8-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 8-K

CURRENT REPORT

PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

Date of report (Date of earliest event reported):  May 12, 2004

NEIGHBORCARE, INC.

(Exact name of registrant as specified in its charter)

Pennsylvania	0-33217	06-1132947
(State or other jurisdiction of incorporation)	(Commission File Number)	(IRS Employer Identification No.)
601 East Pratt Street, Third Floor Baltimore, MD		21202
(Address of principal executive offices)		(Zip Code)
Registrant’s telephone number, including area code    (410) 528-7300
N/A
(Former name or former address, if changed since last report)

Item 7.Exhibits

(a) Financial statements of businesses acquired.

Not Applicable

(b) Pro-forma financial information.

Not Applicable

(c) Exhibits.

The following exhibit is furnished with this report on Form 8-K:

99.1 Press release issued by NeighborCare, Inc. on May 12, 2004 – NeighborCare Reports Second Quarter Fiscal 2004 Results

Item 9.Regulation FD Disclosure

In May, the Company received notice of the resignation of Richard W. Sunderland, Jr. as Senior Vice President and Chief Financial Officer.  Mr. Sunderland will continue in his position while the Company searches for his successor. The Company has retained a third-party search firm to locate a new Chief Financial Officer.

Item 12. Results of Operations and Financial Condition

On May 12, 2004, NeighborCare, Inc. reported its results for the quarter ended March 31, 2004. The earnings release is attached hereto as Exhibit 99.1.

The earnings release includes net revenues as adjusted, cost of revenues as adjusted, gross profit as adjusted, EBITDA, adjusted EBITDA and net income available to common shareholders as adjusted which are non-GAAP financial measures. For purposes of SEC Regulation G, a non-GAAP financial measure is a numerical measure of a registrant’s historical or future financial performance, financial position or cash flows that excludes amounts, or is subject to adjustments that have the effect of excluding amounts, that are included in the most directly comparable financial measure calculated and presented in accordance with GAAP in the statement of operations, balance sheet or statement of cash flows (or equivalent statements) of the registrant; or includes amounts, or is subject to adjustments that have the effect of including amounts, that are excluded from the most directly comparable financial measure so calculated and presented. In this regard, GAAP refers to generally accepted accounting principles in the United States of America. Pursuant to the requirements of Regulation G, NeighborCare has provided reconciliations of the non-GAAP financial measures to the most directly comparable GAAP financial measures.

Management believes that the presentation of net revenues as adjusted, cost of revenues as adjusted, gross profit as adjusted, EBITDA, adjusted EBITDA and net income available to common shareholders as adjusted provides useful information to investors regarding our results of operations because such measures are useful for trending, analyzing and benchmarking the performance and value of our business. We use these non-GAAP financial measures primarily as performance measures. We use net revenues as adjusted, cost of revenues as adjusted and gross profit as adjusted for comparability purposes to assess our total revenues consistently for all customers.  We use EBITDA and adjusted EBITDA as measures to assess the relative performance of our operating businesses, as well as the employees responsible for operating such businesses. EBITDA and adjusted EBITDA are useful in this regard because they do not include such costs as interest expense, income taxes and depreciation and amortization expense, which may vary from business unit to business unit depending upon such factors

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as the method used to finance the original purchase of the business unit or the tax law in the state in which a business unit operates. By excluding such factors when measuring financial performance, many of which are outside of the control of the employees responsible for operating our business units, management is better able to evaluate operating performance of the business unit and the employees responsible for business unit performance. Consequently, management uses EBITDA and adjusted EBITDA to determine the extent to which our employees have met financial performance goals, and therefore may or may not be eligible for incentive compensation awards.

