UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

Commission File Number: 000-33217

NEIGHBORCARE, INC.

(Exact name of registrant as specified in its charter)

(410) 528-7300

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

YES  ý   NO  o

Indicate by check mark whether the registrant is an accelerated filer (as defined by Rule 12b-2 of the Act).

YES  ý   NO  o

As of May 5, 2005, 44,132,566 shares of the registrant’s common stock were outstanding and 259,360 shares are to be issued in connection with the registrant’s joint plan of reorganization confirmed by the Bankruptcy Court on September 20, 2001.

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS.

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.

YES  ý   NO  o

TABLE OF CONTENTS

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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

As used herein, unless the context otherwise requires, “NeighborCare,” the “Company,” “we,” “our” or “us” refers to NeighborCare, Inc. and our subsidiaries.

Statements made in this report 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:

•                  certain statements in “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and the notes to our consolidated financial statements, such as our ability to meet our liquidity needs, scheduled debt and interest payments, and expected future capital expenditure and business acquisition requirements; the expected effects of government regulation on our business including the Medicare Prescription Drug, Improvement and Modernization Act of 2003; our ability to successfully implement our strategic objectives, including the effects of the spin-off of Genesis HealthCare Corporation (“GHC”) and the achievement of certain performance improvement initiatives within our institutional pharmacy segment, in order to improve current pharmacy profitability; costs associated with an unsolicited offer to acquire the Company; and estimates in our significant accounting policies, including our allowance for doubtful accounts, the valuation of our deferred tax assets and the anticipated impact of long-lived asset impairments;

•                  certain statements in “Quantitative and Qualitative Disclosures About Market Risk;” and

•                  certain statements in “Legal Proceedings” regarding the effects of litigation.

The forward-looking statements involve known and unknown risks, uncertainties and other factors that are, in some cases, beyond our control. You are cautioned that these statements are not guarantees of future performance, and that actual results and trends in the future may differ materially.

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 and nomination of an alternative slate of directors;

•                  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;

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•                  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;

•                  income tax liabilities and indemnification obligations related to the spin-off of GHC; and

•                  acts of God or public authorities, war, civil unrest, terrorism, fire, floods, earthquakes and other matters beyond our control.

Certain of these risks are described in more detail in our Annual Report on Form 10-K for the fiscal year ended September 30, 2004 filed with the Securities and Exchange Commission on December 10, 2004, as amended on Form 10-K/A filed with the Securities and Exchange Commission on December 14, 2004.

In addition to these factors and any risks and uncertainties specifically identified in the text surrounding forward-looking statements, any statements in this report or the reports and other documents filed by us with the SEC that warn of risks or uncertainties associated with future results, events or circumstances also identify factors that could cause actual results to differ materially from those expressed in or implied by the forward-looking statements.

All subsequent written and oral forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. We do not undertake any obligation to release publicly any revisions to these forward-looking statements to reflect events or circumstances after the date of this report or to reflect the occurrence of unanticipated events, except as may be required under applicable securities law.

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PART I:  FINANCIAL INFORMATION

Item 1.  Financial Statements

NEIGHBORCARE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited, in thousands)

See accompanying notes to unaudited condensed consolidated financial statements.

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NEIGHBORCARE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited, in thousands except per share amounts)

See accompanying notes to unaudited condensed consolidated financial statements.

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NEIGHBORCARE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited, in thousands except per share amounts)

See accompanying notes to unaudited condensed consolidated financial statements.

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NEIGHBORCARE, INC

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited, in thousands)

See accompanying notes to unaudited condensed consolidated financial statements.

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NeighborCare, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

1.                                      Background and Basis of Presentation

NeighborCare, Inc. (NeighborCare or the Company), formerly named Genesis Health Ventures, Inc., provides pharmacy services nationwide through its NeighborCare® integrated pharmacy operation that serves approximately 289,000 institutional beds in long-term care settings.  NeighborCare also operates 32 community-based retail pharmacies and a group purchasing organization.  Prior to December 1, 2003, the Company also operated an inpatient services business, which was then spun-off as Genesis HealthCare Corporation (GHC).  For additional information, see the Company’s Form 10-K, as amended, for the fiscal year ended September 30, 2004 (Form 10-K).

