** **

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, DC 20549**

**FORM 10-K/A**

**AmendmentNo. 1**

| **(Mark One)** | ** ** | ** **                                                                                                                                                                                                                                              |
|----------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ý         | ** ** | **ANNUAL  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                               |
| ** **     | ** ** | **For the  fiscal year ended September 30, 2004**                                                                                                                                                                                                  |
| ** **     | ** ** | **or**                                                                                                                                                                                                                                                  |
| o              | ** ** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                           |
| ** **     | ** ** | **For the  transition period from                  to                 ** |

**Commission File Number: 000-33217**

**NEIGHBORCARE, INC.**

(Exact name of registrant as specified in itscharter)

| **Pennsylvania**(State or other  jurisdiction of incorporation or organization)                    | ** ** | **06-1132947**(I.R.S. Employer  Identification No.) |
|----------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------|
| **601 East Pratt Street, 3rd Floor  Baltimore, Maryland**(Address of  principal executive offices) | ** ** | **21202**(Zip code)                                 |

 

**(410)528-7300**(Registrant’stelephone number, including area code)

**N/A**(Former name,former address and former fiscal year, if changed since last report)

Securitiesregistered pursuant to Section 12(b) of the Act:**NONE**

Securitiesregistered pursuant to Section 12(g) of the Act:**Common Stock, par value $.02 per sharePreferred Share Purchase Rights, no par value per share**

                Indicate by check mark whetherthe registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.

YES  ý     NO  o

                Indicate by check mark if disclosure of delinquentfilers pursuant to Item 405 of Regulation S-K is not contained herein, andwill not be contained, to the best of registrant’s knowledge, in definitiveproxy or information statements incorporated by reference in Part III ofthis Form 10-K/A or any amendment to this Form 10-K/A.

YES  ý     NO  o

                The aggregate market value of voting and non-votingcommon stock held by non-affiliates of the registrant is $907,817,957 (1). Asof December 1, 2004, 44,114,529 shares of the registrant’s common stockwere outstanding and 259,522 shares are to be issued in connection with theregistrant’s joint plan of reorganization confirmed by the Bankruptcy Court onSeptember 20, 2001.

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

YES  ý     NO  o

APPLICABLE ONLY TOREGISTRANTS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

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

YES  ý      NO o

DOCUMENTS INCORPORATED BY REFERENCE

NONE

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(1)          The aggregate market value of the votingand non-voting common stock set forth above equals the number of shares of theregistrant’s common stock outstanding, reduced by the number of shares ofcommon stock held by officers, directors and shareholders owning in excess of10% of the registrant’s common stock, multiplied by the last reported saleprice for the registrant’s common stock on the last business day of theregistrant’s most recently completed second fiscal quarter (i.e.,March 31, 2004) ($24.36). The information provided shall in no way beconstrued as an admission that any officer, director or 10% shareholder of theregistrant may or may not be deemed an affiliate of the registrant or thathe/it is the beneficial owner of the shares reported as being held by him/it,and any such inference is hereby disclaimed. The information provided herein isincluded solely for record keeping purposes of the Securities and ExchangeCommission.

 

 

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**ExplanatoryNote**

 

                Weare filing this Amendment No. 1 on Form 10-K/A to our AnnualReport on Form 10-K for the fiscal year ended September 30, 2004, asfiled with the Securities and Exchange Commission on December 10,2004, to correct disclosure contained under Part III, Item 11 “ExecutiveCompensation—Employment Agreements” relating to compensation received by ourchief executive officer, John J. Arlotta, under his employment agreement withrespect to fiscal 2004.  This Amendment No. 1 clarifies that Mr. Arlottareceived no incentive (*i.e*.,performance) bonus under his employment agreement with respect to fiscal2004.  With the exception of this change, the below disclosure isidentical to that contained in our Annual Report on Form 10-K for thefiscal year ended September 30, 2004 as filed on December 10, 2004.

 

