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):  August 4, 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 August 4, 2004 – NeighborCare Reports Third Quarter Fiscal 2004 Results

Item 12.Results of Operations and Financial Condition

On August 4, 2004, NeighborCare, Inc. reported its results for the quarter ended June 30, 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 and 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, gross profit as adjusted for comparability purposes to assess our revenues from GHC against those of our external 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 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.

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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 nine months ended June 30, 2004 and the three and nine months ended June 30, 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, $19.1 million and $58.8 million for the nine months ended June 30, 2004 and the three and nine months ended June 30, 2003, respectively.  The amounts of the cost of revenue from GHC facilities that are included in cost of revenues as adjusted are $10.3 million, $15.2 million and $46.6 million for the nine months ended June 30, 2004 and the three and nine months ended June 30, 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, $3.9 million and $12.1 million for the nine months ended June 30, 2004 and the three and nine months ended June 30, 2003, respectively.

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 March 31, 2004, we excluded $2.0 million associated with the spin-off of Genesis Healthcare Corporation (GHC).  For the three and nine months ended June 30, 2004, we excluded from all “as adjusted” calculations the charges of approximately $0.8 million and $43.5 million, respectively, associated with the spin-off of GHC and $16.8 million of takeover defense charges for the three and nine months ended June 30, 2004.  For the three and nine months ended June 30, 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 and nine months ended June 30, 2003 of

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approximately $11.5 million and $9.6 respectively.

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:  August 4, 2004	By:	/s/ Richard W. Hunt.
		Richard W. Hunt
		Senior Vice President and
		Chief Financial Officer

Exhibit Index

Exhibit No.	Description
99.1	Press release issued by NeighborCare, Inc. on August 4, 2004 – NeighborCare Reports Fiscal Third Quarter 2004 Results

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EX-99.1

Exhibit 99.1

FOR IMMEDIATE RELEASE
Investor Contacts:	Media Contact:
Tania Almond	Denise DesChenes/Dan Gagnier
Investor Relations	Citigate Sard Verbinnen
410-528-7555	212-687-8080

NeighborCare Reports Third Quarter Fiscal 2004 Results;

Revenues Grow 9.8% Year-Over-Year;

Business Plan Remains on Track

BALTIMORE, MD – (August 4, 2004) – NeighborCare, Inc. today announced results for its third quarter of fiscal 2004 ended June 30, 2004.  Net revenues in the quarter totaled $371.1 million compared with $318.9 million last year.  Year to date, net revenues were $1,066.1 million compared with the year ago level of $920.9 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 $338.0 million in the year ago quarter for a year over year increase of 9.8%.  Year to date, adjusted net revenues were up 10.2% to $1,079.1 million from $979.7 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.)

For the quarter, net loss available to common shareholders was ($6.8) million, or ($0.16) per diluted share.  This includes the effect of expenses incurred in connection with Omnicare, Inc.’s unsolicited tender offer to purchase all of our outstanding common stock, as well as certain strategic planning, severance and other operating items of $17.5 million.  In the same quarter of the prior year, net income available to common shareholders was $6.5 million, or $0.16 per diluted share.  For the current year to date period, net loss available to common shareholders was ($4.3) million, or ($0.10) per diluted share. For the prior year to date period, net income available to common shareholders was $23.1 million, or $0.56 per diluted share.

NeighborCare’s income available to common shareholders, excluding the effect of expenses incurred in connection with Omnicare, Inc.’s unsolicited tender offer to purchase all of our outstanding common stock, as well as certain strategic planning, severance and other operating items, was $9.3 million, or $0.21 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 $4.5 million, or $0.11 per diluted share.  Net income available to common shareholders adjusted for these charges for the current year to date period was $35.5 million, or $0.81 per diluted share when compared to the adjusted amounts of $26.4 million or $0.61 per diluted share in the prior year to date period (see Table 3 in “Financial Highlights” on page 9.)  In the current nine month period ended June 30, 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 $1.2 million and $20.6 million for the three and nine months ended June 30, 2003, respectively.