We also use net revenues as adjusted, cost of revenues as adjusted, gross profit as adjusted, EBITDA and adjusted EBITDA in our annual budgeting process. We believe net revenues as adjusted, cost of revenues as adjusted, gross profit as adjusted, EBITDA, adjusted EBITDA and net income available to common shareholders as adjusted facilitate internal comparisons to historical operating performance of prior periods and external comparisons to competitors’ historical operating performance. Although we use these non-GAAP financial measures to assess the performance of our business, the use of these measures is limited because they do not consider certain material costs necessary to operate our business. These costs include the cost to service our debt, the non-cash depreciation and amortization associated with our long-lived assets, the cost of our federal and state tax obligations, our share of the earnings or losses of our less than 100% owned operations and the operating results of our discontinued businesses. Because these non-GAAP financial measures do not consider these important elements of our cost structure, a user of our financial information who relies on them as the only measures of our performance could draw an incomplete or misleading conclusion regarding our financial performance. Consequently, a user of our financial information should consider net income an important measure of our financial performance because it provides the most complete measure of our performance. Net revenues as adjusted, cost of revenues as adjusted, gross profit as adjusted, EBITDA, adjusted EBITDA and net income available to common shareholders as adjusted should be considered in addition to, not as a substitute for, or superior to, GAAP financial measures or as indicators of operating performance.

We define EBITDA as earnings from continuing operations before preferred stock dividends, equity in net income (loss) of unconsolidated affiliates, minority interests, interest, taxes, depreciation and amortization. Other companies may define EBITDA differently and, as a result, our measure of EBITDA may not be directly comparable to EBITDA of other companies. EBITDA does not represent net income (loss) as defined by GAAP.

The non-GAAP financial measures of net revenues as adjusted, cost of revenues as adjusted and gross profit as adjusted presented in the earnings release include revenues and related costs from GHC facilities that are excluded from our statements of operations for the six months ended March 31, 2004 and the three and six months ended March 31, 2003.  For periods prior to the spin-off, these amounts were considered intersegment revenues and related costs and were therefore eliminated in consolidation.  The amounts of the revenue from GHC facilities that are included in net revenues as adjusted are $13.0 million, $19.6 million and $39.7 million for the six months ended March 31, 2004 and the three and six months ended March 31, 2003, respectively.  The amounts of the cost of revenues from GHC facilities that are included in cost of  revenues as adjusted are $10.3 million, $15.6 million and $31.5 million for the six months ended March 31, 2004 and the three and six months ended March 31, 2003, respectively.  The amounts of the gross profit related to the revenues from GHC facilities that are included in gross profit as adjusted are $2.7 million, $4.0 million and $8.2 million for the six months ended March 31, 2004 and the three and six months ended March 31, 2003, respectively.  The amounts of the revenue, cost of revenue and gross profit from GHC facilities that are included in net revenues as adjusted, cost of revenues as adjusted and gross profit as adjusted for the three months ended December 31, 2003 are $13.0 million, $10.3 million and $2.7 million, respectively.

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The non-GAAP financial measures of EBITDA, adjusted EBITDA and net income available to common shareholders as adjusted presented in the earnings release exclude amounts related to one-time transactional events and settlements.  Specifically, for the three months ended December 31, 2003, we excluded $40.7 million associated with the spin-off of Genesis Healthcare Corporation (GHC).  For the three and six months ended March 31, 2004, we excluded from all “as adjusted” calculations the charges of approximately $2.0 million and $42.7 million, respectively, associated with the spin-off of GHC and corporate reorganization.  For the three and six months ended March 31, 2003, we excluded from all “as adjusted” calculations the charges associated with the spin-off of GHC and the net gain from the break-up fee from the proposed NCS Healthcare transaction, which resulted in a net loss for the three months ended March 31, 2003 of approximately $2.1 million and net gain of approximately $1.9 million for the six months ended March 31, 2003.