**ITEM 11:  EXECUTIVECOMPENSATION**

**Summary Compensation Table**

                Thefollowing table sets forth the compensation earned during each of the lastthree fiscal years by our current and former Chief Executive Officer and ourfive other most highly compensated executive officers, referred to as the NamedExecutive Officers, whose aggregate salaries and bonuses exceeded $100,000 forservices rendered in all capacities to us during fiscal 2004.
| ** **                                                                           | ** ** | **Annual Compensation** | ** ** | **Long-term Compensation** | ** **       |
|--------------------------------------------------------------------------------------|------------|-------------------------|------------|----------------------------|------------------|
| **Name and Position**                                                                | ** ** | **Fiscal  Year**        | ** ** | **Salary  ($)(1)**         | ** **       | **Bonus  ($)(2)** | ** ** | **Other Annual  Compensation  ($)(3)** | ** ** | **Restricted  Stock  Awards  ($)(4)** | ** ** | **Securities  Underlying  Options/  SARs** | ** ** | **All Other  Compensation  ($)(5)** | ** ** |
| John J. Arlotta  Chairman, President and Chief Executive Officer                     |       | 2004  2003              |       | $                          | 850,000  163,462 |   | $ | 130,000  850,000 |   | $ | 102,184  — |   | $ | 6,077,521  — |   | 1,000,000  — |   | $ | 76,570  29,005 |   |
|                                                                                 |       |                    |       |                       |             |   |   |   |   |   |   |   |   |   |   |
| Robert H. Fish  Former Chief Executive Officer                                       |       | 2004  2003  2002        |       | 375,962  850,000  274,615  |             | 412,500  1,221,410  70,833 |   | —  83,406  — |   | 94,994  —  — |   | 3,913  177,500  25,000 |   | 480  —  — |   |
|                                                                                 |       |                    |       |                       |             |   |   |   |   |   |   |   |   |   |   |
| Robert A. Smith  Senior Vice President and Chief Operating Officer                   |       | 2004  2003  2002        |       | 350,000  360,768  310,003  |             | 405.900  75,250  60,000 |   | —  —  — |   | 822,150  —  304,950 |   | 87,500  —  50,000 |   | 1,708  2,000  1,700 |   |
|                                                                                 |       |                    |       |                       |             |   |   |   |   |   |   |   |   |   |   |
| John F. Gaither, Jr.  Senior Vice President, General Counsel and Corporate Secretary |       | 2004                    |       | 280,000                    |             | 10,000 |   | 9,750 |   | 623,750 |   | 150,000 |   | — |   |
|                                                                                 |       |                    |       |                       |             |   |   |   |   |   |   |   |   |   |   |
| John L. Kordash  Vice Chairman and Executive Vice President                          |       | 2004  2003              |       | 250,000  15,385            |             | 15,000  — |   | 9,750  — |   | 623,750  — |   | 250,000  — |   | 2,398  — |   |
|                                                                                 |       |                    |       |                       |             |   |   |   |   |   |   |   |   |   |   |
| Richard W. Sunderland, Jr.  Former Chief Financial Officer                           |       | 2004  2003  2002        |       | 230,769  244,808  218,828  |             | 314,300  69,375  65,600 |   | —  —  — |   | —  —  223,630 |   | 75,000  —  — |   | 79,607  —  — |   |
|                                                                                 |       |                    |       |                       |             |   |   |   |   |   |   |   |   |   |   |
| Richard W. Hunt  Senior Vice President and Chief Financial Officer                   |       | 2004                    |       | 61,538                     |             | — |   | — |   | 1,247,500 |   | — |   | 225 |   |
|                                                                                      |            |                         |            |                            |                  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

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(1)                                  Includescompensation deferred under the 401(k) Retirement Plan, Non-Qualified DeferredCompensation Plan and other arrangements with us. Other payments made by usunder the 401(k) Retirement Plan, Non-Qualified Deferred Compensation Plan andother arrangements with us are not included.

(2)                                  Messrs. Arlotta,Fish, Gaither, Kordash and Sunderland received bonuses of $130,000, $200,000,$10,000, $15,000, and $20,000, respectively, in connection with the spin-off ofGHC in fiscal 2004. Mr. Fish received a pro rated performance bonus of$212,500 in fiscal 2004. Messrs. Smith and Sunderland received employmentcontract payouts in fiscal 2004 of $405,900 and $294,300, respectively.Mr. Arlotta received a performance bonus of $550,000 and a sign-on bonusof $300,000 in fiscal 2003. Mr. Fish received a performance bonus of$500,000 and a bonus of $721,410 upon his appointment as chief executiveofficer in fiscal 2003. All other amounts reflect performance bonuses.

(3)                                  Mr. Arlottareceived compensation of approximately $40,041 for housing expenses ($16,041 ofwhich represents a tax “gross-up” payment) and $13,000 for automobile expensesin fiscal 2004. Mr. Arlotta also received $49,143 in tax “gross-up”payments in relation to a company-sponsored 

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life insurance plan infiscal 2004. All remaining amounts in fiscal 2004 reflect compensation forautomobile expenses. Mr. Fish received compensation of approximately$62,206 for housing expenses and approximately $15,200 for automobile expensesin fiscal 2003.

 

(4)                                  Restrictedstock grants in fiscal 2004 were authorized under our 2004 PerformanceIncentive Plan (the “2004 Plan”) on June 15, 2004. The restrictions vestat variable rates over a three-year term for each recipient. The market valueof our common stock at September 30, 2004 was $25.35 per share. The grantsof restricted stock to Mr. Arlotta were committed in Mr. Arlotta’semployment agreement but were not made until after our stockholders’ approvalon June 15, 2004 of the 2004 Plan. Restricted stock grants in fiscal 2002and 2003 were authorized under our 2001 Stock Incentive Plan. See “BenefitPlans—2001 Stock Incentive Plan.” Of the shares granted to Mr. Arlotta,64,678 vested immediately. As of September 30, 2004, Mr. Arlotta had113,197 shares unvested at a value of $2,869,543, Mr. Smith had 19,687shares unvested at a value of $499,065, Messrs. Gaither and Kordash had25,000 shares unvested at a value of $633,750, and Mr. Hunt had 37,500shares unvested at a value of $950,625.

