10-K

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

	(Mark One)
	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2003
OR
	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 0-33217

NEIGHBORCARE, INC.

(Exact name of Registrant as specified in its charter)

Pennsylvania	7 East Lee Street Baltimore, MD  21202	06-1132947
(State or other jurisdiction of incorporation or organization)	(Address of principal executive offices including zip code)	(I.R.S. Employer Identification Number)

(410) 752-2600

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

NONE

Securities registered pursuant to Section 12(g) of the Act:

Title of each class

Common Stock, par value $.02 per share
Preferred Share Purchase Rights, no par value per share

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    NO  

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (subsection 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  

The aggregate market value of voting and non-voting common stock held by non-affiliates of the registrant is $499,529,659⁽¹⁾. As of December 17, 2003, 43,093,682 shares of the registrant’s common stock were outstanding and 260,493 shares are to be issued in connection with the registrant’s joint plan of reorganization confirmed by the Bankruptcy Court on September 20, 2001.

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

YES    NO  

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

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 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    NO  

DOCUMENTS INCORPORATED BY REFERENCE

NONE

(1) The aggregate market value of the voting and non-voting common stock set forth above equals the number of shares of the registrant’s common stock outstanding, reduced by the number of shares of common stock held by officers, directors and shareholders owning in excess of 10% of the registrant’s common stock, multiplied by the last reported sale price for the registrant’s common stock on the last business day of the registrant’s most recently completed second fiscal quarter (i.e., March 31, 2003) ($14.86). The information provided shall in no way be construed as an admission that any officer, director or 10% shareholder of the registrant may or may not be deemed an affiliate of the registrant or that he/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 is included solely for record keeping purposes of the Securities and Exchange Commission.

INDEX

		Page
Cautionary Statements Regarding Forward-Looking Statements		1
Risk Factors		2
	PART I
ITEM 1:	BUSINESS	12
ITEM 2:	PROPERTIES	34
ITEM 3:	LEGAL PROCEEDINGS	36
ITEM 4:	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS	37
ITEM 4A:	EXECUTIVE OFFICERS OF THE REGISTRANT	37
	PART II
ITEM 5:	MARKET FOR THE REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS	38
ITEM 6:	SELECTED FINANCIAL DATA	40
ITEM 7:	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	42
ITEM 7A:	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	70
ITEM 8:	FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA	72
ITEM 9:	CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE	120
ITEM 9A:	CONTROLS AND PROCEDURES	120
	PART III
ITEM 10:	DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT	121
ITEM 11:	EXECUTIVE COMPENSATION	125
ITEM 12:	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS	133
ITEM 13:	CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS	136
	PART IV
ITEM 14:	PRINCIPAL ACCOUNTING FEES AND SERVICES	136
ITEM 15:	EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K	137

Cautionary Statements 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:

• statements contained in “Risk Factors;”

• certain statements in “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and our 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 requirements; the expected effects of government regulation on reimbursement for services provided, including the Medicare Prescription Drug, Improvement and Modernization Act of 2003; and our ability to successfully implement our strategic objectives and achieve certain performance improvement initiatives; the expected financial impact of severance and related costs; the expected spin-off costs in fiscal 2004 and the foreseeable future; and estimates in our critical accounting policies, including our allowance for doubtful accounts, the anticipated impact of long-lived asset impairments and our ability to provide for loss reserves for self-insured programs;

• certain statements contained in “Business” concerning strategy, corporate integrity programs, insurance coverage, environmental matters, government regulations and the Medicare and Medicaid programs, and reimbursement for services provided; 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, which are discussed more fully in “Risk Factors:”

• 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 legislation or measures to reduce the reimbursement for our services;

• the expiration or phase out of enactments providing for additional governmental funding;

• changes in pharmacy legislation and/or payment formulas;

• the impact of federal and state regulations;

• the impact of investigations and audits relating to alleged violations of federal and/or state regulations;

• changes in the acuity of our customer’s 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 our manufacturer’s rebate programs;

• competition in our business;

• competition for qualified management and pharmacy professionals;

• 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 any acquisitions on our operations;

• availability of financial and other resources to us after the spin-off of Genesis HealthCare Corporation (“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 act as a separate entity;

• 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;

• the enforceability or limitations of the guarantees on our senior subordinated notes;

• the liquidity of our senior subordinated notes as a new issue of securities;

• our ability to repurchase or fulfill our obligations on our senior subordinated notes; and

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

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.

RISK FACTORS

If we or our client institutions fail to comply with Medicare or Medicaid reimbursement regulations, our revenue could be reduced, we could be subject to penalties and we could lose our eligibility to participate in these programs.

For the year ended September 30, 2003, approximately 44% of our pharmacy services billings were directly reimbursed by government-sponsored programs, including Medicaid and, to a lesser extent, Medicare.   The Medicare and Medicaid programs are highly regulated.  Our failure to comply with applicable reimbursement regulations could adversely affect the reimbursement we receive and our ability to participate in Medicare and Medicaid.  Our failure to comply with these regulations could subject us to other civil and criminal penalties. Moreover, the Medicaid program is significantly dependent upon federal rules. Any limitation of federal funding to states under their Medicaid program could negatively affect our business.

Continuing efforts to contain healthcare costs may reduce our future revenue.

Our sales and profitability are affected by the efforts of healthcare payors to contain or reduce the cost of healthcare by lowering reimbursement rates, limiting the scope of covered services, and negotiating reduced or

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capitated pricing arrangements. Any changes that lower reimbursement levels under Medicare, Medicaid or private pay programs, including managed care contracts, could reduce our future revenue. Furthermore, other changes in these reimbursement programs or in related regulations could reduce our future revenue. These changes may include modifications in the timing or processing of payments and other changes intended to limit or decrease the growth of Medicare, Medicaid or third-party expenditures.

Healthcare-related legislation has significantly impacted our business, and future legislation and regulations may negatively affect our financial condition and results of operations.

In recent years, Congress has passed a number of federal laws that have effected major changes in the healthcare system, including, without limitation, changes under the Medicare and Medicaid programs. Our business is directly affected by changes in reimbursement rates and methodologies for pharmaceutical services and indirectly affected through the changes that negatively impact our healthcare clients. Several of these changes have had a significant impact on us.

It is not possible to quantify fully the effect of potential legislative changes, the interpretation or administration of such legislation or any other governmental initiatives on our business. Accordingly, there can be no assurance that the impact of any future healthcare legislation will not further adversely affect our business. There can be no assurance that payments under governmental and private third-party payor programs will be timely, will remain at levels comparable to present levels or will, in the future, be sufficient to cover the costs allocable to patients eligible for reimbursement pursuant to such programs. Our financial condition and results of operations may be affected by the reimbursement process, which is complex and can result in delays between the time that revenue is recognized and the time that reimbursement amounts are settled.

The recent legislation, titled the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, referred to as the Medicare Modernization Act, passed by Congress on November 25, 2003 and signed by the President on December 8, 2003, may have a significant impact on long-term care pharmacy services with respect to Medicare coverage and payment rates to facilities and individual suppliers.  The Medicare Modernization Act constitutes a significant overhaul of the Medicare system, including provisions which add a prescription drug benefit under Medicare starting in 2006, provide subsidies to insurers and managed care organizations and establish mechanisms to allow private health care coverage plans to compete with Medicare initially on a pilot basis.   In addition, the Medicare Modernization Act phases out the average wholesale price reimbursement system related to certain outpatient pharmaceutical drugs and biologicals.  For discussion of the Medicare Modernization Act, see Part I, Item 1, “Business — NeighborCare, Inc. — Medicare and Medicaid,” of this Form 10-K.

Because of the recent enactment of the Medicare Modernization Act and its broad scope, we are not in a position to fully assess its impact on our business.  The impact of this legislation depends upon a variety of factors, including patient mix.  It is not clear at this time whether this new legislation will have an overall negative impact on long-term care pharmacy services.  This legislation may reduce revenue and impose additional costs to the industry.  Moreover, the United States Department of Health and Human Services, referred to as DHHS, has not yet promulgated any regulations under the Act, as the Act requires it to do.  The impact of these regulations when promulgated, including those regulations relating to the prescription drug discount plan discussed above, is unclear. 

We have described only certain provisions of the Medicare Modernization Act applicable to our business.  There may be other provisions of the legislation that may impact our business by decreasing revenues or increasing operational expenses.  We can make no assurance as to the effect of these provisions on our business.

The phase out of the average wholesale price reimbursement system related to certain outpatient pharmaceutical drugs and biologicals under the Medicare Modernization Act could adversely affect our business.  In addition, a second initiative under consideration at the federal level is a program to further reduce reimbursement for specific types of drugs.  These initiatives have focused on certain therapies that are not extensively utilized in long-term care facilities.  However, if this program were to be expanded, such a decision could have an adverse impact on our business.

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State Medicaid program reimbursement is directly affected by the Medicare Modernization Act and may have a material adverse effect on our operating results.

The reimbursement rates for pharmacy services under Medicaid are determined on a state-by-state basis subject to applicable federal law and review by the Centers for Medicare and Medicaid Services, the agency within DHHS that is responsible for the Medicare and Medicaid programs.  In most states, pharmacy services are priced at the lower of “usual and customary” charges or cost (which generally is defined as a function of average wholesale price and may include a profit percentage) plus a dispensing fee. Certain states have “lowest charge legislation” or “most favored nation provisions” which require us to charge Medicaid no more than its lowest charge to other consumers in the state.  Since 2000, federal Medicaid requirements establishing payment caps on certain drugs have been periodically revised.  The Medicare Modernization Act’s phase out of the use of average wholesale price related to certain outpatient pharmaceutical drugs and biologicals might impact these current payment methodologies.

State Medicaid programs generally have long-established programs for reimbursement which have been revised and refined over time and have not had a material adverse effect on the pricing policies or receivables collection for long-term care facility pharmacy services. Any future changes in such reimbursement programs or in regulations relating thereto, such as reductions in the allowable reimbursement levels or the timing of processing of payments, could adversely affect our business.

In order to control healthcare costs, we anticipate that federal and state governments will continue to review and assess alternate healthcare delivery systems, payment methodologies and operational requirements for healthcare providers, including long-term care facilities and pharmacies.  Given the continuous debate regarding the cost of healthcare, managed care and other healthcare issues, we cannot predict with any degree of certainty what additional healthcare initiatives, if any, will be implemented or the effect any future legislation or regulation will have on our business.

While Congress has expanded Medicare to cover certain costs of outpatient pharmaceutical services, the federal and state governments continue to focus on efforts to curb spending on healthcare programs such as Medicare and Medicaid.  A number of states have enacted or are considering cost containment initiatives. Many of these initiatives focus on reducing the amount that the state Medicaid program will pay for drug acquisition costs. Some have attempted to impose more stringent pricing standards. Institutional pharmacies are often paid a dispensing fee over and above the payment for the drug. To the extent that changes in the payment for drugs are not accompanied by an increase in the dispensing fee, margins could erode. Some states have explored efforts to restrict utilization by requiring the use of preferred drug lists, prior-authorization and formularies. A few states have attempted to extend the preferred Medicaid pricing to all Medicare beneficiaries. We cannot at this time predict the extent to which these proposals will be adopted or, if adopted and implemented, what effect, if any, such proposals will have on us. Efforts to impose reduced allowances, greater discounts and more stringent cost controls by government and other payors are expected to continue.

Healthcare reform and legislation may reduce payments to our skilled nursing facility customers, which may negatively impact our ability to fund our working capital needs.

Healthcare reform and legislation has an indirect effect on our business through decreasing funds available to our skilled nursing facility customers. Limitations or restrictions on Medicare and Medicaid payments to skilled nursing facilities could adversely impact the liquidity of our pharmacy and other service related business customers, resulting in their inability to pay us, or to pay us timely, for our products and services. This factor could require us to borrow in order to fund our working capital needs, and, in turn, cause us to become more highly leveraged.

We derive a significant portion of our revenue from state Medicaid programs and the recent economic downturn in the states in which we operate could have a material adverse effect on our operating results.

There are numerous reports affirming that the recent economic downturn has had a detrimental effect on state revenues. Historically, these budget pressures have translated into reductions in state spending. Given that Medicaid outlays are a significant component of state budgets, we expect continuing cost containment pressures on Medicaid outlays for nursing homes and pharmacy services in the states in which we operate.

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If we, or our long-term care customers, fail to comply with licensure requirements or other applicable laws, we may need to curtail operations, and could be subject to significant penalties.

Our pharmacy services business is subject to extensive and often changing federal, state and local regulations, and our pharmacies are required to be licensed in the states in which they are located or do business. We continuously monitor the effects of regulatory activity on our operations and we currently have pharmacy licenses for each pharmacy we operate. The failure to obtain or renew any required regulatory approvals or licenses could adversely affect the continued operation of our business. The long-term care facilities that contract for our services are also subject to federal, state and local regulations and are required to be licensed in the states in which they are located. The failure by these long-term care facilities to comply with these or future regulations or to obtain or renew any required licenses could result in our inability to provide pharmacy services to these facilities and their residents.

We conduct business in a heavily regulated industry, and changes in regulations or violations of regulations including fraud and abuse laws may result in increased costs or sanctions.

We are also subject to federal and state laws that prohibit some types of direct and indirect payments between healthcare providers. These laws, commonly known as the fraud and abuse laws, prohibit payments intended to induce or encourage the referral of patients to, or the recommendation of, a particular provider of items or services. Violation of these laws can result in loss of licensure, civil and criminal penalties and exclusion from the Medicare, Medicaid and other federal healthcare programs.  We are subject to periodic audits under the Medicare and Medicaid programs, which have various rights and remedies against us if they assert that we have overcharged the programs or failed to comply with program requirements. Rights and remedies available to these programs include repayment of any amounts alleged to be overpayments or in violation of program requirements, or making deductions from future amounts due to us. These programs may also impose fines, criminal penalties or program exclusions. Other third-party payor sources also reserve the right to conduct audits and make monetary adjustments in connection with or exclusive of audit activities.

In the ordinary course of our business, the long-term care facilities we service receive notices of deficiencies for failure to comply with conditions of participation in the Medicare and Medicaid programs.  This non-compliance may have a negative effect upon our business.

We are also subject to federal and state laws that govern financial and other arrangements between healthcare providers. These laws often prohibit certain direct and indirect payments or fee-splitting arrangements between healthcare providers that are designed to induce the referral of patients to a particular provider for medical products and services. Possible sanctions for violation of any of these restrictions or prohibitions include loss of eligibility to participate in reimbursement programs and/or civil and criminal penalties.

We have established policies and procedures that we believe are sufficient to ensure that our facilities will operate in substantial compliance with these anti-fraud requirements.  While we believe that our business practices are consistent with Medicare and Medicaid criteria, those criteria are often complex and subject to change and interpretation.  Aggressive anti-fraud actions, however, could have an adverse effect on our financial condition, results of operations and cash flows.

In addition, a number of states have undertaken enforcement actions against pharmaceutical manufacturers involving pharmaceutical marketing programs, including programs containing incentives to pharmacists to dispense one particular product rather than another. These enforcement actions arose under state consumer protection laws, which generally prohibit false advertising, deceptive trade practices and the like.

New federal medical privacy regulations may increase the costs of operations and expose us to civil and criminal sanctions.

We face additional federal requirements that mandate major changes in the transmission and retention of health information. The Health Insurance Portability and Accountability Act of 1996 was enacted first, to ensure that employees can retain and at times transfer their health insurance when they change jobs, and second, to simplify healthcare administrative processes. This simplification includes expanded protection of the privacy and security of personal medical data and requires the adoption of standards for the exchange of electronic health information.

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Among the standards that the Secretary of Health and Human Services has adopted pursuant to the Health Insurance Portability and Accountability Act are standards for electronic transactions and code sets, and it may adopt unique identifiers for providers, employers, health plans and individuals, security and electronic signatures, privacy and enforcement. Although the Health Insurance Portability and Accountability Act was intended to ultimately reduce administrative expenses and burdens faced within the healthcare industry, we believe that implementation of this law will result in additional costs. Failure to comply with the Health Insurance Portability and Accountability Act could result in fines and penalties that could have a material adverse effect on us.

Possible changes in the acuity of patients as well as payor mix and payment methodologies may significantly affect our profitability.

The sources and amounts of our revenues will be determined by a number of factors, including licensed bed capacity and occupancy rates of the centers we supply, the acuity of patients and the rates of reimbursement among payors. Changes in the acuity of the patients as well as payor mix among private pay, Medicare and Medicaid in the centers we supply will significantly affect our profitability. Particularly, any significant increase in the Medicaid population in such facilities could have a material adverse effect on our financial condition, results of operations and cash flows, especially if states operating these programs continue to limit, or more aggressively seek limits on, reimbursement rates.

Further consolidation of managed care organizations and other third-party payors may adversely affect our profits.

Managed care organizations and other third-party payors have continued to consolidate in order to enhance their ability to influence the delivery of healthcare services. Consequently, the healthcare needs of a large percentage of the U.S. population are increasingly served by a small number of managed care organizations. These organizations generally enter into service agreements with a limited number of providers for needed services. To the extent that such organizations terminate us as a preferred provider and/or engage our competitors as a preferred or exclusive provider, our business could be materially and adversely affected. In addition, private payors, including managed care payors, increasingly are demanding discounted fee structures.

We purchase a significant portion of our pharmaceutical products from one supplier.

We obtain approximately 98% of our pharmaceutical products from one supplier pursuant to contracts that are terminable by either party on 90 days notice. If these contracts are terminated, there can be no assurance that our operations would not be disrupted or that we could obtain the products at similar cost. In this event, failure to satisfy our customers’ requirements could materially and adversely affect our business, results of operations and financial condition.

Possible changes in or our failure to satisfy our manufacturers’ rebate programs could adversely affect our results of operations.

We currently earn rebates from certain manufacturers of pharmaceutical products for meeting targeted purchase volumes on a quarterly basis. There can be no assurance that our pharmaceutical manufacturers will continue to offer these rebates or that we will continue to satisfy the targeted purchase volumes. The termination of such programs or our failure to satisfy the targeted volumes may have an adverse affect on our cost of sales and inventory costs.

We face intense competition in our business.

We compete with a variety of other companies in providing pharmacy services, many of which have greater financial and other resources than we do and may be more established in their respective communities than we are. Competing companies may offer newer or different services than we do and may thereby attract customers who are presently our customers or are otherwise receiving our services.

The provision of pharmacy services in the long-term care industry is highly competitive. In the 32 states and in the District of Columbia where we sell pharmacy products and services, we compete with multiple national, regional and local institutional pharmacies. Institutional pharmacies compete principally on the basis of service, integrity, clinical expertise, fair pricing and the ability to form strong relationships with key personnel.

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We are dependent on our senior management team and our pharmacy professionals.

We are highly dependent upon the members of our senior management team, our pharmacists and other pharmacy professionals. Our business is managed by a small number of key management personnel, including John J. Arlotta, who became our chairman, president and chief executive officer after the spin-off. If we were unable to retain these persons, we might be adversely affected. Our industry is small and there is a limited pool of senior management personnel with significant experience in our industry. Accordingly, we believe we could experience significant difficulty in replacing key management personnel. Although we have employment contracts with our key management personnel, these contracts generally may be terminated without cause by either party.

In addition, our continued success depends on our ability to attract and retain pharmacists and other pharmacy professionals. Competition for qualified pharmacists and other pharmacy professionals is intense. The loss of pharmacy personnel or the inability to attract, retain or motivate sufficient numbers of qualified pharmacy professionals could adversely affect our business. Although we generally have been able to meet our staffing requirements for pharmacists and other pharmacy professionals in the past, our inability to do so in the future could have a material adverse effect on us.

A significant portion of our business is concentrated in certain markets, and an economic downturn or changes in the laws affecting our business in those markets could have a material adverse effect on our operating results.

We receive approximately 62% of our revenue from operations in the states of Maryland, New Jersey, Pennsylvania, Virginia, Ohio and West Virginia. The economic condition of these markets could affect the ability of our patients and third-party payors to reimburse us for our services through a reduction of disposable household income or the ultimate reduction of the tax base used to generate state funding of their respective Medicaid programs. An economic downturn in these markets and in surrounding markets or changes in the laws affecting our business could have a material adverse effect on our financial condition, results of operations and cash flows.

We may make acquisitions that could subject us to a number of operating risks.

We anticipate that we may make acquisitions of, investments in and strategic alliances with complementary businesses to enable us to capitalize on our strong position in the geographic markets in which we operate and to expand our businesses in new geographic markets. However, implementation of this strategy entails a number of risks, including:

• inaccurate assessment of undisclosed liabilities;

• entry into markets in which we may have limited or no experience;

• diversion of management’s attention from our core business;

• difficulties in assimilating the operations of an acquired business or in realizing projected efficiencies and cost savings;

• increase in our indebtedness and a limitation on our ability to access additional capital when needed; and

• difficulties in obtaining anticipated revenue synergies or cost reductions.

In addition, certain changes may be necessary to integrate the acquired businesses into our operations, assimilate many new employees and implement reporting, monitoring, compliance and forecasting procedures.

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We have no history operating as an entity without our eldercare businesses.

Historically, our operations were conducted as part of a consolidated entity with GHC and not as a separate entity. As a result of the spin-off, we own and operate the pharmacy services business and GHC owns and operates the inpatient services business and other ancillary businesses. Neither of these businesses has an operating history as a separate company. The spin-off may result in some temporary dislocation and inefficiencies to our business operations, as well as impact the overall management of our company. In addition, operating these businesses independently may be more expensive, more complicated or more difficult than operating them together.

Since we and our subsidiaries emerged from bankruptcy on October 2, 2001, there is limited operating and financial data available from which to analyze our operating results and cash flows.

Financial information related to our and our subsidiaries’ operations after our emergence from bankruptcy is limited and therefore, it is difficult to compare such post-bankruptcy financial information with that of prior periods. Additionally, this information reflects the results of fresh-start reporting which also makes comparison of results of operations and financial condition after our emergence from bankruptcy to the results of prior periods difficult. For additional information, see Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” of this Form 10-K.

Our historical financial information and our pro forma financial information may not be representative of our results as a separate company.

Historically, our operations were conducted as part of a consolidated entity with GHC and not as a separate entity. Accordingly, the pro forma financial information included in the notes to our consolidated financial statements may not reflect the results of operations and financial condition that would have been achieved had our company been operated independently during the period and as of the dates presented.  In addition, the historical pharmacy services segment information contained herein may not be indicative of how our business would have performed had the spin-off occurred during the periods presented.  Such segment information does not, for example, reflect general and administrative and other corporate overhead expenses.

Costs related to our corporate functions, including legal support, treasury administration, insurance administration, human resource management, information systems, internal audit and corporate accounting and income tax administration, which are not directly and solely related to our operations, have been allocated for purposes of preparing pro forma financial information based upon various methodologies deemed reasonable by management.  Although our management believes that the methods used to allocate and estimate such expenses are reasonable, there can be no assurance that our actual costs will not be higher, perhaps substantially.

Furthermore, our historical consolidated financial statements do not reflect the costs to us of borrowing funds as a separate entity.

We may be responsible for federal income tax liabilities that relate to our distribution of GHC common stock.

We have received a private letter ruling from the Internal Revenue Service to the effect that the spin-off and certain related transactions will qualify as a tax-free distribution to us and our shareholders under Section 355 of the Internal Revenue Code of 1986, as amended. We and GHC have made certain representations in connection with the private letter ruling, and we will agree to restrictions on certain future actions designed to preserve the tax-free status of the spin-off.

If the spin-off were found to be taxable by reason of any act (or failure to act) by GHC described in certain covenants contained in the spin-off documents, any acquisition of our equity securities or assets, or any breach of any of our representations in the spin-off documents or in the private letter ruling request, the spin-off would be taxable to us and may be taxable to holders of our common stock who received shares of GHC common stock in the spin-off. In such case, under the spin-off documents between us and GHC, GHC will be required to indemnify us against any taxes and related losses. The amount of any such indemnification payment could be substantial and we cannot assure you that GHC will have the ability to satisfy those obligations.

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We may be required to satisfy certain indemnification obligations to GHC or may not be able to collect on indemnification rights from GHC.

Under the terms of the separation and distribution agreement, we and GHC have agreed to indemnify each other from and after the distribution with respect to the indebtedness, liabilities and obligations that will be retained by our respective companies. These indemnification obligations could be significant, and we cannot presently determine the amount of indemnification obligations for which we will be liable or for which we will seek payment from GHC. Our ability to satisfy these indemnities, if we are called upon to do so, will depend upon our future financial performance. Similarly, GHC’s ability to satisfy any such obligations to us will depend on GHC’s future financial performance. We cannot assure you that we will have the ability to satisfy any substantial indemnification obligations to GHC. We also cannot assure you that if GHC is required to indemnify us for any substantial obligations, GHC will have the ability to satisfy those obligations.

Our management owns stock in GHC and there continue to be agreements between us and GHC.

As a result of their ownership of our common stock, most of our officers and certain members of our board of directors own GHC stock received in the spin-off distribution to our shareholders. In addition, certain of our subsidiaries entered into a tax sharing agreement, transition services agreement, a group purchasing agreement, an employee benefits agreement, a pharmacy services agreement, a pharmacy benefit management agreement and a durable medical equipment agreement with GHC. Although we believe the charges for services under the group purchasing agreement, the pharmacy services agreement, the pharmacy benefit management agreement and the durable medical equipment services agreement represent fair market value, there can be no assurance that we could not have obtained more favorable terms from an independent third-party. In some cases, the terms of the new agreements are not as favorable to us as the terms in effect prior to the spin-off. Robert H. Fish, the former chairman of our board of directors and chief executive officer, continues to serve as a director of both GHC and NeighborCare. Ownership of GHC common stock by our officers and directors could create, or appear to create, potential conflicts of interest for these officers and directors when faced with decisions that could have implications for both GHC and us.

GHC, our largest customer, will be subject to its own risks as a result of the spin-off and its operation as a separate entity.

Sales to facilities of GHC, our largest customer, represented 14% of our total revenues for the year ended September 30, 2003 after giving effect to the spin-off. As a result of the spin-off, it is operating for the first time as an independent public entity. GHC is also exposed to risks similar to those outlined herein, including initial operation without the support of the former consolidated corporate infrastructure. In addition, GHC will be highly leveraged. The degree to which GHC is leveraged could materially and adversely affect GHC’s ability to obtain financing for working capital, acquisitions or other purposes and could make GHC more vulnerable to industry downturns and competitive pressures. GHC’s ability to meet its obligations will be dependent upon its future performance, which will be subject to financial, business and other factors affecting GHC’s operations. We are bound by a multi-year contractual arrangement with GHC. If GHC is not able to meet its obligations under this arrangement, our financial condition and results of operations could suffer materially.

Our ability to generate cash to service our indebtedness depends on many factors beyond our control.

Our ability to make payments on our existing and future debt and to fund working capital needs and planned capital expenditures will depend on our ability to generate cash in the future. Risks of future cash generation include the ability to sustain an audfit, and utilized, net operating losses for tax purposes. Our ability to generate cash, to a certain extent, is subject to general economic, financial, competitive, regulatory, legislative and other factors that are beyond our control.

Cost containment and lower reimbursement levels relative to inflationary increases in cost by third-party payors, including federal and state governments, have had a significant impact on the healthcare industry and on our

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cash flows. Our operating margins continue to be under pressure because of continuing regulatory scrutiny and growth in operating expenses, such as labor costs and insurance premiums.

We cannot assure you that our business will generate sufficient cash flow from operations or that future borrowings will be available to us in amounts sufficient to enable us to pay our indebtedness or to fund our other liquidity needs. If we do not generate or are unable to borrow sufficient amounts of cash to meet these needs, we may need to refinance all or a portion of our indebtedness on or before maturity, sell assets, curtail discretionary capital expenditures or file for bankruptcy protection. We cannot assure you that we will be able to refinance any of our indebtedness on commercially reasonable terms or at all.

The agreements governing our existing debt permit us, subject to specified conditions, to incur a significant amount of additional indebtedness. If we incur additional debt above current levels, the risks associated with our leverage, including our ability to service our debt, would increase.

The agreements governing our existing debt and preferred stock impose, and future debt may impose, significant operating and financial restrictions on us, which may prevent us from capitalizing on business opportunities and taking some corporate actions.

The agreements and instruments governing our existing debt impose, and the agreements and instruments governing our future debt may impose, significant operating and financial restrictions on us. These restrictions, among other things, limit our ability to:

• incur additional indebtedness;

• issue redeemable preferred stock;

• pay dividends or make other distributions to our shareholders;

• repurchase our stock;

• make certain investments;

• create liens;

• sell or otherwise dispose of certain assets;

• consolidate, merge or sell all of our assets;

• prepay, redeem or repurchase debt;

• enter into transactions with affiliates; and

• engage in certain business activities.

In addition, the agreements and instruments governing our existing debt require us to maintain specified financial ratios and satisfy other financial condition tests. We cannot assure you that these covenants will not adversely affect our ability to finance our future operations or capital needs or to pursue available business opportunities or limit our ability to plan for or react to market conditions or meet capital needs or otherwise restrict our activities or business plans. A breach of any of those covenants or our inability to maintain the required financial ratios could result in a default in respect of the related indebtedness. If a default occurs, the relevant lenders could elect to declare the indebtedness, together with accrued interest and other fees, to be immediately due and payable and proceed against any collateral securing that indebtedness.

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The terms of our outstanding preferred stock also contain restrictions on our ability to complete certain types of transactions without the consent of the holders of our preferred stock.

Provisions in Pennsylvania law and our corporate charter documents could delay or prevent a change in control.

As a Pennsylvania corporation, we are governed by the Pennsylvania Business Corporation Law of 1988, as amended, referred to as Pennsylvania corporation law.  Pennsylvania corporation law provides that the board of directors of a corporation in discharging its duties, including its response to a potential merger or takeover, may consider the effect of any action upon employees, shareholders, suppliers, customers and creditors of the corporation, as well as upon communities in which offices or other establishments of the corporation are located, and all other pertinent factors.  In addition, under Pennsylvania corporation law, subject to certain exceptions, a business combination between us and a beneficial owner of more than 20% of our stock may be accomplished only if certain conditions are met.

Our articles of incorporation contain certain provisions that may affect a person’s decision to implement a takeover of us, including the following provisions:

• a classified board of directors, with each director having a three-year term;

• a provision providing that certain business combinations involving us, unless approved by at least 75% of the board of directors, will require the affirmative vote of at least 80% of our voting stock;

• a provision permitting the board of directors to oppose a tender or other offer for our securities in light of the fairness of the price, the impact on our constituents, the reputation of the offeror, the value of the offered securities and any applicable legal or regulatory issues raised by the offer, as well as all other pertinent factors;

• a provision requiring the affirmative vote of at least 80% of our voting stock to amend provisions relating to anti-takeover measures, unless the amendment is approved by at least 75% of the board of directors; and

• the authority to issue preferred stock with rights to be designated by the board of directors.

Additionally, we have entered into a shareholder rights plan which will make it extremely difficult for any person or group to acquire a significant interest in our common stock without advance approval of our board of directors.

The overall effect of the foregoing provisions may be to deter a future tender offer or other offer to acquire us or our shares.  Shareholders might view such an offer to be in their best interest if the offer includes a substantial premium over the market price of the common stock at that time.  In addition, these provisions may assist our management in retaining their position and place us in a better position to resist changes that the shareholders may want to make if dissatisfied with the conduct of our business.

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PART I

ITEM 1: BUSINESS

General

NeighborCare, Inc. was incorporated in May 1985 as a Pennsylvania corporation and was formerly named Genesis Health Ventures, Inc.

Prior to December 1, 2003, our operations were comprised of two primary business segments:  pharmacy services and inpatient services. On December 1, 2003, we completed the distribution (the “spin-off”) of the common stock of Genesis HealthCare Corporation (“GHC”) and on December 2, 2003, we changed our name to NeighborCare, Inc. and changed our trading symbol to “NCRX.” The spin-off was effected by way of a pro-rata tax free distribution of the common stock of GHC to holders of NeighborCare’s common stock on December 1, 2003 at a rate of 0.5 shares of GHC stock for each share of NeighborCare stock owned as of October 15, 2003. We received a private letter ruling from the Internal Revenue Service to the effect that, for United States federal income tax purposes, the distribution of GHC stock qualified as tax free for GHC and our shareholders, with the exception of cash received for fractional shares.  The common stock of GHC began trading publicly on the Nasdaq National Market System on December 2, 2003 under the symbol “GHCI.”  As a result of the spin-off, we continue to own and operate our pharmacy services business and our group purchasing business and GHC owns and operates what was formerly our inpatient services business (as well as our former rehabilitation therapy, diagnostic, respiratory and management services businesses). See Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Certain Transactions and Events,” of this Form 10-K. As used herein, unless the context otherwise requires, “NeighborCare,” the “Company,” “we,” “our” or “us” refers to NeighborCare, Inc. and its subsidiaries.

Because the spin-off occurred subsequent to our fiscal year ended September 30, 2003 but before the filing of this report on Form 10-K, we have included the required business and financial disclosures of the consolidated organization herein. We will treat the operations of GHC as discontinued in our consolidated financial statements beginning in fiscal 2004.

We provide pharmacy services nationwide through our NeighborCare® integrated pharmacy operation that serves approximately 246,000 institutional beds in long–term care settings. We also operate 32 community–based retail pharmacies and a group purchasing organization.

GHC provides inpatient services through skilled nursing and assisted living centers primarily located in the eastern United States. GHC currently owns, leases, manages or jointly–owns 217 eldercare centers with 26,470 beds, of which two centers with 404 beds have been identified as either held for sale or discontinued operations. See Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Certain Transactions and Events — Assets Held for Sale and Discontinued Operations,” of this Form 10-K. GHC also provides rehabilitation therapy, diagnostic, respiratory, and management services.

Financial information regarding our business segments prior to the spin-off (i.e., pharmacy services and inpatient services) is presented at note 21 — “Segment Information” of Part II, Item 8, “Financial Statements and Supplementary Data,” of this Form 10-K.

The business descriptions below of NeighborCare, Inc. and GHC are as they existed after the spin-off.

NeighborCare, Inc.

Description of Business

We are the third largest provider of institutional pharmacy services in the United States. In five of the seven regions in which we do business, we believe we are the number one or number two institutional pharmacy service provider based upon the number of beds served. As of September 30, 2003, we provided pharmacy services for approximately 246,000 beds in long-term care facilities in 32 states and the District of Columbia. Our pharmacy operations consist of 62 institutional pharmacies (five are jointly-owned), 32 community-based professional retail

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pharmacies (two are jointly-owned) and 20 on-site pharmacies which are located in customers’ facilities and serve only customers of that facility. In addition, we operate 16 home infusion, respiratory and medical equipment distribution centers (four are jointly-owned). Jointly-owned facilities and the operations conducted therein are part of joint ventures which are owned by NeighborCare and at least one other unaffiliated party.

Institutional pharmacy

Our institutional pharmacy business purchases, repackages, labels and dispenses prescription and non-prescription medication in accordance with physician orders and delivers such medications to long-term care facilities for administration to individual residents. We typically service long-term care facilities within a 100-mile radius of our pharmacy locations. We maintain 24-hour, seven-day per week, on-call service for emergency dispensing and delivery or for consultation with the facility’s staff or the resident’s attending physician.

Upon receipt of a prescription, the relevant resident information is entered into our computerized dispensing and billing systems. At that time, the dispensing system checks the prescription for any potentially adverse drug interactions or resident sensitivity. When required and/or specifically requested by the physician or patient, branded drugs are dispensed; otherwise generic drugs are substituted in accordance with applicable federal and state laws. We also provide therapeutic interchange, with physician approval, in accordance with our pharmaceutical care guidelines, which are in compliance with applicable state laws. Therapeutic interchange is a process that allows the pharmacist to dispense a pre-approved therapeutically equivalent and cost-effective product within a designated therapeutic category whenever a non-formulary product is ordered.

We offer prescription and non-prescription pharmaceuticals to our customers through a unit dose or modified unit dose packaging, dispensing and delivery system, typically in 30-day supplies. Unit doses are packaged for dispensing in individual doses compared to bulk packaging used by most retail pharmacies. We believe a unit dose delivery system is preferred over the bulk delivery systems employed by retail pharmacies because it does not require the measurement of each individual dose, improves control over the provision of drugs and reduces errors in drug administration in long-term care facilities. Dispensing in unit dose also makes it possible to accept returns and issue credits where permitted by law, reducing waste and, therefore, resident care costs.

Integral to our drug distribution system is our computerized medical records and documentation system. We provide to each client facility patient specific computerized medication administration records, physician’s order sheets and treatment records. Data extracted from these computerized records is also formulated into monthly management reports which each client facility utilizes in resident care and quality assurance. We believe our computerized documentation system, in combination with our unit dose drug delivery system, results in greater efficiency in nursing time, improved control, reduced drug waste in the facility and lower error rates in both dispensing and administration. In addition, our consulting practice is fully integrated with our dispensing system through proprietary software, enabling us to offer unique, real time consultations to our customers.

Approximately 91% of our institutional pharmacy revenues for the year ended September 30, 2003 consisted of the sale of prescription and non-prescription pharmaceuticals. Approximately 84% of the institutional pharmacy sales in the year ended September 30, 2003 was generated through external contracts with independent healthcare providers, with the balance attributable to centers owned or leased as of December 1, 2003 by GHC. At September 30, 2003, we had contracts to provide services to more than 246,000 residents in long-term care facilities in 32 states and the District of Columbia. These contracts, as is typical in the industry, are generally for a period of one year but can be terminated by either party for any reason upon thirty days written notice. For the year ended September 30, 2003, other than sales to facilities owned or leased as of December 1, 2003 by GHC (16% of institutional pharmacy revenue and 11% of beds served) and Manor Care (14% of institutional pharmacy revenue and 11% of beds served), no individual customer or market group represented more than 5% of the total sales of our institutional pharmacy business. In connection with the spin-off, we entered into a pharmacy services agreement, a pharmacy benefit management agreement and a durable medical equipment agreement with GHC. These new agreements represent an approximately 0.5% annual reduction in revenue for NeighborCare. In addition, we have a pharmacy services agreement with Manor Care which expires in 2006.

We obtain approximately 98% of our institutional pharmaceutical products from one supplier pursuant to contracts that are terminable by either party on 90 days notice. We have not experienced any difficulty in obtaining pharmaceutical products or supplies used in the conduct of our business.

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We also provide pharmacy consulting services that assist clients in complying with federal and state regulations applicable to long-term care facilities. Federal and state regulations mandate that long-term care facilities, in addition to providing a source of pharmaceuticals, retain consultant pharmacist services to monitor and report on prescription drug therapy in order to maintain and improve the quality of resident care. Our consulting services include:

• monthly reviews of each resident’s drug regimen to assess the appropriateness and efficacy of drug therapies, including a review of medical records, monitoring drug interactions with other drugs or food, monitoring laboratory test results and recommending alternate therapies;

• participation on quality assurance and other committees of our customers;

• monitoring and reporting on facility-wide drug utilization;

• development and maintenance of pharmaceutical policy and procedure manuals; and

• assistance with federal and state regulatory compliance pertaining to resident care.

Community-Based Professional Retail Pharmacies

We also operate 32 community-based professional retail pharmacies, two of which are jointly owned. Our community-based professional pharmacies are retail operations located in or near medical centers, hospitals and physician office complexes which provide prescription and non-prescription medications and certain medical supplies as well as personal service and consultation by licensed registered pharmacists.

Home Infusion, Respiratory and Medical Equipment

Our home infusion, respiratory and medical equipment distribution centers provide a wide array of products and services to support the home care needs of a range of individuals of all ages. We work with physicians, hospital discharge planners, case managers and managed care organizations that refer these individuals to us. Services include respiratory and medical equipment (such as oxygen, hospital beds, wheelchairs and respiratory medications), as well as home infusion (such as antibiotics, TPN, chemotherapy and pain management).

Other Services

We also own and operate The Tidewater Healthcare Shared Services Group, Inc., one of the largest long-term care group purchasing companies in the country. Tidewater provides purchasing and shared service programs specially designed to meet the needs of eldercare centers and other long-term care facilities.

Revenue Sources

We receive revenues from Medicare, Medicaid, private insurance, self-pay patients, other third-party payors and long-term care facilities that utilize our pharmacy and other services. The healthcare industry is experiencing the effects of the trend toward cost containment as federal and state governments and other third-party payors seek to control utilization and negotiate reduced payment schedules with providers. These cost containment measures, combined with the increasing influence of managed care payors and competition for customers, generally have resulted in reduced rates of reimbursement for the products and services provided by us.

The sources and amounts of our revenues will be determined by a number of factors, including the mix of our customers’ patients and the rates of reimbursement among payors. Changes in the case mix of the patients as well as payor mix among private pay, Medicare and Medicaid will affect our profitability.

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The following table reflects the payor mix of pharmacy service revenues for the respective years ended September 30:

	2003			2002			2001
Medicaid		42	%		40	%		37	%
Long-term care facilities		30	%		34	%		35	%
Third-party payor		16	%		14	%		14	%
Private		10	%		10	%		11	%
Medicare Part B		2	%		2	%		3	%
Totals:		100	%		100	%		100	%

Medicare and Medicaid

The Health Insurance for Aged and Disabled Act (Title XVIII of the Social Security Act), or “Medicare,” is a federally funded and administered health insurance program for individuals aged 65 and over or for certain individuals who are disabled. The Medicare program consists of three parts: (i) Medicare Part A, which covers, among other things, inpatient hospital, skilled long-term care, home healthcare and certain other types of healthcare services; (ii) Medicare Part B, which covers physicians’ services, outpatient services and certain items and services provided by medical suppliers; and (iii) a managed care option for beneficiaries who are entitled to Medicare Part A and enrolled in Medicare Part B, known as Medicare+Choice or Medicare Part C. Pursuant to the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, or the Medicare Modernization Act, passed by Congress on November 25, 2003 and signed into law by the President on December 8, 2003, the Medicare+Choice program will be subsumed into a new Medicare supplemental product called Medicare Advantage by 2006.  Under Medicare Part B, we are entitled to payment for products that replace a bodily function (i.e., ostomy supplies), home medical equipment and supplies and a limited number of specifically designated prescription drugs.  The Medicare program is currently administered by fiscal intermediaries (for Medicare Part A and some Medicare Part B services) and carriers (for Medicare Part B) under the direction of the Centers for Medicare and Medicaid Services, or CMS, the Medicare and Medicaid oversight division of the United States Department of Health and Human Services, or DHHS.

Medicaid (Title XIX of the Social Security Act) is a federal-state matching fund program, whereby the federal government, under a needs-based formula, matches funds provided by the participating states for medical assistance to “medically indigent” persons. The programs are administered by the applicable state welfare or social service agencies under federal rules. Although Medicaid programs vary from state to state, traditionally they have provided for the payments, up to established limits, at rates determined in accordance with each state’s regulations. The federal Medicaid statute specifies a variety of requirements that the state plan must meet, including requirements relating to eligibility, coverage of services, payment and administration. For patients eligible for Medicaid, we bill the individual state Medicaid program or, in certain circumstances, the state designated managed care or other similar organizations. The reimbursement rates for pharmacy services under Medicaid are determined on a state-by-state basis subject to review by the Centers for Medicare and Medicaid Services and applicable federal law. Federal regulations and the regulations of certain states establish “upper limits” for reimbursement for certain prescription drugs under Medicaid. In most states, pharmacy services are priced at the lower of “usual and customary” charges or cost (which generally is defined as a function of average wholesale price and may include a profit percentage) plus a dispensing fee. Most states establish a fixed dispensing fee that is adjusted to reflect associated costs on an annual or less frequent basis.  The payment methodology for certain forms of prescription drugs and biologicals reimbursed under the Medicaid program may be subject to changes under the Medicare Modernization Act.  See “— NeighborCare, Inc. — Laws Affecting Revenues.”

Any future changes in Medicaid reimbursement programs or in regulations relating thereto, such as reductions in the allowable reimbursement levels or the timing of processing of payments, could adversely affect our business. The annual increase in the federal share could vary from state to state based on a variety of factors. Such provisions, if ultimately signed into law, could adversely affect our business. Additionally, any shift from Medicaid to state designated managed care could adversely affect our business due to historically lower reimbursement rates for managed care.

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Moreover, Medicare and Medicaid are subject to statutory and regulatory changes, retroactive rate adjustments, administrative rulings and government funding restrictions, all of which may materially affect the timing and/or levels of payments to us for our services. 

We are subject to periodic audits by the Medicare and Medicaid programs, which have various rights and remedies against us if they assert that we have overcharged the programs or failed to comply with program requirements. These rights and remedies may include requiring the repayment of any amounts alleged to be overpayments or in violation of program requirements, or making deductions from future amounts due to us. Such programs may also impose fines, criminal penalties or program exclusions. Other third-party payor sources also reserve rights to conduct audits and make monetary adjustments.

Laws Affecting Revenues

Congress has enacted laws directly affecting our business and the skilled nursing facilities served by us. Three major laws during the past six years have significantly altered payment for nursing home and medical ancillary services. Healthcare related legislation has significantly impacted our business, and future legislation and regulations are likely to affect us. For a discussion of the effect of laws upon our business, see “Risk Factors.”

The recently enacted Medicare Prescription Drug, Improvement and Modernization Act of 2003, referred to as the Medicare Modernization Act, may have a significant impact on our business or the business of our primary customers, nursing facilities.  Specifically, the Medicare Modernization Act increases payments to nursing facilities to cover the high costs of care associated with treatment for AIDS patients, subject to applicable sunsets, while potentially reducing payments for certain outpatient pharmaceutical drugs and biologicals currently reimbursed under the “average wholesale price” methodology.  The legislation shifts the payment methodology from average wholesale price to “average sales price.”  DHHS will have the authority to adjust payment rates where the average sales price does not reflect widely available market prices.  In addition, the legislation will have a significant impact on reimbursement rates for durable medical equipment by freezing durable medical equipment rates from 2004 through 2006.  DHHS will have the authority to adjust rates for the top five most widely used durable medical equipment codes to reflect reimbursement rates paid under the Federal Employee Health Benefit Plan.  The Medicare Modernization Act also provides for increased federal resources being available for prescription drug benefits coverage in 2006.  Finally, the Medicare Modernization Act authorizes an interim federally sponsored prescription drug discount plan to provide group discounts for Medicare beneficiaries between 2004 and 2006.

Because of the recent enactment of the Medicare Modernization Act and its broad scope, we are not in a position to fully assess its impact on our business.  The impact of the legislation depends upon a variety of factors, including patient mix.  It is not clear at this time whether this new legislation will have an overall negative impact on institutional and long-term care pharmacy services.  This legislation may reduce revenue and impose additional costs to the industry.  DHHS has not yet promulgated any final regulations under the Act, as the Act requires it to do.  The impact of these regulations when promulgated, including those regulations relating to the prescription drug discount plan discussed above, is unclear. NeighborCare will continue to work closely with the Center for Medicare and Medicaid Services directly, as well as through the Long Term Care Pharmacy Alliance, to offer its expertise in pharmaceutical care for the elderly.

Prior to the Medicare Modernization Act, reimbursement for certain products covered under Medicare Part B was limited to 95% of the “average wholesale price.”  The move to a prospective payment system under the Balanced Budget Act of 1997 made pricing a more important consideration in the selection of pharmacy providers.  Also, Congress included provisions in the Balanced Budget Act of 1997 that would require nursing facilities to submit all claims for Medicare–covered services that their residents receive, both Medicare Part A and Medicare Part B, even if such services are provided by outside suppliers, including but not limited to pharmacy and rehabilitation therapy providers, except for certain excluded services. The Benefits Improvement and Protection Act, enacted in December 2000, repealed this provision, except for therapy services as discussed below.

The reimbursement rates for pharmacy services under Medicaid are determined on a state by state basis subject to review by the Centers for Medicare and Medicaid Services and applicable federal law.  In most states, pharmacy services are priced at the lower of “usual and customary” charges or cost (which generally is defined as a function of average wholesale price and may include a profit percentage) plus a dispensing fee.  Certain states have “lowest charge legislation” or “most favored nation provisions” which require our institutional pharmacy and medical supply operation to charge Medicaid no more than its lowest charge to other consumers in the state. Since 2000, federal Medicaid requirements establishing payment caps on certain drugs have been periodically revised.  We have

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participated in the efforts to review and interact with the Centers for Medicare and Medicaid Services on the revisions.  This proactive involvement has helped in modifying the rate structures and thereby minimizing the impact of the new rules on our operations.

Revisions made by the Medicare Modernization Act are expected to provide significant relief to states as Medicare coverage becomes primary to Medicaid assistance for dually eligible individuals.  While those provisions making Medicare primary to Medicaid do not become effective until January 1, 2006, the competitive design of the interim Drug Rx Discount Card program is expected to influence cost reductions for all pharmacy services, thus impacting Medicaid outlays for prescription drugs. 

It is not possible to quantify fully the effect of legislative changes, the interpretation or administration of such legislation or any other governmental initiatives on our business and the business of our principal customers. Accordingly, there can be no assurance that the impact of any future healthcare legislation will not further adversely affect our business. There can be no assurance that payments under governmental and private third-party payor programs will be timely, will remain at levels comparable to present levels or will, in the future, be sufficient to cover the costs allocable to patients eligible for reimbursement pursuant to such programs. Our financial condition and results of operations may be affected by the reimbursement process, which in the healthcare industry is complex and can involve lengthy delays between the time that revenue is recognized and the time that reimbursement amounts are settled.

We belong, with other leading multi-state institutional pharmacy companies, to the Alliance for Long Term Care Pharmacy (“LTCPA”),an industry trade group established to influence the outcomes of both federal and state-specific legislative and regulatory activities. In this collaboration, LTCPA provides leadership to responding to specific issues. Presently, LTCPA has engaged representation in 23 states and the District of Columbia. Such efforts are augmented by the government relations specialists of the various companies and by active grassroots efforts of pharmacy professionals. These proactive steps have been successful in a number of instances, but given the budgetary concerns of both federal and state governments, there can be no assurance that changes in payment formulas and delivery requirements will not have a negative impact going forward.

While Congress has, through the Medicare Modernization Act, expanded Medicare coverage of certain costs of outpatient pharmaceutical services, the federal government and state governments continue to focus on efforts to curb spending on healthcare programs such as Medicare and Medicaid. We cannot at this time predict the extent to which these proposals will be adopted or, if adopted and implemented, what effect, if any, such proposals and existing new legislation will have on us. Efforts to impose reduced allowances, greater discounts and more stringent cost controls by government and other payors are expected to continue.

See “ — Genesis HealthCare Corporation — Laws Affecting Revenues.”

Government Regulation

General

Our business is subject to extensive federal, state and, in some cases, local regulation with respect to, among other things, licensure, certification and health planning. For pharmacy and medical supply products and services, this regulation relates, among other things, to operational requirements, reimbursement, documentation, licensure, certification and regulation of controlled substances. Compliance with such regulatory requirements, as interpreted and amended from time to time, can increase operating costs and thereby adversely affect the financial viability of our business. Failure to comply with current or future regulatory requirements could also result in the imposition of various remedies including fines, restrictions on admission, the revocation of licensure, decertification, imposition of temporary management or the closure of the facility.

Institutional pharmacies, as well as the long-term care facilities that they service, are subject to extensive federal, state and local laws and regulations. These laws and regulations cover required qualifications, day-to-day operations, reimbursement and the documentation of activities. We continuously monitor the effects of regulatory activity on our operations.

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Licensure, Certification and Regulation

States require that companies operating a pharmacy within that state be licensed by its’ board of pharmacy. We currently hold a license for each of the pharmacies we operate. Our pharmacies are also registered with the appropriate federal and state authorities pursuant to statutes governing the regulation of controlled substances.

For an extensive period of time, the long-term care pharmacy business has operated under regulatory and cost containment pressures from federal and state legislation primarily affecting the Medicare and Medicaid programs.

The Medicare program establishes certain requirements for participation of providers and suppliers in the Medicare program.  Failure to comply with these requirements and standards may adversely affect the ability of providers and/or suppliers to participate in the Medicare program and receive reimbursement for services provided to Medicare beneficiaries.

Federal law and regulations contain a variety of requirements relating to the furnishing of prescription drugs under Medicaid. First, states are given broad authority, subject to certain standards, to limit or to specify conditions as to the coverage of particular drugs. Second, federal Medicaid law establishes standards affecting pharmacy practice. These standards include general requirements relating to patient counseling and drug utilization review and more specific requirements for long-term care facilities relating to drug regimen reviews for Medicaid patients in such facilities. States may require pharmacies to comply with the general standards, regardless of whether the long-term care facility satisfies the drug regimen review requirement, and the states in which we operate currently require their pharmacies to comply therewith. Third, federal regulations impose certain requirements relating to reimbursement for prescription drugs furnished to Medicaid residents.

In addition to requirements imposed by federal law, states have substantial discretion to determine administrative, coverage, eligibility and payment policies under their state Medicaid programs which may affect our operations. For example, some states have enacted “freedom of choice” requirements which prohibit a long-term care facility from requiring its residents to purchase pharmacy or other ancillary medical services or supplies from particular providers that deal with the long-term care facility. Such limitations may increase the competition that we face in providing services to long-term care facility patients.

Providers and suppliers who participate in the Medicare and Medicaid programs are subject to inquiries or audits to evaluate their compliance with requirements and standards set forth under these programs. We believe that our billing procedures materially comply with applicable federal and state requirements. However, there can be no assurance that in the future such requirements will be interpreted in a manner consistent with the current interpretation and application.

Laws Affecting Billing and Business Practices

We are also subject to federal and state laws that govern financial and other arrangements between healthcare providers. These laws often prohibit certain direct and indirect payments or fee-splitting arrangements between healthcare providers that are designed to induce or encourage the referral of patients to, or the recommendation of, a particular provider for medical products and services. These laws include:

• the “anti-kickback” provisions of the federal Medicare and Medicaid programs, which prohibit, among other things, knowingly and willfully soliciting, receiving, offering or paying any remuneration (including any kickback, bribe or rebate) directly or indirectly in return for or to induce the referral of an individual to a person for the furnishing or arranging for the furnishing of any item or service for which payment may be made in whole or in part under Medicare or Medicaid. Penalties may include imprisonment, fines, exclusion from participation in the Medicare and Medicaid programs and loss of license; and

• the “Stark laws” which prohibit, with limited exceptions, the referral of patients by physicians for certain services, to an entity in which the physician has a financial interest. Penalties may include denial of payment, mandatory refund of prior payment, civil monetary penalties and exclusion from participation in the Medicare and Medicaid programs.

In addition, some states restrict certain business relationships between physicians and other providers of healthcare services. Possible sanctions for violation of any of these restrictions or prohibitions include loss of licensure or eligibility to participate in reimbursement programs and civil and criminal penalties. These laws vary from state to state, are often complex and have seldom been interpreted by the courts or regulatory agencies. From time to time, we have sought guidance as to the interpretation of these laws, however, there can be no assurance that such laws will ultimately be interpreted in a manner consistent with our practices.

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There have also been a number of recent federal and state legislative and regulatory initiatives concerning reimbursement under the Medicare and Medicaid programs. During the past few years, the Department of Health and Human Services has issued a series of voluntary compliance guidelines. These compliance guidelines provide guidance on acceptable practices. Skilled nursing facility services and durable medical equipment, prosthetics, orthotics and supplies and supplier performance practices have been among the services addressed in these publications. Our Corporate Integrity Program is working to assure that our practices conform to those requirements applicable to us. The Department of Health and Human Services also issues fraud alerts and advisory opinions. Directives concerning double billing, home health services and the provision of medical supplies to nursing facilities have been released. It is anticipated that areas addressed by these advisories may come under closer scrutiny by the government. While we have focused our internal compliance reviews to assure our practices conform with government instructions, we cannot accurately predict the impact of any such initiatives. See “Cautionary Statements Regarding Forward-Looking Statements” and “— NeighborCare, Inc. — Revenue Sources.”

Laws Governing Health Information

We face additional federal requirements that mandate major changes in the transmission and retention of health information. The Health Insurance Portability and Accountability Act of 1996, or “HIPAA,” was enacted to ensure, first, that employees can retain and at times transfer their health insurance when they change jobs, and second, to simplify healthcare administrative processes. This simplification includes expanded protection of the privacy and security of personal medical data and requires the adoption of standards for the exchange of electronic health information. Among the standards that the DHHS may adopt pursuant to HIPAA are standards for the following: electronic transactions and code sets; unique identifiers for providers, employers, health plans and individuals; security and electronic signatures; privacy; and enforcement.

Although HIPAA was intended to ultimately reduce administrative expenses and burdens faced within the healthcare industry, we believe that implementation of this law will result in additional costs. We have established a HIPAA task force consisting of clinical, financial and information services professionals focused on HIPAA compliance.

The Department of Health and Human Services has released three rules to date mandating the use of new standards with respect to certain healthcare transactions and health information. The first rule establishes uniform standards for common healthcare transactions, including:

• healthcare claims information;

• plan eligibility, referral certification and authorization;

• claims status;

• plan enrollment and disenrollment;

• payment and remittance advice;

• plan premium payments; and

• coordination of benefits.

Second, DHHS has released standards relating to the privacy of individually identifiable health information. These standards not only require our compliance with rules governing the use and disclosure of protected health information, but they also require us to impose those rules, by contract, on any business associate to whom we disclose information. Third, DHHS has released rules governing the security of health information maintained or transmitted in electronic form. 

DHHS finalized the transaction standards on August 17, 2000. DHHS issued the privacy standards on December 28, 2000, and, after certain delays, they became effective on April 14, 2001, with a compliance date of April 14, 2003. On February 20, 2003, DHHS issued final rules governing the security of health information. This rule specifies a series of administrative, technical and physical security procedures to assure the confidentiality of electronic protected health information. Affected parties will have approximately two years to be fully compliant. Sanctions for failing to comply with HIPAA health information practices provisions include criminal penalties and civil sanctions.

At this time, our management anticipates that NeighborCare will be able to fully comply with those HIPAA requirements that have been adopted. As part of our Corporate Integrity Program, we will monitor our compliance with HIPAA. Our compliance and privacy officer will be responsible for administering the Corporate Integrity Program which includes HIPAA related compliance. However, management cannot at this time estimate the cost of compliance, nor can management estimate the cost of compliance with standards that have not yet been finalized by DHHS.

It is not possible to fully quantify the effect of recent legislation, potential legislative or regulatory changes, the interpretation or administration of such legislation or any other governmental initiatives on our business. Accordingly, there can be no assurance that the impact of these changes or any future healthcare legislation will not

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adversely affect our business. There can be no assurance that payments under governmental and private third-party payor programs will be timely, will remain at levels comparable to present levels or will, in the future, be sufficient to cover the costs allocable to patients eligible for reimbursement pursuant to such programs. Our financial condition and results of operations may be affected by the reimbursement process, which in our industry is complex and can involve lengthy delays between the time that revenue is recognized and the time that reimbursement amounts are settled.

Corporate Integrity Program

Our Corporate Integrity Program was developed to assure that we continue to achieve our goal of providing a high level of care and service in a manner consistent with all applicable federal and state laws and regulations and our internal standard of conduct. This program is intended to allow personnel to prevent, detect and resolve any conduct or action that fails to satisfy all applicable laws and our standard of conduct.

We have a corporate compliance officer responsible for administering the Corporate Integrity Program. The corporate compliance officer, with the approval of our chief executive officer or our board of directors, may use any of our resources to evaluate and resolve compliance issues. The corporate compliance officer reports significant compliance issues to our board of directors.

We established the Corporate Integrity Program hotline, which offers a toll-free number available to all of our employees to report non-compliance issues, including any alleged privacy violations under the Health Insurance Portability and Accountability Act of 1996. Employee calls to the hotline will be kept anonymous unless the employee waives his/her right to anonymity. All calls reporting alleged non-compliance are logged, investigated, addressed and remedied by appropriate company officials.

The corporate integrity subcommittee was established to ensure a mechanism exists for us to monitor compliance issues. The corporate integrity subcommittee members are senior members of the human resources, legal, internal audit and operations departments.

Periodically, we receive information from the Department of Health and Human Services regarding individuals and providers that are excluded from participation in Medicare, Medicaid and other federal healthcare programs. Providers may include pharmacists and pharmacy technicians. On a monthly basis, management compares the information provided by the Department of Health and Human Services to our employee databases. Any potential matches are investigated and any necessary corrective action is taken to ensure we cease employing that individual.

Personnel

At September 30, 2003, we employed approximately 5,900 people, including approximately 4,800 full-time and 1,100 part-time employees. Approximately 16% of these employees are pharmacists or nurses.

We currently have two facilities that are covered by collective bargaining agreements. The agreements expire at various dates through 2007 and cover approximately 100 employees. We believe that our relationship with our employees is generally good.

Competition for qualified pharmacists and other pharmacy professionals is intense. See “Risk Factors — We are dependent on our senior management team and our pharmacy professionals.”

We believe that clinical staff retention and development, both pharmacists and nurses, continues to be a critical factor in our successful operation. In order to reduce turnover and increase our staff retention rates, we have implemented a compensation program which provides for annual merit reviews as well as continued market wage assessments. Our management team is also eligible for both financial and clinically based incentives that ultimately promote staff motivation and productivity. All sites participate in performance improvement initiatives that make an impact on the quality of patient care.

In 2002, in response to the pharmacist shortage, we implemented a pharmacist scholarship program to provide financial assistance to 3rd and 4th year pharmacy school students. In addition, we offer tuition assistance programs to our internal associates that enroll in an accredited educational program.

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In 2000, we began a junior level management and leadership training program, Mastering Management. This program includes various topics such as leadership style, setting goals, problem solving, interviewing and performance management. To date, we have trained over 1,000 participants.

Marketing

We market our institutional pharmacy services, homecare and group purchasing services through a direct sales force which primarily calls on long-term care facilities and their owners, hospitals, clinics and home health agencies. In addition, we have formed a national accounts team that is responsible for identifying opportunities within significant long-term care chains.

In addition, we have a corporate marketing department that helps develop promotional materials and literature focusing on our operational philosophy, the programs and services provided, and clinical expertise as well as providing market research.

Our logos, trademarks and service marks are featured in print advertisements in publications serving the markets in which we operate. Our marketing is aimed at supporting the efforts of our field sales staff and increasing awareness among decision makers in key professional and business audiences. We use advertising to promote our brand names in trade, professional and business publications and to promote services directly to consumers. In addition, to support our professional pharmacy business we advertise in regional markets through both radio and television outlets.

Inventories

We seek to maintain adequate on-site inventories of pharmaceuticals and supplies to ensure prompt delivery service to our customers. Our primary supplier also maintains local warehousing in most major geographic markets in which we operate.

Competition

The institutional pharmacy business is highly fragmented. We are the third largest provider of institutional pharmacy services in the United States. In the 32 states and the District of Columbia where we sell pharmacy products and services, we compete with multiple national, regional and local institutional pharmacies, pharmacies owned by long-term care facilities and numerous local retail pharmacies. Some of our competitors may have greater financial and other resources and may be more established than us in the markets in which we compete. Competing companies also may offer newer or different services than us and may thereby attract our clients. We believe that the primary competitive factors in obtaining and retaining clients are service, integrity, clinical expertise, fair pricing and the ability to form strong relationships with key personnel.

We also compete with a variety of companies in the retail pharmacy market as well as companies providing home infusion, respiratory and medical equipment in providing other specialty medical services with a variety of different companies. Generally, this competition is national, regional and local in nature. The primary competitive factors in these businesses are similar to those in the pharmacy business and include service, the cost of services, the quality of clinical services, responsiveness to customer needs, information management and patient record-keeping. See “Risk Factors —We face intense competition in our business.”

Insurance

Our workers’ compensation, automobile, general and professional liability insurance is maintained as statutorily required through third-party commercial insurers. The commercial insurance purchased is loss sensitive in nature. As a result, we are responsible for adverse loss development beyond an aggregate level.

We provide several health insurance options to our employees, including a self-insured health plan and several fully-insured health maintenance organizations.

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Genesis HealthCare Corporation

Description of Business

GHC is one of the largest providers of healthcare and support services to the elderly in the United States. Within its network of geographically concentrated facilities, GHC offers services focusing on the primary medical, physical and behavioral issues facing the medically complex elderly population. Through its physicians, nurses, therapists and other members of our interdisciplinary medical care team, GHC applies a comprehensive approach to the complex needs facing the elderly, which it believes has resulted in its above industry average occupancy levels and an enhanced quality payor mix. For the twelve months ended September 30, 2003, the average occupancy level in GHC’s inpatient facilities was approximately 91%, and approximately 28% of its net revenues were from Medicare patients.

GHC’s business is comprised of two primary businesses: inpatient services and rehabilitation therapy services. These segments are supported by complementary service capabilities.

Approximately 90% of GHC’s net revenues are generated through inpatient services. GHC’s inpatient services business is offered through a network of skilled nursing and assisted living centers primarily located in the eastern United States. Its eldercare centers are concentrated in the states of Pennsylvania, New Jersey, Maryland and Massachusetts. GHC currently owns 123 eldercare facilities, jointly-owns 22 eldercare facilities, leases 37 eldercare facilities and manages 35 eldercare facilities. These eldercare facilities consist of 194 skilled nursing facilities and 23 assisted living facilities with 26,470 beds, including two skilled nursing facilities with 404 beds located in the state of Wisconsin that have been identified as held for sale.

GHC’s rehabilitation therapy business provides an extensive range of rehabilitation therapy services to the elderly, including speech pathology, physical therapy and occupational therapy in its eldercare regional market concentrations. These services are provided by approximately 4,200 licensed rehabilitation therapists and assistants employed or contracted by GHC at substantially all of the eldercare facilities it operates, as well as by contract to third-party healthcare facilities and through its 13 outpatient rehabilitation sites.

Inpatient Services

GHC’s eldercare centers are located in 13 states, and concentrated in three geographic regions: New England Region (Massachusetts/Connecticut/New Hampshire/Vermont/Rhode Island); Midatlantic Region (Greater Philadelphia/Delaware Valley/New Jersey); and Chesapeake/Allegheny Region (Southern Delaware/Eastern Shore of Maryland/Baltimore, Maryland/Washington D.C./Virginia/West Virginia/Western Pennsylvania/North Carolina).

GHC’s services focus on the primary medical, physical and behavioral issues facing the more medically complex elderly. Through the talents of its nurses, physicians, therapists and other members of the interdisciplinary team, GHC believes that its holistic approach to meeting the complex needs facing the elderly has resulted in a high occupancy of available beds and enhanced quality payor mix.

GHC employs physicians, physician assistants and nurse practitioners who are primarily involved in providing medical direction and/or direct patient care. The emphasis on physician leadership is a strength that differentiates GHC from other long-term care companies. Its physician executives are administratively and clinically accountable for clinical care and quality improvement. The nursing center medical directors are dually accountable to the administrator and the physician executive. This medical staff structure allows for significant involvement of physicians at all levels of the organization thus ensuring that an emphasis on quality care is maintained. GHC maintains a corporate quality improvement program to enhance and continuously improve care provided in each center.

GHC has established and actively markets programs for the elderly and other patients who require more complex levels of medical care. It focuses on clinically complex elderly patients who need extensive therapies and treatments to stabilize health problems before returning home or transitioning into a permanent long-term care setting. Over 90% of patients come to GHC’s centers directly from an acute hospital stay and have four or more health problems that affect their ability to carry out everyday activities. Half of the elders who enter GHC’s centers for post-acute care are discharged within 27 days while the average stay for a long-term care patient is 174 days.

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Private insurance companies and other third-party payors, including certain state Medicaid programs, have recognized that treating patients requiring complex medical care in centers such as those GHC operates is a cost-effective alternative to treatment in an acute care hospital. GHC provides high acuity care at rates that it believes are substantially below the rates typically charged by acute care hospitals for comparable services.

The following table reflects GHC’s average number of beds in service and its average occupancy levels for the periods presented. The average beds in service have not been adjusted to exclude discontinued operations, however, the owned and leased facility occupancy data does exclude discontinued operations:

	Years Ended September 30,
	2003			2002			2001
Average Beds in Service
Owned and Leased Facilities		22,758			24,139			24,783
Managed and Jointly-Owned Facilities		6,320			7,898			9,215
Occupancy Based on Average Beds in Service:
Owned and Leased Facilities		91	%		92	%		92	%
Managed and Jointly-Owned Facilities		92	%		91	%		88	%

The following table reflects the payor mix of inpatient services revenues for the periods presented, and has not been adjusted to exclude discontinued operations:

	Years Ended September 30,
	2003			2002			2001
Medicaid		50	%		48	%		48	%
Medicare		28	%		29	%		27	%
Private pay and other		22	%		23	%		25	%
		100	%		100	%		100	%

See “ — Genesis HealthCare Corporation — Revenue Sources” and “ — Genesis HealthCare Corporation — Government Regulation.”

Rehabilitation Therapy

GHC provides an extensive range of rehabilitation therapy services, including speech pathology, physical therapy and occupational therapy in all of its eldercare regional market concentrations. These services are provided by approximately 4,200 licensed rehabilitation therapists and assistants employed or contracted by GHC at substantially all of the eldercare centers it operates, as well as by contract to healthcare facilities operated by others and through any one of GHC’s 13 certified outpatient rehabilitation agencies.

Other Services

GHC provides management services to 57 eldercare centers and transitional care units, which are the eldercare centers jointly-owned and/or managed referred to in “ — Genesis HealthCare Corporation — Inpatient Services” above, pursuant to management agreements that provide generally for the day-to-day responsibility for the operation and management of the centers. In turn, GHC receives management fees, depending on the agreement, computed as an overall fixed fee, a fixed fee per customer, a percentage of net revenues of the center plus an incentive fee, or a percentage of gross revenues of the center with some incentive clauses. The management agreements, including renewal option periods, are scheduled to terminate between 2003 and 2018, 34 of which are scheduled to terminate within the next twelve months. GHC expects to renew a majority of the terminating contracts.

GHC also provides an array of other specialty medical services in certain parts of its eldercare network, including portable x-ray and other diagnostic and respiratory health services.

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Revenue Sources

GHC receives revenues from Medicare, Medicaid, private insurance, self-pay residents, other third-party payors and long-term care facilities that utilize its rehabilitation therapy services and other service related businesses.

The sources and amounts of GHC’s revenues are determined by a number of factors, including licensed bed capacity and occupancy rates of its eldercare centers, the mix of patients and the rates of reimbursement among payors. Likewise, payment for ancillary medical services, including services provided by GHC’s rehabilitation therapy services business, vary based upon the type of payor and payment methodologies. Changes in the case mix of the patients as well as payor mix among Medicare, Medicaid and private pay can significantly affect GHC’s profitability.

Medicare and Medicaid

The Health Insurance for Aged and Disabled Act (Title XVIII of the Social Security Act), or “Medicare,” is a federally funded and administered health insurance program for individuals aged 65 and over or for certain individuals who are disabled. The Medicare program consists of three parts: (i) Medicare Part A, which covers, among other things, inpatient hospital, skilled long-term care, home healthcare and certain other types of healthcare services; (ii) Medicare Part B, which covers physicians’ services, outpatient services and certain items and services provided by medical suppliers; and (iii) a managed care option for beneficiaries who are entitled to Medicare Part A and enrolled in Medicare Part B, known as Medicare+Choice or Medicare Part C. Pursuant to the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, or the Medicare Modernization Act, passed by Congress on November 25, 2003 and signed into law by the President on December 8, 2003, the Medicare+Choice program will be subsumed into a new Medicare supplemental product called Medicare Advantage by 2006.  Under Medicare Part B, we are entitled to payment for products that replace a bodily function (i.e., ostomy supplies), home medical equipment and supplies and a limited number of specifically designated prescription drugs.  The Medicare program is currently administered by fiscal intermediaries (for Medicare Part A and some Medicare Part B services) and carriers (for Medicare Part B) under the direction of the Centers for Medicare and Medicaid Services, or CMS, the Medicare and Medicaid oversight division of the United States Department of Health and Human Services, or DHHS.

Medicaid (Title XIX of the Social Security Act) is a federal-state matching fund program, whereby the federal government, under a needs-based formula, matches funds provided by the participating states for medical assistance to “medically indigent” persons. The programs are administered by the applicable state welfare or social service agencies under federal rules. Although Medicaid programs vary from state to state, traditionally they have provided for the payments, up to established limits, at rates determined in accordance with each state’s regulations. The federal Medicaid statute specifies a variety of requirements that the state plan must meet, including requirements relating to eligibility, coverage of services, payment and administration. For patients eligible for Medicaid, we bill the individual state Medicaid program or, in certain circumstances, the state designated managed care or other similar organizations. The reimbursement rates for pharmacy services under Medicaid are determined on a state-by-state basis subject to review by the Centers for Medicare and Medicaid Services and applicable federal law. Federal regulations and the regulations of certain states establish “upper limits” for reimbursement for certain prescription drugs under Medicaid. In most states, pharmacy services are priced at the lower of “usual and customary” charges or cost (which generally is defined as a function of average wholesale price and may include a profit percentage) plus a dispensing fee. Most states establish a fixed dispensing fee that is adjusted to reflect associated costs on an annual or less frequent basis.  The payment methodology for certain forms of prescription drugs and biologicals reimbursed under the Medicaid program may be subject to changes under the Medicare Modernization Act.  See “ — Genesis HealthCare Corporation — Laws Affecting Revenues.”

State Medicaid programs generally have long-established programs for reimbursement which have been revised and refined over time and have not had a material adverse effect on the pricing policies or receivables collection for long-term care facility pharmacy services. Any future changes in such reimbursement programs or in regulations relating thereto, such as reductions in the allowable reimbursement levels or the timing of processing of payments, could adversely affect our business. The annual increase in the federal share could vary from state to state based on a variety of factors. Such provisions, if ultimately signed into law, could adversely affect our business. Additionally, any shift from Medicaid to state designated managed care could adversely affect our business due to historically lower reimbursement rates for managed care.

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Moreover, Medicare and Medicaid are subject to statutory and regulatory changes, retroactive rate adjustments, administrative rulings and government funding restrictions, all of which may materially affect the timing and/or levels of payments to us for our services. 

We are subject to periodic audits by the Medicare and Medicaid programs, which have various rights and remedies against us if they assert that we have overcharged the programs or failed to comply with program requirements. These rights and remedies may include requiring the repayment of any amounts alleged to be overpayments or in violation of program requirements, or making deductions from future amounts due to us. Such programs may also impose fines, criminal penalties or program exclusions. Other third-party payor sources also reserve rights to conduct audits and make monetary adjustments.

Laws Affecting Revenues

Congress has enacted three major laws during the past six years that have significantly altered payment for skilled nursing facilities and medical ancillary services. The Balanced Budget Act, signed into law on August 5, 1997, reduced federal spending on Medicare and Medicaid programs. The Medicare Balanced Budget Refinement Act, enacted in November 1999, addressed a number of the funding difficulties caused by the Balanced Budget Act. The Benefits Improvement and Protection Act, enacted on December 15, 2000, further modified the law and restored additional funding. The following is a brief summary of these laws and an overview of the impact of these enactments on us. For a discussion of the effect of laws upon our business, see “Risk Factors.”

Under the Balanced Budget Act, participating skilled nursing facilities are reimbursed under a prospective payment system for inpatient Medicare covered services. The prospective payment system commenced with a facility’s first cost reporting period beginning on or after July 1, 1998. Under the prospective payment system, skilled nursing facilities are paid a predetermined amount per patient, per day or “per diem” based on the anticipated costs of treating patients. The per diem rate is determined by classifying each patient into one of 44 resource utilization groups using the information gathered as a result of each patient’s minimum data set assessment. There is a separate per diem rate for each of the resource utilization group classifications. The per diem rate also covers rehabilitation and non-rehabilitation ancillary services. The law phased in the prospective payment system over a three-year period.

As implemented by the Centers for Medicare and Medicaid Services, the prospective payment system has had an adverse impact on the Medicare revenues of many skilled nursing facilities. There have been three primary problems. First, the base year calculations understate costs. Second, the market basket index used to trend payments forward does not adequately reflect market experience. Third, the resource utilization group case mix allocation is not adequately predictive of the costs of care for patients, and does not equitably allocate funding, especially for non-therapy ancillary services.

In November 1999, the Balanced Budget Refinement Act was passed in Congress. This enactment provided relief for certain reductions in Medicare reimbursement caused by the Balanced Budget Act. For covered skilled nursing facility services furnished on or after April 1, 2000, the Medicare per diem rate was increased by 20% for 15 resource utilization group payment categories, which we refer to as “payment add-ons.” While this provision was initially expected to adjust payment rates for only six months, the Centers for Medicare and Medicaid Services withdrew proposed resource utilization group refinement rules. These payment add-ons will continue until the Centers for Medicare and Medicaid Services completes certain mandated recalculations of current resource utilization group weightings.

A number of provisions of the Balanced Budget Refinement Act and the Benefits Improvement and Protection Act, providing additional funding for Medicare participating skilled nursing facilities, expired on September 30, 2002 resulting in an approximate 10% reduction in the rates paid to us for providing services to Medicare patients. We refer to the expiration of the additional funding as the “skilled nursing facility Medicare cliff.” Effective October 1, 2002, Medicare rates adjusted for the skilled nursing facility Medicare cliff were increased by a 2.6% annual market basket adjustment. For us, the net impact of these provisions adversely impacted annual revenue and EBITDA in fiscal 2003 by approximately $24.8 million.

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The final fiscal year 2004 prospective payment system rules for skilled nursing facilities became effective on October 1, 2003. The final rules enhance the reimbursement rates for fiscal year 2004 by increasing base rates by 6.26% (a 3% increase in the annual update factor and a 3.26% upward adjustment correcting previous forecast errors). These changes are estimated to increase Medicare payment rates per patient day by $19. The final rules also provide for the continuation through fiscal year 2004 of certain payment add-ons that were authorized in the Balanced Budget Refinement Act to compensate for non-therapy ancillaries.

The recently enacted Medicare Modernization Act suspended application of the therapy caps, as of December 8, 2003 through calendar year 2005.  The therapy caps in place effective September 1, 2003, imposed payment limits to services provided by independent therapists as well as to those provided by outpatient rehabilitation facilities and other forms of rehabilitation agencies. The suspension does not have retroactive impact upon Medicare beneficiaries who exceeded their caps between September 1, 2003 and December 8, 2003.  The imposition of the therapy caps between September 1, 2003 and December 8, 2003 may have the effect of reducing annual net revenue and EBITDA in GHC’s fiscal year 2004.  Extension of the moratorium removes a significant financial threat to our therapy business for the short term.  Previously, GHC estimated that the therapy caps would reduce its annual net revenues by approximately $18.9 million and EBITDA by approximately $4.9 million.  The new law also assures at least a positive 1.5% increase in the therapy fee schedule for each of the next two years through calendar year 2005.  No assurances can be made or given that Congress will extend the moratorium on application of the therapy caps beyond 2005.

The Balanced Budget Act of 1997 repealed the “Boren Amendment” federal payment standard for payments to Medicaid nursing facilities, effective October 1, 1997. This repeal gave the states greater latitude in setting payment rates for nursing facilities. Budget constraints and other factors have caused some states to reduce Medicaid reimbursement to nursing facilities and states may continue to reduce or delay payments to nursing facilities in the future. The law also granted the states greater flexibility in establishing Medicaid managed care programs without the need to obtain a federal waiver. Although these waiver programs generally exempted institutional care, including nursing facility and institutional pharmacy services, these programs could ultimately change the Medicaid reimbursement system for long-term care. These changes could include changing reimbursement for pharmacy services from fee-for-service, or payment per procedure or service rendered, to a fixed amount per person utilizing managed care negotiated or capitated rates.

The Benefits Improvement and Protection Act of 2000 enacted a phase out of intergovernmental transfer transactions by states whereby states would artificially inflate the payments to certain public facilities to increase federal matching funds.  This action may have had the effect of reducing federal support for a number of state Medicaid programs. The reduced federal payments may impact aggregate available funds requiring states to further contain payments to providers. We operate in several of the states that have experienced or will experience a contraction of federal matching funds.

The recent economic downturn is having a detrimental affect on state revenues in most jurisdictions. Budget shortfalls range from 4% to 5% of outlays upwards to 20% of outlays in a handful of states. Historically these budget pressures have translated into reductions in state spending. Given that Medicaid outlays are a significant component of state budgets, we expect continuing cost containment pressures on Medicaid outlays for skilled nursing facilities in the states in which we operate. In each of the major states where we provide services, we are working with trade groups, consultants and government officials to responsively address the particular funding issues.

The plight of state governments has helped to elevate issues related to Medicaid onto the national agenda. Earlier this year, Congress passed temporary relief to states providing a 2.9% temporary increase in the Federal Medicaid Assistance Percentage for five quarters. This assistance is estimated to provide states $10 billion in Medicaid relief.

Late in November 2003, the General Accounting Office released a study examining how nursing home reimbursement has been affected by the fiscal crisis being experienced by a number of states. The report documents that most states have sustained their reimbursement commitments. States have tapped reserves, tobacco settlement monies and other funding strategies including provider assessments to meet their obligations. While the data does not evaluate the adequacy of state Medicaid payments for nursing facility services, the analysis does suggest that under current difficult conditions states are honoring their commitments.

It is not possible to quantify fully the effect of legislative changes, the interpretation or administration of such legislation or any other governmental initiatives on our business and the business of our principal customers.

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Accordingly, there can be no assurance that the impact of any future healthcare legislation will not further adversely affect our business. There can be no assurance that payments under governmental and private third-party payor programs will be timely, will remain at levels comparable to present levels or will, in the future, be sufficient to cover the costs allocable to patients eligible for reimbursement pursuant to such programs. Our financial condition and results of operations may be affected by the reimbursement process, which in the healthcare industry is complex and can involve lengthy delays between the time that revenue is recognized and the time that reimbursement amounts are settled.

While Congress has, through the Medicare Modernization Act, extended the moratorium on payment caps on Medicare Part B rehabilitation therapy services, the federal government and state governments continue to focus on efforts to curb spending on healthcare programs such as Medicare and Medicaid. We cannot at this time predict the extent to which these proposals will be adopted or, if adopted and implemented, what effect, if any, such proposals and existing new legislation will have on us. Efforts to impose reduced allowances, greater discounts and more stringent cost controls by government and other payors are expected to continue.

See “ — NeighborCare, Inc. — Laws Affecting Revenues.”

Government Regulation

General

GHC’s business is subject to extensive federal, state and, in some cases, local regulation with respect to, among other things, participation in the Medicare and Medicaid programs, licensure, certification and government reimbursement. For GHC’s eldercare centers, these regulations relate, among other things, to the adequacy of physical plant and equipment, qualifications of personnel, standards of care, government reimbursement and operational requirements. Compliance with such regulatory requirements, as interpreted and amended from time to time, can increase operating costs and thereby adversely affect the financial viability of GHC’s business. Failure to comply with current or future regulatory requirements could also result in the imposition of various remedies including fines, restrictions on admission, denial of payment for all or new admissions, the revocation of licensure, decertification, imposition of temporary management or the closure of the facility.

Licensure, Certification and Regulation

All of GHC’s eldercare centers and healthcare services, to the extent required, are currently licensed under applicable law. All skilled nursing centers and healthcare services, or practitioners providing the services therein, are certified or approved as providers under one or more of the Medicaid and Medicare programs. Generally, assisted living centers are not eligible to be certified under Medicare or Medicaid. Licensing, certification and other applicable standards vary from jurisdiction to jurisdiction and are revised periodically. State and local agencies survey all skilled nursing centers on a regular basis to determine whether such centers are in compliance with governmental operating and health standards and conditions for participation in government sponsored third-party payor programs. GHC believes that its eldercare centers and other sites of service are in substantial compliance with the various Medicare, Medicaid and state regulatory requirements applicable to them. However, in the ordinary course of its business, GHC receives notices of deficiencies for failure to comply with condition of participation in the Medicare and Medicaid programs. GHC reviews such notices and takes appropriate corrective action. In these cases, GHC submits its plan to bring the center into compliance with regulations which must be accepted by the reviewing agency. In some cases, the reviewing federal or state agency may take various adverse actions against a provider, including but not limited to:

• the imposition of fines;

• suspension of payments for new or all admissions to the center; and

• in extreme circumstances, decertification from participation in the Medicare or Medicaid programs and revocation of a center’s or service site’s license.

These actions may adversely affect a center’s ability to continue to operate, ability to provide certain services, and/or eligibility to participate in the Medicare or Medicaid programs or to receive payments from other payors. Certain of GHC’s centers have received notices that, as a result of certain alleged deficiencies, the federal and/or

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state agency was taking steps to impose remedies. Additionally, actions taken by one center or service site may subject other centers or service sites under common control or ownership to adverse remedies.

All of GHC’s skilled nursing centers participate in the Medicare and Medicaid programs. Both initial and continuing qualifications of a skilled nursing center to participate in such programs depend upon many factors including accommodations, equipment, services, patient care, safety, personnel, physical environment, and adequate policies, procedures and controls.

During 2002, the Centers for Medicare and Medicaid Services piloted a new nursing home quality initiative in six states. GHC’s facilities cooperated in these initiatives to generate improved reporting and public awareness. Based on the success of the pilot program, the Centers for Medicare and Medicaid Services has rolled out the program nationwide. In addition to the changes being driven by public agencies, a number of nursing home companies in conjunction with several national trade associations have signed a quality covenant. This covenant establishes quality benchmarks the signing companies are striving to obtain.

Several states in which GHC operates have adopted certificate of need or similar laws which generally require that a state agency approve certain acquisitions and determine that the need for certain bed additions, new services, and capital expenditures. State approvals are generally issued for a specified maximum expenditure and require implementation of the proposal within a specified period of time. Failure to obtain the necessary state approval can result in:

• the inability to provide the service;

• the inability to operate the centers;

• the inability to complete the acquisition, addition or other change; and

• the imposition of sanctions or adverse action on the center’s license and adverse reimbursement action.

During recent years several states have passed legislation altering their certificate of need requirements. Virginia is expected to phase out its certificate of need requirement and Maryland is studying a similar action. These changes are not expected to materially alter our business opportunities.

Laws Affecting Billing and Business Practices

GHC is also subject to federal and state laws that govern financial and other arrangements between healthcare providers. These laws often prohibit certain direct and indirect payments or fee-splitting arrangements between healthcare providers that are designed to induce the referral of patients to, or the recommendation of, a particular provider for medical products and services. These laws include:

• the “anti-kickback” provisions of the federal Medicare and Medicaid programs, which prohibit, among other things, knowingly and willfully soliciting, receiving, offering or paying any remuneration (including any kickback, bribe or rebate) directly or indirectly in return for or to induce the referral of an individual to a person for the furnishing or arranging for the furnishing of any item or service for which payment may be made in whole or in part under Medicare or Medicaid. Penalties may include imprisonment, fines, exclusion from participation in the Medicare and Medicaid programs and loss of license; and

• the “Stark laws” which prohibit, with limited exceptions, the referral of patients by physicians for certain services, including home health services, physical therapy and occupational therapy, to an entity in which the physician has a financial interest. Penalties may include denial of payment, mandatory refund of prior payment, civil monetary penalties and exclusion from participation in the Medicare and Medicaid programs.

In addition, some states restrict certain business relationships between physicians and other providers of healthcare services. Possible sanctions for violation of any of these restrictions or prohibitions include loss of licensure or eligibility to participate in reimbursement programs and civil and criminal penalties. These laws vary from state to state, are often complex and have seldom been interpreted by the courts or regulatory agencies. From time to time, GHC has sought guidance as to the interpretation of these laws, however, there can be no assurance that such laws will ultimately be interpreted in a manner consistent with GHC’s practices.

There have also been a number of recent federal and state legislative and regulatory initiatives concerning reimbursement under the Medicare and Medicaid programs. During the past few years, the Department of Health and Human Services has issued a series of voluntary compliance guidelines. These compliance guidelines provide guidance on acceptable practices. Skilled nursing facility services and durable medical equipment, prosthetics, orthotics, supplies, and supplier performance practices have been among the services addressed in these

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publications. GHC’s Corporate Integrity Program is working to assure that its practices conform to regulatory requirements. The Department of Health and Human Services also issues fraud alerts and advisory opinions. For example, directives concerning double billing, home health services, the provision of medical supplies to nursing facilities, and most recently, contractual joint venture relationships have been released. It is anticipated that areas addressed by these advisories may come under closer scrutiny by the government. While GHC has reviewed government guidance, it cannot accurately predict the impact of any such initiatives.

Laws Governing Health Information

GHC faces additional federal requirements that mandate major changes in the transmission and retention of health information. The Health Insurance Portability and Accountability Act of 1996 was enacted to ensure, first, that employees can retain and at times transfer their health insurance when they change jobs, and secondly, to simplify healthcare administrative processes. This simplification includes expanded protection of the privacy and security of personal medical data and requires the adoption of standards for the exchange of electronic health information. Among the standards that the Department of Health and Human Services has or may adopt pursuant to the Health Insurance Portability and Accountability Act are standards for the following: electronic transactions and code sets, unique identifiers for providers, employers, health plans and individuals, security and electronic signatures, privacy, and enforcement.

Although HIPAA was intended to ultimately reduce administrative expenses and burdens faced within the healthcare industry, GHC believes that implementation of this law will result in additional costs. GHC has established a HIPAA task force consisting of clinical, financial and informational services professionals focused on HIPAA compliance.

The Department of Health and Human Services has released three rules to date mandating the use of new standards with respect to certain healthcare transactions and health information. The first rule establishes uniform standards for common healthcare transactions, including:

• healthcare claims information;

• plan eligibility, referral certification and authorization;

• claims status;

• plan enrollment and disenrollment;

• payment and remittance advice;

• plan premium payments; and

• coordination of benefits.

Second, DHHS has released standards relating to the privacy of individually identifiable health information. These standards not only require GHC’s compliance with rules governing the use and disclosure of protected health information, but they also require it to impose those rules, by contract, on any business associate to whom GHC discloses information. Third, DHHS has released rules governing the security of health information maintained or transmitted in electronic form.

DHHS finalized the transaction standards on August 17, 2000. DHHS issued the privacy standards on December 28, 2000, and, after certain delays, they became effective on April 14, 2001, with a compliance date of April 14, 2003. On February 20, 2003, DHHS issued final rules governing the security of health information. This rule specifies a series of administrative, technical and physical security procedures to assure the confidentiality of electronic protected health information. Affected parties will have approximately two years to be fully compliant. Sanctions for failing to comply with HIPAA health information practices provisions include criminal penalties and civil sanctions.

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At this time, GHC management anticipates that GHC will be able to fully comply with those HIPAA requirements that have been adopted. As part of GHC’s Corporate Integrity Program, GHC will monitor its compliance with HIPAA. GHC’s compliance and privacy officer will be responsible for administering the Corporate Integrity Program which includes HIPAA related compliance. However, GHC management cannot at this time estimate the cost of compliance, nor can GHC management estimate the cost of compliance with standards that have not yet been finalized by the DHHS.

It is not possible to fully quantify the effect of recent legislation, potential legislative or regulatory changes, the interpretation or administration of such legislation or any other governmental initiatives on GHC’s business. Accordingly, there can be no assurance that the impact of these changes or any future healthcare legislation will not adversely affect GHC’s business. There can be no assurance that payments under governmental and private third-party payor programs will be timely, will remain at levels comparable to present levels or will, in the future, be sufficient to cover the costs allocable to patients eligible for reimbursement pursuant to such programs. GHC’s financial condition and results of operations may be affected by the reimbursement process, which in GHC’s industry is complex and can involve lengthy delays between the time that revenue is recognized and the time that reimbursement amounts are settled.

Corporate Integrity Program

GHC’s Corporate Integrity Program was developed to assure that it strives to achieve its goal of providing a high level of care and service in a manner consistent with all applicable state and federal laws and regulations and GHC’s internal standard of conduct. This program is intended to allow personnel to prevent, detect and resolve any conduct or action that fails to satisfy all applicable laws and GHC’s standard of conduct.

GHC has a corporate compliance officer responsible for administering the Corporate Integrity Program. The corporate compliance officer, with the approval of the chief executive officer or the board of directors, may use any of GHC’s resources to evaluate and resolve compliance issues. The corporate compliance officer reports significant compliance issues to the board of directors.

GHC established the Corporate Integrity Program hotline, which offers a toll-free number available to all of its employees to report compliance issues, including any alleged privacy violations under the Health Insurance Portability and Accountability Act. All calls reporting alleged non-compliance are logged, investigated, addressed and remedied by appropriate company officials.

The corporate integrity subcommittee was established to ensure a mechanism exists for GHC to monitor compliance issues. The corporate integrity subcommittee members are senior members of the finance, human resources, information systems, legal, clinical practices, internal audit and operations departments.

Periodically, GHC receives information from the Department of Health and Human Services regarding individuals and providers that are excluded from participation in Medicare, Medicaid and other federal healthcare programs. Providers may include medical directors, attending physicians, vendors, consultants and therapists. On a monthly basis, management compares the information provided by the Department of Health and Human Services to databases containing providers and individuals doing business with GHC. Any potential matches are investigated and any necessary corrective action is taken to ensure GHC ceases doing business with that provider and/or individual.

Personnel

GHC employs over 35,000 people. It has 57 facilities that are covered by, or are negotiating, collective bargaining agreements. The agreements expire at various dates through 2006 and cover approximately 4,700 employees. GHC believes that its relationship with its employees is generally good.

GHC and its industry continue to experience shortages in qualified professional clinical staff. GHC competes with other healthcare providers and with non-healthcare providers for both professional and non-professional employees. As the demand for these services continually exceeds the supply of available and qualified staff, GHC and its competitors have been forced to offer more attractive wage and benefit packages to these professionals and to utilize outside contractors for these services at premium rates. Furthermore, the competitive arena for this shrinking labor market has created high turnover among clinical professional staff as many seek to take advantage of the supply of available positions, each offering new and more attractive wage and benefit packages. In addition to the wage pressures inherent in this environment, the cost of training new employees amid the high turnover rates has created added pressure on GHC’s operating margins. Lastly, increased attention to the quality of care provided in skilled nursing facilities has caused several states to mandate and other states to consider mandating minimum staffing laws that further increase the gap between demand for and supply of qualified individuals and lead to higher labor costs. While GHC has been able to retain the services of an adequate number of qualified personnel to staff its facilities and sites of service appropriately and maintain its standards of quality care, there can be no assurance that continued shortages will not affect its ability to attract and maintain an adequate staff of qualified healthcare

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personnel in the future. A lack of qualified personnel at a facility could result in significant increases in labor costs and an increased reliance on expensive temporary nursing agencies at such facility or otherwise adversely affect operations at such facility. Any of these developments could adversely affect GHC’s operating results or expansion plans.

In recognition of the competitive nature of nurse recruitment and retention, GHC expects to create reward, recognition and professional development programs for nurses. Shared Governance, a structure to support the participation of nurses in the development and implementation of policies, projects and processes which affect their practice has been instituted. Additionally, STEPP (Steps To Excellence in Professional Practice), a clinical advancement program which allows nurses to receive recognition and compensation for clinical expertise, has been implemented.

Marketing

Marketing for eldercare centers is focused at the local level and is conducted primarily by a dedicated regional marketing staff that calls on referral sources such as hospitals, hospital discharge planners, doctors and various community organizations. In addition to those efforts, GHC’s marketing objective is to maintain public awareness of its eldercare centers and their capabilities. GHC takes advantage of its regional concentrations in its marketing efforts, where appropriate, through consolidated marketing programs, which benefit more than one center. Toll-free regional phone lines assist the marketing staff and direct referral sources, which speeds admissions by automated tracking of bed availability and specialty care capabilities for each of GHC’s centers and all of its affiliated centers.

GHC markets its rehabilitation therapy services, respiratory therapy and diagnostic services through a direct sales force which primarily calls on eldercare centers, hospitals, clinics and home health agencies.

Historically, GHC operated its core business under the name Genesis ElderCare. Its logos, trademarks and service marks are featured in print advertisements in publications serving the regional markets in which GHC operates. GHC is using advertising, including its toll free ElderCare lines, to promote its brand names in trade, professional and business publications and to promote services directly to consumers.

Competition

GHC competes with a variety of other companies in providing healthcare services. Certain competing companies have greater financial and other resources and may be more established in their respective communities than GHC is. Competing companies may offer newer or different centers or services than GHC and may thereby attract GHC’s patients who are either presently residents of its eldercare centers or are otherwise receiving its healthcare services.

GHC operates eldercare centers in 13 states. In each market, GHC’s eldercare centers may compete for patients with rehabilitation hospitals, subacute units of hospitals, skilled or intermediate nursing centers, and personal care or residential centers. Certain of these providers are operated by not-for-profit organizations and similar businesses that can finance capital expenditures on a tax-exempt basis or receive charitable contributions unavailable to GHC. In competing for patients, a center’s local reputation is of paramount importance. Referrals typically come from acute care hospitals, physicians, religious groups, health maintenance organizations, the patient’s families and friends, and other community organizations.

Members of a patient’s family generally actively participate in the selection of an eldercare center. Competition for medically complex patients is intense among acute care hospitals with long-term care capability, rehabilitation hospitals and other specialty providers and is expected to remain so in the future. Important competitive factors include the reputation in the community, services offered, the appearance of a center, and the cost of services.

GHC competes in providing other healthcare services with a variety of different companies. Generally, this competition is regional and local in nature. The primary competitive factors in these businesses are similar to those in the inpatient services business and include reputation, the cost of services, the quality of clinical services, responsiveness to patient needs, and the ability to provide support in other areas such as third-party reimbursement, information management and patient record-keeping.

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Insurance

GHC has experienced an adverse effect on its operating cash flow due to an increase in the cost of certain of its insurance programs. Rising costs of eldercare malpractice litigation and losses stemming from these malpractice lawsuits and a constriction of insurers have caused many insurance carriers to raise the cost of insurance premiums or refuse to write insurance policies for skilled nursing facilities. Also, a tightening of the reinsurance market has affected property, auto and excess liability insurance carriers. Accordingly, the costs of all insurance premiums have increased.

This increase in insurance costs has prompted GHC to exit its otherwise profitable operations in the State of Florida. There is no assurance that liability exposure and the related costs of insurance will not migrate to other states.

Prior to June 1, 2000, GHC purchased general and professional liability insurance coverage from various commercial insurers on a first dollar coverage basis. Beginning with the June 1, 2000 policy, GHC has purchased general and professional liability insurance coverage from a commercial insurer subject to per claim retentions. These retentions are insured by GHC’s wholly-owned captive insurance company, Liberty Health Corp. Liberty Health Corp. is currently insuring GHC’s workers’ compensation, auto and general and professional liability insurance retentions.

Workers’ compensation insurance has been maintained as statutorily required, and in certain jurisdictions for certain periods, GHC has qualified as exempt or self-insured. Most of the commercial insurance purchased is loss sensitive in nature. As a result, GHC is responsible for adverse loss development.

GHC provides several health insurance options to its employees, including a self-insured health plan and several fully-insured health maintenance organizations. Growth in health insurance premiums in the market has risen to 10% to 20% in recent years. GHC’s business is a labor intensive business, and therefore health insurance costs represent a significant expense for it. In recent years, GHC has managed this increase with changes in program offerings and the shift in responsibility for cost increases to the employee. Continuing increases substantially in excess of inflation could have a negative impact on GHC’s profitability, as further shifts in responsibility for these cost increases to the employee may not be possible.

GHC believes that adequate reserves are in place to cover the ultimate liability related to general and professional liability, workers’ compensation and health insurance claims exposure. However, there can be no assurance that any current or future claims will not exceed applicable insurance coverage.

Other

Environmental Matters

We are subject to various federal, state and local statutes and ordinances regulating the discharge of materials into the environment. Management does not believe that we will be required to expend any material amounts in order to comply with these laws and regulations or that compliance will materially affect our capital expenditures, results of operations or financial condition.

Reorganization

On October 2, 2001, the effective date, we and The Multicare Companies, Inc., our 43.6% owned affiliate, consummated a joint plan of reorganization under Chapter 11 of the Bankruptcy Code pursuant to a September 20, 2001 order entered by the U.S. Bankruptcy Court for the District of Delaware approving our joint plan of reorganization. We have been operating out of bankruptcy since October 2, 2001.

See Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Certain Transactions and Events,” of this Form 10-K for a further description of the nature and results of our reorganization and a description of other recent matters impacting our business and results of operations.

See “Risk Factors.”

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Available Information

Our Internet address is www.NeighborCare.com. During fiscal 2003, we made available free of charge on www.ghv.com and, as of December 1, 2003, we have made available free of charge on www.NeighborCare.com our annual report on Form 10–K, quarterly reports on Form 10–Q and current reports on Form 8–K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC.

In addition, you may request a copy of these filings (excluding exhibits) at no cost by writing or telephoning us at the following address or telephone number:

NeighborCare, Inc.

7 East Lee Street

Baltimore, MD 21202

Attention: Investor Relations

Telephone: (410) 752-2600

Information contained on our website is not part of this annual report on Form 10–K and is not incorporated by reference in this document. Our website is and is only intended to be an inactive textual reference.

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ITEM 2: PROPERTIES

Pharmacy Sites of Service

The following table provides information by state as of December 2003 regarding the pharmacy service locations owned or leased by our NeighborCare pharmacy operations.

State	Institutional Pharmacies		Medical Supply/ Home Medical Equipment Sites		Community- Based Pharmacies		Total		Total Square Feet
Pennsylvania		6		3		2		11		220,930
Maryland		6		5		27		38		208,190
New Jersey		4		1		1		6		200,592
Virginia		4		1		2		7		84,236
Florida		4		1		—		5		66,391
California		4		1		—		5		59,187
Indiana		3		—		—		3		38,500
Wisconsin		4		—		—		4		37,112
Massachusetts		2		1		—		3		30,265
Illinois		3		1		—		4		22,777
Texas		2		—		—		2		22,222
Rhode Island		1		—		—		1		21,600
South Carolina		3		—		—		3		21,149
New Hampshire		1		—		—		1		20,000
Oregon		1		—		—		1		18,428
Colorado		1		—		—		1		17,479
Ohio		1		—		—		1		16,200
West Virginia		1		—		—		1		15,794
Oklahoma		1		—		—		1		14,905
Connecticut		1		1		—		2		12,450
Michigan		1		—		—		1		12,000
North Carolina		2		—		—		2		9,700
Iowa		2		—		—		2		6,803
New York		2		1		—		3		6,000
Washington		1		—		—		1		5,600
Kentucky		1		—		—		1		5,000
Totals		62		16		32		110		1,193,510

In addition to the locations listed in the table above, we also operate 20 on-site pharmacies which are located in customers’ facilities and serve only customers of that facility.

All but 3 of these sites are leased. Our inability to make rental payments under these leases could result in loss of the leased property through eviction or other proceedings. Certain leases do not provide for non–disturbance from the mortgagee of the fee interest in the property and consequently these leases are subject to termination in the event that the mortgage is foreclosed following a default by the owner.

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Inpatient Sites of Service

The following table provides information by state as of December 2003 regarding the eldercare centers we owned, leased and managed. Included in the center count are 23 stand-alone assisted living facilities with 2,133 units and 16 skilled nursing facilities with 550 assisted living units.

	Wholly-Owned Centers				Leased Centers				Managed Centers (1)				Total
State	Facilities		Beds		Facilities		Beds		Facilities		Beds		Facilities		Beds
Pennsylvania		31		4,167		9		1,038		4		705		44		5,910
New Jersey		18		2,654		10		1,738		8		775		36		5,167
Maryland		13		1,613		6		825		12		1,658		31		4,096
Massachusetts		13		1,742		2		250		22		1,533		37		3,525
West Virginia		14		1,306		5		394		4		270		23		1,970
Connecticut		10		1,511		—		—		2		168		12		1,679
New Hampshire		8		814		4		366		1		85		13		1,265
Delaware		5		583		—		—		2		237		7		820
Wisconsin		2		404		—		—		—		—		2		404
Virginia		3		367		1		240		—		—		4		607
Rhode Island		3		373		—		—		—		—		3		373
North Carolina		—		—		—		—		2		340		2		340
Vermont		3		314		—		—		—		—		3		314
Total		123		15,848		37		4,851		57		5,771		217		26,470

(1) Managed facilities include 22 properties with 3,086 beds that are jointly-owned by us and independent third-parties. On a weighted average basis, we have an approximate 22% ownership interest in our jointly-owned properties. Also included in “managed centers” are 16 transitional care units with 412 beds located in hospitals principally in the Commonwealth of Massachusetts.

Included in the total centers listed above are two facilities with 404 beds located in the State of Wisconsin that have been identified as held for sale.

We believe that our physical properties are well maintained and are in a suitable condition for the conduct of our business.

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ITEM 3: LEGAL PROCEEDINGS

We are a party to litigation arising in the ordinary course of business. See “Cautionary Statements Regarding Forward-Looking Statements.”

U.S. ex rel Scherfel v. Genesis Health Ventures et al.

In this action, brought in United States District Court for the District of New Jersey on March 16, 2000, the plaintiff alleges that a pharmacy purchased by NeighborCare failed to process Medicaid credits for returned medications. The allegations are vaguely alleged for other jurisdictions. While the action was under seal in United States District Court, we fully cooperated with the Department of Justice’s evaluation of the allegations. On or about March 2001, the Department of Justice declined to intervene in the suit and prosecute the allegations. The U.S. District court action is no longer under seal but remains administratively stayed pending resolution of the bankruptcy issues.

The plaintiff filed a proof of claim in our bankruptcy proceedings initially for approximately $650 million and subsequently submitted an amended claim in the amount of approximately $325 million. We believe the allegations have no merit and objected to the proof of claim. In connection with an estimation of the proof of claim in the bankruptcy proceeding, we filed a motion for summary judgment urging that the claim be estimated at zero. On or about January 24, 2002, the U.S. Bankruptcy Court for the district granted Debtors’ motion and estimated the claim at zero.

On or about February 11, 2002, the plaintiff appealed the bankruptcy court’s granting of summary judgment to the U.S. District Court in Delaware and sought an injunction preventing the distribution of assets according to the plan of reorganization. The injunction was subsequently denied by the U.S. District Court for several reasons, including that the plaintiff was unlikely to succeed on the merits. When the injunction was denied by the U.S. District Court, the assets previously reserved for the plaintiff’s claim were distributed in accordance with the plan of reorganization. On March 27, 2003, the U.S. District Court denied the plaintiff’s appeal and upheld the summary judgment decision rendered by the United States Bankruptcy Court. On or about April 25, 2003, the plaintiff filed an appeal to the Third Circuit Court of Appeals. The appeal is currently pending with the Third Circuit and it is most likely to be heard by the Court of Appeals in 2004.

The Company believes that the settlement of this matter will not be significant to the results of operations or financial condition of the Company.

Pending DEA Investigation

In August 2001, and March 2002, our pharmacy located in Colorado reported missing inventory and potential diversion to the Drug Enforcement Administration (“DEA”), the local police and the Colorado Board of Pharmacy. As a result of the pharmacy reporting these incidents, the DEA commenced an audit of the pharmacy’s operations. Under the Controlled Substance Act the government may seek the potential value of the inventory diverted as well as other damages. The Civil Division of the U.S. Attorney’s Office for the District of Colorado has advised us that there is potential civil liability relating to the violations of the Controlled Substance Act. The Company has cooperated with all requests for information, including making its personnel and documents available to the government. The government and the Company are currently in discussions regarding the allegations.

The Company believes that the settlement of this matter will not be significant to the results of operations or financial condition of the Company.

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ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

There were no matters submitted to a vote of shareholders during the fourth quarter of fiscal 2003.

ITEM 4A: EXECUTIVE OFFICERS OF THE REGISTRANT

The following table sets forth certain information with respect to our executive officers following the spin-off:

Name	Age	Position
John J. Arlotta	54	Chairman, President and Chief Executive Officer
Robert A. Smith	55	Chief Operating Officer
John L. Kordash	61	Executive Vice President and Assistant to the Chairman and Chief Executive Officer
Richard W. Sunderland, Jr.	43	Senior Vice President and Chief Financial Officer
John F. Gaither, Jr.	54	Senior Vice President, General Counsel and Secretary

John J. Arlotta has served as our vice chairman with primary responsibility for the NeighborCare business since July 2003.  Following the spin-off, Mr. Arlotta has become our chairman, president and chief executive officer.  Prior to joining us, Mr. Arlotta served as a consultant to Caremark Pharmaceutical Services.  Mr. Arlotta was president and chief operating officer of Caremark Pharmaceutical Services from May 1998 to February 2002 and chief operating officer of Caremark Pharmaceutical Services from September 1997 to May 1998.

Robert A. Smith served as our president and chief operating officer of NeighborCare since May 2001. Following the spin-off, Mr. Smith has become our chief operating officer. Prior to May 2001, Mr. Smith served as executive vice president and chief operating officer of NeighborCare’s Allegheny region since November 1999. He served as senior vice president of NeighborCare’s Allegheny region since August 1998, a position he held with Vitalink Pharmacy Services prior to its acquisition by NeighborCare. Mr. Smith has held senior management positions in several long–term care pharmacy organizations since 1988.

John L. Kordash has served as our executive vice president and assistant to the vice chairman since July 2003.  Following the spin-off, Mr. Kordash has become executive vice president and assistant to the chairman and chief executive officer.  Prior to joining us, Mr. Kordash was chairman and chief executive officer of Medical Scientists, Inc., a healthcare company that provides predictive modeling medical software and healthcare consulting services to organizations at risk for medical care costs, since 1997.

Richard W. Sunderland, Jr. has served as senior vice president and corporate controller of NeighborCare since April 2000 and has assumed the role of chief financial officer following the spin-off.  From August 1998 until April 2000, Mr. Sunderland served as vice president and controller of NeighborCare.  From November 1995 to August 1998, Mr. Sunderland served as vice president and controller of Genesis ElderCare Services, Genesis Managed Care Services and the Genesis ElderCare Chesapeake region.  Mr. Sunderland joined the company in 1993 as controller of Genesis ElderCare Services.

John F. Gaither, Jr. joined NeighborCare as senior vice president, general counsel and secretary in September 2003.  From April 2000 to September 2003, Mr. Gaither served as vice president, general counsel and corporate secretary of Global Healthcare Exchange, LLC, a supplier of business-to-business procurement solutions for the healthcare industry.  From 1982 to 2000, Mr. Gaither held various positions with Baxter International, Inc., a leading manufacturer and marketer of healthcare products and services.

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PART II

ITEM 5: MARKET FOR THE REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Our common stock currently trades on the Nasdaq National Market System under the symbol “NCRX.” From February 8, 2002 until December 1, 2003, our common stock traded on the Nasdaq National Market System under the symbol “GHVI.” From October 15, 2001 until February 7, 2002 our common stock traded on the OTC Bulletin Board under the symbol “GHVE”. Our common stock that was cancelled in connection with our reorganization was traded on the New York Stock Exchange through June 22, 2000 and on the OTC Bulletin Board thereafter. The following table indicates, for each of the quarters in the fiscal year ended September 30, 2003, the range of high and low closing prices of our common stock as reported on the Nasdaq National Market.  The table also includes the range of the high and low closing prices of our common stock for each of the quarters in the fiscal year ended September 30, 2002 on the OTC Bulletin Board for the period through February 7, 2002 and on the Nasdaq National Market thereafter.

Fiscal Year Ended	High		Low
September 30, 2003
First Quarter	$	17.51	$	12.79
Second Quarter		16.79		13.01
Third Quarter		17.90		14.35
Fourth Quarter		24.21		17.55
September 30, 2002
First Quarter	$	26.00	$	19.20
Second Quarter		21.00		13.74
Third Quarter		21.23		17.70
Fourth Quarter		19.50		14.25

We consummated the spin-off on December 1, 2003 by distributing, on a pro rata basis, all the shares of GHC common stock that we owned to holders of record of our common stock at the close of business on October 15, 2003, the record date for the spin-off. Holders of shares of GHC common stock were not entitled to preemptive rights. Our common stock price as of the close of business on December 2, 2003 was $22.05, as adjusted to give effect to the spin-off of GHC.

Based on the total number of shares of our common stock outstanding at the close of business on the record date for the spin-off (39,796,209 shares), each record holder of our common stock received 0.5 shares of GHC common stock for each share of our common stock held at the close of business on the record date or cash in lieu of a fractional share of GHC common stock.

Additionally, immediately after the spin-off, we issued a small number of shares of GHC common stock into an escrow account for future delivery to former unsecured claimants of NeighborCare and its subsidiaries that were entitled to receive common equity securities under the terms of our 2001 joint plan of reorganization. We refer to these shares of GHC common stock as the “unsecured claimant shares.” The number of unsecured claimant shares was equal to the product of the distribution ratio and the number of shares of our common stock reserved as of the spin-off date for issuance to former unsecured claimants of NeighborCare. As of October 15, 2003, the number of shares of our common stock reserved for issuance to the unsecured claimants was 260,493.

As of December 15, 2003, there were 6,243 shareholders of record of our common stock. We have never declared or paid cash dividends on our common stock. Our ability to pay dividends on our common stock is restricted by our revolving credit facility and senior subordinated notes agreements. See Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources,” of this Form 10-K. Management does not anticipate the payment of cash dividends on our common stock in the foreseeable future.

See Part III, Item 11, “Executive Compensation — Benefit Plans,” and Item 12, “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters — Equity Compensation Plans,” of this Form 10-K for disclosure regarding our equity compensation plans.

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On October 2, 2001, we and The Multicare Companies, Inc. consummated a joint plan of reorganization under Chapter 11 of the Bankruptcy Code pursuant to a September 20, 2001 order entered by the Bankruptcy Court approving our joint plan of reorganization. In connection with our joint plan of reorganization, we issued or will issue without registration under the Securities Act of 1933 in reliance on Section 1145 of the Bankruptcy Code and the Bankruptcy Court order confirming our joint plan of reorganization: (a) 41,000,000 shares of our common stock to our and Multicare’s creditors as identified in our joint plan of reorganization, of which 40,739,507 of the shares were issued on various dates from December 2, 2001 to December 15, 2003, and as of December 15, 2003, 260,493 of these shares of common stock have not yet been issued, and (b) 425,946 shares of our Series A convertible preferred stock to our and Multicare’s senior secured creditors as identified in our joint plan of reorganization on various dates in fiscal 2002.

Effective December 16, 2003, our board of directors exercised its option to require the mandatory conversion of the Series A convertible preferred stock, at a per share conversion price of $12.60 (as adjusted from $20.33 in connection with the spin-off), into 3,464,255 shares of our common stock pursuant to the terms of our amended and restated articles of incorporation, as amended. 

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ITEM 6: SELECTED FINANCIAL DATA

	Successor Company						Predecessor Company
(Years ended September 30, )	2003			2002			2001			2000			1999
Statement of Operations Data (1)
(in thousands, except per share data)
Net revenues	$	2,648,979		$	2,485,788		$	2,327,133		$	2,206,554		$	1,728,109
Income (loss) from continuing operations		51,112			78,508			270,862			(874,191	)		(286,508	)
Net income (loss) attributable to common shareholders		29,987			70,167			246,474			(882,920	)		(290,050	)
Per common share data (diluted):
Earnings (loss) from continuing operations	$	1.25		$	1.87		$	5.57		$	(18.57	)	$	(8.07	)
Net income (loss) attributable to common shareholders		0.74			1.68			5.07			(18.75	)		(8.17	)
Weighted average common shares – diluted		40,757			43,351			48,641			47,077			35,485
Other Financial Data:
Capital expenditures (in thousands)	$	59,758		$	51,635		$	43,721		$	51,981		$	77,943
Operating Data:
Pharmacy Services
Payor Mix
Long-term care facilities and other		56	%		58	%		60	%		62	%		63	%
Medicaid		42	%		40	%		37	%		35	%		33	%
Medicare Part B		2	%		2	%		3	%		3	%		4	%
Average institutional pharmacy beds served		246,628			247,114			253,224			244,409			245,277
Inpatient Services
Payor Mix
Medicaid		50	%		48	%		48	%		49	%		49	%
Medicare		28	%		29	%		27	%		24	%		23	%
Private pay and other		22	%		23	%		25	%		27	%		28	%
Average owned/leased eldercare center beds (1)		22,758			24,139			24,783			14,286			15,522
Occupancy Percentage		91	%		92	%		92	%		91	%		93	%
Average managed eldercare center beds (1)		6,320			7,898			9,215			23,779			23,984

	Successor Company						Predecessor Company
(As of September 30,)	2003		2002		2001		2000			1999
Balance Sheet Data (in thousands)
Working capital	$	446,657	$	449,006	$	282,016	$	304,241		$	235,704
Total assets		1,938,729		2,010,477		1,839,220		3,081,998			2,429,914
Liabilities subject to compromise		—		—		—		2,446,673			—
Long-term debt		611,619		689,683		644,509		143,441			1,521,636
Redeemable preferred stock		46,831		44,765		42,600		442,820			—
Shareholders’ equity (deficit)	$	916,163	$	914,123	$	834,858	$	(246,391	)	$	587,890

Please refer to Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Certain Transactions and Events,” of this 10-K for a description of significant transactions. See also

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“Management’s Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations — Factors Affecting Comparability of Financial Information.”

(1) The statement of operations data from continuing operations for all prior year periods has been adjusted for operations identified as discontinued. Inpatient services payor mix and occupancy data has also been adjusted to exclude discontinued operations. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Certain Transactions and Events — Assets Held for Sale and Discontinued Operations.”

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ITEM 7: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

General

NeighborCare, Inc. was incorporated in May 1985 as a Pennsylvania corporation and was formerly named Genesis Health Ventures, Inc.

Prior to December 1, 2003, our operations were comprised of two primary business segments: pharmacy services and inpatient services. On December 1, 2003, we completed the distribution (the “spin-off”) of the common stock of Genesis HealthCare Corporation (“GHC”) and on December 2, 2003 we changed our name to NeighborCare, Inc. and changed our trading symbol to “NCRX.” The spin-off was effected by way of a pro-rata tax free distribution of the common stock of GHC to holders of NeighborCare’s common stock on December 1, 2003 at a rate of 0.5 shares of GHC stock for each share of NeighborCare stock owned as of October 15, 2003. We received a private letter ruling from the Internal Revenue Service to the effect that, for United States federal income tax purposes, the distribution of GHC stock qualified as tax free for GHC and our shareholders, with the exception of cash received for fractional shares.  The common stock of GHC began trading publicly on the Nasdaq National Market System on December 2, 2003 under the symbol “GHCI.”  As a result of the spin-off, we continue to own and operate our pharmacy services business and our group purchasing business and GHC owns and operates what was formerly our inpatient services business (as well as our former rehabilitation therapy, diagnostic, respiratory and management services businesses). See “— Certain Transactions and Events.” As used herein, unless the context otherwise requires, “NeighborCare,” the “Company,” “we,” “our” or “us” refers to NeighborCare, Inc. and its subsidiaries.

Because the spin-off occurred subsequent to our fiscal year ended September 30, 2003 but before the filing of this report on Form 10-K, we have included the required business and financial disclosures of the consolidated organization herein. We will treat the operations of GHC as discontinued in our consolidated financial statements beginning in fiscal 2004.

We provide pharmacy services nationwide through our NeighborCare integrated pharmacy operation that serves approximately 246,000 institutional beds in long–term care settings. We also operate 32 community–based retail pharmacies and a group purchasing organization.

GHC provides inpatient services through skilled nursing and assisted living centers primarily located in the eastern United States. GHC currently owns, leases, manages or jointly–owns 217 eldercare centers with 26,470 beds, of which two centers with 404 beds have been identified as either held for sale or discontinued operations. See “— Certain Transactions and Events — Assets Held for Sale and Discontinued Operations.” GHC also provides rehabilitation therapy, diagnostic, respiratory, and management services.

Certain Transactions and Events

The Spin-Off:

Pharmacy services businesses and inpatient services businesses are distinct businesses with significant differences in their markets, products, investment needs and plans for growth. Our board of directors determined that the separation into two independent public companies would resolve existing sales and marketing issues by eliminating customer/competitor conflicts, isolate inherent business risks, provide each organization with the ability to independently access capital markets, and better align management incentives with business-specific operating performance.  The decision of our board of directors to pursue the spin-off was based on, among other things, the following considerations and assumptions.

Sales and Marketing and Customer/Competition Issues

The vast majority of our pharmacy services business customers are in GHC’s business, the ownership or operation of eldercare properties. Many of the pharmacy services business customers or potential customers that operate in GHC’s geographic regions are GHC’s competitors. Many customers or potential customers believe that purchasing pharmacy services from us strengthens a competitor and, therefore, resist doing business with us.

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The spin-off of GHC’s businesses from us and the resulting elimination of the customer/competitor conflict are important to the future growth of our pharmacy services business.

Inherent Business Risks

The inpatient services business and the pharmacy services business face uncertainty because the rate of Medicare and Medicaid reimbursements, which are set by government regulators, are not constant and can be unpredictable. Each business’ reimbursement risks pose problems for the other. In the event that revenues of the inpatient services business or the pharmacy services business are reduced as a result of regulatory changes, we may be forced to use profits from one business to cover the costs of the other, or to cover a disproportionate part of shared costs such as corporate overhead, resulting in a reduction in the amount of capital available to the business that did not suffer the revenue reduction, thereby limiting such business’ ability to expand in new markets or explore new products. In addition to risks associated with Medicare and Medicaid reimbursement, the inpatient services business’ and pharmacy services business’ participation in the Medicare and Medicaid reimbursement systems exposes each business to the risk that one business may cause the other to be burdened by onerous federal and state anti-fraud statutes.

The inpatient services business is exposed to general and professional liability risks relating to the quality of care that are much greater than those present in the pharmacy services business. The inpatient services business’ potential malpractice liability exposures create financial uncertainty and potentially reduce the amount of capital available for investment in the pharmacy services business. These exposures also cause us to divert human and financial resources from the pharmacy services business in favor of the eldercare businesses.

Direct Access to Capital Markets

After the spin-off, we and GHC will no longer need to compete with each other for limited capital resources, and each company will be able to access the debt or equity capital markets directly. As a result of the defined focus of each company, investors should be better able to evaluate the different strategies, investment profiles, operating characteristics and credit fundamentals of the two companies, thereby enhancing the likelihood that each company will achieve appropriate market valuations. As a result, the management of each company will be able to adjust goals and evaluate strategic opportunities in light of investor expectations within its respective industry, without undue attention to investor expectations in other industries. In addition, each company will be able to focus its public relations efforts on cultivating its own separate identity.

Targeted Incentives and Greater Accountability for Employees

The spin-off will permit each company to implement employee compensation and benefit programs, including stock-based and other incentive programs, that reward employees of each company based on the success of the individual company’s operations. Both companies expect the motivation of their employees and the focus of their management to be strengthened by incentive compensation programs that are tied to their core businesses’ financial results and the market performance of their common stock, without regard to the performance of other businesses that are dependent on different growth and performance profiles. As a result, both companies expect the distribution to enhance their ability to attract and retain qualified personnel.

Distribution Transactions:

As a result of the spin-off, as of December 1, 2003, we and GHC operate independently of one another. We have agreed contractually to continue certain transitional arrangements and practices for a limited time after the spin-off. In addition, we have agreed to certain mutually beneficial commercial arrangements.

We and GHC have entered into a separation and distribution agreement, a tax sharing agreement, a transition services agreement, a group purchasing agreement, an employee benefits agreement, a pharmacy services agreement, a pharmacy benefit management agreement and a durable medical equipment agreement.

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Separation and Distribution Agreement

On October 27, 2003, we and GHC entered into the separation and distribution agreement, which sets forth the agreements between us and GHC with respect to the principal corporate transactions required to consummate the spin-off, and a number of other agreements governing the relationship between us and GHC following the spin-off.

The Separation.      Pursuant to the separation and distribution agreement, we transfered to GHC, or caused our subsidiaries to transfer to GHC, the legal entities comprising the eldercare businesses.

Series A Preferred Stock.     We adjusted the conversion price of our Series A Preferred Stock in accordance with the terms thereof.  See Part II, Item 5, “Market For the Registrant’s Common Equity and Related Stockholder Matters,” of this Form 10-K.

Unsecured Bankruptcy Claimants.     GHC agreed to issue 130,247 common shares into an escrow account for future delivery to our and our subsidiaries’ former unsecured claimants who are entitled to receive common equity securities under the terms of our 2001 joint plan of reorganization. We refer to these common shares of GHC as the “unsecured claimant shares.”  As of October 15, 2003, the most recent date for which information is available, the number of our common shares reserved for issuance to the unsecured claimants was 260,493.

Releases and Indemnification.     The separation and distribution agreement generally provides for a full and complete release and discharge as of the date of the consummation of the spin-off of all liabilities existing or arising from all acts and events occurring or failing to occur or alleged to have occurred or to have failed to occur and all conditions existing or alleged to have existed on or before the date of the consummation of the spin-off between or among us and our affiliates, on the one hand, and GHC and its affiliates, on the other hand, including any contractual agreements or arrangements existing or alleged to exist between or among those parties on or before that date.

GHC has agreed to indemnify, defend and hold harmless us and our affiliates, and each of our directors, officers and employees, from and against all liabilities relating to, arising out of or resulting from:

• the failure of GHC, or its affiliates, or any other person to pay, perform or otherwise promptly discharge any of the liabilities of the eldercare businesses;

• any liabilities of the eldercare businesses and the operation of the eldercare businesses at any time before or after the spin-off;

• any breach by GHC or its affiliates of the separation and distribution agreement or any of the ancillary agreements entered into in connection with the separation and distribution agreement;

• one-half of any liabilities arising out of our 2001 joint plan of reorganization (other than certain liabilities specifically allocated in the separation and distribution agreement); and

• specified disclosure liabilities.

We have agreed to indemnify, defend and hold harmless GHC and its affiliates, and each of its directors, officers and employees, from and against all liabilities relating to, arising out of or resulting from:

• the failure of us, or our affiliates, or any other person to pay, perform or otherwise promptly discharge any of our liabilities, other than liabilities of the eldercare businesses;

• any of our liabilities, other than liabilities of the eldercare businesses, and the operation of our business other than the eldercare businesses at any time before or after the spin-off;

• any breach by us or our affiliates of the separation and distribution agreement or any of the ancillary agreements entered into in connection with the separation and distribution agreement;

• one-half of any liabilities arising out of our 2001 joint plan of reorganization (other than certain liabilities specifically allocated in the separation and distribution agreement); and

• specified disclosure liabilities.

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The separation and distribution agreement also specifies procedures for claims for indemnification made under the provisions described above.

Amendments and Waivers.     The separation and distribution agreement provides that no provisions of it or any ancillary agreement will be deemed waived, amended, supplemented or modified by any party unless the waiver, amendment, supplement or modification is in writing and signed by the authorized representative of the party against whom that waiver, amendment, supplement or modification is sought to be enforced.

Tax Sharing Agreement

For periods prior to the spin-off, GHC will be included in our U.S. federal consolidated income tax group, and GHC’s tax liability thus will be included in our and our subsidiaries’ consolidated federal income tax liability. GHC also will be included with us or certain of our subsidiaries in consolidated, combined or unitary income tax groups for state and local tax purposes until the spin-off occurs.

The tax sharing agreement governs the respective rights, responsibilities, and obligations of us and GHC after the spin-off, with respect to tax liabilities and benefits, tax attributes, tax contests and other matters regarding income taxes, other taxes and related tax returns.

In general, we will prepare and file the federal consolidated return, and any combined, consolidated or unitary tax returns that include both us or one of our subsidiaries and GHC or one of its subsidiaries and will be responsible for all income taxes and other taxes with respect to such returns. GHC will prepare and file any tax return required to be filed by GHC or any of its subsidiaries that does not include us or any entity that will be our subsidiary after the spin-off and will be responsible for all income taxes or other taxes with respect to any such tax return. In general, we will be responsible for any increase (and will receive the benefit of any decrease) in the income tax of any entity that is or was reflected on a tax return filed by us and we will control all audits and administrative matters relating to such tax returns.

GHC generally may not (i) take or fail to take any action that would cause any representations, information or covenants in the spin-off documents or documents relating to the private letter ruling request to be untrue, (ii) take or fail to take any action that would cause the spin-off to lose its tax-free status, (iii) sell, issue, redeem or otherwise acquire its equity securities for a period of two years following the spin-off, except in certain specified transactions, and (iv) sell or otherwise dispose of a substantial portion of its assets, liquidate, merge or consolidate with any other person for a period of two years following the spin-off. During that two-year period, GHC may take certain actions prohibited by the covenants if, for example, we obtain a supplemental private letter ruling or an unqualified opinion of counsel to the effect that these actions will not affect the tax-free nature of the spin-off, in each case satisfactory to us in our sole and absolute discretion. Notwithstanding the receipt of any such private letter ruling or opinion, GHC must indemnify us for any taxes and related losses resulting from (i) any act or failure to act described in the covenants above, (ii) any acquisition of GHC’s equity securities or assets (or equity securities or assets of any member of GHC’s group) and (iii) any breach by GHC or any member of GHC’s group of certain representations in the spin-off documents or the documents relating to the private letter ruling.

In addition, the tax sharing agreement provides for cooperation and information sharing with respect to taxes.

Transition Services Agreement

The transition services agreement provides for the provision of certain transitional services by GHC to us. The services include the provision of information systems (e.g., access to computer systems that are expected to be owned by GHC), tax services, investor relations services, corporate compliance services, treasury functions, financial systems and reporting, bankruptcy claims processing and certain additional services identified by the parties. The transition services agreement provides for a term of 18 months. In addition, we may extend the transition services agreement for an additional six months with adequate notice. The pricing is based on actual costs incurred by GHC in rendering the services.

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Tidewater Membership Agreement

The Tidewater membership agreement, referred to as the “Tidewater agreement,” provides group purchasing and shared service programs to skilled nursing facilities and assisted living facilities operated by GHC. Under the Tidewater agreement, GHC engaged Tidewater, our wholly-owned group purchasing subsidiary, as an independent group purchasing organization, and Tidewater will grant to GHC access to its vendor contracts. The initial term of the Tidewater agreement will be ten years. GHC will not make any payments to us under the Tidewater agreement. Instead, Tidewater will receive administrative fees from various suppliers. Such fees are based on a percentage of the volume of purchases made by all of Tidewater’s members, including GHC. GHC will remain directly responsible to vendors for purchases through the Tidewater agreement. The Tidewater agreement will obligate GHC to purchase certain minimum amounts; however, GHC may be a member of other group purchasing organizations. GHC may earn financial incentives, such as fee sharing, for meeting certain purchasing volumes under the Tidewater agreement.

Employee Benefits Agreement

We and GHC entered into an employee benefits agreement which provides for certain employee compensation, benefit and labor-related matters. In general, after the spin-off, we and GHC will be responsible for all obligations and liabilities relating to our respective current and former employees and their dependents and beneficiaries.

As of the date of the spin-off, and except with respect to health and welfare plans and flexible benefit plans as set forth below, GHC will cease to participate in any benefit plan or trust under any such plan sponsored or maintained by us and we will cease to participate in any benefit plan or trust under any such plan sponsored or maintained by GHC. With respect to employees who are transferred to or from us or GHC, both parties will mutually recognize and credit service with the other employer.

