<PAGE>
                                                                     EXHIBIT 2.1


                               AGREEMENT AND PLAN

                                   OF MERGER

                                 BY AND BETWEEN

                        VITALINK PHARMACY SERVICES, INC.

                                      AND

                                 GRANCARE, INC.

                         DATED AS OF SEPTEMBER 3, 1996
<PAGE>
 
                               TABLE OF CONTENTS


                                                                          Page
                                                                          ----

                                   ARTICLE I

                                   THE MERGER

Section 1.01.    The Merger...............................................  2
Section 1.02.    Effective Time...........................................  3
Section 1.03.    Certificate of Incorporation and
                   By-Laws of Surviving Corporation.......................  3
Section 1.04.    Directors and Officers of Surviving
                   Corporation............................................  4
Section 1.05.    Stockholders' Meeting....................................  4
Section 1.06.    Filing of Certificate of Merger..........................  5
Section 1.07.    Further Assurances.......................................  5

                                   ARTICLE II

                              CONVERSION OF SHARES

Section 2.01.    Shares...................................................  6
Section 2.02.    Exchange of Shares.......................................  7
Section 2.03.    Effect on GranCare Options...............................  8
Section 2.04.    Fractional Shares........................................  8

                                  ARTICLE III

                   REPRESENTATIONS AND WARRANTIES OF VITALINK

Section 3.01.    Organization and Qualification..........................   9
Section 3.02.    Authority Relative to This Agreement....................  10
Section 3.03.    Consents, No Conflicts..................................  10
Section 3.04.    Board Recommendation....................................  12
Section 3.05.    State Antitakeover Statutes.............................  12
Section 3.06.    No Existing Violation, Default, Etc.....................  12
Section 3.07.    Licenses and Permits....................................  13
Section 3.08.    Registration Statement; Information
                   Statement.............................................  13
Section 3.09.    Finders or Brokers......................................  14
Section 3.10.    SEC Filings.............................................  14
Section 3.11.    Financial Statements....................................  15
Section 3.12.    Absence of Undisclosed Liabilities......................  16
Section 3.13.    Absence of Changes or Events............................  16
Section 3.14.    Capitalization..........................................  17
Section 3.15.    Capital Stock of Subsidiaries...........................  18
Section 3.16.    Litigation..............................................  18
Section 3.17.    Insurance...............................................  19
Section 3.18.    Title to and Condition of Properties....................  19
Section 3.19.    Leases..................................................  21
 

                                      -i-
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                                                                          ----

Section 3.20.    Contracts and Commitments...............................  21
Section 3.21.    Labor Matters...........................................  23
Section 3.22.    No Change of Control Puts...............................  23
Section 3.23.    Employment and Labor Contracts..........................  23
Section 3.24.    Intellectual Property Rights............................  23
Section 3.25.    Taxes...................................................  24
Section 3.26.    Employee Benefit Plans; ERISA...........................  26
Section 3.27.    Environmental Matters...................................  30
Section 3.28.    Directors, Officers and Compensation
                      of Employees.......................................  34
Section 3.29.    Banks...................................................  34
Section 3.30.    Disclosure..............................................  35
Section 3.31.    Institutional Pharmacy Business.........................  35