(5)                                  Includesseverance pay, company-sponsored long-term disability and life insurancecoverage. Mr. Arlotta received $75,000 in relation to a company-sponsoredlife insurance plan and $1,570 in imputed income from long-term disability/lifeinsurance premiums in fiscal 2004. Payments to Messrs. Fish, Smith,Kordash and Hunt in fiscal 2004 reflect imputed income from long-termdisability/life insurance premiums. Mr. Sunderland received severancepayments in the aggregate amount of $78,919 in fiscal 2004.

 

**Option/SAR Grants in Last Fiscal Year**

 

                The following table sets forthcertain information concerning stock options granted under the 2001 StockOption Plan during fiscal 2004 to the Named Executive Officers:

 
| ** **                 | ** ** | **Individual Grants**                                            | ** ** | **Potential Realized Value  at Assumed Annual Rates  of Stock Price Appreciation  for Option Terms** | ** ** |
|----------------------------|------------|------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------|------------|
| **Name**                   | ** ** | **Number of  Securities  Underlying  Options/SARs  Granted (1)** | ** ** | **Percent of  Total  Options/SARs  Granted to  Employees in  Fiscal Year**                                | ** ** | **Exercise  Price per  Share** | ** ** | **Expiration  Date** | ** ** | **5%** | ** ** | **10%** | ** ** |
| John J. Arlotta            |       | 250,000  250,000  250,000  250,000                               |       | 15.80  15.80  15.80  15.80                                                                                | %  %  %

% | 21.50  19.55  18.79  20.12 |   | 12/9/2013  12/9/2013  12/9/2013  12/9/2013 |   | $  $  $  $ | 3,380,309  3,073,722  2,954,233  3,163,240 |   | $  $  $  $ | 8,566,366  7,789,416  7,486,605  8,016,525 |   |
| Robert H. Fish             |       | 3,913                                                            |       | 0.25                                                                                                      | %          | 15.47 |   | 10/1/2013 |   | $ | 38,070 |   | $ | 96,476 |   |
| Robert A. Smith            |       | 87,500                                                           |       | 5.50                                                                                                      | %          | 21.50 |   | 12/9/2013 |   | $ | 1,183,108 |   | $ | 2,998,228 |   |
| John F. Gaither, Jr.       |       | 150,000                                                          |       | 9.50                                                                                                      | %          | 21.50 |   | 12/9/2013 |   | $ | 2,028,185 |   | $ | 8,566,366 |   |
| John L. Kordash            |       | 250,000                                                          |       | 15.80                                                                                                     | %          | 21.50 |   | 12/9/2013 |   | $ | 3,380,309 |   | $ | 5,139,819 |   |
| Richard W. Sunderland, Jr. |       | 75,000                                                           |       | 4.70                                                                                                      | %          | 21.50 |   | 12/9/2013 |   | $ | 1,014,093 |   | $ | 2,569,910 |   |
| Richard W. Hunt            |       | —                                                           |       | —                                                                                                    |       | — |   | — |   | — |   | — |   |

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(1)                                  Pursuant toMr. Sunderland’s separation agreement, 46,875 options granted under the2001 Stock Option Plan were forfeited in connection with his resignation.

 

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**Aggregate Option/SAR Exercises in Last Fiscal Year and FiscalYear-End Option/SAR Values**

 

                The following table sets forthcertain information concerning the number and value of unexercised options topurchase shares of our common stock held at the end of fiscal 2004 by the NamedExecutive Officers:

 
| **Name**                   | ** ** | **Shares  Acquired on  Exercise (#)** | ** ** | **Value  Realized ($)** | ** ** | **Number of  Unexercised  Securities  Underlying Options/SARs  Fiscal Year-End (#)  Exercisable/  Unexercisable** | ** ** | **Value of Unexercised  In-the-Money  Options/SARs at  Fiscal Year-End ($)  Exercisable/  Unexercisable (1)** | ** ** |
|----------------------------|------------|--------------------------------------------|------------|------------------------------|------------|-------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------|------------|
| John J. Arlotta            |       | —                                     |       | —                       |       | 421,875/578,125                                                                                                   |       | 2,026,250/3,088,594                                                                                           |       |
| Robert H. Fish             |       | 147,797                                    |       | 1,779,403                    |       | 399,163/—                                                                                                    |       | 4,932,794/—                                                                                              |       |
| Robert A. Smith            |       | —                                     |       | —                       |       | 38,281/49,219                                                                                                     |       | 147,382/189,493                                                                                               |       |
| John F. Gaither, Jr.       |       | —                                     |       | —                       |       | 65,625/84,375                                                                                                     |       | 252,656/324,844                                                                                               |       |
| John L. Kordash            |       | —                                     |       | —                       |       | 109,375/140,625                                                                                                   |       | 421,094/541,406                                                                                               |       |
| Richard W. Sunderland, Jr. |       | —                                     |       | —                       |       | 28,125/—                                                                                                     |       | 108,281/—                                                                                                |       |
| Richard W. Hunt            |       | —                                     |       | —                       |       | —/—                                                                                                     |       | —/—                                                                                                 |       |

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(1)           Stock price at close of business onSeptember 30, 2004 was $25.35.