Except as otherwise provided below, all liabilities relating to employee benefits incurred by or on behalf of either company’s employees or their covered dependents on or before the date of the spin-off remain our liabilities. Liabilities and assets will be transferred from our retirement plan to a comparable plan to be established by GHC. Similarly, liabilities and assets will be transferred from our union retirement savings plan, the sponsorship of which will be assumed by GHC. Liabilities under our deferred compensation plan (a non-qualified plan) and assets relating to such plan held in a rabbi trust will be transferred to a comparable plan and trust established by GHC. In the event that we or GHC elect to contribute the full matching amount due to participants covered under each company’s respective plan and entitled to a match at the end of the 2003 plan year, each company will reimburse the other for 50% of the amount contributed with respect to specified employees who are transferred between companies in connection with the spin-off. A similar arrangement will apply with respect to bonus amounts due for the 2003 fiscal year. In general, all liabilities relating to workers’ compensation claims incurred by or on behalf of either company’s employees on or before December 1, 2003, the date of the spin-off, will remain liabilities of GHC.

To avoid the administrative inconvenience and expense that would result from our having to establish separate health and welfare plans and flexible benefit plans for the remainder of the calendar year during which the spin-off occurs, during the period beginning immediately following the spin-off and ending on December 31, 2003, current and former employees of GHC will remain covered under our existing health and welfare plans and flexible benefit plans. GHC will reimburse us for all expenses we incur as a result of this arrangement. As of January 1, 2004, current and former employees of ours and GHC will be covered under their own health insurance plans.

Master Agreement for Pharmacy, Pharmacy Consulting and Related Products and Services

GHC and our subsidiary NeighborCare Pharmacy Services, Inc., or “NCPS,” entered into a master agreement for pharmacy, pharmacy consulting and related products and services, referred to as the “pharmacy services agreement.” The agreement has an initial term of ten years, plus a renewal term of five years if NCPS matches third-party bids for comparable services. The pharmacy services agreement provides the terms and conditions on which NCPS and its affiliates provides pharmacy, pharmacy consulting and medical supply products and services to all long-term care facilities owned or leased by GHC and its affiliates. These services include the provision of all of the needed prescription and non-prescription medications, pharmacy consulting services, Medicare Part B supplies and services, Medicare Part B claim filing services, enteral nutrition products, durable and disposable medical supplies and equipment, and related services as required by applicable law and as reasonably requested by each facility. NCPS also agreed to participate with GHC in a joint committee to review drug utilization at GHC’s facilities, to

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establish a formulary, to provide reports reasonably requested by GHC relating to utilization, and to review the role of the consultant pharmacist. NCPS agreed to designate one dedicated full-time relationship representative to implement the terms of the pharmacy services agreement, as well as to address any concerns and resolve any issues raised by GHC with respect to pharmacy services. NCPS agreed to provide to GHC, as reasonably requested, a report comparing products which GHC has returned to NCPS to credits issued by NCPS for such returned products, and an explanation of the reasons why returned products did not entitle GHC to a credit. The agreement imposes restrictions on GHC’s ability to purchase pharmaceutical products and supplies from other suppliers.

Each of GHC’s eldercare facilities entered into an individual services agreement with NCPS that reflects the terms of the pharmacy services agreement. The individual services agreements govern the terms under which pharmacy, pharmacy consulting and medical supply products and services will be provided to each eldercare facility by NCPS.

Pricing under the pharmacy services agreement is at pre-negotiated prices or formulas consistent with market pricing for the applicable services and are set forth in the individual service agreements. NCPS has the right to adjust prices, other than those that are determined by formula, not more than once per year to account for increases in its costs in providing the services (including inflation). GHC is eligible for a pricing reduction at specified percentages for certain specified products and services if and so long as the aggregate number of skilled nursing facility beds served by NCPS increases to specified targets over a baseline amount. In addition, GHC and NCPS will negotiate in good faith to enter into arrangements whereby GHC will contract directly with certain manufacturers of enteral nutrition products, durable medical equipment and other non-pharmaceutical products historically purchased from NCPS to receive “end user pricing,” and NCPS will distribute enteral nutrition products and durable medical equipment to GHC’s facilities for a fee priced at the fair market value of such distribution services. In addition, after five years, pricing may be reset depending upon NCPS’s pricing to its other customers of similar size.

GHC may terminate the pharmacy services agreement with respect to any facility in connection with a sale of the facility to a third party or the closing of the facility so long as GHC uses its best efforts to persuade the buyer or successor of the facility, if any, to assume the applicable service agreement. This right is limited to five facilities through the first year, 10 facilities through the second year, 20 facilities through the third year, and a maximum of 30 facilities over the 10-year term of the pharmacy services agreement.

If the pharmacy services agreement or any individual service agreement is terminated by GHC, then NCPS will be entitled to recover a specified amount per facility based on the remaining number of months in the term. Each of GHC and NCPS will indemnify the other against all claims, losses and liabilities arising out of the acts or omissions of the other party in connection with the pharmacy services agreement.

The pharmacy services agreement provides that GHC will not compete with NCPS or solicit NCPS’s employees or customers until 2015 or, if later, two years following termination of the pharmacy services agreement.

Either party may assign the pharmacy services agreement, or any individual services agreement, upon receipt of written consent of the other (which consent may not be unreasonably withheld, conditioned or delayed), but NCPS may assign its interest without GHC’s consent to an affiliate, joint venture or a provider whose service and/or quality levels are at least comparable to those currently provided by NCPS.

Pharmacy Benefit Management (CareCard) Agreement

GHC and our subsidiary, CareCard, Inc., entered into a pharmacy benefit management agreement, referred to as the “CareCard agreement.” The CareCard agreement sets forth the agreements between GHC and CareCard relating to the provision of services to GHC by our “CareCard” business. The term of the CareCard agreement expires on December 31, 2004. Under the CareCard agreement, CareCard provides pharmacy benefit management services to GHC and access to retail and mail pharmacy services. GHC agreed to enroll all of its employees participating in a GHC self-insured health plan in the CareCard program. The CareCard agreement may be assigned by either party upon receipt of the written consent of the other (which consent may not be unreasonably withheld, conditioned or delayed), but CareCard may assign its interest without GHC’s consent to a provider whose service and/or quality levels are at least comparable to those currently provided by CareCard.

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Master Agreement for Specialty Beds and Oxygen Concentrators

The master agreement for specialty beds and oxygen concentrators, referred to as the “durable medical equipment agreement,” sets forth the agreements between GHC and NCPS relating to the provision of certain equipment and related services to GHC’s skilled nursing and assisted living facilities. The durable medical equipment agreement provides for an initial five-year term with one-year automatic renewals (unless terminated upon 90 days’ notice prior to the expiration of the then-current term). Under the durable medical equipment agreement, NCPS agreed to provide GHC’s facilities with durable medical equipment (specialty beds and oxygen concentrators), equipment maintenance and warehousing of equipment at prices set forth in the durable medical equipment agreement. The durable medical equipment agreement provides that, except as otherwise required by law, NCPS will be the exclusive provider of specialty beds and oxygen concentrators to the contracting facilities. Either party may assign the agreement upon receipt of the written consent of the other (which consent may not be unreasonably withheld, conditioned or delayed), but NCPS may assign its interest without GHC’s consent to a provider whose service and/or quality levels are at least comparable to those currently provided by NCPS.

Strategic Planning, Severance and Other Related Costs:

We have incurred costs that were attributable to our long-term objective of transforming to a pharmacy based business, including the costs of the spin-off. Certain of these costs are expected to continue into fiscal 2004 and are segregated in the consolidated statement of operations as “Strategic planning, severance and other related costs.” Details of these costs follow (in thousands):

Fiscal 2003:

	Accrued at Beginning of Year		Provision		Paid		Non-cash Charges		Accrued at End of Year
Severance and related costs	$	1,100	$	14,247	$	5,916	$	8,431	$	1,000
Strategic consulting costs		621		14,039		11,280		1,220		2,160
Total	$	1,721	$	28,286	$	17,196	$	9,651	$	3,160

Fiscal 2002:

	Accrued at Beginning of Year		Provision		Paid		Non-cash Charges			Accrued at End of Year
Severance and related costs	$	—	$	16,410	$	10,599	$	4,711	$	1,100
Strategic consulting costs		—		4,730		3,089		1,020		621
Asset impairments		—		358		—		358		—
Total	$	—	$	21,498	$	13,688	$	6,089	$	1,721

Severance and Related Costs

In fiscal 2002, we announced an expense reduction program, which included the termination of over 100 individuals resulting in $3.8 million of severance related costs in that year. In fiscal 2003, in a continuation of that expense reduction initiative, additional overhead terminations resulted in a charge of severance, and related costs of $2.2 million.  At September 30, 2003, $1.0 million remained unpaid, which is expected to be paid in the first fiscal quarter of 2004.

In fiscal 2002, Michael R. Walker resigned as our chief executive officer. Our board of directors appointed Robert H. Fish as our interim chief executive officer. Also, in that period, David C. Barr resigned as vice chairman.

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In fiscal 2002, we recognized $12.6 million in severance and related costs relating to the transition agreements with Mr. Walker and Mr. Barr.

In fiscal 2003, Richard R. Howard resigned as vice chairman. We recognized $4.8 million in severance and related costs in fiscal 2003 in connection with Mr. Howard’s transition agreement. The final payment of this agreement was made in January 2003.

On April 1, 2003, we extended an offer to our employees, including executive officers except for our chief executive officer, to tender all options to purchase shares of our common stock, par value $.02 per share, outstanding under our 2001 Stock Option Plan, for the following consideration: (a) for those holders of options who had received awards of more than 2,000 restricted shares of common stock under our 2001 Stock Incentive Plan, the acceleration of vesting of all such restricted shares plus a cash payment of $2.50 per share underlying the option for options that had an exercise price below $20.00 per share, and (b) with respect to those holders of options who had not received awards of more than 2,000 restricted shares, (i) for those options that had an exercise price of at least $20.00 per share, a cash payment of $2.00 per share underlying the option, and (ii) for those options that had an exercise price below $20.00 per share, a cash payment of $2.50 per share subject to the option. The offer expired on May 12, 2003. We accepted for exchange and cancellation options to purchase 1,724,000 shares of our common stock, which represented all of the eligible outstanding options properly tendered for exchange by eligible option holders, on May 13, 2003. All eligible options held by our employees were tendered in the offer, with the exception of options to purchase 35,000 shares. As a result of this offer and exchange, we expensed $7.2 million in fiscal 2003, of which $1.4 million was disbursed in cash, with the remainder distributed in common stock.

Strategic Consulting Costs

During fiscal 2003 and 2002, we incurred strategic consulting costs of $14.0 million and $4.7 million respectively, in connection with several of our new strategic objectives. Initially, these strategic consulting firms were engaged to assist our board of directors and management in the evaluation of our existing business model and the development of our strategic alternatives. Additional services were procured to assist in the evaluation of our pharmacy sales and marketing function, the bid selection process in connection with the potential sale or spin-off of the eldercare business and, more recently, the legal, accounting and other professional fees directly attributed to the spin-off transaction. Strategic consulting costs in fiscal 2003 also include executive compensation of $2.2 million which relates to certain incentive compensation to recruit John J. Arlotta as the Company's new chief executive officer and incentive compensation paid to Robert H. Fish for services rendered during his term as the interim chief executive officer. During Mr. Fish’s term as interim chief executive officer, his primary objectives were focused on the Company’s pharmacy transformation initiatives.

We recognize the cost of such consulting fees as the services are performed.

We expect to incur approximately $30 million of additional strategic planning, severance and other related costs (excluding deferred financing costs) in fiscal 2004, principally to consummate the spin-off transaction.

Asset Impairments

During fiscal 2002, we incurred $0.4 million of asset impairment charges consisting of the write-down in carrying value of one idle eldercare real estate property.

ElderTrust Transactions:

On September 11, 2003, GHC entered into agreements with ElderTrust, a real estate investment trust from who GHC currently or previously leased or subleased 18 of its eldercare facilities and eight managed and jointly-owned facilities. The principal terms of the agreements are as follows:

• GHC will purchase two skilled nursing facilities having 210 skilled nursing beds and 67 assisted living beds, and three assisted living facilities having 257 beds, for $24.8 million. GHC leases these properties from ElderTrust at an annual cash basis and accrual basis lease cost of $2.4 million and $1.5 million, respectively.  On October 29, 2003, GHC purchased one of the aforementioned eldercare facilities having 183 beds for $10.3 million.  The remaining four properties are expected to be purchased by January 2004;

• GHC agreed to pay ElderTrust $32.3 million to reduce annual cash basis and accrual basis lease cost associated with nine properties by $6.9 million and $1.2 million, respectively, and acquire options to purchase seven properties currently subleased to GHC by ElderTrust.  On October 29, 2003, GHC paid ElderTrust $2.3 million to reduce the rents of two of the nine aforementioned eldercare facilities, and on

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	November 7, 2003 paid ElderTrust the remaining $30.0 million to reduce the rents of the other seven aforementioned eldercare facilities; and
•	NeighborCare paid ElderTrust $4.4 million upon consummation of the spin-off in exchange for ElderTrust’s consent to the assignment of all remaining leases and guarantees from NeighborCare to GHC.

On August 13, 2003, GHC acquired the remaining ownership interest in an unconsolidated joint-venture partnership that operates four skilled nursing facilities with 600 skilled nursing and 125 assisted living beds. Each of the four eldercare centers had been leased to the partnership from ElderTrust. GHC purchased its joint venture partner’s interest in the unconsolidated partnership for $3.1 million and will subsequently purchase one of the four eldercare properties from ElderTrust for $2.6 million. Additionally, GHC paid ElderTrust $2.5 million to reduce the annual cash basis and accrual basis lease expense of one of the three remaining leased facilities by $0.4 million and $0.2 million, respectively. The lease terms of the three facilities that will continue to be leased from ElderTrust were extended from 2010 to 2015.

Reorganization:

Background

On June 22, 2000, we and certain of our direct and indirect subsidiaries filed for voluntary relief under Chapter 11 of the United States Code (the “Bankruptcy Code”) with the United States Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”). On the same date, our 43.6% owned affiliate, The Multicare Companies, Inc., and certain of its direct and indirect subsidiaries, and certain of its affiliates, also filed for relief under Chapter 11 of the Bankruptcy Code with the Bankruptcy Court (singularly and collectively referred to herein as “the Chapter 11 cases,” “our bankruptcy” or other general references to these cases, unless the context otherwise requires).

Our and Multicare’s financial difficulties were attributed to a number of factors. First, the federal government made fundamental changes to the reimbursement for medical services provided to individuals. The changes had a significantly adverse impact on the healthcare industry as a whole and on our and Multicare’s cash flows. Second, the federal reimbursement changes exacerbated a long–standing problem of inadequate reimbursement by the states for medical services provided to indigent persons under the various state Medicaid programs. Third, numerous other factors adversely affected our and Multicare’s cash flows, including increased labor costs, increased professional liability and other insurance costs, and increased interest rates. Finally, as a result of declining governmental reimbursement rates and in the face of rising inflationary costs, we and Multicare were too highly leveraged to service our debt, including our long-term lease obligations.

On October 2, 2001, the effective date, we and Multicare consummated a joint plan of reorganization under Chapter 11 of the Bankruptcy Code pursuant to a September 20, 2001 order entered by the U.S. Bankruptcy Court approving our joint plan of reorganization. The principal provisions of our joint plan of reorganization were as follows:

• Multicare became our wholly-owned subsidiary. We previously owned 43.6% of Multicare and managed its skilled nursing and assisted living facilities under the Genesis ElderCare brand name;

• New senior notes, new convertible preferred stock, new common stock and new warrants were issued to our and Multicare’s creditors. Approximately 93% of new common stock, $242.6 million in new senior notes and new preferred stock with a liquidation preference of $42.6 million were issued to our and Multicare’s senior secured creditors. New one year warrants to purchase an additional 11% of the new common stock were issued, and approximately 7% of the new common stock have been or will be issued to our and Multicare’s unsecured creditors;

• Holders of our and Multicare’s pre-Chapter 11 preferred and common stock received no distribution and those instruments were canceled;

• Claims between us and Multicare were set off against one another and any remaining claims were waived and released; and

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• A new board of directors was constituted.

On October 2, 2001, and in connection with the consummation of the Plan, we entered into a senior credit facility agreement consisting of the following: (1) a $150 million revolving line of credit (the “Revolving Credit Facility”); (2) a $285 million term loan (the “Term Loan”) and (3) an $80 million delayed draw term loan (the “Delayed Draw Term Loan”) (collectively the “Senior Credit Facility”).

In accordance with SOP 90–7 (as defined below under “Fresh–Start Reporting”), we recorded all expenses and gains incurred as a result of the bankruptcy filing separately as debt restructuring and reorganization costs. A summary of the principal categories of debt restructuring and reorganization costs and net (gain) on debt discharge from continuing operations follows (in thousands):

	Successor Company				Predecessor Company
	2003		2002		2001
Professional, bank and other fees	$	—	$	2,570	$	59,393
Employee benefit related costs, including severance		—		—		16,786
Exit costs of terminated businesses		—		—		5,877
Fresh start valuation adjustments (1)		—		—		932,435
Gain on debt discharge (2)		—		—		(1,460,909	)
Post confirmation mortgage adjustment		—		1,700		—
Total debt restructuring and reorganization costs and net gain on debt discharge	$	—	$	4,270	$	(446,418	)

(1)	The fresh-start valuation adjustment represents the net write-down to fair value of NeighborCare’s assets and liabilities from continuing operations at September 30, 2001, and does not include $101.3 million of net write-downs attributed to discontinued operations.
(2)	The gain on debt discharge in 2001 represents the relief of NeighborCare’s obligations for liabilities subject to compromise from continuing operations, and does not include $63.9 million attributed to discontinued operations.

Fresh–Start Reporting

Upon emergence from our Chapter 11 proceedings, we adopted the principles of fresh–start reporting in accordance with the American Institute of Certified Public Accountants Statement of Position 90–7, “Financial Reporting By Entities in Reorganization Under the Bankruptcy Code” (“SOP 90–7”) / (“fresh–start reporting”). For financial reporting purposes, we adopted the provisions of fresh–start reporting effective September 30, 2001. In connection with the adoption of fresh–start reporting, a new entity was deemed created for financial reporting purposes, the provisions of our joint plan of reorganization were implemented, assets and liabilities were adjusted to their estimated fair values and our accumulated deficit was eliminated.

NCS Transaction Termination Fee

On July 28, 2002, we and our wholly-owned subsidiary, Geneva Sub, Inc., entered into an agreement and plan of merger (the “Merger Agreement”) with NCS HealthCare, Inc. (“NCS”), pursuant to which NCS was to become a wholly-owned subsidiary of us (the “NCS Transaction”). After the Merger Agreement was entered, Omnicare, Inc. made a cash tender offer for all of the NCS shares.

On December 11, 2002, the Court of Chancery of the State of Delaware, pursuant to an order of the Delaware Supreme Court dated December 10, 2002 which reversed prior determinations of the Court of Chancery, entered an order preliminary enjoining the consummation of the NCS transaction pending further proceedings.

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On December 15, 2002, we entered into a termination and settlement agreement with Omnicare whereby we agreed to terminate the Merger Agreement and Omnicare agreed to pay to us $22 million. In addition, we and Omnicare each agreed to release the other from any claims arising from the Merger Agreement and not commence any action against one another in connection with the Merger Agreement. On December 16, 2002 we provided notice to NCS terminating the Merger Agreement. In fiscal 2003, we recognized a $10.2 million gain resulting from the $22 million break-up fee, net of $11.8 million of costs associated with the proposed NCS transaction.

Medical Supplies Service Agreement

During the third quarter of fiscal 2002, we entered into a seven year agreement with Medline Industries, Inc. for the fulfillment of our bulk medical supply services to its customers. Under the agreement, Medline provides order intake, warehousing, delivery and invoicing services. NeighborCare earns a service fee from Medline for providing sales and marketing services, calculated as a percentage of the revenues earned by Medline for sales to NeighborCare customers. As a result of this agreement, NeighborCare no longer recognizes revenue for the sale of bulk medical supplies to its customers. The agreement does not include certain products and services that NeighborCare continues to sell directly to customers. It is estimated that the agreement resulted in a reduction of pharmacy service revenue of approximately $40.0 million in fiscal 2003 with no significant impact on EBITDA or net income. This agreement was terminated in connection with the spin-off.

Arbitration Award

On February 14, 2002, an arbitrator ruled in favor of NeighborCare on all claims and counterclaims in the lawsuit involving HCR Manor Care, Inc. and certain of its affiliates. The arbitrator found that HCR Manor Care did not lawfully terminate the Master Service Agreements with NeighborCare, so that those contracts remain in full force and effect until the end of September 2004. The arbitrator awarded NeighborCare $21.9 million in damages, which were recognized in fiscal 2002, for respondents’ failure to allow NeighborCare to exercise its right under the Master Service Agreements to service facilities owned and operated by a subsidiary of respondent HCR Manor Care. In addition, the arbitrator terminated his prior ruling that allowed respondents to withhold 10% of their payments to NeighborCare, and respondents paid NeighborCare $9.1 million in funds representing the amounts withheld during the course of the Arbitration pursuant to the arbitrator’s prior ruling.

Amended Pharmacy Service Agreements

On August 15, 2002, we announced that we and HCR Manor Care, Inc. agreed to withdraw all outstanding legal actions against each other stemming from our acquisition of HCR Manor Care’s pharmacy subsidiary, Vitalink. We and HCR Manor Care also agreed to withdraw the prior pharmacy service agreement that was set to expire in 2004 and entered into a new pharmacy service agreement. The new pharmacy service agreement runs through January 2006 and covers approximately 200 of HCR Manor Care’s facilities. The pricing in the new pharmacy service agreement was reduced by approximately $12.8 million annually based upon then current sales volumes.

In September 2002, we were awarded a contract to serve 6,892 beds owned by the State of New Jersey under a three year agreement with the option for two one-year extensions. NeighborCare was the encumbant pharmacy provider serving these beds under a 1996 agreement of an initial term of three years which was extended through September 30, 2002. The new contract was awarded through New Jersey’s competitive bidding process, and was bid by us at reimbursement rates lower than the prior agreement. The revenue reduction associated with the new pharmacy agreement is approximately $7.2 million annually based upon then current sales volumes.

Assets Held for Sale and Discontinued Operations

In the normal course of business, we continually evaluate the performance of our operating units, with an emphasis on selling or closing under-performing or non-strategic assets. On September 30, 2001, we adopted the provisions of Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of” (SFAS 144). Under SFAS 144, discontinued businesses, including assets held for sale, are removed from the results of continuing operations. The results of operations in the current and prior year periods, along with any cost to exit such businesses in the year of discontinuation, are

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classified as discontinued operations in the consolidated statements of operations. Businesses sold or closed prior to our adoption of SFAS 144 continue to be reported in the results of continuing operations.

Since our adoption of SFAS 144, we have classified several businesses as held for sale or closed. An increasing trend in malpractice litigation claims, rising costs of eldercare malpractice litigation, losses associated with these malpractice lawsuits and a constriction of insurers have caused many insurance carriers to raise the cost of insurance premiums or refuse to write insurance policies for nursing homes. These problems are particularly acute in the state of Florida where, because of higher claim amounts, general liability and professional liability costs have become increasingly expensive. This increase in insurance costs prompted us to sell our otherwise profitable operations in the state of Florida during fiscal 2003. Since our inception, we have continued to develop our eldercare network in concentrated geographic markets in the eastern United States. The geographic location of our eldercare centers in the states of Illinois and Wisconsin relative to our strategic geographic markets, combined with the operating performance of those centers, prompted us to identify those assets as held for sale during fiscal 2002. In addition to these assets, we identified 13 eldercare centers in other states, one rehabilitation services clinic, two physician services practice and our ambulance business as held for sale or closed due to under-performance.

Consolidated interest expense has been allocated to discontinued operations for all periods presented based on allocated debt expected to be repaid in connection with the sale of the assets. The amount of after-tax interest expense allocated to discontinued operations in fiscal 2003, fiscal 2002 and fiscal 2001 was $2.3 million, $3.8 million, and $8.6 million, respectively.

We have separately classified $18.3 million and $46.1 million of carrying value associated with our assets held for sale in our consolidated balance sheets at September 30, 2003 and 2002, respectively.

The following table sets forth net revenues and the components of loss from discontinued operations for the years ended September 30, 2003, 2002, and 2001 (in thousands):

	Successor Company						Predecessor Company
	Years Ended September 30,						Year Ended September 30, 2001
	2003			2002
Net revenues	$	144,279		$	261,879		$	259,014
Net operating loss of discontinued businesses	$	(20,779	)	$	(2,296	)	$	(24,388	)
Loss on discontinuation of businesses		(14,168	)		(11,004	)		—
Income tax benefit		13,822			4,959			—
Loss from discontinued operations, net of taxes	$	(21,125	)	$	(8,341	)	$	(24,388	)

The loss on discontinuation of businesses includes the write-down of assets to estimated net realizable value.

The operations of GHC spun-off on December 1, 2003 will be reported as discontinued operations beginning in fiscal 2004.

Results of Operations

Factors Affecting Comparability of Financial Information

As a consequence of the implementation of fresh-start reporting effective September 30, 2001, the financial information presented in the consolidated statements of operations and the statements of cash flows for the fiscal years ended September 30, 2003 and 2002 are generally not comparable to the financial results for the corresponding period in fiscal 2001. To highlight the lack of comparability, a solid vertical line separates the pre-

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emergence financial information from the post-emergence financial information in the accompanying consolidated financial statements and the notes thereto. Any financial information herein labeled “Predecessor Company” refers to periods prior to the adoption of fresh-start reporting, while those labeled “Successor Company” refer to periods following adoption of fresh-start reporting.

The lack of comparability in the accompanying consolidated financial statements is most apparent in our capital costs (lease, interest, depreciation and amortization), as well as with debt restructuring and reorganization costs and net (gain) on debt discharge, and preferred dividends. We believe that business segment operating revenue and EBITDA of the Predecessor Company are generally comparable to those of the Successor Company.

Fiscal 2003, fiscal 2002 and fiscal 2001 financial information has been adjusted to exclude operations identified as discontinued, including assets held for sale, since our September 30, 2001 adoption of SFAS No. 144. Properties identified as discontinued prior to our September 30, 2001 adoption of SFAS No. 144 continue to be reflected in the results from continuing operations. See “ — Certain Transactions and Events — Assets Held for Sale and Discontinued Operations.”

Reconciliation of Net Income to EBITDA

The following table reconciles our non-GAAP measure of EBITDA to our net income available to common shareholders.  See “— Reasons for Non-GAAP Financial Disclosure” (in thousands):

	Successor Company						Predecessor Company
	Years ended September 30,						Year ended September 30,
	2003			2002			2001
Net income available to common shareholders - as reported	$	29,987		$	70,167		$	246,474
Add back:
Loss from discontinued operations, net of taxes		21,125			8,341			24,388
Preferred stock dividends		2,701			2,599			45,623
Equity in (net income) loss of unconsolidated affiliates		(1,184	)		(2,165	)		10,213
Minority interests		5,194			2,838			(2,249	)
Income tax expense		28,674			35,103			—
Interest expense		40,917			41,183			114,404
Depreciation and amortization expense		66,384			59,449			99,898
EBITDA	$	193,798		$	217,515		$	538,751

The results of operations discussion includes EBITDA. 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 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 measure so calculated and presented. In this regard, GAAP refers to generally accepted accounting principles in the United States. Pursuant to the requirements of Regulation G, we have provided reconciliations of the non-GAAP financial measures to the most directly comparable GAAP financial measures.

Management believes that the presentation of EBITDA provides useful information to investors regarding our results of operations because it is useful for trending, analyzing and benchmarking the performance and value of our business. We use EBITDA primarily as a performance measure. We use EBITDA as a measure to assess the relative performance of our operating businesses, as well as the employees responsible for operating such businesses. EBITDA is useful in this regard because it does 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 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

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EBITDA in our annual budget process. We believe EBITDA facilitates internal comparisons to historical operating performance of prior periods and external comparisons to competitors’ historical operating performance. Although we use EBITDA as a financial measure to assess the performance of our business, the use of EBITDA is limited because it does 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 EBITDA does not consider these important elements of our cost structure, a user of our financial information who relies on EBTIDA as the only measure 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.  EBITDA should be considered in addition to, not as a substitute for, or superior to, GAAP financial measures or as indicators of operating performance. 

We define EBITDA as earnings from continuing operations before 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.

Fiscal 2003 Compared to Fiscal 2002

Consolidated Overview

For the current fiscal year, revenues were $2,649.0 million, an increase of $163.2 million, or 6.6%, over the prior fiscal year.  Of this growth, pharmacy services revenue to external customers increased by $113.5 million, inpatient services revenue increased by $28.2 million and all other business lines grew $21.5 million. See “— Segment Results” below for a discussion of inpatient services and pharmacy services revenue fluctuations.  The other revenue increase of $21.5 million is principally attributed to growth in our rehabilitation services business due to the net addition of 85 new customers, which contributed an additional $21.3 million of revenues.

Net income available to common shareholders for the current fiscal year declined $40.2 million, or 57.3%, to $30.0 million compared to $70.2 million for the prior fiscal year.  The decline in net income is principally attributed to $12.8 million of higher after-tax losses reported by our discontinued operations, $6.9 million of growth in depreciation and amortization expense, $3.3 million of higher earnings levels of our less than 100% owned subsidiaries attributed to our investment partners, partially offset by $6.4 million of reduced income tax expense from continuing operations.  The reasons for each of the above mentioned fluctuations are addressed in the paragraphs that follow. The remaining decline in net income available to common shareholders of approximately $23.6 million is attributed to the matters described under the following bullets:

• A $14.3 million increase in the EBITDA of our pharmacy services segment, principally due to revenue growth and the realization of our pharmacy margin expansion initiatives.  See “— Segment Results” for a more in-depth discussion of the results of our pharmacy services segment.

• A $20.1 million decline in the EBITDA of our inpatient services segment, principally due to the negative impact of the Skilled Nursing Facility Medicare Cliff.  See “— Segment Results” for a more in-depth discussion of the results of our inpatient services segment.

• An $8.3 million decline in all other businesses’ EBITDA, principally due to a decline in the operating performance of our hospitality service business. $6.3 million of this decline is attributed to a change in the pricing charged by our hospitality service business to our inpatient services segment for dietary, housekeeping and laundry management services.  The remaining  $2 million of deterioration is primarily the result of lost external hospitality service business.  The hospitality service business is not considered a component of our core businesses or strategy.

• A $5.3 million decrease in fiscal 2003 general and administrative costs principally due to the results of our overhead reductions initiatives and reduced stock based compensation expenses in the current year period.

• A $6.8 million increase in fiscal 2003 costs incurred in connection with our strategic planning, severance and other related costs versus the same period in the prior year.  The cost increase was centered in strategic consulting costs.  See “— Certain Transactions and Events — Change in Strategic Direction and Objectives” for the composition of such costs incurred in the current year.

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• A $4.3 million decrease in debt restructuring and reorganization costs as a result of the recognition in the prior year-to-date period of approximately $2.6 million of reorganization costs for post confirmation liabilities payable to the United States Trustee related to the Chapter 11 proceedings, as well as recording debt restructuring and reorganization costs resulting from a settlement reached with a lender of a pre-petition mortgage obligation for an amount that exceeded the estimated loan value established in the September 30, 2001 fresh-start balance sheet by approximately $1.7 million. 

• A $12.4 million decrease in fiscal 2003 net gains from break-up fees and other settlements (net gains).  In the current year-to-date period we recorded $11.3 million of net gains composed of a $10.2 million net break-up fee earned in connection with the proposed NCS transaction (see  “ — Certain Transactions and Events — NCS Transaction Termination Fee”) and $1.1 million of net gain resulting from the early extinguishment of debt.  In the prior year-to-date period we recorded a net gain of approximately $23.8 million, principally related to an arbitration award.

Depreciation and amortization expense increased $6.9 million, or 11.7%, to $66.4 million for the current fiscal year compared to $59.5 million for the prior fiscal year.  The increase is attributed to incremental depreciation expense on capital expenditures made since the prior year in excess of fixed asset retirements, and from the amortization of certain identifiable intangible assets acquired since the prior year.

Interest expense was relatively flat with a $0.3 million, or 0.6%, decrease for the current fiscal year to $40.9 million, compared to $41.2 million in the prior fiscal year.  Debt levels and the corresponding interest expense attributable to our continuing operations are lower than the same period in the prior year due to unscheduled debt repayments.  This reduction is offset with the incremental costs of our derivative financial instruments entered into in the fourth quarter of fiscal 2002, which fixed or capped our interest cost on $275 million of debt. 

Income tax expense for the current and prior year to date periods were offset by tax credits of $4.4 million and $10.3 million, respectively, pursuant to the Job Creation and Worker Assistance Act of 2002.  Our income tax expense is otherwise estimated using an effective tax rate of approximately 40.1% in the current year to date period and 39.1% in the prior year to date period.  The increase in the current year effective tax rate is due to the non-deductibility of certain costs related to the spin-off of GHC.

Equity in net income of unconsolidated affiliates for the current fiscal year was $1.2 million compared to our equity in net income of unconsolidated affiliates of $2.2 million for the prior fiscal year.  The $1.0 million decrease in the current year is primarily due to the negative impact of the Skilled Nursing Facility Medicare Cliff on the operating results of eldercare centers that we jointly-own, as well as our purchase in July 2003 of four eldercare centers that were previously jointly-owned and are therefore no longer accounted for under the equity method of accounting.

Minority interests expense increased $2.4 million for the current fiscal year to $5.2 million compared to $2.8 million for the comparable prior fiscal year due primarily to the operational growth and improved operating performance of certain consolidated pharmacy joint-venture partnerships.

Preferred stock dividends were relatively unchanged at $2.7 million for the current fiscal year versus $2.6 million for the prior fiscal year.  Preferred stock dividends are accrued in the form of additional shares of preferred stock (paid-in-kind).

Loss from discontinued operations, net of taxes, was $21.1 million in the current fiscal year and $8.3 million in the prior fiscal year.  The change is due in part to an $8.9 million (after-tax) write-down of assets classified as discontinued in the current fiscal year compared to $6.7 million (after-tax) recorded in the prior fiscal year, combined with the relative results of operations of those businesses identified as discontinued operations.  The

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deterioration in the operating results of our discontinued businesses is attributed to the impact of the Skilled Nursing Facility Medicare Cliff on such operations and adverse self-insured liability claims development associated with our discontinued Florida properties.  See “— Certain Transactions and Events — Assets Held For Sale and Discontinued Operations.” 

Segment Results

For fiscal 2003 and 2002, we had two reportable segments: (1) pharmacy services and (2) inpatient services. For a reconciliation of segment financial information to the consolidated statements of operations, see note 21 to our consolidated financial statements — “Segment Information” of Part II, Item 8, “Financial Statements and Supplementary Data,” of this Form 10-K.

Pharmacy Services

Pharmacy services revenue (before intersegment eliminations) increased $91.0 million, or 7.4%, to $1,313.4 million in the current fiscal year compared to $1,222.4 million for the same period in the prior year. Revenues from intersegment customers, which are eliminated in consolidation, decreased $22.5 million, or 22.4%, to $78.0 million for the current fiscal year compared to $100.5 million for the same period in the prior year. The increase in pharmacy service revenues (before intersegment eliminations) is net of approximately $40.0 million of reduced medical supply revenue resulting from transferring the fulfillment of medical supply services to Medline and net of approximately $20.0 million of reduced revenue related to price concessions afforded in the extension of our contracts with Manor Care and the State of New Jersey.  The gross increase of $151.0 million in pharmacy services revenue is attributable to favorable changes in bed mix, higher patient acuity mix and drug price inflation.

EBITDA of the pharmacy services segment increased $14.3 million, or 12.8 %, to $126.7 million for the current fiscal year from $112.3 million for the prior fiscal year. EBITDA margin improved to 9.6% in the current fiscal year from 9.2% for the same period in the prior year.  EBITDA growth is attributed to the net growth in revenues previously described and improved cost controls.  Cost of sales (before intersegment eliminations) increased $64.0 million, or 8.4%, for the current fiscal year, to $828.0 million from $764.0 million for the same period in the prior year. Of this growth, $56.9 million is attributed to pharmacy services revenue growth and $7.1 million is due to margin compression related changes in payor mix and reductions in reimbursement rates. As a percentage of revenue, cost of sales was 63.0% for the current fiscal year and 62.5% for the same period in the prior year. Included in other operating expenses for this segment are salaries, wages and benefits which increased $10.4 million, or 4.9%, to $222.1 million from $211.7 in the prior year.  As a percentage of revenue, salaries, wages and benefits declined to 16.9% as compared to 17.3% in the prior year.  The remainder of the segment’s other operating expenses include selling, general and administrative expenses which increased to $1.0 million to $99.9 million, or 1%, from $98.9 million in the prior year.  As a percentage of revenues, selling, general and administrative expense declined to 7.6% compared to 8.1% in the prior year.  These declines in operating costs are attributed to improved cost control and the leveraging of fixed costs against increased revenues.

Inpatient Services

Inpatient services revenue increased $28.2 million, or 2.3%, to $1,229.2 million in the current fiscal year from $1,201.1 million for the same period in the prior year.  Of this increase, $23.5 million is attributed to increased payment rates.  Our average rate per patient day in the current fiscal year was $188 compared to $184 for the comparable period in the prior year. This increase in the average rate per patient day is principally driven by increased average Medicaid rates ($148 in 2003 versus $138 in 2002), offset by a decline in our average Medicare rate per patient day ($314 in 2003 versus $340 in 2002) due to the $24.8 million net impact of the October 1, 2002 Skilled Nursing Facility Medicare Cliff. $10.0 million of the overall revenue increase resulted from the revenues of four eldercare centers acquired in July 2003.  Such increases were offset by a decrease in revenue of $7.8 million resulting from an overall decrease in occupancy, partially mitigated by $2.5 million of increased revenues primarily due to a favorable shift in payor mix.  The favorable shift in payor mix resulted from Medicare census representing 0.8% more of total census in 2003 than in 2002.  Total patient days increased 7,983 to 6,545,759 in the current fiscal year compared to 6,537,776 for the same period in the prior year.  Of this increase, 59,042 patient days are attributed to the aforementioned four eldercare centers acquired in July 2003, offset by decreased operating census of 51,059 patient days as the result of a decline in overall occupancy.  Our occupancy was 91% and 92% in the current and prior year periods, respectively. 

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EBITDA for the inpatient services segment in the current fiscal year decreased $20.1 million, or 14.3%, to $120.8 million compared to $140.9 million for the same period last year.  EBITDA margin declined to 9.8% from 11.7% for the same periods, respectively.  Operating margins were adversely impacted by the $24.8 million impact of the Skilled Nursing Facility Medicare Cliff, an overall reduction in occupancy and increased operating expenses.  The preceding were partially mitigated by the favorable increases in state Medicaid rates and less reliance on agency labor.  Operating expenses, including salaries, wages and benefits, and other operating expenses, grew by $48.3 million, or 4.6%, to $1,108.5 million for the current fiscal year compared to the same period in the prior year.  $9.2 million of such growth was due to eldercare centers acquired in July 2003. The remaining $39.1 million of growth in operating expense is principally attributed to wage rate pressures related to a highly competitive market for healthcare professionals and increased ancillary utilization resulting from increased Medicare census.  Nursing labor costs, including both employed and agency labor, increased to $77.73 per patient day in the current fiscal year, or 5.3%, from the same period in the prior year.  This increase is principally driven by inflationary factors which were partially mitigated by less reliance on agency labor (primarily nursing costs), resulting from improved hiring and retention trends.  Other operating expense declined in the current fiscal year by $9.1 million, principally due to reduced agency utilization and reduced pricing from our hospitality service business for dietary, housekeeping and laundry management services, partially offset by increased ancillary costs.

Fiscal 2002 Compared to Fiscal 2001

Consolidated Overview

For fiscal 2002 revenues grew $158.7 million, or 6.8%, to $2,485.8 million compared to $2,327.1 million for the same period in the prior year. Of this growth, external pharmacy services revenue increased by $86.7 million, inpatient services revenue grew by $64.8 million and all other business lines grew $7.2 million. See “ — Segment Results” discussed further in this section for a discussion of revenue fluctuations.

Net income available to common shareholders in fiscal 2002 declined $176.3 million, or 71.5%, to $70.2 million compared to $246.5 million for the prior fiscal year.  The decline in net income is principally attributed to $35.1 million of growth in income tax expense, partially offset by $16.0 million of decreased after-tax losses reported by our discontinued operations, $7.3 million of lower earnings levels of our less than 100% owned subsidiaries attributed to our investment partners, $43.0 million of decreased preferred stock dividends and decreases of $73.2 million and $40.5 million in interest expense and depreciation and amortization expense, respectively.  The reasons for each of the above mentioned fluctuations are addressed in the paragraphs that follow. The remaining decline in net income available to common shareholders of approximately $321.2 million is attributed to the matters described under the following bullets:

• An $11.8 million increase in the EBITDA of our pharmacy services segment, principally due to revenue growth and increased margins.  See “— Segment Results” for a more in-depth discussion of the results of our pharmacy services segment.

• A $24.9 million increase in the EBITDA of our inpatient services segment, principally due to increased payment rates.  See “— Segment Results” for a more in-depth discussion of the results of our inpatient services segment.

• A $2.0 million increase in all other businesses’ EBITDA, principally due to the improved operating performance of our rehabilitation services business.

• An $18.6 million increase in fiscal 2002 general and administrative costs resulting from approximately $9 million of additional expenses for self-insured liability claims, approximately $5 million due to changes in our employee incentive compensation program and the remainder is principally attributed to inflationary increases in cost.

• A $450.5 million increase in fiscal 2002 debt restructuring and reorganization costs and net gain on debt discharge primarily due to $1,460.9 million of gains recognized during fiscal 2001 in connection with the discharge of liabilities subject to compromise pursuant to our joint plan of reorganization, partially offset by $1,014.5 of costs recognized during fiscal 2001, primarily consisting of fresh-start valuation adjustments. Fresh-start valuation adjustments

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	were recorded pursuant to the provisions of SOP 90-7, which require entities to record their assets and their liabilities at estimated fair values. The fresh-start valuation adjustment as described relates only to continuing operations and is principally the result of the elimination of predecessor company goodwill and the revaluation of property, plant and equipment to estimated.  In fiscal 2002, $4.3 million of debt restructuring and reorganization costs were recognized.
•	A $106.4 million decrease in fiscal 2002 operating expenses due to the recognition in fiscal 2001 of costs in connection with certain uncollectible receivables, insurance related costs and other charges included in other operating expenses.  Cost components included:  (a) $30.0 million of notes receivable, advances, and trade receivables, due from affiliated businesses formerly owned or managed deemed uncollectible, (b) $38.9 million of uncollectible trade receivables, (c) $15.1 million of self-insured and related program costs, (d) $22.4 million of other charges principally related to contract and litigation matters and settlements, and certain other charges.
•	A $23.8 million increase in fiscal 2002 net gains from break-up fees and other settlements (net gains). During fiscal 2002, we recorded a net gain of $21.9 million resulting from the award in the Manor Care arbitration. In addition, we also recorded $1.9 million of gains on other legal settlements in fiscal 2002.
•	A $21.5 million decrease in fiscal 2002 costs incurred in connection with our strategic planning, severance and other related costs in fiscal 2002.
•	A $0.5 million net loss on sale of eldercare centers recognized in fiscal 2001. In October 2000, we sold an idle 232 bed eldercare center for cash consideration of $7 million, resulting in a net gain on sale of $1.8 million. In April 2001, we sold an operational 121 bed eldercare center for cash consideration of $0.5 million, resulting in a net loss of $2.3 million.

Depreciation and amortization expense decreased $40.5 million to $59.4 million in fiscal 2002 compared to $99.9 million for the same period in the prior year. The decrease was primarily caused by the impact of fresh-start reporting on the carrying value of our property, plant and equipment, which were adjusted to their estimated fair values as of September 30, 2001, and our September 30, 2001 adoption of an accounting pronouncement which no longer requires the amortization of goodwill.

Interest expense decreased $73.2 million in fiscal 2002 to $41.2 million, compared to $114.4 million for the same period in the prior year. In fiscal 2001, in accordance with SOP 90-7, we ceased accruing interest following the petition date, June 22, 2000, on certain long-term debt instruments classified as liabilities subject to compromise. Our contractual interest expense in fiscal 2001 was $209.8 million, leaving $95.4 million of interest expense unaccrued for that period as a result of the Chapter 11 cases. Interest expense in fiscal 2002 was accrued at the contractual rates. Contractual interest expense in fiscal 2002 decreased by $168.6 million compared to the same period in the prior year. This decrease is attributed to the overall reduction of debt levels following our emergence from bankruptcy in addition to a lower weighted average borrowing rate.

Income tax expense in fiscal 2002 of $45.4 million was offset by a $10.3 million tax credit realized pursuant to the Job Creation and Worker Assistance Act of 2002. Our income tax expense is otherwise estimated using an effective tax rate of 39.1%. We did not record any income tax expense in fiscal 2001 due to our operating losses.

Equity in net income of unconsolidated affiliates in fiscal 2002 was $2.2 million compared to equity in net loss of unconsolidated affiliates of $10.2 million for the same period in the prior year, which is attributed to changes in the earnings / losses reported by our unconsolidated affiliates.  The less favorable operating performance of our unconsolidated affiliates in fiscal 2001 is attributed to certain asset impairment charges recorded by our affiliates in that year.

Minority interests expense increased by $5.1 million in fiscal 2002 to expense of $2.8 million compared to income of $2.2 million for the comparable period in the prior year.  The increase is primarily due to a pharmacy joint-venture partnership initiated in 2002 and improved operating performance of certain other consolidated pharmacy joint-venture partnerships.

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Preferred stock dividends decreased $43.0 million to $2.6 million in fiscal 2002 compared to $45.6 million for the comparable period in the prior year. This decrease is attributed to the cancellation of our predecessor company preferred stock and related dividends, and offset with dividends on $42.6 million of the preferred stock issued in connection with our joint plan of reorganization.

Losses from discontinued operations decreased $16.1 million in fiscal 2002, to $8.3 million from $24.4 million for the same period in the prior year. The decrease in losses from discontinued operations in fiscal 2002 compared to the same period in the prior year is principally due to the level of fixed asset write-downs to fair value in the 2001 period by the discontinued businesses in connection with their adoption of fresh start reporting. See “— Certain Transactions and Events — Assets Held For Sale and Discontinued Operations.”

Segment Results

Pharmacy Services

Pharmacy services revenue (before intersegment eliminations) increased $89.1 million, or 7.9%, to $1,222.4 million in fiscal 2002 compared to $1,133.3 million for the same period in the prior year. Revenues from intersegment customers, which are eliminated in consolidation, increased $2.4 million, or 2.4%, to $100.5 million in fiscal 2002 compared to $98.1 million for the same period in the prior year. Pharmacy service revenues with external customers increased $86.7 million, or 8.4%, due to favorable changes in bed mix and patient acuity, and drug price inflation.

EBITDA of the pharmacy services segment increased $11.8 million, or 11.7%, to $112.3 million in fiscal 2002 from $100.6 million for the same period in the prior year. EBITDA margin improved to 9.2% in fiscal 2002 from 8.9% in the same period in the prior year. EBITDA growth is attributed to the net growth in revenues previously described and improved cost controls.  Cost of sales (before intersegment eliminations) increased $61.3 million, or 8.7%, in fiscal 2002, to $764.0 million from $702.7 million for the same period in the prior year. Of this growth, $55.7 million is attributed to pharmacy and medical supply revenue growth, and $5.6 million is due to margin compression related changes in payor mix and reductions in reimbursement rates. As a percentage of revenue, cost of sales in fiscal 2002 and 2001 was 62.5% and 62.0%, respectively. Other operating expenses for this segment, including salaries, wages and benefits, increased $16.0 million, or 4.8%, to $346.0 million in fiscal 2002 compared to $330.0 million for the same period in the prior year. As a percentage of revenue, other operating costs declined to 28.3% in fiscal 2002 from 29.1% for the comparable period in the prior year. This decline is attributed to improved cost control and the leveraging of fixed costs against increased revenues.

Inpatient Services

Inpatient services revenue increased $64.8 million, or 5.7%, to $1,201.1 million in fiscal 2002 from $1,136.3 million for the same period in the previous year. Of this increase, $67.2 million is principally attributed to increased payment rates. Our average rate per patient day in fiscal 2002 was $184 compared to $171 for the comparable period in the prior year. This increase in the average rate per patient day is principally driven by the full year effect of the April, 2001 implementation of the Benefits Improvement and Protection Act on our average Medicare rate per patient day ($340 in 2002 versus $327 in 2001), as well as increased Medicaid rates ($138 in 2002 versus $128 in 2001) in certain states, most notably in Maryland.  Revenues improved by $11.7 million due to a favorable shift in payor mix resulting from Medicare census representing 1.5% more of total census in 2002 than in 2001.   The preceding were offset by a decrease in revenue of $17.5 million resulting from eldercare center divestitures.  Total patient days decreased 114,361 to 6,537,776 in fiscal 2002 compared to 6,652,137 in fiscal 2001. Of this decrease, 121,768 patient days are attributed to eldercare center divestitures being offset by increased operating census of 7,407 patient days as the result of an increase in overall occupancy.  Our occupancy was 92% in both fiscal year 2002 and 2001. Increased Medicare Part B volume was the primary reason for the remaining $3.4 million of increased revenue in fiscal 2002.

EBITDA for the inpatient services segment in fiscal 2002 increased $24.9 million, or 21.5%, to $140.9 million in fiscal 2002 from $116.0 million in fiscal 2001. EBITDA margin increased to 11.7% from 10.2% for the same periods, respectively.  The improvement in operating margins was primarily the result of improved Medicare and Medicaid payment rates.  Operating expenses, including salaries, wages and

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benefits, and other operating expenses, grew by $39.9 million, or 3.9%, to $1,060.2 million in fiscal 2002 compared to the same period in the prior year. The primary cost for this segment is salary, wage and benefit costs, which increased $18.9 million, or 3.4% in fiscal 2002 to $576.6 million from $557.7 million for the same period in the prior year. This increase is net of $12.2 million of reduced salary, wage and benefit costs resulting from eldercare center divestitures. Salary, wage and benefit costs, considering the impact of divested eldercare centers, increased $31.1 million, or 5.7%, driven by inflationary cost increases and the relative mix of employed labor versus agency labor costs. As a percentage of net revenue, salary, wage and benefit costs, once adjusted for the impact of divested eldercare centers, was 48.0% in fiscal 2002 compared to 48.8% for the comparable period in the prior year. The decline in this ratio is attributed to a disproportionate increase in revenue as a result of the full year impact of the Benefits Improvement Protection Act in 2002 as compared to the increase in labor related costs. The inpatient services segment has experienced continued pressure on wage and benefit related costs mitigated by less reliance on agency labor (primarily nursing costs) resulting from improved hiring and retention trends. Other operating expenses, once reduced for the impact of divested eldercare centers ($8.1 million in fiscal 2001), increased $28.4 million, or 6.3%, to $483.0 million in fiscal 2002 compared to $454.5 million in fiscal 2001. The increase was primarily driven by $12.2 million of additional ancillary supply costs to treat a higher acuity customer base, increased property and general liability insurance of $9.5 million and other operating costs of $6.7 million.

Liquidity and Capital Resources

Working Capital and Cash Flows

At September 30, 2003, we had cash and equivalents of $132.7 million, net working capital of $446.7 million and $149.1 million of unused commitment under our $150 million revolving credit facility.

At September 30, 2003, we had restricted investments in marketable securities of $90.6 million, which are held by Liberty Health Corp. LTD., referred to as LHC, our wholly-owned captive insurance subsidiary incorporated under the laws of Bermuda. The investments held by LHC are restricted by statutory capital requirements in Bermuda. In addition, certain of these investments are pledged as security for letters of credit issued by LHC. As a result of such restrictions and encumbrances, we and LHC are precluded from freely transferring funds through intercompany loans, advances or cash dividends.

Our cash flow from operations before debt restructuring and reorganization costs in fiscal 2003 generated cash of $115.2 million compared to $233.4 million in fiscal 2002. A year-over-year comparison of the primary operating cash flow activities follows:

• A reduction in cash flow from operations of $60.8 million, net of charges not requiring funds, principally driven by the $24.8 million negative impact of the Skilled Nursing Facility Medicare Cliff, $11.3 million of reduced cash received in fiscal 2003 from unusual gains associated with the previously described arbitration awards, break-up fees and other settlements, and $12.8 million of increased losses from discontinued operations;

• Timing of payments for vendor and employee obligations accounted for a $34.1 million decline in operating cash flow in fiscal 2003 versus fiscal 2002; and

• A use of cash of $17.8 million in fiscal 2003 driven by increased trade accounts receivable caused by growth in operations.

Cash payments for debt restructuring and reorganization costs were $4.7 million in fiscal 2003 compared to $54.2 million for the same period in the prior year.

We believe that cash flow from operations, along with available borrowings under our new financing arrangements described below, are sufficient to meet our current liquidity needs.

Our days sales outstanding at September 30, 2003 was 50 days compared to 54 days at September 30, 2002. This reduction is principally due to improvement in the collection of accounts receivable.

Our net cash used in investing activities in fiscal 2003 was $11.6 million, and includes $59.8 million of capital expenditures, $5.3 million of cash used to purchase two eldercare centers, $5.9 million to purchase a rehabilitation

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services business, offset by $55.1 million of proceeds for the sale of eldercare centers principally located in Florida and Illinois. Capital expenditures consist primarily of betterments and expansion of eldercare centers and investments in computer hardware and software.

Our investing activities in fiscal 2003 also include $4.2 million in net investments in restricted investments in marketable securities, representing the current period net funding of self-insured workers’ compensation and general / professional liability insurance retentions held by LHC.

Our financing activities in fiscal 2003 resulted in net cash outflows of $113.6 million, and include $77.4 million of debt repayments and $36.2 million of common stock repurchases. Of the $77.4 million of debt repayments made in fiscal 2003, $24.8 million was the result of an excess cash flow recapture provision, $17.3 million was paid from the net proceeds of the sale of eight skilled nursing facilities in the state of Illinois and the remaining $35.3 million of debt repayments during fiscal 2003 were the result of the early extinguishment of four fixed rate secured loans and scheduled principal payments on all debt instruments. In fiscal 2003, our board of directors authorized us to repurchase up to $50.0 million of our common stock through privately negotiated third party transactions or in the open market. As of September 30, 2003, we had purchased 2.3 million shares of common stock for an aggregate amount of $36.2 million, representing 5.8% of the common stock outstanding.

Following the spin-off, our need for funds arises primarily from our working capital requirements, including the need to finance our receivables, inventory and equipment used to provide services to our pharmacy customers. At the date of the spin-off we had approximately $72.1 million of cash to fund working capital needs. We currently have a $37.9 million deposit with our primary pharmaceutical wholesaler which equates to negative four days payment terms. The deposit is fully refundable to us at our request. This, combined with our contractual ability to go to 15 day payment terms, provides us the ability to use these funds as an additional reserve to meet our working capital requirements, debt service and other cash needs over the next year, if needed. We believe that net cash provided by our operating activities will provide sufficient resources to meet our working capital requirements, debt service and other cash needs over the next year. We also believe that funds available through the revolving line of credit described below under “— New Financing Arrangements” will provide the necessary resources to expand and grow our pharmacy business either through internal growth or acquisitions.

New Financing Arrangements

In connection with the spin-off of GHC, the Company restructured and refinanced nearly all of its indebtedness. At September 30, 2003, the Company had a senior secured credit facility of $315.0 million, senior secured notes of $240.2 million and other secured debt of $56.4 million, along with an undrawn $150.0 million revolving credit facility.  In the first quarter of fiscal 2004, prior to the spin-off, both we and GHC entered into new financing arrangements in an effort to extinguish all senior secured joint and several debt and to provide adequate capital to both separate organizations. As such, we and GHC entered into the following new financing arrangements:

NeighborCare:

• $250.0 million, 6.875% senior subordinated notes due 2013; and

• $100.0 million, undrawn revolving credit facility due 2008. Interest at LIBOR plus 2.00% on borrowings and a commitment fee of 0.50% on any unused commitment.

GHC:

• $225.0 million, 8% senior subordinated notes due 2013;

• $185.0 million, fully drawn term loan due 2010. Interest at LIBOR plus 2.75%; and

• $75.0 million, undrawn revolving credit facility due 2008. Interest at LIBOR plus 3.00% on borrowings; and a commitment fee of 0.50% on any unused commitment.

The $660.0 million of proceeds from the new financing arrangements were used to repay our previously held senior credit facility of $315.0 million ($246.0 million term loan and $68.2 million delayed drawn term loan) and our previously held $240.2 million senior secured notes, which occurred in the first quarter of fiscal 2004.

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The remaining proceeds of approximately $104.8 million were used to pay for approximately $21.0 million of financing fees related to the new financing arrangements, with the remaining $83.8 million used to provide additional liquidity to both organizations to fund both working capital and other requirements.

The agreements and instruments governing our new financing arrangements contain various restrictive covenants that, among other things, require us to comply with or maintain certain financial tests and ratios and restrict our ability to:

• incur more debt;

• pay dividends, redeem stock or make other distributions;

• make certain investments;

• create liens;

• enter into transactions with affiliates;

• make acquisitions;

• merge or consolidate; and

• transfer or sell assets.

Our new financing arrangements require us to maintain compliance with certain financial and non–financial covenants, including minimum EBITDA (earnings before interest, taxes, depreciation and amortization); limitations on capital expenditures, maximum leverage ratios, minimum fixed charge coverage ratios and minimum net worth.

Under the terms of NeighborCare’s and GHC’s senior subordinated notes, the notes are not redeemable until on or after November 15, 2008 and October 28, 2008, respectively. We and GHC may, however, use the net proceeds from one or more equity offerings to redeem up to 35% of the aggregate principal amount of the notes issued on or before November 15, 2006 and October 15, 2006, respectively at 106.875% and 108.000%, respectively, of the principal amount thereof, plus accrued and unpaid interest to the redemption date, subject to the terms of the notes.

Contractual Obligations and Commitments

We have future obligations for debt repayments, capital leases, and future minimum rentals under operating leases. The obligations as of September 30, 2003 are summarized as follows (in thousands):

			Payments Due by Period
Contractual Obligation	Total		Less than 1 year		1-3 years		4-5 years		Thereafter
Long-term debt	$	601,746	$	15,872	$	16,398	$	533,639	$	35,837
Capital lease obligations		9,873		4,263		4,580		1,022		8
Operating leases		137,851		29,109		50,913		40,503		17,326
	$	749,470	$	49,244	$	71,891	$	575,164	$	53,171

Certain of our underlying long-term debt and lease obligations require us to maintain compliance with financial and non–financial covenants, including minimum EBITDAR (earnings before interest, taxes, depreciation, amortization and rents); limitations on capital expenditures, maximum leverage ratios, minimum fixed charge coverage ratios and minimum net worth. Failure to meet these covenants or the occurrence of other defaults, such as non-payment, could result in the acceleration of the maturity of such obligations.

A majority of the Company’s long-term debt obligations were repaid subsequent to September 30, 2003 in connection with the spin-off. See “— New Financing Arrangements.” All of the capital lease obligations and a portion of the operating lease obligations are attributed to NeighborCare and will continue to be our commitments after the spin-off.

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Off-Balance Sheet Commitments

In addition to the contractual obligations and commitments described above, we also have contingent obligations related to outstanding lines of credit, letters of credit and guarantees. These commitments as of September 30, 2003 are summarized as follows (in thousands):

			Amount of Commitment Expiration Per Period
Off-Balance Sheet Commitments	Total		Less than 1 year		1-3 years		4-5 years		Thereafter
Lines of credit	$	2,765	$	—	$	—	$	—	$	2,765
Letters of credit		894		894		—		—		—
Guarantees		23,184		8,623		1,706		12,430		425
	$	26,843	$	9,517	$	1,706	$	12,430	$	3,190

Requests for providing commitments to extend financial guarantees and extend credit are reviewed and approved by senior management. Management regularly reviews all outstanding commitments, letters of credit and financial guarantees, and the results of these reviews are considered in assessing the need for any reserves for possible credit and guarantee loss.

The Company has an agreement with a vendor, which supplies approximately 98% of the Company’s pharmaceutical products, pursuant to which the Company is required to maintain a deposit to secure purchase terms. The deposit of $37.9 million and $32.7 million at September 30, 2003 and 2002, respectively, is refundable upon the Company’s election of alternative purchase terms.

We have extended $7.4 million in working capital lines of credit to certain jointly owned and managed companies, of which $4.6 million were unused at September 30, 2003. Credit risk represents the accounting loss that would be recognized at the reporting date if the affiliate companies were unable to repay any amounts utilized under the working capital lines of credit. Commitments to extend credit to third parties are conditional agreements generally having fixed expiration or termination dates and specific interest rates and purposes.

We have posted $0.9 million of outstanding letters of credit. The letters of credit guarantee performance to third parties of various trade activities. The letters of credit are not recorded as liabilities on our balance sheet unless they are probable of being utilized by the third party. The financial risk approximates the amount of outstanding letters of credit.

We are a party to joint venture partnerships whereby our ownership interests are 50% or less of the total capital of the partnerships. We account for these partnerships using the equity method of accounting and, therefore, the assets, liabilities and operating results of these partnerships are not consolidated with ours. The carrying value of our investment in joint venture partnerships is $8.8 million at September 30, 2003. Our share of the income (loss) of these partnerships for the years ended September 30, 2003, 2002 and 2001 was $1.2 million, $2.2 million and ($10.2) million, respectively. Although we are not contractually obligated to fund operating losses of these partnerships, in certain cases, we have extended credit to such joint venture partnerships in the past and may decide to do so in the future in order to realize economic benefits from our joint venture relationship. Management assesses the creditworthiness of such partnerships in the same manner it does other third–parties. We have provided $10.8 million of financial guarantees related to loan commitments of four jointly owned and managed companies. As of September 30, 2003, we have also provided $12.4 million of financial guarantees related to lease obligations of one jointly–owned and managed company of GHC that operates four eldercare centers. This obligation was subsequently relieved in October 2003 upon the sale of the jointly-owned partnership’s leasehold rights to an independent third party. The guarantees are not recorded as liabilities on our balance sheet unless we are required to perform under the guarantee. Credit risk represents the accounting loss that would be recognized at the reporting date if counter–parties failed to perform completely as contracted. The credit risk amounts are equal to the contractual amounts, assuming that the amounts are fully advanced and that no amounts could be recovered from other parties.

Our business activities do not include the use of unconsolidated special purpose entities. All of the off-balance sheet commitments presented above are attributed to GHC’s business and, consequently, will not be our obligations after the spin-off.

Income Taxes

Pursuant to the Job Creation and Worker Assistance Act of 2002, which extended the net operating loss carryback period to five years, the Company was able to carryback certain net operating losses (“NOL”) originating

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in the year ended September 30, 2001. This enabled the Company to record $4.4 million and $10.3 million in federal tax refunds during the years ended September 30, 2003 and 2002, respectively.

Following consummation of the Plan, and after reduction for (1) the aforementioned NOL carrybacks and (2) cancellation of prepetition indebtedness as provided under Section 108 of the Internal Revenue Code, the Company had Predecessor Company NOL carry-forwards of $278.0 million, which expire between September 30, 2020 and September 30, 2021. Under applicable limitations imposed by Section 382 of the Internal Revenue Code, the Company’s ability to utilize these loss carry-forwards became subject to an annual limitation of $43.3 million, inclusive of a separate limitation for Multicare. During the years ended September 30, 2003 and 2002, the Company utilized $5.0 million and $8.0 million, respectively, of Predecessor loss carry-forwards. Pursuant to SOP 90–7, the income tax benefit of any Predecessor NOL utilization ultimately serves to reduce goodwill and, thereafter, to increase additional paid-in-capital. The Company has Predecessor NOL carry-forwards of $265.0 million remaining at September 30, 2003. There can be no assurances that the Company will be able to utilize these NOL’s and, consequently, a 100% valuation allowance against these NOL’s has been provided. During fiscal 2003, the Successor Company generated an additional NOL of $27.2 million not subject to annual limitation which is available for carry-forward through the year ended September 30, 2023. Other deferred tax assets include $3.3 million for built–in losses recognized by Multicare during fiscal 2002 in excess of its separate limitation under Section 382.

Revenue Sources

We receive revenues from Medicare, Medicaid, private insurance, self-pay residents, other third party payors and long-term care facilities which utilize our pharmacy and other specialty medical services. The healthcare industry is experiencing the effects of the federal and state governments’ trend toward cost containment, as government and other third party payors seek to impose lower reimbursement and utilization rates and negotiate reduced payment schedules with providers. These cost containment measures, combined with the increasing influence of managed care payors and competition for patients, have resulted in reduced rates of reimbursement for services we provide.

The recently enacted Medicare Modernization Act may have an effect upon our business or to the business of our primary customers, nursing facilities.  Specifically, it increases payments to nursing facilities to cover the high costs of care associated with treatment for AIDS patients, subject to applicable sunsets, while potentially reducing payments for certain outpatient pharmaceutical drugs and biologicals currently reimbursed under the “average wholesale price” methodology.  The legislation shifts the payment methodology from average wholesale price to “average sales price.”  DHHS will have the authority to adjust payment rates where the average sales price does not reflect widely available market prices.  In addition, the legislation will have a significant impact on reimbursement rates for durable medical equipment by freezing durable medical equipment rates from 2004 through 2006.  DHHS will have the authority to adjust rates for the top five most widely used durable medical equipment codes to reflect reimbursement rates paid under the Federal Employee Health Benefit Plan.  The Medicare Modernization Act also provides for increased federal resources being available for prescription drug benefits coverage in 2006.  Finally, the Medicare Modernization Act authorizes an interim federally sponsored prescription drug discount plan to provide group discounts for Medicare beneficiaries between 2004 and 2006.

Because of the recent enactment of the Medicare Modernization Act and its broad scope, we are not in a position to fully assess its impact on our business.  The impact of the legislation depends upon a variety of factors, including patient mix.  It is not clear at this time whether this new legislation will have an overall negative impact on institutional and long-term care pharmacy services.  This legislation may reduce revenue and impose additional costs to the industry.  DHHS has not yet promulgated any final regulations under the Act, as the Act requires it to do.  The impact of these regulations when promulgated, including those regulations relating to the prescription drug discount plan discussed above, is unclear.

Critical Accounting Policies

An accounting policy is considered to be critical if it is important to the registrant’s financial condition and results, and requires significant judgment and estimates on the part of management in its application. Our critical accounting estimates

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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 the critical 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. Our senior management has reviewed these critical accounting policies. We believe that the following represents our critical accounting policies. For a summary of all of our significant accounting policies, including critical accounting policies discussed below, see note 1 —“Summary of Significant Accounting Policies” to Part II, Item 8, “Financial Statements and Supplementary Data,” of this Form 10-K.

Allowance for Doubtful Accounts

We utilize the “Aging Method” to evaluate the adequacy of our allowance for doubtful accounts. This method is based upon applying estimated standard allowance requirement percentages to each accounts receivable aging category for each type of payor. We have developed estimated standard allowance requirement percentages by utilizing historical collection trends and our understanding of the nature and collectibility of receivables in the various aging categories and the various segments of our business. The standard allowance percentages are developed by payor type as the accounts receivable from each payor type have unique characteristics. The allowance for doubtful accounts is determined utilizing the aging method described above while also considering accounts specifically identified as uncollectible. Accounts receivable that we specifically estimate to be uncollectible, based upon the age of the receivables, the results of collection efforts or other circumstances, are fully reserved for in the allowance for doubtful accounts until they are written–off.

In fiscal 2001, we performed a re–evaluation of our allowance for doubtful accounts triggered by deterioration in the agings of certain categories of receivables. We believe that such deteriorations were due to several prolonged negative factors related to the operational effects of our bankruptcy filings, personnel shortages, the time demands required in normalizing relations with vendors and addressing a multitude of other bankruptcy issues. As a result of this re–evaluation, we determined that an increase to the allowance for doubtful accounts of $38.9 million was necessary, and certain changes to the aging method resulting in higher levels of allowance for doubtful accounts requirements were also necessary.

Over the past three years, we have continued to refine our assumptions and methodologies underlying the aging method. We believe the assumptions used in aging method employed in fiscal 2003 and 2002, coupled with continued improvements in our collection patterns, suggest that our allowance for doubtful accounts is adequately provided for. However, because the assumptions underlying the aging method are based upon historical collection data, there is a risk that our current assumptions are not reflective of more recent collection patterns. Changes in overall collection patterns can be caused by market conditions and/or budgetary constraints of government funded programs such as Medicare and Medicaid. Such changes can adversely impact the collectibility of receivables, but not be addressed in a timely fashion when using the aging method, until updates to our periodic historical collection studies are completed and implemented.

At least annually, we update our historical collection studies in order to evaluate the propriety of the assumptions underlying the aging method. Any changes to the underlying assumptions are implemented immediately. Changes to these assumptions can have a material impact on our bad debt expense, which is reported in the consolidated statements of operations as a component of other operating expenses.

Loss Reserves For Certain Self–Insured Programs

General and Professional Liability and Workers Compensation

General and professional liability costs for the long–term care industry have become increasingly expensive. Specifically, rising costs of eldercare malpractice litigation, and losses stemming from these malpractice lawsuits and a constriction of insurers have caused many insurance carriers to raise the cost of insurance premiums or refuse to write insurance policies for nursing homes. These problems are particularly acute in the State of Florida where, because certain laws allow for significantly higher liability awards than in other states, general liability and professional liability costs have increased substantially. In fiscal 2003, we sold all of our approximately 1,500

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skilled nursing and assisted living beds in the State of Florida, representing six percent of our then owned and leased beds.

Prior to June 1, 2000, we had first dollar coverage for general and professional liability costs with third party insurers; accordingly, we have no exposure for claims prior to that date. Effective June 1, 2000, we began insuring a substantial portion of our professional liability risks through our wholly–owned insurance company, LHC. LHC was a wholly-owned subsidiary of GHC as of the date of the spin-off and as a result will not be included in the consolidated financial statements of the Company after the spin-off. Specifically, we are responsible for the first dollar of each claim (on a claims–made basis), up to a self–insurance retention limit determined by the individual policies, subject to aggregate limits for each policy year. The self–insured retention limits amount to $14 million, $22 million and $19 million for the policy years ended May 31, 2004, 2003 and 2002, respectively. For policy years 2004 and 2002, any costs above these retention limits are covered by third-party insurance carriers. For policy year 2003 (June 2002 to May 2003), we have retained an additional self–insurance layer of $5 million. Since the June 1, 2000 inception of the self–insurance program through September 30, 2003, our cumulative self–insurance retention levels are $60 million and our provision for these losses is $45.8 million. Assuming our actual losses were to reach our retention limits in each of the policy years, our additional exposure is approximately $14.2 million which, if incurred, would be recognized as an increase to our other operating expenses in our consolidated statements of operations in the period such exposure became known. In addition, we have provided $5.3 million for the estimated costs of claims incurred but not reported as of September 30, 2003.

Beginning in 1994, we insured our workers compensation exposure, principally via self–insurance retentions and large deductible programs through LHC. In addition, we inherited legacy workers compensation programs from acquisitions we completed.

Over the past three years, the majority of our workers compensation coverage was structured as follows: For policy years 2002–2004 (May 1, 2001 – April 30, 2004) we have large deductible programs, the deductibles for which are insured through LHC; and for policy year 2001 (May 1, 2000 – April 30, 2001) we were insured on a first dollar coverage basis for our Multicare subsidiaries, and insured through an incurred loss retrospectively rated policy for our non–Multicare subsidiaries.

For policy years 2004, 2003 and 2002, we are self-insured through LHC up to the first $0.5 million per incident for workers compensation. All claims above $0.5 million per incident are insured through a third–party insurer. We have annual aggregate self–insured retentions of $47.4 million, $52.8 million and $48 million in policy years 2004, 2003 and 2002, respectively. Claims above these aggregate limits are insured through a third party–insurer as of September 30, 2003. Our provision for losses in these policy years is $53.4 million as of September 30, 2003. Our reserve levels are evaluated on a quarterly basis. Any necessary adjustments are recognized as an adjustment to salaries, wages and benefits in our consolidated statements of operations.

For policy year 2001, our incurred losses for our non-Multicare subsidiaries for workers compensation recognized through September 30, 2003 were $20.8 million. Our development factors are updated quarterly and are based upon commonly used industry standards. Any changes to the incurred losses are recognized quarterly as an adjustment to salaries, wages and benefits in our consolidated statements of operations. We are insured through a third party insurer for aggregate claims in excess of $44.1 million.

We record outstanding losses and loss expenses for both general and professional liability and workers compensation liability based on the estimates of the amount of reported losses together with a provision for losses incurred but not reported, based on the recommendations of an independent actuary, and management’s judgment using our past experience and industry experience. As of September 30, 2003, our estimated range of discounted outstanding losses for these liabilities is $60.2 million to $74.2 million. Our recorded reserves for these liabilities were $66.4 million as of September 30, 2003, and are included in self–insurance liability reserves in our consolidated balance sheet. We (through LHC) have restricted investments in marketable securities of $90.6 million at September 30, 2003 which are substantially restricted to securing the outstanding claim losses of LHC.

General and professional liability and workers compensation claims are discounted at a rate of 4.5% in 2003 and 2002, which estimates the present value of funds required to pay losses at a future date. Had we provided losses at undiscounted levels at September 30, 2003 and 2002, the reserve for outstanding losses and loss expenses would have been increased by approximately $12 million in 2003 and $6.6 million in 2002.

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We believe that the provision for outstanding losses and loss expenses will be adequate to cover the ultimate net cost of losses incurred as of September 30, 2003, but the provision is necessarily an estimate and may ultimately be settled for a significantly greater or lesser amount. It is at least reasonably possible that we will revise our estimates significantly in the near term. Any subsequent differences arising are recorded in the period in which they are determined.

Health Insurance

We offer employees an option to participate in a self–insured health plan. Health claims under this plan are self–insured with a stop–loss umbrella policy in place to limit maximum potential liability for both individual claims and total claims for a plan year. Health insurance claims are paid as they are submitted to the plan administrator. We maintain an accrual for claims that have been incurred but not yet reported to the plan administrator and therefore have not been paid. The incurred but not reported reserve is based on the historical claim lag period and current payment trends of health insurance claims (generally 2–3 months).

We charge our employees a portion of the cost of our self–insured and non self-insured health plans, and we determine this charge at the beginning of each plan year based upon historical and projected medical utilization data, along with projected inflationary increases in medical costs. Any differences between our projections and our actual experience are borne by us. A one percent variance between our projections and the actual medical utilization or inflationary increases in cost would result in a $0.6 million change in our expense, which would be reflected in salaries, wages and benefits in our consolidated statements of operations.

Revenue Recognition / Contractual Allowances

Within our pharmacy and other ancillary service businesses, we record revenues at the time services or products are provided or delivered to the customer. Upon delivery of products or services, we have no additional performance obligation to the customer. We receive payments through reimbursement from Medicaid and Medicare programs and directly from individual residents (private pay), private third–party insurers and long–term care facilities.

Within our pharmacy services segment, we record an estimated contractual allowance against non–private pay revenues and accounts receivable. Accordingly, the net revenues and accounts receivable reported in our consolidated financial statements are recorded at the amount expected to be received. Contractual allowances are adjusted to actual as cash is received and claims are reconciled. We evaluate the following criteria in developing the estimated contractual allowance percentages each month: historical contractual allowance trends based on actual claims paid by third party payors; review of contractual allowance information reflecting current contract terms; consideration and analysis of changes in customer base, product mix, payor mix reimbursement levels or other issues that may impact contractual allowances.

Within our former inpatient services segment, revenue is recognized in the period the related services are rendered. We derived a substantial portion of our inpatient services revenue under Medicaid and Medicare reimbursement systems.

Within our former inpatient services segment, under certain prospective Medicaid systems and Medicare we are reimbursed at a predetermined rate based upon the historical cost to provide the service, demographics of the site of service and the acuity of the customer. The differences between the established billing rates and the predetermined rates are recorded as contractual adjustments and deducted from revenues. Under a prospective reimbursement system, there is no adjustment or settlement of the difference between the actual cost to provide the service and the predetermined rate.

We recorded contractual adjustments from continuing operations of $544.8 million, $505.8 million and $474.7 million in fiscal year 2003, 2002 and 2001, respectively.

Long–lived Asset Impairments

We account for long–lived assets, other than goodwill with an indefinite useful life, in accordance with the provisions of SFAS No. 144, “Accounting for the Impairment or Disposal of Long–Lived Assets.” This statement requires that long–lived assets be reviewed for impairment whenever events or changes in circumstances indicate the

68

carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by comparison of the carrying amount of an asset to the future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized to the extent the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of are reported at the lower of the carrying amount or the fair value less costs to sell.

With regard to goodwill, we adopted SFAS No. 142 on September 30, 2001 in accordance with the early adoptions provisions of SOP 90–7. SFAS No. 142 provides that goodwill no longer be amortized on a recurring basis but rather is subject to periodic impairment testing. Prior to adopting SFAS No. 142, we amortized goodwill over periods not exceeding 40 years. The impairment test requires us to compare the fair value of our businesses to their carrying value including assigned goodwill. SFAS No.142 requires an impairment test annually. In addition, goodwill is tested more frequently if changes in circumstances or the occurrence of events indicate impairment exists. We performed the annual impairment test effective September 30, 2003. Virtually all of our goodwill is ascribed to our pharmacy services segment, and the results of this test indicated that the fair value of our pharmacy services segment exceeded carrying amounts.

We use a multiple of future pharmacy services cash flows to determine fair value. Our judgment is required in the estimation of cash flows results and to determine the appropriate multiple. Our estimate of future pharmacy services cash flows is derived from our operating budget for the forthcoming fiscal year, less an estimated corporate overhead allocation calculated as one percent of budgeted pharmacy segment revenues. The multiple is determined from comparable industry transactions. Future operating results and multiples could reasonably differ from the estimates. However, given the substantial margin by which fair value exceeded carrying amounts in the latest goodwill impairment review, we do not anticipate a material impact on the consolidated financial statements from differences in these assumptions.

In fiscal 2001, we recognized a $258 million net write–down of our property, plant and equipment in connection with our adoption of fresh–start reporting. Fresh–start reporting requires companies that emerge from reorganization to adjust their long–lived assets to fair value. We estimated fair value by using both third–party appraisals and commonly used discounted cash flow techniques. These adjustments were recognized as fresh–start valuation adjustments and recorded as debt restructuring and reorganization costs and net gain on debt discharge in the consolidated statements of operations.

Other

Until December 1, 2003, we managed the operations of 57 eldercare centers. Under a majority of these arrangements, we employed the operational staff of the managed business for ease of benefit administration and billed the related wage and benefit costs on a dollar-for-dollar basis to the owner of the managed property. In this capacity, we operated as an agent on behalf of the managed property owner and are not the primary obligor in the context of a traditional employee / employer relationship. Historically, we have treated these transactions on a “net basis” thereby not reflecting the billed labor and benefit costs as a component of our net revenue or expenses. For the fiscal years ended 2003, 2002 and 2001 we billed our managed clients $125.3 million, $140.5 million, and $153.6 million, respectively for such labor related costs.

Seasonality

Our earnings generally fluctuate from quarter to quarter. This seasonality is related to a combination of factors, which include the timing of Medicaid rate increases and payroll tax obligations, seasonal census cycles, and the number of calendar days in a given quarter.

Impact of Inflation

The healthcare industry is labor intensive. Wages and other labor costs are especially sensitive to inflation and marketplace labor shortages. To date, we have offset our increased operating costs by increasing charges for our services and expanding our services. We have also implemented cost control measures to limit increases in operating costs and expenses but cannot predict our ability to control such operating cost increases in the future. See “Cautionary Statements Regarding Forward-Looking Statements,” “Risk Factors” and Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” of this Form 10-K.

69

ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to the impact of interest rate changes. We employ established policies and procedures to manage our exposure to changes in interest rates. Our objective in managing exposure to interest rate changes is to limit the impact of such changes on earnings and cash flows and to lower our overall borrowing costs. To achieve our objective, we primarily use interest rate swap and cap agreements to manage net exposure to interest rate changes related to our portfolio of borrowings. We do not enter into such arrangements for trading purposes.

After December 1, 2003, we entered into our new senior credit facility consisting of a $100.0 million revolving credit facility that bears interest based on variable rates.  If we were to borrow the $100.0 million available under the revolving credit facility without entering into any derivative financial instruments, a 1% increase in variable rates of interest would result in additional interest expense of $1.0 million annually.

In connection with the spin-off and the repayment of senior indebtedness the Company terminated the two variable to fixed rate swaps presented below with an aggregate notional amount of $200 million. As a consequence the Company paid the contracting parties approximately $3.5 million which will be accounted for as a spin-off related charge in the first fiscal quarter of 2004.

The information below summarizes our market risks associated with debt obligations and other significant financial instruments as of September 30, 2003, prior to the changes in our capital structure in connection with the spin-off. Fair values were based upon confirmations from third party financial institutions. For debt obligations, the table presents principal cash flows and related interest rates by expected fiscal year of maturity. For interest rate swaps and caps, the table presents the notional amounts and related weighted-average interest rates by fiscal year of maturity. The variable rates presented are the average forward rates for the term of each contract.

	Expected Maturity Date
($ in thousands)	2004			2005			2006			2007			2008			Thereafter			Total			Fair Value
Fixed rate debt	$	2,075		$	2,085		$	2,161		$	2,352		$	2,023		$	35,837		$	46,533		$	59,260
Weighted average rate		8.20	%		8.22	%		8.27	%		8.31	%		8.21	%		9.31	%		9.07	%
Variable rate debt	$	13,797		$	6,076		$	6,076		$	529,264		$	—		$	—		$	555,213		$	555,213
Weighted average rate		L+4.10	%		L+4.10	%		L+4.10	%		L+4.15	%		—			—			L+4.15	%
Variable to fixed swaps (2)	$	—		$	75,000		$	—		$	125,000		$	—		$	—		$	200,000		$	(7,219	)
Pay fixed rate		—			3.10	%		—			3.77	%		—			—			3.52	%
Receive variable rate		—			L			—			L			—			—			L
Interest rate cap (1)	$	75,000		$	—		$	—		$	—		$	—		$	—		$	75,000		$	2

L =	three-month LIBOR (approximately 1.16% at September 30, 2003)
(1)	The interest rate cap pays interest to us when LIBOR exceeds 3%. The amount paid to us is equal to the notional principal balance of $75 million multiplied by (LIBOR minus 3%) in those periods in which LIBOR exceeds 3%.
(2)	Amounts under expected maturity dates represent notional amounts.

70

Our wholly-owned subsidiary, Liberty Health Corporation, LTD, holds investments in marketable securities. Securities that are affected by market rates of interest at September 30, 2003 amounted to $16.6 million. A 1% change in the rate of interest would result in a change to operating income of $0.2 million annually.

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ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

	Page
Independent Auditors’ Report	73
Consolidated Balance Sheets as of September 30, 2003 and 2002 (Successor)	74
Consolidated Statements of Operations for the years ended September 30, 2003, 2002 (Successor), and 2001 (Predecessor)	75
Consolidated Statements of Shareholders’ Equity (Deficit) for the years ended September 30, 2003, 2002 (Successor), and 2001 (Predecessor)	76
Consolidated Statements of Cash Flows for the years ended September 30, 2003, 2002 (Successor), and 2001 (Predecessor)	77
Notes to Consolidated Financial Statements	78

72

Independent Auditors’ Report

The Board of Directors and Shareholders
NeighborCare, Inc.

We have audited the accompanying consolidated balance sheets of NeighborCare, Inc. and subsidiaries (the “Company”) as of September 30, 2003 and 2002, and the related consolidated statements of operations, shareholders’ equity (deficit) and cash flows for each of the years in the three year period ended September 30, 2003. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of NeighborCare, Inc. and subsidiaries as of September 30, 2003 and 2002, and the results of their operations and their cash flows for each of the years in the three year period ended September 30, 2003, in conformity with accounting principles generally accepted in the United States of America.

As disclosed in note 1 to the consolidated financial statements, the Company adopted the provisions of Statement of Financial Accounting Standards No. 145 with regard to accounting for extinguishment of debt effective October 1, 2002.

As described in note 3 to the consolidated financial statements, on October 2, 2001 the Company consummated a Joint Plan of Reorganization (the “Plan”) which had been confirmed by the United States Bankruptcy Court. The Plan resulted in a change in ownership of the Company and, accordingly, effective September 30, 2001 the Company accounted for the change in ownership through “fresh–start” reporting. As a result, the consolidated information prior to September 30, 2001 is presented on a different cost basis than that as of and subsequent to September 30, 2001 and, therefore, is not comparable.

	/s/ KPMG LLP
Philadelphia, Pennsylvania
December 1, 2003, except as to note 14, which is as of December 16, 2003

73

NeighborCare, Inc.

Consolidated Balance Sheets

	Successor Company
	September 30, 2003			September 30, 2002
	(in thousands, except share and per share data)
Assets:
Current assets:
Cash and equivalents	$	132,726		$	148,030
Restricted investments in marketable securities		29,320			20,542
Accounts receivable, net allowance for doubtful accounts    of $48,628 in 2003 and $55,791 in 2002		366,886			369,969
Inventories		66,747			64,734
Prepaid expenses and other current assets		82,197			71,854
Assets held for sale		7,721			46,134
Total current assets		685,597			721,263
Property, plant and equipment, net		751,996			795,928
Assets held for sale		10,624			—
Restricted investments in marketable securities		61,271			65,605
Notes receivable and other investments		19,252			17,034
Other long-term assets		42,606			34,008
Investments in unconsolidated affiliates		8,822			14,143
Identifiable intangible assets, net		20,866			25,795
Goodwill		337,695			336,701
Total assets	$	1,938,729		$	2,010,477
Liabilities and Shareholders’ Equity:
Current liabilities:
Current installments of long-term debt	$	20,135		$	40,744
Accounts payable		58,435			80,248
Accrued expenses		29,493			28,723
Current portion of self-insurance liability reserves		29,320			20,542
Accrued compensation		92,774			91,546
Accrued interest		4,667			5,517
Income taxes payable		4,116			4,937
Total current liabilities		238,940			272,257
Long-term debt		591,484			648,939
Deferred income taxes		50,022			37,191
Self-insurance liability reserves		37,093			36,551
Other long-term liabilities		47,837			48,989
Minority interests		10,359			7,662
Redeemable preferred stock, including accrued dividends		46,831			44,765
Commitments and contingencies
Shareholders’ equity:
Common stock - par $0.02, 200,000,000 authorized, 41,813,603 and 39,872,740 issued,    39,514,351 and 39,872,740 outstanding, and 260,493 and 811,153 to be issued at    September 30, 2003 and 2002, respectively		842			830
Additional paid-in-capital		853,540			843,625
Retained earnings		101,290			71,303
Accumulated other comprehensive loss		(3,301	)		(1,635	)
Treasury stock, at cost – 2,299,252 shares		(36,208	)		—
Total shareholders’ equity		916,163			914,123
Total liabilities and shareholders’ equity	$	1,938,729		$	2,010,477

See accompanying Notes to Consolidated Financial Statements

74

NeighborCare, Inc.

Consolidated Statements of Operations

	Successor Company Years ended September 30,						Predecessor Company Year ended September 30,
	2003			2002			2001
	(in thousands, except share and per share data)
Net revenues:
Inpatient services	$	1,229,239		$	1,201,071		$	1,136,273
Pharmacy services		1,235,398			1,121,917			1,035,188
Other revenues		184,342			162,800			155,672
Total net revenues		2,648,979			2,485,788			2,327,133
Operating expenses:
Salaries, wages and benefits		1,119,244			1,035,603			981,536
Cost of sales		783,895			705,524			642,836
Other operating expenses		506,869			498,727			581,219
Strategic planning, severance and other related costs		28,286			21,498			—
Net loss on sale of eldercare centers		—			—			540
Net gain from break-up fee and other settlements		(11,337	)		(23,768	)		—
Depreciation and amortization expense		66,384			59,449			99,898
Lease expense		28,224			26,419			28,669
Interest expense (contractual interest for the year ended September 30, 2001 was $209,822)		40,917			41,183			114,404
Income (loss) before debt restructuring and reorganization costs and net (gain) on debt discharge, income tax expense, equity in net income (loss) of unconsolidated affiliates and minority interests		86,497			121,153			(121,969	)
Debt restructuring and reorganization costs and net (gain) on debt discharge		—			4,270			(446,418	)
Income before income tax expense, equity in net income (loss) of unconsolidated affiliates and minority interests		86,497			116,883			324,449
Income tax expense		28,674			35,103			—
Income before equity in net income (loss) of unconsolidated affiliates and minority interests		57,823			81,780			324,449
Equity in net income (loss) of unconsolidated affiliates		1,184			2,165			(10,213	)
Minority interests		(5,194	)		(2,838	)		2,249
Income from continuing operations before preferred stock dividends		53,813			81,107			316,485
Preferred stock dividends		2,701			2,599			45,623
Income from continuing operations		51,112			78,508			270,862
Loss from discontinued operations, net of taxes		(21,125	)		(8,341	)		(24,388	)
Net income attributed to common shareholders	$	29,987		$	70,167		$	246,474
Per Common Share Data:
Basic:
Income from continuing operations	$	1.25		$	1.90		$	5.57
Loss from discontinued operations		(0.52	)		(0.20	)		(0.50	)
Net income	$	0.74		$	1.70		$	5.07
Weighted average shares		40,755,507			41,225,564			48,641,456
Diluted:
Income from continuing operations	$	1.25		$	1.87		$	5.57
Loss from discontinued operations		(0.52	)		(0.20	)		(0.50	)
Net income	$	0.74		$	1.68		$	5.07
Weighted average shares - income from continuing operations		43,009,647			43,351,187			48,641,456
Weighted average shares - net income		40,756,587			43,351,187			48,641,456

See accompanying Notes to Consolidated Financial Statements

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NeighborCare, Inc.

Consolidated Statements of Shareholders’ Equity (Deficit)

(in thousands)	Series G Cumulative Convertible Preferred  Stock			Common stock			Additional paid-in capital			Retained earnings (deficit)			Accumulated other comprehensive income (loss)			Treasury stock			Total shareholders’ equity (deficit)
Balance at September 30, 2000 (Predecessor Company)	$	6		$	973		$	803,202		$	(1,048,540	)	$	(1,789	)	$	(243	)	$	(246,391	)
Comprehensive income
Net unrealized gain on marketable securities		—			—			—			—			1,981			—			1,981
Net income		—			—			—			292,097			—			—			292,097
Preferred Stock dividends		—			—			—			(45,623	)		—			—			(45,623	)
Total comprehensive income																				248,455
Balance at September 30, 2001 (Predecessor Company)	$	6		$	973		$	803,202		$	(802,066	)	$	192		$	(243	)	$	2,064
Fresh start adjustments		(6	)		(973	)		(803,202	)		803,202			—			243			(736	)
Issuance of common stock		—			820			832,710			—			—			—			833,530
Balance at September 30, 2001 (Successor Company)	$	—		$	820		$	832,710		$	1,136		$	192		$	—		$	834,858
Issuance of common stock		—			10			10,915			—			—			—			10,925
Comprehensive income
Net unrealized gain on marketable securities		—			—			—			—			647			—			647
Net change in fair value of interest rate swap and cap agreements		—			—			—			—			(2,474	)		—			(2,474	)
Net income		—			—			—			72,766			—			—			72,766
Preferred Stock dividends		—			—			—			(2,599	)		—			—			(2,599	)
Total comprehensive income																				68,340
Balance at September 30, 2002 (Successor Company)	$	—		$	830		$	843,625		$	71,303		$	(1,635	)	$	—		$	914,123
Issuance of common stock		—			12			9,915			—			—			—			9,927
Purchases of common stock for the treasury		—			—			—			—			—			(36,208	)		(36,208	)
Comprehensive income
Net unrealized gain on marketable securities		—			—			—			—			262			—			262
Net change in fair value of interest rate swap and cap agreements		—			—			—			—			(1,928	)		—			(1,928	)
Net income		—			—			—			32,688			—			—			32,688
Preferred Stock dividends		—			—			—			(2,701	)		—			—			(2,701	)
Total comprehensive income																				28,321
Balance at September 30, 2003 (Successor Company)	$	—		$	842		$	853,540		$	101,290		$	(3,301	)	$	(36,208	)	$	916,163

See accompanying Notes to Consolidated Financial Statements

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NeighborCare, Inc.

Consolidated Statements Of Cash Flows

	Successor Company Years ended September 30,						Predecessor Company Year ended September 30,
	2003			2002			2001
				(in thousands)
Cash flows from operating activities:
Net income attributed to common shareholders	$	29,987		$	70,167		$	246,474
Adjustments to reconcile net income to net cash provided by operating activities:
Charges (credits) included in operations not requiring funds:
Debt restructuring and reorganization costs and net (gain) on debt discharge		—			4,270			(427,640	)
Loss on impairment - Discontinuation of businesses		13,215			6,364			110,249
Depreciation and amortization		67,085			65,768			106,189
Provision for losses on accounts receivable		37,838			44,712			49,901
Arbitration award and other legal settlements		—			1,139			—
Non-cash stock compensation		10,196			6,936			—
Equity in (earnings) loss of unconsolidated affiliates and minority interests		4,009			1,259			7,986
Amortization of deferred gains and net unfavorable leases		(4,660	)		(5,575	)		(7,820	)
Loss on sale of assets		—			—			540
Provision for deferred taxes		14,063			37,693			—
Preferred stock dividends		2,701			2,599			45,623
Net gain from break-up fee and other related costs		(1,125	)		—			—
Changes in assets and liabilities, excluding the effects of acquisitions:
Accounts receivable		(37,451	)		(19,633	)		(40,745	)
Inventory		(2,372	)		1,233			(236	)
Prepaid expense and current assets		(367	)		1,441			(12,094	)
Accounts payable and accrued expenses		(17,899	)		15,014			(26,685	)
Net cash provided by operating activities before debt restructuring and reorganization costs		115,220			233,387			51,742
Cash paid for debt restructuring and reorganization costs		(4,659	)		(54,202	)		(44,405	)
Net cash provided by operating activities		110,561			179,185			7,337
Cash flows from investing activities:
Capital expenditures		(59,758	)		(51,635	)		(43,721	)
Proceedings on maturity or sales of restricted marketable securities		39,765			52,202			33,311
Purchases of restricted marketable securities		(43,948	)		(86,077	)		(55,057	)
Acquisition of rehabilitation services business		(5,923	)		—			—
Proceeds from sale of eldercare assets		55,123			2,955			7,010
Purchase of eldercare assets		(5,325	)		(10,453	)		—
Notes receivable and other investment additions		(2,183	)		(2,655	)		1,032
Other, net		9,961			824			(1,324	)
Net cash used in investing activities		(12,288	)		(94,839	)		(58,749	)
Cash flows from financing activities:
Repayment of long-term debt and payment of sinking fund requirements		(77,369	)		(48,455	)		(77,990	)
Proceeds from issuance of long-term debt		—			80,000			285,000
Debt issuance costs		—			—			(14,413	)
Net borrowings under prepetition working capital revolving credit facilities		—			—			1,006
Net borrowings under debtor-in-possession financing facility		—			—			63,000
Repayment of debtor-in-possession financing facility		—			—			(196,000	)
Repurchase of common stock		(36,208	)		—			—
Net cash (used in) provided by financing activities		(113,577	)		31,545			60,603
Net (decrease) increase in cash and equivalents	$	(15,304	)	$	115,891		$	9,191
Cash and equivalents:
Beginning of year		148,030			32,139			22,948
End of year	$	132,726		$	148,030		$	32,139
Supplemental cash flow information:
Interest paid	$	41,767		$	58,284		$	118,057
Income taxes paid, net of refunds		3,941			(5,594	)		—
Non-cash financing activities:
Issuance of preferred stock		—			—			42,600
Capital leases		5,453			10,983			3,484

See accompanying Notes to Consolidated Financial Statements

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NeighborCare, Inc.

Notes to Consolidated Financial Statements

(1) Summary of Significant Accounting Policies

Organization and Description of Business

NeighborCare, Inc. (“NeighborCare” or the “Company”) was incorporated in May 1985 as a Pennsylvania corporation and was formerly named Genesis Health Ventures, Inc.

Prior to December 1, 2003, the Company’s operations were comprised of two primary business segments: pharmacy services and inpatient services. On December 1, 2003, the Company completed the distribution (the “spin-off”) of the common stock of Genesis Healthcare Corporation (“GHC”) and on December 2, 2003, the Company changed its name to NeighborCare, Inc. and changed its trading symbol to “NCRX.” The spin-off was effected by way of a pro-rata tax free distribution of the common stock of GHC to holders of NeighborCare’s common stock on December 1, 2003 at a rate of 0.5 shares of GHC stock for each share of NeighborCare stock owned as of October 15, 2003. NeighborCare received a private letter ruling from the Internal Revenue Service to the effect that, for United States federal income tax purposes, the distribution of GHC stock qualified as tax free for GHC and its shareholders, with the exception of cash received for fractional shares.  The common stock of GHC began trading publicly on the Nasdaq National Market System on December 2, 2003 under the symbol “GHCI.”  As a result of the spin-off, NeighborCare continues to own and operate its pharmacy services business and its group purchasing organization and GHC owns and operates what was formerly the Company’s inpatient services business (as well as its former rehabilitation therapy, diagnostic, respiratory, and management services businesses).

In connection with the spin-off, NeighborCare and GHC have agreed contractually to continue certain transitional arrangements and practices for a limited time after the spin-off.  In addition, NeighborCare and GHC have entered into certain mutually beneficial commercial arrangements.  Specifically, NeighborCare and GHC entered into a separation and distribution agreement, a tax sharing agreement, a transition services agreement, a group purchasing agreement, an employee benefits agreement, a pharmacy services agreement, a pharmacy benefit management agreement and a durable medical equipment agreement.

The following unaudited pro forma financial information gives effect to the spin-off as if it occurred on October 1, 2002 after giving effect to certain adjustments including the treatment of GHC as a discontinued operation, an allocation of general and administrative expenses associated with GHC and changes to interest expense and debt as a result of changes in NeighborCare’s capital structure.  The unaudited pro forma financial information does not consider the impact of approximately $6 million of estimated incremental operating expense and reduced interest income beyond levels allocated for purposes of presenting the following pro forma information.   The unaudited pro forma data is for informational purposes only and does not purport to represent the results of future periods.  The pro forma data reflects adjustments based upon available information and certain assumptions that management of NeighborCare considers reasonable.  No changes in operating revenues and expenses have been made to reflect the results of any modifications to operations that might have been made had the spin-off of GHC been completed on the aforesaid effective date for purposes of the pro forma results.  The following unaudited pro forma information is presented in thousands, except per share information:

	As reported		Pro forma (Unaudited)
Net revenues	$	2,648,979	$	1,323,705
Income from continuing operations		51,112		24,125
Diluted earnings per share – from continuing operations		1.25		0.59
Total assets		1,938,729		839,251
Long-term debt, including current installments		611,619		260,119
Shareholders’ equity		916,163		399,226

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The Company provides pharmacy services nationwide through its NeighborCare® integrated pharmacy operation that serves approximately 246,000 institutional beds in long–term care settings. NeighborCare also operates 32 community–based retail pharmacies and a group purchasing organization.

GHC provides inpatient services through skilled nursing and assisted living centers primarily located in the eastern United States. GHC currently has 217 owned, leased, managed and jointly–owned eldercare centers with 26,470 beds. Revenues of GHC’s owned and leased centers are included in inpatient service revenues in the consolidated statements of operations. Management fees earned from GHC’s managed and jointly–owned centers are included in other revenues in the consolidated statements of operations. GHC also provides rehabilitation, diagnostic and respiratory services, the revenues for which are included in other revenues in the consolidated statements of operations.

Factors Affecting Comparability of Financial Information

As a consequence of the implementation of fresh–start reporting effective September 30, 2001 (see note 2 —“Reorganization”), the financial information presented in the consolidated statements of operations, shareholders’ equity (deficit) and cash flows for the year ended September 30, 2003 and 2002 are generally not comparable to the financial results for the corresponding period in 2001. To highlight the lack of comparability, a solid vertical line separates the pre–emergence financial information from the post–emergence financial information in the accompanying consolidated financial statements and the notes thereto. Any financial information herein labeled “Predecessor Company” refers to periods prior to the adoption of fresh–start reporting, while those labeled “Successor Company” refer to periods following the Company’s adoption of fresh–start reporting.

The lack of comparability in the accompanying consolidated financial statements is most apparent in the Company’s capital costs (lease, interest, depreciation and amortization), as well as with, debt restructuring and reorganization costs and net (gain) on debt discharge, and preferred dividends. Management believes that business segment operating revenues and EBITDA of the Successor Company are generally comparable to those of the Predecessor Company.

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of the Successor Company of NeighborCare, Inc. and its subsidiaries as of September 30, 2003 and 2002 and for the years ended September 30, 2003 and 2002, and the Predecessor Company of NeighborCare, Inc. and its subsidiaries for the year ended September 30, 2001. All significant intercompany accounts and transactions have been eliminated in consolidation.

Investments in unconsolidated affiliated companies, owned 20% to 50% inclusive, are stated at cost of acquisition plus the Company’s equity in undistributed net income (loss) since acquisition. The change in the equity in net income (loss) of these companies is reflected as a component of net income or loss in the consolidated statements of operations.

The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. In the opinion of management, the consolidated financial statements for the periods presented include all necessary adjustments for a fair presentation of the financial position and results of operations for the periods presented.

Reclassifications

Certain prior year balances have been reclassified to conform to the current year presentation.

Revenue Recognition / Contractual Allowances

Within the Company’s pharmacy and other ancillary service businesses, the Company records revenues at the time services or products are provided or delivered to the customer. Upon delivery of products or services, the Company has no additional performance obligation to the customer. The Company receives payments through reimbursement from Medicaid and Medicare programs and directly from individual residents (private pay), private third–party insurers and long–term care facilities.

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Within the Company’s pharmacy services segment, the Company records an estimated contractual allowance against non–private pay revenues and accounts receivable. Accordingly, the net revenues and accounts receivable reported in the Company’s financial statements are recorded at the amount expected to be received. Contractual allowances are adjusted to actual as cash is received and claims are reconciled. The Company evaluates the following criteria in developing the estimated contractual allowance percentages each month: historical contractual allowance trends based on actual claims paid by third party payors; review of contractual allowance information reflecting current contract terms; consideration and analysis of changes in customer base, product mix, payor mix reimbursement levels or other issues that may impact contractual allowances.

Within the Company’s former inpatient services segment, revenue is recognized in the period the related services are rendered. The Company derives a substantial portion of its inpatient services revenue under Medicaid and Medicare reimbursement systems.

Within the Company’s former inpatient segment, under certain prospective Medicaid systems and Medicare, the Company is reimbursed at a predetermined rate based upon the historical cost to provide the service, demographics of the site of service and the acuity of the customer. The differences between the established billing rates and the predetermined rates are recorded as contractual adjustments and deducted from revenues.

The Company recorded contractual allowances from continuing operations of $544.8 million, $505.8 million and $474.7 million in fiscal years 2003, 2002 and 2001, respectively.

Cash Equivalents

Short–term investments that have a maturity of ninety days or less at acquisition are considered cash equivalents. Investments in cash equivalents are carried at cost, which approximates fair value. The Company’s cash balances at September 30, 2003 and 2002 include $4.7 million and $5.5 million of restricted cash, respectively. This restricted cash is held by the Company’s wholly–owned captive insurance subsidiary, Liberty Health Corp., LTD (“LHC”) and is substantially restricted to securing the outstanding claims losses of LHC.

Restricted Investments in Marketable Securities

Restricted investments in marketable securities, which are comprised of fixed interest securities, equity securities and money market funds are considered to be available for sale and accordingly are reported at fair value with unrealized gains and losses, net of related tax effects, included within accumulated other comprehensive income (loss) as a separate component of shareholders’ equity. Fair values for fixed interest securities and equity securities are based on quoted market prices.

A decline in the market value of any security below cost that is deemed other than temporary is charged to earnings, resulting in the establishment of a new cost basis for the security.

Premiums and discounts on fixed interest securities are amortized or accreted over the life of the related security as an adjustment to yield. Realized gains and losses for securities classified as available for sale are included in other revenue and are derived using the specific identification method for determining the cost of securities sold.

Marketable securities are held by the Company’s wholly–owned captive insurance subsidiary, LHC, and are substantially restricted to securing the outstanding claims losses of LHC.

Allowance for Doubtful Accounts

The Company utilizes the “Aging Method” to evaluate the adequacy of its allowance for doubtful accounts. This method is based upon applying estimated standard allowance requirement percentages to each accounts receivable aging category for each type of payor. The Company has developed estimated standard allowance requirement percentages by utilizing historical collection trends and its understanding of the nature and collectibility of receivables in the various aging categories and the various segments of the Company’s business. The standard allowance percentages are developed by payor type as the accounts receivable from each payor type have unique characteristics. The allowance for doubtful accounts is determined utilizing the aging method described above while also considering accounts specifically identified as uncollectible. Accounts receivable that Company management

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specifically estimates to be uncollectible, based upon the age of the receivables, the results of collection efforts, or other circumstances, are reserved for in the allowance for doubtful accounts until they are written–off.

Management believes the assumptions used in the aging method employed in fiscal 2003 and 2002, coupled with continued improvements in our collection patterns suggests the allowance for doubtful accounts is adequately provided for. However, because the assumptions underlying the aging method are based upon historical data, there is a risk that the Company’s current assumptions are not reflective of more recent collection patterns. Changes in overall collection patterns can be caused by market conditions and/or budgetary constraints of government funded programs such as Medicare and Medicaid. Such changes can adversely impact the collectibility of receivables, but not be addressed in a timely fashion when using the aging method, until updates to the Company’s periodic historical collection studies are completed and implemented.

Inventories and Cost of Sales

Inventories, consisting of drugs and supplies, are stated at the lower of cost or market. Cost is determined primarily on the first–in, first–out (“FIFO”) method.

Approximately 92% of the Company’s inventory is carried by the pharmacy segment. Physical inventory counts are performed periodically at all sites. As the Company does not utilize a perpetual inventory system, cost of sales is estimated between physical counts and is adjusted to actual by recording the results of the periodic physical inventory counts. The Company evaluates the following criteria in developing estimated cost of sales:

• Historical cost of sales trends based on prior physical inventory results;

• Review of cost of sales information reflecting current customer and vendor terms; and

• Consideration and analysis of changes in customer base and product mix, payor mix, or other issues that may impact cost of sales.

Property, Plant and Equipment

As part of fresh–start reporting, substantially all property, plant and equipment was re–valued to estimated fair value as of September 30, 2001, which became the new cost basis. In addition, the depreciable lives of certain assets were changed. All capital additions made subsequent to September 30, 2001 are stated at cost.

Depreciation is calculated on the straight–line method over estimated useful lives of 20–35 years for land and building improvements and buildings, and 3–15 years for equipment, furniture and fixtures and information systems. Included in depreciation expense is the amortization of assets capitalized under capitalized lease obligations. Expenditures for maintenance and repairs necessary to maintain property and equipment in efficient operating condition are charged to operations as incurred. Costs of additions and betterments are capitalized. Interest costs associated with construction or renovation are capitalized in the period in which they are incurred.

Depreciation expense from continuing operations for the fiscal years ended September 30, 2003, 2002 and 2001 was $56.2 million, $47.4 million and $55.5 million, respectively.

Deferred Financing Costs

Financing costs are deferred and are amortized on a straight–line basis, which approximates the effective interest method, over the terms of the related debt. Deferred financing costs were $12.0 million ($7.6 million net of accumulated amortization) and $14.0 million ($10.1 million net of accumulated amortization) at September 30, 2003 and 2002, respectively, and are included in other long–term assets. Amortization of deferred financing fees is included in depreciation and amortization expense in the consolidated statements of operations.

Long–Lived Asset Valuation

The Company accounts for long–lived assets, other than goodwill with an indefinite useful life, in accordance with the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long–Lived Assets”. This statement requires that long–lived assets be reviewed for

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impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by comparison of the carrying amount of an asset to the future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized to the extent the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of are reported at the lower of the carrying amount or the fair value less costs to sell.

With regard to goodwill, the Company adopted SFAS No. 142, “Goodwill and Other Intangible Assets.” on September 30, 2001. SFAS No. 142 provides that goodwill no longer be amortized on a recurring basis but rather is subject to periodic impairment testing. Prior to adopting SFAS No. 142, the Company amortized goodwill over periods not exceeding 40 years. The impairment test requires companies to compare the fair value of its businesses to their carrying value including assigned goodwill. SFAS No.142 requires an impairment test annually. In addition, goodwill is tested more frequently if changes in circumstances or the occurrence of events indicate impairment exists. The Company performed annual impairment tests effective September 30, 2003 and 2002 and the results of these tests indicated that the fair value of the Company’s goodwill exceeded carrying amounts.

In fresh-start reporting, the Company’s reorganization value in excess of fair value (goodwill) was allocated to the pharmacy segment and identifiable intangible assets were assigned to the specific reporting units that own these assets.

Loss Reserves For Certain Self–Insured Programs

Workers’ compensation and general and professional liability

Certain of the Company’s workers compensation, and general and professional liability coverage is provided by the Company’s wholly–owned insurance company, Liberty Health Corp., LTD (“LHC”). LHC was a wholly–owned subsidiary of GHC as of the date of the spin–off and as a result will not be included in the consolidated finanacial statements of the Company after the spin–off.

Outstanding losses and loss expenses comprise estimates of the amount of reported losses together with a provision for losses incurred but not reported, based on the recommendations of an independent actuary using the past experience of the Company and the industry.

Prior to June 1, 2000, the Company had first dollar coverage for general and professional liability costs with third party insurers; accordingly, the Company has no exposure for claims prior to that date. Effective June 1, 2000, the Company began insuring a substantial portion of its professional liability risks through its wholly–owned insurance company, LHC. Specifically, the Company is responsible for the first dollar of each claim (on a claims–made basis), up to a self–insurance retention limit determined by the individual policies, subject to aggregate limits for each policy year. The self–insured retention limits amount to $14 million, $22 million and $19 million for the policy years ended May 31, 2004, 2003 and 2002, respectively. For policy years 2004 and 2002, any costs above these retention limits are covered by third-party insurance carriers. For policy year 2003 (June 2002 to May 2003), the Company has retained an additional self–insurance layer of $5 million. Since the June 1, 2000 inception of the self–insurance program through September 30, 2003, the Company’s cumulative self–insurance retention levels are $60 million and its provision for these losses is $45.8 million. Assuming the Company’s actual losses were to reach its retention limits in each of the policy years, its additional exposure is approximately $14.2 million which, if incurred, would be recognized as an increase to other operating expenses in the Company’s consolidated statements of operations in the period such exposure became known. In addition, the Company has provided $5.3 million for the estimated costs of claims incurred but not reported as of September 30, 2003.

Beginning in 1994, the Company insured its workers compensation exposure, principally via self–insurance retentions and large deductible programs through LHC. In addition, the Company inherited legacy workers compensation programs from acquisitions it completed.

Over the past three years, the majority of the Company’s workers compensation coverage was structured as follows: For policy years 2002–2004 (May 1, 2001 – April 30, 2004) the Company has large deductible programs, the deductibles for which are insured through LHC; and for policy year 2001 (May 1, 2000 – April 30, 2001) the Company was insured on a first dollar coverage basis for its Multicare subsidiaries, and insured through an incurred loss retrospectively rated policy for its non–Multicare subsidiaries.

For policy years 2004, 2003 and 2002, the Company is self-insured through through LHC up to the first $0.5 million per incident for workers compensation. All claims above $0.5 million per incident are insured through a

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third–party insurer. The Company has annual aggregate self–insured retentions of $47.4 million, $52.8 million and $48 million in policy years 2004, 2003 and 2002, respectively. Claims above these aggregate limits are insured through a third party–insurer as of September 30, 2003. The Company’s provision for losses in these policy years is $53.4 million as of September 30, 2003. The Company’s reserve levels are evaluated on a quarterly basis. Any necessary adjustments are recognized as an adjustment to salaries, wages and benefits in the consolidated statements of operations.

For policy year 2001, the Company’s incurred losses for the Company’s non-Multicare subsidiaries for workers compensation recognized through September 30, 2003 were $20.8 million. The Company’s development factors are updated quarterly and are based upon commonly used industry standards. Any changes to the incurred losses are recognized quarterly as an adjustment to salaries, wages and benefits in the Company’s consolidated statements of operations. The Company is insured through a third party insurer for aggregate claims in excess of $44.1 million.

The Company records outstanding losses and loss expenses for both general and professional liability and workers compensation liability’s based on the estimates of the amount of reported losses together with a provision for losses incurred but not reported, based on the recommendations of an independent actuary, and management’s judgment using its past experience and industry experience. As of September 30, 2003, the Company’s estimated range of discounted outstanding losses for these liabilities is $60.2 million to $74.2 million. The Company’s recorded reserves for these liabilities were $66.4 million as of September 30, 2003, and is included in self–insurance liability reserves in its consolidated balance sheet. The Company (through LHC) has restricted investments in marketable securities of $90.6 million at September 30, 2003 which are substantially restricted to securing the outstanding claim losses of LHC.

General and professional liability and workers compensation claims are discounted at a rate of 4.5% in 2003 and 2002, which estimates the present value of funds required to pay losses at a future date. Had the Company provided losses at undiscounted levels at September 30, 2003 and 2002, the reserve for outstanding losses and loss expenses would have been increased by approximately $12 million in 2003 and $6.6 million in 2002.

Management believes based on the recommendations of an independent actuary, that the provision for outstanding losses and loss expenses will be adequate to cover the ultimate net cost of losses incurred as of the balance sheet date but the provision is necessarily an estimate and may ultimately be settled for a significantly different amounts. It is at least reasonably possible that management will revise this estimate significantly in the near term. Any subsequent revisions are recorded in the period in which they are determined.

Self–Insured Health Plan

The Company offers employees an option to participate in a self–insured health plan. Health claims under this plan are self–insured with a stop–loss umbrella policy in place to limit maximum potential liability for both individual claims and total claims for a plan year. Health insurance claims are paid as they are submitted to the plan administrator. The Company maintains an accrual for claims that have been incurred but not yet reported (IBNR) to the plan administrator and therefore have not been paid. The IBNR reserve is based on the historical claim lag period and current payment trends of health insurance claims (generally 2–3 months). The liability for the self–insurance health plan is recorded in accrued compensation in the accompanying consolidated balance sheets.

Income Taxes

Income taxes are accounted for under the asset and liability method. Deferred income taxes are recognized for the tax consequences of “temporary differences” by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. Provision is made for deferred income taxes applicable to temporary differences between financial statement and taxable income. In assessing the realizability of deferred tax assets, the Company considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. To the extent that the deferred tax asset related to net operating loss carry-forwards are subject to a valuation allowance due to uncertainty regarding its utilization, the income tax benefit derived from its future utilization would ultimately be applied to reduce goodwill and, thereafter, to increase additional paid-in-capital.

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Stock–Based Compensation

The Company has adopted the disclosure–only provisions of Statement of Financial Accounting Standards No. 123, “Accounting for Stock–Based Compensation,” (SFAS 123) and applies APB Opinion No. 25 in accounting for its plans. Under the Company’s stock option plan, the Company grants stock options to employees and directors at an exercise price equal to or greater than the fair market value on the date of grant. Accordingly, the Company has not recognized compensation cost for stock options issued to employees and directors in its consolidated financial statements. Had the Company determined compensation cost based on the fair value at the grant date consistent with the provisions of SFAS 123, the Company’s net income would have been changed to the pro forma amounts indicated below (in thousands):

	2003		2002		2001
Net income - as reported	$	29,987	$	70,167	$	246,474
Net income - pro forma		25,947		57,422		246,474
Net income per share - as reported (diluted)	$	0.74	$	1.68	$	5.07
Net income per share - pro forma (diluted)		0.64		1.38		5.07

The fair value of stock options granted in 2003 and 2002 was estimated at the grant date using the Black–Scholes option–pricing model with the following assumptions for 2003 and 2002: dividend yield of 0% (2003 and 2002); expected volatility of 39.18% (2003) and 36.92% (2002); a risk–free return of 2.69% (2003) and 3.8% (2002); and expected lives of 3.7 years (2003) and 8.1 years (2002).

The Company did not make any stock option grants in 2001 and as a result of the Company’s deteriorating stock price following its voluntary petition for relief under Chapter 11 bankruptcy, there were no outstanding stock options with intrinsic value during the year ended September 30, 2001. Consequently, there is no stock compensation cost in fiscal 2001 pursuant to SFAS 123.

Comprehensive Income

Comprehensive income includes all changes to shareholders’ equity during a period, except those resulting from investments by and distributions to shareholders. The components of comprehensive income are shown in the consolidated statements of shareholders’ equity (deficit).

Unfavorable Leases

At September 30, 2003, an unfavorable lease credit of $11.3 million is carried on the consolidated balance sheet in long–term liabilities. The unfavorable lease credit was established at September 30, 2001 in accordance with the implementation of fresh–start reporting. Amortization of unfavorable leases is computed using the straight–line method over the individual terms of each unfavorable lease. See note 12, “–Leases and Lease Commitments”.

Derivative Financial Instruments

The Company follows the provisions of SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended. The Company is exposed to the impact of interest rate changes. The Company employs established policies and procedures to manage its exposure to changes in interest rates. The Company’s objective in managing exposure to interest rate changes is to limit the impact of such changes on earnings and cash flows and to lower its overall borrowing costs. To achieve the objective, the Company primarily uses interest rate swap and cap agreements to manage net exposure to interest rate changes related to its portfolio of borrowings. The Company does not enter into such arrangements for trading purposes. The Company recognizes all derivatives on the consolidated balance sheet at fair value. Changes in the fair value of a derivative that is designated as and meets all the required criteria for a cash flow hedge are recorded in accumulated other comprehensive income (loss) and reclassified as an adjustment to interest expense as the underlying hedged item affects earnings.

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Reimbursement of Managed Property Labor Costs

The Company manages the operations of 57 eldercare centers. Under a majority of these arrangements, the Company employs the operational staff of the managed business for ease of benefit administration and bills the related wage and benefit costs on a dollar-for-dollar basis to the owner of the managed property. In this capacity, the Company operates as an agent on behalf of the managed property owner and is not the primary obligor in the context of a traditional employee / employer relationship. Historically, the Company has treated these transactions on a “net basis”, thereby not reflecting the billed labor and benefit costs as a component of its net revenue or expenses. For the years ended September 30, 2003, 2002 and 2001 the Company billed its managed clients $125.3 million, $140.5 million, and $153.6 million, respectively, for such labor related costs.

Earnings or Loss Per Share

Basic earnings or loss per share is calculated by dividing net income or loss attributed to common shareholders by the weighted average of common shares outstanding during the period. Diluted earnings per share is calculated by using the weighted average of common shares outstanding adjusted to include the potentially dilutive effect of common stock equivalents.

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The following table sets forth the computation of basic and diluted earnings per share applicable to common shares (in thousands except per share data):

	Successor Company						Predecessor Company 2001
	2003			2002
Earnings (loss) used in computation:
Income from continuing operations – basic computation	$	51,112		$	78,508		$	270,862
Elimination of preferred stock dividend requirements upon assumed conversion of preferred stock		2,701			2,599			45,623
Income from continuing operations – diluted computation	$	53,813		$	81,107		$	316,485
Loss from discontinued operations – basic and diluted computation	$	(21,125	)	$	(8,341	)	$	(24,388	)
Net income attributed to common shareholders – basic computation	$	29,987		$	70,167		$	246,474
Elimination of preferred stock dividend requirements upon assumed conversion of preferred stock		—			2,599			—
Net income – diluted computation	$	29,987		$	72,766		$	246,474
Shares used in computation:
Weighted average shares outstanding – basic computation		40,756			41,226			48,641
Assumed conversion of preferred stock		2,253			2,091			—
Dilutive effect of outstanding stock options		1			—			—
Contingent consideration related to an acquisition		—			34			—
Weighted average shares outstanding – diluted computation,
income from continuing operations		43,010			43,351			48,641
Less assumed conversion of preferred stock		(2,253	)		—			—
Weighted average shares outstanding – diluted computation, net income attributed to common shareholders		40,757			43,351			48,641
Earnings per common share:
Basic:
Income from continuing operations	$	1.25		$	1.90		$	5.57
Loss from discontinued operations		(0.52	)		(0.20	)		(0.50	)
Net income attributed to common shareholders		0.74			1.70			5.07
Diluted:
Income from continuing operations	$	1.25		$	1.87		$	5.57
Loss from discontinued operations *		(0.52	)		(0.20	)		(0.50	)
Net income attributed to common shareholders		0.74			1.68			5.07

* The basic weighted average shares calulation is used for all periods to calculated losses per share from discontinued operations.

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New Accounting Pronouncements

In May 2002, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 145, “Recission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections as of April 2002” (“SFAS 145”). SFAS 145 rescinds SFAS No. 4, “Reporting Gains and Losses from Extinguishment of Debt”, which required that gains and losses from extinguishment of debt that were included in the determination of net income be aggregated and, if material, classified as an extraordinary item, net of the related income tax effect. Under SFAS 145, gains or losses from extinguishment of debt should be classified as extraordinary items only if they meet the criteria in Accounting Principles Board Opinion No. 30 (“APB 30”), “Reporting Results of Operations – Reporting the Effects of Disposal of a Segment of a Business.” Applying the criteria in APB 30 will distinguish transactions that are part of an entity’s recurring operations from those that are unusual or infrequent or that meet the criteria for classification as an extraordinary item. SFAS 145 is effective for fiscal years beginning after May 15, 2002 for provisions related to SFAS No. 4, effective for all transactions occurring after May 15, 2002 for provisions related to SFAS No. 13 and effective for all financial statements issued on or after May 15, 2002 for all other provisions of SFAS 145. The most significant impact of the adoption of SFAS 145 on the Company is that effective October 1, 2002 any gains or losses on the extinguishment of debt that were classified as extraordinary items in prior periods that do not meet the new criteria of APB 30 for classification as extraordinary items have been reclassified. This reclassification includes the $1.5 billion gain recognized in fiscal 2001 in connection with the discharge of liabilities subject to compromise upon the Company’s emergence from Chapter 11 bankruptcy which is now included in income from continuing operations.

In November 2002, FASB issued Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Guarantees of Indebtedness of Others” (the “Interpretation”), which addresses the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under guarantees. The Interpretation also requires the recognition of a liability by a guarantor at the inception of certain guarantees. The new requirements are effective for interim and annual financial statements ending after December 15, 2002. The Interpretation requires the guarantor to recognize a liability for the non-contingent component of the guarantee. This is the obligation to stand ready to perform in the event that specified triggering events or conditions occur. The initial measurement of this liability is the fair value of the guarantee at inception. The recognition of the liability is required even if it is not probable that payments will be required under the guarantee or if the guarantee was issued with a premium payment or as part of a transaction with multiple elements. The Company applies the recognition and measurement provisions for all guarantees entered into or modified after December 31, 2002. The Company had provided $23.2 million of financial guarantees prior to December 31, 2002 that remain in effect as of September 30, 2003, related to loan and lease commitments of five jointly-owned and managed companies that remain in affect as of September 30, 2003. The adoption of the Interpretation did not have any impact on the consolidated financial statements of the Company.

In January 2003, FASB issued Interpretation No. 46 (“FIN 46”), “Consolidation of Variable Interest Entities” with the objective of improving financial reporting by companies involved with variable interest entities. A variable interest entity is a corporation, partnership, trust, or any other legal structure used for business purposes that either (a) does not have equity investors with voting rights, or (b) has equity investors that do not provide sufficient financial resources for the entity to support its activities. Historically, entities generally were not consolidated unless the entity was controlled through voting interests. FIN 46 changes that by requiring a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity’s activities or entitled to receive a majority of the entity’s residual returns or both. A company that consolidates a variable interest entity is called the “primary beneficiary” of that entity. FIN 46 also requires disclosures about variable interest entities that a company is not required to consolidate but in which it has a significant variable interest. The consolidation requirements of FIN 46 apply immediately to variable interest entities created after January 31, 2003. The consolidation requirements of FIN 46 apply to existing entities in the first fiscal year or interim period beginning after June 15, 2003, with early adoption permitted. Also, certain disclosure requirements apply to all financial statements issued after January 31, 2003, regardless of when the variable interest entity was established. The Company has concluded that one of its joint venture partnerships that operates four eldercare centers requires consolidation under FIN 46 because the Company holds a majority of the related financial risks and rewards, despite the Company’s lack of voting control. This partnership has assets of $7.3 million, annual

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revenues of approximately $15.5 million, and de minimus net income. Effective in the second fiscal quarter of 2003, the Company began consolidating this entity, which is held for sale. Upon consolidation, the Company eliminated its investment in this partnership. At September 30, 2003, the Company’s maximum exposure to loss as a result of its involvement with this partnership was $12.4 million, consisting of the Company’s financial guarantee related to the lease obligations of the joint venture partnership. Subsequent to September 30, 2003, the $12.4 million guarantee was terminated in connection with the sale of the partnership’s leasehold rights to an independent third party.

Use of Estimates

The Company has made a number of estimates relating to the reporting of assets and liabilities, revenues and expenses and the disclosure of contingent assets and liabilities to prepare these consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. Some of the more significant estimates impact accounts receivable, long–lived assets and loss reserves for self–insurance programs. Actual results could differ significantly from those estimates. See note 4 —“Certain Significant Risks and Uncertainties.”

(2) Reorganization

On June 22, 2000 (the “Petition Date”), NeighborCare and certain of its direct and indirect subsidiaries filed for voluntary relief under Chapter 11 of the United States Code (the “Bankruptcy Code”) with the United States Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”). On the same date, NeighborCare’s 43.6% owned affiliate, The Multicare Companies, Inc., and certain of its direct and indirect subsidiaries (“Multicare”) and certain of its affiliates also filed for relief under Chapter 11 of the Bankruptcy Code with the Bankruptcy Court (singularly and collectively referred to herein as “the Chapter 11 cases” or other general references to these cases unless the context otherwise requires).

NeighborCare’s and Multicare’s financial difficulties were attributed to a number of factors. First, the federal government made fundamental changes to the reimbursement for medical services provided to individuals. The changes had a significant adverse impact on the healthcare industry as a whole and on NeighborCare’s and Multicare’s cash flows. Second, the federal reimbursement changes exacerbated a long–standing problem of inadequate reimbursement by the states for medical services provided to indigent persons under the various states Medicaid programs. Third, numerous other factors adversely affected NeighborCare’s and Multicare’s cash flows, including increased labor costs, increased professional liability and other insurance costs, and increased interest rates. Finally, as a result of declining governmental reimbursement rates and in the face of rising inflationary costs, NeighborCare and Multicare were too highly leveraged to service our debt, including our long–term lease obligations.

On October 2, 2001, (the “effective date”), NeighborCare and Multicare consummated a joint plan of reorganization (the “Plan”) under Chapter 11 of the Bankruptcy Code (the “Reorganization”) pursuant to a September 20, 2001 order entered by the Bankruptcy Court approving the Plan proposed by NeighborCare and Multicare.  In general, the Plan provided for the resolution of all claims against the Company and Multicare as of the Petition Date in exchange for new indebtedness, preferred stock, warrants and/or common stock of NeighborCare.  In addition, Multicare became a wholly-owned subsidiary of the Company and a new board of directors was constituted.

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In accordance with SOP 90–7 (as defined in note 3 –”Fresh–Start Reporting”), the Company recorded all expenses incurred as a result of the Bankruptcy filing separately as debt restructuring and reorganization costs. A summary of the principal categories of debt restructuring and reorganization costs and net (gain) on debt discharge from continuing operations follows (in thousands):

	Successor Company				Predecessor Company
	2003		2002		2001
Professional, bank and other fees	$	—	$	2,570	$	59,393
Employee benefit related costs, including severance		—		—		16,786
Exit costs of terminated businesses		—		—		5,877
Fresh-start valuation adjustments (1)		—		—		932,435
Gain on debt discharge (2)		—		—		(1,460,909	)
Post confirmation mortgage adjustment		—		1,700		—
Total debt restructuring and reorganization costs and net gain on debt discharge	$	—	$	4,270	$	(446,418	)

(1)	The fresh-start valuation adjustment represents the net write-down to fair value of NeighborCare’s assets and liabilities from continuing operations at September 30, 2001, and does not include $101.3 million of net write-downs attributed to discontinued operations.
(2)	The gain on debt discharge in 2001 represents the relief of NeighborCare’s obligations for liabilities subject to compromise from continuing operations, and does not include $63.9 million attributed to discontinued operations.

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As a result of the consummation of the Plan, the Company recognized a gain on debt discharge in 2001 as follows (in thousands):

Liabilities subject to compromise:
Revolving credit and term loans	$	1,484,904
Senior subordinated notes		617,510
Other indebtedness		120,961
Long-term debt subject to compromise		2,223,375
Accounts payable and accrued liabilities		64,621
Accrued interest (including a $28,331 swap termination fee)		87,716
Accrued preferred stock dividends on Series G Preferred Stock		49,673
Subtotal – liabilities subject to compromise		2,425,385
Redeemable preferred stock – Series H and Series I		468,722
Total liabilities subject to compromise		2,894,107
Less:
Cash payments		25,000
Value of secured, priority and other claims assumed		143,319
Value of new Senior Secured Notes		242,605
Value of Term Loan used to repay synthetic lease facility		50,000
Carrying value of deferred financing fees of discharged debts		32,230
Value of Successor Company’s common stock		833,530
Value of Successor Company’s redeemable preferred stock		42,600
Gain on debt discharge	$	1,524,823
Less: net gain on discontinued operations		(63,914	)
Gain on debt discharge as reported from continuing operations	$	1,460,909

(3) Fresh–Start Reporting

Upon emergence from our Chapter 11 proceedings, NeighborCare adopted the principles of fresh–start reporting in accordance with the American Institute of Certified Public Accountants Statement of Position 90–7, “Financial Reporting By Entities in Reorganization Under the Bankruptcy Code” (“SOP 90–7”) / (“fresh–start reporting”). For financial reporting purposes, NeighborCare adopted the provisions of fresh–start reporting effective September 30, 2001. In connection with the adoption of fresh–start reporting, a new entity was deemed created for financial reporting purposes, the provisions of the Plan were implemented, assets and liabilities were adjusted to their estimated fair values and NeighborCare’s accumulated deficit was eliminated.

