medicare Part B products, oxygen and other miscellaneous services. Finally, NCS offers specialized educational services that aid facilities in the training of their staff. These services include surveys to prepare facilities for state reviews and training on appropriate nursing techniques in infusion therapy, wound care management and restorative nursing. FORMULARY MANAGEMENT NCS employs formulary management techniques designed to assist physicians in making the best clinical decision on the appropriate 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 dosage forms. The formulary takes into account such factors as pharmacology, safety and toxicity, efficacy, drug administration, quality of life and other considerations specific to the elderly population of long-term care facilities. Successful implementation of formulary guidelines is dependent upon close interaction between the pharmacist and the prescribing physician. NCS seeks to attract and retain highly trained clinical pharmacists and encourages their active participation in the caring for residents of long-term care facilities, including consultation with the facilities' medical staff and other prescribing physicians, to increase the likelihood that the most efficacious, safe and cost-effective drug therapy is prescribed. The Company's formulary program is directed by the NCS Pharmacy and Therapeutic Committee, which is comprised of NCS clinical pharmacists, a registered nurse and a physician. The Company believes that adherence to the NCS formulary guidelines provides the most cost effective therapy to the resident and strengthens the Company's purchasing power with pharmaceutical manufacturers. MANAGEMENT INFORMATION SYSTEMS An integral part of NCS' operations is its proprietary management information system called "Concord DX," which has extensive capabilities designed to improve operating efficiencies and controls both internally and at the customer level. In conjunction with the unit dose distribution system and the use of a bar-coding label system on unit dose packages, Concord DX is able to monitor pharmaceuticals within NCS throughout the production and distribution process. At the customer level, Concord DX automatically screens prescription orders received from physicians for patient-specific allergies and potentially adverse reactions given other medications the patient may be receiving. Concord DX is also used to create individual patient medical records and monthly management and quality assurance reports for NCS' customers. To date, Concord DX has been implemented in 93% of the Company's pharmacy operating facilities. In 1997, the Company acquired Rescot Systems Group, Inc. ("Rescot"). For the past 13 years, Rescot has developed one of the premier institutional pharmacy operating systems used for managing patient and pharmacy data. Rescot has been instrumental in the design and implementation of Concord DX. In May 2001, NCS introduced iAstral(TM) which is a web-based internal company portal. NCS users can access many functions through iAstral(TM) including: REAL-TIME BUSINESS MONITORING allows Company personnel to view real-time information related to pharmacy operations including: on-line rejected third party claims, therapeutic interchange opportunities, gross margin opportunities, prescriptions with missing billing information, and prescriptions connected to delinquent accounts. HISTORICAL FINANCIAL INFORMATION allows Company personnel to view financial information and operational metrics regarding customers including gross and net sales, gross margin and historical rejected claim data. In addition to these internal capabilities, in May 2000, the Company introduced its web-based eASTRAL (TM), which is designed to perform the following functions: (1) improve a nursing home's ability to adapt and operate in an environment of 7 tightening margins and lower reimbursement levels under PPS, (2) enhance the communication between nursing homes and NCS, and (3) improve a nursing home's ability to conform to regulatory requirements. NCS' eASTRAL (TM) modules are as follows: eMEDMANAGER allows on-line pre-fill edit reviews. These reviews provide the nursing home formulary recommendations, alternative medications and information on potential cost savings. With access to this type of critical information they can make more informed clinical and financial decisions. PAYOR STATUS REPORTS have become critically important for nursing homes to assist them in controlling their Medicare Part A costs. Through the use of eASTRAL(TM), our customers can make adjustments to patient status through an internet connection. ORDER STATUS REPORT provides information on the status of each patient's medication orders, eliminating the need for the nursing staff to contact the pharmacy for this information. NDC REPORT is available through the web. This report provides information needed to complete Section U of the MDS for any long-term care patient. eBILL offers on-line invoice reviews. This is an important feature, especially for regional or national nursing home chains that perform facility to facility cost comparisons. DRUG FACT provides detailed information on any medication, including its use, side effects, storage, precautions, interactions and instructions for use. REFILL ORDERS allows nursing homes to refill orders on-line. MEDICAL RECORDS PRINTING allows nursing homes to print medical records at their facility. The Company believes that these capabilities distinguish NCS from others in the institutional pharmacy industry. As nursing homes become more sophisticated, their interest in and need for these capabilities will increase. The Company believes it is uniquely positioned to fulfill those needs. SALES AND MARKETING In marketing to prospective customers, NCS has organized the selling efforts of each formerly independent location into a single sales force consisting of Account Executives, Divisional Sales Managers, National Account Managers and a Chief Development Officer (CDO). The National Account Managers, along with the CDO, are responsible for selling to national chains and other strategically significant accounts. The Account Executives report directly to the Divisional Sales Managers and are trained in each of the Company's products and services. Typically, they sell these services throughout their respective geographic territories most of which consist of approximately 400 long-term care facilities. These individuals are paid base salaries with commissions comprising up to 75% of a successful salesperson's compensation. The Company believes that long-term care facilities change institutional pharmacies fairly infrequently, but when a change is made, it is generally the result of a competitor's ability to offer better service or a broader array of products and services. Additionally, in the PPS environment, price competition is becoming an increasingly significant factor. The marketing function also reports to the CDO. This function is responsible for the overall branding of the Company through trade advertising, direct telemarketing, educational seminars, industry press releases, industry trade shows and competitive information. PURCHASING NCS purchases pharmaceuticals primarily through a national wholesale distributor, with whom it has negotiated a prime vendor contract, and directly from certain pharmaceutical manufacturers. The Company also is a member of industry buying groups that contract with manufacturers for volume-based discounted prices which are passed through to the Company by its wholesale distributor. In addition, the Company has formed a group purchasing organization with two other large pharmaceutical buyers in the long-term care and acute care industries. The Company purchases the majority of its pharmaceuticals through this organization. The organization utilizes the same wholesale distributor as the Company. 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. 8 CUSTOMERS At June 30, 2002, NCS had contracts to provide services to more than 203,000 long-term care beds in 33 states. These contracts, as is typical in the industry, are generally for a period of one year but can be terminated by either party for any reason upon thirty days written notice. Over the past few years, NCS has expanded its customer base to also include rural hospitals. As of June 30, 2002, no individual customer or market group represented more than 5% of the total sales of the Company's institutional pharmacy business. COMPETITION Competition among providers of pharmacy services to long-term care facilities is intense. The Company believes that it is one of the four largest national independent institutional pharmacies in the United States. Institutional pharmacies compete principally on the basis of quality, cost effectiveness and service level. In the geographic areas it serves, the Company competes with local retail pharmacies, captive pharmacies and local, regional and national institutional pharmacies. The Company competes with several other companies with similar marketing strategies, some of which have greater resources than the Company. REIMBURSEMENT AND BILLING As is generally the case for long-term care facility services, NCS receives payments through reimbursement from Medicaid and Medicare programs and directly from individual residents (private pay), private third-party insurers and long-term care facilities. For the fiscal year ended June 30, 2002, the Company's payor mix was approximately 49% Medicaid, 20% long-term care facilities (including amounts for which the long-term care facility receives reimbursement under Medicare Part A), 14% private pay, 11% third-party insurance, 1% Medicare and 5% other sources. Medicare and Medicaid are highly regulated. The failure of NCS and/or its client institutions to comply with applicable reimbursement regulations could adversely affect the Company's business. Private Pay. For those residents who are not covered by government-sponsored programs or private insurance, NCS generally bills the patient or other responsible party on a monthly basis. Depending upon local market practices, NCS may alternatively bill private residents through the long-term care facility. Pricing for private pay residents is based on prevailing regional market rates or "usual and customary" charges. Medicaid. The Medicaid program is a federal-state cooperative program designed to enable states to provide medical assistance to aged, blind or disabled individuals, or to members of families with dependent children whose income and resources are insufficient to meet the costs of necessary medical services. State participation in the Medicaid program is voluntary. To become eligible to receive federal funds, a state must submit a Medicaid "state plan" to the Secretary of Health and Human Services (HHS) for approval. The federal Medicaid statute specifies a variety of requirements that the state plan must meet, including requirements relating to eligibility, coverage of services, payment and administration. For residents eligible for Medicaid, the Company bills the individual state Medicaid program or, in certain circumstances state designated managed care or other similar organizations. Medicaid programs are funded jointly by the federal government and individual states and are administered by the states. The reimbursement rates for pharmacy services under Medicaid are determined on a state-by-state basis subject to review by the Centers for Medicare and Medicaid Services (CMS) (formerly the Health Care Finance Administration) and applicable federal law. Federal regulations and the regulations of certain states establish "upper limits" for reimbursement for certain prescription drugs under Medicaid. In most states pharmacy services are priced at the lower of "usual and customary" charges or cost (which generally is defined as a function of average wholesale price and may include a profit percentage) plus a dispensing fee. Most states establish a fixed dispensing fee that is adjusted to reflect associated costs on an annual or less frequent basis. State Medicaid programs generally have long-established programs for reimbursement which have been revised and refined over time and have not had a material adverse effect on the pricing policies or receivables collection for long-term care facility pharmacy services. Any future changes in such reimbursement programs or in regulations relating thereto, such as reductions in the allowable reimbursement levels or the timing of processing of payments, could adversely affect the Company's business. The annual increase in the federal share would vary from state to state based on a variety of factors. Such provisions, if ultimately signed into law, could adversely affect the Company's business. Additionally, any shift from Medicaid to state designated managed care could adversely affect the Company's business due to historically lower reimbursement rates for managed care. Medicare. The Medicare program is a federally funded and administered health insurance program for individuals age 65 and over or for certain individuals who are disabled. The Medicare program consists of two parts: Medicare Part A, which covers, among other things, inpatient hospital, skilled long-term care facility, home health care and certain other types of health care services; and Medicare Part B, which covers physicians' services, outpatient services and certain items and services 9 provided by medical suppliers. Medicare Part B also covers a limited number of specifically designated prescription drugs. Services for residents of long-term care facilities eligible for Part A coverage are billed directly to the respective long-term care facility. 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. 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 insurance plans, veterans' benefits, workers' compensation and other programs. The resident's individual insurance plan is billed immediately upon dispensing of the pharmacy services. Additionally, the resident is billed monthly for a copay or deductible portion of the pharmacy services. The Company is under contract directly with the various third party insurance plans and the reimbursement rates are determined accordingly. Long-Term Care Facilities. In addition to occasional private patient billings and those related to drugs for Medicare eligible residents, long-term care facilities are billed directly for consulting services, certain over-the-counter medications and bulk house supplies. GOVERNMENT REGULATION Institutional pharmacies, as well as the long-term care facilities they service, are subject to extensive federal, state and local laws and regulations. These laws and regulations cover required qualifications, day-to-day operations, reimbursement and the documentation of activities. NCS continuously monitors the effects of regulatory activity on its operations. Licensure, Certification and Regulation. States generally require that companies operating a pharmacy within that state be licensed by the state board of pharmacy. The Company currently has pharmacy licenses in each of the states in which it operates a pharmacy. In addition, the Company's pharmacies are registered with the appropriate state and federal authorities pursuant to statutes governing the regulation of controlled substances. Long-term care facilities are also separately required to be licensed in the states in which they operate and, if serving Medicare or Medicaid patients, must be certified to ensure compliance with applicable program participation requirements. Long-term care facilities are also subject to the long-term care facility reforms of OBRA, which impose strict compliance standards relating to the quality of care for long-term care operations, including vastly increased documentation and reporting requirements. In addition, pharmacists, nurses and other health professionals who provide services on the Company's behalf are in most cases required to obtain and maintain professional licenses and are subject to state regulation regarding professional standards of conduct. Federal and State Laws Affecting the Repackaging, Labeling and Interstate Shipping of Drugs. Federal and state laws impose certain repackaging, labeling and package insert requirements on pharmacies that repackage drugs for distribution beyond the regular practice of dispensing or selling drugs directly to patients at retail. A drug repackager must register with the FDA. The Company believes that it holds all required registrations and licenses and that its repackaging operations are in compliance with applicable state and federal requirements. Medicare and Medicaid. For an extensive period of time, the long-term care facility pharmacy business has operated under regulatory and cost containment pressures from state and federal legislation primarily affecting Medicaid and Medicare. The Medicare program establishes certain requirements for participation of providers and suppliers in the Medicare program. Pharmacies are not subject to such certification requirements. Skilled long-term care facilities and suppliers of DMEPOS, however, are subject to specified standards. Failure to comply with these requirements and standards may adversely 10 affect an entity's ability to participate in the Medicare program and receive reimbursement for services provided to Medicare beneficiaries. See "Reimbursement and Billing." Federal law and regulations contain a variety of requirements relating to the furnishing of prescription drugs under Medicaid. First, states are given broad authority, subject to certain standards, to limit or to specify conditions as to the coverage of particular drugs. Second, federal Medicaid law establishes standards affecting pharmacy practice. These standards include general requirements relating to patient counseling and drug utilization review and more specific requirements for long-term care facilities relating to drug regimen reviews for Medicaid patients in such facilities. Recent regulations clarify that, under federal law, a pharmacy is not required to meet the general standards for drugs dispensed to long-term care facility residents if the long-term care facility complies with the drug regimen review requirements. However, the regulations indicate that states may nevertheless require pharmacies to comply with the general standards, regardless of whether the long-term care facility satisfies the drug regimen review requirement, and the states in which the Company operates currently require its pharmacies to comply therewith. Third, federal regulations impose certain requirements relating to reimbursement for prescription drugs furnished to Medicaid residents. See "Reimbursement and Billing - Medicaid." In addition to requirements imposed by federal law, states have substantial discretion to determine administrative, coverage, eligibility and payment policies under their state Medicaid programs which may affect the Company's operations. For example, some states have enacted "freedom of choice" requirements which prohibit a long-term care facility from requiring its residents to purchase pharmacy or other ancillary medical services or supplies from particular providers that deal with the long-term care facility. Such limitations may increase the competition that the Company faces in providing services to long-term care facility patients. Medicare and Medicaid providers and suppliers are subject to inquiries or audits to evaluate their compliance with requirements and standards set forth under these programs. The Company believes that its billing procedures materially comply with applicable state and federal requirements. However, there can be no assurance that in the future such requirements will be interpreted in a manner consistent with its interpretation and application. The Medicare and Medicaid programs are subject to statutory and regulatory changes, retroactive and prospective rate adjustments, administrative rulings, executive orders and freezes and government funding restrictions, all of which may adversely affect the Company's business. There can be no assurance that payments for services under the Medicare and Medicaid programs will continue to be based on current methodologies or remain comparable to present levels. The Company may be subject to rate reductions as a result of federal budgetary or other legislation related to the Medicare and Medicaid programs. In addition, various state Medicaid programs periodically experience budgetary shortfalls which may result in Medicaid payment reductions and delays in payments. Healthcare Reform and Federal Budget Legislation. The Balanced Budget Act of 1997 (BBA), enacted on August 5, 1997, mandated the implementation of a prospective payment system (PPS) for skilled nursing facilities (SNFs) providing care for Medicare Part A patients, effective for cost reporting periods beginning on or after July 1, 1998. Under the new PPS, SNFs receive a single per diem payment for all Medicare Part A covered SNF services. The new single, per diem federal rate was phased in over a three-year period that began on July 1, 1998. Each Medicare Part A covered patient is designated into one of 44 resource utilization group (RUG), or case-mix categories, as defined by the Health Care Financing Administration (HCFA). The per diem payment associated with each RUG category encompasses all costs of furnishing covered skilled nursing services including routine, ancillary and capital-related costs. PPS incorporates payment for pharmacy within the nursing component (as a non-therapy ancillary) of the federal per diem and adjusts costs by the nursing index. PPS represented a significant change in the way long term care facilities were reimbursed for care of Medicare Part A patients. Prior to PPS, long term care facilities were reimbursed the actual cost incurred related to care for the medically complex Part A patients. The new PPS regulations now reimburse only a predetermined rate for each Part A covered resident regardless of the actual cost of care. On November 29, 1999, Congress enacted the Balanced Budget Refinement Act of 1999 (BBRA) in response to concerns that the PPS rates did not adequately reflect the high medication costs of high acuity patients. The BBRA temporarily increases the federal per diem rates by 20% for 15 high acuity categories (RUGs) under Extensive Services, Special Care, Clinically Complex and High and Medium Rehab (effective October 1, 2000). In addition, it increases the per diem payment by four percent for all acuity categories (calculated exclusive of the 20% RUG increase) for the years commencing October 1, 2000 and 2001. BBRA also allows SNFs to elect transition to full federal PPS rates on or after December 15, 1999 instead of participating in the three-year transition period. On December 15, 2000, Congress enacted the Medicare, Medicaid and SCHIP Benefits Improvement and Protection Act of 2000 (BIPA) to further mitigate the effects of reimbursement cuts contained in the BBA. BIPA, effective April 2001, 11 further increases reimbursement by means of a 6.7% rate increase for certain high-acuity rehabilitation patients and a 16.66% across the board increase in the nursing component of the federal rate for all patients. Certain of the increases in Medicare reimbursement for SNFs provided under the BBRA and BIPA will expire in October 2002 unless Congress enacts additional legislation. If no additional legislation is enacted, the loss of revenues associated with this occurrence could have an adverse effect on the financial condition of the Company's SNF customers. While it is hoped that Congress will act in a timely fashion, no assurances can be given as to whether Congress will take action, the timing of any action or the form of any relief enacted. Moreover, for several years, the federal government has examined the appropriateness of the "average wholesale price" ("AWP") as a basis for reimbursement of outpatient prescription drugs under Part B of the Medicare program and certain state Medicaid programs. AWP is an industry term that typically is understood to represent a suggested resale price for wholesale sales to pharmacies. The Company's revenues for drugs dispensed under Medicare Part B are less than 0.5% of total revenues. Discounted AWP plus a dispensing fee is also the basis for many state Medicaid programs' reimbursement of drugs to pharmacy providers for Medicaid beneficiaries generally as well as under certain private reimbursement programs. If government or private health insurance programs discontinue or modify the use of AWP or otherwise implement payment methods that reduce the reimbursement for pharmaceuticals, it could adversely affect the Company's reimbursement. With respect to Medicaid, the BBA repealed the "Boren Amendment" federal payment standard for Medicaid payments to nursing facilities effective October 1, 1997, giving states greater latitude in setting payment rates for such facilities. The law also granted states greater flexibility to establish Medicaid managed care programs without the need to obtain a federal waiver. Although these waiver projects generally exempt institutional care, including nursing facilities and institutional pharmacy services, no assurances can be given that these programs ultimately will not change the reimbursement system for long-term care, including pharmacy services, from fee-for-service to managed care negotiated or capitated rates. The Company is unable to predict what impact, if any, future changes in Medicaid payments to nursing facilities or managed care systems might have on its operations. It is uncertain at this time what additional healthcare reform initiatives, including an expanded Medicare prescription drug benefit, if any, will be implemented, or whether there will be other changes in the administration of governmental healthcare programs or interpretation of governmental policies or other changes affecting the healthcare system. There can be no assurance that future healthcare or budget legislation or other changes will not have an adverse effect on our business. The Health Insurance Portability and Accountability Act of 1996 (HIPAA) was enacted in August 1996. The goals of the legislation are 1) to promote the simplification, standardization and security of the electronic submission of healthcare information (electronic transactions and code sets rule), 2) to protect the security and integrity of healthcare information (security rule) and 3) to protect the confidentiality of healthcare information (privacy rule). The Company has assembled a multi-disciplinary task force to ensure that it has the systems and procedures in place to comply with the HIPAA regulations in a timely manner. Referral Restrictions. The Company is subject to federal and state laws that govern financial and other arrangements between health care providers. These laws include the federal anti-kickback statute, which prohibits, among other things, knowingly and willfully soliciting, receiving, offering or paying any remuneration directly or indirectly in return for or to induce the referral of an individual to a person for the furnishing of any item or service for which payment may be made in whole or in part under Medicare or Medicaid. Many states have enacted similar statutes that are not necessarily limited to items and services for which payment is made by Medicare or Medicaid. Other applicable laws include the federal and state false claims acts. Violations of these laws may result in fines, imprisonment and exclusion from the Medicare and Medicaid programs or other state-funded programs. Federal and state court decisions interpreting these statutes are limited, but have generally construed the statutes broadly. Recent Federal legislation has increased the enforcement and penalties for violation of these statutes. Federal regulations establish "Safe Harbors," which give immunity from criminal or civil penalties to parties in good faith compliance. While the failure to satisfy all the criteria for a specific Safe Harbor does not necessarily mean that an arrangement violates the federal statute, the arrangement is subject to review by the HHS Office of Inspector General (OIG), which is charged with administering the federal anti-kickback statute. Beginning January 1, 1997, the Secretary of Health and Human Services began issuing written advisory opinions regarding the applicability of certain aspects of the anti-kickback statute to specific arrangements or proposed arrangements. Advisory opinions will be binding as to the Secretary and the party requesting the opinion. The OIG has issued "Fraud Alerts" identifying certain questionable arrangements and practices, which it believes, may implicate the federal anti-kickback statute. The OIG has issued a Fraud Alert providing its views on certain joint venture and contractual arrangements between health care providers. The OIG has recently issued a Fraud Alert concerning prescription drug marketing practices that could potentially violate the federal anti-kickback statute. Pharmaceutical marketing activities may implicate the federal anti-kickback statute because drugs are often reimbursed under the Medicaid program. According to the 12 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 that 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. EMPLOYEES As of June 30, 2002, the Company had approximately 2,500 full-time employees. None of its employees are represented by a union. The Company considers relations with its employees to be good. 13 ITEM 2. PROPERTIES The Company presently maintains its executive offices in approximately 27,500 square feet of space in Beachwood, Ohio pursuant to a lease expiring in 2005 with an unaffiliated third party. NCS currently considers this space to be sufficient for its corporate headquarters operations. As of June 30, 2002, the Company leased or owned 86 properties in 33 states with a total square footage of 798,000 square feet ranging in size from approximately 500 square feet to approximately 38,000 square feet. The terms of the leases relating to these properties vary in length remaining, from one month to fourteen years and, in some cases, include options to extend. For information concerning the Company's rental obligations, see Note 5 (Operating Leases) of the Notes to Consolidated Financial Statements, which is set forth at Item 8 of this Annual Report on Form 10-K. ITEM 3. LEGAL PROCEEDINGS In the ordinary course of its business, the Company is subject to inspections, audits, inquiries and similar actions by governmental authorities responsible for enforcing the laws and regulations to which the Company is subject. On July 28, 2002, NCS, Genesis and Geneva Sub, Inc., a wholly owned subsidiary of Genesis ("Sub") entered into a definitive Agreement and Plan of Merger (the "Merger Agreement"), pursuant to which Sub will merge with and into NCS (the "Proposed Merger"), with NCS surviving as a wholly owned subsidiary of Genesis. If the Proposed Merger is completed, each outstanding share of common stock of NCS, par value $0.01 per share ("NCS Common Stock"), other than the NCS Common Stock held by NCS and other than dissenting shares, will be converted into the right to receive 0.1 of a share of common stock of Genesis, par value $0.02 per share. The completion of the Proposed Merger is subject to regulatory approvals and other customary conditions, including the approval of the holders of a majority of the outstanding voting power of NCS Common Stock. In connection with the Merger Agreement, on July 28, 2002, NCS and Genesis entered into agreements (the "Voting Agreements") with certain stockholders of NCS beneficially owning in the aggregate a majority of the outstanding voting power of NCS Common Stock. In the Voting Agreements, such stockholders agreed (1) to vote their shares of NCS Common Stock in favor of adoption and approval of the Merger Agreement and against proposals for certain other transactions and (2) not to transfer their shares of NCS Common Stock prior to the consummation of the Proposed Merger. On August 8, 2002, Omnicare, Inc. (Omnicare) commenced a cash tender offer to purchase all of the outstanding shares of Class A and Class B common stock of NCS for $3.50 per share. The effect of the Omnicare tender offer on the proposed merger between NCS and Genesis is not known at this time. Since the Company entered into the Merger Agreement, seven shareholder lawsuits (six of which are purported class action lawsuits) were filed against NCS and its directors in connection with the Proposed Merger with Genesis and, in two cases, against Genesis and Sub (the "Stockholder Claims"). The Stockholder Claims allege that the directors of NCS breached their fiduciary duties, and certain other duties, to stockholders by entering into the Merger Agreement and seek various relief, including an injunction against consummation of the Proposed Merger, requiring separate class voting on approval of the Proposed Merger by NCS Stockholders, rescinding the Proposed Merger if the same is consummated prior to a final judgment on the Stockholder Claims, declaring the Voting Agreements null and void and compensatory damages and costs. In addition, the amended complaint filed by Omnicare alleges that the Voting Agreements violate the NCS amended and restated certificate of incorporation and therefore resulted in an automatic conversion of such stockholders' Class B common shares into Class A common shares. No court dates have been set for these matters. The Company believes that the allegations set forth in these lawsuits are without merit and intends to contest them vigorously; however, the ultimate outcome of these lawsuits cannot be predicted with certainty. These lawsuits could adversely affect the Company's ability to consummate the Merger Agreement with Genesis. The following lawsuits were each filed with the Court of Chancery in the State of Delaware in and for New Castle County on the dates indicated: - Dr. Dorrin Beirch and Robert M. Miles on behalf of themselves and all others similarly situated v. NCS HealthCare, Inc., Jon H. Outcalt, Kevin B. Shaw, Richard L. Osborne, and Boake A. Sells, filed on July 30, 2002. - Anthony Noble v. NCS HealthCare, Inc., Richard L. Osborne, Jon H. Outcalt, Boake A. Sells, and Kevin B. Shaw, filed on August 1, 2002. - Jeffery Treadway v. Jon H. Outcalt, Kevin B. Shaw, Boake A. Sells, Richard L. Osborne, and NCS HealthCare, Inc., filed on August 2, 2002. 14 - Tillie Saltzman v. Jon H. Outcalt, Kevin B. Shaw, Boake A. Sells, Richard L. Osborne, and NCS HealthCare, Inc., filed on August 2, 2002. - Dolphin Limited Partnership, L.L.P. v. Jon H. Outcalt, Kevin B. Shaw, Boake A. Sells, Richard L. Osborne, Genesis Health Ventures, Inc., Genesis Sub, Inc. and NCS HealthCare, Inc., filed on August 7, 2002. - First Amended Complaint Omnicare, Inc. v. NCS HealthCare, Inc., Jon H. Outcalt, Kevin B. Shaw, Boake A. Sells, Richard L. Osborne, Genesis Health Ventures, Inc. and Genesis Sub, Inc., filed on August 12, 2002 (original complaint filed on August 1, 2002). The following lawsuit was filed with the Court of Common Pleas for Cuyahoga County, Ohio: - Michael Petrovic on behalf of himself and all others similarly situated v. NCS HealthCare, Inc., Jon H. Outcalt, Kevin B. Shaw, Richard L. Osborne, and Boake A. Sells, filed on August 1, 2002. On August 20, 2002, the Company filed a complaint against Omnicare in the United States District Court for the Northern District of Ohio, titled NCS Healthcare, Inc. v. Omnicare, Inc., Case No. 1:02CV1635 (Maita, J.), and, on August 21, 2002, the Company amended the complaint. The complaint, as amended, alleges, among other things, that Omnicare's disclosure on Schedule TO, filed on August 8, 2002 in connection with the associated tender offer, contains materially false and misleading disclosures in violation of Section 14(e) of the Securities Exchange Act of 1934. The Company's subsidiary, NCS HealthCare of Illinois, Inc. ("NCS Illinois") and former owners of the Herrin, Illinois site, were named defendants in a civil action filed under the federal civil False Claims Act in the United States District Court for the Southern District of Illinois in the case captioned "The United States of America, ex rel., Denis Crews, et al. v. Family Nursing Home Services, Inc., et al." (Case No. 99-4020-GPM). On February 20, 2002, the United States of America filed a Notice of Election to Decline Intervention. This Notice was filed in camera and under seal. The complaint was then served on NCS Illinois on July 12, 2002. On July 29, 2002, the Company received a copy of an Amended Complaint in the above-captioned matter in which the Company was also named as a Defendant. 15 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. ITEM 4A. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY* The name, age and positions of each of the Company's Directors and executive officers are as follows: NAME AGE POSITION ---- --- -------- Jon H. Outcalt 66 Chairman of the Board of Directors Kevin B. Shaw 45 President, Chief Executive Officer and Director William B. Byrum 58 Executive Vice President and Chief Operating Officer Gerald D. Stethem 38 Senior Vice President and Chief Financial Officer Mary Beth Levine 42 Senior Vice President and General Counsel John P. DiMaggio 39 Senior Vice President Michael J. Mascali 42 Senior Vice President Thomas Bryant Mangum 51 Senior Vice President Natalie R. Wenger 43 Senior Vice President Richard L. Osborne 64 Director Boake A. Sells 65 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 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 Fiberglass. Mr. Shaw is a graduate of Harvard College (B.A.) and Stanford Graduate School of Business (M.B.A.). William B. Byrum, Executive Vice President and Chief Operating Officer, joined the Company in September 1995. From April 1993 to September 1995, Mr. Byrum was President and Chief Executive Officer of Corinthian Healthcare Systems, Inc., an institutional pharmacy, prior to its acquisition by the Company. From 1991 to April 1993, he was Vice President of Development (Acquisitions) for Hook-SupeRx, Inc. Prior to 1991, Mr. Byrum was Vice President, Store Operations at the Hook Drug Division of Hook-SupeRx, Inc., serving in various management positions. Mr. Byrum is a graduate of Purdue University with a B.S. in Pharmacy. Gerald D. Stethem, Senior Vice President and Chief Financial Officer, joined NCS in November 1994 and served as Controller until February 1998, at which time he was named Chief Financial Officer. He was previously with Ernst & Young LLP, an auditing and accounting firm, where he served as a Manager in the firm's Entrepreneurial Services Group. He is a graduate of Ohio State University with a B.A. in Accounting. Mary Beth Levine, Senior Vice President and General Counsel, joined NCS in July 1999 as Legal Counsel and served in that capacity until June 2000, at which time she was named General Counsel. She was previously an associate with the Cleveland, Ohio law firm of Benesch, Friedlander, Coplan & Aronoff, joining that firm in 1987. She is a graduate of Northwestern University (B.A, M.A) and Case Western University School of Law (J.D). John P. DiMaggio, Senior Vice President, joined the Company in December 1992 and served as Management Information Systems Director of the Company until December 1994. Mr. DiMaggio served as Vice President of Information Systems of the Company from December 1994 to November 1998, at which time he assumed his current position as Senior Vice President of Information Systems. Mr. DiMaggio has an M.B.A. in Finance from the Katz Graduate School of Business and a B.S. Degree in Computer Science from the University of Pittsburgh. Michael J. Mascali, Senior Vice President, joined the Company in October 1995. Mr. Mascali was a Regional Vice President of Operations from October 1995 to February 1998. From February 1998 to January 1999, he was Senior Vice President of Compliance and from January 1999 to May 1999 he was Senior Vice President of Operations, at which time he 16 assumed his current position as Senior Vice President of Compliance. From May 1989 to October 1995, Mr. Mascali was a director of pharmacy for Synetic and Pharmacy Corporation of America in Connecticut, a long term care pharmacy. Mr. Mascali graduated from St. John's University with a B.S. in Pharmacy. Thomas Bryant Mangum, Senior Vice President, joined the Company in June 1998. From November 1996 to June 1998, Mr. Mangum was Senior Director of Pharmacy for Tenet HealthCare System, an owner and manager of acute care hospitals. From November 1995 to November 1996, he was Vice President of Pharmacy services for Premier, Inc., a group purchasing organization for acute care hospitals, where he had responsibility for pharmaceutical contract negotiations. From 1990 to November 1995, Mr. Mangum was Associate Vice President of Pharmacy and Nutrition Services for SunHealth, a group purchasing organization for acute care hospitals. He is a graduate of University of North Carolina Pharmacy School and currently serves on the Pharmacy School Board. Natalie R. Wenger, Senior Vice President, joined the Company in July 1996 as Vice President of Quality Assurance and served in that capacity until May 1997. She served as a Regional Vice President of Operations from May 1997 until July 1999 and a Divisional Vice President of Operations from July 1999 until July 2002 when she assumed her current position as Senior Vice President of Operations. Prior to joining the company she was Vice President of Operations and President of the Greenwood Pharmacy division of Thrift Drug. Ms. Wenger is a graduate of Duquesne University with a B.S. Degree in Pharmacy. Richard L. Osborne, a Director of the Company since 1986, is currently serving as the Professor for the Practice of Management at the Weatherhead School of Management, Case Western Reserve University, Cleveland, Ohio. Mr. Osborne serves on the Board of Directors of Myers Industries, Inc., a manufacturer of plastic and rubber parts for the automotive and other industries, New Horizons Worldwide, Inc., a provider of computer training services, and Ohio Savings Financial Corporation, a savings and loan holding company. He is a graduate of Bowling Green State University (B.S.) and Case Western Reserve University (M.S.). Boake A. Sells, a Director of the Company since November 1993, has been a self-employed private investor since June 1992. He was Chairman of the Board, President and Chief Executive Officer of Revco D.S., Inc. from September 1987 to June 1992, and was formerly President and Chief Operating Officer of Dayton Hudson Corporation and President and Chief Operating Officer of Cole National Corporation. Mr. Sells is a Director of Harrah's Entertainment, Inc., a leading casino gaming company. He is a graduate of University of Iowa (B.A.) and Harvard Graduate School of Business (M.B.A.). 17 PART II ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS The Class A Common Stock is traded on the Pink Sheets Electronic Quotation Service under the symbol NCSS. Between December 8, 1999 and October 9, 2000, the Company's Class A Common Stock was traded on the Nasdaq SmallCap Market. Prior to December 8, 1999, the Company's Class A Common Stock was traded on the Nasdaq National Market. The following table sets forth, for the two fiscal years ended June 30, 2002, the high and low sale prices per share for the Class A Common Stock, as reported on the Pink Sheets Electronic Quotation Service and the Nasdaq SmallCap Market. These prices do not include retail markups, markdowns or commissions. HIGH LOW ----- ----- 2001 First Quarter $0.69 $0.25 Second Quarter 0.47 0.09 Third Quarter 0.50 0.16 Fourth Quarter 0.35 0.17 2002 First Quarter $0.25 $0.16 Second Quarter 0.24 0.12 Third Quarter 0.19 0.07 Fourth Quarter 0.26 0.11 On August 15, 2002, the last sale price of the Class A Common Stock as reported by the Pink Sheets Electronic Quotation Service was $2.49 per share. As of August 15, 2002, there were approximately 224 holders of record of the Class A Common Stock, and approximately 21 holders of record of Class B Common Stock. This figure does not include stockholders with shares held under beneficial ownership in nominee name or within clearinghouse positions of brokerage firms and banks. The Company has never declared or paid cash dividends on its Class A Common Stock. The Company currently intends to retain any earnings for use in its business and therefore does not anticipate paying any dividends in the foreseeable future. Any determination to pay cash dividends in the future will be at the discretion of the Board of Directors after taking into account various factors, including the Company's financial condition, results of operations, current and anticipated cash needs and plans for expansion. On August 3, 1999 the Company amended its line of credit agreement entering into several restrictive covenants including a restriction on declaration and payment of cash dividends to shareholders. There were no equity securities of the Company issued during the fourth fiscal quarter that were not registered under the Securities Act of 1933, as amended (the "Securities Act"). The following table sets forth securities authorized for issuance under equity compensation plans as of June 30, 2002. All applicable equity compensation plans were previously approved by security holders. EQUITY COMPENSATION PLAN INFORMATION