Adjusted EBITDA for the quarter ended June 30, 2004 was $28.2 million compared with adjusted EBITDA of $17.9 million for the same period last year.  Year to date, adjusted EBITDA was $82.5 million versus $46.6 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, 2003 EBITDA excludes gross profit on intersegment revenues from Genesis HealthCare Corporation (GHC) of $3.9 million and $12.1 million for the three and nine months ended June 30, 2003, respectively.  Second, prior periods presented also include corporate overhead costs that could not be allocated to discontinued operations of $7.9 million and $23.5 million for the three and nine months ended June 30, 2003, respectively.  Third, for the current nine-month period ended June 30, 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.

John J. Arlotta, NeighborCare’s Chairman, President and CEO, said: “I am pleased to announce third quarter earnings that meet our expectations and support our guidance for the full year 2004.  We continue to execute and make significant progress on the business plan we outlined in detail in June.  As we have said in the past, competitive and regulatory pressures, which have been readily apparent for some time, require that we manage costs and provide a more efficient, effective and competitive service to customers.  NeighborCare is well on its way to meeting these objectives and to delivering on the plan we have outlined for 2004 and beyond.”

 “As discussed on our June 14 conference call, we will substantially complete Phase One of our cost reductions programs by the end of 2004, achieving approximately $18 million in savings on an annualized basis.  Phase Two, the initial implementation of our automation and consolidation programs, will continue in calendar year 2005, and Phase Three, our advanced pharmacy automation program will begin in 2006.  Both phases are also expected to deliver substantial annualized savings,” Arlotta continued.

“NeighborCare’s vision is unique and, even though we are only eight months out of the Genesis spin-off, we are transforming how this industry does business and creating value for our shareholders through the diligent implementation of our business plan,” concluded Arlotta.

At June 30, 2004, NeighborCare served 262,927 beds.  Organic net bed growth for the quarter was 269 beds and 6,693 beds for the fiscal year to date.  Additionally, approximately 7,000 beds were acquired in June 2004, the majority of which have come online ending this quarter.  Bed counts ending June 30, 2003 and March 31, 2004 were 248,000 and 255,990, respectively.  Average revenue per bed per month for the quarter ended June 30, 2004 was $420 compared to $386 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 distributed, under the provisions of Statement of Financial Accounting Standards, No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”).  Under SFAS 144, discontinued businesses including assets distributed 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 $53.8 million.  On an as adjusted basis this growth was $34.6 million, or 12.2% 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, the full impact of the amended GHC contract along with competitive price reductions.

Cost of revenues.  Cost of revenues in the quarter increased by $47.7 million to $294.1 million from $246.4 million in the year ago quarter.  Cost of revenues in the quarter compared with the as adjusted level last year increased $32.5 million, or 12.4%, to $294.1 million from the as adjusted year ago level of $261.5 million.

Gross margin.  Gross margin in the quarter declined to 20.8% from 22.7% last year.  On an as adjusted basis, gross margin declined to 20.8% from 22.6% last year, or 187 basis points.  Reduction in the gross margin is primarily attributable to state Medicaid reimbursement reductions and changes in product mix and contract pricing, including the impact of the amended contract with GHC.

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Selling, general and administrative.  SG&A in the current quarter declined $5.8 million to $48.8 million from the year ago level of $54.6 million.  The year ago level included approximately $7.9 million of shared overhead costs not allocated to discontinued operations.  The resulting net increase in SG&A expenses after taking into account the effect of the shared overhead costs is primarily due to the vesting of restricted stock awards granted in the current quarter and increases in legal fees and bad debt provisions.  As a percentage of revenue, SG&A was 13.2% this quarter compared with 17.1% last year.

Liquidity and capital resources.  NeighborCare ended the quarter with $70.1 million of cash and $287.4 million of working capital.  The Company generated $43.3 million year to date in operating cash flows and has $263.2 million of indebtedness.  NeighborCare’s $100 million revolving credit facility remains undrawn.

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 unchanged, and are summarized as follows:

Category / Initiative	Time Frame	Savings
Cost of Service Reductions
Best Demonstrated Practices	FY2004	$6M
Centralization / Consolidation	2HF04 - 1HF05	$3M-$5M
Fax Server	CY 2005 - 2006	$2M-$4M
Decision Rule Engine	CY 2005 - 2006	$2M-$4M
Drug Repackaging Facility	CY 2005 - 2006	$3M-$5M
Automation	CY 2006 - 2008	$20M
Cost of Product Reductions
Rebates and Generics	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.