In adopting the requirements of fresh–start reporting as of September 30, 2001, the Company was required to value its assets and liabilities at fair value and eliminate its accumulated deficit at September 30, 2001. A $1,525 million reorganization value, before consideration of post filing current and long term liabilities or minority interests was determined by the Company with the assistance of financial advisors in reliance upon various valuation

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methods, including discounted projected cash flow analysis, price / earnings ratios, and other applicable ratios and economic industry information relevant to the operations of the Company, and through negotiations with the various creditor parties in interest.

The following reconciliation of the Predecessor Company’s consolidated balance sheet as of September 30, 2001 to that of the Successor Company was prepared to present the primary adjustments that give effect to the reorganization and fresh–start reporting.

The adjustments entitled “Reorganization” reflect the consummation of the Plan, and are the more significant adjustments summarized as follows:

• Other long-term assets – represents the write-off of unamortized financing fees associated with debts that were discharged in connection with the Plan.

• Current installments of long-term debt, accrued interest and long-term debt – represents the capitalization of the Company’s newly issued senior debt agreements in accordance with the Plan, as well as debts specifically held by the Company’s subsidiaries that were deemed unimpaired in accordance with the Plan. Adjustments to accrued interest represent unpaid interest obligations through September 30, 2001 that were deemed unimpaired in accordance with the Plan.

• Liabilities subject to compromise – represents the write-off of liabilities that were discharged under the Plan and the reclassification of debt obligations to appropriate debt accounts for those debts specifically held by the Company’s subsidiaries that were deemed unimpaired in accordance with the Plan.

• Deferred gain and other long-term liabilities – represents the reclassification of liabilities subject to compromise that survived the bankruptcy in accordance with the Plan. These liabilities principally consist of priority tax claims made by a multitude of taxing authorities.

• Redeemable preferred stock – represents the cancellation of the previously issued Series H and Series I Preferred, as well as the issuance of the Series A Preferred in accordance with the Plan.

• Series G preferred stock, common stock, additional paid-in-capital and treasury stock – represents the cancellation of the Company’s previously issued equity securities, offset by 41 million newly issued shares of common stock of the successor company at $20.33 per share.

• Retained earnings (accumulated deficit) – represents the net gain recognized for relief of the Company’s obligations for liabilities subject to compromise in exchange for the newly issued debt and equity securities.

The adjustments entitled “Fresh-Start Adjustments” reflect the adoption of fresh-start reporting, including management’s estimates of the fair value of its assets and liabilities by utilizing both independent appraisals and commonly used discounted cash flow valuation methods. The fresh-start adjustments are summarized as follows:

• Property and equipment, net – represents the net write-down of property and equipment to its fair value.

• Other long-term assets – represents the write-down of cost report receivables due principally from the Medicare program. In connection with the reorganization, the Company entered into a global settlement with the federal government regarding various unresolved reimbursement appeal issues. As a result of the settlement, the Company agreed not to further pursue collection of certain of its cost report receivable accounts due from Medicare.

• Identifiable intangible assets – represents the fair value of customer contracts, trademarks and tradenames, and non-compete agreements.

• Goodwill, net – represents the write-off of goodwill which was deemed unrecoverable.

• Deferred gain and other long-term liabilities – represents the write-off of $40.1 million of deferred gains recorded on sale lease back transactions, offset by the recognition of $28.6 million of net unfavorable lease liabilities recognized in order to carry certain above market operating leases at fair value.

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• Deferred income taxes – represents the revaluation of deferred tax assets and liabilities.

• Minority interest – represents the elimination of NeighborCare’s right to purchase its joint venture partners’ minority interest in Multicare for $2.0 million.

• Retained earnings (accumulated deficit) – represents the offsetting net loss recognized in fresh-start reporting related to the previously described fresh-start adjustments.

Several of the Company’s subsidiaries did not file for Chapter 11 protection. The non-filing subsidiaries were not subject to the fresh-start reporting provisions under SOP 90-7 and, consequently, their balance sheets are reflected in the consolidated balance sheet at historical carrying value.

(in thousands)	Predecessor Company			Reorganization			Fresh-Start Adjustments			Reclassification		Successor Company
Assets:
Cash and equivalents	$	30,552		$	1,587		$	—		$	—	$	32,139
Restricted investments in marketable securities		12,932			—			—			—		12,932
Accounts receivable, net		399,816			—			—			—		399,816
Inventory		65,222			—			—			—		65,222
Prepaid expenses and other current assets		35,753			—			—			—		35,753
Total current assets		544,275			1,587			—			—		545,862
Property, plant and equipment		1,387,608			—			(553,883	)		—		833,725
Accumulated depreciation		(306,797	)		—			295,812			—		(10,985	)
Property, plant and equipment, net		1,080,811			—			(258,071	)		—		822,740
Restricted investments in marketable securities		38,693			—			—			—		38,693
Notes receivable and other investments		18,001			—			(3,462	)		—		14,539
Other long-term assets		84,135			(25,452	)		(12,985	)		—		45,698
Investments in unconsolidated affiliates		12,504			—			—			—		12,504
Identifiable intangible assets		—			—			33,591			—		33,591
Goodwill, net		1,155,956			—			(830,363	)		—		325,593
Total assets	$	2,934,375		$	(23,865	)	$	(1,071,290	)	$	—	$	1,839,220

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(in thousands)	Predecessor Company			Reorganization			Fresh-Start Adjustments			Reclassification			Successor Company
Liabilities and Shareholders’ Equity (Deficit)
Current installments of long-term debt	$	196,000		$	(196,000	)	$	—		$	41,241		$	41,241
Accounts payable		46,429			—			—			—			46,429
Accrued expenses		67,904			(5,635	)		2,423			—			64,692
Current portion of self-insurance liability reserves		12,932			—			—			—			12,932
Accrued compensation		78,074			—			—			—			78,074
Accrued interest		1,599			14,239			—			—			15,838
Income taxes payable		4,640			—			—			—			4,640
Total current liabilities		407,578			(187,396	)		2,423			41,241			263,846
Liabilities subject to compromise		2,425,385			(2,425,385	)		—			—			—
Long-term debt		14,104			626,921			3,484			(41,241	)		603,268
Deferred income taxes		48,534			—			(48,534	)		—			—
Self-insurance liability reserves		26,834			—			—			—			26,834
Deferred gain and other long-term liabilities		46,713			30,500			(11,536	)		—			65,677
Minority interests		4,137			—			(2,000	)		—			2,137
Redeemable preferred stock		468,722			(426,122	)		—			—			42,600
Shareholders’ equity (deficit)
Series G preferred stock		6			(6	)		—			—			—
Common stock		973			(153	)		—			—			820
Additional paid-in capital		803,202			832,710			—			(803,202	)		832,710
Retained earnings (accumulated deficit)		(1,311,762	)		1,524,823			(1,015,127	)		803,202			1,136
Accumulated other comprehensive income		192			—			—			—			192
Treasury stock, at cost		(243	)		243			—			—			—
Total shareholders’ equity (deficit)		(507,632	)		2,357,617			(1,015,127	)		—			834,858
Total liabilities and shareholders’ equity (deficit)	$	2,934,375		$	(23,865	)	$	(1,071,290	)	$	—		$	1,839,220

Accounting Pronouncements Adopted in Fresh-Start Reporting

As of September 30, 2001, and in accordance with the early adoption provisions of SOP 90-7, the Company adopted the provisions of Statements of Financial Accounting Standards No. 141, “Business Combinations” (“SFAS No. 141”), Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (“SFAS No. 142”), and Standards of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (SFAS No. 144”).

(4) Certain Significant Risks and Uncertainties

The Company receives revenues from Medicare, Medicaid, private insurance, self–pay residents, other third party payors and long–term care facilities which utilize our pharmacy and other specialty medical services. The healthcare industry is experiencing the effects of the federal and state governments’ trend toward cost containment, as government and other third party payors seek to impose lower reimbursement and utilization rates and negotiate reduced payment schedules with providers. These cost containment measures, combined with the increasing influence of managed care payors and competition for patients, have resulted in reduced rates of reimbursement for services provided by the Company.

The Medicaid and Medicare programs are highly regulated. The failure of the Company or its customers to comply with applicable reimbursement regulations could adversely affect the Company’s business. The Company monitors its receivables from third–party payor programs and reports such revenues at the net realizable value expected to be received.

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The Company’s pharmacy segment earned revenues from the following payor sources for the three years ended September 30, 2003:

	2003			2002			2001
Medicaid		42	%		40	%		37	%
Long term care facilities		30			34			35
Third-party payor		16			14			14
Private		10			10			11
Medicare Part B		2			2			3
Total		100	%		100	%		100	%

The Company’s former inpatient services segment earned revenues from the following payor sources for the three years ended September 30, 2003:

	2003			2002			2001
Medicaid		50	%		48	%		48	%
Medicare		28			29			27
Private pay and other		22			23			25
Total		100	%		100	%		100	%

It is not possible to quantify fully the effect of pending legislative or regulatory changes, the administration of such legislation or any other governmental initiatives on the Company’s business. Accordingly, there can be no assurance that the impact of these changes or any future healthcare legislation will not further adversely affect the Company’s business. There can be no assurance that payments under governmental and private third–party payor programs will be timely, will remain at levels comparable to present levels or will, in the future, be sufficient to cover the costs allocable to patients eligible for reimbursement pursuant to such programs. The Company’s financial condition and results of operations may be affected by the reimbursement process, which in the healthcare industry is complex and can involve lengthy delays between the time that revenue is recognized and the time that reimbursement amounts are settled.

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(5) Significant Transactions and Events

Strategic Planning, Severance and Other Related Costs

The Company has incurred costs that are directly attributable to the Company’s long term objective of transforming to a pharmacy–based business, including the spin-off. Details of these costs and the amounts incurred, but not paid at September 30, 2003 follow (in thousands):

Fiscal 2003:

	Accrued at Beginning of Year		Provision		Paid		Non-cash Charges		Accrued at End of Year
Severance and related costs	$	1,100	$	14,247	$	5,916	$	8,431	$	1,000
Strategic consulting costs		621		14,039		11,280		1,220		2,160
Total	$	1,721	$	28,286	$	17,196	$	9,651	$	3,160

Fiscal 2002:

	Accrued at Beginning of Year		Provision		Paid		Non-cash Charges		Accrued at End of Year
Severance and related costs	$	—	$	16,410	$	10,599	$	4,711	$	1,100
Strategic consulting costs		—		4,730		3,089		1,020		621
Asset impairments		—		358		—		358		—
Total	$	—	$	21,498	$	13,688	$	6,089	$	1,721

Severance and Related Costs

In fiscal 2002, the Company announced an expense reduction program, which included the termination of over 100 individuals resulting in $3.8 million of severance related costs in that year. In fiscal 2003, in a continuation of that expense reduction initiative, additional overhead terminations resulted in a charge of severance and related costs of $2.2 million. At September 30, 2003, $1.0 million remained unpaid, which is expected to be paid in the first fiscal quarter of 2004.

In fiscal 2002, Michael R. Walker resigned as the Company’s chief executive officer. The Company’s board of directors appointed Robert H. Fish as its interim chief executive officer. Also, in that period, David C. Barr resigned as vice chairman. In fiscal 2002, the Company recognized $12.6 million in severance and related costs relating to the transition agreements with Mr. Walker and Mr. Barr.

In fiscal 2003, Richard R. Howard resigned as vice chairman. The Company recognized $4.8 million in severance and related costs in fiscal 2003 in connection with Mr. Howard’s transition agreement. The final payment of this agreement was made in January 2003.

On April 1, 2003, the Company extended an offer to its employees, including executive officers except for its chief executive officer, to tender all options to purchase shares of the Company’s common stock, par value $.02 per share, outstanding under its 2001 stock option plan, for the following consideration: (a) for those holders of options who had received awards of more than 2,000 restricted shares of common stock under the Company’s stock incentive plan, the acceleration of vesting of all such restricted shares plus a cash payment of $2.50 per share underlying the option for options that had an exercise price below $20.00 per share, and (b) with respect to those holders of options who had not received awards of more than 2,000 restricted shares, (i) for those options that had an exercise price of at least $20.00 per share, a cash payment of $2.00 per share underlying the option, and (ii) for those

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options that had an exercise price below $20.00 per share, a cash payment of $2.50 per share subject to the option. The offer expired on May 12, 2003. The Company accepted for exchange and cancellation options to purchase 1,724,000 shares of its common stock, which represented all of the eligible outstanding options properly tendered for exchange by eligible option holders. All eligible options held by the Company’s employees were tendered in the offer, with the exception of options to purchase 35,000 shares. As a result of this offer and exchange, the Company expensed $7.2 million in fiscal 2003, of which $1.4 million was disbursed in cash, with the remainder distributed in common stock.

Strategic Consulting Costs

During fiscal year 2003 and 2002, the Company incurred strategic consulting costs of $14.0 million and $4.7 million, respectively, in connection with several of its new strategic objectives. Initially, these strategic consulting firms were engaged to assist the Company’s board of directors and management in the evaluation of its existing business model and the development of its strategic alternatives. Additional services were procured to assist in the evaluation of the Company’s pharmacy sales and marketing function, the bid selection process in connection with the potential sale or spin-off of the eldercare business and, more recently, the legal, accounting and other professional fees directly attributed to the spin-off transaction. Strategic consulting costs in fiscal 2003 also include executive compensation of $2.2 million which relates to certain incentive compensation to recruit John J. Arlotta as the Company's new chief executive officer and incentive compensation paid to Robert H. Fish for services rendered during his term as the interim chief executive officer. During Mr. Fish’s term as interim chief executive officer, his primary objectives were focused on the Company’s pharmacy transformation initiatives.

We recognize the cost of such consulting fees as the services are performed.

Asset Impairments

During fiscal 2002, we incurred $0.4 million of asset impairment charges consisting of the write-down in carrying value of one idle eldercare real estate property.

ElderTrust Transactions

On September 11, 2003, GHC entered into agreements with ElderTrust, a real estate investment trust from who GHC currently or previously leased or subleased 18 of its eldercare facilities and eight managed and jointly-owned facilities. The principal terms of the agreements are as follows:

• GHC will purchase two skilled nursing facilities having 210 skilled nursing beds and 67 assisted living beds, and three assisted living facilities having 257 beds, for $24.8 million. GHC leases these properties from ElderTrust at an annual cash basis and accrual basis lease cost of $2.4 million and $1.5 million, respectively.  On October 29, 2003, GHC purchased one of the aforementioned eldercare facilities having 183 beds for $10.3 million.  The remaining four properties are expected to be purchased by January 2004;

• GHC agreed to pay ElderTrust $32.3 million to reduce annual cash basis and accrual basis lease cost associated with nine properties by $6.9 million and $1.2 million, respectively, and acquire options to purchase seven properties currently subleased to GHC by ElderTrust.  On October 29, 2003, GHC paid ElderTrust $2.3 million to reduce the rents of two of the nine aforementioned eldercare facilities, and on November 7, 2003 paid ElderTrust the remaining $30.0 million to reduce the rents of the other seven aforementioned eldercare facilities; and

• NeighborCare paid ElderTrust $4.4 million upon consummation of the spin-off in exchange for ElderTrust’s consent to the assignment of all remaining leases and guarantees from NeighborCare to GHC.

On August 13, 2003, GHC acquired the remaining ownership interest in an unconsolidated joint-venture partnership that operates four skilled nursing facilities with 600 skilled nursing and 125 assisted living beds. Each of the four eldercare centers had been leased to the partnership from ElderTrust. GHC purchased its joint venture partner’s interest in the unconsolidated partnership for $3.1 million and will subsequently purchase one of the four eldercare properties from ElderTrust for $2.6 million. Additionally, GHC paid ElderTrust $2.5 million to reduce the annual cash basis and accrual basis lease expense of one of the three remaining leased facilities by $0.4 million and $0.2 million, respectively. The lease terms of the three facilities that will continue to be leased from ElderTrust are expected to be extended from 2010 to 2015.

NCS Transaction Termination Fee

On July 28, 2002, the Company and its wholly-owned subsidiary, Geneva Sub, Inc., entered into an agreement and plan of merger (the “Merger Agreement”) with NCS HealthCare, Inc. (“NCS”), pursuant to which NCS was to become a wholly-owned subsidiary of the Company (the “NCS Transaction”).

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On December 11, 2002, the Court of Chancery of the State of Delaware, pursuant to an order of the Delaware Supreme Court dated December 10, 2002 which reversed prior determinations of the Court of Chancery, entered an order preliminary enjoining the consummation of the NCS transaction pending further proceedings.

On December 15, 2002, the Company entered into a termination and settlement agreement with Omnicare whereby it agreed to terminate the Merger Agreement and Omnicare agreed to pay to the Company $22 million. In addition, the Company and Omnicare each agreed to release the other from any claims arising from the Merger Agreement and not commence any action against one another in connection with the Merger Agreement. On December 16, 2002 the Company provided notice to NCS terminating the Merger Agreement. In fiscal 2003, the Company recognized a $10.2 million gain resulting from the $22 million break-up fee, net of $11.8 million of costs associated with the proposed NCS transaction.

Arbitration Award

On February 14, 2002, an arbitrator ruled in favor of NeighborCare on all claims and counterclaims in the lawsuit involving HCR Manor Care, Inc. and certain of its affiliates The arbitrator found that HCR Manor Care did not lawfully terminate the Master Service Agreements with NeighborCare, so that those contracts remain in full force and effect until the end of September 2004. The arbitrator awarded NeighborCare $21.9 million in damages for respondents’ failure to allow NeighborCare to exercise its right under the Master Service Agreements to service facilities owned and operated by a subsidiary of respondent HCR Manor Care. The Company recognized the $21.9 million award as a gain which is included under the caption net gain from break–up fee and other settlements in the consolidated statements of operations. In addition, the arbitrator terminated his prior ruling that allowed respondents to withhold 10% of their payments to NeighborCare, and respondents paid NeighborCare $9.1 million in funds representing the amounts withheld during the course of the Arbitration pursuant to the arbitrator’s prior ruling.

Amended Pharmacy Service Agreements

On August 15, 2002, the Company announced that it and HCR Manor Care, Inc. agreed to withdraw all outstanding legal actions against each other stemming from the acquisition by the Company of HCR Manor Care’s pharmacy subsidiary, Vitalink. The Company and HCR Manor Care also agreed to withdraw the prior pharmacy service agreement that was set to expire in 2004 and entered into a new pharmacy service agreement. The new pharmacy service agreement runs through January 2006 and covers approximately 200 of HCR Manor Care’s facilities. The pricing in the new pharmacy service agreement was reduced by approximately $12.8 million annually based upon then current sales volumes.

In September 2002, the Company was awarded a contract to serve 6,892 beds owned by the State of New Jersey under a three year agreement with the option for two one-year extensions. NeighborCare was the predecessor pharmacy serving these beds under a 1996 agreement of an initial term of three years which was extended through September 30, 2002. The new contract was awarded through New Jersey’s competitive bidding process, and was bid by the Company at reimbursement rates lower than the prior agreement. The revenue reduction associated with the new pharmacy agreement was approximately $7.2 million annually based upon then current sales volumes.

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(6) Restricted Investments in Marketable Securities

Marketable securities (classified as available for sale) are held by the Company’s wholly–owned subsidiary, Liberty Health Corporation, LTD (“LHC”), incorporated under the laws of Bermuda. LHC provides various insurance coverages to the Company and to unrelated entities, most of which are managed by the Company.

The current portion of restricted investments in marketable securities represents an estimate of the level of outstanding losses the Company expects to pay in the succeeding year.

Marketable securities at September 30, 2003 of the Company consist of the following (in thousands):

	Amortized cost		Unrealized gains		Unrealized losses		Fair value
Fixed interest securities:
U.S. mortgage backed securities	$	5,475	$	677	$	—	$	6,152
Corporate bonds		9,771		658		—		10,429
Government bonds		1,368		21		42		1,347
Term deposits		1,028		—		—		1,028
Equity securities		1,102		380		—		1,482
Money market funds		70,153		—		—		70,153
	$	88,897	$	1,736	$	42	$	90,591
Less: Current portion of restricted investments								(29,320	)
Long-term restricted investments							$	61,271

Marketable securities at September 30, 2002 of the Company consisted of the following (in thousands):

	Amortized cost		Unrealized gains		Unrealized losses			Fair value
Fixed interest securities:
U.S. mortgage backed securities	$	5,464	$	774	$	—		$	6,238
Corporate bonds		12,209		633		(42	)		12,800
Government bonds		1,413		22		(95	)		1,340
Term deposits		2,495		—		—			2,495
Equity securities		1,103		—		—			1,103
Money market funds		62,171		—		—			62,171
	$	84,855	$	1,429	$	(137	)	$	86,147
Less: Current portion of restricted investments									(20,542	)
Long-term restricted investments								$	65,605

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Fixed interest securities held at September 30, 2003 mature as follows (in thousands):

	2003
	Amortized cost		Fair value
Due in one year or less	$	3,060	$	3,088
Due after 1 year through 5 years		10,988		11,983
Due after 5 years through 10 years		2,010		2,229
Over 10 years		556		628
	$	16,614	$	17,928

Actual maturities may differ from stated maturities because borrowers have the right to call or prepay certain obligations with or without prepayment penalties.

In the normal course of business, LHC’s bankers have issued letters of credit totaling $87.9 million in 2003 and $74.9 million in 2002 in favor of insurers. Cash and equivalents in the sum of $4.1 million, and investments with an amortized cost of $87.7 million and a market value of $89.4 million are pledged as security for these letters of credit as of September 30, 2003.

(7) Property, Plant and Equipment

Property, plant and equipment at September 30, 2003 and 2002 consist of the following (in thousands):

	2003			2002
Land	$	72,515		$	79,321
Buildings and improvements		584,263			594,446
Equipment, furniture and fixtures		203,619			169,383
Construction in progress		6,372			16,152
		866,769			859,302
Less accumulated depreciation		(114,773	)		(63,374	)
Property, plant and equipment, net	$	751,996		$	795,928

(8) Notes Receivable and Other Investments

Notes receivable and other investments at September 30, 2003 and 2002 consist of the following (in thousands):

	2003		2002
Mortgage notes and other notes receivable	$	19,252	$	15,664
Investments in revenue bonds		—		1,370
Notes receivable and other investments	$	19,252	$	17,034

Mortgage notes and other notes receivable at September 30, 2003 and 2002 bear interest at rates ranging from 7.25% to 10.00% and mature at various times ranging from 2004 to 2029. The majority of the mortgage notes and

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other notes are secured by first or second mortgage liens on underlying facilities and personal property, accounts receivable, inventory and / or gross facility receipts, as defined.

The Company has agreed to provide third parties, including facilities under management contract, with $7.4 million of working capital lines of credit. The unused portion of working capital lines of credit was $4.6 million at September 30, 2003.

Investments in revenue bonds at September 30, 2002 bore interest at rates ranging from 10.00% to 10.45% and mature at various times between 2011 and 2021. The revenue bonds held were issued by a skilled nursing facility owned by an independent third party.

(9) Other Long–Term Assets

Other long–term assets at September 30, 2003 and 2002 consist of the following (in thousands):

	2003		2002
Deferred financing fees, net	$	7,575	$	10,131
Cost report receivables, net		2,123		4,379
Property deposits and funds held in escrow		22,783		14,035
Employee deferred compensation		7,501		1,950
Other, net		2,624		3,513
Other long-term assets	$	42,606	$	34,008

(10) Goodwill and Identifiable Intangible Assets

The change in the carrying amount of goodwill for the years ended September 30, 2003 and 2002 is as follows (in thousands):

	2003			2002
Balance at beginning of period	$	336,701		$	325,593
Goodwill acquired during the year		3,040			4,833
Impairment losses		—			(2,818	)
Utilization of net operating losses		(2,046	)		(3,149	)
Fresh-start valuation adjustments		—			12,242
Balance at end of period	$	337,695		$	336,701

In fiscal 2002, the Company recorded $12.2 million of fresh-start valuation adjustments representing miscellaneous changes to its initial application of fresh-start reporting. Also in fiscal 2003 and 2002, in accordance with SOP 90-7, the Company utilized $5.0 million and $8.0 million of net operating loss carry forwards which resulted in a $2.0 million and $3.1 million reduction in goodwill, respectively.

The consolidated statement of operation for the year ended September 30, 2001 includes $32.4 million of goodwill amortization. Following the adoption of SFAS No. 142, no goodwill amortization expense was recognized for the years ended September 30, 2003 and 2002. The following table adjusts the reported income from continuing operations and the corresponding income per share amounts for the year ended September 30, 2001 for the predecessor company on a pro forma basis assuming the provisions of SFAS No. 142 were adopted effective October 1, 2000 (in thousands, except per share amounts):

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	2001
Income from continuing operations – as reported	$	270,862
Income from continuing operations – as adjusted		303,275
Income per share from continuing operations – basic and diluted – as reported	$	5.57
Income per share from continuing operations – basic and diluted – as adjusted		6.23

In adopting the requirements of fresh-start reporting, the Company recognized certain identifiable intangible assets which were established at September 30, 2001 at their estimated fair value and, in accordance with SFAS 142, are being amortized on a straight-line basis over their estimated useful lives.  Identifiable intangible assets at September 30, 2003 and 2002 consist of the following (in thousands, except years):

Classification	2003			2002			Estimated Life (Years)
Customer Contracts	$	28,164		$	26,391			2-6
Trademarks and trade names		5,000			5,000			5
Non-competition agreements		4,081			2,200			1-4
Identifiable intangible assets		37,245			33,591
Accumulated amortization		(16,379	)		(7,796	)
Identifiable intangible assets, net	$	20,866		$	25,795

Aggregate amortization expense for amortizing identifiable intangible assets for the years ended September 30, 2003 and 2002 was $8.6 million and $7.8 million, respectively. Following the spin-off, estimated amortization expense for the next four fiscal years is $3.6 million in fiscal 2004, $3.0 million in fiscal 2005, $2.8 million in fiscal 2006 and $2.8 million in fiscal 2007. The identifiable intangible assets attributed to NeighborCare will be fully amortized by the end of fiscal 2007.

(11) Long–Term Debt

Long–term debt at September 30, 2003 and 2002 consists of the following (in thousands):

	2003			2002
Secured debt
Senior Credit Facility
Term Loan	$	246,875		$	281,575
Delayed Draw Term Loan		68,162			79,239
Total Senior Credit Facility		315,037			360,814
Senior Secured Notes		240,176			242,602
Mortgages and other secured debt		56,406			86,267
Total debt		611,619			689,683
Less:
Current portion of long-term debt		(20,135	)		(40,744	)
Long-term debt	$	591,484		$	648,939

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There was no capitalization of interest in 2003 or 2002. However, $2.5 million in interest was capitalized in 2001, relating to facility construction, systems development and renovations.

The Senior Credit Facility and the Senior Secured Notes that are described below were repaid subsequent to September 30, 2003 in connection with the spin–off of GHC and the recapitalization of both organizations. See “New Financing Arrangements” below.

Senior Credit Facility

On October 2, 2001, and in connection with the consummation of the Plan, the Company entered into a Senior Credit Facility consisting of the following: (1) a $150 million revolving line of credit (the “Revolving Credit Facility”); (2) a $285 million term loan (the “Term Loan”) and (3) an $80 million delayed draw term loan (the “Delayed Draw Term Loan”) (collectively the “Senior Credit Facility”). The outstanding amounts under the Term Loan and the Delayed Draw Term Loan bore interest at the London Inter–bank Offered Rate (“LIBOR”) plus 3.50%, or 4.66%, at September 30, 2003. The Revolving Credit Facility bore interest based upon a performance related grid, or 4.16%, at September 30, 2003. The Revolving Credit Facility was not drawn upon during fiscal 2003 or 2002.

Pursuant to the Senior Credit Facility, the Company and each of its subsidiaries named as guarantors granted the lenders first priority liens and security interests in all unencumbered property, including but not limited to: fee owned property, bank accounts, investment property, accounts receivable, inventory, equipment and general intangible assets.

The Senior Credit Facility contained an annual excess cash flow payment requirement. At the end of each fiscal year, the Company was required to prepare an excess cash flow calculation as defined in the senior credit agreement. Of the amount, determined as excess cash flow, 75% was to be paid to the Company’s senior lenders in the form of a mandatory payment by December 31 of each year. The Company paid $24.8 million on or near December 31, 2002 pursuant to the excess cash flow recapture provision, and as a result, this estimated level of payment is classified in the Company’s consolidated balance sheet under the current installments of long–term debt at September 30, 2002. Because the Company refinanced the Senior Credit Facility in connection with the spin-off, there will not be an annual excess cash flow payment requirement on December 31, 2003.

The Revolving Credit Facility was available for general working capital requirements. The Revolving Credit Facility was to mature on October 2, 2006. Usage under the Revolving Credit Facility was subject to a Borrowing Base (as defined) calculation based upon real property collateral value and a percentage of eligible accounts receivable (as defined). Excluding a $0.9 million posted letter of credit, no borrowings were made under the Revolving Credit Facility at September 30, 2003.

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In the year ended September 30, 2002, the Company borrowed $42 million from the Delayed Draw Term Loan to finance the repayment of all trade balances due to NeighborCare’s primary supplier of pharmacy products. In addition, the Company utilized $10 million from the Delayed Draw Term Loan to fund the exercise of the purchase option on three eldercare centers, previously described, and the Company utilized $28 million from the Delayed Draw Term Loan to satisfy certain mortgages as previously described. The Delayed Draw Term Loan was fully drawn at September 30, 2003 and is being repaid with no additional borrowings available under the Delayed Draw Term Loan.

Senior Secured Notes

On October 2, 2001, and in connection with the consummation of the Plan, the Company entered an indenture agreement in the principal amount of $242.6 million (the “Senior Secured Notes”). The Senior Secured Notes bore interest at LIBOR plus 5.0% (6.16% at September 30, 2003), and amortize one percent each year and were scheduled to mature on April 2, 2007. The Senior Secured Notes were secured by a junior lien on real property and related fixtures of substantially all of the Company’s subsidiaries, subject to liens granted to the lenders’ interests subject to the Senior Credit Facility.

Other Secured Indebtedness

At September 30, 2003, the Company had $56.4 million of other secured debt consisting principally of revenue bonds, capital lease obligations and secured bank loans, including loans insured by the Department of Housing and Urban Development. These loans are secured by the underlying real and personal property of individual eldercare centers. All of the other secured loans have fixed rates of interest ranging from 3% to 11%, with a weighted average rate of 8.88% at September 30, 2003.

Sinking fund requirements, installments of long–term debt and capital leases are as follows (in thousands):

	Principal Amount
Years Ending September 30,	Loans		Capital Leases
2004	$	15,872	$	4,263
2005		8,161		2,939
2006		8,237		1,641
2007		531,616		907
2008		2,023		115
Thereafter		35,837		8

New Financing Arrangements

In connection with the spin-off of GHC, the Company restructured and refinanced nearly all of its indebtedness. Prior to the spin-off both NeighborCare and GHC entered into new financing arrangements in an effort to extinguish all senior secured joint and several debt and to provide adequate capital to both separate organizations. As such, NeighborCare and GHC entered into the following new financing arrangements:

NeighborCare:

• $250.0 million, 6.875% senior subordinated notes due 2013; and

• $100.0 million, undrawn revolving credit facility due 2008. Interest at LIBOR plus 2.00% on borrowings

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and a commitment fee of 0.50% on any unused commitment.

GHC:

• $225.0 million, 8% senior subordinated notes due 2013;

• $185.0 million, fully drawn term loan due 2010. Interest at LIBOR plus 2.75%; and

• $75 million, undrawn revolving credit facility due 2008. Interest at LIBOR plus 3.00% on borrowings and a commitment fee of 0.50% on any unused borrowings.

The $660.0 million of proceeds from the new financing arrangements were used to repay the Company’s previously held senior credit facility of $315.1 million ($246.9 million term loan and $68.2 million delayed drawn term loan) and the Company’s previously held $240.2 million senior secured notes.

The remaining proceeds of approximately $104.8 million were used to pay for approximately $21.0 million of financing fees related to the new financing arrangements, with the remaining $83.8 million used to provide additional liquidity to both organizations to fund both working capital and other requirements.

The agreements and instruments governing our new financing arrangements contain various restrictive covenants that, among other things, require the Company to comply with or maintain certain financial tests and ratios and restrict our ability to:

• incur more debt;

• pay dividends, redeem stock or make other distributions;

• make certain investments;

• create liens;

• enter into transactions with affiliates;

• make acquisitions;

• merge or consolidate; and

• transfer or sell assets.

The new financing arrangements require us to maintain compliance with certain financial and non–financial covenants, including minimum EBITDA (earnings before interest, taxes, depreciation and amortization); limitations on capital expenditures, maximum leverage ratios, minimum fixed charge coverage ratios and minimum net worth.

Under the terms of NeighborCare’s and GHC’s senior subordinated notes, the notes are not redeemable until on or after November 15, 2008 and October 28, 2008, respectively. NeighborCare and GHC may, however, use the net proceeds from one or more equity offerings to redeem up to 35% of the aggregate principal amount of the notes issued on or before November 15, 2006 and October 15, 2006, respectively at 106.875% and 108.000%, respectively, of the principal amount thereof, plus accrued and unpaid interest to the redemption date, subject to the terms of the notes.

(12) Leases and Lease Commitments

The Company leases certain facilities under operating leases. Future minimum payments for the next five years under non–cancellable operating leases at September 30, 2003 are as follows (in thousands):

Year ending September 30,	Minimum Payment
2004	$	29,109
2005		27,149
2006		23,764
2007		21,188
2008		19,315
Thereafter		17,326

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For the year ended September 30, 2003, the Company incurred $40.3 million of lease obligation costs. The Company classifies operating lease costs associated with its eldercare centers and corporate office sites as lease expense in the consolidated statements of operations, while the operating lease costs of pharmacy and other health service sites are included within other operating expenses.

In connection with the adoption of fresh–start reporting, the Company recorded an unfavorable lease credit associated with 40 leased properties which is amortized using the straight–line method over the remaining lives of the leases. The unfavorable component of these lease contracts was estimated using market comparable lease coverage ratios for similar assets. The unfavorable lease liability at September 30, 2003 of $11.3 million, included in other long–term liabilities in the consolidated balance sheet, will be amortized as reduction to lease expense over the remaining lease terms, which have a weighted average term of 3.4 years.

(13) Income Taxes

Income tax expense (benefit) for the years ended September 30, 2003, 2002 and 2001 was as follows (in thousands):

	Successor Company						Predecessor Company
	2003			2002			2001
Income from continuing operations	$	28,674		$	35,103		$	—
Loss from discontinued operations		(13,822	)		(4,959	)		—
Total	$	14,852		$	30,144		$	—

The components of the provision (benefit) for income taxes on income from continuing operations for the years ended September 30, 2003, 2002 and 2001 was as follows (in thousands):

	Successor Company					Predecessor Company
	2003		2002			2001
Current:
Federal	$	13,602	$	(10,285	)	$	—
State		3,859		2,736			—
		17,461		(7,549	)		—
Deferred:
Federal		9,294		37,846			—
State		1,919		4,806			—
		11,213		42,652			—
Total	$	28,674	$	35,103		$	—

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Total income tax expense differed from the amounts computed by applying the U.S. federal income tax rate of 35% to income from continuing operations before income taxes, equity in net income (loss) of unconsolidated affiliates and minority interests (in thousands):

	Successor Company						Predecessor Company
	2003			2002			2001
Computed “expected” tax	$	30,274		$	40,909		$	113,557
Increase (reduction) in income taxes resulting from:
State and local income taxes, net of federal tax benefits		3,936			4,960			—
Amortization of goodwill		—			—			8,750
Targeted jobs tax credits		(1,102	)		(857	)		—
Carryback of losses allowed under Job Creation and Worker Assistance Act of 2002		(4,443	)		(10,285	)		—
Write-off of non-deductible goodwill		1,571			—			304,500
Cancellation of debt income		—			—			(538,962	)
Adequate protection payments		—			—			40,250
Change in valuation allowance		—			—			74,005
Other, net		(1,562	)		376			(2,100	)
Total income tax expense	$	28,674		$	35,103		$	—

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The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at September 30, 2003 and 2002 are presented below (in thousands):

	2003			2002
Deferred Tax Assets:
Accrued liabilities and reserves	$	66,056		$	63,296
Net operating loss carry-forwards (Predecessor)		98,835			100,881
Net operating loss carry-forwards (Successor)		12,289			—
Derivatives financial instruments		2,389			—
Net unfavorable leases		7,345			8,800
Other		11,900			12,449
Deferred tax assets		198,814			185,426
Valuation allowance		(98,835	)		(100,881	)
Net deferred tax assets		99,979			84,545
Deferred Tax Liabilities:
Accounts receivable		(22,622	)		(20,243	)
Goodwill and other intangibles		(65,150	)		(58,721	)
Depreciation		(50,434	)		(33,000	)
Deferred gain		(4,047	)		(5,800	)
Other		(7,748	)		(3,972	)
Total deferred tax liability		(150,001	)		(121,736	)
Net deferred tax liability	$	(50,022	)	$	(37,191	)

Pursuant to the Job Creation and Worker Assistance Act of 2002, which extended the net operating loss carryback period to five years, the Company was able to carryback certain net operating loss (“NOL”) carry-forwards originating in the year ended September 30, 2001. This enabled the Company to record $4.4 million and $10.3 million in federal tax refunds during the years ended September 30, 2003 and 2002, respectively.

Following consummation of the Plan, and after reduction for (1) the aforementioned NOL carrybacks and (2) cancellation of prepetition indebtedness as provided under Section 108 of the Internal Revenue Code, the Company had Predecessor Company NOL carry-forwards of $278.0 million, which expire between September 30, 2020 and September 30, 2021. Under applicable limitations imposed by Section 382 of the Internal Revenue Code, the Company’s ability to utilize these loss carry-forwards became subject to an annual limitation of $43.3 million, inclusive of a separate limitation for Multicare. During the years ended September 30, 2003 and 2002, the Company utilized $5.0 million and $8.0 million, respectively, of Predecessor loss carry-forwards. Pursuant to SOP 90–7, the income tax benefit of any Predecessor NOL utilization ultimately serves to reduce goodwill and, thereafter, to increase paid-in-capital. The Company has Predecessor NOL carry-forwards of $265.0 million remaining at September 30, 2003. There can be no assurances that the Company will be able to utilize these NOL’s and, consequently, a 100% valuation allowance against these NOL’s has been provided. During the year ended September 30, 2003, the Successor Company generated an additional NOL of $27.2 million not subject to annual limitation which is available for carry-forward through the year ended September 30, 2023. Other deferred tax assets include $3.3

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million for built–in losses recognized by Multicare during the fiscal year ended September 30, 2002 in excess of its separate limitation under Section 382.

(14) Redeemable Preferred Stock

In connection with the consummation of the Plan, the Company issued 425,946 shares of Series A Convertible Preferred Stock (the “Series A Preferred”). The Series A Preferred has a liquidation preference of $46.8 million and accrue dividends at the annual rate of 6% payable in additional shares of Series A Preferred. The Series A Preferred is convertible at any time, at the option of the holders. Following the spin-off, each share of Series A Preferred is convertible into the number of shares of the Company’s common stock which results from dividing (x) the liquidation preference of $100 per each such share plus all accrued and unpaid dividends by (y) the conversion price per share of $12.60. In fiscal 2002, 4,338 shares of Series A Preferred were converted to 21,336 shares of common stock. In fiscal 2003, 6,351 shares of Series A Preferred were converted into 31,231 shares of common stock.

The Company has the right to convert all of the shares of Series A Preferred to shares of common stock at any time after the first anniversary date of the effective date, or October 2, 2002, when the average trading price of the Company’s common stock over the immediately preceding 30 days is $18.60 (following the spin-off) or more per share. The Company has the right to redeem the Series A Preferred at any time by giving 30 days notice to the holders (subject to certain restrictions imposed by the Company’s Senior Credit Facility). The Series A Preferred are subject to mandatory redemption on October 2, 2010. The conversion rate is $12.60 of liquidation preference for each share common stock.

Effective December 16, 2003, the Company’s board of directors exercised its option to require the mandatory conversion of the Series A Preferred, at a per share conversion price of $12.60 (as adjusted from $20.33 in connection with the spin-off), into 3,464,255 shares of NeighborCare common stock pursuant to the terms of the Company’s amended and restated articles of incorporation, as amended.

The Series A Preferred is reflected in the consolidated balance sheet under redeemable preferred stock.

(15) Shareholders’ Equity

Common Stock

The authorized common stock consists of 200,000,000 shares, $0.02 par value, of which 41,813,603 shares were issued and 39,514,351 were outstanding at September 30, 2003. The provisions of the Plan call for the issuance of 41,000,000 shares, of which 260,493 are to be issued when all outstanding claim objections and other disputed claim matters of the bankruptcy proceedings are resolved.

Treasury stock

In fiscal 2003, the Company’s board of directors authorized the repurchase of up to $50.0 million of NeighborCare common stock through privately negotiated third party transactions or in the open market. As of September 30, 2003, the Company had repurchased 2,299,252 common shares at a cost of $36.2 million, representing 5.8% of the common stock outstanding.

Restricted Stock Grants

On October 2, 2001, the Board of Directors authorized the Company to issue 750,000 restricted shares of common stock to certain of its senior officers. These shares were scheduled to vest quarterly over a five year period ending on October 1, 2006.

The Company recorded compensation expense ratably over each vesting period at $20.33 per vesting share. In fiscal 2002, the Company recognized $2.5 million of compensation cost for the scheduled vesting of restricted stock grants, which is included in salaries, wages and benefit costs in the consolidated statements of operations. Also in fiscal 2002, the Company recognized $4.7 million of compensation cost for the accelerated vesting of restricted stock grants held by certain key executives whose employment was terminated during the fiscal year. See note 5 —“Significant Transactions and Events — Strategic Planning, Severance and Other Related Costs.” The compensation cost for the accelerated vesting of these restricted stock grants is included in strategic planning, severance and other related costs in the consolidated statements of operations.

On April 1, 2003, the Company extended an offer to its employees, including executive officers except for its chief executive officer, to tender all options to purchase shares of its common stock, par value $.02 per share, outstanding under its 2001 stock option plan, for the following consideration: (a) for those holders of options who had received awards of more than 2,000 restricted shares of common stock under the stock incentive plan, the acceleration of vesting of all such restricted shares plus a cash payment of $2.50 per share underlying the option for

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options that had an exercise price below $20.00 per share, and (b) with respect to those holders of options who had not received awards of more than 2,000 restricted shares, (i) for those options that had an exercise price of at least $20.00 per share, a cash payment of $2.00 per share underlying the option, and (ii) for those options that had an exercise price below $20.00 per share, a cash payment of $2.50 per share subject to the option. The offer expired on May 12, 2003. The Company accepted for exchange and cancellation options to purchase 1,724,000 shares of its common stock, which represented all of the eligible outstanding options properly tendered for exchange by eligible option holders. All eligible options held by the Company’s employees were tendered in the offer, with the exception of options to purchase 35,000 shares. As a result of this offer and exchange, the Company expensed $7.2 million in fiscal 2003, of which $1.4 million was disbursed in cash, with the remainder distributed in common stock. This expense is classified as a component of strategic planning, severance and other related costs in the Company’s consolidated statements of operations.

(16) Stock Option Plans

In fiscal 2002, the Company adopted the 2001 Stock Option Plan (the “2001 Plan”). The aggregate number of shares of common stock that may be issued under the 2001 Plan is 3,480,000, of which 3,305,000 may be issued to non–directors and 175,000 may be issued solely to directors.

	Option Price Per Share		Outstanding			Exercisable			Available for Grant
Balance at September 30, 2001		—		—			—			—
Authorized		—		—			—			3,480,000
Granted		$ 18.75 - $ 20.33		2,751,000			—			(2,751,000	)
Exercisable		—		—			619,779			—
Canceled / Forfeited		—		(392,000	)		—			392,000
Balance at September 30, 2002		$ 18.75 - $ 20.33		2,359,000			619,779			1,121,000
Authorized		—		—			—			—
Granted		$ 15.06 - $ 20.33		652,500			—			(652,500	)
Exercisable		—		—			(299,459	)		—
Canceled / Forfeited		—		(2,271,500	)		—			2,271,500
Balance at September 30, 2003		$ 16.80 - $ 20.33		740,000			320,320			2,740,000

(17) Loss on Impairment of Assets and Other Charges

Fiscal 2003

During the year ended September 30, 2003, the Company did not incur any impairment charges from continuing operations.

Fiscal 2002

In connection with the Company’s change in strategic direction and objectives, the Company incurred $0.4 million of asset impairment charges from continuing operations consisting of the write–down in carrying value of an idle eldercare real estate property. See note 5 —“Significant Transactions and Events — Strategic planning, severance and other related costs.”

During the year ended September 30, 2002, the Company recorded $4.3 million of debt restructuring and reorganization costs, of which $2.6 million related to post confirmation liabilities payable to the United States Trustee related to Chapter 11 cases that remained open. With the exception of three open cases, all other Chapter 11 cases were closed in July 2002. The remaining $1.7 million represents a post confirmation charge resulting from a settlement reached with the lender of a pre–petition mortgage obligation for an amount that exceeded the estimated loan value established in the September 30, 2001 fresh–start balance sheet.

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Fiscal 2001

During the year ended September 30, 2001, the Company recorded costs in connection with certain uncollectible receivables, insurance related costs and other charges, and debt restructuring and reorganization costs. The Company also recognized a gain on the discharge of debt in connection with the consummation of the Plan. The following table and discussion provides additional information on these charges and gain in continuing operations (in thousands):

	2001
Notes receivable, advances, and trade receivables, due from affiliated businesses formerly owned or managed deemed uncollectible	$	30,048
Uncollectible trade receivables		38,883
Self-insured and related program costs		15,110
Other charges		22,390
Total uncollectible receivable, insurance related and other charges (included in other operating expenses)	$	106,431
Debt restructuring and reorganization costs and net (gain) on debt discharge:
Professional, bank and other fees	$	59,393
Employee benefit related costs, including severance		16,786
Exit costs of terminated businesses		5,877
Fresh start valuation adjustments		932,435
Gain on debt discharge		(1,460,909	)
Total debt restructuring and reorganization costs and net (gain) on debt discharge	$	(446,418	)

Uncollectible receivable, insurance related costs and other charges included in other operating expenses

In fiscal 2001, the Company performed periodic assessments of the collectibility of amounts due from certain affiliated businesses in light of the adverse impact of PPS on their liquidity and profitability. As a result of our assessment, the carrying value of notes receivable, advances and trade receivables due from affiliates was written down by $30 million.

In fiscal 2001, the Company performed a re–evaluation of its allowance for doubtful accounts triggered by deterioration in the agings of certain categories of receivables. Management believed that such deterioration in the agings were due to several prolonged negative factors related to the operational effects of the bankruptcy filings such as personnel shortages and the time demands required in normalizing relations with vendors and addressing a multitude of bankruptcy issues. As a result of this re–evaluation, the Company determined that an increase in the allowance for doubtful accounts of $38.9 million was necessary.

In fiscal 2001, as a result of adverse claims development we re–evaluated the levels of reserves established for certain self–insured health and workers’ compensation benefits and other insurance related programs. These charges were $15.1 million.

In addition, the Company incurred charges of $22.4 million during fiscal 2001, principally related to contract and litigation matters and settlements, and certain other charges.

Debt restructuring and reorganization costs and net gain on debt discharge

During the twelve months ended September 30, 2001, the Company incurred $1,014.5 million of legal, bank, accounting, fresh–start valuation adjustments and other costs in connection with its debt restructuring and the Chapter 11 cases. Of these charges, $59.4 million is attributed to professional, bank and other fees and $16.8 million pertains to certain salary and benefit related costs, principally for a court approved special recognition program. In

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addition, the Company incurred $5.9 million of costs associated with exiting certain terminated businesses. Fresh–start valuation adjustments of $932.4 million were recorded pursuant to the provisions of SOP 90–7, which require entities to record their assets and liabilities at fair value. The fresh–start valuation adjustments are principally the result of the elimination of predecessor company goodwill and the revaluation of property, plant and equipment to estimated fair values. The gain on debt discharge represents the relief of liabilities subject to compromise in accordance with the plan of reorganization.

(18) Commitments and Contingencies

Financial Commitments

Requests for providing commitments to extend financial guarantees and extend credit are reviewed and approved by senior management. Management regularly reviews all outstanding commitments, letters of credit and financial guarantees, and the results of these reviews are considered in assessing the need for any reserves for possible credit and guarantee losses.

The Company has an agreement with a vendor, which supplies approximately 98% of the Company’s pharmaceutical products, pursuant to which the Company is required to maintain a deposit to secure purchase terms. The deposit of $37.9 million and $32.7 million at September 30, 2003 and 2002, respectively, is refundable upon the Company’s election of alternative purchase terms and accordingly, is classified among current assets.

The Company has posted $0.9 million of outstanding letters of credit. The letters of credit guarantee performance to third parties of various trade activities. The letters of credit are not recorded as liabilities on the Company’s balance sheet unless they are probable of being utilized by the third party. The financial risk approximates the amount of outstanding letters of credit.

The Company has extended $7.4 million in working capital lines of credit to certain jointly owned and managed companies, of which $4.6 million were unused at September 30, 2003. Credit risk represents the accounting loss that would be recognized at the reporting date if the affiliate companies were unable to repay any amounts utilized under the working capital lines of credit. Commitments to extend credit to third parties are conditional agreements generally having fixed expiration or termination dates and specific interest rates and purposes.

The Company is a party to joint venture partnerships whereby its ownership interests are 50% or less of the total capital of the partnerships. The Company accounts for these partnerships using the equity method of accounting and, therefore, the assets, liabilities and operating results of these partnerships are not consolidated with the Company’s. The carrying value of the Company’s investment in joint ventures is $8.8 million and $14.1 million at September 30, 2003 and 2002, respectively. The Company’s share of the income (loss) of the partnerships for the years ended September 30, 2003, 2002 and 2001 was $1.2 million, $2.2 million and $(10.2) million, respectively. Although the Company is not contractually obligated to fund operating losses of these partnerships, in certain cases, it has extended credit to such joint venture partnerships in the past and may decide to do so in the future in order to realize economic benefits from our joint venture relationship. Management assesses the creditworthiness of such partnerships in the same manner it does other third–parties. The Company has provided $10.8 million of financial guarantees related to loan commitments of four jointly owned and managed companies of GHC. As of September 30, 2003, the Company has also provided $12.4 million of financial guarantees related to lease obligations of one jointly–owned and managed company that operates four eldercare centers. This obligation was subsequently relieved in October 2003 upon the sale of the jointly-owned partnership’s leasehold rights to an independent third party. The guarantees are not recorded as liabilities on the Company’s balance sheet unless it is required to perform under the guarantee. Credit risk represents the accounting loss that would be recognized at the reporting date if counter–parties failed to perform completely as contracted. The credit risk amounts are equal to the contractual amounts, assuming that the amounts are fully advanced and that no amounts could be recovered from other parties.

Legal Proceedings

The Company is a party to litigation arising in the ordinary course of business. With exception to the discussion which follows, the Company does not believe the results of such litigation, even if the outcome is unfavorable, would have a material adverse effect on the Company’s financial position.

U.S. ex rel Scherfel v. Genesis Health Ventures et al.

In this action, brought in United States District Court for the District of New Jersey on March 16, 2000, the plaintiff alleges that a pharmacy purchased by NeighborCare failed to process Medicaid credits for returned medications. The allegations are vaguely alleged for other jurisdictions. While the action was under seal in United

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States District Court, the Company fully cooperated with the Department of Justice’s evaluation of the allegations. On or about March 2001, the Department of Justice declined to intervene in the suit and prosecute the allegations. The U.S. District court action is no longer under seal but remains administratively stayed pending resolution of the bankruptcy issues.

The plaintiff filed a proof of claim in the Company’s bankruptcy proceedings initially for approximately $650 million and subsequently submitted an amended claim in the amount of approximately $325 million. The Company believes the allegations have no merit and objected to the proof of claim. In connection with an estimation of the proof of claim in the bankruptcy proceeding, the Company filed a motion for summary judgment urging that the claim be estimated at zero. On or about January 24, 2002, the U.S. Bankruptcy Court for the district granted Debtors’ motion and estimated the claim at zero.

On or about February 11, 2002, the plaintiff appealed the bankruptcy court’s granting of summary judgment to the U.S. District Court in Delaware and sought an injunction preventing the distribution of assets according to the plan of reorganization. The injunction was subsequently denied by the U.S. District Court for several reasons, including that the plaintiff was unlikely to succeed on the merits. When the injunction was denied by the U.S. District Court, the assets previously reserved for the plaintiff’s claim were distributed in accordance with the plan of reorganization. On March 27, 2003, the U.S. District Court denied the plaintiff’s appeal and upheld the summary judgment decision rendered by the United States Bankruptcy Court. On or about April 25, 2003, the plaintiff filed an appeal to the Third Circuit Court of Appeals. The appeal is currently pending with the Third Circuit and it is most likely to be heard by the Court of Appeals in 2004.

The Company believes that the settlement of this matter will not be significant to the results of operations or financial condition of the Company.

Pending DEA Investigation

In August 2001, and March 2002, the Company’s pharmacy located in Colorado reported missing inventory and potential diversion to the Drug Enforcement Administration (“DEA”), the local police and the Colorado Board of Pharmacy. As a result of the pharmacy reporting these incidents, the DEA commenced an audit of the pharmacy’s operations. Under the Controlled Substance Act the government may seek the potential value of the inventory diverted as well as other damages. The Civil Division of the U.S. Attorney’s Office for the District of Colorado has advised the Company that there is potential civil liability relating to the violations of the Controlled Substance Act. The Company has cooperated with all requests for information, including making its personnel and documents available to the government. The government and the Company are currently in discussions regarding the allegations.

The Company believes that the settlement of this matter will not be significant to the results of operations or financial condition of the Company.

Spin-off Contingencies

The separation and distribution agreement generally provides for a full and complete release and discharge as of the date of the consummation of the spin-off of all liabilities existing or arising from all acts and events occurring or failing to occur or alleged to have occurred or to have failed to occur and all conditions existing or alleged to have existed on or before the date of the consummation of the spin-off between or among NeighborCare and its affiliates, on the one hand, and GHC and its affiliates, on the other hand, including any contractual agreements or arrangements existing or alleged to exist between or among those parties on or before that date.

GHC has agreed to indemnify, defend and hold harmless NeighborCare and its affiliates, and each of its directors, officers and employees, from and against all liabilities relating to, arising out of or resulting from:

• the failure of GHC, or its affiliates, or any other person to pay, perform or otherwise promptly discharge any of the liabilities of the eldercare businesses;

• any liabilities of the eldercare businesses and the operation of the eldercare businesses at any time before or after the spin-off;

• any breach by GHC or its affiliates of the separation and distribution agreement or any of the ancillary agreements entered into in connection with the separation and distribution agreement;

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• one-half of any liabilities arising out of our 2001 joint plan of reorganization (other than certain liabilities specifically allocated in the separation and distribution agreement); and

• specified disclosure liabilities.

NeighborCare has agreed to indemnify, defend and hold harmless GHC and its affiliates, and each of its directors, officers and employees, from and against all liabilities relating to, arising out of or resulting from:

• the failure of NeighborCare, or its affiliates, or any other person to pay, perform or otherwise promptly discharge any of our liabilities, other than liabilities of the eldercare businesses;

• any of NeighborCare liabilities, other than liabilities of the eldercare businesses, and the operation of its business other than the eldercare businesses at any time before or after the spin-off;

• any breach by NeighborCare or its affiliates of the separation and distribution agreement or any of the ancillary agreements entered into in connection with the separation and distribution agreement;

• one-half of any liabilities arising out of our 2001 joint plan of reorganization (other than certain liabilities specifically allocated in the separation and distribution agreement); and

• specified disclosure liabilities.

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(19) Fair Value of Financial Instruments

The carrying amount and fair value of financial instruments at September 30, 2003 and 2002 consist of the following (in thousands):

	2003						2002
	Carrying Amount			Fair Value			Carrying Amount			Fair Value
Cash and equivalents	$	132,726		$	132,726		$	148,030		$	148,030
Restricted investments in marketable securities		90,591			90,591			86,147			86,147
Accounts receivable, net		366,886			366,886			369,969			369,969
Accounts payable		58,435			58,435			80,248			80,248
Debt, excluding capital leases		601,746			614,473			679,402			696,351
Pay fixed / receive variable interest rate swap		(7,219	)		(7,219	)		(4,454	)		(4,454	)
Interest rate cap		2			2			398			398

The carrying value of cash and equivalents, net accounts receivable and accounts payable is equal to its fair value due to their short maturity. The Company’s restricted investments in marketable securities are carried at fair value.

The fair value of debt, excluding capital leases, is computed using discounted cash flow analysis, based on the Company’s estimated incremental borrowing rate at the end of each fiscal period presented.

The fair values of interest rate swap and cap agreements were determined using confirmations from third–party financial institutions.

(20) Assets Held for Sale and Discontinued Operations

In the normal course of business, the Company continually evaluates the performance of its operating units, with an emphasis on selling or closing under-performing or non-strategic assets. On September 30, 2001, the Company adopted the provisions of Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of” (SFAS 144). Under SFAS 144, discontinued businesses, including assets held for sale, are removed from the results of continuing operations. The results of operations in the current and prior year periods, along with any costs to exit such businesses in the year of discontinuation, are classified as discontinued operations in the consolidated statements of operations. Businesses sold or closed prior to the Company’s adoption of SFAS 144 continue to be reported in the results of continuing operations.

Since the Company’s adoption of SFAS 144, it has classified several businesses as held for sale or closed. An increasing trend in malpractice litigation claims, rising costs of eldercare malpractice litigation, losses associated with these malpractice lawsuits and a constriction of insurers have caused many insurance carriers to raise the cost of insurance premiums or refuse to write insurance policies for nursing homes. These problems are particularly acute in the state of Florida where, because of higher claim amounts, general liability and professional liability costs have become increasingly expensive. This increase in insurance costs prompted the Company to sell its otherwise profitable operations in the state of Florida during fiscal 2003. Since the Company’s inception, it has continued to develop its eldercare network in concentrated geographic markets in the eastern United States. The geographic location of the Company’s eldercare centers in the states of Illinois and Wisconsin relative to its strategic geographic markets, combined with the operating performance of those centers, prompted the Company to identify those assets as held for sale during fiscal 2002. In addition to these assets, the Company identified 13 eldercare centers in other states, one rehabilitation services clinic, two physician services practices and its ambulance business as held for sale or closed due to under-performance.

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Consolidated interest expense has been allocated to discontinued operations for all periods presented based on allocated debt expected to be repaid in connection with the sale of the assets. The amount of after-tax interest expense allocated to discontinued operations for the fiscal 2003, fiscal 2002 and fiscal 2001 was $2.3 million, $3.8 million, and $8.6 million, respectively.

The Company has separately classified $18.3 million and $46.1 million of carrying value associated with assets held for sale in the consolidated balance sheets at September 30, 2003 and 2002, respectively.

The following table sets forth net revenues and the components of loss from discontinued operations for the years ended September 30, 2003, 2002, and 2001 (in thousands):

	Successor Company						Predecessor Company
	Years Ended September 30,						Year Ended September 30, 2001
	2003			2002
Net revenues	$	144,279		$	261,879		$	259,014
Net operating loss of discontinued businesses	$	(20,779	)	$	(2,296	)	$	(24,388	)
Loss on discontinuation of businesses		(14,168	)		(11,004	)		—
Income tax benefit		13,822			4,959			—
Loss from discontinued operations, net of taxes	$	(21,125	)	$	(8,341	)	$	(24,388	)

The loss on discontinuation of businesses includes the write-down of assets to estimated net realizable value.The operations of GHC spun-off on December 1, 2003 will be reported as discontinued operations beginning in fiscal 2004.

(21) Segment Information

The Company’s principal operating segments are identified by the types of products and services from which revenues are derived and are consistent with the reporting structure of the Company’s internal organization. The Company has two reportable segments: (1) pharmacy services and (2) inpatient services.

Included in the Company’s pharmacy service revenues are institutional pharmacy revenues, which include the provision of infusion therapy, medical supplies and equipment provided to eldercare centers it operates, as well as to independent healthcare providers by contract. The Company provides these services through 62 institutional pharmacies and 16 medical supply and home medical equipment distribution centers located in its various market areas. In addition, the Company operates 32 community–based pharmacies which are located in or near medical centers, hospitals and physician office complexes. 86% of the sales attributable to all pharmacy operations are generated through external contracts with independent healthcare providers with the balance attributable to centers owned or leased by the Company.

The Company includes in inpatient services revenues all room and board charges and ancillary service revenue for its eldercare customers at the 160 eldercare centers which the Company owns or leases.

The accounting policies of the segments are the same as those of the consolidated organization. All intersegment sales prices are market based.

The Company’s capital costs in the following segment information (depreciation and amortization, lease expense, and interest), as well as preferred dividends for the years ended September 30, 2003 and 2002, reflect the provisions of the Plan and the impact of fresh–start reporting. These costs for periods prior to the Company’s emergence from bankruptcy generally were recorded based on historical costs or contractual agreements and do not reflect the provisions of the Plan. Accordingly, capital costs of the Successor Company for the years ended September 30, 2003 and 2002 are not comparable to those of the Predecessor Company in 2001.

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Summarized financial information concerning the Company’s reportable segments is shown in the following table. The “All other services” category of revenues and operating income represents operating information of business units below the prescribed quantitative thresholds. These business units derive revenues from the following services: rehabilitation therapy, management services, consulting services, homecare services, physician services, diagnostic services, hospitality services, group purchasing fees, respiratory health services, staffing services and other healthcare related services. The “Corporate” category consists of the Company’s general and administrative function, for which there is generally no revenue generated. The “Other adjustments” category consists of charges that have not been allocated to our reportable segments or the “All other services” or “Corporate” categories. This approach to segment reporting is consistent with the Company’s internal financial reporting and the information used by the chief operating decision maker regarding the performance of our reportable and non–reportable segments.

	Successor Company						Predecessor Company
(in thousands)	2003			2002 (1)			2001 (1)
Revenues:
Inpatient services – external	$	1,229,239		$	1,201,071		$	1,136,273
Pharmacy services:
External		1,235,398			1,121,917			1,035,188
Intersegment		78,019			100,502			98,122
All other services:
External		184,342			162,800			155,672
Intersegment		146,159			172,160			194,323
Elimination of intersegment revenues		(224,178	)		(272,662	)		(292,445	)
Total net revenues		2,648,979			2,485,788			2,327,133
EBITDA (2):
Inpatient services		120,763			140,884			115,974
Pharmacy services		126,663			112,328			100,571
All other services		38,456			46,735			44,705
Corporate		(75,135	)		(80,432	)		(61,837	)
Other adjustments (3)		(16,949	)		(2,000	)		339,878
Net loss on sale of eldercare centers		—			—			(540	)
Total EBITDA		193,798			217,515			538,751
Capital and other:
Consolidated:
Depreciation and amortization		(66,384	)		(59,449	)		(99,898	)
Interest expense		(40,917	)		(41,183	)		(114,404	)
Income tax expense		(28,674	)		(35,103	)		—
Equity in net income (loss) of unconsolidated affiliates		1,184			2,165			(10,213	)
Minority interests		(5,194	)		(2,838	)		2,249
Preferred stock dividends		(2,701	)		(2,599	)		(45,623	)
Income from continuing operations		51,112			78,508			270,862
Loss from discontinued operations, net of taxes		(21,125	)		(8,341	)		(24,388	)
Net income attributed to common shareholders	$	29,987		$	70,167		$	246,474

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	Successor Company				Predecessor Company
(in thousands)	September 30, 2003		September 30, 2002 (4)		September 30, 2001
Assets:
Inpatient services (5)	$	846,361	$	945,047	$	973,476
Pharmacy services		729,586		701,036		686,361
All other		362,782		364,394		179,383
	$	1,938,729	$	2,010,477	$	1,839,220

(1)	Segment revenue and EBITDA data previously reported was adjusted to remove discontinued businesses from the results of continuing operations for the September 30, 2002 and 2001 periods.
(2)	EBITDA is defined as earnings before interest, taxes, depreciation and amortization of the Company’s continuing operations. EBITDA is calculated by adding back interest, income tax expense, depreciation and amortization, equity in net income (loss) of unconsolidated affiliates, minority interests, preferred stock dividends, and loss from discontinued operations, net of taxes to net income attributed to common shareholders. EBITDA of the operating segments include the direct overhead costs attributable to those segments.
(3)	Other adjustments includes strategic planning, severance and other related costs, net gain from breakup fee and other settlements and debt restructuring and reorganization costs and net (gain) on debt discharge from the Company’s consolidated statements of operations.
(4)	Certain prior year amounts have been reclassified to conform with the current year presentation.
(5)	Assets of the inpatient services segment at September 30, 2003 and September 30, 2002 include $18.3 million and $46.1 million, respectively, of assets held for sale. See note 20 — “Assets Held for Sale and Discontinued Operations.”

(22) Comprehensive Income

The following table sets forth the computation of comprehensive income for the years ended September 30, 2003, 2002 and 2001 (in thousands):

	Successor Company						Predecessor Company
	2003			2002			2001
Net income attributed to common shareholders	$	29,987		$	70,167		$	246,474
Unrealized gain on marketable securities (net of income taxes of $141, $349 and $1,067, respectively)		262			647			1,981
Net change in fair value of interest rate swap and cap agreements (net of income tax benefit of $1,233 and $1,582, respectively)		(1,928	)		(2,474	)		—
Total comprehensive income	$	28,321		$	68,340		$	248,455

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(23) Derivative Financial Instruments

The Company follows the provisions of SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”, and SFAS No. 138, “Accounting for Certain Derivative Instruments and Certain Hedging Activities – an Amendment of FASB Statement No. 133.” The Company utilizes derivative financial instruments, such as interest rate swaps and caps, to manage changes in market conditions related to debt obligations. As of September 30, 2003 and 2002, the Company has a $75 million swap maturing on September 13, 2005, to receive fixed (3.1%) / pay variable (one month LIBOR) and a $125 million swap maturing on September 13, 2007, to receive fixed (3.77%) / pay variable (one month LIBOR). In addition, the Company has a $75 million cap maturing on September 13, 2004. The interest rate cap pays interest to the Company when LIBOR exceeds 3%. The amount paid to the Company is equal to the notional principal balance of $75 million multiplied by (LIBOR minus 3%) in those periods in which LIBOR exceeds 3%. We purchased the interest rate cap in September 2002 for $0.7 million which is being amortized to interest expense over the two year term of the agreement.

Based upon confirmations from third party financial institutions, the fair value of the interest rate swap agreements and the cap are ($7.2) million and $2 thousand dollars, respectively, at September 30, 2003.

The Company recognizes all derivatives on the balance sheet at fair value. Changes in the fair value of a derivative that is designated as and meets all the required criteria for a cash flow hedge are recorded in accumulated other comprehensive income (loss) and reclassified to earnings as the underlying hedged item affects earnings. Amounts reclassified into earnings related to interest rate swap and cap agreements are included in interest expense. During fiscal 2003 and 2002, $1.9 million and $2.5 million, respectively, of after tax net unrealized losses related to interest rate swap and caps were recorded in other comprehensive income. As of September 30, 2003 and 2002, $7.2 million and $4.0 million, respectively, have been classified in other long term liabilities in the consolidated balance sheet related to cash flow hedges. The counterparties to the above derivative agreements are major international banks.

In connection with the spin-off and the repayment of senior indebtedness, the Company terminated the two variable to fixed rate swaps described above with an aggregate notional amount of $200 million. As a consequence the Company paid the contracting parties approximately $3.5 million which will be accounted for as a spin-off related charge in the first fiscal quarter of 2004.

(24) Subsequent Event

Preferred Share Purchase Rights

On November 13, 2003, the Board of Directors of the Company declared a dividend of one preferred share purchase right (a “Right”) for each outstanding share of common stock, par value $0.02 per share, payable on December 1, 2003 to the stockholders of record on that date.  The Board of Directors declared these rights to protect stockholders from coercive or otherwise unfair takeover tactics. The Rights should not interfere with any merger or other business combination approved by the Board of Directors.

Each Right will allow its holder to purchase from the Company one one-hundredth of a share of Series B Junior Participating Preferred Stock (a “Preferred Share”) for $100.00, once the Rights become exercisable. This portion of a Preferred Share will give the stockholder approximately the same dividend and liquidation rights as would one share of common stock. Prior to exercise, the Right does not give its holder any dividend, voting, or liquidation rights.

The Rights will not be exercisable until ten days after the public announcement of the acquisition by any person or group of beneficial ownership of 20% or more of NeighborCare’s outstanding common stock (or ten days after a person or group begins a tender or exchange offer that, if consummated, would bestow upon them beneficial ownership of 20% or more of NeighborCare’s outstanding common stock).  The Rights expire December 1, 2013.

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(25) Quarterly Financial Data (Unaudited)

The Company’s unaudited quarterly financial information is as follows (in thousands, except per share data):

	Total Net Revenues		Income (Loss) from Continuing Operations		Net Income (Loss) Attributed to Common Shareholders		Diluted Income (Loss) Per Common Share from Continuing Operations		Diluted Net Income (Loss) Per Common Share
Quarter ended:
December 31, 2002	$	638,582	$	17,010	$	11,934	$	0.40	$	0.29
March 31, 2003		645,076		9,619		4,670		0.25		0.11
June 30, 2003		666,320		12,518		6,471		0.31		0.16
September 30, 2003		699,001		11,965		6,912		0.30		0.17
Quarter ended:
December 31, 2001	$	606,869	$	16,711	$	15,599	$	0.40	$	0.38
March 31, 2002		617,821		27,559		24,943		0.65		0.59
June 30, 2002		625,540		18,518		17,453		0.44		0.42
September 30, 2002		635,558		15,720		12,172		0.38		0.29

Earnings per share was calculated for each three–month and the twelve–month period on a stand–alone basis. As a result, the sum of the diluted earnings per share for the four quarters may not equal the earnings per share for the year.

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ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None

ITEM 9A: CONTROLS AND PROCEDURES

As required by Exchange Act Rule 13a-15(b), NeighborCare’s management, including its chief executive officer and chief financial officer, conducted an evaluation as of the end of the period covered by this report of the effectiveness of NeighborCare’s disclosure controls and procedures as defined in Exchange Act Rule 13a-15(e).  Based on that evaluation, NeighborCare’s chief executive officer and chief financial officer concluded that NeighborCare’s disclosure controls and procedures were effective in reaching a reasonable level of assurance that management is timely alerted to material information relating to NeighborCare during the period when NeighborCare’s reports are being prepared. 

As required by Exchange Act Rule 13a-15(d), NeighborCare’s management, including its chief executive officer and chief financial officer, also conducted an evaluation of NeighborCare’s internal control over financial reporting to determine whether any changes occurred during the period covered by this report that have materially affected, or are reasonable likely to materially affect, NeighborCare’s internal control over financial reporting.  Based on that evaluation, there has been no such change during the period presented by this report.

There have not been any significant changes to our internal controls over financial reporting or in other factors that could significantly affect these controls, including any corrective actions with regard to significant deficiencies and material weaknesses.

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PART III

ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

BOARD OF DIRECTORS OF THE REGISTRANT

The following table sets forth information with respect to our directors following the spin-off:

Name	Age	Committees of the board of directors
John J. Arlotta	54	Chairman, Executive Committee
James H. Bloem	53	Chairman, Audit and Compliance Committee; Compensation Committee
James E. Dalton, Jr.	61	Nominating and Governance Committee; Compensation Committee
James D. Dondero	41	Chairman, Compensation Committee; Executive Committee
Robert H. Fish	53	Executive Committee
Dr. Philip P. Gerbino	56	Audit and Compliance Committee; Chairman, Nominating and Governance Committee
Arthur J. Reimers	48	Audit and Compliance Committee; Executive Committee
Phyllis R. Yale	46	Nominating and Governance Committee

John J. Arlotta has served as our vice chairman with primary responsibility for the NeighborCare business since July 2003.  Following the spin-off, Mr. Arlotta has become our chairman, president and chief executive officer.  Prior to joining us, Mr. Arlotta served as a consultant to Caremark Pharmaceutical Services.  Mr. Arlotta was president and chief operating officer of Caremark Pharmaceutical Services from May 1998 to February 2002 and chief operating officer of Caremark Pharmaceutical Services from September 1997 to May 1998.

James H. Bloem has served as our director since October 2, 2001. Mr. Bloem is senior vice president and chief financial officer of Humana, Inc. and is responsible for developing business growth strategies and supervising all accounting, actuarial, financial, tax, risk management, treasury, and investor relations activities. Previously, Mr. Bloem has served as executive vice president, then as president of the personal care division of Perrigo Company, the nation’s largest manufacturer of over–the–counter pharmaceuticals, personal care, and nutritional products for the store brand market. Mr. Bloem’s experience also includes independent financial and business consulting and a law partnership with a specialization in taxation and corporate. He is also a certified public accountant and serves as director of several corporate and educational boards. Mr. Bloem is a member of the board of directors of the following companies: Bissell, Inc., Nutramax Products, Inc., Van Eerden Company, and Imperial Graphics, Inc.

James E. Dalton has served as our director since October 2, 2001. Mr. Dalton’s extensive management experience includes senior management positions with several national healthcare organizations including Quorum Health Group, Inc., HealthTrust Inc. and Humana and with hospitals in Virginia and West Virginia. He serves on the board of directors of a number of health care organizations and serves on the board of trustees of Universal Health Realty Income Trust, and the American Hospital Association. He is a Fellow of the American College of Healthcare Executives and past chairman of the Federation of American Hospitals. Mr. Dalton is a member of the board of directors of the following companies: Triad Hospitals, Inc., AmSouth Bancorporation, U.S. Oncology, Inc., Select Medical, Inc., and Universal Health Realty Income Trust.

James D. Dondero has served as our director since October 2, 2001. Mr. Dondero is president of Highland Capital Management, LP where he has facilitated growth through the creation of 19 separate portfolios holding in excess of $8 billion. Formerly, Mr. Dondero served as chief investment officer of Protective Life Insurance Company’s GIC subsidiary from 1989 to 1993. His portfolio management experience includes mortgage–backed securities, investment grade corporates, leveraged bank loans, emerging markets, derivatives, preferred stocks and

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common stocks. Mr. Dondero is a certified public accountant, chartered financial analyst, a certified management accountant and a member of the NYSSA. Mr Donero is a member of the board of directors of Motient Corporation.

Robert H. Fish has served as our director since October 2001. Mr. Fish also served as chief executive officer from June 2002 and chairman from November 2002 until his resignation from these positions on December 1, 2003. He is a managing partner of Sonoma–Seacrest, LLC, a California–based healthcare practice specializing in strategic planning, performance improvement, and merger and acquisition issues. Prior to joining Sonoma, Mr. Fish served as president and chief executive officer of St. Joseph Health System and president and chief executive officer of ValleyCare Health System.

Dr. Philip P. Gerbino has served as our director since March 16, 2000. Dr. Gerbino is president of the University of the Sciences in Philadelphia, which includes the Philadelphia College of Pharmacy, and has been part of the faculty and administration of that institution for over 25 years. In addition, he is a national leader in the pharmacy field and has served as president of the American Pharmaceutical Association, president of the APhA Academy of Pharmacy Practice, member of the U.S. Pharmacopeial Advisory Panel on Geriatrics and as chair of the Commission for Certification in Geriatric Pharmacy. Dr. Gerbino is a member of the board of directors of Arrow Prescription Centers and Health ATOZ.

Arthur J. Reimers, 48, joined Goldman, Sachs & Co. as an investment banker in 1981 and in 1990 became a partner of the firm.  Upon Goldman, Sachs & Co.’s initial public offering in 1998, Mr. Reimers became a managing director and served in that capacity until his retirement in 2001.  From 1991 through 1996, Mr. Reimers served as co-head of Goldman, Sachs & Co.’s Financial Advisory Group in its London office.  Returning to New York in 1996, Mr. Reimers founded and served as co-head of Goldman, Sachs & Co.’s Healthcare Investment Banking Division.  Mr. Reimers serves on the boards of Rotech Health, Inc., and Surgis, Inc. 

Phyllis R. Yale, 46, is a managing director of Bain and Company, a global business consulting firm with 2,000 consultants in 29 offices in 19 countries.  Ms. Yale joined Bain and Company in 1982, was elected to partnership in 1987 and currently manages its Boston office.  Ms. Yale has worked extensively in the healthcare and financial services industries.  

See the information set forth in Part I, Item 4A, “Executive Officers of the Registrant,” of this Form 10-K.

Election of Directors

The Board of Directors is responsible for the overall affairs of NeighborCare. In connection with our emergence from bankruptcy on October 2, 2001, we amended and restated our Articles of Incorporation and established a classified Board of Directors pursuant to which the directors of NeighborCare are to be divided into three classes consisting of Class I, Class II and Class III, respectively, commencing with our first annual meeting after October 2, 2002, which occurred during the annual shareholders’ meeting on April 9, 2003. At subsequent annual meetings, only directors for the class whose term is expiring will be elected at that annual meeting.

The number of directors in each class is determined by the board of directors and consists of as nearly equal a number of directors as possible. Following the spin-off, there are eight directors, and accordingly, each of Class I and II will include three directors and Class III will include two directors, which may be adjusted from time to time, should the board of directors increase or decrease the number of directors representing a class. The term of the Class I Directors initially expires after the 2004 Annual Meeting of Shareholders; the term of the Class II Directors initially expires after the 2005 Annual Meeting of Shareholders, and the term of the Class III Directors initially expires after the 2006 Annual Meeting of Shareholders. At each annual meeting of shareholders, directors of the respective class whose term expired will be up for re–election, and the directors chosen to succeed those whose terms have expired will be elected to hold office for a three year term.

The three Class I Directors, whose terms expire at the 2004 Annual Meeting of Shareholders, are John J. Arlotta, Robert H. Fish and Arthur J. Reimers. The three Class II Directors, whose terms expire at the 2005 Annual Meeting of Shareholders, are James D. Dondero, James H. Bloem and Phyllis R. Yale. The two Class III Directors, whose terms would expire at the 2006 Annual Meeting of Shareholders, are James E. Dalton, Jr. and Dr. Philip P. Gerbino.

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Each director serves until his or her successor is elected and qualified or until his or her death, retirement, resignation, or removal. Should a vacancy occur or be created, whether arising through death, resignation, retirement or removal of a director, the vacancy will be filled by a majority vote of the remaining directors. A director so elected to fill a vacancy will serve for the remainder of the present term of office of the class to which he or she was elected.

Reorganization

On October 2, 2001, the effective date, we and The Multicare Companies, Inc., our 43.6% owned affiliate, consummated a joint plan of reorganization under Chapter 11 of the Bankruptcy Code pursuant to a September 20, 2001 order entered by the U.S. Bankruptcy Court for the District of Delaware approving our joint plan of reorganization. We have been operating out of bankruptcy since October 2, 2001.

See Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Certain Transactions and Events,” of this Form 10-K for a further description of the nature and results of our reorganization and a description of other recent matters impacting our business and results of operations.

See “Risk Factors.”

Audit Committee and Financial Experts

We have a separately designated standing audit committee established in accordance with Section 3(a)(58)(A) of the Act comprised of Messrs. Bloem, Reimers and Gerbino, each of whom is “independent” as defined under Item 7(d)(3)(iv) of Schedule 14A of the Act.  Our Board of Directors has determined that Mr. Bloem is an “audit committee financial expert” as defined under Item 401 of Regulation S-K.

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Section 16 (A) Beneficial Ownership Reporting Compliance

Section 16 (a) of the Exchange Act requires our directors and executive officers and persons who own more than 10% of a registered class of our equity securities, to file with the SEC initial reports of ownership and reports of changes in ownership of our common stock and other equity securities. Officers, directors and greater than 10% shareholders are required by the SEC regulation to furnish us with copies of all Section 16 (a) forms they file.

To our knowledge, based solely on review of the copies of such reports submitted to us with respect to the fiscal year ended September 30, 2003, all Section 16 (a) filing requirements applicable to our executive officers, directors and greater than 10% beneficial owners were complied with, except that each of Robert H. Fish, James H. Bloem, James E. Dalton, Jr., James D. Dondero and Dr. Philip P. Gerbino filed a late report on Form 4.

Code of Ethics

We have adopted a code of ethics that applies to our senior management, including our chief executive officer, and chief financial officer.  Copies of our code of ethics are available without charge upon written request directed to Investor Relations, NeighborCare, Inc., 7 East Lee Street, Baltimore, Maryland 21202, (410) 752-2600.

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ITEM 11: EXECUTIVE COMPENSATION

Summary Compensation Table

	Annual Compensation						Long-term Compensation
Name and Position	Fiscal Year	Salary ($)(1)	Bonus ($)(2)		Other Annual Compensation (3)		Restricted Stock Awards ($)(4)		Securities Underlying Options/SAR’s		All Other Compensation ($)(5)
Robert H. Fish, Chief Executive Officer	2003	850,000		1,221,410		83,406		—		177,500		—
	2002	274,615		70,833		—		—		25,000		—
John J. Arlotta, Vice Chairman
	2003	163,462		850,000		—		—		—		29,005
George V. Hager, Jr., Chief Financial Officer	2003	400,001		155,000		—		—		—		1,023,315
	2002	398,078		200,000		—		1,524,750		75,000		601,698
	2001	350,000		309,875		—		—		—		1,700
Robert A. Smith, President, NeighborCare	2003	360,768		75,250		—		—		—		2,000
	2002	310,003		60,000		—		304,950		50,000		1,700
	2001	232,281		117,000		75,103		—		—		1,700
Richard Pell, Jr., Senior Vice President, Administration and Chief Compliance Officer	2003	271,827		715,875		—		—		—		2,000
	2002	260,382		55,000		—		304,950		50,000		2,000
	2001	224,039		71,000		—		—		—		1,700
Richard Howard, Former Vice Chairman	2003	59,615		—		—		—		—		4,035,048
	2002	500,000		250,000		—		1,524,750		75,000		320,008
	2001	500,000		432,250		—		—		—		—

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(1)	Includes compensation deferred under the 401(k) Retirement Plan, Non Qualified Deferred Compensation Plan and other arrangements with us. Other payments made by us under the 401(k) Retirement Plan, Non Qualified Deferred Compensation Plan and other arrangements with us are not included.
(2)	Mr. Fish received a performance bonus of $500,000 and a bonus of $721,410 upon his appointment to chief executive officer. Mr. Arlotta received a performance bonus of $550,000 and a sign-on bonus of $300,000. Mr. Pell received an employment contract payout of $661,400 and a performance bonus of $54,475. All other amounts in 2003 reflect performance bonuses.
(3)	Mr. Fish received compensation of approximately $62,206 for housing expenses and approximately $15,200 for the use of a Company owned automobile. All other amounts reflect the receipt of relocation benefits.
(4)	Restricted stock grants were authorized by the board of directors on October 2, 2001 and vest quarterly over a five year period beginning January 1, 2002. Our common stock market value as of October 2, 2001 was $20.33 per share. As of September 30, 2003, the restricted stock grants issued to Mr. Smith and Mr. Pell each had an aggregate market value of $363,150. As of September 30, 2003, the restricted stock grants issued to Mr. Hager and Mr. Howard each had an aggregate market value of $1,815,750. The restricted stock grants of each of the previously mentioned individuals are fully vested at September 30, 2003. The market value of our common stock at September 30, 2003 was $24.21 per share.
(5)	Includes severance pay, company-sponsored life insurance coverage, note forgiveness as well as our matching contribution under the 401(k) Retirement Plan and Non Qualified Deferred Compensation Plan. Mr. Arlotta received $29,005 in relation to his company-sponsored life insurance plan. Mr. Hager received $1,021,315 of note forgiveness and $2,000 of 401(k) matching compensation. Mr. Smith and Mr. Pell each received $2,000 of 401(k) matching compensation. Mr. Howard received note forgiveness in the amount of $1,238,298 and severance pay in the amount of $2,796,750.

Options Granted

The following table sets forth certain information concerning stock options granted under the 2001 Stock Option Plan during fiscal 2003 to our chief executive officer and each of our most highly compensated executive officers:

Option/SAR Grants in Last Fiscal Year

				Individual Grants							Potential Realized Value at Assumed Annual Rates of Stock Price Appreciation for Option Terms
Name	Number of Securities Underlying Options/SARs Granted			Percent of Total Options/ SARs Granted to Employees in Fiscal Year			Exercise Price ($/share)		Expiration Date		5%		10%
Robert H. Fish		2,500			0.4	%	$	16.80		10/2/12	$	26,414	$	66,937
		275,000			43.14	%	$	17.00		12/2/06	$	1,358,833	$	4,932,871
		225,000	(1)		35.29	%	$	20.33		12/2/06	$	362,522	$	3,286,735

(1) Includes 100,000 options that were forfieted in fiscal 2003 as a result of failure to satisfy vesting conditions.

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Aggregate Option/SAR Exercises in Last Fiscal Year and Fiscal Year–End Option/SAR Values

Name	Shares Acquired on Exercise (#)	Value Realized ($) (1)	Number of Unexercised Securities Underlying Options/SARs Fiscal Year-End (#) Exercisable/Unexercisable	Value of Unexercised In-the- Money Options/SARs at Fiscal Year-End ($) Exercisable/ Unexercisable
Robert H. Fish	—	—	177,500/352,500	1,197,025/1,774,250

(1) Stock price at close of business on September 30, 2003 was $24.21.

Directors Compensation

Each of our directors who is not our employee receives an annual fee of $25,000 for serving as a director and cash compensation of $1,500 for each in-person meeting of the board of directors attended and $1,000 for each telephonic meeting of the board of directors attended. Each such director also receives $1,500 for each in-person meeting of a committee of our board of directors attended and $1,000 for each telephonic meeting of a committee of our board of directors attended. The chairman of the audit and compliance committee receives an additional annual fee of $7,500. Upon shareholder approval of a restricted stock plan, each director will also receive an annual award of restricted stock having a fair market value at the time of grant of $95,000.

In October 2002, each of Messrs. Fish, Bloem, Dalton, Dondero, Gerbino and LaNasa received options to purchase 2,500 shares of our common stock at an exercise price per share of $16.80 in exchange for services rendered as a director.

Employment Agreements

Effective May 28, 2002, we entered into an employment agreement with Robert H. Fish, our interim chief executive officer, which originally expired on November 30, 2002, but which was extended beyond November 30, 2002, on a month to month basis. The base salary of Mr. Fish was $850,000 on an annual basis and Mr. Fish received a $70,833 sign–on bonus. This agreement was terminated on February 28, 2003.

Effective February 28, 2003, we entered into a two (2) year employment agreement with Robert H. Fish as our Chief Executive Officer at an annual base salary of $850,000. In addition, the agreement provides for an annual bonus of up to 100% of the base salary, and stock options of up to 600,000 shares, upon the occurrence of certain performance based benchmarks. The base salary is reviewable by the board of directors at least annually. The agreement may be terminated by NeighborCare at anytime for Cause (as defined in the employment agreement). Mr. Fish may terminate his employment upon notice to NeighborCare of the occurrence of certain events, including a change in control of NeighborCare. In the event that NeighborCare terminates the agreement without Cause, or if Mr. Fish terminates his employment agreement as described in the preceding sentence, Mr. Fish is entitled to severance compensation consisting of accrued and unpaid bonuses (including a pro rata bonus for the portion of the year prior to the date of termination), a continuation of health and insurance benefits for himself, his spouse and eligible dependents for a period of one (1) year following the date of termination. Moreover, all restricted stock awards made to Mr. Fish shall fully vest, and all vested stock options shall remain exercisable through the original terms with all rights. The agreement also contains provisions which restrict Mr. Fish from competing with NeighborCare during the term of the agreement and for a one (1) year period thereafter.

On December 9, 2003, we entered into an option cancellation agreement with Mr. Fish relating to options which vested upon the completion of the spin-off and Mr. Fish’s termination of employment in connection with the spin-off.  After the board of director’s adjustment to the aggregate number and exercise price of all outstanding options to purchase our common stock in connection with the spin-off and as of the date of the agreement, Mr. Fish held options to purchase 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 expire on February 28, 2006.  Under the option cancellation agreement, Mr. Fish surrendered to us options to purchase 282,673 shares of common stock at the exercise price of $10.86 for the aggregate cash payment of $2,580,108 less any applicable withholding taxes.

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Effective July 7, 2003, we entered into an employment agreement with John J. Arlotta, our chairman, president and chief executive officer, as amended on December 9, 2003. The agreement currently expires on July 7, 2005, with automatic one-year renewals beginning on July 7, 2004 and each successive anniversary thereafter.  The automatic extension of the agreement may be terminated with notice by either the affirmative vote of two-thirds of the non-management members of the board of directors or by Mr. Arlotta.  Mr. Arlotta will receive an annual base salary of $850,000, subject to annual reviews by the compensation committee of the board of directors commencing February 4, 2004.  The agreement provides for an incentive bonus of not less than $550,000, with a target bonus of 80% of his base salary, for fiscal year 2003.  Annually thereafter, Mr. Arlotta will receive an incentive bonus equal to at least 100% of his base salary but only upon the compensation committee’s certification that the applicable performance goals have been achieved.  Mr. Arlotta received a signing bonus of $300,000 in fiscal year 2003 pursuant to the agreement. 

The agreement provides for options to purchase 1,000,000 shares of our common stock to be granted to Mr. Arlotta 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 vests in quarterly installments of 6.25% thereafter.  The agreement also provides for a restricted stock award on January 15, 2004 with an aggregate value of $4,000,000, rounded to the nearest whole share and based on the average closing price of our common stock for the thirty trading days immediately preceding the award, subject to shareholder approval of the restricted stock plan.  On the date of the restricted stock award, 25% of the shares vest immediately, with vesting in equal quarterly installments thereafter such that the shares vest in full by July 7, 2006.  In addition, Mr. Arlotta will be entitled to participate in each employee benefit plan or perquisite applicable generally to our executive officers.

We may terminate the employment agreement with or without cause, as defined in the agreement, by the affirmative vote of two-thirds of the non-management members of the board of directors.  Mr. Arlotta may terminate his employment with us upon notice of the occurrence of certain events, including a change in control of us.  Upon termination of the employment agreement for any reason, Mr. Arlotta will be entitled to his accrued and unpaid base salary through the date of termination, any earned but unpaid bonus for any fiscal year ending prior to the date of termination, any benefits accrued and vested under the terms of our employee benefit plans and programs through the date of termination, all deferred compensation of any kind and the option to have assigned to him any assignable insurance policy relating to him.  In addition upon death, we will pay Mr. Arlotta’s estate a lump sum in cash equal to his base salary for the period from the date of death through the end of the term of the agreement, benefits as if his employment had terminated on the last day of the month and a pro rata bonus for the portion of the year of termination preceding the date of his death based upon an annual amount equal to 100% of his base salary.  Also, all restricted stock, stock options and performance share awards will automatically vest as of the date of death.

If Mr. Arlotta’s employment agreement is terminated by us without cause or due to his disability, each as defined in the agreement, or by Mr. Arlotta for good reason or a change of control, each as defined in the agreement, or as a result of non-extension of the agreement, in addition to the foregoing, we will:

• pay him a pro rata bonus for the portion of the year in which the date of termination occurs preceding the date of termination based upon an annual amount equal to 100% of his base salary and a lump-sum cash payment equal to two times his highest base salary in the three years preceding termination plus two times his target bonus for the year of termination less any disability insurance benefits if applicable for the two-year period beginning with the date of termination;

• continue to provide the health and life insurance benefits provided to him and his spouse and eligible dependents immediately prior to his date of termination for a period of two years following the date of termination; and

• all restricted stock, stock option and performance share awards will fully vest.

In addition, Mr. Arlotta is entitled to the above consideration in the event that he terminates the agreement because we have engaged or have required that he engage in any activity which would cause him to violate covenants of his contained in a consulting agreement between him and his former employer.  If Mr. Arlotta is prevented from fulfilling his obligations under the employment agreement with us as a result of enforcement or

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threatened enforcement of the consulting agreement with his former employer, we will continue to provide him with the compensation and benefits described above, unless we decide to terminate his employment, in which case, as more fully described in the employment agreement, the compensation paid and benefits provided by us to him will depend on whether Mr. Arlotta’s former employer continues to provide him with the cash payments and benefits described in the consulting agreement and/or whether we terminate him prior to or on or after January 1, 2004.

Mr. Arlotta’s employment agreement contains confidentiality provisions that apply during and after the term of employment and non-competition provisions that limit him from competing with 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, we entered into employment agreements with John L. Kordash, our executive vice president and assistant to the chief executive officer, John F. Gaither, Jr., our senior vice president, general counsel and secretary, Richard W. Sunderland, Jr., our chief financial officer, and Robert A. Smith, our chief operating officer, respectively.  Effective December 9, 2003, each of these agreements was amended and restated.  The agreements with Messrs. Kordash and Gaither expire on October 1, 2005.  The agreements with Messrs. Sunderland and Smith expire on December 1, 2005.  The annual base salaries received by Messrs. Kordash, Gaither, Sunderland and Smith are $250,000, $280,000, $250,000 and $350,000, respectively.  The agreements with Messrs. Kordash and Gaither provide for an option 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% vests immediately upon the date of grant and the remainder vests in quarterly installments of 6.25% thereafter.  The agreements with Messrs. Sunderland and Smith provide for option grants by incorporation of prior letter agreements with us, as described below, at the same exercise price and vesting schedule described above.

The agreements with Messrs. Kordash, Gaither, Sunderland and Smith contain provisions that are substantially similar to those provisions contained in Mr. Arlotta’s employment agreement, discussed above, including an automatic one-year extension, eligibility to participate in stock option, incentive compensation and other incentive plans, receipt of perquisites generally provided to our officers, termination of the agreement by us with or without cause and by the executive upon the occurrence of certain events and confidentiality and non-competition provisions.  Each agreement also provides for severance compensation consisting of a pro rata bonus for the portion of the year in which the date of termination occurs, a lump-sum payment equal to the sum of the executive’s average base salary and the average annual bonus earned under our incentive plans for the most recent two years, continuation of health and life insurance benefits for up to two years and vesting of previously granted stock options and restricted stock.

In November 2003, in contemplation of the spin-off of GHC, we entered into letter agreements with Messrs. Smith and Sunderland which were incorporated by reference into each executive’s amended and restated employment agreement described above.  Under the letter agreements, each executive agreed to waive his right to a lump-sum payment and other benefits that the spin-off would likely have triggered under their employment agreements in exchange for continued employment until the spin-off.  In addition, upon completion of the spin-off, we agreed to:

• make a lump-sum payment to Messrs. Smith and Sunderland of $405,900 and $294,300, respectively;

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

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

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

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Transition Agreements

Effective October 28, 2002, we entered into a voluntary separation agreement with Richard R. Howard, our Vice Chairman. Under the agreement, Mr. Howard received $2.8 million of severance, incentive compensation of $0.3 million and life insurance and other related benefits of $0.3 million. In addition, we expensed $1.3 million related to Mr. Howard’s unvested restricted shares of common stock under the 2001 Stock Incentive Plan, which vested upon his resignation. The separation agreement contains customary non–compete clauses in effect from the date of separation.

Benefit Plans

2001 Stock Incentive Plan

On October 2, 2001, our board of directors authorized the issuance of 750,000 shares of restricted common stock to certain of our senior officers. These shares vest and are issued quarterly over a five–year period, which commenced on February 28, 2002 and will end on October 1, 2006. Upon the resignation of Messrs. Walker and Barr, 202,500 shares of restricted common stock vested immediately. Upon the resignation of Mr. Howard, 60,000 shares of restricted common stock vested immediately. In May 2003, the Company made an offer to employees who held shares of restricted common stock to accelerate the vesting of all such restricted shares in exchange for the tendering of any options to purchase common stock. At September 30, 2003, 625 shares of restricted common stock remain unvested and issuable through October 1, 2006. See “ — Options Repurhased and Restricted Stock Vested In Connection with the Spin-off.”

2001 Stock Option Plan

The purpose of our 2001 Stock Option Plan is to provide additional incentive to officers, other key employees, and directors of, and important consultants to us and each present or future parent or subsidiary corporation, by encouraging them to invest in shares of our common stock, par value $0.02 and thereby acquire a proprietary interest in us and an increased personal interest in our continued success and progress.

The aggregate number of shares of our common stock that may be issued under our 2001 Stock Option Plan is 3,480,000. Notwithstanding the foregoing, in the event of any change in the outstanding shares of our common stock by reason of a stock dividend, stock split, combination of shares, recapitalization, merger, consolidation, transfer of assets, reorganization, conversion or what our compensation committee of the board of directors deems in its sole discretion to be similar circumstances, the aggregate number and kind of shares which may be issued under our 2001 Stock Option Plan shall be appropriately adjusted in a manner determined in the sole discretion of the compensation committee. Reacquired shares of our common stock, as well as unissued shares, may be used for the purpose of our 2001 Stock Option Plan. Our common stock subject to options which have terminated unexercised, either in whole or in part, shall be available for future options granted under our 2001 Stock Option Plan. As of September 30, 2003, 2,813,500 stock options have been awarded of which 2,636,000 stock options were awarded to employees, 162,500 stock options were awarded to non–employee directors and 15,000 stock options were awarded to non–employee consultants. See “ — Options Repurchased and Restricted Stock Vested in Preparation for the Spin-off.”

All of our officers and key employees and officers and key employees of any present or future parent or subsidiary corporation are eligible to receive an option or options under our 2001 Stock Option Plan. All directors of, and important consultants to us and of any of our present or future parent or subsidiary corporation are also eligible to receive an option or options under this 2001 Stock Option Plan. The individuals who receive an option or options shall be selected by the compensation committee, in its sole discretion unless otherwise stipulated in our 2001 Stock Option Plan. No individual may receive options under our 2001 Stock Option Plan for more than 80% of the total number of shares of our common stock authorized for issuance under our 2001 Stock Option Plan.

Non–Qualified Deferred Compensation Plan

Effective April 1, 2001 we adopted the Genesis Health Ventures, Inc. Deferred Compensation Plan for a select group of management and/or highly compensated employees, as such term is defined in the Internal Revenue Code which allows these individuals to defer receipt of compensation and supplement retirement savings under the Genesis Health Ventures, Inc. Retirement Plan. In October of 2001, the Non–Qualified Deferred Compensation Plan was amended and made available to all highly compensated employees as defined by the IRS (in calendar 2003, employees whose base salary meets or exceeds $90,000).

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Beginning January 1, 2002, eligible employees were permitted to defer up to 50% of their base salary and up to 100% of their incentive compensation bonus each year on a pre–tax basis. Participants are able to select from several fund choices and their Plan account will raise or decline in value in accordance with the performance of the funds they have selected.

Retirement Plan

On January 1, 1989, we adopted an employee Retirement Plan that consists of a 401(k) component and a profit sharing component. Our retirement plan is a cash deferred profit–sharing plan covering all of our employees (other than certain employees covered by a collective bargaining agreement) who have completed at least 500 hours of service and six months of employment. Under the 401(k) component, each employee may elect to contribute a portion of his or her current compensation up to the maximum permitted by the Internal Revenue Code or 50% (or for more highly compensated employees a maximum of 4%, in accordance with our policy) of such employee’s annual compensation. We may make a matching contribution each year as determined by the board of directors. The board of directors may establish this contribution at any level each year, or may omit such contribution entirely.

Under the profit sharing provisions of the Retirement Plan, we may make an additional employer contribution as determined by the board of directors each year. The board of directors may establish this contribution at any level each year, or may omit such contribution entirely. It is our intent that employer contributions under the profit sharing provisions of the Retirement Plan are to be made only if there are sufficient profits to do so. Profit sharing contributions are allocated among the accounts of participants in the proportion that their annual compensation bears to the aggregate annual compensation of all participants. All employee contributions to the Retirement Plan are 100% vested. Our contributions are vested in accordance with a schedule that generally provides for vesting after six years of service with us (any non–vested amounts that are forfeited by participants are used to reduce the following year’s contribution by us).

Options Repurchased and Restricted Stock Vested in Connection with the Spin-off

On April 1, 2003, the Company extended an offer to its employees, including executive officers except for its chief executive officer, to tender all options to purchase shares of its common stock, par value $.02 per share, outstanding under its 2001 Stock Option Plan, for the following consideration: (a) for those holders of options who had received awards of more than 2,000 restricted shares of common stock under the 2001 Stock Incentive Plan, the acceleration of vesting of all such restricted shares plus a cash payment of $2.50 per share underlying the option for options that had an exercise price below $20.00 per share, and (b) with respect to those holders of options who had not received awards of more than 2,000 restricted shares, (i) for those options that had an exercise price of at least $20.00 per share, a cash payment of $2.00 per share underlying the option, and (ii) for those options that had an exercise price below $20.00 per share, a cash payment of $2.50 per share subject to the option. The offer expired on May 12, 2003.  NeighborCare accepted for exchange and cancellation options to purchase 1,724,000 shares of its common stock, which represented all of the eligible outstanding options properly tendered for exchange by eligible option holders, on May 13, 2003.  All eligible options held by the Company’s employees were tendered in the offer, with the exception of options to purchase 35,000 shares. 

See “ — Employment Agreements.”

Senior Executive Stock Ownership Program and Executive Loans

In December, 1997 the board of directors approved a Senior Executive Stock Ownership Program. Under the terms of the program, certain of our senior executive employees were required to own shares of our common stock having a market value based upon a multiple of the executive’s salary. Each executive was required to own the shares within three years of the date of the adoption of the program. Subject to applicable laws, we were authorized to lend funds to one or more of the senior executive employees for his or her purchase of our common stock. As of September 30, 2001, we had outstanding loan and accrued interest balances of $3,200,000 from the senior executives, including Mr. Hager. The note agreements were amended in fiscal 2000 to adjust the interest rate to 8% simple interest. Previously, the loans accrued interest based on the market rate at the date of the loan initiation.

On February 23, 2001, the U.S. Bankruptcy Court ordered that the remaining loans be forgiven on the earlier of the termination of the executives’ employment (for reasons other than for cause or for the voluntary resignation of

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the executive without “Good Reason” as defined in the employment agreement) or the first anniversary of our emergence from bankruptcy. Therefore, on or before October 2, 2002, all of these loans were forgiven and the executives were held harmless for all and any of the tax consequences resulting from the forgiveness of the loans.

Compensation Committee Interlocks and Insider Participation

Until his resignation on December 1, 2003, Joseph A. LaNasa III was a member of our Compensation Committee. Mr. LaNasa is employed by Goldman Sachs and Co. as a managing director. We engaged Goldman Sachs and Co. to act as joint lead financial advisor together with UBS Warburg in connection with a strategic transaction with respect to our eldercare businesses, including our inpatient services, rehabilitation therapy, diagnostic, respiratory, hospitality and healthcare consulting businesses and the issuance of our 6.875% senior subordinated notes due 2013. As compensation for services provided, we agreed to pay Goldman Sachs and Co. a transaction fee based on the value of the consummated transactions.

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ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND OTHER STOCKHOLDER RELATED MATTERS

The following table sets forth information with respect to the beneficial ownership of our common stock as of December 17, 2003 for: each person who we know owns beneficially more than 5% of our common stock; each of our most highly compensated executive officers; each of our directors; and all of our executive officers and directors as a group. On December 17, 2003 there were 43,093,682 shares of our common stock outstanding, including 260,493 shares to be issued in connection with our joint plan of reorganization confirmed by the Bankruptcy Court on September 20, 2001.

Unless otherwise noted below, and subject to applicable community property laws, to our knowledge, each person has sole voting and investment power over the shares shown as beneficially owned, except to the extent authority is shared by spouses under applicable law and except as set forth in the footnotes to the table.

The number of shares beneficially owned by each shareholder is determined under rules promulgated by the SEC. The information does not necessarily indicate beneficial ownership for any other purpose. Beneficial ownership, as set forth in the regulations of the SEC, includes securities owned by or for the spouse, children or certain other relatives of such person as well as other securities as to which the person has or shares voting or investment power or has the right to acquire within 60 days of December 17, 2002. The same shares may be beneficially owned by more than one person. Beneficial ownership may be disclaimed as to certain of the securities. Shares of common stock issuable upon the exercise of securities currently exercisable or exercisable within 60 days of December 17, 2003 are deemed outstanding for computing the share ownership and percentage ownership of the person holding such securities, but are not deemed outstanding for computing the percentage of any other person.

All addresses for the executive officers and directors are c/o NeighborCare, Inc., 7 East Lee Street, Baltimore, Maryland  21202.

	Shares of Common Stock Beneficially Owned (1)		Percent of Common Stock Owned (1)
Highland Capital Management, L.P. Two Galleria Tower 13455 Noel Road, Suite 1300 Dallas, TX 75240 (2)		4,358,972		10.10	%
Goldman, Sachs Group 85 Broad Street New York, NY 10004 (3)		4,306,146		9.97	%
John J. Arlotta (4)		125,000		*
James H. Bloem (5)		46,960		*
James D. Dondero (2)		4,358,972		10.10	%
Robert H. Fish (6)		546,960		1.25	%
Dr. Philip P. Gerbino (7)		46,960		*
James E. Dalton, Jr. (8)		46,960		*
Arthur J. Reimers		—		*
Phyllis R. Yale		—		*
George V. Hager, Jr.		—		*
Robert A. Smith		—		*
Richard Pell, Jr.		—		*
Richard Howard		—		*
All executive officers and directors as a group (15 persons) (9)		5,312,437		12.05	%

* Less than one percent

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(1)	Includes an aggregate of 3,464,255 shares of common stock issued on December 16, 2003 as a result of the board of directors’ election to exercise its option to require the mandatory conversion of the Series A convertible preferred stock, pursuant to the Company’s amended and restated articles of incorporation, as amended, excludes 2,299,252 shares held by the Company in treasury, and gives effect to the adjustment of stock option amounts and exercise prices as a result of the spin-off.
(2)	Includes 2,429,471  shares of our common stock beneficially and directly owned by Highland Capital Management, L.P (“Highland Capital”); 46,960 stock options to purchase our common stock, which are exercisable within sixty days of December 17, 2003, granted under our 2001 Stock Option Plan to Mr. Dondero (Mr. Dondero has an understanding with Highland Capital pursuant to which he holds the options for the benefit of Highland Capital); 1,404,120 shares of common stock beneficially and directly owned by Highland Crusader Offshore Partners, L.P. (“Crusader”), of which 251,272 shares were issued upon conversion of the Series A convertible preferred stock; 263,577 shares of common stock beneficially and directly owned by Prospect Street High Income Portfolio, Inc. (“Prospect”), of which 123,803 shares were issued upon conversion of the Series A convertible preferred stock; 41,100 shares of common stock owned by PCMG Trading Partners XXIII L.P. (“PCMG”); 173,745 shares of common stock beneficially and directly owned by KZH-Pamco LLC (“KZH”), of which 16,484 shares were issued upon conversion of the Series A convertible preferred stock. Mr. Dondero disclaims beneficial ownership of 3,295,654 shares of our common stock. Based partially upon a Schedule 13D/A filed with the SEC on April 8, 2002 and a Form 4 filed with the SEC on October 24, 2003, on behalf of a group consisting of Highland Capital, Crusader, Prospect, PCMG, KZH and Mr. Dondero. The general partner of Crusader is Highland Capital. Highland Capital, as a registered investment advisor, is the investment advisor for Prospect. The general partner of Highland Capital is Strand Advisors, Inc., a Delaware corporation (“Strand”). The general partner of PCMG is Strand Advisors III, Inc., a Delaware corporation (“Strand III”). Mr. Dondero is the president of Highland, Prospect, Strand, and Strand III, and our director.
(3)	Goldman, Sachs & Co. is a wholly–owned subsidiary of Goldman, Sachs Group. Goldman, Sachs & Co.’s direct beneficial ownership consists of 4,263,099 shares of common stock, of which 632,135 shares were issued upon conversion of the Series A convertible preferred stock.  Joseph A. LaNasa III, a managing director of Goldman, Sachs & Co., was a member of our board of directors in fiscal 2003 and was granted 43,047 options to purchase our common stock, which are exercisable within 60 days of December 17, 2003, granted under our 2001 Stock Option Plan. Mr. LaNasa has an understanding with Goldman, Sachs Group pursuant to which he holds the options for the benefit of the Goldman, Sachs Group. Based in part upon a Schedule 13D/A filed with the SEC on December 2, 2003.
(4)	Includes 125,000 shares of common stock issuable upon the exercise of stock options that are exercisable within 60 days of December 17, 2003 granted under our 2001 Stock Option Plan.
(5)	Includes 46,960 shares of common stock issuable upon the exercise of stock options that are exercisable within 60 days of December 17, 2003 granted under our 2001 Stock Option Plan.
(6)	Includes 546,960 shares of common stock issuable upon the exercise of stock options that are exercisable within 60 days of December 17, 2003 granted under our 2001 Stock Option Plan.
(7)	Includes 46,960 shares of common stock issuable upon the exercise of stock options that are exercisable within 60 days of December 17, 2003 granted under our 2001 Stock Option Plan.
(8)	Includes 46,960 shares of common stock issuable upon the exercise of stock options that are exercisable within 60 days of December 17, 2003 granted under our 2001 Stock Option Plan.

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	that are immediately exercisable.
(9)	Includes officers with no beneficial ownership and those with ownership less than five percent beneficial ownership.

Equity Compensation Plans

The following table details information regarding our existing equity compensation plans as of September 30, 2003:

	A		B		C
	Number of securities to be issued upon exercise of outstanding options, warrants and rights		Weighted-average exercise price of outstanding options, warrants and rights		Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column A)
Equity compensation plans approved by security holders		—		—		—
Equity compensation plans not approved by security holders		740,000	$	19.70		2,740,000

The above table represents securities to be issued upon exercise of outstanding options under our 2001 Stock Option Plan, which was approved by the Bankruptcy Court. We have not included in the above table the shares granted pursuant to our 2001 Stock Incentive Plan, which was approved by the Bankruptcy Court.

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ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Pursuant to the Senior Executive Officer Stock Ownership Plan at September 30, 2001, we had loans outstanding to Messrs. Howard, Hager and Rubinger in the principal amounts of $646,889, $624,244 and $492,812, respectively. On February 23, 2001, the U.S. Bankruptcy Court ordered that the remaining loans be forgiven on the first anniversary of our emergence from bankruptcy. Therefore, effective October 2, 2002, these loans were forgiven and the executives held harmless for all and any of the tax consequences resulting from the forgiveness of the loans.

Mr. Joseph A. LaNasa III was an elected member of our board of directors in fiscal 2003. In this capacity, he participated and had the opportunity to vote on matters that were presented to our board of directors. Mr. LaNasa is employed by Goldman Sachs & Co. as a managing director. Mr. LaNasa has acquired stock options that were granted under our 2001 Stock Option Plan. He has an understanding with the Goldman Sachs Group pursuant to which he holds the options for the benefit of the Goldman Sachs Group. As of December 17, 2003, the Goldman Sachs Group beneficially owns 9.98% of our common stock.

Mr. Arthur Reimers was elected to our board of directors on December 1, 2003 and was employed by Goldman, Sachs & Co. as a managing director until 2001.

We engaged Goldman Sachs to act as joint lead financial advisor, together with UBS Warburg, in connection with the potential sale or spin–off of a significant portion of our capital stock or assets. In December 2003, we paid Goldman Sachs transaction fees in connection with strategic transactions and placement fees for the sale of securities.

Mr. James Dondero is an elected member of our board of directors. Mr. Dondero has acquired stock options that were granted under our 2001 Stock Option Plan. In addition to stock held directly by Mr. Dondero, he may be deemed to beneficially own stock held by Highland Capital Management, L.P, Highland Crusader Offshore Partners, L.P., Prospect Street High Income Portfolio Inc., and PCMG Trading Partners XXIII LP. In total, Mr. Dondero beneficially owns 10.10% of our common stock.

PART IV

ITEM 14: PRINCIPAL ACCOUNTANT FEES AND SERVICES

Consistent with the Audit and Compliance Committee’s responsibility for engaging the Company’s independent auditors, beginning with 2003 all audit and permitted non-audit services require preapproval by the Audit and Compliance Committee. The full Committee approves proposed services and fee estimates for these services. The Committee Chairman has been designated by the Committee to approve any services arising during the year that were not preapproved by the Committee and services that were preapproved. Services approved by the Chairman are communicated to the full Committee at its next regular quarterly meeting and the Committee reviews services and fees for the fiscal year at each such meeting. During 2003 all services performed by the auditors were preapproved.

During fiscal years 2003 and 2002, the Company retained KPMG to provide services in the following categories and amounts:

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	2003		2002
Audit fees	$	2,249,000	$	1,363,000
Audit related fees		78,000		40,000
Tax fees		—		569,000
All other fees		244,000		581,000
Total	$	2,571,000	$	2,553,000

Audit fees are those fees for professional services rendered in connection with the audit of the Company’s consolidated financial statements for the year ended September 30, 2003 and 2002 and the review of the Company’s quarterly consolidated financial statements on Form 10-Q’s that are customary under auditing standards generally accepted in the United States.  Audit fees also include the separate audits of certain eldercare centers as required under debt agreements.  Fiscal 2003 audit fees include Genesis HealthCare Corporation’s Form 10 filling and combined financial statement of Genesis HealthCare Corporation in connection with of the spin-off from the Company. 

Audit-related fees consisted primarily of services rendered in connection with employee benefit plan audits.

Tax fees are for 2002 related primarily to assistance and preparation of tax returns.

All other fees for fiscal 2003 consist primarily of services rendered in connection with Sarbanes Oxley Section 404.  Aggregate fees billed for all other services amounted to $581,000 for fiscal 2002. This amount primarily related to post bankruptcy assistance to the Company. KPMG LLP did not perform any financial information system design and implementation services during the fiscal year ended September 30, 2002.

ITEM 15: EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8–K

(a)(1)	The following financial statements of NeighborCare, Inc. and Subsidiaries are filed as part of this Form 10-K in Item 8:
	Independent Auditors’ Report
	Consolidated Balance Sheets as of September 30, 2003 and 2002 (Successor)
	Consolidated Statements of Operations for the years ended September 30, 2003, 2002 (Successor), and 2001 (Predecessor)
	Consolidated Statements of Shareholders’ Equity (Deficit) for the years ended September 30, 2003, 2002 (Successor), and 2001 (Predecessor)
	Consolidated Statements of Cash Flows for the years ended September 30, 2003, 2002 (Successor), and 2001 (Predecessor)
	Notes to Consolidated Financial Statements
(a)(2)	Schedule
	Schedule II - Valuation and Qualifying Accounts for the years ended September 30, 2003, 2002 and 2001. Schedule II is included herein. All other schedules not listed have been omitted since the required information is included in the consolidated financial statements or the notes thereto, or is not applicable or required.
2.1(1)	Debtors’ Joint Plan of Reorganization under Chapter 11 of the Bankruptcy Code dated July 6, 2001.
2.2(2)	Technical Amendments to Debtors’ Joint Plan of Reorganization under Chapter 11 of the Bankruptcy Code dated August 27, 2001.
2.3(2)	Amendments to Debtors’ Joint Plan of Reorganization under Chapter 11 of the Bankruptcy Code dated to

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	comply with opinion on confirmation dated September 13, 2001.
2.4(3)	Separation and Distribution Agreement by and between the Company and Genesis HealthCare Corporation, dated as of October 27, 2003 (Schedules and exhibits are omitted pursuant to Regulation S-K, Item 601(b)(2); the Company agrees to furnish supplementally a copy of such schedules and/or exhibits to the Securities and Exchange Commission upon request).
3.1(4)	Amended and Restated Articles of Incorporation of the Company.
3.2(4)	Articles of Amendment to the Company’s Amended and Restated Articles of Incorporation, effective as of December 2, 2003, changing the name to NeighborCare, Inc.
3.3(4)	Statement with Respect to Shares, effective as of December 5, 2003, designating the Company’s Series B Junior Participating Preferred Stock, par value $0.01 per share.
3.4(4)	Amended and Restated Bylaws of the Company, as amended.
4.1(5)	Specimen of Common Stock Certificate.
4.2(6)	Certificate of Designation of the Series A Convertible Preferred Stock (included in Exhibit 3.1).
4.3	Specimen of the Company’s 6.785% Senior Subordinated Notes due 2013 (included in Exhibit 4.4).
4.4	Indenture, dated as of November 4, 2003, among the Company, the Guarantors and The Bank of New York, as trustee, relating to the Company 6.875% Senior Subordinated Notes due 2013.
4.5(7)	Rights Agreement, dated as of November 18, 2003, by and between the Company and StockTrans, Inc., as rights agent.
4.6(4)	Statement with Respect to Shares, effective as of December 5, 2003, designating the Company’s Series B Junior Participating Preferred Stock, par value $0.01 per share (included in Exhibit 3.3).
+10.1(8)	The Company’s Employee Retirement Plan, adopted January 1, 1989, as amended and related Retirement Plan Trust Agreement.
+10.2(6)	2001 Stock Option Plan.
10.3(6)	Registration Rights Agreement between the Company, Goldman Sachs & Co., and Highland Capital Management L.P., dated as of October 2, 2001, regarding the Company’s Common Stock.
10.4(6)	Registration Rights Agreement between the Company, Goldman Sachs & Co., and Highland Capital Management L.P., dated as of October 2, 2001, regarding the Company’s Second Priority Secured Notes due 2007.
10.5(6)	Credit, Security, Guaranty and Pledge Agreement, dated as of October 2, 2001, among the Company, the Guarantors, the Lenders, First Union Securities, Inc., as Co–Lead Arranger, Goldman Sachs Credit Partners L.P., as Co–Lead Arranger and Syndication Agent, First Union National Bank, as Administrative Agent and Collateral Agent, General Electric Capital Corporation, as Collateral Monitoring Agent and Co–Documentation Agent and CitiCorp USA, Inc., as Co–Documentation Agent (the “Credit, Security, Guaranty and Pledge Agreement”).
10.6(9)	Amendment No. 1, dated as of December 31, 2001, to the Credit, Security, Guaranty and Pledge Agreement.
10.7(10)	Amendment No. 2, dated as of June 28, 2002, to the Credit, Security, Guaranty and Pledge Agreement.

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10.8(11)	Employment Agreement between the Company and Robert H. Fish dated as of May 28, 2002 and the addendum thereto dated November 30, 2002.
+10.9(12)	The Company’s Deferred Compensation Plan.
+10.10(13)	Transition Agreement by and between the Company and Michael R. Walker, dated as of May 28, 2002.
+10.11(13)	Transition Agreement by and between the Company and David C. Barr, dated as of June 18, 2002.
+10.12(11)	Voluntary Separation Agreement between the Company and Richard R. Howard dated as of October 28, 2002.
+10.13(14)	2001 Stock Incentive Plan.
+10.14(15)	Employment Agreement, dated as of February 28, 2003, by and between the Company and Robert H. Fish.
+10.15	Employment Agreement, dated as of July 7, 2003, by and between the Company and John J. Arlotta.
+10.16	Employment Agreement, dated as of July 28, 2003 and amended and restated as of December 9, 2003, by and between the Company and  John L. Kordash.
+10.17	Employment Agreement, dated as of September 10, 2003 and amended and restated as of December 9, 2003, by and between the Company and John F. Gaither, Jr.
10.18	Registration Rights Agreement, dated as of November 4, 2003, by and among the Company, the Guarantors, Goldman, Sachs & Co., Lehman Brothers Inc., UBS Securities LLC and J.P. Morgan Securities Inc.
+10.19	Letter Agreement, dated as of November 7, 2003, by and between the Company and Richard W. Sunderland.
+10.20	Letter Agreement, dated as of November 20, 2003, by and between the Company and Robert A. Smith.
+10.21	Employment Agreement, dated as of November 24, 2003 and amended and restated as of December 9, 2003, by and between the Company and Richard W. Sunderland.
+10.22	Employment Agreement, dated as of November 26, 2003 and amended and restated as of December 9, 2003, by and between the Company and Robert A. Smith.
10.23(4)	Tax Sharing Agreement, dated as of December 1, 2003, by and between the Company and Genesis HealthCare Corporation.
10.24(4)	Transition Services Agreement, dated as of December 1, 2003, by and between the Company and Genesis HealthCare Corporation.
10.25(4)	Employee Benefits Agreement, dated as of December 1, 2003, by and between the Company and Genesis HealthCare Corporation.
10.26(4)	Master Agreement for Pharmacy, Pharmacy Consulting and Related Products and Services, dated as of December 1, 2003, by and between NeighborCare Pharmacy Services, Inc. and Genesis HealthCare Corporation
10.27(4)	Credit Agreement by and among the Company, the domestic subsidiaries of the Company from time to

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	time party thereto, the lenders party thereto, Wachovia Bank, National Association, as administrative agent, and General Electric Capital Corporation and ING Capital LLC, as syndication agents, and LaSalle Bank National Association and U.S. Bank, National Association, as documentation agents (Schedules and exhibits are omitted; the Company agrees to furnish supplementally a copy of such schedules and/or exhibits to the Securities and Exchange Commission upon request).
+10.28	Amendment, dated as of December 9, 2003, to Employment Agreement by and between the Company and John J. Arlotta.
+10.29	Option Cancellation Agreement, dated as of December 9, 2003, by and between the Company and Robert H. Fish.
21	Subsidiaries of the Company.
23	Consent of KPMG LLP.
31.1	Certificate of John J. Arlotta, Chief Executive Officer of the Company, pursuant to Exchange Act Rule 13a-14(a)/15d-14(a), as adopted pursuant to Sections 302 and 404 of the Sarbanes-Oxley Act of 2002.
31.2	Certificate of Richard W. Sunderland, Chief Financial Officer of the Company, pursuant to Exchange Act Rule 13a-14(a)/15d-14(a), as adopted pursuant to Sections 302 and 404 of the Sarbanes-Oxley Act of 2002.
32.1	Certificate of John J. Arlotta, Chief Executive Officer of the Company pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certificate of Richard W. Sunderland, Chief Financial Officer of the Company pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

+	Management contract or compensatory plan or arrangement required to be filed as an exhibit to this Form 10-K pursuant to Item 14(c) of Form 10-K.
1)	Incorporated by reference to the Company’s Current Report on Form 8–K filed on June 19, 2001.
2)	Incorporated by reference to the Company’s Form T–3 filed on September 18, 2001.
3)	Incorporated by reference to Genesis HealthCare Corporation’s Registration Statement on Form 10 dated November 14, 2003 (as amended) (File No. 000-50351).
4)	Incorporated by reference to an exhibit to the Company’s Current Report on Form 8-K filed on December 9, 2003.
5)	Incorporated by reference to the Company’s Form 8–A filed on October 2, 2001.
6)	Incorporated by reference to the Company’s Annual Report on Form 10–K for the fiscal year ended September 30, 2001.
7)	Incorporated by reference to an exhibit to the Company’s Form 8-A filed on November 18, 2003.
8)	Incorporated by reference to the Company’s Registration Statement on Form S–1, dated June 19, 1991 (Registration No. 33–40007).
9)	Incorporated by reference to the Company’s Quarterly Report for the quarter ended December 31, 2001.
10)	Incorporated by reference to the Company’s Quarterly Report on Form 10–Q for the quarter ended June 30, 2002.
11)	Incorporated by reference to the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2002.
12)	Incorporated by reference to the Company’s Registration Statement on Form S–8 (File No. 33–82208) filed on February 5, 2002.
13)	Incorporated by reference to the Company’s Current Report on Form 8–K filed on July 1, 2002.
14)	Incorporated by reference to the Company’s Registration Statement on Form S–8 (File No. 33–83430) filed on February 26, 2002.
15)	Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2003.

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(b)	Reports on Form 8-K
	On August 5, 2003, the Company filed a Current Report on Form 8-K under Items 9 and 12 reporting its financial results for the quarter and year to date periods ended June 30, 2003.

141

Independent Auditors’ Report

The Board of Directors and Shareholders
NeighborCare, Inc.

Under date of December 1, 2003, except as to note 14, which is as of December 16, 2003, we reported on the consolidated balance sheets of NeighborCare, Inc. and subsidiaries (the “Company”) as of September 30, 2003 and 2002, and the related consolidated statements of operations, shareholders’ equity (deficit) and cash flows for each of the years in the three year period ended September 30, 2003, as contained in the NeighborCare, Inc. annual report on Form 10–K for the year ended September 30, 2003. In connection with our audits of the aforementioned consolidated financial statements, we also audited the related financial statement schedule in the Form 10–K. This financial statement schedule is the responsibility of the Company’s management. Our responsibility is to express an opinion on this financial statement schedule based on our audits.

In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

As disclosed in note 1 to the consolidated financial statements, the Company adopted the provisions of Statement of Financial Accounting Standards No. 145 with regard to accounting for extinguishment of debt effective October 1, 2002.

As described in note 3 to the consolidated financial statements, on October 2, 2001 the Company consummated a Joint Plan of Reorganization (the “Plan”) which had been confirmed by the United States Bankruptcy Court. The Plan resulted in a change in ownership of the Company and, accordingly, effective September 30, 2001 the Company accounted for the change in ownership through “fresh–start” reporting. As a result, the consolidated information prior to September 30, 2001 is presented on a different cost basis than that as of and subsequent to September 30, 2001 and, therefore, is not comparable.

	/s/ KPMG LLP
Philadelphia, Pennsylvania
December 1, 2003, except as to note 14, which is as of December 16, 2003

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Schedule II

NeighborCare, Inc.
Valuation and Qualifying Accounts
Years Ended September 30, 2003, 2002 and 2001
(in thousands)

Description	Balance at Beginning of Period		Charged to Operations		Charged to Other Accounts (1)		Deductions (2)		Balance at End of Period
Year Ended September 30, 2003
Allowance for Doubtful Accounts	$	55,791		37,085		—		44,248	$	48,628
Year Ended September 30, 2002
Allowance for Doubtful Accounts	$	83,125		44,712		—		72,046	$	55,791
Year Ended September 30, 2001
Allowance for Doubtful Accounts	$	78,020		49,901		12,509		57,305	$	83,125

(1)	In fiscal 2001, represents a reclassification of amounts previously reported as a direct reduction to trade receivables, rather than an allowance for doubtful accounts.
(2)	Represents amounts written off as uncollectible.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf on December 23, 2003 by the undersigned thereunto duly authorized.

NeighborCare, Inc.
	/s/ RICHARD W. SUNDERLAND, JR.
By:	Richard W. Sunderland, Jr.
	Chief Financial Officer

Pursuant to the requirements of the Securities Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on December 23, 2003.

Signature	Capacity
/s/ JOHN J. ARLOTTA
John J. Arlotta	Chairman, President and Chief Executive Officer
/s/ JAMES H. BLOEM
James H. Bloem	Director
/s/ JAMES E. DALTON, JR.
James E. Dalton, Jr.	Director
/s/ JAMES D. DONDERO
James D. Dondero	Director
/s/ ROBERT H. FISH
Robert H. Fish	Director
/s/ DR. PHILIP P. GERBINO
Dr. Philip P. Gerbino	Director
/s/ ARTHUR J. REIMERS
Arthur J. Reimers	Director
/s/ PHYLLIS R. YALE
Phyllis R. Yale	Director

144

/s/ RICHARD W. SUNDERLAND, JR.
Richard W. Sunderland, Jr.	Chief Financial Officer

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Exhibit 21 Subsidiaries of the Company

Entity Name	State of Organization
Accumed, Inc.	New Hampshire
ASCO Healthcare of New England, Inc.	Maryland
ASCO Healthcare of New England, Limited Partnership	Maryland
ASCO Healthcare, Inc.	Maryland
Care4, L.P.	Delaware
CareCard, Inc.	Maryland
Concord Pharmacy Services, Inc.	Pennsylvania
Delco Apothecary, Inc.	Pennsylvania
Eastern Medical Supplies, Inc.	Maryland
Encare of Massachusetts, Inc.	Delaware
Genesis Health Ventures, Inc.	Pennsylvania
Genesis Holdings, Inc.	Delaware
Geneva Sub, Inc.	Delaware
H.O. Subsidiary, Inc. f/k/a HealthObjects, Inc.	Maryland
Health Concepts and Services, Inc.	Maryland
HealthObjects Corporation f/k/a Neighborware Health Systems, Inc.	Maryland
Horizon Medical Equipment and Supply, Inc.	West Virginia
Institutional Health Care Services, Inc.	New Jersey
Medical Services Group, Inc.	Maryland
Neighborcare Home Medical Equipment of Maryland, L. L. C.	Maryland
NeighborCare Home Medical Equipment, Inc. f/k/a United Health Care Services, Inc.	Pennsylvania
NeighborCare Infusion Services, Inc. f/k/a Vitalink Infusion Services, Inc.	Delaware
NeighborCare of Indiana, Inc. f/k/a TeamCare of Indiana, Inc.	Indiana
NeighborCare of New Hampshire L. L. C.	New Hampshire
NeighborCare of Northern California, Inc. f/k/a CompuPharm of Northern California, Inc.	California
NeighborCare of Oklahoma, Inc. f/k/a Vitalink Subsidiary, Inc.	Oklahoma
NeighborCare of Virginia, Inc. f/k/a TeamCare of Virginia, Inc.	Virginia
NeighborCare of Wisconsin, Inc. f/k/a GCI Innovative Pharmacy, Inc.	Wisconsin
NeighborCare Pharmacies, Inc.	Maryland
NeighborCare Pharmacy of Oklahoma LLC	Oklahoma
NeighborCare Pharmacy of Virginia LLC	Virginia
NeighborCare Pharmacy Services, Inc. f/k/a Vitalink Pharmacy Services, Inc.	Delaware
NeighborCare-Medisco, Inc. f/k/a Medisco Pharmacies, Inc.	California
NeighborCare-ORCA, Inc. f/k/a White, Mack & Wart, Inc. d/b/a Propac Pharmacy	Oregon
NeighborCare-TCI, Inc.	Delaware

146

Entity Name	State of Organization
Professional Pharmacy Services, Inc.	Maryland
SNALF, Inc.	Delaware
Tidewater Healthcare Shared Services Group, Inc. The f/k/a TW Acquisition Corp	Pennsylvania

147

Exhibit 23 – Consent of Independent Auditors

The Board of Directors
NeighborCare, Inc.:

We consent to the incorporation by reference in the registration statement on Form S–3 (No. 333–101004), and the registration statement on Form S–8 (No. 333–111068) of NeighborCare, Inc. of our reports dated December 1, 2003, except as to note 14, which is as of December 16, 2003, with respect to the consolidated balance sheets of NeighborCare, Inc. and subsidiaries (the “Company”) as of September 30, 2003 and 2002, and the related consolidated statements of operations, shareholders’ equity (deficit), and cash flows for each of the years in the three–year period ended September 30, 2003, and the related financial statement schedule, which reports appear in the September 30, 2003 annual report on Form 10–K of NeighborCare, Inc.

Our reports contain an explanatory paragraph that refers to the Company’s adoption of the provisions of Statement of Financial Accounting Standards No. 145 with regard to accounting for extinguishment of debt effective October 1, 2002.