                                   ARTICLE IV

                   REPRESENTATIONS AND WARRANTIES OF GRANCARE
 
Section 4.01.    Organization and Qualification..........................  36
Section 4.02.    Authority Relative to This Agreement....................  37
Section 4.03.    Consents, No Conflicts..................................  38
Section 4.04.    Board Recommendation....................................  39
Section 4.05.    State Antitakeover Statutes.............................  39
Section 4.06.    No Existing Violation, Default, Etc.....................  39
Section 4.07.    Affiliates..............................................  40
Section 4.08.    Licenses and Permits....................................  40
Section 4.09.    Registration Statement; Proxy
                      Statement; SNFCo Registration
                      Documents..........................................  41
Section 4.10.    Finders or Brokers......................................  42
Section 4.11.    SEC Filings.............................................  42
Section 4.12.    Financial Statements....................................  43
Section 4.13.    Absence of Undisclosed Liabilities......................  43
Section 4.14.    Absence of Changes or Events............................  43
Section 4.15.    Capitalization..........................................  44
Section 4.16.    Capital Stock of Subsidiaries...........................  46
Section 4.17.    Litigation..............................................  46
Section 4.18.    Insurance...............................................  47
Section 4.19.    Title to and Condition of Properties....................  47
Section 4.20.    Leases..................................................  49
Section 4.21.    Contracts and Commitments...............................  49
Section 4.22.    Labor Matters...........................................  51
Section 4.23.    No Change of Control Puts...............................  51
Section 4.24.    Employment and Labor Contracts..........................  51
Section 4.25.    Intellectual Property Rights............................  52
Section 4.26.    Taxes...................................................  52
Section 4.27.    Employee Benefit Plans; ERISA...........................  54
Section 4.28.    Environmental Matters...................................  58
Section 4.29.    Directors, Officers and Compensation
                       of Employees......................................  61
 

                                      -ii-
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                                                                          ----

Section 4.30.    Banks...................................................  61
Section 4.31.    Disclosure..............................................  61
Section 4.32.    Institutional Pharmacy Business.........................  61
Section 4.33.    Fairness Opinion........................................  62
Section 4.34.    Sufficiency of Assets...................................  63

                                   ARTICLE V

                                   COVENANTS
 
Section 5.01.    Conduct of Business of GranCare.........................  63
Section 5.02.    Conduct of Business of Vitalink.........................  67
Section 5.03.    No Solicitation by GranCare.............................  70
Section 5.04.    No Solicitation by Vitalink.............................  71
Section 5.05.    Access to Information...................................  72
Section 5.06.    Registration Statement and
                      Proxy Statement....................................  73
Section 5.07.    Commercially Reasonable Efforts;
                      Other Actions......................................  73
Section 5.08.    Public Announcements....................................  74
Section 5.09.    Notification of Certain Matters.........................  74
Section 5.10.    Indemnification.........................................  74
Section 5.11.    Expenses................................................  75
Section 5.12.    Stock Exchange Listings.................................  75
Section 5.13.    GranCare and Subsidiary Actions.........................  76
Section 5.14.    Vitalink and Subsidiary Actions.........................  76
Section 5.15.    Environmental Matters...................................  76
Section 5.16.    Actions Regarding Outstanding Debt......................  77

                                   ARTICLE VI

                         CONDITIONS TO THE OBLIGATIONS
                            OF VITALINK AND GRANCARE
 
Section 6.01.    Registration Statements.................................  77
Section 6.02.    Stockholder Approval....................................  77
Section 6.03.    Listings................................................  78
Section 6.04.    Certain Proceedings.....................................  78
Section 6.05.    Consents and Approvals..................................  78
Section 6.06.    Distribution............................................  78
Section 6.07.    Dissenting Shares.......................................  78
Section 6.08.    Opinions................................................  79
Section 6.09.    Existing Indebtedness...................................  79

                                  ARTICLE VII

                   CONDITIONS TO THE OBLIGATIONS OF VITALINK
 
Section 7.01.    Representations and Warranties True.....................  79
Section 7.02.    Performance.............................................  80
 

                                     -iii-
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                                                                          ----

Section 7.03.    Certificates............................................  80
Section 7.04.    Material Adverse Change.................................  80
Section 7.05.    Pharmacy Financial Statements...........................  80
Section 7.06.    Auditors' Letter........................................  81

                                  ARTICLE VIII

                   CONDITIONS TO THE OBLIGATIONS OF GRANCARE
 
Section 8.01.    Representations and Warranties True.....................  81
Section 8.02.    Performance.............................................  81
Section 8.03.    Certificates............................................  81
Section 8.04.    Material Adverse Change.................................  81
Section 8.05.    Shareholders' Agreement.................................  82
Section 8.06.    Auditors' Letter........................................  82