The non-GAAP measures are presented because management uses this information in evaluating its ongoing operations. Management believes that this information provides investors a valuable insight into its operating results. Management also believes that excluding such gains and expenses provide better comparability to prior period results.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

	NEIGHBORCARE, INC.
Date:  May 12, 2004	By:	/s/ Richard W. Sunderland, Jr.
		Richard W. Sunderland, Jr.
		Senior Vice President and Chief Financial Officer

Exhibit Index

Exhibit No.	Description
	99.1         Press release issued by NeighborCare, Inc. on May 12, 2004 – NeighborCare Reports Second Fiscal Quarter 2004 Results

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EX-99.1

Exhibit 99.1

FOR IMMEDIATE RELEASE
	Investor Contact:	Media Contact:
	Tania Almond	Crista Stark
	Investor Relations	Public Relations
	410-528-7555	410-528-7456

NeighborCare Reports Second Quarter Fiscal 2004 Results;

$0.19 E.P.S from Net Income Available to Common Shareholders;

$0.23 E.P.S. from Net Income Available to Common Shareholder as Adjusted;

Year to Date Organic Net Bed Growth over 6,000

BALTIMORE, MD – (May 12, 2004) – NeighborCare, Inc. today announced results for its second quarter of fiscal 2004 ended March 31, 2004.  For the quarter, net income available to common shareholders was $8.2 million, or $0.19 per diluted share.  In the same quarter of the prior year, net income available to common shareholders was $4.7 million, or $0.11 per share.  For the current year to date period, net income available to common shareholders was $2.5 million, or $0.06 per diluted share. For the prior year to date period, net income available to common shareholders was $16.6 million, or $0.40 per share.

NeighborCare’s income available to common shareholders excluding the effect of certain strategic planning, severance and other operating items was $10.2 million, or $0.23 per diluted share for the current quarter.  In the same quarter of the prior year, income available to common shareholders adjusted for these charges was $7.9 million, or $0.18 per share.  Net income available to common shareholders adjusted for these charges for the current year to date period was $26.2 million, or $0.60 per diluted share when compared to the adjusted amounts of $21.9 million or $0.50 per share in the prior year to date period (see Table 3 in “Financial Highlights” on page 9). In the current six month period ended March 31, 2004, income available to common shareholders includes $8.4 million of income from discontinued operations.  In prior periods, income available to common shareholders includes income from discontinued operations of $5.7 million and $19.5 million for the three and six months ended March 31, 2003, respectively.

Adjusted EBITDA for the quarter ended March 31, 2004 was $28.7 million compared with Adjusted EBITDA of $15.8 million for the same period last year.  Year to date, Adjusted EBITDA was $54.3 million versus $28.7 million last year (see Table 2 in “Financial Highlights” on page 9).  Prior periods Adjusted EBITDA may not be considered comparable for several reasons including: First, it excludes gross profit on intersegment revenues from Genesis HealthCare Corporation (GHC) of $4.0 million and $8.2 million for the three and six months ended March 31, 2003, respectively.  Second, prior periods presented also include corporate overhead costs that could not be allocated to discontinued operations of $7.9 million and $15.5 million for the three and six months ended March 31, 2003, respectively.  Third, for the current six month period ended March 31, 2004, Adjusted EBITDA excludes gross profit on intersegment sales from GHC prior to the spin-off of $2.7 million.  Adjusted EBITDA for all periods presented excludes the results of discontinued operations.

Net revenues in the quarter totaled $356.6 million compared with $304.9 million last year.  Year to date, net revenues were $695.0 million compared with the year ago level of $602.0 million.  In accordance with generally accepted accounting principles (GAAP), the prior year revenue numbers exclude intersegment revenues with GHC.  Net revenues, as adjusted for intersegment transactions with GHC, totaled $324.5 million in the year ago quarter for a year over year increase of 9.9%.  Year to date, adjusted net revenues were up 10.3% to $708.1 million from $641.7 million in the year ago period (see Introductory Note in “Quarterly Results Review” on page 2 and Table 1 in “Financial Highlights” on page 9).

John J. Arlotta, NeighborCare’s Chairman, President and CEO, said: “I am pleased with the results for the second quarter as our team continues to focus on executing our business plan, just five months out from our separation with GHC.  We are making solid progress on reducing our cost of service, improving our formulary management, growing sales organically, and reducing bed losses.  Our strategy is working in the marketplace and we are confident we will deliver substantial value and returns to our shareholders over the long term.”