~~PART~~NUMBER IOF ~~ITEM~~SECURITIES 1.NUMBER ~~BUSINESS 4 ITEM 2. PROPERTIES 13 ITEM 3. LEGAL PROCEEDINGS 13 ITEM 4. SUBMISSION~~ OF ~~MATTERS~~SECURITIES TO AWEIGHTED ~~VOTE~~AVERAGE OFEXERCISE ~~SECURITY~~REMAINING ~~HOLDERS~~AVAILABLE ~~13 ITEM 4A. EXECUTIVE OFFICERS OF THE COMPANY 14 PART II ITEM 5. MARKET~~ FOR ~~THE~~BE ~~COMPANY'S~~ISSUED ~~COMMON~~UPON ~~STOCK~~EXERCISE ~~AND~~PRICE ~~RELATED STOCKHOLDER MATTERS 15 ITEM 6. SELECTED FINANCIAL DATA 16 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS~~ OF ~~FINANCIAL~~OUTSTANDING ~~CONDITION~~FUTURE ~~AND~~ISSUANCE ~~RESULTS~~UNDER OFEQUITY ~~OPERATIONS~~PLAN 17CATEGORY ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 25 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 25 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH AUDITORS ON ACCOUNTING AND FINANCIAL DISCLOSURE 47 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF ~~THE~~OUTSTANDING ~~COMPANY~~OPTIONS 47OPTIONS ~~ITEM 11. EXECUTIVE~~ COMPENSATION 47PLANS ~~ITEM~~------------- ~~12.~~---------------------- ~~SECURITY~~------- ~~OWNERSHIP~~------------------ OFEquity ~~CERTAIN~~compensation ~~BENEFICIAL~~plans ~~OWNERS~~approved ~~AND~~by ~~MANAGEMENT~~security 47holders ~~ITEM~~2,517,582 ~~13.~~$ ~~CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 47 PART IV ITEM 14~~4.44 ~~EXHIBITS~~1, ~~FINANCIAL STATEMENT SCHEDULES~~476,943 ~~AND~~========= ~~REPORTS~~====== ~~ON FORM 8-K 48~~=========

18 ITEM 6. SELECTED FINANCIAL DATA

~~NAME~~YEAR ~~AGE~~ENDED ~~POSITION~~JUNE ~~Jon~~30, H.------------------- ~~Outcalt~~2002 652001 ~~Chairman~~2000 of1999 ~~the~~1998 ~~Board~~---- ---- ---- ---- ---- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) STATEMENT OF OPERATIONS DATA: Revenues $ 645,756 $ 626,328 $ 694,530 $ 717,825 $ 509,064 Cost of ~~Directors~~revenues ~~Kevin~~538,926 B.514,483 ~~Shaw~~556,757 540,547 380,217 --------- --------- --------- --------- --------- Gross profit 106,830 111,845 137,773 177,278 128,847 Selling general and administrative expenses (1), (3) 93,776 123,272 126,969 139,522 93,895 Special charge to increase allowance for doubtful accounts (2) - - 44,623 ~~President~~32,384 ~~Chief~~- ~~Executive~~Nonrecurring ~~Officer~~charges (2) - - 51,136 ~~Secretary~~8,115 8,862 --------- --------- --------- --------- --------- Operating income (loss) 13,054 (11,427) (84,955) (2,743) 26,090 Interest expense, net (25,195) (31,713) (26,243) (18,301) (5,745) --------- --------- --------- --------- --------- Income (loss) before income taxes and ~~Director~~cumulative ~~William~~effect Bof accounting change (12,141) (43,140) (111,198) (21,044) 20,345 Income tax (expense) benefit (300) (370) (3,326) 7,640 (9,014) --------- --------- --------- --------- --------- Income (loss) before cumulative effect of accounting change (12,441) (43,510) (114,524) (13,404) 11,331 Cumulative effect of accounting change (1), (4) (222,116) - - (2,921) - --------- --------- --------- --------- --------- Net income (loss) $(234,557) $ (43,510) $(114,524) $ (16,325) $ 11,331 ========= ========= ========= ========= ========= Net income (loss) per share - basic $ (9.89) ~~Byrum~~$ 57(1.85) ~~Executive~~$ ~~Vice~~(5.31) ~~President~~$ ~~and~~(0.81) ~~Chief~~$ ~~Operating~~0.59 ~~Officer~~========= ~~Gerald~~========= D========= ========= ========= Net income (loss) per share - diluted $ (9.89) ~~Stethem~~$ 37(1.85) ~~Senior~~$ ~~Vice~~(5.31) ~~President~~$ ~~and~~(0.81) ~~Chief~~$ ~~Financial~~0.58 ~~Officer~~========= ~~Mary~~========= ~~Beth~~========= ~~Levine~~========= 41========= ~~Senior~~Net ~~Vice~~income ~~President~~(loss) ~~and~~per ~~General~~share ~~Counsel~~before ~~John~~cumulative Peffect of accounting change - basic $ (0.52) ~~DiMaggio~~$ 38(1.85) ~~Senior~~$ ~~Vice~~(5.31) ~~President~~$ ~~Michael~~(0.66) J$ 0.59 ~~Mascali~~========= 41========= ~~Senior~~========= ~~Vice~~========= ~~President~~========= ~~Thomas~~Net ~~Bryant~~income ~~Mangum~~(loss) 50per ~~Senior~~share ~~Vice~~before ~~President~~cumulative ~~Richard~~effect Lof accounting change - diluted $ (0.52) ~~Osborne~~$ 63(1.85) ~~Director~~$ ~~Boake~~(5.31) A$ (0.66) ~~Sells~~$ 640.58 ~~Director~~========= ========= ========= ========= ========= Weighted average common shares outstanding - basic 23,717 23,535 21,551 20,200 19,100 ========= ========= ========= ========= ========= Weighted average common shares outstanding - 23,717 23,535 21,551 20,200 19,372 diluted ========= ========= ========= ========= ========= AS OF JUNE 30, -------------- 2002 2001 2000 1999 1998 ---- ---- ---- ---- ---- (IN THOUSANDS) BALANCE SHEET DATA: Cash and cash equivalents $ 42,539 $ 39,464 $ 16,387 $ 29,424 $ 21,186 Working capital (223,430) (216,529) (93,865) 197,395 149,362 Total assets 277,793 513,971 546,663 699,499 623,790 Line of credit 206,130 206,130 206,130 214,700 147,800 Long-term debt, excluding current portion 549 825 1,291 1,936 3,879 Convertible subordinated debentures 102,361 102,107 102,000 100,000 102,753 Stockholders' equity (deficit) (108,062) 126,495 169,705 276,434 287,334

(1) Selling, general and administrative expenses for 1999 include $11,503 of pre-tax costs that would have been capitalized prior to the adoption of SOP 98-5, "Reporting on the Costs of Start-up Activities." The cumulative effect of accounting change represents start-up costs, net of tax, that were previously capitalized as of June 30, 1998. The fiscal year 2002 cumulative effect of accounting change represents the implementation of SFAS No. 142 "Goodwill and Other Intangible Assets". (2) For 1998, represents a nonrecurring charge related to restructuring and other nonrecurring expenses in connection with the implementation and execution of strategic restructuring and consolidation initiatives of certain operations and other nonrecurring items. For 1999, represents a special charge to increase the allowance for doubtful accounts and other nonrecurring charges in association with the implementation and execution of strategic restructuring and consolidation initiatives of certain operations and other nonrecurring items. For 2000, represents a special charge to increase the allowance for doubtful accounts and nonrecurring, restructuring and other special charges associated with the continuing implementation and execution of strategic restructuring and consolidation activities, the planned disposition of certain non-core and/or non-strategic assets, 19 impairment of certain assets and other nonrecurring items. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." (3) Selling, general and administrative expenses for the year ended June 30, 2001 include the following: 1) $10,043 of additional bad debt expense to fully reserve for remaining accounts receivable of non-core and non-strategic businesses exited by the Company, 2) $1,034 of restructuring and other related charges associated with the continuing implementation and execution of strategic restructuring and consolidation activities and 3) $2,106 in fixed asset impairment charges recorded in accordance with Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long Lived Assets and for Long Lived Assets to be Disposed of," relating primarily to changes in asset values resulting from the impact of restructuring activities and changes in operational processes under restructured operations. (4) For 2002, the cumulative effect of accounting change represents the adoption of Statement of Financial Accounting Standards (SFAS) No. 142 "Goodwill and Other Intangible Assets." The Company recorded a non-cash charge of $222,116 to reduce the carrying value of its goodwill in accordance with SFAS No. 142. 20 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS PROPOSED MERGER WITH GENESIS HEALTH VENTURES, INC. On July 28, 2002, the Company entered into a definitive merger agreement with Genesis Health Ventures, Inc. (Genesis). If the proposed merger is completed, each outstanding share of common stock of the Company will be converted into the right to receive 0.1 of a share of Genesis common stock. At the closing of the proposed merger, Genesis will repay in full the outstanding debt of NCS, including $206 million of senior debt, and will redeem $102 million of 5 3/4% convertible subordinated debentures, including accrued and unpaid interest and any applicable redemption premiums. The completion of the proposed merger is subject to regulatory approvals and other customary conditions, including the approval of the holders of a majority of the outstanding voting power of the Company's common stock. In connection with the merger agreement, on July 28, 2002, NCS and Genesis entered into agreements (voting agreements) with certain stockholders of NCS beneficially owning in the aggregate a majority of the outstanding voting power of NCS Common Stock. In the voting agreements, such stockholders agreed (1) to vote their shares of NCS Common Stock in favor of adoption and approval of the merger agreement and against proposals for certain other transactions and (2) not to transfer their shares of NCS Common Stock prior to the consummation of the proposed merger. Genesis provides healthcare services to America's elderly through a network of NeighborCare pharmacies and Genesis ElderCare skilled nursing and assisted living facilities. The merger will consolidate the operations of the Company and NeighborCare, Genesis' pharmacy subsidiary, creating the second largest long-term care pharmacy provider in the United States. On August 8, 2002, Omnicare, Inc. (Omnicare) commenced a cash tender offer to purchase all of the outstanding shares of Class A and Class B common stock of NCS for $3.50 per share. The effect of the Omnicare tender offer on the proposed merger between NCS and Genesis is not known at this time. RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, certain items from the Company's Statements of Operations, expressed as a percentage of total revenues.

~~HIGH~~YEAR ~~LOW~~ENDED JUNE 30, ---- --------------- 2002 2001 2000 ~~First~~---- ~~Quarter~~---- $---- 5Revenues 100.630% $100.0% 1100.780% ~~Second~~Cost ~~Quarter~~of 3revenues 83.845 82.1 80.532 ~~Third~~------- ~~Quarter~~------- 3------ Gross margin 16.5 17.9 19.8 1Selling, general and administrative expenses 14.475 ~~Fourth~~19.7 ~~Quarter~~18.3 1Special charge to increase allowance for doubtful accounts - - 6.814 0Nonrecurring charges - - 7.563 ~~2001~~------- ~~First~~------- ~~Quarter~~------- $Operating income (loss) 2.0 (1.698) $(12.2) 0Interest expense, net (3.259) ~~Second~~(5.1) ~~Quarter~~(3.8) 0------- ------- ------- Loss before income taxes and cumulative effect of accounting change (1.479) 0(6.099) ~~Third~~(16.0) ~~Quarter~~Income tax expense (0.505) 0------- ------- ------- Loss before income taxes (1.9) (6.9) (16.5) ~~Fourth~~Cumulative ~~Quarter~~effect 0of accounting change (34.354) 0- - ------- ------- ------- Net loss (36.173)% (6.9)% (16.5)% ======= ======= =======