The accompanying condensed consolidated financial statements are unaudited and have been prepared on a basis that is substantially consistent with the accounting principles applied in the Form 10-K.  Accordingly, certain information and footnote disclosures normally included in the financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted.  These interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in the Form 10-K.

In the opinion of NeighborCare’s management, the unaudited condensed consolidated financial statements include all necessary adjustments consisting of normal recurring accruals and adjustments for a fair presentation of the financial position and results of operations for the periods presented. Certain reclassifications have been made to the prior year’s financial statements to conform to the current year’s presentation.

2.                                      Significant Accounting Policies

Management’s Use of Estimates

An accounting policy is considered to be significant if it is important to the Company’s financial condition and results of operations, and requires significant judgment and estimates on the part of management in its application. Significant accounting estimates and the related assumptions are evaluated periodically as conditions warrant, and changes to such estimates are recorded as new information or changed conditions require revision. Application of certain accounting policies requires management’s significant judgments, often as the result of the need to make estimates of matters that are inherently uncertain. If actual results were to differ materially from the estimates made, the reported results could be materially affected. The Company’s significant estimates include allowance for doubtful accounts, allowance for inventories, revenue recognition and contractual allowances, and the valuation of long-lived assets.

Senior management has reviewed these significant accounting policies and estimates with the Company’s audit committee. During the current quarter, there were no material changes made to the estimates or methods by which estimates are derived with regard to the significant accounting policies of the Company. See the Form 10-K for more detail regarding the Company’s significant accounting policies.

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Stock Based Compensation

As permitted by the Financial Accounting Standards Board (FASB) SFAS No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure” (SFAS 148), the Company applies the intrinsic value method as defined in APB Opinion No. 25, “Accounting for Stock Issued to Employees,” in accounting for its stock option and restricted stock plans. Had the Company determined compensation cost of outstanding stock options based on the fair value at the grant date consistent with the provisions of SFAS 123 “Accounting for Stock Based Compensation,” the Company’s net income would have been changed to the pro forma amounts indicated below (in thousands):

There were no stock options granted during the six months ended March 31, 2005.  The fair value of stock options granted during the three and six months ended March 31, 2004 was estimated at the grant date using the Black-Scholes option-pricing model with the following assumptions:

On December 16, 2004, the FASB issued Statement No. 123R, “Share Based Payment” (SFAS 123R), which is a revision of SFAS 123, “Accounting for Stock-Based Compensation.”  SFAS 123R requires that all share-based payments to employees, including stock options, be recognized in the financial statements based on their fair values on the date of grant and eliminates the disclosure-only provisions permitted under SFAS 148.  SFAS 123R was to be effective for fiscal periods beginning after June 15, 2005.  However, on April 14, 2005, the Securities and Exchange Commission announced that the effective date of SFAS 123R will be postponed until October 1, 2005 for the Company.  The Company does not expect that the adoption of SFAS 123R will have a significant adverse effect on its results of operations.

3.                                      Acquisitions

In the ordinary course of business, the Company makes strategic acquisitions to enhance its geographical market presence and to create beneficial operating synergies through acquisitions in locations that it has an existing market presence. On January 1, 2005, the Company purchased all of the assets of UniScripts, LTC.  On December 1, 2004, the Company completed the acquisition of Belville Pharmacy Services, Inc. (Belville) by purchasing certain of the assets of Belville. As of October 1, 2004, the Company acquired certain of the assets and assumed certain liabilities of Quest Total Care, L.P. These acquisitions were accounted for under the purchase method of accounting for business combinations in accordance with SFAS No. 141 “Business Combinations.”

Results of these completed acquisitions are included in the Company’s consolidated statements of operations from the date of the respective acquisition.  Pro-forma financial information has not been prepared because the acquisitions are not material to the consolidated operations and financial position of the Company.  The Company’s preliminary purchase price allocation, which is based on fair-value estimates, is as follows (in thousands):

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The Company expects to complete its independent third-party valuation of Belville during the third quarter of fiscal 2005.