                                   ARTICLE IX

                                    CLOSING

Section 9.01.    Time and Place..........................................  82
Section 9.02.    Filings at the Closing..................................  82

                                   ARTICLE X

                          TERMINATION AND ABANDONMENT
 
Section 10.01.   Termination.............................................  82
Section 10.02.   Termination by Vitalink.................................  83
Section 10.03.   Termination by GranCare.................................  84
Section 10.04.   Procedure for Termination...............................  86
Section 10.05.   Effect of Termination and Abandonment...................  86

                                   ARTICLE XI

                                  DEFINITIONS

Section 11.01.   Terms Defined in This Agreement..........................  89

                                  ARTICLE XII

                                 MISCELLANEOUS
 
Section 12.01.   Amendment and Modification..............................  91
Section 12.02.   Waiver of Compliance; Consents..........................  92
Section 12.03.   Survivability; Investigations...........................  92
Section 12.04.   Notices.................................................  92
Section 12.05.   Assignment..............................................  93
Section 12.06.   Governing Law...........................................  94
Section 12.07.   Counterparts............................................  94
 

                                      -iv-
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                                                                          Page
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Section 12.08.    Severability...........................................  94
Section 12.09.    Interpretation.........................................  94
Section 12.10.    Entire Agreement.......................................  94
 
Signatures............................................................... S-1
 
EXHIBITS

     Exhibit A    Form of Distribution Agreement
     Exhibit B    Form of Voting Agreement
     Exhibit C    Form of Affiliate Letter
     Exhibit D    Shareholders Agreement
     Exhibit E    List of Directors
     Exhibit F    List of Officers
     Exhibit G    Opinions

                                      -v-
<PAGE>
 
                          AGREEMENT AND PLAN OF MERGER
                          ----------------------------


          AGREEMENT AND PLAN OF MERGER, dated as of September 3, 1996 (the
"Agreement"), by and between Vitalink Pharmacy Services, Inc., a Delaware
corporation ("Vitalink"), and GranCare, Inc., a California corporation
("GranCare").  Vitalink and GranCare are hereinafter sometimes collectively
referred to as the "Constituent Corporations."

                                    RECITALS

          WHEREAS, Vitalink and GranCare desire to combine their respective
pharmacy businesses, and Vitalink does not want to own the Skilled Nursing
Businesses (as hereinafter defined) of GranCare;

          WHEREAS, prior to the Merger (as hereinafter defined), GranCare and
its Subsidiaries (as hereinafter defined) will transfer on the terms and subject
to the conditions set forth in the Distribution Agreement between GranCare and a
previously existing corporation ("SNFCo") in the form attached hereto as Exhibit
A (including the Ancillary Agreements as defined therein, the "Distribution
Agreement"), all of the Skilled Nursing Assets and Skilled Nursing Liabilities
of GranCare and its Subsidiaries (each as defined in the Distribution Agreement)
to SNFCo (the "Restructuring"); following which all of the capital stock of
SNFCo (the "SNFCo Stock") will be distributed (the "Distribution") immediately
prior to the Merger to the shareholders of GranCare.

          WHEREAS, after the Distribution GranCare will own only the
Institutional Pharmacy Assets, and be subject only to the Institutional Pharmacy
Liabilities (each as defined in the Distribution Agreement);

          WHEREAS, the Board of Directors of GranCare has determined that the
Merger and the Distribution are advisable on the terms and conditions contained
in this Agreement and the Distribution Agreement, and that each of the other
transactions contemplated herein or in the Distribution Agreement is consistent
with and in furtherance of the long-term business strategy of GranCare and is
fair to, and in the best interests of, GranCare and GranCare's shareholders, and
has approved and adopted this Agreement and the Distribution Agreement and each
of the other transactions contemplated herein and intends to  recommend the
approval and adoption of this Agreement and the Distribution Agreement by the
shareholders of GranCare;
<PAGE>
 
