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 4, 2005

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)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

o    Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

o    Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

o    Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

o    Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Item 2.02               Results of Operations and Financial Condition

On May 4, 2005, NeighborCare, Inc. reported its results for the three and six months ended March 31, 2005. 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 income from continuing operations 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 income from continuing operations 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 and income from continuing operations 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.

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 income from continuing operations 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 income from continuing operations as adjusted should be considered in addition to, not as a substitute for, or superior to, GAAP financial measures.

We define EBITDA as earnings from continuing operations before 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, gross profit as adjusted and income from continuing operations as adjusted presented in the earnings release include an unusual charge totaling $1.4 million that is excluded from our statements of operations for the three and six months ended March 31, 2005.  These charges predominately relate to state Medicaid audits related to prior periods that were recorded in the periods ending March 31, 2005.

The non-GAAP financial measures of net revenues as adjusted, cost of revenues as adjusted, gross profit as adjusted and income from continuing operations 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.  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 for the six months ended March 31, 2004.

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The amounts of the cost of revenues from GHC facilities that are included in cost of revenues as adjusted are $10.3 million for the six months ended March 31, 2004.  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 for the three months ended March 31, 2004.

The non-GAAP financial measures of EBITDA, adjusted EBITDA and income from continuing operations 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, 2005, we excluded from all “as adjusted” calculations the charges of approximately $(0.06) million and $0.8 million, respectively, associated with pharmacy consolidations and defense against the unsolicited tender offer to purchase all of our outstanding common stock.  For the three months ended December 31, 2004, we excluded from all “as adjusted” calculations the charges of approximately $0.5 million and $0.8 million, respectively, associated with pharmacy consolidations and defense against the unsolicited tender offer to purchase all of our outstanding common stock.  For the six months ended March 31, 2005, we excluded from all “as adjusted” calculations the charges of approximately $0.5 million and $1.6 million, respectively, associated with pharmacy consolidations and defense against the unsolicited tender offer to purchase all of our outstanding common stock.  For the three and six months ended March 31, 2004, we excluded from all “as adjusted” calculations the charges associated with the spin-off of GHC of approximately $2.0 million and $40.7 million, 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.

Item 9.01Exhibits

(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 4, 2005 – NeighborCare Reports Second Quarter Fiscal 2005 Year End 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 4, 2005	By:	/s/ Richard W. Hunt
		Richard W. Hunt
		Senior Vice President and
		Chief Financial Officer

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Exhibit Index

Exhibit No.	Description
99.1	Press release issued by NeighborCare, Inc. on May 4, 2005 – NeighborCare Reports Second Quarter Fiscal 2005 Year End 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 Second Quarter Fiscal 2005 Results;

Revenues Grow 13.5% Year-Over-Year;

Total Beds Served Up 13.0% Year-Over-Year;

NeighborCare Signs Definitive Agreement to Acquire an Additional 10,000 Beds

BALTIMORE, MD – (May 4, 2005) – NeighborCare, Inc. today announced its results for the second quarter of fiscal 2005 ended March 31, 2005.  Net revenues in the quarter totaled $404.7 million compared with $356.6 million last year, a 13.5% increase.  Net revenues for the year to date period were up 14.6% to $796.7 million from $695.0 million.

For the quarter, income from continuing operations was $9.7 million, or $0.22 per diluted share.  In the same quarter of the prior year, income from continuing operations was $8.2 million, or $0.19 per diluted share.  Income from continuing operations for the quarter ended March 31, 2005 includes an unusual charge totaling $1.4 million before taxes ($0.8 million after taxes or $0.02 per diluted share) predominately related to state Medicaid audits related to prior periods which were a direct charge to gross profit for the quarter.  In addition, income from continuing operations for the current quarter includes the effect of expenses incurred in connection with the unsolicited tender offer to purchase all of our outstanding common stock, as well as adjustments for certain strategic planning, severance and other operating items together aggregating $0.7 million.  Income from continuing operations for the quarter ended March 31, 2004 includes certain strategic planning, severance and other operating items aggregating $2.0 million.  For the current year to date period,   income from continuing operations was $19.4 million or $0.43 per diluted share.  For the prior year to date period, loss from continuing operations was ($5.9) million or ($0.14) per diluted share.