4.                                      Discontinued Operations

Effective December 1, 2003, NeighborCare completed its plan of disposition for GHC through a distribution of GHC common stock to NeighborCare’s shareholders of record as of October 15, 2003 in the form of a tax-free spin-off as described in Note 1. Under SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (SFAS 144), discontinued businesses, including assets held for sale or distributed to shareholders, are removed from the results of continuing operations.  Consolidated interest expense in periods prior to the spin-off has been allocated to discontinued operations using a basis of net assets of each of the continuing and discontinued operating segments for the six months ended March 31, 2004.

The following table sets forth the components of income from discontinued operations for the six months ended March 31, 2004 related to the operations of GHC for periods prior to the spin off (in thousands):

5.                                      Certain Significant Transactions and Events

Strategic Planning, Severance and Other Operating Items

NeighborCare has incurred costs that are directly attributable to the Company’s transforming to a pharmacy-based business and certain of its short-term strategic objectives. These costs are segregated in the unaudited condensed consolidated statements of operations as “Strategic planning, severance and other operating items.” A summary of these costs for the six months ended March 31, 2005 follows (in thousands):

Strategic planning, severance and other operating items for the six months ended March 31, 2005 are primarily attributable to the consolidation of pharmacy operations.  For the three months ended March 31, 2005, the Company recognized a $64,000 reduction in total strategic planning, severance and other operating items resulting from the adjustment of prior periods’ accruals.

Strategic planning, severance and other operating items for the six months ended March 31, 2004 relate primarily to legal, professional and other fees incurred to complete the spin-off transaction of $17.5 million; costs incurred pursuant to the termination provisions of employment contracts and transaction completion bonuses with NeighborCare and GHC executives of $9.0 million; costs incurred to extinguish long-term debt and related obligations in connection with the spin-off of $14.5 million; and severance and related costs incurred pursuant to our corporate and regional consolidation in the second quarter of fiscal 2004 of $1.7 million. Debt extinguishment costs represent the write-off of unamortized deferred financing costs of $5.9 million, consent fees required to eliminate our commitments under GHC debt of $5.0 million and other related debt settlements of $3.6 million.

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Takeover Defense Expenses

On May 24, 2004, Omnicare, Inc. announced its intention to purchase all of the outstanding shares of NeighborCare, Inc. common stock for $30 per share in cash. On May 25, 2004, NeighborCare announced that its Board of Directors unanimously rejected the proposal. On June 3, 2004, Omnicare, Inc. announced its intention to commence a tender offer to purchase all of the outstanding shares of NeighborCare, Inc. common stock for $30 per share in cash. The tender offer formally commenced on June 4, 2004 and was originally stated to expire on July 7, 2004 but has been subsequently extended on several occasions, most recently to June 3, 2005. In any event, Omnicare, Inc. has announced an agreement with the Federal Trade Commission that it will not close any transaction to acquire NeighborCare prior to 12:01 a.m. on June 16, 2005.  On June 14, 2004, NeighborCare, Inc. announced that the Board of Directors had unanimously recommended that shareholders reject the tender offer and not tender shares pursuant to the offer. On December 23, 2004, Omnicare, Inc. nominated three directors to the Company’s eight member Board of Directors.  Further information relating to the tender offer, including the Board’s recommendation and reasons therefore, can be found in the Company’s Solicitation/Recommendation Statement on Schedule 14D-9 filed with the Securities and Exchange Commission on June 14, 2004, and in subsequent amendments filed with Securities and Exchange Commission.

The Company has incurred various expenses as a result of the tender offer including legal, investment banking and other fees.  During the three and six months ended March 31, 2005, $0.8 million and $1.6 million, respectively, of takeover defense expenses were incurred. The Company anticipates that additional takeover defense expenses will continue to be incurred through the duration of the tender offer; however, the impact of these expenses cannot be reasonably estimated.

6.                                      Certain Significant Risks, Uncertainties and Business Concentrations

At March 31, 2005, the Company had contracts to provide services to approximately 289,000 residents in long-term care facilities in 34 states and the District of Columbia. Many of these contracts, as is typical in the industry, are for a period of one year but can be terminated by either party for any reason upon thirty to sixty days written notice.