In addition, our reports contain an explanatory paragraph that states, on October 2, 2001 the Company consummated a Joint Plan of Reorganization (the “Plan”) which had been confirmed by the United States Bankruptcy Court. The Plan resulted in a change in ownership of the Company and, accordingly, effective September 30, 2001 the Company accounted for the change in ownership through “fresh–start” reporting. As a result, the consolidated information prior to September 30, 2001 is presented on a different cost basis than that as of and subsequent to September 30, 2001 and, therefore, is not comparable.

/s/ KPMG LLP

Philadelphia, Pennsylvania
December 23, 2003

148

Exhibit 31.1 – CERTIFICATIONS PURSUANT TO SECTION 302 OF THE SARBANES–OXLEY ACT OF 2002

I, John J. Arlotta, Chief Executive Officer of NeighborCare, Inc., certify that:

1.	I have reviewed this annual report on Form 10-K of NeighborCare, Inc. and subsidiaries;
2.	Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3.	Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15e and 15d-15(e)) for the registrant and have:
	a)	designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
	b)	[Intentionally omitted];
	c)	evaluated the effectiveness of the registrant’s disclosure controls and procedure and presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
	d)	disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.
5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):
	a)	all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
	b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting.

Date: December 24, 2003

John J. Arlotta

149

Exhibit 31.2 – CERTIFICATIONS PURSUANT TO SECTION 302 OF THE SARBANES–OXLEY ACT OF 2002

I, Richard W. Sunderland, Jr., Chief Financial Officer of NeighborCare, Inc., certify that:

1.	I have reviewed this annual report on Form 10-K of NeighborCare, Inc. and subsidiaries;
2.	Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3.	Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15e and 15d-15(e)) for the registrant and have:
	a)	designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
	b)	[Intentionally omitted];
	c)	evaluated the effectiveness of the registrant’s disclosure controls and procedure and presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
	d)	disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.
5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):
	a)	all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
	b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting.

Date: December 24, 2003

/s/
	Richard W. Sunderland, Jr.

150

Exhibit 32.1 – CERTIFICATIONS PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES–OXLEY ACT OF 2002

In connection with the filing of the NeighborCare’s Annual Report on Form 10–K for the period ended September 30, 2003 with the Securities and Exchange Commission on the date hereof (the “Report”), I, John J. Arlotta, the Chief Executive Officer of NeighborCare, Inc, certify, pursuant to 18 U.S.C. Section. 1350 as adopted pursuant to Section 906 of the Sarbanes–Oxley Act of 2002, that:

1.	The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2.	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: December 24, 2003

/s/

John J. Arlotta

151

Exhibit 32.2 – CERTIFICATIONS PURSUANT TO TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES–OXLEY ACT OF 2002

In connection with the filing of the NeighborCare’s Annual Report on Form 10–K for the period ended September 30, 2003 with the Securities and Exchange Commission on the date hereof (the “Report”), I, Richard W. Sunderland, Jr., the Chief Financial Officer of NeighborCare, Inc, certify, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes–Oxley Act of 2002, that:

1.	The Report fully complies with the requirements of section 13 (a) or 15(d) of the Securities Exchange Act of 1934; and
2.	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: December 24, 2003

/s/

Richard W. Sunderland, Jr.

152

EX-4

================================================================================



                                    INDENTURE

                                      Among

                         GENESIS HEALTH VENTURES, INC.,

                          THE GUARANTORS PARTIES HERETO

                                       and

                        THE BANK OF NEW YORK, as Trustee

                        6.875% SENIOR SUBORDINATED NOTES

                                    DUE 2013

                          Dated as of November 4, 2003

================================================================================




                             CROSS-REFERENCE TABLE*

        Trust Indenture                                   Indenture Section
        Act Section
        310(a)(1).......................................            7.10
             (a)(2).....................................            7.10
             (a)(3).....................................            N.A.
             (a)(4).....................................            N.A.
             (a)(5).....................................            7.10
             (b)........................................            7.10
             (c)........................................            N.A.
        311(a)..........................................            7.11
             (b)........................................            7.11
             (c)........................................            N.A.
        312(a)..........................................            2.05
             (b)........................................           13.03
             (c)........................................           13.03
        313(a)..........................................            7.06
             (b)(1).....................................            N.A.
             (b)(2).....................................         7.06; 7.07
             (c)........................................        7.06; 13.02
             (d)........................................            7.06
        314(a)..........................................     4.03; 13.02; 13.05
             (b)........................................            N.A.
             (c)(1).....................................           13.04
             (c)(2).....................................           13.04
             (c)(3).....................................            N.A.
             (d.........................................            N.A.
             (e)........................................           13.05
             (f)........................................            N.A.
        315(a)..........................................            7.01
             (b)........................................        7.05; 13.02
             (c)........................................            7.01
             (d)........................................            7.01
             (e)........................................            6.11
        316(a) (last sentence)..........................            2.09
             (a)(1)(A)..................................            6.05
             (a)(1)(B)..................................            6.04
             (a)(2).....................................            N.A.
             (b)........................................            6.07
             (c)........................................            2.12
        317(a)(1).......................................            6.08
             (a)(2).....................................            6.09
             (b)........................................            2.04
        318(a)..........................................           13.01
             (b)........................................            N.A.
             (c)........................................           13.01

N.A. means not applicable.
* This Cross Reference Table is not part of the Indenture.




                                TABLE OF CONTENTS
                                                                            Page

                                   ARTICLE 1.
                          DEFINITIONS AND INCORPORATION
                                  BY REFERENCE

Section 1.01     Definitions...................................................1
Section 1.02     Other Definitions............................................21
Section 1.03     Incorporation by Reference of Trust Indenture Act............21
Section 1.04     Rules of Construction........................................22

                                   ARTICLE 2.
                                   THE NOTES

Section 2.01     Form and Dating..............................................22
Section 2.02     Execution and Authentication.................................23
Section 2.03     Registrar and Paying Agent...................................24
Section 2.04     Paying Agent to Hold Money in Trust..........................24
Section 2.05     Holder Lists.................................................25
Section 2.06     Transfer and Exchange........................................25
Section 2.07     Replacement Notes............................................37
Section 2.08     Outstanding Notes............................................37
Section 2.09     Treasury Notes...............................................38
Section 2.10     Temporary Notes..............................................38
Section 2.11     Cancellation.................................................38
Section 2.12     Defaulted Interest...........................................38

                                   ARTICLE 3.
                            REDEMPTION AND PREPAYMENT

Section 3.01     Notices to Trustee...........................................39
Section 3.02     Selection of Notes to Be Redeemed or Purchased...............39
Section 3.03     Notice of Redemption.........................................40
Section 3.04     Effect of Notice of Redemption...............................40
Section 3.05     Deposit of Redemption or Purchase Price......................41
Section 3.06     Notes Redeemed or Purchased in Part..........................41
Section 3.07     Optional Redemption..........................................41
Section 3.08     Mandatory Redemption.........................................42
Section 3.09     Special Redemption...........................................42
Section 3.10     Offer to Purchase by Application of Excess Proceeds..........42

                                   ARTICLE 4.
                                   COVENANTS

Section 4.01     Payment of Notes.............................................44
Section 4.02     Maintenance of Office or Agency..............................44
Section 4.03     Reports......................................................45
Section 4.04     Compliance Certificate.......................................45
Section 4.05     Taxes........................................................46
Section 4.06     Stay, Extension and Usury Laws...............................46
Section 4.07     Restricted Payments..........................................46
Section 4.08     Dividend and Other Payment Restrictions Affecting
                    Restricted Subsidiaries...................................49

                                       i



Section 4.09     Incurrence of Indebtedness and Issuance of
                    Preferred Stock..........................................51
Section 4.10     Asset Sales.................................................53
Section 4.11     Transactions with Affiliates................................55
Section 4.12     Liens.......................................................56
Section 4.13     Business Activities.........................................59
Section 4.14     Corporate Existence.........................................59
Section 4.15     Offer to Repurchase Upon a Change of Control................59
Section 4.16     Payments for Consent........................................61
Section 4.17     Additional Subsidiary Guarantees............................61
Section 4.18     Designation of Restricted and Unrestricted Subsidiaries.....61
Section 4.19     No Senior Subordinated Debt.................................61
Section 4.20     Consummation of Spin-off....................................62
Section 4.21     Limitation on Activities of the Company.....................62
Section 4.22     Spin-off....................................................62

                                   ARTICLE 5.
                                   SUCCESSORS

Section 5.01     Merger, Consolidation or Sale of Assets......................62
Section 5.02     Successor Corporation Substituted............................63

                                 ARTICLE 6.
                            DEFAULTS AND REMEDIES

Section 6.01     Events of Default............................................63
Section 6.02     Acceleration.................................................65
Section 6.03     Other Remedies...............................................66
Section 6.04     Waiver of Past Defaults......................................66
Section 6.05     Control by Majority..........................................66
Section 6.06     Limitation on Suits..........................................66
Section 6.07     Rights of Holders of Notes to Receive Payment................67
Section 6.08     Collection Suit by Trustee...................................67
Section 6.09     Trustee May File Proofs of Claim.............................67
Section 6.10     Priorities...................................................67
Section 6.11     Undertaking for Costs........................................68
Section 6.12     Restoration of Rights and Remedies...........................68

                                 ARTICLE 7.
                                 TRUSTEE

Section 7.01     Duties of Trustee............................................68
Section 7.02     Rights of Trustee............................................69
Section 7.03     Individual Rights of Trustee.................................71
Section 7.04     Trustee's Disclaimer.........................................71
Section 7.05     Notice of Defaults...........................................71
Section 7.06     Reports by Trustee to Holders of the Notes...................71
Section 7.07     Compensation and Indemnity...................................71
Section 7.08     Replacement of Trustee.......................................72
Section 7.09     Successor Trustee by Merger, etc.............................73
Section 7.10     Eligibility; Disqualification................................73
Section 7.11     Preferential Collection of Claims Against Company............73

                                       ii



                                 ARTICLE 8.
                  LEGAL DEFEASANCE AND COVENANT DEFEASANCE

Section 8.01     Option to Effect Legal Defeasance or Covenant Defeasance.....74
Section 8.02     Legal Defeasance and Discharge...............................74
Section 8.03     Covenant Defeasance..........................................74
Section 8.04     Conditions to Legal or Covenant Defeasance...................75
Section 8.05     Deposited Money and Government Securities to be Held in
                    Trust; Other Miscellaneous Provisions.....................76
Section 8.06     Repayment to Company.........................................76
Section 8.07     Reinstatement................................................77

                                 ARTICLE 9.
                      AMENDMENT, SUPPLEMENT AND WAIVER

Section 9.01     Without Consent of Holders of Notes..........................77
Section 9.02     With Consent of Holders of Notes.............................78
Section 9.03     Compliance with Trust Indenture Act..........................79
Section 9.04     Revocation and Effect of Consents............................79
Section 9.05     Notation on or Exchange of Notes.............................79
Section 9.06     Trustee to Sign Amendments, etc..............................80

                                   ARTICLE 10.
                                   GUARANTEES

Section 10.01    Guarantee....................................................80
Section 10.02    Limitation on Guarantor Liability............................81
Section 10.03    Execution and Delivery of the Guarantee......................81
Section 10.04    Guarantors May Consolidate, etc., on Certain Terms...........82
Section 10.05    Release of Subsidiary Guarantors from Obligations............82

                                   ARTICLE 11.
                                  SUBORDINATION

Section 11.01    Agreement to Subordinate.....................................83
Section 11.02    Liquidation; Dissolution; Bankruptcy.........................83
Section 11.03    Default on Designated Senior Debt............................84
Section 11.04    Acceleration of Notes........................................84
Section 11.05    When Distribution Must Be Paid Over..........................84
Section 11.06    Notice by Company............................................85
Section 11.07    Subrogation..................................................85
Section 11.08    Relative Rights..............................................85
Section 11.09    Subordination May Not Be Impaired by Company.................86
Section 11.10    Distribution or Notice to Representative.....................86
Section 11.11    Rights of Trustee and Paying Agent...........................86
Section 11.12    Authorization to Effect Subordination........................87
Section 11.13    Amendments...................................................87

                                 ARTICLE 12.
                         Satisfaction and Discharge

Section 12.01    Satisfaction and Discharge...................................87
Section 12.02    Application of Trust Money...................................88


                                      iii



                                   ARTICLE 13.
                                  MISCELLANEOUS

Section 13.01    Trust Indenture Act Controls.................................88
Section 13.02    Notices......................................................88
Section 13.03    Communication by Holders of Notes with Other Holders
                    of Notes..................................................89
Section 13.04    Certificate and Opinion as to Conditions Precedent...........89
Section 13.05    Statements Required in Certificate or Opinion................90
Section 13.06    Rules by Trustee and Agents..................................90
Section 13.07    No Personal Liability of Directors, Officers, Employees
                    and Stockholders..........................................90
Section 13.08    Governing Law................................................90
Section 13.09    Submission to Jurisdiction and Waiver of Jury Trial..........91
Section 13.10    No Adverse Interpretation of Other Agreements................91
Section 13.11    Successors...................................................91
Section 13.12    Severability.................................................91
Section 13.13    Counterpart Originals........................................91
Section 13.14    Table of Contents, Headings, etc.............................91
Section 13.15    Acts of Holders..............................................91

                                    EXHIBITS

Exhibit A        FORM OF NOTE
Exhibit B        FORM OF CERTIFICATE OF TRANSFER
Exhibit C        FORM OF CERTIFICATE OF EXCHANGE
Exhibit D        FORM OF CERTIFICATE OF ACQUIRING INSTITUTIONAL
                 ACCREDITED INVESTOR
Exhibit E        FORM OF SUBSIDIARY GUARANTEE
Exhibit F        FORM OF SUPPLEMENTAL INDENTURE


                                       iv



         INDENTURE, dated as of November 4, 2003, among Genesis Health Ventures,
Inc., a Pennsylvania corporation, having its principal office at 7 East Lee
Street, Baltimore, Maryland 21202 (the "Company"), the entities listed on the
signature pages hereto (the "Guarantors") and The Bank of New York, a New York
banking corporation, as Trustee (the "Trustee"), having its principal corporate
trust office at 101 Barclay Street, Floor 8 West, New York, New York 10286.

         The Company, the Guarantors and the Trustee agree as follows for the
benefit of each other and for the equal and ratable benefit of the Holders (as
defined below) of (i) $250 million of the Company's 6.875% Senior Subordinated
Notes due 2013 (the "Initial Notes"), (ii) if and when issued, the Company's
additional 6.875% Senior Subordinated Notes due 2013 that may be offered from
time to time subsequent to the date hereof (the "Additional Notes") and (iii) if
and when issued in exchange for the Initial Notes or any Additional Notes as
provided for in the Registration Rights Agreement (as hereinafter defined), the
Company's 6.875% Senior Subordinated Notes due 2013 (the "Exchange Notes" and,
together with the Initial Notes and the Additional Notes, the "Notes"):

                                   ARTICLE 1.
                          DEFINITIONS AND INCORPORATION
                                  BY REFERENCE

Section 1.01      Definitions.

         "144A Global Note" means a Global Note substantially in the form of
Exhibit A hereto bearing the Global Note Legend and the Private Placement Legend
and deposited with or on behalf of, and registered in the name of, the
Depositary or its nominee that will be issued in a denomination equal to the
outstanding principal amount of the Notes sold in reliance on Rule 144A.

            "Acquired Debt" means, with respect to any specified Person:

            (1) Indebtedness of any other Person existing at the time such other
         Person is merged with or into or became a Subsidiary of such specified
         Person, whether or not such Indebtedness is incurred in connection
         with, or in contemplation of, such other Person merging with or into,
         or becoming a Subsidiary of, such specified Person; and

            (2) Indebtedness secured by a Lien encumbering any asset acquired by
         such specified Person.

         "Additional Interest" means all additional interest then owing pursuant
to Section 5 of the Registration Rights Agreement.

         "Additional Notes" has the meaning assigned to it in the preamble to
this Indenture and are Notes (other than the Initial Notes) issued under this
Indenture in accordance with Section 2.02 and in compliance with Section 4.09
hereof, as part of the same series as the Initial Notes.

         "Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control,"
as used with respect to any Person, means the possession, directly or
indirectly, of the power to direct or cause the direction of the management or
policies of such Person, whether through the ownership of voting securities, by
agreement or otherwise. For purposes of this definition, the terms
"controlling," "controlled by" and "under common control with" have correlative
meanings.


                                       1



         "Agent" means any Registrar, co-registrar, Paying Agent or additional
paying agent.

         "Applicable Procedures" means, with respect to any transfer or exchange
of or for beneficial interests in any Global Note, the rules and procedures of
the Depositary, Euroclear and Clearstream that apply to such transfer or
exchange.

         "Asset Sale" means:

            (1) the sale, lease, conveyance or other disposition of any assets
         or rights, other than sales of inventory in the ordinary course of
         business consistent with past practices; provided that the sale,
         conveyance or other disposition of all or substantially all of the
         assets of the Company and its Restricted Subsidiaries taken as a whole
         will be governed by Sections 4.15 and 5.01 hereof and not by the
         provisions of Section 4.10 hereof; and

            (2) the issuance of Equity Interests in any of the Company's
         Restricted Subsidiaries or the sale of Equity Interests in any of its
         Restricted Subsidiaries.

            Notwithstanding the preceding, the following items will not be
         deemed to be Asset Sales:

            (1) any single transaction or series of related transactions that
         involves assets having a fair market value of less than $10.0 million;

            (2) a transfer of assets between or among the Company and its
         Restricted Subsidiaries or between or among Restricted Subsidiaries;

            (3) an issuance of Equity Interests by a Restricted Subsidiary to
         the Company or to another Restricted Subsidiary;

            (4) a sale, lease, transfer, conveyance or other distribution
         effected in compliance with Section 5.01 hereof;

            (5) a Restricted Payment or Permitted Investment that is permitted
         by Section 4.07;

            (6) the Spin-off and all transactions that are necessary or are
         contemplated to be performed in connection therewith;

            (7) the sale or other disposition of cash or Cash Equivalents;

            (8) the sale, lease, conveyance or other disposition of any property
         or assets recorded on the balance sheet as of June 30, 2003 of the
         Company as being held for sale;

            (9) a Permitted Asset Swap;

            (10) the subletting of real property in the ordinary course of
         business;

            (11) the sale, lease or other disposition or replacement of (i)
         accounts receivable in the ordinary course of business, or (ii)
         equipment, inventory or property that has become obsolete, worn out,
         damaged or no longer useful in the conduct of the Company's business
         and that is disposed of in the ordinary course of business; and

            (12) any loans of equipment to customers of the Company or any
         Restricted Subsidiary in the ordinary course of business for use with
         the products or services of the Company or any Restricted Subsidiary.


                                       2


         "Attributable Debt" in respect of a sale and leaseback transaction
means, at the time of determination, the present value of the obligation of the
lessee for net rental payments during the remaining term of the lease included
in such sale and leaseback transaction including any period for which such lease
has been extended or may, at the option of the lessor, be extended. Such present
value shall be calculated using a discount rate equal to the rate of interest
implicit in such transaction, determined in accordance with GAAP.

         "Bankruptcy Law" means Title 11, United States Code or any similar
federal or state law for the relief of debtors.

         "Beneficial Owner" has the meaning assigned to such term in Rule 13d-3
and Rule 13d-5 under the Exchange Act, except that in calculating the beneficial
ownership of any particular "person" (as that term is used in Section 13(d)(3)
of the Exchange Act), such "person" will be deemed to have beneficial ownership
of all securities that such "person" has the right to acquire by conversion or
exercise of other securities, whether such right is currently exercisable or is
exercisable only upon the occurrence of a subsequent condition. The terms
"Beneficially Owns" and "Beneficially Owned" have a corresponding meaning.

         "Board of Directors" means:

            (1) with respect to a corporation, the board of directors of the
         corporation;

            (2) with respect to a partnership, the board of directors of the
         general partner of the partnership; and

            (3) with respect to any other Person, the board or committee of such
         Person serving a similar function.

         "Board Resolution" means a resolution duly adopted by the Board of
Directors, a copy of which, certified by the Secretary or an Assistant Secretary
of the Company to be in full force and effect on the date of such certification,
shall have been delivered to the Trustee.

         "Broker-Dealer" has the meaning set forth in the Registration Rights
Agreement.

         "Business Day" means any day other than a Legal Holiday.

         "Capital Lease Obligation" means, at the time any determination is to
be made, the amount of the liability in respect of a capital lease that would at
that time be required to be capitalized on a balance sheet in accordance with
GAAP.

         "Capital Stock" means:

            (1) in the case of a corporation, corporate stock;

            (2) in the case of an association or business entity, any and all
         shares, interests, participations, rights or other equivalents (however
         designated) of corporate stock;

            (3) in the case of a partnership or limited liability company,
         partnership or membership interests (whether general or limited); and

            (4) in the case of any other entity, any other interest or
         participation that confers on a Person the right to receive a share of
         the profits and losses of, or distributions of assets of, the issuing
         Person.

         "Cash Equivalents" means:

            (1) United States dollars;

            (2) securities issued or directly and fully guaranteed or insured by
         the United States government or any agency or instrumentality of the
         United States government (provided that the full faith and credit of
         the United States is pledged in support of those securities) having
         maturities of not more than six months from the date of acquisition;

            (3) certificates of deposit and eurodollar time deposits with
         maturities of six months or less from the date of acquisition, bankers'
         acceptances with maturities not exceeding six months and overnight bank
         deposits, in each case, with any lender party to the Credit Agreement
         or with any domestic commercial bank having capital and surplus in
         excess of $500.0 million and a Thomson Bank Watch Rating of "B" or
         better;


                                       3


            (4) repurchase obligations with a term of not more than seven days
         for underlying securities of the types described in clauses (2) and (3)
         above entered into with any financial institution meeting the
         qualifications specified in clause (3) above;

            (5) commercial paper having the highest rating obtainable from
         Moody's Investors Service, Inc. or Standard & Poor's Rating Services
         and in each case maturing within six months after the date of
         acquisition; and

            (6) money market funds at least 95% of the assets of which
         constitute Cash Equivalents of the kinds described in clauses (1)
         through (5) of this definition.

         "Change of Control" means the occurrence of any of the following:

            (1) the direct or indirect sale, transfer, conveyance or other
         disposition (other than by way of merger or consolidation), in one or a
         series of related transactions, of all or substantially all of the
         properties or assets of the Company and its Restricted Subsidiaries,
         taken as a whole, to any "person" (as that term is used in Section
         13(d)(3) of the Exchange Act), other than the Spin-off, and other than
         any such transaction where the Voting Stock of the Company outstanding
         immediately prior to such transaction is converted into or exchanged
         for Voting Stock (other than Disqualified Stock) of the surviving or
         transferee Person constituting a majority of the outstanding shares of
         such Voting Stock of such surviving or transferee Person (immediately
         after giving effect to such issuance);

            (2) the adoption of a plan relating to the liquidation or
         dissolution of the Company;

            (3) the consummation of any transaction (including, without
         limitation, any merger or consolidation) the result of which is that
         any "person" (as defined above), becomes the Beneficial Owner, directly
         or indirectly, of more than 35% of the Voting Stock of the Company,
         measured by voting power rather than number of shares;

            (4) the first day on which a majority of the members of the Board of
         Directors of the Company are not Continuing Directors; or


                                       4


            (5) the Company consolidates with, or merges with or into, any
         Person, or any Person consolidates with, or merges with or into, the
         Company, in any such event pursuant to a transaction in which any of
         the outstanding Voting Stock of the Company or such other Person is
         converted into or exchanged for cash, securities or other property,
         other than the merger of GHC with and into the Company if the Spin-off
         does not occur by February 27, 2004, and other than any such
         transaction where the Voting Stock of the Company outstanding
         immediately prior to such transaction is converted into or exchanged
         for Voting Stock (other than Disqualified Stock) of the surviving or
         transferee Person constituting a majority of the outstanding shares of
         such Voting Stock of such surviving or transferee Person (immediately
         after giving effect to such issuance).

         "Clearstream" means Clearstream Banking, S.A.

         "Commission" means Securities and Exchange Commission.

         "Company" means Genesis Health Ventures, Inc., and any and all
successors thereto.

         "Consolidated Cash Flow" means, with respect to any specified Person
for any period, the Consolidated Net Income of such Person for such period plus:

            (1) any "non-recurring" charges that would be permitted under Item
         10 of Regulation S-K to be excluded from non-GAAP financial measures in
         any registration statement filed with the Commission; provided that
         such "non-recurring charges" are not included in the definition of
         "Consolidated Net Income"; plus

            (2) provision for taxes based on income or profits of such Person
         and its Restricted Subsidiaries for such period, to the extent that
         such provision for taxes was deducted in computing such Consolidated
         Net Income; plus

            (3) consolidated interest expense of such Person and its Restricted
         Subsidiaries for such period, whether paid or accrued and whether or
         not capitalized (including, without limitation, amortization of debt
         issuance costs and original issue discount, non-cash interest payments,
         the interest component of any deferred payment obligations, the
         interest component of all payments associated with Capital Lease
         Obligations, imputed interest with respect to Attributable Debt,
         commissions, discounts and other fees and charges incurred in respect
         of letter of credit or bankers' acceptance financings, and net of the
         effect of all payments made or received pursuant to Hedging
         Obligations), to the extent that any such expense was deducted in
         computing such Consolidated Net Income; plus

            (4) depreciation, amortization (including amortization of goodwill
         and other intangibles but excluding amortization of prepaid cash
         expenses that were paid in a prior period) and other non-cash expenses
         (excluding any such non-cash expense to the extent that it represents
         an accrual of or reserve for cash expenses in any future period) of
         such Person and its Restricted Subsidiaries for such period to the
         extent that such depreciation, amortization and other non-cash expenses
         were deducted in computing such Consolidated Net Income; minus

            (5) non-cash items increasing such Consolidated Net Income for such
         period, other than the accrual of revenue in the ordinary course of
         business,

in each case, on a consolidated basis and determined in accordance with GAAP.


                                       5


         "Consolidated Net Income" means, with respect to any specified Person
for any period, the aggregate of the Net Income of such Person and its
Subsidiaries for such period, on a consolidated basis, determined in accordance
with GAAP; provided that:

            (1) the Net Income (but not loss) of any Person that is not a
         Restricted Subsidiary or that is accounted for by the equity method of
         accounting shall be included only to the extent of the amount of
         dividends or distributions paid in cash to the specified Person or a
         Restricted Subsidiary of the Person;

            (2) the Net Income of any Restricted Subsidiary shall be excluded to
         the extent that the declaration or payment of dividends or similar
         distributions by that Restricted Subsidiary of that Net Income is not
         at the date of determination permitted without any prior governmental
         approval (that has not been obtained) or, directly or indirectly, by
         operation of the terms of its charter or any agreement, instrument,
         judgment, decree, order, statute, rule or governmental regulation
         applicable to that Restricted Subsidiary or its shareholders; and

            (3) the cumulative effect of a change in accounting principles shall
         be excluded.

         In addition, the Net Income, prior to the Spin-off, of GHC and the
         Subsidiaries of the Company that will be Subsidiaries of GHC after the
         Spin-off will be included in the Consolidated Net Income of the Company
         only to the extent of the amount of dividends or distributions paid in
         cash to the Company or a Restricted Subsidiary of the Company.

         "Consolidated Tangible Assets" means the total assets, less goodwill
and other intangibles, shown on the Company's most recent consolidated balance
sheet, determined on a consolidated basis in accordance with GAAP less all
write-ups (other than write-ups in connection with acquisitions) subsequent to
the date of this Indenture in the book value of any asset (except any such
intangible assets) owned by the Company or any of its Restricted Subsidiaries.

         "Continuing Directors" means, as of any date of determination, any
member of the Board of Directors of the Company who:

            (1) was a member of such Board of Directors the date of this
         Indenture; or

            (2) was nominated for election or elected to such Board of Directors
         with the approval of a majority of the Continuing Directors who were
         members of such Board of Directors at the time of such nomination or
         election.

         "Corporate Trust Office of the Trustee" means the principal office of
the Trustee at which at any time its corporate trust business shall be
administered, which office at the date hereof is located at 101 Barclay Street,
Floor 8 West, New York, New York 10286, Attention: Corporate Finance Unit, or
such other address as the Trustee may designate from time to time by notice to
the Holders and the Company, or the principal corporate trust office of any
successor Trustee (or such other address as a successor Trustee may designate
from time to time by notice to the Holders and the Company).

         "Credit Facilities" means one or more debt facilities or agreements
(including, without limitation, the Company's Existing Credit Agreement) or
commercial paper facilities, in each case with banks or other institutional
lenders or investors providing for revolving credit loans, term loans,
receivables financing (including through the sale of receivables to such lenders
or to special purpose entities formed to borrow from such lenders against such
receivables) or letters of credit, in each case, as amended, restated, modified,
renewed, refunded, replaced, restructured or refinanced (including any agreement
to increase the amount of available borrowings thereunder, extend the maturity
thereof and add additional borrowers or guarantors) in whole or in part from
time to time under the same or any other agent, lender or group of lenders.


                                       6


         "Custodian" means the Trustee, as custodian with respect to the Notes
in global form, or any successor entity thereto.

         "Default" means any event that is, or with the passage of time or the
giving of notice or both would be, an Event of Default.

         "Definitive Note" means a certificated Note registered in the name of
the Holder thereof and issued in accordance with Section 2.06 hereof,
substantially in the form of Exhibit A hereto except that such Note shall not
bear the Global Note Legend and shall not have the "Schedule of Exchanges of
Interests in the Global Note" attached thereto.

         "Depositary" means, with respect to the Notes issuable or issued in
whole or in part in global form, the Person specified in Section 2.03 hereof as
the Depositary with respect to the Notes, and any and all successors thereto
appointed as depositary hereunder and having become such pursuant to the
applicable provision of this Indenture.

         "Designated Non-Cash Consideration" means the fair market value of
total consideration received by the Company or any of its Restricted
Subsidiaries in connection with an Asset Sale that is so designated as
Designated Non-Cash Consideration pursuant to an officer's certificate, setting
forth the basis of such valuation, executed by the principal executive officer
and principal financial officer, less the amount of cash or Cash Equivalents
received in connection with the Asset Sale; provided, however, the total amount
of Designated Non-Cash Consideration outstanding at one time does not exceed the
greater of $25.0 million and 2.5% of Consolidated Tangible Assets.

         "Designated Senior Debt" means (i) any Indebtedness outstanding under
the Company's Existing Credit Agreement and (ii) any other Senior Debt permitted
hereunder the principal amount of which is $50.0 million or more and that has
been designated by the Company as "Designated Senior Debt."

         "Disqualified Stock" means any Capital Stock that, by its terms (or by
the terms of any security into which it is convertible, or for which it is
exchangeable, in each case at the option of the holder of the Capital Stock), or
upon the happening of any event, matures or is mandatorily redeemable, pursuant
to a sinking fund obligation or otherwise, or redeemable at the option of the
holder of the Capital Stock, in whole or in part, on or prior to the date that
is 91 days after the date on which the Notes mature. Notwithstanding the
preceding sentence, any Capital Stock that would constitute Disqualified Stock
solely because the holders of the Capital Stock have the right to require the
Company to repurchase such Capital Stock upon the occurrence of a Change of
Control or an Asset Sale shall not constitute Disqualified Stock if the terms of
such Capital Stock provide that the Company may not repurchase or redeem any
such Capital Stock pursuant to such provisions unless such repurchase or
redemption complies with Section 4.07.

         "Escrow Agreement" means the Escrow and Security Agreement dated as of
November 4, 2003 by and between the Company and The Bank of New York, a New York
banking corporation, as securities intermediary and escrow agent, in favor of
the Holders of the Notes issued by the Company under this Indenture.


                                       7


         "Equity Interests" means Capital Stock and all warrants, options or
other rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).

         "Equity Offering" means any public or private sale of Capital Stock
(other than Disqualified Stock) made for cash on a primary basis by the Company
after the date of this Indenture.

         "Euroclear" means Euroclear Bank S.A./N.V., as operator of the
Euroclear system.

         "Exchange Act" means the Securities Exchange Act of 1934, as amended.

         "Exchange Notes" has the meaning assigned to it in the preamble to this
Indenture and are Notes issued in the Exchange Offer pursuant to Section 2.06(f)
hereof and having substantially identical terms as the Notes (except that the
Exchange Notes will not contain terms with respect to transfer restrictions)
pursuant to a registered Exchange Offer as provided in the Registration Rights
Agreement.

         "Exchange Offer" has the meaning set forth in the Registration Rights
Agreement.

         "Exchange Offer Registration Statement" has the meaning set forth in
the Registration Rights Agreement.

         "Existing Credit Agreement" means that certain Credit, Security,
Guaranty and Pledge Agreement dated as of October 2, 2001, among the Company,
the guarantors referred to therein, the lenders referred to therein, First Union
Securities, Inc. as Co-Lead Arranger, Goldman Sachs Credit Partners L.P. as
Co-Lead Arranger and Syndication Agent, First Union National Bank as
Administrative Agent and Collateral Agent, General Electric Capital Corporation
as Collateral Monitoring Agent and Co-Documentation Agent and Citicorp USA, Inc.
as Co-Documentation Agent, in existence on the date of this Indenture, providing
for up to $365 million of term loan borrowings and $150 million of revolving
credit borrowings, including any related notes, guarantees, collateral
documents, instruments and agreements executed in connection therewith, and in
each case as amended, restated, modified, renewed, refunded, replaced or
refinanced (in whole or in part) from time to time, whether or not with the same
lenders or agent.

         "Existing Indebtedness" means up to $296.7 million in aggregate
principal amount of Indebtedness of the Company and its Subsidiaries (other than
Indebtedness under the Company's Existing Credit Agreement) in existence on the
date of this Indenture, until such amounts are repaid.

         "Existing Preferred Stock" means the Company's Series A Convertible
Preferred Stock.

         "Fixed Charges" means, with respect to any specified Person for any
period, the sum, without duplication, of:

            (1) the consolidated interest expense of such Person and its
         Restricted Subsidiaries for such period, whether paid or accrued,
         including, without limitation, amortization of debt issuance costs and
         original issue discount, non-cash interest payments, the interest
         component of any deferred payment obligations, the interest component
         of all payments associated with Capital Lease Obligations, imputed
         interest with respect to Attributable Debt, commissions, discounts and
         other fees and charges incurred in respect of letter of credit or
         bankers' acceptance financings, and net of the effect of all payments
         made or received pursuant to Hedging Obligations; plus


                                       8


            (2) the consolidated interest of such Person and its Restricted
         Subsidiaries that was capitalized during such period; plus

            (3) any interest expense on Indebtedness of another Person that is
         Guaranteed by such Person or one of its Restricted Subsidiaries or
         secured by a Lien on assets of such Person or one of its Restricted
         Subsidiaries, whether or not such Guarantee or Lien is called upon, but
         only if the outstanding Indebtedness that is Guaranteed or secured by a
         Lien is in the aggregate greater than $15.0 million; plus

            (4) the product of (a) all dividends, whether paid or accrued and
         whether or not in cash, on any series of preferred stock of such Person
         or any of its Restricted Subsidiaries, other than dividends on Equity
         Interests payable solely in Equity Interests of the Company (other than
         Disqualified Stock) or to the Company or a Restricted Subsidiary of the
         Company, times (b) a fraction, the numerator of which is one and the
         denominator of which is one minus the then current combined federal,
         state and local statutory tax rate of such Person, expressed as a
         decimal, in each case, on a consolidated basis and in accordance with
         GAAP.

         "Fixed Charge Coverage Ratio" means with respect to any specified
Person for any period, the ratio of the Consolidated Cash Flow of such Person
and its Restricted Subsidiaries for such period to the Fixed Charges of such
Person and its Restricted Subsidiaries for such period. In the event that the
specified Person or any of its Restricted Subsidiaries incurs, assumes,
Guarantees, repays, repurchases or redeems any Indebtedness (other than ordinary
working capital borrowings) or issues, repurchases or redeems preferred stock
subsequent to the commencement of the period for which the Fixed Charge Coverage
Ratio is being calculated and on or prior to the date on which the event for
which the calculation of the Fixed Charge Coverage Ratio is made (the
"Calculation Date"), then the Fixed Charge Coverage Ratio will be calculated
giving pro forma effect to such incurrence, assumption, Guarantee, repayment,
repurchase or redemption of Indebtedness, or such issuance, repurchase or
redemption of preferred stock, and the use of the proceeds therefrom as if the
same had occurred at the beginning of the applicable four-quarter reference
period.

         In addition, for purposes of calculating the Fixed Charge Coverage
Ratio:

            (1) acquisitions that have been made by the specified Person or any
         of its Restricted Subsidiaries, including through mergers or
         consolidations and including any related financing transactions, during
         the four-quarter reference period or subsequent to such reference
         period and on or prior to the Calculation Date shall be given pro forma
         effect (calculated in accordance with Regulation S-X) as if they had
         occurred on the first day of the four-quarter reference period and
         Consolidated Cash Flow for such reference period will be calculated
         without giving effect to clause (3) of the proviso set forth in the
         definition of Consolidated Net Income; and

            (2) the Consolidated Cash Flow attributable to discontinued
         operations, as determined in accordance with GAAP, and operations or
         businesses disposed of prior to the Calculation Date, will be excluded;
         and

            (3) the Fixed Charges attributable to discontinued operations, as
         determined in accordance with GAAP, and operations or businesses
         disposed of prior to the Calculation Date, will be excluded.

         "GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession, which are in effect on the date of this Indenture.


                                       9


         "GHC" means Genesis HealthCare Corporation.

         "GHC Credit Agreement" means that certain Credit Agreement to be
entered into by and among GHC, the Guarantors party thereto and the lenders from
time to time party thereto, providing for a term loan and a revolving credit
facility, including any related notes, guarantees, collateral documents,
instruments and agreements executed in connection therewith, and in each case as
amended, restated, modified, renewed, refunded, replaced or refinanced (in whole
or in part) from time to time, whether or not with the same lenders or agent.

         "GHC Notes" means the notes issued by GHC under an indenture among GHC,
the guarantors thereunder and The Bank of New York, as the trustee.

         "Global Notes" means, individually and collectively, each of the
Restricted Global Notes and the Unrestricted Global Notes, substantially in the
form of Exhibit A hereto issued in accordance with Sections 2.01, 2.06(b)(3),
2.06(b)(4), 2.06(d)(2) or 2.06(f) hereof.

         "Global Note Legend" means the legend set forth in Section 2.06(g)(2),
which is required to be placed on all Global Notes issued under this Indenture.

         "Government Securities" means direct obligations of, or obligations
Guaranteed by, the United States of America, and the payment for which the
United States pledges its full faith and credit.

         "Guarantee" means a guarantee other than by endorsement of negotiable
instruments for collection in the ordinary course of business, direct or
indirect, in any manner including, without limitation, by way of a pledge of
assets or through letters of credit or reimbursement agreements in respect
thereof, of all or any part of any Indebtedness.

         "Guarantors" means each of:

            (1) the Company's Restricted Subsidiaries that guarantee the
         Company's Existing Credit Agreement; and

            (2) any other Subsidiary that executes a Subsidiary Guarantee in
         accordance with the provisions of this Indenture; provided, however,
         that upon the release and discharge of any Person from its Subsidiary
         Guarantee in accordance with this Indenture, such Person shall cease to
         be a Guarantor,

and their respective successors and assigns.

         "Hedging Obligations" means, with respect to any specified Person, the
obligations of such Person under:

            (1) interest rate swap agreements, interest rate cap agreements and
         interest rate collar agreements; and

            (2) other agreements or arrangements designed to protect such Person
         against fluctuations in interest rates.

                                       10


         "Holder" means a Person in whose name a Note is registered.

         "IAI Global Note" means a Global Note substantially in the form of
Exhibit A hereto bearing the Global Note Legend and the Private Placement Legend
and deposited with or on behalf of and registered in the name of the Depositary
or its nominee that will be issued in a denomination equal to the outstanding
principal amount of the Notes sold to Institutional Accredited Investors.

         "Indebtedness" means, with respect to any specified Person, any
indebtedness of such Person, whether or not contingent:

            (1) in respect of borrowed money;

            (2) evidenced by bonds, notes, debentures or similar instruments or
         letters of credit (or reimbursement agreements in respect thereof);

            (3) in respect of banker's acceptances;

            (4) representing Capital Lease Obligations;

            (5) representing the balance deferred and unpaid of the purchase
         price of any property, except any such balance that constitutes an
         accrued expense or trade payable; or

            (6) representing any Hedging Obligations,

if and to the extent any of the preceding items (other than letters of credit
and Hedging Obligations) would appear as a liability upon a balance sheet of the
specified Person prepared in accordance with GAAP. In addition, the term
"Indebtedness" includes all Indebtedness of others secured by a Lien on any
asset of the specified Person (whether or not such Indebtedness is assumed by
the specified Person) and, to the extent not otherwise included, the Guarantee
by the specified Person of any indebtedness of any other Person.

         Notwithstanding anything in the foregoing to the contrary, Indebtedness
shall not include trade payables or accrued expenses for property or services
incurred in the ordinary course of business.

         The amount of any Indebtedness outstanding as of any date shall be:

            (1) the accreted value of the Indebtedness, in the case of any
         Indebtedness issued with original issue discount; and

            (2) the principal amount of the Indebtedness, together with any
         interest on the Indebtedness that is more than 30 days past due, in the
         case of any other Indebtedness.

         "Indenture" means this Indenture, as amended or supplemented from time
to time.

         "Indirect Participant" means a Person who holds a beneficial interest
in a Global Note through a Participant.


                                       11


         "Initial Notes" means the first $250.0 million aggregate principal
amount of Notes issued under this Indenture on the date hereof.

         "Initial Purchasers" means Goldman, Sachs & Co., UBS Securities LLC,
Lehman Brothers Inc. and J.P. Morgan Securities Inc.

         "Institutional Accredited Investor" means an institution that is an
"accredited investor" as defined in Rule 501(a)(1), (2), (3) or (7) under the
Securities Act, who are not also QIBs.

         "Investments" means, with respect to any Person, all direct or indirect
investments by such Person in other Persons (including Affiliates) in the forms
of loans (including Guarantees or other obligations), advances or capital
contributions (excluding commission, travel and similar advances to officers and
employees made in the ordinary course of business), purchases or other
acquisitions for consideration of Indebtedness, Equity Interests or other
securities, together with all items that are or would be classified as
investments on a balance sheet prepared in accordance with GAAP. If the Company
or any Restricted Subsidiary of the Company sells or otherwise disposes of any
Equity Interests of any direct or indirect Restricted Subsidiary of the Company
such that, after giving effect to any such sale or disposition, such Person is
no longer a Restricted Subsidiary of the Company, the Company shall be deemed to
have made an Investment on the date of any such sale or disposition equal to the
fair market value of the Equity Interests of such Restricted Subsidiary not sold
or disposed of in an amount determined as provided in the final paragraph of
Section 4.07 hereof; provided that the Company shall not have been deemed to
have made an Investment pursuant to the foregoing if the Company shall have
previously or concurrently therewith been deemed to have made an Investment in
connection with such Equity Interest. The acquisition by the Company or any
Restricted Subsidiary of the Company of a Person that holds an Investment in a
third Person shall be deemed to be an Investment by the Company or such
Restricted Subsidiary in such third Person in an amount equal to the fair market
value of the Investment held by the acquired Person in such third Person in an
amount determined as provided in the final paragraph of Section 4.07 hereof;
provided that the Company shall not have been deemed to have made an Investment
pursuant to the foregoing if the Company shall have previously or concurrently
therewith been deemed to have made an Investment in connection with such
acquisition.

         "Item 10 of Regulation S-K" means Item 10 of Regulation S-K as adopted
by the Commission and in effect on the date hereof.

         "Legal Holiday" means a Saturday, a Sunday or a day on which banking
institutions in the City of New York or at a place of payment are authorized by
law, regulation or executive order to remain closed. If a payment date is a
Legal Holiday at a place of payment, payment may be made at that place on the
next succeeding day that is not a Legal Holiday, and no interest shall accrue on
such payment for the intervening period.

         "Letter of Transmittal" means the letter of transmittal to be prepared
by the Company and sent to all Holders of the Notes for use by such Holders in
connection with the Exchange Offer.

         "Lien" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such asset,
whether or not filed, recorded or otherwise perfected under applicable law,
including any conditional sale or other title retention agreement, any lease in
the nature thereof, any option or other agreement to sell or give a security
interest in and any filing of or agreement to give any financing statement under
the Uniform Commercial Code (or equivalent statutes) of any jurisdiction.

         "Net Income" means, with respect to any specified Person, the net
income (loss) of such Person, determined in accordance with GAAP and before any
reduction in respect of preferred stock dividends, excluding, however:

            (1) any gain (but not loss), together with any related provision for
         taxes on such gain (but not loss), realized in connection with: (a) any
         Asset Sale; or (b) the disposition of any securities by such Person or
         any of its Restricted Subsidiaries or the extinguishment of any
         Indebtedness of such Person or any of its Restricted Subsidiaries;

                                       12


            (2) any extraordinary gain, together with any related provision for
         taxes on such extraordinary gain; and

            (3) any non-cash, "non-recurring" charges that would be permitted
         under Item 10 of Regulation S-K to be excluded from non-GAAP financial
         measures in any registration statement filed with the Commission.

         "Net Proceeds" means the aggregate cash proceeds received by the
Company or any of its Restricted Subsidiaries in respect of any Asset Sale
(including, without limitation, any cash received upon the sale or other
disposition of any non-cash consideration received in any Asset Sale), net of
the direct costs relating to such Asset Sale, including, without limitation,
legal, accounting and investment banking fees, and sales commissions, and any
relocation expenses incurred as a result of the Asset Sale, taxes paid or
payable as a result of the Asset Sale, in each case, after taking into account
any available tax credits or deductions and any tax sharing arrangements, and
amounts required to be applied to the repayment of Indebtedness, other than
Senior Debt, secured by a Lien on the asset or assets that were the subject of
such Asset Sale, all distributions and other payments required to be made to
non-majority interest holders in Subsidiaries or joint ventures as a result of
such Asset Sale, and any reserve for adjustment in respect of the sale price of
such asset or assets established in accordance with GAAP.

         "New Credit Agreement" means that certain Credit Agreement to be
entered into by and among the Company, the Guarantors party thereto and the
lenders from time to time party thereto, providing for a revolving credit
facility, including any related notes, guarantees, collateral documents,
instruments and agreements executed in connection therewith, and in each case as
amended, restated, modified, renewed, refunded, replaced or refinanced (in whole
or in part) from time to time, whether or not with the same lenders or agent.

         "Non-recourse Debt" means Indebtedness:

            (1) as to which neither the Company nor any of its Restricted
         Subsidiaries (a) provides credit support of any kind (including any
         undertaking, agreement or instrument that would constitute
         Indebtedness), (b) is directly or indirectly liable as a guarantor or
         otherwise, or (c) constitutes the lender;

            (2) no default with respect to which (including any rights that the
         holders thereof may have to take enforcement action against an
         Unrestricted Subsidiary) would permit upon notice, lapse of time or
         both any holder of any other Indebtedness (other than the Notes) of the
         Company or any of its Restricted Subsidiaries to declare a default on
         such other Indebtedness or cause the payment thereof to be accelerated
         or payable prior to its stated maturity; and

            (3) as to which the lenders have been notified in writing that they
         will not have any recourse to the stock or assets of the Company or any
         of its Restricted Subsidiaries.

         "Non-U.S. Person" means a Person who is not a U.S. Person.

         "Notes" has the meaning assigned to it in the preamble to this
Indenture. The Initial Notes and the Additional Notes shall be treated as a
single class for all purposes under this Indenture, and unless the context
otherwise requires, all references to the Notes shall include the Initial Notes
and any Additional Notes.


                                       13


         "Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, costs, expenses, damages and other liabilities
payable under the documentation governing any Indebtedness.

         "Offering Circular" means the offering circular of the Company dated
October 29, 2003 for the Notes.

         "Officer" means, with respect to any Person, the Chairman of the Board,
the Chief Executive Officer, the President, the Chief Operating Officer, the
Chief Financial Officer, the Treasurer, any Assistant Treasurer, the Controller,
the Secretary, any Assistant Secretary or any Vice-President of such Person.

         "Officers' Certificate" means a certificate signed on behalf of the
Company by two Officers of the Company, one of whom must be the principal
executive officer, the principal financial officer, the treasurer or the
principal accounting officer of the Company, that meets the requirements of
Section 13.05 hereof.

         "Opinion of Counsel" means an opinion from legal counsel who is
reasonably acceptable to the Trustee, that meets the requirements of Section
13.05 hereof. The counsel may be an employee of or counsel to the Company or any
Subsidiary of the Company.

         "Participant" means, with respect to the Depositary, Euroclear or
Clearstream, a Person who has an account with the Depositary, Euroclear or
Clearstream, respectively (and, with respect to DTC, shall include Euroclear and
Clearstream).

         "Permitted Asset Swap" means sales, transfers or other dispositions of
assets, including all of the outstanding Capital Stock of a Restricted
Subsidiary, for consideration at least equal to the fair market value of the
assets sold or disposed of, but only if the consideration received consists of
Capital Stock of a Person that becomes a Restricted Subsidiary engaged in, or
property or assets (other than cash, except to the extent used as a bona fide
means of equalizing the value of the property or assets involved in the swap
transaction) of a nature or type or that are used in, a business having property
or assets of a nature or type, or engaged in a business similar or related to
the nature or type of the property and assets of, or business of, the Company
and the Restricted Subsidiaries existing on the date of such sale or other
disposition.

         "Permitted Business" means the lines of business conducted by the
Company and its Restricted Subsidiaries and Permitted Joint Ventures on the date
hereof and the businesses reasonably related thereto, including the lines of
business of GHC and its Restricted Subsidiaries and the business related thereto
if the Spin-off does not occur by February 27, 2004, and GHC merges with and
into the Company.

         "Permitted Investments" means:

            (1) any Investment in the Company or in a Restricted Subsidiary of
         the Company that is a Guarantor;

            (2) any Investment in Cash Equivalents;

            (3) any Investment by the Company or any Restricted Subsidiary of
         the Company in a Person, if as a result of such Investment:

                  (a) such Person becomes a Restricted Subsidiary of the Company
            and a Guarantor; or

                  (b) such Person is merged, consolidated or amalgamated with or
            into, or transfers or conveys substantially all of its assets to, or
            is liquidated into, the Company or a Subsidiary of the Company that
            is a Guarantor;


                                       14


            (4) Investments existing on the date of this Indenture and any
         renewal or replacement thereof on terms and conditions not materially
         less favorable than that being renewed or replaced;

            (5) Investments of a Person or any of its Subsidiaries existing at
         the time such Person becomes a Restricted Subsidiary or at the time
         such Person merges or consolidates with the Company or any of its
         Restricted Subsidiaries, in either case, in compliance with this
         Indenture; provided that such Investments were not made by such Person
         in connection with, or in anticipation or contemplation of, such Person
         becoming a Restricted Subsidiary or such merger or consolidation;

            (6) Investments in purchase price adjustments, contingent purchase
         price payments or other earn-out obligations received in connection
         with Investments otherwise permitted under this Indenture;

            (7) any Investment made as a result of the receipt of non-cash
         consideration from an Asset Sale that was made pursuant to and in
         compliance with Section 4.10 hereof or any transaction not constituting
         an Asset Sale by reason of the $10.0 million threshold contained in the
         definition thereof;

            (8) any acquisition of assets solely in exchange for the issuance of
         Equity Interests (other than Disqualified Stock) of the Company;

            (9) any Investments received in compromise of obligations of such
         persons incurred in the ordinary course of trade creditors or customers
         that were incurred in the ordinary course of business, including
         pursuant to any plan of reorganization or similar arrangement upon the
         bankruptcy or insolvency of any trade creditor or customer;

            (10) Hedging Obligations;

            (11) Investments not to exceed $40.0 million at any one time
         outstanding in Permitted Joint Ventures;

            (12) Investments represented by accounts receivable created or
         acquired in the ordinary course of business; intercompany Indebtedness
         to the extent permitted by Section 4.09; Investments in prepaid
         expenses, negotiable instruments held for collection and lease, utility
         and workers' compensation, performance and other similar deposits made
         in the ordinary course of business and Investments to secure
         participation in government reimbursement programs; Investments by any
         qualified or nonqualified benefit plan established by the Company or
         its Restricted Subsidiaries made in accordance with the terms of such
         plan, or any Investments made by the Company or any Restricted
         Subsidiary in connection with the funding thereof; loans or advances to
         employees (other than executive officers to the extent not in
         compliance with Section 402 of the Sarbanes-Oxley Act of 2002) made in
         the ordinary course of business consistent with past practices of the
         Company or its Restricted Subsidiaries; and the extension of trade
         credit in the ordinary course of business;

                                       15


            (13) Investments in any Subsidiary that constitutes a special
         purpose entity formed for the primary purpose of financing receivables
         or for the primary purpose of issuing trust preferred or similar
         securities in a transaction permitted by Section 4.09;

            (14) Guarantees of a Restricted Subsidiary of the Company given by
         the Company or another Restricted Subsidiary of the Company, in each
         case, in accordance with the terms of this Indenture; and

            (15) other Investments in any Person having an aggregate fair market
         value (measured on the date each such Investment was made and without
         giving effect to subsequent changes in value), when taken together with
         all other Investments made pursuant to this clause (15) that are at the
         time outstanding, not to exceed the greater of $25.0 million or 5.0% of
         Consolidated Tangible Assets.

         "Permitted Joint Ventures" means any joint venture that the Company or
any Restricted Subsidiary or Unrestricted Subsidiary is a party to that is
engaged in a Permitted Business, including without limitation, NeighborCare
Pharmacy of Virginia, LLC, NeighborCare of New Hampshire, LLC, NeighborCare Home
Medical Equipment of Md., LLC, PPS-GBMC Joint Venture, LLC and Pharmacy Services
of Indiana, LLC.

         "Permitted Junior Securities" means:

            (1) Equity Interests in the Company or any Guarantor; or

            (2) debt securities that are subordinated to all Senior Debt and any
         debt securities issued in exchange for Senior Debt to substantially the
         same extent as, or to a greater extent than, the Notes and the
         Subsidiary Guarantees are subordinated to Senior Debt under this
         Indenture.

         "Permitted Refinancing Indebtedness" means any Indebtedness of the
Company or any of its Restricted Subsidiaries issued in exchange for, or the net
proceeds of which are used to extend, refinance, renew, replace, defease or
refund other Indebtedness of the Company or any of its Restricted Subsidiaries
(other than intercompany Indebtedness); provided that:

            (1) the principal amount (or accreted value, if applicable) of such
         Permitted Refinancing Indebtedness does not exceed the principal amount
         (or accreted value, if applicable) of the Indebtedness extended,
         refinanced, renewed, replaced, defeased or refunded (plus all accrued
         interest on the Indebtedness and the amount of all expenses and
         premiums incurred in connection therewith);

            (2) such Permitted Refinancing Indebtedness has a final maturity
         date later than the final maturity date of, and has a Weighted Average
         Life to Maturity equal to or greater than the Weighted Average Life to
         Maturity of, the Indebtedness being extended, refinanced, renewed,
         replaced, defeased or refunded; provided, however, that with respect to
         Permitted Refinancing Indebtedness of Existing Indebtedness, this
         clause (2) shall not apply;

            (3) if the Indebtedness being extended, refinanced, renewed,
         replaced, defeased or refunded is subordinated in right of payment to
         the Notes, such Permitted Refinancing Indebtedness has a final maturity
         date later than the final maturity date of, and is subordinated in
         right of payment to, the Notes on terms at least as favorable to the
         Holders of Notes as those contained in the documentation governing the
         Indebtedness being extended, refinanced, renewed, replaced, defeased or
         refunded; and


                                       16


            (4) such Indebtedness is incurred either by the Company, a Guarantor
         or the Subsidiary who is the obligor on the Indebtedness being
         extended, refinanced, renewed, replaced, defeased or refunded.

          "Person" means any individual, corporation, partnership, joint
venture, association, joint-stock company, trust, unincorporated organization,
limited liability company or government or other entity.

         "Private Placement Legend" means the legend set forth in Section
2.06(g)(1) to be placed on all Notes issued under this Indenture except where
otherwise permitted by the provisions of this Indenture.

         "QIB" means a "qualified institutional buyer" as defined in Rule 144A.

         "Registration Rights Agreement" means the Registration Rights
Agreement, dated as of November 4, 2003, among the Company, the Guarantors and
the other parties named on the signature pages thereof, as such agreement may be
amended, modified or supplemented from time to time and, with respect to any
Additional Notes, one or more registration rights agreements among the Company,
the Guarantors and the other parties thereto, as such agreement(s) may be
amended, modified or supplemented from time to time, relating to rights given by
the Company and the Guarantors to the purchasers of Additional Notes to register
such Additional Notes under the Securities Act.

         "Regulation S" means Regulation S promulgated under the Securities Act.

         "Regulation S Global Note" means a Global Note bearing the Private
Placement Legend and deposited with or on behalf of the Depositary and
registered in the name of the Depositary or its nominee, issued in a
denomination equal to the outstanding principal amount of the Notes initially
sold in reliance on Rule 903 of Regulation S.

         "Replacement Assets" means assets used or useful in a Permitted
Business or securities of a Person principally engaged in a Permitted Business
who is a Restricted Subsidiary after the acquisition of such securities by the
Company or any of its Restricted Subsidiaries that, in each case, replace assets
that were the subject of an Asset Sale.

         "Responsible Officer," when used with respect to the Trustee, means any
vice president, any assistant vice president, any assistant treasurer, any trust
officer, or any other officer associated with the corporate trust department of
the Trustee customarily performing functions similar to those performed by any
of the above designated officers and also means, with respect to a particular
corporate trust matter, any other officer to whom such matter is referred
because of such person's knowledge of and familiarity with the particular
subject.

         "Restricted Definitive Note" means a Definitive Note bearing the
Private Placement Legend.

         "Restricted Global Note" means a Global Note bearing the Private
Placement Legend.

         "Restricted Investment" means an Investment other than a Permitted
Investment.

         "Restricted Period" means the 40-day distribution compliance period as
defined in Regulation S.

         "Restricted Subsidiary" of a Person means any Subsidiary of the
referent Person that is not an Unrestricted Subsidiary.

         "Rule 144" means Rule 144 promulgated under the Securities Act.

                                       17


         "Rule 144A" means Rule 144A promulgated under the Securities Act.

         "Rule 903" means Rule 903 promulgated under the Securities Act.

         "Rule 904" means Rule 904 promulgated the Securities Act.

         "Securities Act" means the Securities Act of 1933, as amended.

         "Senior Debt" means:

            (1) all Indebtedness of the Company or any Guarantor outstanding
         under Credit Facilities and all Hedging Obligations with respect
         thereto;

            (2) all Indebtedness of the Company outstanding prior to the
         consummation of the Spin-off which is senior in right of payment to the
         Notes;

            (3) any other Indebtedness of the Company or any Guarantor permitted
         to be incurred under the terms of this Indenture, unless the instrument
         under which such Indebtedness is incurred expressly provides that it is
         on a parity with or subordinated in right of payment to the Notes or
         any Subsidiary Guarantee; and

            (4) all Obligations with respect to the items listed in the
         preceding clauses (1), (2) and (3).

         Notwithstanding anything to the contrary in the preceding, Senior Debt
will not include:

            (1) any liability for federal, state, local or other taxes owed or
         owing by the Company;

            (2) any Indebtedness of the Company to any of its Subsidiaries or
         other Affiliates;

            (3) any trade payables; or

            (4) the portion of any Indebtedness that is incurred in violation of
         this Indenture.

         "Senior Subordinated Indebtedness" means (i) with respect to the
Company, the Notes and any other Indebtedness of the Company that specifically
provides that such Indebtedness is to have the same rank as the Notes in right
of payment and is not subordinated by its terms in right of payment to any
Indebtedness or other obligation of the Company which is not Senior Debt and
(ii) with respect to any Guarantor, the Note guarantees and any other
Indebtedness of such Guarantor that specifically provides that such Indebtedness
is to have the same rank as the Note guarantees in right of payment and is not
subordinated by its terms in right of payment to any Indebtedness or other
obligation of such Guarantor which is not Senior Debt.

         "Shelf Registration Statement" means the Shelf Registration Statement
as defined in the Registration Rights Agreement.

         "Significant Subsidiary" means any Subsidiary that would be a
"significant subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X,
promulgated pursuant to the Securities Act, as such Regulation is in effect on
the date hereof.


                                       18


         "Spin-off" means the one time dividend or distribution of all or
substantially all of the Capital Stock of GHC to the shareholders of the Company
at or prior to February 27, 2004, provided that following such dividend or
distribution, GHC's outstanding shares of common stock are traded on the Nasdaq
National Market System or the New York Stock Exchange.

         "Spin-off Documents" means the Separation and Distribution Agreement,
the Tax Sharing Agreement, the Transition Services Agreement, the Tidewater
Membership Agreement, the Employee Benefits Agreement, the Master Agreement for
Pharmacy, Pharmacy Consulting and Related Products and Services, the Pharmacy
Benefit Management Agreement and the Master Agreement for Specialty Beds and
Oxygen Concentrators, in each case entered into on or before the closing date of
the Spin-off between the Company and GHC.

         "Stated Maturity" means, with respect to any installment of interest or
principal on any series of Indebtedness, the date on which the payment of
interest or principal was scheduled to be paid in the original documentation
governing such Indebtedness, and shall not include any contingent obligations to
repay, redeem or repurchase any such interest or principal prior to the date
originally scheduled for the payment thereof.

         "Subordinated Obligation" means any Indebtedness of a party (whether
outstanding on the date of this Indenture or thereafter incurred) that is
subordinate or junior in right of payment to the Notes pursuant to a written
agreement to that effect.

         "Subsidiary" means, with respect to any specified Person:

            (1) any corporation, association or other business entity of which
         more than 50% of the total voting power of shares of Capital Stock
         entitled (without regard to the occurrence of any contingency) to vote
         in the election of directors, managers or trustees of the corporation,
         association or other business entity is at the time owned or
         controlled, directly or indirectly, by that Person or one or more of
         the other Subsidiaries of that Person (or a combination thereof); and

            (2) any partnership (a) the sole general partner or the managing
         general partner of which is such Person or a Subsidiary of such Person
         or (b) the only general partners of which are that Person or one or
         more Subsidiaries of that Person (or any combination thereof).

         "Subsidiary Guarantee" means the Guarantee of the Notes by each of the
Guarantors pursuant to Article 12 of this Indenture and in the form of the
Guarantee endorsed on the form of Note attached as Exhibit A to this Indenture
and any additional Guarantee of the Notes to be executed by any Subsidiary of
the Company, pursuant to the covenants described in Sections 4.17 and 10.01.

         "TIA" means the Trust Indenture Act of 1939 (15 U.S.C. ss.ss.
77aaa-77bbbb) as in effect on the date on which this Indenture is qualified
under the TIA.

         "Trustee" means the party named as such in the preamble to this
Indenture until a successor replaces it in accordance with the applicable
provisions of this Indenture and thereafter means the successor serving
hereunder.

         "Unrestricted Definitive Note" means one or more Definitive Notes that
do not bear and are not required to bear the Private Placement Legend.

         "Unrestricted Global Note" means a permanent global Note substantially
in the form of Exhibit A attached hereto that bears the Global Note Legend and
that has the "Schedule of Exchanges of Interests in the Global Note" attached
thereto, and that is deposited with or on behalf of and registered in the name
of the Depositary, representing a series of Notes that do not bear the Private
Placement Legend.


                                       19


         "Unrestricted Subsidiary" means any Subsidiary of the Company or any
successor to any of them that is designated by the Board of Directors as an
Unrestricted Subsidiary pursuant to a Board Resolution, but, other than as
permitted by clause (11) of the definition of "Permitted Investments," only to
the extent that such Subsidiary:

                  (1) has no Indebtedness other than Non-Recourse Debt;

                  (2) is not party to any agreement, contract, arrangement or
         understanding with the Company or any Restricted Subsidiary of the
         Company unless the terms of any such agreement, contract, arrangement
         or understanding are no less favorable to the Company or such
         Restricted Subsidiary than those that might be obtained at the time
         from Persons who are not Affiliates of the Company;

                  (3) is a Person with respect to which neither the Company nor
         any of its Restricted Subsidiaries has any direct or indirect
         obligation (a) to subscribe for additional Equity Interests or (b) to
         maintain or preserve such Person's financial condition or to cause such
         Person to achieve any specified levels of operating results;

                  (4) has not guaranteed or otherwise directly or indirectly
         provided credit support for any Indebtedness of the Company or any of
         its Restricted Subsidiaries; and

                  (5) other than Permitted Joint Ventures, has at least one
         director on its Board of Directors that is not a director or executive
         officer of the Company or any of its Restricted Subsidiaries and has at
         least one executive officer that is not a director or executive officer
         of the Company or any of its Restricted Subsidiaries.

         Any designation of a Subsidiary of such Person as an Unrestricted
Subsidiary shall be evidenced to the Trustee by filing with the Trustee a
certified copy of the Board Resolution giving effect to such designation and an
Officers' Certificate certifying that such designation complied with the
preceding conditions and was permitted by Section 4.07 hereof. If, at any time,
any Unrestricted Subsidiary would fail to meet the preceding requirements as an
Unrestricted Subsidiary, it shall thereafter cease to be an Unrestricted
Subsidiary for purposes of this Indenture and any Indebtedness of such
Subsidiary shall be deemed to be incurred by a Restricted Subsidiary of such
Person as of such date and, if such Indebtedness is not permitted to be incurred
as of such date under Section 4.09 hereof, such Person will be in default of
such covenant. The Board of Directors of such Person may at any time designate
any Unrestricted Subsidiary to be a Restricted Subsidiary; provided that such
designation shall be deemed to be an incurrence of Indebtedness by a Restricted
Subsidiary of such Person of any outstanding Indebtedness of such Unrestricted
Subsidiary and such designation shall only be permitted if (1) such Indebtedness
is permitted under the covenant described under Section 4.09 hereof calculated
on a pro forma basis as if such designation had occurred at the beginning of the
four-quarter reference period; and (2) no Default or Event of Default would be
in existence following such designation.

         All Permitted Joint Ventures shall be designated Unrestricted
Subsidiaries unless otherwise so designated by the Company. Notwithstanding
anything to the contrary herein, GHC and Subsidiaries of the Company that will
be Subsidiaries of GHC after the Spin-off shall be deemed Unrestricted
Subsidiaries unless otherwise so designated by the Company.

         "U.S. Person" means a U.S. Person as defined in Rule 902(o) under the
Securities Act.

                                       20


         "Voting Stock" of any Person as of any date means the Capital Stock of
such Person that is at the time entitled to vote in the election of the Board of
Directors of such Person.

         "Weighted Average Life to Maturity" means, when applied to any
Indebtedness at any date, the number of years obtained by dividing:

                  (1) the sum of the products obtained by multiplying (a) the
         amount of each then remaining installment, sinking fund, serial
         maturity or other required payments of principal, including payment at
         final maturity, in respect of the Indebtedness, by (b) the number of
         years (calculated to the nearest one-twelfth) that will elapse between
         such date and the making of such payment; by

                  (2) the then outstanding aggregate principal amount of such
         Indebtedness.

Section 1.02  Other Definitions.

                                                                      Defined in
        Term                                                            Section
        ----                                                          ----------
        "Affiliate Transaction".......................................   4.11
        "Alternate Offer".............................................   4.15
        "Asset Sale Offer"............................................   3.10
        "Authentication Order"........................................   2.02
        "Change of Control Offer".....................................   4.15
        "Change of Control Payment"...................................   4.15
        "Change of Control Payment Date"..............................   4.15
        "Covenant Defeasance".........................................   8.03
        "DTC".........................................................   2.03
        "Event of Default"............................................   6.01
        "Excess Proceeds".............................................   4.10
        "incur".......................................................   4.09
        "Legal Defeasance"............................................   8.02
        "Offer Amount"................................................   3.10
        "Offer Period"................................................   3.10
        "Paying Agent"................................................   2.03
        "Payment Blockage Notice".....................................   11.03
        "Payment Default".............................................   6.01
        "Permitted Debt"..............................................   4.09
        "Purchase Date"...............................................   3.10
        "Registrar"...................................................   2.03
        "Restricted Payments".........................................   4.07
        "Special Redemption Date".....................................   3.09
        "Special Redemption Price"....................................   3.09
        "Spin-off Officer's Certificate"..............................   3.01


Section 1.03   Incorporation by Reference of Trust Indenture Act.

         Whenever this Indenture refers to a provision of the TIA, the provision
is incorporated by reference in and made a part of this Indenture.

         The following TIA terms used in this Indenture have the following
meanings:

                                       21


         "indenture securities" means the Notes;

         "indenture security Holder" means a Holder of a Note;

         "indenture to be qualified" means this Indenture;

         "indenture trustee" or "institutional trustee" means the Trustee; and

         "obligor" on the Notes and the Subsidiary Guarantees means the Company
and the Guarantors, respectively, and any successor obligor upon the Notes and
the Subsidiary Guarantees, respectively.

         All other terms used in this Indenture that are defined by the TIA,
defined by TIA reference to another statute or defined by Commission rule under
the TIA have the meanings so assigned to them.

Section 1.04   Rules of Construction.

         Unless the context otherwise requires:

            (1) a term has the meaning assigned to it;

            (2) an accounting term not otherwise defined has the meaning
         assigned to it in accordance with GAAP;

            (3) "or" is not exclusive;

            (4) words in the singular include the plural, and in the plural
         include the singular;

            (5) "will" and "shall" shall be interpreted to express a command;

            (6) provisions apply to successive events and transactions; and

            (7) references to sections of or rules under the Securities Act will
         be deemed to include substitute, replacement of successor sections or
         rules adopted by the Commission from time to time.

                                   ARTICLE 2.
                                   THE NOTES

Section 2.01   Form and Dating.

         (a) General. The Notes and the Trustee's certificate of authentication
will be substantially in the form of Exhibit A hereto. The Notes may have
notations, legends or endorsements required by law, stock exchange rule or
usage. Each Note will be dated the date of its authentication. The Notes shall
be in denominations of $1,000 and integral multiples thereof.

         The terms and provisions contained in the Notes will constitute, and
are hereby expressly made, a part of this Indenture and the Company, the
Guarantors and the Trustee, by their execution and delivery of this Indenture,
expressly agree to such terms and provisions and to be bound thereby. However,
to the extent any provision of any Note conflicts with the express provisions of
this Indenture, the provisions of this Indenture shall govern and be
controlling.

                                       22


         (b) Global Notes. Notes issued in global form will be substantially in
the form of Exhibit A attached hereto (including the Global Note Legend thereon
and the "Schedule of Exchanges of Interests in the Global Note" attached
thereto). Notes issued in definitive form will be substantially in the form of
Exhibit A attached hereto (but without the Global Note Legend thereon and
without the "Schedule of Exchanges of Interests in the Global Note" attached
thereto). Each Global Note will represent such of the outstanding Notes as will
be specified therein and each shall provide that it represents the aggregate
principal amount of outstanding Notes from time to time endorsed thereon and
that the aggregate principal amount of outstanding Notes represented thereby may
from time to time be reduced or increased, as appropriate, to reflect exchanges
and redemptions. Any endorsement of a Global Note to reflect the amount of any
increase or decrease in the aggregate principal amount of outstanding Notes
represented thereby will be made by the Trustee or the Custodian, at the
direction of the Trustee, in accordance with instructions given by the Holder
thereof as required by Section 2.06 hereof.

Section 2.02   Execution and Authentication.

         Two Officers must sign the Notes for the Company by manual or facsimile
signature.

         If an Officer whose signature is on a Note no longer holds that office
at the time a Note is authenticated, the Note will nevertheless be valid.

         A Note will not be valid until authenticated by the manual signature of
the Trustee. The signature will be conclusive evidence that the Note has been
authenticated under this Indenture.

         The Trustee shall, upon receipt of a written order of the Company
signed by an Officer (an "Authentication Order"), authenticate the Initial Notes
for original issue up to $250.0 million in aggregate principal amount and, upon
receipt of an Authentication Order in accordance with this Section 2.02, at any
time and from time to time thereafter, the Trustee shall authenticate Additional
Notes and Exchange Notes for original issue in an aggregate principal amount
specified in such Authentication Order.

         At any time and from time to time after the execution and delivery of
this Indenture (including without limitation under Section 2.06(f) hereof), the
Company may deliver Additional Notes or Exchange Notes executed by the Company
to the Trustee for authentication. Except as otherwise provided herein, the
Trustee shall thereupon authenticate and make available for delivery said
Additional Notes or Exchange Notes to or upon receipt of an Authentication
Order. In authenticating such Additional Notes or Exchange Notes, and accepting
the additional responsibilities under this Indenture in relation to such
Additional Notes or Exchange Notes, the Trustee shall be entitled to receive and
shall be fully protected in relying upon:

            (1) A copy of the resolution or resolutions of the Board of
         Directors in or pursuant to which the terms and form of the Additional
         Notes or Exchange Notes were established, certified by the Secretary or
         an Assistant Secretary of the Company to have been duly adopted by the
         Board of Directors and to be in full force and effect as of the date of
         such certificate, and if the terms and form of such Additional Notes or
         Exchange Notes are established by an Officer's Certificate pursuant to
         general authorization of the Board of Directors, such Officer's
         Certificate;

            (2) an Officer's Certificate delivered in accordance with Section
         13.04(1) hereof; and

            (3) an Opinion of Counsel which shall state:

                                       23


                  (A) that the form of such Additional Notes or Exchange Notes
            has been established by or pursuant to a resolution of the Board of
            Directors in conformity with the provisions of this Indenture;

                  (B) that the terms of such Additional Notes or Exchange Notes
            have been established in accordance with the provisions of this
            Indenture;

                  (C) that such Additional Notes or Exchange Notes, when
            authenticated and delivered by the Trustee and issued by the Company
            in the manner and subject to any conditions specified in such
            Opinion of Counsel, will constitute valid and legally binding
            obligations of the Company, enforceable in accordance with their
            terms, subject to bankruptcy, insolvency, reorganization and other
            laws of general applicability relating to or affecting the
            enforcement of creditors' rights and to general equity principles;
            and

                  (D) that all laws and requirements in respect of the execution
            and delivery by the Company of such Additional Notes or Exchange
            Notes have been complied with.

         The Trustee shall have the right to decline to authenticate and deliver
any Additional Notes or Exchange Notes under this Section if the Trustee, being
advised by counsel, determines that such action may not lawfully be taken or if
the Trustee in good faith shall determine that such action would expose the
Trustee to personal liability to existing Holders.

         The Trustee may appoint an authenticating agent acceptable to the
Company to authenticate Notes. An authenticating agent may authenticate Notes
whenever the Trustee may do so. Each reference in this Indenture to
authentication by the Trustee includes authentication by such agent. An
authenticating agent has the same rights as an Agent to deal with Holders or an
Affiliate of the Company.

Section 2.03   Registrar and Paying Agent.

         The Company will maintain an office or agency where Notes may be
presented for registration of transfer or for exchange ("Registrar") and an
office or agency where Notes may be presented for payment ("Paying Agent"). The
Registrar will keep a register of the Notes and of their transfer and exchange.
The Company may appoint one or more co-registrars and one or more additional
paying agents. The term "Registrar" includes any co-registrar and the term
"Paying Agent" includes any additional paying agent. The Company may change any
Paying Agent or Registrar without notice to any Holder. The Company will notify
the Trustee in writing of the name and address of any Agent not a party to this
Indenture. If the Company fails to appoint or maintain another entity as
Registrar or Paying Agent, the Trustee shall act as such. The Company or any of
its Subsidiaries may act as Paying Agent or Registrar.

         The Company initially appoints The Depository Trust Company ("DTC") to
act as Depositary with respect to the Global Notes.

         The Company initially appoints the Trustee to act as the Registrar and
Paying Agent and to act as Custodian with respect to the Global Notes.

Section 2.04   Paying Agent to Hold Money in Trust.

         The Company will require each Paying Agent other than the Trustee to
agree in writing that the Paying Agent will hold in trust for the benefit of
Holders or the Trustee all money held by the Paying Agent for the payment of
principal, premium or Additional Interest, if any, or interest on the Notes, and
will notify the Trustee of any default by the Company in making any such
payment. While any such default continues, the Trustee may require a Paying
Agent to pay all money held by it to the Trustee. The Company at any time may
require a Paying Agent to pay all money held by it to the Trustee. Upon payment
over to the Trustee, the Paying Agent (if other than the Company or a
Subsidiary) will have no further liability for the money. If the Company or a
Subsidiary acts as Paying Agent, it will segregate and hold in a separate trust
fund for the benefit of the Holders all money held by it as Paying Agent. Upon
any bankruptcy or reorganization proceedings relating to the Company, the
Trustee will serve as Paying Agent for the Notes.

                                       24


Section 2.05   Holder Lists.

         The Trustee will preserve in as current a form as is reasonably
practicable the most recent list available to it of the names and addresses of
all Holders and shall otherwise comply with TIA ss. 312(a). If the Trustee is
not the Registrar, the Company will furnish to the Trustee at least seven
Business Days before each interest payment date and at such other times as the
Trustee may request in writing, a list in such form and as of such date as the
Trustee may reasonably require of the names and addresses of the Holders of
Notes and the Company shall otherwise comply with TIA ss. 312(a).

Section 2.06   Transfer and Exchange.

         (a) Transfer and Exchange of Global Notes. A Global Note may not be
transferred as a whole except by the Depositary to a nominee of the Depositary,
by a nominee of the Depositary to the Depositary or to another nominee of the
Depositary, or by the Depositary or any such nominee to a successor Depositary
or a nominee of such successor Depositary. All Global Notes will be exchanged by
the Company for Definitive Notes if:

                  (1) the Company delivers to the Trustee notice from the
            Depositary that it is unwilling or unable to continue to act as
            Depositary or that it is no longer a clearing agency registered
            under the Exchange Act and, in either case, a successor Depositary
            is not appointed by the Company within 90 days after the date of
            such notice from the Depositary; or

                  (2) the Company, at its option, determines that the Global
            Notes (in whole but not in part) should be exchanged for Definitive
            Notes and delivers a written notice to such effect to the Trustee;
            or

                  (3) there has occurred and is continuing a Default or Event of
            Default with respect to the Notes and that has not been waived.

         Upon the occurrence of any of the preceding events in (1), (2) or (3)
above, Definitive Notes shall be issued in such names as the Depositary shall
instruct the Trustee. Global Notes also may be exchanged or replaced, in whole
or in part, as provided in Sections 2.07 and 2.10 hereof. Every Note
authenticated and delivered in exchange for, or in lieu of, a Global Note or any
portion thereof, pursuant to this Section 2.06 or Section 2.07 or 2.10 hereof,
shall be authenticated and delivered in the form of, and shall be, a Global
Note. A Global Note may not be exchanged for another Note other than as provided
in this Section 2.06(a); however, beneficial interests in a Global Note may be
transferred and exchanged as provided in Section 2.06(b), (c) or (f) hereof.

         (b) Transfer and Exchange of Beneficial Interests in the Global Notes.
The transfer and exchange of beneficial interests in the Global Notes will be
effected through the Depositary, in accordance with the provisions of this
Indenture and the Applicable Procedures. Beneficial interests in the Restricted
Global Notes will be subject to restrictions on transfer comparable to those set
forth herein to the extent required by the Securities Act. Transfers of
beneficial interests in the Global Notes also will require compliance with
either subparagraph (1) or (2) below, as applicable, as well as one or more of
the other following subparagraphs, as applicable:


                                       25


            (1) Transfer of Beneficial Interests in the Same Global Note.
         Beneficial interests in any Restricted Global Note may be transferred
         to Persons who take delivery thereof in the form of a beneficial
         interest in the same Restricted Global Note in accordance with the
         transfer restrictions set forth in the Private Placement Legend;
         provided, however, that prior to the expiration of the Restricted
         Period, transfers of beneficial interests in the Regulation S Global
         Note may not be made to a U.S. Person or for the account or benefit of
         a U.S. Person (other than an Initial Purchaser). Beneficial interests
         in any Unrestricted Global Note may be transferred to Persons who take
         delivery thereof in the form of a beneficial interest in an
         Unrestricted Global Note. No written orders or instructions shall be
         required to be delivered to the Registrar to effect the transfers
         described in this Section 2.06(b)(1).

            (2) All Other Transfers and Exchanges of Beneficial Interests in
         Global Notes. In connection with all transfers and exchanges of
         beneficial interests that are not subject to Section 2.06(b)(1) above,
         the transferor of such beneficial interest must deliver to the
         Registrar either:

            (A) both:

                  (i) a written order from a Participant or an Indirect
            Participant given to the Depositary in accordance with the
            Applicable Procedures directing the Depositary to credit or cause to
            be credited a beneficial interest in another Global Note in an
            amount equal to the beneficial interest to be transferred or
            exchanged; and

                  (ii) instructions given in accordance with the Applicable
            Procedures containing information regarding the Participant account
            to be credited with such increase; or

            (B) both:

                  (i) a written order from a Participant or an Indirect
            Participant given to the Depositary in accordance with the
            Applicable Procedures directing the Depositary to cause to be issued
            a Definitive Note in an amount equal to the beneficial interest to
            be transferred or exchanged; and

                  (ii) instructions given by the Depositary to the Registrar
            containing information regarding the Person in whose name such
            Definitive Note shall be registered to effect the transfer or
            exchange referred to in (1) above.

         Upon consummation of an Exchange Offer by the Company in accordance
         with Section 2.06(f) hereof, the requirements of this Section
         2.06(b)(2) shall be deemed to have been satisfied upon receipt by the
         Registrar of the instructions contained in the Letter of Transmittal
         delivered by the Holder of such beneficial interests in the Restricted
         Global Notes. Upon satisfaction of all of the requirements for transfer
         or exchange of beneficial interests in Global Notes contained in this
         Indenture and the Notes or otherwise applicable under the Securities
         Act, the Trustee shall adjust the principal amount of the relevant
         Global Note(s) pursuant to Section 2.06(h) hereof.

            (3) Transfer of Beneficial Interests to Another Restricted Global
         Note. A beneficial interest in any Restricted Global Note may be
         transferred to a Person who takes delivery thereof in the form of a
         beneficial interest in another Restricted Global Note if the transfer
         complies with the requirements of Section 2.06(b)(2) above and the
         Registrar receives the following:

                                       26


            (A) if the transferee will take delivery in the form of a beneficial
         interest in the 144A Global Note, then the transferor must deliver a
         certificate in the form of Exhibit B hereto, including the
         certifications in item (1) thereof;

            (B) if the transferee will take delivery in the form of a beneficial
         interest in the Regulation S Global Note, then the transferor must
         deliver a certificate in the form of Exhibit B hereto, including the
         certifications in item (2) thereof; and

            (C) if the transferee will take delivery in the form of a beneficial
         interest in the IAI Global Note, then the transferor must deliver a
         certificate in the form of Exhibit B hereto, including the
         certifications, certificates and Opinion of Counsel required by item
         (3) thereof, if applicable.

            (4) Transfer and Exchange of Beneficial Interests in a Restricted
         Global Note for Beneficial Interests in an Unrestricted Global Note. A
         beneficial interest in any Restricted Global Note may be exchanged by
         any holder thereof for a beneficial interest in an Unrestricted Global
         Note or transferred to a Person who takes delivery thereof in the form
         of a beneficial interest in an Unrestricted Global Note if the exchange
         or transfer complies with the requirements of Section 2.06(b)(2) above
         and:

            (A) such exchange or transfer is effected pursuant to the Exchange
         Offer in accordance with the Registration Rights Agreement and the
         holder of the beneficial interest to be transferred, in the case of an
         exchange, or the transferee, in the case of a transfer, certifies in
         the applicable Letter of Transmittal that it is not (i) a
         Broker-Dealer, (ii) a Person participating in the distribution of the
         Exchange Notes or (iii) a Person who is an affiliate (as defined in
         Rule 144) of the Company;

            (B) such transfer is effected pursuant to the Shelf Registration
         Statement in accordance with the Registration Rights Agreement;

            (C) such transfer is effected by a Broker-Dealer pursuant to the
         Exchange Offer Registration Statement in accordance with the
         Registration Rights Agreement; or

            (D) the Registrar receives the following:

                  (i) if the holder of such beneficial interest in a Restricted
            Global Note proposes to exchange such beneficial interest for a
            beneficial interest in an Unrestricted Global Note, a certificate
            from such holder in the form of Exhibit C hereto, including the
            certifications in item (1)(a) thereof; or

                  (ii) if the holder of such beneficial interest in a Restricted
            Global Note proposes to transfer such beneficial interest to a
            Person who shall take delivery thereof in the form of a beneficial
            interest in an Unrestricted Global Note, a certificate from such
            holder in the form of Exhibit B hereto, including the certifications
            in item (4) thereof;

         and, in each such case set forth in this subparagraph (D), if the
         Registrar so requests or if the Applicable Procedures so require, an
         Opinion of Counsel in form reasonably acceptable to the Registrar to
         the effect that such exchange or transfer is in compliance with the
         Securities Act and that the restrictions on transfer contained herein
         and in the Private Placement Legend are no longer required in order to
         maintain compliance with the Securities Act.


                                       27


         If any such transfer is effected pursuant to subparagraph (B) or (D)
above at a time when an Unrestricted Global Note has not yet been issued, the
Company shall issue and, upon receipt of an Authentication Order in accordance
with Section 2.02 hereof, the Trustee shall authenticate one or more
Unrestricted Global Notes in an aggregate principal amount equal to the
aggregate principal amount of beneficial interests transferred pursuant to
subparagraph (B) or (D) above.

         Beneficial interests in an Unrestricted Global Note cannot be exchanged
for, or transferred to Persons who take delivery thereof in the form of, a
beneficial interest in a Restricted Global Note.

         (c) Transfer or Exchange of Beneficial Interests for Definitive Notes.

            (1) Beneficial Interests in Restricted Global Notes to Restricted
         Definitive Notes. If any holder of a beneficial interest in a
         Restricted Global Note proposes to exchange such beneficial interest
         for a Restricted Definitive Note or to transfer such beneficial
         interest to a Person who takes delivery thereof in the form of a
         Restricted Definitive Note, then, upon receipt by the Registrar of the
         following documentation:

                  (A) if the holder of such beneficial interest in a Restricted
            Global Note proposes to exchange such beneficial interest for a
            Restricted Definitive Note, a certificate from such holder in the
            form of Exhibit C hereto, including the certifications in item
            (2)(a) thereof;

                  (B) if such beneficial interest is being transferred to a QIB
            in accordance with Rule 144A, a certificate to the effect set forth
            in Exhibit B hereto, including the certifications in item (1)
            thereof;

                  (C) if such beneficial interest is being transferred to a
            Non-U.S. Person in an offshore transaction in accordance with Rule
            903 or Rule 904, a certificate to the effect set forth in Exhibit B
            hereto, including the certifications in item (2) thereof;

                  (D) if such beneficial interest is being transferred pursuant
            to an exemption from the registration requirements of the Securities
            Act in accordance with Rule 144, a certificate to the effect set
            forth in Exhibit B hereto, including the certifications in item
            (3)(a) thereof;

                  (E) if such beneficial interest is being transferred to the
            Company or any of its Subsidiaries, a certificate to the effect set
            forth in Exhibit B hereto, including the certifications in item
            (3)(b) thereof;

                  (F) if such beneficial interest is being transferred pursuant
            to an effective registration statement under the Securities Act, a
            certificate to the effect set forth in Exhibit B hereto, including
            the certifications in item (3)(c) thereof; or

                  (G) if such beneficial interest is being transferred to an
            Institutional Accredited Investor in reliance on an exemption from
            the registration requirements of the Securities Act other than those
            listed in subparagraphs (B) through (D) above, a certificate to the
            effect set forth in Exhibit B hereto, including the certifications,
            certificates and Opinion of Counsel required by item (3)(d) thereof,
            if applicable,


                                       28


the Trustee shall cause the aggregate principal amount of the applicable Global
Note to be reduced accordingly pursuant to Section 2.06(h) hereof, and the
Company shall execute and the Trustee shall authenticate and deliver to the
Person designated in the instructions a Definitive Note in the appropriate
principal amount. Any Definitive Note issued in exchange for a beneficial
interest in a Restricted Global Note pursuant to this Section 2.06(c) shall be
registered in such name or names and in such authorized denomination or
denominations as the holder of such beneficial interest shall instruct the
Registrar through instructions from the Depositary and the Participant or
Indirect Participant. The Trustee shall deliver such Definitive Notes to the
Persons in whose names such Notes are so registered. Any Definitive Note issued
in exchange for a beneficial interest in a Restricted Global Note pursuant to
this Section 2.06(c)(1) shall bear the Private Placement Legend and shall be
subject to all restrictions on transfer contained therein.

            (2) Beneficial Interests in Restricted Global Notes to Unrestricted
         Definitive Notes. A holder of a beneficial interest in a Restricted
         Global Note may exchange such beneficial interest for an Unrestricted
         Definitive Note or may transfer such beneficial interest to a Person
         who takes delivery thereof in the form of an Unrestricted Definitive
         Note only if:

                  (A) such exchange or transfer is effected pursuant to the
            Exchange Offer in accordance with the Registration Rights Agreement
            and the holder of such beneficial interest, in the case of an
            exchange, or the transferee, in the case of a transfer, certifies in
            the applicable Letter of Transmittal that it is not (i) a
            Broker-Dealer, (ii) a Person participating in the distribution of
            the Exchange Notes or (iii) a Person who is an affiliate (as defined
            in Rule 144) of the Company;

                  (B) such transfer is effected pursuant to the Shelf
            Registration Statement in accordance with the Registration Rights
            Agreement;

                  (C) such transfer is effected by a Broker-Dealer pursuant to
            the Exchange Offer Registration Statement in accordance with the
            Registration Rights Agreement; or

                  (D) the Registrar receives the following:

                      (i) if the holder of such beneficial interest in a
                  Restricted Global Note proposes to exchange such beneficial
                  interest for a Definitive Note that does not bear the Private
                  Placement Legend, a certificate from such holder in the form
                  of Exhibit C hereto, including the certifications in item
                  (1)(b) thereof; or

                      (ii) if the holder of such beneficial interest in a
                  Restricted Global Note proposes to transfer such beneficial
                  interest to a Person who shall take delivery thereof in the
                  form of a Definitive Note that does not bear the Private
                  Placement Legend, a certificate from such holder in the form
                  of Exhibit B hereto, including the certifications in item (4)
                  thereof;

            and, in each such case set forth in this subparagraph (D), if the
            Registrar so requests or if the Applicable Procedures so require, an
            Opinion of Counsel in form reasonably acceptable to the Registrar to
            the effect that such exchange or transfer is in compliance with the
            Securities Act and that the restrictions on transfer contained
            herein and in the Private Placement Legend are no longer required in
            order to maintain compliance with the Securities Act.


                                       29


            (3) Beneficial Interests in Unrestricted Global Notes to
Unrestricted Definitive Notes. If any holder of a beneficial interest in an
Unrestricted Global Note proposes to exchange such beneficial interest for a
Definitive Note or to transfer such beneficial interest to a Person who takes
delivery thereof in the form of a Definitive Note, then, upon satisfaction of
the conditions set forth in Section 2.06(b)(2) hereof, the Trustee will cause
the aggregate principal amount of the applicable Global Note to be reduced
accordingly pursuant to Section 2.06(h) hereof, and the Company will execute and
the Trustee will authenticate and deliver to the Person designated in the
instructions a Definitive Note in the appropriate principal amount. Any
Definitive Note issued in exchange for a beneficial interest pursuant to this
Section 2.06(c)(3) will be registered in such name or names and in such
authorized denomination or denominations as the holder of such beneficial
interest requests through instructions to the Registrar from or through the
Depositary and the Participant or Indirect Participant. The Trustee will deliver
such Definitive Notes to the Persons in whose names such Notes are so
registered. Any Definitive Note issued in exchange for a beneficial interest
pursuant to this Section 2.06(c)(3) will not bear the Private Placement Legend.

            (d) Transfer and Exchange of Definitive Notes for Beneficial
         Interests.

                  (1) Restricted Definitive Notes to Beneficial Interests in
            Restricted Global Notes. If any Holder of a Restricted Definitive
            Note proposes to exchange such Note for a beneficial interest in a
            Restricted Global Note or to transfer such Restricted Definitive
            Notes to a Person who takes delivery thereof in the form of a
            beneficial interest in a Restricted Global Note, then, upon receipt
            by the Registrar of the following documentation:

                           (A) if the Holder of such Restricted Definitive Note
                  proposes to exchange such Note for a beneficial interest in a
                  Restricted Global Note, a certificate from such Holder in the
                  form of Exhibit C hereto, including the certifications in item
                  (2)(b) thereof;

                           (B) if such Restricted Definitive Note is being
                  transferred to a QIB in accordance with Rule 144A, a
                  certificate to the effect set forth in Exhibit B hereto,
                  including the certifications in item (1) thereof;

                           (C) if such Restricted Definitive Note is being
                  transferred to a Non-U.S. Person in an offshore transaction in
                  accordance with Rule 903 or Rule 904, a certificate to the
                  effect set forth in Exhibit B hereto, including the
                  certifications in item (2) thereof;

                           (D) if such Restricted Definitive Note is being
                  transferred pursuant to an exemption from the registration
                  requirements of the Securities Act in accordance with Rule
                  144, a certificate to the effect set forth in Exhibit B
                  hereto, including the certifications in item (3)(a) thereof;

                           (E) if such Restricted Definitive Note is being
                  transferred to the Company or any of its Subsidiaries, a
                  certificate to the effect set forth in Exhibit B hereto,
                  including the certifications in item (3)(b) thereof;

                           (F) if such Restricted Definitive Note is being
                  transferred pursuant to an effective registration statement
                  under the Securities Act, a certificate to the effect set
                  forth in Exhibit B hereto, including the certifications in
                  item (3)(c) thereof; or


                                       30


                           (G) if such Restricted Definitive Note is being
                  transferred to an Institutional Accredited Investor in
                  reliance on an exemption from the registration requirements of
                  the Securities Act other than those listed in subparagraphs
                  (B) through (D) above, a certificate to the effect set forth
                  in Exhibit B hereto, including the certifications,
                  certificates and Opinion of Counsel required by item (3)(d)
                  thereof, if applicable,

         the Trustee will cancel the Restricted Definitive Note, increase or
         cause to be increased the aggregate principal amount of, in the case of
         clause (A) above, the appropriate Restricted Global Note, in the case
         of clause (B) above, the 144A Global Note, in the case of clause (C)
         above, the Regulation S Global Note, and in all other cases, the IAI
         Global Note.

            (2) Restricted Definitive Notes to Beneficial Interests in
         Unrestricted Global Notes. A Holder of a Restricted Definitive Note may
         exchange such Note for a beneficial interest in an Unrestricted Global
         Note or transfer such Restricted Definitive Note to a Person who takes
         delivery thereof in the form of a beneficial interest in an
         Unrestricted Global Note only if:

                  (A) such exchange or transfer is effected pursuant to the
            Exchange Offer in accordance with the Registration Rights Agreement
            and the Holder, in the case of an exchange, or the transferee, in
            the case of a transfer, certifies in the applicable Letter of
            Transmittal that it is not (i) a Broker-Dealer, (ii) a Person
            participating in the distribution of the Exchange Notes or (iii) a
            Person who is an affiliate (as defined in Rule 144) of the Company;

                  (B) such transfer is effected pursuant to the Shelf
            Registration Statement in accordance with the Registration Rights
            Agreement;

                  (C) such transfer is effected by a Broker-Dealer pursuant to
            the Exchange Offer Registration Statement in accordance with the
            Registration Rights Agreement; or

                  (D) the Registrar receives the following:

                      (i) if the Holder of such Definitive Notes proposes to
                  exchange such Notes for a beneficial interest in the
                  Unrestricted Global Note, a certificate from such Holder in
                  the form of Exhibit C hereto, including the certifications in
                  item (1)(c) thereof; or

                      (ii) if the Holder of such Definitive Notes proposes to
                  transfer such Notes to a Person who shall take delivery
                  thereof in the form of a beneficial interest in the
                  Unrestricted Global Note, a certificate from such Holder in
                  the form of Exhibit B hereto, including the certifications in
                  item (4) thereof;

                  and, in each such case set forth in this subparagraph (D), if
                  the Registrar so requests or if the Applicable Procedures so
                  require, an Opinion of Counsel in form reasonably acceptable
                  to the Registrar to the effect that such exchange or transfer
                  is in compliance with the Securities Act and that the
                  restrictions on transfer contained herein and in the Private
                  Placement Legend are no longer required in order to maintain
                  compliance with the Securities Act.

                  Upon satisfaction of the conditions of any of the
         subparagraphs in this Section 2.06(d)(2), the Trustee will cancel the
         Definitive Notes and increase or cause to be increased the aggregate
         principal amount of the Unrestricted Global Note.


                                       31


            (3) Unrestricted Definitive Notes to Beneficial Interests in
         Unrestricted Global Notes. A Holder of an Unrestricted Definitive Note
         may exchange such Note for a beneficial interest in an Unrestricted
         Global Note or transfer such Definitive Notes to a Person who takes
         delivery thereof in the form of a beneficial interest in an
         Unrestricted Global Note at any time. Upon receipt of a request for
         such an exchange or transfer, the Trustee will cancel the applicable
         Unrestricted Definitive Note and increase or cause to be increased the
         aggregate principal amount of one of the Unrestricted Global Notes.

            If any such exchange or transfer from a Definitive Note to a
         beneficial interest is effected pursuant to subparagraphs (2)(B),
         (2)(D) or (3) above at a time when an Unrestricted Global Note has not
         yet been issued, the Company will issue and, upon receipt of an
         Authentication Order in accordance with Section 2.02 hereof, the
         Trustee will authenticate one or more Unrestricted Global Notes in an
         aggregate principal amount equal to the principal amount of Definitive
         Notes so transferred.

            (e) Transfer and Exchange of Definitive Notes for Definitive Notes.
         Upon request by a Holder of Definitive Notes and such Holder's
         compliance with the provisions of this Section 2.06(e), the Registrar
         will register the transfer or exchange of Definitive Notes. Prior to
         such registration of transfer or exchange, the requesting Holder must
         present or surrender to the Registrar the Definitive Notes duly
         endorsed or accompanied by a written instruction of transfer in form
         satisfactory to the Registrar duly executed by such Holder or by its
         attorney, duly authorized in writing. In addition, the requesting
         Holder must provide any additional certifications, documents and
         information, as applicable, required pursuant to the following
         provisions of this Section 2.06(e).

                  (1) Restricted Definitive Notes to Restricted Definitive
            Notes. Any Restricted Definitive Note may be transferred to and
            registered in the name of Persons who take delivery thereof in the
            form of a Restricted Definitive Note if the Registrar receives the
            following:

                      (A) if the transfer will be made pursuant to Rule 144A
                  under the Securities Act, then the transferor must deliver a
                  certificate in the form of Exhibit B hereto, including the
                  certifications in item (1) thereof;

                      (B) if the transfer will be made pursuant to Rule 903 or
                  Rule 904, then the transferor must deliver a certificate in
                  the form of Exhibit B hereto, including the certifications in
                  item (2) thereof; and

                      (C) if the transfer will be made pursuant to any other
                  exemption from the registration requirements of the Securities
                  Act, then the transferor must deliver a certificate in the
                  form of Exhibit B hereto, including the certifications,
                  certificates and Opinion of Counsel required by item (3)
                  thereof, if applicable.

                  (2) Restricted Definitive Notes to Unrestricted Definitive
            Notes. Any Restricted Definitive Note may be exchanged by the Holder
            thereof for an Unrestricted Definitive Note or transferred to a
            Person or Persons who take delivery thereof in the form of an
            Unrestricted Definitive Note if:

                      (A) such exchange or transfer is effected pursuant to the
                  Exchange Offer in accordance with the Registration Rights
                  Agreement and the Holder, in the case of an exchange, or the
                  transferee, in the case of a transfer, certifies in the
                  applicable Letter of Transmittal that it is not (i) a
                  broker-dealer, (ii) a Person participating in the distribution
                  of the Exchange Notes or (iii) a Person who is an affiliate
                  (as defined in Rule 144) of the Company;

                                       32


                      (B) any such transfer is effected pursuant to the Shelf
                  Registration Statement in accordance with the Registration
                  Rights Agreement;

                      (C) any such transfer is effected by a Broker-Dealer
                  pursuant to the Exchange Offer Registration Statement in
                  accordance with the Registration Rights Agreement; or

                      (D) the Registrar receives the following:

                         (i) if the Holder of such Restricted Definitive Notes
                      proposes to exchange such Notes for an Unrestricted
                      Definitive Note, a certificate from such Holder in the
                      form of Exhibit C hereto, including the certifications in
                      item (1)(d) thereof; or

                         (ii) if the Holder of such Restricted Definitive Notes
                      proposes to transfer such Notes to a Person who shall take
                      delivery thereof in the form of an Unrestricted Definitive
                      Note, a certificate from such Holder in the form of
                      Exhibit B hereto, including the certifications in item (4)
                      thereof;

                  and, in each such case set forth in this subparagraph (D), if
                  the Registrar so requests, an Opinion of Counsel in form
                  reasonably acceptable to the Company to the effect that such
                  exchange or transfer is in compliance with the Securities Act
                  and that the restrictions on transfer contained herein and in
                  the Private Placement Legend are no longer required in order
                  to maintain compliance with the Securities Act.

                  (3) Unrestricted Definitive Notes to Unrestricted Definitive
            Notes. A Holder of Unrestricted Definitive Notes may transfer such
            Notes to a Person who takes delivery thereof in the form of an
            Unrestricted Definitive Note. Upon receipt of a request to register
            such a transfer, the Registrar shall register the Unrestricted
            Definitive Notes pursuant to the instructions from the Holder
            thereof.

            (f) Exchange Offer. Upon the occurrence of the Exchange Offer in
         accordance with the Registration Rights Agreement, the Company will
         issue and, upon receipt of an Authentication Order in accordance with
         Section 2.02 hereof, the Trustee will authenticate:

                  (1) one or more Unrestricted Global Notes in an aggregate
            principal amount equal to the principal amount of the beneficial
            interests in the Restricted Global Notes tendered into the Exchange
            Offer by Persons that certify in the applicable Letters of
            Transmittal that (A) they are not Broker-Dealers, (B) they are not
            participating in a distribution of the Exchange Notes and (z) they
            are not affiliates (as defined in Rule 144) of the Company; and

                  (2) Unrestricted Definitive Notes in an aggregate principal
            amount equal to the principal amount of the Restricted Definitive
            Notes accepted for exchange in the Exchange Offer.

         Concurrently with the issuance of such Notes, the Trustee will cause
the aggregate principal amount of the applicable Restricted Global Notes to be
reduced accordingly, and the Company will execute and the Trustee will
authenticate and deliver to the Persons designated by the Holders of Definitive
Notes so accepted Unrestricted Definitive Notes in the appropriate principal
amount.


                                       33


            (g) Legends. The following legends will appear on the face of all
         Global Notes and Definitive Notes issued under this Indenture unless
         specifically stated otherwise in the applicable provisions of this
         Indenture.

                  (1) Private Placement Legend.

                      (A) Except as permitted by subparagraph (B) below, each
                  Global Note and each Definitive Note (and all Notes issued in
                  exchange therefor or substitution thereof) shall bear the
                  legend in substantially the following form:

"THE NOTES EVIDENCED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED (THE "SECURITIES ACT"), OR OTHER SECURITIES LAWS. NEITHER THIS
NOTE NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED,
TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH
REGISTRATION OR UNLESS THE TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, THE
REGISTRATION REQUIREMENTS OF THE SECURITIES ACT. THE HOLDER OF THIS SECURITY BY
ITS ACCEPTANCE HEREOF (1) REPRESENTS THAT (A) IT IS A "QUALIFIED INSTITUTIONAL
BUYER" (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT), (B) IT IS NOT A U.S.
PERSON AND IS ACQUIRING ITS NOTE IN AN "OFFSHORE TRANSACTION" PURSUANT TO RULE
904 OF REGULATION S UNDER THE SECURITIES ACT, OR (C) IT IS AN INSTITUTIONAL
"ACCREDITED INVESTOR" WITHIN THE MEANING OF RULE 501(a)(1), (2), (3) OR (7)
UNDER THE SECURITIES ACT, ACQUIRING THE NOTE FOR ITS OWN ACCOUNT OR FOR THE
ACCOUNT OF SUCH AN INSTITUTIONAL ACCREDITED INVESTOR, IN EACH CASE IN A MINIMUM
PRINCIPAL AMOUNT OF THE NOTES OF $250,000, FOR INVESTMENT PURPOSES AND NOT WITH
A VIEW TO OR FOR OFFER OR SALE IN CONNECTION WITH ANY DISTRIBUTION IN VIOLATION
OF THE SECURITIES ACT, (2) AGREES THAT IT WILL NOT PRIOR TO (X) THE DATE WHICH
IS TWO YEARS (OR SUCH SHORTER PERIOD OF TIME AS PERMITTED BY RULE 144(k) UNDER
THE SECURITIES ACT OR ANY SUCCESSOR PROVISION THEREUNDER) AFTER THE LATER OF THE
ORIGINAL ISSUE DATE HEREOF (OR OF ANY PREDECESSOR OF THIS NOTE) OR THE LAST DAY
ON WHICH THE COMPANY OR ANY AFFILIATE OF THE COMPANY WAS THE OWNER OF THIS NOTE
(OR ANY PREDECESSOR OF THIS NOTE) AND (Y) SUCH LATER DATE, IF ANY, AS MAY BE
REQUIRED BY APPLICABLE LAW (THE "RESALE RESTRICTION TERMINATION DATE"), OFFER,
SELL OR OTHERWISE TRANSFER THIS NOTE EXCEPT (A) TO THE COMPANY, (B) PURSUANT TO
A REGISTRATION STATEMENT WHICH HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES
ACT, (C) FOR SO LONG AS THE NOTES ARE ELIGIBLE FOR RESALE PURSUANT TO RULE 144A,
TO A PERSON IT REASONABLY BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER" AS
DEFINED IN RULE 144A UNDER THE SECURITIES ACT THAT PURCHASES FOR ITS OWN ACCOUNT
OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN
THAT THE TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A INSIDE THE UNITED
STATES, (D) PURSUANT TO OFFERS AND SALES TO NON-U.S. PERSONS THAT OCCUR OUTSIDE
THE UNITED STATES WITHIN THE MEANING OF REGULATION S UNDER THE SECURITIES ACT,
(E) TO AN INSTITUTIONAL "ACCREDITED INVESTOR" WITHIN THE MEANING OF RULE
501(a)(1), (2), (3) OR (7) UNDER THE SECURITIES ACT OR (F) PURSUANT TO ANY OTHER
AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND
(3) AGREES THAT IT WILL GIVE TO EACH PERSON TO WHOM THIS NOTE IS TRANSFERRED A
NOTICE SUBSTANTIALLY TO THE EFFECT TO THIS LEGEND; PROVIDED THAT THE COMPANY,
THE TRUSTEE AND THE REGISTRAR SHALL HAVE THE RIGHT PRIOR TO ANY SUCH OFFER, SALE
OR TRANSFER (I) PURSUANT TO CLAUSE (D), (E) OR (F) TO REQUIRE THE DELIVERY OF AN
OPINION OF COUNSEL, CERTIFICATION AND/OR OTHER INFORMATION SATISFACTORY TO EACH
OF THEM, AND (II) IN EACH OF THE FOREGOING CASES, TO REQUIRE THAT A
CERTIFICATION OF TRANSFER IN THE FORM APPEARING ON THE OTHER SIDE OF THIS NOTE
IS COMPLETED AND DELIVERED BY THIS TRANSFEROR TO THE TRUSTEE. THIS LEGEND WILL
BE REMOVED UPON THE REQUEST OF THE HOLDER AFTER THE RESALE RESTRICTION
TERMINATION DATE. AS USED HEREIN, THE TERMS "OFFSHORE TRANSACTION," "UNITED
STATES" AND "U.S. PERSON" HAVE THE MEANINGS GIVEN TO THEM BY REGULATION S UNDER
THE SECURITIES ACT."


                                       34


                      (B) Notwithstanding the foregoing, any Global Note or
                  Definitive Note issued pursuant to subparagraphs (b)(4),
                  (c)(2), (c)(3), (d)(2), (d)(3), (e)(2), (e)(3) or (f) of this
                  Section 2.06 (and all Notes issued in exchange therefor or
                  substitution thereof) will not bear the Private Placement
                  Legend.

                  (2) Global Note Legend. Each Global Note will bear a legend in
            substantially the following form:

"THIS GLOBAL NOTE IS HELD BY THE DEPOSITARY (AS DEFINED IN THE INDENTURE
GOVERNING THIS NOTE) OR ITS NOMINEE IN CUSTODY FOR THE BENEFIT OF THE BENEFICIAL
OWNERS HEREOF, AND IS NOT TRANSFERABLE TO ANY PERSON UNDER ANY CIRCUMSTANCES
EXCEPT THAT (1) THE TRUSTEE MAY MAKE SUCH NOTATIONS HEREON AS MAY BE REQUIRED
PURSUANT TO SECTION 2.06 OF THE INDENTURE, (2) THIS GLOBAL NOTE MAY BE EXCHANGED
IN WHOLE BUT NOT IN PART PURSUANT TO SECTION 2.06(a) OF THE INDENTURE, (3) THIS
GLOBAL NOTE MAY BE DELIVERED TO THE TRUSTEE FOR CANCELLATION PURSUANT TO SECTION
2.11 OF THE INDENTURE AND (IV) THIS GLOBAL NOTE MAY BE TRANSFERRED TO A
SUCCESSOR DEPOSITARY WITH THE PRIOR WRITTEN CONSENT OF THE COMPANY.

UNLESS AND UNTIL IT IS EXCHANGED IN WHOLE OR IN PART FOR NOTES IN DEFINITIVE
FORM, THIS NOTE MAY NOT BE TRANSFERRED EXCEPT AS A WHOLE BY THE DEPOSITARY TO A
NOMINEE OF THE DEPOSITARY OR BY A NOMINEE OF THE DEPOSITARY TO THE DEPOSITARY OR
ANOTHER NOMINEE OF THE DEPOSITARY OR BY THE DEPOSITARY OR ANY SUCH NOMINEE TO A
SUCCESSOR DEPOSITARY OR A NOMINEE OF SUCH SUCCESSOR DEPOSITARY. UNLESS THIS
CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST
COMPANY (55 WATER STREET, NEW YORK, NEW YORK) ("DTC") TO THE COMPANY OR ITS
AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE
ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR SUCH OTHER NAME AS MAY BE
REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO
CEDE & CO. OR SUCH OTHER ENTITY AS MAY BE REQUESTED BY AN AUTHORIZED
REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR
OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER
HEREOF, CEDE & CO., HAS AN INTEREST HEREIN."

         (h) Cancellation and/or Adjustment of Global Notes. At such time as all
beneficial interests in a particular Global Note have been exchanged for
Definitive Notes or a particular Global Note has been redeemed, repurchased or
canceled in whole and not in part, each such Global Note will be returned to or
retained and canceled by the Trustee in accordance with Section 2.11 hereof. At
any time prior to such cancellation, if any beneficial interest in a Global Note
is exchanged for or transferred to a Person who will take delivery thereof in
the form of a beneficial interest in another Global Note or for Definitive
Notes, the principal amount of Notes represented by such Global Note will be
reduced accordingly and an endorsement will be made on such Global Note by the
Trustee or by the Depositary at the direction of the Trustee to reflect such
reduction; and if the beneficial interest is being exchanged for or transferred
to a Person who will take delivery thereof in the form of a beneficial interest
in another Global Note, such other Global Note will be increased accordingly and
an endorsement will be made on such Global Note by the Trustee or by the
Depositary at the direction of the Trustee to reflect such increase.

                                       35


         (i) General Provisions Relating to Transfers and Exchanges.

            (1) To permit registrations of transfers and exchanges, the Company
         will execute and the Trustee will authenticate Global Notes and
         Definitive Notes upon receipt of an Authentication Order in accordance
         with Section 2.02 or at the Registrar's request.

            (2) No service charge will be made to a Holder of a Global Note or
         to a Holder of a Definitive Note for any registration of transfer or
         exchange, but the Company may require payment of a sum sufficient to
         cover any transfer tax or similar governmental charge payable in
         connection therewith (other than any such transfer taxes or similar
         governmental charge payable upon exchange or transfer pursuant to
         Sections 2.10, 3.06, 3.10, 4.10, 4.15 and 9.05 hereof).

            (3) The Registrar will not be required to register the transfer of
         or exchange any Note selected for redemption in whole or in part,
         except the unredeemed portion of any Note being redeemed in part.

            (4) All Global Notes and Definitive Notes issued upon any
         registration of transfer or exchange of Global Notes or Definitive
         Notes will be the valid obligations of the Company, evidencing the same
         debt, and entitled to the same benefits under this Indenture, as the
         Global Notes or Definitive Notes surrendered upon such registration of
         transfer or exchange.

            (5) The Company will not be required:

                  (A) to issue, to register the transfer of or to exchange any
            Notes during a period beginning at the opening of business 15 days
            before the day of any selection of Notes for redemption under
            Section 3.02 hereof and ending at the close of business on the day
            of selection;

                  (B) to register the transfer of or to exchange any Note
            selected for redemption in whole or in part, except the unredeemed
            portion of any Note being redeemed in part; or

                  (C) to register the transfer of or to exchange a Note between
            a record date and the next succeeding interest payment date.

            (6) Prior to due presentment for the registration of a transfer of
         any Note, the Trustee, any Agent and the Company may deem and treat the
         Person in whose name any Note is registered as the absolute owner of
         such Note for the purpose of receiving payment of principal of and
         interest on such Notes and for all other purposes, and none of the
         Trustee, any Agent or the Company shall be affected by notice to the
         contrary.

            (7) The Trustee will authenticate Global Notes and Definitive Notes
         in accordance with the provisions of Section 2.02 hereof.


                                       36


            (8) All certifications, certificates and Opinions of Counsel
         required to be submitted to the Registrar pursuant to this Section 2.06
         to effect a registration of transfer or exchange may be submitted by
         facsimile.

            (9) Each Holder of a Note agrees to indemnify the Company and the
         Trustee against any liability that may result from the transfer,
         exchange or assignment of such Holder's Note in violation of any
         provision of this Indenture and/or applicable United States federal or
         state securities law.

            (10) The Trustee shall have no obligation or duty to monitor,
         determine or inquire as to compliance with any restrictions on transfer
         imposed under this Indenture or under applicable law with respect to
         any transfer of any interest in any Note (including any transfers
         between or among Depositary Participants or beneficial owners of
         interests in any Global Note) other than to require delivery of such
         certificates and other documentation or evidence as are expressly
         required by, and to do so if and when expressly required by the terms
         of, this Indenture, and to examine the same to determine substantial
         compliance as to form with the express requirements hereof.

         (j) Euroclear and Clearstream Procedures Applicable. The provisions of
the "Operating Procedures of the Euroclear System" and "Terms and Conditions
Governing Use of Euroclear" and the "General Terms and Conditions of Clearstream
Banking" and "Customer Handbook" of Clearstream will be applicable to transfers
of beneficial interests in the Regulation S Global Notes that are held by
Participants through Euroclear or Clearstream.

Section 2.07   Replacement Notes.

         If any mutilated Note is surrendered to the Trustee or the Company and
the Trustee receives evidence to its satisfaction of the destruction, loss or
theft of any Note, the Company will issue and the Trustee, upon receipt of an
Authentication Order, will authenticate a replacement Note if the Trustee's
requirements are met. If required by the Trustee or the Company, an indemnity
bond must be supplied by the Holder that is sufficient in the judgment of the
Trustee and the Company to protect the Company, the Trustee, any Agent and any
authenticating agent from any loss that any of them may suffer if a Note is
replaced. The Company may charge for its expenses in replacing a Note.

         Every replacement Note is an additional obligation of the Company and
will be entitled to all of the benefits of this Indenture equally and
proportionately with all other Notes duly issued hereunder.

Section 2.08   Outstanding Notes.

         The Notes outstanding at any time are all the Notes authenticated by
the Trustee except for those canceled by it, those delivered to it for
cancellation, those reductions in the interest in a Global Note effected by the
Trustee in accordance with the provisions hereof, and those described in this
Section 2.08 as not outstanding. Except as set forth in Section 2.09 hereof, a
Note does not cease to be outstanding because the Company or an Affiliate of the
Company holds the Note; however, Notes held by the Company or a Subsidiary of
the Company shall not be deemed to be outstanding for purposes of Section
3.07(a) hereof.

         If a Note is replaced pursuant to Section 2.07 hereof, it ceases to be
outstanding unless the Trustee receives proof satisfactory to it that the
replaced Note is held by a protected purchaser.

         If the principal amount of any Note is considered paid under Section
4.01 hereof, it ceases to be outstanding and interest on it ceases to accrue.


                                       37


         If the Paying Agent (other than the Company, a Subsidiary or an
Affiliate of any thereof) holds, on a redemption date or maturity date, money
sufficient to pay Notes payable on that date, then on and after that date such
Notes will be deemed to be no longer outstanding and will cease to accrue
interest.

Section 2.09   Treasury Notes.

         In determining whether the Holders of the required principal amount of
Notes have concurred in any direction, waiver or consent, Notes owned by the
Company, or by any Person directly or indirectly controlling or controlled by or
under direct or indirect common control with the Company, will be considered as
though not outstanding, except that for the purposes of determining whether the
Trustee will be protected in relying on any such direction, waiver or consent,
only Notes that a Responsible Officer of the Trustee knows are so owned will be
so disregarded.

Section 2.10   Temporary Notes.

         Until certificates representing Notes are ready for delivery, the
Company may prepare and the Trustee, upon receipt of an Authentication Order,
will authenticate temporary Notes. Temporary Notes will be substantially in the
form of certificated Notes but may have variations that the Company considers
appropriate for temporary Notes and as may be reasonably acceptable to the
Trustee. Without unreasonable delay, the Company will prepare and the Trustee
will authenticate definitive Notes in exchange for temporary Notes.

         Holders of temporary Notes will be entitled to all of the benefits of
this Indenture.

Section 2.11   Cancellation.

         The Company at any time may deliver Notes to the Trustee for
cancellation. The Registrar and Paying Agent will forward to the Trustee any
Notes surrendered to them for registration of transfer, exchange or payment. The
Trustee and no one else will cancel all Notes surrendered for registration of
transfer, exchange, payment, replacement or cancellation and will treat such
cancelled Notes in accordance with its document retention policies and
applicable laws. Certification of the destruction of all canceled Notes will be
delivered to the Company. The Company may not issue new Notes to replace Notes
that it has paid or that have been delivered to the Trustee for cancellation.

Section 2.12   Defaulted Interest.

         If the Company defaults in a payment of interest on the Notes, it will
pay the defaulted interest in any lawful manner plus, to the extent lawful,
interest payable on the defaulted interest, to the Persons who are Holders on a
subsequent special record date, in each case at the rate provided in the Notes
and in Section 4.01 hereof. The Company will notify the Trustee in writing of
the amount of defaulted interest proposed to be paid on each Note and the date
of the proposed payment. The Company will fix or cause to be fixed each such
special record date and payment date, provided that no such special record date
may be less than 10 days prior to the related payment date for such defaulted
interest. At least 15 days before the special record date, the Company (or, upon
the written request of the Company, the Trustee in the name and at the expense
of the Company) will mail or cause to be mailed to Holders a notice that states
the special record date, the related payment date and the amount of such
interest to be paid.


                                       38


                                   ARTICLE 3.
                            REDEMPTION AND PREPAYMENT

Section 3.01   Notices to Trustee.

         If the Company elects to redeem Notes pursuant to the optional
redemption provisions of Section 3.07 hereof or elects to redeem the Notes
pursuant to Section 3.09(i) hereof, it must furnish to the Trustee, at least 30
days but not more than 60 days before a redemption date if the redemption is
pursuant to Section 3.07 and at least 5 Business Days before a redemption date
if the redemption is pursuant to Section 3.09(i), an Officers' Certificate
setting forth:

                  (1) the clause of this Indenture pursuant to which the
            redemption shall occur;

                  (2) the redemption date;

                  (3) the principal amount of Notes to be redeemed;

                  (4) the redemption price; and

                  (5) the CUSIP number.

         In the event that the Spin-off is consummated, the Company shall
provide the Trustee an Officers' Certificate (the "Spin-off Officers'
Certificate") certifying that the Spin-off has been consummated.

Section 3.02   Selection of Notes to Be Redeemed or Purchased.

         If less than all of the Notes are to be redeemed or purchased in an
offer to purchase at any time, the Trustee will select Notes for redemption or
purchase as follows:

                  (1) if the Notes are listed on any national securities
            exchange, in compliance with the requirements of the principal
            national securities exchange on which the Notes are listed; or

                  (2) if the Notes are not listed on any national securities
            exchange, on a pro rata basis, by lot or by such method as the
            Trustee shall deem fair and appropriate.

         In the event of partial redemption or purchase by lot, the particular
Notes to be redeemed or purchased will be selected, unless otherwise provided
herein, not less than 30 nor more than 60 days prior to the redemption or
purchase date by the Trustee from the outstanding Notes not previously called
for redemption or purchase.

         The Trustee will promptly notify the Company in writing of the Notes
selected for redemption or purchase and, in the case of any Note selected for
partial redemption or purchase, the principal amount thereof to be redeemed or
purchased. Notes and portions of Notes selected will be in amounts of $1,000 or
whole multiples of $1,000; except that if all of the Notes of a Holder are to be
redeemed or purchased, the entire outstanding amount of Notes held by such
Holder, even if not a multiple of $1,000, shall be redeemed or purchased. Except
as provided in the preceding sentence, provisions of this Indenture that apply
to Notes called for redemption or purchase also apply to portions of Notes
called for redemption or purchase.


                                       39


Section 3.03   Notice of Redemption.

         Subject to the provisions of Section 3.09 and 3.10 hereof, at least 30
days but not more than 60 days before a redemption date, the Company will mail
or cause to be mailed, by first class mail, a notice of redemption to each
Holder whose Notes are to be redeemed at its registered address, except that (i)
redemption notices shall be mailed promptly upon receipt of notice from the
Company pursuant to Section 3.01 of a Special Redemption Date or on March 1,
2004 if the Trustee has not received the Spin-off Officer's Certificate prior to
5:00 p.m. on February 27, 2004 and (ii) redemption notices may be mailed more
than 60 days prior to a redemption date if the notice is issued in connection
with a defeasance of the Notes or a satisfaction and discharge of this Indenture
pursuant to Articles 8 or 12 of this Indenture.

         The notice will identify the Notes to be redeemed and will state:

                  (1) the redemption date;

                  (2) the redemption price;

                  (3) the principal amount of the Notes to be redeemed; if any
            Note is being redeemed in part, the portion of the principal amount
            of such Note to be redeemed and that, after the redemption date upon
            surrender of such Note, a new Note or Notes in principal amount
            equal to the unredeemed portion will be issued upon cancellation of
            the original Note;

                  (4) the name and address of the Paying Agent;

                  (5) that Notes called for redemption must be surrendered to
            the Paying Agent to collect the redemption price;

                  (6) that, unless the Company defaults in making such
            redemption payment, interest on Notes called for redemption ceases
            to accrue on and after the redemption date;

                  (7) the paragraph of the Notes and/or Section of this
            Indenture pursuant to which the Notes called for redemption are
            being redeemed;

                  (8) the CUSIP number; and

                  (9) that no representation is made as to the correctness or
            accuracy of the CUSIP number, if any, listed in such notice or
            printed on the Notes.

         At the Company's request, the Trustee will give the notice of
redemption in the Company's name and at its expense; provided, however, that
(other than in connection with Section 3.09) the Company has delivered to the
Trustee, at least 45 days prior to the redemption date, an Officers' Certificate
requesting that the Trustee give such notice and setting forth the information
to be stated in such notice as provided in the preceding paragraph.

Section 3.04   Effect of Notice of Redemption.

         Once notice of redemption is mailed in accordance with Section 3.03
hereof, Notes called for redemption become irrevocably due and payable on the
redemption date at the redemption price. A notice of redemption may not be
conditional.


                                       40


Section 3.05   Deposit of Redemption or Purchase Price.

         One Business Day prior to the redemption or purchase price date, the
Company will deposit with the Trustee or with the Paying Agent money sufficient
to pay the redemption or purchase price of and accrued interest and Additional
Interest, if any, on all Notes to be redeemed or purchased on that date. The
Trustee or the Paying Agent will promptly return to the Company any money
deposited with the Trustee or the Paying Agent by the Company in excess of the
amounts necessary to pay the redemption or purchase price of, and accrued
interest and Additional Interest, if any, on, all Notes to be redeemed or
purchased.

         If the Company complies with the provisions of the preceding paragraph,
on and after the redemption or purchase date, interest will cease to accrue on
the Notes or the portions of Notes called for redemption or purchase. If a Note
is redeemed or purchased on or after an interest record date but on or prior to
the related interest payment date, then any accrued and unpaid interest shall be
paid to the Person in whose name such Note was registered at the close of
business on such record date. If any Note called for redemption or purchase is
not so paid upon surrender for redemption or purchase because of the failure of
the Company to comply with the preceding paragraph, interest shall be paid on
the unpaid principal, from the redemption or purchase date until such principal
is paid, and to the extent lawful on any interest not paid on such unpaid
principal, in each case at the rate provided in the Notes and in Section 4.01
hereof.

Section 3.06   Notes Redeemed or Purchased in Part.

         Upon surrender of a Note that is redeemed or purchased in part, the
Company will issue and, upon receipt of an Authentication Order, the Trustee
will authenticate for the Holder at the expense of the Company a new Note equal
in principal amount to the unredeemed or unpurchased portion of the Note
surrendered.

Section 3.07   Optional Redemption.

         (a) At any time prior to November 15, 2006, the Company may on any one
or more occasions redeem up to 35% of the aggregate principal amount of Notes
issued under this Indenture at a redemption price of 106.875% of the principal
amount thereof, plus accrued and unpaid interest and Additional Interest, if
any, to the redemption date, with the net cash proceeds of one or more Equity
Offerings by the Company; provided that:

            (1) at least 65% of the aggregate principal amount of the Initial
         Notes issued under this Indenture remains outstanding immediately after
         the occurrence of such redemption (excluding Notes held by the Company
         and its Subsidiaries); and

            (2) the redemption occurs within 90 days of the date of the closing
         of such Equity Offering.

         (b) Except pursuant to the preceding paragraph or pursuant to Section
3.09 below, the Notes will not be redeemable at the Company's option prior to
November 15, 2008.

         (c) After November 15, 2008, the Company may redeem all or a part of
the Notes upon not less than 30 nor more than 60 days prior notice, at the
redemption prices (expressed as percentages of principal amount) set forth below
plus accrued and unpaid interest and Additional Interest, if any, on the Notes
redeemed, to the applicable redemption date, if redeemed during the twelve-month
period beginning on November 15 of the years indicated below:


                                       41


Year                                                                Percentage
- ----                                                                ----------
2008..............................................................    103.438%
2009..............................................................    102.292%
2010..............................................................    101.146%
2011 and thereafter...............................................    100.000%


         (d) Any redemption pursuant to this Section 3.07 shall be made pursuant
to the provisions of Section 3.01 through 3.06 hereof.

Section 3.08   Mandatory Redemption.

         Other than as described below in Section 3.09, the Company is not
required to make mandatory redemption or sinking fund payments with respect to
the Notes.

Section 3.09   Special Redemption.

         Notwithstanding the foregoing, in the event that (i) in its sole
discretion, the Company has determined that the Spin-off will not be consummated
on or prior to February 27, 2004, then the Company may redeem the Notes, in
whole but not in part, on or prior to February 27, 2004 at a redemption price
(the "Special Redemption Price") in cash equal to 101% of the issue price of the
Notes, plus the accrued and unpaid interest to the Special Redemption Date or
(ii) the Spin-off has not been consummated on or prior to February 27, 2004,
then the Company shall mandatorily redeem all of the Notes on March 5, 2004 at
the Special Redemption Price. The "Special Redemption Date" means the earlier of
(a) the date five Business Days after the Company sends notice to the Trustee of
a Special Redemption Date pursuant to Section 3.01, if in its sole discretion,
the Company has determined that the Spin-off will not be consummated on or prior
to February 27, 2004, or (b) March 5, 2004, if the Spin-off is not consummated
on or prior to February 27, 2004.

         Other than as specifically provided in this Section 3.09, any
redemption pursuant to this Section 3.09 shall be made pursuant to the
provisions of Sections 3.01 through 3.06 hereof.

Section 3.10   Offer to Purchase by Application of Excess Proceeds.

         In the event that, pursuant to Section 4.10 hereof, the Company is
required to commence an offer to all Holders to purchase Notes (an "Asset Sale
Offer"), it will follow the procedures specified below.

         The Asset Sale Offer shall be made to all Holders and all holders of
other Indebtedness that is pari passu with the Notes containing provisions
similar to those set forth in this Indenture with respect to offers to purchase
or redeem with the proceeds of sales and assets. The Asset Sale Offer will
remain open for a period of at least 20 Business Days following its commencement
and not more than 30 Business Days, except to the extent that a longer period is
required by applicable law (the "Offer Period"). No later than three Business
Days after the termination of the Offer Period (the "Purchase Date"), the
Company will apply all Excess Proceeds (the "Offer Amount") to the purchase of
Notes and such other pari passu Indebtedness (on a pro rata basis as set forth
in Section 3.02 or in such other manner as the Trustee deems appropriate, if
applicable) or, if less than the Offer Amount has been tendered, all Notes and
other Indebtedness tendered in response to the Asset Sale Offer. Payment for any
Notes so purchased will be made in the same manner as interest payments are
made.

         If the Purchase Date is on or after an interest record date and on or
before the related interest payment date, any accrued and unpaid interest and
Additional Interest, if any, through the Purchase Date will be paid to the
Person in whose name a Note is registered at the close of business on such
record date, and no additional interest will be payable to Holders who tender
Notes pursuant to the Asset Sale Offer.