YEARS ENDED JUNE 30, 2002 AND 2001 Net loss for the year ended June 30, 2002 was $234.6 million or $9.89 per share compared to a net loss of $43.5 million or $1.85 per share for the year ended June 30, 2001. 21 Net loss for the year ended June 30, 2002, excluding the cumulative effect of the adoption of Statement of Financial Accounting Standards (SFAS) No. 142 "Goodwill and Other Intangible Assets," was $12.4 million or $0.52 per share compared to net loss, excluding bad debt expense for non-core businesses which had been either sold or shut down (exited businesses), fixed asset impairment charges and additional expenses related to restructuring activities, of $30.3 million or $1.29 per share for the year ended June 30, 2001. The Company elected early adoption of SFAS No. 142 effective July 1, 2001. In accordance with SFAS No. 142, goodwill and other indefinite lived intangible assets are no longer amortized. Under this non-amortization approach, SFAS No. 142 requires that goodwill and other indefinite lived intangible assets be reviewed for impairment using a fair value based approach upon adoption and at least annually thereafter. The Company recorded a non-cash charge of $222.1 million to reduce the carrying value of its goodwill as a result of the adoption of SFAS No. 142. In accordance with the requirements of SFAS No. 142, the charge has been recorded as a cumulative effect of accounting change in the Company's consolidated statement of operations. The results for the year ended June 30, 2002 exclude goodwill amortization in accordance with the Company's adoption of SFAS No. 142. In accordance with SFAS No. 142, the results for the year ended June 30, 2001 are as originally reported and include goodwill amortization. If SFAS No. 142 would have been effective for the year ended June 30, 2001, net loss would have been $33.1 million and net loss per share would have been $1.41, excluding $10.4 million of goodwill amortization. Revenues for the year ended June 30, 2002 increased $19.5 million or 3.1% to $645.8 million from $626.3 million for the year ended June 30, 2001. The increase in revenue from the prior fiscal year is primarily attributable to pharmaceutical inflation over the last year and the increased utilization of higher priced drugs. Cost of revenues for the year ended June 30, 2002 increased $24.4 million or 4.7% to $538.9 million from $514.5 million for the year ended June 30, 2001. Cost of revenues as a percentage of revenues increased to 83.5% for the year ended June 30, 2002 from 82.1% for the year ended June 30, 2001. The decline in gross margin as a percentage of revenues was primarily due to an unfavorable change in product mix, the continued shift toward lower margin payer sources such as Medicaid and third-party insurance plans, and lower Medicaid and third- party insurance reimbursement levels. Medicaid and third-party insurance revenues accounted for 60.1% of revenues for the year ended June 30, 2002 versus 57.4% for the year ended June 30, 2001. The Company expects these gross margin trends to continue in fiscal 2003. Selling, general and administrative expenses for the year ended June 30, 2002 decreased $29.5 million or 23.9% to $93.8 million from $123.3 million for the year ended June 30, 2001. Selling, general and administrative expenses as a percentage of revenues decreased from 19.7% for the year ended June 30, 2001 to 14.5% for the year ended June 30, 2002. Selling, general and administrative expenses for the year ended June 30, 2001 included $13.2 million for bad debt expense for exited businesses, fixed asset impairment charges and additional expenses related to restructuring activities. The Company recorded $10.1 million of additional bad debt expense to fully reserve for remaining accounts receivable of non-core and non-strategic businesses exited prior to June 30, 2001. These businesses were ancillary to the core pharmacy operations and as part of the restructuring activities were either sold, if there was an available buyer, or shut down. Collection of these receivables was much more difficult than anticipated. The Company recorded additional expenses related to restructuring activities of approximately $1.0 million, primarily for lease terminations associated with the continuing implementation and execution of strategic restructuring and consolidation activities. The Company recorded a fixed asset impairment charge of $2.1 million in accordance with Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long Lived Assets and for Long Lived Assets to be Disposed of" (SFAS No. 121). This charge relates primarily to changes in asset values resulting from the impact of restructuring activities and changes in operational processes under restructured operations. As discussed above, the Company adopted SFAS No. 142 effective July 1, 2001 and accordingly discontinued the amortization of goodwill. If SFAS No. 142 would have been effective for the year ended June 30, 2001, selling, general and administrative expenses would have been $112.9 million. Excluding the impact of the adoption of SFAS No. 142 and bad debt expense for exited businesses, fixed asset impairment charges and additional expenses related to restructuring activities, selling, general and administrative expenses for the year ended June 30, 2001 would have been $99.7 million or 15.9% of sales compared to $93.8 million or 14.5% of sales for the year ended June 30, 2002. The decrease in expenses from the prior year is a result of efforts by the Company to reduce operating and overhead costs and a decrease in bad debt expense, partially offset by an increase in professional fees related to restructuring activities. The decrease in bad debt expense is primarily a result of improved collection trends and improved accounts receivable aging characteristics. Days sales outstanding on net accounts receivable decreased to 48 days at June 30, 2002 from 55 days at June 30, 2001. Operating income for the year ended June 30, 2002, was $13.1 million or 2.0% of revenues compared to operating income, excluding the impact of the adoption of SFAS No. 142 and bad debt expense for exited businesses, fixed asset impairment charges and additional expenses related to restructuring activities, of $12.2 million or 1.9% of revenues for the 22 year ended June 30, 2001. The increase is primarily a result of a decrease in operating expenses, partially offset by an increase in cost of revenues as discussed above. Improvement in operating performance in fiscal 2002 is also due to a more stable operating environment for skilled nursing facility (SNF) customers as they realized the benefits of higher statutory reimbursements rates in conjunction with the implementation of the Balanced Budget Refinement Act of 1999 (BBRA) and the Medicare, Medicaid and SCHIP Benefits Improvement and Protection Act of 2000 (BIPA). Certain of the increases in Medicare reimbursement for SNFs provided under the BBRA and BIPA will expire in October 2002 unless Congress enacts additional legislation. If additional legislation is not enacted, the loss of revenues associated with this occurrence could have a negative impact on the financial condition of the Company's SNF customers. The Company had net interest expense of $25.2 million for the year ended June 30, 2002, compared to net interest expense of $31.7 million for the year ended June 30, 2001. The decrease is primarily attributable to a decrease in interest rates during fiscal year 2002. As discussed below, the line of credit agreement expired on May 31, 2002 and the Company is currently being charged a default interest rate. YEARS ENDED JUNE 30, 2001 AND 2000 Net loss for the year ended June 30, 2001 was $43.5 million or $1.85 per share compared to a net loss of $114.5 million or $5.31 per share for the year ended June 30, 2000. Net loss for the year ended June 30, 2001, excluding bad debt expense for non-core businesses which had been either sold or shut down (exited businesses), fixed asset impairment charges and additional expenses related to restructuring activities, was $30.3 million or $1.29 per share compared to net loss, excluding nonrecurring, restructuring, other special charges and a non-cash charge related to a valuation allowance recorded against the Company's net deferred tax assets, of $9.5 million or $0.44 per share for the year ended June 30, 2000. Operating results of the Company in fiscal 2000 and 2001 were negatively affected by the ongoing difficulty of the operating environment in the long-term care industry. In particular, the long-term care industry was adversely effected by the continued impact of the implementation of Medicare's Prospective Payment System (PPS). The adverse impact of the implementation of PPS under the Balanced Budget Act of 1997 for Medicare residents of skilled nursing facilities was significantly greater than anticipated and resulted in a difficult operating environment in the long-term care industry. PPS resulted in a substantial reduction in reimbursement for skilled nursing facilities. Consequently, the Company experienced revenue and margin pressure as a result of these reimbursement changes. Resident acuity level also decreased as these facilities attempted to avoid high acuity patients, negatively impacting the overall utilization of drugs, particularly those with higher costs such as infusion therapy. For the Company, operating processes for administering and executing PPS related activities were significantly different than operating processes prior to the implementation of PPS. Contracting processes, data gathering, and operational dispensing processes for Medicare Part A residents all underwent significant change resulting in higher costs and lower margins for the Company. These costs were in addition to the impact of costs associated with customer bankruptcies and their deteriorating financial condition. During the two years ended June 30, 2001, the Company made considerable efforts in reducing overhead and operating costs by accelerating efforts to consolidate and /or close pharmacy and ancillary service locations, the shutdown or sale of certain non-strategic and/or unprofitable operations, and continuing its employee reduction plan. In addition, the Company continued to review the profitability of its customer base and terminated uneconomic accounts and began applying stricter standards in accepting new business. Revenues for the year ended June 30, 2001 decreased $68.2 million or 9.8% to $626.3 million from $694.5 million for the year ended June 30, 2000. Approximately $46.9 million of the decrease in revenue from the prior fiscal year is attributable to a decrease in revenue from the Company's allied and ancillary services. This decrease is due to decisions by management to terminate uneconomic accounts and the shutdown or sale of certain non-strategic or unprofitable operations. Through June 30, 2001, the Company had disposed of three ancillary operations that were not contributing to the overall financial performance of the Company. The remaining $21.3 million of the decrease in revenue is attributable to the Company's pharmacy operations and is related to net bed loss during the year and revenue pressure associated with the continued implementation of the PPS. Although the Company added new customers during fiscal 2001 through its sales and marketing efforts, the number of beds served by the Company declined due to competitive conditions and decisions by management to terminate uneconomic accounts and accounts with unacceptable credit risk. Cost of revenues for the year ended June 30, 2001 decreased $42.3 million or 7.6% to $514.5 million from $556.8 million for the year ended June 30, 2000. Cost of revenues as a percentage of revenues increased to 82.1% for the year ended June 30, 2001 from 80.2% for the year ended June 30, 2000. Gross margins for the year ended June 30, 2001 continued to be effected by the impact of the PPS reimbursement system. Margin pressure resulted from continued Medicare Part A pricing pressure, lower than anticipated gross margins on PPS related contracts, reduced acuity levels and census at customer facilities, a continued shift toward lower margin payer sources including Medicaid and insurance and lower Medicaid and insurance reimbursement. This 23 includes the impact of the implementation of the Health Care Financing Administration Federal Upper Limits (FUL's) which were implemented in December 2000 and reflected lower reimbursement from State Medicaid programs. Selling, general and administrative expenses for the year ended June 30, 2001 decreased $3.7 million or 2.9% to $123.3 million from $127.0 million for the year ended June 30, 2000. Selling, general and administrative expenses as a percentage of revenues increased from 18.3% for the year ended June 30, 2000 to 19.7% for the year ended June 30, 2001. Excluding bad debt expense for exited businesses, fixed asset impairment charges and additional expenses related to restructuring activities, selling, general and administrative expenses for the year ended June 30, 2001 decreased $16.9 million or 13.3% to $110.1 million from $127.0 million for the year ended June 30, 2000. Excluding bad debt expense for exited businesses, fixed asset impairment charges and additional expenses related to restructuring activities, selling, general and administrative expenses as a percentage of revenues decreased from 18.3% for the year ended June 30, 2000 to 17.6% for the year ended June 30, 2001. The decrease in expenses from the year ended June 30, 2000 is a result of efforts by the Company to reduce operating and overhead costs, including continuing the consolidation and/or closing of pharmacy locations, the restructuring or sale of certain non-core ancillary lines of business and continuing its employee reduction plan. These decreases were partially offset by increases in bad debt expense for continuing businesses and professional fees related to restructuring activities. Selling, general and administrative expenses for the year ended June 30, 2001 included $13.2 million for bad debt expense for exited businesses, fixed asset impairment charges and additional expenses related to restructuring activities. The Company recorded $10.0 million of additional bad debt expense to fully reserve for remaining accounts receivable of non-core and non-strategic businesses exited by the Company. These businesses were ancillary to the core pharmacy operations and as part of the restructuring activities were either sold, if there was an available buyer, or shut down. Collection efforts on these receivables were much more difficult than anticipated. The Company recorded additional expenses related to restructuring activities of approximately $1.1 million, primarily for lease terminations associated with the continuing implementation and execution of strategic restructuring and consolidation activities. At June 30, 2002, approximately $0.4 million is included in accrued expenses related to these expenses. For the year ended June 30, 2001, the Company recorded a fixed asset impairment charge of $2.1 million in accordance with Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long Lived Assets and for Long Lived Assets to be Disposed of" (SFAS No. 121). This charge relates primarily to changes in asset values resulting from the impact of restructuring activities and changes in operational processes under restructured operations. Operating income for the year ended June 30, 2001, excluding bad debt expense for exited businesses, fixed asset impairment charges and additional expenses related to restructuring activities, was $1.8 million or 1.9% of revenues compared to operating income, excluding nonrecurring, restructuring and special charges described below of $10.8 million or 1.6% of revenues for the year ended June 30, 2000. The decrease is primarily a result of a decrease in gross margins as described above and increases in bad debt expense for continuing businesses and professional fees related to restructuring activities, partially offset by a decrease in operating expenses as a result of efforts by the Company to reduce operating and overhead costs, including continuing the consolidation and/or closing of pharmacy locations, the restructuring or sale of certain non-core ancillary lines of business and continuing its employee reduction plan. During fiscal 2000, the Company recorded nonrecurring, restructuring and special charges of $95.8 million. A special charge of $44.6 million was recorded to increase the allowance for doubtful accounts, and nonrecurring, restructuring and other special charges of $51.2 million were recorded in connection with the implementation and execution of strategic restructuring and consolidation initiatives of certain operations, the planned disposition of certain non-core and/or non-strategic assets, impairment of certain assets and other nonrecurring items. The special charge to increase the allowance for doubtful accounts resulted from the continuing negative changes observed in industry and customer trends during the year ended June 30, 2000, and a change in the method of estimating the allowance necessary for accounts receivable. The financial condition of the Company's primary customer base and general industry trends continued to deteriorate throughout the year. Due to the negative trends that the Company's customers were facing, management re-evaluated the method of estimating the allowances necessary for these and other customers. The total provision for doubtful accounts, including the amounts included in the special charge, was $53.8 million for the year ended June 30, 2000. The Company continued its plan of restructuring to consolidate certain pharmacy sites in order to improve operating efficiencies. As a result, the Company consolidated thirteen additional pharmacy sites into either a new or existing location. The Company also shutdown six locations associated with certain ancillary services. During the year ended June 30, 2000, the Company recorded nonrecurring charges of $9.7 million related to these site consolidations and location shutdowns, inclusive of $1.1 million of additional costs incurred on site consolidations previously announced. During the year ended June 30, 2000, the Company adopted a formal exit plan to dispose of certain non-core and/or non-strategic assets. The Company recorded nonrecurring charges of $30.7 million related to the planned disposition of assets primarily consisting of impairment to goodwill and property and equipment. Through June 30, 2002, the Company has disposed of four ancillary service operations that were not contributing to the overall financial performance of the Company. Total revenue and operating income of the related business units was $59.3 million and $1.5 million, respectively, for the year ended 24 June 30, 2000. The carrying amount of assets held for sale at June 30, 2000 was $7.6 million. At June 30, 2002, the Company has no assets held for sale. The remaining $10.8 million of the nonrecurring charge primarily relates to severance incurred during the year associated with the Company's expense reduction initiatives, additional asset impairments, costs related to a settlement with federal authorities regarding the investigation of the Company's Indianapolis, Indiana facility and other nonrecurring expenses. During December 1999, the Company reached a settlement with the U.S. Attorney's office in the Southern District of Indiana regarding the federal investigation of the Company's facility in Indianapolis, Indiana. As a result, the Company recorded the settlement amount as a nonrecurring charge. Under the terms of the settlement, the Company paid $4.1 million to the U.S. Attorney's office. The Company also agreed to maintain its current level of spending in connection with its compliance systems and procedures for a period of three years. If the Company does not comply with the terms of the accord, an additional $1.5 million will be payable to the U.S. Attorney's office. See "Certain Regulatory Investigations and Legal Proceedings". Employee severance costs included in the nonrecurring charges relate to the termination of 472 employees. As of June 30, 2002, all terminations associated with these restructuring activities have been completed. Details of the fiscal 2000 nonrecurring, restructuring and special charges and related activity are as follows:

~~YEAR~~Nonrecurring ~~ENDED~~Reserve ~~JUNE~~Reserve ~~30,~~Description Cash/Non-~~------------------~~cash ~~2001~~Charge ~~2000~~Activity ~~1999~~At ~~1998~~6/30/01 ~~1997~~Activity At 6/30/02 --------- --~~-------~~ --------- ----~~-----~~ --------- ~~(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) STATEMENT OF OPERATIONS DATA: Revenues $ 626,328 $ 694,530 $ 717,825 $ 509,064 $ 275,040 Cost of revenues 514,483 556,757 540,547 380,217 205,536~~ ---~~------~~ --------- ---------- --------- ---------- ~~Gross~~(In ~~profit~~millions) ~~111,845~~Site ~~137,773~~Consolidations ~~177,278~~Severance/compensation ~~128,847~~related ~~69,504~~Cash ~~Selling,~~$ ~~general and administrative expenses (~~1),.3 $(1.3) ~~123,271~~$ ~~126,969~~-- ~~139,522~~$ ~~93,895~~-- ~~51,153~~$ ~~Special~~-- ~~charge~~Lease toterminations ~~increase~~Cash ~~allowance~~2.8 ~~for doubtful accounts~~ (2.1) -.7 ~~44,623 32,384 - - Nonrecurring charges~~ (2.5) -.2 ~~51,136~~Asset ~~8,115~~impairments ~~8,862~~ Non-cash ~~---------~~4.4 ~~---------~~(4.4) --~~-------~~ --~~-------~~ --~~-------~~ ~~Operating~~Other ~~income~~Cash ~~(loss)~~1.2 (~~11,426~~1.0) ~~(84,955)~~.2 (~~2,743~~.1) ~~26,090~~.1 ~~18,351~~Special ~~Interest~~increase ~~(expense)~~to ~~income,~~allowance ~~net~~for ~~(31,714)~~doubtful ~~(26,243)~~accounts ~~(18,301)~~Non-cash 44.6 (~~5,745~~44.6) ~~1,576~~ --~~-------~~ --~~-------~~ --~~-------~~ ~~---------~~Disposition ~~---------~~of ~~Income~~Assets ~~(loss)~~Asset ~~before~~impairment ~~income~~Non-cash ~~taxes~~30.2 (~~43,140~~30.2) ~~(111,198)~~-- ~~(21,044)~~-- ~~20,345~~-- ~~19,927~~Other ~~Income~~Cash ~~tax~~.5 (~~expense~~.5) ~~benefit (370) (3,326) 7,640 (9,014) (8,655)~~ --~~-------~~ --~~-------~~ --~~-------~~ ~~---------~~Other ~~---------~~Cash ~~Income~~6.6 (~~loss~~6.5) ~~before~~.1 ~~accounting change~~ (~~43,510) (114,524) (13,404) 11,331 11,272 Cumulative effect of accounting change (~~.1) -- Non-cash 4.2 (4.2~~,921~~) - - -- -- ------ ------~~---~~ ------~~---~~ ------~~---~~ ------~~---~~ ~~Net~~Total ~~income (loss)~~ $ ~~(43,510) $(114,524) $ (16,325) $ 11,331 $ 11,272 ========= ========= ========= ========= ========= Net income (loss) per share - basic $ (1~~95.~~85)~~8 $ (594.318) $ ~~(0.81) $ 0.59 $ 0.70 ========= ========= ========= ========= ========= Net income (loss) per share - diluted $ (~~1.~~85) $ (5.31) $ (~~0~~.81)~~ $ ~~0.58 $ 0.69 ========= ========= ========= ========= ========= Income~~ (~~loss) before accounting change - basic $ (1.85) $ (5.31) $ (~~0.667) $ 0.593 ~~$ 0.70~~ ======~~===~~ ======~~===~~ ======~~===~~ ======~~===~~ ========= Income (loss) before accounting change - diluted $ (1.85) $ (5.31) $ (0.66) $ 0.58 $ 0.69 ========= ========= ========= ========= ========= Weighted average common shares outstanding - basic 23,535 21,551 20,200 19,100 15,991 ========= ========= ========= ========= ========= Weighted average common shares outstanding - diluted 23,535 21,551 20,200 19,372 16,843 ========= ========= ========= ========= ========= YEAR ENDED JUNE 30, 2001 2000 1999 1998 1997 --------- --------- --------- --------- --------- (IN THOUSANDS) BALANCE SHEET DATA: Cash and cash equivalents $ 39,464 $ 16,387 $ 29,424 $ 21,186 $ 8,160 Working capital (216,529) (93,865) 197,395 149,362 53,164 Total assets 513,971 546,663 699,499 623,790 321,030 Line of credit 206,130 206,130 214,700 147,800 10,285 Long-term debt, excluding current portion 825 1,291 1,936 3,879 8,043 Convertible subordinated debentures 102,107 102,000 100,000 102,753 4,813 Stockholders' equity $ 126,495 $ 169,705 $ 276,434 $ 287,334 $ 253,226

The Company had net interest expense of $31.7 million for the year ended June 30, 2001, compared to net interest expense of $26.2 million for the year ended June 30, 2000. The increase is primarily attributable to an increase in interest rates and other finance related charges during fiscal year 2001. As discussed below, the line of credit agreement expired on May 31, 2002 and the Company is currently being charged a default interest rate. LIQUIDITY AND CAPITAL RESOURCES Net cash provided by operating activities was $10.8 million, $27.8 million, and $9.4 million in fiscal 2000, 2001 and 2002, respectively. The decrease in net cash provided by operating activities in fiscal 2002 resulted primarily from an increase in accounts payable in the prior year due to a temporary modification of payment terms negotiated with a major Company supplier. The increase in net cash provided by operating activities during fiscal 2001 primarily resulted from a decrease in inventory as a result of the Company's inventory reduction efforts, a slower growth rate in accounts receivable and an increase in accounts payable due to the temporary modification of payment terms negotiated with a major Company supplier discussed above. 25 Net cash used in investing activities was $11.8 million, $4.1 million, and $5.9 million in fiscal 2000, 2001 and 2002, respectfully. The Company made capital expenditures of $6.6 million, $3.4 million and $5.5 million in fiscal 2000, 2001 and 2002, respectfully. Significant capital expenditures made by the Company include capitalized software costs associated with the Concord DX operating system, computer equipment, leasehold improvements and medication carts. Net cash used in financing activities was $12.0 million, $0.7 million, and $0.5 million in fiscal 2000, 2001 and 2002, respectfully. The decrease in fiscal 2001 is primarily attributable to the Company making net payments of $8.6 million on its line of credit in fiscal 2000 with no similar payments in fiscal 2001 and 2002. In August 1997, the Company issued $100 million of convertible subordinated debentures due 2004. The debentures carry an interest rate of 5 3/4%. The debentures are obligations of the Company. The operations of the Company are currently conducted principally through subsidiaries, which are separate and distinct legal entities. The Company's ability to make payments of principal and interest on the debentures will depend on its ability to receive distributions of cash from its subsidiaries. Each of the Company's wholly owned subsidiaries has guaranteed the Company's payment obligations under the debentures, so long as such subsidiary is a member of an affiliated group (within the meaning of Section 279(g) of the Internal Revenue Code of 1986, as amended) which includes the Company. The satisfaction by the Company's subsidiaries of their contractual guarantees, as well as the payment of dividends and certain loans and advances to the Company by such subsidiaries, may be subject to certain statutory or contractual restrictions, are contingent upon the earnings of such subsidiaries and are subject to various business considerations. The Company elected to not make the semi-annual $2.875 million interest payments due February 15 and August 15, 2001 and February 15 and August 15, 2002 on the Company's 5 3/4% Convertible Subordinated Debentures due 2004 (Debentures). On April 6, 2001, the Company received a formal Notice of Default and Acceleration and Demand for Payment from the Indenture Trustee. The Indenture Trustee declared the entire principal and any accrued interest thereon to be immediately due and payable and demanded immediate payment of such amounts. If such payments are not made, the Indenture Trustee reserves the right to pursue remedial measures in accordance with the Indenture, including, without limitation, collection activities. As of June 30, 2002, the amount of principal and accrued interest is $110.8 million. As a result of the above noted Debentures being in default, an additional $2.4 million of convertible subordinated debentures due 2004 are also in default. Until the defaults are resolved, convertible subordinated debentures of $102.4 million and related accrued interest of $10.9 million will be classified as a current liability. In June 1998, the Company entered into a four-year revolving credit agreement (Credit Facility) which expired on May 31, 2002. On June 3, 2002, the Company received correspondence from the senior lenders indicating that they reserve the right to exercise all rights, powers and privileges provided for in the credit agreement including the acceleration of the collection of the Company's obligations and/or exercise other remedies under the credit agreement including exercising their rights with respect to the pledged collateral. At the current time, the senior lenders have not chosen to exercise and enforce the rights and remedies available to them under the credit agreement. The Company continues to operate under the terms of the Credit Facility. The Credit Facility, as amended, had an available commitment of $207 million, provided all Company assets as security, limited the availability of the Credit Facility to use for working capital only, required Lender approval on acquisitions, provided for interest at a variable rate and contained certain debt covenants including an interest coverage ratio, minimum consolidated net worth requirements and a restriction on declaration and payment of cash dividends to shareholders. Prior to the expiration of the Credit Facility, the Company had been in violation of certain financial covenants of the Credit Facility. On April 21, 2000, the Company received a formal notice of default from the senior lenders. As a result of the notice of default, the interest rate on the Credit Facility (excluding facility fee) increased to the Prime Rate plus 2.25% (7.0% at June 30, 2002). The borrowings of $206.1 million under the Credit Facility at June 30, 2002 are classified as a current liability. Failure to obtain a favorable resolution to the expiration of the Credit Facility could have a material adverse effect on the Company. During the past three years, the Company has implemented measures to improve cash flows generated from operating activities, including reductions in operating and overhead costs by continuing the consolidation and/or closing of pharmacy locations, continuing its employee reduction plan, more aggressive collection activity and inventory reduction efforts, and a temporary modification of payment terms negotiated with a major Company supplier. In addition, the Company continues to review the profitability of its customer base and is terminating uneconomic accounts as well as applying stricter standards in accepting new business. The Company expects to meet its financing needs for the next twelve months through the use of cash generated from operations and its cash balance of $42.5 million dollars at June 30, 2002. However, the Company may require additional capital resources for internal working capital needs and may need to incur additional indebtedness to meet these requirements. Additional funds are currently not available under the Credit Facility as described above and there can be no assurance that additional funds will be available. During the past two years, the Company has been in ongoing discussions with the Company's senior lenders and with an ad hoc committee of holders of the 5 3/4% Convertible Subordinated Debentures due 2004 regarding the defaults discussed above and potential restructuring options. In addition, the Company engaged financial advisors and legal counsel to assist in exploring 26 various capital restructuring and strategic alternatives with third parties. These defaults, among other factors, raise substantial doubt about the Company's ability to continue as a going concern. On July 28, 2002, the Company entered into a definitive merger agreement with Genesis Health Ventures, Inc. (Genesis). If the proposed merger is completed, each outstanding share of common stock of the Company will be converted into the right to receive 0.1 of a share of Genesis common stock. At the closing of the proposed merger, Genesis will repay in full the outstanding debt of NCS, including the borrowings of $206.1 million under the Credit Facility, and will redeem $102.4 million of 5 3/4% convertible subordinated debentures, including any accrued and unpaid interest. The completion of the proposed merger is subject to regulatory approvals and other customary conditions, including the approval of the holders of a majority of the outstanding voting power of the Company's common stock. The timing and ultimate outcome of the proposed merger or any future negotiations with the Company's senior lenders and ad hoc committee of debenture holders is uncertain and could have a material adverse effect on the Company. Given the foregoing, no assurances can be given that the Company will be able to maintain its current level of operations, or that its financial condition and prospects will not be materially and adversely affected over the next twelve months. The Company's effective income tax expense (benefit) rates were, 3.0%, 0.9% and 2.5% for the years ended June 30, 2000, 2001 and 2002, respectively. The effective tax rate differs from the federal statutory rate primarily as a result of the recording of a full valuation allowance against the Company's net deferred tax assets consisting primarily of net operating loss carryforwards. CONTRACTUAL OBLIGATIONS As of June 30, 2002, the Company had the following contractual obligations: Payments Due by Period (In Thousands)

~~YEAR~~Less ~~ENDED~~Than ~~JUNE~~1 ~~30,~~5 Years and Total Year 1-2 Years 3-4 Years After ----- ---- --------- ~~2001 2000 1999~~ ---- ----- ----- ~~Revenues~~Revolving ~~100.0%~~credit ~~100.0%~~facility ~~100.0%~~(1) ~~Cost~~$206,130 of$206,130 ~~revenues~~$ ~~82.1~~- ~~80.2~~$ ~~75.3~~ -~~----~~ ~~-----~~$ -~~----~~ ~~Gross~~Convertible ~~margin~~subordinated ~~17.9~~debentures ~~19.8~~(2) ~~24.7~~102,361 ~~Selling~~102,361 ~~general~~- ~~and~~- ~~administrative~~- ~~expenses~~Other ~~19.7~~long-term ~~18.3~~debt ~~19.4~~823 ~~Special~~274 ~~charge~~237 to130 ~~increase~~182 ~~allowance~~Non-cancelable ~~for~~operating ~~doubtful~~leases ~~accounts~~22,919 -7,114 ~~6.4~~9,463 4.5,876 ~~Nonrecurring charges - 7.3~~ 1.2,466 ----- ----- ----- ~~Operating loss (1.8) (12.2) (0.4) Interest expense, net (5.1) (3.8) (2.6)~~ ----- ----- --~~---~~ ~~Loss before income taxes (6.9) (16.0) (3.0) Cumulative effect of accounting change~~ - - ~~(0.4) Income tax (expense) benefit~~ - ~~(0.5) 1.1~~ ----- ----- --~~---~~ ~~Net~~Total ~~loss~~contractual ~~(6.~~cash obligations $332,233 $315,879 $ 9)%,700 ~~(16.~~$ 5)%,006 ~~(2.3)%~~$ 1,648 ======== ======== ======= ======== =======