For the three months ended March 31, 2005 and 2004, net revenues from GHC were 11% and 12%, respectively of consolidated net revenues.  Net revenues from HCR Manor Care, Inc. (Manor Care) in the both of the three months ended March 31, 2005 and 2004 were 10% of consolidated net revenues. For the six months ended March 31, 2005 and 2004, net revenues from GHC were 11% of total consolidated net revenues.  Net revenues from Manor Care in the six months ended March 31, 2005 and 2004 were 10% of consolidated net revenues.  No other individual customer or market group represented more than 5% of the Company’s consolidated net revenues.

The Company currently has a $34.3 million deposit with its primary pharmaceutical wholesaler. The deposit is fully refundable at the request of the Company.

7.                                      Long-Term Debt

Long-term debt as of March 31, 2005 and September 30, 2004 consists of the following (in thousands):

In order to effectively convert $125 million of its $250 million fixed-rate debt into variable-rate debt, the Company entered into an interest rate swap agreement with a notional amount of $125 million, which expires November 15, 2013, in which the Company receives a fixed-rate of 6.875% and pays a floating rate based on the six-month London InterBank Offered Rate (LIBOR) plus 1.8475% with measurement and settlement performed semiannually. The swap is designated as a fair value hedge, as the critical terms of the interest rate swap and the hedged item are designed to match thereby satisfying the criteria for short-cut method of accounting as defined by SFAS No. 133, as amended. Accordingly, the swap and the underlying debt obligation are recorded on the balance sheet at their fair value, with the changes in fair value of the derivative and the related debt being recorded in the consolidated statement of operations. Based upon valuations provided by third party financial institutions, the fair values of the interest rate swap were $(2.4) million as of March 31, 2005 and $0.3 million as of September 30, 2004.  The fair value of the hedged portion of the debt is recorded as a reduction to the carrying value of the Senior Subordinated Notes due 2013 included in capital lease obligations and other debt, inclusive of fair market value adjustments.  A corresponding liability is recorded in other long-term liabilities at March 31,

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2005 to reflect the fair market value of the interest rate swap derivative instrument.  At September 30, 2004, the fair value of the hedged debt was recorded as an increase to the carrying value of the Senior Subordinated Notes due 2013 being hedged through capital lease obligations and other debt, inclusive of fair market value adjustments.  A corresponding asset was recorded in other long-term assets at September 30, 2004 reflecting the fair market value of the interest rate swap at that date.  The fair value of the 6.875% Senior Subordinated Notes due 2013 on March 31, 2005 and September 30, 2004 was $264.4 million and $250.8 million, respectively, and was determined using quoted market rates on those dates.

During the six months ended March 31, 2004, the Company repaid substantially all of its existing long-term debt using the proceeds of the Company’s $250 million senior subordinated notes offering and GHC’s $225 million senior subordinated notes offering.

8.                                      Guarantor Subsidiaries and Condensed Consolidated Financial Statements

The Company’s $250 million senior subordinated notes due 2013 are fully and unconditionally guaranteed on a joint and several basis by certain 100% owned subsidiaries of the Company (Guarantors). Those subsidiaries that do not guarantee the notes consist of the joint ventures in which NeighborCare has a greater than 50% share in the equity and earnings thereof (Non-Guarantors). Separate financial statements of the guarantor subsidiaries have not been prepared because management believes it would not be material to investors. The following tables present the condensed consolidating financial statements of NeighborCare, Inc. (Parent), the guarantor subsidiaries and the non-guarantor subsidiaries:

Condensed Consolidating Balance Sheets

March 31, 2005

(in thousands)

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Condensed Consolidating Balance Sheets

September 30, 2004

(in thousands)

Condensed Consolidating Statements of Operations

Three months ended

March 31, 2005

(in thousands)

Condensed Consolidating Statements of Operations

Three months ended

March 31, 2004

(in thousands)

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Condensed Consolidating Statements of Operations

Six months ended

March 31, 2005

(in thousands)

Condensed Consolidating Statements of Operations

Six months ended

March 31, 2004

(in thousands)

Condensed Consolidating Statements of Cash Flows

Six months ended

March 31, 2005

(in thousands)

Condensed Consolidating Statements of Cash Flows

Six months ended

March 31, 2004

(in thousands)

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9.                                      Earnings (Loss) Per Share

The following table sets forth the computation of basic and diluted earnings (loss) per share for the three and six months ended March 31, 2005 and 2004 (in thousands, except per share data):