NeighborCare’s income from continuing operations, excluding the charges and adjustments noted above and an adjustment to a 40% effective tax rate, was $11.2 million, or $0.25 per diluted share for the current quarter.  In the same quarter of the prior year, income from continuing operations adjusted for certain strategic planning, severance and other operating items and including an adjustment to a 40% tax rate was $10.2 million, or $0.23 per diluted share.  For the current year to date period, adjusted income from continuing operations was $21.6 million or $0.48 per diluted share compared to $19.4 million or $0.44 per diluted share in the prior year to date period.  (See Table 3 in “Financial Highlights” on page 6 for a reconciliation of income from continuing operations to income from continuing operations, as adjusted).

Adjusted EBITDA for the quarter ended March 31, 2005 was $32.4 million compared with adjusted EBITDA of $28.7 million for the same period last year or an increase of 13.1%.  For the current year to date period, adjusted EBITDA was $62.8 million compared to $54.3 million in the prior year to date period or an increase of 15.7%.  (See Table 2 in “Financial Highlights” on page 6 for a reconciliation of income (loss) from continuing operations to EBITDA and adjusted EBITDA).

John J. Arlotta, NeighborCare’s Chairman, President and CEO, said “I am pleased to report that NeighborCare recorded strong performance for our second quarter of 2005 in line with the indications I provided on our last earnings call. Despite start-up expenses for our new drug repack facility and continued pricing pressures, on a sequential basis we were able to maintain our adjusted gross margins for the quarter and through our cost control program, adjusted EBITDA margin improved.”

Arlotta added, “I am also pleased to announce today our most recent acquisition of Primecare Pharmacy in Los Angeles, California, a 10,000 bed institutional pharmacy which is an outstanding add-on to our existing business in southern California.  This acquisition brings our total beds served to almost 300,000 and solidifies us as the second largest provider in the institutional pharmacy industry today.  Importantly, this bed count demonstrates our continued success in growing our business both organically and through acquisitions.”

At March 31, 2005, NeighborCare served 289,362 beds.  Organic net bed growth for the quarter totaled 671 beds.  Bed counts ending March 31, 2004 and December 31, 2004 were 255,990 and 287,249, respectively.  Average revenue per bed per month for the quarter ended March 31, 2005 was $415 compared to $406 for the same quarter of the prior year.

Quarterly Results Review

Introductory Note.  Net revenues and cost of revenues do not include intersegment revenues and related cost of revenues with Genesis Healthcare Corporation (GHC) for periods prior to the spin-off (October 1, 2003 through December 1, 2003).  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, cost of revenues and gross margin reflects the adjustment to include the intersegment transactions as these transactions with GHC are and will continue to be reflected in continuing operations in all periods subsequent to December 1, 2003.    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.  Adjusted net revenues and gross margin also reflect an adjustment to add back the current quarter charges related to state Medicaid audits.  (See Reconciliation Table 1 in “Financial Highlights” on page 6).

Revenues.  Net revenues in the quarter increased $48.1 million, or 13.5%, to $404.7 million from $356.6 million in the year ago quarter.  This was principally driven by growth in revenue of the Company’s institutional pharmacy segment of approximately $47.1 million, or 15.5% 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 competitive price reductions.

Cost of revenues.  Cost of revenues in the quarter increased by $39.0 million, or 13.8%, to $321.3 million from $282.3 million in the year ago quarter.  Increases in delivery costs - including fuel, labor costs and insurance - were partially offset by reduced labor costs due to pharmacy consolidations and process improvement initiatives.

Gross margin.  Gross margin in the quarter declined to 20.6% from 20.9% last year.  This reduction is primarily due to the charge recorded related to the state Medicaid audits.  On an adjusted basis, gross margin remained constant at 20.9%.

Selling, general and administrative (SG&A).  SG&A in the current quarter increased $8.9 million to $60.5 million from the year ago level of $51.6 million.  The primary reason for the increase in SG&A is acquisitions, increased salary and wages expense due to the creation of corporate functions after the spin-off of GHC, the expensing of restricted stock granted to employees, increased depreciation expense, and costs incurred in connection with Sarbanes-Oxley compliance.   As a percentage of adjusted net revenues, SG&A was 14.9% compared to 14.5% for the same period in the prior year.

Liquidity and capital resources.  NeighborCare ended the quarter with $27.3 million of cash and $263.0 million of working capital.