(1) The revolving credit facility expired on May 31, 2002. See above discussion and Note 2 to the Consolidated Financial Statements. (2) The Company is in default on the convertible subordinated debentures at June 30, 2002 and the debentures are therefore classified as a current liability. See above discussion and Note 8 to the Consolidated Financial Statements. CRITICAL ACCOUNTING POLICIES In December 2001, the SEC issued Financial Reporting Release No. 60, "Cautionary Advice Regarding Disclosure About Critical Accounting Policies" (FR 60), suggesting companies provide additional disclosure and commentary on those accounting policies considered most critical. FR 60 considers an accounting policy to be critical if it is important to the Company's financial condition and results, and requires significant judgment and estimates on the part of management in its application. The Company believes that the following represents its critical accounting policies as contemplated by FR 60. For a summary of all of the Company's significant accounting policies, including the critical accounting policies discussed below, see Note 1 to the accompanying consolidated financial statements. Revenue Recognition: Revenue is recognized on a monthly basis for products or services provided to customers during that month. The revenue cycle ends on the last day of the month. As is generally the case for long-term care facility services, the Company 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, 2002, the Company's payor mix was approximately 49% Medicaid, 20% long-term care facilities (including amounts for which the long-term care facility receives reimbursement under Medicare Part A), 14% private pay, 11% third-party insurance, 1% Medicare and 5% other sources. The Medicaid and Medicare programs 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. The Company monitors its receivables from Medicaid and other third-party payor programs and reports such revenues at the net realizable amount expected to be received from third-party payors. Contractual Allowances: An estimated contractual allowance is recorded against third-party sales and accounts receivable (Medicaid and insurance). Accordingly, the net sales and accounts receivable reported in the Company's financial statements are recorded at the amount expected to be received from the third-party payor. Contractual allowances are adjusted to actual as cash is 27 received and claims are reconciled. The Company evaluates the following criteria in developing the estimated contractual allowance percentages each month: 1) Historical contractual allowance trends based on actual claims paid by third-party payors. 2) Review of contractual allowance information reflecting current contract terms. 3) Consideration and analysis of changes in customer base, product mix, payor mix, reimbursement levels or other issues that may impact contractual allowances. Allowance for Doubtful Accounts: The Company's ability to collect outstanding receivables is critical to its operating performance and cash flows. The allowance for doubtful accounts is approximately 19.7% of the gross accounts receivable balance, net of contractual allowances, as of June 30, 2002. The provision for doubtful accounts was $53,825, $31,101, and $18,013 for the years ended June 30, 2000, 2001, and 2002, respectively. The Company utilizes the "Aging Method" to evaluate the adequacy of its allowance for doubtful accounts. This method is based upon applying estimated standard allowance requirement percentages to each accounts receivable aging category for each payor. Company management developed the estimated standard allowance requirement percentages by utilizing historical collection trends and its understanding of the nature and collectibility of receivables in the various aging categories. The standard allowance percentages were developed by payor type as the accounts receivable from each payor type have unique characteristics. The necessary balance sheet allowance for doubtful accounts is calculated on a monthly basis utilizing the aging method described above. The Company ensures that the actual balance in the allowance for doubtful accounts is equal to or greater than the estimated amount calculated by the aging method. Cost of Goods Sold: Physical inventories are performed on a quarterly basis at all sites. As the Company does not utilize a perpetual inventory system, cost of goods sold is estimated during non-inventory months and is adjusted to actual by recording the results of the quarterly physical inventories. The Company evaluates the following criteria in developing estimated cost of goods sold during non-inventory months: 1) Historical cost of goods sold trends based on prior physical inventory results. 2) Review of cost of goods sold information reflecting current customer contract terms. 3) Consideration and analysis of changes in customer base, product mix, payor mix, State Medicaid and third-party insurance reimbursement levels or other issues that may impact cost of goods sold. Accrued Health Insurance: The Company is self-insured for health insurance claims with a stop-loss umbrella policy in place to limit the maximum potential liability for both individual claims and total claims for a plan year. Health insurance claims are paid as they are submitted to the plan administrator. The Company maintains an accrual for claims that have been incurred but not yet reported (IBNR) to the plan administrator and therefore have not been paid. The Company maintains an IBNR reserve based on the historical claim lag period and current payment trends of health insurance claims (generally 2 to 3 months). The Company records a monthly expense for the health insurance plan in its financial statements. The initial monthly expense for a plan year is determined at the beginning of the plan year by reviewing historical claims experience and the range of liability for the plan year as determined by the plan administrator. The initial monthly expense is adjusted each month as necessary to ensure that an adequate IBNR reserve level is maintained. Obligations Under Prime Wholesaler Agreement: The Company purchases the majority of its inventory through one primary pharmaceutical supplier. In fiscal 2001, the Company negotiated a temporary modification of payment terms with this supplier. In June 2002, the Company entered into a letter of intent with this supplier and is continuing its negotiations to achieve a permanent modification in payment terms. In addition, the Company earns administrative fees and amounts from certain other contractual arrangements under a prime wholesaler agreement with this supplier. The administrative fees and amounts from other contractual arrangements are accrued on a monthly basis based on purchasing data and knowledge of the terms of the contractual arrangements. The actual amounts due under the contractual arrangements are typically communicated to the Company on a quarterly or annual basis based on the terms of the contractual arrangements. As a result of the 2001 temporary modification of payment terms, the supplier is withholding certain contractual amounts due to the Company. Receivables from the supplier of $5.9 million and $12.2 million at June 30, 2001 and 2002, respectively, have been netted against accounts payable to the supplier for financial reporting purposes. The Company believes that the receivables arising from these contractual arrangements are collectible and is currently operating under the letter of intent which provides for the Company to make monthly payments to the supplier based on the net amount payable to the supplier. Goodwill and Other Intangible Assets: In July 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards (SFAS) No. 141, "Business Combinations," and No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. Use of the pooling-of-interests method is no longer permitted. SFAS No. 141 also includes guidance on the initial 28 recognition and measurement of goodwill and other intangible assets acquired in a business combination that is completed after June 30, 2001. The Company adopted SFAS No. 141 on July 1, 2001. The Company elected early adoption of SFAS No. 142 as of July 1, 2001. In accordance with SFAS No. 142, goodwill and other indefinite lived intangible assets will no longer be amortized. Under this non-amortization approach, SFAS No. 142 requires that goodwill and other indefinite lived intangible assets be reviewed for impairment using a fair value based approach upon adoption and at least annually thereafter. SFAS No. 142 provides a six-month transitional period from the effective date of adoption for the Company to perform an assessment of whether there is an indication that goodwill is impaired. To the extent that an indication of impairment exists, the Company must perform a second test to measure the amount of the impairment. For the purposes of SFAS No. 142, the Company is considered to have one reporting unit. The Company determined its implied fair value utilizing a market capitalization approach and compared the fair value of the Company to its carrying value. This evaluation indicated that goodwill was potentially impaired as of July 1, 2001. As a result, the Company was required to complete the second step of the transitional impairment test to measure the amount of the impairment. In calculating the impairment, the implied fair value of goodwill was determined by calculating the fair value of all tangible and intangible net assets through appraisals, external valuations, quoted market prices and other valuation methods. The implied fair value of goodwill was compared to the carrying value of goodwill to measure the amount of the impairment. The Company recorded a non-cash charge of $222.1 million as of July 1, 2001 to reduce the carrying value of its goodwill as a result of the adoption of SFAS No. 142. As of June 30, 2002, remaining goodwill was $80.5 million which is subject to continuing review of impairment under a similar approach as described above. The amount of the impairment primarily reflects the decline in the Company's stock price and financial condition since the acquisitions were consummated that generated the goodwill. The Company observed significant negative industry and customer trends during the three years prior to the valuation date of July 1, 2001, including a net loss of $16.3 million, $114.5 million and $43.5 million for the years ended June 30, 1999, 2000 and 2001, respectively. These trends primarily related to increased bankruptcies and significant financial difficulties experienced by the Company's skilled nursing facility customers primarily as a result of the greater than expected adverse impact with regard to implementation of the Medicare Prospective Payment System (PPS) under the Balanced Budget Act of 1997. SFAS No. 142 also requires goodwill to be tested annually and between annual tests if events occur or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The Company has elected to perform its annual tests for indications of goodwill impairment as of April 1 of each year. As of April 1, 2002, the Company's annual assessment indicated that the remaining goodwill was not impaired. The methodology of accounting for goodwill under SFAS No. 142 differs from the Company's previous policy, in accordance with accounting standards existing at that time, of using undiscounted cash flows over the remaining amortization period to determine if goodwill is recoverable. Intangible assets that will continue to be amortized under SFAS No. 142 consist primarily of non-compete covenants and debt issuance costs. Debt issuance costs are included in other assets and are amortized using the effective interest method over the life of the related debt. RECENTLY ISSUED ACCOUNTING STANDARDS In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of" and amends APB Opinion No. 30, "Reporting Results of Operations-Reporting the Effects of Disposal of a Segment of a Business." This statement develops one accounting model (based on the model in SFAS No. 121) for long-lived assets that are disposed of by sale, as well as addresses the principal implementation issues. SFAS No. 144 also expands the scope of discontinued operations and changes the disclosure requirement for discontinued operations. This statement is effective for fiscal years beginning after December 15, 2001. The Company does not expect this standard to have a material impact on the Company's consolidated financial position, results of operations or cash flows. The FASB recently issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146 addresses the recognition, measurement, and reporting of costs that are associated with exit and disposal activities, including costs related to terminating a contract that is not a capital lease, costs to consolidate facilities or relocate employees, and termination benefits provided to employees that are involuntarily terminated under the terms of a one-time benefit arrangement that is not an ongoing benefit arrangement or an individual deferred-compensation contract. SFAS 146 No. supersedes Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to exit an Activity (including Certain Costs Incurred in a Restructuring)" and requires liabilities 29 associated with exit and disposal activities to be recognized when the liability is incurred. SFAS No. 146 is effective for exit or disposal activities that are initiated after December 31, 2002. CERTAIN REGULATORY INVESTIGATIONS AND LEGAL PROCEEDINGS In the ordinary course of its business, the Company is subject to inspections, audits, inquiries and similar actions by governmental authorities responsible for enforcing the laws and regulations to which the Company is subject. In January 1997, governmental authorities requested information from the Company in connection with an audit and investigation of the circumstances surrounding the apparent drug-related homicide of a non-management employee of one of the Company's pharmacies. The information provided relates to the Company's inventory and the possible theft of controlled substances from this pharmacy. The review identified inadequacies in inventory record keeping and control at this pharmacy. In a meeting with governmental authorities in August 1997, the Company discussed its findings and those of the government and documented corrective measures taken by the Company. In September 1998, the Company was notified by the United States Department of Justice, United States Attorney for the Southern District of Indiana ("USA-Indiana") that the United States Drug Enforcement Administration had referred this matter to the Office of the USA-Indiana for possible legal action involving certain numerous alleged violations of federal law. The USA-Indiana invited the Company to contact the Office of the USA-Indiana in an effort to resolve the matter. The Company subsequently contacted the Office of the USA-Indiana and discussions regarding a possible settlement of this matter ensued. During December 1999, the Company and NCS HealthCare of Indiana, Inc. (NCS Indiana), a wholly-owned subsidiary of the Company, reached a settlement with the USA-Indiana regarding the previously disclosed federal investigation of the Company's facility in Indianapolis, Indiana. Under the terms of the settlement, the Company paid $4.1 million to the USA-Indiana. The Company also agreed to maintain its current level of spending in connection with its compliance systems and procedures for a period of three years. If the Company does not comply with the terms of the accord, an additional $1.5 million will be payable to the USA-Indiana. In January 1998, federal and state government authorities sought and obtained various documents and records from a Herrin, Illinois pharmacy operated by a wholly-owned subsidiary of the Company. The Company has cooperated fully and continues to cooperate fully with the government's inquiry. In June 1999, representatives of the Company met with attorneys with the Civil and Criminal Divisions of the Office of the United States Department of Justice, United States Attorney for the Southern District of Illinois ("USA-Illinois") regarding the government's investigation. The USA-Illinois informed the Company that it had information that allegedly substantiated numerous violations of federal law at that facility. In May 2001, the Company reached a settlement with the USA-Illinois regarding this investigation and recorded the settlement amount in the fiscal 2001 consolidated financial statements. On June 7, 1999, a lawsuit was filed against the Company in the Superior Court of Norfolk County, Massachusetts. Plaintiffs were certain selling stockholders of the PharmaSource Group, Inc. ("PharmaSource"), which NCS acquired on September 17, 1997. The complaint alleged breach of contract and unfair business practices arising out of NCS' non-payment of certain amounts allegedly payable under the terms of an earn-out provision included in the acquisition agreement. On January 21, 2000, the Company reached a settlement of this litigation. Under the terms of the settlement, the Company issued 1,750,000 Class A Common Shares and a $2 million convertible subordinated debenture maturing on August 15, 2004. The note and accrued "payment-in-kind" interest will be convertible into a maximum of 200,000 Class A Common Shares at a conversion price of $8.00 per share. On July 28, 2002, NCS, Genesis and Geneva Sub, Inc., a wholly owned subsidiary of Genesis ("Sub") entered into a definitive Agreement and Plan of Merger (the "Merger Agreement"), pursuant to which Sub will merge with and into NCS (the "Proposed Merger"), with NCS surviving as a wholly owned subsidiary of Genesis. If the Proposed Merger is completed, each outstanding share of common stock of NCS, par value $0.01 per share ("NCS Common Stock"), other than the NCS Common Stock held by NCS and other than dissenting shares, will be converted into the right to receive 0.1 of a share of common stock of Genesis, par value $0.02 per share. The completion of the Proposed Merger is subject to regulatory approvals and other customary conditions, including the approval of the holders of a majority of the outstanding voting power of NCS Common Stock. In connection with the Merger Agreement, on July 28, 2002, NCS and Genesis entered into agreements (the "Voting Agreements") with certain stockholders of NCS beneficially owning in the aggregate a majority of the outstanding voting power of NCS Common Stock. In the Voting Agreements, such stockholders agreed (1) to vote their shares of NCS Common Stock in favor of adoption and approval of the Merger Agreement and against proposals for certain other transactions and (2) not to transfer their shares of NCS Common Stock prior to the consummation of the Proposed Merger. 30 On August 8, 2002, Omnicare, Inc. (Omnicare) commenced a cash tender offer to purchase all of the outstanding shares of Class A and Class B common stock of NCS for $3.50 per share. The effect of the Omnicare tender offer on the proposed merger between NCS and Genesis is not known at this time. Since the Company entered into the Merger Agreement, seven shareholder lawsuits (six of which are purported class action lawsuits) were filed against NCS and its directors in connection with the Proposed Merger with Genesis and, in two cases, against Genesis and Sub (the "Stockholder Claims"). The Stockholder Claims allege that the directors of NCS breached their fiduciary duties, and certain other duties, to stockholders by entering into the Merger Agreement and seek various relief, including an injunction against consummation of the Proposed Merger, requiring separate class voting on approval of the Proposed Merger by NCS Stockholders, rescinding the Proposed Merger if the same is consummated prior to a final judgment on the Stockholder Claims, declaring the Voting Agreements null and void and compensatory damages and costs. In addition, the amended complaint filed by Omnicare alleges that the Voting Agreements violate the NCS amended and restated certificate of incorporation and therefore resulted in an automatic conversion of such stockholders' Class B common shares into Class A common shares. No court dates have been set for these matters. The Company believes that the allegations set forth in these lawsuits are without merit and intends to contest them vigorously; however, the ultimate outcome of these lawsuits cannot be predicted with certainty. These lawsuits could adversely affect the Company's ability to consummate the Merger Agreement with Genesis. The following lawsuits were each filed with the Court of Chancery in the State of Delaware in and for New Castle County on the dates indicated: - Dr. Dorrin Beirch and Robert M. Miles on behalf of themselves and all others similarly situated v. NCS HealthCare, Inc., Jon H. Outcalt, Kevin B. Shaw, Richard L. Osborne, and Boake A. Sells, filed on July 30, 2002. - Anthony Noble v. NCS HealthCare, Inc., Richard L. Osborne, Jon H. Outcalt, Boake A. Sells, and Kevin B. Shaw, filed on August 1, 2002. - Jeffery Treadway v. Jon H. Outcalt, Kevin B. Shaw, Boake A. Sells, Richard L. Osborne, and NCS HealthCare, Inc., filed on August 2, 2002. - Tillie Saltzman v. Jon H. Outcalt, Kevin B. Shaw, Boake A. Sells, Richard L. Osborne, and NCS HealthCare, Inc., filed on August 2, 2002. - Dolphin Limited Partnership, L.L.P. v. Jon H. Outcalt, Kevin B. Shaw, Boake A. Sells, Richard L. Osborne, Genesis Health Ventures, Inc., Genesis Sub, Inc. and NCS HealthCare, Inc., filed on August 7, 2002. - First Amended Complaint Omnicare, Inc. v. NCS HealthCare, Inc., Jon H. Outcalt, Kevin B. Shaw, Boake A. Sells, Richard L. Osborne, Genesis Health Ventures, Inc. and Genesis Sub, Inc., filed on August 12, 2002 (original complaint filed on August 1, 2002). The following lawsuit was filed with the Court of Common Pleas for Cuyahoga County, Ohio: - Michael Petrovic on behalf of himself and all others similarly situated v. NCS HealthCare, Inc., Jon H. Outcalt, Kevin B. Shaw, Richard L. Osborne, and Boake A. Sells, filed on August 1, 2002. On August 20, 2002, the Company filed a complaint against Omnicare in the United States District Court for the Northern District of Ohio, titled NCS Healthcare, Inc. v. Omnicare, Inc., Case No. 1:02CV1635 (Maita, J.), and, on August 21, 2002, the Company amended the complaint. The complaint, as amended, alleges, among other things, that Omnicare's disclosure on Schedule TO, filed on August 8, 2002 in connection with the associated tender offer, contains materially false and misleading disclosures in violation of Section 14(e) of the Securities Exchange Act of 1934. The Company's subsidiary, NCS HealthCare of Illinois, Inc. ("NCS Illinois") and former owners of the Herrin, Illinois site, were named defendants in a civil action filed under the federal civil False Claims Act in the United States District Court for the Southern District of Illinois in the case captioned "The United States of America, ex rel., Denis Crews, et al. v. Family Nursing Home Services, Inc., et al." (Case No. 99-4020-GPM). On February 20, 2002, the United States of America filed a Notice of Election to Decline Intervention. This Notice was filed in camera and under seal. The complaint was then served on NCS Illinois on July 12, 2002. On July 29, 2002, the Company received a copy of an Amended Complaint in the above-captioned matter in which the Company was also named as a Defendant. DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS Certain statements contained in or incorporated by reference into this Annual Report on Form 10-K, including, but not limited to, those regarding the Company's financial position, business strategy and other plans and objectives for future operations and any other statements that are not historical facts constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other important factors that could cause the actual results, performance or achievements of the Company, or industry results, to differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements. Although the Company believes that the expectations reflected in these forward-looking statements are reasonable, there can be no assurance that the actual results or developments anticipated by the Company will be realized or, even if substantially realized, that they will have expected effects on its business or operations. These forward-looking statements are made based on management's expectations and beliefs concerning future events impacting the Company and are subject to uncertainties and factors (including, but not limited to, those specified below) which are difficult to predict and, in many instances, are beyond the control of the Company. As a result, actual results of the Company may differ materially from those expressed or implied by any such forward-looking statements. These forward-looking statements may include, but are not limited to, statements containing words such as "anticipate," "believe," "plan," "estimate," "expect," "intend," "may" and similar expressions. Among the factors that could cause actual results to differ materially from the Company's expectations include the 31 ability to consummate the proposed merger transaction with Genesis and/or obtain the anticipated results and synergies from the proposed merger transaction with Genesis and the increased uncertainty created by the integration of the two businesses, the outcome of the Omnicare, Inc. tender offer and related litigation, the continued impact of the Medicare Prospective Payment System, discussions with the Company's senior lenders and the ad hoc committee of debenture holders, overall economic, financial and business conditions, delays in reimbursement by the government or other payors of the Company and its customers, the overall financial condition of the Company's customers, the ability of the Company to assess and react to the financial condition of customers, the effect of new government regulation, access to capital and financing, the demand for the Company's products and services, pricing and competitive factors in the industry, changes in accounting rules and standards continuation of various trends in the long-term care market (including the trend toward consolidation), changes in reimbursement levels from State Medicaid programs and third-party insurance plans, the credit worthiness of customers, competition among providers of long-term care pharmacy services, negotiations regarding payment terms and other contractual obligations with suppliers, changes in regulatory requirements and Federal and State reimbursement levels, reform of the health care delivery system, litigation matters and other factors and risks and uncertainties described in the Company's SEC reports. 32 ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to certain market risks from transactions that are entered into during the normal course of business. The Company has not entered into derivative financial instruments for trading purposes. The Company's primary market risk exposure relates to interest rate risk. The Company has managed its interest rate risk by balancing its exposure between fixed and variable rates while attempting to minimize its interest costs. The Company has a balance of $206.1 million on its revolving credit facility at June 30, 2002, which is subject to a variable rate of interest based on the Prime rate. Assuming borrowings at June 30, 2002, a one-hundred basis point change in interest rates would impact net interest expense by approximately $2.1 million per year. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Consolidated Financial Statements Report of Independent Auditors 34 Consolidated Balance Sheets at June 30, 2001 and 2002 35 Consolidated Statements of Operations for each of the three years in the period ended June 30, 2002 37 Consolidated Statements of Stockholders' Equity (Deficit) for each of the three years in the period ended June 30, 2002 38 Consolidated Statements of Cash Flows for each of the three years in the period ended June 30, 2002 39 Notes to Consolidated Financial Statements 40 33 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, 2001 and 2002, and the related consolidated statements of operations, stockholders' equity (deficit) and cash flows for each of the three years in the period ended June 30, 2002. 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 auditing standards generally accepted in the United States. 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, 2001 and 2002, and the consolidated results of their operations and their cash flows for each of the three years in the period ended June 30, 2002, in conformity with accounting principles generally accepted in the United States. The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company is in violation of certain financial covenants under its revolving credit facility. As a result of the covenant violations, the Company's lenders may accelerate the maturity of the Company's obligations under the revolving credit facility. In addition, the Company is in default on its 5 3/4% Convertible Subordinated Debentures due 2004. These factors raise substantial doubt about the Company's ability to continue as a going concern. Management's plan in regard to this matter is also described in Note 1. The consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts or classifications of liabilities that may result from the outcome of this uncertainty. As discussed in Note 1 to the consolidated financial statements, effective July 1, 2001, the Company changed its method of accounting for goodwill. August 2, 2002 Ernst & Young LLP Cleveland, Ohio 34 NCS HEALTHCARE, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE INFORMATION) ASSETS

~~Nonrecurring~~June ~~Reserve Reserve Description Cash/Non-cash Charge Activity At 6/~~30~~/00~~, ~~Activity At 6/30/01~~ --------~~---~~ ~~-------------~~2002 ~~------~~2001 ----~~----~~ ----~~------~~ ~~--------~~CURRENT ~~----------~~ASSETS ~~(In~~Cash ~~millions)~~and ~~Site~~cash ~~Consolidations~~equivalents ~~Severance/compensation~~$42,539 ~~related~~$39,464 ~~Cash~~Trade $accounts ~~1.3~~receivable, ~~$(1.0)~~less $allowance .3for doubtful accounts of $21,026 ~~(.3)~~and $28,332 --as ~~Lease~~of ~~terminations~~June ~~Cash~~30, ~~2.8~~2002 ~~(.4)~~and ~~2.4~~2001 ~~(1.7)~~85,808 .794,447 ~~Asset~~Inventories ~~impairments~~30,593 ~~Non-cash~~32,770 ~~4.4~~Prepaid ~~(4.4)~~expenses and other current assets 2,863 3,301 -- ------ -------- ~~Other~~Total ~~Cash~~current ~~1.2~~assets ~~(.6)~~161,803 .6169,982 ~~(.4)~~PROPERTY, .2PLANT ~~Special~~AND ~~increase~~EQUIPMENT toLand ~~allowance~~130 ~~for~~130 ~~doubtful~~Buildings ~~accounts~~2,397 ~~Non-cash~~2,397 ~~44.6~~Machinery, ~~(44.6)~~equipment --and --vehicles --21,173 ~~Disposition~~23,039 ofComputer ~~Assets~~equipment ~~Asset~~and ~~impairment~~software ~~Non-cash~~34,863 ~~30.2~~34,817 ~~(30.2)~~Furniture, fixtures and leasehold improvements 18,070 18,685 -- -- ---- ~~Other Cash .5 (.2) .3 (.3)~~ -------- ~~Other~~76,633 ~~Cash~~79,068 ~~6.6~~Less ~~(6.2)~~accumulated .4depreciation ~~(.3)~~and .1amortization ~~Non-cash~~48,515 ~~4.2~~45,049 ~~(4.2)~~ -- -- -- -- --- ------ 28,118 34,019 Goodwill, net 80,487 301,907 Other assets, net 7,385 8,063 ------ -- ---- ---- ~~Total~~TOTAL ~~$95.8~~ASSETS $~~(91.8)~~277,793 $513,971 ~~4.0 $ (3.0) $1.0~~ ===== ====== ====== ==~~==== ====~~

See accompanying notes 35 NCS HEALTHCARE, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE INFORMATION) LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

~~Nonrecurring~~JUNE ~~Reserve Reserve Description Cash/Non-cash Charge Activity At 6/~~30~~/00~~, ~~Activity At 6/30/01~~ --------~~---~~ 2002 2001 ---- ---- CURRENT LIABILITIES Line of credit in default $ 206,130 $ 206,130 Convertible subordinated debentures in default 102,361 102,107 Trade accounts payable 45,336 56,349 Accrued compensation and related expenses 8,525 7,715 Other accrued expenses 22,607 13,754 Current portion of long-~~----~~term debt 274 456 ------ -----~~---~~ ---------- -~~-------~~ Total current liabilities 385,233 386,511 Long-~~---------~~term ~~(In~~debt, ~~millions)~~excluding ~~Site~~current ~~Consolidations~~portion ~~Severance/compensation~~549 ~~related~~825 ~~Cash~~Other $long-term ~~2.1~~liabilities $73 140 STOCKHOLDERS' EQUITY (~~2.1~~DEFICIT) $Preferred --stock, $.01 par value per share; 1,000,000 shares authorized; none issued - - Common stock, $.01 par value per share: Class A -- ~~Lease~~50,000,000 ~~terminations~~shares ~~Cash~~authorized; .618,461,599 ~~(.5)~~and .118,421,845 ~~(.1)~~shares --issued ~~Asset~~and ~~impairments~~outstanding ~~Non-cash~~at ~~1.5~~June ~~(1.5)~~30, --2002 --and 2001, respectively 184 184 Class B -- ~~Other~~20,000,000 ~~Cash~~shares .authorized; 5,255,210 (.and 5),294,964 --shares --issued --and ~~Special~~outstanding ~~increase~~at toJune ~~allowance~~30, ~~For~~2002 ~~doubtful~~and ~~accounts~~2001, ~~Non-cash~~respectively ~~32.4~~53 ~~(32.4)~~53 Paid--in --capital --271,943 ~~Other~~271,943 ~~Cash~~Accumulated ~~3.4~~deficit (~~3.2~~380,242) .2 (.2145,685) -- --------- ------ ----- (108,062) 126,495 ----------- ----------- ~~Total~~TOTAL ~~$40.5~~LIABILITIES ~~$(40.2)~~AND $STOCKHOLDERS' .3EQUITY $ (.3DEFICIT) $277,793 --$513,971 ===== ====== ===== ====== ~~======~~

See accompanying notes 36 NCS HEALTHCARE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)

YEAR ENDED JUNE 30, 2002 2001 2000 ---- ---- ----~~----~~ ~~CURRENT~~Revenues ~~ASSETS~~$ ~~Cash~~645,756 ~~and cash equivalents~~ $ 39626,~~464~~328 $ 16694,~~387~~530 ~~Trade~~Cost ~~accounts~~of ~~receivable~~revenues 538,926 ~~less~~514,483 ~~allowance~~556,757 ~~for~~--------- ~~doubtful~~--------- ~~accounts~~---------- ofGross ~~$28~~profit 106,~~332~~830 ~~and~~111,845 ~~$53~~137,~~926~~773 ~~as of June 30~~Selling, ~~2001~~general and ~~2000~~administrative ~~94,447~~expenses ~~120~~93,~~849~~776 ~~Inventories 32~~123,~~770~~272 37126,~~086~~969 ~~Prepaid~~Special ~~expenses~~charge ~~and~~to ~~other~~increase ~~current~~allowance ~~assets~~for 3doubtful accounts - - 44,~~301~~623 5Nonrecurring charges - - 51,~~322~~136 --------- --------- ~~Total~~---------- ~~current~~Operating ~~assets~~income ~~169~~(loss) 13,~~982~~054 ~~179~~(11,~~644~~427) ~~PROPERTY~~(84,955) ~~PLANT~~Interest ~~AND~~expense ~~EQUIPMENT~~(26,642) ~~Land~~(34,300) ~~130~~(29,808) ~~204~~Interest ~~Buildings~~income 21,~~397~~447 2,~~212~~587 ~~Machinery~~3,565 ~~equipment~~--------- ~~and~~--------- ~~vehicles~~---------- ~~23,039~~Loss ~~29,212~~before ~~Computer~~income ~~equipment~~taxes and ~~software~~cumulative 34effect of accounting change (12,~~817~~141) 39(43,~~025~~140) ~~Furniture~~(111,198) ~~fixtures~~Income ~~and~~tax ~~leasehold~~expense ~~improvements~~300 ~~18,685~~370 213,~~775~~326 --------- --------- 79---------- Loss before cumulative effect of accounting change (12,~~068~~441) 92(43,~~428~~510) ~~Less~~(114,524) ~~accumulated~~Cumulative ~~depreciation~~effect ~~and~~of ~~amortization~~accounting ~~45,049~~change 47(222,~~264~~116) - - --------- --------- 34---------- Net loss $ (234,~~019~~557) 45$ (43,~~164~~510) ~~Goodwill~~$ (114,524) ~~less~~========== ~~accumulated~~========= ~~amortization~~========== ofLoss ~~$44,176~~per ~~and~~share ~~$33,620~~data: asNet ofloss ~~June~~per ~~30,~~common ~~2001~~share ~~and~~before ~~2000~~cumulative ~~301,907~~effect ~~311,876~~of ~~Other~~accounting ~~assets,~~change ~~less~~- ~~accumulated~~basic ~~amortization~~and ofdiluted $~~6,878~~ ~~and~~(0.52) $ (1.85) $ (5~~,520~~.31) asCumulative effect of ~~June~~accounting ~~30,~~change ~~2001~~$ ~~and~~(9.37) ~~2000~~- ~~8,063~~- ~~9,979~~--------- --------- ---------- ~~TOTAL~~Net ~~ASSETS~~loss per common share - basic and diluted $~~513,971~~ (9.89) $~~546~~ (1.85) $ (5.31) ========== ========== ========== Weighted average number of common shares outstanding - basic and diluted 23,~~663~~717 23,535 21,551 ========== ========== ==========

See accompanying notes 37 NCS HEALTHCARE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (IN THOUSANDS, EXCEPT SHARE INFORMATION)