                                      -2-


          WHEREAS, the Board of Directors of Vitalink has determined that the
Merger is advisable on the terms and conditions contained in this Agreement and
that each of the other transactions contemplated herein is consistent with and
in furtherance of the long-term business strategy of Vitalink and is fair to,
and in the best interests of, Vitalink and Vitalink's shareholders, and has
approved and adopted this Agreement and each of the other transactions
contemplated herein and intends to recommend the approval and adoption of this
Agreement by the shareholders of Vitalink;

          WHEREAS, Manor Care, Inc., a Delaware corporation, and Vitalink's
majority stockholder ("Parent"), has committed to vote in favor of approving
this Agreement and the transactions contemplated hereby and has agreed not to
approve or support any competing transaction, all as provided in the form
attached hereto as Exhibit B (the "Voting Agreement");

          WHEREAS, Vitalink and GranCare intend that at the Effective Time (as
hereinafter defined) the Board of Directors of Vitalink shall consist equally of
individuals designated by Vitalink and by GranCare and that the Chief Executive
Officer of GranCare shall become the Chief Executive Officer of Vitalink; and

          WHEREAS, Vitalink and GranCare desire to make certain representations,
warranties, covenants and agreements in connection with the merger of Vitalink
and GranCare and the Distribution by GranCare.

          NOW, THEREFORE, in consideration of the premises and the mutual
representations, warranties, covenants, agreements and conditions contained
herein, the parties hereto agree as follows:

                                   ARTICLE I.

                                   THE MERGER

          Section 1.01   The Merger.  (a)  In accordance with the provisions of
                         ----------                                            
this Agreement, the General Corporation Law of the State of Delaware (the
"Delaware Act") and the General Corporation Law of the State of California (the
"California Act"), at the Effective Time, GranCare shall be merged (the
"Merger") with and into Vitalink, and Vitalink shall be the surviving
corporation (hereinafter sometimes called the "Surviving Corporation") and shall
continue its corporate existence under the laws of the State of Delaware.  At
the Effective Time the separate existence of GranCare shall cease.
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                                      -3-

          (b)  The Merger shall have the effects on Vitalink and GranCare as
constituent corporations of the Merger as provided under the Delaware Act and
the California Act.

          Section 1.02  Effective Time.  Following filing of the certificate of
                        --------------                                         
satisfaction with the Franchise Tax Board in accordance with the provisions of
(S) 1103 of the California Act and the Bank and Corporation Tax Law, the filing
of a certified copy of this Agreement, in the form required by and executed in
accordance with the California Act, with the Secretary of State of the State of
California in accordance with the provisions of (S) 1108 of the California Act
(the "Certified Agreement"), the Merger shall become effective at the time of
filing of, or at such later time specified in, a certificate of merger, in the
form required by and executed in accordance with the Delaware Act, with the
Secretary of State of the State of Delaware in accordance with the provisions of
(S) 252 of the Delaware Act (the "Certificate of Merger").  The date and time
when the Merger shall become effective is herein referred to as the "Effective
Time."

          Section 1.03  Certificate of Incorporation and By-Laws of Surviving
                        -----------------------------------------------------
Corporation.  (a) The Certificate of Incorporation of Vitalink, as in effect
-----------                                                                
immediately prior to the Effective Time, shall be the Certificate of
Incorporation of the Surviving Corporation until thereafter amended as provided
by law; provided, however, that if prior to the Effective Time the stockholders
        --------  -------                                                      
of Vitalink shall have approved an increase in the number of authorized shares
of Common Stock from 30,000,000 to 80,000,000, then Article 4 of the Certificate
of Incorporation shall read as follows:  "4.  The total number of shares which
this corporation shall have authority to issue is 90,000,000 shares, consisting
of 10,000,000 shares of Preferred Stock, par value $.01 per share (the
"Preferred Stock") and 80,000,000 shares of Common Stock, par value $.01 per
share (the "Common Stock")" (the "Amendment").