                                       42


         Upon the commencement of an Asset Sale Offer, the Company will send, by
first class mail, a notice to the Trustee and each of the Holders. The notice
will contain all instructions and materials necessary to enable such Holders to
tender Notes pursuant to the Asset Sale Offer. The notice, which will govern the
terms of the Asset Sale Offer, will state:

            (1) that the Asset Sale Offer is being made pursuant to this Section
         3.10 and Section 4.10 hereof and the length of time the Asset Sale
         Offer will remain open;

            (2) the Offer Amount, the purchase price and the Purchase Date;

            (3) that any Note not tendered or accepted for payment will continue
         to accrue interest;

            (4) that, unless the Company defaults in making such payment, any
         Note accepted for payment pursuant to the Asset Sale Offer will cease
         to accrue interest after the Purchase Date;

            (5) that Holders electing to have a Note purchased pursuant to an
         Asset Sale Offer may elect to have Notes purchased in integral
         multiples of $1,000 only;

            (6) that Holders electing to have a Note purchased pursuant to any
         Asset Sale Offer will be required to surrender the Note, with the form
         entitled "Option of Holder to Elect Purchase" on the reverse of the
         Note completed, or transfer by book-entry transfer, to the Company, a
         Depositary, if appointed by the Company, or a Paying Agent at the
         address specified in the notice at least three days before the Purchase
         Date;

            (7) that Holders will be entitled to withdraw their election if the
         Company, the Depositary or the Paying Agent, as the case may be,
         receives, not later than the expiration of the Offer Period, a
         facsimile transmission or letter setting forth the name of the Holder,
         the principal amount of the Note the Holder delivered for purchase and
         a statement that such Holder is withdrawing his election to have such
         Note purchased;

            (8) that, if the aggregate principal amount of Notes and other pari
         passu Indebtedness surrendered by Holders exceeds the Offer Amount, the
         Company will select the Notes and other pari passu Indebtedness to be
         purchased on a pro rata basis based on the principal amount of Notes
         and such other pari passu Indebtedness surrendered or in such other
         manner as the Trustee deems appropriate (with such adjustments as may
         be deemed appropriate by the Company so that only Notes in
         denominations of $1,000, or integral multiples thereof, will be
         purchased); and

            (9) that Holders whose Notes were purchased only in part will be
         issued new Notes equal in principal amount to the unpurchased portion
         of the Notes surrendered (or transferred by book-entry transfer).

         On or before the Purchase Date, the Company will, to the extent lawful,
accept for payment, on a pro rata basis or in such other manner as the Trustee
deems appropriate, to the extent necessary, the Offer Amount of Notes or
portions thereof tendered pursuant to the Asset Sale Offer, or if less than the
Offer Amount has been tendered, all Notes tendered, and will deliver to the
Trustee an Officers' Certificate stating that such Notes or portions thereof
were accepted for payment by the Company in accordance with the terms of this
Section 3.10. The Company, the Depositary or the Paying Agent, as the case may
be, will promptly (but in any case not later than five Business Days after the
Purchase Date) mail or deliver to each tendering Holder an amount equal to the
purchase price of the Notes tendered by such Holder and accepted by the Company
for purchase, and the Company will promptly issue a new Note, and the Trustee,
upon written request from the Company will authenticate and mail or deliver such
new Note to such Holder, in a principal amount equal to any unpurchased portion
of the Note surrendered. Any Note not so accepted shall be promptly mailed or
delivered by the Company to the Holder thereof. The Company will publicly
announce the results of the Asset Sale Offer on the Purchase Date.


                                       43


         Other than as specifically provided in this Section 3.10, any purchase
pursuant to this Section 3.10 shall be made pursuant to the provisions of
Sections 3.01 through 3.06 hereof.

                                   ARTICLE 4.
                                   COVENANTS

Section 4.01   Payment of Notes.

         The Company shall pay or cause to be paid the principal of, premium, if
any, and interest and Additional Interest, if any, on the Notes on the dates and
in the manner provided in the Notes. Principal, premium, if any, and interest
and Additional Interest, if any, shall be considered paid on the date due if the
Paying Agent, if other than the Company or a Subsidiary thereof, holds as of
10:00 a.m. Eastern Time on the due date money deposited by the Company in
immediately available funds and designated for and sufficient to pay all
principal, premium, if any, and interest then due. The Company shall pay all
Additional Interest, if any, in the same manner on the dates and in the amounts
set forth in the Registration Rights Agreement.

         The Company shall pay interest (including post-petition interest in any
proceeding under any Bankruptcy Law) on overdue principal at the rate equal to
1% per annum in excess of the then-applicable interest rate on the Notes to the
extent lawful; it shall pay interest (including post-petition interest in any
proceeding under any Bankruptcy Law) on overdue installments of interest and
Additional Interest (without regard to any applicable grace period) at the same
rate to the extent lawful.

Section 4.02   Maintenance of Office or Agency.

         The Company shall maintain in the Borough of Manhattan, the City of New
York, an office or agency (which may be an office of the Trustee or an affiliate
of the Trustee, Registrar or co-registrar) where Notes may be surrendered for
registration of transfer or for exchange and where notices and demands to or
upon the Company in respect of the Notes and this Indenture may be served. The
Company shall give prompt written notice to the Trustee of the location, and any
change in the location, of such office or agency. If at any time the Company
fails to maintain any such required office or agency or fails to furnish the
Trustee with the address thereof, such presentations, surrenders, notices and
demands may be made or served at the Corporate Trust Office of the Trustee.

         The Company may also from time to time designate one or more other
offices or agencies where the Notes may be presented or surrendered for any or
all such purposes and may from time to time rescind such designations; provided,
however, that no such designation or rescission will in any manner relieve the
Company of its obligation to maintain an office or agency in the Borough of
Manhattan, the City of New York for such purposes. The Company shall give prompt
written notice to the Trustee of any such designation or rescission and of any
change in the location of any such other office or agency.

         The Company hereby designates the Corporate Trust Office of the Trustee
as one such office or agency of the Company in accordance with Section 2.03
hereof.


                                       44


Section 4.03   Reports.

         (a) Whether or not required by the Commission, so long as any Notes are
outstanding, the Company shall furnish to the Holders of Notes, within the time
periods specified in the Commission's rules and regulations:

            (1) all quarterly and annual financial information that would be
         required to be contained in a filing with the Commission on Forms 10-Q
         and 10-K if the Company were required to file such Forms, including a
         "Management's Discussion and Analysis of Financial Condition and
         Results of Operations" and, with respect to the annual information
         only, a report on the annual financial statements by the Company's
         certified independent accountants; and

            (2) all current reports that would be required to be filed with the
         Commission on Form 8-K if the Company were required to file such
         reports;

provided, however, that the first quarterly report to be furnished pursuant to
this Section 4.03(a) shall be furnished as soon as is reasonably practicable
following the end of such quarterly period but in no event later than February
16, 2004; provided, further, that the Company will not be required to furnish
such information to the Holders to the extent such information is electronically
filed with the Commission and is electronically available to the public free of
cost.

         If the Company has designated any of its Subsidiaries as Unrestricted
Subsidiaries, then either (i) the quarterly and annual financial information
required by this Section 4.03(a) or (ii) a separate report furnished to the
Holders will include a reasonably detailed presentation of the financial
condition and results of operations of the Company and its Restricted
Subsidiaries separate from the financial condition and results of operations of
the Unrestricted Subsidiaries of the Company, as required by federal securities
laws.

         In addition, following the consummation of the Exchange Offer
contemplated by the Registration Rights Agreement, whether or not required by
the Commission, the Company shall file a copy of all of the information and
reports referred to in clauses (1) and (2) above with the Commission for public
availability within the time periods specified in the Commission's rules and
regulations (unless the Commission will not accept such a filing) and make such
information available to securities analysts and prospective investors upon
request. The Company shall at all times comply with TIA ss. 314(a).

         (b) For so long as any Notes remain outstanding, the Company and the
Guarantors shall furnish to the Holders and to securities analysts and
prospective investors, upon their request, the information required to be
delivered pursuant to Rule 144A(d)(4) under the Securities Act to the extent
such information is not electronically filed with the Commission and
electronically available to the public free of cost.

         Delivery of such reports, information and documents to the Trustee is
for informational purposes only and the Trustee's receipt of such shall not
constitute constructive notice of any information contained therein or
determinable from information contained therein, including the Company's
compliance with any of its covenants hereunder (as to which the Trustee is
entitled to conclusively rely exclusively on Officers Certificates).




                                       45


Section 4.04   Compliance Certificate.

         (a) The Company and each Guarantor (to the extent that such Guarantor
is so required under the TIA) shall deliver to the Trustee, within 90 days after
the end of each fiscal year, an Officers' Certificate stating that a review of
the activities of the Company and its Subsidiaries during the preceding fiscal
year has been made under the supervision of the signing Officers with a view to
determining whether the Company has kept, observed, performed and fulfilled its
obligations under this Indenture, and further stating, as to each such Officer
signing such certificate, that to the best of his or her knowledge the Company
has kept, observed, performed and fulfilled each and every covenant contained in
this Indenture and is not in default in the performance or observance of any of
the terms, provisions and conditions of this Indenture (or, if a Default or
Event of Default has occurred, describing all such Defaults or Events of Default
of which he or she may have knowledge and what action the Company is taking or
proposes to take with respect thereto) and that to the best of his or her
knowledge no event has occurred and remains in existence by reason of which
payments on account of the principal of or interest, if any, on the Notes is
prohibited or if such event has occurred, a description of the event and what
action the Company is taking or proposes to take with respect thereto.

         (b) So long as any of the Notes are outstanding, the Company shall
deliver to the Trustee, promptly upon any Officer becoming aware of any Default
or Event of Default, an Officers' Certificate specifying such Default or Event
of Default and what action the Company is taking or proposes to take with
respect thereto.

Section 4.05   Taxes.

         The Company shall pay, and shall cause each of its Subsidiaries to pay,
prior to delinquency, all material taxes, assessments, and governmental levies
except such as are contested in good faith and by appropriate proceedings or
where the failure to effect such payment is not adverse in any material respect
to the Holders of the Notes.

Section 4.06   Stay, Extension and Usury Laws.

         The Company and each of the Guarantors covenants (to the extent that it
may lawfully do so) that it will not at any time insist upon, plead, or in any
manner whatsoever claim or take the benefit or advantage of, any stay, extension
or usury law wherever enacted, now or at any time hereafter in force, that may
affect the covenants or the performance of this Indenture; and the Company and
each of the Guarantors (to the extent that it may lawfully do so) hereby
expressly waives all benefit or advantage of any such law, and covenants that it
will not, by resort to any such law, hinder, delay or impede the execution of
any power herein granted to the Trustee, but will suffer and permit the
execution of every such power as though no such law has been enacted.

Section 4.07   Restricted Payments.

         (a) The Company shall not, and shall not permit any of its Restricted
Subsidiaries to, directly or indirectly:

            (1) declare or pay any dividend or make any other payment or
         distribution on account of the Company's or any of its Restricted
         Subsidiaries' Equity Interests (including, without limitation, any
         payment in connection with any merger or consolidation involving the
         Company or any of its Restricted Subsidiaries), other than in
         connection with the Spin-off, or to the direct or indirect holders of
         the Company's or any of its Restricted Subsidiaries' Equity Interests
         in their capacity as such (other than dividends or distributions
         payable in Equity Interests (other than Disqualified Stock) of the
         Company or to the Company or a Restricted Subsidiary of the Company);


                                       46


            (2) purchase, redeem or otherwise acquire or retire for value
         (including, without limitation, in connection with any merger or
         consolidation involving the Company) any Equity Interests of the
         Company or any direct or indirect parent of the Company;

            (3) make any payment on or with respect to, or purchase, redeem,
         defease or otherwise acquire or retire for value any Subordinated
         Obligations of the Company or any Guarantor, except (x) a payment of
         interest or principal at the Stated Maturity thereof; or (y) any
         payment made with Equity Interests (other than Disqualified Stock) and
         (z) any payment with respect to Subordinated Obligations owed to the
         Company or any of the Guarantors; or

            (4) make any Restricted Investment (all such payments and other
         actions set forth in these clauses (1) through (4) above being
         collectively referred to as "Restricted Payments"),

unless, at the time of and after giving effect to such Restricted Payment:

            (1) no Default or Event of Default has occurred and is continuing or
         would occur as a consequence of such Restricted Payment; and

            (2) the Company would, at the time of such Restricted Payment and
         after giving pro forma effect thereto (including the pro forma
         application of the net proceeds therefrom) as if such Restricted
         Payment had been made at the beginning of the applicable four-quarter
         period, have been permitted to incur at least $1.00 of additional
         Indebtedness pursuant to the Fixed Charge Coverage Ratio test set forth
         in the first paragraph of Section 4.09 hereof; and

            (3) such Restricted Payment, together with the aggregate amount of
         all other Restricted Payments made by the Company and its Restricted
         Subsidiaries after the date of this Indenture (excluding Restricted
         Payments permitted by clauses (2), (3), (4), (5), (7)(i), (8), (9) and
         (10) of Section 4.07(b) below and up to $5.0 million permitted by
         clause (6) of Section 4.07(b) below, is less than the sum, without
         duplication, of:

                  (a) 50% of the Consolidated Net Income of the Company for the
            period (taken as one accounting period) from June 30, 2003 to the
            end of the Company's most recently ended fiscal quarter for which
            internal financial statements are available at the time of such
            Restricted Payment (or, if such Consolidated Net Income for such
            period is a deficit, less 100% of such deficit), plus

                  (b) 100% of the aggregate net cash proceeds received by the
            Company since the date of this Indenture as a contribution to its
            common equity capital or from the issue or sale of Equity Interests
            of the Company (other than Disqualified Stock) or from the issue or
            sale of convertible or exchangeable Disqualified Stock or
            convertible or exchangeable debt securities of the Company that have
            been converted into or exchanged for such Equity Interests (other
            than Equity Interests or Disqualified Stock or debt securities sold
            to a Subsidiary of the Company), plus

                  (c) to the extent that any Restricted Investment that was made
            after the date of this Indenture is sold for cash or Cash
            Equivalents or otherwise liquidated or repaid for cash or Cash
            Equivalents, the lesser of (i) the cash return of capital with
            respect to such Restricted Investment (less the cost of disposition,
            if any) and (ii) the initial amount of such Restricted Investment,
            plus


                                       47


                  (d) to the extent that any Unrestricted Subsidiary of the
            Company is redesignated as a Restricted Subsidiary after the date of
            this Indenture, the lesser of (i) the fair market value of the
            Company's Investment in such Subsidiary as of the date of such
            redesignation or (ii) such fair market value as of the date on which
            such Subsidiary was originally designated as an Unrestricted
            Subsidiary, plus

                  (e) any amount which previously qualified as a Restricted
            Payment on account of any Guarantee entered into by the Company or
            any Restricted Subsidiary; provided that such Guarantee has not been
            called upon and the obligation arising under such Guarantee no
            longer exists.

         (b) So long as no Default has occurred and is continuing or would be
caused thereby, the provisions of Section 4.07(a) shall not prohibit:

            (1) the payment of any dividend within 60 days after the date of
         declaration of the dividend, if at the date of declaration the dividend
         payment would have complied with the provisions of this Indenture;

            (2) the redemption, repurchase, retirement, defeasance or other
         acquisition of any Subordinated Obligations of the Company or any
         Guarantor or of any Equity Interests of the Company in exchange for, or
         out of the net cash proceeds of the substantially concurrent sale
         (other than to a Restricted Subsidiary of the Company) of, Equity
         Interests of the Company (other than Disqualified Stock); provided that
         the amount of any such net cash proceeds that are utilized for any such
         redemption, repurchase, retirement, defeasance or other acquisition
         shall be excluded from clause (3) (b) of the preceding paragraph;

            (3) the defeasance, redemption, repurchase or other acquisition of
         Subordinated Obligations of the Company or any Guarantor with the net
         cash proceeds from an incurrence of Permitted Refinancing Indebtedness;

            (4) the payment of any dividend or similar distribution by a
         Restricted Subsidiary of the Company to the holders of its Equity
         Interests on a pro rata basis;

            (5) the repurchase, redemption or other acquisition or retirement
         for value of any Equity Interests of the Company or any Restricted
         Subsidiary of the Company held by any officer or director of the
         Company (or any of its Restricted Subsidiaries) pursuant to any
         management equity subscription agreement, any compensation, retirement,
         disability, severance or benefit plan or agreement, any employment
         agreement, incentive plan or agreement, any stock option plan or
         agreement or similar plan or agreement; provided that the aggregate
         price paid for all such repurchased, redeemed, acquired or retired
         Equity Interests shall not exceed $5.0 million in any twelve-month
         period;

            (6) any purchase, redemption or other acquisition of Equity
         Interests of a Permitted Joint Venture which is required to be
         purchased, redeemed or otherwise acquired by applicable law or the
         terms of the organizational or governing documents or agreements;

            (7) the payment of any scheduled or required dividend (whether in
         cash or in kind) and any scheduled or required repayment of the stated
         amount, liquidation preference or any similar amount at final maturity
         or on any scheduled or required redemption or repurchase date, to
         holders of (i) any class or series of Disqualified Stock of the Company
         issued in compliance with Section 4.09 provided that scheduled or
         required dividends on such Disqualified Stock are included in the
         definition of "Fixed Charges," and (ii) the Existing Preferred Stock of
         the Company; provided that such payments were scheduled or required to
         be paid in the original documentation governing such series of
         Disqualified Stock or Existing Preferred Stock of the Company (it being
         understood that the foregoing provisions of this clause (7) shall not
         be deemed to permit the payment of any dividend or similar
         distribution, or the payment of the stated amount, liquidation
         preference or any similar amount, prior to the date originally
         scheduled or required for the payment thereof);



                                       48


            (8) payments in lieu of fractional shares;

            (9) the Spin-off and all transactions that are necessary or are
         contemplated to be performed in connection therewith; and

            (10) other Restricted Payments pursuant to this clause (10) in an
         aggregate amount since the date of this Indenture not to exceed $15.0
         million.

         The amount of all Restricted Payments (other than cash) shall be the
fair market value on the date of the Restricted Payment of the asset(s) or
securities proposed to be transferred or issued by the Company or such
Restricted Subsidiary, as the case may be, pursuant to the Restricted Payment.
The fair market value of any assets or securities that are required to be valued
by this Section 4.07 shall be determined by the Board of Directors whose
resolution with respect thereto shall be delivered to the Trustee. The Board of
Directors' determination must be based upon an opinion or appraisal issued by an
accounting, appraisal or investment banking firm of national standing if the
fair market value exceeds $10.0 million. Not later than the date of making any
Restricted Payment, the Company shall deliver to the Trustee an Officers'
Certificate stating that such Restricted Payment is permitted and setting forth
the basis upon which the calculations required by this Section 4.07 were
computed, together with a copy of any fairness opinion or appraisal required by
this Indenture.

Section 4.08   Dividend and Other Payment Restrictions Affecting Restricted
Subsidiaries.

         (a) The Company shall not, and shall not permit any of its Restricted
Subsidiaries to, directly or indirectly, create or permit to exist or become
effective any consensual encumbrance or restriction on the ability of any
Restricted Subsidiary to:

            (1) pay dividends or make any other distributions on its Capital
         Stock to the Company or any of its Restricted Subsidiaries, or with
         respect to any other interest or participation in, or measured by, its
         profits, or pay any indebtedness owed to the Company or any of its
         Restricted Subsidiaries;

            (2) make loans or advances to the Company or any of its Restricted
         Subsidiaries; or

            (3) transfer any of its properties or assets to the Company or any
         of its Restricted Subsidiaries.

         (b) The restrictions in Section 4.08(a) shall not apply to encumbrances
or restrictions existing under or by reason of:

            (1) agreements governing Existing Indebtedness and Credit Facilities
         as in effect on the date of this Indenture, and any amendments,
         modifications, restatements, renewals, increases, supplements,
         refundings, replacements or refinancings of those agreements, provided
         that the amendments, modifications, restatements, renewals, increases,
         supplements, refundings, replacement or refinancings are no more
         restrictive, taken as a whole, with respect to such dividend and other
         payment restrictions than those contained in those agreements on the
         date of this Indenture;


                                       49


            (2) this Indenture, the Notes, the Exchange Notes and the Subsidiary
         Guarantees;

            (3) applicable law;

            (4) any instrument governing Indebtedness or Capital Stock of a
         Person acquired by the Company or any of its Restricted Subsidiaries as
         in effect at the time of such acquisition (except to the extent such
         Indebtedness or Capital Stock was incurred in connection with or in
         contemplation of such acquisition), which encumbrance or restriction is
         not applicable to any Person, or the properties or assets of any
         Person, other than the Person, or the property or assets of the Person,
         so acquired, provided that, in the case of Indebtedness, such
         Indebtedness was permitted by the terms of this Indenture to be
         incurred;

            (5) customary non-assignment provisions in leases, intellectual
         property agreements and licenses entered into in the ordinary course of
         business and consistent with past practices;

            (6) purchase money obligations for property acquired in the ordinary
         course of business that impose restrictions on that property of the
         nature described in clause (3) of Section 4.08(a);

            (7) any agreement for the sale or other disposition of a Restricted
         Subsidiary that restricts distributions by that Restricted Subsidiary
         pending its sale or other disposition;

            (8) Permitted Refinancing Indebtedness, provided that the
         restrictions contained in the agreements governing such Permitted
         Refinancing Indebtedness are not materially more restrictive, taken as
         a whole, than those contained in the agreements governing the
         Indebtedness being refinanced;

            (9) Liens securing Indebtedness otherwise permitted to exist or be
         incurred under Section 4.12 hereof that limit the right of the debtor
         to dispose of the assets subject to such Liens;

            (10) provisions with respect to the disposition or distribution of
         assets or property in joint venture agreements, asset sale agreements,
         stock sale agreements and other similar agreements entered into in the
         ordinary course of business;

            (11) any agreement relating to a sale and leaseback transaction or
         Capital Lease Obligation, in each case, otherwise permitted by this
         Indenture, but only on the property subject to such transaction or
         lease and only to the extent that such restrictions or encumbrances are
         customary with respect to a sale and leaseback transaction or capital
         lease;

            (12) restrictions imposed in connection with a financing transaction
         involving a sale or other disposition of accounts receivable and
         related assets (including, without limitation, in connection with a
         securitization or similar financing) or in connection with a financing
         involving a subsidiary trust or similar financing vehicle that is
         permitted by Section 4.09 below; and

            (13) restrictions on cash or other deposits or net worth imposed by
         customers under contracts entered into in the ordinary course of
         business or imposed by governmental agencies or authorities.


                                       50


Section 4.09   Incurrence of Indebtedness and Issuance of Preferred Stock.

         (a) The Company shall not, and shall not permit any of its Restricted
Subsidiaries to, directly or indirectly, create, incur, issue, assume, guarantee
or otherwise become directly or indirectly liable, contingently or otherwise,
with respect to (collectively, "incur") any Indebtedness (including Acquired
Debt), and the Company shall not issue any Disqualified Stock and shall not
permit any of its Restricted Subsidiaries to issue any shares of preferred
stock; provided, however, that the Company may incur Indebtedness (including
Acquired Debt) or issue preferred stock or Disqualified Stock, and any of the
Company's Restricted Subsidiaries that are Guarantors may incur Indebtedness, if
the Fixed Charge Coverage Ratio for the Company's most recently ended four full
fiscal quarters for which internal financial statements are available
immediately preceding the date on which such additional Indebtedness is incurred
or such Disqualified Stock is issued would have been at least 2.00 to 1,
determined on a pro forma basis (including a pro forma application of the net
proceeds therefrom), as if such additional Indebtedness had been incurred or the
preferred stock or Disqualified Stock had been issued, as the case may be, at
the beginning of such four-quarter period.

         (b) The provisions of Section 4.09(a) hereof shall not prohibit any of
the following (collectively, "Permitted Debt"):

            (1) the incurrence by the Company or any Guarantor of Indebtedness
         and letters of credit under one or more Credit Facilities (including,
         without limitation, the Company's New Credit Facility) and Guarantees
         thereof by the Guarantors, provided that, the aggregate principal
         amount of Indebtedness of the Company and the Guarantors incurred
         pursuant to this clause (1) (with letters of credit being deemed to
         have a principal amount equal to the maximum potential liability of the
         Company and the Guarantor thereunder) does not exceed an amount equal
         to $150.0 million;

            (2) the incurrence by the Company and its Restricted Subsidiaries of
         the Existing Indebtedness and, prior to the Spin-off, the GHC Credit
         Agreement;

            (3) the incurrence by the Company and the Guarantors of Indebtedness
         represented by the Notes to be issued on the date of this Indenture
         (and the related Exchange Notes to be issued pursuant to the
         Registration Rights Agreement) and the incurrence by the Guarantors of
         the Subsidiary Guarantees of those Notes;

            (4) the incurrence by the Company or any of its Restricted
         Subsidiaries of Indebtedness represented by Capital Lease Obligations,
         mortgage financings or purchase money obligations, in each case
         incurred for the purpose of financing all or any part of the purchase
         price or cost of construction or improvement of property, plant or
         equipment used in the business of the Company or such Restricted
         Subsidiary, in an aggregate principal amount, including all Permitted
         Refinancing Indebtedness incurred to refund, refinance or replace any
         Indebtedness incurred pursuant to this clause (4), not to exceed $25.0
         million at the time of such incurrence;

            (5) the incurrence by the Company or any of its Restricted
         Subsidiaries of Permitted Refinancing Indebtedness in exchange for, or
         the net proceeds of which are used to refund, refinance or replace
         Indebtedness (other than intercompany Indebtedness) that was incurred
         under Section 4.09(a) hereof or clauses (2), (3), (4), (5), (12), (13),
         (16) or (17) of this Section 4.09(b);

            (6) the incurrence by the Company or any of its Restricted
         Subsidiaries of intercompany Indebtedness between or among the Company
         and any of its Restricted Subsidiaries that are Guarantors; provided,
         however, that


                                       51


                  (a) if the Company is the obligor on such Indebtedness, such
            Indebtedness must be expressly subordinated to the prior payment in
            full in cash of all Obligations with respect to the Notes;

                  (b) if a Restricted Subsidiary of the Company is the obligor
            on such Indebtedness, such Indebtedness is expressly subordinated to
            the prior payment in full in cash of such Restricted Subsidiary's
            Subsidiary Guarantee; and

                         (i) any subsequent issuance or transfer of Equity
                      Interests that results in any such Indebtedness being held
                      by a Person other than the Company or a Restricted
                      Subsidiary of the Company that is a Guarantor and

                         (ii) any sale or other transfer of any such
                      Indebtedness to a Person that is not either the Company or
                      a Restricted Subsidiary of the Company that is a Guarantor
                      shall be deemed, in each case, to constitute an incurrence
                      of such Indebtedness by the Company or such Restricted
                      Subsidiary, as the case may be, that was not permitted by
                      this clause (6);

            (7) the incurrence by the Company or any of its Restricted
         Subsidiaries of Hedging Obligations that are incurred in the normal
         course of business and consistent with past business practices for the
         purpose of fixing or hedging interest rate risk (including with respect
         to any floating rate Indebtedness that is permitted by the terms of
         this Indenture to be outstanding in connection with the conduct of
         their respective businesses and not for speculative purposes);

            (8) the guarantee by the Company or any of the Guarantors of
         Indebtedness of the Company or a Restricted Subsidiary of the Company
         that was permitted to be incurred by another provision of this Section
         4.09;

            (9) the incurrence by the Company's Unrestricted Subsidiaries of
         Non-recourse Debt; provided, however, that if any such Indebtedness
         ceases to be Non-recourse Debt of an Unrestricted Subsidiary, such
         event shall be deemed to be an incurrence of Indebtedness by a
         Restricted Subsidiary of the Company that was not permitted by this
         clause (9);

            (10) the incurrence by the Company or any of its Restricted
         Subsidiaries of Indebtedness arising from guarantees of Indebtedness of
         the Company or any Restricted Subsidiary or the agreements of the
         Company or a Restricted Subsidiary providing for indemnification,
         adjustment of purchase price or similar obligations, in each case,
         incurred or assumed in connection with the disposition of any business,
         assets or Capital Stock of a Restricted Subsidiary; provided that the
         maximum aggregate liability in respect of all such Indebtedness shall
         at no time exceed the gross proceeds actually received by the Company
         and its Restricted Subsidiaries in connection with such disposition;

            (11) Indebtedness arising from the honoring by a bank or other
         financial institution of a check, draft or similar instrument
         inadvertently drawn against insufficient funds;

            (12) the incurrence by the Company or any of its Restricted
         Subsidiaries of Indebtedness to the extent the proceeds thereof are
         deposited to defease the Notes as described in Article 8 hereof;


                                       52


            (13) if the Spin-off does not occur by February 27, 2004 and GHC is
         merged with and into the Company, (a) any then-outstanding indebtedness
         of GHC or any Restricted Subsidiary of GHC and (b) any additional
         indebtedness or letters of credit under GHC's Credit Agreement;

            (14) the incurrence by the Company or any of its Restricted
         Subsidiaries of Indebtedness represented by workers' compensation
         claims and other statutory or regulatory obligations, self-insurance
         obligations, letters of credit, performance bonds, warranty or
         contractual service obligations or appeal bonds, in each case to the
         extent incurred in the ordinary course of business of the Company or
         such Restricted Subsidiary;

            (15) the incurrence by the Company or any of the Guarantors of
         additional Indebtedness in an aggregate principal amount (or accreted
         value, as applicable) at any time outstanding, including all Permitted
         Refinancing Indebtedness incurred to refund, refinance or replace any
         Indebtedness incurred pursuant to this clause (15), not to exceed $50.0
         million;

            (16) Guarantees and other Indebtedness or Disqualified Stock that
         constitute a Permitted Investment or a payment permitted under Section
         4.07 hereof; and

            (17) the incurrence by the Company or any Restricted Subsidiary of
         subordinated unsecured Indebtedness to the extent the proceeds thereof
         are used to purchase notes pursuant to a Change of Control Offer.

         (c) For purposes of determining compliance with this Section 4.09, in
the event that an item of proposed Indebtedness meets the criteria of more than
one of the categories of Permitted Debt described in clauses (1) through (17)
above as of the date of incurrence thereof or is entitled to be incurred
pursuant to Section 4.09(a) hereof as of the date of incurrence thereof, the
Company shall, in its sole discretion, classify (or later classify in whole or
in part, in its sole discretion) such item of Indebtedness in any manner that
complies with this Section 4.09 and such Indebtedness will be treated as having
been incurred pursuant to such clauses or the first paragraph hereof, as the
case may be, designated by the Company. Indebtedness under Credit Facilities
outstanding on the date of this Indenture will not be deemed to have been
incurred until the date of the application of the proceeds from the Spin-off and
will be deemed to have been incurred on such date in reliance of the exception
provided by clause (1) of the definition of Permitted Debt. Accrual of interest
or dividends, the accretion of accreted value or liquidation preference and the
payment of interest or dividends in the form of additional Indebtedness or
Disqualified Stock will not be deemed to be an incurrence of Indebtedness or an
issuance of Disqualified Stock for purposes of this Section 4.09.

Section 4.10   Asset Sales.

         (a) The Company shall not, and shall not permit any of its Restricted
Subsidiaries to, consummate an Asset Sale unless:

                  (1) the Company (or the Restricted Subsidiary, as the case may
            be) receives consideration at the time of the Asset Sale at least
            equal to the fair market value of the assets or Equity Interests of
            any Restricted Subsidiary issued or sold or otherwise disposed of;

                  (2) the fair market value is determined by the Company's Board
            of Directors and evidenced by a resolution of the Board of Directors
            set forth in an Officer's Certificate delivered to the Trustee; and


                                       53


                  (3) at least 75% of the consideration received in the Asset
            Sale by the Company or such Subsidiary is in the form of cash, Cash
            Equivalents and/or Replacement Assets. For purposes of this
            provision, each of the following shall be deemed to be cash:

                      (a) any liabilities, as shown on the Company's or such
                  Restricted Subsidiary's most recent balance sheet, of the
                  Company or any Restricted Subsidiary (other than contingent
                  liabilities and liabilities that are by their terms
                  subordinated to the Notes or any Restricted Subsidiary
                  Guarantee) that are assumed by the transferee of any such
                  assets pursuant to a customary novation agreement that
                  releases the Company or such Subsidiary from further
                  liability; and

                      (b) any securities, Notes or other obligations received by
                  the Company or any such Restricted Subsidiary from such
                  transferee that are, subject to ordinary settlement periods,
                  converted by the Company or such Restricted Subsidiary into
                  cash within 90 days, to the extent of the cash received in
                  that conversion; and

                      (c) any Designated Non-Cash Consideration received by the
                  Company or any of its Restricted Subsidiaries in an Asset
                  Sale.

         (b) Within 365 days after the receipt of any Net Proceeds from an Asset
Sale, the Company may apply those Net Proceeds at its option:

                  (1) to repay Senior Debt and, if the Senior Debt repaid is
            revolving credit Indebtedness, to correspondingly reduce commitments
            with respect thereto;

                  (2) to acquire all or substantially all of the assets of, or
            all or a majority of the Voting Stock of another Permitted Business;
            or

                  (3) to acquire other long-term assets or property that are
            used or useful in a Permitted Business or to make a capital
            expenditure (or enter into a definitive agreement committing to make
            such acquisition or expenditure within six months after the date of
            such agreement; provided that if such agreement is terminated, the
            Company may invest such Net Proceeds prior to the end of such
            365-day period, or if later, prior to the end of such six-month
            period referred to in this clause (3)).

Pending the final application of any Net Proceeds, the Company may temporarily
reduce revolving credit borrowings or otherwise invest the Net Proceeds in any
manner that is not prohibited by this Indenture.

         (c) Any Net Proceeds from Asset Sales that are not applied or invested
as provided in Section 4.10(b) shall constitute "Excess Proceeds." When the
aggregate amount of Excess Proceeds exceeds $25.0 million, the Company shall
make an Asset Sale Offer to all Holders of Notes and all holders of other
Indebtedness that is pari passu with the Notes containing provisions similar to
those set forth in this Indenture with respect to offers to purchase or redeem
with the proceeds of sales of assets to purchase the maximum principal amount of
Notes and such other pari passu Indebtedness that may be purchased out of the
Excess Proceeds. The offer price in any Asset Sale Offer shall be equal to 100%
of principal amount plus accrued and unpaid interest and Additional Interest, if
any, to the date of purchase, and shall be payable in cash. If any Excess
Proceeds remain after consummation of an Asset Sale Offer, the Company may use
those Excess Proceeds for any purpose not otherwise prohibited by this
Indenture. If the aggregate principal amount of Notes and other pari passu
Indebtedness tendered into such Asset Sale Offer exceeds the amount of Excess
Proceeds, the Trustee shall select the Notes and such other pari passu
Indebtedness to be purchased on a pro rata basis as provided in Section 3.02
hereof or such other manner as the Trustee deems appropriate. Upon completion of
each Asset Sale Offer, the amount of Excess Proceeds then remaining, if any,
shall be reset at zero.

                                       54


         The Company shall comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent those laws and regulations are applicable in connection with each
repurchase of Notes pursuant to an Asset Sale Offer. To the extent that the
provisions of any securities laws or regulations conflict with this Section
4.10, the Company shall comply with the applicable securities laws and
regulations and shall not be deemed to have breached its obligations under this
Section 4.10 by virtue of such conflict.

Section 4.11   Transactions with Affiliates.

         (a) The Company shall not, and shall not permit any of its Restricted
Subsidiaries to, make any payment to, or sell, lease, transfer or otherwise
dispose of any of its properties or assets to, or purchase any property or
assets from, or enter into or make or amend any transaction, contract,
agreement, understanding, loan, advance or guarantee with, or for the benefit
of, any Affiliate (each, an "Affiliate Transaction"), unless:

            (1) the Affiliate Transaction is on terms that are no less favorable
         to the Company or the relevant Restricted Subsidiary than those that
         would have been obtained in a comparable transaction by the Company or
         such Restricted Subsidiary with an unrelated Person; and

            (2) the Company delivers to the Trustee:

                  (a) with respect to any Affiliate Transaction or series of
            related Affiliate Transactions involving aggregate consideration in
            excess of $5.0 million, a resolution of the Board of Directors set
            forth in an Officers' Certificate certifying that such Affiliate
            Transaction complies with this Section 4.11(a) and that such
            Affiliate Transaction has been approved by a majority of the
            disinterested members of the Board of Directors; and

                  (b) with respect to any Affiliate Transaction or series of
            related Affiliate Transactions involving aggregate consideration in
            excess of $10.0 million, an opinion as to the fairness to the
            Holders of such Affiliate Transaction from a financial point of view
            issued by an accounting, appraisal or investment banking firm of
            national standing.

         (b) The following items shall not be deemed to be Affiliate
Transactions and, therefore, shall not be subject to the provisions of Section
4.11(a) hereof:

            (1) the Spin-off;

            (2) any employment agreement entered into by the Company or any of
         its Restricted Subsidiaries in the ordinary course of business and
         consistent with the past practice of the Company or such Restricted
         Subsidiary;

            (3) transactions between or among the Company and/or its Restricted
         Subsidiaries;

            (4) performance of all agreements in existence on the issue date of
         this Indenture or to be entered into with GHC in connection with the
         Spin-off as contemplated in the Offering Circular and any modification
         thereto or any transaction contemplated thereby in any replacement
         agreement therefor so long as such modification or replacement is not
         materially more disadvantageous to the Company or any of its Restricted
         Subsidiaries than the original agreement in effect on the date of this
         Indenture;

                                       55


            (5) transactions in connection with a financing transaction
         involving a sale or other disposition of accounts receivable and
         related assets (including, without limitation, in connection with a
         securitization or similar financing) or in connection with a financing
         involving a subsidiary trust or similar financing vehicle that is
         permitted by the covenant described under Section 4.09;

            (6) transactions with a Person that is an Affiliate of the Company
         solely because the Company owns an Equity Interest in such Person;

            (7) any issuance of Equity Interests, securities or any other
         reasonable payments of compensation, retirement, disability, severance,
         employee benefit awards, incentive awards, director fees, reimbursement
         of expenses and indemnity to officers, directors and employees in the
         ordinary course of business;

            (8) sales of Equity Interests (other than Disqualified Stock) to
         Affiliates of the Company;

            (9) Permitted Investments;

            (10) Restricted Payments that are permitted by Section 4.07 hereof;

            (11) all transactions and agreements that are necessary to enter
         into in connection with, or as contemplated by, the Spin-off or in
         contemplation of the merger of GHC with and into the Company if the
         Spin-off does not occur by February 27, 2004;

            (12) any reimbursement by a Permitted Joint Venture for the services
         of employees of the Company or any of its Restricted Subsidiaries and
         the provision of such services to such Permitted Joint Venture by the
         Company or its Restricted Subsidiaries, in either case, in the ordinary
         course of business; and

            (13) any reimbursement by a Permitted Joint Venture for
         pharmaceutical products provided by the Company or any of its
         Restricted Subsidiaries, which products were purchased pursuant to a
         pharmaceutical products supply agreement to which the Company or any of
         its Restricted Subsidiaries is a party.

Section 4.12   Liens.

         The Company shall not, and shall not permit any Restricted Subsidiary
to, directly or indirectly, create, incur or assume any consensual Liens of any
kind against or upon any of their respective property (including Capital Stock
of a Restricted Subsidiary) or assets, whether owned at the date of this
Indenture or thereafter acquired, or any proceeds, income or profit therefrom
that secure Senior Subordinated Indebtedness or Subordinated Obligations,
unless:

            (1) in the case of Liens securing Subordinated Obligations, the
         Notes are secured by a Lien on such property (including Capital Stock
         of a Restricted Subsidiary), assets, proceeds, income or profit that is
         senior in priority to such Liens; and

            (2) in the case of Liens securing Senior Subordinated Indebtedness,
         the Notes are equally and ratably secured by a Lien on such property
         (including Capital Stock of a Restricted Subsidiary), assets, proceeds,
         income or profit.

         Notwithstanding the foregoing, no restriction will apply to:


                                       56


            (1) Liens imposed by law, including carriers', warehousemen's and
         mechanics' Liens, in each case for sums not yet due or being contested
         in good faith by appropriate proceedings if a reserve or other
         appropriate provisions, if any, as shall be required by GAAP shall have
         been made in respect thereof;

            (2) Liens for taxes, assessments or other governmental charges not
         yet subject to penalties for non-payment or which are being contested
         in good faith by appropriate proceedings provided appropriate reserves
         required pursuant to GAAP have been made in respect thereof;

            (3) Liens in favor of issuers of surety or performance bonds or
         letters of credit or bankers' acceptances issued pursuant to the
         request of and for the account of such Person in the ordinary course of
         its business; provided, however, that such letters of credit do not
         constitute Indebtedness;

            (4) encumbrances, ground leases, easements or reservations of, or
         rights of others for, licenses, rights of way, sewers, electric lines,
         telegraph and telephone lines and other similar purposes, or zoning,
         building codes or other restrictions (including, without limitation,
         minor defects or irregularities in title and similar encumbrances) as
         to the use of real properties or liens incidental to the conduct of the
         business of such Person or to the ownership of its properties which do
         not in the aggregate materially adversely affect the value of said
         properties or materially impair their use in the operation of the
         business of such Person;

            (5) pledges or deposits by the Company or any of its Restricted
         Subsidiaries under workers' compensation laws, unemployment insurance
         laws or similar legislation, or good faith deposits in connection with
         bids, tenders, contracts (other than for the payment of Indebtedness)
         or leases to which the Company or any of its Restricted Subsidiaries is
         a party, or deposits to secure public or statutory obligations of the
         Company or any of its Restricted Subsidiaries or deposits of cash or
         United States government bonds to secure surety or appeal bonds to
         which the Company or any of its Restricted Subsidiaries is a party, or
         deposits as security for contested taxes or import or customs duties or
         for the payment of rent, in each case incurred in the ordinary course
         of business;

            (6) Liens securing Hedging Obligations so long as the related
         Indebtedness is, and is permitted to be under this Indenture, secured
         by a Lien on the same property securing such Hedging Obligation;

            (7) leases, licenses, subleases and sublicenses of assets
         (including, without limitation, real property and intellectual property
         rights), which do not materially interfere with the ordinary conduct of
         the business of the Company or any of its Restricted Subsidiaries;

            (8) judgment Liens not giving rise to an Event of Default so long as
         such Lien is adequately bonded and any appropriate legal proceedings
         which may have been duly initiated for the review of such judgment have
         not been finally terminated or the period within which such proceedings
         may be initiated has not expired;

            (9) Liens for the purpose of securing the payment of all or a part
         of the purchase price of, or Capitalized Lease Obligations, purchase
         money obligations or other payments incurred to finance the
         acquisition, improvement or construction of, assets or property
         acquired or constructed in the ordinary course of business; provided
         that:


                                       57


                  (a) the aggregate principal amount of Indebtedness secured by
            such Liens is otherwise permitted to be incurred under this
            Indenture and does not exceed the cost of the assets or property so
            acquired or constructed; and

                  (b) such Liens are created within 180 days of construction or
            acquisition of such assets or property and do not encumber any other
            assets or property of the Company or any Restricted Subsidiary other
            than such assets or property and assets affixed or appurtenant
            thereto;

            (10) Liens arising solely by virtue of any statutory or common law
         provisions relating to banker's Liens, rights of set-off or similar
         rights and remedies as to deposit accounts or other funds maintained
         with a depositary institution; provided that:

                  (a) such deposit account is not a dedicated cash collateral
            account and is not subject to restrictions against access by the
            Company in excess of those set forth by regulations promulgated by
            the Federal Reserve Board; and

                  (b) such deposit account is not intended by the Company or any
            Restricted Subsidiary to provide collateral to the depository
            institution;

            (11) Liens arising from Uniform Commercial Code financing statement
         filings regarding operating leases entered into by the Company and its
         Restricted Subsidiaries in the ordinary course of business;

            (12) Liens existing on the date of this Indenture;

            (13) Liens on property or shares of stock of a Person at the time
         such Person becomes a Restricted Subsidiary; provided, however, that
         such Liens are not created, incurred or assumed in connection with, or
         in contemplation of, such other Person becoming a Restricted
         Subsidiary; provided further, however, that any such Lien may not
         extend to any other property owned by the Company or any Restricted
         Subsidiary;

            (14) Liens on property at the time the Company or a Restricted
         Subsidiary acquired the property, including any acquisition by means of
         a merger or consolidation with or into the Company or any Restricted
         Subsidiary; provided, however, that such Liens are not created,
         incurred or assumed in connection with, or in contemplation of, such
         acquisition; provided further, however, that such Liens may not extend
         to any other property owned by the Company or any Restricted
         Subsidiary;

            (15) Liens securing Indebtedness or other obligations of a
         Restricted Subsidiary owing to the Company or another Restricted
         Subsidiary;

            (16) Liens securing the Notes and Subsidiary Guarantees; and

            (17) any interest or title of a lessor under any Capitalized Lease
         Obligation or operating lease.


                                       58


Section 4.13   Business Activities.

         The Company shall not, and shall not permit any Restricted Subsidiary
to, engage in any business other than Permitted Businesses, except to such
extent as would not be material to the Company and its Subsidiaries, taken as a
whole.

Section 4.14   Corporate Existence.

         Subject to Article 5 hereof, the Company shall do or cause to be done
all things necessary to preserve and keep in full force and effect:

                  (1) its corporate existence, and the corporate, partnership or
            other existence of each of the Subsidiary Guarantors, in accordance
            with the respective organizational documents (as the same may be
            amended from time to time) of the Company or any such Subsidiary
            Guarantor; and

                  (2) the rights (charter and statutory), licenses and
            franchises of the Company and the Subsidiary Guarantors;

provided, however, that the Company shall not be required to preserve any such
right, license or franchise, or the corporate, partnership or other existence of
any of the Subsidiary Guarantors, if the Board of Directors shall determine that
the preservation thereof is no longer desirable in the conduct of the business
of the Company and its Restricted Subsidiaries, taken as a whole, and that the
loss thereof is not adverse in any material respect to the Holders of the Notes.

Section 4.15   Offer to Repurchase Upon a Change of Control.

         (a) Upon the occurrence of a Change of Control, each Holder shall have
the right to require the Company to make an offer (a "Change of Control Offer")
to that Holder to repurchase all or any part (equal to $1,000 or an integral
multiple of $1,000) of that Holder's Notes at a purchase price equal to 101% of
the aggregate principal amount thereof plus accrued and unpaid interest and
Additional Interest on the Notes repurchased, if any, to the date of purchase
(the "Change of Control Payment"). Within 30 days following any Change of
Control, the Company shall mail a notice to each Holder describing the
transaction or transactions that constitute the Change of Control and stating:

                  (1) a description of the transaction or transactions that
            constitute a Change of Control and that the Change of Control Offer
            is being made pursuant to this Section 4.15 and that all Notes
            tendered will be accepted for payment;

                  (2) the purchase price and the purchase date, which shall be
            no earlier than 30 days and not later than 60 days from the date
            such notice is mailed (the "Change of Control Payment Date");

                  (3) that any Note not tendered will continue to accrue
            interest;

                  (4) that, unless the Company defaults in the payment of the
            Change of Control Payment, all Notes accepted for payment pursuant
            to the Change of Control Offer will cease to accrue interest after
            the Change of Control Payment Date;

                  (5) that Holders electing to have any Notes purchased pursuant
            to a Change of Control Offer will be required to surrender the
            Notes, with the form entitled "Option of Holder to Elect Purchase"
            on the reverse of the Notes completed, to the Paying Agent at the
            address specified in the notice prior to the close of business on
            the third Business Day preceding the Change of Control Payment Date;

                                       59


                  (6) that Holders will be entitled to withdraw their election
            if the Paying Agent receives, not later than the close of business
            on the second Business Day preceding the Change of Control Payment
            Date, a facsimile transmission or letter setting forth the name of
            the Holder, the principal amount of Notes delivered for purchase,
            and a statement that such Holder is withdrawing his election to have
            the Notes purchased; and

                  (7) that Holders whose Notes are being purchased only in part
            will be issued new Notes equal in principal amount to the
            unpurchased portion of the Notes surrendered, which unpurchased
            portion must be equal to $1,000 in principal amount or an integral
            multiple thereof.

         The Company shall comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent those laws and regulations are applicable in connection with the
repurchase of the Notes as a result of a Change of Control. To the extent that
the provisions of any securities laws or regulations conflict with the
provisions of this Section 4.15, the Company shall comply with the applicable
securities laws and regulations and shall not be deemed to have breached its
obligations under this Section 4.15 by virtue of such conflict.

         (b) On the Change of Control Payment Date, the Company shall, to the
extent lawful:

                  (1) accept for payment all Notes or portions thereof properly
            tendered pursuant to the Change of Control Offer;

                  (2) deposit with the Paying Agent an amount equal to the
            Change of Control Payment in respect of all Notes or portions of
            Notes properly tendered; and

                  (3) deliver or cause to be delivered to the Trustee the Notes
            properly accepted together with an Officers' Certificate stating the
            aggregate principal amount of Notes or portions of Notes being
            purchased by the Company.

         The Paying Agent shall promptly mail to each Holder of Notes properly
tendered the Change of Control Payment for such Notes, and the Trustee shall
promptly authenticate and mail (or cause to be transferred by book entry) to
each Holder of Notes properly tendered a new Note equal in principal amount to
any unpurchased portion of the Notes surrendered, if any; provided that each new
Note shall be in a principal amount of $1,000 or an integral multiple thereof.

         Prior to complying with any of the provisions of this Section 4.15, but
in any event within 90 days following a Change of Control, the Company shall
either repay all outstanding Senior Debt or obtain the requisite consents, if
any, under all agreements governing outstanding Senior Debt to permit the
repurchase of Notes required by this covenant. The Company shall publicly
announce the results of the Change of Control Offer on or as soon as practicable
after the Change of Control Payment Date.

         (c) Notwithstanding anything to the contrary in this Section 4.15, the
Company shall not be required to make a Change of Control Offer upon a Change of
Control if a third party makes the Change of Control Offer in the manner, at the
times and otherwise in compliance with the requirements set forth in this
Section 4.15 and purchases all Notes properly tendered and not withdrawn under
the Change of Control Offer.


                                       60


         (d) The provisions described in this Section 4.15 that require the
Company to make a Change of Control Offer following a Change of Control shall be
applicable whether or not any other provisions of this Indenture are applicable.

         (e) Notwithstanding the foregoing, the Company shall not be required to
make a Change of Control Offer, as provided above, if, in connection with or in
contemplation of any Change of Control, it has made an offer to purchase (an
"Alternate Offer") any and all Notes validly tendered at a cash price equal to
or higher than the Change of Control Payment and has purchased all Notes
properly tendered in accordance with the terms of such Alternate Offer.

Section 4.16   Payments for Consent.

         The Company shall not, and shall not permit any of its Restricted
Subsidiaries to, directly or indirectly, pay or cause to be paid any
consideration to or for the benefit of any Holder of Notes for or as an
inducement to any consent, waiver or amendment of any of the terms or provisions
of this Indenture or the Notes unless such consideration is offered to be paid
and is paid to all Holders of the Notes that consent, waive or agree to amend in
the time frame set forth in the solicitation documents relating to such consent,
waiver or agreement.

Section 4.17   Additional Subsidiary Guarantees.

         If the Company or any of its Restricted Subsidiaries acquires or
creates another Subsidiary after the date of this Indenture that guarantees the
Company's Existing Credit Agreement, then that newly acquired or created
Subsidiary shall become a Guarantor and execute a supplemental indenture and
deliver an Opinion of Counsel satisfactory to the Trustee within 10 Business
Days of the date on which it was acquired or created; provided, however, that
this Section 4.17 shall not apply to Subsidiaries that have properly been
designated as Unrestricted Subsidiaries in accordance with this Indenture for so
long as they continue to constitute Unrestricted Subsidiaries; without limiting
this Section 4.17, the Guarantee of such acquired or created Subsidiary shall be
subject to the subordination provisions contained in Article 11.

Section 4.18   Designation of Restricted and Unrestricted Subsidiaries.

         The Board of Directors may designate any Restricted Subsidiary to be an
Unrestricted Subsidiary if that designation would not cause a Default. If a
Restricted Subsidiary is designated as an Unrestricted Subsidiary, the aggregate
fair market value of all outstanding Investments owned by the Company and its
Restricted Subsidiaries in the Subsidiary properly designated shall be deemed to
be an Investment made as of the time of the designation and shall reduce the
amount available for Restricted Payments under the first paragraph of the
covenant described above under Section 4.07 hereof or Permitted Investments, as
determined by the Company. That designation shall only be permitted if the
Investment would be permitted at that time and if the Restricted Subsidiary
otherwise meets the definition of an Unrestricted Subsidiary. The Board of
Directors may redesignate any Unrestricted Subsidiary to be a Restricted
Subsidiary if the redesignation would not cause a Default.

Section 4.19   No Senior Subordinated Debt.

         The Company shall not incur, create, issue, assume, guarantee or
otherwise become liable for any Indebtedness that is subordinate or junior in
right of payment to any Senior Debt of the Company and senior in any respect in
right of payment to the Notes. No Guarantor will incur, create, issue, assume,
guarantee or otherwise become liable for any Indebtedness that is subordinate or
junior in right of payment to the Senior Debt of such Guarantor and senior in
any respect in right of payment to such Guarantor's Subsidiary Guarantee.


                                       61


Section 4.20   Consummation of Spin-off.

         Notwithstanding anything herein to the contrary, nothing in this
Indenture, including the restrictions described in Sections 4.07, 4.08, 4.09,
4.10, 4.11, 4.12, 4.13, 4.14, 4.15, 4.16, 4.17, 4.18, 4.19, 4.20, 4.21 and 5.01,
shall be interpreted to prohibit or restrict, and none of the terms and
conditions of this Indenture shall apply to, the consummation of the Spin-off
and the other transactions contemplated thereby, including, without limitation,
the transfer of certain Subsidiaries of the Company to GHC and the entering into
and performance by GHC, its Subsidiaries and the Company of their respective
obligations under the Spin-off Documents and the related transactions, in each
case as described by the Offering Circular with such modifications thereto that
are not materially adverse to the Holders.

Section 4.21   Limitation on Activities of the Company.

         In the event that the Spin-off occurs by February 27, 2004, the Company
agrees that in consideration inter alia for the transfer of the net proceeds of
the offering of the GHC Notes from GHC to the Company, the Company will convey
to GHC all or substantially all of its Subsidiaries that comprise the eldercare
business and are included in the audited financial statements of GHC dated as of
or for the period ended September 30, 2002 filed with GHC's Form 10 on October
10, 2003 in accordance with the terms of the Spin-off Documents, as described in
the Offering Circular with such modifications thereto that are not materially
adverse to the Holders.

Section 4.22   Spin-off.

         If the Spin-off does not occur on or prior to February 27, 2004, the
Company and GHC agree that GHC will merge with and into the Company by no later
than March 31, 2004. By operation of law, the Company will assume the GHC Notes
and all references to the Company in the GHC Notes will be replaced with the
Company. In addition, the Company and GHC will agree to execute all other
documents necessary to assume the GHC Notes and the Company will cause each of
its Restricted Subsidiaries that guarantee the Company's Existing Credit
Agreement or will guarantee any of the Company's Credit Facilities, as the case
may be, to become a Guarantor of the GHC Notes.

                                   ARTICLE 5.
                                  SUCCESSORS

Section 5.01   Merger, Consolidation or Sale of Assets.

         The Company may not, directly or indirectly: (1) consolidate or merge
with or into another Person (whether or not the Company is the surviving
corporation) or (2) sell, assign, transfer, convey or otherwise dispose of all
or substantially all of the properties or assets of the Company and its
Restricted Subsidiaries taken as a whole, in one or more related transactions,
to another Person; unless:

            (1) either: (a) the Company is the surviving corporation; or (b) the
         Person formed by or surviving any such consolidation or merger (if
         other than the Company) or to which such sale, assignment, transfer,
         conveyance or other disposition has been made is a corporation
         organized or existing under the laws of the United States, any state of
         the United States or the District of Columbia;


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            (2) the Person formed by or surviving any such consolidation or
         merger (if other than the Company) or the Person to which such sale,
         assignment, transfer, conveyance or other disposition has been made
         assumes all the obligations of the Company under the Notes and this
         Indenture pursuant to agreements reasonably satisfactory to the
         Trustee;

            (3) immediately after such transaction no Default or Event of
         Default exists; and

            (4) other than the merger of GHC with and into the Company if the
         Spin-off does not occur by February 27, 2004, the Company or the Person
         formed by or surviving any such consolidation or merger (if other than
         the Company), or to which such sale, assignment, transfer, conveyance
         or other disposition has been made will, on the date of such
         transaction after giving pro forma effect thereto and any related
         financing transactions as if the same had occurred at the beginning of
         the applicable four-quarter period, be permitted to incur at least
         $1.00 of additional Indebtedness pursuant to the Fixed Charge Coverage
         Ratio test set forth in Section 4.09(a) hereof.

         The Company shall not, directly or indirectly, lease all or
substantially all of its properties or assets, in one or more related
transactions, to any other Person.

Section 5.02   Successor Corporation Substituted.

         Upon any consolidation or merger, or any sale, assignment, transfer,
lease, conveyance or other disposition of all or substantially all of the assets
of the Company in a transaction that is subject to, and that complies with the
provisions of, Section 5.01 hereof, the successor corporation formed by such
consolidation or into or with which the Company is merged or to which such sale,
assignment, transfer, lease, conveyance or other disposition is made shall
succeed to, and be substituted for (so that from and after the date of such
consolidation, merger, sale, lease, conveyance or other disposition, the
provisions of this Indenture referring to the "Company" shall refer instead to
the successor corporation and not to the Company), and may exercise every right
and power of the Company under this Indenture with the same effect as if such
successor Person had been named as the Company herein; provided, however, that
the predecessor Company shall not be relieved from the obligation to pay the
principal of and interest on the Notes except in the case of a sale of all of
the Company's assets in a transaction that is subject to, and that complies with
the provisions of, Section 5.01 hereof.

                                   ARTICLE 6.
                              DEFAULTS AND REMEDIES

Section 6.01   Events of Default.

         Each of the following is an Event of Default:

            (1) default for 30 days in the payment when due of interest on, or
         Additional Interest with respect to, the Notes (whether or not
         prohibited by the subordination provisions of this Indenture);

            (2) default in payment when due of the principal of or premium, if
         any, on the Notes (whether or not prohibited by the subordination
         provisions of this Indenture);

            (3) failure by the Company or any of its Restricted Subsidiaries to
         comply with the provisions of Section 5.01 hereof;


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            (4) failure by the Company or any of its Restricted Subsidiaries for
         30 days after notice to comply with the provisions of Sections 4.07.
         4.09, 4.10 or 4.15 hereof;

            (5) failure by the Company or any of its Restricted Subsidiaries for
         60 days after notice to comply with any of its other agreements in this
         Indenture or the Notes;

            (6) default under any mortgage, indenture or instrument under which
         there may be issued or by which there may be secured or evidenced any
         Indebtedness for money borrowed by the Company or any of its Restricted
         Subsidiaries (or the payment of which is guaranteed by the Company or
         any of its Restricted Subsidiaries) whether such Indebtedness or
         guarantee now exists, or is created after the date of this Indenture,
         if that default:

                  (a) is caused by a failure to pay principal of, or interest or
            premium, if any, on such Indebtedness prior to the expiration of the
            grace period provided in such Indebtedness on the date of such
            default (a "Payment Default"); or

                  (b) results in the acceleration of such Indebtedness prior to
            its express maturity,

            and, in each case, the principal amount of any such Indebtedness,
            together with the principal amount of any other such Indebtedness
            under which there has been a Payment Default or the maturity of
            which has been so accelerated, aggregates $20.0 million or more;

            (7) failure by the Company or any of its Restricted Subsidiaries to
         pay final judgments aggregating in excess of $20.0 million, which
         judgments are not paid, discharged or stayed for a period of 60 days;

            (8) except as permitted by this Indenture, any Subsidiary Guarantee
         shall be held in any judicial proceeding to be unenforceable or invalid
         or shall cease for any reason to be in full force and effect or any
         Guarantor, or any Person acting on behalf of any Guarantor, shall deny
         or disaffirm its obligations under its Subsidiary Guarantee; and

            (9) the Company or any of its Restricted Subsidiaries that is a
         Significant Subsidiary or any group of Restricted Subsidiaries that,
         taken as a whole, would constitute a Significant Subsidiary pursuant to
         or within the meaning of any Bankruptcy Law:

                  (A) commences a voluntary case,

                  (B) consents to the entry of an order for relief against it in
            an involuntary case,

                  (C) consents to the appointment of a custodian of it or for
            all or substantially all of its property,

                  (D) makes a general assignment for the benefit of its
            creditors, or

                  (E) generally is not paying its debts as they become due; and

            (10) a court of competent jurisdiction enters an order or decree
         under any Bankruptcy Law that:


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                  (A) is for relief against the Company or any of its Restricted
            Subsidiaries that is a Significant Subsidiary or any group of
            Restricted Subsidiaries that, taken as a whole, would constitute a
            Significant Subsidiary in an involuntary case;

                  (B) appoints a custodian of the Company or any of its
            Restricted Subsidiaries that is a Significant Subsidiary or any
            group of Restricted Subsidiaries that, taken as a whole, would
            constitute a Significant Subsidiary or for all or substantially all
            of the property of the Company or any of its Restricted Subsidiaries
            that is a Significant Subsidiary or any group of Restricted
            Subsidiaries that, taken as a whole, would constitute a Significant
            Subsidiary; or

                  (C) orders the liquidation of the Company or any of its
            Restricted Subsidiaries that is a Significant Subsidiary or any
            group of Restricted Subsidiaries that, taken as a whole, would
            constitute a Significant Subsidiary;

         and the order or decree remains unstayed and in effect for 60
consecutive days.

         The Holders of a majority in aggregate principal amount of the Notes
then outstanding by notice to the Trustee may on behalf of the Holders of all of
the Notes waive any existing Default or Event of Default and its consequences
under this Indenture except a continuing Default or Event of Default in the
payment of interest or Additional Interest on, or the principal of, the Notes.

Section 6.02   Acceleration.

         In the case of an Event of Default specified in clause (9) or (10) of
Section 6.01 hereof, with respect to the Company, any Subsidiary that is a
Significant Subsidiary or any group of Subsidiaries that, taken together, would
constitute a Significant Subsidiary, all outstanding Notes will become due and
payable immediately without further action or notice. If any other Event of
Default occurs and is continuing, the Trustee or the Holders of at least 25% in
principal amount of the then outstanding Notes may declare all the Notes to be
due and payable immediately.

         Holders of the Notes may not enforce this Indenture or the Notes except
as provided in this Indenture. Subject to certain limitations, Holders of a
majority in principal amount of the then outstanding Notes may direct the
Trustee in its exercise of any trust or power. The Trustee may withhold from
Holders of the Notes notice of any continuing Default or Event of Default if it
determines that withholding notice is in their interest, except a Default or
Event of Default relating to the payment of principal or interest or Additional
Interest.

         In the case of any Event of Default occurring by reason of any willful
action or inaction taken or not taken by or on behalf of the Company with the
intention of avoiding payment of the premium that the Company would have had to
pay if the Company then had elected to redeem the Notes pursuant to the optional
redemption provisions of this Indenture, an equivalent premium will also become
and be immediately due and payable to the extent permitted by law upon the
acceleration of the Notes. If an Event of Default occurs prior to November 15,
2008, by reason of any willful action (or inaction) taken (or not taken) by or
on behalf of the Company with the intention of avoiding the prohibition on
redemption of the Notes prior to November 15, 2008, then the premium specified
in this Indenture will also become immediately due and payable to the extent
permitted by law upon the acceleration of the Notes.

         The Company must promptly notify holders of Senior Debt if payment of
the Notes is accelerated because of an Event of Default.


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Section 6.03   Other Remedies.

         If an Event of Default occurs and is continuing, the Trustee may pursue
any available remedy to collect the payment of principal, premium and Additional
Interest, if any, and interest on the Notes or to enforce the performance of any
provision of the Notes or this Indenture.

         The Trustee may maintain a proceeding even if it does not possess any
of the Notes or does not produce any of them in the proceeding. A delay or
omission by the Trustee or any Holder of a Note in exercising any right or
remedy accruing upon an Event of Default shall not impair the right or remedy or
constitute a waiver of or acquiescence in the Event of Default. All remedies are
cumulative to the extent permitted by law.

Section 6.04   Waiver of Past Defaults.

         Holders of not less than a majority in aggregate principal amount of
the then outstanding Notes by notice to the Trustee may on behalf of the Holders
of all of the Notes waive an existing Default or Event of Default and its
consequences hereunder, except a continuing Default or Event of Default in the
payment of the principal of, premium and Additional Interest, if any, or
interest on, the Notes (including in connection with an offer to purchase);
provided, however, that the Holders of a majority in aggregate principal amount
of the then outstanding Notes may rescind an acceleration and its consequences,
including any related payment default that resulted from such acceleration. Upon
any such waiver, such Default shall cease to exist, and any Event of Default
arising therefrom shall be deemed to have been cured for every purpose of this
Indenture; but no such waiver shall extend to any subsequent or other Default or
impair any right consequent thereon.

Section 6.05   Control by Majority.

         Holders of a majority in aggregate principal amount of the then
outstanding Notes may direct the time, method and place of conducting any
proceeding for exercising any remedy available to the Trustee or exercising any
trust or power conferred on it and the Trustee may take any other action deemed
proper by the Trustee which is not inconsistent with such direction. However,
the Trustee may refuse to follow any direction that conflicts with law or this
Indenture that the Trustee determines may be unduly prejudicial to the rights of
other Holders of Notes or that may involve the Trustee in personal liability.

Section 6.06   Limitation on Suits.

         A Holder of a Note may pursue a remedy with respect to this Indenture
or the Notes only if:

            (1) the Holder of a Note gives to the Trustee written notice of a
         continuing Event of Default;

            (2) the Holders of at least 25% in principal amount of the then
         outstanding Notes make a written request to the Trustee to pursue the
         remedy;

            (3) such Holder of a Note or Holders of Notes offer and, if
         requested, provide to the Trustee indemnity satisfactory to the Trustee
         against any loss, liability or expense;

            (4) the Trustee does not comply with the request within 60 days
         after receipt of the request and the offer and, if requested, the
         provision of indemnity; and


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            (5) during such 60-day period the Holders of a majority in principal
         amount of the then outstanding Notes do not give the Trustee a
         direction inconsistent with the request.

         A Holder of a Note may not use this Indenture to prejudice the rights
of another Holder of a Note or to obtain a preference or priority over another
Holder of a Note.

Section 6.07   Rights of Holders of Notes to Receive Payment.

         Notwithstanding any other provision of this Indenture, the right of any
Holder of a Note to receive payment of principal, premium and Additional
Interest, if any, and interest on the Note, on or after the respective due dates
expressed in the Note (including in connection with an offer to purchase), or to
bring suit for the enforcement of any such payment on or after such respective
dates, shall not be impaired or affected without the consent of such Holder.

Section 6.08   Collection Suit by Trustee.

         If an Event of Default specified in Section 6.01(1) or (2) occurs and
is continuing, the Trustee is authorized to recover judgment in its own name and
as trustee of an express trust against the Company for the whole amount of
principal of, premium and Additional Interest, if any, and interest remaining
unpaid on the Notes and interest on overdue principal and, to the extent lawful,
interest and such further amount as shall be sufficient to cover the costs and
expenses of collection, including the reasonable compensation, expenses,
disbursements and advances of the Trustee, its agents and counsel.

Section 6.09   Trustee May File Proofs of Claim.

         The Trustee is authorized to file such proofs of claim and other papers
or documents as may be necessary or advisable in order to have the claims of the
Trustee (including any claim for the reasonable compensation, expenses,
disbursements and advances of the Trustee, its agents and counsel) and the
Holders of the Notes allowed in any judicial proceedings relative to the Company
(or any other obligor upon the Notes), its creditors or its property and shall
be entitled and empowered to collect, receive and distribute any money or other
property payable or deliverable on any such claims and any custodian in any such
judicial proceeding is hereby authorized by each Holder to make such payments to
the Trustee, and in the event that the Trustee shall consent to the making of
such payments directly to the Holders, to pay to the Trustee any amount due to
it for the reasonable compensation, expenses, disbursements and advances of the
Trustee, its agents and counsel, and any other amounts due the Trustee under
Section 7.07 hereof. To the extent that the payment of any such compensation,
expenses, disbursements and advances of the Trustee, its agents and counsel, and
any other amounts due the Trustee under Section 7.07 hereof out of the estate in
any such proceeding, shall be denied for any reason, payment of the same shall
be secured by a Lien on, and shall be paid out of, any and all distributions,
dividends, money, securities and other properties that the Holders may be
entitled to receive in such proceeding whether in liquidation or under any plan
of reorganization or arrangement or otherwise. Nothing herein contained shall be
deemed to authorize the Trustee to authorize or consent to or accept or adopt on
behalf of any Holder any plan of reorganization, arrangement, adjustment or
composition affecting the Notes or the rights of any Holder, or to authorize the
Trustee to vote in respect of the claim of any Holder in any such proceeding.

Section 6.10   Priorities.

         If the Trustee collects any money pursuant to this Article 6, it shall
pay out the money in the following order:


                                       67


            First: to the Trustee, its agents and attorneys for amounts due
         under Section 7.07 hereof, including payment of all compensation,
         expenses and liabilities incurred, and all advances made, by the
         Trustee and the costs and expenses of collection;

            Second: to Holders of Notes for amounts due and unpaid on the Notes
         for principal, premium and Additional Interest, if any, and interest,
         ratably, without preference or priority of any kind, according to the
         amounts due and payable on the Notes for principal, premium and
         Additional Interest, if any and interest, respectively; and

            Third: to the Company or to such party as a court of competent
         jurisdiction shall direct.

         The Trustee may fix a record date and payment date for any payment to
Holders of Notes pursuant to this Section 6.10.

Section 6.11   Undertaking for Costs.

         In any suit for the enforcement of any right or remedy under this
Indenture or in any suit against the Trustee for any action taken or omitted by
it as a Trustee, a court in its discretion may require the filing by any party
litigant in the suit of an undertaking to pay the costs of the suit, and the
court in its discretion may assess reasonable costs, including reasonable
attorneys' fees and expenses, against any party litigant in the suit, having due
regard to the merits and good faith of the claims or defenses made by the party
litigant. This Section 6.11 does not apply to a suit by the Trustee, a suit by a
Holder of a Note pursuant to Section 6.07 hereof, or a suit by Holders of more
than 10% in principal amount of the then outstanding Notes.

Section 6.12   Restoration of Rights and Remedies.

         If the Trustee or any Holder has instituted any proceeding to enforce
any right or remedy under this Indenture and such proceeding has been
discontinued or abandoned for any reason, or has been determined adversely to
the Trustee or to such Holder, then and in every such case, subject to any
determination in such proceeding, the Company, the Trustee, and the Holders will
be restored severally and respectively to their former positions hereunder and
thereafter all rights and remedies of the Trustee and the Holders will continue
as though no such proceeding had been instituted.

                                   ARTICLE 7.
                                    TRUSTEE

Section 7.01   Duties of Trustee.

         (a) If an Event of Default has occurred and is continuing, the Trustee
shall exercise such of the rights and powers vested in it by this Indenture, and
use the same degree of care and skill in their exercise, as a prudent person
would exercise or use under the circumstances in the conduct of such person's
own affairs.

         (b) Except during the continuance of an Event of Default known to the
Trustee under Section 7.02(g) hereof:

            (1) the duties of the Trustee shall be determined solely by the
         express provisions of this Indenture and the Trustee need perform only
         those duties that are specifically set forth in this Indenture and no
         others, and no implied covenants or obligations shall be read into this
         Indenture against the Trustee; and


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            (2) in the absence of bad faith on its part, the Trustee may
         conclusively rely, as to the truth of the statements and the
         correctness of the opinions expressed therein, upon certificates or
         opinions furnished to the Trustee and conforming to the requirements of
         this Indenture. However, the Trustee shall examine the certificates and
         opinions to determine whether or not they conform to the requirements
         of this Indenture (but need not confirm or investigate the accuracy of
         mathematical calculations or other facts stated therein).

         (c) The Trustee may not be relieved from liability for its own
negligent action, its own negligent failure to act, or its own willful
misconduct, except that:

            (1) this paragraph does not limit the effect of paragraph (b) of
         this Section 7.01;

            (2) the Trustee shall not be liable for any error of judgment made
         in good faith by a Responsible Officer, unless it is proved that the
         Trustee was negligent in ascertaining the pertinent facts; and

            (3) the Trustee shall not be liable with respect to any action it
         takes or omits to take in good faith in accordance with a direction
         received by it pursuant to Sections 6.02 or 6.05 hereof.

         (d) Whether or not therein expressly so provided, every provision of
this Indenture that in any way relates to the Trustee is subject to paragraphs
(a), (b), (c), (e) and (f) of this Section 7.01.

         (e) No provision of this Indenture shall require the Trustee to expend
or risk its own funds or otherwise incur any financial liability in the
performance of any of its rights or powers if it shall have reasonable grounds
for believing that repayment of such funds or adequate indemnity satisfactory to
it against risk or liability is not reasonably assured to it. The Trustee shall
be under no obligation to exercise any of its rights and powers under this
Indenture at the request of any Holders, unless such Holder has offered to the
Trustee security and indemnity satisfactory to it against any loss, liability or
expense.

         (f) The Trustee shall not be liable for interest on any money received
by it except as the Trustee may agree in writing with the Company or any
Guarantor. Money held in trust by the Trustee need not be segregated from other
funds except to the extent required by law.

Section 7.02   Rights of Trustee.

         (a) The Trustee may conclusively rely (and shall be fully protected in
acting or refraining from acting) upon any document believed by it to be genuine
and to have been signed or presented by the proper Person. The Trustee need not
investigate any fact or matter stated in the document.

         (b) Before the Trustee acts or refrains from acting, it may require an
Officers' Certificate or an Opinion of Counsel or both. The Trustee shall not be
liable for any action it takes or omits to take in good faith in reliance on
such Officers' Certificate or Opinion of Counsel. The Trustee may consult with
counsel of its own selection, and the advice of such counsel or any Opinion of
Counsel shall be full and complete authorization and protection from liability
in respect of any action taken, suffered or omitted by it hereunder in good
faith and in reliance thereon.


                                       69


         (c) The Trustee may act through its attorneys and agents and shall not
be responsible for the misconduct or negligence of any agent appointed with due
care.

         (d) The Trustee shall not be liable for any action it takes or omits to
take in good faith that it believes to be authorized or within the rights or
powers conferred upon it by this Indenture.

         (e) Unless otherwise specifically provided in this Indenture, any
demand, request, direction or notice from the Company shall be sufficient if
signed by an Officer of the Company.

         (f) The Trustee shall be under no obligation to exercise any of the
rights or powers vested in it by this Indenture at the request or direction of
any of the Holders unless such Holders have offered to the Trustee security or
indemnity reasonably satisfactory to it against the costs, expenses and
liabilities that might be incurred by it in compliance with such request or
direction.

         (g) The Trustee is not required to take notice or deemed to have notice
of any default or Event of Default hereunder, except Events of Default under
Section 6.01(1) and (2), unless a Responsible Officer of the Trustee has actual
knowledge thereof or has received at the Corporate Trust Office of the Trustee
notice in writing of such default or Event of Default from the Company or the
Holders of at least 25% in aggregate principal amount of the Notes then
outstanding, and in the absence of any such notice, the Trustee may conclusively
assume that no such default or Event of Default exists.

         (h) The Trustee is not required to give any bond or surety with respect
to the performance of its duties or the exercise of its powers under this
Indenture.

         (i) In the event the Trustee receives inconsistent or conflicting
requests and indemnity from two or more groups of Holders of Notes, each
representing less than a majority in aggregate principal amount of the Notes
Outstanding, pursuant to the provisions of this Indenture, the Trustee, in its
sole discretion, may determine what action, if any, shall be taken.

         (j) The Trustee's immunities and protections from liability and its
right to indemnification in connection with the performance of its duties under
this Indenture shall extend to and shall be enforceable by the Trustee in each
of its capacities hereunder and the Trustee's officers, directors, agents,
attorneys and employees. Such immunities and protections and right to
indemnification, together with the Trustee's right to compensation, shall
survive the Trustee's resignation or removal, the defeasance or discharge of
this Indenture and final payment of the Notes.

         (k) The permissive right of the Trustee to take the actions permitted
by this Indenture shall not be construed as an obligation or duty to do so.

         (l) Except for information provided by the Trustee concerning the
Trustee, the Trustee shall have no responsibility for any information in any
offering circular or other disclosure material distributed with respect to the
Notes, and the Trustee shall have no responsibility for compliance with any
state or federal securities laws in connection with the Notes.

         (m) The Trustee may request that the Company deliver an Officer's
Certificate setting forth the names of individuals and/or titles of officers
authorized at such time to take specified actions pursuant to this Indenture,
which Officers' Certificate may be signed by any persons authorized to sign an
Officers' Certificate, including any persons specified as so authorized in any
such certificate previously delivered and not superseded.


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Section 7.03   Individual Rights of Trustee.

         The Trustee or any Affiliate of the Trustee in its individual or any
other capacity may become the owner or pledgee of Notes and may otherwise deal
with the Company or any Affiliate of the Company or any Guarantor or Affiliate
with the same rights it would have if it were not Trustee. However, in the event
that the Trustee acquires any conflicting interest it must eliminate such
conflict within 90 days, apply to the Commission for permission to continue as
trustee or resign. Any Agent may do the same with like rights and duties. The
Trustee is also subject to Sections 7.10 and 7.11 hereof.

Section 7.04   Trustee's Disclaimer.

         The Trustee shall not be responsible for and makes no representation as
to the validity or adequacy of this Indenture or the Notes, it shall not be
accountable for the Company's use of the proceeds from the Notes or any money
paid to the Company or upon the Company's direction under any provision of this
Indenture, it shall not be responsible for the use or application of any money
received by any Paying Agent other than the Trustee, and it shall not be
responsible for any statement or recital herein or any statement in the Notes or
any other document in connection with the sale of the Notes or pursuant to this
Indenture other than its certificate of authentication.

Section 7.05   Notice of Defaults.

         If a Default or Event of Default occurs and is continuing and if it is
known to the Trustee, the Trustee shall mail to Holders of Notes a notice of the
Default or Event of Default within 90 days after it occurs. Except in the case
of a Default or Event of Default in payment of principal of, premium or
Additional Interest, if any, or interest on any Note, the Trustee may withhold
the notice if and so long as a committee of its Board of Directors or a trust
committee of Responsible Officers in good faith determines that withholding the
notice is in the interests of the Holders of the Notes.

Section 7.06   Reports by Trustee to Holders of the Notes.

         (a) Within 60 days after each May 15 beginning with the May 15
following the date of this Indenture, and for so long as Notes remain
outstanding, the Trustee shall mail to the Holders of the Notes a brief report
dated as of such reporting date that complies with TIA ss. 313(a) (but if no
event described in TIA ss. 313(a) has occurred within the twelve months
preceding the reporting date, no report need be transmitted). The Trustee also
shall comply with TIA ss. 313(b)(2). The Trustee shall also transmit by mail all
reports as required by TIA ss. 313(c).

         (b) A copy of each report at the time of its mailing to the Holders of
Notes shall be mailed by the Trustee to the Company and filed by the Trustee
with the Commission and each stock exchange, if any, on which the Notes are
listed in accordance with TIA ss. 313(d). The Company shall promptly notify the
Trustee if and when the Notes are listed on any stock exchange.

Section 7.07   Compensation and Indemnity.

         (a) The Company and the Guarantors shall pay to the Trustee from time
to time such reasonable compensation for its acceptance of this Indenture and
services hereunder as the parties shall agree in writing from time to time. The
Trustee's compensation shall not be limited by any law on compensation of a
trustee of an express trust. The Company and the Guarantors shall reimburse the
Trustee promptly upon request for all reasonable disbursements, advances and
expenses incurred or made by it in addition to the compensation for its
services. Such expenses shall include the reasonable compensation, disbursements
and expenses of the Trustee's agents and counsel.


                                       71


         (b) The Company and the Guarantors (on a joint and several basis) shall
indemnify each of the Trustee and any predecessor Trustee, for, and hold each of
them harmless against, any and all claims, loss, damage, liability, costs and
expenses (including but not limited to attorneys' fees and expenses and taxes,
other than taxes based upon the income of the Trustee) incurred by it arising
out of or in connection with the acceptance or administration of its duties
under this Indenture, including the costs and expenses of enforcing this
Indenture against the Company and the Guarantors (including this Section 7.07)
and defending itself against any claim (whether asserted by the Company, the
Guarantors or any Holder or any other Person) or liability in connection with
the exercise or performance of any of its powers or duties hereunder, except to
the extent any such loss, liability or expense may be attributable to its
negligence or willful misconduct. The Trustee shall notify the Company promptly
of any claim for which it may seek indemnity. Failure by the Trustee to so
notify the Company shall not relieve the Company or any of the Guarantors of
their obligations hereunder. The Company or such Guarantor shall defend the
claim and the Trustee shall cooperate in the defense. The Trustee may have
separate counsel and the Company shall pay the reasonable fees and expenses of
such counsel. Neither the Company nor any Guarantor need pay for any settlement
made without its consent, which consent shall not be unreasonably withheld.

         (c) The obligations of the Company and the Guarantors under this
Section 7.07 shall survive the satisfaction and discharge of this Indenture and
the resignation or removal of the Trustee.

         (d) To secure the payment obligations in this Section 7.07, the Trustee
shall have a Lien prior to the Notes on all money or property held or collected
by the Trustee, except that held in trust to pay principal and interest on
particular Notes. Such Lien shall survive the satisfaction and discharge of this
Indenture and the resignation or removal of the Trustee.

         (e) When the Trustee incurs expenses or renders services after an Event
of Default specified in Section 6.01(9) or (10) hereof occurs, the expenses and
the compensation for the services (including the fees and expenses of its agents
and counsel) are intended to constitute expenses of administration under any
Bankruptcy Law.

         (f) The Trustee shall comply with the provisions of TIAss. 313(b)(2) to
the extent applicable.

Section 7.08      Replacement of Trustee.

         (a) A resignation or removal of the Trustee and appointment of a
successor Trustee shall become effective only upon the successor Trustee's
acceptance of appointment as provided in this Section 7.08.

         (b) The Trustee may resign in writing at any time and be discharged
from the trust hereby created by so notifying the Company. The Holders of a
majority in principal amount of the then outstanding Notes may remove the
Trustee by so notifying the Trustee and the Company in writing. The Company may
remove the Trustee if:

            (1) the Trustee fails to comply with Section 7.10 hereof;

            (2) the Trustee is adjudged a bankrupt or an insolvent or an order
         for relief is entered with respect to the Trustee under any Bankruptcy
         Law;

            (3) a custodian or public officer takes charge of the Trustee or its
         property; or

            (4) the Trustee becomes incapable of acting.


                                       72


         (c) If the Trustee resigns or is removed or if a vacancy exists in the
office of Trustee for any reason, the Company shall promptly appoint a successor
Trustee. Within one year after the successor Trustee takes office, the Holders
of a majority in principal amount of the then outstanding Notes may appoint a
successor Trustee to replace the successor Trustee appointed by the Company.

         (d) If a successor Trustee does not take office within 60 days
following the date of any notice of resignation or removal of the Trustee under
Section 7.08(b) hereof, the retiring Trustee (at the expense of the Company),
the Company, or the Holders of at least 10% in principal amount of the then
outstanding Notes may petition any court of competent jurisdiction for the
appointment of a successor Trustee.

         (e) If the Trustee, after written request by any Holder who has been a
Holder for at least six months, fails to comply with Section 7.10, such Holder
may petition any court of competent jurisdiction for the removal of the Trustee
and the appointment of a successor Trustee.

         (f) A successor Trustee shall deliver a written acceptance of its
appointment to the retiring Trustee and to the Company. Thereupon, the
resignation or removal of the retiring Trustee shall become effective, and the
successor Trustee shall have all the rights, powers and duties of the Trustee
under this Indenture. The successor Trustee shall mail a notice of its
succession to Holders. The retiring Trustee shall promptly transfer all property
held by it as Trustee to the successor Trustee, provided all sums owing to the
Trustee hereunder have been paid and subject to the Lien provided for in Section
7.07 hereof. Notwithstanding replacement of the Trustee pursuant to this Section
7.08, the Company's obligations under Section 7.07 hereof shall continue for the
benefit of the retiring Trustee.

Section 7.09   Successor Trustee by Merger, etc.

         If the Trustee consolidates, merges or converts into, or transfers all
or substantially all of its corporate trust business to, another Person, the
successor corporation without any further act shall be the successor Trustee.

Section 7.10   Eligibility; Disqualification.

         There shall at all times be a Trustee hereunder that is a corporation
organized and doing business under the laws of the United States of America or
of any state thereof that is authorized under such laws to exercise corporate
trustee power, that is subject to supervision or examination by federal or state
authorities and that has a combined capital and surplus of at least $50.0
million as set forth in its most recent published annual report of condition.

         This Indenture shall always have a Trustee who satisfies the
requirements of TIA ss. 310(a)(1), (2) and (5). The Trustee is subject to TIA
ss. 310(b) including the provision in ss.310(b)(i); provided that there shall be
excluded from the operation of TIA ss.310(b)(i) any indenture or indentures
under which other securities, or conflicts of interest or participation in other
securities, of the Company or the Guarantors are outstanding if the requirements
for exclusion set forth in TIA ss.310(b)(i) are met.

Section 7.11   Preferential Collection of Claims Against Company.

         The Trustee is subject to TIA ss. 311(a), excluding any creditor
relationship listed in TIA ss. 311(b). A Trustee who has resigned or been
removed shall be subject to TIA ss. 311(a) to the extent indicated therein.


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                                   ARTICLE 8.
                    LEGAL DEFEASANCE AND COVENANT DEFEASANCE

Section 8.01   Option to Effect Legal Defeasance or Covenant Defeasance.

         The Company may, at the option of its Board of Directors evidenced by a
resolution set forth in an Officers' Certificate, at any time, elect to have
either Section 8.02 or 8.03 hereof be applied to all outstanding Notes upon
compliance with the conditions set forth below in this Article 8.

Section 8.02   Legal Defeasance and Discharge.

         Upon the Company's exercise under Section 8.01 hereof of the option
applicable to this Section 8.02, the Company and each of the Guarantors shall,
subject to the satisfaction of the conditions set forth in Section 8.04 hereof,
be deemed to have been discharged from their obligations with respect to all
outstanding Notes (including the Subsidiary Guarantees) on the date the
conditions set forth below are satisfied (hereinafter, "Legal Defeasance"). For
this purpose, Legal Defeasance means that the Company and the Guarantors will be
deemed to have paid and discharged the entire Indebtedness represented by the
outstanding Notes (including the Subsidiary Guarantees), which will thereafter
be deemed to be "outstanding" only for the purposes of Section 8.05 hereof and
the other Sections of this Indenture referred to in clauses (1) and (2) below,
and to have satisfied all their other obligations under such Notes, the
Subsidiary Guarantees and this Indenture (and the Trustee, on demand of and at
the expense of the Company, shall execute proper instruments acknowledging the
same), except for the following provisions which will survive until otherwise
terminated or discharged hereunder:

            (1) the rights of Holders of outstanding Notes to receive payments
         in respect of the principal of, or interest or premium and Additional
         Interest, if any, on such Notes when such payments are due from the
         trust referred to in Section 8.04 hereof;

            (2) the Company's obligations with respect to the Notes concerning
         issuing temporary Notes, registration of Notes, mutilated, destroyed,
         lost or stolen Notes and the maintenance of an office or agency for
         payment and money for security payments held in trust provided under
         Article 2 and Section 4.02 hereof;

            (3) the rights, powers, trusts, duties and immunities of the Trustee
         hereunder and the Company's and the Guarantors' obligations in
         connection therewith; and

            (4) under the provisions of this Article 8.

         Subject to compliance with this Article 8, the Company may exercise its
option under this Section 8.02 notwithstanding the prior exercise of its option
under Section 8.03 hereof.

Section 8.03   Covenant Defeasance.

         Upon the Company's exercise under Section 8.01 hereof of the option
applicable to this Section 8.03, the Company and the Guarantors shall, subject
to the satisfaction of the conditions set forth in Section 8.04 hereof, be
released from each of their obligations under the covenants contained in
Sections 4.03, 4.07, 4.08, 4.09, 4.10, 4.11, 4.12, 4.13, 4.15, 4.16, 4.17, 4.18,
4.19, 4.21 and 4.22 hereof and Article 5 hereof with respect to the outstanding
Notes on and after the date the conditions set forth in Section 8.04 hereof are
satisfied (hereinafter, "Covenant Defeasance"), and the Notes shall thereafter
be deemed not "outstanding" for the purposes of any direction, waiver, consent
or declaration or act of Holders (and the consequences of any thereof) in


                                       74


connection with such covenants, but will continue to be deemed "outstanding" for
all other purposes hereunder (it being understood that such Notes will not be
deemed outstanding for accounting purposes). For this purpose, Covenant
Defeasance means that, with respect to the outstanding Notes and the Guarantees,
the Company and the Guarantors may omit to comply with and will have no
liability in respect of any term, condition or limitation set forth in any such
covenant, whether directly or indirectly, by reason of any reference elsewhere
herein to any such covenant or by reason of any reference in any such covenant
to any other provision herein or in any other document and such omission to
comply will not constitute a Default or an Event of Default under Section 6.01
hereof, but, except as specified above, the remainder of this Indenture and such
Notes and the Guarantees will be unaffected thereby. In addition, upon the
Company's exercise under Section 8.01 hereof of the option applicable to this
Section 8.03 hereof, subject to the satisfaction of the conditions set forth in
Section 8.04 hereof, Sections 6.01(3) through 6.01(8) hereof will not constitute
Events of Default.

Section 8.04   Conditions to Legal or Covenant Defeasance.

         In order to exercise either Legal Defeasance or Covenant Defeasance
under either Section 8.02 or 8.03 hereof:

            (1) the Company must irrevocably deposit with the Trustee, in trust,
         for the benefit of the Holders of the Notes, cash in U.S. dollars,
         non-callable Government Securities, or a combination of cash in U.S.
         dollars and non-callable Government Securities, in amounts as will be
         sufficient, in the opinion of a nationally recognized firm of
         independent public accountants, to pay the principal of, or interest
         and premium and Additional Interest, if any, on the outstanding Notes
         on the stated maturity or on the applicable redemption date, as the
         case may be, and the Company must specify whether the Notes are being
         defeased to maturity or to a particular redemption date;

            (2) in the case of Legal Defeasance, the Company has delivered to
         the Trustee an Opinion of Counsel reasonably acceptable to the Trustee
         confirming that (a) the Company has received from, or there has been
         published by, the Internal Revenue Service a ruling or (b) since the
         date of this Indenture, there has been a change in the applicable
         federal income tax law, in either case to the effect that, and based
         thereon such Opinion of Counsel shall confirm that, the Holders of the
         outstanding Notes will not recognize income, gain or loss for federal
         income tax purposes as a result of such Legal Defeasance and will be
         subject to federal income tax on the same amounts, in the same manner
         and at the same times as would have been the case if such Legal
         Defeasance had not occurred;

            (3) in the case of Covenant Defeasance, the Company has delivered to
         the Trustee an Opinion of Counsel reasonably acceptable to the Trustee
         confirming that the Holders of the outstanding Notes will not recognize
         income, gain or loss for federal income tax purposes as a result of
         such Covenant Defeasance and will be subject to federal income tax on
         the same amounts, in the same manner and at the same times as would
         have been the case if such Covenant Defeasance had not occurred;

            (4) no Default or Event of Default has occurred and is continuing on
         the date of such deposit (other than a Default or Event of Default
         resulting from the borrowing of funds to be applied to such deposit);

            (5) such Legal Defeasance or Covenant Defeasance will not result in
         a breach or violation of, or constitute a default under any material
         agreement or instrument (other than this Indenture) to which the
         Company or any of its Subsidiaries is a party or by which the Company
         or any of its Subsidiaries is bound;


                                       75


            (6) the Company must deliver to the Trustee an Officers' Certificate
         stating that the deposit was not made by the Company with the intent of
         preferring the Holders of Notes over the other creditors of the Company
         with the intent of defeating, hindering, delaying or defrauding
         creditors of the Company or others; and

            (7) the Company must deliver to the Trustee an Officers' Certificate
         and an Opinion of Counsel, each stating that all conditions precedent
         relating to the Legal Defeasance or the Covenant Defeasance have been
         complied with.

Section 8.05   Deposited Money and Government Securities to be Held in Trust;
Other Miscellaneous Provisions.

         Subject to Section 8.06 hereof, all money and non-callable Government
Securities (including the proceeds thereof) deposited with the Trustee (or other
qualifying trustee, collectively for purposes of this Section 8.05, the
"Trustee") pursuant to Section 8.04 hereof in respect of the outstanding Notes
will be held in trust and applied by the Trustee, in accordance with the
provisions of such Notes and this Indenture, to the payment, either directly or
through any Paying Agent (including the Company acting as Paying Agent) as the
Trustee may determine, to the Holders of such Notes of all sums due and to
become due thereon in respect of principal, premium and Additional Interest, if
any, and interest, but such money need not be segregated from other funds except
to the extent required by law.

         The Company will pay and indemnify the Trustee against any tax, fee or
other charge imposed on or assessed against the cash or non-callable Government
Securities deposited pursuant to Section 8.04 hereof or the principal and
interest received in respect thereof other than any such tax, fee or other
charge which by law is for the account of the Holders of the outstanding Notes.

         Notwithstanding anything in this Article 8 to the contrary, the Trustee
will deliver or pay to the Company from time to time upon the request of the
Company any money or non-callable Government Securities held by it as provided
in Section 8.04 hereof which, in the opinion of a nationally recognized firm of
independent public accountants expressed in a written certification thereof
delivered to the Trustee (which may be the opinion delivered under Section
8.04(1) hereof), are in excess of the amount thereof that would then be required
to be deposited to effect an equivalent Legal Defeasance or Covenant Defeasance.

Section 8.06   Repayment to Company.

         Any money deposited with the Trustee or any Paying Agent, or then held
by the Company, in trust for the payment of the principal of, premium or
Additional Interest, if any, or interest on any Note and remaining unclaimed for
two years after such principal, premium or Additional Interest, if any, or
interest has become due and payable shall be paid to the Company on its request
or (if then held by the Company) will be discharged from such trust; and the
Holder of such Note will thereafter be permitted to look only to the Company for
payment thereof, and all liability of the Trustee or such Paying Agent with
respect to such trust money, and all liability of the Company as trustee
thereof, will thereupon cease; provided, however, that the Trustee or such
Paying Agent, before being required to make any such repayment, may at the
expense of the Company cause to be published once, in The New York Times and The
Wall Street Journal (national edition), notice that such money remains unclaimed
and that, after a date specified therein, which will not be less than 30 days
from the date of such notification or publication, any unclaimed balance of such
money then remaining will be repaid to the Company. In the absence of a written
request from the Company to return unclaimed funds to the Company, the Trustee
shall from time to time deliver all unclaimed funds to or as directed by
applicable escheat authorities, in accordance with the customary practices and
procedures of the Trustee. Any unclaimed funds held by the Trustee pursuant to
this Section 8.06 shall be held uninvested and without any liability for
interest.


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Section 8.07   Reinstatement.

         If the Trustee or Paying Agent is unable to apply any United States
dollars or non-callable Government Securities in accordance with Section 8.02 or
8.03 hereof, as the case may be, by reason of any order or judgment of any court
or governmental authority enjoining, restraining or otherwise prohibiting such
application, then the Company's and the Guarantor's obligations under this
Indenture and the Notes and the Subsidiary Guarantees will be revived and
reinstated as though no deposit had occurred pursuant to Section 8.02 or 8.03
hereof until such time as the Trustee or Paying Agent is permitted to apply all
such money in accordance with Section 8.02 or 8.03 hereof, as the case may be;
provided, however, that, if the Company makes any payment of principal of,
premium or Additional Interest, if any, or interest on any Note following the
reinstatement of its obligations, the Company will be subrogated to the rights
of the Holders of such Notes to receive such payment from the money held by the
Trustee or Paying Agent.

                                   ARTICLE 9.
                        AMENDMENT, SUPPLEMENT AND WAIVER

Section 9.01   Without Consent of Holders of Notes.

         Notwithstanding Section 9.02 of this Indenture, the Company, the
Guarantors and the Trustee may amend or supplement this Indenture or the Notes
without the consent of any Holder of a Note:

            (1) to cure any ambiguity, defect or inconsistency;

            (2) to provide for uncertificated Notes in addition to or in place
         of certificated Notes;

            (3) to provide for the assumption of the Company's obligations to
         Holders of Notes in the case of a merger or consolidation or sale of
         all or substantially all of the Company's assets;

            (4) to make any change that would provide any additional rights or
         benefits to the Holders of Notes or that does not adversely affect the
         legal rights under this Indenture of any Holder;

            (5) to comply with requirements of the Commission in order to effect
         or maintain the qualification of this Indenture under the TIA;

            (6) to provide for the issuance of Additional Notes in accordance
         with the limitation set forth in this Indenture as of the date hereof;

            (7) to release a Guarantor from its obligation under its Subsidiary
         Guarantee or this Indenture in accordance with the terms of this
         Indenture;

            (8) to allow any Guarantor to execute a supplemental indenture
         and/or a Subsidiary Guarantee with respect to the Notes; or

            (9) to evidence and provide the acceptance of the appointment of a
         successor Trustee under this Indenture.


                                       77


         Upon the request of the Company accompanied by a resolution of its
Board of Directors authorizing the execution of any such amended or supplemental
Indenture, and upon receipt by the Trustee of the documents described in
Sections 7.02(b) and 9.06 hereof, the Trustee will join with the Company and the
Guarantors in the execution of any amended or supplemental Indenture authorized
or permitted by the terms of this Indenture and to make any further appropriate
agreements and stipulations that may be therein contained, but the Trustee will
not be obligated to enter into any such amended or supplemental Indenture that
affects its own rights, duties or immunities under this Indenture or otherwise.

Section 9.02   With Consent of Holders of Notes.

         Except as provided below in this Section 9.02, the Company and the
Trustee may amend or supplement this Indenture (including, without limitation,
Sections 3.10, 4.10 and 4.15 hereof) and the Notes with the consent of the
Holders of at least a majority in principal amount of the Notes (including,
without limitation, Additional Notes, if any) then outstanding voting as a
single class (including, without limitation, consents obtained in connection
with a tender offer or exchange offer for, or purchase of, the Notes), and,
subject to Sections 6.04 and 6.07 hereof, any existing Default or Event of
Default (other than a Default or Event of Default in the payment of the
principal of, premium or Additional Interest, if any, or interest on the Notes,
except a payment default resulting from an acceleration that has been rescinded)
or compliance with any provision of this Indenture or the Notes may be waived
with the consent of the Holders of a majority in principal amount of the then
outstanding Notes voting as a single class (including consents obtained in
connection with a tender offer or exchange offer for, or purchase of, the
Notes). Sections 2.08 and 2.09 hereof shall determine which Notes are considered
to be "outstanding" for purposes of this Section 9.02.

         Upon the request of the Company accompanied by a resolution of its
Board of Directors authorizing the execution of any such amended or supplemental
Indenture, and upon the filing with the Trustee of evidence satisfactory to the
Trustee of the consent of the Holders of Notes as aforesaid, and upon receipt by
the Trustee of the documents described in Sections 7.02(b) and 9.06 hereof, the
Trustee will join with the Company in the execution of such amended or
supplemental Indenture unless such amended or supplemental Indenture directly
affects the Trustee's own rights, duties or immunities under this Indenture or
otherwise, in which case the Trustee may in its discretion, but will not be
obligated to, enter into such amended or supplemental Indenture.

         It is not necessary for the consent of the Holders of Notes under this
Section 9.02 to approve the particular form of any proposed amendment or waiver,
but it is sufficient if such consent approves the substance thereof.

         After an amendment, supplement or waiver under this Section 9.02
becomes effective, the Company will mail to the Holders of Notes affected
thereby a notice briefly describing the amendment, supplement or waiver. Any
failure of the Company to mail such notice, or any defect therein, will not,
however, in any way impair or affect the validity of any such amended or
supplemental Indenture or waiver. Subject to Sections 6.04, 6.07 and 11.13
hereof, the Holders of a majority in aggregate principal amount of the Notes
then outstanding voting as a single class may waive compliance in a particular
instance by the Company with any provision of this Indenture or the Notes.
However, without the consent of each Holder affected, an amendment or waiver
under this Section 9.02 may not (with respect to any Notes held by a
non-consenting Holder):

            (1) reduce the principal amount of Notes whose Holders must consent
         to an amendment, supplement or waiver;

            (2) reduce the principal of or change the fixed maturity of any Note
         or alter the provisions with respect to the redemption of the Notes
         (other than provisions relating to Sections 3.10, 4.10 and 4.15 hereof;


                                       78


            (3) reduce the rate of or change the time for payment of interest on
         any Note;

            (4) waive a Default or Event of Default in the payment of principal
         of, or interest or premium, or Additional Interest, if any, on the
         Notes (except a rescission of acceleration of the Notes by the Holders
         of at least a majority in aggregate principal amount of the Notes and a
         waiver of the payment default that resulted from such acceleration);

            (5) make any Note payable in money other than that stated in the
         Notes;

            (6) make any change in the provisions of this Indenture relating to
         waivers of past Defaults or the rights of Holders of Notes to receive
         payments of principal of, or interest or premium or Additional
         Interest, if any, on the Notes;

            (7) waive a redemption payment with respect to any Note (including a
         payment required by Sections 3.10, 4.10 and 4.15 hereof);

            (8) release any Guarantor from any of its obligations under its
         Subsidiary Guarantee or this Indenture, except in accordance with the
         terms of this Indenture; or

            (9) make any change in the preceding amendment and waiver
         provisions.

         Any amendment or supplement to the provisions of this Indenture
relating to the subordination or legal or covenant defeasance provisions that
materially adversely affects the rights of the holders of Senior Debt then
outstanding will require the consent of such holders of Senior Debt or the agent
therefore, acting on their behalf.

Section 9.03   Compliance with Trust Indenture Act.

         Every amendment or supplement to this Indenture or the Notes will be
set forth in an amended or supplemental Indenture that complies with the TIA as
then in effect.

Section 9.04   Revocation and Effect of Consents.

         Until an amendment, supplement or waiver becomes effective, a consent
to it by a Holder of a Note is a continuing consent by the Holder of a Note and
every subsequent Holder of a Note or portion of a Note that evidences the same
debt as the consenting Holder's Note, even if notation of the consent is not
made on any Note. However, any such Holder of a Note or subsequent Holder of a
Note may revoke the consent as to its Note if the Trustee receives written
notice of revocation before the date the waiver, supplement or amendment becomes
effective. An amendment, supplement or waiver becomes effective in accordance
with its terms and thereafter binds every Holder.

Section 9.05   Notation on or Exchange of Notes.

         The Trustee may place an appropriate notation about an amendment,
supplement or waiver on any Note thereafter authenticated. The Company in
exchange for all Notes may issue and the Trustee shall, upon receipt of an
Authentication Order, authenticate new Notes that reflect the amendment,
supplement or waiver.


                                       79


         Failure to make the appropriate notation or issue a new Note will not
affect the validity and effect of such amendment, supplement or waiver.

Section 9.06   Trustee to Sign Amendments, etc.

         The Trustee will sign any amended or supplemental Indenture authorized
pursuant to this Article 9 if the amendment or supplement does not adversely
affect the rights, duties, liabilities or immunities of the Trustee. The Company
may not sign an amendment or supplemental Indenture until the Board of Directors
approves it. In executing any amended or supplemental indenture, the Trustee
will be entitled to receive and (subject to Section 7.01 hereof) will be fully
protected in relying upon, in addition to the documents required by Section
13.04 hereof, an Officers' Certificate and an Opinion of Counsel stating that
the execution of such amended or supplemental Indenture is authorized or
permitted by this Indenture.

                                  ARTICLE 10.
                                  GUARANTEES

Section 10.01  Guarantee.

         (a) Subject to this Article 10 and the subordination provisions of
Article 11, each of the Guarantors hereby, jointly and severally,
unconditionally guarantees to each Holder of a Note authenticated and delivered
by the Trustee and to the Trustee and its successors and assigns, irrespective
of the validity and enforceability of this Indenture, the Notes or the
Obligations of the Company hereunder or thereunder, that:

                  (1) the principal of, premium and Additional Interest, if any,
            and interest on the Notes will be promptly paid in full when due,
            whether at maturity, by acceleration, redemption or otherwise, and
            interest on the overdue principal of and interest on the Notes, if
            any, if lawful, and all other obligations of the Company to the
            Holders or the Trustee hereunder or thereunder will be promptly paid
            in full or performed, all in accordance with the terms hereof and
            thereof; and

                  (2) in case of any extension of time of payment or renewal of
            any Notes or any of such other Obligations, that same will be
            promptly paid in full when due or performed in accordance with the
            terms of the extension or renewal, whether at stated maturity, by
            acceleration or otherwise.

         Failing payment when due of any amount so Guaranteed or any performance
so Guaranteed for whatever reason, the Guarantors will be jointly and severally
obligated to pay the same immediately. Each Guarantor agrees that this is a
Guarantee of payment and not a Guarantee of collection.

         (b) The Guarantors hereby agree that their obligations hereunder are
unconditional, irrespective of the validity, regularity or enforceability of the
Notes or this Indenture, the absence of any action to enforce the same, any
waiver or consent by any Holder of the Notes with respect to any provisions
hereof or thereof, the recovery of any judgment against the Company, any action
to enforce the same or any other circumstance which might otherwise constitute a
legal or equitable discharge or defense of a guarantor. Each Guarantor hereby
waives diligence, presentment, demand of payment, filing of claims with a court
in the event of insolvency or bankruptcy of the Company, any right to require a
proceeding first against the Company, protest, notice and all demands whatsoever
and covenant that this Guarantee will not be discharged except by complete
performance of the obligations contained in the Notes and this Indenture.

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         (c) If any Holder or the Trustee is required by any court or otherwise
to return to the Company, the Guarantors or any custodian, trustee, liquidator
or other similar official acting in relation to either the Company or the
Guarantors, any amount paid by either to the Trustee or such Holder, this
Guarantee, to the extent theretofore discharged, will be reinstated in full
force and effect.

         (d) Each Guarantor agrees that it will not be entitled to any right of
subrogation in relation to the Holders in respect of any obligations Guaranteed
hereby until payment in full of all obligations Guaranteed hereby. Each
Guarantor further agrees that, as between the Guarantors, on the one hand, and
the Holders and the Trustee, on the other hand, (1) the maturity of the
obligations Guaranteed hereby may be accelerated as provided in Article 6 hereof
for the purposes of this Guarantee, notwithstanding any stay, injunction or
other prohibition preventing such acceleration in respect of the obligations
Guaranteed hereby, and (2) in the event of any declaration of acceleration of
such obligations as provided in Article 6 hereof, such obligations (whether or
not due and payable) will forthwith become due and payable by the Guarantors for
the purpose of this Guarantee. The Guarantors will have the right to seek
contribution from any non-paying Guarantor so long as the exercise of such right
does not impair the rights of the Holders under the Guarantee.

Section 10.02  Limitation on Guarantor Liability.

         Each Guarantor, and by its acceptance of Notes, each Holder, hereby
confirms that it is the intention of all such parties that this Guarantee of
such Guarantor not constitute a fraudulent transfer or conveyance for purposes
of any Bankruptcy Law, the Uniform Fraudulent Conveyance Act, the Uniform
Fraudulent Transfer Act or any similar federal or state law to the extent
applicable to any Guarantee. To effectuate the foregoing intention, the Holders
and the Guarantors hereby irrevocably agree that the obligations of such
Guarantor shall be limited to the maximum amount that will, after giving effect
to such maximum amount and all other contingent and fixed liabilities of such
Guarantor that are relevant under such laws, and after giving effect to any
collections from, rights to receive contribution from or payments made by or on
behalf of any other Guarantor in respect of the obligations of such other
Guarantor under this Article 10, result in the obligations of such Guarantor
under its Guarantee not constituting a fraudulent transfer or conveyance.

Section 10.03  Execution and Delivery of the Guarantee.

         To evidence its Guarantee set forth in Section 10.01, each Guarantor
hereby agrees that a notation of such Guarantee substantially in the form
attached as Exhibit E hereto will be endorsed by an Officer of such Guarantor on
each Note authenticated and delivered by the Trustee and that this Indenture
will be executed on behalf of such Guarantor by one of its Officers.

         Each Guarantor hereby agrees that its Guarantee set forth in Section
10.01 will remain in full force and effect notwithstanding any failure to
endorse on each Note a notation of such Guarantee.

         If an Officer whose signature is on this Indenture or on the Guarantee
no longer holds that office at the time the Trustee authenticates the Note on
which a Guarantee is endorsed, the Guarantee will be valid nevertheless.

         The delivery of any Note by the Trustee, after the authentication
thereof hereunder, will constitute due delivery of the Guarantee set forth in
this Indenture on behalf of the Guarantors.

         In the event that the Company creates or acquires a Subsidiary, after
the date of this Indenture, if required by Section 4.17 hereof, the Company will
cause such Subsidiary to comply with the provisions of Section 4.17 hereof and
this Article 10, to the extent applicable.


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Section 10.04  Guarantors May Consolidate, etc., on Certain Terms.

         Except as otherwise provided in Section 10.05, no Guarantor may sell or
otherwise dispose of all or substantially all of its assets to, or consolidate
with or merge with or into (whether or not such Guarantor is the surviving
Person) another Person, other than the Company or another Guarantor, unless:

            (1) immediately after giving effect to such transaction, no Default
         or Event of Default exists; and

            (2) either:

                  (a) subject to Section 10.05 hereof, the Person acquiring the
            property in any such sale or disposition or the Person formed by or
            surviving any such consolidation or merger unconditionally assumes
            all the obligations of that Guarantor, (i) pursuant to a
            supplemental indenture in form and substance reasonably satisfactory
            to the Trustee, under the Notes, this Indenture and the Guarantee
            and (ii) pursuant to a supplemental agreement, under the
            Registration Rights Agreement, in each case on the terms set forth
            herein or therein; or

                  (b) the Net Proceeds of such sale or other disposition are
            applied in accordance with the applicable provisions of this
            Indenture, including without limitation, Section 4.10 hereof.

         In case of any such consolidation, merger, sale or conveyance and upon
the assumption by the successor Person, by supplemental indenture, executed and
delivered to the Trustee and satisfactory in form to the Trustee, of the
Guarantee endorsed upon the Notes and the due and punctual performance of all of
the covenants and conditions of this Indenture to be performed by the Guarantor,
such successor Person will succeed to and be substituted for the Guarantor with
the same effect as if it had been named herein as a Guarantor. Such successor
Person thereupon may cause to be signed any or all of the Guarantees to be
endorsed upon all of the Notes issuable hereunder which theretofore shall not
have been signed by the Company and delivered to the Trustee. All the Guarantees
so issued will in all respects have the same legal rank and benefit under this
Indenture as the Guarantees theretofore and thereafter issued in accordance with
the terms of this Indenture as though all of such Guarantees had been issued at
the date of the execution hereof.

         Except as set forth in Articles 4 and 5 hereof, and notwithstanding
clauses (a) and (b) above, nothing contained in this Indenture or in any of the
Notes will prevent any consolidation or merger of a Guarantor with or into the
Company or another Guarantor, or will prevent any sale or conveyance of the
property of a Guarantor as an entirety or substantially as an entirety to the
Company or another Guarantor.

Section 10.05  Release of Subsidiary Guarantors from Obligations.

         (a) In the event of any sale or other disposition of all or
substantially all of the assets of any Subsidiary Guarantor, by way of merger,
consolidation or otherwise, or a sale or other disposition of all to the Capital
Stock of any Subsidiary Guarantor, in each case to a Person that is not (either
before or after giving effect to such transactions) a Subsidiary of the Company,
then such Subsidiary Guarantor (in the event of a sale or other disposition, by
way of merger, consolidation or otherwise, of all of the Capital Stock of such
Subsidiary Guarantor) or the corporation acquiring the property (in the event of
a sale or other disposition of all or substantially all of the assets of such
Subsidiary Guarantor) shall be released and relieved of any obligations under
its Subsidiary Guarantee; provided that the Net Proceeds of such sale or other
disposition are applied in accordance with the applicable provisions of this
Indenture, including without limitation Section 4.10 hereof. Upon delivery by
the Company to the Trustee of an Officers' Certificate and an Opinion of Counsel
to the effect that such sale or other disposition was made by the Company in
accordance with the provisions of this Indenture, including without limitation
Section 4.10 hereof, the Trustee shall execute any documents reasonably required
in order to evidence the release of any Subsidiary Guarantor from its
obligations under its Subsidiary Guarantee.


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         (b) If the Company designates any Restricted Subsidiary that is a
Subsidiary Guarantor as an Unrestricted Subsidiary in accordance with Section
4.18 of this Indenture, then such Subsidiary Guarantor shall be released and
relieved of any Obligations under its Subsidiary Guarantee in accordance with
the provisions of this Indenture.

         (c) Upon the full and unconditional release of a Guarantee by a
Subsidiary under all then outstanding Credit Facilities, then such Subsidiary
Guarantor shall be released and relieved of any Obligations under its Subsidiary
Guarantee in accordance with the provisions of this Indenture; provided,
however, that in the event that any such Subsidiary thereafter Guarantees any
Indebtedness of the Company under any Credit Facility (or if any released
Guarantee under any Credit Facility is reinstated or renewed), then such
Subsidiary shall be required to be a Subsidiary Guarantor by executing a
supplemental indenture and providing the Trustee with an Officer's Certificate
and an Opinion of Counsel.

         (d) Any Subsidiary Guarantor not released from its obligations under
its Subsidiary Guarantee shall remain liable for the full amount of principal of
and interest on the Notes and for the other obligations of any Guarantor under
this Indenture as provided in this Article 10.

                                  ARTICLE 11.
                                 SUBORDINATION

Section 11.01  Agreement to Subordinate.

         Each of the Company and the Guarantors agrees, and each Holder by
accepting a Note agrees, that the Indebtedness evidenced by the Notes and the
Guarantees is subordinated in right of payment, to the extent and in the manner
provided in this Article 11, to the prior payment in full in cash of all Senior
Debt (whether outstanding on the date hereof or hereafter created, incurred,
assumed or Guaranteed), and that the subordination is for the benefit of the
holders of Senior Debt.

Section 11.02  Liquidation; Dissolution; Bankruptcy.

         Upon any distribution to creditors of the Company or a Guarantor in a
liquidation or dissolution of the Company or such Guarantor, in a bankruptcy,
reorganization, insolvency, receivership or similar proceeding relating to the
Company or a Guarantor or their property, in an assignment for the benefit of
creditors or in any marshalling of the assets and liabilities of the Company or
a Guarantor, the holders of Senior Debt shall be entitled to receive payment in
full in cash or Cash Equivalents of all Obligations due in respect of such
Senior Debt (including interest after the commencement of any such proceeding at
the rate specified in the applicable Senior Debt) before the Holders of Notes
will be entitled to receive any payment with respect to the Notes or the
Guarantees, and until all Obligations with respect to Senior Debt are paid in
full in cash, any distribution to which the Holders of Notes would be entitled
shall be made to the holders of Senior Debt (except, in each case, that Holders
of Notes may receive Permitted Junior Securities and payments made from the
trust described under Article 8).


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Section 11.03  Default on Designated Senior Debt.

         The Company may not make any payment in respect of the Notes (except in
Permitted Junior Securities or from the trust described under Article 8) and
will not make any deposit pursuant to the provisions described under Article 8
if:

                  (1) a payment default on Designated Senior Debt (including,
            without limitation, upon any acceleration of the maturity thereof)
            occurs and is continuing; or

                  (2) any other default occurs and is continuing on any series
            of Designated Senior Debt that permits holders of that series of
            Designated Senior Debt to accelerate its maturity and the Trustee
            receives a notice of such default (a "Payment Blockage Notice") from
            the Company or the representative of any Designated Senior Debt.

            Payments on the Notes may and will be resumed:

                  (1) in the case of a payment default, upon the date on which
            such default is cured or waived; and

                  (2) in the case of a nonpayment default, upon the earlier of
            (x) the date on which such nonpayment default is cured or waived (so
            long as no other default exists), (y) 179 days after the date on
            which the applicable Payment Blockage Notice is received, or (z) the
            date on which the trustee receives notice from a representative of
            Designated Senior Debt rescinding such Payment Blockage Notice,
            unless, in each case, the maturity of any Designated Senior Debt has
            been accelerated.

            No new Payment Blockage Notice may be delivered unless and until:

                  (1) 360 days have elapsed since the delivery of the
            immediately prior Payment Blockage Notice; and

                  (2) all scheduled payments of principal, interest and premium
            and Additional Interest, if any, on the Notes that have come due
            have been paid in full in cash.

         No nonpayment default that existed or was continuing on the date of
delivery of any Payment Blockage Notice to the Trustee will be, or be made, the
basis for a subsequent Payment Blockage Notice unless such default has been
cured or waived for a period of not less than 90 days.

Section 11.04  Acceleration of Notes.

         If payment of the Notes is accelerated because of an Event of Default,
the Company shall promptly notify holders of Senior Debt of the acceleration.

Section 11.05  When Distribution Must Be Paid Over.

         In the event that the Trustee or any Holder receives any payment of any
Obligations with respect to the Notes and the Guarantees at a time when the
Trustee or such Holder, as applicable, has actual knowledge that such payment is
prohibited by Article 11 hereof, such payment shall be held by the Trustee or
such Holder, in trust for the benefit of, and shall be paid forthwith over and
delivered, upon proper written request, to, the holders of Senior Debt as their
interests may appear or their Representative under this Indenture or other
agreement (if any) pursuant to which Senior Debt may have been issued, as their
respective interests may appear, which with respect to any and all Indebtedness
outstanding under the Credit Agreement, shall mean the agent for such holders,
for application to the payment of all Obligations with respect to Senior Debt
remaining unpaid to the extent necessary to pay such Obligations in full in
accordance with their terms, after giving effect to any concurrent payment or
distribution to or for the holders of Senior Debt.


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         With respect to the holders of Senior Debt, the Trustee undertakes to
perform only such obligations on the part of the Trustee as are specifically set
forth in this Article 11, and no implied covenants or obligations with respect
to the holders of Senior Debt shall be read into this Indenture against the
Trustee. The Trustee shall not be deemed to owe any fiduciary duty to the
holders of Senior Debt, and shall not be liable to any such holders if the
Trustee shall pay over or distribute to or on behalf of Holders or the Company
or any other Person money or assets to which any holders of Senior Debt shall be
entitled by virtue of this Article 11, except if such payment is made as a
result of the willful misconduct or negligence of the Trustee.

Section 11.06  Notice by Company

         The Company shall promptly notify the Trustee and the Paying Agent of
any facts known to the Company that would cause a payment of any Obligations
with respect to the Notes and the Guarantees to violate this Article 11, but
failure to give such notice shall not affect the subordination of the Notes and
the Guarantees to the Senior Debt as provided in this Article 11.

         The Trustee shall be entitled to rely on the delivery to it of a
written notice by a person representing himself to be a holder of Senior Debt
(or a trustee or agent on behalf of such holder) to establish that such notice
has been given by a holder of Senior Debt (or a trustee or agent on behalf of
any such holder). In the event that the Trustee determines in good faith that
further evidence is required with respect to the right of any person as holder
of Senior Debt to participate in any payment or distribution pursuant to this
Article 11, the Trustee may request such person to furnish evidence to the
reasonable satisfaction of the Trustee as to the amount of Senior Debt held by
such person and the extent to which such person is entitled to participate in
such payment or distribution. If such evidence is not furnished, the Trustee may
defer any payment which it may be required to make for the benefit of such
person pursuant to the terms of this Indenture pending judicial determination as
to the rights of such person to receive such payment.

Section 11.07  Subrogation.

         After all Senior Debt is paid in full in cash and until the Notes are
paid in full, Holders of Notes shall be subrogated (equally and ratably with all
other Indebtedness pari passu with the Notes) to the rights of holders of Senior
Debt to receive distributions applicable to Senior Debt to the extent that
distributions otherwise payable to the Holders of Notes have been applied to the
payment of Senior Debt. A distribution made under this Article 11 to holders of
Senior Debt that otherwise would have been made to Holders of Notes is not, as
between the Company and Holders, a payment by the Company or the Guarantors on
the Notes and the Guarantees.

Section 11.08  Relative Rights.

         This Article 11 defines the relative rights of Holders of Notes and
holders of Senior Debt. Nothing in this Indenture shall:


                                       85


                  (1) impair, as between the Company and Holders of Notes, the
            obligation of the Company, which is absolute and unconditional, to
            pay principal of and interest on the Notes in accordance with their
            terms;

                  (2) affect the relative rights of Holders of Notes and
            creditors of the Company other than their rights in relation to
            holders of Senior Debt; or

                  (3) prevent the Trustee or any Holder of Notes from exercising
            its available remedies upon a Default or Event of Default, subject
            to the rights of holders and owners of Senior Debt to receive
            distributions and payments otherwise payable to Holders of Notes.

         If the Company fails because of this Article 11 to pay principal of or
interest on a Note on the due date, the failure is still a Default or Event of
Default.

Section 11.09  Subordination May Not Be Impaired by Company.

         No right of any holder of Senior Debt to enforce the subordination of
the Indebtedness evidenced by the Notes shall be impaired by any act or failure
to act by the Company or any Holder or by the failure of the Company or any
Holder to comply with this Indenture.

Section 11.10  Distribution or Notice to Representative.

         Whenever a distribution is to be made or a notice given to holders of
Senior Debt, the distribution may be made and the notice given to their
Representative.

         Upon any payment or distribution of assets of the Company or the
Guarantors referred to in this Article 11, the Trustee and the Holders of Notes
shall be entitled to rely upon any order or decree made by any court of
competent jurisdiction or upon any certificate of such Representative or of the
liquidating trustee or agent or other Person making any distribution to the
Trustee or to the Holders of Notes for the purpose of ascertaining the Persons
entitled to participate in such distribution, the holders of the Senior Debt and
other Indebtedness of the Company and the Guarantors, the amount thereof or
payable thereon, the amount or amounts paid or distributed thereon and all other
facts pertinent thereto or to this Article 11.

Section 11.11  Rights of Trustee and Paying Agent.

         Notwithstanding the provisions of this Article 11 or any other
provision of this Indenture, the Trustee shall not be charged with knowledge of
the existence of any facts that would prohibit the making of any payment or
distribution by the Trustee, and the Trustee and the Paying Agent may continue
to make payments on the Notes, unless the Trustee shall have received at its
Corporate Trust Office of the Trustee at least three Business Days prior to the
date of such payment written notice of facts that would cause the payment of any
Obligations with respect to the Notes to violate this Article 11. Only the
Company or a Representative may give the notice. Nothing in this Article 11
shall impair the claims of, or payments to, the Trustee under or pursuant to
Section 7.07 hereof.

         The Trustee in its individual or any other capacity may hold Senior
Debt with the same rights it would have if it were not Trustee. Any Agent may do
the same with like rights.

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Section 11.12  Authorization to Effect Subordination.

         Each Holder of Notes, by the Holder's acceptance thereof, authorizes
and directs the Trustee on such Holder's behalf to take such action as may be
necessary or appropriate to effectuate the subordination as provided in this
Article 11, and appoints the Trustee to act as such Holder's attorney-in-fact
for any and all such purposes. If the Trustee does not file a proper proof of
claim or proof of debt in the form required in any proceeding referred to in
Section 6.09 hereof at least 30 days before the expiration of the time to file
such claim, the credit agents are hereby authorized to file an appropriate claim
for and on behalf of the Holders of the Notes.

Section 11.13  Amendments.

         The provisions of this Article 11 shall not be amended or modified
without the written consent of the holders of at least 75% in aggregate
principal amount of the Notes then outstanding if such amendment would adversely
affect the rights of Holders of Notes.

                                  ARTICLE 12.
                           satisfaction and discharge

Section 12.01  Satisfaction and Discharge.

         This Indenture will be discharged and will cease to be of further
effect as to all Notes issued hereunder, when:

            (1) either:

                  (a) all Notes that have been authenticated, except lost,
            stolen or destroyed Notes that have been replaced or paid and Notes
            for whose payment money has been deposited in trust and thereafter
            repaid to the Company, have been delivered to the Trustee for
            cancellation; or

                  (b) all Notes that have not been delivered to the Trustee for
            cancellation have become due and payable by reason of the mailing of
            a notice of redemption or otherwise or will become due and payable
            within one year, and the Company has irrevocably deposited or caused
            to be deposited with the Trustee as trust funds in trust solely for
            the benefit of the Holders, cash in U.S. dollars, non-callable
            Government Securities, or a combination of cash in U.S. dollars and
            non-callable Government Securities, in such amounts as will be
            sufficient without consideration of any reinvestment of interest, to
            pay and discharge the entire indebtedness on the Notes not delivered
            to the Trustee for cancellation for principal, premium and
            Additional Interest, if any, and accrued interest to the date of
            maturity or redemption;

            (2) no Default or Event of Default has occurred and is continuing on
         the date of the deposit or will occur as a result of the deposit and
         the deposit will not result in a breach or violation of, or constitute
         a default under, any other instrument to which the Company or any
         Guarantor is a party or by which the Company or any Guarantor is bound;

            (3) the Company has paid or caused to be paid (or deposited for
         payment as set forth above) all sums payable by it under this
         Indenture; and


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            (4) the Company has delivered irrevocable instructions to the
         Trustee under this Indenture to apply the deposited money toward the
         payment of the Notes at maturity or the redemption date, as the case
         may be.

In addition, the Company must deliver an Officers' Certificate and an Opinion of
Counsel to the Trustee stating that all conditions precedent to satisfaction and
discharge have been satisfied.

Section 12.02  Application of Trust Money.

         Subject to the provisions of Section 8.06, all money deposited with the
Trustee pursuant to Section 12.01 shall be held in trust and applied by it, in
accordance with the provisions of the Notes and this Indenture, to the payment,
either directly or through any Paying Agent (including the Company acting as its
own Paying Agent) as the Trustee may determine, to the Persons entitled thereto,
of the principal (and premium, if any) and interest for whose payment such money
has been deposited with the Trustee; but such money need not be segregated from
other funds except to the extent required by law.

         If the Trustee or Paying Agent is unable to apply any money or
Government Securities in accordance with Section 12.01 by reason of any legal
proceeding or by reason of any order or judgment of any court or governmental
authority enjoining, restraining or otherwise prohibiting such application, the
Company's and any Guarantor's obligations under this Indenture and the Notes
shall be revived and reinstated as though no deposit had occurred pursuant to
Section 12.01; provided that if the Company has made any payment of principal
of, premium, if any, or interest on any Notes because of the reinstatement of
its obligations, the Company shall be subrogated to the rights of the Holders of
such Notes to receive such payment from the money or Government Securities held
by the Trustee or Paying Agent.

                                  ARTICLE 13.
                                 MISCELLANEOUS

Section 13.01  Trust Indenture Act Controls.

         If any provision of this Indenture limits, qualifies or conflicts with
the duties imposed by TIA ss.318(c), the imposed duties will control.

Section 13.02  Notices.

         Any notice or communication by the Company, any Guarantor or the
Trustee to the others is duly given if in writing and delivered in Person or
mailed by first class mail (registered or certified, return receipt requested),
telecopier or overnight air courier guaranteeing next day delivery, to the
others' address:

         If to the Company and/or any Guarantor:

         Genesis Health Ventures, Inc.
         7 East Lee Street
         Baltimore, Maryland 21202
         Attention:  John F. Gaither, Jr.
         Fax: (253) 390-6623


                                       88


         With a copy to:

         Blank Rome LLP
         One Logan Square
         Philadelphia, PA  19103-6998
         Attention:  Francis E. Dehel
         Fax: (215) 569-5555

         If to the Trustee:

         The Bank of New York
         101 Barclay Street, Floor 8 West
         New York, New York 10286
         Attn: Corporate Finance Unit
         Fax: (212) 815-5707

         The Company, any Guarantor or the Trustee, by notice to the others may
designate additional or different addresses for subsequent notices or
communications.

         All notices and communications (other than those sent to Holders) will
be deemed to have been duly given: at the time delivered by hand, if personally
delivered; five Business Days after being deposited in the mail, postage
prepaid, if mailed; when receipt acknowledged, if telecopied; and the next
Business Day after timely delivery to the courier, if sent by overnight air
courier guaranteeing next day delivery. Notwithstanding the foregoing, notices
to the Trustee shall be effective only upon receipt.

         Any notice or communication to a Holder will be mailed by first class
mail, certified or registered, return receipt requested, or by overnight air
courier guaranteeing next day delivery to its address shown on the register kept
by the Registrar. Any notice or communication will also be so mailed to any
Person described in TIA ss. 313(c), to the extent required by the TIA. Failure
to mail a notice or communication to a Holder or any defect in it will not
affect its sufficiency with respect to other Holders.

         If a notice or communication is mailed in the manner provided above
within the time prescribed, it is duly given, whether or not the addressee
receives it.

         If the Company mails a notice or communication to Holders, it will mail
a copy to the Trustee and each Agent at the same time.

Section 13.03  Communication by Holders of Notes with Other Holders of Notes.

         Holders may communicate pursuant to TIA ss. 312(b) with other Holders
with respect to their rights under this Indenture or the Notes. The Company, the
Trustee, the Registrar and anyone else shall have the protection of TIA ss.
312(c).

Section 13.04  Certificate and Opinion as to Conditions Precedent.

         Upon any request or application by the Company to the Trustee to take
any action under this Indenture, the Company shall furnish to the Trustee:

            (1) an Officers' Certificate in form and substance reasonably
         satisfactory to the Trustee (which must include the statements set
         forth in Section 13.05 hereof) stating that, in the opinion of the
         signers, all conditions precedent and covenants, if any, provided for
         in this Indenture relating to the proposed action have been satisfied;
         and


                                       89


            (2) an Opinion of Counsel in form and substance reasonably
         satisfactory to the Trustee (which must include the statements set
         forth in Section 13.05 hereof) stating that, in the opinion of such
         counsel, all such conditions precedent and covenants have been
         satisfied.

Section 13.05  Statements Required in Certificate or Opinion.

         Each certificate or opinion with respect to compliance with a condition
or covenant provided for in this Indenture (other than a certificate provided
pursuant to TIA ss. 314(a)(4)) must comply with the provisions of TIA ss. 314(e)
and must include:

            (1) a statement that the Person making such certificate or opinion
         has read such covenant or condition;

            (2) a brief statement as to the nature and scope of the examination
         or investigation upon which the statements or opinions contained in
         such certificate or opinion are based;

            (3) a statement that, in the opinion of such Person, he or she has
         made such examination or investigation as is necessary to enable him or
         her to express an informed opinion as to whether or not such covenant
         or condition has been satisfied; and

            (4) a statement as to whether or not, in the opinion of such Person,
         such condition or covenant has been satisfied.

Section 13.06  Rules by Trustee and Agents.

         The Trustee may make reasonable rules for action by or at a meeting of
Holders. The Registrar or Paying Agent may make reasonable rules and set
reasonable requirements for its functions.

Section 13.07  No Personal Liability of Directors, Officers, Employees and
Stockholders.

         No past, present or future director, officer, employee, incorporator or
shareholder of the Company or any Guarantor, as such, will have any liability
for any obligations of the Company or the Guarantors under the Notes, this
Indenture, the Subsidiary Guarantees, or for any claim based on, in respect of,
or by reason of, such obligations or their creation. Each Holder of Notes by
accepting a Note waives and releases all such liability. The waiver and release
are part of the consideration for issuance of the Notes. The waiver may not be
effective to waive liabilities under the federal securities laws.