~~JUNE~~CLASS ~~30,~~A ~~2001~~CLASS ~~2000~~B RETAINED STOCKHOLDERS' COMMON COMMON PAID-IN EARNINGS EQUITY STOCK STOCK CAPITAL (DEFICIT) (DEFICIT) ----- ----- ------- --------- ~~CURRENT~~--------- ~~LIABILITIES~~Balance ~~Line~~at ofJuly ~~credit~~1, in1999 ~~default~~$ 143 $ ~~206~~60 $ 263,~~130~~882 $ ~~206~~12,~~130~~349 ~~Convertible~~$ ~~subordinated~~276,434 ~~debentures~~Issuance inof ~~default~~2,203,844 ~~102~~shares of Class A Common Stock for business combinations 22 - 6,~~107~~811 -- ~~Trade~~6,833 ~~accounts~~Issuance ~~payable~~of 56497,~~349~~153 ~~44,857~~shares ~~Accrued~~of ~~compensation~~Class ~~and~~A ~~related~~Common ~~expenses~~Stock ~~7,715~~for ~~7,115~~profit ~~Other~~sharing ~~accrued~~plan ~~expenses~~5 ~~13,754~~- 14957 - 962 Conversion of 197,~~756~~997 ~~Current~~shares ~~portion~~of Class B Common Stock to 197,997 shares of ~~other~~Class ~~long~~A Common Stock 2 (2) -~~term~~ ~~debt~~- ~~456~~- ~~651~~Net loss - - - (114,524) (114,524) ------ ----- ------- ~~Total~~--------- ~~current~~--------- ~~liabilities~~Balance ~~386,511~~at ~~273,509~~June ~~Long-term debt~~30, ~~excluding~~2000 ~~current~~172 ~~portion~~58 ~~825~~271,650 1(102,~~291~~175) ~~Convertible~~169,705 ~~subordinated~~Issuance ~~debentures~~of in733,040 ~~default~~shares --of ~~102,000~~Class ~~Other~~A ~~long-term~~Common ~~liabilities~~Stock ~~140~~for ~~158~~profit ~~STOCKHOLDERS'~~sharing ~~EQUITY~~plan ~~Preferred~~7 ~~stock,~~- ~~$.01~~293 ~~par~~- ~~value~~300 ~~per~~Conversion ~~share;~~of 1512,~~000,000~~319 shares ~~authorized;~~of ~~none~~Class ~~issued~~B --Common --Stock ~~Common~~to ~~stock~~512,319 ~~$.01~~shares ~~par~~of ~~value~~Class ~~per~~A ~~share:~~Common ~~Class~~Stock A5 (5) - - ~~50,000,000~~- ~~shares~~Net ~~authorized;~~loss ~~18,421,845~~- ~~and~~- 17- (43,~~176~~510) (43,~~486~~510) ~~shares~~------ ~~issued~~----- ~~and~~------- ~~outstanding~~--------- --------- Balance at June 30, 2001 ~~and~~184 ~~2000~~53 271,943 ~~respectively~~(145,685) ~~184~~126,495 ~~172~~------ ~~Class~~----- B------- --------- 20--------- Conversion of 39,~~000,000~~754 shares ~~authorized;~~of ~~5,294,964~~Class ~~and~~B ~~5,807,283~~Common ~~shares~~Stock ~~issued~~to ~~and~~39,754 ~~outstanding~~shares atof ~~June~~Class ~~30,~~A ~~2001~~Common ~~and~~Stock ~~2000,~~- ~~respectively~~- 53- 58- ~~Paid~~-in ~~capital~~Net ~~271,943~~loss ~~271,650~~- ~~Accumulated~~- ~~deficit~~- (~~145~~234,~~685~~557) (~~102~~234,~~175~~557) ------ --- -- ------- ~~126,495 169,705~~ --------- --------- ~~TOTAL~~Balance ~~LIABILITIES~~at ~~AND~~June ~~STOCKHOLDERS'~~30, ~~EQUITY~~2002 $ ~~513~~184 $ 53 $271,~~971~~943 $(380,242) ~~546~~$(108,~~663~~062) ====== ===== ======== ========= =========

See accompanying notes 38 NCS HEALTHCARE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)

YEAR ENDED JUNE 30, 2002 2001 2000 ~~1999~~ ---- ----- ---- OPERATING ACTIVITIES Net loss $(234,557) $(43,510) $ (114,524) Adjustments to reconcile net loss to net cash provided by operating activities: Cumulative effect of accounting change 222,116 - - Non-cash portion of fixed asset impairment charge - 2,106 - Non-cash portion of nonrecurring charges - -~~------~~ ~~Revenues~~38,555 $Depreciation ~~626,328~~and $amortization ~~694~~13,~~530~~085 $24,993 ~~717~~28,~~825~~678 ~~Cost~~Provision offor ~~revenues~~doubtful ~~514~~accounts 18,~~483~~013 ~~556~~31,~~757~~101 ~~540~~53,~~547~~825 Deferred income taxes - -~~-------~~ 2,937 Non-~~--------~~cash profit sharing expense -~~--------~~ ~~Gross~~300 ~~profit~~962 ~~111,845~~Changes ~~137,773~~in ~~177,278~~assets ~~Selling~~and liabilities, ~~general~~net of effects of assets and ~~administrative~~liabilities ~~expenses~~acquired: ~~123~~Trade accounts receivable (17,~~272~~629) ~~126~~(8,~~969~~570) ~~139~~(10,~~522~~309) ~~Special~~Inventories ~~charge~~2,536 to4,316 ~~increase~~12,151 ~~allowance~~Trade ~~for doubtful~~ accounts --payable 44(4,~~623~~647) 3217,~~384~~363 ~~Nonrecurring~~(5,204) ~~charges~~Accrued --expenses 519,~~136~~657 8(295) (11,~~115~~251) Prepaid expenses and other 811 21 14,948 --------- --------- --------- ~~Operating~~Net ~~loss~~cash ~~(11~~provided by operating activities 9,~~427)~~385 ~~(84~~27,~~955)~~825 (210,~~743)~~768 ~~Interest~~INVESTING ~~expense~~ACTIVITIES Capital expenditures for property, plant and equipment (345,~~300~~489) (293,~~808~~359) (196,~~864~~616) ~~Interest~~Proceeds ~~income~~from ~~2,587~~sales ~~3,565~~of assets 230 250 621 Purchases of businesses (1,~~563~~371) - - Other 778 (978) (5,766) -------- --------- --------- ~~Loss~~Net ~~before~~cash ~~income~~used ~~taxes~~in investing activities (435,~~140~~852) (~~111~~4,~~198~~087) (2111,~~044~~761) ~~Income~~FINANCING ~~tax~~ACTIVITIES Repayment of long-term debt (~~expense~~458) ~~benefit~~ (~~370~~661) (3,~~326~~474) ~~7,640~~Borrowings ~~Cumulative~~on ~~effect~~ line-of-credit ~~accounting~~- ~~change~~- 91,300 ~~net~~Payments ofon ~~taxes~~ line-of-credit - - (299,~~921~~870) --------- --------- --------- Net ~~loss~~cash $used in financing activities (~~43,510~~458) $(~~114,524~~661) $ (1612,~~325~~044) ~~=========~~-------- ~~=========~~-------- ~~=========~~--------- ~~Loss~~Net ~~per~~increase ~~share~~(decrease) ~~data:~~in ~~Loss~~cash ~~per~~and ~~common~~cash ~~share~~equivalents -3,075 ~~basic~~23,077 $ (~~1.85~~13,037) $Cash ~~(5.31)~~and $cash ~~(0.81)~~equivalents ~~=========~~at ~~=========~~beginning ~~=========~~of ~~Loss~~period ~~per~~39,464 ~~common~~16,387 ~~share~~29,424 -------- ~~diluted~~-------- --------- Cash and cash equivalents at end of period $ ~~(1.85)~~42,539 $ ~~(5.31)~~39,464 $ ~~(0.81)~~16,387 ========= ========= ========= ~~Weighted~~Supplemental ~~average~~disclosure ~~number~~ of ~~common~~cash ~~shares~~flow ~~outstanding~~information: -Cash ~~basic~~paid ~~23,535~~during the year for: Interest $ 21,~~551~~176 20$ 31,~~200~~655 $ 28,975 ========= ========= ========= ~~Weighted~~Income ~~average~~taxes ~~number~~$ of304 ~~common~~$ ~~shares~~355 ~~outstanding~~$ -404 ~~diluted 23,535 21,551 20,200~~ ========= ========= =========

See accompanying notes 39 NCS HEALTHCARE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED JUNE 30, 2000, 2001 AND 2002 (IN THOUSANDS, EXCEPT SHARE INFORMATION) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES DESCRIPTION OF BUSINESS NCS HealthCare, Inc. (the Company) operates in one primary business segment providing a broad range of health care services primarily to long-term care institutions including skilled nursing facilities, assisted living facilities and other institutional health care settings. The Company purchases, repackages and dispenses prescription and non-prescription pharmaceuticals and provides client facilities with related management services, automated medical record keeping, drug therapy evaluation, regulatory assistance and certain ancillary health care services. MANAGEMENT'S PLAN TO CONTINUE AS A GOING CONCERN The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the ordinary course of business. As shown in the accompanying consolidated financial statements, the Company has incurred net losses of $43,510 and $234,557 for the years ended June 30, 2001 and 2002, respectively. At June 30, 2002 the Company's working capital deficit was $(223,430), primarily as a result of classifying $206,130 under the revolving credit facility and $102,361 of convertible subordinated debentures as a current liability. As discussed in Note 2, the revolving credit facility expired on May 31, 2002. As discussed in Note 8, as of June 30, 2002 the Company is in default on $102,361 of its 5 3/4% convertible subordinated debentures. All borrowings under the credit agreement and the convertible subordinated debentures have been classified as a current liability. These factors, among others, raise substantial doubt about the Company's ability to continue as a going concern. During the past three years the Company has implemented measures to improve cash flows generated from operating activities, including reductions in operating and overhead costs by continuing the consolidation and/or closing of pharmacy locations, continuing its employee reduction plan, more aggressive collection activity and inventory reduction efforts, and a temporary modification of payment terms negotiated with a major Company supplier. In addition, the Company continues to review the profitability of its customer base and is terminating uneconomic accounts as well as applying stricter standards in accepting new business. During the past two years, the Company has been in ongoing discussions with the Company's senior lenders and with an ad hoc committee of holders of the 5 3/4% Convertible Subordinated Debentures due 2004 regarding the defaults and potential restructuring options. In addition, the Company engaged financial advisors and legal counsel to assist in exploring various capital restructuring and strategic alternatives with third parties. On July 28, 2002, the Company entered into a definitive merger agreement with Genesis Health Ventures, Inc. (Genesis). If the proposed merger is completed, each outstanding share of common stock of the Company will be converted into the right to receive 0.1 of a share of Genesis common stock. At the closing of the proposed merger, Genesis will repay in full the outstanding debt of NCS, including $206,130 of senior debt, and will redeem $102,361 of 5 3/4% convertible subordinated debentures, including accrued and unpaid interest and any applicable redemption premiums. The completion of the proposed merger is subject to regulatory approvals and other customary conditions, including the approval of the holders of a majority of the outstanding voting power of the Company's common stock. The timing and ultimate outcome of the proposed merger or any future negotiations with the Company's senior lenders and ad hoc committee of debenture holders is uncertain and could have a material adverse effect on the Company. Given the foregoing, no assurances can be given that the Company will be able to maintain its current level of operations, or that its financial condition and prospects will not be materially and adversely affected over the next twelve months. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and its wholly owned and majority owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. 40 REVENUE RECOGNITION Revenue is recognized on a monthly basis for products or services provided to customers during that month. The revenue cycle ends on the last day of the month. As is generally the case for long-term care facility services, the Company 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, 2002, the Company's payor mix was approximately 49% Medicaid, 20% long-term care facilities (including amounts for which the long-term care facility receives reimbursement under Medicare Part A), 14% private pay, 11% third-party insurance, 1% Medicare and 5% other sources. The Medicaid and Medicare programs 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. The Company monitors its receivables from Medicaid and other third-party payor programs and reports such revenues at the net realizable amount expected to be received from third-party payors. 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. CONTRACTUAL ALLOWANCES An estimated contractual allowance is recorded against third-party sales and accounts receivable (Medicaid and insurance). Accordingly, the net sales and accounts receivable reported in the Company's financial statements are recorded at the amount expected to be received from the third-party payor. Contractual allowances are adjusted to actual as cash is received and claims are reconciled. The Company evaluates the following criteria in developing the estimated contractual allowance percentages each month: - Historical contractual allowance trends based on actual claims paid by third-party payors. - Review of contractual allowance information reflecting current contract terms. - Consideration and analysis of changes in customer base, product mix, payor mix, reimbursement levels or other issues that may impact contractual allowances. ALLOWANCE FOR DOUBTFUL ACCOUNTS The Company utilizes the "Aging Method" to evaluate the adequacy of its allowance for doubtful accounts. This method is based upon applying estimated standard allowance requirement percentages to each accounts receivable aging category for each payor. Company management developed the estimated standard allowance requirement percentages by utilizing historical collection trends and its understanding of the nature and collectibility of receivables in the various aging categories. The standard allowance percentages were developed by payor type as the accounts receivable from each payor type have unique characteristics. The necessary balance sheet allowance for doubtful accounts is calculated on a monthly basis utilizing the aging method described above. The Company ensures that the actual balance in the allowance for doubtful accounts is equal to or greater than the estimated amount calculated by the aging method. Movement of the allowance for doubtful accounts is as follows: Write-offs, Balance at Provision for Net of Balance at Beginning of Doubtful Recoveries End of Period Accounts and Other Period ------------ ------------- ----------- ---------- Fiscal Year Ended June 30, 2002 $ 28,332 $ 18,013 $ (25,319) $ 21,026 2001 $ 53,926 $ 31,101 $ (56,695) $ 28,332 2000 $ 38,880 $ 53,825 $ (38,779) $ 53,926 INVENTORIES AND COST OF GOODS SOLD 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 4% of the June 30, 2002 net inventory balance and by using the first-in, first-out (FIFO) method for the remaining 96%. If the FIFO inventory valuation method had been used exclusively, inventories would have been $636 and $512 higher at June 30, 2001 and 2002, respectively. 41 Physical inventories are performed on a quarterly basis at all sites. As the Company does not utilize a perpetual inventory system, cost of goods sold is estimated during non-inventory months and is adjusted to actual by recording the results of the quarterly physical inventories. The Company evaluates the following criteria in developing estimated cost of goods sold during non-inventory months: - Historical cost of goods sold trends based on prior physical inventory results. - Review of cost of goods sold information reflecting current customer contract terms. - Consideration and analysis of changes in customer base, product mix, payor mix, State Medicaid and third-party insurance reimbursement levels or other issues that may impact cost of goods sold. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are stated at cost. Depreciation on property, plant and equipment is computed using the straight-line method over the estimated useful lives of the assets, which are as follows: Buildings 30 years Machinery, equipment and vehicles 5 - 10 years Computer equipment and software 3 - 5 years Furniture, fixtures and leasehold improvements 3 - 10 years Depreciation expense, including amortization of capital leased assets, was $15,110, $11,979 and $11,191 for the years ended June 30, 2000, 2001 and 2002, respectively. In February 2001, the Company recorded a fixed asset impairment charge of $2,106 in accordance with Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long Lived Assets and for Long Lived Assets to be Disposed of" (SFAS No. 121). This charge relates primarily to changes in asset values resulting from the impact of restructuring activities and changes in operational processes under restructured operations. GOODWILL, INTANGIBLES AND OTHER ASSETS In July 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards (SFAS) No. 141, "Business Combinations," and No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. Use of the pooling-of-interests method is no longer permitted. SFAS No. 141 also includes guidance on the initial recognition and measurement of goodwill and other intangible assets acquired in a business combination that is completed after June 30, 2001. The Company adopted SFAS No. 141 on July 1, 2001. The Company elected early adoption of SFAS No. 142 as of July 1, 2001. In accordance with SFAS No. 142, goodwill and other indefinite lived intangible assets will no longer be amortized. Under this non-amortization approach, SFAS No. 142 requires that goodwill and other indefinite lived intangible assets be reviewed for impairment using a fair value based approach upon adoption and at least annually thereafter. SFAS No. 142 provides a six-month transitional period from the effective date of adoption for the Company to perform an assessment of whether there is an indication that goodwill is impaired. To the extent that an indication of impairment exists, the Company must perform a second test to measure the amount of the impairment. For the purposes of SFAS No. 142, the Company is considered to have one reporting unit. The Company determined its implied fair value utilizing a market capitalization approach and compared the fair value of the Company to its carrying value. This evaluation indicated that goodwill was potentially impaired as of July 1, 2001. As a result, the Company was required to complete the second step of the transitional impairment test to measure the amount of the impairment. In calculating the impairment, the implied fair value of goodwill was determined by calculating the fair value of all tangible and intangible net assets through appraisals, external valuations, quoted market prices and other valuation methods. The implied fair value of goodwill was compared to the carrying value of goodwill to measure the amount of the impairment. The Company recorded a non-cash charge of $222,116 as of July 1, 2001 to reduce the carrying value of its goodwill as a result of the adoption of SFAS No. 142. In accordance with the requirements of SFAS No. 142, the charge has been recorded as a cumulative effect of accounting change in the Company's consolidated statement of operations. Since a portion of the impaired goodwill is not deductible for taxes or as a result of the full valuation allowance on deferred taxes, no tax benefit was recorded in relation to the non-cash charge. As of June 30, 2002, remaining goodwill was $80,487 which is subject to continuing review of impairment under a similar approach as described above. The amount of the impairment primarily reflects the decline in the Company's stock price and financial condition since the acquisitions were consummated that generated the goodwill. The Company observed significant negative industry and customer trends during the three years prior to the valuation date of July 1, 2001, including a net loss of $16,325, $114,524 and $43,510 42 for the years ended June 30, 1999, 2000 and 2001, respectively. These trends primarily related to increased bankruptcies and significant financial difficulties experienced by the Company's skilled nursing facility customers primarily as a result of the greater than expected adverse impact with regard to implementation of the Medicare Prospective Payment System (PPS) under the Balanced Budget Act of 1997. SFAS No. 142 also requires goodwill to be tested annually and between annual tests if events occur or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The Company has elected to perform its annual tests for indications of goodwill impairment as of April 1 of each year. As of April 1, 2002, the Company's annual assessment indicated that the remaining goodwill was not impaired. The methodology of accounting for goodwill under SFAS No. 142 differs from the Company's previous policy, in accordance with accounting standards existing at that time, of using undiscounted cash flows over the remaining amortization period to determine if goodwill is recoverable. Intangible assets that will continue to be amortized under SFAS No. 142 consist primarily of non-compete covenants and debt issuance costs. Debt issuance costs are included in other assets and are amortized using the effective interest method over the life of the related debt. ACCRUED HEALTH INSURANCE The Company is self-insured for health insurance claims with a stop-loss umbrella policy in place to limit the maximum potential liability for both individual claims and total claims for a plan year. Health insurance claims are paid as they are submitted to the plan administrator. The Company maintains an accrual for claims that have been incurred but not yet reported (IBNR) to the plan administrator and therefore have not been paid. The Company maintains an IBNR reserve based on the historical claim lag period and current payment trends of health insurance claims (generally 2 to 3 months). The Company records a monthly expense for the health insurance plan in its financial statements. The initial monthly expense for a plan year is determined at the beginning of the plan year by reviewing historical claims experience and the estimated range of liability for the plan year as determined by the plan administrator. The initial monthly expense is adjusted each month as necessary to ensure that an adequate IBNR reserve level is maintained. INCOME TAXES The Company follows Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." This accounting standard requires that the liability method be used in accounting for income taxes. Under this accounting method, deferred tax assets and liabilities are determined based on the differences between the financial reporting basis and the tax basis of assets and liabilities and are measured using the expected enacted tax rates and laws that apply in the periods in which the deferred tax asset or liability is expected to be realized or settled. STOCK OPTIONS The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related Interpretations in accounting for its employee stock options because, as discussed in Note 9, the alternative fair value accounting provided under FASB Statement No. 123, "Accounting for Stock-Based Compensation," (SFAS No. 123) requires use of option valuation models that were not developed for use in valuing employee stock options. Under APB 25, when the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. EARNINGS PER SHARE The Company follows Statement of Financial Accounting Standards No. 128, "Earnings per Share." Under this accounting standard, basic earnings per share are computed based on the weighted average number of shares of Class A and Class B shares outstanding during the period. Diluted earnings per share include the dilutive effect of stock options and subordinated convertible debentures. FAIR VALUE OF FINANCIAL INSTRUMENTS The fair value of all financial instruments of the Company approximates the amounts presented on the consolidated balance sheet. 43 RECENTLY ISSUED ACCOUNTING STANDARDS In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". SFAS No. 144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of" and amends APB Opinion No. 30, "Reporting Results of Operations-Reporting the Effects of Disposal of a Segment of a Business" ("APB 30"). This statement develops one accounting model (based on the model in SFAS No. 121) for long-lived assets that are disposed of by sale, as well as addresses the principal implementation issues. SFAS No. 144 also expands the scope of discontinued operations and changes the disclosure requirement for discontinued operations. This statement is effective for fiscal years beginning after December 15, 2001. Management does not expect this standard to have a material impact on the Company's consolidated financial position, results of operations or cash flows. The FASB recently issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146 addresses the recognition, measurement, and reporting of costs that are associated with exit and disposal activities, including costs related to terminating a contract that is not a capital lease, costs to consolidate facilities or relocate employees, and termination benefits provided to employees that are involuntarily terminated under the terms of a one-time benefit arrangement that is not an ongoing benefit arrangement or an individual deferred-compensation contract. SFAS 146 No. supersedes Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to exit an Activity (including Certain Costs Incurred in a Restructuring)" and requires liabilities associated with exit and disposal activities to be recognized when the liability is incurred. SFAS No. 146 is effective for exit or disposal activities that are initiated after December 31, 2002. USE OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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 depending upon certain risks and uncertainties. MATERIAL RISKS AND UNCERTAINTIES Potential risks and uncertainties, many of which are beyond the control of the Company include, but are not limited to, such factors as the Company's ability to consummate the proposed merger transaction with Genesis, discussions with the Company's senior lenders and the ad hoc committee of debenture holders, overall economic, financial and business conditions, delays in reimbursement by the government or other payors of the Company and its customers, the overall financial condition of the Company's customers, the effect of new government regulation, changes in reimbursement levels from State Medicaid programs and third-party insurance plans, negotiations regarding payment terms and other contractual obligations with suppliers, the outcome of litigation, access to capital and financing, the demand for the Company's products and services, pricing and competitive factors in the industry and changes in accounting rules and standards. The Company purchases the majority of its inventory through one primary pharmaceutical supplier representing a concentration of credit risk to the Company. In fiscal 2001, the Company negotiated a temporary modification of payment terms with this supplier. In June 2002, the Company entered into a letter of intent with this supplier and is continuing its negotiations to achieve a permanent modification in payment terms. In addition, the Company earns administrative fees and amounts from certain other contractual arrangements under a prime wholesaler agreement with this supplier. The administrative fees and amounts from other contractual arrangements are accrued on a monthly basis based on purchasing data and knowledge of the terms of the contractual arrangements. The actual amounts due under the contractual arrangements are typically communicated to the Company on a quarterly or annual basis based on the terms of the contractual arrangements. As a result of the 2001 temporary modification of payment terms, the supplier is withholding certain contractual amounts due to the Company. Receivables from the supplier of $5,871 and $12,237 at June 30, 2001 and 2002, respectively, have been netted against accounts payable to the supplier for financial reporting purposes. The Company believes that the receivables arising from these contractual arrangements are collectible and is currently operating under the letter of intent which provides for the Company to make monthly payments to the supplier based on the net amount payable to the supplier. 2. LINE OF CREDIT In June 1998, the Company entered into a four-year revolving credit agreement (Credit Facility) which expired on May 31, 2002. On June 3, 2002, the Company received correspondence from the senior lenders indicating that they reserve the right to exercise all rights, powers and privileges provided for in the credit agreement including the acceleration of the collection of the Company's obligations and/or exercise other remedies under the credit agreement including exercising their rights with respect 44 to the pledged collateral. At the current time, the senior lenders have not chosen to exercise and enforce the rights and remedies available to them under the credit agreement. The Company continues to operate under the terms of the Credit Facility. The Credit Facility, as amended, had an available commitment of $207 million, provided all Company assets as security, limited the availability of the Credit Facility to use for working capital only, required Lender approval on acquisitions, provided for interest at a variable rate and contained certain debt covenants including an interest coverage ratio, minimum consolidated net worth requirements and a restriction on declaration and payment of cash dividends to shareholders. Prior to the expiration of the Credit Facility, the Company had been in violation of certain financial covenants of the Credit Facility. On April 21, 2000, the Company received a formal notice of default from the senior lenders. As a result of the notice of default, the interest rate on the Credit Facility (excluding facility fee) increased to the Prime Rate plus 2.25% (7.0% at June 30, 2002). The borrowings of $206,130 under the Credit Facility at June 30, 2002 are classified as a current liability. Failure to obtain a favorable resolution to the expiration of the Credit Facility could have a material adverse effect on the Company. See additional discussion regarding the Credit Facility and the proposed merger with Genesis in Note 1. 3. LONG-TERM DEBT Long-term debt consists of the following: JUNE 30, -------- 2002 2001 ---- ---- 2% note payable to Pennsylvania Industrial Development Authority due in monthly installments through June, 2010, and secured through an interest in a building of the Company $ 393 $ 425 Collateralized lease obligations with interest ranging from 7% to 16% due monthly through April, 2004 318 707 Other 112 149 ---- --- Total long-term debt 823 1,281 Less current portion 274 456 ------ ------ Long-term debt, excluding current portion $ 549 $ 825 ====== ====== The aggregate maturities of the long-term debt for each of the five years subsequent to June 30, 2002 are as follows: FISCAL YEAR ENDING JUNE 30, AMOUNT --------------------------- ------ 2003 $ 274 2004 170 2005 67 2006 70 2007 60 Thereafter 182 ------- $ 823 ======= 45 4. INCOME TAX EXPENSE Income tax expense (benefit), for each of the three years ended June 30, 2002, consists of:

~~CLASS~~2002 A2001 ~~CLASS~~2000 ~~B RETAINED COMMON COMMON PAID~~-~~IN EARNINGS STOCKHOLDERS' STOCK STOCK CAPITAL (DEFICIT) EQUITY~~ ----- ----- ----~~---~~ ~~--------~~CURRENT ~~------~~DEFERRED ~~Balance~~TOTAL atCURRENT ~~July~~DEFERRED 1,TOTAL ~~1998~~CURRENT ~~$133~~DEFERRED $TOTAL ~~65 $258,462 $ 28,674 $287,334 Exercise of stock options (3,545 shares of Class A Common Stock and 69,692 shares of Class B Common Stock)~~ -- -- ~~823~~ -- ~~823 Issuance of 114,134 shares of Class A Common Stock and return of 7,572 shares of Class B Common Stock for business combinations 1~~ -- ~~1,397~~ -- ~~1,398 Issuance of 31,383 shares of Class A Common Stock for profit sharing plan 1~~ -- ~~449~~ -- ~~450 Conversion of 520,084 shares of Class B Common Stock to 520,084 shares of Class A Common Stock 5 (5)~~ -- -- -- ~~Conversion of convertible subordinated debentures (273,707 shares of Class A Common Stock) 3~~ -- ~~2,751~~ -- ~~2,754 Net loss~~ -- -- -- ~~(16,325) (16,325)~~ ----- ---- ----- ------- --------- -----~~-----~~ ~~Balance~~Federal at$ ~~June~~- ~~30,~~$ ~~1999~~- $~~143~~ - $ 60- $~~263,882~~ - $ ~~12,349~~- $~~276,434~~ ~~Issuance~~(56) of$ 2,~~203,844~~505 ~~shares~~$ of2,449 ~~Class~~State Aand ~~Common~~local ~~Stock~~300 ~~for~~- ~~business~~300 ~~combinations~~370 22 -- ~~6,811~~370 --445 ~~6,833~~432 ~~Issuance~~877 ~~of 497,153 shares of Class A Common Stock for profit sharing plan 5~~ -- ~~957~~ -- ~~962 Conversion of 197,997 shares of Class B Common Stock to 197,997 shares of Class A Common Stock 2 (2)~~ -- -- -- ~~Net loss~~ --- -- ---- ~~(114,524) (114,524)~~ ------ ------- ------ ------- --------- --------- ~~Balance~~$ at300 ~~June~~$ ~~30,~~- ~~2000~~$ 300 $~~172~~ 370 $ 58- $~~271,650~~ 370 $~~(102~~ 89 $ 2,~~175)~~937 $~~169~~ 3,~~705~~326 ====== ======= ====== ====== ======= ====== ======= ======== ========

Reconciliation of income taxes at the United States Federal statutory rate to the effective income tax rate for the three years ended June 30, 2002 are as follows:

~~CLASS~~2002 A2001 ~~CLASS~~2000 ~~B RETAINED COMMON COMMON PAID~~-~~IN EARNINGS STOCKHOLDERS' STOCK STOCK CAPITAL (DEFICIT) EQUITY~~ ----- ----- ----~~---~~ ~~--------~~Income ~~------~~tax ~~Balance~~benefit at ~~June~~the ~~30,~~United ~~2000~~States ~~$172~~statutory $rate 58 $~~271~~ (79,~~650~~647) $(~~102~~14,~~175~~668) $~~169~~(37,~~705~~807) --State ~~Issuance~~and oflocal ~~733,040~~income ~~shares~~tax ofbenefit ~~Class~~(12,455) A(2,327) ~~Common~~(2,989) ~~Stock~~Amortization/write-off ~~for~~of ~~profit~~nondeductible ~~sharing~~intangible ~~plan~~assets 712,806 --532 ~~293~~561 --Increase ~~300~~in ~~Conversion~~valuation ofallowance ~~512~~79,~~319~~254 ~~shares~~16,770 of35,993 ~~Class~~Nondeductible Bnonrecurring ~~Common~~charges ~~Stock~~- to- ~~512~~6,~~319~~725 ~~shares~~Other of- ~~Class~~net A342 ~~Common~~63 ~~Stock~~843 ~~5 (5)~~ -- -- -- ~~Net loss~~ --- -- -- ~~(43,510) (43,510)~~ ---- -------- Total provision for income tax expense 300 370 3,326 Income tax benefit from cumulative effect of accounting change - - - ----- ---- -------- -------- ~~Balance~~Net attax ~~June~~provision ~~30,~~$ ~~2001~~300 $~~184~~ $370 53 $~~271,943~~ ~~$(145~~3,~~685)~~326 ~~$126,495~~ ==== ==== =~~=======~~ ========= ========

The tax effects of temporary differences that give rise to significant portions of the net deferred tax assets are as follows: JUNE 30, -------- 2002 2001 ---- ---- Deferred tax assets (liabilities): Allowance for doubtful accounts $ 8,550 $ 11,082 Accrued expenses and other 5,369 4,825 Loss carryforwards 78,457 65,477 Intangibles 40,867 (25,863) Depreciable assets and other (1,082) (2,245) Valuation allowance (132,161) (53,276) --------- --------- Net deferred tax assets $ - $ - The evaluation of the realizability of the Company's net deferred tax assets in future periods is made based upon historical and projected operating performance and other factors for generating future taxable income, such as intent and ability to sell assets. At this time, the Company has concluded that the realization of deferred tax assets is not deemed to be "more likely than not" and, consequently, established a valuation allowance during the years ended June 30, 2001 and 2002 equal to its net deferred tax asset. At June 30, 2002 the Company has net operating loss carryforwards of $192.3 million for income tax purposes that expire in years 2010 through 2022. U.S. tax laws limit the annual utilization of tax loss carryforwards of acquired businesses. 46 5. OPERATING LEASES The Company is obligated under operating leases primarily for office facilities and equipment. Future minimum lease payments under noncancelable operating leases as of June 30, 2002 are as follows: FISCAL YEAR ENDING JUNE 30, AMOUNT --------------------------- ------ 2003 $ 7,114 2004 5,639 2005 3,824 2006 2,843 2007 2,033 Thereafter 1,466 ------ $ 22,919 ======== Total rent expense under all operating leases for the years ended June 30, 2000, 2001 and 2002 was $9,762, $8,698, and $8,446 respectively. 6. PROFIT-SHARING PLAN The Company maintains a profit sharing plan with an Internal Revenue Code Section 401(k) feature covering substantially all of its employees. Under the terms of the plan, the Company will match up to 20% of the first 10% of eligible employee compensation. Effective January 1, 1999, the Company amended the profit sharing plan to provide for the Company match to be contributed as the Company's common stock. Effective October 1, 2000 the Company amended the profit sharing plan to return the Company match back to a cash contribution. The Company's aggregate contributions to the plan and related expense were $962, $852 and $834 for the years ended June 30, 2000, 2001 and 2002, respectively. 7. RELATED PARTY TRANSACTIONS The Company currently leases 11 of its facilities from entities affiliated with former owners of certain businesses acquired, who are employees of the Company. The buildings are used for operations of the Company. Rent expense of $1,197, $888 and $890 was incurred under these leasing arrangements in the years ended June 30, 2000, 2001 and 2002, respectively. 8. STOCKHOLDERS' EQUITY/CONVERTIBLE SUBORDINATED DEBENTURES Holders of Class A Common Stock and holders of Class B Common Stock are entitled to one and ten votes, respectively, in corporate matters requiring approval of the shareholders of the Company. No dividend may be declared or paid on the Class B Common Stock unless a dividend of equal or greater amount is declared or paid on the Class A Common Stock. On August 3, 1999 the Company amended its line of credit agreement entering into several restrictive covenants including a restriction on the declaration and payment of cash dividends to shareholders. On August 13, 1997, the Company issued $100,000 of convertible subordinated debentures (1998 debentures) due 2004. Net proceeds to the Company were approximately $97,250, net of underwriting discounts and expenses. The 1998 debentures carry an interest rate of 5 3/4% and are convertible into shares of Class A Common Stock at any time prior to maturity at $32.70 per share. A portion of the proceeds from the debenture offering was used to repay approximately $21,000 of outstanding indebtedness under short-term borrowings. The debentures are obligations of the Company. The operations of the Company are currently conducted principally through subsidiaries, which are separate and distinct legal entities. Each of the Company's wholly owned subsidiaries has unconditionally guaranteed, jointly and severally, the Company's payment obligations under the 1998 debentures. Accordingly, summarized financial information regarding the guarantor subsidiaries has not been presented because management of the Company believes that such information would not be meaningful to investors. The Company elected not to make the semi-annual $2,875 interest payments due February 15, 2001, August 15, 2001, February 15, 2002 and August 15, 2002 on the 1998 debentures. On April 6, 2001, the Company received a formal Notice of Default and Acceleration and Demand for Payment from the Indenture Trustee. The Indenture Trustee declared the entire 47 principal and any accrued interest thereon to be immediately due and payable and demanded immediate payment of such amounts. If such payments are not made, the Indenture Trustee reserves the right to pursue remedial measures in accordance with the Indenture, including, without limitation, collection activities. As of June 30, 2002, the amount of principal and accrued interest is $110,767. During fiscal 2000, in connection with an acquisition agreement, the Company issued a $2,000 convertible subordinated debenture maturing on August 15, 2004. The note and accrued "payment-in-kind" interest will be convertible into a maximum of 200,000 Class A Common Shares at a conversion price of $8.00 per share. During fiscal 2001 and 2002, $107 and $254 of accrued interest was converted to principal, respectively. As a result of the 1998 debentures being in default, these debentures are also in default at June 30, 2001 and 2002. Until the defaults on the debentures are resolved, convertible subordinated debentures of $102,361 and the related accrued interest of $10,856 will be classified as a current liability. See additional discussion regarding the convertible subordinated debentures and the proposed merger with Genesis in Note 1. 9. STOCK OPTIONS During the period from 1987 through 1995, the Company granted stock options to certain directors and key employees which provide for the purchase of 1,054,890 common shares in the aggregate, at exercise prices ranging from $0.71 to $6.19 per share, which represented fair market values on the dates the grants were made. During fiscal 1995, the Company adopted an Employee Stock Purchase and Option Plan that authorized 100,000 shares of Class A Common Stock for awards of stock options to certain key employees. During fiscal 1995 and 1996 the Company granted 11,520 and 7,458 options, respectively, at an exercise price of $6.19 and $7.33 per share, respectively, under the provisions of this plan. These exercise prices represented fair market values on the dates the grants were made. In January 1996, the Company adopted a Long Term Incentive Plan (the Plan) to provide up to 700,000 shares of Class A Common Stock for awards of incentive and nonqualified stock options to officers and key employees of the Company. During fiscal 1996, the Company granted 56,500 nonqualified stock options and 27,540 incentive stock options, all at $16.50 per share. The nonqualified stock options have a term of five years and became exercisable in thirds on February 1, 1998, 1999 and 2000. The incentive stock options have a term of six years and became exercisable in fifths each year on February 1, 1997, 1998, 1999, 2000 and 2001. During fiscal 1997 and 1999 the Company granted 301,250 and 345,250 nonqualified stock options, respectively, at an exercise price of $20.00 and $15.00 per share, respectively, the market values of the stock on the dates of the grant. The fiscal 1997 nonqualified stock options have a term of five years and became exercisable in thirds on April 1, 1999, 2000 and 2001. The fiscal 1999 nonqualified stock options have a term of five years and become exercisable in thirds on November 1, 2000, 2001, and 2002. During fiscal 2001, the Company granted 240,000 nonqualified stock options at an exercise price of $0.135, the market value of the stock on the date of the grant. The options have a term of five years and become exercisable in thirds on November 1, 2002, 2003 and 2004. In October 1998, the Company adopted the 1998 Performance Plan (the 1998 Performance Plan) to provide up to 1,200,000 shares of Class A Common Stock for awards of incentive and nonqualified options to directors, officers, and key employees of the Company. During fiscal 1999, the Company granted 85,000 nonqualified stock options at an exercise price of $18.50 per share, the market value of the stock on the date of the grant. These nonqualified stock options have a term of five years and become exercisable in thirds on January 1, 2001, 2002 and 2003. During fiscal 2000, the Company granted 494,250 and 290,500 nonqualified stock options at an exercise price of $4.25 and $1.47 per share respectively, the market values of the stock on the date of the grants. The 494,250 nonqualified stock options have a term of five years and become exercisable in thirds on August 1 2001, 2002 and 2003. The 290,500 nonqualified stock options have a term of five years and became exercisable in halves on January 28, 2001 and 2002. During fiscal 2001 the Company granted 460,000 nonqualified stock options at an exercise price of $0.135, the market value of the stock on the date of the grant. The options have a term of five years and become exercisable in thirds on November 1, 2002, 2003 and 2004. In November 2000, the Company adopted the 2000 Performance Plan (the 2000 Performance Plan) to provide up to 2,000,000 shares of Class A Common Stock for awards of incentive and nonqualified options to directors, officers, and key employees of the Company. During fiscal 2002, the Company granted 705,000 nonqualified stock options at an exercise price of $0.19 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 December 1, 2003, 2004 and 2005. Substantially all of the Company's outstanding stock options contain provisions that provide for immediate vesting upon a change in control of the Company. 48 The Company's stock option activity and related information for the years ended June 30 are summarized as follows:

~~YEAR~~2002 ~~ENDED JUNE 30,~~ 2001 2000 ~~1999~~ ---- ---- ---- ~~OPERATING~~WEIGHTED ~~ACTIVITIES~~WEIGHTED ~~Net~~WEIGHTED ~~loss~~AVERAGE $AVERAGE ~~(43,510)~~AVERAGE ~~$(114,524)~~EXERCISE $EXERCISE ~~(16,325)~~EXERCISE ~~Adjustments~~OPTIONS toPRICE ~~reconcile~~OPTIONS ~~net~~PRICE ~~income~~OPTIONS ~~loss~~PRICE ~~to net cash provided by (used in) operating activities: Non~~-~~cash portion of fixed asset impairment charge 2,106~~ -- -- ~~Non~~-~~cash portion of nonrecurring charges~~ -- ~~38,555 1,486 Depreciation and amortization 24,993 28,678 23,512 Provision for doubtful accounts 31,101 53,825 35,568 Deferred income taxes~~ -- ~~2,937 (3,665) Cumulative effect of accounting change, net of taxes~~ --- -- ~~2,921 Non~~-cash profit sharing expense 300 962 450 Changes in assets and liabilities, net of effects of assets and liabilities acquired: Trade accounts receivable (8,570) (10,309) (58,702) Inventories 4,316 12,151 (5,759) Trade accounts payable 17,363 (5,204) 15,930 Accrued expenses (295) (11,251) (2,366) Prepaid expenses and other 21 14,948 (17,042) ---- ----- --------- -----~~----~~ ~~Net~~Outstanding ~~cash~~at ~~provided~~beginning byof ~~(used~~year ~~in) operating activities 27~~1,~~825 10~~954,~~768~~798 ~~(23,992)~~$ ~~INVESTING~~5.99 ~~ACTIVITIES Capital expenditures for property~~1, ~~plant and equipment (3~~297,~~359)~~109 ~~(6,616)~~$ ~~(29,400)~~9.14 ~~Proceeds from sales of assets 250 621 300 Purchases of businesses -- -- (653) Other (978) (5~~846,~~766)~~694 ~~(5,264)~~$15.82 ~~---------~~Granted ~~--------- --------- Net cash used in investing activities (4~~705,~~087)~~000 ~~(11,761)~~0.19 ~~(35~~700,~~017)~~000 ~~FINANCING~~0.14 ~~ACTIVITIES Proceeds from issuance of long-term debt -- -- 1~~784,~~664~~750 ~~Repayment~~3.22 ofForfeited ~~long-term debt~~ (~~661) (3~~142,~~474~~216) 4.72 (142,~~675~~311) ~~Borrowings~~5.80 ~~on line-of-credit -- 91,300 108,325 Payments on line-of-credit --~~ (99334,~~870~~335) ~~(41,425)~~12.32 ~~Proceeds from issuance of common stock and exercise of stock options~~ -- -- ~~358~~ -----~~----~~ ------~~---~~ --------- ~~Net cash provided by (used in) financing activities (661) (12,044) 67,247~~ ------~~---~~ --------- ------~~---~~ ~~Net~~Outstanding ~~increase (decrease) in cash and cash equivalents 23,077 (13,037) 8,238 Cash and cash equivalents~~ at ~~beginning~~end of ~~period~~year 162,~~387 29~~517,~~424~~582 ~~21,186 --------- --------- --------- Cash and cash equivalents at end of period~~ $ 394.44 1,~~464~~954,798 $ 165.99 1,~~387~~297,109 $ ~~29,424~~9.14 ========= ====== === ~~--------- Supplemental disclosure of cash flow information: Cash paid during the year for: Interest $ 31,655 $ 28,975 $ 20,179~~ ====== === === ====== === ====== ~~Income~~Exercisable ~~taxes~~at $end ~~355~~of $year ~~404~~850,814 $537,828 1266,~~792~~441 ========= ========= =========

Information regarding stock options outstanding as of June 30, 2002 is summarized as follows:

~~Write~~[-~~offs,~~-------------------------------Options ~~Balance~~Outstanding--------------------------------] at[----------Options ~~Provision~~Exercisable----------] ~~for~~Weighted ~~Net~~Weighted ofAverage ~~Beginning~~Average Number Weighted Remaining Number Weighted Range of ~~Doubtful~~Outstanding ~~Recoveries~~Average ~~Balance~~Contractual atExercisable ~~Period~~Average ~~Accounts~~Exercise ~~and~~Prices ~~Other~~At ~~End~~June of30, ~~Period~~2002 Exercise Price Life (In Years) At June 30, 2002 Exercise Price ---------------- ---------------- -------------- --------------- ~~Fiscal~~---------------- ~~Year~~-------------- ~~Ended~~$0.14 ~~June~~- 30$0.14 627,000 ~~2001~~$ 0.14 4.50 -- $ ~~53,926~~-- 0.19 - $0.19 31694,~~101~~000 $0.19 ~~(56~~3.33 -- -- 1.47 - 1.47 236,~~695)~~750 $1.47 282.58 236,~~332~~750 ~~2000~~1.47 $4.25 38- 6.19 481,~~880~~358 $4.63 532.23 223,~~825~~682 $5.07 ~~(38~~15.00 - 16.50 228.274 15.32 1.81 168,~~779)~~516 $15.44 5318.50 - 20.00 250,~~926~~200 ~~1999~~19.49 $3.74 18221,~~427~~866 19.62 --------------- ------- ----- ---- ------- ----- $0.14 ~~35,568~~- $20.00 ~~(15~~2,~~115)~~517,582 $ 384.44 3.28 850,~~880~~814 $ 9.92 =============== ========= ======= ==== ======= ======

Pro forma information regarding net income and earnings per share is required by SFAS No. 123, and has been determined as if the Company had accounted for its employee stock options under the fair value method of that Statement. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted average assumptions: risk-free interest rates of 6.00%; a dividend yield of 0.00%; a volatility factor of the expected market price of the Company's Class A Common Stock ranging from .482 to 1.964; and a weighted-average expected option life ranging from 4 to 4.5 years. The weighted average fair value of options granted during fiscal 2000, 2001 and 2002 was $1.97, $0.13 and $0.11 per share, respectively. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma information for the three years ended June 30, 2002 is as follows (in thousands except for earnings per share information): 2002 2001 2000 ---- ---- ---- Net loss - basic and diluted $(235,293) $(44,554) $(115,577) Earnings per share - basic and diluted (9.92) (1.89) (5.36) 49 10. ACQUISITIONS As described in Note 1, the Company adopted SFAS No. 141 as of July 1, 2001. SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. The Company paid cash of $1,371 for three immaterial acquisitions in fiscal 2002. These acquisitions have been recorded using the purchase method of accounting and, accordingly, results of their operations have been included in the Company's consolidated financial statements since the effective date of the respective acquisitions. There were no acquisitions during the fiscal years ended June 30, 2000 and 2001. Certain of the Company's acquisition agreements provided for contingent purchase price arrangements under which the purchase price paid may be subsequently increased upon the achievement of specific operating performance targets during post acquisition periods. The additional purchase price, payable in cash or Company stock is recorded, if earned, upon resolution of the contingent factors. The Company issued 2,203,844 shares of Class A Common Stock valued at $6,833 and a $2,000 convertible subordinated debenture maturing on August 15, 2004 under contingent purchase price arrangements during fiscal 2000. As of June 30, 2002, no material contingencies remain from the Company's acquisition agreements. 11. SPECIAL AND NONRECURRING CHARGES During fiscal 2000, the Company recorded nonrecurring, restructuring and special charges of $95,800. A special charge of $44,600 was recorded to increase the allowance for doubtful accounts and nonrecurring, restructuring and other special charges of $51,200 were recorded in connection with the implementation and execution of strategic restructuring and consolidation initiatives of certain operations, the planned disposition of certain non-core and/or non-strategic assets, impairment of certain assets and other nonrecurring items. The special charge to increase the allowance for doubtful accounts resulted from continuing negative changes observed in industry and customer trends during the year ended June 30, 2000, and a change in the method of estimating the allowance necessary for accounts receivable. The financial condition of the Company's primary customer base and negative industry trends continued to deteriorate throughout the year. Due to the negative trends that the Company's customers were facing, management re-evaluated the method of estimating the allowances necessary for these and other customers. The total provision for doubtful accounts, including the amounts included in the special charge, was $53,825 for the year ended June 30, 2000. The Company continued its plan of restructuring to consolidate certain pharmacy sites in order to improve operating efficiencies. As a result, the Company consolidated thirteen additional pharmacy sites into either a new or existing location. The Company also shutdown six locations associated with certain ancillary services. During the year ended June 30, 2000, the Company recorded nonrecurring charges of $9,700 related to these site consolidations and location shutdowns, inclusive of $1,100 of additional costs incurred on site consolidations previously announced. During the year ended June 30, 2000, the Company adopted a formal exit plan to dispose of certain non-core and/or non-strategic assets. The Company recorded nonrecurring charges of $30,700 related to the planned disposition of assets primarily consisting of impairment to goodwill and property and equipment. Through June 30, 2002, the Company has disposed of four ancillary service operations that were not contributing to the overall financial performance of the Company. Total revenue and operating income of the related business units was $59,300 and $1,500, respectively, for the year ended June 30, 2000. The remaining $10,800 of the nonrecurring charge primarily relates to severance incurred during the year associated with the Company's expense reduction initiatives, additional asset impairments, costs related to a settlement with federal authorities regarding the investigation of the Company's Indianapolis, Indiana facility and other nonrecurring expenses. During December 1999, the Company reached a settlement with the U.S. Attorney's office in the Southern District of Indiana regarding the federal investigation of the Company's facility in Indianapolis, Indiana. As a result, the Company recorded the settlement amount as a nonrecurring charge. Under the terms of the settlement, the Company paid $4,100 to the U.S. Attorney's office. The Company also agreed to maintain its current level of spending in connection with its compliance systems and procedures for a period of three years. If the Company does not comply with the terms of the accord, an additional $1,500 will be payable to the U.S. Attorney's office. Employee severance costs included in the nonrecurring charges relate to the termination of 472 employees. As of June 30, 2002, all terminations associated with these restructuring activities have been completed. 50 Details of the fiscal 2000 nonrecurring, restructuring and special charges and related activity are as follows:

~~JUNE~~Nonrecurring Reserve Reserve Description Cash/non-cash Charge Activity At 6/30,/01 Activity At 6/30/02 ----------- ~~2001~~------------- ~~2000~~------ -------- ---------- ~~Notes~~-------- ~~payable~~---------- to(in ~~former~~thousands) ~~owner~~Site ofConsolidations anSeverance/compensation ~~acquired~~Cash ~~company~~$ ~~maturing in July~~1,300 ~~2000~~$(1,300) at$ an-- ~~interest rate of 5%~~ $ -- $ 17-- 2%related ~~note~~Lease ~~payable~~terminations toCash ~~Pennsylvania~~2,800 ~~Industrial~~(2,100) ~~Development~~700 ~~Authority~~(500) ~~due~~200 inAsset ~~monthly~~impairments ~~installments~~Non-cash ~~through June~~4,400 ~~2010~~(4,400) ~~and~~-- ~~secured~~-- ~~through~~-- anOther ~~interest~~Cash in1,200 a(1,000) ~~building~~200 of(100) ~~the~~100 ~~Company~~Special ~~425~~increase ~~468~~to ~~Collateralized~~allowance ~~lease~~for ~~obligations~~doubtful ~~with~~accounts ~~interest~~Non-cash ~~ranging~~44,600 ~~from~~(44,600) 7%-- to-- ~~16%~~-- ~~due~~Disposition ~~monthly~~of ~~through~~Assets ~~April,~~Asset ~~2004~~impairment ~~707~~Non-cash 130,~~226~~200 ~~Other~~(30,200) ~~149 231~~ -- -- -- Other Cash 500 (500) -- -- -- ~~Total~~Other ~~long-term~~Cash ~~debt 1~~6,~~281~~600 1(6,~~942~~500) ~~Less~~100 ~~current~~(100) ~~portion~~-- ~~456~~Non-cash ~~651~~4,200 (4,200) -- -- -- ------- ~~Long~~-~~term~~------- ~~debt,~~------ ~~excluding~~------- ~~current~~----- ~~portion~~Total $95,800 ~~825~~$(94,800) $1,~~291~~000 $ (700) $ 300 ======= ========= ====== ========= =====

51 12. EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share:

~~FISCAL~~2002 ~~YEAR~~2001 ~~ENDING~~2000 ~~JUNE~~---- 30---- ---- Numerator: Numerator for basic earnings per share - net loss $(234,557) ~~AMOUNT~~$(43,510) $(114,524) Effect of dilutive securities: Convertible debentures - - - --------- -------- --------- Numerator for diluted earnings per share $(234,557) $(43,510) $(114,524) ========== ========= ========== Denominator: Denominator for basic earnings per share - weighted average common shares 23,717 23,535 21,551 Effect of dilutive securities: Stock options - - - Convertible debentures - - ~~2002~~- --------- -------- --------- Dilutive potential common shares - - - --------- -------- --------- Denominator for diluted earnings per share 23,717 23,535 21,551 ======== ======== ========= Basic earnings per share: Loss before cumulative effect of accounting change $ ~~456~~(0.52) ~~2003~~$ ~~256~~(1.85) ~~2004~~$ ~~184~~(5.31) ~~2005~~Cumulative 62effect ~~2006~~of 64accounting ~~Thereafter~~change ~~259~~(9.37) - - --------- -------- --------- Net loss per share $ (9.89) $ (1~~,281~~.85) $ (5.31) ======== ======== ========= Diluted earnings per share: Loss before cumulative effect of accounting change $ (0.52) $ (1.85) $ (5.31) Cumulative effect of accounting change (9.37) - - --------- -------- --------- Net loss per share $ (9.89) $ (1.85) $ (5.31) ======== ======== =========

At June 30, 2002, the Company has $102,361 of convertible subordinated debentures outstanding that are convertible into 3,258,104 shares of Class A Common Stock and 2,517,582 employee stock options that are potentially dilutive that were not included in the computation of diluted earnings per share as their effect would be antidilutive. At June 30, 2001, the Company has $102,107 of convertible subordinated debentures outstanding that are convertible into 3,258,104 shares of Class A Common Stock and 1,954,798 employee stock options that are potentially dilutive that were not included in the computation of diluted earnings per share as their effect would be antidilutive. 52 13. GOODWILL AND INTANGIBLE ASSETS As described in Note 1, the Company adopted SFAS No. 142 as of July 1, 2001. In accordance with SFAS No. 142, the Company discontinued the amortization of goodwill effective July 1, 2001. A reconciliation of previously reported net loss and loss per share to the amounts adjusted for the exclusion of the cumulative effect of accounting change and goodwill amortization, net of the related income tax effect, follows:

YEAR ENDED JUNE 30, 2002 2001 2000 ~~1999~~ ---- ---- ---- ~~CURRENT~~Net ~~DEFERRED~~Loss: ~~TOTAL~~As ~~CURRENT~~reported ~~DEFERRED~~$(234,557) ~~TOTAL~~$(43,510) ~~CURRENT~~$(114,524) ~~DEFERRED~~Goodwill ~~TOTAL~~amortization ~~Federal~~- $10,396 10,865 Cumulative effect of accounting change 222,116 - - $--------- -------- $ --------- $As ~~(56)~~adjusted $ ~~2,505 $2,449 $~~(312,~~994~~114) $(333,~~218~~114) $(7103,~~212~~659) ~~State~~========= ======== ========= Basic and ~~local~~Diluted ~~370~~Loss --Per ~~370~~Share: ~~445~~As ~~432~~reported ~~877~~$ (~~1,929~~9.89) $ (~~447~~1.85) $ (~~2,376~~5.31) ~~-----~~Goodwill ~~-----~~amortization -~~------~~ 0.44 0.50 Cumulative effect of accounting change 9.37 -~~------~~ -~~------~~ ----- ----~~---~~ -------- ------- ~~$ 370 $~~ -- $As ~~370~~adjusted $ ~~389 $ 2,937 $3,326 $~~(~~5,923~~0.52) $ (~~3,665~~1.41) $ (~~9,588~~4.81) ===== ===== ======= =~~======~~ ======= ==~~=== ======= ======= =======~~