At March 31, 2004, NeighborCare served 255,990 beds including approximately 3,400 acquired in January 2004.  Organic net bed growth for the quarter was 2,562 beds and 6,424 beds for the fiscal year to date.  Bed counts ending March 31, 2003 and December 31, 2003 were 251,845 and 250,003, respectively.  Average revenue per bed per month for the quarter ended March 31, 2004 was $406 compared to $376 in the prior year period.  For the fiscal year 2004, NeighborCare continues to expect organic net bed growth in line with its previous estimates of 5,000-10,000 net beds.

Quarterly Results Review

Introductory Note.  Net revenues and cost of revenues do not include intersegment revenues and related cost of revenues with GHC for periods prior to the spin-off.  GAAP requires that intersegment revenues from GHC for periods prior to the spin-off be eliminated in consolidation and that the associated gross profit be included in NeighborCare’s discontinued operations.  For comparison purposes, the presentation of adjusted net revenues and costs of revenues reflects the adjustment to include the intersegment transactions as these transactions with GHC are and will continue to be reflected in continuing operations in the current and future periods (see Reconciliation Table 1 in “Financial Highlights” on page 9).  NeighborCare accounts for discontinued operations, including assets held for distribution, under the provisions of Statement of Financial Accounting Standards, No. 144 “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of” (“SFAS 144”).  Under SFAS 144, discontinued businesses including assets held for distribution are removed from the results of continuing operations and presented as a separate line on the statement of operations.

Revenues.  Net revenue growth over the year ago period was principally driven by growth in revenue of the Company’s institutional pharmacy segment of approximately $45.4 million.  On an as adjusted basis this growth was $25.8 million, or 9.3% over the same period in the prior year.  This growth was driven by an increase in bed census, as well as increased drug trend partially offset by certain state Medicaid reimbursement reductions and the full impact of the new GHC contract.

Cost of revenues.  Cost of revenues in the quarter increased by $48.4 million to $282.3 million from $233.9 million in the year ago quarter.  Cost of revenues in the quarter compared with the as adjusted level last year increased $32.8 million, or 13.2%, to $282.3 million from the as adjusted year ago level of $249.5 million.

Gross margin.  Gross margin in the quarter declined to 20.9% from 23.3% last year.  On an as adjusted basis, gross margin declined to 20.9% from 23.1% last year, or 220 basis points.  Reduction in the gross margin is primarily attributable to state Medicaid reimbursement reductions, the impact of the new GHC contract, a significant one-time credit to a large customer, and price increases from manufacturers.

Selling, general and administrative.  SG&A in the current quarter declined $9.6 million to $45.7 million from the year ago level of $55.3 million.  The year ago level included approximately $7.9 million of shared overhead costs not allocated to discontinued operations.  As a percentage of revenue, SG&A was 12.8% this quarter compared with 18.1% last year.  For the year ago period, SG&A, adjusted for the shared overhead costs, as a percentage of as adjusted revenues was 14.6%.  Contributing to the decline in SG&A are lower insurance costs as well as one-time positive adjustments related to a reduction in bad debt expense during the period and adjustments to certain accruals, including incentive compensation.  Going forward, the Company expects its SG&A expenses to be higher than this quarter but less than the $50 million previously indicated.

Liquidity and capital resources.  NeighborCare ended the quarter with $91.3 million of cash and $309.1 million of working capital.  The Company generated $35.2 million year to date in operating cash flows and has $258.3 million of indebtedness.  NeighborCare’s $100 million revolving credit facility remains undrawn.

Centralization and Consolidation

During the quarter NeighborCare continued a comprehensive review of its field operations.  As a result of that review, the Company reorganized some of its field organization, consolidated certain regional functions

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including several smaller pharmacies, and centralized and consolidated certain overhead functions.  These changes are directly related to previously announced plans to centralize certain functions.  NeighborCare now expects annualized savings of $3-$5 million over the next twelve months from these initiatives (see table below).  Expenses related to these changes totaled $1.7 million for the quarter and are included in strategic planning, severance and other operating items.  Additional expenses are anticipated as this initiative and other future initiatives are completed.