 

**Directors’ Compensation**

 

                Each of our directors who is notour employee receives an annual fee of $25,000 for serving as a director andcash compensation of $1,500 for each in-person meeting of the Board ofDirectors or Board Committee attended and $1,000 for each telephonic meeting ofthe Board of Directors or Board Committee attended. The chairman of our Auditand Compliance Committee receives an additional annual fee of $10,000.

 

                Each director also receives anannual award of restricted stock under our 2004 Performance Incentive Planhaving a fair market value at the time of grant of $95,000. Such shares are100% vested on the date of the award but during the period commencing on thedate of the award and terminating on the date the grantee no longer serves as adirector, referred to as the restricted period, the shares may not be sold,assigned, exchanged, gifted, transferred, pledged, or otherwise encumbered bythe grantee except as described below. If, during the restricted period, thefair market value of the shares is greater than $285,000, the restrictionsshall be lifted with respect to that number of the shares which represents theamount of the fair market value of the shares in excess of $285,000, but therestrictions shall continue to apply during the restricted period to thatportion of the shares with a fair market value of $285,000. Upon a change ofcontrol, as defined in the plan, the shares shall be free of restrictions.

 

                Effective June 15, 2004,each director was granted 3,033 shares of restricted stock valued at theclosing market price of our common stock of $31.32.

 

**Employment Agreements**

 

                Effective July 7, 2003, weentered into an employment agreement with John J. Arlotta, our chairman,president and chief executive officer, as amended on December 9, 2003. Theagreement currently expires on July 7, 2005, with automatic one-yearrenewals beginning on July 7, 2004 and each successive anniversarythereafter. The automatic extension of the agreement may be terminated withnotice by either the affirmative vote of two-thirds of the non-managementmembers of the Board of Directors or by Mr. Arlotta. Mr. Arlotta willreceive an annual base salary of $850,000, subject to annual reviews by theCompensation Committee of the Board of Directors commencing February 4,2004. The agreement provided for an incentive bonus of not less than $550,000,with a target bonus of 80% of his base salary, for fiscal 2003. Annuallythereafter, the agreement provides that Mr. Arlotta will receive anincentive bonus equal to at least 100% of his base salary but only upon theCompensation Committee’s certification that the applicable performance goalshave been achieved. Mr. Arlotta received a signing bonus of $300,000 andan

 

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incentive(*i.e.*, performance) bonus of$550,000 in fiscal 2003 pursuant to the agreement.  Mr. Arlotta received no incentive (*i.e*., performance) bonus under hisemployment contract with respect to fiscal 2004.

 

                Pursuant to the terms of theagreement, we granted to Mr. Arlotta options to purchase 1,000,000 sharesof our Common Stock in increments of 250,000 shares on each of December 9,2003, December 16, 2003, December 24, 2003 and January 5, 2004,of which 25% vests immediately upon the date of grant and the remainder vestsin quarterly installments of 6.25% thereafter. Under the agreement,Mr. Arlotta also received a restricted stock award on January 15,2004 with an aggregate value of $4,000,000, rounded to the nearest whole shareand based on the average closing price of our common stock for the thirty tradingdays immediately following the spin-off. On the date of the restricted stockaward, 25% of the shares vested immediately, with vesting in equal quarterlyinstallments thereafter such that the shares vest in full by July 7, 2006.In addition, Mr. Arlotta is entitled to participate in each employeebenefit plan or perquisite applicable generally to our executive officers.Under the terms of the agreement, all equity-based compensation willfully vest automatically upon a change in control, any termination by us withoutcause or due to Mr. Arlotta’s death or disability, each as defined in theagreement, any termination by Mr. Arlotta for good reason or our failureto automatically extend the term of the agreement.

 

                The Board of Directors mayterminate the employment agreement with Mr. Arlotta with or without cause,as defined in the agreement, by the affirmative vote of two-thirds of thenon-management members of the Board of Directors. Mr. Arlotta mayterminate his employment with us upon notice of the occurrence of certainevents, including a change in control of NeighborCare. Upon termination of theemployment agreement for any reason, Mr. Arlotta will be entitled to hisaccrued and unpaid base salary through the date of termination, any earned butunpaid bonus for any fiscal year ending prior to the date of termination, anybenefits accrued and vested under the terms of our employee benefit plans andprograms through the date of termination, all deferred compensation of any kindand the option to have assigned to him any assignable insurance policy relatingto him. In addition upon death, we will pay Mr. Arlotta’s estate a lumpsum in cash equal to his base salary for the period from the date of deaththrough the end of the term of the agreement, benefits as if his employment hadterminated on the last day of the month and a pro rata bonus for the portion ofthe year of termination preceding the date of his death based upon an annualamount equal to 100% of his base salary. Also, all restricted stock, stockoptions and performance share awards will automatically vest as of the date ofdeath.

 

                If Mr. Arlotta’s employmentagreement is terminated by us without cause or due to his disability, each asdefined in the agreement, or by Mr. Arlotta for good reason or following achange of control, each as defined in the agreement, or as a result ofnon-extension of the agreement, in addition to the foregoing, NeighborCarewill:

 

•                  pay him a pro rata bonus for the portion of the yearin which the date of termination occurs preceding the date of termination basedupon an annual amount equal to 100% of his base salary and a lump-sum cashpayment equal to two times his highest base salary in the three years precedingtermination plus two times his target bonus for the year of termination lessany disability insurance benefits if applicable for the two-year periodbeginning with the date of termination;

 

•                  continue to provide the health andlife insurance benefits provided to him and his spouse and eligible dependentsimmediately prior to his date of termination for a period of two yearsfollowing the date of termination; and

 

•                  all restricted stock, stock option and performanceshare awards will fully vest and remain exercisable for two years followingtermination.