Outlook

NeighborCare today commented on the Company’s previously issued fiscal 2005 guidance. Revenues are expected to be toward the middle of the original range of $1.55-$1.725 billion for 2005 or approximately $1.6 billion.  Adjusted EBITDA and adjusted earnings per share, which in each case exclude one time charges and

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special items, are now expected to be approximately $132 million and $1.02 per share, respectively.  One-time charges or special items would reduce net income, EBITDA and net income per share.  We are not able to reasonably forecast such charges or items at this time and accordingly have not provided an estimate of their impact on net income, EBITDA or net income per share nor an estimate of net income.  (See reconciliation in “Earnings Outlook for the Fiscal Year Ended September 30, 2005” on page 9)

Conference Call

NeighborCare will host a conference call and webcast at 10:00 a.m. Eastern Time on May 5, 2005 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:  5738227

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, 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 34 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 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, our anticipated results of operations for fiscal 2005 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: our ability, and the ability of our customers, to comply with Medicare or Medicaid reimbursement regulations or other applicable laws, changes in the reimbursement rates or methods of payment from Medicare and Medicaid, or the implementation of other measures to reduce the reimbursement for our services and the impact of the Medicare Prescription Drug, Improvement and Modernization Act of 2003, changes in pharmacy legislation and payment formulas, the impact of federal and state regulations, competition in our businesses, the impact of Omnicare, Inc.’s unsolicited tender offer to acquire all of our outstanding common stock, competition for qualified management and pharmacy professionals, the impact of investigations and audits relating to alleged violations of federal and/or state regulations, changes in the acuity of patients, payor mix and payment methodologies, further consolidation of managed care organizations and other third party payors, the effect of the expiration or termination of certain service and supply contracts, changes in or our failure to satisfy pharmaceutical manufacturers’ rebate programs, an economic downturn or changes in the laws affecting our business in those markets in which we operate, the impact of acquisitions, and our ability to integrate acquired businesses, on our operations and finances, our ability to control operating costs and generate sufficient cash flow to meet operational and financial requirements, our ability, and the ability of our subsidiary guarantors, to fulfill debt obligations, our covenants and restrictions contained in financing agreements which limit our discretion in the operation of our business, our charter documents and the Pennsylvania Business Corporation Law of 1988, as amended, which could delay or prevent a change of control, availability of financial and other resources to us after the spin-off of GHC, operating inefficiencies and higher costs after the spin-off of GHC, federal income tax liabilities and indemnification obligations related to the spin-off of GHC, conflicts of interest as a result of our continuing relationship with GHC after the spin-off, the ability of GHC, as our largest customer, to operate as a separate entity and acts of God or public authorities, war, civil unrest, terrorism, fire, floods, earthquakes and other matters beyond our control.

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

(Unaudited, in thousands except per share amounts)

	Three Months Ended March 31,					Six Months Ended March 31,
	2005			2004		2005		2004
Net revenues	$	404,706		$	356,646	$	796,706	$	695,040
Cost of revenues	321,329			282,285		631,063		544,256
Gross profit	83,377			74,361		165,643		150,784
Selling, general and administrative	60,518			51,599		120,164		108,635
Strategic planning, severance and other operating items	(64		)	2,037		455		42,701
Takeover defense expenses	785			—		1,557		—
Operating income (loss)	22,138			20,725		43,467		(552		)
Interest expense, net	4,498			4,553		8,529		10,207
Other expense	1,173			1,225		2,301		2,317
Income (loss) before income tax provision (benefit)	16,467			14,947		32,637		(13,076		)
Income tax provision (benefit)	6,782			6,731		13,250		(7,143		)
Income (loss) from continuing operations	9,685			8,216		19,387		(5,933		)
Income from discontinued operations, net of taxes	—			—		—		8,435
Net income	$	9,685		$	8,216	19,387		2,502
Per common share data
Basic
Income (loss) from continuing operations	$	0.22		$	0.19	$	0.44	$	(0.14	)
Income from discontinued operations	$	—		$	—	$	—	$	0.20
Net income	$	0.22		$	0.19	$	0.44	$	0.06
Weighted average shares outstanding	43,838			43,640		43,823		42,010
Diluted
Income (loss) from continuing operations	$	0.22		$	0.19	$	0.43	$	(0.14	)
Income from discontinued operations	$	—		$	—	$	—	$	0.20
Net income	$	0.22		$	0.19	$	0.43	$	0.06
Weighted average shares outstanding	44,688			43,957		44,649		42,010

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NEIGHBORCARE, INC.