Cost Improvement Initiatives

In past conference calls, NeighborCare has commented on several programs designed to reduce its cost of product and cost of service.  These initiatives and their impact to the Company’s business remain on track or ahead of plan and are summarized as follows:

	Previous Estimates		Current Estimates
Category / Initiative	Time Frame	Savings	Time Frame	Savings
Cost of Service Reductions
Best Demonstrated Practices	FY 2004	$6M	FY2004	$6M
Centralization / Consolidation	CY 2004 - 2005	$1M-$2M	2HF04 - 1HF05	$3M-$5M
Fax Server	CY 2005 - 2006	$2M-$4M	CY 2005 - 2006	$2M-$4M
Decision Rule Engine	CY 2005 - 2006	$2M-$4M	CY 2005 - 2006	$2M-$4M
Drug Repackaging Facility	CY 2006	$3M-$5M	CY 2005 - 2006	$3M-$5M
Cost of Product Reductions
Rebates and Generics	FY 2004	$3M-$5M	FY 2004	$4M-$6M

Notes:  FY = Fiscal Year, CY = Calendar Year, 2HF = Second Half Fiscal, 1HF = First Half Fiscal

All savings represented are on an “annualized basis” except for Best Demonstrated Practices which is on a “booked” basis.

Management Update

Rick Sunderland, Senior Vice President and Chief Financial Officer, has announced his intention to resign from the company.  Rick has served the company in various financial positions for 12 years.  He will continue in his current position during the search for his replacement and for a transition period.  “We thank Rick for his years of service to NeighborCare and for all of his outstanding work through the spin-off transaction.  We wish Rick well in his future endeavors and appreciate his flexibility in continuing to assist us while we find a replacement,” said John J. Arlotta, NeighborCare’s Chairman, President and CEO.  Spencer Stuart has been retained to assist in recruiting a new CFO.

Conference Call

NeighborCare will host a conference call and webcast at 9:00 a.m. EDT on May 13, 2004 to discuss results for the second fiscal quarter.  The conference call information follows:

Toll-Free Number:  (888) 240-0264

Toll Number:  (706) 679-5757

Leader:  John Arlotta

Conference ID:  6891657

Investors can also access the conference live via webcast through NeighborCare’s web site at http://www.neighborcare.com/investor/earnings.cfm, where a replay of the call will also be posted.

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About NeighborCare, Inc.

NeighborCare, Inc. (NASDAQ: NCRX) is one of the nation’s leading institutional pharmacy providers serving long term care and skilled nursing facilities, specialty hospitals, assisted and independent living communities, and other assorted group settings.  NeighborCare also provides infusion therapy services, home medical equipment, respiratory therapy services, community-based retail pharmacies and group purchasing. In total, NeighborCare’s operations span the nation, providing pharmaceutical services in 32 states and the District of Columbia.

Visit our website at www.neighborcare.com.

Statements made in this release, our website and in our other public filings and releases, which are not historical facts contain “forward-looking” statements (as defined in the Private Securities Litigation Reform Act of 1995) that involve risks and uncertainties and are subject to change at any time.  These forward-looking statements may include, but are not limited to, statements containing words such as “anticipate,” “believe,” “plan,” “estimate,” “expect,” “intend,” “may”, “target” and similar expressions. Such forward looking statements include, without limitation, statements regarding the effect of the spin-off on our operations, expected changes in reimbursement rates and inflationary increases in state Medicaid rates, expected bed count, expected SG&A expense, anticipated restructuring charges and estimates of timing and costs savings related to cost improvement initiatives.  Factors that could cause actual results to differ materially include, but are not limited to, the following: costs, changes in the reimbursement rates or methods of payment from Medicare or Medicaid, or the implementation of other measures to reduce reimbursement for our services; changes in pharmacy legislation and payment formulas; the expiration of enactments providing for additional government funding; efforts of third party payors to control costs; the impact of federal and state regulations; changes in payor mix and payment methodologies; further consolidation of managed care organizations and other third party payors; competition in our business; an increase in insurance costs and potential liability for losses not covered by, or in excess of, our insurance; competition for qualified staff in the healthcare industry; our ability to control operating costs, and generate sufficient cash flow to meet operational and financial requirements; and an economic downturn or changes in the laws affecting our business in those markets in which NeighborCare operates.