Outlook

NeighborCare also today affirmed the Company’s previously issued guidance for the fiscal year 2004.  On a GAAP basis, the earnings per share for the fiscal year 2004 are estimated to be $0.06 to $0.12.  Full year 2004 adjusted earnings per share, which excludes one-time charges, are estimated to be $0.85 to $0.90.    (See earnings outlook and related reconciliation on page 10.)  Adjusted EPS for 2004 is based on first quarter 2004 income from continuing operations on an adjusted basis of $0.21, second quarter 2004 income available to common shareholders on an adjusted basis of $0.23 and third quarter 2004 income available to common shareholders on an adjusted basis of $0.21.

Conference Call

NeighborCare will host a conference call and webcast at 9:00 a.m. Eastern Time on August 5, 2004 to discuss results for the third fiscal quarter.  The conference call information follows:

Toll-Free Number:  (888) 240-0264

Toll Number:  (706) 679-5757

Leader:  John Arlotta

Conference ID:  8879849

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.

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,

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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 document, our website and in our other public filings and releases, which are not historical facts contain “forward-looking” statements (as defined in the federal securities laws) 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.  Our business, operations or results could also be affected by and the effects of Omnicare’s tender offer or its pendency on the company and its business, employees, customers and suppliers.

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.

NeighborCare has filed a solicitation/recommendation statement on Schedule 14D-9 regarding Omnicare’s tender offer.  NeighborCare’s shareholders are strongly advised to read carefully NeighborCare’s solicitation/recommendation statement (including any amendments or supplements) regarding Omnicare’s tender offer, because it contains important information. Free copies of the solicitation/recommendation statement and the related amendments or supplements, which have been filed by NeighborCare with the Securities and Exchange Commission, are available at the SEC’s web site at www.sec.gov, or at the NeighborCare web site at www.neighborcare.com, and also by directing requests to NeighborCare’s information agent, MacKenzie Partners, Inc., at 1-800-322-2885.

#  #  #

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NEIGHBORCARE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited, in thousands except per share amounts)

	Three Months Ended June 30,						Nine Months Ended June 30,
	2004			2003			2004			2003
Net revenues	$	371,094		$	318,886		$	1,066,134		$	920,924
Cost of revenues	294,061			246,360			838,317			710,817
Gross profit	77,033			72,526			227,817			210,107
Selling, general and administrative	48,807			54,600			145,286			163,507
Depreciation and amortization	7,107			7,785			19,263			23,048
Strategic planning, severance and other operating items	792			11,474			43,494			9,603
Takeover defense expenses	16,751			—			16,751			—
Operating income (loss)	3,576			(1,333		)	3,023			13,949
Interest expense, net	4,492			3,419			14,699			10,636
Other expense	1,137			1,151			3,454			3,281
Income (loss) before income tax provision (benefit)	(2,053		)	(5,903		)	(15,130		)	32
Income tax provision (benefit)	4,720			(11,851		)	(2,423		)	(4,404		)
Income (loss) from continuing operations	(6,773		)	5,948			(12,707		)	4,436
Income from discontinued operations, net of taxes	—			1,184			8,435			20,646
Net income (loss)	(6,773		)	7,132			(4,272		)	25,082
Preferred stock dividends	—			660			—			2,009
Net income (loss) available to common shareholders	$	(6,773	)	$	6,472		$	(4,272	)	$	23,073
Per common share data
Basic
Income (loss) from continuing operations	$	(0.16	)	$	0.13		$	(0.30	)	$	0.06
Income from discontinued operations	$	—		$	0.03		$	0.20		$	0.50
Net income (loss) available to common shareholders	$	(0.16	)	$	0.16		$	(0.10	)	$	0.56
Weighted average shares outstanding	43,682			40,097			42,565			41,135
Diluted
Income (loss) from continuing operations	$	(0.16	)	$	0.13		$	(0.30	)	$	0.06
Income from discontinued operations	$	—		$	0.03		$	0.20		$	0.50
Net income (loss) available to common shareholders	$	(0.16	)	$	0.16		$	(0.10	)	$	0.56
Weighted average shares outstanding	43,682			40,097			42,565			41,135

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NEIGHBORCARE, INC.