          (b)  The By-Laws of Vitalink, as in effect immediately prior to the
Effective Time, shall be the By-Laws of the Surviving Corporation until
thereafter amended as provided by law.

          Section 1.04  Directors and Officers of Surviving Corporation.  The
                        -----------------------------------------------      
individuals identified on Exhibit E shall comprise all of the members of the
Board of Directors of the Surviving Corporation at the Effective Time.  The
individuals identified on Exhibit F shall comprise all of the senior officers of
the Surviving Corporation at the Effective Time and shall hold the positions set
forth opposite their names.
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                                      -4-

          Section 1.05  Stockholders' Meeting.  (a)  GranCare will take all
                        ---------------------                              
action necessary in accordance with applicable law and its Restated Articles of
Incorporation and By-Laws to convene a special meeting of its stockholders (the
"Special Meeting") as soon as practicable to consider and vote upon the approval
of this Agreement, the Distribution Agreement and the other transactions
contemplated by this Agreement and the Distribution Agreement.  GranCare,
through its Board of Directors, shall recommend to its stockholders approval of
this Agreement, the Distribution Agreement and the other transactions
contemplated by this Agreement and the Distribution Agreement (which
recommendation shall be contained in the Proxy Statement (as hereinafter
defined)) and shall use all commercially reasonable efforts to solicit from its
stockholders proxies in favor of approval and adoption of this Agreement, the
Distribution Agreement and the other transactions contemplated by this Agreement
and the Distribution Agreement.  GranCare's Board of Directors shall not
withdraw, change, modify in any manner or take action inconsistent with its
recommendation of the Distribution, the Distribution Agreement, the Merger, this
Agreement or the other transactions contemplated hereby or thereby and shall not
resolve to do any of the foregoing and publicly disclose such resolution;
provided, however, that GranCare's Board of Directors may withdraw, change,
--------  -------                                                          
modify in any manner or take action inconsistent with such recommendation or
resolve to do any of the foregoing and publicly disclose such resolution in the
event that there is an unsolicited written proposal for a GranCare Acquisition
Transaction from a bona fide financially capable third party only if (i) three
business days' written notice shall have been given to Vitalink; (ii) GranCare's
Board of Directors shall have been advised (A) in writing by its investment
banker that such third party is financially capable of consummating a GranCare
Acquisition Transaction that would yield a higher value to GranCare's
stockholders than will the Merger and (B) by the written opinion of outside
counsel to GranCare that recommending this Agreement to the stockholders of
GranCare or failing to take the action proposed would be inconsistent with
GranCare's Board of Directors' fiduciary duties to such stockholders (in
providing such opinion  GranCare's counsel may assume that California law is not
materially different from Delaware law); and (iii) after weighing such advice,
GranCare's Board of Directors shall determine that failure to take the proposed
action would be inconsistent with such Board of Directors' fiduciary duties.

          (b)  Vitalink will take all action necessary in accordance with
applicable law and its Certificate of Incorporation and By-Laws to obtain as
soon as practicable the approval of its stockholders of this Agreement and the
transactions contemplated hereby through, at the election of Vitalink, written
consents or a
<PAGE>
 
                                      -5-

stockholders meeting (the "Stockholder  Approval").  Vitalink, through its Board
of Directors, shall recommend to its stockholders approval of this Agreement
(which recommendation shall be contained in the Vitalink Information Statement
(as hereinafter defined)) and the transactions contemplated hereby, including
the Amendment.