The forward-looking statements involve known and unknown risks, uncertainties and other factors that are, in some cases, beyond our control.  We caution investors that any forward-looking statements made by us are not guarantees of future performance.  We disclaim any obligation to update any such factors or to announce publicly the results of any revisions to any of the forward-looking statements to reflect future events or developments

#  #  #

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NEIGHBORCARE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands except per share amounts)

	Three Months Ended March 31,					Six Months Ended March 31,
	2004		2003			2004			2003
	(unaudited)		(unaudited)			(unaudited)			(unaudited)
Net revenues	$	356,646	$	304,933		$	695,040		$	602,037
Cost of revenues	282,285		233,893			544,256			464,457
Gross profit	74,361		71,040			150,784			137,580
Selling, general and administrative	45,687		55,285			96,479			108,907
Depreciation and amortization	5,912		7,491			12,156			15,263
Strategic planning, severance and other operating items	2,037		2,065			42,701			(1,871		)
Operating income (loss)	20,725		6,199			(552		)	15,281
Interest expense, net	4,553		3,543			10,207			7,217
Other expense	1,225		1,091			2,317			2,130
Income (loss) before income tax provision (benefit)	14,947		1,565			(13,076		)	5,934
Income tax provision (benefit)	6,731		1,964			(7,143		)	7,447
Income (loss) from continuing operations	8,216		(399		)	(5,933		)	(1,513		)
Income from discontinued operations, net of taxes	—		5,728			8,435			19,463
Net income	8,216		5,329			2,502			17,950
Preferred stock dividends	—		665			—			1,349
Net income available to common shareholders	$	8,216	$	4,664		$	2,502		$	16,601
Per common share data
Basic
Income (loss) from continuing operations	$	0.19	$	(0.03	)	$	(0.14	)	$	(0.07	)
Income from discontinued operations	$	—	$	0.14		$	0.20		$	0.47
Net income available to common shareholders	$	0.19	$	0.11		$	0.06		$	0.40
Weighted average shares outstanding	43,640		41,641			42,010			41,595
Diluted
Income (loss) from continuing operations	$	0.19	$	(0.03	)	$	(0.14	)	$	(0.07	)
Income from discontinued operations	$	—	$	0.14		$	0.20		$	0.47
Net income available to common shareholders	$	0.19	$	0.11		$	0.06		$	0.40
Weighted average shares outstanding	43,957		41,641			42,010			41,595

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NEIGHBORCARE, INC.

SEGMENT INFORMATION

(Unaudited)

(in thousands)	Institutional Pharmacy		Corporate and Other			Consolidated
Three months ended March 31, 2004
Net revenues	$	303,256	$	53,390		$	356,646
Gross profit	$	57,704	$	16,657		$	74,361
Operating income (loss)	$	28,521	$	(7,796	)	$	20,725
Three months ended March 31, 2003
Net revenues	$	257,868	$	47,065		$	304,933
Gross profit	$	54,721	$	16,319		$	71,040
Operating income (loss)	$	24,549	$	(18,350	)	$	6,199
Six months ended March 31, 2004
Net revenues	$	585,047	$	109,993		$	695,040
Gross profit	$	115,818	$	34,966		$	150,784
Operating income (loss)	$	55,094	$	(55,646	)	$	(552	)
Six months ended March 31, 2003
Net revenues	$	495,985	$	106,052		$	602,037
Gross profit	$	102,548	$	35,032		$	137,580
Operating income (loss)	$	42,230	$	(26,949	)	$	15,281
Total assets as of
March 31, 2004	$	181,236	$	681,056		$	862,292
September 30, 2003	$	192,149	$	1,746,580		$	1,938,729

Note: Reference Table 1 of the Financial Highlights section for intersegment adjustments which impact only the institutional pharmacy segment.