 

                In addition, Mr. Arlotta isentitled to the above consideration in the event that he terminates theagreement because NeighborCare has engaged or has required that he engage inany activity which would cause him to violate covenants of his contained in aconsulting agreement between him and his former employer, CaremarkRx, Inc.. On July 8, 2003, Caremark filed a complaint seeking toprohibit Mr. Arlotta’s employment with NeighborCare pursuant to the termsof such consulting agreement. In December 2003, NeighborCare, Caremark andMr. Arlotta entered into a Partial Release and Settlement Agreementpursuant to which Mr. Arlotta was permitted to accept continued employmentwith NeighborCare under certain conditions and Caremark was released of certaincompensation obligations to Mr. Arlotta and the complaint was dismissedwithout prejudice.

 

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                Mr. Arlotta’s employmentagreement contains confidentiality provisions that apply during and after theterm of employment and non-competition provisions that limit him from competingwith us for the term of employment and for a period of two years after,regardless of the reason for the termination of employment.

 

                On each of July 28, 2003,September 10, 2003, November 24, 2003 and November 26, 2003, weentered into employment agreements with John L. Kordash, our executive vicepresident and assistant to the chief executive officer, John F. Gaither, Jr.,our senior vice president, general counsel and secretary, Richard W.Sunderland, Jr., our former chief financial officer, and Robert A. Smith, ourchief operating officer, respectively. Effective December 9, 2003, each ofthese agreements was amended and restated. Effective June 22, 2004, theagreements with Messrs. Kordash and Gaither were further amended. Theagreements with Messrs. Kordash and Gaither expire on October 1, 2005On May 7, 2004, the Company entered into a Separation Agreement withRichard W. Sunderland, Jr., and on August 27, 2004, Mr. Sunderlandresigned as our chief financial officer. See “—Transition Agreements.”

 

                The agreement withMr. Smith expires on December 1, 2005. The agreements provide thatannual base salaries to be paid to Messrs.  Kordash, Gaither, Sunderlandand Smith are $250,000, $280,000, $250,000 and $350,000, respectively. Inaddition, the agreements with Messrs. Kordash and Gaither provided for anoption grant on December 9, 2003 to purchase 250,000 and 150,000 shares,respectively, of our common stock at an exercise price of $21.50, of which 25%vested immediately upon the date of grant and the remainder vests in quarterlyinstallments of 6.25% thereafter. The agreements with Messrs. Sunderlandand Smith provided for option grants by incorporation of prior letteragreements with us, as described below, at the same exercise price and vestingschedule described above. Under the terms of the agreements, all outstandingequity-based compensation shall automatically become fully vested uponany termination by us without cause or due to the executive’s death ordisability or the executive’s termination for good reason, each as defined inthe agreements; provided that the agreements with Messrs. Smith andSunderland provide for less than full vesting upon termination on or beforeJanuary 1, 2005 in certain instances.

 

                The agreements withMessrs. Kordash, Gaither, Sunderland and Smith contain the followingprovisions that are substantially similar to those provisions contained inMr. Arlotta’s employment agreement discussed above: an automatic one-yearextension, eligibility to participate in stock option, incentive compensationand other incentive plans, receipt of perquisites generally provided to ourofficers, termination of the agreement by us with or without cause and by theexecutive upon the occurrence of certain events and confidentiality andnon-competition provisions. Each agreement also provides for severancecompensation in the event of termination without cause or for good reasonconsisting of a pro rata bonus for the portion of the year in which the date oftermination occurs, a lump-sum payment equal to the sum of the executive’saverage base salary and the average annual bonus earned under our incentiveplans for the most recent two years, continuation of health and life insurancebenefits for up to two years and vesting of previously granted stock optionsand restricted stock.

 

                Effective June 22, 2004, weamended our agreements with Messrs. Kordash and Gaither to further provide(i) that resignation within ninety days following a change in control willconstitute termination by the executive for good reason, (ii) for paymentupon termination without cause, death or disability or termination by executivefor good reason within two years of a change in control equal to two times hisaverage annual base salary and average annual bonus under our incentive plansfor the most recent two years, and (iii) for the automatic vesting of allequity-based compensation upon a change in control unless otherwisespecifically provided by reference to the amended agreement in any plan oraward thereunder or unless 75% of the incumbent directors (as defined in our2004 Performance Incentive Plan) determine otherwise prior to such change incontrol.