SEGMENT INFORMATION

(Unaudited)

(in thousands)	Institutional Pharmacy		Corporate and Other			Consolidated
Three months ended March 31, 2005
Net revenues	$	350,344	$	54,362		$	404,706
Gross profit	$	67,206	$	16,171		$	83,377
Operating income (loss)	$	33,344	$	(11,206	)	$	22,138
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
Six months ended March 31, 2005
Net revenues	$	688,176	$	108,530		$	796,706
Gross profit	$	132,705	$	32,938		$	165,643
Operating income (loss)	$	66,394	$	(22,927	)	$	43,467
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	)
Total assets as of
March 31, 2005	$	282,235	$	605,187		$	887,422
September 30, 2004	$	217,969	$	631,439		$	849,408

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

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NEIGHBORCARE, INC.

FINANCIAL HIGHLIGHTS

(Unaudited)

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

(in thousands)

	Three Months Ended									Six Months Ended
	31-Mar-05			31-Mar-04			31-Dec-04			31-Mar-05			31-Mar-04
Net revenues - as reported	$	404,706		$	356,646		$	392,000		$	796,706		$	695,040
Add back:
Intersegment revenues with Genesis HealthCare	—			—			—			—			13,013
Unusual charge	1,400			—			—			1,400
Net revenues - as adjusted	$	406,106		$	356,646		$	392,000		$	798,106		$	708,053
Cost of revenues - as reported	$	321,329		$	282,285		$	309,734		$	631,063		$	544,256
Add back:
Intersegment cost of revenues for Genesis HealthCare	—			$	—		—			$	—		$	10,332
Cost of revenues - as adjusted	$	321,329		$	282,285		$	309,734		$	631,063		$	554,588
Gross Margin $ - as adjusted	$	84,777		$	74,361		$	82,266		$	167,043		$	153,465
Gross Margin % - as adjusted	20.9		%	20.9		%	21.0		%	20.9		%	21.7		%

Table 2 - Reconciliation of income (loss) from continuing operations, as reported, to EBITDA and Adjusted EBITDA

(in thousands)

	Three Months Ended							Six Months Ended
	31-Mar-05			31-Mar-04		31-Dec-04		31-Mar-05		31-Mar-04
Income (loss) from continuing operations - as reported	$	9,685		$	8,216	$	9,702	$	19,387	$	(5,933	)
Add back (deduct):
Other expense	1,173			1,225		1,128		2,301		2,317
Income tax provision (benefit)	6,782			6,731		6,468		13,250		(7,143		)
Interest expense, net	4,498			4,553		4,031		8,529		10,207
Depreciation and amortization	8,182			5,912		7,697		15,879		12,156
EBITDA	$	30,320		$	26,637	$	29,026	$	59,346	$	11,604
Add back:
Unusual charge	1,400			—		—		1,400		—
Strategic planning, severance and other operating items	(64		)	2,037		519		455		42,701
Takeover defense expenses	785			—		772		1,557		—
Adjusted EBITDA	$	32,441		$	28,674	$	30,317	$	62,758	$	54,305

Table 3 - Reconciliation of income (loss) from continuing operations, as reported, to income from continuing operations, as adjusted
(in thousands, except per share amounts)

	Three Months Ended									Six Months Ended
	31-Mar-05			31-Mar-04			31-Dec-04			31-Mar-05			31-Mar-04
Income (loss) from continuing operations - as reported	$	9,685		$	8,216		$	9,702		$	19,387		$	(5,933	)
Add back (deduct):
Intersegment revenues with Genesis HealthCare	—			—			—			—			13,013
Intersegment cost of revenues for Genesis HealthCare	—			—			—			—			(10,332		)
Unusual charge	1,400			—			—			1,400			—
Strategic planning, severance and other operating items	(64		)	2,037			519			455			42,701
Takeover defense expenses	785			—			772			1,557			—
Tax impact of items added back above to 40% effective tax rate	(653		)	(63		)	(516		)	(1,170		)	(20,065		)
Income from continuing operations - as adjusted	$	11,153		$	10,190		$	10,477		$	21,629		$	19,384
Income from continuing operations - as adjusted per share - basic	$	0.25		$	0.23		$	0.24		$	0.49		$	0.46
Weighted average shares - basic	43,838			43,640			43,809			43,823			42,010
Income from continuing operations - as adjusted per share - diluted	$	0.25		$	0.23		$	0.24		$	0.48		$	0.44
Weighted average shares - diluted	44,688			43,957			44,545			44,649			43,875

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 from continuing operations - as adjusted 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.