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NEIGHBORCARE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)

	March 31, 2004		December 31, 2003		September 30, 2003
	(unaudited)		(unaudited)
ASSETS
Current assets
Cash and cash equivalents	$	91,338	$	92,761	$	132,726
Restricted investments in marketable securities	—		—		29,320
Accounts receivable, net	209,095		206,686		366,886
Inventory	66,360		67,176		66,747
Prepaid expenses and other current assets	47,978		40,726		89,918
Total current assets	414,771		407,349		685,597
Property, plant and equipment, net	76,863		74,085		751,996
Restricted investments in marketable securities	—		—		61,271
Other long-term assets	19,162		18,632		81,304
Identifiable intangible assets, net	12,226		12,813		20,866
Goodwill	339,270		334,742		337,695
Total assets	$	862,292	$	847,621	$	1,938,729
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Current portion of long-term debt	$	4,288	$	4,300	$	20,135
Accounts payable and accrued expenses	101,422		104,577		214,689
Income taxes payable	—		—		4,116
Total current liabilities	105,710		108,877		238,940
Long-term debt	253,994		254,332		591,484
Deferred income taxes	12,084		12,084		50,022
Other long-term liabilities	16,461		10,684		84,930
Total liabilities	388,249		385,977		965,376
Minority interest	9,592		9,267		10,359
Redeemable preferred stock	—		—		46,831
Total shareholders’ equity	464,451		452,377		916,163
Total liabilities and shareholders’ equity	$	862,292	$	847,621	$	1,938,729

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NEIGHBORCARE, INC.

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(in thousands)

	Three Months Ended March 31, 2004
				Six Months Ended March 31,
				2004			2003
	(unaudited)			(unaudited)			(unaudited)
Cash flows from operating activities
Net income available to common shareholders	$	8,216		$	2,502		$	16,601
Net charges included in operations not requiring funds	6,185			26,412			63,019
Changes in operating assets and liabilities
Change in accounts receivable, net	(2,012		)	(39,986		)	(22,742		)
Change in accounts payable and accrued expenses	(4,947		)	79,671			(7,622		)
Receipt of break-up fee, net of costs	—			—			10,580
Other, net	825			(33,384		)	3,768
Net cash provided by operating activities	8,267			35,215			63,604
Cash flows from investing activities
Capital expenditures	(6,972		)	(16,545		)	(26,952		)
Purchase of pharmacy assets	(3,969		)	(3,969		)	—
Other, net	46			(33,432		)	29,233
Net cash (used in) provided by investing activities	(10,895		)	(53,946		)	2,281
Cash flows from financing activities
Distributions of cash to GHC	—			(72,161		)	—
Funds received from GHC for debt financing	—			353,001			—
Repayment of long-term debt	(1,072		)	(556,285		)	(63,496		)
Proceeds from issuance of long-term debt, net of debt
issuance costs	—			240,804			—
Repurchase of common stock	—			—			(16,938		)
Other	2,277			11,984			—
Net cash (used in) provided by financing activities	1,205			(22,657		)	(80,434		)
Net decrease in cash and cash equivalents	$	(1,423	)	$	(41,388	)	$	(14,549	)
Cash and cash equivalents at beginning of period	92,761			132,726			148,030
Cash and cash equivalents at end of period	$	91,338		$	91,338		$	133,481
Non-cash investing and financing activities
Distribution of net assets to GHC	—			$	(437,157	)	—
Conversion of preferred stock	—			(46,831		)	—

8

NEIGHBORCARE, INC.