 

                In November 2003, incontemplation of the spin-off of GHC, we entered into letter agreements withMessrs. Smith and Sunderland which were incorporated by reference intoeach executive’s amended and restated employment agreement described above.Under the letter agreements, each executive agreed to waive his right to alump-sum payment and other benefits that the spin-off would likely havetriggered under their employment agreements in exchange for continuedemployment until the spin-off. In addition, upon completion of the spin-off, weagreed to:

 

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•                  make a lump-sum payment to Messrs. Smith andSunderland of $405,900 and $294,300, respectively, in settlement of amountsowing under prior employment agreements;

 

•                  continue each executive’s employment with the termsand conditions of the employment agreements described above;

 

•                  grant a stock option to Messrs. Smith andSunderland to purchase 87,500 and 75,000, respectively, shares of our CommonStock; and

 

•                  on the six-month anniversary of the option grant,either grant an additional option to purchase the same amount of our CommonStock or grant shares of restricted stock having a value equivalent to thereplaced options.

 

                On June 29, 2004, weentered into an employment agreement with Richard W. Hunt, our senior vicepresident and chief financial officer. The agreement provides thatMr. Hunt’s base salary for the initial one-year term of the agreement is$250,000. The agreement also provides for the grant of 50,000 shares of ourrestricted stock, of which 12,500 vest 45 days after the grant date andthe remaining amount vests in equal installments on each of the first threeanniversaries of the effective date, provided that Mr. Hunt remainsemployed by us on each such date. In the event that a change of control, asdefined in the agreement, occurs on or prior to December 31, 2004, 30,000of such shares of restricted stock will immediately vest (inclusive of, and notin addition to, the 12,500 shares scheduled to vest 45 days after thegrant date). In the event that a change of control occurs afterDecember 31, 2004, all of such shares of restricted stock will vest in full.

 

                The agreement with Mr. Huntcontains the following provisions that are substantially similar to thoseprovisions contained in our agreements, as amended, with Messrs. Kordashand Gaither discussed above: an automatic one-year extension, eligibility toparticipate in equity and cash incentive compensation and other incentiveplans, receipt of perquisites generally provided to our officers, terminationof the agreement by us with or without cause and by Mr. Hunt upon theoccurrence of certain events and confidentiality and non-competitionprovisions. The agreement also provides for severance compensation in the eventof termination without cause or for good reason consisting of a pro rata bonusfor the portion of the year in which the date of termination occurs, a lump-sumpayment equal to the sum of Mr. Hunt’s average base salary and the averageannual bonus earned under our incentive plans for the most recent two years or,during the two-year period following a change of control as described abovewith respect to our agreements with Messrs. Kordash and Gaither, two timessuch sum, continuation of health and life insurance benefits for up to twoyears and, if but only if such termination occurs after the first anniversaryof our agreement with Mr. Hunt, vesting of previously granted stockoptions and restricted stock.

 

**Transition Agreements**

 

                On December 1, 2003, inconnection with the spin-off, Robert Fish resigned as our chairman and chiefexecutive officer. Mr. Fish remained our employee for transitionalpurposes until his termination on February 28, 2004. Pursuant to the termsof Mr. Fish’s employment agreement, upon his resignation Mr. Fishreceived $766,500 in accrued and unpaid salary and bonuses through the date oftermination and a continuation of health and insurance benefits for himself,his spouse and eligible dependents for a period of one year following the dateof termination. Upon his resignation, all restricted stock awards made toMr. Fish fully vested, and all vested stock options remained exercisablethrough the original terms with all rights. The employment agreement alsocontains provisions which restrict Mr. Fish from competing withNeighborCare for a period of one year after termination.

 

                On December 9, 2003, weentered into an option cancellation agreement with Mr. Fish relating tooptions which vested upon the completion of the spin-off and Mr. Fish’stermination of employment in connection with the spin-off. After the board ofdirector’s adjustment to the aggregate number and exercise price of alloutstanding options to purchase our common stock in connection with thespin-off and as of the date of the agreement, Mr. Fish held options topurchase 430,470 shares of our common stock at an exercise price per share of$10.86 and 352,203 shares at an exercise price of $12.99, each of which expireon February 28, 2006. Under the option cancellation agreement,Mr. Fish surrendered to us options to purchase 282,673 shares of commonstock at the exercise price of $10.86 for the aggregate cash payment of $2,580,108less any applicable withholding taxes.

 

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                On May 7, 2004, we enteredinto a Separation Agreement with Richard W. Sunderland, Jr., our chieffinancial officer. Under the agreement, effective August 27, 2004,Mr. Sunderland received incentive compensation of $59,688 and will receive$250,000 of severance through August 27, 2005. Additionally,Mr. Sunderland will continue to receive benefits through August 27,2006.

 

**Benefit Plans**

 

*                2004Performance Incentive Plan*

 

                On June 15, 2004, ourshareholders approved our 2004 Performance Incentive Plan. The purposes of our2004 Performance Incentive Plan are to attract and promote the long-termretention of our key employees, directors and certain other persons who are ina position to make significant contributions to our success, to reward ouremployees, directors and other persons for their contributions, to provideadditional incentive to our employees, directors and other persons to continuemaking similar contributions and to further align the interests of ouremployees, directors and other persons with those of our shareholders. The 2004Performance Incentive Plan was adopted to replace, on a prospective basis, our2001 Stock Incentive Plan and 2001 Stock Option Plan, each as described below.See “—2001 Stock Incentive Plan” and “—2001 Stock Option Plan.”