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NEIGHBORCARE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited, in thousands)

	March 31, 2005		December 31, 2004		September 30, 2004
ASSETS
Current assets
Cash and cash equivalents	$	27,316	$	21,092	$	81,923
Accounts receivable, net	265,557		253,015		230,903
Inventories	69,779		73,873		64,111
Prepaid expenses and other current assets	43,906		41,026		40,046
Total current assets	406,558		389,006		416,983
Property, plant and equipment, net	95,600		91,207		84,215
Other long-term assets	21,343		20,735		19,353
Identifiable intangible assets, net	16,824		16,990		12,737
Goodwill	347,097		342,940		316,120
Total assets	$	887,422	$	860,878	$	849,408
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Current portion of long-term debt	$	9,035	$	22,150	$	4,263
Accounts payable and accrued expenses	119,604		96,029		116,965
Income taxes payable	14,878		8,838		4,747
Total current liabilities	143,517		127,017		125,975
Long-term debt	255,648		258,418		258,008
Other long-term liabilities	73,049		70,738		70,765
Total liabilities	472,214		456,173		454,748
Minority interest	7,893		7,531		7,880
Total shareholders’ equity	407,315		397,174		386,780
Total liabilities and shareholders’ equity	$	887,422	$	860,878	$	849,408

7

NEIGHBORCARE, INC.

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(Unaudited, in thousands)

	Three Months Ended			Six Months Ended March 31,
	March 31, 2005			2005			2004
Cash flows from operating activities
Net income	$	9,685		$	19,387		$	2,502
Net charges included in operations not requiring funds	12,892			28,159			26,412
Changes in operating assets and liabilities, excluding impact of business acquisitions
Change in accounts receivable, net	(14,372		)	(34,504		)	(39,986		)
Change in accounts payable and accrued expenses	28,909			10,475			79,671
Other, net	537			(8,330		)	(33,384		)
Net cash provided by operating activities	37,651			15,187			35,215
Cash flows from investing activities
Capital expenditures	(10,408		)	(23,133		)	(16,545		)
Business acquisitions	(7,011		)	(46,900		)	(3,969		)
Other, net	—			(2,004		)	(33,432		)
Net cash used by investing activities	(17,419		)	(72,037		)	(53,946		)
Cash flows from financing activities
Net borrowings against revolving credit facility	(13,000		)	4,000			—
Repayment of long-term debt	(1,070		)	(2,399		)	(556,285		)
Proceeds from issuance of long-term debt, net of debt issuance costs	—			—			465,804
Distributions of cash to GHC	—			—			(63,154		)
Funds received from GHC for debt financing	—			—			135,885
Other	62			642			(4,907		)
Net cash provided (used) by financing activities	(14,008		)	2,243			(22,657		)
Net increase (decrease) in cash and cash equivalents	6,224			(54,607		)	(41,388		)
Cash and cash equivalents at beginning of period	21,092			81,923			132,726
Cash and cash equivalents at end of period	$	27,316		$	27,316		$	91,338

8

NEIGHBORCARE, INC.

EARNINGS OUTLOOK FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2005

(Unaudited, in thousands except per share amounts)

Reconciliation of net income to Adjusted EBITDA

	FY2005E
Net income	$	43,309
Add back:
Unusual charge	1,400
Strategic planning, severance and other operating items	455
Takeover defense expenses	1,557
Income taxes	29,080
Depreciation and amortization	33,743
Interest expense	18,556
Other expense	4,300
Adjusted EBITDA	$	132,400

Reconciliation of net income to adjusted net income and EPS to adjusted EPS

	$			Per Share
Net income	$	43,309		$	0.97
Add back:
Unusual charge	1,400			0.03
Strategic planning, severance and other operating items	455			0.01
Takeover defense expenses	1,557			0.03
Tax impact of adjustments	(1,365		)	(0.03		)
Adjusted net income	$	45,356		$	1.02

9