FINANCIAL HIGHLIGHTS

(Unaudited)

Table 1 - Reconciliation of net revenues, cost of revenues, gross profit and gross margin

(in thousands, except per share amounts)

	Three Months Ended									Six Months Ended
	March 31, 2004			March 31, 2003			December 31, 2003			March 31, 2004			March 31, 2003
Net revenues - as reported	$	356,646		$	304,933		$	338,394		$	695,040		$	602,037
Add back:
Intersegment revenues with Genesis HealthCare				19,611			13,013			13,013			39,662
Net revenues - as adjusted	$	356,646		$	324,544		$	351,407		$	708,053		$	641,699
Cost of revenues - as reported	$	282,285		$	233,893		$	261,967		$	544,256		$	464,457
Add back:
Intersegment cost of revenues for Genesis HealthCare				$	15,564		10,332			$	10,332		$	31,477
Cost of revenues - as adjusted	$	282,285		$	249,457		$	272,299		$	554,588		$	495,934
Gross Profit - as adjusted	$	74,361		$	75,087		$	79,108		$	153,465		$	145,765
Gross Margin - as adjusted	20.9		%	23.1		%	22.5		%	21.7		%	22.7		%

Table 2 - Reconciliation of net income (loss) available to common shareholders to EBITDA and Adjusted EBITDA

(in thousands)

	Three Months Ended								Six Months Ended
	March 31, 2004		March 31, 2003			December 31, 2003			March 31, 2004			March 31, 2003
Net income (loss) available to common shareholders - as reported	$	8,216	$	4,664		$	(5,714	)	$	2,502		$	16,601
Deduct:
Income from discontinued operations, net of taxes	—		(5,728		)	(8,435		)	(8,435		)	(19,463		)
Add back:
Preferred stock dividends	—		665			—			—			1,349
Other expense	1,225		1,091			1,091			2,317			2,130
Income tax provision (benefit)	6,731		1,964			(13,874		)	(7,143		)	7,447
Interest expense, net	4,553		3,543			5,654			10,207			7,217
Depreciation and amortization	5,912		7,491			6,244			12,156			15,263
EBITDA - as reported	$	26,637	$	13,690		$	(15,034	)	$	11,604		$	30,544
Add back:
Strategic planning, severance and other operating items	2,037		2,065			40,664			42,701			(1,871		)
Adjusted EBITDA	$	28,674	$	15,755		$	25,630		$	54,305		$	28,673

Table 3 - Reconciliation of net income (loss) available to common shareholders, as reported, to net income (loss) available to common shareholders, as adjusted

(in thousands, except per share amounts)

	Three Months Ended								Six Months Ended
	March 31, 2004			March 31, 2003		December 31, 2003			March 31, 2004			March 31, 2003
Net income (loss) available to common shareholders - as reported	$	8,216		$	4,664	$	(5,714	)	$	2,502		$	16,601
Add back:
Strategic planning, severance and other operating items	2,037			2,065		40,664			42,701			(1,871		)
Tax impact of items added back above and adjustment to 40% effective tax rate on income from continuing operations	(63		)	512		(18,930		)	(18,993		)	5,822
Preferred stock dividends	—			665		—			—			1,349
Net income available to common shareholders - as adjusted	$	10,190		$	7,906	$	16,020		$	26,210		$	21,901
Net income available to common shareholders - as adjusted per share - diluted	$	0.23		$	0.18	$	0.36		$	0.60		$	0.50
Weighted average shares - diluted	43,957			43,876		43,969			43,876			43,830

Notes:

• Adjusted EBITDA is a non-GAAP financial measure that management considers, along with GAAP measures, when evaluating the Company’s operating performance.  Adjusted EBITDA is reconciled to the most directly comparable GAAP financial measure.

• Income available to common shareholders excluding the effect of certain strategic planning, severance and other operating items is a non-GAAP financial measure that management considers, along with GAAP measures, when evaluating the Company’s operating performance. This non-GAAP financial measure is reconciled to the most directly comparable GAAP financial measure.

9