Section 13.08  Governing Law.

         THIS INDENTURE, THE NOTES AND THE SUBSIDIARY GUARANTEES AND THE RIGHTS
AND DUTIES OF THE PARTIES HEREUNDER AND THEREUNDER AND ALL MATTERS ARISING OUT
OF OR RELATING TO THIS INDENTURE, THE NOTES AND THE SUBSIDIARY GUARANTEES SHALL
BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW
YORK.


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Section 13.09  Submission to Jurisdiction and Waiver of Jury Trial.

         The Parties to this Indenture each hereby irrevocably submit to the
non-exclusive jurisdiction of any New York State or federal court sitting in the
Borough of Manhattan in The City of New York in any action or proceeding arising
out of or relating to the Notes, the Guarantees or this Indenture, and all such
parties hereby irrevocably agree that all claims in respect of such action or
proceeding may be heard and determined in such New York State or federal court
and hereby irrevocably waive, to the fullest extent that they may legally do so,
the defense of an inconvenient forum to the maintenance of such action or
proceeding. EACH OF THE PARTIES HERETO HEREBY IRREVOCABLY WAIVE, TO THE FULLEST
EXTENT PERMITTED BY APPLICABLE LAW, ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY
ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS INDENTURE, THE NOTES,
THE GUARANTEES OR THE TRANSACTIONS CONTEMPLATED HEREBY.

Section 13.10  No Adverse Interpretation of Other Agreements.

         This Indenture may not be used to interpret any other indenture, loan
or debt agreement of the Company or its Subsidiaries or of any other Person. Any
such indenture, loan or debt agreement may not be used to interpret this
Indenture.

Section 13.11  Successors.

         All agreements of the Company in this Indenture and the Notes will bind
its successors. All agreements of the Trustee in this Indenture will bind its
successors. All agreements of each Guarantor in this Indenture will bind its
successors, except as otherwise provided in Section 10.05.

Section 13.12  Severability.

         In case any provision in this Indenture or in the Notes is invalid,
illegal or unenforceable, the validity, legality and enforceability of the
remaining provisions will not in any way be affected or impaired thereby.

Section 13.13  Counterpart Originals.

         The parties may sign any number of copies of this Indenture. Each
signed copy will be an original, but all of them together represent the same
agreement.

Section 13.14  Table of Contents, Headings, etc.

         The Table of Contents, Cross-Reference Table and Headings of the
Articles and Sections of this Indenture have been inserted for convenience of
reference only, are not to be considered a part of this Indenture and will in no
way modify or restrict any of the terms or provisions hereof.

Section 13.15  Acts of Holders.

         (a) Any request, demand, authorization, direction, notice, consent,
waiver or other action provided by this Indenture to be given or taken by
Holders may be embodied in and evidenced by one or more instruments of
substantially similar tenor signed by such Holders in person or by an agent duly
appointed in writing; and, except as herein otherwise expressly provided, such
action shall become effective when such instrument or instruments are delivered
to the Trustee and, where it is hereby expressly required, to the Company. Such
instrument or instruments (and the action embodied therein and evidenced
thereby) are herein sometimes referred to as the "Act" of Holders signing such
instrument or instruments. Proof of execution of any such instrument or of a
writing appointing any such agent shall be sufficient for any purpose of this
Indenture and conclusive in favor of the Trustee and the Company, if made in the
manner provided in this Section 13.15.


                                       91


         (b) The fact and date of the execution by any Person of any such
instrument or writing may be proved by the affidavit of a witness of such
execution or by a certificate of a notary public or other officer authorized by
law to take acknowledgements of deeds, certifying that the individual signing
such instrument or writing acknowledged to such officer the execution thereof.
Where such execution is by a signer acting in a capacity other than such
signer's individual capacity, such certificate or affidavit shall also
constitute sufficient proof of such signer's authority. The fact and date of the
execution of any such instrument or writing, or the authority of the Person
executing the same, may also be proved in any other manner which the Trustee
deems sufficient.

         (c) The ownership of the Notes shall be proved by the Holder list
maintained pursuant to Section 2.05 hereof.

         (d) Any request, demand, authorization, direction, notice, consent,
waiver or other Act of the Holder of any Note shall bind every future Holder of
the same Note and the Holder of every Note issued upon the registration of
transfer thereof or in exchange therefor or in lieu thereof in respect of
anything done, omitted or suffered to be done by the Trustee or the Company in
reliance thereon, whether or not notation of such action is made upon such Note.

         (e) If the Company shall solicit from the Holders any request, demand,
authorization, direction, notice, consent, waiver or other Act, the Company may,
at its option, by or pursuant to a Board Resolution, fix in advance a record
date for the determination of Holders entitled to give such request, demand,
authorization, direction, notice, consent, waiver or other Act, but the Company
shall have no obligation to do so. If such record date is fixed, such request,
demand, authorization, direction, notice, consent, waiver or other Act may be
given before or after such record date, but only the Holders of record at the
close of business on such record date shall be deemed to be Holders for the
purposes of determining whether Holders of the requisite proportion of
outstanding Notes have authorized or agreed or consented to such request,
demand, authorization, direction, notice, consent, waiver or other Act, and for
that purpose the outstanding Notes shall be computed as of such record date;
provided that no such authorization, agreement or consent by the Holders on such
record date shall be deemed effective unless it shall become effective pursuant
to the provisions of this Indenture not later than six months after the record
date.

                         [Signatures on following page]



                                       92



         IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be
duly executed all as of the day and year first above written.

                                    GENESIS HEALTH VENTURES, INC.

                                    By:  /s/  Robert H. Fish
                                       ---------------------------------
                                    Name:  Robert H. Fish
                                    Title: Chief Executive Officer


                                       93




                                    GUARANTORS:
                                    -----------

                                    ACCUMED, INC.

                                    ASCO HEALTHCARE OF NEW ENGLAND, INC.

                                    ASCO HEALTHCARE, INC.

                                    CARECARD, INC.

                                    COMPASS HEALTH SERVICES, INC.

                                    CONCORD PHARMACY SERVICES, INC.

                                    DELCO APOTHECARY, INC.

                                    EASTERN MEDICAL SUPPLIES, INC.

                                    EASTERN REHAB SERVICES, INC.

                                    ENCARE OF MASSACHUSETTS, INC.

                                    GENESIS HEALTH SERVICES CORPORATION
                                    t/b/k/a NeighborCare Services Corporation

                                    GENESIS HOLDINGS, INC. t/b/k/a NeighborCare
                                    Holdings, Inc.

                                    GENEVA SUB, INC.

                                    H.O. SUBSIDIARY, INC. f/k/a  HEALTHOBJECTS,
                                    INC.

                                    HEALTH CONCEPTS AND SERVICES, INC.

                                    HEALTHOBJECTS CORPORATION f/k/a NeighborWare
                                    Health Systems, Inc.

                                    HORIZON MEDICAL EQUIPMENT AND SUPPLY, INC.

                                    INSTITUTIONAL HEALTH CARE SERVICES, INC.

                                    MEDICAL SERVICES GROUP, INC.

                                    NEIGHBORCARE  HOME MEDICAL  EQUIPMENT,
                                    INC.  f/k/a United  Health Care  Services,
                                    Inc.

                                    NEIGHBORCARE INFUSION SERVICES, INC. f/k/a
                                    Vitalink Infusion Services, Inc.

                                    NEIGHBORCARE OF CALIFORNIA, INC.

                                    NEIGHBORCARE OF INDIANA, INC. f/k/a Teamcare
                                    of Indiana, Inc.


                                       94


                                    NEIGHBORCARE OF NORTHERN CALIFORNIA,
                                    INC. f/k/a   Compupharm  of  Northern
                                    California, Inc.

                                    NEIGHBORCARE OF OHIO, INC.

                                    NEIGHBORCARE OF OKLAHOMA, INC. f/k/a
                                    Vitalink Subsidiary, Inc.

                                    NEIGHBORCARE OF TEXAS, INC.

                                    NEIGHBORCARE OF VIRGINIA, INC. f/k/a
                                    Teamcare of Virginia, Inc.

                                    NEIGHBORCARE OF WISCONSIN, INC. f/k/a
                                    GCI Innovative Pharmacy, Inc.

                                    NEIGHBORCARE PHARMACIES, INC.

                                    NEIGHBORCARE PHARMACY SERVICES, INC.
                                    f/k/a Vitalink Pharmacy Services, Inc.

                                    NEIGHBORCARE-MEDISCO, INC. f/k/a Medisco
                                    Pharmacies, Inc.

                                    NEIGHBORCARE-ORCA, INC. f/k/a White, Mack &
                                    Wart, Inc. d/b/a Propac Pharmacy

                                    NEIGHBORCARE-TCI, INC.

                                    PROFESSIONAL PHARMACY SERVICES, INC.
                                    SUBURBAN MEDICAL SERVICES, INC.

                                    THE TIDEWATER HEALTHCARE SHARED SERVICES
                                    GROUP, INC. f/k/a TW Acquisition Corp.


                                    By:  /s/  Robert H. Fish
                                       ---------------------------------
                                         Name:  Robert H. Fish

                                          On behalf of the foregoing  entities
                                          as an  Authorized  Signatory of such
                                          entities


                                       95




                                                ASCO  HEALTHCARE OF NEW ENGLAND,
                                                LIMITED  PARTNERSHIP,  by ASCO
                                                Healthcare of New England, Inc.,
                                                its General Partner

                                                CARE4, L.P., by Institutional
                                                Health Care Services, Inc., its
                                                General Partner


                                                By:  /s/  Robert H. Fish
                                                     ---------------------------
                                                     Name:  Robert H. Fish

                                                     On behalf of the foregoing
                                                entities as an Authorized
                                                Signatory of each respective
                                                authorized General Partner


                                       96



                                                AUTOMATED HOMECARE SYSTEM, LLC,
                                                by Health Objects Corporation,
                                                its authorized  Member

                                                MAIN STREET PHARMACY, L.L.C.,
                                                by  Professional Pharmacy
                                                Services, Inc. and NeighborCare
                                                Pharmacies, Inc., its authorized
                                                Members

                                                NEIGHBORCARE PHARMACY OF
                                                OKLAHOMA LLC, by NeighborCare
                                                Pharmacy Services, Inc., its
                                                authorized Member



                                                By:  /s/  Robert H. Fish
                                                     ---------------------------
                                                      Name:  Robert H. Fish

                                                      On behalf of the foregoing
                                                      entities as an Authorized
                                                      Signatory of each
                                                      respective authorized
                                                      Member

                                       97




                                                THE BANK OF NEW YORK, (as
                                                Trustee and not in its
                                                individual capacity)

                                                      By: /s/ Joseph A. Lloret
                                                         -----------------------
                                                      Name:  Joseph A. Lloret
                                                      Title: Assistant Treasurer


                                       98


                                                                       EXHIBIT A

                                 [Face of Note]

- --------------------------------------------------------------------------------

                                                              CUSIP ____________

                    6.875% Senior Subordinated Notes due 2013

No. ___                                                            $____________

                          GENESIS HEALTH VENTURES, INC.

promises to pay to CEDE & CO.

or registered assigns,

the principal sum of____________________________________________________________

Dollars on November 15, 2013.

Interest Payment Dates:  May 15 and November 15

Record Dates:  May 1 and November 1

Dated:  November 4, 2003

                                                GENESIS HEALTH VENTURES, INC.

                                                By:
                                                    ----------------------------
                                                Name:  Robert H. Fish
                                                Title: Chief Executive Officer

                                                By: ____________________________
                                                Name:  George V. Hager, Jr.
                                                Title: Chief Financial Officer

This is one of the Notes referred
to in the within-mentioned Indenture:

The Bank of New York,
  as Trustee

By: _____________________________________
             Authorized Signatory

- --------------------------------------------------------------------------------


                                      A-1



                                  Back of Note

                    6.875% Senior Subordinated Notes due 2013

[Insert the Global Note Legend, if applicable pursuant to the provisions of the
Indenture]

[Insert the Private Placement Legend, if applicable pursuant to the provisions
of the Indenture]

         Capitalized terms used herein have the meanings assigned to them in the
Indenture referred to below unless otherwise indicated.

            (1) INTEREST. Genesis Health Ventures, Inc., a Pennsylvania
         corporation (the "Company"), promises to pay interest on the principal
         amount of this Note at 6.875% per annum from November 4, 2003 until
         maturity and shall pay the Additional Interest, if any, payable
         pursuant to Section 5 of the Registration Rights Agreement referred to
         below. The Company will pay interest and Additional Interest, if any,
         semi-annually in arrears on May 15 and November 15 of each year, or if
         any such day is not a Business Day, on the next succeeding Business Day
         (each, an "Interest Payment Date"). Interest on the Notes will accrue
         from the most recent date to which interest has been paid or, if no
         interest has been paid, from the date of issuance; provided that if
         there is no existing Default in the payment of interest, and if this
         Note is authenticated between a record date referred to on the face
         hereof and the next succeeding Interest Payment Date, interest shall
         accrue from such next succeeding Interest Payment Date; provided,
         further, that the first Interest Payment Date shall be May 15, 2004.
         The Company will pay interest (including post-petition interest in any
         proceeding under any Bankruptcy Law) on overdue principal and premium,
         if any, from time to time on demand at a rate that is 1% per annum in
         excess of the rate then in effect; it will pay interest (including
         post-petition interest in any proceeding under any Bankruptcy Law) on
         overdue installments of interest and Additional Interest, if any,
         (without regard to any applicable grace periods) from time to time on
         demand at the same rate to the extent lawful. Interest will be computed
         on the basis of a 360-day year composed of twelve 30-day months.

            (2) METHOD OF PAYMENT. The Company will pay interest on the Notes
         (except defaulted interest) and Additional Interest, if any, to the
         Persons who are registered Holders of Notes at the close of business on
         each May 1 and November 1 preceding the applicable Interest Payment
         Date, even if such Notes are canceled after such record date and on or
         before such Interest Payment Date, except as provided in Section 2.12
         of the Indenture with respect to defaulted interest. The Notes will be
         payable as to principal, premium and Additional Interest, if any, and
         interest at the office or agency of the Company maintained for such
         purpose within or without the City and State of New York, or, at the
         option of the Company, payment of interest and Additional Interest, if
         any, may be made by check mailed to the Holders at their addresses set
         forth in the register of Holders; provided that payment by wire
         transfer of immediately available funds will be required with respect
         to principal of and interest, premium and Additional Interest, if any,
         on, all Global Notes and all other Notes the Holders of which will have
         provided wire transfer instructions to the Company or the Paying Agent.
         Such payment will be in such coin or currency of the United States of
         America as at the time of payment is legal tender for payment of public
         and private debts.

            (3) PAYING AGENT AND REGISTRAR. Initially, The Bank of New York, the
         Trustee under the Indenture, will act as Paying Agent and Registrar.
         The Company may change any Paying Agent or Registrar without notice to
         any Holder. The Company or any of its Subsidiaries may act in any such
         capacity.

                                      A-2



            (4) INDENTURE. The Company issued the Notes under an Indenture dated
         as of November 4, 2003 (the "Indenture") among the Company, the
         Guarantors and the Trustee. The terms of the Notes include those stated
         in the Indenture and those made part of the Indenture by reference to
         the Trust Indenture Act of 1939, as amended (15 U.S. Code ss.ss.
         77aaa-77bbbb). The Notes are subject to all such terms, and Holders are
         referred to the Indenture and such Act for a statement of such terms.
         To the extent any provision of this Note conflicts with the express
         provisions of the Indenture, the provisions of the Indenture shall
         govern and be controlling. The Notes are unsecured obligations of the
         Company.

            (5) OPTIONAL REDEMPTION.

            (a) Except as set forth in subparagraph (b) of this Paragraph 5 and
         as set forth in Paragraph 7, the Company will not have the option to
         redeem the Notes prior to November 15, 2008. Thereafter, the Company
         will have the option to redeem the Notes, in whole or in part, upon not
         less than 30 nor more than 60 days prior notice, at the redemption
         prices (expressed as percentages of principal amount) set forth below
         plus accrued and unpaid interest and Additional Interest, if any,
         thereon to the applicable redemption date, if redeemed during the
         twelve-month period beginning on November 15 of the years indicated
         below:

        Year                                                          Percentage
        2008....................................................       103.438%
        2009....................................................       102.292%
        2010....................................................       101.146%
        2011 and thereafter.....................................       100.000%

            (b) Notwithstanding the provisions of subparagraph (a) of this
         Paragraph 5, at any time prior to November 15, 2006, the Company may on
         any one of more occasions redeem up to 35% of the aggregate principal
         amount of the Notes issued under the Indenture at a redemption price
         equal to 106.875% of the principal amount, plus accrued and unpaid
         interest and Additional Interest, if any, to the redemption date, with
         net cash proceeds of one or more Equity Offerings by the Company;
         provided that at least 65% of the aggregate principal amount of the
         Initial Notes issued under the Indenture remains outstanding
         immediately after the occurrence of such redemption (excluding Notes
         held by the Company and its Subsidiaries) and that such redemption
         occurs within 90 days of the date of the closing of such Equity
         Offering.

            (6) MANDATORY REDEMPTION.

            Other than as set forth in Paragraph 7, the Company will not be
         required to make mandatory redemption or sinking fund payments with
         respect to the Notes.

            (7) SPECIAL REDEMPTION.

            Notwithstanding the foregoing, in the event that (i) in its sole
         discretion, the Company has determined that the Spin-off will not be
         consummated on or prior to February 27, 2004, then the Company may
         redeem the Notes, in whole but not in part, on or prior to February 27,
         2004 at a redemption price (the "Special Redemption Price") in cash
         equal to 101% of the issue price of the Notes, plus the accrued and
         unpaid interest to the Special Redemption Date or (ii) the Spin-off has
         not been consummated on or prior to February 27, 2004, then the Company
         shall mandatorily redeem all of the Notes on March 5, 2004 at the
         Special Redemption Price. The "Special Redemption Date" means the
         earlier of (a) the date five Business Days after the Company sends
         notice to the Trustee of a Special Redemption Date pursuant to Section
         3.01, if in its sole discretion, the Company has determined that the
         Spin-off will not be consummated on or prior to February 27, 2004, or
         (b) March 5, 2004, if the Spin-off is not consummated on or prior to
         February 27, 2004.

                                      A-3


            (8) REPURCHASE AT OPTION OF HOLDER.

            (a) If there is a Change of Control, each Holder shall have the
         right to require the Company to make an offer (a "Change of Control
         Offer") to that Holder to repurchase all or any part (equal to $1,000
         or an integral multiple thereof) of that Holder's Notes at a purchase
         price equal to 101% of the aggregate principal amount thereof plus
         accrued and unpaid interest and Additional Interest thereon, if any, to
         the date of purchase (the "Change of Control Payment"). Within 30 days
         following any Change of Control, the Company shall mail a notice to
         each Holder setting forth the procedures governing the Change of
         Control Offer as required by the Indenture.

            (b) If the Company or a Restricted Subsidiary consummates any Asset
         Sales, within five business days of each date on which the aggregate
         amount of Excess Proceeds exceeds $25.0 million, the Company will
         commence an offer to all Holders of Notes and all holders of other
         Indebtedness that is pari passu with the Notes containing provisions
         similar to those set forth in the Indenture with respect to offers to
         purchase or redeem with the proceeds of sales of assets (an "Asset Sale
         Offer") pursuant to Section 3.10 of the Indenture to purchase the
         maximum principal amount of Notes (including any Additional Notes) and
         other pari passu Indebtedness that may be purchased out of the Excess
         Proceeds at an offer price in cash in an amount equal to 100% of the
         principal amount plus accrued and unpaid interest and Additional
         Interest, if any, to the date fixed for the closing of such offer, in
         accordance with the procedures set forth in the Indenture. To the
         extent that the aggregate principal amount of Notes (including any
         Additional Notes) and other pari passu Indebtedness tendered pursuant
         to an Asset Sale Offer is less than the Excess Proceeds, the Company
         (or such Restricted Subsidiary) may use such deficiency for any purpose
         not otherwise prohibited by the Indenture. If the aggregate principal
         amount of Notes and other pari passu Indebtedness surrendered by
         holders thereof exceeds the amount of Excess Proceeds, the Trustee
         shall select the Notes and other pari passu Indebtedness to be
         purchased on a pro rata basis as provided in Section 3.02 of the
         Indenture or such other manner as the Trustee deems appropriate.
         Holders of Notes that are the subject of an offer to purchase will
         receive an Asset Sale Offer from the Company prior to any related
         purchase date and may elect to have such Notes purchased by completing
         the form entitled "Option of Holder to Elect Purchase" on the reverse
         of the Notes.

            (9) NOTICE OF REDEMPTION. Other than as provided in Paragraphs 7 and
         8(b), notice of redemption will be mailed at least 30 days but not more
         than 60 days before the redemption date to each Holder whose Notes are
         to be redeemed at its registered address. Notes in denominations larger
         than $1,000 may be redeemed in part but only in whole multiples of
         $1,000, unless all of the Notes held by a Holder are to be redeemed. On
         and after the redemption date interest ceases to accrue on Notes or
         portions thereof called for redemption.

            (10) DENOMINATIONS, TRANSFER, EXCHANGE. The Notes are in registered
         form without coupons in denominations of $1,000 and integral multiples
         of $1,000. The transfer of Notes may be registered and Notes may be
         exchanged as provided in the Indenture. The Registrar and the Trustee
         may require a Holder, among other things, to furnish appropriate
         endorsements and transfer documents and the Company may require a
         Holder to pay any taxes and fees required by law or permitted by the
         Indenture. The Company need not exchange or register the transfer of
         any Note or portion of a Note selected for redemption, except for the
         unredeemed portion of any Note being redeemed in part. Also, the
         Company need not exchange or register the transfer of any Notes for a
         period of 15 days before a selection of Notes to be redeemed or during
         the period between a record date and the corresponding Interest Payment
         Date.


                                      A-4




            (11) PERSONS DEEMED OWNERS. The registered Holder of a Note may be
         treated as its owner for all purposes.

            (12) AMENDMENT, SUPPLEMENT AND WAIVER. Subject to certain
         exceptions, the Indenture or the Notes may be amended or supplemented
         with the consent of the Holders of at least a majority in principal
         amount of the then outstanding Notes and Additional Notes, if any,
         voting as a single class, and any existing default or compliance with
         any provision of the Indenture or the Notes may be waived with the
         consent of the Holders of a majority in principal amount of the then
         outstanding Notes and Additional Notes, if any, voting as a single
         class. Without the consent of any Holder of a Note, the Indenture or
         the Notes may be amended or supplemented to cure any ambiguity, defect
         or inconsistency, to provide for uncertificated Notes in addition to or
         in place of certificated Notes, to provide for the assumption of the
         Company's obligations to Holders of the Notes in case of a merger or
         consolidation or sale of all or substantially all of the Company's
         assets, to make any change that would provide any additional rights or
         benefits to the Holders of the Notes or that does not adversely affect
         the legal rights under the Indenture of any such Holder, to comply with
         the requirements of the Commission in order to effect or maintain the
         qualification of the Indenture under the Trust Indenture Act, to
         provide for the issuance of Additional Notes in accordance with the
         limitations set forth in the Indenture, to release a Guarantor from its
         obligation under its Subsidiary Guarantee or this Indenture in
         accordance with the terms of this Indenture, to allow any Guarantor to
         execute a supplemental indenture to the Indenture and/or a Subsidiary
         Guarantee with respect to the Notes or to evidence and provide the
         acceptance of the appointment of a successor Trustee under this
         Indenture.

            (13) DEFAULTS AND REMEDIES. Events of Default include: (i) default
         for 30 days in the payment when due of interest on, or Additional
         Interest with respect to, the Notes (whether or not prohibited by the
         subordination provisions of the Indenture); (ii) default in payment
         when due of principal of or premium, if any, on the Notes (whether or
         not prohibited by the subordination provisions of the Indenture), (iii)
         failure by the Company or any of its Restricted Subsidiaries to comply
         with Section 5.01 of the Indenture, (iv) failure by the Company or any
         of its Restricted Subsidiaries for 30 days after notice to comply with
         the provisions of Section 4.07, 4.09, 4.10 or 4.15 of the Indenture;
         (v) failure by the Company or any of its Restricted Subsidiaries for 60
         days after notice to comply with any of its other agreements in the
         Indenture or the Notes; (vi) default under any mortgage, indenture or
         instrument under which there may be issued or by which there may be
         secured or evidenced any Indebtedness for money borrowed by the Company
         or any of its Restricted Subsidiaries (or the payment of which is
         guaranteed by the Company or any of its Restricted Subsidiaries),
         whether such Indebtedness or guarantee now exists, or is created after
         the date of the Indenture, if that default: (a) is caused by a failure
         to pay principal of, or interest or premium, if any, on such
         Indebtedness prior to the expiration of the grace period provided in
         such Indebtedness on the date of such default (a "Payment Default"); or
         (b) results in the acceleration of such Indebtedness prior to its
         express maturity, and, in each case, the principal amount of any such
         Indebtedness, together with the principal amount of any other such
         Indebtedness under which there has been a Payment Default or the
         maturity of which has been so accelerated, aggregates $20.0 million or
         more; (vii) failure by the Company or any of its Restricted
         Subsidiaries to pay final judgments aggregating in excess of $20.0
         million, which judgments are not paid, discharged or stayed for a
         period of 60 days; (viii) except as permitted by the Indenture, any
         Subsidiary Guarantee shall be held in any judicial proceeding to be

                                      A-5



         unenforceable or invalid or shall cease for any reason to be in full
         force and effect or any Guarantor, or any Person acting on behalf of
         any Guarantor, shall deny or disaffirm its obligations under its
         Subsidiary Guarantee; and (ix) certain events of bankruptcy or
         insolvency described in the Indenture with respect to the Company or
         any Restricted Subsidiary of the Company that would constitute a
         Significant Subsidiary or any group of Restricted Subsidiaries of the
         Company that, taken together, would constitute a Significant
         Subsidiary. In the case of an Event of Default arising from certain
         events of bankruptcy or insolvency, all outstanding Notes will become
         due and payable without further action or notice. If any other Event of
         Default occurs and is continuing, the Trustee or the Holders of at
         least 25% in principal amount of the then outstanding Notes may declare
         all the Notes to be due and payable immediately; provided, however,
         that so long as any Designated Senior Debt is outstanding, such
         declaration shall not become effective until the earlier of (i) the day
         which is five business days after receipt by the representatives of
         Designated Senior Debt of such notice of acceleration; or (ii) the date
         of the acceleration of any Designated Senior Debt. Holders may not
         enforce the Indenture or the Notes except as provided in the Indenture.
         Subject to certain limitations, Holders of a majority in principal
         amount of the then outstanding Notes may direct the Trustee in its
         exercise of any trust or power. The Trustee may withhold from Holders
         of the Notes notice of any continuing Default or Event of Default
         (except a Default or Event of Default relating to the payment of
         principal or interest or Additional Interest) if it determines that
         withholding notice is in their interest. The Holders of not less than a
         majority in aggregate principal amount of the Notes then outstanding by
         notice to the Trustee may on behalf of the Holders of all of the Notes
         waive any existing Default or Event of Default and its consequences
         under the Indenture except a continuing Default or Event of Default in
         the payment of interest or premium and Additional Interest, if any on,
         or the principal of, the Notes (including in connection with an offer
         to purchase). In the case of any Event of Default occurring by reason
         of any willful action or inaction taken or not taken by or on behalf of
         the Company with the intention of avoiding payment of the premium that
         the Company would have had to pay if the Company then had elected to
         redeem the Notes pursuant to the optional redemption provisions of the
         Indenture, an equivalent premium will also become and be immediately
         due and payable to the extent permitted by law upon the acceleration of
         the Notes. If an Event of Default occurs prior to November 15, 2008, by
         reason of any willful action (or inaction) taken (or not taken) by or
         on behalf of the Company with the intention of avoiding the prohibition
         on redemption of the Notes prior to November 15, 2008, then the premium
         specified in the Indenture will also become immediately due and payable
         to the extent permitted by law upon the acceleration of the Notes. The
         Company is required to deliver to the Trustee annually a statement
         regarding compliance with the Indenture, and the Company is required
         upon becoming aware of any Default or Event of Default, to deliver to
         the Trustee a statement specifying such Default or Event of Default.

            (14) SUBORDINATION. The Notes and the Guarantees are subordinated to
         Senior Debt, as defined in the Indenture. To the extent provided in the
         Indenture, Senior Debt must be paid before the Notes may be paid.

            (15) TRUSTEE DEALINGS WITH COMPANY. The Trustee or any Affiliate of
         the Trustee in its individual or any other capacity may become the
         owner or pledgee of Notes and may otherwise deal with the Company or
         any Affiliate of the Company or any Guarantor or Affiliate with the
         same rights it would have if it were not Trustee. However, in the event
         that the Trustee acquires any conflicting interest it must eliminate
         such conflict within 90 days, apply to the Commission for permission to
         continue as trustee or resign. Any Agent may do the same with like
         rights and duties.

                                      A-6



            (16) NO RECOURSE AGAINST OTHERS. No past, present or future
         director, officer, employee, incorporator or shareholder, of the
         Company or any Guarantor, as such, will have any liability for any
         obligations of the Company or the Guarantors under the Notes, the
         Guarantees or the Indenture or for any claim based on, in respect of,
         or by reason of, such obligations or their creation. Each Holder by
         accepting a Note waives and releases all such liability. The waiver and
         release are part of the consideration for the issuance of the Notes.

            (17) AUTHENTICATION. This Note will not be valid until authenticated
         by the manual signature of the Trustee or an authenticating agent.

            (18) ABBREVIATIONS. Customary abbreviations may be used in the name
         of a Holder or an assignee, such as: TEN COM (= tenants in common), TEN
         ENT (= tenants by the entireties), JT TEN (= joint tenants with right
         of survivorship and not as tenants in common), CUST (= Custodian), and
         U/G/M/A (= Uniform Gifts to Minors Act).

            (19) ADDITIONAL RIGHTS OF HOLDERS OF RESTRICTED GLOBAL NOTES AND
         RESTRICTED DEFINITIVE NOTES. In addition to the rights provided to
         Holders of Notes under the Indenture, Holders of Restricted Global
         Notes and Restricted Definitive Notes will have all the rights set
         forth in the Registration Rights Agreement dated as of November 4, 2003
         among the Company, the Subsidiary Guarantors and the other parties
         named on the signature pages thereof or, in the case of Additional
         Notes, Holders of Restricted Global Notes and Restricted Definitive
         Notes will have the rights set forth in one or more registration rights
         agreements, if any, among the Company, the Guarantors and the other
         parties thereto, relating to rights given by the Company and the
         Guarantors to the purchasers of any Additional Notes (collectively, the
         "Registration Rights Agreement").

            (20) CUSIP NUMBERS. Pursuant to a recommendation promulgated by the
         Committee on Uniform Security Identification Procedures, the Company
         has caused CUSIP numbers to be printed on the Notes and the Trustee may
         use CUSIP numbers in notices of redemption as a convenience to Holders.
         No representation is made as to the accuracy of such numbers either as
         printed on the Notes or as contained in any notice of redemption and
         reliance may be placed only on the other identification numbers placed
         thereon.

         The Company will furnish to any Holder upon written request and without
charge a copy of the Indenture and/or the Registration Rights Agreement.
Requests may be made to:

Genesis Health Ventures, Inc.
7 East Lee Street
Baltimore, Maryland 21202
Attention:  John F. Gaither, Jr.

                                      A-7





                                 ASSIGNMENT FORM

         To assign this Note, fill in the form below:

(I) or (we) assign and transfer this Note to:___________________________________
                                                (Insert assignee's legal name)

________________________________________________________________________________
                  (Insert assignee's soc. sec. or tax I.D. no.)

________________________________________________________________________________

________________________________________________________________________________

________________________________________________________________________________

________________________________________________________________________________
              (Print or type assignee's name, address and zip code)

and irrevocably appoint_________________________________________________________
to transfer this Note on the books of the Company.  The agent may substitute
another to act for him.

Date:  _______________

                                       Your Signature:__________________________
                                             (Sign exactly as your name appears
                                                on the face of this Note)

Signature Guarantee*:  _________________________

* Participant in a recognized Signature Guarantee Medallion Program (or other
signature guarantor acceptable to the Trustee).


                                      A-8





                       OPTION OF HOLDER TO ELECT PURCHASE

         If you want to elect to have this Note purchased by the Company
pursuant to Section 4.10 or 4.15 of the Indenture, check the appropriate box
below:

                [  ]   Section 4.10        [  ]  Section 4.15

         If you want to elect to have only part of the Note purchased by the
Company pursuant to Section 4.10 or Section 4.15 of the Indenture, state the
amount you elect to have purchased:

                                   $_______________

Date:  _______________

                                       Your Signature:__________________________
                                              (Sign exactly as your name appears
                                                on the face of this Note)

                                       Tax Identification No.:__________________

Signature Guarantee*:  ____________________

* Participant in a recognized Signature Guarantee Medallion Program (or other
signature guarantor acceptable to the Trustee).


                                      A-9




              SCHEDULE OF EXCHANGES OF INTERESTS IN THE GLOBAL NOTE

         The following exchanges of a part of this Global Note for an interest
in another Global Note or for a Definitive Note, or exchanges of a part of
another Global Note or Definitive Note for an interest in this Global Note, have
been made:



                                                                                       
                                                                        Principal Amount of
                      Amount of decrease in    Amount of increase in      this Global Note         Signature of authorized
                       Principal Amount of      Principal Amount of        following such           officer of Trustee or
Date of Exchange        this Global Note         this Global Note       decrease (or increase)           Custodian
- ----------------      ---------------------    ---------------------    ----------------------     -----------------------





* This schedule should be included only if the Note is issued in global form.

                                      A-10






                                                                       EXHIBIT B

                         FORM OF CERTIFICATE OF TRANSFER

Genesis Health Ventures, Inc.
7 East Lee Street
Baltimore, Maryland 21202

The Bank of New York
101 Barclay Street, Floor 8 West
New York, New York 10286

         Re:   6.875% Senior Subordinated Notes due 2013

         Reference is hereby made to the Indenture, dated as of November 4, 2003
(the "Indenture"), among Genesis Health Ventures, Inc., as issuer (the
"Company"), the Subsidiary Guarantors named on the signature pages thereto and
The Bank of New York, as trustee. Capitalized terms used but not defined herein
shall have the meanings given to them in the Indenture.

         ___________________, (the "Transferor") owns and proposes to transfer
the Note[s] or interest in such Note[s] specified in Annex A hereto, in the
principal amount of $___________ in such Note[s] or interests (the "Transfer"),
to ___________________________ (the "Transferee"), as further specified in Annex
A hereto. In connection with the Transfer, the Transferor hereby certifies that:

                             [CHECK ALL THAT APPLY]

         1. [ ] Check if Transferee will take delivery of a beneficial interest
in the 144A Global Note or a Definitive Note Pursuant to Rule 144A. The Transfer
is being effected pursuant to and in accordance with Rule 144A under the
Securities Act of 1933, as amended (the "Securities Act"), and, accordingly, the
Transferor hereby further certifies that the beneficial interest or Definitive
Note is being transferred to a Person that the Transferor reasonably believed
and believes is purchasing the beneficial interest or Definitive Note for its
own account, or for one or more accounts with respect to which such Person
exercises sole investment discretion, and such Person and each such account is a
"qualified institutional buyer" within the meaning of Rule 144A in a transaction
meeting the requirements of Rule 144A and such Transfer is in compliance with
any applicable blue sky securities laws of any state of the United States. Upon
consummation of the proposed Transfer in accordance with the terms of the
Indenture, the transferred beneficial interest or Definitive Note will be
subject to the restrictions on transfer enumerated in the Private Placement
Legend printed on the 144A Global Note and/or the Definitive Note and in the
Indenture and the Securities Act.

         2. [ ] Check if Transferee will take delivery of a beneficial interest
in the Regulation S Global Note or a Definitive Note pursuant to Regulation S.
The Transfer is being effected pursuant to and in accordance with Rule 903 or
Rule 904 under the Securities Act and, accordingly, the Transferor hereby
further certifies that (i) the Transfer is not being made to a Person in the
United States and (x) at the time the buy order was originated, the Transferee
was outside the United States or such Transferor and any Person acting on its
behalf reasonably believed and believes that the Transferee was outside the
United States or (y) the transaction was executed in, on or through the
facilities of a designated offshore securities market and neither such
Transferor nor any Person acting on its behalf knows that the transaction was
prearranged with a buyer in the United States, (ii) no directed selling efforts
have been made in contravention of the requirements of Rule 903(b) or Rule
904(b) of Regulation S under the Securities Act (iii) the transaction is not
part of a plan or scheme to evade the registration requirements of the
Securities Act and (iv) if the proposed transfer is being made prior to the
expiration of the Restricted Period, the transfer is not being made to a U.S.
Person or for the account or benefit of a U.S. Person (other than an Initial
Purchaser). Upon consummation of the proposed transfer in accordance with the
terms of the Indenture, the transferred beneficial interest or Definitive Note
will be subject to the restrictions on Transfer enumerated in the Private
Placement Legend printed on the Regulation S Global Note and/or the Definitive
Note and in the Indenture and the Securities Act.

                                      B-1



         3. [ ] Check and complete if Transferee will take delivery of a
beneficial interest in the IAI Global Note or a Definitive Note pursuant to any
provision of the Securities Act other than Rule 144A or Regulation S. The
Transfer is being effected in compliance with the transfer restrictions
applicable to beneficial interests in Restricted Global Notes and Restricted
Definitive Notes and pursuant to and in accordance with the Securities Act and
any applicable blue sky securities laws of any state of the United States, and
accordingly the Transferor hereby further certifies that (check one):

                  (a)[ ] such Transfer is being effected pursuant to and in
            accordance with Rule 144 under the Securities Act;

                                       or

                  (b) [ ] such Transfer is being effected to the Company or a
            subsidiary thereof;

                                       or

                  (c) [ ] such Transfer is being effected pursuant to an
            effective registration statement under the Securities Act and in
            compliance with the prospectus delivery requirements of the
            Securities Act;

                                       or

                  (d) [ ] such Transfer is being effected to an Institutional
            Accredited Investor and pursuant to an exemption from the
            registration requirements of the Securities Act other than Rule
            144A, Rule 144 or Rule 904, and the Transferor hereby further
            certifies that it has not engaged in any general solicitation within
            the meaning of Regulation D under the Securities Act and the
            Transfer complies with the transfer restrictions applicable to
            beneficial interests in a Restricted Global Note or Restricted
            Definitive Notes and the requirements of the exemption claimed,
            which certification is supported by (1) a certificate executed by
            the Transferee in the form of Exhibit D to the Indenture and (2) an
            Opinion of Counsel provided by the Transferor or the Transferee (a
            copy of which the Transferor has attached to this certification), to
            the effect that such Transfer is in compliance with the Securities
            Act. Upon consummation of the proposed transfer in accordance with
            the terms of the Indenture, the transferred beneficial interest or
            Definitive Note will be subject to the restrictions on transfer
            enumerated in the Private Placement Legend printed on the IAI Global
            Note and/or the Definitive Notes and in the Indenture and the
            Securities Act.

         4. [ ] Check if Transferee will take delivery of a beneficial interest
in an Unrestricted Global Note or of an Unrestricted Definitive Note.

         (a) [ ] Check if Transfer is pursuant to Rule 144. (i) The Transfer is
being effected pursuant to and in accordance with Rule 144 under the Securities
Act and in compliance with the transfer restrictions contained in the Indenture
and any applicable blue sky securities laws of any state of the United States
and (ii) the restrictions on transfer contained in the Indenture and the Private
Placement Legend are not required in order to maintain compliance with the
Securities Act. Upon consummation of the proposed Transfer in accordance with
the terms of the Indenture, the transferred beneficial interest or Definitive
Note will no longer be subject to the restrictions on transfer enumerated in the
Private Placement Legend printed on the Restricted Global Notes, on Restricted
Definitive Notes and in the Indenture.


                                      B-2



         (b) [ ] Check if Transfer is Pursuant to Regulation S. (i) The Transfer
is being effected pursuant to and in accordance with Rule 903 or Rule 904 under
the Securities Act and in compliance with the transfer restrictions contained in
the Indenture and any applicable blue sky securities laws of any state of the
United States and (ii) the restrictions on transfer contained in the Indenture
and the Private Placement Legend are not required in order to maintain
compliance with the Securities Act. Upon consummation of the proposed Transfer
in accordance with the terms of the Indenture, the transferred beneficial
interest or Definitive Note will no longer be subject to the restrictions on
transfer enumerated in the Private Placement Legend printed on the Restricted
Global Notes, on Restricted Definitive Notes and in the Indenture.

         (c) [ ] Check if Transfer is Pursuant to Other Exemption. (i) The
Transfer is being effected pursuant to and in compliance with an exemption from
the registration requirements of the Securities Act other than Rule 144, Rule
903 or Rule 904 and in compliance with the transfer restrictions contained in
the Indenture and any applicable blue sky securities laws of any State of the
United States and (ii) the restrictions on transfer contained in the Indenture
and the Private Placement Legend are not required in order to maintain
compliance with the Securities Act. Upon consummation of the proposed Transfer
in accordance with the terms of the Indenture, the transferred beneficial
interest or Definitive Note will not be subject to the restrictions on transfer
enumerated in the Private Placement Legend printed on the Restricted Global
Notes or Restricted Definitive Notes and in the Indenture.

         This certificate and the statements contained herein are made for your
benefit and the benefit of the Company.

                                       _________________________________________
                                                [Insert Name of Transferor]

                                       By:______________________________________
                                        Name:
                                        Title:

         Dated:  _______________________



                                      B-3




                       ANNEX A TO CERTIFICATE OF TRANSFER

         1. The Transferor owns and proposes to transfer the following:

                            [CHECK ONE OF (a) OR (b)]

            (a) [ ] a beneficial interest in the:

                  (i [ ] 144A Global Note (CUSIP _________), or

                  (ii) [ ] Regulation S Global Note (CUSIP _________), or

                  (iii) [ ] IAI Global Note (CUSIP _________); or

            (b) [ ] a Restricted Definitive Note.

         2. After the Transfer the Transferee will hold:

                                   [CHECK ONE]

            (a) [ ] a beneficial interest in the:

                  (i) [ ] 144A Global Note (CUSIP _________), or

                  (ii) [ ] Regulation S Global Note (CUSIP _________), or

                  (iii [ ] IAI Global Note (CUSIP _________); or

                  (iv) [ ] Unrestricted Global Note (CUSIP _________); or

            (b) [ ] a Restricted Definitive Note; or

            (c) [ ] an Unrestricted Definitive Note,

            in accordance with the terms of the Indenture.


                                      B-4



                                                                       EXHIBIT C

                         FORM OF CERTIFICATE OF EXCHANGE

Genesis Health Ventures, Inc.
7 East Lee Street
Baltimore, Maryland 21202

The Bank of New York
101 Barclay Street, Floor 8 West
New York, New York 10286

         Re:       6.875% Senior Subordinated Notes due 2013

                             (CUSIP _______________)

         Reference is hereby made to the Indenture, dated as of November 4, 2003
(the "Indenture"), among Genesis Health Ventures, Inc., as issuer (the
"Company"), the Subsidiary Guarantors named on the signature pages thereto and
The Bank of New York, as trustee. Capitalized terms used but not defined herein
shall have the meanings given to them in the Indenture.

         __________________________, (the "Owner") owns and proposes to exchange
the Note[s] or interest in such Note[s] specified herein, in the principal
amount of $____________ in such Note[s] or interests (the "Exchange"). In
connection with the Exchange, the Owner hereby certifies that:

         1. Exchange of Restricted Definitive Notes or Beneficial Interests in a
Restricted Global Note for Unrestricted Definitive Notes or Beneficial Interests
in an Unrestricted Global Note

         (a) [ ] Check if Exchange is from beneficial interest in a Restricted
Global Note to beneficial interest in an Unrestricted Global Note. In connection
with the Exchange of the Owner's beneficial interest in a Restricted Global Note
for a beneficial interest in an Unrestricted Global Note in an equal principal
amount, the Owner hereby certifies (i) the beneficial interest is being acquired
for the Owner's own account without transfer, (ii) such Exchange has been
effected in compliance with the transfer restrictions applicable to the Global
Notes and pursuant to and in accordance with the Securities Act of 1933, as
amended (the "Securities Act"), (iii) the restrictions on transfer contained in
the Indenture and the Private Placement Legend are not required in order to
maintain compliance with the Securities Act and (iv) the beneficial interest in
an Unrestricted Global Note is being acquired in compliance with any applicable
blue sky securities laws of any state of the United States.

         (b) [ ] Check if Exchange is from beneficial interest in a Restricted
Global Note to Unrestricted Definitive Note. In connection with the Exchange of
the Owner's beneficial interest in a Restricted Global Note for an Unrestricted
Definitive Note, the Owner hereby certifies (i) the Definitive Note is being
acquired for the Owner's own account without transfer, (ii) such Exchange has
been effected in compliance with the transfer restrictions applicable to the
Restricted Global Notes and pursuant to and in accordance with the Securities
Act, (iii) the restrictions on transfer contained in the Indenture and the
Private Placement Legend are not required in order to maintain compliance with
the Securities Act and (iv) the Definitive Note is being acquired in compliance
with any applicable blue sky securities laws of any state of the United States.

         (c) [ ] Check if Exchange is from Restricted Definitive Note to
beneficial interest in an Unrestricted Global Note. In connection with the
Owner's Exchange of a Restricted Definitive Note for a beneficial interest in an
Unrestricted Global Note, the Owner hereby certifies (i) the beneficial interest
is being acquired for the Owner's own account without transfer, (ii) such
Exchange has been effected in compliance with the transfer restrictions
applicable to Restricted Definitive Notes and pursuant to and in accordance with
the Securities Act, (iii) the restrictions on transfer contained in the
Indenture and the Private Placement Legend are not required in order to maintain
compliance with the Securities Act and (iv) the beneficial interest is being
acquired in compliance with any applicable blue sky securities laws of any state
of the United States.


                                       C-1



         (d) [ ] Check if Exchange is from Restricted Definitive Note to
Unrestricted Definitive Note. In connection with the Owner's Exchange of a
Restricted Definitive Note for an Unrestricted Definitive Note, the Owner hereby
certifies (i) the Unrestricted Definitive Note is being acquired for the Owner's
own account without transfer, (ii) such Exchange has been effected in compliance
with the transfer restrictions applicable to Restricted Definitive Notes and
pursuant to and in accordance with the Securities Act, (iii) the restrictions on
transfer contained in the Indenture and the Private Placement Legend are not
required in order to maintain compliance with the Securities Act and (iv) the
Unrestricted Definitive Note is being acquired in compliance with any applicable
blue sky securities laws of any state of the United States.

         2. Exchange of Restricted Definitive Notes or Beneficial Interests in
Restricted Global Notes for Restricted Definitive Notes or Beneficial Interests
in Restricted Global Notes

         (a) [ ] Check if Exchange is from beneficial interest in a Restricted
Global Note to Restricted Definitive Note. In connection with the Exchange of
the Owner's beneficial interest in a Restricted Global Note for a Restricted
Definitive Note with an equal principal amount, the Owner hereby certifies that
the Restricted Definitive Note is being acquired for the Owner's own account
without transfer. Upon consummation of the proposed Exchange in accordance with
the terms of the Indenture, the Restricted Definitive Note issued will continue
to be subject to the restrictions on transfer enumerated in the Private
Placement Legend printed on the Restricted Definitive Note and in the Indenture
and the Securities Act.

         (b) [ ] Check if Exchange is from Restricted Definitive Note to
beneficial interest in a Restricted Global Note. In connection with the Exchange
of the Owner's Restricted Definitive Note for a beneficial interest in the
[CHECK ONE] [ ] 144A Global Note, [ ] Regulation S Global Note, [ ] IAI Global
Note with an equal principal amount, the Owner hereby certifies (i) the
beneficial interest is being acquired for the Owner's own account without
transfer and (ii) such Exchange has been effected in compliance with the
transfer restrictions applicable to the Restricted Global Notes and pursuant to
and in accordance with the Securities Act, and in compliance with any applicable
blue sky securities laws of any state of the United States. Upon consummation of
the proposed Exchange in accordance with the terms of the Indenture, the
beneficial interest issued will be subject to the restrictions on transfer
enumerated in the Private Placement Legend printed on the relevant Restricted
Global Note and in the Indenture and the Securities Act.

         This certificate and the statements contained herein are made for your
benefit and the benefit of the Company.

                                       _________________________________________
                                                Insert Name of Transferor]

                                       By:______________________________________
                                         Name:
                                         Title:

Dated:  ______________________


                                      C-2


                                                                       EXHIBIT D

                            FORM OF CERTIFICATE FROM
                   ACQUIRING INSTITUTIONAL ACCREDITED INVESTOR

Genesis Health Ventures, Inc.
7 East Lee Street
Baltimore, Maryland 21202

The Bank of New York
101 Barclay Street, Floor 8 West
New York, New York 10286

         Re:      6.875% Senior Subordinated Notes due 2013

         Reference is hereby made to the Indenture, dated as of November 4, 2003
(the "Indenture"), among Genesis Health Ventures, Inc., as issuer (the
"Company"), the Subsidiary Guarantors named on the signature pages thereto and
The Bank of New York, as trustee. Capitalized terms used but not defined herein
shall have the meanings given to them in the Indenture.

         In connection with our proposed purchase of $____________ aggregate
         principal amount of:

         (a) [ ]  a beneficial interest in a Global Note, or

         (b) [ ]  a Definitive Note,

         we confirm that:

         1. We understand that any subsequent transfer of the Notes or any
interest therein is subject to certain restrictions and conditions set forth in
the Indenture and the undersigned agrees to be bound by, and not to resell,
pledge or otherwise transfer the Notes or any interest therein except in
compliance with, such restrictions and conditions and the Securities Act of
1933, as amended (the "Securities Act").

         2. We understand that the offer and sale of the Notes have not been
registered under the Securities Act, and that the Notes and any interest therein
may not be offered or sold except as permitted in the following sentence. We
agree, on our own behalf and on behalf of any accounts for which we are acting
as hereinafter stated, that if we should sell the Notes or any interest therein,
we will do so only (A) to the Company or any subsidiary thereof, (B) in
accordance with Rule 144A under the Securities Act to a "qualified institutional
buyer" (as defined therein), (C) to an institutional "accredited investor" (as
defined below) that, prior to such transfer, furnishes (or has furnished on its
behalf by a U.S. broker-dealer) to you and to the Company a signed letter
substantially in the form of this letter and an Opinion of Counsel in form
reasonably acceptable to the Company to the effect that such transfer is in
compliance with the Securities Act, (D) outside the United States in accordance
with Rule 904 of Regulation S under the Securities Act, (E) pursuant to any
other available exemption from the registration requirements under the
Securities Act or (F) pursuant to an effective registration statement under the
Securities Act, and we further agree to provide to any Person purchasing the
Definitive Note or beneficial interest in a Global Note from us in a transaction
meeting the requirements of clauses (A) through (E) of this paragraph a notice
advising such purchaser that resales thereof are restricted as stated herein.

                                      D-1




         3. We understand that, on any proposed resale of the Notes or
beneficial interest therein, we will be required to furnish to you and the
Company such certifications, legal opinions and other information as you and the
Company may reasonably require to confirm that the proposed sale complies with
the foregoing restrictions. We further understand that the Notes purchased by us
will bear a legend to the foregoing effect.

         4. We are an institutional "accredited investor" (as defined in Rule
501(a)(1), (2), (3) or (7) of Regulation D under the Securities Act) and have
such knowledge and experience in financial and business matters as to be capable
of evaluating the merits and risks of our investment in the Notes, and we and
any accounts for which we are acting are each able to bear the economic risk of
our or its investment.

         5. We are acquiring the Notes or beneficial interest therein purchased
by us for our own account or for one or more accounts (each of which is an
institutional "accredited investor") as to each of which we exercise sole
investment discretion.

         You and the Company are entitled to rely upon this letter and are
irrevocably authorized to produce this letter or a copy hereof to any interested
party in any administrative or legal proceedings or official inquiry with
respect to the matters covered hereby.

                                   _____________________________________________
                                       [Insert Name of Accredited Investor]

                                   By:__________________________________________
                                     Name:
                                     Title:

Dated:  _______________________


                                      D-2



                                                                       EXHIBIT E

                         [FORM OF NOTATION OF GUARANTEE]

         For value received, each Guarantor (which term includes any successor
Person under the Indenture) has, jointly and severally, unconditionally
guaranteed, to the extent set forth in the Indenture and subject to the
provisions in the Indenture dated as of November 4, 2003 (the "Indenture") among
Genesis Health Ventures, Inc. (the "Company"), the Guarantors named on the
signature page thereto and The Bank of New York, as trustee (the "Trustee"), (a)
the due and punctual payment of the principal of, premium and Additional
Interest, if any, and interest on the Notes (as defined in the Indenture),
whether at maturity, by acceleration, redemption or otherwise, the due and
punctual payment of interest on overdue principal of and interest on the Notes,
if any, if lawful, and the due and punctual performance of all other obligations
of the Company to the Holders or the Trustee all in accordance with the terms of
the Indenture and (b) in case of any extension of time of payment or renewal of
any Notes or any of such other obligations, that the same will be promptly paid
in full when due or performed in accordance with the terms of the extension or
renewal, whether at stated maturity, by acceleration or otherwise. The
obligations of the Guarantors to the Holders of Notes and to the Trustee
pursuant to the Guarantee and the Indenture are expressly set forth in Article
10 of the Indenture and reference is hereby made to the Indenture for the
precise terms of the Guarantee. Each Holder of a Note, by accepting the same,
(a) agrees to and shall be bound by such provisions, (b) authorizes and directs
the Trustee, on behalf of such Holder, to take such action as may be necessary
or appropriate to effectuate the subordination as provided in the Indenture and
(c) appoints the Trustee attorney-in-fact of such Holder for such purpose.

                                       [Guarantor(s)]

                                       By:______________________________________
                                       Name:
                                       Title:

                                      E-1



                                                                       EXHIBIT F

                         [FORM OF SUPPLEMENTAL INDENTURE
                    TO BE DELIVERED BY SUBSEQUENT GUARANTORS]

         SUPPLEMENTAL INDENTURE (this "Supplemental Indenture"), dated as of
________________, 200__, among __________________ (the "Guaranteeing
Subsidiary"), a subsidiary of Genesis Health Ventures, Inc., the other
Guarantors (as defined in the Indenture referred to herein) and The Bank of New
York, as trustee under this Indenture referred to below (the "Trustee").

                              W I T N E S S E T H

         WHEREAS, the Company has heretofore executed and delivered to the
Trustee an indenture (the "Indenture"), dated as of November 4, 2003 providing
for the issuance of 6.875% Senior Subordinated Notes due 2013 (the "Notes");

         WHEREAS, the Indenture provides that under certain circumstances the
Guaranteeing Subsidiary shall execute and deliver to the Trustee a supplemental
indenture pursuant to which the Guaranteeing Subsidiary shall unconditionally
Guarantee all of the Company's Obligations under the Notes and the Indenture on
the terms and conditions set forth herein (the "Subsidiary Guarantee"); and

         WHEREAS, pursuant to Section 9.01 of the Indenture, the Trustee is
authorized to execute and deliver this Supplemental Indenture.

         NOW THEREFORE, in consideration of the foregoing and for other good and
valuable consideration, the receipt of which is hereby acknowledged, the parties
mutually covenant and agree for the equal and ratable benefit of the Holders of
the Notes as follows:

         1. CAPITALIZED TERMS. Capitalized terms used herein without definition
shall have the meanings assigned to them in the Indenture.

         2. AGREEMENT TO GUARANTEE. The Guaranteeing Subsidiary hereby agrees as
follows:

                  (a) Along with all Guarantors named in the Indenture, to
            jointly and severally Guarantee to each Holder of a Note
            authenticated and delivered by the Trustee and to the Trustee and
            its successors and assigns, the Notes or the obligations of the
            Company hereunder or thereunder, that:

                  (i) the principal of, and premium and Additional Interest, if
            any, and interest on the Notes will be promptly paid in full when
            due, whether at maturity, by acceleration, redemption or otherwise,
            and interest on the overdue principal of and interest on the Notes,
            if any, if lawful, and all other obligations of the Company to the
            Holders or the Trustee hereunder or thereunder will be promptly paid
            in full or performed, all in accordance with the terms hereof and
            thereof;

                  (ii) in case of any extension of time of payment or renewal of
            any Notes or any of such other Obligations, that same will be
            promptly paid in full when due or performed in accordance with the
            terms of the extension or renewal, whether at stated maturity, by
            acceleration or otherwise.


                                      F-1



                  Failing payment when due of any amount so Guaranteed or any
            performance so Guaranteed for whatever reason, the Guarantors shall
            be jointly and severally obligated to pay the same immediately.

                  (b) The obligations hereunder shall be unconditional,
            irrespective of the validity, regularity or enforceability of the
            Notes or the Indenture, the absence of any action to enforce the
            same, any waiver or consent by any Holder of the Notes with respect
            to any provisions hereof or thereof, the recovery of any judgment
            against the Company, any action to enforce the same or any other
            circumstance which might otherwise constitute a legal or equitable
            discharge or defense of a Guarantor.

                  (c) The following is hereby waived: diligence, presentment,
            demand of payment, filing of claims with a court in the event of
            insolvency or bankruptcy of the Company, any right to require a
            proceeding first against the Company, protest, notice and all
            demands whatsoever.

                  (d) This Subsidiary Guarantee shall not be discharged except
            by complete performance of the obligations contained in the Notes
            and the Indenture, and the Guaranteeing Subsidiary accepts all
            obligations of a Guarantor under the Indenture.

                  (e) If any Holder or the Trustee is required by any court or
            otherwise to return to the Company, the Guarantors, or any
            custodian, trustee, liquidator or other similar official acting in
            relation to either the Company or the Guarantors, any amount paid by
            either to the Trustee or such Holder, this Subsidiary Guarantee, to
            the extent theretofore discharged, shall be reinstated in full force
            and effect.

                  (f) The Guaranteeing Subsidiary shall not be entitled to any
            right of subrogation in relation to the Holders in respect of any
            obligations Guaranteed hereby until payment in full of all
            obligations Guaranteed hereby.

                  (g) As between the Guarantors, on the one hand, and the
            Holders and the Trustee, on the other hand, (x) the maturity of the
            obligations Guaranteed hereby may be accelerated as provided in
            Article 6 of the Indenture for the purposes of this Subsidiary
            Guarantee, notwithstanding any stay, injunction or other prohibition
            preventing such acceleration in respect of the obligations
            Guaranteed hereby, and (y) in the event of any declaration of
            acceleration of such obligations as provided in Article 6 of the
            Indenture, such obligations (whether or not due and payable) shall
            forthwith become due and payable by the Guarantors for the purpose
            of this Subsidiary Guarantee.

                  (h) The Guarantors shall have the right to seek contribution
            from any non-paying Guarantor so long as the exercise of such right
            does not impair the rights of the Holders under the Subsidiary
            Guarantee.

                  (i) Pursuant to Section 10.02 of the Indenture, after giving
            effect to any maximum amount and all other contingent and fixed
            liabilities that are relevant under any applicable Bankruptcy or
            fraudulent conveyance laws, and after giving effect to any
            collections from, rights to receive contribution from or payments
            made by or on behalf of any other Guarantor in respect of the
            obligations of such other Guarantor under Article 10 of the
            Indenture, this new Subsidiary Guarantee shall be limited to the
            maximum amount permissible such that the obligations of such
            Guarantor under this Subsidiary Guarantee will not constitute a
            fraudulent transfer or conveyance.


                                      F-2



         3. EXECUTION AND DELIVERY. Each Guaranteeing Subsidiary agrees that the
Subsidiary Guarantees shall remain in full force and effect notwithstanding any
failure to endorse on each Note a notation of such Subsidiary Guarantee.

         4. GUARANTEEING SUBSIDIARY MAY CONSOLIDATE, ETC. ON CERTAIN TERMS.

                  (a) The Guaranteeing Subsidiary may not sell or otherwise
            dispose of all substantially all of its assets to, or consolidate
            with or merge with or into (whether or not such Guarantor is the
            surviving Person) another Person, other than the Company or another
            Guarantor unless:

                  (i) immediately after giving effect to such transaction, no
            Default or Event of Default exists; and

                  (ii) either (A) subject to Sections 10.04 and 10.05 of the
            Indenture, the Person acquiring the property in any such sale or
            disposition or the Person formed by or surviving any such
            consolidation or merger unconditionally assumes all the obligations
            of that Guarantor, pursuant to a supplemental indenture in form and
            substance reasonably satisfactory to the Trustee, under the Notes,
            the Indenture and the Subsidiary Guarantee on the terms set forth
            herein or therein; or (B) the Net Proceeds of such sale or other
            disposition are applied in accordance with the applicable provisions
            of the Indenture, including without limitation, Section 4.10
            thereof.

                  (b) In case of any such consolidation, merger, sale or
            conveyance and upon the assumption by the successor Person, by (i)
            supplemental indenture, executed and delivered to the Trustee and
            satisfactory in form to the Trustee, of the Subsidiary Guarantee
            endorsed upon the Notes and the due and punctual performance of all
            of the covenants and conditions of the Indenture to be performed by
            the Guarantor and (ii) supplemental agreement, of the Registration
            Rights Agreement, such successor Person shall succeed to and be
            substituted for the Guarantor with the same effect as if it had been
            named herein as a Guarantor. Such successor Person thereupon may
            cause to be signed any or all of the Subsidiary Guarantees to be
            endorsed upon all of the Notes issuable under the Indenture which
            theretofore shall not have been signed by the Company and delivered
            to the Trustee. All the Subsidiary Guarantees so issued shall in all
            respects have the same legal rank and benefit under the Indenture as
            the Subsidiary Guarantees theretofore and thereafter issued in
            accordance with the terms of the Indenture as though all of such
            Subsidiary Guarantees had been issued at the date of the execution
            hereof.

                  (c) Except as set forth in Articles 4 and 5 and Section 10.05
            of Article 10 of the Indenture, and notwithstanding clauses (a) and
            (b) above, nothing contained in the Indenture or in any of the Notes
            shall prevent any consolidation or merger of a Guarantor with or
            into the Company or another Guarantor, or shall prevent any sale or
            conveyance of the property of a Guarantor as an entirety or
            substantially as an entirety to the Company or another Guarantor.

         5. RELEASES.

                  (a) In the event of any sale or other disposition of all or
            substantially all of the assets of any Guarantor, by way of merger,
            consolidation or otherwise, or a sale or other disposition of all of
            the Capital Stock of any Guarantor, in each case to a Person that is
            not (either before or after giving effect to such transaction) a
            Subsidiary of the Company, then such Guarantor (in the event of a
            sale or other disposition, by way of merger, consolidation or
            otherwise, of all of the Capital Stock of such Guarantor) or the
            corporation acquiring the property (in the event of a sale or other
            disposition of all or substantially all of the assets of such
            Guarantor) shall be released and relieved of any obligations under
            its Subsidiary Guarantee; provided that the Net Proceeds of such
            sale or other disposition are applied in accordance with the
            applicable provisions of the Indenture, including without limitation
            Section 4.10 of the Indenture. Upon delivery by the Company to the
            Trustee of an Officers' Certificate and an Opinion of Counsel to the
            effect that such sale or other disposition was made by the Company
            in accordance with the provisions of the Indenture, including
            without limitation Section 4.10 of the Indenture, the Trustee shall
            execute any documents reasonably required in order to evidence the
            release of any Guarantor from its obligations under its Subsidiary
            Guarantee.


                                      F-3



                  (b) If the Company designates any Restricted Subsidiary that
            is a Guarantor as an Unrestricted Subsidiary in accordance with
            Section 4.18 of the Indenture, then such Guarantor shall be released
            and relieved of any Obligations under its Subsidiary Guarantee in
            accordance with the provisions of the Indenture.

                  (c) Upon the full and unconditional release of a Guarantee by
            a Subsidiary under all then outstanding Credit Facilities, then such
            Guarantor shall be released and relieved of any Obligations under
            its Subsidiary Guarantee in accordance with the provisions of the
            Indenture; provided, however, that in the event that any such
            Subsidiary thereafter Guarantees any Indebtedness of the Company
            under any Credit Facility (or if any released Guarantee under any
            Credit Facility is reinstated or renewed), then such Subsidiary
            shall be required to be a Guarantor by executing a supplemental
            indenture and providing the Trustee with an Officer's Certificate
            and an Opinion of Counsel.

                  (d) Any Guarantor not released from its obligations under its
            Subsidiary Guarantee shall remain liable for the full amount of
            principal of and interest on the Notes and for the other obligations
            of any Guarantor under the Indenture as provided in Article 10 of
            the Indenture.

         6. SUBORDINATION. The Notes and the Subsidiary Guarantees are
subordinated to Senior Debt, as defined in the Indenture. To the extent provided
in the Indenture, Senior Debt must be paid before the Notes may be paid. Each of
the Company and the Guarantors agrees, and each Holder by accepting a Note and a
Subsidiary Guarantee agrees, to the subordination provisions contained in the
Indenture.

         7. NO RECOURSE AGAINST OTHERS. No past, present or future director,
officer, employee, incorporator, shareholder of the Guaranteeing Subsidiary, as
such, shall have any liability for any obligations of the Company or any
Guaranteeing Subsidiary under the Notes, any Subsidiary Guarantees, the
Indenture or this Supplemental Indenture or for any claim based on, in respect
of, or by reason of, such obligations or their creation. Each Holder of the
Notes by accepting a Note waives and releases all such liability. The waiver and
release are part of the consideration for issuance of the Notes. Such waiver may
not be effective to waive liabilities under the federal securities laws.

         8. NEW YORK LAW TO GOVERN. THIS SUPPLEMENTAL INDENTURE AND THE RIGHTS
AND DUTIES OF THE PARTIES HEREUNDER SHALL BE GOVERNED BY, AND CONSTRUED IN
ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK.


                                      F-4



         9. COUNTERPARTS. The parties may sign any number of copies of this
Supplemental Indenture. Each signed copy shall be an original, but all of them
together represent the same agreement.

         10. EFFECT OF HEADINGS. The Section headings herein are for convenience
only and shall not affect the construction hereof.

         11. THE TRUSTEE. The Trustee shall not be responsible in any manner
whatsoever for or in respect of the validity or sufficiency of this Supplemental
Indenture or for or in respect of the recitals contained herein, all of which
recitals are made solely by the Guaranteeing Subsidiary and the Company.

                                      F-5




         IN WITNESS WHEREOF, the parties hereto have caused this Supplemental
Indenture to be duly executed, all as of the date first above written.

         Dated:  _______________, 20___

                                        [GUARANTEEING SUBSIDIARY]

                                         By:  __________________________________
                                         Name:
                                         Title:

                                        GENESIS HEALTH VENTURES, INC.

                                        By:  ___________________________________
                                        Name:
                                        Title:

                                        [EXISTING GUARANTORS]

                                        By:  ___________________________________
                                        Name:
                                        Title:

                                        The Bank of New York,
                                          as Trustee

                                        By:  ___________________________________

                                             Authorized Signatory

                                      F-6

EX-10

                              EMPLOYMENT AGREEMENT

         This Agreement is made as of this 7th day of July, 2003, by and between
GENESIS HEALTH VENTURES, INC., a Delaware corporation (the "Company"), and JOHN
ARLOTTA ("Executive").

         WHEREAS, the Company desires to employ Executive, and Executive desires
to be employed by the Company, in accordance with the terms and conditions
stated below;

         WHEREAS, the Company and Genesis HealthCare Corporation ("ElderCare")
are negotiating a Separation and Distribution Agreement (the "Separation and
Distribution Agreement") and certain other agreements that will govern certain
matters relating to the Separation and the Contribution, the Distribution (each
as defined in the Separation and Distribution Agreement) and the relationship of
the Company, ElderCare, and their respective subsidiaries following the
Distribution;

         NOW, THEREFORE, in consideration of the mutual covenants herein
contained, the parties hereto agree as follows:

1.       Employment. The Company agrees to employ Executive, and Executive is
willing to accept such employment, for the period stated in Section 2 hereof and
upon the terms and conditions herein provided.

2.       Term.

         2.1 Relevant Dates. The period of Executive's employment under this
Agreement shall commence on July 7, 2003 (the "Effective Date"), and shall,
unless sooner terminated pursuant to Section 6, continue for a two-year period
(such period, as extended from time to time, herein referred to as the "Term").
Subject to Section 2.2, and if the Term has not been terminated pursuant to
Section 6, on the first anniversary of this Agreement and on each successive
anniversary thereafter (each such anniversary an "Automatic Extension") the Term
shall be extended for an additional period of one year.

         2.2 Non-Extension Procedure. The Company (with the affirmative vote of
two-thirds (2/3) of the non-management membership of the Board of Directors of
the Company (the "Board") at a meeting of the Board called and held for such
purpose) or Executive may elect to terminate the automatic extension of this
Agreement described in Section 2.1 by giving written notice of such election.
Any notice given hereunder must be given not less than sixty (60) days prior to
the applicable Automatic Extension date.

3.       Position and Responsibilities.

         3.1 Position. As of the Effective Date, the Company agrees to employ
Executive in the position of Vice Chairman of the Company with primary
responsibility for the management and operations of NeighborCare, and as a
director of the Company. The Company agrees, as of the first to occur of (a)







January 1, 2004 and (b) such earlier time as may be determined by the Board, to
employ Executive in the position of Chief Executive Officer of the Company (such
date Executive becomes the Chief Executive Officer, the "CEO Appointment Date"),
pursuant to a plan of succession that will be completed and approved by the
Board no later than the Distribution Date. Executive agrees to perform such
services and have such duties and responsibilities, not inconsistent with his
position as Vice Chairman - Company or Chief Executive Officer, as applicable,
customarily associated with and incidental to such positions and as may from
time to time be reasonably assigned to him by the Chief Executive Officer of the
Company (while serving as Vice Chairman -- Company) or the Board, as applicable.
Executive further agrees to serve as an executive officer or director of any
subsidiaries of the Company without additional compensation.

         3.2 Duties. During the period of his employment hereunder Executive
shall devote all of his business time, attention, skill and efforts to the
earnest and faithful performance of his duties; provided, however, that
Executive may serve as a member of the board of directors of corporations or
similar positions with other organizations which, in the Board's judgment, will
not present any conflict of interest with the Company or any of its
subsidiaries, or materially interfere with the performance of Executive's
services, duties or responsibilities pursuant to this Agreement. Executive has
disclosed to the Board all current boards of directors on which he is a member
and shall disclose any additional boards of directors that Executive desires to
join. Nothing in this Agreement shall preclude Executive from engaging in
charitable and community affairs, or from managing his personal investments,
provided, that these activities do not interfere with the performance of
Executive's duties and responsibilities hereunder or violate the provisions of
Section 10 of this Agreement.

         3.3 Place of Employment. As of the Effective Date, Executive shall
perform his duties hereunder primarily at NeighborCare's principal offices,
currently located in Baltimore, Maryland, and shall travel to the Company's
other offices or locations (including its offices in Kennett Square,
Pennsylvania) as may be necessary or appropriate for him to perform his duties
hereunder. As of the CEO Appointment Date, Executive shall perform his duties
hereunder at the Company's executive offices, currently located in Baltimore,
Maryland, and shall travel to the Company's other offices or locations as may be
necessary or appropriate for him to perform his duties hereunder.

4.       Compensation and Benefits.

         4.1 Salary. For all services rendered by Executive as Vice Chairman of
the Company or Chief Executive Officer of the Company, as a director of the
Company, or as an officer or director of any subsidiary of the Company during
his employment under this Agreement, the Company shall pay Executive a base
salary at the annual rate of $850,000. During the Term, Executive's base salary
shall be reviewed at least annually, with the first such annual review on
February 4, 2004. Such review shall be conducted by a committee comprised of
individuals designated by the Board from its members (the "Compensation
Committee"), and the Compensation Committee may increase said base salary. The
annual base salary payable to Executive in any year is referred to herein as the
"Base Salary" for such year.







         4.2 Annual Bonus. For each fiscal year of the Company during the Term,
the Company shall afford Executive the opportunity to earn an incentive bonus
("Bonus") under the terms of the Genesis Health Venture, Inc. Incentive Program
or similar program, as described in this Section 4.2. The aggregate target Bonus
payable to Executive under such program(s) shall equal at least one hundred
percent (100)% of the Base Salary for such fiscal year, and shall be payable to
the extent the applicable performance goals are achieved (which goals shall be
set by the Compensation Committee within the first three (3) months of each such
year, and with respect to the Company's 2003 fiscal year as of the Effective
Date or as soon as practicable thereafter), but only upon certification by the
Compensation Committee that the applicable goals have been achieved; provided,
that (a) the Compensation Committee may approve a Bonus of greater than 100% of
Base Salary, (b) the target Bonus percentage for fiscal year 2003 shall be
eighty percent (80%) and (c) in no event shall the Bonus for fiscal year 2003 be
less than $550,000.

         4.3 Signing Bonus. As soon as practicable following the Effective Date,
the Company shall pay to Executive a signing bonus in a lump sum equal to
$300,000.

         4.4 Equity Incentive.

         (a) Stock Option. The Company shall, pursuant to the terms of its stock
option plan or any similar plan, grant to Executive as of the "Option Grant
Dates" (as defined below), one or more options (the "Stock Options") to acquire
an aggregate of 1,000,000 shares of common stock of the Company ("Company
Stock"). The Option Grant Dates shall be on the fifth (5th), eleventh (11th),
seventeenth (17th) and twenty-third (23rd) trading days following the
Distribution Date or, if the Distribution does not occur prior to January 1,
2004, the fifth (5th), eleventh (11th), seventeenth (17th) and twenty-third
(23rd) trading days in 2004. A Stock Option for 250,000 shares of Company Stock
shall be granted on each of the Option Grant Dates. The exercise price per share
of the Company Stock subject to the Stock Options shall be the closing price of
the Company Stock on the Option Grant Dates. If the Stock Options are granted
and then the Distribution occurs, the Stock Options will be equitably adjusted
to preserve their value following the Distribution. The Stock Options shall vest
with respect to the shares subject thereto in equal installments of twenty-five
percent (25%) on the Option Grant Date for the applicable Stock Option and
twenty-five percent (25%) on each of the first three (3) anniversaries of the
Effective Date; provided, that Executive remains employed with the Company on
each such anniversary. Notwithstanding the foregoing, the Stock Options shall
fully and immediately vest on (i) a Change in Control (as defined in Section
6.5), (ii) any termination of Executive's employment with the Company by the
Company without Cause (as defined in Section 6.3(b)) or because of Executive's
death or Disability (as defined in Section 6.2), or (iii) any termination of
Executive's employment by Executive's resignation for Good Reason (as defined in
Section 6.4) or (iv) as a result of the Company's failure to automatically
extend the Term pursuant to Section 2.2 (a "Non-Extension"). The Stock Options
shall have a scheduled ten (10) year term. The Stock Options shall be "incentive
stock options" to the fullest extent permitted. Beginning in the first calendar
year following the Effective Date, Executive shall be entitled to receive
additional annual grants of options under the Company's stock option plan made
available by the Company from time to time on a basis commensurate with his
status and responsibilities, as determined by the Compensation Committee, and
with a vesting schedule commensurate with that provided to other executive
officers of the Company generally.





             (b) Restricted Stock Award. The Company shall make a restricted
stock award to Executive, on the thirty-first (31st) trading day following the
Distribution Date, or, if the Distribution does not occur by December 31, 2003,
on the thirty-first (31st) trading day after such date (in either event, the
"Stock Grant Date"), of a number of shares of Company Stock with an aggregate
value on the Stock Grant Date of $4,000,000, rounded to the nearest whole share
(the "Restricted Shares"). Such valuation shall be based on the average closing
price of Company Stock for the thirty trading days immediately preceding the
Stock Grant Date. If the Restricted Shares are granted and then the Distribution
occurs, the Restricted Shares which are unvested as of the date the Distribution
occurs will be equitably adjusted to preserve their value following the
Distribution. Twenty-five percent (25%) of the Restricted Shares shall vest on
the Stock Grant Date. The remaining unvested Restricted Shares shall thereafter
vest in equal quarterly installments beginning on the first day of the Company's
trading window during each following calendar quarter, beginning with the first
trading window to commence following the Stock Grant Date (or if such calendar
quarter does not have a trading window, the final day of the calendar quarter),
such that the Restricted Shares will be fully vested on the third anniversary of
the Effective Date; provided, that Executive remains employed with the Company
on each such vesting date. Notwithstanding anything to the contrary herein, all
Restricted Shares shall fully and immediately vest on (i) a Change in Control,
(ii) any termination of Executive's employment with the Company by the Company
without Cause or because of Executive's death or Disability, (iii) any
termination of Executive's employment by Executive's resignation for Good Reason
or (iv) a Non-Extension.

         4.5 Participation in Benefit Plans. (a) Executive shall be entitled to
participate in each employee benefit plan or perquisite applicable generally to
executive officers of the Company (including health, life insurance, long-term
disability, qualified and non-qualified retirement plans, if any, and deferred
compensation benefits, but excluding any severance benefit or termination pay
plan) in accordance with the provisions thereof. Notwithstanding the foregoing,
Executive shall not be entitled to receive any additional benefits or awards
under discretionary plans or programs of the Company unless the Compensation
Committee exercises the necessary discretion to provide Executive with such
benefits or awards.

             (b) During the Term, Executive shall be entitled to (i) payment of
club dues and membership fees for the golf club of his choice, (ii) an amount
equal to the cost of Executive's reasonable housing in the Kennett Square,
Pennsylvania or Baltimore, Maryland area, as applicable, (iii) reimbursement for
reasonable travel expenses, (iv) use of a Company-provided automobile
appropriate to his position with the Company, (v) $75,000 of life insurance
premium payments annually, (such payments for the calendar year 2003 pro-rated
for the portion of the year following the Effective Date) and (vi) payment of
Executive's reasonable expenses for personal financial planning and preparation
of his personal tax returns, provided, that such payments shall not exceed
$5,000 annually.





             (c) To the extent that Executive incurs any federal or state
ordinary income tax liability on account of the payments specified in Sections
4(b)(ii) and (v) hereof, the Company shall reimburse Executive for all such tax
liability incurred and all federal and state ordinary income tax, employment and
payroll tax liability incurred as a result of the tax gross-up payments
specified pursuant to this Section 4(c), so that Executive is in the same
after-tax basis as if all such payments had not been subject to such taxes.

         4.6 Vacation and Holidays. Executive shall be entitled to vacation in
accordance with the Company's vacation policy in effect from time to time for
its executive officers, but not less than five (5) weeks in each full calendar
year. Executive shall also be entitled to all paid holidays given by the Company
to its executive officers. Vacation days that are not used during any calendar
year may not be accrued, nor shall Executive be entitled to compensation for
unused vacation days.

5.       Reimbursement of Expenses. The Company shall pay or reimburse Executive
for all reasonable business expenses incurred by Executive in performing his
obligations under this Agreement in accordance with its business expense
policies in effect from time to time.

6.       Events of Termination of Employment.

         6.1 Expiration of Term. Executive's employment with the Company and its
subsidiaries shall cease automatically on the expiration of the Term.

         6.2 Death or Disability. Executive's employment with the Company and
its subsidiaries shall automatically terminate on Executive's death. Executive's
employment shall terminate thirty (30) days after Executive is notified that his
employment is terminated for Disability (provided, that Executive shall not have
returned to the performance of his duties on a full-time basis during such
thirty (30) day period). For purposes of this Agreement, "Disability" means an
incapacity due to a physical or mental condition which causes Executive to be
unable to substantially perform his duties under this Agreement on a full-time
basis for (i) a period of six (6) consecutive months, or (ii) for shorter
periods aggregating more than six (6) months in any twelve (12) month period.
"Disabling Condition" shall mean such an incapacity that does not meet the time
requirements for Disability. The Company may temporarily relieve Executive from
his duties and responsibilities during any period that he has a Disabling
Condition (provided, that the Company shall continue to provide Executive with
full compensation and benefits during such period), provided, that Executive
shall be immediately restored to his duties and responsibilities if Executive is
able to resume his duties on a full-time basis prior to his termination for
Disability. Executive agrees to submit to reasonable medical examination upon
the reasonable request, and at the expense, of the Company during any period
when he (or his representative) claims that he has a Disabling Condition.






         6.3 Termination by Company for Cause.

             (a) The Company may, following any determination by the Board that
Cause exists in accordance with the procedure set forth in the this subsection
(a), terminate Executive's employment with the Company and its subsidiaries for
Cause by notice to Executive describing the reasons for such termination. In the
event the Board believes Cause may exist for termination of Executive's
employment, the Board shall provide written notice to Executive describing the
basis for such belief. Executive shall be afforded a reasonable period of time
to and shall fully and promptly address, to the extent of Executive's knowledge,
any concerns raised by the Board regarding the existence of Cause. The Company
may temporarily relieve Executive from his duties and responsibilities pending
the outcome of any proceeding of the Board to determine if Cause exists
(provided, that the Company shall continue to provide Executive with full
compensation and benefits during such period); provided, that Executive shall be
immediately restored to his duties and responsibilities if the Board determines
that Cause does not exist or fails to render a prompt determination following
the substantial completion of its investigation. The final determination that
Executive's employment shall be terminated for Cause shall be made by the
affirmative vote of two-thirds (2/3) of the non-management membership of the
Board at a meeting of the Board duly called and held upon at least fifteen (15)
days prior written notice to Executive specifying the particulars of the action
or inaction alleged to constitute "Cause" (and at which meeting Executive and
his counsel are entitled to be present and are given a reasonable opportunity to
be heard).

             (b) For purposes of this Section 6.3, "Cause" means any of the
following events with respect to Executive:

                 (i) Executive has been convicted of, or pleads guilty or nolo
             contendere to, any crime or offense constituting a felony under
             applicable law or involving embezzlement, theft or moral turpitude,
             which crime or offense is substantially related to Executive's
             position with the Company or impairs Executive's ability to perform
             his duties with the Company, in either case as may be reasonably
             determined by the Board;

                 (ii) Executive's commission of a willful act of fraud or
             dishonesty against the Company or any of its subsidiaries, or
             Executive's willful engaging in conduct which is injurious to the
             Company or any of its subsidiaries, monetarily or otherwise;

                 (iii) Executive's abuse of illegal drugs and other controlled
             substances or Executive's habitual intoxication, which conduct
             continues after written demand for cessation of such conduct is
             delivered to Executive by the Board; or

                 (iv) Any willful, continuous or gross neglect of or refusal to
             perform Executive's duties or responsibilities, in each case which
             continues after detailed written notice thereof has been given to
             Executive;






             Action or inaction by Executive shall not be considered "willful"
         unless done or omitted by him intentionally and without his reasonable
         belief that his action or inaction was in the best interests of the
         Company, and shall not include failure to act by reason of total or
         partial incapacity due to physical or mental illness.

         6.4 Resignation by Executive for Good Reason. Upon the occurrence of
any event described in this Section 6.4 below in the absence of Executive's
express written consent or request, Executive shall have the right to elect to
terminate his employment under this Agreement from all (but not less than all)
positions with the Company and its subsidiaries by resignation, upon not less
than thirty (30) days' prior written notice given within one hundred twenty
(120) days after the event purportedly giving rise to Executive's right to
elect; provided, however, that the Company has not cured or otherwise corrected
such event prior to the expiration of such 30-day period.

             (a) Any reduction by the Company of Executive's Base Salary;

             (b) Any relocation of Executive's principal place of employment or
the relocation of the Company's principal office or corporate headquarters to a
location which is not within forty-five (45) miles of either the City of
Baltimore, Maryland or the Borough of Kennett Square, Pennsylvania, or a failure
to allow Executive, upon written request to the Board, to establish a principal
Company office in a city of his choice following the second anniversary of the
Effective Date or, once established, the relocation of Executive more than
twenty-five (25) miles from such office;

             (c) The assignment to Executive by the Company of any duties
inconsistent with Executive's status with the Company or a substantial
alteration in the nature or status of Executive's responsibilities from those
described in Section 3.1, or a reduction in Executive's titles or offices as in
effect as of the Effective Date or the CEO Appointment Date, as applicable, or
any removal of Executive from, or any failure to nominate or appoint Executive
to any such positions other than as a result of Executive's death, termination
of employment (and other than as a result of Executive's Disabling Condition or
pending a determination that Cause exists), or the failure to restore Executive
to his responsibilities following his recovery from a Disabling Condition prior
to his employment termination or following a determination that Cause does not
exist; provided, that, a failure of the Company's shareholders to elect
Executive to the Board shall not constitute Good Reason under this Agreement;

             (d) Any liquidation or dissolution of the Company, unless the
voting common equity interests of an ongoing entity (other than a liquidating
trust) are beneficially owned, directly or indirectly, by the same persons in
substantially the same proportions as such persons' ownership immediately prior
to such liquidation or dissolution, and such ongoing entity assumes all existing
obligations of the Company to Executive under this Agreement;

             (e) Any material breach of this Agreement by the Company; or







             (f) The Company engages in any activity which would cause Executive
to violate any of the covenants of Executive contained in the consulting
agreement between Executive and Executive's former employer (the "Consulting
Agreement"), or the Company requires that Executive engage in any activity which
would cause Executive to violate any of the covenants of Executive contained in
the Consulting Agreement, except if Section 6.7 of this Agreement applies.

Executive agrees and acknowledges that neither the occurrence nor the failure to
occur of the Distribution and the other transactions contemplated by the
Separation and Distribution Agreement shall constitute "Good Reason" hereunder.
Executive agrees and acknowledges further that the appointment by the Company of
a non-executive Chairman of the Board or a lead director shall not constitute
"Good Reason" hereunder.

         6.5 Resignation by Executive Following A Change in Control. Executive
may resign from the Company's employ during the ninety (90) day period
commencing on the date that is six (6) months after a Change in Control of the
Company for any reason by providing the Company with a written notice of
termination. Notwithstanding anything to the contrary in Section 6.4, should
Executive notify the Company that Good Reason exists at any time within the
twenty-four (24) months following a Change in Control and should the event
constituting Good Reason continue for more than ten (10) days following
Executive's notice, Executive may, at his option, immediately resign or resign
at any time during such twenty-four month period and any such resignation shall
be treated as a resignation for Good Reason under this Agreement. For purposes
of this Section 6.5 only, Good Reason shall include any relocation of
Executive's principal place of employment more than 25 miles from the location
existing on the date of the Change in Control. For purposes of this Agreement, a
Change in Control of the Company means the occurrence of one of the following
events:

             (a) The acquisition by any individual, entity or group (within the
meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934,
as amended (the "Exchange Act")) (a "Person") of beneficial ownership (within
the meaning of Rule 13d-3 promulgated under the Exchange Act) of twenty-five
percent (25%) or more of either (A) the then-outstanding shares of common stock
of the Company (the "Outstanding Company Common Stock") or (B) the combined
voting power of the then-outstanding voting securities of the Company entitled
to vote generally in the election of directors (the "Outstanding Company Voting
Securities"); provided, however, that, for purposes of this Section 6.5(a), the
following acquisitions shall not constitute a Change of Control: (i) any
acquisition directly from the Company, (ii) any acquisition by the Company,
(iii) any acquisition by any employee benefit plan (or related trust) sponsored
or maintained by the Company or any of its affiliates, (iv) any acquisition by
any corporation pursuant to a transaction that complies with Sections 6.5(c)(i),
6.5(c)(ii) and 6.5(c)(iii), (v) any acquisition by any underwriter temporarily
holding securities pursuant to an offering of such securities, (vi) any
acquisition by Goldman Sachs Capital Partners and Highland Capital, (vii) any
acquisition by Executive or any group of persons including Executive (or any
entity controlled by Executive or any group of persons including Executive) or
(viii) a beneficial owner of less than twenty-five percent (25%) of the
Outstanding Company Voting Securities that becomes a beneficial owner of






twenty-five percent (25%) or more of the Outstanding Company Voting Securities
solely by reason of redemption or repurchase of such securities by the Company
so long as such beneficial owner takes immediate action to reduce its beneficial
ownership of Company Voting Securities below twenty-five percent (25%);

             (b) Any time at which individuals who, as of the date hereof,
constitute the Board (the "Incumbent Board") cease for any reason to constitute
at least a majority of the Board; provided, however, that any individual
becoming a director subsequent to the date hereof whose election, or nomination
for election by the Company's shareholders, was approved by a vote of at least a
majority of the directors then comprising the Incumbent Board shall be
considered as though such individual were a member of the Incumbent Board, but
excluding, for this purpose, any such individual whose initial assumption of
office occurs as a result of an actual or threatened election contest with
respect to the election or removal of directors or other actual or threatened
solicitation of proxies or consents by or on behalf of a Person other than the
Board; provided, further, that any individual becoming a director subsequent to
the date hereof who was elected by, or on the recommendation of any person
described in clause (vi) of Section 6.5(a) above pursuant to contractual rights
as of the Effective Date with respect to Outstanding Company Voting Securities
owned by such person;

             (c) Consummation of a reorganization, merger, statutory share
exchange or consolidation or similar corporate transaction involving the Company
or any of its subsidiaries, a sale or other disposition of all or substantially
all of the assets of the Company, or the acquisition of assets or stock of
another entity by the Company or any of its subsidiaries (each, a "Business
Combination"), in each case unless, following such Business Combination, (i) all
or substantially all of the individuals and entities that were the beneficial
owners of the Outstanding Company Common Stock and the Outstanding Company
Voting Securities immediately prior to such Business Combination beneficially
own, directly or indirectly, more than fifty percent (50%) of the
then-outstanding shares of common stock and the combined voting power of the
then-outstanding voting securities entitled to vote generally in the election of
directors, as the case may be, of the corporation resulting from such Business
Combination (including, without limitation, a corporation that, as a result of
such transaction, owns the Company or all or substantially all of the Company's
assets either directly or through one or more subsidiaries) in substantially the
same proportions as their ownership immediately prior to such Business
Combination of the Outstanding Company Common Stock and the Outstanding Company
Voting Securities, as the case may be, (ii) no Person (excluding any corporation
resulting from such Business Combination or any employee benefit plan (or
related trust) of the Company or such corporation resulting from such Business
Combination) beneficially owns, directly or indirectly, twenty-five percent
(25%) or more of, respectively, the then-outstanding shares of common stock of
the corporation resulting from such Business Combination or the combined voting
power of the then-outstanding voting securities of such corporation, except to
the extent that such ownership existed prior to the Business Combination, and
(iii) at least a majority of the members of the board of directors of the
corporation resulting from such Business Combination were members of the
Incumbent Board at the time of the execution of the initial agreement or of the
action of the Board providing for such Business Combination; or







             (d) Approval by the shareholders of the Company of a complete
liquidation or dissolution of the Company.

         6.6 Termination by the Company without Cause. In addition to any
termination of Executive's employment with the Company and its subsidiaries for
reasons described in the foregoing provisions of this Section 6, the Company may
terminate such employment at any time without Cause. Such determination shall be
made by the affirmative vote of two-thirds (2/3) of the non-management
membership of the Board at a meeting of the Board called and held for such
purpose. The Board shall provide Executive with written determination of its
decision no less than thirty (30) days prior to the effective date of such
employment termination.

         6.7 Consulting Agreement. If, on or following the date hereof,
Executive is prevented from fulfilling his obligations under this Agreement as a
result of the enforcement, or threatened enforcement, of the Consulting
Agreement, the Company will continue to provide Executive with the compensation
and benefits set forth in Section 4 hereof, unless the Company decides to
terminate Executive's employment as a result of Executive being prevented from
fulfilling his obligations under this Agreement because of the enforcement or
threatened enforcement of the Consulting Agreement, in which event the
provisions of subsections (a) or (b), below, will apply.

             (a) Termination Without Cause Prior to January 1, 2004. If (i) the
         Company terminates Executive's employment without Cause in a situation
         governed by this Section 6.7 prior to January 1, 2004, and (ii)
         Executive continues to receive cash payments and benefits under the
         Consulting Agreement from his former employer for the entire term
         thereof, the Company will have no obligation to make continuing
         payments of Base Salary and Bonus to Executive or to provide benefits
         to Executive. If (i) the Company terminates Executive's employment
         without Cause in a situation governed by this Section 6.7 prior to
         January 1, 2004, and (ii) Executive's former employer suspends, or does
         not provide, the cash payments and benefits (as described in Section 5
         of the Consulting Agreement), the Company shall, for the remainder of
         the scheduled term of the Consulting Agreement, continue to pay
         Executive an amount equal to his Base Salary in effect on the date his
         employment terminates, in accordance with the Company's normal payroll
         practices. In addition, the Company shall pay Executive the Bonus
         provided in Section 4.2 hereof for the Company's 2003 fiscal year and a
         target Bonus for the Company's 2004 fiscal year, no later than when
         other executive officers of the Company are paid their bonuses. In
         addition, the Company shall provide Executive with the benefits set
         forth in Section 7.4(c) hereof for the remainder of the term of the
         Consulting Agreement. If Executive receives any payments under the
         Consulting Agreement after the date his employment with the Company
         terminates, such amounts will reduce, on a dollar for dollar basis, the
         cash amounts owing to Executive from the Company under this Section
         6.7(a). In addition, the Company shall continue to be bound by, and
         shall fulfill, its obligation under Section 4.4 to issue the Stock
         Option and Restricted Shares whether or not Executive receives cash
         payments or benefits under the Consulting Agreement from his former






         employer, except that the Stock Option and Restricted Shares will be
         vested to the following extent on the later of (i) the date of award or
         (ii) the date of termination of employment: 25% plus the product of (a)
         25% and (b) a fraction, the numerator of which is the number of days
         Executive was employed by the Company and the denominator of which is
         365. The Stock Option shall remain exercisable for two (2) years after
         Executive's termination of employment. Any termination of Executive's
         employment as a result of the events described in this Section 6.7(a)
         shall not be treated as a termination by the Company without Cause or a
         termination by the Executive for Good Reason under other provisions of
         this Agreement.

             (b) Termination without Cause On or After January 1, 2004. If the
         Company terminates Executive's employment without Cause in a situation
         governed by this Section 6.7 on or after January 1, 2004, he will be
         entitled to the severance provided in Section 7.4 hereof. Payment of
         such severance shall, in the discretion of the Company, be subject to
         the execution of a release substantially in the form set forth as
         Exhibit A hereto, and no revocation of such release, provided, that the
         indemnification rights contained in Section 12.8 hereof shall
         specifically not be released.

             (c) Payments Whenever Termination Occurs. In addition to the
         payments set out in subsection (a) and (b) of this Section 6.7, the
         Company shall continue to pay to Executive the amount set forth in
         Section 4.5(b)(ii) for the remaining term of the lease for such housing
         (but not for longer than the one-year period after termination of
         employment), grossed up for taxes as provided in Section 4.5(c).

         7.  Severance Upon an Event of Termination.

         7.1 General Provision. Upon termination of Executive's employment for
any reason, Executive shall be entitled to no further compensation hereunder
other than (i) Executive's accrued and unpaid Base Salary through the date of
termination, (ii) any earned but unpaid Bonus for any fiscal year ending prior
to the date of termination, (iii) any benefits (including reasonable business
expenses) accrued and vested under the terms of the Company's employee benefit
plans and programs through the date of termination, (iv) all deferred
compensation of any kind, including, without limitation, any amounts earned
under any bonus plan, (v) the option to have assigned to him at no cost and with
no apportionment of prepaid premiums any assignable insurance policy owned by
the Company and relating specifically to Executive and (vi) any other payments
or benefits specifically provided in Section 7 of this Agreement.

         7.2 Termination Due to Death. Upon Executive's employment termination
due to his death, the Company shall pay to Executive (or to his estate) (i) a
lump sum in cash equal to Executive's Base Salary for the period from the date
of termination through the end of the Term (computed as if Executive had not
died); (ii) benefits as if Executive's employment had terminated on the last day
of the month; and (iii) a pro rata bonus for the portion of the year in which
the date of termination occurs preceding the date of termination based upon the







amount that would have been earned based on the Company's actual performance for
the portion of the year ending on the date of termination, using performance
goals that are pro-rated to reflect the portion of the year prior to the date of
termination (which amount will be paid as soon as practicable following the date
of termination). In addition, all restricted stock, stock options and
performance share awards made to Executive shall automatically become fully
vested and immediately exercisable as of the date of death, and, to the extent
requiring exercise, shall be immediately exercisable for a period of two (2)
years following the termination of Executive's employment, but in no event later
than ten (10) years from the date of grant of an option or award. If the equity
incentives provided for in Section 4.4 have not been awarded prior to the date
of Executive's death, they shall be deemed to have been issued immediately prior
thereto so that the restricted stock will vest on death and the options will
vest and remain exercisable for two years post-death.

         7.3 Termination for Cause. Upon Executive's employment termination for
Cause, the Company shall pay to Executive all deferred compensation of any kind.

         7.4 Severance. Upon Executive's employment termination by the Company
without Cause, due to Executive's Disability, by Executive for Good Reason, by
Executive in accordance with Section 6.5 following a Change in Control or as a
result of a Non-Extension (each a "Qualifying Termination"), the Company shall,
subject to Executive's compliance with the provisions of Section 9 and 10 below,
provide the following to Executive (or, in the event of Executive's death after
a Qualifying Termination, his beneficiary or beneficiaries or his estate, as
provided):

             (a) Bonus for Year of Termination of Employment. The Company shall
pay to Executive (or to his estate) a pro rata bonus for the portion of the year
in which the date of termination occurs preceding the date of termination based
upon the amount that would have been earned based on the Company's actual
performance for the portion of the year ending on the date of termination, using
performance goals that are pro-rated to reflect the portion of the year prior to
the date of termination (which amount will be paid as soon as practicable
following the date of termination).

             (b) Severance Pay. The Company shall provide to Executive (or his
estate), as severance pay (the "Severance Payments") two (2) times Executive's
Termination Base Salary (as defined below) plus two (2) times Executive's target
Bonus (as in effect on the date of termination pursuant to Section 4.2 hereof)
for the year of termination, less any applicable disability insurance benefits
(if Executive's employment terminates because of Disability) for the two-year
period beginning with the date of termination of employment. "Termination Base
Salary" means the highest Base Salary paid to Executive in the three (3) years
preceding the Qualifying Termination. Payment under this Section 7.4(b) shall be
made in a lump sum within ten (10) days following the date of Executive's
termination. Any such payments shall, in the discretion of the Company, be
subject to Executive entering into and not revoking a release substantially in
the form set forth as Exhibit A hereto. In no event shall such payments be
reduced for any reason (other than in the case of Disability as set forth
above), including the fact that Executive is employed by any other entity.






             (c) Benefit Continuation. The Company shall continue to provide, on
the same basis as executive officers generally, the health and life insurance
benefits (but excluding disability benefits) provided to Executive and his
spouse and eligible dependants immediately prior to his date of termination for
a period of two (2) years following the date of termination (provided, that
Executive continues to make all required employee contributions) and as modified
for any changes to such benefits made with respect to executive officers of the
Company. In the event that Executive's participation in any such plan or program
is barred by the terms thereof, the Company shall pay to Executive an amount
equal to the annual contribution, payments, credits or allocation made by the
Company to him, to his account or on his behalf under such plans and programs
from which his continued participation is barred except that if Executive's
participation in any health, medical, or life insurance plan or program is
barred, the Company shall obtain and pay for, on Executive's behalf, individual
insurance plans, policies or programs that provide to Executive health, medical
and life insurance coverage which is equivalent to the insurance coverage to
which Executive was entitled prior to the date of termination. The Company shall
continue to provide Executive with the perquisites set forth in Sections
4.5(b)(iv) and 4.5(b)(vi) hereof (up to $15,000 per year with respect to Section
4.5(b)(vi)) for a period of two (2) years following the date of termination.

             (d) Equity. All restricted stock, stock option and performance
share awards made to Executive shall fully vest and, to the extent requiring
exercise, shall be immediately exercisable for a period of two (2) years
following the termination of Executive's employment, but in no event later than
ten (10) years from the date of grant of an option or award. If the equity
incentives provided for in Section 4.4 have not been awarded prior to the date
that Executive's employment terminates, they shall be issued thereafter in
accordance with the timing set forth in Section 4.4, and both the restricted
stock and options will be fully vested on date of grant. In addition, the
options will remain exercisable for two (2) years after termination of
Executive's employment.

8.       Certain Additional Payments by the Company.

             (a) Anything in this Agreement to the contrary notwithstanding, in
the event it shall be determined that any payment or distribution by the Company
or its affiliates to or for the benefit of Executive (whether paid or payable or
distributed or distributable pursuant to the terms of this Agreement or
otherwise, but determined without regard to any additional payments required
under this Section 8) (a "Payment") would be subject to the excise tax imposed
by Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code") or
any interest or penalties are incurred by Executive with respect to such excise
tax (such excise tax, together with any such interest and penalties,
collectively the "Excise Tax"), then Executive shall be entitled to receive an
additional payment (the "Gross-Up Payment") in an amount such that, after
payment by Executive of all taxes (including any interest or penalties imposed
with respect to such taxes), including, without limitation, any income taxes
(and any interest and penalties imposed with respect thereto) and Excise Tax
imposed upon the Gross-Up Payment, Executive retains an amount of the Gross-Up
Payment equal to the Excise Tax imposed upon the Payments.







         (b) Subject to the provisions of Section 8(c), all determinations
required to be made under this Section 8, including whether and when a Gross-Up
Payment is required, the amount of such Gross-Up Payment and the assumptions to
be utilized in arriving at such determination, shall be made by a nationally
recognized certified public accounting firm designated by Executive, subject to
the Company's approval which will not be unreasonably withheld (the "Accounting
Firm"). The Accounting Firm shall provide detailed supporting calculations both
to the Company and Executive within fifteen (15) business days of the receipt of
notice from Executive that there has been a Payment or such earlier time as is
requested by the Company. In the event that the Accounting Firm is serving as
accountant or auditor for the individual, entity or group effecting the Change
in Control, Executive, subject to the Company's approval which will not be
unreasonably withheld, may appoint another nationally recognized accounting firm
to make the determinations required hereunder (which accounting firm shall then
be referred to as the Accounting Firm hereunder). All fees and expenses of the
Accounting Firm shall be borne solely by the Company. Any Gross-Up Payment, as
determined pursuant to this Section 8, shall be paid by the Company to Executive
within five (5) days of the receipt of the Accounting Firm's determination. Any
determination by the Accounting Firm shall be binding upon the Company and
Executive. As a result of the uncertainty in the application of Section 4999 of
the Code at the time of the initial determination by the Accounting Firm
hereunder, it is possible that Gross-Up Payments that will not have been made by
the Company should have been made (the "Underpayment"), consistent with the
calculations required to be made hereunder. In the event the Company exhausts
its remedies pursuant to Section 8(c) and Executive thereafter is required to
make a payment of any Excise Tax, the Accounting Firm shall determine the amount
of the Underpayment that has occurred and any such Underpayment shall be
promptly paid by the Company to or for the benefit of Executive.

         (c) Executive shall notify the Company in writing of any claim by the
Internal Revenue Service that, if successful, would require the payment by the
Company of the Gross-Up Payment. Such notification shall be given as soon as
practicable, but no later than ten (10) business days after Executive is
informed in writing of such claim. Executive shall apprise the Company of the
nature of such claim and the date on which such claim is requested to be paid.
Executive shall not pay such claim prior to the expiration of the thirty (30)
day period following the date on which Executive gives such notice to the
Company (or such shorter period ending on the date that any payment of taxes
with respect to such claim is due). If the Company notifies Executive in writing
prior to the expiration of such period that the Company desires to contest such
claim, Executive shall:

         (i) give the Company any information reasonably requested by the
Company relating to such claim,

         (ii) take such action in connection with contesting such claim as the
Company shall reasonably request in writing from time to time, including,
without limitation, accepting legal representation with respect to such claim by
an attorney reasonably selected by the Company,






         (iii) cooperate with the Company in good faith in order effectively to
contest such claim, and

         (iv) permit the Company to participate in any proceedings relating to
such claim;

provided, however, that the Company shall bear and pay directly all costs and
expenses (including additional interest and penalties) incurred in connection
with such contest, and shall indemnify and hold Executive harmless, on an
after-tax basis, for any Excise Tax or income tax (including interest and
penalties) imposed as a result of such representation and payment of costs and
expenses. Without limitation on the foregoing provisions of this Section 8(c),
the Company shall control all proceedings taken in connection with such contest,
and, at its sole discretion, may pursue or forgo any and all administrative
appeals, proceedings, hearings and conferences with the applicable taxing
authority in respect of such claim and may, at its sole discretion, either pay
the tax claimed to the appropriate taxing authority on behalf of Executive and
direct Executive to sue for a refund or contest the claim in any permissible
manner, and Executive agrees to prosecute such contest to a determination before
any administrative tribunal, in a court of initial jurisdiction and in one or
more appellate courts, as the Company shall determine; provided, however, that,
if the Company pays such claim and directs Executive to sue for a refund, the
Company shall indemnify and hold Executive harmless, on an after-tax basis, from
any Excise Tax or income tax (including interest or penalties) imposed with
respect to such payment or with respect to any imputed income in connection with
such payment; and provided, further, that any extension of the statute of
limitations relating to payment of taxes for the taxable year of Executive with
respect to which such contested amount is claimed to be due is limited solely to
such contested amount. Furthermore, the Company's control of the contest shall
be limited to issues with respect to which the Gross-Up Payment would be payable
hereunder, and Executive shall be entitled to settle or contest, as the case may
be, any other issue raised by the Internal Revenue Service or any other taxing
authority.

         (d) If, after the receipt by Executive of a Gross-Up Payment or payment
by the Company of an amount on Executive's behalf pursuant to Section 8(c),
Executive becomes entitled to receive any refund with respect to the Excise Tax
to which such Gross-Up Payment relates or with respect to such claim, Executive
shall (subject to the Company's complying with the requirements of Section 8(c),
if applicable) promptly pay to the Company the amount of such refund (together
with any interest paid or credited thereon after taxes applicable thereto). If,
after payment by the Company of an amount on Executive's behalf pursuant to
Section 8(c), a determination is made that Executive shall not be entitled to
any refund with respect to such claim and the Company does not notify Executive
in writing of its intent to contest such denial of refund prior to the
expiration of thirty (30) days after such determination, then the amount of such
payment shall offset, to the extent thereof, the amount of Gross-Up Payment
required to be paid.

         (e) Notwithstanding any other provision of this Section 8, the Company
may, in its sole discretion, withhold and pay to the Internal Revenue Service or
any other applicable taxing authority, for the benefit of Executive, all or any
portion of any Gross-Up Payment, and Executive hereby consents to such
withholding.






9.       Duties Upon Termination.

         9.1 Return of Materials. Executive agrees that he will, upon
termination of his employment with the Company for any reason whatsoever,
deliver to the Company any and all records, forms, contracts, memoranda, work
papers, lists of names or other customer data and any other articles or papers
which have come into his possession by reason of his employment with the Company
or which he holds for the Company, regardless of whether or not any of said
items were prepared by him, and he shall not retain memoranda or copies of any
of said items. Executive shall assign to the Company all rights to trade secrets
and the products relating to the Company's business developed by him alone or in
conjunction with others at any time alike employed by the Company.
Notwithstanding anything herein to the contrary, Executive may retain this
Agreement, any documents relating to this Agreement and any documents relating
to Executive's compensation, benefits, retirement plans and deferred
compensation plans.

         9.2 Resignation from All Positions. Notwithstanding any other provision
of this Agreement, upon the termination of Executive's employment for any
reason, unless otherwise requested by the Board, Executive shall immediately
resign from all positions that he holds or has ever held with the Company and
any of its subsidiaries and affiliates (and with any other entities with respect
to which the Company has requested Executive to perform services). Executive
hereby agrees to execute any and all documentation to effectuate such
resignations upon request by the Company, but he shall be treated for all
purposes as having so resigned upon termination of his employment, regardless of
when or whether he executes any such documentation.

         9.3 Cooperation. Following the termination of Executive's employment,
Executive will respond to inquiries from the Company with respect to matters
within Executive's knowledge. Executive need only respond to such inquiries by
telephone or E-mail, and the amount of detail in such response and the
promptness with which it is made will depend on the other demands on Executive's
time.

10.      Post-Termination Obligations. All payments and benefits to Executive
under this Agreement shall be subject to Executive's compliance with the
following provisions.

         10.1 Confidential Information. At all times during and after the term
of this Agreement, Executive shall not disclose or reveal to any unauthorized
person any trade secret or other confidential information relating to the
Company, its subsidiaries or its affiliates, or to any businesses operated by
them, including, without limitation, any customer lists; and Executive confirms
that such information constitutes the exclusive property of the Company. For
purposes of this Section 10.1, confidential information shall not include any
information that is now known by or readily available to the general public or
which becomes known by or readily available to the general public other than as
a result of any improper act or omission of Executive. Notwithstanding anything
herein to the contrary, during the term of this Agreement, Executive may reveal





information, as necessary, (i) pursuant to his conducting Company business or
(ii) when required to do so by a court of competent jurisdiction, by any
governmental agency having supervisory authority over the business of the
Company, or by any administrative body or legislative body (including a
committee thereof) with jurisdiction to order Executive to divulge, disclose or
make accessible such information.

         10.2 Competitive Conduct. While Executive is employed by the Company
and for the two-year period beginning on the date of termination of employment,
Executive shall not, except with the Company's express prior written consent,
directly or indirectly, in any capacity for the benefit of any person:

         (a) solicit any person who then is, and who was within six months prior
to the termination of Executive's employment, a customer, supplier, salesman,
agent or representative of the Company, in any manner which interferes with such
person's relationship with the Company, or in an effort to obtain such person as
a customer, supplier, salesman, agent or representative of any business in
competition with the Company which business conducts operations within fifteen
(15) miles of any office or facility owned, leased or operated by the Company or
in any county, or similar political subdivision, in which the Company conducts
substantial business;

         (b) solicit the employment of or (solely with respect to employees who
are then or were managing directors or officers of the Company) hire (whether as
an employee, officer, director, agent, consultant or independent contractor),
any person who is, or was at any time during the previous three (3) months, an
employee, consultant, officer or director of the Company or any of its
subsidiaries and affiliates (except for such employment by the Company or any of
its subsidiaries and affiliates);

         (c) establish, engage, own, manage, operate, join or control, or
participate in the establishment, ownership (other than as the owner of less
than one percent (1%) of the stock of a corporation whose shares are publicly
traded) management, operation or control of, or be a director, officer,
employee, salesman, agent or representative of, or be a consultant to, any
person in any business in competition with any material business of the Company
if such person has any office or facility, at any location within fifteen (15)
miles of any office or facility owned, leased or operated by the Company or
conducts substantial business in any county, or similar political subdivision in
which the Company conducts substantial business. For purposes of Section 10.2,
the term "Company" shall include all affiliates and subsidiaries of the Company
except, in the event that the Distribution shall occur, ElderCare.

         10.3 Failure of Executive to Comply. If Executive shall, without
written consent of the Company, fail to comply with the provisions of this
Section 10, his rights to any future payments or other benefits hereunder shall
terminate (without prejudice to any other rights, including recovery of damages
of the Company), and the Company's obligations to make such payments and provide
such benefits shall cease; provided, however, that, for purposes of Section
10.3, no such failure to comply with any provision of this Section 10 shall be
deemed to have occurred unless and until Executive receives written notice from
the Company specifying the conduct alleged to constitute such failure and,
solely with respect to any failure to comply with any provision of this Section
10, if such failure is an unintentional violation of this Section 10, Executive
has not cured such failure within thirty (30) days after such notice.







         10.4 Remedies. Executive agrees that monetary damages would not be
adequate compensation for any loss incurred by the Company by reason of a breach
of the provisions of Sections 9 and 10 of this Agreement and hereby agrees to
waive the defense in any action for specific performance that a remedy at law
would be adequate. Accordingly, in addition to any other remedies that the
Company may have at law or in equity, the Company shall have the right to have
all obligations, agreements and other provisions of Sections 10 and 11
specifically performed by Executive, and the Company shall have the right to
obtain preliminary injunctive relief to secure specific performance and to
prevent a breach of Section 9 or 10. If the Company is obliged to resort to
litigation to enforce a covenant in Section 9 or 10 that contains a fixed term,
then such fixed term shall be extended for a period of time equal to the period
during which a material breach of such covenant was occurring, beginning on the
date of a final court order (without further right of appeal) holding that such
a material breach occurred, or, if later, the last day of the original fixed
term of such covenant.

         10.5 Consideration. Executive expressly acknowledges that the covenants
contained in Sections 9 and 10 are a material part of the consideration
bargained for by the Company and, without the agreement of Executive to be bound
by the covenants contained in such sections, the Company would not have agreed
to enter into this Agreement.

         10.6 Scope. If any portion of the covenants contained in Section 9 or
10 or its application is construed to be invalid, illegal or unenforceable, then
the other portions and their application shall not be affected thereby and shall
be enforceable without regard thereto. If any of the such covenants is
determined to be unenforceable because of its scope, duration, geographical area
or similar factor, the court making such determination shall have the power to
reduce or limit such scope, duration, area or other factor, and such covenant
shall then be enforceable in its reduced or limited for.

11.      Effect of Prior Agreements. This Agreement contains the entire
understanding between the parties hereto and, upon effectiveness of this
Agreement pursuant to Section 2 hereof, supersedes all prior agreements and
discussions between the Company and Executive.

12.      General Provisions.

         12.1 Arbitration. (a) Except with respect to injunctive relief under
Section 10 or otherwise, any controversy or claim arising out of or relating to
this Agreement or its alleged breach, or arising out of or relating to
Executive's employment or termination of employment (including, without
limitation, any dispute arising out of Section 6.3 hereof), shall be resolved
exclusively by final and binding arbitration held in the location of the
Company's principal office where Executive is then employed (or was last
employed if Executive's employment with the Company has been terminated) in
accordance with the Commercial Arbitration Rules of the American Arbitration
Association ("AAA"), and judgment on the award rendered by the arbitrator may be
entered by any court having jurisdiction thereof in such state.






         (b) An arbitrator shall be selected by mutual agreement of the parties,
if possible. If the parties fail to reach agreement upon appointment of the
arbitrator within thirty (30) days following receipt by one party of the other
party's notice of desire to arbitrate, the arbitrator shall be selected from a
list or lists of persons submitted by the AAA. The selection process shall be
that which is set forth in the AAA Commercial Arbitration Rules then prevailing,
except that, if the parties fail to select the arbitrator from one or more
lists, AAA shall not have the power to make an appointment but shall continue to
submit additional lists until the arbitrator has been selected. If, after three
lists have been submitted by the AAA, the parties have not appointed an
arbitrator, the AAA may limit the number of names that can be stricken by each
party from each subsequent list, until an arbitrator is selected.

         (c) Notice of arbitration must be given within one (1) year after the
accrual of the claim on which the notice is based. If the claiming party fails
to give notice of arbitration within that time, the claim shall be deemed to be
waived and shall be barred from either arbitration or litigation.

         (d) If Executive prevails as to any material issue presented to the
arbitrator, the entire cost of such proceedings, (including, without limitation,
Executive's reasonable attorneys' fees), shall be borne by the Company. If
Executive does not prevail as to any material issue, each party will pay for the
fees and expenses of its own attorneys, expert witnesses, and preparation and
presentation of proofs and post-hearing briefs. If a party breaches this Section
12.1, however, by commencing litigation of a claim that should be arbitrated
hereunder, then the other party shall have the right to move for a court order
compelling arbitration and, if successful, shall be entitled to recover from the
breaching party the reasonable attorneys' fees and court costs incurred in
obtaining such order.

         (e) Except to the extent necessary in connection with a proceeding
relating to the arbitration or an arbitration award contemplated by this Section
12.1, information concerning: (1) the existence of an arbitration, (ii) any
documentary or other evidence given by a party or witness in the arbitration and
(iii) the arbitration award, shall not be disclosed by the Company or its
subsidiaries or affiliates, Executive or their respective counsel and other
representatives, and the Company and Executive agree to use their best efforts
to cause the arbitration tribunal, the administrator, any other party to the
arbitration, such other party's counsel and every other person or entity
connected to, or having knowledge, of the proceeding or related arbitration or
judicial proceeding to keep such information from being disclosed, unless any
such party is required to do so by law or by a competent court or regulatory
body, and then only to the extend of disclosing no more than such party is
legally required to disclose.

         (f) The parties hereby waive any rights to appeal or to review of such
decision by any court or tribunal and also waive any objections to such
enforcement. THE PARTIES HEREBY AGREE TO WAIVE ALL RIGHTS TO TRIAL BY JURY WITH
RESPECT TO ANY CONTROVERSY, DISPUTE OR CLAIM SUBMITTED TO ARBITRATION UNDER THIS
AGREEMENT.







         12.2 Legal Expenses. Except as otherwise provided in Section 12.1, in
the event Executive prevails as to any material issue in any legal proceeding to
enforce the terms of this Agreement, the Company shall reimburse Executive for
reasonable attorneys' fees, costs and expenses incurred in connection therewith.
The Company shall pay directly all attorneys' fees and expenses reasonably
incurred by Executive in connection with the negotiation and preparation of this
Agreement and any negotiations with Executive's prior employer in connection
with Executive's capacity to enter into this Agreement, subject to a maximum of
$25,000.

         12.3 Mitigation. Executive shall not be obligated to seek other
employment or take any other action to mitigate any severance benefits
hereunder.

         12.4 Successors and Assigns. This Agreement shall be binding upon and
inure to the benefit of the successors and permitted assigns of the Company and
Executive and his heirs, executors, legal representatives, successors and
permitted assigns. Unless clearly inapplicable, reference herein to the Company
shall be deemed to include its successors and permitted assigns. However,
neither party may assign, transfer, pledge, encumber, hypothecate or otherwise
dispose of this Agreement or any of its or his rights hereunder without prior
written consent of the other party, any such attempted assignment, transfer,
pledge, encumbrance, hypothecation or other disposition without such consent
shall be null and void, without effect; provided, that the Company may assign
this Agreement to any successor to all or substantially all of its assets.

         12.5 Severability. In the event any provision of this Agreement or any
part hereof is held invalid, such invalidity shall not affect any remaining part
of such provision or any other provision, and to this end, the provisions of
this Agreement are intended to be and shall be deemed severable. If any court
construes any provision of this Agreement to be illegal, void or unenforceable
because of the duration or the area or matter covered thereby, such court shall
reduce the duration, area or matter of such provision, and, in its reduced form,
such provision shall then be enforceable and shall be enforced.

         12.6 Withholding. The Company may withhold from any amounts payable
under this Agreement such taxes and governmentally required withholdings as may
be required to be withheld pursuant to any applicable law or regulation.

         12.7 Representations. Executive represents that he has disclosed to the
Company in writing all material (i) threatened claims that (x) are unresolved
and still outstanding as of the Effective Date and (y) have been received by
Executive in writing during the twenty-four (24) months prior to the Effective
Date, (ii) existing claims, and (iii) pending claims, in each case, against him
of which he is aware, if any, as a result of his employment with Caremark Rx,
Inc. or his membership on any boards of directors which could be reasonably
expected to be materially damaging to Executive monetarily, reputationally or
otherwise.







         12.8 Indemnification. (a) The Company shall indemnify Executive and his
beneficiaries and successors (the "Legal Representatives") to the fullest extent
permitted by applicable law against all costs, charges, damages, amounts paid in
settlement or expenses (including reasonable attorneys' fees) whatsoever
incurred or sustained by him or his Legal Representatives in connection with any
threatened, pending or completed action, suit or proceeding to which he or his
Legal Representatives may be made a party as a result of the enforcement of the
Consulting Agreement in connection with the entering into of this Agreement or
the performance of services hereunder. This indemnification provision is in
addition to, and is not in substitution for, any other indemnification rights
that Executive might have under any insurance policy, the Company's By-Laws, or
any other plan, policy or agreement which provides indemnification rights for
Executive; provided, however, that any indemnity payments made pursuant to this
Section 12.8 shall not be duplicative of payments made pursuant to any insurance
policy, the Company's By-Laws, or any other plan, policy or agreement which
provides indemnification rights for Executive.

              (b) Notice of Claim. Executive shall give to the Company notice of
any claim made against him for which indemnification will or could be sought
under this Section 12.8. In addition, Executive shall give the Company such
information and cooperation as it may reasonably require and as shall be within
Executive's power, at such times and places as are convenient for Executive.

              (c) Defense of Claim. With respect to any claim under this Section
12.8 as to which Executive notifies the Company of the commencement thereof:

                  (i) The Company will be entitled to participate therein at its
own expense; and

                  (ii) To the extent that it may wish, the Company will be
entitled to assume the defense thereof, with counsel reasonably satisfactory to
Executive, which in the Company's sole discretion may be regular counsel to the
Company and may be counsel to other officers and directors of the Company or any
subsidiary.

                  (iii) The Company shall not be liable to indemnify Executive
under this Section 12.8 for any amounts paid in settlement of any action or
claim effected without its written consent. The Company shall not settle any
action or claim in any manner which would impose any penalty or limitation on
Executive without Executive's written consent. Neither the Company nor Executive
will unreasonably withhold or delay their consent to any proposed settlement.

              (d) Timing of Payment. The Company shall pay all costs and
expenses (including reasonable attorneys' fees) incurred by Executive or his
Legal Representatives in connection with the investigation, defense, settlement
or appeal of any action, suit or proceeding within thirty days of presentation
to the Company of an itemized statement of such costs and expenses. The Company
shall pay any damages or settlement amounts to the claiming party when such
amounts are due and owing under any court order or settlement document. If the
Company does not pay any amounts on a timely basis, Executive or his Legal
Representatives may bring a claim for payment against the Company and the
Company shall pay Executive's or his Legal Representative's costs and expenses
(including reasonable attorneys' fees) in connection with such claim.






              (e) Survival. Notwithstanding anything contained herein to the
contrary, the provisions of this Section 12.8 shall survive the termination of
this Agreement.

13.      Modification and Waiver.

         13.1 Amendment of Agreement. Except for increases in compensation made
as provided in Section 4.1, this Agreement may not be changed or modified except
by an instrument in writing signed by both of the parties hereto.

         13.2 Waiver. No term or condition of this Agreement shall be deemed to
have been waived, nor shall there be any estoppel against the enforcement of any
provision of this Agreement, except by written instrument of the party charged
with such waiver or estoppel. No such written waiver shall be deemed a
continuing waiver unless specifically stated therein, and each such waiver shall
operate only as to the specific term or condition waived and shall not
constitute a waiver of such term or condition for the future or as to any act
other than that specifically waived.

14.      Notices. Any notice to be given hereunder shall be in writing and shall
be deemed given when delivered personally, sent by courier or telecopy or
registered or certified mail, postage prepaid, return receipt requested,
addressed to the party concerned at the address indicated below or to such other
address as such party may subsequently give notice of hereunder in writing:

                           To Executive at:

                           c/o Richard S. Marcus
                           Godfrey & Kahn, S.C.
                           780 N. Water Street
                           Milwaukee, Wisconsin 53202

                           with a copy:

                           Debra Sadow Koenig
                           Godfrey & Kahn, S.C.
                           780 N. Water Street
                           Milwaukee, Wisconsin 53202








                           To the Company at:

                           Genesis Health Ventures, Inc.
                           101 East State Street
                           Kennett Square, PA  19348
                           Attention: Law Department

                           And with a copy to:

                           The Chairman of the Compensation Committee

15.      Governing Law. The parties hereto intend that this Agreement shall be
governed by the laws of the state in which the Company's executive offices are
located at the time any claim arising out of or relating to this Agreement is
brought, without regard to its conflict of laws provisions. Each party hereto
hereby irrevocably waives, to the fullest extent permitted by law, (i) any
objection that it may now or hereafter have to laying venue of any suit, action
or proceeding brought in such courts, and (ii) any claim that any suit, action
or proceeding brought in such courts has been brought in an inconvenient forum.

                  IN WITNESS WHEREOF, the Company has caused this Agreement to
be executed by its duly authorized officer, and Executive has signed this
Agreement, all as of the day and year first above written.

                          GENESIS HEALTH VENTURES, INC.

                          /s/ Robert H. Fish
                          ---------------------------------------
                          By:
                          Name: Robert H. Fish
                          Title: Chairman and CEO

                          /s/ John Arlotta
                          ---------------------------------------
                          JOHN ARLOTTA






Acknowledged on Behalf of the Board:

/s/ James J. Wankmiller
- ------------------------------------
Name:  James J. Wankmiller
Title: Sr. V.P.







                                    EXHIBIT A
                                    ---------

                            FORM OF RELEASE AGREEMENT

         This Release Agreement ("Release") is entered into as of this ______day
of ________, hereinafter "Execution Date", by and between [Employee Full Name]
(hereinafter "Employee"), and [Employer Full Name] and its successors and
assigns (hereinafter, the Company"). The Employee and the Company are sometimes
collectively referred to as the "Parties".

1.       The Employee's employment with the Company is terminated effective
     [Month, Day, Year] (hereinafter "Termination Date"). The Parties have
     agreed to avoid and resolve any alleged existing or potential disagreements
     between them arising out of or connected with the Employee's employment
     with the Company including the termination thereof. The Company expressly
     disclaims any wrongdoing or any liability to the Employee.

2.       The Company agrees to provide the Employee the severance benefits
     provided for in his/her Employment Agreement with the Company, dated as of
     [ ], after he/she executes this Release and the Release becomes effective
     pursuant to its terms [FOR 40+ and does not revoke it as permitted in
     Section 8 below, the expiration of such revocation period being the
     "Effective Date")].

3.       Employee represents that he has not filed, and will not file, any
     complaints, lawsuits, administrative complaints or charges relating to his
     employment with, or resignation from, the Company[; provided, however, that
     nothing contained in this Section 3 shall prohibit Employee from bringing a
     claim to challenge the validity of the ADEA Release in Section 8 herein].
     In consideration of the benefits described in Section 2, for himself and
     his heirs, administrators, representatives, executors, successors and
     assigns (collectively, "Releasers"), Employee agrees to release the
     Company, its subsidiaries, affiliates, and their respective parents, direct
     or indirect subsidiaries, divisions, affiliates and related companies or
     entities, regardless of its or their form of business organization, any
     predecessors, successors, joint ventures, and parents of any such entity,
     and any and all of their respective past or present shareholders, partners,
     directors, officers, employees, consultants, independent contractors,
     trustees, administrators, insurers, agents, attorneys, representatives and
     fiduciaries, including without limitation all persons acting by, through,
     under or in concert with any of them (collectively, the "Released
     Parties"), from any and all claims, charges, complaints, causes of action
     or demands of whatever kind or nature that Employee and his Releasers now
     have or have ever had against the Released Parties, whether known or
     unknown, including but not limited to: wrongful or tortious termination;
     constructive discharge; implied or express employment contracts and/or
     estoppel; discrimination and/or retaliation under any federal, state or
     local statute or regulation, specifically including any claims Employee may
     have under the Fair Labor Standards Act, the Americans with Disabilities




                                     PAGE 1


     Act, Title VII of the Civil Rights Act of 1964 as amended, and the Family
     and Medical Leave Act; the discrimination or other employment laws of the
     State of [      ](1); any claims brought under any federal or state statute
     or regulation for non-payment of wages or other compensation, including
     grants of stock options or any other equity compensation; and libel,
     slander, or breach of contract other than the breach of this Release. This
     Release specifically excludes claims, charges, complaints, causes of action
     or demand that (a) post-date the Termination Date, (b) relate to any
     unemployment compensation claim Employee may have, (c) involve rights to
     receive vested benefits to which Employee is entitled as of the Termination
     Date under any qualified or nonqualified employee benefit plans and
     arrangements of the Company, (d) relate to claims for indemnification as
     provided under applicable law, any applicable insurance policies, e.g.,
     directors and officers insurance, the Articles of Incorporation or By-Laws
     of the Company or any affiliate of the Company, or any applicable policy
     statements or indemnification agreements by or with the Company or any
     affiliate of the Company, or (e) involve obligations owed to Employee by
     the Company under the Employment Agreement dated July __, 2003 between the
     Company and the Employee.

4.       The Company, on its own behalf and on behalf of the Released Parties,
     hereby releases Employee from all claims, causes of actions, demands or
     liabilities which arose against the Employee on or before the time it signs
     this Agreement. This release covers any claims, whether the facts or
     circumstances giving rise to them are currently known or unknown. This
     Paragraph, however, does not apply to or adversely affect any claims
     against Employee which allege or involve the following: (i) a failure to
     deal fairly with the Company or its shareholders in connection with a
     matter in which Employee has a conflict of interest; (ii) a violation of
     criminal law, unless Employee has reasonable cause to believe that his
     conduct was lawful; (iii) willful misconduct or gross negligence by
     Employee; or (iv) obligations owed by him to the Company under the
     Employment Agreement dated July __, 2003 between the Company and the
     Employee. The Company will indemnify Employee for reasonable attorneys'
     fees, costs and damages which may arise in connection with any proceeding
     by the Company or any Released Party which is inconsistent with this
     Release by the Company and the Released Parties.


5.       Employee agrees to keep the fact that this Release exists and the terms
     of this Release in strict confidence except to his/her immediate family and
     his/her financial and legal advisors on a need-to-know basis, except as
     required by law.

6.       Employee warrants that no promise or inducement has been offered for
     this Release other than as set forth herein and that this Release is
     executed without reliance upon any other promises or representations, oral
     or written. Any modification of this Release must be made in writing and be
     signed by Employee and the Company.



- ----------------
(1) Insert state of employment.


                                     PAGE 2



7.       If any provision of this Release or compliance by Employee or the
     Company with any provision of the Release constitutes a violation of any
     law, or is or becomes unenforceable or void, then such provision, to the
     extent only that it is in violation of law, unenforceable or void, will be
     deemed modified to the extent necessary so that it is no longer in
     violation of law, unenforceable or void, and such provision will be
     enforced to the fullest extent permitted by law. If such modification is
     not possible, such provision, to the extent that it is in violation of law,
     unenforceable or void, will be deemed severable from the remaining
     provisions of this Release, which provisions will remain binding on both
     Employee and the Company. This Release is governed by, and construed and
     interpreted in accordance with the laws of the State of [ ], without regard
     to principles of conflicts of law. Employee consents to venue and personal
     jurisdiction in the State of [ ] for disputes arising under this Release.
     This Release represents the entire understanding with the Parties with
     respect to subject matter herein, no oral representations have been made or
     relied upon by the Parties.