 

                The 2004 Performance IncentivePlan permits grants of incentive stock options, options not intended to qualifyas incentive stock options, stock appreciation rights, restricted andunrestricted stock awards, restricted stock units, cash-based awards, includingsupplemental cash awards, and performance awards, and any combination thereof.Awards of restricted and unrestricted stock, restricted stock units and/ordeferred stock may also be issued under the 2004 Performance Incentive Plan toparticipants in connection with management or employee purchase programs.Shares issuable under awards that terminate unexercised or otherwise terminatewithout an issuance of shares, shares issuable under awards that are payable instock or cash but are paid in cash and shares issued but later forfeited willbe available for future awards under the 2004 Performance Incentive Plan. Ifshares of our common stock are not issued because such shares instead are usedto satisfy an applicable tax withholding requirement or other obligation to usin connection with the exercise of an award, then such shares will again beavailable for future issuance under the 2004 Performance Incentive Plan. Inaddition, if the exercise price of any award is satisfied by the tender ofshares of our common stock (by actual delivery or attestation), only the numberof shares of our common stock issued under the 2004 Performance Incentive Plan,net of any shares so tendered, will be deemed issued to the recipient.

 

                Incentive stock options may begranted under the 2004 Performance Incentive Plan only to our employees. All ofour current and future employees and other persons who, in the opinion of ourCompensation Committee, are in a position to make significant contributions toour success, such as consultants and non-employee directors, are eligible toreceive all other types of awards under the 2004 Performance Incentive Plan.Our Compensation Committee will determine the exercise price applicable to eachstock option and stock appreciation right, which will not be less than the fairmarket value of our common stock at the time of the grant. In no case may ourCompensation Committee amend an outstanding award, or cancel an outstandingaward and issue a new award, for the sole purpose of reducing the exerciseprice thereunder.

 

                The aggregate number of sharesof our common stock for which awards may be granted under the 2004 PerformanceIncentive Plan is 5,000,000 shares, with an individual limit of 500,000 sharesper fiscal year for each participant (excluding grants under any individualemployment agreement as an inducement material to the individual’s enteringinto an employment contract with us). Notwithstanding the foregoing, in theevent of any stock dividend, stock split, combination or exchange of equitysecurities, merger, consolidation, recapitalization, reorganization,divestiture or other distribution (other than ordinary cash dividends) ofassets to our shareholders, or any other event affecting our common stock thatthe Compensation Committee deems, in its sole discretion, to be similarcircumstances, the aggregate number of shares of our common stock which may beissued under our 2004 Performance Incentive Plan shall be appropriately adjustedin a manner determined in the sole discretion of our Compensation Committee.

 

                The maximum aggregate amountthat may be awarded in the form of a cash-based award, including a supplementalcash award, in any one fiscal year to a participant who is a “covered employee”as defined in Section 162(m) of the Internal Revenue Code of 1986, asamended, shall not exceed $2,000,000 determined as of the date of vesting orpayout, as applicable. The maximum aggregate amount that may be

 

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awardedin the form of a cash-based award, including a supplemental cash award, in anyone fiscal year to a participant who is not a “covered employee” shall bedetermined by our Compensation Committee.

 

                As of September 30, 2004,416,946 shares of restricted stock have been issued to our employees, of which145,304 were fully vested and 44,038 were surrendered to fulfill employeeincome tax obligations resulting from the grants, and 21,231 shares ofrestricted stock have been issued to members of our Board of Directors under the2004 Performance Incentive Plan. Restrictions on grants to our employeestypically vest ratably over three years form the date of grant such that theemployee cannot sell or trade the restricted stock until it becomes vested.Restrictions on grants to our directors are described under “—Directors’Compensation.”

 

*                2001Stock Incentive Plan*

 

                On October 2, 2001, ourBoard of Directors authorized the issuance of 750,000 shares of restrictedcommon stock to certain of our senior officers. These shares vest and areissued quarterly over a five-year period, which commenced on February 28,2002 and will generally end on October 1, 2006. In May 2003, theCompany made an offer to employees who held shares of restricted common stockto accelerate the vesting of all such restricted shares in exchange for thetendering of any options to purchase common stock. At September 30, 2004,625 shares of restricted common stock remain unvested and issuable throughOctober 1, 2006. See “—2001 Stock Option Plan.” We will not make anyfuture grants under the 2001 Stock Incentive Plan.

 

*                2001Stock Option Plan*

 

                The purpose of our 2001 StockOption Plan is to provide additional incentive to officers, other keyemployees, and directors of, and important consultants to us and each presentor future parent or subsidiary corporation, by encouraging them to invest inshares of our common stock thereby acquire a proprietary interest in us and anincreased personal interest in our continued success and progress.