Changes in the carrying amount of goodwill for fiscal 2002 are as follows: Balance at June 30, 2001 $ 301,907 Cumulative effect of accounting change (222,116) Other 696 ---------- Balance at June 30, 2002 $ 80,487 ========== Accumulated amortization of goodwill was $44,176 at June 30, 2001. The gross carrying amount and accumulated amortization of intangible assets subject to amortization was $11,334 and $6,879, respectively, at June 30, 2001 and $10,128 and $7,934, respectively, at June 30, 2002. Intangible assets that will continue to be amortized under SFAS No. 142 consist primarily of non-compete covenants and deferred debenture issuance costs. Amortization expense for the year ended June 30, 2002 was $1,894. The estimated amortization expense for each of the five fiscal years subsequent to June 30, 2002 is as follows: FISCAL YEAR ENDING JUNE 30, AMOUNT --------------------------- ------ 2003 $572 2004 420 2005 247 2006 201 2007 70 14. CONTINGENCIES 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 and is involved from time to time in litigation on various matters. 15. SUBSEQUENT EVENT (UNAUDITED) On July 28, 2002, NCS, Genesis and Geneva Sub, Inc., a wholly owned subsidiary of Genesis ("Sub") entered into a definitive Agreement and Plan of Merger (the "Merger Agreement"), pursuant to which Sub will merge with and into NCS (the "Proposed Merger"), with NCS surviving as a wholly owned subsidiary of Genesis. If the Proposed Merger is completed, each outstanding share of common stock of NCS, par value $0.01 per share ("NCS Common Stock"), other than the NCS Common Stock held by NCS and other than dissenting shares, will be converted into the right to receive 0.1 of a share of 53 common stock of Genesis, par value $0.02 per share. The completion of the Proposed Merger is subject to regulatory approvals and other customary conditions, including the approval of the holders of a majority of the outstanding voting power of NCS Common Stock. In connection with the Merger Agreement, on July 28, 2002, NCS and Genesis entered into agreements (the "Voting Agreements") with certain stockholders of NCS beneficially owning in the aggregate a majority of the outstanding voting power of NCS Common Stock. In the Voting Agreements, such stockholders agreed (1) to vote their shares of NCS Common Stock in favor of adoption and approval of the Merger Agreement and against proposals for certain other transactions and (2) not to transfer their shares of NCS Common Stock prior to the consummation of the Proposed Merger. On August 8, 2002, Omnicare, Inc. (Omnicare) commenced a cash tender offer to purchase all of the outstanding shares of Class A and Class B common stock of NCS for $3.50 per share. The effect of the Omnicare tender offer on the proposed merger between NCS and Genesis is not known at this time. Since the Company entered into the Merger Agreement, seven shareholder lawsuits (six of which are purported class action lawsuits) were filed against NCS and its directors in connection with the Proposed Merger with Genesis and, in two cases, against Genesis and Sub (the "Stockholder Claims"). The Stockholder Claims allege that the directors of NCS breached their fiduciary duties, and certain other duties, to stockholders by entering into the Merger Agreement and seek various relief, including an injunction against consummation of the Proposed Merger, requiring separate class voting on approval of the Proposed Merger by NCS Stockholders, rescinding the Proposed Merger if the same is consummated prior to a final judgment on the Stockholder Claims, declaring the Voting Agreements null and void and compensatory damages and costs. In addition, the amended complaint filed by Omnicare alleges that the Voting Agreements violate the NCS amended and restated certificate of incorporation and therefore resulted in an automatic conversion of such stockholders' Class B common shares into Class A common shares. No court dates have been set for these matters. The Company believes that the allegations set forth in these lawsuits are without merit and intends to contest them vigorously; however, the ultimate outcome of these lawsuits cannot be predicted with certainty. These lawsuits could adversely affect the Company's ability to consummate the Merger Agreement with Genesis. On August 20, 2002, the Company filed a complaint against Omnicare in the United States District Court for the Northern District of Ohio, titled NCS Healthcare, Inc. v. Omnicare, Inc., Case No. 1:02CV1635 (Maita, J.), and, on August 21, 2002, the Company amended the complaint. The complaint, as amended, alleges, among other things, that Omnicare's disclosure on Schedule TO, filed on August 8, 2002 in connection with the associated tender offer, contains materially false and misleading disclosures in violation of Section 14(e) of the Securities Exchange Act of 1934. 54 16. QUARTERLY DATA (UNAUDITED) Selected quarterly data for the years ended June 30, 2001 and 2002:

YEAR ENDED JUNE 30, 2001 ~~2000~~------------------------ ~~1999~~FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER TOTAL ------- ------- ------- ~~Income~~------- ~~taxes~~----- ~~benefit~~Revenues at$159,022 ~~the~~$157,461 ~~United~~$154,890 ~~States~~$154,955 ~~statutory~~$626,328 ~~rate~~Gross ~~$(14~~profit 28,~~668~~037 28,673 27,676 27,459 111,845 Operating income (loss) $(~~37,807~~b) $1,036 1,260 (912,~~070~~800) ~~State~~(923) ~~and~~(11,427) ~~local~~Net ~~income~~loss ~~taxes~~(7,113) (27,~~327~~203) (220,~~989~~807) (18,~~544~~387) ~~Amortization~~(43,510) ofEarnings ~~nondeductible~~per ~~intangible~~share ~~assets~~- ~~532~~basic ~~561~~(a) ~~640~~(0.31) ~~Increase~~(0.31) in(0.88) ~~valuation~~(0.35) ~~allowance~~(1.85) ~~16,770~~Earnings ~~35,993~~per share -- ~~Nondeductible~~diluted ~~nonrecurring~~(a) ~~charges~~(0.31) (~~See~~0.31) ~~Note~~(0.88) 11(0.35) --(1.85) 6YEAR ENDED JUNE 30,~~725~~ 2002 ------------------------ ~~Other~~FIRST -SECOND ~~net~~THIRD 63FOURTH ~~843~~QUARTER ~~386~~QUARTER QUARTER QUARTER TOTAL -------- ------- ------- ------- ----- ~~Total~~Revenues ~~provision~~$ ~~for~~157,836 $161,708 $163,816 $ 162,396 $ 645,756 Gross profit 27,180 26,381 26,418 26,851 106,830 Operating income ~~tax~~1,848 ~~expense~~1,292 ~~(benefit)~~4,842 ~~370~~5,072 313,~~326~~054 Net loss as reported (95,~~588~~179) ~~Income~~(5,239) ~~tax~~(1,323) ~~benefit~~(700) ~~from~~(12,441) ~~cumulative~~Cumulative effect of accounting change --(c) ~~-- 1~~(222,~~948~~116) -- -- ---- (222,116) Net loss as restated (227,295) (5,239) (1,323) (700) (234,557) Earnings per share as reported -~~-------~~ basic (a) (0.22) (0.22) (0.06) (0.03) (0.52) Earnings per share as reported -~~-------~~ ~~Net~~diluted ~~provision~~(a) (~~benefit~~0.22) ~~excluding~~(0.22) ~~benefit~~(0.06) ~~related~~(0.03) to(0.52) ~~cumulative~~Earnings ~~effect~~per ofshare ~~accounting~~as ~~change~~restated $- ~~370~~basic $(a) ~~3,326~~(9.58) $(0.22) (~~7,640~~0.06) ~~========~~(0.03) ~~========~~(9.89) ~~========~~Earnings per share as restated - diluted (a) (9.58) (0.22) (0.06) (0.03) (9.89)

(a) Earnings per share is calculated independently for each quarter and the sum of the quarters may not necessarily be equal to the full year earnings per share amount. (b) The operating loss for the year ended June 30, 2001 includes the following: 1) $10,043 of additional bad debt expense to fully reserve for remaining accounts receivable of non-core and non-strategic businesses exited by the Company, 2) $1,034 of restructuring and other related charges associated with the continuing implementation and execution of strategic restructuring and consolidation activities and 3) $2,106 in fixed asset impairment charges recorded in accordance with Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long Lived Assets and for Long Lived Assets to be Disposed of," relating primarily to changes in asset values resulting from the impact of restructuring activities and changes in operational processes under restructured operations. (c) The cumulative effect of accounting change represents the early adoption of Statement of Financial Accounting Standards (SFAS) No. 142 "Goodwill and Other Intangible Assets." The Company recorded a non-cash charge of $222,116 as of July 1, 2001 to reduce the carrying value of its goodwill in accordance with SFAS No. 142. The net loss for the three months ended September 30, 2001 as originally reported did not include the cumulative effect of the adoption of SFAS No. 142. In accordance with SFAS No. 142, the Company had until June 30, 2002 to complete the final step of the transitional impairment test. The resulting impairment of the Company's goodwill was required to be recorded as of July 1, 2001. 55 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 Information required by this item as to the Directors and 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. Section 16(a) of the Securities Exchange Act of 1934 (the Exchange Act) requires the Company's Directors and certain of its officers and persons who own more than 10% of a registered class of the Company's equity securities to file reports of ownership and changes in ownership on Forms 3, 4 and 5 with the Securities and Exchange Commission. Such persons are further required to furnish the Company with copies of all such forms they file. Based solely on the Company's review of the copies of such forms it has received, the Company believes all Section 16(a) filing requirements were satisfied by the Company's Directors and executive officers for the fiscal year ended June 30, 2002. ITEM 11. EXECUTIVE COMPENSATION EXECUTIVE COMPENSATION The table below sets forth certain information with respect to compensation paid or accrued by the Company during the fiscal years ended June 30, 2002, 2001 and 2000, to the Company's (i) Chief Executive Officer, (ii) the other four most highly compensated executive officers of the Company for the fiscal year ended June 30, 2002 and (iii) any individual that would have been one of the four most highly compensated executive officers but for the fact that such individual was not serving as an executive officer of the Company at the end of the fiscal year ended June 30, 2002 (collectively, the "Named Executive Officers"). SUMMARY COMPENSATION TABLE

~~JUNE~~LONG-TERM ~~30,~~COMPENSATION ~~2001~~AWARDS ~~2000~~ANNUAL COMPENSATION ---------- ------------------- ~~Deferred~~SECURITIES ~~tax~~FISCAL ~~assets~~OTHER ANNUAL UNDERLYING ALL OTHER YEAR SALARY BONUS COMPENSATION OPTIONS(~~liabilities~~1): ~~Allowance~~COMPENSATION ~~for~~------ ~~doubtful~~----------- ~~accounts~~------------ -------------- ----------- ------------ Jon H. Outcalt ..................... 2002 $11200,~~082~~000 $22 -- $204,~~087~~000(2) ~~Accrued~~45,000 ~~expenses~~$ ~~and~~-- ~~other~~Chairman, 4Board of Directors........ 2001 156,~~825~~153 5-- $119,~~464~~000(2) ~~Loss~~60,000 ~~carryforwards~~-- 652000 100,~~477~~000 33-- -- 87,~~765~~000 ~~Depreciable~~-- ~~assets~~Kevin ~~and~~B. ~~other~~Shaw....................... 2002 196,500 25,000(3) -- 45,000 2,~~245~~200(5)(9) President & Chief Executive Officer. 2001 187,000 25,000(13) -- 40,~~662~~000 2,100(5)(9) ~~Intangibles~~2000 187,000 -- -- 52,000 2,100(255)(9) William B. Byrum.................... 2002 396,~~863~~635 490,000(4) -- 45,000 2,200(235)(7) Executive Vice President &.......... 2001 225,~~661~~000 45,000(3) ~~Valuation~~-- ~~allowance~~60,000 6,680(535)(7) Chief Operating Officer 2000 225,~~276~~000 -- -- 82,000 8,600(5)(7) Thomas Bryant Mangum................ 2002 210,000 20,000(353) -- 20,~~993~~000 582(5)(9) Senior Vice President .............. 2001 210,000 10,000(3) -- 20,000 2,100(5)(9) 2000 210,000 -- -- 30,000 2,000(5)(9) Gerald D. Stethem................... 2002 197,115 65,000(8) -- 35,000 2,100(5)(10) Senior Vice President &............. 2001 175,000 22,500(3) -- 35,000 2,100(5)(10) Chief Financial Officer 2000 172,465 -- -- 47,000 26,908(5)(10) Natalie R. Wenger................... 2002 149,538 85,000(8) -- ~~Net~~25,000 ~~deferred~~2,100(5)(9) ~~tax~~Senior ~~assets~~Vice $President 2001 137,692 20,000(3) -- $30,000 1,892(5)(9) 2000 134,231 22,150(6) -- ~~=======~~17,000 ~~========~~1,876(5)(9)

(1) Represents options to purchase shares of Class A Stock. (2) Represents consulting fees for services in connection with the Company's restructuring program. 56 (3) Represents a retention bonus payable in one-half increments during fiscal years 2001 and 2002 in connection with a Retention Program adopted by the Board of Directors on November 29, 2000. (4) Represents a retention bonus, signing bonus and restructuring bonus payable in accordance with the terms of Mr. Byrum's Employment Agreement dated July 1, 2001. (5) The Company currently matches each participating employee's contributions to the 401(k) Plan to the extent of 20% of the first 10% of the participant's salary deduction, up to the maximum allowable contributions under the Internal Revenue Code. (6) Represents a 2000 Fiscal Year Performance Bonus. (7) Represents, for the fiscal years ended June 30, 2002, June 30, 2001 and June 30, 2000 (i) $2,200 contributed by the Company to its 401(k) Plan on behalf of Mr. Byrum; (ii) $2,100 contributed by the Company to its 401(k) Plan on behalf of Mr. Byrum and a $4,580 taxable fringe benefit auto allowance; and (iii) $2,000 contributed by the Company to its 401(k) Plan on behalf of Mr. Byrum and a $6,600 taxable fringe benefit auto allowance, respectively. (8) Represents a retention bonus and a fiscal year performance bonus. The Retention Bonuses paid were: $45,000 to Mr. Stethem and $40,000 to Ms. Wenger. The 2002 Fiscal Year Performance Bonuses paid were: $20,000 to Mr. Stethem and $45,000 to Ms. Wenger. (9) Represents amounts contributed by NCS to its 401(k) Plan on behalf of the employee. (10) Represents, for the fiscal years ended June 30, 2002, June 30, 2001 and June 30, 2000 (i) $2,200 contributed by the Company to its 401(k) Plan on behalf of Mr. Stethem; (ii) $2,100 contributed by the Company to its 401(k) Plan on behalf of Mr. Stethem; and (iii) $2,100 contributed by the Company to its 401(k) Plan on behalf of Mr. Stethem and a $24,808 one-time payment made by the Company in connection with accrued, but unpaid vacation, respectively. OPTION GRANTS Shown below is information on grants of stock options pursuant to the Company's 2000 Performance Plan during the fiscal year ended June 30, 2002 to the Named Executive Officers. OPTION GRANTS IN LAST FISCAL YEAR

INDIVIDUAL GRANTS POTENTIAL REALIZABLE ----------------- VALUE AT ASSUMED PERCENTAGE OF ANNUAL RATES OF NUMBER OF TOTAL OPTIONS STOCK PRICE SECURITIES GRANTED TO EXERCISE OR APPRECIATION FOR UNDERLYING EMPLOYEES IN BASE PRICE EXPIRATION OPTION TERMS NAME OPTIONS FISCAL YEAR ~~ENDING~~(PER ~~JUNE~~SHARE) ~~30,~~DATE ~~AMOUNT~~5% 10% ---- ------- ----------- ----------- ---- -- ~~2002~~--- Jon H. Outcalt.................. 45,000(1) 6.4% $0.19 12/11/06 $2,362 $5,~~954~~220 ~~2003~~Chairman Kevin B. Shaw................... 45,000(1) 6.4% $0.19 12/11/06 2,~~671~~362 ~~2004~~5,220 3President,~~329~~ ~~2005~~Chief Executive Officer & Secretary William B. Byrum................ 45,000(1) 6.4% $0.19 12/11/06 2,~~282~~362 ~~2006~~5,220 1Executive Vice President & Chief Operating Officer Thomas Bryant Mangum............ 20,~~567~~000(1) ~~Thereafter~~2.8% $0.19 12/11/06 1,050 2,~~543~~320 ~~------~~Senior Vice President Gerald D. Stethem............... 35,000(1) 5.0% $200.19 12/11/06 1,~~346~~837 ~~=======~~4,060 Senior Vice President & Chief Financial Officer Natalie R. Wenger............... 30,000(1) 4.3% $0.19 12/11/06 1,575 3,480 Senior Vice President

(1) The option was granted on December 11, 2001 and becomes exercisable annually in one-third increments beginning on December 1, 2003. 57 OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES The following table provides certain information concerning the value of securities underlying unexercised stock options held by each of the Named Executive Officers during the fiscal year ended June 30, 2002. This table assumes the conversion into Class A Stock of all shares of Class B Stock issuable upon the exercise of certain options.

~~2001~~NUMBER ~~2000~~OF ~~1999~~SECURITIES ~~----~~VALUE ~~----~~OF UNEXERCISED NUMBER OF UNDERLYING UNEXERCISED IN-THE---MONEY ~~WEIGHTED~~OPTIONS ~~WEIGHTED~~AT ~~WEIGHTED~~SHARES ~~AVERAGE~~OPTIONS ~~AVERAGE~~AT ~~AVERAGE~~JUNE ~~EXERCISE~~30, ~~EXERCISE~~2002 ~~EXERCISE~~JUNE ~~OPTIONS~~30, ~~PRICE~~2002(1) ~~OPTIONS~~ACQUIRED ~~PRICE~~ON ~~OPTIONS~~VALUE ~~PRICE~~ ------- ----- ------- ----- ------- --------- ~~Outstanding~~NAME atEXERCISE ~~beginning~~REALIZED ofEXERCISABLE ~~year~~UNEXERCISABLE ~~1,297,109~~EXERCISABLE $UNEXERCISABLE ~~9.14 846,694 $ 15.82 535,188 $14.64 Granted 700,000 0.14 784,750 3.22 430,250 15.69 Exercised~~ -- -- -- -- ~~(73,237) 4.87 Forfeited (42,311) 5.80 (334,335) 12.32 (45,507) 18.63~~ ---- -------- ----------- ------------- ----------- ------- ------ ~~Outstanding~~Jon atH. ~~end~~Outcalt of............ ~~year~~-- ~~1,954,798~~ $ ~~5.99~~-- 189,~~297~~499 140,~~109~~001 $ ~~9.14~~-- ~~846~~$ 8,~~694~~550 ~~$15~~Kevin B.82 Shaw.............. -- -- 101,999 125,001 -- 6,450 William B. Byrum........... -- -- ~~======~~89,666 153,334 -- 8,550 Thomas Bryant Mangum....... -- -- 29,999 60,001 --- ~~=======~~3,100 Gerald D. Stethem.......... -- -- 57,333 97,667 --- ~~======~~5,425 ~~Exercisable~~Natalie atR. ~~end~~Wenger.......... of-- ~~year~~-- ~~537~~47,~~828~~333 ~~266~~82,~~441~~667 ~~237,872~~-- ~~========== ========== =======~~4,650

(1) Includes options granted on December 11, 2001 and October 25, 2000 with an exercise price of $0.19 and $0.135, respectively. COMPENSATION OF DIRECTORS The Company endeavors to maintain a mutuality of interest between its Directors and the stockholders of the Company. Hence, it has required all of its Directors to purchase Common Stock and has compensated its Directors, who are not also key employees, by granting options to purchase shares of Class B Stock. Directors who are not also key employees receive an annual Director fee in the amount of $35,000. Mr. Outcalt, in his position as Chairman of the Board of Directors, receives an annual salary of $200,000. Mr. Outcalt also receives a monthly consulting fee of $17,000 for services in connection with the Company's restructuring program. Upon completion of the restructuring, Mr. Outcalt and Mr. Shaw will each receive a one-time payment of $200,000. Mr. Sells receives a monthly consulting fee of $10,000 in addition to the Director fee. EMPLOYMENT AGREEMENTS The Company is party to an employment agreement with William B. Byrum, dated July 1, 2001, pursuant to which the Company employs Mr. Byrum as Executive Vice President and Chief Operating Officer. This agreement replaces an earlier agreement, dated September 1, 1995 and terminated on October 25, 2000, pursuant to which the Company employed Mr. Byrum as Vice President - Corporate Development. In June 1998, Mr. Byrum was promoted to the position of Senior Vice President and in June 1999, Mr. Byrum was promoted to his current position of Executive Vice President and Chief Operating Officer. The agreement provides for a term of two years and an annual salary subject to increase at the discretion of the Company. The agreement also provides for a bonus to be paid to Mr. Byrum. In addition, the agreement contains certain non-compete, non-disclosure and non-interference provisions applicable to Mr. Byrum. The Company has entered into a salary continuation agreement with Mr. Byrum, the terms of which are more fully described below. The Company is a party to a salary continuation agreement with each of Jon H. Outcalt, Kevin B. Shaw, William B. Byrum, Thomas B. Mangum, Gerald D. Stethem and Natalie R. Wenger (each an "Employee"). The agreements entered into with Messrs. Mangum, Stethem and Wenger are dated July 20, 1999. The agreements with Messrs. Outcalt and Shaw are dated September 29, 2000 and Mr. Byrum's agreement is dated October 25, 2000. Under the terms of the salary continuation agreement, if there is a change of control transaction involving the Company and/or subsequent to a change of control transaction involving the Company the Employee's employment is terminated by the Company other than for cause (as defined in the agreement) or he terminates his employment for good reason (as defined in the agreement), the Employee will be entitled to receive for a period ending (A) two years for Messrs. Outcalt, Shaw, Byrum, Mangum and Stethem, and (B) one year for Ms. Wenger, from the date of change of control transaction (i) a base salary at an annual rate equal to the greater of (x) the highest monthly base salary paid by the Company to the Employee during the 12 months preceding the change of control transaction or (y) the highest monthly salary paid by the Company to the Employee during the period from the date of the change of control transaction to the date of the termination of the Employee's employment, and (ii) health insurance, life insurance and retirement benefits that would have been provided if the Employee had not been terminated, in accordance with the most favorable plans or policies of the Company during the 90-day period preceding the change of control transaction, or, if more favorable to the Employee, as in effect at any time thereafter with respect to other key employees. In July of 2001, the HR Committee authorized an amendment of the Company's existing Salary Continuation Agreements to provide for salary continuation from the date of termination of the employee rather than from the date of the triggering event and adding insolvency as a triggering event (as more fully described in the Salary Continuation Agreements). The Company has entered into similar salary continuation agreements for six, twelve, eighteen and twenty-four month terms with an additional twenty-nine key employees. In addition, the Company has entered into an Indemnification Agreement with each of Boake A. Sells, Richard L. Osborne, Jon 58 H. Outcalt, Kevin B. Shaw, William B. Byrum, Thomas B. Mangum, Gerald D. Stethem and Natalie R. Wenger and fourteen additional key employees. HUMAN RESOURCES COMMITTEE REPORT ON EXECUTIVE COMPENSATION The Company's executive compensation program is administered by the Human Resources Committee (the "Committee") of the Board of Directors. The Committee is comprised of Messrs. Osborne and Sells, neither of who is an officer or employee of the Company. Compensation Philosophy: The Committee's philosophy regarding the compensation of the executive officers is to (i) provide a competitive total compensation package in line with the special circumstances the Company is facing that will allow the Company to attract and retain qualified executives; (ii) provide executives with incentive bonuses linked to Company and individual performance; and (iii) provide executive officers with a significant equity stake in the Company through stock options or other equity incentives. Section 162(m) of the Internal Revenue Code prohibits a deduction to any publicly held corporation for compensation paid to a "covered employee" in any year in excess of $1 million. A covered employee is generally one of the Named Executive Officers. The Committee does not expect the deductibility of any compensation paid to any of the Named Executive Officers in 2002 to be affected by Section 162(m). However, the Committee may consider alternatives to its existing compensation programs in the future to assure the deductibility of executive compensation. Fiscal 2002 Compensation Decisions: Salaries. Salaries for all executive officers for fiscal 2002, other than for Mr. Shaw, were established by the Committee based on recommendations by Mr. Shaw. Bonuses. Generally, cash bonuses paid by the Company to its executive officers are based on each executive's function, level of responsibility and/or the terms of their employment agreements. To enhance the ability of the Company to retain highly qualified employees during the implementation of a restructuring plan, a Retention Program was adopted on November 29, 2000 providing for a bonus to each of the Company's executive officers during fiscal 2002 if they remain employed by the Company on the scheduled payment date. Stock Options. The Committee believes that the interests of executives most responsible for the management and growth of the Company should be closely aligned with the long-term interests of the Company's stockholders. As a consequence, options to purchase an aggregate of 705,000 shares of Class A Stock were granted to 41 employees of the Company and to Mr. Sells and Mr. Osborne on December 11, 2001 based on the Board's recommendation on December 11, 2001. Of the total stock options granted, the Company awarded options to purchase an aggregate of 320,000 shares of Class A Stock to the Company's executive officers. The stock options vest incrementally over time beginning two years from the date of grant and expire five years from the date of grant. The exercise price of each stock option is $0.19 per share, which was the closing price of the Class A Stock on the date of grant. In determining the number of options awarded to individual executive officers, the Committee generally establishes a level of award based on the individual's position and level of responsibility. Compensation of the Chief Executive Officer: The compensation arrangement of Mr. Shaw, the President, Chief Executive Officer and Secretary of the Company, is determined based on the Committee's subjective assessment of his performance, measured by the Company's overall financial performance and the Committee's assessment of his contributions to achieving strategic objectives during the year. Mr. Shaw's salary was increased in fiscal year 2002 to $200,000. The Board of Directors awarded Mr. Shaw a retention bonus as a part of the Retention Program it adopted on November 29, 2000 and approved a one-time payment of $200,000 upon completion of the restructuring (See Compensation of Directors Section). HUMAN RESOURCES COMMITTEE Richard L. Osborne, Chairman Boake A. Sells 59 PERFORMANCE GRAPH The following line graph compares the percentage in the cumulative total stockholder return on the Class A Stock of the Company against the cumulative total return of the Nasdaq Stock Market (U.S.) Index and the Nasdaq Health Services Index for the period commencing June 30, 1997 and ended June 30, 2002. The graph assumes an investment of $100 on June 30, 1997 in Class A Stock or the applicable index, a reinvestment of dividends (no dividends were declared on the Class A Stock during the period), and actual market value increases and decreases of the Class A Stock relative to an initial investment of $100 in the applicable index. The Company believes the information provided has only limited relevance and is not necessarily indicative of future price performance. [GRAPH]

[---------------------------~~Options~~----- ~~Outstanding~~--------------- -------------- --]------------- [--------~~Options~~------ ~~Exercisable~~--------]------ ~~Weighted~~--------------- ~~Average~~Total ~~Number~~Return ~~Weighted~~Analysis ~~Remaining~~06/30/97 ~~Number~~06/30/98 ~~Weighted~~06/30/99 ~~Range~~06/30/00 ~~of Outstanding Average Contractual Exercisable Average Exercise prices at June~~ 06/30,/01 ~~2001 Exercise Price Life (in years) at June~~ 06/30,/02 ~~2001 Exercise Price~~ --------------- ----------------- --------------- -------------- --------------- -------------- -------------- --------------- $NCS 0HealthCare, Inc.14 - $ 0100.1400 ~~698,000~~ $~~0.14~~ 493.3384 -- $ ~~-- 1~~17.4790 -$ 12.47 ~~244,250~~$ 10.4766 3$ 0.5879 ~~122,125~~-------------------------------- ~~1.47~~--------------- ~~4.25~~-------------- --------------- ~~6.19~~-------------- ~~498,858~~-------------- ~~4.62~~--------------- ~~3.23~~Nasdaq ~~94,858~~Health ~~6.19~~Services 15$ 100.00 -$ 1697.5040 ~~254,690~~$ 1592.3054 ~~2.77~~$ ~~118,513 15~~71.6395 ~~18.50~~$ ~~- 20~~102.0068 ~~259,000~~$ 19102.5168 ~~4.78~~-------------------------------- ~~202,332 19.79~~ --------------- -------------- --------------- -------------- -------------- --------------- ~~$0.14~~Nasdaq -Stock Market $20 100.00 ~~1,954,798~~$ 131.65 $5 189.9958 3$ 280.8103 ~~537,828~~$ 152.60 $ 12103.3231 ~~===============~~-------------------------------- ~~=========~~--------------- ~~=====~~-------------- ~~====~~--------------- ~~=======~~-------------- ~~=======~~-------------- ---------------

Source: Carl Thompson Associates www.ctaonline.com (800) 959-9677. Data from BRIDGE Information Systems, Inc. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth certain information with respect to beneficial ownership of the Common Stock as of June 30, 2002, unless otherwise indicated, by (i) each person known by the Company to be the beneficial owner of more than 5% of any class of Common Stock, (ii) each Director, (iii) each Named Executive Officer and (iv) all Directors and executive officers as a group.