8.       [FOR EMPLOYEES OVER 40 ONLY -- In further recognition of the above,
     Employee hereby releases and discharges the Released Parties from any and
     all claims, actions and causes of action that he/she may have against the
     Released Parties, as of the date of the execution of this Release, arising
     under the Age Discrimination in Employment Act of 1967, as amended
     ("ADEA"), and the applicable rules and regulations promulgated thereunder.
     The Employee acknowledges and understands that ADEA is a federal statute
     that prohibits discrimination on the basis of age in employment, benefits
     and benefit plans. Employee specifically agrees and acknowledges that: (A)
     the release in this Section 8 was granted in exchange for the receipt of
     consideration that exceeds the amount to which he/she would otherwise be
     entitled to receive upon termination of his/her employment; (B) his/her
     waiver of rights under this Release is knowing and voluntary as required
     under the Older Workers Benefit Protection Act; (B) that he/she has read
     and understands the terms of this Release; (C) he/she has hereby been
     advised in writing by the Company to consult with an attorney prior to
     executing this Release; (D) the Company has given him/her a period of up to
     twenty-one (21) days within which to consider this Release, which period
     shall be waived by the Employee's voluntary execution prior to the
     expiration of the twenty-one day period; and (E) following his/her
     execution of this Release he/she has seven (7) days in which to revoke
     his/her release as set forth in this Section 8 only and that, if he/she
     chooses not to so revoke, the Release in this Section 8 shall then become
     effective and enforceable and the payment listed above shall then be made
     to his/her in accordance with the terms of this Release. To cancel this





                                     PAGE 3



     Release, Employee understands that he/she must give a written revocation to
     the General Counsel of the Company at [    ](2), either by hand delivery or
     certified mail within the seven-day period. If he/she rescinds the Release,
     it will not become effective or enforceable and he/she will not be entitled
     to any benefits from the Company.]

9.   EMPLOYEE ACKNOWLEDGES AND AGREES THAT HE/SHE HAS CAREFULLY READ AND
     VOLUNTARILY SIGNED THIS RELEASE, THAT HE/SHE HAS HAD AN OPPORTUNITY TO
     CONSULT WITH AN ATTORNEY OF HIS/HER CHOICE, AND THAT HE/SHE SIGNS THIS
     RELEASE WITH THE INTENT OF RELEASING THE RELEASED PARTIES TO THE EXTENT SET
     FORTH HEREIN.

10.  In the event that any provision of this Release should be held to be
     invalid or unenforceable, each and all of the other provisions of this
     Release shall remain in full force and effect. If any provision of this
     Release is found to be invalid or unenforceable, such provision shall be
     modified as necessary to permit this Release to be upheld and enforced to
     the maximum extent permitted by law.

ACCEPTED AND AGREED TO:

_________________________________           ____________________________________

[Employer Full Name]                        [Employee Full Name]



Dated:___________________________           Dated:______________________________






- ----------------
(2) Insert address.







                                     PAGE 4

EX-10

                              EMPLOYMENT AGREEMENT

         THIS EMPLOYMENT AGREEMENT (the "Agreement") originally dated as of July
28, 2003 (the "Effective Date") by and between NeighborCare, Inc. (formerly
known as Genesis Health Ventures, Inc.), a Pennsylvania corporation with its
principal place of business at 7 Lee Street, Baltimore, MD 21202 (the
"Company"), and John L. Kordash (the "Executive) is amended and restated as of
December 9, 2003.

                                   WITNESSETH

         WHEREAS, the Company desires to employ the Executive as an employee of
the Company, and the Executive desires to provide services to the Company, all
upon the terms and conditions hereinafter set forth;

         WHEREAS, upon due consideration, the Executive acknowledges that the
consideration set forth herein is reasonable and adequate, including the terms
of employment and covenants contained herein; and

         WHEREAS, the Company is contemplating a spin-off (the "Spin-Off") of
Genesis Healthcare Corporation; and

         WHEREAS, the Executive will remain an employee of the Company after the
completion of the Spin-Off;

         NOW, THEREFORE, in consideration of the premises and mutual agreements
hereinafter set forth, and intending to be legally bound hereby, the parties
hereto agree as follows:

1. Offer and Acceptance of Employment. The Company hereby agrees to employ the
Executive as Executive Vice President and Assistant to the Vice Chairman and
following the spin-off to the Chairman, President and Chief Executive Officer.
The Executive accepts such employment and agrees to perform the customary
responsibilities of such position during the term of this Agreement. The
Executive will perform such other duties as may from time to time be reasonably
assigned to the Executive by the Board of Directors of the Company (the "Board")
or the Company's Chief Executive Officer, provided such duties are consistent
with and do not interfere with the performance of the duties described herein
and are of a type customarily performed by persons of similar titles with
similar corporations. Nothing in this Agreement shall preclude the Executive
from serving as a director, trustee, officer of, or partner in, any other firm,
trust, corporation or partnership or from pursuing personal investments, as long
as such activities do not interfere with the Executive's performance of the
Executive's duties hereunder or violate the terms of Section 8 hereof.


2. Period of Employment.

         (a) Period of Employment. The period of the Executive's employment
under this Agreement shall commence on the Effective Date and shall, unless
sooner terminated pursuant to Section 4, terminate on October 1, 2005 (such
period, as extended from time to time, herein referred to as the "Term").
Subject to Section 2(b), and if the Term has not been terminated pursuant to
Section 4, on October 1, 2005 and on each October 1st thereafter (each such
October 1st, an "Automatic Extension Date") the Term shall be extended for an
additional period of one year.

         (b) Termination of Automatic Extension by Notice. The Company (with the
affirmative vote of two-thirds of the non-management membership of the Board at
a meeting of the Board called and held for such purpose) or the Executive may
elect to terminate the automatic extension of the Term set forth in Section 2(a)
("Automatic Extension") by giving written notice of such election. Any notice
given hereunder must be given not less than 60 days prior to the applicable
Automatic Extension Date.

3. Compensation and Benefits.

         (a) Base Salary. As long as the Executive remains an employee of the
Company, the Executive will be paid an annual base salary of $250,000.00, which
shall continue at this rate, subject to adjustment as hereinafter provided. The
Executive's annual base salary shall be reviewed periodically and the Company
may increase such annual base salary, by an amount, if any, it determines to be
appropriate. Any such increase shall not reduce or limit any other obligation of
the Company hereunder. The Executive's annual base salary payable hereunder, as
it may be increased from time to time and without reduction for any amounts
deferred as described below, is referred to herein as "Base Salary". The
Executive's Base Salary, as in effect from time to time, may not be reduced by
the Company without the Executive's consent, provided that the Base Salary
payable under this paragraph shall be reduced to the extent the Executive elects
to defer or reduce such salary under the terms of any deferred compensation or
savings plan or other employee benefit arrangement maintained or established by
the Company. The Company shall pay the Executive the portion of the Executive's
Base Salary not deferred in accordance with its customary periodic payroll
practices.

         (b) Incentive Compensation. The Executive shall be eligible to
participate in stock option, incentive compensation and other plans at a level
consistent with the Executive's position with the Company and the Company's then
current policies and practices.

         (c) Stock Option. The Company shall, subject to approval by the
compensation committee of the Board, pursuant to the terms of its stock option
plan or any similar plan, grant to the Executive on the latter of November 13,
2003 or the fifth business day after the completion of the Spin-Off (the "Grant
Date") an option to acquire 250,000 shares of common stock of the Company
("Company Stock"). The exercise price of the shares subject to the stock options
shall be established by the compensation committee of the Board at the time of
the grant and shall be equal to the fair market value of the Company Stock (as
determined under the Company stock option plan) on the Grant Date. The Options
shall vest over a three year period with the exact frequency of the vesting to
be set by the Compensation Committee of the Board. The Executive must be
employed with the Company on each vesting date in order for those stock options
which vest on those respective option dates to vest. In addition, the previously
granted and outstanding stock options under this Section 3(c) shall fully and
immediately vest on (i) any termination of the Executive's employment with the
Company by the Company without Cause (as defined in Section 4 (b)) or because of
the Executive's death or Disability (as defined in Section 4 (c)), or (ii) any
termination of the Executive's employment by the Executive's resignation for
Good Reason (as defined in Section 4 (d)). The stock options shall have a ten
(10) year term subject to earlier termination of such options on account of the
Executive's termination of employment for any reason, at which point the
exercisability of the vested options will be as set forth in the applicable plan
or agreement except as otherwise set forth in this Agreement.

                                      -2-


         (d) Benefits, Perquisites and Expenses.

                  (i) Benefits. During the Term, the Executive shall be eligible
to participate in (1) each welfare benefit plan sponsored or maintained by the
Company, including, without limitation, each life, hospitalization, medical,
dental, health, accident or disability insurance or similar plan or program of
the Company, and (2) each pension, profit sharing, retirement, deferred
compensation or savings plan sponsored or maintained by the Company, in each
case, whether now existing or established hereafter, to the extent that the
Executive is eligible to participate in any such plan under the generally
applicable provisions thereof. With respect to the pension or retirement
benefits payable to the Executive, the Executive's service credited for purposes
of determining the Executive's benefits and vesting shall be determined in
accordance with the terms of the applicable plan or program. Nothing in this
Section 3(c), in and of itself, shall be construed to limit the ability of the
Company to amend or terminate any particular plan, program or arrangement. If
the Company terminates medical or disability benefits during the terms of this
Agreement, the Executive shall have the option of securing substantially similar
benefits at Company expense, less any prior contributions being made by the
Executive.

                  (ii) Vacation. During the Term, the Executive shall be
entitled to the number of paid vacation days in each anniversary year determined
by the Company from time to time for its senior executive officers, but not less
than four (4) weeks in any anniversary year. The Executive shall also be
entitled to all paid holidays given by the Company to its senior officers.
Vacation days which are not used during any calendar year may not be accrued,
nor shall the Executive be entitled to compensation for unused vacation days,
during the Term or upon termination of employment.

                  (iii) Executive Benefits. During the Term, the Executive shall
be entitled to receive such perquisites (e.g., fringe benefits), plans and other
benefits as are generally provided to other senior officers of the Company in
accordance with the then current policies and practices of the Company.



                                      -3-


                  (iv) Business Expenses. During the Term, the Company shall pay
or reimburse the Executive for all reasonable expenses incurred or paid by the
Executive in the performance of the Executive's duties hereunder, upon
presentation of expense statements or vouchers and such other information as the
Company may reasonably require and in accordance with the generally applicable
policies and practices of the Company. The Company shall reimburse the Executive
for reasonable costs associated with temporary housing and shall pay for moving
expenses (including gross up).

4. Employment Termination.

         The Term of employment under this Agreement may be earlier terminated
only as follows:

         (a) Cause. The Company shall have the right to terminate the
Executive's employment for Cause. For purposes hereof, a termination by the
Company for "Cause" shall mean termination by action of at least two-thirds of
the non-management membership of the Board at a meeting duly called and held
upon at least fifteen (15) days prior written notice to the Executive specifying
the particulars of the action or inaction alleged to constitute "Cause" because
of (i) the Executive's conviction of, or plea of guilty or nolo contendere to,
(A) any felony (whether or not involving the Company or any of its subsidiaries)
or (B) any other crime involving moral turpitude which subjects, or if generally
known, would subject, the Company or any of its subsidiaries to public ridicule
or embarrassment, (ii) habitual intoxication, the use of illegal drugs, or the
abuse of chemical substances by the Executive, (iii) fraud or other willful
misconduct by the Executive in respect of the Executive's obligations under this
Agreement, (iv) the willful engaging by the Executive in gross misconduct or a
material violation of the Company's code of conduct or corporate policies, or
(vi) willful refusal or continuing failure to attempt, without proper cause and,
other than by reason of illness, to follow the lawful directions of the Board
following thirty days prior written notice to the Executive of the Executive's
refusal to perform, or failure to attempt to perform such duties and which
during such thirty day period such refusal or failure to attempt is not cured by
the Executive. "Cause" shall not include a bona fide disagreement over a
corporate policy, so long as the Executive does not willfully violate on a
continuing basis specific written directions from the Board, which directions
are consistent with the provisions of this Agreement. Action or inaction by the
Executive shall not be considered "willful" unless done or omitted by the
Executive intentionally and without the Executive's reasonable belief that the
Executive's action or inaction was in the best interests of the Company, and
shall not include failure to act by reason of total or partial incapacity due to
physical or mental illness.

         (b) Without Cause. Notwithstanding anything to the contrary contained
in this Agreement, the Company may, at any time after at least 30 days prior
written notice in accordance with Section 4(f) hereof to the Executive,
terminate the Executive's employment hereunder without Cause.



                                      -4-


         (c) Death or Disability. If the Executive dies, the Executive's
employment shall terminate as of the date of death. If the Executive develops a
disability, the Company may terminate the Executive's employment for Disability.
As used in this Agreement, the term "Disability" shall mean incapacity due to
physical or mental illness which has caused the Executive to be unable to
substantially perform the essential functions of the Executive's duties with or
without a reasonable accommodation with the Company on a full time basis for (i)
a period of six (6) consecutive months, or (ii) for shorter periods aggregating
more than six (6) months in any twelve (12) month period. During any period of
Disability, the Executive agrees to submit to reasonable medical examinations
upon the reasonable request, and at the expense, of the Company.

         (d) Good Reason. The Executive may terminate the Executive's employment
for Good Reason at any time during the term of this Agreement. For purposes of
this Agreement, "Good Reason" shall mean any of the following, without the
Executive's written consent, provided, that (x) the Executive shall provide the
Company with written notice thereof within thirty (30) days after the Executive
has knowledge of the occurrence of any of the events or circumstances set forth
in clauses (i) through (v) below, which notice shall specifically identify the
event or circumstance that the Executive believes constitutes Good Reason, (y)
the Company fails to correct the circumstance or event so identified within
thirty (30) days after the date of delivery of the notice referred to in clause
(x) above, and (z) the Executive resigns his employment for Good Reason within
ninety (90) days after the date of delivery of the notice referred to in (x)
above:

                  (i) the assignment to the Executive by the Company of any
duties materially adversely inconsistent with the Executive's status with the
Company or a substantial alteration in the nature or status of the Executive's
responsibilities from those in effect on the Effective Date, or a reduction in
the Executive's titles or offices as in effect on the Effective Date, or any
removal of the Executive from, or any failure to reelect the Executive to, any
of such positions, except in connection with the termination of the Executive's
employment for Disability or Cause or as a result of the Executive's death or by
the Executive other than for Good Reason;

                  (ii) a reduction by the Company in the Executive's Base Salary
as in effect on the date hereof or as the same may be increased from time to
time during the term of this Agreement;

                  (iii) any material failure by the Company to comply with any
of the material provisions of this Agreement including the failure by the
Company to award the stock options set forth in Section 3 (c);

                  (iv) the Company's termination of the Automatic Extension
pursuant to Section 2(b) of this Agreement;

                  (v) following a Change of Control, any relocation of the
Executive's principal place of employment to a location more than forty-five
(45) miles beyond the location at which the Executive was employed immediately
prior to the Change of Control.

                                      -5-


         (e) Executive's Voluntary Termination. Notwithstanding anything to the
contrary contained in this Agreement, the Executive may, at any time after at
least sixty (60) days but no more than ninety (90) days prior written notice in
accordance with Section 4(f) hereof to the Company, terminate voluntarily the
Executive's employment hereunder.

         (f) Notice of Termination. Any termination, except for death, pursuant
to this Section 4 shall be communicated by a Notice of Termination. For purposes
of this Agreement, a "Notice of Termination" shall mean a written notice which
shall indicate those specific termination provisions in this Agreement relied
upon and which sets forth in reasonable detail the facts and circumstances
claimed to provide a basis for termination of the Executive's employment under
the provision so indicated.

         (g) Date of Termination. "Date of Termination" shall mean (i) if this
Agreement is terminated by the Company for Disability, thirty (30) days after
Notice of Termination is given to the Executive (provided that the Executive
shall not have returned to the performance of the Executive's duties on a
full-time basis during such 30-day period), (ii) if the Executive's employment
is terminated due to the Executive's death, on the date of death; (iii) if the
Executive's employment is terminated due to the Executive's voluntary
resignation pursuant to Section 4(e), the date specified in the notice (which
shall not be less than sixty (60) days nor more than ninety (90) days from the
date such Notice of Termination is given); or (iii) if the Executive's
employment is terminated for any other reason, the date specified in the Notice
of Termination (which shall not be less than thirty (30) days from the date such
Notice of Termination is given).

         (h) Resignation from All Positions. Notwithstanding any other provision
of this Agreement, upon the termination of the Executive's employment for any
reason, unless otherwise requested by the Board, the Executive shall immediately
resign from all positions that the Executive holds or has ever held with the
Company and any other affiliate of the Company (and with any other entities with
respect to which the Company has requested the Executive to perform services).
The Executive hereby agrees to execute any and all documentation to effectuate
such resignations upon request by the Company, but he shall be treated for all
purposes as having so resigned upon termination of his employment, regardless of
when or whether he executes any such documentation.

5. Payments upon Termination.

         (a) Termination Due to Death or Disability. Upon the Executive's death
or the termination of the Executive's employment by reason of the Disability of
the Executive, to the extent not theretofore paid or provided, (i) the Company
shall pay to the Executive's estate or the Executive, as applicable, within
thirty (30) days after the Date of Termination (1) the Executive's full Base
Salary and other accrued benefits earned up to the last day of the month of the
Executive's death or termination of employment by reason of the Executive's
Disability, (2) all deferred compensation of any kind, including, without
limitation, any amounts earned under any bonus plan, and (3) if any bonus, under
any bonus plan of the Company, shall be payable in respect of the year in which
the Executive's death or termination of employment by reason of the Executive's
Disability occurs, such bonus(es) prorated up to the last day of the month of
the Executive's death or termination of employment by reason of the Executive's
Disability and (ii) all restricted stock, stock option and performance share
awards made to the Executive and outstanding as of the Date of Termination shall
automatically become fully vested as of the Date of Termination.

                                      -6-


         (b) Termination for Cause. If the Executive's employment shall be
terminated for Cause, the Company shall pay the Executive, within thirty (30)
days after the Date of Termination: (i) the Executive's full Base Salary through
the Date of Termination at the rate in effect at the time Notice of Termination
is given, and (ii) all deferred compensation of any kind. The Company shall have
no further obligations to the Executive under this Agreement.

         (c) Termination by the Executive for Good Reason or by the Company for
Reasons other than for Cause, Disability or Death.

                  (i) In the event (1) the Company terminates the Executive's
employment during the Term other than for Cause, death or Disability, or (2) the
Executive resigns during the Term for Good Reason, then (I) the Company shall
make a lump-sum cash payment to the Executive, within thirty (30) days after the
Date of Termination, equal to the sum of (x) the Executive's Average Base Salary
(as defined below) and (y) the Executive's Average Assumed Cash Incentive
Compensation (as defined below); and (II) all stock options, stock awards and
similar equity rights, if any, granted to the Executive and outstanding as of
the Date of Termination shall vest and become exercisable immediately prior to
the Date of Termination and shall remain exercisable for a period of ninety (90)
days following the Date of Termination (or, if sooner, the end of the scheduled
term of the stock option) and (III) Executive shall receive Pro Rata Bonus.
"Executive's Average Base Salary" means the Executive's Base Salary for (a) the
most recent two years (including the year in which the Date of Termination
occurs) divided by two if the Executive has been employed hereunder for more
than two years, or (b) the year in which the Date of Termination occurs if the
Executive has been employed hereunder for less than two years. "Executive's
Average Assumed Cash Incentive Compensation" means all annual bonuses earned
under the Company's annual incentive compensation plan (which is intended to be
a cash plan as of the Effective Date) in consideration of services for the two
(2) most recent completed fiscal years prior to the Date of Termination, divided
by two (2), or the annual bonuse earned in such shorter number of fiscal years
during which an annual bonus incentive program existed. "Pro Rata Bonus" means a
pro rata bonus for the portion of the year in which the date of termination
occurs preceding the date of termination based upon the amount that would have
been earned based on the Company's actual performance for the portion of the
year ending on the date of termination, using performance goals that are
pro-rated to reflect the portion of the year prior to the date of termination
(which amount will be paid as soon as practicable following the date of
termination).

                  (ii) The payments under this Section are subject to, and
conditional upon, the Executive executing and not revoking a general release of
all statutory and common law claims relating to employment and termination from
employment in a form provided by the Company.



                                      -7-


                  (iii) Following (1) termination of the Executive's employment
by the Company during the Term other than for Cause, death or Disability, or (2)
the Executive's resignation during the Term for Good Reason, the Company shall
also maintain in full force and effect, for the continued benefit of the
Executive and his dependents for a period equal to the greater of (x) the
remaining period of the then current Term without giving effect to such
termination or (y) two (2) years, all employee insurance benefit plans and
programs to which the Executive was entitled prior to the Date of Termination
(including, without limitation, the health, dental, vision, life and other
voluntary insurance programs, but specifically excluding any company paid
disability plan or program provided by the Company) if the Executive's continued
participation is permissible under the general terms and provisions of such
plans and programs and the Executive continues to pay all applicable premiums.
In the event that the Executive's participation in any health, medical or life
insurance plan or program is barred, the Company shall obtain and pay for, on
the Executive's behalf, individual insurance plans, policies or programs which
provide to the Executive health, medical, and life insurance coverage which is
equivalent to the insurance coverage to which the Executive was entitled prior
to the Date of Termination.

                  (iv) The Executive recognizes and accepts that the Company
shall not, in any case, be responsible for any additional amount, severance pay,
termination pay, severance obligation, incentive compensation payments, costs,
attorneys fees or other damages whatsoever arising from termination of the
Executive's employment, above and beyond those specifically provided for herein.
Notwithstanding anything herein to the contrary, the Executive shall maintain
his/her rights under any Company sponsored qualified or nonqualified retirement
plan.

6. Change of Control.

         For purposes of this Agreement, the term "Change of Control" shall mean
the occurrence of any of the following:

                  (a) The acquisition by any individual, entity or group (within
the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of
1934, as amended (the "Exchange Act")) (a "Person") of beneficial ownership
(within the meaning of Rule 13d-3 promulgated under the Exchange Act) of forty
percent (40%) or more of either (A) the then-outstanding shares of common stock
of the Company (the "Outstanding Company Common Stock") or (B) the combined
voting power of the then-outstanding voting securities of the Company entitled
to vote generally in the election of directors (the "Outstanding Company Voting
Securities"); provided, however, that, for purposes of this Section 6(a), the
following acquisitions shall not constitute a Change of Control: (i) any
acquisition directly from the Company, (ii) any acquisition by the Company,
(iii) any acquisition by any employee benefit plan (or related trust) sponsored
or maintained by the Company or any of its affiliates, (iv) any acquisition by
any corporation pursuant to a transaction that complies with Sections 6(c)(i),
6(c)(ii) and 6(c)(iii), (v) any acquisition by any underwriter temporarily
holding securities pursuant to an offering of such securities, (vi) any
acquisition by Goldman Sachs Capital Partners or Highland Capital, (vii) any
acquisition by the Executive or any group of persons including the Executive (or
any entity controlled by the Executive or any group of persons including the
Executive) or (viii) a beneficial owner of less than forty percent (40%) of the
Outstanding Company Voting Securities that becomes a beneficial owner of forty
percent (40%) or more of the Outstanding Company Voting Securities solely by
reason of redemption or repurchase of such securities by the Company so long as
such beneficial owner takes immediate action to reduce its beneficial ownership
of Company Voting Securities below forty percent (40%);

                                      -8-


                  (b) Any time at which individuals who, as of the date hereof,
constitute the Board (the "Incumbent Board") cease for any reason to constitute
at least a majority of the Board; provided, however, that any individual
becoming a director subsequent to the date hereof whose election, or nomination
for election by the Company's shareholders, was approved by a vote of at least a
majority of the directors then comprising the Incumbent Board shall be
considered as though such individual were a member of the Incumbent Board, but
excluding, for this purpose, any such individual whose initial assumption of
office occurs as a result of an actual or threatened election contest with
respect to the election or removal of directors or other actual or threatened
solicitation of proxies or consents by or on behalf of a Person other than the
Board; provided, further, that any individual becoming a director subsequent to
the date hereof who was elected by, or on the recommendation of any person
described in clause (vi) of Section 6(a) above pursuant to contractual rights as
of the Effective Date with respect to Outstanding Company Voting Securities
owned by such person shall be treated as a member of the Incumbent Board;

                  (c) Consummation of a merger, statutory share exchange or
consolidation or similar corporate transaction involving the Company or any of
its subsidiaries, a sale or other disposition of all or substantially all of the
assets of the Company, or the acquisition of assets or stock of another entity
by the Company or any of its subsidiaries (each, a "Business Combination"), in
each case unless, following such Business Combination, (i) all or substantially
all of the individuals and entities that were the beneficial owners of the
Outstanding Company Common Stock and the Outstanding Company Voting Securities
immediately prior to such Business Combination beneficially own, directly or
indirectly, more than fifty percent (50%) of the then-outstanding shares of
common stock and the combined voting power of the then-outstanding voting
securities entitled to vote generally in the election of directors, as the case
may be, of the corporation resulting from such Business Combination (including,
without limitation, a corporation that, as a result of such transaction, owns
the Company or all or substantially all of the Company's assets either directly
or through one or more subsidiaries) in substantially the same proportions as
their ownership immediately prior to such Business Combination of the
Outstanding Company Common Stock and the Outstanding Company Voting Securities,
as the case may be, (ii) no Person (excluding any corporation resulting from
such Business Combination or any employee benefit plan (or related trust) of the
Company or such corporation resulting from such Business Combination)
beneficially owns, directly or indirectly, forty percent (40%) or more of,
respectively, the then-outstanding shares of common stock of the corporation
resulting from such Business Combination or the combined voting power of the
then-outstanding voting securities of such corporation, except to the extent
that such ownership existed prior to the Business Combination, and (iii) at
least a majority of the members of the board of directors of the corporation
resulting from such Business Combination were members of the Incumbent Board at
the time of the execution of the initial agreement or of the action of the Board
providing for such Business Combination; provided, however, that a spinoff of
subsidiaries or divisions of the Company to an entity which is owned by the
shareholders of the Company in substantially the same proportion as their
ownership of the Company shall not constitute a Change of Control; or

                                      -9-


                  (d) Approval by the shareholders of the Company of a complete
liquidation or dissolution of the Company.

7. Certain Tax Matters.

         (a) Anything in this Agreement to the contrary notwithstanding, in the
event it shall be determined that any Payment would be subject to the Excise
Tax, then the Executive shall be entitled to receive an additional payment (the
"Gross-Up Payment") in an amount such that, after payment by the Executive of
all taxes (and any interest or penalties imposed with respect to such taxes),
including, without limitation, any income taxes (and any interest and penalties
imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment,
the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax
imposed upon the Payments. The Company's obligation to make Gross-Up Payments
under this Section 7 shall not be conditioned upon the Executive's termination
of employment.

         (b) Subject to the provisions of Section 7(c), all determinations
required to be made under this Section 7, including whether and when a Gross-Up
Payment is required, the amount of such Gross-Up Payment and the assumptions to
be utilized in arriving at such determination, shall be made, to the extent
permitted by applicable law, by the Company's auditors as of immediately prior
to the Change of Control, or such other nationally recognized certified public
accounting firm as may be designated by the Executive (the "Accounting Firm").
The Accounting Firm shall provide detailed supporting calculations both to the
Company and the Executive within 15 business days of the receipt of notice from
the Executive that there has been a Payment or such earlier time as is requested
by the Company. In the event that the Accounting Firm is serving as accountant
or auditor for the individual, entity or group effecting the Change of Control,
the Executive may appoint another nationally recognized accounting firm to make
the determinations required hereunder (which accounting firm shall then be
referred to as the Accounting Firm hereunder). All fees and expenses of the
Accounting Firm shall be borne solely by the Company. Any Gross-Up Payment, as
determined pursuant to this Section 7, shall be paid by the Company to the
Executive within 5 days of the receipt of the Accounting Firm's determination.
Any determination by the Accounting Firm shall be binding upon the Company and
the Executive. As a result of the uncertainty in the application of Section 4999
of the Code at the time of the initial determination by the Accounting Firm
hereunder, it is possible that Gross-Up Payments that will not have been made by
the Company should have been made (the "Underpayment"), consistent with the
calculations required to be made hereunder. In the event the Company exhausts
its remedies pursuant to Section 7(c) and the Executive thereafter is required
to make a payment of any Excise Tax, the Accounting Firm shall determine the
amount of the Underpayment that has occurred and any such Underpayment shall be
promptly paid by the Company to or for the benefit of the Executive.

                                      -10-


         (c) The Executive shall notify the Company in writing of any claim by
the Internal Revenue Service that, if successful, would require the payment by
the Company of the Gross-Up Payment. Such notification shall be given as soon as
practicable, but no later than 10 business days after the Executive is informed
in writing of such claim. The Executive shall apprise the Company of the nature
of such claim and the date on which such claim is requested to be paid. The
Executive shall not pay such claim prior to the expiration of the 30-day period
following the date on which the Executive gives such notice to the Company (or
such shorter period ending on the date that any payment of taxes with respect to
such claim is due). If the Company notifies the Executive in writing prior to
the expiration of such period that the Company desires to contest such claim,
the Executive shall:

                  (i) give the Company any information reasonably requested by
the Company relating to such claim,

                  (ii) take such action in connection with contesting such claim
as the Company shall reasonably request in writing from time to time, including,
without limitation, accepting legal representation with respect to such claim by
an attorney reasonably selected by the Company,

                  (iii) cooperate with the Company in good faith in order
effectively to contest such claim, and

                  (iv) permit the Company to participate in any proceedings
relating to such claim;

provided, however, that the Company shall bear and pay directly all costs and
expenses (including additional interest and penalties) incurred in connection
with such contest, and shall indemnify and hold the Executive harmless, on an
after-tax basis, for any Excise Tax or income tax (including interest and
penalties) imposed as a result of such representation and payment of costs and
expenses. Without limitation on the foregoing provisions of this Section 7(c),
the Company shall control all proceedings taken in connection with such contest,
and, at its sole discretion, may pursue or forgo any and all administrative
appeals, proceedings, hearings and conferences with the applicable taxing
authority in respect of such claim and may, at its sole discretion, either pay
the tax claimed to the appropriate taxing authority on behalf of the Executive
and direct the Executive to sue for a refund or contest the claim in any
permissible manner, and the Executive agrees to prosecute such contest to a
determination before any administrative tribunal, in a court of initial
jurisdiction and in one or more appellate courts, as the Company shall
determine; provided, however, that, if the Company pays such claim and directs
the Executive to sue for a refund, the Company shall indemnify and hold the
Executive harmless, on an after-tax basis, from any Excise Tax or income tax
(including interest or penalties) imposed with respect to such payment or with
respect to any imputed income in connection with such payment; and provided,
further, that any extension of the statute of limitations relating to payment of
taxes for the taxable year of the Executive with respect to which such contested
amount is claimed to be due is limited solely to such contested amount.
Furthermore, the Company's control of the contest shall be limited to issues
with respect to which the Gross-Up Payment would be payable hereunder, and the
Executive shall be entitled to settle or contest, as the case may be, any other
issue raised by the Internal Revenue Service or any other taxing authority.

                                      -11-


         (d) If, after the receipt by the Executive of a Gross-Up Payment or
payment by the Company of an amount on the Executive's behalf pursuant to
Section 7(c), the Executive becomes entitled to receive any refund with respect
to the Excise Tax to which such Gross-Up Payment relates or with respect to such
claim, the Executive shall (subject to the Company's complying with the
requirements of Section 7(c), if applicable) promptly pay to the Company the
amount of such refund (together with any interest paid or credited thereon after
taxes applicable thereto). If, after payment by the Company of an amount on the
Executive's behalf pursuant to Section 7(c), a determination is made that the
Executive shall not be entitled to any refund with respect to such claim and the
Company does not notify the Executive in writing of its intent to contest such
denial of refund prior to the expiration of 30 days after such determination,
then the amount of such payment shall offset, to the extent thereof, the amount
of Gross-Up Payment required to be paid.

         (e) Notwithstanding any other provision of this Section 7, the Company
may, in its sole discretion, withhold and pay over to the Internal Revenue
Service or any other applicable taxing authority, for the benefit of the
Executive, all or any portion of any Gross-Up Payment, and the Executive hereby
consents to such withholding.

         (f) Definitions. The following terms shall have the following meanings
for purposes of this Section 7.

                  "Excise Tax" shall mean the excise tax imposed by Section 4999
of the Code, together with any interest or penalties imposed with respect to
such excise tax.

                  A "Payment" shall mean any payment or distribution in the
nature of compensation (within the meaning of Section 280G(b)(2) of the Code) to
or for the benefit of the Executive, whether paid or payable pursuant to this
Agreement or otherwise.

8. Executive's Covenants.

         (a) Nondisclosure. At all times during and after the Term, the
Executive shall keep confidential and shall not, except with the Company's
express prior written consent, or except in the proper course of the Executive's
employment with the Company, directly or indirectly, communicate, disclose,
divulge, publish, or otherwise express, to any Person, or use for the
Executive's own benefit or the benefit of any Person, any trade secrets,
confidential or proprietary knowledge or information, no matter when or how
acquired concerning the conduct and details of the Company's business, including
without limitation, names of customers and suppliers, marketing methods, trade
secrets, policies, prospects and financial condition. For purposes of this
Section 8, confidential information shall not include any information which is
now known by or readily available to the general public or which becomes known
by or readily available to the general public other than as a result of any
improper act or omission of the Executive.


                                      -12-



         (b) Non-Competition. During the Term hereof and for a period of two (2)
years following the Executive's termination of employment for any reason, the
Executive shall not, except with the Company's express prior written consent,
directly or indirectly, in any capacity, for the benefit of any Person:

                  (i) Solicit any Person with whom Executive had substantial
contact or about whom Executive acquired confidential information during
Executive's employment with the Company in any manner which interferes or might
interfere with such Person's relationship with the Company, or in an effort to
obtain such Person as a customer, supplier, salesman, agent, or representative
of any business in competition with the Company.

                  (ii) Solicit the employment of or hire, whether as an
employee, officer, director, agent, consultant or independent contractor, any
person who is, or was at any time during the twelve (12) month period preceding
the termination of the Executive's employment through the expiration of this
covenant, an employee, consultant, officer or director of the Company or any of
its subsidiaries and affiliates (except for such employment by the Company or
any of its subsidiaries and affiliates);

                  (iii) Establish, engage, own, manage, operate, join or
control, or participate in the establishment, ownership (other than as the owner
of less than one percent (1%) of the stock of a corporation whose shares are
publicly traded), management, operation or control of, or be a director,
officer, employee, salesman, agent or representative of, or be a consultant to,
any Person in any business in competition with the Company anywhere in the
United States or act or conduct himself in any manner which the Executive would
have reason to believe inimical or contrary to the best interests of the
Company. Executive acknowledges that this nationwide restriction is reasonable
and necessary because Executive's responsibilities include strategies for
geographic expansion throughout the United States. Executive acknowledges that
the provisions contained in this section will not impair Executive's ability to
earn a livelihood because Executive has the ability to engage in other
professional activities that will not breach these provisions.

         (c) Enforcement. The Executive acknowledges that any breach by the
Executive of any of the covenants and agreements of this Section 8 ("Covenants")
will result in irreparable injury to the Company for which money damages could
not adequately compensate the Company, and therefore, in the event of any such
breach, the Company shall be entitled, in addition to all other rights and
remedies which the Company may have at law or in equity, to have an injunction
issued by any competent court enjoining and restraining the Executive and/or all
other Persons involved therein from continuing such breach. The existence of any
claim or cause of action which the Executive or any such other Person may have
against the Company shall not constitute a defense or bar to the enforcement of
any of the Covenants. If the Company is obliged to resort to litigation to
enforce any of the Covenants which has a fixed term, then such term shall be
extended for a period of time equal to the period during which a material breach
of such Covenant was occurring, beginning on the date of a final court order
(without further right of appeal) holding that such a material breach occurred,
or, if later, the last day of the original fixed term of such Covenant.

                                      -13-


         (d) Consideration. The Executive expressly acknowledges that the
Covenants are a material part of the consideration bargained for by the Company
and, without the agreement of the Executive to be bound by the Covenants, the
Company would not have agreed to enter into this Agreement.

         (e) Scope. If any portion of any Covenant or its application is
construed to be invalid, illegal or unenforceable, then the other portions and
their application shall not be affected thereby and shall be enforceable without
regard thereto. If any of the Covenants is determined to be unenforceable
because of its scope, duration, geographical area or similar factor, then the
court making such determination shall have the power to reduce or limit such
scope, duration, area or other factor, and such Covenant shall then be
enforceable in its reduced or limited form.

9. No Obligation to Mitigate Damages; No Effect on Other Contractual Rights.

         The Executive shall not be required to mitigate damages or the amount
of any payment provided for under this Agreement by seeking other employment or
otherwise, nor shall the amount of payment provided for under this Agreement be
reduced by any compensation earned by the Executive as the result of employment
by another employer after the Date of Termination, or otherwise. The amounts
payable to the Executive under Section 5 hereof shall not be treated as damages
but as severance compensation to which the Executive is entitled by reason of
termination of the Executive's employment in the circumstances contemplated by
this Agreement.

10. Miscellaneous.

         (a) Notices. All notices, requests, demands, consents or other
communications required or permitted to be given under this Agreement shall be
in writing and shall be deemed to have been duly given if and when (i) delivered
personally, (ii) mailed by first class certified mail, return receipt requested,
postage prepaid, or (iii) sent by a nationally recognized express courier
service, postage or delivery changes prepaid, with receipt, or (iv) delivered by
telecopy (with receipt, and with original delivered in accordance with any of
(i), (ii) or (iii) above) to the parties at their respective addresses stated
below or to such other addresses of which the parties may give notice in
accordance with this Section.

                                      -14-


                           If to the Company, to:

                           NeighborCare, Inc.
                           Seven East Lee Street
                           Baltimore, MD 21202

                           Attention: Law Department
                           Attention: Chairman and Chief Executive Officer

                           If to the Executive, to:
                           John L. Kordash
                           2 Knollwood Drive
                           Dover, MA 02030

         (b) Entire Understanding. This Agreement sets forth the entire
understanding between the parties with respect to the subject matter hereof and
supersedes all prior and contemporaneous, written, oral, expressed or implied,
communications, agreements and understandings with respect to the subject matter
hereof.

         (c) Modification. This Agreement shall not be amended, modified,
supplemented or terminated except in writing signed by both parties. No action
taken by the Company hereunder, including without limitation any waiver, consent
or approval, shall be effective unless approved by a majority of the Board.

         (d) Assignability and Binding Effect. This Agreement (including the
covenants set forth in Section 8) shall inure to the benefit of and shall be
binding upon the Company and its successors (including successors to all or
substantially all of the Company's assets) and permitted assigns and upon the
Executive and the Executive's heirs, executors, legal representatives,
successors and permitted assigns. This Agreement, including but not limited to
the covenants contained in Section 8 above, may be assigned or otherwise
transferred by the Company to any of its subsidiaries or other affiliates and by
such transferees to its subsidiaries or other affiliates, provided that, in any
assignment or transfer the assignee or transferee agrees to be bound by the
terms and conditions hereof. Upon assignment or transfer, the "Company" herein
shall mean the buyer, assignee or transferee of this Agreement. This Agreement
may not, however, be assigned by the Executive to a third party, nor may the
Executive delegate his duties under this Agreement.

         (e) Severability. If any provision of this Agreement is construed to be
invalid, illegal or unenforceable, then the remaining provisions hereof shall
not be affected thereby and shall be enforceable without regard thereto.

         (f) Counterparts. This Agreement may be executed in any number of
counterparts, each of which when so executed and delivered shall be an original
hereof, and it shall not be necessary in making proof of this Agreement to
produce or account for more than one counterpart hereof.

                                      -15-


         (g) Section Headings. Section and subsection headings in this Agreement
are inserted for convenience of reference only, and shall neither constitute a
part of this Agreement nor affect its construction, interpretation, meaning or
effect.

         (h) References. All words used in this Agreement shall be construed to
be of such number and gender as the context requires or permits.

         (i) Controlling Law. This Agreement is made under, and shall be
governed by, construed and enforced in accordance with, the substantive laws of
the State of Maryland applicable to agreements made and to be performed entirely
therein.

         (j) Settlement of Disputes. Except with respect to injunctive relief
under Section 8 or otherwise, the Executive and the Company will attempt in good
faith to resolve any and all controversies, claims, and disputes of every kind
and nature, including both common law and statutory, between the parties to this
Agreement, arising out of or in connection with the Executive's employment
relationship, terms and conditions of employment, or separation of employment
with the Company for whatever reason, (including without limitation, any such
claim, dispute or controversy arising under any federal, state or local law,
statute, regulation or ordinance or arising under the Company's employee benefit
plans, policies or programs), including the existence, construction, validity,
interpretation or meaning, performance, non-performance, enforcement, operation,
breach, continuance, or termination of this Agreement (each, a "Dispute")
promptly by discussions between the parties to this Agreement. If the Dispute
cannot be resolved through such discussions, the Dispute shall be submitted to
arbitration in accordance with the National Rules for the Resolution of
Employment Disputes ("the Rules") of the American Arbitration Association
("AAA") then in effect, except as otherwise agreed to herein. The time
limitation for submitting a Dispute to arbitration pursuant to this Agreement is
sixty (60) days from the date of the occurrence giving rise to the Dispute,
unless the Dispute is based on statutory rights, in which case the applicable
statute of limitations governs the time period in which a Dispute must be
submitted to arbitration. By submitting a Dispute to arbitration pursuant to
this Agreement, the Executive and the Company acknowledge and agree to waive
their respective rights to seek relief in a judicial forum and before a jury.
The arbitration shall be conducted by a single arbitrator, selected by
alternately striking from a list of five (5) arbitrators supplied by the AAA.
The arbitrator's fees shall be borne by the Company. The Executive and the
Company are separately responsible for their costs, transcript fees, expenses,
witness fees, attorney's fees and other costs associated with the arbitration.
The parties agree that any arbitration conducted pursuant to this section shall
be held in the county in which the Company's corporate headquarters is located
(or at such other location as shall be mutually agreed to by the parties). The
decision of the arbitrator shall be final and binding upon the parties. In
rendering a decision, the arbitrator shall apply all legal principles and
standards that would govern if the Dispute were being brought in a judicial
forum, including all statute of limitations and defenses. Discovery shall be
allowed pursuant to the Rules then in effect as the arbitrator determines
appropriate under the circumstances. The arbitrator may grant injunctions or
provide other relief available in a court of law or equity. Any action to
enforce or vacate the arbitrator's award shall be governed by the Federal
Arbitration Act, if applicable, and otherwise by applicable state law. If either
the Company or the Executive pursues any claim, dispute or controversy against
the other in a proceeding other than the arbitration provided for herein, the
responding party shall be entitled to dismissal or injunctive relief regarding
such action and recovery of all costs, losses and attorney's fees related to
such action. Nothing herein shall preclude the Company from seeking, in any
court of competent jurisdiction in Pennsylvania, damages, specific performance,
or other equitable or legal remedies in the case of any breach or threatened
breach by the Executive of this Agreement. The arbitrator shall be required to
apply the contractual provisions hereof or the Company's policies and procedures
in deciding any matter submitted to him and shall not have any authority, by
reason of this Agreement or otherwise, to render a decision that is contrary to
the mutual intent of the parties as set forth in this Agreement or the Company's
intent as set forth in the Company's policies and procedures. Any of the
parties, before or during the arbitration contemplated by this section, may
apply to a court for a temporary restraining order or preliminary injunction or
similar equitable relief to protect its interests pending completion of such
arbitration proceedings and, in particular, to enforce the provisions of this
section and to aid the arbitration contemplated thereby.

                                      -16-


         (k) Approval and Authorizations. The execution and the implementation
of the terms and conditions of this Agreement have been fully authorized by the
Board.

         (l) Indulgences, Etc. Neither the failure nor delay on the part of
either party to exercise any right, remedy, power or privilege under this
Agreement shall operate as a waiver thereof, nor shall the single or partial
exercise of any right, remedy, power or privilege preclude any other or further
exercise of the same or any other right, remedy, power or privilege, nor shall
any waiver of any right, remedy, power or privilege with respect to any
occurrence be construed as a waiver of such right, remedy, power or privilege
with respect to any other occurrence. No waiver shall be effective unless it is
in writing and is signed by the party asserted to have granted such waiver.

         (m) Legal Expenses. In the event that the Executive institutes any
legal action to enforce the Executive's rights under, or to recover damages for
breach of this Agreement, the Executive, if the Executive is the prevailing
party, shall be entitled to recover from the Company any reasonable expenses for
attorney's fees and disbursements incurred by the Executive.








                            [Signature Page follows]


                                      -17-



         IN WITNESS WHEREOF, the parties hereto have executed this Agreement the
day and year first above mentioned, under seal, intending to be legally bound
hereby.

                           COMPANY:

                           By:        /s/   John J. Arlotta
                                      ------------------------------------------
                           Name:      John J. Arlotta
                                      ------------------------------------------
                           Title:     Chairman, President and Chief Executive
                                      Officer
                                      ------------------------------------------

Witness:                   EXECUTIVE



/s/  Katherine Dumont      Name:      /s/  John L. Kordash
- ------------------------              ------------------------------------------
                           Title:     Executive Vice President and Assistant to
                                      the Chairman, President and
                                      Chief Executive Officer
                                      ------------------------------------------





                                      -18-

EX-10

                              EMPLOYMENT AGREEMENT
                              --------------------

         THIS EMPLOYMENT AGREEMENT (the "Agreement") originally dated as of
September 10, 2003, by and between NeighborCare, Inc. (formerly known as Genesis
Health Ventures, Inc.), a Pennsylvania corporation (the "Company") with a place
of business at 7 Lee Street, Baltimore, MD 21202 and John F. Gaither, Jr. (the
"Executive"), which shall be effective as of September 27, 2003 (the "Effective
Date") is amended and restated effective December 9, 2003.


                                   WITNESSETH
                                   ----------

         WHEREAS, the Company desires to employ the Executive as an employee of
the Company, and the Executive desires to provide services to the Company, all
upon the terms and conditions hereinafter set forth;

         WHEREAS, upon due consideration, the Executive acknowledges that the
consideration set forth herein is reasonable and adequate, including the terms
of employment and covenants contained herein; and

         WHEREAS, the Company is contemplating a spin-off (the "Spin-Off") of
Genesis Healthcare Corporation; and

         WHEREAS, the Executive will remain an employee of the Company after the
completion of the Spin-Off;

         NOW, THEREFORE, in consideration of the premises and mutual agreements
hereinafter set forth, and intending to be legally bound hereby, the parties
hereto agree as follows:

1.       Offer and Acceptance of Employment. The Company hereby agrees to employ
the Executive as Senior Vice President, General Counsel and Secretary of its
NeighborCare Division, and Executive's principal place of business shall be
located at the Company's headquarters currently located in Baltimore, Md. After
the completion of the Spin-Off, the Company hereby agrees to employ the
Executive as Senior Vice President, General Counsel and Secretary of the
Company. The Executive accepts such employment and agrees to perform the
customary responsibilities of such position during the term of this Agreement.
The Executive will perform such other duties as may from time to time be
reasonably assigned to the Executive by the Board of Directors of the Company
(the "Board") or the Company's Chief Executive Officer, provided such duties are
consistent with and do not interfere with the performance of the duties
described herein and are of a type customarily performed by persons of similar
titles with similar corporations. Nothing in this Agreement shall preclude the
Executive from serving as a director, trustee, officer of, or partner in, any
other firm, trust, corporation or partnership or from pursuing personal
investments, as long as such activities do not interfere with the Executive's
performance of the Executive's duties hereunder or violate the terms of Section
8 hereof.






2.       Period of Employment.

         (a) Period of Employment. The period of the Executive's employment
under this Agreement shall commence on the Effective Date and shall, unless
sooner terminated pursuant to Section 4, terminate on October 1, 2005 (such
period, as extended from time to time, herein referred to as the "Term").
Subject to Section 2(b), and if the Term has not been terminated pursuant to
Section 4, on October 1, 2005 and on each October 1st thereafter (each such
October 1st, an "Automatic Extension Date") the Term shall be extended for an
additional period of one year.

         (b) Termination of Automatic Extension by Notice. The Company (with the
affirmative vote of two-thirds of the non-management membership of the Board at
a meeting of the Board called and held for such purpose) or the Executive may
elect to terminate the automatic extension of the Term set forth in Section 2(a)
("Automatic Extension") by giving written notice of such election. Any notice
given hereunder must be given not less than 60 days prior to the applicable
Automatic Extension Date.

3.       Compensation and Benefits.

         (a) Base Salary. As long as the Executive remains an employee of the
Company, the Executive will be paid an annual base salary of $280,000, which
shall continue at this rate, subject to adjustment as hereinafter provided. The
Executive's annual base salary shall be reviewed periodically and the Company
may increase such annual base salary, by an amount, if any, it determines to be
appropriate. Any such increase shall not reduce or limit any other obligation of
the Company hereunder. The Executive's annual base salary payable hereunder, as
it may be increased from time to time and without reduction for any amounts
deferred as described below, is referred to herein as "Base Salary". The
Executive's Base Salary, as in effect from time to time, may not be reduced by
the Company without the Executive's consent, provided that the Base Salary
payable under this paragraph shall be reduced to the extent the Executive elects
to defer or reduce such salary under the terms of any deferred compensation or
savings plan or other employee benefit arrangement maintained or established by
the Company. The Company shall pay the Executive the portion of the Executive's
Base Salary not deferred in accordance with its customary periodic payroll
practices.

         (b) Incentive Compensation. The Executive shall be eligible to
participate in stock option, incentive compensation and other plans at a level
consistent with the Executive's position with the Company and the Company's then
current policies and practices.

Stock Option. The Company shall, subject to approval by the compensation
committee of the Board, pursuant to the terms of its stock option plan or any
similar plan, grant to the Executive on the latter of November 13, 2003 or the
fifth business day after the completion of the Spin-Off (the "Grant Date") an





                                       -2-


option to acquire 150,000 shares of common stock of the Company ("Company
Stock"). The exercise price of the shares subject to the stock options shall be
established by the compensation committee of the Board at the time of the grant
and shall be equal to the fair market value of the Company Stock (as determined
under the Company stock option plan) on the Grant Date. The Options shall vest
over a three year period with the exact frequency of the vesting to be set by
the Compensation Committee of the Board. The Executive must be employed with the
Company on each vesting date in order for those stock options which vest on
those respective option dates to vest. In addition, the previously granted and
outstanding stock options under this Section 3(c) shall fully and immediately
vest on (i) any termination of the Executive's employment with the Company by
the Company without Cause (as defined in Section 4 (b)) or because of the
Executive's death or Disability (as defined in Section 4(c)), or (ii) any
termination of the Executive's employment by the Executive's resignation for
Good Reason (as defined in Section 4 (d)). The stock options shall have a ten
(10) year term subject to earlier termination of such options on account of the
Executive's termination of employment for any reason, at which point the
exercisability of the vested options will be as set forth in the applicable plan
or agreement except as otherwise set forth in this Agreement.

         (c) Benefits, Perquisites and Expenses.

               (i) Benefits. During the Term, the Executive shall be eligible to
participate in (1) each welfare benefit plan sponsored or maintained by the
Company, including, without limitation, each life, hospitalization, medical,
dental, health, accident or disability insurance or similar plan or program of
the Company, and (2) each pension, profit sharing, retirement, deferred
compensation or savings plan sponsored or maintained by the Company, in each
case, whether now existing or established hereafter, to the extent that the
Executive is eligible to participate in any such plan under the generally
applicable provisions thereof. With respect to the pension or retirement
benefits payable to the Executive, the Executive's service credited for purposes
of determining the Executive's benefits and vesting shall be determined in
accordance with the terms of the applicable plan or program. Nothing in this
Section 3(c), in and of itself, shall be construed to limit the ability of the
Company to amend or terminate any particular plan, program or arrangement. If
the Company terminates medical or disability benefits during the terms of this
Agreement, the Executive shall have the option of securing substantially similar
benefits at Company expense, less any prior contributions being made by the
Executive.

               (ii) Vacation. During the Term, the Executive shall be entitled
to the number of paid vacation days in each anniversary year determined by the
Company from time to time for its senior executive officers, but not less than
four (4) weeks in any anniversary year. The Executive shall also be entitled to
all paid holidays given by the Company to its senior officers. Vacation days
which are not used during any calendar year may not be accrued, nor shall the
Executive be entitled to compensation for unused vacation days, during the Term
or upon termination of employment.

               (iii) Executive Benefits. During the Term, the Executive shall be
entitled to receive such perquisites (e.g., fringe benefits), plans and other
benefits as are generally provided to other senior officers of the Company in
accordance with the then current policies and practices of the Company.





                                      -3-


               (iv) Business Expenses. During the Term, the Company shall pay or
reimburse the Executive for all reasonable expenses incurred or paid by the
Executive in the performance of the Executive's duties hereunder, upon
presentation of expense statements or vouchers and such other information as the
Company may reasonably require and in accordance with the generally applicable
policies and practices of the Company. The Company shall reimburse the Executive
for reasonable costs associated with temporary housing and shall pay for moving
expenses (including gross up).

4.       Employment Termination.

         The Term of employment under this Agreement may be earlier terminated
only as follows:

         (a) Cause. The Company shall have the right to terminate the
Executive's employment for Cause. For purposes hereof, a termination by the
Company for "Cause" shall mean termination by action of at least two-thirds of
the non-management membership of the Board at a meeting duly called and held
upon at least fifteen (15) days prior written notice to the Executive specifying
the particulars of the action or inaction alleged to constitute "Cause" because
of (i) the Executive's conviction of, or plea of guilty or nolo contendere to,
(A) any felony (whether or not involving the Company or any of its subsidiaries)
or (B) any other crime involving moral turpitude which subjects, or if generally
known, would subject, the Company or any of its subsidiaries to public ridicule
or embarrassment, (ii) habitual intoxication, the use of illegal drugs, or the
abuse of chemical substances by the Executive, (iii) fraud or other willful
misconduct by the Executive in respect of the Executive's obligations under this
Agreement, (iv) the willful engaging by the Executive in gross misconduct or a
material violation of the Company's code of conduct or corporate policies, or
(vi) willful refusal or continuing failure to attempt, without proper cause and,
other than by reason of illness, to follow the lawful directions of the Board
following thirty days prior written notice to the Executive of the Executive's
refusal to perform, or failure to attempt to perform such duties and which
during such thirty day period such refusal or failure to attempt is not cured by
the Executive. "Cause" shall not include a bona fide disagreement over a
corporate policy, so long as the Executive does not willfully violate on a
continuing basis specific written directions from the Board, which directions
are consistent with the provisions of this Agreement. Action or inaction by the
Executive shall not be considered "willful" unless done or omitted by the
Executive intentionally and without the Executive's reasonable belief that the
Executive's action or inaction was in the best interests of the Company, and
shall not include failure to act by reason of total or partial incapacity due to
physical or mental illness.

         (b) Without Cause. Notwithstanding anything to the contrary contained
in this Agreement, the Company may, at any time after at least 30 days prior
written notice in accordance with Section 4(f) hereof to the Executive,
terminate the Executive's employment hereunder without Cause.




                                       -4-


         (c) Death or Disability. If the Executive dies, the Executive's
employment shall terminate as of the date of death. If the Executive develops a
disability, the Company may terminate the Executive's employment for Disability.
As used in this Agreement, the term "Disability" shall mean incapacity due to
physical or mental illness which has caused the Executive to be unable to
substantially perform the essential functions of the Executive's duties with or
without a reasonable accommodation with the Company on a full time basis for (i)
a period of six (6) consecutive months, or (ii) for shorter periods aggregating
more than six (6) months in any twelve (12) month period. During any period of
Disability, the Executive agrees to submit to reasonable medical examinations
upon the reasonable request, and at the expense, of the Company.

         (d) Good Reason. The Executive may terminate the Executive's employment
for Good Reason at any time during the term of this Agreement. For purposes of
this Agreement, "Good Reason" shall mean any of the following, without the
Executive's written consent, provided, that (x) the Executive shall provide the
Company with written notice thereof within thirty (30) days after the Executive
has knowledge of the occurrence of any of the events or circumstances set forth
in clauses (i) through (v) below, which notice shall specifically identify the
event or circumstance that the Executive believes constitutes Good Reason, (y)
the Company fails to correct the circumstance or event so identified within
thirty (30) days after the date of delivery of the notice referred to in clause
(x) above, and (z) the Executive resigns his employment for Good Reason within
ninety (90) days after the date of delivery of the notice referred to in (x)
above:

               (i) the assignment to the Executive by the Company of any duties
materially adversely inconsistent with the Executive's status with the Company
or a substantial alteration in the nature or status of the Executive's
responsibilities from those in effect on the Effective Date, or a reduction in
the Executive's titles or offices as in effect on the Effective Date, or any
removal of the Executive from, or any failure to reelect the Executive to, any
of such positions, except in connection with the termination of the Executive's
employment for Disability or Cause or as a result of the Executive's death or by
the Executive other than for Good Reason;

               (ii) a reduction by the Company in the Executive's Base Salary as
in effect on the date hereof or as the same may be increased from time to time
during the term of this Agreement;

               (iii) any material failure by the Company to comply with any of
the material provisions of this Agreement including the failure by the Company
to award the stock options set forth in Section 3 (c);

               (iv) the Company's termination of the Automatic Extension
pursuant to Section 2(b) of this Agreement;

               (v) following a Change of Control, any relocation of the
Executive's principal place of employment to a location more than forty-five
(45) miles beyond the location at which the Executive was employed immediately
prior to the Change of Control.





                                       -5-


         (e) Executive's Voluntary Termination. Notwithstanding anything to the
contrary contained in this Agreement, the Executive may, at any time after at
least sixty (60) days but no more than ninety (90) days prior written notice in
accordance with Section 4(f) hereof to the Company, terminate voluntarily the
Executive's employment hereunder.

         (f) Notice of Termination. Any termination, except for death, pursuant
to this Section 4 shall be communicated by a Notice of Termination. For purposes
of this Agreement, a "Notice of Termination" shall mean a written notice which
shall indicate those specific termination provisions in this Agreement relied
upon and which sets forth in reasonable detail the facts and circumstances
claimed to provide a basis for termination of the Executive's employment under
the provision so indicated.

         (g) Date of Termination. "Date of Termination" shall mean (i) if this
Agreement is terminated by the Company for Disability, thirty (30) days after
Notice of Termination is given to the Executive (provided that the Executive
shall not have returned to the performance of the Executive's duties on a
full-time basis during such 30-day period), (ii) if the Executive's employment
is terminated due to the Executive's death, on the date of death; (iii) if the
Executive's employment is terminated due to the Executive's voluntary
resignation pursuant to Section 4(e), the date specified in the notice (which
shall not be less than sixty (60) days nor more than ninety (90) days from the
date such Notice of Termination is given); or (iii) if the Executive's
employment is terminated for any other reason, the date specified in the Notice
of Termination (which shall not be less than thirty (30) days from the date such
Notice of Termination is given).

         (h) Resignation from All Positions. Notwithstanding any other provision
of this Agreement, upon the termination of the Executive's employment for any
reason, unless otherwise requested by the Board, the Executive shall immediately
resign from all positions that the Executive holds or has ever held with the
Company and any other affiliate of the Company (and with any other entities with
respect to which the Company has requested the Executive to perform services).
The Executive hereby agrees to execute any and all documentation to effectuate
such resignations upon request by the Company, but he shall be treated for all
purposes as having so resigned upon termination of his employment, regardless of
when or whether he executes any such documentation.

5.       Payments upon Termination.

         (a) Termination Due to Death or Disability. Upon the Executive's death
or the termination of the Executive's employment by reason of the Disability of
the Executive, to the extent not theretofore paid or provided, (i) the Company
shall pay to the Executive's estate or the Executive, as applicable, within
thirty (30) days after the Date of Termination (1) the Executive's full Base
Salary and other accrued benefits earned up to the last day of the month of the
Executive's death or termination of employment by reason of the Executive's
Disability, (2) all deferred compensation of any kind, including, without
limitation, any amounts earned under any bonus plan, and (3) if any bonus, under
any bonus plan of the Company, shall be payable in respect of the year in which
the Executive's death or termination of employment by reason of the Executive's
Disability occurs, such bonus(es) prorated up to the last day of the month of
the Executive's death or termination of employment by reason of the Executive's




                                       -6-


Disability and (ii) all restricted stock, stock option and performance share
awards made to the Executive and outstanding as of the Date of Termination shall
automatically become fully vested as of the Date of Termination.

         (b) Termination for Cause. If the Executive's employment shall be
terminated for Cause, the Company shall pay the Executive, within thirty (30)
days after the Date of Termination: (i) the Executive's full Base Salary through
the Date of Termination at the rate in effect at the time Notice of Termination
is given, and (ii) all deferred compensation of any kind. The Company shall have
no further obligations to the Executive under this Agreement.

         (c) Termination by the Executive for Good Reason or by the Company for
Reasons other than for Cause, Disability or Death.

               (i) In the event (1) the Company terminates the Executive's
employment during the Term other than for Cause, death or Disability, or (2) the
Executive resigns during the Term for Good Reason, then (I) the Company shall
make a lump-sum cash payment to the Executive, within thirty (30) days after the
Date of Termination, equal to the sum of (x) the Executive's Average Base Salary
(as defined below) and (y) the Executive's Average Assumed Cash Incentive
Compensation (as defined below); and (II) all stock options, stock awards and
similar equity rights, if any, granted to the Executive and outstanding as of
the Date of Termination shall vest and become exercisable immediately prior to
the Date of Termination and shall remain exercisable for a period of ninety (90)
days following the Date of Termination (or, if sooner, the end of the scheduled
term of the stock option) and (III) Executive shall receive Pro Rata Bonus.
"Executive's Average Base Salary" means the Executive's Base Salary for (a) the
most recent two years (including the year in which the Date of Termination
occurs) divided by two if the Executive has been employed hereunder for more
than two years, or (b) the year in which the Date of Termination occurs if the
Executive has been employed hereunder for less than two years. "Executive's
Average Assumed Cash Incentive Compensation" means all annual bonuses earned
under the Company's annual incentive compensation plan (which is intended to be
a cash plan as of the Effective Date) in consideration of services for the two
(2) most recent completed fiscal years prior to the Date of Termination, divided
by two (2), or the annual bonuse earned in such shorter number of fiscal years
during which an annual bonus incentive program existed. "Pro Rata Bonus" means a
pro rata bonus for the portion of the year in which the date of termination
occurs preceding the date of termination based upon the amount that would have
been earned based on the Company's actual performance for the portion of the
year ending on the date of termination, using performance goals that are
pro-rated to reflect the portion of the year prior to the date of termination
(which amount will be paid as soon as practicable following the date of
termination).

               (ii) The payments under this Section are subject to, and
conditional upon, the Executive executing and not revoking a general release of
all statutory and common law claims relating to employment and termination from
employment in a form provided by the Company.





                                       -7-


               (iii) Following (1) termination of the Executive's employment by
the Company during the Term other than for Cause, death, or Disability, or (2)
the Executive's resignation during the Term for Good Reason, the Company shall
also maintain in full force and effect, for the continued benefit of the
Executive and his dependents for a period equal to the greater of (x) the
remaining period of the then current Term without giving effect to such
termination or (y) two (2) years, all employee insurance benefit plans and
programs to which the Executive was entitled prior to the Date of Termination
(including, without limitation, the health, dental, vision, life and other
voluntary insurance programs, but specifically excluding any company paid
disability plan or program provided by the Company) if the Executive's continued
participation is permissible under the general terms and provisions of such
plans and programs and the Executive continues to pay all applicable premiums.
In the event that the Executive's participation in any health, medical or life
insurance plan or program is barred, the Company shall obtain and pay for, on
the Executive's behalf, individual insurance plans, policies or programs which
provide to the Executive health, medical, and life insurance coverage which is
equivalent to the insurance coverage to which the Executive was entitled prior
to the Date of Termination.

               (iv) The Executive recognizes and accepts that the Company shall
not, in any case, be responsible for any additional amount, severance pay,
termination pay, severance obligation, incentive compensation payments, costs,
attorneys fees or other damages whatsoever arising from termination of the
Executive's employment, above and beyond those specifically provided for herein.
Notwithstanding anything herein to the contrary, the Executive shall maintain
his/her rights under any Company sponsored qualified or nonqualified retirement
plan.

6.       Change of Control.

         For purposes of this Agreement, the term "Change of Control" shall mean
the occurrence of any of the following:

               (a) The acquisition by any individual, entity or group (within
the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of
1934, as amended (the "Exchange Act")) (a "Person") of beneficial ownership
(within the meaning of Rule 13d-3 promulgated under the Exchange Act) of forty
percent (40%) or more of either (A) the then-outstanding shares of common stock
of the Company (the "Outstanding Company Common Stock") or (B) the combined
voting power of the then-outstanding voting securities of the Company entitled
to vote generally in the election of directors (the "Outstanding Company Voting
Securities"); provided, however, that, for purposes of this Section 6(a), the
following acquisitions shall not constitute a Change of Control: (i) any
acquisition directly from the Company, (ii) any acquisition by the Company,
(iii) any acquisition by any employee benefit plan (or related trust) sponsored
or maintained by the Company or any of its affiliates, (iv) any acquisition by
any corporation pursuant to a transaction that complies with Sections 6(c)(i),
6(c)(ii) and 6(c)(iii), (v) any acquisition by any underwriter temporarily
holding securities pursuant to an offering of such securities, (vi) any





                                       -8-


acquisition by Goldman Sachs Capital Partners or Highland Capital, (vii) any
acquisition by the Executive or any group of persons including the Executive (or
any entity controlled by the Executive or any group of persons including the
Executive) or (viii) a beneficial owner of less than forty percent (40%) of the
Outstanding Company Voting Securities that becomes a beneficial owner of forty
percent (40%) or more of the Outstanding Company Voting Securities solely by
reason of redemption or repurchase of such securities by the Company so long as
such beneficial owner takes immediate action to reduce its beneficial ownership
of Company Voting Securities below forty percent (40%);

                  (b) Any time at which individuals who, as of the date hereof,
constitute the Board (the "Incumbent Board") cease for any reason to constitute
at least a majority of the Board; provided, however, that any individual
becoming a director subsequent to the date hereof whose election, or nomination
for election by the Company's shareholders, was approved by a vote of at least a
majority of the directors then comprising the Incumbent Board shall be
considered as though such individual were a member of the Incumbent Board, but
excluding, for this purpose, any such individual whose initial assumption of
office occurs as a result of an actual or threatened election contest with
respect to the election or removal of directors or other actual or threatened
solicitation of proxies or consents by or on behalf of a Person other than the
Board; provided, further, that any individual becoming a director subsequent to
the date hereof who was elected by, or on the recommendation of any person
described in clause (vi) of Section 6(a) above pursuant to contractual rights as
of the Effective Date with respect to Outstanding Company Voting Securities
owned by such person shall be treated as a member of the Incumbent Board;

                  (c) Consummation of a merger, statutory share exchange or
consolidation or similar corporate transaction involving the Company or any of
its subsidiaries, a sale or other disposition of all or substantially all of the
assets of the Company, or the acquisition of assets or stock of another entity
by the Company or any of its subsidiaries (each, a "Business Combination"), in
each case unless, following such Business Combination, (i) all or substantially
all of the individuals and entities that were the beneficial owners of the
Outstanding Company Common Stock and the Outstanding Company Voting Securities
immediately prior to such Business Combination beneficially own, directly or
indirectly, more than fifty percent (50%) of the then-outstanding shares of
common stock and the combined voting power of the then-outstanding voting
securities entitled to vote generally in the election of directors, as the case
may be, of the corporation resulting from such Business Combination (including,
without limitation, a corporation that, as a result of such transaction, owns
the Company or all or substantially all of the Company's assets either directly
or through one or more subsidiaries) in substantially the same proportions as
their ownership immediately prior to such Business Combination of the
Outstanding Company Common Stock and the Outstanding Company Voting Securities,
as the case may be, (ii) no Person (excluding any corporation resulting from
such Business Combination or any employee benefit plan (or related trust) of the
Company or such corporation resulting from such Business Combination)
beneficially owns, directly or indirectly, forty percent (40%) or more of,
respectively, the then-outstanding shares of common stock of the corporation
resulting from such Business Combination or the combined voting power of the




                                       -9-


then-outstanding voting securities of such corporation, except to the extent
that such ownership existed prior to the Business Combination, and (iii) at
least a majority of the members of the board of directors of the corporation
resulting from such Business Combination were members of the Incumbent Board at
the time of the execution of the initial agreement or of the action of the Board
providing for such Business Combination; provided, however, that a spinoff of
subsidiaries or divisions of the Company to an entity which is owned by the
shareholders of the Company in substantially the same proportion as their
ownership of the Company shall not constitute a Change of Control; or

                  (d) Approval by the shareholders of the Company of a complete
liquidation or dissolution of the Company.

7.       Certain Tax Matters.

         (a) Anything in this Agreement to the contrary notwithstanding, in the
event it shall be determined that any Payment would be subject to the Excise
Tax, then the Executive shall be entitled to receive an additional payment (the
"Gross-Up Payment") in an amount such that, after payment by the Executive of
all taxes (and any interest or penalties imposed with respect to such taxes),
including, without limitation, any income taxes (and any interest and penalties
imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment,
the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax
imposed upon the Payments. The Company's obligation to make Gross-Up Payments
under this Section 7 shall not be conditioned upon the Executive's termination
of employment.

         (b) Subject to the provisions of Section 7(c), all determinations
required to be made under this Section 7, including whether and when a Gross-Up
Payment is required, the amount of such Gross-Up Payment and the assumptions to
be utilized in arriving at such determination, shall be made, to the extent
permitted by applicable law, by the Company's auditors as of immediately prior
to the Change of Control, or such other nationally recognized certified public
accounting firm as may be designated by the Executive (the "Accounting Firm").
The Accounting Firm shall provide detailed supporting calculations both to the
Company and the Executive within 15 business days of the receipt of notice from
the Executive that there has been a Payment or such earlier time as is requested
by the Company. In the event that the Accounting Firm is serving as accountant
or auditor for the individual, entity or group effecting the Change of Control,
the Executive may appoint another nationally recognized accounting firm to make
the determinations required hereunder (which accounting firm shall then be
referred to as the Accounting Firm hereunder). All fees and expenses of the
Accounting Firm shall be borne solely by the Company. Any Gross-Up Payment, as
determined pursuant to this Section 7, shall be paid by the Company to the
Executive within 5 days of the receipt of the Accounting Firm's determination.
Any determination by the Accounting Firm shall be binding upon the Company and
the Executive. As a result of the uncertainty in the application of Section 4999
of the Code at the time of the initial determination by the Accounting Firm
hereunder, it is possible that Gross-Up Payments that will not have been made by
the Company should have been made (the "Underpayment"), consistent with the
calculations required to be made hereunder. In the event the Company exhausts





                                      -10-


its remedies pursuant to Section 7(c) and the Executive thereafter is required
to make a payment of any Excise Tax, the Accounting Firm shall determine the
amount of the Underpayment that has occurred and any such Underpayment shall be
promptly paid by the Company to or for the benefit of the Executive.

         (c) The Executive shall notify the Company in writing of any claim by
the Internal Revenue Service that, if successful, would require the payment by
the Company of the Gross-Up Payment. Such notification shall be given as soon as
practicable, but no later than 10 business days after the Executive is informed
in writing of such claim. The Executive shall apprise the Company of the nature
of such claim and the date on which such claim is requested to be paid. The
Executive shall not pay such claim prior to the expiration of the 30-day period
following the date on which the Executive gives such notice to the Company (or
such shorter period ending on the date that any payment of taxes with respect to
such claim is due). If the Company notifies the Executive in writing prior to
the expiration of such period that the Company desires to contest such claim,
the Executive shall:

             (i) give the Company any information reasonably requested by the
Company relating to such claim,

             (ii) take such action in connection with contesting such claim as
the Company shall reasonably request in writing from time to time, including,
without limitation, accepting legal representation with respect to such claim by
an attorney reasonably selected by the Company,

             (iii) cooperate with the Company in good faith in order effectively
to contest such claim, and

             (iv) permit the Company to participate in any proceedings relating
to such claim;

provided, however, that the Company shall bear and pay directly all costs and
expenses (including additional interest and penalties) incurred in connection
with such contest, and shall indemnify and hold the Executive harmless, on an
after-tax basis, for any Excise Tax or income tax (including interest and
penalties) imposed as a result of such representation and payment of costs and
expenses. Without limitation on the foregoing provisions of this Section 7(c),
the Company shall control all proceedings taken in connection with such contest,
and, at its sole discretion, may pursue or forgo any and all administrative
appeals, proceedings, hearings and conferences with the applicable taxing
authority in respect of such claim and may, at its sole discretion, either pay
the tax claimed to the appropriate taxing authority on behalf of the Executive
and direct the Executive to sue for a refund or contest the claim in any
permissible manner, and the Executive agrees to prosecute such contest to a
determination before any administrative tribunal, in a court of initial
jurisdiction and in one or more appellate courts, as the Company shall
determine; provided, however, that, if the Company pays such claim and directs
the Executive to sue for a refund, the Company shall indemnify and hold the
Executive harmless, on an after-tax basis, from any Excise Tax or income tax





                                      -11-


(including interest or penalties) imposed with respect to such payment or with
respect to any imputed income in connection with such payment; and provided,
further, that any extension of the statute of limitations relating to payment of
taxes for the taxable year of the Executive with respect to which such contested
amount is claimed to be due is limited solely to such contested amount.
Furthermore, the Company's control of the contest shall be limited to issues
with respect to which the Gross-Up Payment would be payable hereunder, and the
Executive shall be entitled to settle or contest, as the case may be, any other
issue raised by the Internal Revenue Service or any other taxing authority.

         (d) If, after the receipt by the Executive of a Gross-Up Payment or
payment by the Company of an amount on the Executive's behalf pursuant to
Section 7(c), the Executive becomes entitled to receive any refund with respect
to the Excise Tax to which such Gross-Up Payment relates or with respect to such
claim, the Executive shall (subject to the Company's complying with the
requirements of Section 7(c), if applicable) promptly pay to the Company the
amount of such refund (together with any interest paid or credited thereon after
taxes applicable thereto). If, after payment by the Company of an amount on the
Executive's behalf pursuant to Section 7(c), a determination is made that the
Executive shall not be entitled to any refund with respect to such claim and the
Company does not notify the Executive in writing of its intent to contest such
denial of refund prior to the expiration of 30 days after such determination,
then the amount of such payment shall offset, to the extent thereof, the amount
of Gross-Up Payment required to be paid.

         (e) Notwithstanding any other provision of this Section 7, the Company
may, in its sole discretion, withhold and pay over to the Internal Revenue
Service or any other applicable taxing authority, for the benefit of the
Executive, all or any portion of any Gross-Up Payment, and the Executive hereby
consents to such withholding.

         (f) Definitions. The following terms shall have the following meanings
for purposes of this Section 7.

              "Excise Tax" shall mean the excise tax imposed by Section 4999 of
the Code, together with any interest or penalties imposed with respect to such
excise tax.

              A "Payment" shall mean any payment or distribution in the nature
of compensation (within the meaning of Section 280G(b)(2) of the Code) to or for
the benefit of the Executive, whether paid or payable pursuant to this Agreement
or otherwise.

8.       Executive's Covenants.

         (a) Nondisclosure. At all times during and after the Term, the
Executive shall keep confidential and shall not, except with the Company's
express prior written consent, or except in the proper course of the Executive's
employment with the Company, directly or indirectly, communicate, disclose,
divulge, publish, or otherwise express, to any Person, or use for the
Executive's own benefit or the benefit of any Person, any trade secrets,
confidential or proprietary knowledge or information, no matter when or how






                                      -12-


acquired concerning the conduct and details of the Company's business, including
without limitation, names of customers and suppliers, marketing methods, trade
secrets, policies, prospects and financial condition. For purposes of this
Section 8, confidential information shall not include any information which is
now known by or readily available to the general public or which becomes known
by or readily available to the general public other than as a result of any
improper act or omission of the Executive.

         (b) Non-Competition. During the Term hereof and for a period of two (2)
years following the Executive's termination of employment for any reason, the
Executive shall not, except with the Company's express prior written consent,
directly or indirectly, in any capacity, for the benefit of any Person:

             (i) Solicit any Person with whom Executive had substantial contact
or about whom Executive acquired confidential information during Executive's
employment with the Company in any manner which interferes or might interfere
with such Person's relationship with the Company, or in an effort to obtain such
Person as a customer, supplier, salesman, agent, or representative of any
business in competition with the Company.

             (ii) Solicit the employment of or hire, whether as an employee,
officer, director, agent, consultant or independent contractor, any person who
is, or was at any time during the twelve (12) month period preceding the
termination of the Executive's employment through the expiration of this
covenant, an employee, consultant, officer or director of the Company or any of
its subsidiaries and affiliates (except for such employment by the Company or
any of its subsidiaries and affiliates);

             (iii) Establish, engage, own, manage, operate, join or control, or
participate in the establishment, ownership (other than as the owner of less
than one percent (1%) of the stock of a corporation whose shares are publicly
traded), management, operation or control of, or be a director, officer,
employee, salesman, agent or representative of, or be a consultant to, any
Person in any business in competition with the Company anywhere in the United
States or act or conduct himself in any manner which the Executive would have
reason to believe inimical or contrary to the best interests of the Company.
Executive acknowledges that this nationwide restriction is reasonable and
necessary because Executive's responsibilities include strategies for geographic
expansion throughout the United States. Executive acknowledges that the
provisions contained in this section will not impair Executive's ability to earn
a livelihood because Executive has the ability to engage in other professional
activities that will not breach these provisions.

         (c) Enforcement. The Executive acknowledges that any breach by the
Executive of any of the covenants and agreements of this Section 8 ("Covenants")
will result in irreparable injury to the Company for which money damages could
not adequately compensate the Company, and therefore, in the event of any such
breach, the Company shall be entitled, in addition to all other rights and
remedies which the Company may have at law or in equity, to have an injunction
issued by any competent court enjoining and restraining the Executive and/or all





                                      -13-


other Persons involved therein from continuing such breach. The existence of any
claim or cause of action which the Executive or any such other Person may have
against the Company shall not constitute a defense or bar to the enforcement of
any of the Covenants. If the Company is obliged to resort to litigation to
enforce any of the Covenants which has a fixed term, then such term shall be
extended for a period of time equal to the period during which a material breach
of such Covenant was occurring, beginning on the date of a final court order
(without further right of appeal) holding that such a material breach occurred,
or, if later, the last day of the original fixed term of such Covenant.

         (d) Consideration. The Executive expressly acknowledges that the
Covenants are a material part of the consideration bargained for by the Company
and, without the agreement of the Executive to be bound by the Covenants, the
Company would not have agreed to enter into this Agreement.

         (e) Scope. If any portion of any Covenant or its application is
construed to be invalid, illegal or unenforceable, then the other portions and
their application shall not be affected thereby and shall be enforceable without
regard thereto. If any of the Covenants is determined to be unenforceable
because of its scope, duration, geographical area or similar factor, then the
court making such determination shall have the power to reduce or limit such
scope, duration, area or other factor, and such Covenant shall then be
enforceable in its reduced or limited form.

9.       No Obligation to Mitigate Damages; No Effect on Other Contractual
Rights.

         The Executive shall not be required to mitigate damages or the amount
of any payment provided for under this Agreement by seeking other employment or
otherwise, nor shall the amount of payment provided for under this Agreement be
reduced by any compensation earned by the Executive as the result of employment
by another employer after the Date of Termination, or otherwise. The amounts
payable to the Executive under Section 5 hereof shall not be treated as damages
but as severance compensation to which the Executive is entitled by reason of
termination of the Executive's employment in the circumstances contemplated by
this Agreement.

10.      Miscellaneous.

         (a) Notices. All notices, requests, demands, consents or other
communications required or permitted to be given under this Agreement shall be
in writing and shall be deemed to have been duly given if and when (i) delivered
personally, (ii) mailed by first class certified mail, return receipt requested,
postage prepaid, or (iii) sent by a nationally recognized express courier
service, postage or delivery changes prepaid, with receipt, or (iv) delivered by
telecopy (with receipt, and with original delivered in accordance with any of
(i), (ii) or (iii) above) to the parties at their respective addresses stated
below or to such other addresses of which the parties may give notice in
accordance with this Section.





                                      -14-


                           If to the Company, to:

                           NeighborCare, Inc.
                           Seven East Lee Street
                           Baltimore, MD 21202

                           Attention: Law Department
                           Attention: Chairman and Chief Executive Officer

                           If to the Executive, to:
                           John F. Gaither, Jr.
                           501 South Rockefeller Road
                           Lake Forest, Illinois 60045

         (b) Entire Understanding. This Agreement sets forth the entire
understanding between the parties with respect to the subject matter hereof and
supersedes all prior and contemporaneous, written, oral, expressed or implied,
communications, agreements and understandings with respect to the subject matter
hereof.

         (c) Modification. This Agreement shall not be amended, modified,
supplemented or terminated except in writing signed by both parties. No action
taken by the Company hereunder, including without limitation any waiver, consent
or approval, shall be effective unless approved by a majority of the Board.

         (d) Assignability and Binding Effect. This Agreement (including the
covenants set forth in Section 8) shall inure to the benefit of and shall be
binding upon the Company and its successors (including successors to all or
substantially all of the Company's assets) and permitted assigns and upon the
Executive and the Executive's heirs, executors, legal representatives,
successors and permitted assigns. This Agreement, including but not limited to
the covenants contained in Section 8 above, may be assigned or otherwise
transferred by the Company to any of its subsidiaries or other affiliates and by
such transferees to its subsidiaries or other affiliates, provided that, in any
assignment or transfer the assignee or transferee agrees to be bound by the
terms and conditions hereof. Upon assignment or transfer, the "Company" herein
shall mean the buyer, assignee or transferee of this Agreement. This Agreement
may not, however, be assigned by the Executive to a third party, nor may the
Executive delegate his duties under this Agreement.

         (e) Severability. If any provision of this Agreement is construed to be
invalid, illegal or unenforceable, then the remaining provisions hereof shall
not be affected thereby and shall be enforceable without regard thereto.

         (f) Counterparts. This Agreement may be executed in any number of
counterparts, each of which when so executed and delivered shall be an original
hereof, and it shall not be necessary in making proof of this Agreement to
produce or account for more than one counterpart hereof.






                                      -15-


         (g) Section Headings. Section and subsection headings in this Agreement
are inserted for convenience of reference only, and shall neither constitute a
part of this Agreement nor affect its construction, interpretation, meaning or
effect.

         (h) References. All words used in this Agreement shall be construed to
be of such number and gender as the context requires or permits.

         (i) Controlling Law. This Agreement is made under, and shall be
governed by, construed and enforced in accordance with, the substantive laws of
the State of Maryland applicable to agreements made and to be performed entirely
therein.

         (j) Settlement of Disputes. Except with respect to injunctive relief
under Section 8 or otherwise, the Executive and the Company will attempt in good
faith to resolve any and all controversies, claims, and disputes of every kind
and nature, including both common law and statutory, between the parties to this
Agreement, arising out of or in connection with the Executive's employment
relationship, terms and conditions of employment, or separation of employment
with the Company for whatever reason, (including without limitation, any such
claim, dispute or controversy arising under any federal, state or local law,
statute, regulation or ordinance or arising under the Company's employee benefit
plans, policies or programs), including the existence, construction, validity,
interpretation or meaning, performance, non-performance, enforcement, operation,
breach, continuance, or termination of this Agreement (each, a "Dispute")
promptly by discussions between the parties to this Agreement. If the Dispute
cannot be resolved through such discussions, the Dispute shall be submitted to
arbitration in accordance with the National Rules for the Resolution of
Employment Disputes ("the Rules") of the American Arbitration Association
("AAA") then in effect, except as otherwise agreed to herein. The time
limitation for submitting a Dispute to arbitration pursuant to this Agreement is
sixty (60) days from the date of the occurrence giving rise to the Dispute,
unless the Dispute is based on statutory rights, in which case the applicable
statute of limitations governs the time period in which a Dispute must be
submitted to arbitration. By submitting a Dispute to arbitration pursuant to
this Agreement, the Executive and the Company acknowledge and agree to waive
their respective rights to seek relief in a judicial forum and before a jury.
The arbitration shall be conducted by a single arbitrator, selected by
alternately striking from a list of five (5) arbitrators supplied by the AAA.
The arbitrator's fees shall be borne by the Company. The Executive and the
Company are separately responsible for their costs, transcript fees, expenses,
witness fees, attorney's fees and other costs associated with the arbitration.
The parties agree that any arbitration conducted pursuant to this section shall
be held in the county in which the Company's corporate headquarters is located
(or at such other location as shall be mutually agreed to by the parties). The
decision of the arbitrator shall be final and binding upon the parties. In
rendering a decision, the arbitrator shall apply all legal principles and
standards that would govern if the Dispute were being brought in a judicial
forum, including all statute of limitations and defenses. Discovery shall be
allowed pursuant to the Rules then in effect as the arbitrator determines
appropriate under the circumstances. The arbitrator may grant injunctions or
provide other relief available in a court of law or equity. Any action to
enforce or vacate the arbitrator's award shall be governed by the Federal
Arbitration Act, if applicable, and otherwise by applicable state law. If either




                                      -16-


the Company or the Executive pursues any claim, dispute or controversy against
the other in a proceeding other than the arbitration provided for herein, the
responding party shall be entitled to dismissal or injunctive relief regarding
such action and recovery of all costs, losses and attorney's fees related to
such action. Nothing herein shall preclude the Company from seeking, in any
court of competent jurisdiction in Pennsylvania, damages, specific performance,
or other equitable or legal remedies in the case of any breach or threatened
breach by the Executive of this Agreement. The arbitrator shall be required to
apply the contractual provisions hereof or the Company's policies and procedures
in deciding any matter submitted to him and shall not have any authority, by
reason of this Agreement or otherwise, to render a decision that is contrary to
the mutual intent of the parties as set forth in this Agreement or the Company's
intent as set forth in the Company's policies and procedures. Any of the
parties, before or during the arbitration contemplated by this section, may
apply to a court for a temporary restraining order or preliminary injunction or
similar equitable relief to protect its interests pending completion of such
arbitration proceedings and, in particular, to enforce the provisions of this
section and to aid the arbitration contemplated thereby.

         (k) Approval and Authorizations. The execution and the implementation
of the terms and conditions of this Agreement have been fully authorized by the
Board.

         (l) Indulgences, Etc. Neither the failure nor delay on the part of
either party to exercise any right, remedy, power or privilege under this
Agreement shall operate as a waiver thereof, nor shall the single or partial
exercise of any right, remedy, power or privilege preclude any other or further
exercise of the same or any other right, remedy, power or privilege, nor shall
any waiver of any right, remedy, power or privilege with respect to any
occurrence be construed as a waiver of such right, remedy, power or privilege
with respect to any other occurrence. No waiver shall be effective unless it is
in writing and is signed by the party asserted to have granted such waiver.

         (m) Legal Expenses. In the event that the Executive institutes any
legal action to enforce the Executive's rights under, or to recover damages for
breach of this Agreement, the Executive, if the Executive is the prevailing
party, shall be entitled to recover from the Company any reasonable expenses for
attorney's fees and disbursements incurred by the Executive.

                            [Signature Page follows]














                                      -17-






         IN WITNESS WHEREOF, the parties hereto have executed this Agreement the
day and year first above mentioned, under seal, intending to be legally bound
hereby.





                           COMPANY:

                           By:        /s/   John J. Arlotta
                                      ------------------------------------------
                           Name:      John J. Arlotta
                                      ------------------------------------------
                           Title:     Chairman, President and
                                      Chief Executive Officer
                                      ------------------------------------------

Witness:                   EXECUTIVE



/s/  Katherine Dumont      Name:      /s/  John F. Gaither, Jr.
- ------------------------              ------------------------------------------
                           Title:     Senior Vice President, General Counsel
                                      and Secretary
                                      ------------------------------------------















                                      -18-

EX-10

                                                                  Execution Copy

                          REGISTRATION RIGHTS AGREEMENT

                          Dated as of November 4, 2003
                                  by and among

                          Genesis Health Ventures, Inc.

                                    as Issuer

                          Each of the Guarantors Listed
                          On the Signature Pages Herein

                                as the Guarantors

                                       and

                              Goldman, Sachs & Co.
                               UBS Securities LLC
                              Lehman Brothers Inc.
                           J.P. Morgan Securities Inc.

                            as the Initial Purchasers






         This Registration Rights Agreement (this "Agreement") is made and
entered into as of November 4, 2003, by and among Genesis Health Ventures, Inc.,
a Pennsylvania corporation (the "Company"), the subsidiaries listed on Schedule
A attached hereto (the "Guarantors"), and the several initial purchasers listed
in Schedule I to the Purchase Agreement (as defined below) (each an "Initial
Purchaser" and, collectively, the "Initial Purchasers"), for whom Goldman, Sachs
& Co., UBS Securities LLC and Lehman Brothers Inc. are acting as
representatives. The Initial Purchasers have agreed to purchase the Company's
6.875% Senior Subordinated Notes due November 15, 2013 (the "Notes") pursuant to
the Purchase Agreement (as defined below).

         This Agreement is made pursuant to the Purchase Agreement, dated
October 29, 2003 (the "Purchase Agreement"), by and among the Company, the
Guarantors and the Initial Purchasers. In order to induce the Initial Purchasers
to purchase the Notes, the Company and the Guarantors have agreed to provide the
registration rights set forth in this Agreement. Capitalized terms used herein
and not otherwise defined shall have the meanings assigned to them in the
Indenture, dated the date hereof among the Company, the Guarantors and The Bank
of New York, as Trustee, relating to the Notes and the Exchange Notes (as
defined below) (the "Indenture").

         The parties hereby agree as follows:

SECTION 1. DEFINITIONS

         As used in this Agreement, the following capitalized terms shall have
the following meanings:

         Act: The Securities Act of 1933, as amended.

         Affiliate: As defined in Rule 144 of the Act.

         Agreement: As defined in the preamble hereof.

         Blackout Period: As defined in Section 5(a) hereof.

         Broker-Dealer: Any broker or dealer registered under the Exchange Act.

         Closing Date: The date hereof.

         Commission: The Securities and Exchange Commission.

         Company: As defined in the preamble hereof.

         Consummate: An Exchange Offer shall be deemed "Consummated" for
purposes of this Agreement upon the occurrence of (a) the filing and
effectiveness under the Act of the Exchange Offer Registration Statement
relating to the Exchange Notes to be issued in the Exchange Offer, (b) the
maintenance of such Exchange Offer Registration Statement continuously effective
and the keeping of the Exchange Offer open for a period not less than the period
required pursuant to Section 3(b) hereof and (c) the delivery by the Company to
the Registrar under the Indenture of Exchange Notes in the same aggregate
principal amount as the aggregate principal amount of Notes tendered by Holders
thereof pursuant to the Exchange Offer.



                                       2


         Consummation Deadline: As defined in Section 5 hereof.

         Effectiveness Deadline: As defined in Section 3(a) and 4(a) hereof.

         Exchange Act: The Securities Exchange Act of 1934, as amended.

         Exchange Notes: The Company's 6.875% Senior Subordinated Notes due
2013, registered under the Act, to be issued pursuant to the Indenture: (i) in
the Exchange Offer or (ii) as contemplated by Section 4 hereof.

         Exchange Offer: The exchange and issuance by the Company of a principal
amount of Exchange Notes (which shall be registered pursuant to the Exchange
Offer Registration Statement) equal to the outstanding principal amount of Notes
that are tendered by such Holders in connection with such exchange and issuance.

         Exchange Offer Registration Statement: The Registration Statement
relating to the Exchange Offer, including the related Prospectus.

         Exempt Resales: The transactions in which the Initial Purchasers
propose to sell the Notes to certain "qualified institutional buyers," as such
term is defined in Rule 144A under the Act, and pursuant to Regulation S under
the Act.

         Filing Deadline: As defined in Sections 3(a) and 4(a) hereof.

         Guarantees: Guarantees by the Guarantors of the Company's obligations
under the Notes, the Exchange Notes and the Indenture.

         Guarantors: As defined in the preamble hereof.

         Holders: As defined in Section 2 hereof.

         Indenture: As defined in the preamble hereof.

         Initial Purchasers: As defined in the preamble hereof.

         Prospectus: The prospectus included in a Registration Statement at the
time such Registration Statement is declared effective, as amended or
supplemented by any prospectus supplement and by all other amendments thereto,
including post-effective amendments, and all material incorporated by reference
into such Prospectus.

         Purchase Agreement: As defined in the preamble hereof.

         Recommencement Date: As defined in Section 6(e) hereof.



                                       3


         Registration Default: As defined in Section 5 hereof.

         Registration Statement: Any registration statement of the Company and
the Guarantors relating to (a) an offering of Exchange Notes and related
Guarantees pursuant to an Exchange Offer or (b) the registration for resale of
Transfer Restricted Securities pursuant to the Shelf Registration Statement, in
each case (i) that is filed pursuant to the provisions of this Agreement and
(ii) including the Prospectus included therein, all amendments and supplements
thereto (including post-effective amendments) and all exhibits and material
incorporated by reference therein.

         Regulation S: Regulation S promulgated under the Act.

         Rule 144: Rule 144 promulgated under the Act.

         Shelf Registration Statement: As defined in Section 4 hereof.

         Suspension Notice: As defined in Section 6(e) hereof.

         TIA: The Trust Indenture Act of 1939 (15 U.S.C. Section 77aaa-77bbbb)
as in effect on the date of the Indenture.

         Transfer Restricted Securities: (i) Each Note and the related
Guarantees, until the earliest to occur of (a) the date on which such Note is
exchanged in the Exchange Offer for an Exchange Note which is entitled to be
resold to the public by the Holder thereof without complying with the prospectus
delivery requirements of the Act, (b) the date on which such Note has been
disposed of in accordance with a Shelf Registration Statement, or (c) the date
on which such Note is distributed to the public pursuant to Rule 144 under the
Act or could (except with respect to affiliates of the Company within the
meaning of the Act) be sold in compliance with Rule 144(k) under the Act and
(ii) each Exchange Note and the related Guarantees acquired by a Broker-Dealer
in exchange for a Note acquired for its own account as a result of market making
activities or other trading activities until the date on which such Exchange
Note is disposed of by a Broker-Dealer pursuant to the "Underwriting"
contemplated by the Exchange Offer Registration Statement (including the
delivery of the Prospectus contained therein).

         Underwritten Registration or Underwritten Offering: A registration in
which securities of the Company are sold to an underwriter for reoffering to the
public.

SECTION 2. HOLDERS

         A person is deemed to be a holder of Transfer Restricted Securities
(each, a "Holder") whenever such person owns Transfer Restricted Securities.

                                       4


SECTION 3. REGISTERED EXCHANGE OFFER

         (a) Unless the Exchange Offer shall not be permitted by applicable
federal law or Commission policy, the Company and the Guarantors shall (i) cause
the Exchange Offer Registration Statement to be filed with the Commission on or
prior to April 30, 2004 (the "Filing Deadline"), (ii) use their reasonable best
efforts to cause such Exchange Offer Registration Statement to become effective
on or prior to July 15, 2004 (the "Effectiveness Deadline"), (iii) in connection
with the foregoing, (A) file all pre-effective amendments to such Exchange Offer
Registration Statement as may be necessary in order to cause it to become
effective, (B) file, if applicable, a post-effective amendment to such Exchange
Offer Registration Statement pursuant to Rule 430A under the Act and (C) cause
all necessary filings, if any, in connection with the registration and
qualification of the Exchange Notes to be made under the blue sky laws of such
jurisdictions as are necessary to permit Consummation of the Exchange Offer, and
(iv) upon the effectiveness of such Exchange Offer Registration Statement,
commence and Consummate the Exchange Offer. The Exchange Offer shall be on the
appropriate form permitting (i) registration of the Exchange Notes to be offered
in exchange for the Notes that are Transfer Restricted Securities and (ii)
resales of Exchange Notes by Broker-Dealers that tendered into the Exchange
Offer Notes that such Broker-Dealer acquired for its own account as a result of
market making activities or other trading activities (other than Notes acquired
directly from the Company or any of its Affiliates) as contemplated by Section
3(c) below.

         (b) The Company and the Guarantors shall use their reasonable best
efforts to cause the Exchange Offer Registration Statement to be effective
continuously, and shall keep the Exchange Offer open for a period of not less
than the minimum period required under applicable federal and state securities
laws to Consummate the Exchange Offer; provided, however, that in no event shall
such period be less than 20 business days. The Company and the Guarantors shall
cause the Exchange Offer to comply with all applicable federal and state
securities laws. No securities other than the Exchange Notes shall be included
in the Exchange Offer Registration Statement. The Company and the Guarantors
shall use their reasonable best efforts to cause the Exchange Offer to be
Consummated within 45 business days, or longer, if required by the federal
securities laws, after the Exchange Offer Registration Statement has become
effective.

         (c) The Company shall include a "Plan of Distribution" section in the
Prospectus contained in the Exchange Offer Registration Statement and indicate
therein that any Broker-Dealer who holds Transfer Restricted Securities that
were acquired for the account of such Broker-Dealer as a result of market-making
activities or other trading activities (other than Notes acquired directly from
the Company or any Affiliate of the Company), may exchange such Transfer
Restricted Securities pursuant to the Exchange Offer. Such "Plan of
Distribution" section shall also contain all other information with respect to
such sales by such Broker-Dealers that the Commission may require in order to
permit such sales pursuant thereto, but such "Plan of Distribution" shall not
name any such Broker-Dealer or disclose the amount of Transfer Restricted
Securities held by any such Broker-Dealer, except to the extent required by the
Commission as a result of a change in policy, rules or regulations after the
date of this Agreement.



                                       5


         Because such Broker-Dealer may be deemed to be an "underwriter" within
the meaning of the Act and must, therefore, deliver a prospectus meeting the
requirements of the Act in connection with its initial sale of any Exchange
Notes received by such Broker-Dealer in the Exchange Offer, the Company and the
Guarantors shall permit the use of the Prospectus contained in the Exchange
Offer Registration Statement by such Broker-Dealer to satisfy such prospectus
delivery requirement. To the extent necessary to ensure that the prospectus
contained in the Exchange Offer Registration Statement is available for sales of
Exchange Notes by Broker-Dealers, the Company and the Guarantors agree to use
their reasonable best efforts to keep the Exchange Offer Registration Statement
continuously effective, supplemented, amended and current as required by and
subject to the provisions of Section 6(a) and (c) hereof and in conformity with
the requirements of this Agreement, the Act and the policies, rules and
regulations of the Commission as announced from time to time, for a period of
one year from the date on which the Exchange Offer is Consummated or such
shorter period as will terminate when all Transfer Restricted Securities held by
such Broker-Dealers covered by such Registration Statement have been sold
pursuant thereto. The Initial Purchasers shall use their reasonable best efforts
to cooperate with the Company in determining when Transferred Restricted
Securities are acquired by Broker-Dealers and when such Transferred Restricted
Securities have been sold. The Company shall provide sufficient copies of the
latest version of such Prospectus to such Broker-Dealers, promptly upon request,
at any time during such period.

SECTION 4. SHELF REGISTRATION

         (a) Shelf Registration. If (i) the Exchange Offer is not permitted by
applicable law or Commission policy or (ii) if any Holder of Transfer Restricted
Securities shall notify the Company within 20 business days following the
Consummation of the Exchange Offer that (A) such Holder was prohibited by law or
Commission policy from participating in the Exchange Offer or (B) such Holder
may not resell the Exchange Notes acquired by it in the Exchange Offer to the
public without delivering a prospectus and the Prospectus contained in the
Exchange Offer Registration Statement is not appropriate or available for such
resales by such Holder or (C) such Holder is a Broker-Dealer and holds Notes
acquired directly from the Company or any of its Affiliates, then the Company
and the Guarantors shall:

         (x) use their reasonable best efforts to cause to be filed, on or prior
to 60 days after the earlier of (i) the date on which the Company determines
that the Exchange Offer Registration Statement cannot be filed as a result of
clause (a)(i) above and (ii) the date on which the Company receives the notice
specified in clause (a)(ii) above (such earlier date, the "Filing Deadline"), a
shelf registration statement pursuant to Rule 415 under the Act (which may be an
amendment to the Exchange Offer Registration Statement (the "Shelf Registration
Statement")), relating to all Transfer Restricted Securities; and

         (y) use their reasonable best efforts to cause such Shelf Registration
Statement to become effective on or prior to 120 days after the Filing Deadline
for the Shelf Registration Statement (such 120th day the "Effectiveness
Deadline").

         If, after the Company has and the Guarantors have filed an Exchange
Offer Registration Statement that satisfies the requirements of Section 3(a)
above, the Company is and the Guarantors are required to file and make effective
a Shelf Registration Statement solely because the Exchange Offer is not
permitted under applicable federal law or Commission policy (i.e., clause (a)(i)
above), then the filing of the Exchange Offer Registration Statement shall be
deemed to satisfy the requirements of clause (x) above; provided that, in such
event, the Company and the Guarantors shall remain obligated to meet the
Effectiveness Deadline set forth in clause (y).



                                       6


         To the extent necessary to ensure that the Shelf Registration Statement
is available for sales of Transfer Restricted Securities by the Holders thereof
entitled to the benefit of this Section 4(a) and the other securities required
to be registered therein pursuant to Section 6(b)(ii) and subject to Section
5(c) hereof, the Company and the Guarantors shall use their reasonable best
efforts to keep any Shelf Registration Statement required by this Section 4(a)
continuously effective, supplemented, amended and current as required by and
subject to the provisions of Sections 6(b) and (c) hereof and in conformity with
the requirements of this Agreement, the Act and the policies, rules and
regulations of the Commission as announced from time to time, for a period of at
least two years (as extended pursuant to Section 6(c)(i)) following the Closing
Date, or such shorter period as will terminate when all Transfer Restricted
Securities covered by such Shelf Registration Statement have been sold pursuant
thereto.

         (b) Provision by Holders of Certain Information in Connection with the
Shelf Registration Statement. No Holder of Transfer Restricted Securities may
include any of its Transfer Restricted Securities in any Shelf Registration
Statement pursuant to this Agreement unless and until such Holder furnishes to
the Company in writing, within 20 days after receipt of a request therefor, the
information specified in Item 507 or 508 of Regulation S-K, as applicable, of
the Act for use in connection with any Shelf Registration Statement or
Prospectus or preliminary Prospectus included therein. No Holder of Transfer
Restricted Securities shall be entitled to additional interest pursuant to
Section 5 hereof unless and until such Holder shall have provided all such
information. By its acceptance of Transfer Restricted Securities, each Holder
agrees to promptly furnish additional information required to be disclosed in
order to make the information previously furnished to the Company by such Holder
not materially misleading.

SECTION 5. ADDITIONAL INTEREST

         (a) If (i) any Registration Statement required by this Agreement is not
filed with the Commission on or prior to the applicable Filing Deadline, (ii)
any such Registration Statement has not been declared effective by the
Commission on or prior to the applicable Effectiveness Deadline, (iii) the
Exchange Offer has not been Consummated on or prior to 45 business days or
longer, if required by federal securities laws, after the Effectiveness Deadline
(the "Consummation Deadline") or (iv) any Registration Statement required by
this Agreement is filed and declared effective but shall thereafter cease to be
effective or fail to be usable for its intended purpose without being succeeded
within seven business days by a post-effective amendment to such Registration
Statement that cures such failure and that is itself declared effective within
ten business days of filing such post-effective amendment to such Registration
Statement (except as permitted in paragraph (c) of this Section 5, such period
of time during which any such Registration Statement is not effective or any
such Registrations Statement or the related Prospectus is not usable being
referred to as a "Blackout Period") (each such event referred to in clauses (i)
through (iv), a "Registration Default"), then the Company and the Guarantors
hereby jointly and severally agree to pay to each Holder of Transfer Restricted
Securities affected thereby additional interest in an amount equal to $0.05 per
week per $1,000 in principal amount of Transfer Restricted Securities held by
such Holder for the first 90-day period immediately following the occurrence of
such Registration Default. The amount of the additional interest shall increase
by an additional $0.05 per week per $1,000 in principal amount of Transfer
Restricted Securities with respect to each subsequent 90-day period until all
Registration Defaults have been cured, up to a maximum amount of additional
interest of $0.50 per week per $1,000 in principal amount of Transfer Restricted
Securities; provided that the Company and the Guarantors shall in no event be
required to pay additional interest for more than one Registration Default at
any given time. Notwithstanding anything to the contrary set forth herein, (1)
upon filing of the Exchange Offer Registration Statement (and/or, if applicable,
the Shelf Registration Statement), in the case of (i) above, (2) upon the
effectiveness of the Exchange Offer Registration Statement (and/or, if
applicable, the Shelf Registration Statement), in the case of (ii) above, (3)
upon Consummation of the Exchange Offer, in the case of (iii) above, or (4) upon
the filing of a post-effective amendment to the Registration Statement or an
additional Registration Statement that causes the Exchange Offer Registration
Statement (and/or, if applicable, the Shelf Registration Statement) to again be
declared effective or made usable, in the case of (iv) above, the additional
interest payable with respect to the Transfer Restricted Securities as a result
of such clause (i), (ii), (iii) or (iv), as applicable, shall cease.

                                       7


         (b) All accrued additional interest shall be paid to the Holders
entitled thereto, in the manner provided for the payment of interest in the
Indenture, on each Interest Payment Date, as more fully set forth in the
Indenture and the Notes. Notwithstanding the fact that any securities for which
additional interest are due cease to be Transfer Restricted Securities, all
obligations of the Company and the Guarantors to pay accrued additional interest
with respect to securities shall survive until such time as such obligations
with respect to such securities shall have been satisfied in full.

         (c) A Registration Default referred to in Section 5(a)(iv) shall be
deemed not to have occurred and be continuing in relation to a Registration
Statement or the related Prospectus if (i) the Blackout Period has occurred
solely as a result of (x) the filing of a post-effective amendment to such Shelf
Registration Statement to incorporate annual audited financial information with
respect to the Company where such post-effective amendment is not yet effective
and needs to be declared effective to permit Holders to use the related
Prospectus or (y) the occurrence of other material events with respect to the
Company that would need to be described in such Registration Statement or the
related Prospectus and (ii) in the case of clause (y), the Company is proceeding
promptly and in good faith to amend or supplement (including by way of filing
documents under the Exchange Act which are incorporated by reference into the
Registration Statement) such Registration Statement and the related Prospectus
to describe such events; provided, however, that in any case if such Blackout
Period occurs for a continuous period in excess of 30 days, a Registration
Default shall be deemed to have occurred on the 31st day of such Blackout Period
and additional interest shall be payable in accordance with paragraph (a) of
this Section 5 from the day such Registration Default occurred until such
Registration Default is cured or until the Company is no longer required
pursuant to this Agreement to keep such Registration Statement effective or such
Registration Statement or the related Prospectus usable; provided, further, that
in no event shall the total of all Blackout Periods exceed 45 days in the
aggregate of any 12-month period.

SECTION 6. REGISTRATION PROCEDURES

         (a) Exchange Offer Registration Statement. In connection with the
Exchange Offer, the Company and the Guarantors shall (x) comply with all
applicable provisions of Section 6(c) below, (y) use their reasonable best
efforts to effect such exchange and to permit the resale of Exchange Notes by
any Broker-Dealer that tendered Notes in the Exchange Offer that such
Broker-Dealer acquired for its own account as a result of its market making
activities or other trading activities (other than Notes acquired directly from
the Company or any of its Affiliates) being sold in accordance with the intended
method or methods of distribution thereof, and (z) comply with all of the
following provisions:

                                       8


                  (i) As a condition to its participation in the Exchange Offer,
         each Holder of Transfer Restricted Securities (including, without
         limitation, any Holder who is a Broker Dealer) shall furnish, upon the
         request of the Company, prior to the Consummation of the Exchange
         Offer, a written representation to the Company and the Guarantors
         (which may be contained in the letter of transmittal contemplated by
         the Exchange Offer Registration Statement) to the effect that (A) it is
         not an Affiliate of the Company, (B) it is not engaged in, and does not
         intend to engage in, and has no arrangement or understanding with any
         person to participate in, a distribution of the Exchange Notes to be
         issued in the Exchange Offer and (C) it is acquiring the Exchange Notes
         in its ordinary course of business. Each Holder using the Exchange
         Offer to participate in a distribution of the Exchange Notes will be
         required to acknowledge and agree that, if the resales are of Exchange
         Notes obtained by such Holder in exchange for Notes acquired directly
         from the Company or an Affiliate thereof, it (1) could not, under
         Commission policy as in effect on the date of this Agreement, rely on
         the position of the Commission enunciated in Morgan Stanley and Co.,
         Inc. (available June 5, 1991) and Exxon Capital Holdings Corporation
         (available May 13, 1988), as interpreted in the Commission's letter to
         Shearman & Sterling dated July 2, 1993, and similar no-action letters,
         and (2) must comply with the registration and prospectus delivery
         requirements of the Act in connection with a secondary resale
         transaction and that such a secondary resale transaction must be
         covered by an effective registration statement containing the selling
         security holder information required by Item 507 or 508, as applicable,
         of Regulation S-K.

                  (ii) Prior to effectiveness of the Exchange Offer Registration
         Statement, the Company and the Guarantors shall provide a supplemental
         letter to the Commission (A) stating that the Company and the
         Guarantors are registering the Exchange Offer in reliance on the
         position of the Commission enunciated in Exxon Capital Holdings
         Corporation (available May 13, 1988), Morgan Stanley and Co., Inc.
         (available June 5, 1991) as interpreted in the Commission's letter to
         Shearman & Sterling dated July 2, 1993, and (B) including a
         representation that neither the Company nor any Guarantor has entered
         into any arrangement or understanding with any person to distribute the
         Exchange Notes to be received in the Exchange Offer and that, to the
         best of the Company's and each Guarantor's information and belief, each
         Holder participating in the Exchange Offer is acquiring the Exchange
         Notes in its ordinary course of business and has no arrangement or
         understanding with any person to participate in the distribution of the
         Exchange Notes received in the Exchange Offer.

                                       9


         (b) Shelf Registration Statement. In connection with the Shelf
Registration Statement, the Company and the Guarantors shall:

                  (i) comply with all the provisions of Section 6(c) and 6(d)
         below and use reasonable best efforts to effect such registration to
         permit the sale of the Transfer Restricted Securities being sold in
         accordance with the intended method or methods of distribution thereof
         (as indicated in the information furnished to the Company pursuant to
         Section 4(b) hereof), and pursuant thereto the Company and the
         Guarantors will prepare and file with the Commission a Registration
         Statement relating to the registration on any appropriate form under
         the Act, which form shall be available for the sale of the Transfer
         Restricted Securities in accordance with the intended method or methods
         of distribution thereof within the time periods and otherwise in
         accordance with the provisions hereof; and

                  (ii) issue, upon the request of any Holder or purchaser of
         Notes covered by any Shelf Registration Statement contemplated by this
         Agreement, Exchange Notes having an aggregate principal amount equal to
         the aggregate principal amount of Notes sold pursuant to the Shelf
         Registration Statement and surrendered to the Company for cancellation;
         the Company and the Guarantors shall register Exchange Notes and the
         related Guarantees on the Shelf Registration Statement for this purpose
         and issue the Exchange Notes to the purchaser(s) of securities subject
         to the Shelf Registration Statement in the names as such purchaser(s)
         shall designate.

         (c) General Provisions. In connection with any Registration Statement
and any related Prospectus required by this Agreement, the Company and the
Guarantors shall:

                  (i) use reasonable best efforts to keep such Registration
         Statement continuously effective and provide all requisite financial
         statements for the period specified in Section 3 or 4 of this
         Agreement, as applicable. Upon the occurrence of any event that would
         cause any such Registration Statement or the Prospectus contained
         therein (A) to contain an untrue statement of material fact or omit to
         state any material fact necessary to make the statements therein not
         misleading or (B) not to be effective and usable for resale of Transfer
         Restricted Securities during the period required by this Agreement, the
         Company and the Guarantors shall file promptly an appropriate amendment
         to such Registration Statement curing such defect, and, if Commission
         review is required, use their respective reasonable best efforts to
         cause such amendment to be declared effective as soon as practicable.
         Notwithstanding the foregoing, the Company may allow the Shelf
         Registration Statement to cease to become effective and usable and may
         suspend sales of Transfer Restricted Securities pursuant thereto if (x)
         the board of directors of the Company determines in good faith that it
         is in the best interests of the Company not to disclose the existence
         of or facts surrounding any proposed or pending material corporate
         transaction involving the Company or its Guarantors, and the Company
         notifies the Holders within two business days after such board of
         directors makes such determination or (y) the Prospectus contained in
         the Shelf Registration Statement contains an untrue statement of a
         material fact or omits to state a material fact necessary in order to
         make the statements made therein, in the light of the circumstances
         under which they were made, not misleading; provided that the two-year
         period referred to in Section 4(a) hereof during which the Shelf
         Registration Statement is required to be effective and usable shall be
         extended by the number of days during which such Registration Statement
         was not effective or usable pursuant to the foregoing provisions; and
         provided further that additional interest shall accrue on the Notes as
         provided in Section 5 hereof;

                                       10


                  (ii) if at any time the Commission shall issue any stop order
         suspending the effectiveness of any Registration Statement, or any
         state securities commission or other regulatory authority shall issue
         an order suspending the qualification or exemption from qualification
         of the Transfer Restricted Securities under state securities or Blue
         Sky laws, the Company and the Guarantors shall use their respective
         reasonable best efforts to obtain the withdrawal or lifting of such
         order at the earliest possible time;

                  (iii) prepare and file with the Commission such amendments and
         post-effective amendments to the applicable Registration Statement as
         may be necessary to keep such Registration Statement effective for the
         applicable period set forth in Section 3 or 4 hereof, as the case may
         be; cause the Prospectus to be supplemented by any required Prospectus
         supplement, and as so supplemented to be filed pursuant to Rule 424
         under the Act, and to comply fully with Rules 424, 430A and 462, as
         applicable, under the Act in a timely manner; and comply with the
         provisions of the Act with respect to the disposition of all securities
         covered by such Registration Statement during the applicable period in
         accordance with the intended method or methods of distribution by the
         sellers thereof set forth in such Registration Statement or supplement
         to the Prospectus;

                  (iv) in connection with any sale of Transfer Restricted
         Securities that will result in such securities no longer being Transfer
         Restricted Securities, cooperate with the Holders to facilitate the
         timely preparation and delivery of certificates representing Transfer
         Restricted Securities to be sold and not bearing any restrictive
         legends; and to register such Transfer Restricted Securities in such
         denominations and such names as the selling Holders may request at
         least two business days prior to such sale of Transfer Restricted
         Securities;

                  (v) use reasonable best efforts to cause the disposition of
         the Transfer Restricted Securities covered by the Registration
         Statement to be registered with or approved by such other governmental
         agencies or authorities as may be necessary to enable the seller or
         sellers thereof to consummate the disposition of such Transfer
         Restricted Securities; provided, however, that neither the Company nor
         any Guarantor shall be required to register or qualify as a foreign
         corporation where it is not now so qualified or to take any action that
         would subject it to the service of process in suits or to taxation,
         other than as to matters and transactions relating to the Registration
         Statement, in any jurisdiction where it is not now so subject;

                  (vi) provide a CUSIP number for all Transfer Restricted
         Securities not later than the effective date of a Registration
         Statement covering such Transfer Restricted Securities and provide the
         Trustee under the Indenture with certificates for the Transfer
         Restricted Securities which are in a form eligible for deposit with The
         Depository Trust Company;

                                       11


                  (vii) otherwise use reasonable best efforts to comply with all
         applicable rules and regulations of the Commission, and make generally
         available to its security holders with regard to any applicable
         Registration Statement, as soon as practicable, a consolidated earnings
         statement meeting the requirements of Rule 158 (which need not be
         audited) covering a twelve-month period beginning after the effective
         date of the Registration Statement (as such term is defined in
         paragraph (c) of Rule 158 under the Act); and

                  (viii) cause the Indenture to be qualified under the TIA not
         later than the effective date of the first Registration Statement
         required by this Agreement and, in connection therewith, cooperate with
         the Trustee and the Holders to effect such changes to the Indenture as
         may be required for such Indenture to be so qualified in accordance
         with the terms of the TIA; and execute and use reasonable best efforts
         to cause the Trustee to execute, all documents that may be required to
         effect such changes and all other forms and documents required to be
         filed with the Commission to enable such Indenture to be so qualified
         in a timely manner.

         (d) Additional Provisions Applicable to Shelf Registration Statements
and Certain Exchange Offer Prospectuses. In connection with each Shelf
Registration Statement, and each Exchange Offer Registration Statement if and to
the extent that an Initial Purchaser has notified the Company that it is a
holder of Exchange Notes that are Transfer Restricted Securities (for so long as
such Exchange Notes are Transfer Restricted Securities or for the period
provided in Section 3, whichever is shorter), the Company and the Guarantors
shall:

                  (i) advise each Holder promptly and, if requested by such
         Holder, confirm such advice in writing, (A) when the Prospectus or any
         Prospectus supplement or post-effective amendment has been filed, and,
         with respect to any applicable Registration Statement or any
         post-effective amendment thereto, when the same has become effective,
         (B) of any request by the Commission for amendments to the Registration
         Statement or amendments or supplements to the Prospectus or for
         additional information relating thereto, (C) of the issuance by the
         Commission of any stop order suspending the effectiveness of the
         Registration Statement under the Act or of the suspension by any state
         securities commission of the qualification of the Transfer Restricted
         Securities for offering or sale in any jurisdiction, or the initiation
         of any proceeding for any of the preceding purposes, (D) of the
         existence of any fact or the happening of any event that makes any
         statement of a material fact made in the Registration Statement, the
         Prospectus, any amendment or supplement thereto or any document
         incorporated by reference therein untrue, or that requires the making
         of any additions to or changes in the Registration Statement in order
         to make the statements therein not misleading, or that requires the
         making of any additions to or changes in the Prospectus in order to
         make the statements therein, in the light of the circumstances under
         which they were made, not misleading;

                                       12


                  (ii) except as provided in Section 6(c)(i), if any fact or
         event contemplated by Section 6(d)(i)(D) above shall exist or have
         occurred, use reasonable best efforts to prepare a supplement or
         post-effective amendment to the Registration Statement or related
         Prospectus or any document incorporated therein by reference or file
         any other required document so that, as thereafter delivered to the
         purchasers of Transfer Restricted Securities, the Prospectus will not
         contain an untrue statement of a material fact or omit to state any
         material fact necessary to make the statements therein, in the light of
         the circumstances under which they were made, not misleading;

                  (iii) if requested in writing, furnish to each Holder in
         connection with such exchange or sale, if any, before filing with the
         Commission, copies of any Registration Statement or any Prospectus
         included therein (except the Prospectus included in the Exchange Offer
         Registration Statement at the time it was declared effective) or any
         amendments or supplements to any such Registration Statement or
         Prospectus (including all documents incorporated by reference after the
         initial filing of such Registration Statement), which documents will be
         subject to the review and comment of such Holders in connection with
         such sale, if any, for a period of at least five business days, and the
         Company will not file any such Registration Statement or Prospectus or
         any amendment or supplement to any such Registration Statement or
         Prospectus (including all such documents incorporated by reference) to
         which such Holders shall reasonably object in writing within five
         business days after the receipt thereof. A Holder shall be deemed to
         have reasonably objected in writing to such filing if such Registration
         Statement, amendment, Prospectus or supplement, as applicable, as
         proposed to be filed, contains an untrue statement of a material fact
         or omits to state any material fact necessary to make the statements
         therein not misleading or fails to comply with the applicable
         requirements of the Act;

                  (iv) promptly upon request, provide copies of any document
         that is to be incorporated by reference into a Registration Statement
         or Prospectus to each Holder in connection with such exchange or sale,
         if any, make the Company's and the Guarantors' representatives
         available for discussion of such document and other customary due
         diligence matters, and include such information in such document prior
         to the filing thereof as such Holders may reasonably request;

                  (v) make available, at reasonable times, for inspection by
         each Holder and any attorney or accountant retained by such Holders,
         all financial and other records, pertinent corporate documents of the
         Company and the Guarantors and cause the Company's and the Guarantors'
         officers, directors and employees to supply all information reasonably
         requested by any such Holder, attorney or accountant in connection with
         such Registration Statement or any post-effective amendment thereto
         subsequent to the filing thereof and prior to its effectiveness;
         provided, however, that the foregoing inspection and information
         gathering shall be coordinated on behalf of the selling Holders by one
         counsel designated by and on behalf of such Holders; provided, further,
         that each such party shall be required to maintain in confidence and
         not disclose to any other person any information or records reasonably
         designated by the Company in writing as being confidential, until such
         time as (A) such information becomes a matter of public record (whether
         by virtue of its inclusion in such Registration Statement or
         otherwise), (B) such person shall be required so to disclose such
         information pursuant to a subpoena or order of any court or other
         governmental agency or body having jurisdiction over the matter
         (subject to the requirements of such order, and only after such person
         shall have given the Company prompt prior written notice of such
         requirement) or (C) such information is required to be set forth in
         such Registration Statement or Prospectus included therein or in an
         amendment to such Registration Statement or an amendment or supplement
         to such Prospectus in order that such Registration Statement,
         Prospectus, amendment or supplement, as the case may be, does not
         contain an untrue statement of a material fact or omit to state therein
         a material fact required to be stated therein or necessary to make the
         statements made therein not misleading;

                                       13


                  (vi) if requested by any Holders in connection with such
         exchange or sale, promptly include in any Registration Statement or
         Prospectus, pursuant to a supplement or post-effective amendment if
         necessary, such information as such Holders may reasonably request to
         have included therein, including, without limitation, information
         relating to the "Underwriting" of the Transfer Restricted Securities;
         and make all required filings of such Prospectus supplement or
         post-effective amendment as soon as practicable after the Company is
         notified of the matters to be included in such Prospectus supplement or
         post-effective amendment; provided, however, that the Company shall not
         be required to take any action pursuant to this Section 6(d)(vi) that
         would, in the opinion of counsel for the Company reasonably
         satisfactory to the Initial Purchasers, violate applicable law;

                  (vii) furnish to each Holder in connection with such exchange
         or sale without charge, at least one copy of the Registration
         Statement, as first filed with the Commission, and of each amendment
         thereto, including all documents incorporated by reference therein and
         all exhibits (including exhibits incorporated therein by reference);

                  (viii) deliver to each Holder without charge, as many copies
         of the Prospectus (including each preliminary prospectus) and any
         amendment or supplement thereto as such persons reasonably may request;
         and subject to Section 6(e), the Company and the Guarantors hereby
         consent to the use (in accordance with law) of the Prospectus and any
         amendment or supplement thereto by each selling Holder in connection
         with the offering and the sale of the Transfer Restricted Securities
         covered by the Prospectus or any amendment or supplement thereto;

                  (ix) enter into such agreements (including underwriting
         agreements) and make such representations and warranties and take all
         such other actions in connection therewith in order to expedite or
         facilitate the disposition of the Transfer Restricted Securities
         pursuant to any applicable Registration Statement contemplated by this
         Agreement, all to such extent as may be reasonably requested by any
         Holder or Holders of Transfer Restricted Securities who hold at least
         25% in aggregate principal amount of such class of Transfer Restricted
         Securities; provided that the Company and the Guarantors shall not be
         required to enter into any such agreement more than once with respect
         to all of the Transfer Restricted Securities and may delay entering
         into such agreement if the board of directors of the Company determines
         in good faith that it is in the best interests of the Company and the
         Guarantors not to disclose the existence of or facts surrounding any
         proposed or pending material corporate transaction involving the
         Company or the Guarantors; and whether or not an underwriting agreement
         is entered into and whether or not the registration is an Underwritten
         Registration, the Company and the Guarantors shall:

                                       14


                           (A) furnish (or in the case of paragraphs (2) and
                  (3), use reasonable best efforts to cause to be furnished) to
                  the Initial Purchasers, the Holders of Transfer Restricted
                  Securities who hold at least 25% in aggregate principal amount
                  of such class of Transfer Restricted Securities and each
                  underwriter, if any in such substance and scope as they may
                  reasonably request and as are customarily made in connection
                  with an offering of debt securities pursuant to a Shelf
                  Registration Statement (i) upon effective date of the Shelf
                  Registration Statement (and if such Shelf Registration
                  Statement contemplates an Underwritten Offering of Transfer
                  Restricted Securities upon the date of the closing under the
                  underwriting agreement related thereto) and (ii) upon the
                  filing of any amendment or supplement to the Shelf
                  Registration Statement or any other document that is
                  incorporated in the Shelf Registration Statement by reference
                  and includes financial data with respect to a fiscal quarter
                  or year:

                                    (1) a certificate, dated such date, signed
                           on behalf of the Company and each Guarantor by (x)
                           the President or any Vice President and (y) a
                           principal financial or accounting officer of the
                           Company and such Guarantor, confirming, as of the
                           date thereof, the matters set forth in paragraph (i)
                           of Section 7 of the Purchase Agreement and such other
                           similar matters as such Holders may reasonably
                           request;

                                    (2) an opinion, dated the date of
                           Consummation of the Exchange Offer or the date of
                           effectiveness of the Shelf Registration Statement, as
                           the case may be, of counsel for the Company and the
                           Guarantors covering matters similar to those set
                           forth in paragraph b and c of Section 7 of the
                           Purchase Agreement and such other matters as such
                           Holder may reasonably request, and in any event
                           including a statement to the effect that such counsel
                           has participated in conferences with officers and
                           other representatives of the Company and the
                           Guarantors, representatives of the independent public
                           accountants for the Company and the Guarantors and
                           has considered the matters required to be stated
                           therein and the statements contained therein,
                           although such counsel has not independently verified
                           the accuracy, completeness or fairness of such
                           statements; and that such counsel advises that, on
                           the basis of the foregoing, no facts came to such
                           counsel's attention that caused such counsel to
                           believe that the applicable Registration Statement,
                           at the time such Registration Statement or any
                           post-effective amendment thereto became effective
                           and, in the case of the Exchange Offer Registration
                           Statement, as of the date of Consummation of the
                           Exchange Offer, contained an untrue statement of a
                           material fact or omitted to state a material fact
                           required to be stated therein or necessary to make
                           the statements therein not misleading, or that the
                           Prospectus contained in such Registration Statement
                           as of its date and, in the case of the opinion dated
                           the date of Consummation of the Exchange Offer, as of
                           the date of Consummation, contained an untrue
                           statement of a material fact or omitted to state a
                           material fact necessary in order to make the
                           statements therein, in the light of the circumstances
                           under which they were made, not misleading. Without
                           limiting the foregoing, such counsel may state
                           further that such counsel assumes no responsibility
                           for, and has not independently verified, the
                           accuracy, completeness or fairness of the financial
                           statements, notes and schedules and other financial
                           or statistical data included or incorporated by
                           reference in any Registration Statement contemplated
                           by this Agreement or the related Prospectus; and

                                       15


                                    (3) a customary comfort letter, dated the
                           date of Consummation of the Exchange Offer, or as of
                           the date of effectiveness of the Shelf Registration
                           Statement, as the case may be, from the Company's
                           independent accountants, in the customary form and
                           covering matters of the type customarily covered in
                           comfort letters to underwriters in connection with
                           underwritten offerings, and affirming the matters set
                           forth in the comfort letters delivered pursuant to
                           paragraph (d) of Section 7 of the Purchase Agreement;
                           and

                           (B) deliver such other documents and certificates as
                  may be reasonably requested by the selling Holders to evidence
                  compliance with the matters covered in clause (A) above and
                  with any customary conditions contained in any agreement
                  entered into by the Company and the Guarantors pursuant to
                  this clause (ix); and

                  (x) prior to any public offering of Transfer Restricted
         Securities, cooperate with the selling Holders and their counsel in
         connection with the registration and qualification of the Transfer
         Restricted Securities under the securities or Blue Sky laws of such
         jurisdictions as the selling Holders may request and do any and all
         other acts or things necessary or advisable to enable the disposition
         in such jurisdictions of the Transfer Restricted Securities covered by
         the applicable Registration Statement; provided, however, that neither
         the Company nor any Guarantor shall be required to register or qualify
         as a foreign corporation where it is not now so qualified or to take
         any action that would subject it to the service of process in suits or
         to taxation, other than as to matters and transactions relating to the
         Registration Statement, in any jurisdiction where it is not now so
         subject.

         (e) Restrictions on Holders. Each Holder's acquisition of a Transfer
Restricted Security constitutes such Holder's agreement that, upon receipt of
the notice referred to in Section 6(d)(i)(C) or any notice from the Company of
the existence of any fact of the kind described in Section 6(d)(i)(D) or 6(c)(i)
hereof (in each case, a "Suspension Notice"), such Holder will forthwith
discontinue disposition of Transfer Restricted Securities pursuant to the
applicable Registration Statement until (i) such Holder has received copies of
the supplemented or amended Prospectus contemplated by Section 6(d)(ii) hereof,
or (ii) such Holder is advised in writing by the Company that the use of the
Prospectus may be resumed, and has received copies of any additional or
supplemental filings that are incorporated by reference in the Prospectus (in
each case, the "Recommencement Date"). Each Holder receiving a Suspension Notice
shall be required to either (i) destroy any Prospectuses, other than permanent
file copies, then in such Holder's possession which have been replaced by the
Company with more recently dated Prospectuses or (ii) deliver to the Company (at
the Company's expense) all copies, other than permanent file copies, then in
such Holder's possession of the Prospectus covering such Transfer Restricted
Securities that was current at the time of receipt of the Suspension Notice. The
time period regarding the effectiveness of such Registration Statement set forth
in Section 3 or 4 hereof, as applicable, shall be extended by a number of days
equal to the number of days in the period from and including the date of
delivery of the Suspension Notice to the date of delivery of the Recommencement
Date and, provided that the Company uses its reasonable best efforts to file and
have declared effective (if an amendment) as soon as practicable an amendment or
supplement to the Shelf Registration Statement, the Company shall be deemed to
have used its reasonable best efforts to keep the Shelf Registration Statement
effective during such period of suspension.

                                       16


         (f) Holder Information. The Company and the Guarantors may require each
Holder of Transfer Restricted Securities as to which any registration is being
effected to furnish to the Company such information regarding such Holder and
such Holder's intended method of distribution of the applicable Transfer
Restricted Securities as the Company may from time to time reasonably request in
writing, but only to the extent that such information is required in order to
comply with the Act. Each such Holder agrees to notify the Company as promptly
as practicable of (i) any inaccuracy or change in information previously
furnished by such Holder to the Company or (ii) the occurrence of any event, in
either case, as a result of which any Prospectus relating to such registration
contains or would contain an untrue statement of a material fact regarding such
Holder or such Holder's intended method of distribution of the applicable
Transfer Restricted Securities or omits to state any material fact regarding
such Holder or such Holder's intended method of distribution of the applicable
Transfer Restricted Securities required to be stated therein or necessary to
make the statements made therein, in the light of the circumstances under which
they were made, not misleading and promptly furnish to the Company any
additional information required to correct and update any previously furnished
information or required so that such Prospectus shall not contain, with respect
to such Holder or the distribution of the applicable Transfer Restricted
Securities an untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements therein
not misleading.