 

                The aggregate number of sharesof our common stock that may be issued under our 2001 Stock Option Plan is3,480,000. Notwithstanding the foregoing, in the event of any change in theoutstanding shares of our common stock by reason of a stock dividend, stocksplit, combination of shares, recapitalization, merger, consolidation, transferof assets, reorganization, conversion or what our compensation committee of theBoard of Directors deems in its sole discretion to be similar circumstances,the aggregate number and kind of shares which may be issued under our 2001Stock Option Plan shall be appropriately adjusted in a manner determined in thesole discretion of the compensation committee. Reacquired shares of our commonstock, as well as unissued shares, may be used for the purpose of our 2001Stock Option Plan. Our common stock subject to options which have terminatedunexercised, either in whole or in part, shall be available for future optionsgranted under our 2001 Stock Option Plan. As of September 30, 2004,2,281,904 options are granted and outstanding, of which 1,632,287 are held byemployees, 626,137 are held by current and former directors and 39,134 are heldby a third party consultant. We will not make any future grants under the 2001Stock Option Plan.

 

                On April 1, 2003, weextended an offer to our employees, including executive officers except for ourthen chief executive officer, to tender all options to purchase shares of ourcommon stock, par value $.02 per share, outstanding under its 2001 Stock OptionPlan, for the following consideration: (a) for those holders of optionswho had received awards of more than 2,000 restricted shares of common stockunder our 2001 Stock Incentive Plan, the acceleration of vesting of all suchrestricted shares plus a cash payment of $2.50 per share underlying the optionfor options that had an exercise price below $20.00 per share, and(b) with respect to those holders of options who had not received awardsof more than 2,000 restricted shares, (i) for those options that had anexercise price of at least $20.00 per share, a cash payment of $2.00 per shareunderlying the option, and (ii) for those options that had an exerciseprice below $20.00 per share, a cash payment of $2.50 per share subject to theoption. The offer expired on May 12, 2003. We accepted for exchange andcancellation options to purchase 1,724,000 shares of our common stock, whichrepresented all of the eligible outstanding options properly tendered forexchange by eligible option holders, on May 13, 2003. All eligible optionsheld by our employees were tendered on the offer, with the exception of optionsto purchase 35,000 shares.

 

                See “—Transition Agreements.”

 

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*                Non-QualifiedDeferred Compensation Plan*

 

                On April 1, 2001, weadopted a Non-Qualified Deferred Compensation Plan. Beginning January 1,2002, eligible employees (i.e., in calendar 2004, employees whose base salarymeets or exceeds $90,000) were permitted to defer up to 50% of their basesalary and up to 90% of their incentive compensation bonus each year on a pre-taxbasis under the NeighborCare Non-Qualified Deferred Compensation Plan.Participants are able to select from several fund choices and their DeferredCompensation Plan account increases or decreases in value in accordance withthe performance of the funds selected. The Non-Qualified Deferred CompensationPlan is administered by a trustee.

 

*                RetirementPlan*

 

                On January 1, 1989, weadopted an employee Retirement Plan that consists of a 401(k) component and aprofit sharing component. Our retirement plan is a 401(k)/cash or deferredarrangement covering all of our employees (other than certain employees coveredby a collective bargaining agreement) who have completed at least500 hours of service during the six-month period beginning on his or her commencementdate or who has completed at least 1,000 hours of service in the firstyear of employment or any subsequent calendar year. Under the 401(k) component,each employee may elect to contribute a portion of his or her currentcompensation up to the lesser of the maximum permitted by the Internal RevenueCode or 50% (or, in the case of a highly compensated employee, a maximum of 6%(4% for plan years ending prior to January 1, 2004)) of such employee’sannual compensation. We may make a matching contribution each year asdetermined by the Board of Directors. The Board of Directors may establish thiscontribution at any level each year, or may omit such contribution entirely.Under the profit sharing component of the Retirement Plan, we may make anadditional employer contribution as determined by the Board of Directors eachyear. The Board of Directors may establish this contribution at any level eachyear, or may omit such contribution entirely

 

**Compensation Committee Interlocks and Insider Participation**

 

                The Compensation Committee wascomprised of Messrs. Gerbino and LaNasa until the consummation of thespin-off of GHC on December 1, 2003, at which time Mr. LaNasaresigned from our Board of Directors and Messrs. Dondero, Bloem and Daltonwere appointed as the members of our Compensation Committee.

 

                No person who served as a memberof our Compensation Committee during fiscal 2004 is currently nor was during orprior to fiscal 2004 an officer or employee of the Company or, except asdescribed in Item 13, “Certain Relationships and Related Transactions,” below,engaged in certain transactions with us required to be disclosed by regulationsof the Securities and Exchange Commission. Additionally, there were nocompensation committee “interlocks” during fiscal 2004, which generally meansthat none of our executive officers served as a director or member of thecompensation committee of another entity, one of whose executive officersserved as a director or member of our Compensation Committee.

 

                See Item 13 “CertainRelationships and Related Transactions.”

 

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**SIGNATURE**

                Pursuantto the requirements of Section 13 or 15(d) of the Securities and Exchange Actof 1934, the Registrant has duly caused this Amendment No. 1 to the AnnualReport on Form 10-K/A to be signed on its behalf on December 14, 2004 by theundersigned thereunto duly authorized.
|   | NeighborCare,  Inc. |
|--------|---------------------|
|   |                |   |
|   |                | /s/RICHARD  W. HUNT |   |
|   | By:                 | Richard  W. Hunt |
|   |                | Senior  Vice President and Chief Financial Officer |

 

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