~~2001~~CLASS ~~2000~~A ~~1999~~STOCK CLASS B STOCK BENEFICIALLY OWNED BENEFICIALLY OWNED(1) ------------------ --------------------- NAME NUMBER PERCENT NUMBER PERCENT ---- ~~Net~~------ ~~loss~~------- ------ ~~basic~~------- $Jon H. Outcalt(~~44,554~~2)............................. ~~$(115~~303,~~577~~229(3) ~~$(17~~1.6 3,~~029~~476,086(4) ~~Net~~66.1 ~~loss~~Kevin -B. ~~diluted~~ Shaw(~~44,554~~2).............................. ~~(115~~147,~~577~~841(5) ~~(17~~* 1,~~029~~141,133(6) ~~Earnings~~21.7 ~~per~~William ~~share~~B. Byrum.............................. 157,085(7) * -- ~~basic~~-- Richard L. Osborne............................ 66,662(8) * 101,403 1.899 Boake A. Sells................................ 37,593(9) * 92,184 1.8 Gerald D. Stethem............................. 67,333(510) * -- -- Thomas B. Mangum.............................. 36,666(11) (0* -- -- Natalie R.~~84)~~ ~~Earnings~~Wenger............................. ~~per~~56,289(12) ~~share~~* -- ~~diluted~~-- $All Directors and executive officers as a group (~~1.89~~12 persons).............................. $ 1,004,677(13) 5.~~36)~~4 $4,810,806 (091.~~84)~~5

* Less than one percent. (1) Each share of Class B Stock carries ten votes per share and is convertible at any time into one share of Class A Stock on a one-for-one basis. (2) The beneficial owner's address is c/o NCS HealthCare, Inc., 3201 Enterprise Parkway, Cleveland, Ohio 44122. (3) Includes (i) 32,063 shares of Class A Stock held by Mr. Outcalt's spouse, (ii) 170,000 shares of Class A Stock held by the custodian of an individual retirement account for the benefit of Mr. Outcalt, and (iii) options to purchase 101,166 shares of Class A Stock that are exercisable within 60 days of June 30, 2002. (4) Owner of record is the Jon H. Outcalt Trust. 60 (5) Includes (i) 4,575 shares of Class A Stock held by Mr. Shaw's spouse, and (ii) options to purchase 113,666 shares of Class A Stock that are exercisable within 60 days of June 30, 2002. (6) Includes 184,370 shares of Class B Stock owned of record by Mr. Shaw's spouse. (7) Includes (i) 280 shares of Class A Stock held by the trustee of an individual retirement account for the benefit of Mr. Byrum's spouse, and (ii) options to purchase 109,666 shares of Class A Stock that are exercisable within 60 days of June 30, 2002. (8) Includes options to purchase 17,500 shares of Class A Stock that are exercisable within 60 days of June 30, 2002. (9) Includes options to purchase 23,333 shares of Class A Stock that are exercisable within 60 days of June 30, 2002. (10) Represents options to purchase shares of Class A Stock that are exercisable within 60 days of June 30, 2002. (11) Represents options to purchase shares of Class A Stock that are exercisable within 60 days of June 30, 2002. (12) Includes options to purchase 55,666 shares of Class A Stock that are exercisable within 60 days of June 30, 2002. (13) Includes options to purchase 649,661 shares of Class A Stock that are exercisable within 60 days of June 30, 2002. CHANGES IN CONTROL On July 28, 2002, NCS, Genesis and Geneva Sub, Inc., a wholly owned subsidiary of Genesis ("Sub") entered into a definitive Agreement and Plan of Merger (the "Merger Agreement"), pursuant to which Sub will merge with and into NCS (the "Proposed Merger"), with NCS surviving as a wholly owned subsidiary of Genesis. If the Proposed Merger is completed, each outstanding share of common stock of NCS, par value $0.01 per share ("NCS Common Stock"), other than the NCS Common Stock held by NCS and other than dissenting shares, will be converted into the right to receive 0.1 of a share of common stock of Genesis, par value $0.02 per share. The completion of the Proposed Merger is subject to regulatory approvals and other customary conditions, including the approval of the holders of a majority of the outstanding voting power of NCS Common Stock. In connection with the Merger Agreement, on July 28, 2002, NCS and Genesis entered into agreements (the "Voting Agreements") with Jon H. Outcalt and Kevin B. Shaw (stockholders). The stockholders beneficially own in the aggregate a majority of the outstanding voting power of NCS Common Stock. In the Voting Agreements, such stockholders agreed (1) to vote their shares of NCS Common Stock in favor of adoption and approval of the Merger Agreement and against proposals for certain other transactions and (2) not to transfer their shares of NCS Common Stock prior to the consummation of the Proposed Merger. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS None noted. 61 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 2002 Consolidated Financial Statements of NCS HealthCare, Inc. and subsidiaries are included in Part II, Item 8. 2. Financial Statement Schedules. All financial statement schedules for the Company and its subsidiaries have been included in the consolidated financial statements or the related footnotes, or they are either inapplicable or not required. 3. Exhibits See the Index to Exhibits at page E-1 of this Form 10-K. (b) Reports on Form 8-K No reports on Form 8-K were filed during the quarter ended June 30, 2002. 62 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 22, 2002 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 Kevin B. Shaw (Principal Executive Officer) /s/ WILLIAM B. BYRUM Executive Vice President and Chief Operating Officer William B. Byrum (Principal Executive Officer) /s/ GERALD D. STETHEM Senior Vice President and Chief Financial Officer Gerald D. Stethem (Principal Financial Officer) /s/ BOAKE A. SELLS Boake A. Sells Director /s/ RICHARD L. OSBORNE Richard L. Osborne Director Date: August 23, 2002 63 INDEX OF EXHIBITS

~~Nonrecurring~~SEQUENTIAL ~~Reserve~~EXHIBIT ~~Reserve~~NO. ~~Description~~DESCRIPTION ~~Cash/Non-cash~~PAGE ~~Charge Activity At 6/30/00 Activity At 6/30/01~~ ----------- ------------- ----~~--------~~ ~~--------~~2.1 ~~----------~~Asset ~~--------~~Purchase ~~----------~~Agreement, ~~(in~~dated ~~thousands)~~as ~~Site~~of ~~Consolidations~~July ~~Severance/compensation~~31, ~~related~~1996, ~~Cash~~by $and 1among the Company,~~300~~ ~~$(1~~NCS HealthCare of Oregon,~~000)~~ $Inc., ~~300~~IPAC $Pharmacy, Inc. and Prestige Care, Inc. (~~300~~A) $2.2 --Agreement ~~Lease~~of ~~terminations~~Merger, ~~Cash~~dated 2August 13,~~800~~ 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. (~~400~~B) 2.3 Asset Purchase Agreement,~~400~~ (1dated August 13,~~700)~~ ~~700~~1996, ~~Asset~~by ~~impairments~~an ~~Non~~among NCS HealthCare of Oklahoma, Inc., an Oklahoma corporation, Med-~~cash~~Equip 4Homecare Equipment Service,~~400~~ Inc., an Oklahoma corporation, Gail Benjamin, Willis V. Smith and John Tarr (B) 2.4 Asset Purchase Agreement,~~400)~~ --dated --August --13, ~~Other~~1996, ~~Cash~~by 1and among Thrifty Medical of Tulsa,~~200~~ L.L.C., an Oklahoma limited liability company, Willis V. Smith, Charles Oliver and NCS HealthCare of Oklahoma, Inc., an Oklahoma corporation (~~600~~B) ~~600~~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 (~~400~~B) ~~200~~2.6 ~~Special~~Asset ~~increase~~Purchase toAgreement, ~~allowance~~dated ~~for~~December ~~doubtful~~29, ~~accounts~~1997, ~~Non-cash~~by 44and among the Company,~~600~~ NCS HealthCare of New York, Inc., Thrift Drug, Inc., Fay's Incorporated and Eckerd Corporation (44C) 2.7 Asset Purchase Agreement,~~600~~ dated April 10, 1998, among the Company, NCS Acquisition Sub, Inc., Walgreens Advance Care, Inc. and Walgreen Co. Incorporated and Eckerd Corporation (D) --2.8 --Agreement --and ~~Disposition~~Plan of ~~Assets~~Merger, ~~Asset~~dated ~~impairment~~as ~~Non-cash~~of 30July 28,~~200~~ ~~(30~~2002,~~200)~~ --by --and --among ~~Other~~Genesis ~~Cash~~Health ~~500~~Ventures, Inc., Geneva Sub, Inc. and NCS HealthCare, Inc. (~~200~~L) ~~300~~3.1 Amended and Restated Certificate of Incorporation of the Company (~~300~~E) 3.2 Amended By--Laws ~~Other~~of ~~Cash~~the ~~6,600~~Company (~~6,200~~E) ~~400~~4.1 Specimen certificate of the Company's Class A Common Stock (~~300~~E) ~~100~~4.2 ~~Non-cash~~Specimen ~~4,200~~certificate of the Company's Class B Common Stock (~~4,200~~E) --4.3 --Form --of ~~-------~~5 ~~---------~~3/4% ~~------~~Convertible ~~---------~~Subordinated ~~------~~Debentures ~~Total~~due ~~$95,800~~2004 $(~~91,800~~F) $4.4 Indenture,~~000~~ $dated (3August 13,~~000~~ 1997, between the Company and National City Bank, as Trustee (F) $* 10.1 Deferred Compensation Agreement,~~000~~ ~~=======~~dated ~~=========~~as ~~======~~of ~~=========~~January ~~======~~1, 1994, by and between Modern Pharmacy Consultants, Inc. and Phyllis K. Wilson (E) * 10.2 1996 Long Term Incentive Plan (C)

E-1

~~Nonrecurring~~SEQUENTIAL ~~Reserve~~EXHIBIT ~~Reserve~~NO. ~~Description~~DESCRIPTION ~~Cash/Non-cash~~PAGE ~~Charge Activity At 6/30/00 Activity At 6/30/01~~ ----------- ------------- ----~~--------~~ ~~--------~~* ~~----------~~10.3 ~~--------~~Aberdeen ~~----------~~Group, ~~(In~~Inc. ~~thousands~~1995 Amended and Restated Employee Stock Purchase and Option Plan (C) ~~Site~~* ~~Consolidations~~10.4 ~~Severance/compensation~~Amended ~~related~~and ~~Cash~~Restated $Stock 2Option Agreement,~~100~~ $dated as of December 3, 1993, by and between Aberdeen Group, Inc. and Richard L. Osborne (2E) * 10.5 Amended and Restated Stock Option Agreement,~~100~~ dated as of December 29, 1994, by and between Aberdeen Group, Inc. and Jeffrey R. Steinhilber (E) $10.6 --Lease $Agreement, --dated $as of July 16, 1990, by and among Crow-O'Brien-Woodhouse I Limited Partnership, Aberdeen Group, Inc. and Van Cleef Properties, Inc. (E) 10.7 Lease ~~terminations~~Agreement, ~~Cash~~dated ~~600~~as of January 1, 1996, by and between PR Realty and Nursing Center Services, Inc. (~~500~~E) ~~100~~10.8 Industrial Lease Agreement dated as of May 28, 1993 by and between Industrial Developments International, Inc. and Corinthian Pharmaceutical Systems, Inc. (~~100~~E) --10.9 ~~Asset~~Lease ~~impairments~~Agreement, ~~Non-cash~~dated 1as of January 17,~~500~~ 1995, by and among Calvin Hunsicker, Brenda Hunsicker and Aberdeen Group, Inc. (E) 10.10 Form of Indemnity Agreement by and between the Company and each of its Directors and Executive Officers (E) *10.11 Employment and Noncompetition Agreement, dated as of September 1,~~500)~~ --1995, --by --and ~~Other~~between ~~Cash~~Aberdeen ~~500~~Group, Inc. and William B. Bryum (~~500~~E) --10.12 --Credit --Agreement, ~~Special~~dated ~~increase~~as toof ~~allowance~~June ~~for~~1, ~~doubtful~~1998, ~~accounts~~among ~~Non-cash~~the 32Company,~~400~~ (32G) the lending institutions named therein and KeyBank National Association,~~400~~ as the Swing Line Lender, Letter of Credit Issuer and Administrative Agent 10.13 Letter Agreement, dated June 1, 1998, between the Company (G) --and --KeyBank --National ~~Other~~Association ~~Cash~~regarding 3Capital Markets Bridge Facility 10.14 Amendment No. 1,~~400~~ dated as of July 13, 1998, to the Credit (G) Agreement, dated as of June 1, 1998, among the Company, the lending institutions named therein and KeyBank National Association, as the Swing Line Lender, Letter of Credit Issuer and Administrative Agent 10.15 Amendment No. 2, dated March 3,~~200)~~ ~~200~~1999, to the Credit Agreement dated (~~200~~H) --as ~~-------~~of ~~--------~~June ~~------~~1, ~~-------~~1998 among the Company and the Lenders named therein, NBD Bank and National City Bank, as co-~~----~~agents, ~~Total~~and ~~$40~~KeyBank National Association ,~~500~~ ~~$(40~~as a Lender,~~200)~~ $the ~~300~~Swing $Line Lender, the Letter of Credit Issuer and as Administrative Agent 10.16 Amendment No. 3, dated August 3, 1999, to the Credit Agreement dated (~~300~~I) $as of June 1, 1998 among the Company and the Lenders named therein, NBD Bank and National City Bank, as co--agents, ~~=======~~and ~~========~~KeyBank ~~======~~National ~~=======~~Association ~~=====~~, as a Lender, the Swing Line Lender, the Letter of Credit Issuer and as Administrative Agent

E-2

~~2001~~SEQUENTIAL ~~2000~~EXHIBIT ~~1999~~NO. DESCRIPTION PAGE ----------- ----------- ---- ~~Numerator:~~10.17 ~~Numerator~~Security ~~for~~Agreement, ~~basic~~dated ~~earnings~~August ~~per~~3, ~~share~~1999, -among ~~net~~the ~~loss~~Company, $its ~~(43,510)~~subsidiaries $and (~~114,524~~I) $KeyBank ~~(16~~National Association * 10.18 Separation Agreement,~~325)~~ ~~Effect~~effective ofJune ~~dilutive~~11, ~~securities:~~1999, ~~Convertible~~between ~~debentures~~Jeffrey --R. --Steinhilber --and ~~-----------~~the ~~-----------~~(I) ~~-----------~~Company ~~Numerator~~* ~~for~~10.19 ~~diluted~~Salary ~~earnings~~Continuation ~~per~~Agreement ~~share~~dated $September ~~(43~~29,~~510)~~ $2000 ~~(114,524)~~between $the Company and Jon H. Outcalt (~~16,325~~J) ~~===========~~* ~~===========~~10.20 ~~===========~~Salary ~~Denominator:~~Continuation ~~Denominator~~Agreement ~~for~~dated ~~basic~~September ~~earnings~~29, ~~per~~2000 ~~share~~between -the ~~weighted~~Company ~~average~~and ~~common~~Kevin ~~shares~~B. ~~23,535~~Shaw ~~21,551~~(J) ~~20,200~~* ~~Effect~~10.21 ofSalary ~~dilutive~~Continuation ~~securities:~~Agreement ~~Stock~~dated ~~options~~October --25, --2000 --between ~~Convertible~~the ~~debentures~~Company --and --William --B. ~~-----------~~Byrum. ~~-----------~~(J) ~~-----------~~* ~~Dilutive~~10.22 ~~potential~~Employment ~~common~~Agreement ~~shares~~dated --July --1, --2001 ~~-----------~~between ~~-----------~~the ~~-----------~~Company ~~Denominator~~and ~~for~~William ~~diluted~~B. ~~earnings~~Byrum ~~per~~(K) ~~share~~* 10.23~~,535~~ ~~21,551~~Amendment ~~20,200~~to ~~===========~~Salary ~~===========~~Continuation ~~===========~~Agreement ~~Basic~~dated ~~earnings~~August ~~per~~21, ~~share:~~2001 ~~Loss~~between ~~before~~the ~~accounting~~Company ~~change~~and $Jon (1H.~~85)~~ $Outcalt (~~5.31~~K) $* (010.~~66)~~24 ~~Cumulative~~Amendment ~~effect~~to ofSalary ~~change~~Continuation inAgreement ~~accounting~~dated ~~principle~~August --21, --2001 ~~(0.15)~~between ~~-----------~~the ~~-----------~~Company ~~-----------~~and ~~Net~~Kevin ~~loss per share $ (1~~B.~~85)~~ $Shaw (~~5.31~~K) ~~$ (0~~10.~~81)~~25 ~~===========~~Voting ~~===========~~Agreement, ~~===========~~dated ~~Diluted~~as ~~earnings~~of ~~per~~July ~~share:~~28, ~~Loss~~2002, ~~before~~by ~~accounting~~and ~~change~~among $Jon (1H.~~85)~~ $Outcalt, (5NCS HealthCare, Inc.~~31)~~ $and (0Genesis Health Ventures, Inc.66 (L) ~~Cumulative~~10.26 ~~effect~~Voting Agreement, dated as of ~~change~~July in28, ~~accounting~~2002, ~~principle~~by --and --among (0Kevin B.~~15)~~ ~~-----------~~Shaw, ~~-----------~~NCS ~~-----------~~HealthCare, ~~Net~~Inc. ~~loss~~and ~~per~~Genesis ~~share~~Health $Ventures, (1Inc.~~85)~~ $ (~~5.31~~L) $21.1 (0Subsidiaries of the Company 23.~~81)~~0 ~~===========~~Consent ~~===========~~of ~~===========~~Independent Auditors

* Management contract or compensatory plan or arrangement (A) Incorporated herein by reference to the appropriate exhibit to the Company's Current Report in Form 8-K, dated August 1, 1996 (File No. 0-027602). (B) Incorporated herein by reference to the appropriate exhibit to the Company's Current Report on Form 8-K, dated August 15, 1996 (File No. 0- 027602). (C) Incorporated herein by reference to the appropriate exhibit to the Company's Current report on Form 8-K, dated January 30, 1998. (D) Incorporated herein by reference to the appropriate exhibit to the Company's Current report on Form 8-K, dated June 1, 1998. (E) Incorporated herein by reference to the appropriate exhibit to the Company's Registration Statement on Form S-1 declared effective on February 13, 1996 (Reg. No. 33-80455). (F) Incorporated herein by reference to the appropriate exhibit to the Company's Registration Statement on Form S-3, as amended (Reg. No. 333-35551). (G) Incorporated herein by reference to the appropriate exhibit to the Company's Annual Report on Form 10-K for the year ended June 30, 1998. E-3 (H) Incorporated herein by reference to the appropriate exhibit to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1999. (I) Incorporated herein by reference to the appropriate exhibit to the Company's Annual Report on Form 10-K for the year ended June 30, 1999. (J) Incorporated herein by reference to the appropriate exhibit to the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2000. (K) Incorporated herein by reference to the appropriate exhibit to the Company's Annual Report on Form 10-K for the year ended June 30, 2001. (L) Incorporated herein by reference to the appropriate exhibit to the Company's Current Report on Form 8-K dated July 28, 2002. E-4

YEAR ENDED JUNE 30, 2000 ------------------------ FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER TOTAL ------- ------- ------- ------- ----- Revenues $ 184,191 $ 179,323 $ 170,462 $ 160,554 $ 694,530 Gross profit 40,300 37,424 31,419 28,630 137,773 Special charge to increase allowance (b) for doubtful accounts -- 11,885 -- 32,738 44,623 Nonrecurring charge (b) -- 27,952 5,462 17,722 51,136 Operating income (loss) 8,260 (34,715) (4,376) (54,124) (84,955) Net income (loss) (c) $ 1,528 $ (31,307) $ (22,938) $ (61,807) $(114,524) Earnings per share - basic (a) $ 0.08 $ (1.51) $ (1.03) $ (2.70) $ (5.31) Earnings per share - diluted (a) $ 0.08 $ (1.51) $ (1.03) $ (2.70) $ (5.31)

YEAR ENDED JUNE 30, 2001 ------------------------ FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER TOTAL ------- ------- ------- ------- ----- Revenues $ 159,022 $ 157,461 $ 154,890 $ 154,955 $ 626,328 Gross profit 28,037 28,673 27,676 27,459 111,845 Operating income (loss) (d) 1,036 1,260 (12,800) (923) (11,427) Net loss $ (7,113) $ (7,203) $ (20,807) $ (8,387) $ (43,510) Earnings per share - basic (a) $ (0.31) $ (0.31) $ (0.88) $ (0.35) $ (1.85) Earnings per share - diluted (a) $ (0.31) $ (0.31) $ (0.88) $ (0.35) $ (1.85)

Signature Title /s/ JON H. OUTCALT Chairman of the Board of Directors Jon H. Outcalt /s/ KEVIN B. SHAW President, Chief Executive Officer, Secretary and Director Kevin B. Shaw (Principal Executive Officer) /s/ WILLIAM B. BYRUM Chief Operating Officer William B. Byrum (Principal Executive Officer) /s/ GERALD D. STETHEM Senior Vice President and Chief Financial Officer Gerald D. Stethem (Principal Financial Officer) /s/ BOAKE A. SELLS Boake A. Sells Director /s/ RICHARD L. OSBORNE Richard L. Osborne Director Date: September 27, 2001

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) 2.6 Asset Purchase Agreement, dated December 29, 1997, by and among the Company, NCS HealthCare of New York, Inc., Thrift Drug, Inc., Fay's Incorporated and Eckerd Corporation (C) 2.7 Asset Purchase Agreement, dated April 10, 1998, among the Company, NCS Acquisition Sub, Inc., Walgreens Advance Care, Inc. and Walgreen Co. Incorporated and Eckerd Corporation (D) 3.1 Amended and Restated Certificate of Incorporation of the Company (E) 3.2 Amended By-Laws of the Company (E) 4.1 Specimen certificate of the Company's Class A Common Stock (E) 4.2 Specimen certificate of the Company's Class B Common Stock (E) 4.3 Form of 5 3/4% Convertible Subordinated Debentures due 2004 (F) 4.4 Indenture, dated August 13, 1997, between the Company and National City Bank, as Trustee (F) * 10.1 Deferred Compensation Agreement, dated as of January 1, 1994, by and between Modern Pharmacy Consultants, Inc. and Phyllis K. Wilson (E) * 10.2 1996 Long Term Incentive Plan (C) * 10.3 Aberdeen Group, Inc. 1995 Amended and Restated Employee Stock Purchase and Option Plan (C)

SEQUENTIAL EXHIBIT NO. DESCRIPTION PAGE ----------- ----------- ---- * 10.4 Amended and Restated Stock Option Agreement, dated as of December 3, 1993, by and between Aberdeen Group, Inc. and Richard L. Osborne (E) * 10.5 Amended and Restated Stock Option Agreement, dated as of December 29, 1994, by and between Aberdeen Group, Inc. and Jeffrey R. Steinhilber (E) 10.6 Lease Agreement, dated as of July 16, 1990, by and among Crow-O'Brien-Woodhouse I Limited Partnership, Aberdeen Group, Inc. and Van Cleef Properties, Inc. (E) 10.7 Lease Agreement, dated as of January 1, 1996, by and between PR Realty and Nursing Center Services, Inc. (E) 10.8 Industrial Lease Agreement dated as of May 28, 1993 by and between Industrial Developments International, Inc. and Corinthian Pharmaceutical Systems, Inc. (E) 10.9 Lease Agreement, dated as of January 17, 1995, by and among Calvin Hunsicker, Brenda Hunsicker and Aberdeen Group, Inc. (E) 10.10 Form of Indemnity Agreement by and between the Company and each of its Directors and Executive Officers (E) *10.11 Employment and Noncompetition Agreement, dated as of September 1, 1995, by and between Aberdeen Group, Inc. and William B. Bryum (E) 10.12 Credit Agreement, dated as of June 1, 1998, among the Company, (G) the lending institutions named therein and KeyBank National Association, as the Swing Line Lender, Letter of Credit Issuer and Administrative Agent 10.13 Letter Agreement, dated June 1, 1998, between the Company (G) and KeyBank National Association regarding Capital Markets Bridge Facility 10.14 Amendment No. 1, dated as of July 13, 1998, to the Credit (G) Agreement, dated as of June 1, 1998, among the Company, the lending institutions named therein and KeyBank National Association, as the Swing Line Lender, Letter of Credit Issuer and Administrative Agent 10.15 Amendment No. 2, dated March 3, 1999, to the Credit Agreement dated (H) as of June 1, 1998 among the Company and the Lenders named therein, NBD Bank and National City Bank, as co-agents, and KeyBank National Association , as a Lender, the Swing Line Lender, the Letter of Credit Issuer and as Administrative Agent 10.16 Amendment No. 3, dated August 3, 1999, to the Credit Agreement dated (I) as of June 1, 1998 among the Company and the Lenders named therein, NBD Bank and National City Bank, as co-agents, and KeyBank National Association , as a Lender, the Swing Line Lender, the Letter of Credit Issuer and as Administrative Agent 10.17 Security Agreement, dated August 3, 1999, among the Company, its (I) subsidiaries and KeyBank National Association *10.18 Separation Agreement, effective June 11, 1999, between Jeffrey R. (I) Steinhilber and the Company

SEQUENTIAL EXHIBIT NO. DESCRIPTION PAGE ----------- ----------- ---- * 10.19 Salary Continuation Agreement dated September 29, 2000 between the Company and Jon H. Outcalt (J) * 10.20 Salary Continuation Agreement dated September 29, 2000 between the Company and Kevin B. Shaw (J) * 10.21 Salary Continuation Agreement dated October 25, 2000 between the Company and William B. Byrum. (J) * 10.22 Employment Agreement dated July 1, 2001 between the Company and William B. Byrum * 10.23 Amendment to Salary Continuation Agreement dated August 21, 2001 between the Company and Jon H. Outcalt * 10.24 Amendment to Salary Continuation Agreement dated August 21, 2001 between the Company and Kevin B. Shaw 21.1 Subsidiaries of the Company 23.0 Consent of Independent Auditors * Management contract or compensatory plan or arrangement (A) Incorporated herein by reference to the appropriate exhibit to the Company's Current Report in Form 8-K, dated August 1, 1996 (File No. 0-027602). (B) Incorporated herein by reference to the appropriate exhibit to the Company's Current Report on Form 8-K, dated August 15, 1996 (File No. 0- 027602). (C) Incorporated herein by reference to the appropriate exhibit to the Company's Current report on Form 8-K, dated January 30, 1998. (D) Incorporated herein by reference to the appropriate exhibit to the Company's Current report on Form 8-K, dated June 1, 1998. (E) Incorporated herein by reference to the appropriate exhibit to the Company's Registration Statement on Form S-1 declared effective on February 13, 1996 (Reg. No. 33-80455). (F) Incorporated herein by reference to the appropriate exhibit to the Company's Registration Statement on Form S-3, as amended (Reg. No. 333-35551). (G) Incorporated herein by reference to the appropriate exhibit to the Company's Annual Report on Form 10-K for the year ended June 30, 1998. (H) Incorporated herein by reference to the appropriate exhibit to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1999. (I) Incorporated herein by reference to the appropriate exhibit to the Company's Annual Report on Form 10-K for the year ended June 30, 1999. (J) Incorporated herein by reference to the appropriate exhibit to the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2000.

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