SECTION 7. REGISTRATION EXPENSES

         (a) All expenses incident to the Company's and the Guarantors'
performance of or compliance with this Agreement will be borne by the Company,
regardless of whether a Registration Statement becomes effective, including
without limitation: (i) all registration and filing fees and expenses; (ii) all
fees and expenses of compliance with federal securities and state Blue Sky or
securities laws; (iii) all expenses of printing (including certificates for the
Exchange Notes to be issued in the Exchange Offer and printing of Prospectuses),
messenger and delivery services and telephone; (iv) all reasonable fees and
disbursements of counsel for the Company, the Guarantors and one counsel for the
Holders of Transfer Restricted Securities (which shall be Simpson Thacher &
Bartlett LLP or such other counsel as may be selected by a majority of such
Holders); and (v) all fees and disbursements of independent certified public
accountants of the Company and the Guarantors (including the expenses of any
special audit and comfort letters required by or incident to such performance).

                                       17


         The Company will, in any event, bear its and the Guarantors' internal
expenses (including, without limitation, all salaries and expenses of its
officers and employees performing legal or accounting duties), the expenses of
any annual audit and the fees and expenses of any person, including special
experts, retained by the Company or the Guarantors.

         (b) Each Holder of Transfer Restricted Securities will pay all
underwriting discounts and commissions (prior to the reduction thereof with
respect to selling concessions, if any), if any, and transfer taxes, if any,
relating to the disposition of such Holder's Transfer Restricted Securities.

SECTION 8. INDEMNIFICATION

         (a) The Company and the Guarantors agree, jointly and severally, to
indemnify and hold harmless each Holder, its directors, officers and each
person, if any, who controls such Holder (within the meaning of Section 15 of
the Act or Section 20 of the Exchange Act), from and against any and all losses,
claims, damages, liabilities, judgments, (including without limitation, any
legal or other expenses incurred in connection with investigating or defending
any matter, including any action that could give rise to any such losses,
claims, damages, liabilities or judgments) caused by any untrue statement or
alleged untrue statement of a material fact contained in any Registration
Statement, preliminary prospectus or Prospectus (or any amendment or supplement
thereto) provided by the Company to any Holder or any prospective purchaser of
Transfer Restricted Securities, or caused by any omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, except insofar as such losses, claims,
damages, liabilities or judgments are caused by an untrue statement or omission
or alleged untrue statement or omission that is based upon information relating
to any of the Holders furnished to the Company by any of the Holders. The
foregoing indemnity with respect to any untrue statement contained in or any
omission from a preliminary prospectus or Prospectus shall not inure to the
benefit of any such Holder, its directors, officers or person who controls such
Holder from whom the person asserting any such loss, claim, damage, liability or
judgment purchased any of the Transfer Restricted Securities that are the
subject thereof if the Company shall sustain the burden of proving that such
person was not sent or given a copy of such preliminary prospectus or Prospectus
as amended or supplemented at or prior to the written confirmation of the sale
of such Transfer Restricted Securities to such person and the untrue statement
contained in or the omission from such preliminary prospectus or Prospectus was
corrected in such amended or supplemented preliminary prospectus or Prospectus,
unless such failure resulted from noncompliance by the Company with its
obligations hereunder to furnish the Initial Purchasers with copies of such
preliminary prospectus or Prospectus as amended or supplemented.



                                       18


         (b) By its acquisition of Transfer Restricted Securities, each Holder
of Transfer Restricted Securities agrees, severally and not jointly, to
indemnify and hold harmless the Company and the Guarantors, and their respective
directors and officers, and each person, if any, who controls (within the
meaning of Section 15 of the Act or Section 20 of the Exchange Act) the Company
or the Guarantors to the same extent as the foregoing indemnity from the Company
and the Guarantors set forth in section (a) above, but only with reference to
information relating to such Holder furnished in writing to the Company by such
Holder expressly for use in any Registration Statement, preliminary prospectus
or Prospectus (or any amendment or supplement thereto). In no event shall any
Holder, its directors, officers or any person who controls such Holder be liable
or responsible for any amount in excess of the amount by which the total amount
received by such Holder with respect to its sale of Transfer Restricted
Securities pursuant to a Registration Statement exceeds (i) the amount paid by
such Holder for such Transfer Restricted Securities and (ii) the amount of any
damages that such Holder, its directors, officers or any person who controls
such Holder has otherwise been required to pay by reason of such untrue or
alleged untrue statement or omission or alleged omission.

         (c) In case any action shall be commenced involving any person in
respect of which indemnity may be sought pursuant to Section 8(a) or 8(b) (the
"indemnified party"), the indemnified party shall promptly notify the person
against whom such indemnity may be sought (the "indemnifying person") in writing
and the indemnifying party shall assume the defense of such action, including
the employment of counsel reasonably satisfactory to the indemnified party and
the payment of all fees and expenses of such counsel, as incurred (except that
in the case of any action in respect of which indemnity may be sought pursuant
Section 8(b), a Holder shall not be required to assume the defense of such
action pursuant to this Section 8(c), but may employ separate counsel and
participate in the defense thereof, but the fees and expenses of such counsel,
except as provided below, shall be at the expense of the Holder). Any
indemnified party shall have the right to employ separate counsel in any such
action and participate in the defense thereof, but the fees and expenses of such
counsel shall be at the expense of the indemnified party unless (i) the
employment of such counsel shall have been specifically authorized in writing by
the indemnifying party, (ii) the indemnifying party shall have failed to assume
the defense of such action or employ counsel reasonably satisfactory to the
indemnified party or (iii) the named parties to any such action (including any
impleaded parties) include both the indemnified party and the indemnifying
party, and the indemnified party shall have been advised by such counsel that
there may be one or more legal defenses available to it which are different from
or additional to those available to the indemnifying party (in which case the
indemnifying party shall not have the right to assume the defense of such action
on behalf of the indemnified party). In any such case, the indemnifying party
shall not, in connection with any one action or separate but substantially
similar or related actions in the same jurisdiction arising out of the same
general allegations or circumstances, be liable for the fees and expenses of
more than one separate firm of attorneys (in addition to any local counsel) for
all indemnified parties and all such fees and expenses shall be reimbursed as
they are incurred. Such firm shall be designated in writing by a majority of the
Holders, in the case of the parties indemnified pursuant to Section 8(a), and by
the Company and the Guarantors, in the case of parties indemnified pursuant to
Section 8(b). The indemnifying party shall indemnify and hold harmless the
indemnified party from and against any and all losses, claims, damages,
liabilities and judgments by reason of any settlement of any action (i) effected
with its written consent or (ii) effected without its written consent if (x) the
settlement is entered into more than 30 business days after the indemnifying
party shall have received a request from the indemnified party for reimbursement
for the fees and expenses of counsel (in any case where such fees and expenses
are at the expense of the indemnifying party), (y) the indemnifying party shall
have received notice of the terms of such settlement at least 20 business days
prior to such settlement being entered into and, (z) prior to the date of such
settlement, the indemnifying party shall have failed to comply with such
reimbursement request. No indemnifying party shall, without the prior written
consent of the indemnified party, effect any settlement or compromise of, or
consent to the entry of judgment with respect to, any pending or threatened
action in respect of which the indemnified party is or could have been a party
and indemnity or contribution may be or could have been sought hereunder by the
indemnified party, unless such settlement, compromise or judgment (i) includes
an unconditional release of the indemnified party from all liability on claims
that are or could have been the subject matter of such action and (ii) does not
include a statement as to or an admission of fault, culpability or a failure to
act, by or on behalf of the indemnified party.

                                       19


         (d) To the extent that the indemnification provided for in this Section
8 is unavailable to an indemnified party in respect of any losses, claims,
damages, liabilities or judgments referred to therein, then each indemnifying
party, in lieu of indemnifying such indemnified party, shall contribute to the
amount paid or payable by such indemnified party as a result of such losses,
claims, damages, liabilities or judgments (i) in such proportion as is
appropriate to reflect the relative benefits received by the Company and the
Guarantors on the one hand, and the Holders, on the other hand, from their
initial sale of Transfer Restricted Securities (or in the case of Exchange Notes
that are Transfer Restricted Securities, the sale of the Notes for which such
Exchange Notes were exchanged) or (ii) if the allocation provided by clause
8(d)(i) is not permitted by applicable law, in such proportion as is appropriate
to reflect not only the relative benefits referred to in clause 8(d)(i) above
but also the relative fault of the Company and the Guarantors, on the one hand,
and of the Holder, on the other hand, in connection with the statements or
omissions which resulted in such losses, claims, damages, liabilities or
judgments, as well as any other relevant equitable considerations. The relative
fault of the Company and the Guarantors, on the one hand, and of the Holder, on
the other hand, shall be determined by reference to, among other things, whether
the untrue or alleged untrue statement of a material fact or the omission or
alleged omission to state a material fact relates to information supplied by the
Company or such Guarantor, on the one hand, or by the Holder, on the other hand,
and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission. The amount paid or
payable by a party as a result of the losses, claims, damages, liabilities and
judgments referred to above shall be deemed to include any legal or other fees
or expenses reasonably incurred by such party in connection with investigating
or defending any action or claim.

         The Company, the Guarantors and, by its acquisition of Transfer
Restricted Securities, each Holder agree that it would not be just and equitable
if contribution pursuant to this Section 8(d) were determined by pro rata
allocation (even if the Holders were treated as one entity for such purpose) or
by any other method of allocation which does not take account of the equitable
considerations referred to in the immediately preceding paragraph. The amount
paid or payable by an indemnified party as a result of the losses, claims,
damages, liabilities or judgments referred to in the immediately preceding
paragraph shall be deemed to include, subject to the limitations set forth
above, any legal or other expenses reasonably incurred by such indemnified party
in connection with investigating or defending any matter, including any action
that could have given rise to such losses, claims, damages, liabilities or
judgments. Notwithstanding the provisions of this Section 8, no Holder, its
directors, its officers or any person, if any, who controls such Holder shall be
required to contribute, in the aggregate, any amount in excess of the amount by
which the total received by such Holder with respect to the sale of Transfer
Restricted Securities pursuant to a Registration Statement exceeds (i) the
amount paid by such Holder for such Transfer Restricted Securities and (ii) the
amount of any damages which such Holder has otherwise been required to pay by
reason of such untrue or alleged untrue statement or omission or alleged
omission. No person guilty of fraudulent misrepresentation (within the meaning
of Section 11(f) of the Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation. The Holders'
obligations to contribute pursuant to this Section 8(d) are several in
proportion to the respective principal amount of Transfer Restricted Securities
held by each Holder hereunder and not joint.

                                       20


SECTION 9. RULE 144A AND RULE 144

         The Company and each Guarantor agrees with each Holder, for so long as
any Transfer Restricted Securities remain outstanding and during any period in
which the Company or such Guarantor (i) is not subject to Section 13 or 15(d) of
the Exchange Act, to make available, upon request of any Holder, to such Holder
or beneficial owner of Transfer Restricted Securities in connection with any
sale thereof and any prospective purchaser of such Transfer Restricted
Securities designated by such Holder or beneficial owner, the information
required by Rule 144A(d)(4) under the Act in order to permit resales of such
Transfer Restricted Securities pursuant to Rule 144A, and (ii) is subject to
Section 13 or 15(d) of the Exchange Act, to make all filings required thereby in
a timely manner in order to permit resales of such Transfer Restricted
Securities pursuant to Rule 144.

SECTION 10. PARTICIPATION IN UNDERWRITTEN REGISTRATIONS

         No Holder may participate in an Underwritten Registration hereunder
unless such Holder (a) agrees to sell such Holder's Transfer Restricted
Securities on the basis provided in any underwriting arrangements approved by
the persons entitled hereunder to approve such arrangements and (b) completes
and executes all reasonable questionnaires, powers of attorney, indemnities,
underwriting agreements, lock-up letters and other documents required under the
terms of such underwriting arrangements.

SECTION 11. SELECTION OF UNDERWRITERS

         In any such Underwritten Offering, the investment banker or investment
bankers and manager or managers that will administer the offering will be
selected by the Holders of a majority in aggregate principal amount of the
Transfer Restricted Securities included in such offering; provided that such
investment bankers and managers must be reasonably satisfactory to the Company.

                                       21


SECTION 12. MISCELLANEOUS

         (a) Remedies. The Company and the Guarantors acknowledge and agree that
any failure by the Company and/or the Guarantors to comply with their respective
obligations under Sections 3 and 4 hereof may result in material irreparable
injury to the Initial Purchasers or the Holders for which there is no adequate
remedy at law, that it will not be possible to measure damages for such injuries
precisely and that, in the event of any such failure, the Initial Purchasers or
any Holder may obtain such relief as may be required to specifically enforce the
Company's and the Guarantor's obligations under Sections 3 and 4 hereof. The
Company and the Guarantors further agree to waive the defense in any action for
specific performance that a remedy at law would be adequate.

         (b) No Inconsistent Agreements. The Company and the Guarantors will
not, on or after the date of this Agreement, enter into any agreement with
respect to their respective securities that is inconsistent with the rights
granted to the Holders in this Agreement or otherwise conflicts with the
provisions hereof. Except for (i) that certain Registration Rights Agreement
among Genesis HealthCare Corporation, the Company and the parties referred to
therein, dated as of October 28, 2003, regarding the Genesis HealthCare
Corporation's Senior Subordinated Notes due 2013, (ii) that certain Registration
Rights Agreement among the Company, Goldman Sachs & Co., and Highland Capital
Management L.P., dated as of October 2, 2001, regarding the Company's common
stock and (iii) that certain Registration Rights Agreement among the Company,
Goldman Sachs & Co., and Highland Capital Management L.P., dated as of October
2, 2001, regarding the Company's Second Priority Secured Notes due 2007, the
Company and the Guarantors have not previously entered into any agreement
granting any registration rights with respect to their respective securities to
any person that would require such securities to be included in any Registration
Statement filed hereunder. The rights granted to the Holders hereunder do not in
any way conflict with and are not inconsistent with the rights granted to the
holders of the Company's and the Guarantors' securities under any agreement in
effect on the date hereof.

         (c) Amendments and Waivers. The provisions of this Agreement may not be
amended, modified or supplemented, and waivers or consents to or departures from
the provisions hereof may not be given unless the Company has obtained the
written consent of Holders of a majority of the outstanding principal amount of
Transfer Restricted Securities (excluding Transfer Restricted Securities held by
the Company or its Affiliates). Notwithstanding the foregoing, a waiver or
consent to departure from the provisions hereof that relates exclusively to the
rights of Holders whose Transfer Restricted Securities are being tendered
pursuant to the Exchange Offer, and that does not affect directly or indirectly
the rights of other Holders whose Transfer Restricted Securities are not being
tendered pursuant to such Exchange Offer, may be given by the Holders of a
majority of the outstanding principal amount of Transfer Restricted Securities
subject to such Exchange Offer.

                                       22


         (d) Third Party Beneficiary. The Holders shall be third party
beneficiaries to the agreements made hereunder between the Company and the
Guarantors, on the one hand, and the Initial Purchasers, on the other hand, and
shall have the right to enforce such agreements directly to the extent they may
deem such enforcement necessary or advisable to protect their rights hereunder.

         (e) Notices. All notices and other communications provided for or
permitted hereunder shall be made in writing by hand-delivery, first-class mail
(registered or certified, return receipt requested), telex, telecopier, or air
courier guaranteeing overnight delivery:

                  (i) if to a Holder, at the address set forth on the records of
         the Registrar under the Indenture, with a copy to the Registrar under
         the Indenture; and

                  (ii) if to the Company or any of the Guarantors:

                             Genesis Health Ventures, Inc.
                             7 East Lee Street
                             Baltimore, Maryland 21202

                             Attention: John Gaither, Senior Vice President,
                             General Counsel and Secretary
                             Facsimile: (253) 390-6623

         All such notices and communications shall be deemed to have been duly
given at the time delivered by hand, when receipt acknowledged, if telecopied;
and on the next business day, if timely delivered to an air courier guaranteeing
overnight delivery.

         Copies of all such notices, demands or other communications shall be
concurrently delivered by the person giving the same to the Trustee at the
address specified in the Indenture.

         (f) Successors and Assigns. This Agreement shall inure to the benefit
of and be binding upon the successors and assigns of each of the parties,
including without limitation and without the need for an express assignment,
subsequent Holders; provided, that nothing herein shall be deemed to permit any
assignment, transfer or other disposition of Transfer Restricted Securities in
violation of the terms hereof or of the Purchase Agreement or the Indenture. If
any transferee of any Holder shall acquire Transfer Restricted Securities in any
manner, whether by operation of law or otherwise, such Transfer Restricted
Securities shall be held subject to all of the terms of this Agreement, and by
taking and holding such Transfer Restricted Securities such person shall be
conclusively deemed to have agreed to be bound by and to perform all of the
terms and provisions of this Agreement, including the restrictions on resale set
forth in this Agreement and, if applicable, the Purchase Agreement, and such
person shall be entitled to receive the benefits hereof.

         (g) Counterparts. This Agreement may be executed in any number of
counterparts and by the parties hereto in separate counterparts, each of which
when so executed shall be deemed to be an original and all of which taken
together shall constitute one and the same agreement.

         (h) Headings. The headings in this Agreement are for convenience of
reference only and shall not limit or otherwise affect the meaning hereof.

                                       23


         (i) Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO THE
CONFLICT OF LAW RULES THEREOF.

         (j) Severability. In the event that any one or more of the provisions
contained herein, or the application thereof in any circumstance, is held
invalid, illegal or unenforceable, the validity, legality and enforceability of
any such provision in every other respect and of the remaining provisions
contained herein shall not be affected or impaired thereby.

         (k) Entire Agreement. This Agreement is intended by the parties as a
final expression of their agreement and intended to be a complete and exclusive
statement of the agreement and understanding of the parties hereto in respect of
the subject matter contained herein. There are no restrictions, promises,
warranties or undertakings, other than those set forth or referred to herein
with respect to the registration rights granted with respect to the Transfer
Restricted Securities. This Agreement supersedes all prior agreements and
understandings between the parties with respect to such subject matter.



                                       24




                  IN WITNESS WHEREOF, the parties have executed this Agreement
as of the date first written above.

                                         Genesis Health Ventures, Inc.



                                         By: /s/  Robert H. Fish
                                             ____________________________

                                               Name:  Robert H. Fish
                                               Title: Chief Executive Officer




                                       25



     GUARANTORS:
     -----------

     ACCUMED, INC.

     ASCO HEALTHCARE OF NEW ENGLAND, INC.

     ASCO HEALTHCARE, INC.

     CARECARD, INC.

     COMPASS HEALTH SERVICES, INC.

     CONCORD PHARMACY SERVICES, INC.

     DELCO APOTHECARY, INC.

     EASTERN MEDICAL SUPPLIES, INC.

     EASTERN REHAB SERVICES, INC.

     ENCARE OF MASSACHUSETTS, INC.

     GENESIS  HEALTH  SERVICES   CORPORATION  t/b/k/a  NeighborCare
     Services Corporation

     GENESIS HOLDINGS, INC. t/b/k/a NeighborCare Holdings, Inc.

     GENEVA SUB, INC.

     H.O. SUBSIDIARY, INC. f/k/a HEALTHOBJECTS, INC.

     HEALTH CONCEPTS AND SERVICES, INC.

     HEALTHOBJECTS  CORPORATION f/k/a NeighborWare  Health Systems, Inc.

     HORIZON MEDICAL EQUIPMENT AND SUPPLY, INC.

     INSTITUTIONAL HEALTH CARE SERVICES, INC.

     MEDICAL SERVICES GROUP, INC.

     NEIGHBORCARE  HOME  MEDICAL   EQUIPMENT,   INC.  f/k/a  United
     Health Care Services, Inc.

     NEIGHBORCARE  INFUSION SERVICES,  INC. f/k/a Vitalink Infusion
     Services, Inc.

     NEIGHBORCARE OF CALIFORNIA, INC.



                                       26



     NEIGHBORCARE OF INDIANA, INC. f/k/a Teamcare of Indiana, Inc.

     NEIGHBORCARE  OF NORTHERN  CALIFORNIA,  INC. f/k/a  Compupharm
     of Northern California, Inc.

     NEIGHBORCARE OF OHIO, INC.

     NEIGHBORCARE  OF OKLAHOMA,  INC.  f/k/a  Vitalink  Subsidiary, Inc.

     NEIGHBORCARE OF TEXAS, INC.

     NEIGHBORCARE  OF VIRGINIA,  INC.  f/k/a  Teamcare of Virginia, Inc.

     NEIGHBORCARE   OF  WISCONSIN,   INC.   f/k/a  GCI   Innovative
     Pharmacy, Inc.

     NEIGHBORCARE PHARMACIES, INC.

     NEIGHBORCARE  PHARMACY SERVICES,  INC. f/k/a Vitalink Pharmacy
     Services, Inc.

     NEIGHBORCARE-MEDISCO, INC. f/k/a Medisco Pharmacies, Inc.

     NEIGHBORCARE-ORCA,  INC. f/k/a White,  Mack & Wart, Inc. d/b/a
     Propac Pharmacy

     NEIGHBORCARE-TCI, INC.

     PROFESSIONAL PHARMACY SERVICES, INC.

     SUBURBAN MEDICAL SERVICES, INC.

     THE TIDEWATER  HEALTHCARE  SHARED SERVICES  GROUP,  INC. f/k/a
     TW Acquisition Corp.


      By: /s/  Robert H. Fish
          ----------------------------
          Name:  Robert H. Fish

           On behalf of the foregoing entities as an
           Authorized Signatory of such entities



                                       27



     ASCO HEALTHCARE OF NEW ENGLAND, LIMITED PARTNERSHIP, by ASCO
     Healthcare of New England, Inc., its General Partner

     CARE4, L.P., by Institutional Health Care Services, Inc.,
     its General Partner

     By: /s/  Robert H. Fish
         ----------------------------
         Name:  Robert H. Fish

           On behalf of the foregoing entities as an
           Authorized Signatory of each respective authorized
           General Partner







                                       28



     AUTOMATED HOMECARE SYSTEM, LLC, by Health Objects
     Corporation, its authorized Member

     MAIN STREET PHARMACY, L.L.C., by Professional Pharmacy
     Services, Inc. and NeighborCare Pharmacies, Inc., its
     authorized Members

     NEIGHBORCARE PHARMACY OF OKLAHOMA LLC, NeighborCare Pharmacy
     Services, Inc., its authorized Member


     By: /s/  Robert H. Fish
         ----------------------------
         Name:  Robert H. Fish

          On   behalf   of  the   foregoing   entities   as  an
          Authorized  Signatory of each  respective  authorized
          Member





                                       29


GOLDMAN, SACHS & Co.
UBS Securities LLC
Lehman Brothers Inc.
J.P. Morgan Securities Inc.

      BY GOLDMAN SACHS & Co., as Authorized Representative





By:  /s/  Goldman, Sachs & Co.
     ---------------------------
       (Goldman, Sachs & Co.)







                                       30



                                   Schedule A
                                   ----------

Guarantors
- ----------

1.   ACCUMED, INC.
2.   ASCO HEALTHCARE OF NEW ENGLAND, INC.
3.   ASCO HEALTHCARE, INC.
4.   CARECARD, INC.
5.   COMPASS HEALTH SERVICES, INC.
6.   CONCORD PHARMACY SERVICES, INC.
7.   DELCO APOTHECARY, INC.
8.   EASTERN MEDICAL SUPPLIES, INC.
9.   EASTERN REHAB SERVICES, INC.
10.  ENCARE OF MASSACHUSETTS, INC.
11.  GENESIS HEALTH SERVICES CORPORATION t/b/k/a NeighborCare Services
     Corporation
12.  GENESIS HOLDINGS, INC. t/b/k/a NeighborCare Holdings, Inc.
13.  GENEVA SUB, INC.
14.  H.O. SUBSIDIARY, INC. f/k/a HEALTHOBJECTS, INC.
15.  HEALTH CONCEPTS AND SERVICES, INC.
16.  HEALTHOBJECTS CORPORATION f/k/a NeighborWare Health Systems, Inc.
17.  HORIZON MEDICAL EQUIPMENT AND SUPPLY, INC.
18.  INSTITUTIONAL HEALTH CARE SERVICES, INC.
19.  MEDICAL SERVICES GROUP, INC.
20.  NEIGHBORCARE HOME MEDICAL EQUIPMENT, INC. f/k/a United Health Care
     Services, Inc.
21.  NEIGHBORCARE INFUSION SERVICES, INC. f/k/a Vitalink Infusion Services, Inc.
22.  NEIGHBORCARE OF CALIFORNIA, INC.
23.  NEIGHBORCARE OF INDIANA, INC. f/k/a Teamcare of Indiana, Inc.
24.  NEIGHBORCARE OF NORTHERN CALIFORNIA, INC. f/k/a Compupharm of Northern
     California, Inc.
25.  NEIGHBORCARE OF OHIO, INC.
26.  NEIGHBORCARE OF OKLAHOMA, INC. f/k/a Vitalink Subsidiary, Inc.
27.  NEIGHBORCARE OF TEXAS, INC.
28.  NEIGHBORCARE OF VIRGINIA, INC. f/k/a Teamcare of Virginia, Inc.
29.  NEIGHBORCARE OF WISCONSIN, INC. f/k/a GCI Innovative Pharmacy, Inc.
30.  NEIGHBORCARE PHARMACIES, INC.
31.  NEIGHBORCARE PHARMACY SERVICES, INC. f/k/a Vitalink Pharmacy Services, Inc.
32.  NEIGHBORCARE-MEDISCO, INC. f/k/a Medisco Pharmacies, Inc.
33.  NEIGHBORCARE-ORCA, INC. f/k/a White, Mack & Wart, Inc. d/b/a Propac
     Pharmacy
34.  NEIGHBORCARE-TCI, INC.
35.  PROFESSIONAL PHARMACY SERVICES, INC.
36.  SUBURBAN MEDICAL SERVICES, INC.
37.  THE TIDEWATER HEALTHCARE SHARED SERVICES GROUP, INC. f/k/a TW Acquisition
     Corp.
38.  AUTOMATED HOMECARE SYSTEM, LLC
39.  MAIN STREET PHARMACY, L.L.C.
40.  NEIGHBORCARE PHARMACY OF OKLAHOMA LLC,
41.  ASCO HEALTHCARE OF NEW ENGLAND, LIMITED PARTNERSHIP
42.  CARE4, L.P.



                                       31

EX-10

Richard W. Sunderland
Seven East Lee Street
Baltimore, MD 21202

Hand Delivered

November 7, 2003

Re:    Employment Agreement

Dear Rick,

As you know, Genesis Health Ventures, Inc. (the "Company") is contemplating a
spin-off of its eldercare business ("Spin-Off") through the creation of a new
public company. This transaction will likely trigger your right to receive a
lump-sum payment to you under Section 5 of your current employment agreement
with the Company ("Current Employment Agreement") equal to two times the sum of
your Average Base Salary (as defined in your Current Employment Agreement) plus
your Average Assumed Cash Incentive Compensation (as defined in your Current
Employment Agreement).

If you voluntarily elect to waive your option to receive the lump-sum payment
and other benefits under your Current Employment Agreement, the Company is
willing to continue your employment pursuant to the terms and conditions of your
Current Employment Agreement until the Spin-Off, and upon the successful
completion of the Spin-Off:

1.       make a lump-sum payment to you in the amount of $294,300 ("Lump Sum
         Payment"),

2.       continue your employment with the Company pursuant to the terms and
         conditions of the employment agreement to which this letter is Exhibit
         A.

3.       grant a stock option to you for 75,000 shares of the Company's common
         stock at fair market value on date of grant with vesting to occur as
         described in the Amended Employment Agreement ("First Option Tranche"),
         and

4.       on the six month anniversary of the grant of the First Option Tranche,
         either (1) grant a stock option to you for an additional 75,000 shares
         of the Company's common stock at fair market value on the date of grant
         with vesting to occur as described in the Amended Employment Agreement
         ("Second Option Tranche") or (2) in lieu of the Second Option Tranche,
         in whole or in part, grant shares of restricted stock to you having a
         value equivalent to the replaced options as determined by the board of
         directors with the same terms as grants made to other executive
         officers of the company. In the event of a Change of Control as defined
         in the Amended Employment Agreement the grant of the Second Option
         Tranche or restricted stock in lieu of the Second Option Tranche shall
         become effective immediately.

The Lump Sum Payment will be made and the Amended Employment Agreement will take
effect upon the successful completion of the Spin-Off.

The Company also offers you an opportunity to receive an option for additional
shares of stock. If you elect to forego receipt of the Lump Sum Payment, you may
instead receive at the time of the First Option Tranche an option for an
additional 25,000 shares of the Company's common stock at fair market value on
the date of grant with vesting to occur immediately on the date of grant ("Stock
Election").

This letter is subject to the approval of the board of directors and the option
grant may only be made by the board of directors. Should the board of directors
not approve the terms of this letter and grant the options referred to above by
December 31, 2003, you may revoke this letter by written notice to me and
receive payment in accordance with the terms of your Current Employment
Agreement.








The offer set forth in this letter will remain open until November 17, 2003. In
the event that you do not accept the terms of this letter by that date, we will
treat that as a rejection of the offer and the offer will be revoked at that
time.

If you have any questions please do not hesitate to contact me.

Very truly yours,



/s/  John J. Arlotta
- ------------------------------
John J. Arlotta, Vice Chairman

I hereby acknowledge that I understand the options before me and, subject to the
Spin-Off becoming effective, and the execution and delivery of the Amended
Employment Agreement:

1. I voluntarily elect to waive my option to receive a lump sum payment as
specified above and other rights under my Current Employment Agreement and
accept the Company's offer set forth above, which will become effective on the
date of the Spin-Off; and

2. I agree that I will execute the Amended Employment Agreement upon the
successful completion of the Spin-Off.

3. Initial as appropriate: ________I wish to make the Stock Election defined
above

                           ___X____I DO NOT wish to make the Stock Election
                                   defined above.


/s/   Richard W. Sunderland
- ---------------------------------
Richard W. Sunderland

EX-10

Robert A. Smith
Seven East Lee Street
Baltimore, MD 21202

Hand Delivered

November 20, 2003

Re:    Employment Agreement

Dear Bob,

As you know, Genesis Health Ventures, Inc. (the "Company") is contemplating a
spin-off of its eldercare business ("Spin-Off") through the creation of a new
public company. This transaction will likely trigger your right to receive a
lump-sum payment to you under Section 5 of your current employment agreement
with the Company ("Current Employment Agreement") equal to two times the sum of
your Average Base Salary (as defined in your Current Employment Agreement) plus
your Average Assumed Cash Incentive Compensation (as defined in your Current
Employment Agreement).

If you voluntarily elect to waive your option to receive the lump-sum payment
and other benefits under your Current Employment Agreement, the Company is
willing to continue your employment pursuant to the terms and conditions of your
Current Employment Agreement until the Spin-Off, and upon the successful
completion of the Spin-Off:

    1.   make a lump-sum payment to you in the amount of $405,900 ("Lump Sum
         Payment"),

    2.   continue your employment with the Company pursuant to the terms and
         conditions of the employment agreement to which this letter is Exhibit
         A.

    3.   grant a stock option to you for 87,500 shares of the Company's common
         stock at fair market value on date of grant with vesting to occur as
         described in the Amended Employment Agreement ("First Option Tranche"),
         and

    4.   on the six month anniversary of the grant of the First Option Tranche,
         either (1) grant a stock option to you for an additional 87,500 shares
         of the Company's common stock at fair market value on the date of grant
         with vesting to occur as described in the Amended Employment Agreement
         ("Second Option Tranche") or (2) in lieu of the Second Option Tranche,
         in whole or in part, grant shares of restricted stock to you having a
         value equivalent to the replaced options as determined by the board of
         directors with the same terms as grants made to other executive
         officers of the company. In the event of a Change of Control as defined
         in the Amended Employment Agreement the grant of the Second Option
         Tranche or restricted stock in lieu of the Second Option Tranche shall
         become effective immediately.

The Lump Sum Payment will be made and the Amended Employment Agreement will take
effect upon the successful completion of the Spin-Off.

The Company also offers you an opportunity to receive an option for additional
shares of stock. If you elect to forego receipt of the Lump Sum Payment, you may
instead receive at the time of the First Option Tranche an option for an
additional 35,000 shares of the Company's common stock at fair market value on
the date of grant with vesting to occur immediately on the date of grant ("Stock
Election").

This letter is subject to the approval of the board of directors and the option
grant may only be made by the board of directors. Should the board of directors
not approve the terms of this letter and grant the options referred to above by
December 31, 2003, you may revoke this letter by written notice to me and
receive payment in accordance with the terms of your Current Employment
Agreement.








Robert A. Smith
November 20, 2003


The offer set forth in this letter will remain open until November 24, 2003. In
the event that you do not accept the terms of this letter by that date, we will
treat that as a rejection of the offer and the offer will be revoked at that
time.

If you have any questions please do not hesitate to contact me.

Very truly yours,



/s/  John J. Arlotta
- ------------------------------
John J. Arlotta, Vice Chairman

I hereby acknowledge that I understand the options before me and, subject to the
Spin-Off becoming effective, and the execution and delivery of the Amended
Employment Agreement:

1. I voluntarily elect to waive my option to receive a lump sum payment as
specified above and other rights under my Current Employment Agreement and
accept the Company's offer set forth above, which will become effective on the
date of the Spin-Off; and

2. I agree that I will execute the Amended Employment Agreement upon the
successful completion of the Spin-Off.

3. Initial as appropriate: ________I wish to make the Stock Election defined
above

                           ____X___I DO NOT wish to make the Stock Election
                                   defined above.


/s/  Robert A. Smith
- -------------------------------------------_
Robert A. Smith

EX-10

                              EMPLOYMENT AGREEMENT
                              --------------------

         THIS EMPLOYMENT AGREEMENT (the "Agreement") originally dated as of
November 24, 2003, by and between NeighborCare, Inc. (formerly known as Genesis
Health Ventures, Inc.), a Pennsylvania corporation (the "Company") with a place
of business at 7 Lee Street, Baltimore, MD 21202 (the "Company"), and Richard W.
Sunderland (the "Executive"), which shall be effective as of December 1, 2003
(the "Effective Date") is amended and restated as of December 9, 2003.

                                   WITNESSETH
                                   ----------

         WHEREAS, the Company desires to employ the Executive as an employee of
the Company, and the Executive desires to provide services to the Company, all
upon the terms and conditions hereinafter set forth; and

         WHEREAS, the Executive currently is employed by the Company pursuant to
an employment agreement dated September 1, 2000 ("Current Employment Agreement")
amended October 2, 2001; and

         WHEREAS, the Company is contemplating a spin-off (the "Spin-Off") of
Genesis HealthCare Corporation; and

         WHEREAS, the consummation of the Spin-Off and potential changes to the
Executive's employment may trigger the right of the Executive under Section 5 of
the Current Employment Agreement to a lump-sum payment equal to two times the
sum of the Executive's Average Base Salary (as defined in the Current Employment
Agreement) plus the Executive's Average Assumed Cash Incentive Compensation (as
defined in the Current Employment Agreement); and

         WHEREAS, in consideration of the cash payments and the award of stock
options and/or restricted stock as set forth in the proposal letter dated
November 18, 2003 and which is attached hereto as Exhibit A (which the Executive
acknowledges is good and valuable consideration), the Executive, after due
consideration, has agreed to waive any rights the Executive may have under the
Current Employment Agreement; and

         WHEREAS, upon due consideration, the Executive acknowledges that the
consideration set forth herein is reasonable and adequate, including the terms
of employment and covenants contained herein; and

         WHEREAS, it is the intent of the parties that upon the Effective Date
the Current Employment Agreement shall be superseded by this Agreement.







         NOW, THEREFORE, in consideration of the premises and mutual agreements
hereinafter set forth, and intending to be legally bound hereby, the parties
hereto agree as follows:

1.       Offer and Acceptance of Employment. The Company hereby agrees to employ
the Executive with an initial title of Senior Vice President and Chief Financial
Officer of its NeighborCare Division, and Executive's principal place of
business shall be located at the Company's headquarters currently located in
Baltimore, Md. The Executive accepts such employment and agrees to perform the
customary responsibilities of such position during the term of this Agreement.
The Executive will perform such other duties as may from time to time be
reasonably assigned to the Executive by the Board of Directors of the Company
(the "Board") or the Company's Chief Executive Officer, provided such duties are
consistent with and do not interfere with the performance of the duties
described herein and are of a type customarily performed by persons of similar
titles with similar corporations. Nothing in this Agreement shall preclude the
Executive from serving as a director, trustee, officer of, or partner in, any
other firm, trust, corporation or partnership, as long as such activities do not
interfere with the Executive's performance of the Executive's duties hereunder
or violate the terms of Section 8 hereof, and so long as the Executive has
received written approval by the Chief Executive Officer of the Company.
Furthermore, nothing in this Agreement shall preclude the Executive from
pursuing personal investments, as long as such activities do not interfere with
the Executive's performance of the Executive's duties hereunder or violate the
terms of Section 8 hereof.

2.       Period of Employment.

         (a) Period of Employment. The period of the Executive's employment
under this Agreement shall commence on the Effective Date and shall, unless
sooner terminated pursuant to Section 4, terminate on the second anniversary of
the Effective Date (such period, as extended from time to time, herein referred
to as the "Term"). Subject to Section 2(b), and if the Term has not been
terminated pursuant to Section 4, on such second anniversary, and on each
anniversary of such date thereafter (each such anniversary, an "Automatic
Extension Date"), the Term shall be extended for an additional period of one
year.

         (b) Termination of Automatic Extension by Notice. The Company or the
Executive may elect to terminate the automatic extension of the Term set forth
in Section 2(a) ("Automatic Extension") by giving written notice of such
election. Any notice given hereunder must be given at least 60 days prior to the
applicable Automatic Extension Date.

3.       Compensation and Benefits.

         (a) Base Salary. As long as the Executive remains an employee of the
Company, the Executive will be paid an annual base salary of $250,000 which
shall continue at this rate, subject to adjustment as hereinafter provided. The
Executive's annual base salary shall be reviewed periodically and the Company
may increase such annual base salary, by an amount, if any, it determines to be
appropriate. Any such increase shall not reduce or limit any other obligation of
the Company hereunder. The Executive's annual base salary payable hereunder, as
it may be increased from time to time and without reduction for any amounts






                                        2


deferred as described below, is referred to herein as "Base Salary". The
Executive's Base Salary, as in effect from time to time, may not be reduced by
the Company without the Executive's consent, provided that the Base Salary
payable under this paragraph shall be reduced to the extent the Executive elects
to defer or reduce such salary under the terms of any deferred compensation or
savings plan or other employee benefit arrangement maintained or established by
the Company. The Company shall pay the Executive the portion of the Executive's
Base Salary not deferred in accordance with its customary periodic payroll
practices.

         (b) Incentive Compensation. The Executive shall be eligible to
participate in stock option, incentive compensation and other plans at a level
consistent with the Executive's position with the Company and the Company's then
current policies and practices.

         (c) Stock Options/Restricted Stock. The Company shall, subject to
approval by the compensation committee of the Board, pursuant to the terms of
its stock option plan or any similar plan, grant to the Executive the stock
options and/or restricted stock set forth in Exhibit A. The exercise price of
the shares subject to the stock options shall be established by the compensation
committee of the Board at the time of the grant and shall be equal to the fair
market value of the Company Stock (as determined under the Company stock option
plan or similar plan) on the effective date of grant. The Options shall vest
over a three year period with the exact frequency of the vesting to be set by
the Compensation Committee of the Board. The Executive must be employed with the
Company on each vesting date in order for those stock options which vest on
those respective option dates to vest except as provided in Section 5(c)(i). The
stock options shall have a ten (10) year term subject to earlier termination of
such options on account of the Executive's termination of employment for any
reason, at which point the exercisability of the vested options will be, except
as provided in Section 5(c)(i), as set forth in the applicable plan or
agreement. Any restricted stock granted will be in accordance with the terms of
the Company's restricted stock plan, when adopted, and the terms for Executive
shall be the same as the terms for other executives with similar levels of
responsibility as determined by the board of directors.

         (d) Benefits, Perquisites and Expenses.

                (i) Benefits. During the Term, the Executive shall be eligible
to participate in (1) each welfare benefit plan sponsored or maintained by the
Company, including, without limitation, each life, hospitalization, medical,
dental, health, accident or disability insurance or similar plan or program of
the Company, and (2) each pension, profit sharing, retirement, deferred
compensation or savings plan sponsored or maintained by the Company, in each
case, whether now existing or established hereafter, to the extent that the
Executive is eligible to participate in any such plan under the generally
applicable provisions thereof. With respect to the pension or retirement
benefits payable to the Executive, the Executive's service credited for purposes
of determining the Executive's benefits and vesting shall be determined in
accordance with the terms of the applicable plan or program. Nothing in this
Section 3(d), in and of itself, shall be construed to limit the ability of the
Company to amend or terminate any particular plan, program or arrangement.





                                        3


                (ii) Vacation. During the Term, the Executive shall be entitled
to the number of paid vacation days in each anniversary year determined by the
Company from time to time for its senior executive officers, but not less than
four (4) weeks in any anniversary year. The Executive shall also be entitled to
all paid holidays given by the Company to its senior officers. Vacation days
which are not used during any calendar year may not be accrued, nor shall the
Executive be entitled to compensation for unused vacation days, during the Term
or upon termination of employment.

                (iii) Executive Benefits. During the Term, the Executive shall
be entitled to receive such perquisites (e.g., fringe benefits), plans and other
benefits as are generally provided to other senior officers of the Company in
accordance with the then current policies and practices of the Company.

                (iv) Business Expenses. During the Term, the Company shall pay
or reimburse the Executive for all reasonable expenses incurred or paid by the
Executive in the performance of the Executive's duties hereunder, upon
presentation of expense statements or vouchers and such other information as the
Company may reasonably require and in accordance with the generally applicable
policies and practices of the Company.

4.       Employment Termination.

         The Term of employment under this Agreement may be earlier terminated
only as follows:

         (a) Cause. The Company shall have the right to terminate the
Executive's employment for Cause. For purposes hereof, a termination by the
Company for "Cause" shall mean termination by action of a majority of the
non-management membership of the Board at a meeting duly called and held upon at
least fifteen (15) days prior written notice to the Executive specifying the
particulars of the action or inaction alleged to constitute "Cause" because of
(i) the Executive's conviction of, or plea of guilty or nolo contendere to, (A)
any felony (whether or not involving the Company or any of its subsidiaries) or
(B) any other crime involving moral turpitude which subjects, or if generally
known, would subject, the Company or any of its subsidiaries to public ridicule
or embarrassment, (ii) habitual intoxication, the use of illegal drugs, or the
abuse of chemical substances by the Executive, (iii) fraud or other willful
misconduct by the Executive in respect of the Executive's obligations under this
Agreement, (iv) willful and continued failure of the Executive to perform
substantially the Executive's duties (as contemplated by Section 1 of this
Agreement) with the Company (other than any such failure resulting from
incapacity due to physical or mental illness or following the Executive's
delivery of a Notice of Termination (as defined in Section 4(f)) for Good
Reason), after a written demand for substantial performance is delivered to the
Executive by the Board or the Chief Executive Officer of the Company that
specifically identifies the manner in which the Board or the Chief Executive
Officer of the Company believes that the Executive has not substantially
performed the Executives duties, (v) the willful engaging by the Executive in
gross misconduct or a material violation of the Company's code of conduct or
corporate policies, or (vi) willful refusal or continuing failure to attempt,
without proper cause and, other than by reason of illness, to follow the lawful
directions of the Board following thirty days prior written notice to the





                                        4


Executive of the Executive's refusal to perform, or failure to attempt to
perform such duties and which during such thirty day period such refusal or
failure to attempt is not cured by the Executive. "Cause" shall not include a
bona fide disagreement over a corporate policy, so long as the Executive does
not willfully violate specific written directions from the Board, which
directions are consistent with the provisions of this Agreement. Action or
inaction by the Executive shall not be considered "willful" unless done or
omitted by the Executive intentionally and without the Executive's reasonable
belief that the Executive's action or inaction was in the best interests of the
Company, and shall not include failure to act by reason of total or partial
incapacity due to physical or mental illness.

         (b) Without Cause. Notwithstanding anything to the contrary contained
in this Agreement, the Company may, at any time after at least thirty (30) days
prior written notice in accordance with Section 4(f) hereof to the Executive,
terminate the Executive's employment hereunder without Cause.

         (c) Death or Disability. If the Executive dies, the Executive's
employment shall terminate as of the date of death. If the Executive develops a
disability, the Company may terminate the Executive's employment for Disability.
As used in this Agreement, the term "Disability" shall mean incapacity due to
physical or mental illness which has caused the Executive to be unable to
substantially perform the essential functions of the Executive's duties with or
without a reasonable accommodation with the Company on a full time basis for (i)
a period of six (6) consecutive months, or (ii) for shorter periods aggregating
more than six (6) months in any twelve (12) month period. During any period of
Disability, the Executive agrees to submit to reasonable medical examinations
upon the reasonable request, and at the expense, of the Company.

         (d) Good Reason. The Executive may terminate the Executive's employment
for Good Reason at any time during the term of this Agreement. For purposes of
this Agreement, "Good Reason" shall mean any of the following, without the
Executive's written consent, provided, that (x) the Executive shall provide the
Company with written notice thereof within thirty (30) days after the Executive
has knowledge of the occurrence of any of the events or circumstances set forth
in clauses (i) through (v) below, which notice shall specifically identify the
event or circumstance that the Executive believes constitutes Good Reason, (y)
the Company fails to correct the circumstance or event so identified within
thirty (30) days after the date of delivery of the notice referred to in clause
(x) above, and (z) the Executive resigns his employment for Good Reason within
ninety (90) days after the date of delivery of the notice referred to in (x)
above:

                (i) a reduction by the Company in the Executive's Base Salary as
in effect on the date hereof or as the same may be increased from time to time
during the term of this Agreement;

                (ii) any material failure by the Company to comply with any of
the material provisions of this Agreement including the failure by the Company
to award the stock options set forth in Section 3(c);





                                        5


                (iii) the Company's termination of the Automatic Extension
pursuant to Section 2(b) of this Agreement;

                (iv) following a Change of Control, the assignment to the
Executive by the Company of any duties that constitute a material reduction in
the Executive's status with the Company or a substantial reduction in the nature
or status of the Executive's responsibilities from those in effect immediately
prior to the Change of Control, or a reduction in the Executive's titles or
offices as in effect immediately prior to the Change of Control, or any removal
of the Executive from, or any failure to reelect the Executive to, any of such
positions, except in connection with the termination of the Executive's
employment for Disability or Cause or as a result of the Executive's death or by
the Executive other than for Good Reason; and

                (v) following a Change of Control, any relocation of the
Executive's principal place of employment to a location more than forty-five
(45) miles beyond the location at which the Executive was employed immediately
prior to the Change of Control.

         (e) Executive's Voluntary Termination. Notwithstanding anything to the
contrary contained in this Agreement, the Executive may, at any time after at
least sixty (60) days but no more than ninety (90) days prior written notice in
accordance with Section 4(f) hereof to the Company, terminate voluntarily the
Executive's employment hereunder.

         (f) Notice of Termination. Any termination, except for death, pursuant
to this Section 4 shall be communicated by a Notice of Termination. For purposes
of this Agreement, a "Notice of Termination" shall mean a written notice which
shall indicate those specific termination provisions in this Agreement relied
upon and which sets forth in reasonable detail the facts and circumstances
claimed to provide a basis for termination of the Executive's employment under
the provision so indicated.

         (g) Date of Termination. "Date of Termination" shall mean (i) if this
Agreement is terminated by the Company for Disability, thirty (30) days after
Notice of Termination is given to the Executive (provided that the Executive
shall not have returned to the performance of the Executive's duties on a
full-time basis during such 30-day period), (ii) if the Executive's employment
is terminated due to the Executive's death, on the date of death; (iii) if the
Executive's employment is terminated due to the Executive's voluntary
resignation pursuant to Section 4(e), the date specified in the notice (which
shall not be less than sixty (60) days nor more than ninety (90) days from the
date such Notice of Termination is given); or (iii) if the Executive's
employment is terminated for any other reason, the date specified in the Notice
of Termination (which shall not be less than thirty (30) days from the date such
Notice of Termination is given).

         (h) Resignation from All Positions. Notwithstanding any other provision
of this Agreement, upon the termination of the Executive's employment for any
reason, unless otherwise requested by the Board, the Executive shall immediately
resign from all positions that the Executive holds or has ever held with the
Company and any other affiliate of the Company (and with any other entities with
respect to which the Company has requested the Executive to perform services).
The Executive hereby agrees to execute any and all documentation to effectuate
such resignations upon request by the Company, but he shall be treated for all
purposes as having so resigned upon termination of his employment, regardless of
when or whether he executes any such documentation.





                                        6


5.       Payments upon Termination.

         (a) Termination Due to Death or Disability. Upon the Executive's death
or the termination of the Executive's employment by reason of the Disability of
the Executive, to the extent not theretofore paid or provided, (i) the Company
shall pay to the Executive's estate or the Executive, as applicable, within
thirty (30) days after the Date of Termination (1) the Executive's full Base
Salary and other accrued benefits earned up to the last day of the month of the
Executive's death or termination of employment by reason of the Executive's
Disability, (2) all deferred compensation of any kind, including, without
limitation, any amounts earned under any bonus plan, and (3) if any bonus, under
any bonus plan of the Company, shall be payable in respect of the year in which
the Executive's death or termination of employment by reason of the Executive's
Disability occurs, such bonus(es) prorated up to the last day of the month of
the Executive's death or termination of employment by reason of the Executive's
Disability and (ii) all restricted stock, stock option and performance share
awards made to the Executive and outstanding as of the Date of Termination shall
automatically become fully vested as of the Date of Termination.

         (b) Termination for Cause. If the Executive's employment shall be
terminated for Cause, the Company shall pay the Executive, within thirty (30)
days after the Date of Termination: the Executive's full Base Salary through the
Date of Termination at the rate in effect at the time Notice of Termination is
given. The Company shall have no further obligations to the Executive under this
Agreement.

         (c) Termination by the Executive for Good Reason or by the Company for
Reasons other than for Cause, Disability or Death.

                (i) In the event that after December 31, 2004, (1) the Company
terminates the Executive's employment during the Term other than for Cause,
death or Disability or (2) the Executive resigns during the Term for Good
Reason, then the Executive shall receive:

                    (A) Benefit Continuation;
                    (B) Pro Rata Bonus;
                    (C) Severance Benefit; and
                    (D) Full Equity Vesting.

                (ii) In the event that before January 1, 2005, (1) the Company
terminates the Executive's employment during the Term other than for Cause,
death or Disability or the Executive resigns for Good Reason for the limited
reasons defined in Section 4 (d)(i), 4 (d)(ii) or 4 (d)(iii), then the Executive
shall receive:





                                        7


                    (A) Benefit Continuation;
                    (B) Pro Rata Bonus;
                    (C) Severance Benefit; and
                    (D) Two Quarter Equity Vesting.

                (iii) In the event that before January 1, 2005, the Executive
resigns for Good Reason for the limited reasons defined in Section 4 (d) (iv) or
4 (d) (v) (Change of Control provisions), then the Executive shall receive:

                    (A) Benefit Continuation;
                    (B) Pro Rata Bonus;
                    (C) Severance Benefit; and
                    (D) Full Equity Vesting.

         As used in this section,

         "Benefit Continuation" means that the Company shall maintain in full
force and effect, for the continued benefit of the Executive and his dependents
for a period equal to the greater of (x) the remaining period of the then
current Term without giving effect to such termination or (y) two (2) years, all
employee insurance benefit plans and programs to which the Executive was
entitled prior to the Date of Termination (including, without limitation, the
health, dental, vision, life and other voluntary insurance programs, but
specifically excluding any company paid disability plan or program provided by
the Company) if the Executive's continued participation is permissible under the
general terms and provisions of such plans and programs and the Executive
continues to pay all applicable premiums. In the event that the Executive's
participation in any health, medical or life insurance plan or program is
barred, the Company shall obtain and pay for, on the Executive's behalf,
individual insurance plans, policies or programs which provide to the Executive
health, medical, and life insurance coverage which is equivalent to the
insurance coverage to which the Executive was entitled prior to the Date of
Termination.

         "Executive's Average Base Salary" means the Executive's Base Salary for
the most recent two years (including the year in which the Date of Termination
occurs) divided by two.

         "Executive's Average Assumed Cash Incentive Compensation" means all
annual bonuses earned under the Company's annual incentive compensation plan
(which is intended to be a cash plan as of the Effective Date) in consideration
of services for the two (2) most recent completed fiscal years prior to the Date
of Termination, divided by two (2), or the average annual bonuses earned in such
shorter number of fiscal years during which an annual bonus incentive plan
existed or the Executive was employed.

         "Full Equity Vesting" means that the previously granted and outstanding
stock options and restricted stock shall fully and immediately vest and, in the
case of stock options, shall remain exercisable for a period of at least ninety
(90) days following the Date of Termination (or, if sooner, the end of the
scheduled award term).






                                        8


         "Pro Rata Bonus" means a pro rata bonus for the portion of the year in
which the date of termination occurs preceding the date of termination based
upon the amount that would have been earned based on the Company's actual
performance for the portion of the year ending on the date of termination, using
performance goals that are pro-rated to reflect the portion of the year prior to
the date of termination (which amount will be paid as soon as practicable
following the date of termination).

         "Severance Benefit" means a lump-sum cash payment to the Executive,
within thirty (30) days after the Date of Termination, equal to the sum of (x)
the Executive's Average Base Salary (as defined below) and (y) the Executive's
Average Assumed Cash Incentive Compensation (as defined below).

         "Two Quarter Equity Vesting" means that the number of option shares,
restricted stock, and similar equity rights previously granted and outstanding
that would have vested on the first day of each of the next two calendar
quarters following the date of such termination, had the Executive's employment
with the Company not been terminated, shall immediately vest and, in the case of
stock options, shall remain exercisable for a period of at least ninety (90)
days following the Date of Termination (or, if sooner, the end of the scheduled
award term).

                (iv) The payments under this Section are subject to, and
conditional upon, the Executive executing and not revoking a general release of
all statutory and common law claims relating to employment and termination from
employment in a form provided by the Company.

                (v) The Executive recognizes and accepts that the Company shall
not, in any case, be responsible for any additional amount, severance pay,
termination pay, severance obligation, incentive compensation payments, costs,
attorneys fees or other damages whatsoever arising from termination of the
Executive's employment, above and beyond those specifically provided for herein.
Notwithstanding anything herein to the contrary, the Executive shall maintain
his/her rights under any Company sponsored qualified or nonqualified retirement
plan.

6.       Change of Control.

         For purposes of this Agreement, the term "Change of Control" shall mean
the occurrence of any of the following:

                (a) The acquisition by any individual, entity or group (within
the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of
1934, as amended (the "Exchange Act")) (a "Person") of beneficial ownership
(within the meaning of Rule 13d-3 promulgated under the Exchange Act) of forty
percent (40%) or more of either (A) the then-outstanding shares of common stock
of the Company (the "Outstanding Company Common Stock") or (B) the combined
voting power of the then-outstanding voting securities of the Company entitled
to vote generally in the election of directors (the "Outstanding Company Voting
Securities"); provided, however, that, for purposes of this Section 6(a), the
following acquisitions shall not constitute a Change of Control: (i) any
acquisition directly from the Company, (ii) any acquisition by the Company,
(iii) any acquisition by any employee benefit plan (or related trust) sponsored
or maintained by the Company or any of its affiliates, (iv) any acquisition by




                                        9


any corporation pursuant to a transaction that complies with Sections 6(c)(i),
6(c)(ii) and 6(c)(iii), (v) any acquisition by any underwriter temporarily
holding securities pursuant to an offering of such securities, (vi) any
acquisition by Goldman Sachs Capital Partners or Highland Capital, (vii) any
acquisition by the Executive or any group of persons including the Executive (or
any entity controlled by the Executive or any group of persons including the
Executive) or (viii) a beneficial owner of less than forty percent (40%) of the
Outstanding Company Voting Securities that becomes a beneficial owner of forty
percent (40%) or more of the Outstanding Company Voting Securities solely by
reason of redemption or repurchase of such securities by the Company so long as
such beneficial owner takes immediate action to reduce its beneficial ownership
of Company Voting Securities below forty percent (40%);

                (b) Any time at which individuals who, as of the date hereof,
constitute the Board (the "Incumbent Board") cease for any reason to constitute
at least a majority of the Board; provided, however, that any individual
becoming a director subsequent to the date hereof whose election, or nomination
for election by the Company's shareholders, was approved by a vote of at least a
majority of the directors then comprising the Incumbent Board shall be
considered as though such individual were a member of the Incumbent Board, but
excluding, for this purpose, any such individual whose initial assumption of
office occurs as a result of an actual or threatened election contest with
respect to the election or removal of directors or other actual or threatened
solicitation of proxies or consents by or on behalf of a Person other than the
Board; provided, further, that any individual becoming a director subsequent to
the date hereof who was elected by, or on the recommendation of any person
described in clause (vi) of Section 6(a) above pursuant to contractual rights as
of the Effective Date with respect to Outstanding Company Voting Securities
owned by such person shall be treated as a member of the Incumbent Board;

                (c) Consummation of a merger, statutory share exchange or
consolidation or similar corporate transaction involving the Company or any of
its subsidiaries, a sale or other disposition of all or substantially all of the
assets of the Company, or the acquisition of assets or stock of another entity
by the Company or any of its subsidiaries (each, a "Business Combination"), in
each case unless, following such Business Combination, (i) all or substantially
all of the individuals and entities that were the beneficial owners of the
Outstanding Company Common Stock and the Outstanding Company Voting Securities
immediately prior to such Business Combination beneficially own, directly or
indirectly, more than fifty percent (50%) of the then-outstanding shares of
common stock and the combined voting power of the then-outstanding voting
securities entitled to vote generally in the election of directors, as the case
may be, of the corporation resulting from such Business Combination (including,
without limitation, a corporation that, as a result of such transaction, owns
the Company or all or substantially all of the Company's assets either directly
or through one or more subsidiaries) in substantially the same proportions as
their ownership immediately prior to such Business Combination of the
Outstanding Company Common Stock and the Outstanding Company Voting Securities,
as the case may be, (ii) no Person (excluding any corporation resulting from
such Business Combination or any employee benefit plan (or related trust) of the
Company or such corporation resulting from such Business Combination)
beneficially owns, directly or indirectly, forty percent (40%) or more of,






                                       10


respectively, the then-outstanding shares of common stock of the corporation
resulting from such Business Combination or the combined voting power of the
then-outstanding voting securities of such corporation, except to the extent
that such ownership existed prior to the Business Combination, and (iii) at
least a majority of the members of the board of directors of the corporation
resulting from such Business Combination were members of the Incumbent Board at
the time of the execution of the initial agreement or of the action of the Board
providing for such Business Combination; provided, however, that a spinoff of
subsidiaries or divisions of the Company to an entity which is owned by the
shareholders of the Company in substantially the same proportion as their
ownership of the Company shall not constitute a Change of Control; or

                (d) Approval by the shareholders of the Company of a complete
liquidation or dissolution of the Company.

7.       Certain Tax Matters.

         (a) Anything in this Agreement to the contrary notwithstanding, in the
event it shall be determined that any Payment would be subject to the Excise
Tax, then the Executive shall be entitled to receive an additional payment (the
"Gross-Up Payment") in an amount such that, after payment by the Executive of
all taxes (and any interest or penalties imposed with respect to such taxes),
including, without limitation, any income taxes (and any interest and penalties
imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment,
the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax
imposed upon the Payments. The Company's obligation to make Gross-Up Payments
under this Section 7 shall not be conditioned upon the Executive's termination
of employment.

         (b) Subject to the provisions of Section 7(c), all determinations
required to be made under this Section 7, including whether and when a Gross-Up
Payment is required, the amount of such Gross-Up Payment and the assumptions to
be utilized in arriving at such determination, shall be made, to the extent
permitted by applicable law, by the Company's auditors as of immediately prior
to the Change of Control, or such other nationally recognized certified public
accounting firm as may be designated by the Executive (the "Accounting Firm").
The Accounting Firm shall provide detailed supporting calculations both to the
Company and the Executive within 15 business days of the receipt of notice from
the Executive that there has been a Payment or such earlier time as is requested
by the Company. In the event that the Accounting Firm is serving as accountant
or auditor for the individual, entity or group effecting the Change of Control,
the Executive may appoint another nationally recognized accounting firm to make
the determinations required hereunder (which accounting firm shall then be
referred to as the Accounting Firm hereunder). All fees and expenses of the
Accounting Firm shall be borne solely by the Company. Any Gross-Up Payment, as
determined pursuant to this Section 7, shall be paid by the Company to the
Executive within 5 days of the receipt of the Accounting Firm's determination.
Any determination by the Accounting Firm shall be binding upon the Company and
the Executive. As a result of the uncertainty in the application of Section 4999
of the Code at the time of the initial determination by the Accounting Firm
hereunder, it is possible that Gross-Up Payments that will not have been made by
the Company should have been made (the "Underpayment"), consistent with the





                                       11


calculations required to be made hereunder. In the event the Company exhausts
its remedies pursuant to Section 7(c) and the Executive thereafter is required
to make a payment of any Excise Tax, the Accounting Firm shall determine the
amount of the Underpayment that has occurred and any such Underpayment shall be
promptly paid by the Company to or for the benefit of the Executive.

         (c) The Executive shall notify the Company in writing of any claim by
the Internal Revenue Service that, if successful, would require the payment by
the Company of the Gross-Up Payment. Such notification shall be given as soon as
practicable, but no later than 10 business days after the Executive is informed
in writing of such claim. The Executive shall apprise the Company of the nature
of such claim and the date on which such claim is requested to be paid. The
Executive shall not pay such claim prior to the expiration of the 30-day period
following the date on which the Executive gives such notice to the Company (or
such shorter period ending on the date that any payment of taxes with respect to
such claim is due). If the Company notifies the Executive in writing prior to
the expiration of such period that the Company desires to contest such claim,
the Executive shall:

             (i) give the Company any information reasonably requested by the
Company relating to such claim,

             (ii) take such action in connection with contesting such claim as
the Company shall reasonably request in writing from time to time, including,
without limitation, accepting legal representation with respect to such claim by
an attorney reasonably selected by the Company,

             (iii) cooperate with the Company in good faith in order effectively
to contest such claim, and

             (iv) permit the Company to participate in any proceedings relating
to such claim;

provided, however, that the Company shall bear and pay directly all costs and
expenses (including additional interest and penalties) incurred in connection
with such contest, and shall indemnify and hold the Executive harmless, on an
after-tax basis, for any Excise Tax or income tax (including interest and
penalties) imposed as a result of such representation and payment of costs and
expenses. Without limitation on the foregoing provisions of this Section 7(c),
the Company shall control all proceedings taken in connection with such contest,
and, at its sole discretion, may pursue or forgo any and all administrative
appeals, proceedings, hearings and conferences with the applicable taxing
authority in respect of such claim and may, at its sole discretion, either pay
the tax claimed to the appropriate taxing authority on behalf of the Executive
and direct the Executive to sue for a refund or contest the claim in any
permissible manner, and the Executive agrees to prosecute such contest to a
determination before any administrative tribunal, in a court of initial
jurisdiction and in one or more appellate courts, as the Company shall
determine; provided, however, that, if the Company pays such claim and directs
the Executive to sue for a refund, the Company shall indemnify and hold the
Executive harmless, on an after-tax basis, from any Excise Tax or income tax
(including interest or penalties) imposed with respect to such payment or with




                                       12


respect to any imputed income in connection with such payment; and provided,
further, that any extension of the statute of limitations relating to payment of
taxes for the taxable year of the Executive with respect to which such contested
amount is claimed to be due is limited solely to such contested amount.
Furthermore, the Company's control of the contest shall be limited to issues
with respect to which the Gross-Up Payment would be payable hereunder, and the
Executive shall be entitled to settle or contest, as the case may be, any other
issue raised by the Internal Revenue Service or any other taxing authority.

         (d) If, after the receipt by the Executive of a Gross-Up Payment or
payment by the Company of an amount on the Executive's behalf pursuant to
Section 7(c), the Executive becomes entitled to receive any refund with respect
to the Excise Tax to which such Gross-Up Payment relates or with respect to such
claim, the Executive shall (subject to the Company's complying with the
requirements of Section 7(c), if applicable) promptly pay to the Company the
amount of such refund (together with any interest paid or credited thereon after
taxes applicable thereto). If, after payment by the Company of an amount on the
Executive's behalf pursuant to Section 7(c), a determination is made that the
Executive shall not be entitled to any refund with respect to such claim and the
Company does not notify the Executive in writing of its intent to contest such
denial of refund prior to the expiration of 30 days after such determination,
then the amount of such payment shall offset, to the extent thereof, the amount
of Gross-Up Payment required to be paid.

         (e) Notwithstanding any other provision of this Section 7, the Company
may, in its sole discretion, withhold and pay over to the Internal Revenue
Service or any other applicable taxing authority, for the benefit of the
Executive, all or any portion of any Gross-Up Payment, and the Executive hereby
consents to such withholding.

         (f) Definitions. The following terms shall have the following meanings
for purposes of this Section 7.

              "Excise Tax" shall mean the excise tax imposed by Section 4999 of
the Code, together with any interest or penalties imposed with respect to such
excise tax.

              A "Payment" shall mean any payment or distribution in the nature
of compensation (within the meaning of Section 280G(b)(2) of the Code) to or for
the benefit of the Executive, whether paid or payable pursuant to this Agreement
or otherwise.

8.       Executive's Covenants.

         (a) Nondisclosure. At all times during and after the Term, the
Executive shall keep confidential and shall not, except with the Company's
express prior written consent, or except in the proper course of the Executive's
employment with the Company, directly or indirectly, communicate, disclose,
divulge, publish, or otherwise express, to any Person, or use for the
Executive's own benefit or the benefit of any Person, any trade secrets,
confidential or proprietary knowledge or information, no matter when or how
acquired concerning the conduct and details of the Company's business, including
without limitation, names of customers and suppliers, marketing methods, trade
secrets, policies, prospects and financial condition. For purposes of this
Section 8, confidential information shall not include any information which is
now known by or readily available to the general public or which becomes known
by or readily available to the general public other than as a result of any
improper act or omission of the Executive.




                                       13


         (b) Non-Competition. During the Term hereof and for a period of two (2)
years following the Executive's termination of employment for any reason, the
Executive shall not, except with the Company's express prior written consent,
directly or indirectly, in any capacity, for the benefit of any Person:

                (i) Solicit any Person with whom Executive had substantial
contact or about whom Executive acquired confidential information during
Executive's employment with the Company in any manner which interferes or might
interfere with such Person's relationship with the Company, or in an effort to
obtain such Person as a customer, supplier, salesman, agent, or representative
of any business in competition with the Company.

                (ii) Solicit the employment of or hire, whether as an employee,
officer, director, agent, consultant or independent contractor, any person who
is, or was at any time during the twelve (12) month period preceding the
termination of the Executive's employment through the expiration of this
covenant, an employee, consultant, officer or director of the Company or any of
its subsidiaries and affiliates (except for such employment by the Company or
any of its subsidiaries and affiliates);

                (iii) Establish, engage, own, manage, operate, join or control,
or participate in the establishment, ownership (other than as the owner of less
than one percent (1%) of the stock of a corporation whose shares are publicly
traded), management, operation or control of, or be a director, officer,
employee, salesman, agent or representative of, or be a consultant to, any
Person in any business in competition with the Company anywhere in the United
States or act or conduct himself in any manner which the Executive would have
reason to believe inimical or contrary to the best interests of the Company.
Executive acknowledges that this nationwide restriction is reasonable and
necessary because Executive's responsibilities include strategies for geographic
expansion throughout the United States. Executive acknowledges that the
provisions contained in this section will not impair Executive's ability to earn
a livelihood because Executive has the ability to engage in other professional
activities that will not breach these provisions.

         (c) Enforcement. The Executive acknowledges that any breach by the
Executive of any of the covenants and agreements of this Section 8 ("Covenants")
will result in irreparable injury to the Company for which money damages could
not adequately compensate the Company, and therefore, in the event of any such
breach, the Company shall be entitled, in addition to all other rights and
remedies which the Company may have at law or in equity, to have an injunction
issued by any competent court enjoining and restraining the Executive and/or all
other Persons involved therein from continuing such breach. The existence of any
claim or cause of action which the Executive or any such other Person may have
against the Company shall not constitute a defense or bar to the enforcement of
any of the Covenants. If the Company is obliged to resort to litigation to
enforce any of the Covenants which has a fixed term, then such term shall be
extended for a period of time equal to the period during which a material breach
of such Covenant was occurring, beginning on the date of a final court order
(without further right of appeal) holding that such a material breach occurred,
or, if later, the last day of the original fixed term of such Covenant.





                                       14


         (d) Consideration. The Executive expressly acknowledges that the
Covenants are a material part of the consideration bargained for by the Company
and, without the agreement of the Executive to be bound by the Covenants, the
Company would not have agreed to enter into this Agreement.

         (e) Scope. If any portion of any Covenant or its application is
construed to be invalid, illegal or unenforceable, then the other portions and
their application shall not be affected thereby and shall be enforceable without
regard thereto. If any of the Covenants is determined to be unenforceable
because of its scope, duration, geographical area or similar factor, then the
court making such determination shall have the power to reduce or limit such
scope, duration, area or other factor, and such Covenant shall then be
enforceable in its reduced or limited form.

9.       No Obligation to Mitigate Damages; No Effect on Other Contractual
Rights.

         The Executive shall not be required to mitigate damages or the amount
of any payment provided for under this Agreement by seeking other employment or
otherwise, nor shall the amount of payment provided for under this Agreement be
reduced by any compensation earned by the Executive as the result of employment
by another employer after the Date of Termination, or otherwise. The amounts
payable to the Executive under Section 5 hereof shall not be treated as damages
but as severance compensation to which the Executive is entitled by reason of
termination of the Executive's employment in the circumstances contemplated by
this Agreement.

10.      Miscellaneous.

         (a) Notices. All notices, requests, demands, consents or other
communications required or permitted to be given under this Agreement shall be
in writing and shall be deemed to have been duly given if and when (i) delivered
personally, (ii) mailed by first class certified mail, return receipt requested,
postage prepaid, or (iii) sent by a nationally recognized express courier
service, postage or delivery changes prepaid, with receipt, or (iv) delivered by
telecopy (with receipt, and with original delivered in accordance with any of
(i), (ii) or (iii) above) to the parties at their respective addresses stated
below or to such other addresses of which the parties may give notice in
accordance with this Section.

                           If to the Company, to:

                           NeighborCare, Inc.
                           Seven East Lee Street
                           Baltimore, MD 21202

                           Attention: Chairman and Chief Executive Officer





                                       15


                           with a copy at the same address:

                           Attention: General Counsel

                           If to the Executive, to:
                           Richard W. Sunderland
                           5306 Springlake Way
                           Baltimore, Md. 21212

         (b) Entire Understanding. This Agreement sets forth the entire
understanding between the parties with respect to the subject matter hereof and
supersedes all prior and contemporaneous, written, oral, expressed or implied,
communications, agreements and understandings with respect to the subject matter
hereof.

         (c) Modification. This Agreement shall not be amended, modified,
supplemented or terminated except in writing signed by both parties. No action
taken by the Company hereunder, including without limitation any waiver, consent
or approval, shall be effective unless approved by a majority of the Board.

         (d) Termination of Prior Employment Agreements. All prior employment
agreements between the Executive and the Company and/or any of its affiliates
(and any of their predecessors) are hereby terminated as of the Effective Date,
including without limitation the Current Employment Agreement, and the Executive
shall not be entitled to any payments or benefits under the Current Employment
Agreement as of and following the Effective Date.

         (e) Assignability and Binding Effect. This Agreement (including the
covenants set forth in Section 8) shall inure to the benefit of and shall be
binding upon the Company and its successors (including successors to all or
substantially all of the Company's assets) and permitted assigns and upon the
Executive and the Executive's heirs, executors, legal representatives,
successors and permitted assigns. This Agreement, including but not limited to
the covenants contained in Section 8 above, may be assigned or otherwise
transferred by the Company to any of its subsidiaries or other affiliates and by
such transferees to its subsidiaries or other affiliates, provided that, in any
assignment or transfer the assignee or transferee agrees to be bound by the
terms and conditions hereof. Upon assignment or transfer, the "Company" herein
shall mean the buyer, assignee or transferee of this Agreement. This Agreement
may not, however, be assigned by the Executive to a third party, nor may the
Executive delegate his duties under this Agreement.

         (f) Severability. If any provision of this Agreement is construed to be
invalid, illegal or unenforceable, then the remaining provisions hereof shall
not be affected thereby and shall be enforceable without regard thereto.

         (g) Counterparts. This Agreement may be executed in any number of
counterparts, each of which when so executed and delivered shall be an original
hereof, and it shall not be necessary in making proof of this Agreement to
produce or account for more than one counterpart hereof.






                                       16


         (h) Section Headings. Section and subsection headings in this Agreement
are inserted for convenience of reference only, and shall neither constitute a
part of this Agreement nor affect its construction, interpretation, meaning or
effect.

         (i) References. All words used in this Agreement shall be construed to
be of such number and gender as the context requires or permits.

         (j) Controlling Law. This Agreement is made under, and shall be
governed by, construed and enforced in accordance with, the substantive laws of
the State of Maryland applicable to agreements made and to be performed entirely
therein.

         (k) Settlement of Disputes. Except with respect to injunctive relief
under Section 8 or otherwise, the Executive and the Company will attempt in good
faith to resolve any and all controversies, claims, and disputes of every kind
and nature, including both common law and statutory, between the parties to this
Agreement, arising out of or in connection with the Executive's employment
relationship, terms and conditions of employment, or separation of employment
with the Company for whatever reason, (including without limitation, any such
claim, dispute or controversy arising under any federal, state or local law,
statute, regulation or ordinance or arising under the Company's employee benefit
plans, policies or programs), including the existence, construction, validity,
interpretation or meaning, performance, non-performance, enforcement, operation,
breach, continuance, or termination of this Agreement (each, a "Dispute")
promptly by discussions between the parties to this Agreement. If the Dispute
cannot be resolved through such discussions, the Dispute shall be submitted to
arbitration in accordance with the National Rules for the Resolution of
Employment Disputes ("the Rules") of the American Arbitration Association
("AAA") then in effect, except as otherwise agreed to herein. The time
limitation for submitting a Dispute to arbitration pursuant to this Agreement is
sixty (60) days from the date of the occurrence giving rise to the Dispute,
unless the Dispute is based on statutory rights, in which case the applicable
statute of limitations governs the time period in which a Dispute must be
submitted to arbitration. By submitting a Dispute to arbitration pursuant to
this Agreement, the Executive and the Company acknowledge and agree to waive
their respective rights to seek relief in a judicial forum and before a jury.
The arbitration shall be conducted by a single arbitrator, selected by
alternately striking from a list of five (5) arbitrators supplied by the AAA.
The arbitrator's fees shall be borne by the Company. The Executive and the
Company are separately responsible for their costs, transcript fees, expenses,
witness fees, attorney's fees and other costs associated with the arbitration.
The parties agree that any arbitration conducted pursuant to this section shall
be held in the county in which the Company's corporate headquarters is located
(or at such other location as shall be mutually agreed to by the parties). The
decision of the arbitrator shall be final and binding upon the parties. In
rendering a decision, the arbitrator shall apply all legal principles and
standards that would govern if the Dispute were being brought in a judicial
forum, including all statute of limitations and defenses. Discovery shall be
allowed pursuant to the Rules then in effect as the arbitrator determines
appropriate under the circumstances. The arbitrator may grant injunctions or
provide other relief available in a court of law or equity. Any action to
enforce or vacate the arbitrator's award shall be governed by the Federal
Arbitration Act, if applicable, and otherwise by applicable state law. If either
the Company or the Executive pursues any claim, dispute or controversy against





                                       17


the other in a proceeding other than the arbitration provided for herein, the
responding party shall be entitled to dismissal or injunctive relief regarding
such action and recovery of all costs, losses and attorney's fees related to
such action. Nothing herein shall preclude the Company from seeking, in any
court of competent jurisdiction in Pennsylvania, damages, specific performance,
or other equitable or legal remedies in the case of any breach or threatened
breach by the Executive of this Agreement. The arbitrator shall be required to
apply the contractual provisions hereof or the Company's policies and procedures
in deciding any matter submitted to him and shall not have any authority, by
reason of this Agreement or otherwise, to render a decision that is contrary to
the mutual intent of the parties as set forth in this Agreement or the Company's
intent as set forth in the Company's policies and procedures. Any of the
parties, before or during the arbitration contemplated by this section, may
apply to a court for a temporary restraining order or preliminary injunction or
similar equitable relief to protect its interests pending completion of such
arbitration proceedings and, in particular, to enforce the provisions of this
section and to aid the arbitration contemplated thereby.

         (l) Approval and Authorizations. The execution and the implementation
of the terms and conditions of this Agreement have been fully authorized by the
Board.

         (m) Indulgences, Etc. Neither the failure nor delay on the part of
either party to exercise any right, remedy, power or privilege under this
Agreement shall operate as a waiver thereof, nor shall the single or partial
exercise of any right, remedy, power or privilege preclude any other or further
exercise of the same or any other right, remedy, power or privilege, nor shall
any waiver of any right, remedy, power or privilege with respect to any
occurrence be construed as a waiver of such right, remedy, power or privilege
with respect to any other occurrence. No waiver shall be effective unless it is
in writing and is signed by the party asserted to have granted such waiver.

         (n) Legal Expenses. In the event that the Executive institutes any
legal action to enforce the Executive's rights under, or to recover damages for
breach of this Agreement, the Executive, if the Executive is the prevailing
party, shall be entitled to recover from the Company any reasonable expenses for
attorney's fees and disbursements incurred by the Executive.










                                       18




         IN WITNESS WHEREOF, the parties hereto have executed this Agreement the
day and year first above mentioned, under seal, intending to be legally bound
hereby.

                                        COMPANY:
                                               /s/  John J. Arlotta
                                               -------------------------------
                                        By:    Name: John J. Arlotta
                                        Title: Chairman, President
                                               and Chief Executive
                                               Officer



Witness:                                EXECUTIVE


                                        By:    /s/ Richard W. Sunderland
/s/   Betty Phelps                             -------------------------------
- --------------------------------        Name:  Richard W. Sunderland
                                        Title: Senior Vice President
                                               Chief Financial Officer

EX-10

                              EMPLOYMENT AGREEMENT

         THIS EMPLOYMENT AGREEMENT (the "Agreement") originally dated as of
November 26, 2003, by and between NeighborCare, Inc. (formerly known as Genesis
Health Ventures, Inc.), a Pennsylvania corporation (the "Company") with a place
of business at 7 Lee Street, Baltimore, MD 21202 (the "Company"), and Robert A.
Smith (the "Executive"), which shall be effective as of December 1, 2003 (the
"Effective Date") is amended and restated as of December 9, 2003.

                                   WITNESSETH

         WHEREAS, the Company desires to employ the Executive as an employee of
the Company, and the Executive desires to provide services to the Company, all
upon the terms and conditions hereinafter set forth; and

         WHEREAS, the Executive currently is employed by the Company pursuant to
an employment agreement dated July 1, 2001 ("Current Employment Agreement")
amended October 2, 2001; and

         WHEREAS, the Company is contemplating a spin-off (the "Spin-Off") of
Genesis HealthCare Corporation; and

         WHEREAS, the consummation of the Spin-Off and potential changes to the
Executive's employment may trigger the right of the Executive under Section 5 of
the Current Employment Agreement to a lump-sum payment equal to two times the
sum of the Executive's Average Base Salary (as defined in the Current Employment
Agreement) plus the Executive's Average Assumed Cash Incentive Compensation (as
defined in the Current Employment Agreement); and

         WHEREAS, in consideration of the cash payments and the award of stock
options and/or restricted stock as set forth in the proposal letter dated
November 20, 2003 and which is attached hereto as Exhibit A (which the Executive
acknowledges is good and valuable consideration), the Executive, after due
consideration, has agreed to waive any rights the Executive may have under the
Current Employment Agreement; and

         WHEREAS, upon due consideration, the Executive acknowledges that the
consideration set forth herein is reasonable and adequate, including the terms
of employment and covenants contained herein; and

         WHEREAS, it is the intent of the parties that upon the Effective Date
the Current Employment Agreement shall be superseded by this Agreement.




         NOW, THEREFORE, in consideration of the premises and mutual agreements
hereinafter set forth, and intending to be legally bound hereby, the parties
hereto agree as follows:

1. Offer and Acceptance of Employment. The Company hereby agrees to employ the
Executive as Chief Operating Officer of its NeighborCare Division, and
Executive's principal place of business shall be located at the Company's
headquarters currently located in Baltimore, Md.. The Executive accepts such
employment and agrees to perform the customary responsibilities of such position
during the term of this Agreement. The Executive will perform such other duties
as may from time to time be reasonably assigned to the Executive by the Board of
Directors of the Company (the "Board") or the Company's Chief Executive Officer,
provided such duties are consistent with and do not interfere with the
performance of the duties described herein and are of a type customarily
performed by persons of similar titles with similar corporations. Nothing in
this Agreement shall preclude the Executive from serving as a director, trustee,
officer of, or partner in, any other firm, trust, corporation or partnership, as
long as such activities do not interfere with the Executive's performance of the
Executive's duties hereunder or violate the terms of Section 8 hereof, and so
long as the Executive has received written approval by the Chief Executive
Officer of the Company. Furthermore, nothing in this Agreement shall preclude
the Executive from pursuing personal investments, as long as such activities do
not interfere with the Executive's performance of the Executive's duties
hereunder or violate the terms of Section 8 hereof.

2. Period of Employment.

         (a) Period of Employment. The period of the Executive's employment
under this Agreement shall commence on the Effective Date and shall, unless
sooner terminated pursuant to Section 4, terminate on the second anniversary of
the Effective Date (such period, as extended from time to time, herein referred
to as the "Term"). Subject to Section 2(b), and if the Term has not been
terminated pursuant to Section 4, on such second anniversary, and on each
anniversary of such date thereafter (each such anniversary, an "Automatic
Extension Date"), the Term shall be extended for an additional period of one
year.

         (b) Termination of Automatic Extension by Notice. The Company or the
Executive may elect to terminate the automatic extension of the Term set forth
in Section 2(a) ("Automatic Extension") by giving written notice of such
election. Any notice given hereunder must be given at least 60 days prior to the
applicable Automatic Extension Date.

3. Compensation and Benefits.

         (a) Base Salary. As long as the Executive remains an employee of the
Company, the Executive will be paid an annual base salary of $350,000 which
shall continue at this rate, subject to adjustment as hereinafter provided. The
Executive's annual base salary shall be reviewed periodically and the Company
may increase such annual base salary, by an amount, if any, it determines to be
appropriate. Any such increase shall not reduce or limit any other obligation of
the Company hereunder. The Executive's annual base salary payable hereunder, as
it may be increased from time to time and without reduction for any amounts
deferred as described below, is referred to herein as "Base Salary". The
Executive's Base Salary, as in effect from time to time, may not be reduced by
the Company without the Executive's consent, provided that the Base Salary
payable under this paragraph shall be reduced to the extent the Executive elects
to defer or reduce such salary under the terms of any deferred compensation or
savings plan or other employee benefit arrangement maintained or established by
the Company. The Company shall pay the Executive the portion of the Executive's
Base Salary not deferred in accordance with its customary periodic payroll
practices.

                                       2


         (b) Incentive Compensation. The Executive shall be eligible to
participate in stock option, incentive compensation and other plans at a level
consistent with the Executive's position with the Company and the Company's then
current policies and practices.

         (c) Stock Options/Restricted Stock. The Company shall, subject to
approval by the compensation committee of the Board, pursuant to the terms of
its stock option plan or any similar plan, grant to the Executive the stock
options and/or restricted stock set forth in Exhibit A. The exercise price of
the shares subject to the stock options shall be established by the compensation
committee of the Board at the time of the grant and shall be equal to the fair
market value of the Company Stock (as determined under the Company stock option
plan or similar plan) on the effective date of grant. The Options shall vest
over a three year period with the exact frequency of the vesting to be set by
the Compensation Committee of the Board. The Executive must be employed with the
Company on each vesting date in order for those stock options which vest on
those respective option dates to vest except as provided in Section 5(c). The
stock options shall have a ten (10) year term subject to earlier termination of
such options on account of the Executive's termination of employment for any
reason, at which point the exercisability of the vested options will be, except
as provided in Section 5(c), as set forth in the applicable plan or agreement.
Any restricted stock granted will be in accordance with the terms of the
Company's restricted stock plan, when adopted, and the terms for Executive shall
be the same as the terms for other executives with similar levels of
responsibility as determined by the board of directors.

         (d) Benefits, Perquisites and Expenses.

                  (i) Benefits. During the Term, the Executive shall be eligible
to participate in (1) each welfare benefit plan sponsored or maintained by the
Company, including, without limitation, each life, hospitalization, medical,
dental, health, accident or disability insurance or similar plan or program of
the Company, and (2) each pension, profit sharing, retirement, deferred
compensation or savings plan sponsored or maintained by the Company, in each
case, whether now existing or established hereafter, to the extent that the
Executive is eligible to participate in any such plan under the generally
applicable provisions thereof. With respect to the pension or retirement
benefits payable to the Executive, the Executive's service credited for purposes
of determining the Executive's benefits and vesting shall be determined in
accordance with the terms of the applicable plan or program. Nothing in this
Section 3(d), in and of itself, shall be construed to limit the ability of the
Company to amend or terminate any particular plan, program or arrangement.

                                       3


                  (ii) Vacation. During the Term, the Executive shall be
entitled to the number of paid vacation days in each anniversary year determined
by the Company from time to time for its senior executive officers, but not less
than four (4) weeks in any anniversary year. The Executive shall also be
entitled to all paid holidays given by the Company to its senior officers.
Vacation days which are not used during any calendar year may not be accrued,
nor shall the Executive be entitled to compensation for unused vacation days,
during the Term or upon termination of employment.

                  (iii) Executive Benefits. During the Term, the Executive shall
be entitled to receive such perquisites (e.g., fringe benefits), plans and other
benefits as are generally provided to other senior officers of the Company in
accordance with the then current policies and practices of the Company.

                  (iv) Business Expenses. During the Term, the Company shall pay
or reimburse the Executive for all reasonable expenses incurred or paid by the
Executive in the performance of the Executive's duties hereunder, upon
presentation of expense statements or vouchers and such other information as the
Company may reasonably require and in accordance with the generally applicable
policies and practices of the Company.

4. Employment Termination.

         The Term of employment under this Agreement may be earlier terminated
only as follows:

         (a) Cause. The Company shall have the right to terminate the
Executive's employment for Cause. For purposes hereof, a termination by the
Company for "Cause" shall mean termination by action of a majority of the
non-management membership of the Board at a meeting duly called and held upon at
least fifteen (15) days prior written notice to the Executive specifying the
particulars of the action or inaction alleged to constitute "Cause" because of
(i) the Executive's conviction of, or plea of guilty or nolo contendere to, (A)
any felony (whether or not involving the Company or any of its subsidiaries) or
(B) any other crime involving moral turpitude which subjects, or if generally
known, would subject, the Company or any of its subsidiaries to public ridicule
or embarrassment, (ii) habitual intoxication, the use of illegal drugs, or the
abuse of chemical substances by the Executive, (iii) fraud or other willful
misconduct by the Executive in respect of the Executive's obligations under this
Agreement, (iv) willful and continued failure of the Executive to perform
substantially the Executive's duties (as contemplated by Section 1 of this
Agreement) with the Company (other than any such failure resulting from
incapacity due to physical or mental illness or following the Executive's
delivery of a Notice of Termination (as defined in Section 4(f)) for Good
Reason), after a written demand for substantial performance is delivered to the
Executive by the Board or the Chief Executive Officer of the Company that
specifically identifies the manner in which the Board or the Chief Executive
Officer of the Company believes that the Executive has not substantially
performed the Executives duties, (v) the willful engaging by the Executive in
gross misconduct or a material violation of the Company's code of conduct or
corporate policies, or (vi) willful refusal or continuing failure to attempt,
without proper cause and, other than by reason of illness, to follow the lawful
directions of the Board following thirty days prior written notice to the
Executive of the Executive's refusal to perform, or failure to attempt to
perform such duties and which during such thirty day period such refusal or
failure to attempt is not cured by the Executive. "Cause" shall not include a
bona fide disagreement over a corporate policy, so long as the Executive does
not willfully violate specific written directions from the Board, which
directions are consistent with the provisions of this Agreement. Action or
inaction by the Executive shall not be considered "willful" unless done or
omitted by the Executive intentionally and without the Executive's reasonable
belief that the Executive's action or inaction was in the best interests of the
Company, and shall not include failure to act by reason of total or partial
incapacity due to physical or mental illness.

                                       4


         (b) Without Cause. Notwithstanding anything to the contrary contained
in this Agreement, the Company may, at any time after at least thirty (30) days
prior written notice in accordance with Section 4(f) hereof to the Executive,
terminate the Executive's employment hereunder without Cause.

         (c) Death or Disability. If the Executive dies, the Executive's
employment shall terminate as of the date of death. If the Executive develops a
disability, the Company may terminate the Executive's employment for Disability.
As used in this Agreement, the term "Disability" shall mean incapacity due to
physical or mental illness which has caused the Executive to be unable to
substantially perform the essential functions of the Executive's duties with or
without a reasonable accommodation with the Company on a full time basis for (i)
a period of six (6) consecutive months, or (ii) for shorter periods aggregating
more than six (6) months in any twelve (12) month period. During any period of
Disability, the Executive agrees to submit to reasonable medical examinations
upon the reasonable request, and at the expense, of the Company.

         (d) Good Reason. The Executive may terminate the Executive's employment
for Good Reason at any time during the term of this Agreement. For purposes of
this Agreement, "Good Reason" shall mean any of the following, without the
Executive's written consent, provided, that (x) the Executive shall provide the
Company with written notice thereof within thirty (30) days after the Executive
has knowledge of the occurrence of any of the events or circumstances set forth
in clauses (i) through (v) below, which notice shall specifically identify the
event or circumstance that the Executive believes constitutes Good Reason, (y)
the Company fails to correct the circumstance or event so identified within
thirty (30) days after the date of delivery of the notice referred to in clause
(x) above, and (z) the Executive resigns his employment for Good Reason within
ninety (90) days after the date of delivery of the notice referred to in (x)
above:

                  (i) a reduction by the Company in the Executive's Base Salary
as in effect on the date hereof or as the same may be increased from time to
time during the term of this Agreement;

                  (ii) any material failure by the Company to comply with any of
the material provisions of this Agreement including the failure by the Company
to award the stock options set forth in Section 3(c);



                                       5


                  (iii) the Company's termination of the Automatic Extension
pursuant to Section 2(b) of this Agreement;

                  (iv) following a Change of Control, the assignment to the
Executive by the Company of any duties that constitute a material reduction in
the Executive's status with the Company or a substantial reduction in the nature
or status of the Executive's responsibilities from those in effect immediately
prior to the Change of Control, or a reduction in the Executive's titles or
offices as in effect immediately prior to the Change of Control, or any removal
of the Executive from, or any failure to reelect the Executive to, any of such
positions, except in connection with the termination of the Executive's
employment for Disability or Cause or as a result of the Executive's death or by
the Executive other than for Good Reason; and

                  (v) following a Change of Control, any relocation of the
Executive's principal place of employment to a location more than forty-five
(45) miles beyond the location at which the Executive was employed immediately
prior to the Change of Control.

         (e) Executive's Voluntary Termination. Notwithstanding anything to the
contrary contained in this Agreement, the Executive may, at any time after at
least sixty (60) days but no more than ninety (90) days prior written notice in
accordance with Section 4(f) hereof to the Company, terminate voluntarily the
Executive's employment hereunder.

         (f) Notice of Termination. Any termination, except for death, pursuant
to this Section 4 shall be communicated by a Notice of Termination. For purposes
of this Agreement, a "Notice of Termination" shall mean a written notice which
shall indicate those specific termination provisions in this Agreement relied
upon and which sets forth in reasonable detail the facts and circumstances
claimed to provide a basis for termination of the Executive's employment under
the provision so indicated.

         (g) Date of Termination. "Date of Termination" shall mean (i) if this
Agreement is terminated by the Company for Disability, thirty (30) days after
Notice of Termination is given to the Executive (provided that the Executive
shall not have returned to the performance of the Executive's duties on a
full-time basis during such 30-day period), (ii) if the Executive's employment
is terminated due to the Executive's death, on the date of death; (iii) if the
Executive's employment is terminated due to the Executive's voluntary
resignation pursuant to Section 4(e), the date specified in the notice (which
shall not be less than sixty (60) days nor more than ninety (90) days from the
date such Notice of Termination is given); or (iii) if the Executive's
employment is terminated for any other reason, the date specified in the Notice
of Termination (which shall not be less than thirty (30) days from the date such
Notice of Termination is given).

         (h) Resignation from All Positions. Notwithstanding any other provision
of this Agreement, upon the termination of the Executive's employment for any
reason, unless otherwise requested by the Board, the Executive shall immediately
resign from all positions that the Executive holds or has ever held with the
Company and any other affiliate of the Company (and with any other entities with
respect to which the Company has requested the Executive to perform services).
The Executive hereby agrees to execute any and all documentation to effectuate
such resignations upon request by the Company, but he shall be treated for all
purposes as having so resigned upon termination of his employment, regardless of
when or whether he executes any such documentation.

                                       6


5. Payments upon Termination.

         (a) Termination Due to Death or Disability. Upon the Executive's death
or the termination of the Executive's employment by reason of the Disability of
the Executive, to the extent not theretofore paid or provided, (i) the Company
shall pay to the Executive's estate or the Executive, as applicable, within
thirty (30) days after the Date of Termination (1) the Executive's full Base
Salary and other accrued benefits earned up to the last day of the month of the
Executive's death or termination of employment by reason of the Executive's
Disability, (2) all deferred compensation of any kind, including, without
limitation, any amounts earned under any bonus plan, and (3) if any bonus, under
any bonus plan of the Company, shall be payable in respect of the year in which
the Executive's death or termination of employment by reason of the Executive's
Disability occurs, such bonus(es) prorated up to the last day of the month of
the Executive's death or termination of employment by reason of the Executive's
Disability and (ii) all restricted stock, stock option and performance share
awards made to the Executive and outstanding as of the Date of Termination shall
automatically become fully vested as of the Date of Termination.

         (b) Termination for Cause. If the Executive's employment shall be
terminated for Cause, the Company shall pay the Executive, within thirty (30)
days after the Date of Termination: the Executive's full Base Salary through the
Date of Termination at the rate in effect at the time Notice of Termination is
given. The Company shall have no further obligations to the Executive under this
Agreement.

         (c) Termination by the Executive for Good Reason or by the Company for
Reasons other than for Cause, Disability or Death.

                  (i) In the event that after December 31, 2004, (1) the Company
terminates the Executive's employment during the Term other than for Cause,
death or Disability or (2) the Executive resigns during the Term for Good
Reason, then the Executive shall receive:

                      Benefit Continuation;
                      Pro Rata Bonus;
                      Severance Benefit; and
                      Full Equity Vesting.

                 (ii) In the event that before January 1, 2005, (1) the Company
terminates the Executive's employment during the Term other than for Cause,
death or Disability or the Executive resigns for Good Reason for the limited
reasons defined in Section 4 (d)(i), 4 (d)(ii) or 4 (d)(iii), then the Executive
shall receive:

                                       7


                      Benefit Continuation;
                      Pro Rata Bonus;
                      Severance Benefit; and
                      Two Quarter Equity Vesting.

                (iii) In the event that before January 1, 2005, the Executive
resigns for Good Reason for the limited reasons defined in Section 4 (d) (iv) or
4 (d) (v) (Change of Control provisions), then the Executive shall receive:

                      Benefit Continuation;
                      Pro Rata Bonus;
                      Severance Benefit; and
                      Full Equity Vesting.

         As used in this section,

         "Benefit Continuation" means that the Company shall maintain in full
force and effect, for the continued benefit of the Executive and his dependents
for a period equal to the greater of (x) the remaining period of the then
current Term without giving effect to such termination or (y) two (2) years, all
employee insurance benefit plans and programs to which the Executive was
entitled prior to the Date of Termination (including, without limitation, the
health, dental, vision, life and other voluntary insurance programs, but
specifically excluding any company paid disability plan or program provided by
the Company) if the Executive's continued participation is permissible under the
general terms and provisions of such plans and programs and the Executive
continues to pay all applicable premiums. In the event that the Executive's
participation in any health, medical or life insurance plan or program is
barred, the Company shall obtain and pay for, on the Executive's behalf,
individual insurance plans, policies or programs which provide to the Executive
health, medical, and life insurance coverage which is equivalent to the
insurance coverage to which the Executive was entitled prior to the Date of
Termination.

         "Executive's Average Base Salary" means the Executive's Base Salary for
the most recent two years (including the year in which the Date of Termination
occurs) divided by two.

         "Executive's Average Assumed Cash Incentive Compensation" means all
annual bonuses earned under the Company's annual incentive compensation plan
(which is intended to be a cash plan as of the Effective Date) in consideration
of services for the two (2) most recent completed fiscal years prior to the Date
of Termination, divided by two (2), or the average annual bonuses earned in such
shorter number of fiscal years during which an annual bonus incentive plan
existed or the Executive was employed.

         "Full Equity Vesting" means that the previously granted and outstanding
stock options and restricted stock shall fully and immediately vest and, in the
case of stock options, shall remain exercisable for a period of at least ninety
(90) days following the Date of Termination (or, if sooner, the end of the
scheduled award term).

         "Pro Rata Bonus" means a pro rata bonus for the portion of the year in
which the date of termination occurs preceding the date of termination based
upon the amount that would have been earned based on the Company's actual
performance for the portion of the year ending on the date of termination, using
performance goals that are pro-rated to reflect the portion of the year prior to
the date of termination (which amount will be paid as soon as practicable
following the date of termination).

                                       8


          "Severance Benefit" means a lump-sum cash payment to the Executive,
within thirty (30) days after the Date of Termination, equal to the sum of (x)
the Executive's Average Base Salary (as defined below) and (y) the Executive's
Average Assumed Cash Incentive Compensation (as defined below).

         "Two Quarter Equity Vesting" means that the number of option shares,
restricted stock, and similar equity rights previously granted and outstanding
that would have vested on the first day of each of the next two calendar
quarters following the date of such termination, had the Executive's employment
with the Company not been terminated, shall immediately vest and, in the case of
stock options, shall remain exercisable for a period of at least ninety (90)
days following the Date of Termination (or, if sooner, the end of the scheduled
award term).

                  (iv) The payments under this Section are subject to, and
conditional upon, the Executive executing and not revoking a general release of
all statutory and common law claims relating to employment and termination from
employment in a form provided by the Company.

                  (v) The Executive recognizes and accepts that the Company
shall not, in any case, be responsible for any additional amount, severance pay,
termination pay, severance obligation, incentive compensation payments, costs,
attorneys fees or other damages whatsoever arising from termination of the
Executive's employment, above and beyond those specifically provided for herein.
Notwithstanding anything herein to the contrary, the Executive shall maintain
his/her rights under any Company sponsored qualified or nonqualified retirement
plan.

6. Change of Control.

         For purposes of this Agreement, the term "Change of Control" shall mean
the occurrence of any of the following:

                  (a) The acquisition by any individual, entity or group (within
the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of
1934, as amended (the "Exchange Act")) (a "Person") of beneficial ownership
(within the meaning of Rule 13d-3 promulgated under the Exchange Act) of forty
percent (40%) or more of either (A) the then-outstanding shares of common stock
of the Company (the "Outstanding Company Common Stock") or (B) the combined
voting power of the then-outstanding voting securities of the Company entitled
to vote generally in the election of directors (the "Outstanding Company Voting
Securities"); provided, however, that, for purposes of this Section 6(a), the
following acquisitions shall not constitute a Change of Control: (i) any
acquisition directly from the Company, (ii) any acquisition by the Company,
(iii) any acquisition by any employee benefit plan (or related trust) sponsored
or maintained by the Company or any of its affiliates, (iv) any acquisition by
any corporation pursuant to a transaction that complies with Sections 6(c)(i),
6(c)(ii) and 6(c)(iii), (v) any acquisition by any underwriter temporarily
holding securities pursuant to an offering of such securities, (vi) any
acquisition by Goldman Sachs Capital Partners or Highland Capital, (vii) any
acquisition by the Executive or any group of persons including the Executive (or
any entity controlled by the Executive or any group of persons including the
Executive) or (viii) a beneficial owner of less than forty percent (40%) of the
Outstanding Company Voting Securities that becomes a beneficial owner of forty
percent (40%) or more of the Outstanding Company Voting Securities solely by
reason of redemption or repurchase of such securities by the Company so long as
such beneficial owner takes immediate action to reduce its beneficial ownership
of Company Voting Securities below forty percent (40%);

                                       9


                  (b) Any time at which individuals who, as of the date hereof,
constitute the Board (the "Incumbent Board") cease for any reason to constitute
at least a majority of the Board; provided, however, that any individual
becoming a director subsequent to the date hereof whose election, or nomination
for election by the Company's shareholders, was approved by a vote of at least a
majority of the directors then comprising the Incumbent Board shall be
considered as though such individual were a member of the Incumbent Board, but
excluding, for this purpose, any such individual whose initial assumption of
office occurs as a result of an actual or threatened election contest with
respect to the election or removal of directors or other actual or threatened
solicitation of proxies or consents by or on behalf of a Person other than the
Board; provided, further, that any individual becoming a director subsequent to
the date hereof who was elected by, or on the recommendation of any person
described in clause (vi) of Section 6(a) above pursuant to contractual rights as
of the Effective Date with respect to Outstanding Company Voting Securities
owned by such person shall be treated as a member of the Incumbent Board;

                  (c) Consummation of a merger, statutory share exchange or
consolidation or similar corporate transaction involving the Company or any of
its subsidiaries, a sale or other disposition of all or substantially all of the
assets of the Company, or the acquisition of assets or stock of another entity
by the Company or any of its subsidiaries (each, a "Business Combination"), in
each case unless, following such Business Combination, (i) all or substantially
all of the individuals and entities that were the beneficial owners of the
Outstanding Company Common Stock and the Outstanding Company Voting Securities
immediately prior to such Business Combination beneficially own, directly or
indirectly, more than fifty percent (50%) of the then-outstanding shares of
common stock and the combined voting power of the then-outstanding voting
securities entitled to vote generally in the election of directors, as the case
may be, of the corporation resulting from such Business Combination (including,
without limitation, a corporation that, as a result of such transaction, owns
the Company or all or substantially all of the Company's assets either directly
or through one or more subsidiaries) in substantially the same proportions as
their ownership immediately prior to such Business Combination of the
Outstanding Company Common Stock and the Outstanding Company Voting Securities,
as the case may be, (ii) no Person (excluding any corporation resulting from
such Business Combination or any employee benefit plan (or related trust) of the
Company or such corporation resulting from such Business Combination)
beneficially owns, directly or indirectly, forty percent (40%) or more of,
respectively, the then-outstanding shares of common stock of the corporation
resulting from such Business Combination or the combined voting power of the
then-outstanding voting securities of such corporation, except to the extent
that such ownership existed prior to the Business Combination, and (iii) at
least a majority of the members of the board of directors of the corporation
resulting from such Business Combination were members of the Incumbent Board at
the time of the execution of the initial agreement or of the action of the Board
providing for such Business Combination; provided, however, that a spinoff of
subsidiaries or divisions of the Company to an entity which is owned by the
shareholders of the Company in substantially the same proportion as their
ownership of the Company shall not constitute a Change of Control; or

                                       10


                  (d) Approval by the shareholders of the Company of a complete
liquidation or dissolution of the Company.

7 Certain Tax Matters.

         (d) Anything in this Agreement to the contrary notwithstanding, in the
event it shall be determined that any Payment would be subject to the Excise
Tax, then the Executive shall be entitled to receive an additional payment (the
"Gross-Up Payment") in an amount such that, after payment by the Executive of
all taxes (and any interest or penalties imposed with respect to such taxes),
including, without limitation, any income taxes (and any interest and penalties
imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment,
the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax
imposed upon the Payments. The Company's obligation to make Gross-Up Payments
under this Section 7 shall not be conditioned upon the Executive's termination
of employment.

         (e) Subject to the provisions of Section 7(c), all determinations
required to be made under this Section 7, including whether and when a Gross-Up
Payment is required, the amount of such Gross-Up Payment and the assumptions to
be utilized in arriving at such determination, shall be made, to the extent
permitted by applicable law, by the Company's auditors as of immediately prior
to the Change of Control, or such other nationally recognized certified public
accounting firm as may be designated by the Executive (the "Accounting Firm").
The Accounting Firm shall provide detailed supporting calculations both to the
Company and the Executive within 15 business days of the receipt of notice from
the Executive that there has been a Payment or such earlier time as is requested
by the Company. In the event that the Accounting Firm is serving as accountant
or auditor for the individual, entity or group effecting the Change of Control,
the Executive may appoint another nationally recognized accounting firm to make
the determinations required hereunder (which accounting firm shall then be
referred to as the Accounting Firm hereunder). All fees and expenses of the
Accounting Firm shall be borne solely by the Company. Any Gross-Up Payment, as
determined pursuant to this Section 7, shall be paid by the Company to the
Executive within 5 days of the receipt of the Accounting Firm's determination.
Any determination by the Accounting Firm shall be binding upon the Company and
the Executive. As a result of the uncertainty in the application of Section 4999
of the Code at the time of the initial determination by the Accounting Firm
hereunder, it is possible that Gross-Up Payments that will not have been made by
the Company should have been made (the "Underpayment"), consistent with the
calculations required to be made hereunder. In the event the Company exhausts
its remedies pursuant to Section 7(c) and the Executive thereafter is required
to make a payment of any Excise Tax, the Accounting Firm shall determine the
amount of the Underpayment that has occurred and any such Underpayment shall be
promptly paid by the Company to or for the benefit of the Executive.

                                       11


         (f) The Executive shall notify the Company in writing of any claim by
the Internal Revenue Service that, if successful, would require the payment by
the Company of the Gross-Up Payment. Such notification shall be given as soon as
practicable, but no later than 10 business days after the Executive is informed
in writing of such claim. The Executive shall apprise the Company of the nature
of such claim and the date on which such claim is requested to be paid. The
Executive shall not pay such claim prior to the expiration of the 30-day period
following the date on which the Executive gives such notice to the Company (or
such shorter period ending on the date that any payment of taxes with respect to
such claim is due). If the Company notifies the Executive in writing prior to
the expiration of such period that the Company desires to contest such claim,
the Executive shall:

                  (i) give the Company any information reasonably requested by
the Company relating to such claim,

                  (ii) take such action in connection with contesting such claim
as the Company shall reasonably request in writing from time to time, including,
without limitation, accepting legal representation with respect to such claim by
an attorney reasonably selected by the Company,

                  (iii) cooperate with the Company in good faith in order
effectively to contest such claim, and

                  (iv) permit the Company to participate in any proceedings
relating to such claim;

provided, however, that the Company shall bear and pay directly all costs and
expenses (including additional interest and penalties) incurred in connection
with such contest, and shall indemnify and hold the Executive harmless, on an
after-tax basis, for any Excise Tax or income tax (including interest and
penalties) imposed as a result of such representation and payment of costs and
expenses. Without limitation on the foregoing provisions of this Section 7(c),
the Company shall control all proceedings taken in connection with such contest,
and, at its sole discretion, may pursue or forgo any and all administrative
appeals, proceedings, hearings and conferences with the applicable taxing
authority in respect of such claim and may, at its sole discretion, either pay
the tax claimed to the appropriate taxing authority on behalf of the Executive
and direct the Executive to sue for a refund or contest the claim in any
permissible manner, and the Executive agrees to prosecute such contest to a
determination before any administrative tribunal, in a court of initial
jurisdiction and in one or more appellate courts, as the Company shall
determine; provided, however, that, if the Company pays such claim and directs
the Executive to sue for a refund, the Company shall indemnify and hold the
Executive harmless, on an after-tax basis, from any Excise Tax or income tax
(including interest or penalties) imposed with respect to such payment or with
respect to any imputed income in connection with such payment; and provided,
further, that any extension of the statute of limitations relating to payment of
taxes for the taxable year of the Executive with respect to which such contested
amount is claimed to be due is limited solely to such contested amount.
Furthermore, the Company's control of the contest shall be limited to issues
with respect to which the Gross-Up Payment would be payable hereunder, and the
Executive shall be entitled to settle or contest, as the case may be, any other
issue raised by the Internal Revenue Service or any other taxing authority.

                                       12


         (g) If, after the receipt by the Executive of a Gross-Up Payment or
payment by the Company of an amount on the Executive's behalf pursuant to
Section 7(c), the Executive becomes entitled to receive any refund with respect
to the Excise Tax to which such Gross-Up Payment relates or with respect to such
claim, the Executive shall (subject to the Company's complying with the
requirements of Section 7(c), if applicable) promptly pay to the Company the
amount of such refund (together with any interest paid or credited thereon after
taxes applicable thereto). If, after payment by the Company of an amount on the
Executive's behalf pursuant to Section 7(c), a determination is made that the
Executive shall not be entitled to any refund with respect to such claim and the
Company does not notify the Executive in writing of its intent to contest such
denial of refund prior to the expiration of 30 days after such determination,
then the amount of such payment shall offset, to the extent thereof, the amount
of Gross-Up Payment required to be paid.

         (h) Notwithstanding any other provision of this Section 7, the Company
may, in its sole discretion, withhold and pay over to the Internal Revenue
Service or any other applicable taxing authority, for the benefit of the
Executive, all or any portion of any Gross-Up Payment, and the Executive hereby
consents to such withholding.

         (i) Definitions. The following terms shall have the following meanings
for purposes of this Section 7.

                  "Excise Tax" shall mean the excise tax imposed by Section 4999
of the Code, together with any interest or penalties imposed with respect to
such excise tax.

                  A "Payment" shall mean any payment or distribution in the
nature of compensation (within the meaning of Section 280G(b)(2) of the Code) to
or for the benefit of the Executive, whether paid or payable pursuant to this
Agreement or otherwise.

8. Executive's Covenants.

         (a) Nondisclosure. At all times during and after the Term, the
Executive shall keep confidential and shall not, except with the Company's
express prior written consent, or except in the proper course of the Executive's
employment with the Company, directly or indirectly, communicate, disclose,
divulge, publish, or otherwise express, to any Person, or use for the
Executive's own benefit or the benefit of any Person, any trade secrets,
confidential or proprietary knowledge or information, no matter when or how
acquired concerning the conduct and details of the Company's business, including
without limitation, names of customers and suppliers, marketing methods, trade
secrets, policies, prospects and financial condition. For purposes of this
Section 8, confidential information shall not include any information which is
now known by or readily available to the general public or which becomes known
by or readily available to the general public other than as a result of any
improper act or omission of the Executive.

                                       13


         (b) Non-Competition. During the Term hereof and for a period of two (2)
years following the Executive's termination of employment for any reason, the
Executive shall not, except with the Company's express prior written consent,
directly or indirectly, in any capacity, for the benefit of any Person:

                  (i) Solicit any Person with whom Executive had substantial
contact or about whom Executive acquired confidential information during
Executive's employment with the Company in any manner which interferes or might
interfere with such Person's relationship with the Company, or in an effort to
obtain such Person as a customer, supplier, salesman, agent, or representative
of any business in competition with the Company.

                  (ii) Solicit the employment of or hire, whether as an
employee, officer, director, agent, consultant or independent contractor, any
person who is, or was at any time during the twelve (12) month period preceding
the termination of the Executive's employment through the expiration of this
covenant, an employee, consultant, officer or director of the Company or any of
its subsidiaries and affiliates (except for such employment by the Company or
any of its subsidiaries and affiliates);

                  (iii) Establish, engage, own, manage, operate, join or
control, or participate in the establishment, ownership (other than as the owner
of less than one percent (1%) of the stock of a corporation whose shares are
publicly traded), management, operation or control of, or be a director,
officer, employee, salesman, agent or representative of, or be a consultant to,
any Person in any business in competition with the Company anywhere in the
United States or act or conduct himself in any manner which the Executive would
have reason to believe inimical or contrary to the best interests of the
Company. Executive acknowledges that this nationwide restriction is reasonable
and necessary because Executive's responsibilities include strategies for
geographic expansion throughout the United States. Executive acknowledges that
the provisions contained in this section will not impair Executive's ability to
earn a livelihood because Executive has the ability to engage in other
professional activities that will not breach these provisions.

         (c) Enforcement. The Executive acknowledges that any breach by the
Executive of any of the covenants and agreements of this Section 8 ("Covenants")
will result in irreparable injury to the Company for which money damages could
not adequately compensate the Company, and therefore, in the event of any such
breach, the Company shall be entitled, in addition to all other rights and
remedies which the Company may have at law or in equity, to have an injunction
issued by any competent court enjoining and restraining the Executive and/or all
other Persons involved therein from continuing such breach. The existence of any
claim or cause of action which the Executive or any such other Person may have
against the Company shall not constitute a defense or bar to the enforcement of
any of the Covenants. If the Company is obliged to resort to litigation to
enforce any of the Covenants which has a fixed term, then such term shall be
extended for a period of time equal to the period during which a material breach
of such Covenant was occurring, beginning on the date of a final court order
(without further right of appeal) holding that such a material breach occurred,
or, if later, the last day of the original fixed term of such Covenant.



                                       14


         (d) Consideration. The Executive expressly acknowledges that the
Covenants are a material part of the consideration bargained for by the Company
and, without the agreement of the Executive to be bound by the Covenants, the
Company would not have agreed to enter into this Agreement.

         (e) Scope. If any portion of any Covenant or its application is
construed to be invalid, illegal or unenforceable, then the other portions and
their application shall not be affected thereby and shall be enforceable without
regard thereto. If any of the Covenants is determined to be unenforceable
because of its scope, duration, geographical area or similar factor, then the
court making such determination shall have the power to reduce or limit such
scope, duration, area or other factor, and such Covenant shall then be
enforceable in its reduced or limited form.

9. No Obligation to Mitigate Damages; No Effect on Other Contractual Rights.

         The Executive shall not be required to mitigate damages or the amount
of any payment provided for under this Agreement by seeking other employment or
otherwise, nor shall the amount of payment provided for under this Agreement be
reduced by any compensation earned by the Executive as the result of employment
by another employer after the Date of Termination, or otherwise. The amounts
payable to the Executive under Section 5 hereof shall not be treated as damages
but as severance compensation to which the Executive is entitled by reason of
termination of the Executive's employment in the circumstances contemplated by
this Agreement.

10. Miscellaneous.

         (a) Notices. All notices, requests, demands, consents or other
communications required or permitted to be given under this Agreement shall be
in writing and shall be deemed to have been duly given if and when (i) delivered
personally, (ii) mailed by first class certified mail, return receipt requested,
postage prepaid, or (iii) sent by a nationally recognized express courier
service, postage or delivery changes prepaid, with receipt, or (iv) delivered by
telecopy (with receipt, and with original delivered in accordance with any of
(i), (ii) or (iii) above) to the parties at their respective addresses stated
below or to such other addresses of which the parties may give notice in
accordance with this Section.

                           If to the Company, to:

                           NeighborCare, Inc.
                           Seven East Lee Street
                           Baltimore, MD 21202

                           Attention: Chairman and Chief Executive Officer

                           with a copy at the same address:

                           Attention: General Counsel

                           If to the Executive, to:
                           Robert A. Smith
                           1718 Oakdale Drive
                           Cooksville, Md. 21723



                                       15


         (b) Entire Understanding. This Agreement sets forth the entire
understanding between the parties with respect to the subject matter hereof and
supersedes all prior and contemporaneous, written, oral, expressed or implied,
communications, agreements and understandings with respect to the subject matter
hereof.

         (c) Modification. This Agreement shall not be amended, modified,
supplemented or terminated except in writing signed by both parties. No action
taken by the Company hereunder, including without limitation any waiver, consent
or approval, shall be effective unless approved by a majority of the Board.

         (d) Termination of Prior Employment Agreements. All prior employment
agreements between the Executive and the Company and/or any of its affiliates
(and any of their predecessors) are hereby terminated as of the Effective Date,
including without limitation the Current Employment Agreement, and the Executive
shall not be entitled to any payments or benefits under the Current Employment
Agreement as of and following the Effective Date.

         (e) Assignability and Binding Effect. This Agreement (including the
covenants set forth in Section 8) shall inure to the benefit of and shall be
binding upon the Company and its successors (including successors to all or
substantially all of the Company's assets) and permitted assigns and upon the
Executive and the Executive's heirs, executors, legal representatives,
successors and permitted assigns. This Agreement, including but not limited to
the covenants contained in Section 8 above, may be assigned or otherwise
transferred by the Company to any of its subsidiaries or other affiliates and by
such transferees to its subsidiaries or other affiliates, provided that, in any
assignment or transfer the assignee or transferee agrees to be bound by the
terms and conditions hereof. Upon assignment or transfer, the "Company" herein
shall mean the buyer, assignee or transferee of this Agreement. This Agreement
may not, however, be assigned by the Executive to a third party, nor may the
Executive delegate his duties under this Agreement.

         (f) Severability. If any provision of this Agreement is construed to be
invalid, illegal or unenforceable, then the remaining provisions hereof shall
not be affected thereby and shall be enforceable without regard thereto.

         (g) Counterparts. This Agreement may be executed in any number of
counterparts, each of which when so executed and delivered shall be an original
hereof, and it shall not be necessary in making proof of this Agreement to
produce or account for more than one counterpart hereof.

                                       16


         (h) Section Headings. Section and subsection headings in this Agreement
are inserted for convenience of reference only, and shall neither constitute a
part of this Agreement nor affect its construction, interpretation, meaning or
effect.

         (i) References. All words used in this Agreement shall be construed to
be of such number and gender as the context requires or permits.

         (j) Controlling Law. This Agreement is made under, and shall be
governed by, construed and enforced in accordance with, the substantive laws of
the State of Maryland applicable to agreements made and to be performed entirely
therein.

         (k) Settlement of Disputes. Except with respect to injunctive relief
under Section 8 or otherwise, the Executive and the Company will attempt in good
faith to resolve any and all controversies, claims, and disputes of every kind
and nature, including both common law and statutory, between the parties to this
Agreement, arising out of or in connection with the Executive's employment
relationship, terms and conditions of employment, or separation of employment
with the Company for whatever reason, (including without limitation, any such
claim, dispute or controversy arising under any federal, state or local law,
statute, regulation or ordinance or arising under the Company's employee benefit
plans, policies or programs), including the existence, construction, validity,
interpretation or meaning, performance, non-performance, enforcement, operation,
breach, continuance, or termination of this Agreement (each, a "Dispute")
promptly by discussions between the parties to this Agreement. If the Dispute
cannot be resolved through such discussions, the Dispute shall be submitted to
arbitration in accordance with the National Rules for the Resolution of
Employment Disputes ("the Rules") of the American Arbitration Association
("AAA") then in effect, except as otherwise agreed to herein. The time
limitation for submitting a Dispute to arbitration pursuant to this Agreement is
sixty (60) days from the date of the occurrence giving rise to the Dispute,
unless the Dispute is based on statutory rights, in which case the applicable
statute of limitations governs the time period in which a Dispute must be
submitted to arbitration. By submitting a Dispute to arbitration pursuant to
this Agreement, the Executive and the Company acknowledge and agree to waive
their respective rights to seek relief in a judicial forum and before a jury.
The arbitration shall be conducted by a single arbitrator, selected by
alternately striking from a list of five (5) arbitrators supplied by the AAA.
The arbitrator's fees shall be borne by the Company. The Executive and the
Company are separately responsible for their costs, transcript fees, expenses,
witness fees, attorney's fees and other costs associated with the arbitration.
The parties agree that any arbitration conducted pursuant to this section shall
be held in the county in which the Company's corporate headquarters is located
(or at such other location as shall be mutually agreed to by the parties). The
decision of the arbitrator shall be final and binding upon the parties. In
rendering a decision, the arbitrator shall apply all legal principles and
standards that would govern if the Dispute were being brought in a judicial
forum, including all statute of limitations and defenses. Discovery shall be
allowed pursuant to the Rules then in effect as the arbitrator determines
appropriate under the circumstances. The arbitrator may grant injunctions or
provide other relief available in a court of law or equity. Any action to
enforce or vacate the arbitrator's award shall be governed by the Federal
Arbitration Act, if applicable, and otherwise by applicable state law. If either
the Company or the Executive pursues any claim, dispute or controversy against
the other in a proceeding other than the arbitration provided for herein, the
responding party shall be entitled to dismissal or injunctive relief regarding
such action and recovery of all costs, losses and attorney's fees related to
such action. Nothing herein shall preclude the Company from seeking, in any
court of competent jurisdiction in Pennsylvania, damages, specific performance,
or other equitable or legal remedies in the case of any breach or threatened
breach by the Executive of this Agreement. The arbitrator shall be required to
apply the contractual provisions hereof or the Company's policies and procedures
in deciding any matter submitted to him and shall not have any authority, by
reason of this Agreement or otherwise, to render a decision that is contrary to
the mutual intent of the parties as set forth in this Agreement or the Company's
intent as set forth in the Company's policies and procedures. Any of the
parties, before or during the arbitration contemplated by this section, may
apply to a court for a temporary restraining order or preliminary injunction or
similar equitable relief to protect its interests pending completion of such
arbitration proceedings and, in particular, to enforce the provisions of this
section and to aid the arbitration contemplated thereby.

                                       17


         (l) Approval and Authorizations. The execution and the implementation
of the terms and conditions of this Agreement have been fully authorized by the
Board.

         (m) Indulgences, Etc. Neither the failure nor delay on the part of
either party to exercise any right, remedy, power or privilege under this
Agreement shall operate as a waiver thereof, nor shall the single or partial
exercise of any right, remedy, power or privilege preclude any other or further
exercise of the same or any other right, remedy, power or privilege, nor shall
any waiver of any right, remedy, power or privilege with respect to any
occurrence be construed as a waiver of such right, remedy, power or privilege
with respect to any other occurrence. No waiver shall be effective unless it is
in writing and is signed by the party asserted to have granted such waiver.

         (n) Legal Expenses. In the event that the Executive institutes any
legal action to enforce the Executive's rights under, or to recover damages for
breach of this Agreement, the Executive, if the Executive is the prevailing
party, shall be entitled to recover from the Company any reasonable expenses for
attorney's fees and disbursements incurred by the Executive.


                                       18



         IN WITNESS WHEREOF, the parties hereto have executed this Agreement the
day and year first above mentioned, under seal, intending to be legally bound
hereby.

                            COMPANY:

                            By:     /s/   John J. Arlotta
                                    ------------------------------------------
                            Name:   John J. Arlotta
                                    ------------------------------------------
                            Title:  Chairman, President and Chief Executive
                                    Officer
                                    ------------------------------------------


Witness:                    EXECUTIVE


                            By:     /s/  Robert A. Smith
                                    -----------------------------------------
/s/ Betty Phelps            Name:   Robert A. Smith
- -----------------------             ------------------------------------------
                            Title:  Chief Operating Officer
                                    ------------------------------------------
                                    ------------------------------------------



                                       19

EX-10

                                  AMENDMENT TO

                              EMPLOYMENT AGREEMENT

         This is an amendment (the "Amendment") made as of December 9, 2003, to
the Employment Agreement (the "Agreement") originally made as of July, 7, 2003,
by and between NeighborCare, Inc. (then known as Genesis Health Ventures, Inc.),
a Pennsylvania corporation (the "Company"), and JOHN ARLOTTA ("Executive").

         Section 10.2 of the Agreement is amended and restated in its entirety
as follows:

                  10.2 Competitive Conduct. During the Term hereof and for a
         period of two (2) years following the Executive's termination of
         employment for any reason, the Executive shall not, except with the
         Company's express prior written consent, directly or indirectly, in any
         capacity, for the benefit of any Person:

                           (a) Solicit any Person with whom Executive had
         substantial contact or about whom Executive acquired confidential
         information during Executive's employment with the Company in any
         manner which interferes or might interfere with such Person's
         relationship with the Company, or in an effort to obtain such Person as
         a customer, supplier, salesman, agent, or representative of any
         business in competition with the Company.

                           (b) Solicit the employment of or hire, whether as an
         employee, officer, director, agent, consultant or independent
         contractor, any person who is, or was at any time during the twelve
         (12) month period preceding the termination of the Executive's
         employment through the expiration of this covenant, an employee,
         consultant, officer or director of the Company or any of its
         subsidiaries and affiliates (except for such employment by the Company
         or any of its subsidiaries and affiliates);

                           (c) Establish, engage, own, manage, operate, join or
         control, or participate in the establishment, ownership (other than as
         the owner of less than one percent (1%) of the stock of a corporation
         whose shares are publicly traded), management, operation or control of,
         or be a director, officer, employee, salesman, agent or representative
         of, or be a consultant to, any Person in any business in competition
         with the Company anywhere in the United States or act or conduct
         himself in any manner which the Executive would have reason to believe
         inimical or contrary to the best interests of the Company. Executive
         acknowledges that this nationwide restriction is reasonable and
         necessary because Executive's responsibilities include strategies for
         geographic expansion throughout the United States. Executive
         acknowledges that the provisions contained in this section will not
         impair Executive's ability to earn a livelihood because Executive has
         the ability to engage in other professional activities that will not
         breach these provisions.

         Section 14 of the Agreement is amended and restated in its entirety as
follows:






         14. Notices. Any notice to be given hereunder shall be in writing and
shall be deemed given when delivered personally, sent by courier or telecopy or
registered or certified mail, postage prepaid, return receipt requested,
addressed to the party concerned at the address indicated below or to such other
address as such party may subsequently give notice of hereunder in writing:

     To Executive at:                         To the Company at:

     c/o Richard S. Marcus                    NeighborCare, Inc.
     Godfrey & Kahn, S.C.                     Seven East Lee Street
     780 N. Water Street                      Baltimore, MD 21202
     Milwaukee, Wisconsin  53202              Attention: Law Department

     with a copy:                             And with a copy to:

     Debra Sadow Koenig                       The Chairman of the Compensation
     Godfrey & Kahn, S.C.                     Committee
     780 N. Water Street
     Milwaukee, Wisconsin  53202



         IN WITNESS WHEREOF, the Company has caused this Amendment to be
executed by its duly authorized officer, and Executive has signed this
Agreement, all as of the day and year first above written.

                                 NEIGHBORCARE, INC.

                                 By: /s/ John F. Gaither, Jr.
                                     --------------------------------
                                 Name:    John F. Gaither, Jr.
                                 Title:   Senior Vice President, General Counsel
                                          and Corporate Secretary

                                 /s/ John Arlotta
                                 ------------------------------------
                                 John Arlotta

Confirmed for the
Board of Directors



By: /s/ James Dondero
    ------------------------


                                       -2-

EX-10

                          OPTION CANCELLATION AGREEMENT

         This OPTION CANCELLATION AGREEMENT ("Agreement") is entered into as of
December 9, 2003 (the "Effective Date"), by and between NeighborCare, Inc. (the
"Company"), a Delaware corporation formerly known as Genesis Health Ventures
Inc. ("GHVI"), and Robert H. Fish ("Fish").

         WHEREAS, pursuant to an employment agreement effective as of February
28, 2003, by and between the Company and Fish (the "Employment Agreement"), the
Company granted Fish options to acquire an aggregate of up to 600,0000 shares of
common stock of the Company, subject to certain vesting milestones (the
"Options");

         WHEREAS, pursuant to Section 4.3(a) of the Employment Agreement,
150,000 Options vested upon the execution of the Employment Agreement;

         WHEREAS, on July 7, 2003, the Company's Board of Directors approved a
succession plan relating to the Company's pharmacy business and, pursuant to
Section 4.3(d) of the Employment Agreement, (a) 75,000 Options vested upon such
approval and (b) 100,000 Options were forfeited upon such approval, as their
vesting conditions could no longer be met;

         WHEREAS, on December 1, 2003 (the "Spin-off Date"), the Company
completed a spin-off (the "Spin-off") of its eldercare and rehabilitation
businesses into a separate publicly traded company, Genesis Healthcare
Corporation ("GHC");

         WHEREAS, pursuant to Section 4.3(c)(ii) of the Employment Agreement,
125,000 Options vested upon the completion of the Spin-off;

         WHEREAS, in connection with the Spin-off, Fish's employment as Chief
Executive Officer was terminated by the Company without cause;

         WHEREAS, upon such termination, (a) 150,000 Options vested pursuant to
Section 4.3(b) of the Employment Agreement;

         WHEREAS, on the Spin-off Date, the Company distributed to each of its
shareholders 0.50 shares of GHC common stock for each share of common stock of
the Company held by such shareholder (the "Spin-off Distribution");

         WHEREAS, in order to prevent the dilution of Fish's vested Options that
would otherwise result from the Spin-off Distribution, the Board of Directors of
the Company approved an adjustment (identical to the adjustment approved with
respect to all other outstanding options to purchase Company common stock held
by other persons) of the aggregate number and the exercise price of each such
Option, as a result of which Fish holds, as of the date of this Agreement,
782,673 options issued pursuant to the Employment Agreement to purchase common
stock of the Company (the "Adjusted Options"), at an exercise price per share of
$10.86 for 430,470 of the Adjusted Options and an exercise price per share of
$12.99 for 352,203 of the Adjusted Options, all of which will expire on February
28, 2006;




Robert H. Fish
Option Cancellation Agreement
Page 2

         WHEREAS, the intrinsic value of the Options was equal to $6,500,750 as
of the close of business on November 28, 2003, the measurement date approved by
the Board of Directors;

         WHEREAS, the Company wishes to redeem and cancel, and Fish wishes to
surrender in exchange for cash payment, a portion of the Adjusted Options that
Fish currently holds;

         NOW, THEREFORE, in consideration of the mutual covenants contained
herein, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto hereby agree as
follows:

         1. Fish hereby surrenders to the Company 282,673 of his Adjusted
Options (all of which shall be from among the options with an adjusted exercise
price of $10.86), for the aggregate cash payment of $2,580,108 less any
applicable withholding taxes, which the Company shall promptly deliver to Fish
following the execution of this Agreement. Upon execution of this Agreement by
Fish, the 282,673 Post-spin Options so surrendered shall immediately be
cancelled, terminate, and no longer be exercisable at any future date by Fish.

         2. The parties hereto intend that this Agreement shall be governed by
the laws of the Commonwealth of Pennsylvania.

         3. Section 12 (General Provisions) and Section 13 (Modification and
Waiver) of the Employment Agreement shall apply to this Agreement with full
force and effect as if they were set forth in full herein.

         IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement as of the date first-above written.

                              /s/  Robert H. Fish
                              -----------------------------------------------
                              Robert H. Fish




                              NEIGHBORCARE, INC.


                              /s/ Philip P. Gerbino
                              -----------------------------------------------
                              Name: Philip P. Gerbino

                              Title:   On behalf of the Compensation Committee
                                       of the Board of Directors