SEGMENT INFORMATION

(Unaudited)

(in thousands)	Institutional Pharmacy		Corporate and Other			Consolidated
Three months ended June 30, 2004
Net revenues	$	317,794	$	53,300		$	371,094
Gross profit	$	60,952	$	16,081		$	77,033
Operating income (loss)	$	31,063	$	(27,487	)	$	3,576
Three months ended June 30, 2003
Net revenues	$	264,035	$	54,851		$	318,886
Gross profit	$	54,081	$	18,445		$	72,526
Operating income (loss)	$	24,206	$	(25,539	)	$	(1,333	)
Nine months ended June 30, 2004
Net revenues	$	902,840	$	163,294		$	1,066,134
Gross profit	$	176,784	$	51,033		$	227,817
Operating income (loss)	$	86,158	$	(83,135	)	$	3,023
Nine months ended June 30, 2003
Net revenues	$	760,021	$	160,903		$	920,924
Gross profit	$	156,915	$	53,192		$	210,107
Operating income (loss)	$	66,447	$	(52,498	)	$	13,949
Total assets as of
June 30, 2004	$	194,426	$	675,874		$	870,300
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)

	June 30, 2004		March 31, 2004		September 30, 2003
	(unaudited)		(unaudited)
ASSETS
Current assets
Cash and cash equivalents	$	70,144	$	91,338	$	132,726
Restricted investments in marketable securities	—		—		29,320
Accounts receivable, net	225,480		209,095		366,886
Inventory	66,170		66,360		66,747
Prepaid expenses and other current assets	36,355		47,978		89,918
Total current assets	398,149		414,771		685,597
Property, plant and equipment, net	80,251		76,863		751,996
Restricted investments in marketable securities	—		—		61,271
Other long-term assets	21,272		19,162		81,304
Identifiable intangible assets, net	13,852		12,226		20,866
Goodwill	356,776		339,270		337,695
Total assets	$	870,300	$	862,292	$	1,938,729
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Current portion of long-term debt	$	4,275	$	4,288	$	20,135
Accounts payable and accrued expenses	106,430		101,422		214,689
Income taxes payable	—		—		4,116
Total current liabilities	110,705		105,710		238,940
Long-term debt	258,921		253,994		591,484
Other long-term liabilities	31,742		28,545		134,952
Total liabilities	401,368		388,249		965,376
Minority interest	9,596		9,592		10,359
Redeemable preferred stock	—		—		46,831
Total shareholders’ equity	459,336		464,451		916,163
Total liabilities and shareholders’ equity	$	870,300	$	862,292	$	1,938,729

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NEIGHBORCARE, INC.

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(in thousands)

	Three Months
	Ended			Nine Months Ended June 30,
	June 30, 2004			2004			2003
	(unaudited)			(unaudited)			(unaudited)
Cash flows from operating activities
Net income (loss) available to common shareholders	$	(6,773	)	$	(4,271	)	$	23,073
Net charges included in operations not requiring funds	13,994			40,408			106,836
Changes in operating assets and liabilities
Change in accounts receivable, net	(12,898		)	(52,884		)	(23,835		)
Change in accounts payable and accrued expenses	2,114			81,785			(16,606		)
Receipt of break-up fee, net of costs	—			—			(1,677		)
Other, net	11,663			(21,723		)	(6,673		)
Net cash provided by operating activities	8,100			43,315			81,118
Cash flows from investing activities
Capital expenditures	(5,321		)	(21,866		)	(42,496		)
Acquisitions	(22,340		)	(26,309		)	—
Other, net				(33,432		)	50,258
Net cash (used in) provided by investing activities	(27,661		)	(81,607		)	7,762
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	(1,633		)	(557,918		)	(66,617		)
Proceeds from issuance of long-term debt, net of debt
issuance costs	—			240,804			—
Repurchase of common stock	—			—			(36,207		)
Other	—			11,984			—
Net cash used in financing activities	(1,633		)	(24,290		)	(102,824		)
Net decrease in cash and cash equivalents	(21,194		)	(62,582		)	(13,944		)
Cash and cash equivalents at beginning of period	91,338			132,726			148,030
Cash and cash equivalents at end of period	$	70,144		$	70,144		$	134,086
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									Nine Months Ended
	June 30, 2004			June 30, 2003			March 31, 2004			June 30, 2004			June 30, 2003
Net revenues - as reported	$	371,094		$	318,886		$	356,646		$	1,066,134		$	920,924
Add back:
Intersegment revenues with Genesis HealthCare	—			19,112			—			13,013			58,774
Net revenues - as adjusted	$	371,094		$	337,998		$	356,646		$	1,079,147		$	979,698
Cost of revenues - as reported	$	294,061		$	246,360		$	282,285		$	838,317		$	710,817
Add back:
Intersegment cost of revenues for Genesis HealthCare	0			$	15,168		—			$	10,332		$	46,645
Cost of revenues - as adjusted	$	294,061		$	261,528		$	282,285		$	848,649		$	757,462
Gross Profit - as adjusted	$	77,033		$	76,470		$	74,361		$	230,498		$	222,236
Gross Margin - as adjusted	20.8		%	22.6		%	20.9		%	21.4		%	22.7		%

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

(in thousands)

	Three Months Ended								Nine Months Ended
	June 30, 2004			June 30, 2003			March 31, 2004		June 30, 2004			June 30, 2003
Net income (loss) available to common shareholders - as reported	$	(6,773	)	$	6,472		$	8,216	$	(4,272	)	$	23,073
Deduct:
Income from discontinued operations, net of taxes	—			(1,184		)	—		(8,435		)	(20,646		)
Add back:
Preferred stock dividends	—			660			—		—			2,009
Other expense	1,137			1,151			1,225		3,454			3,281
Income tax expense	4,720			(11,851		)	6,731		(2,423		)	(4,404		)
Interest expense, net	4,492			3,419			4,553		14,699			10,636
Depreciation and amortization	7,107			7,785			5,912		19,263			23,048
EBITDA - as reported	$	10,683		$	6,452		$	26,637	$	22,286		$	36,997
Add back:
Takeover defense expenses	16,751			—			—		16,751			—
Strategic planning, severance and other operating items	792			11,474			2,037		43,494			9,603
Adjusted EBITDA	$	28,226		$	17,926		$	28,674	$	82,531		$	46,600

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									Nine Months Ended
	June 30, 2004			June 30, 2003			March 31, 2004			June 30, 2004			June 30, 2003
Net income (loss) available to common shareholders - as reported	$	(6,773	)	$	6,472		$	8,216		$	(4,272	)	$	23,073
Add back:
Takeover defense expenses	16,751			—			—			16,751			—
Strategic planning, severance and other operating items	792			11,474			2,037			43,494			9,603
Tax impact of items added back above and adjustment to 40% effective tax rate on income from continuing operations	(1,476		)	(14,079		)	(63		)	(20,469		)	(8,258		)
Preferred stock dividends	—			660			—			—			2,009
Net income available to common shareholders - as adjusted	$	9,294		$	4,527		$	10,190		$	35,504		$	26,427
Net income available to common shareholders - as adjusted per share - basic	$	0.21		$	0.11		$	0.23		$	0.83		$	0.64
Weighted average shares - basic	43,682			40,097			43,640			42,565			41,135
Net income available to common shareholders - as adjusted per share - diluted	$	0.21		$	0.11		$	0.23		$	0.81		$	0.61
Weighted average shares - diluted	44,120			42,371			43,957			43,953			43,378

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

NEIGHBORCARE, INC.

EARNINGS OUTLOOK FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2004

(Unaudited, in thousands except per share amounts)

Reconciliation of GAAP to non-GAAP projected earnings

	FY2004E
	Low End of Range				High End of Range
	$		$ per share		$		$ per share
Projected net income available to common shareholders (GAAP)	$	2,550	$	0.06	$	5,175	$	0.12
Deduct:
Income from discontinued operations, net of taxes	$	8,435			$	8,435
Tax impact of items added back below and adjustment to 40% effective tax rate on income from continuing operations	$	22,741			$	22,341
Add back:
Strategic planning, severance and other related items	$	44,500			$	44,000
Takeover defense expenses	$	18,800			$	18,300
Intersegment gross profit on transactions with GHC	$	2,681			$	2,681
Adjusted Earnings and EPS (non-GAAP)	$	37,355	$	0.85	$	39,380	$	0.90

10