          Section 1.06  Filing of Certificate of Merger.  At the Closing (as
                        -------------------------------                     
hereinafter defined), Vitalink and GranCare shall cause a Certificate of Merger
to be executed and filed with the Secretary of State of the State of Delaware as
provided in (S) 252 of the Delaware Act and the Certified Agreement to be
executed and filed with the Secretary of State of the State of California as
provided in (S) 1108 of the California Act, and shall take any and all other
lawful actions and do any and all other lawful things to cause the Merger to
become effective.

          Section 1.07  Further Assurances. If, at any time after the Effective
                        ------------------
Time, the Surviving Corporation shall consider or be advised that any deeds,
bills of sale, assignments, assurances or any other actions or things are
necessary or desirable to vest, perfect or confirm of record or otherwise in the
Surviving Corporation its right, title or interest in, to or under any of the
rights, properties or assets of either of the Constituent Corporations acquired
or to be acquired by the Surviving Corporation as a result of, or in connection
with, the Merger or otherwise to carry out this Agreement, the officers and
directors of the Surviving Corporation shall be authorized to execute and
deliver, in the name and on behalf of each of the Constituent Corporations or
otherwise, all such deeds, bills of sale, assignments and assurances and to take
and do, in the name and on behalf of each of the Constituent Corporations or
otherwise, all such other actions and things as may be necessary or desirable to
vest, perfect or confirm any and all right, title and interest in, to and under
such rights, properties or assets in the Surviving Corporation or otherwise to
carry out this Agreement.

                                  ARTICLE II.

                              CONVERSION OF SHARES

          Section 2.01  Shares.  (a)  Each share of common stock, without par
                        ------                                               
value, of GranCare (the "GranCare Common Stock") issued and outstanding
immediately prior to the Effective Time (except for Dissenting Shares (as
hereinafter defined), shares owned by GranCare as treasury stock or shares owned
by any Subsidiary of GranCare) shall, by virtue of the Merger and without any
action on the part of the holder thereof, be converted into the right to receive
 .478 of one share (the "Exchange Ratio") of common stock,

<PAGE>
 
                                      -6-

par value $.01 per share, of Vitalink ("Vitalink Common Stock").  The shares of
Vitalink Common Stock delivered in exchange for shares of GranCare Common Stock
pursuant to this Section 2.01(a) are hereinafter sometimes called the "Closing
Consideration."  In the event of any change in Vitalink Common Stock or GranCare
Common Stock by reason of any stock split, readjustment, stock dividend,
exchange of shares, reclassification, recapitalization or otherwise (other than
the Distribution), the Exchange Ratio shall be correspondingly adjusted.

          (b)  All shares of GranCare Common Stock, by virtue of the Merger and
without any action on the part of the holders thereof, shall no longer be
outstanding and shall be cancelled and retired and shall cease to exist, and
each holder of a certificate representing any such shares of GranCare Common
Stock shall thereafter cease to have any rights with respect to such shares of
GranCare Common Stock, except the right to receive the Closing Consideration for
such shares of GranCare Common Stock as specified in the foregoing clause (a)
upon the surrender of such certificate in accordance with Section 2.02 and the
right to receive the SNFCo capital stock distributed with respect to such shares
of GranCare Common Stock in accordance with the terms of the Distribution
Agreement.

          (c)  Notwithstanding anything in this Agreement to the contrary,
shares of GranCare Common Stock which are outstanding immediately prior to the
Effective Time and which are held by stockholders who (i) shall not have voted
such shares in favor of the Merger and (ii) shall have delivered the
certificates representing such shares marked to indicate such shares are
dissenting shares or a written demand for appraisal  of such shares in the
manner provided in Sections 1300 and 1302 of the California Act (the "Dissenting
Shares") shall not be converted as described in Section 2.01(a), but instead the
holders thereof shall be entitled to payment of the appraised value of such
shares in accordance with the provisions of such Section 1300.

          Section 2.02  Exchange of Shares.  (a)  Promptly after the Effective
                        ------------------                                    
Time, Vitalink shall mail to each record holder, as of the Effective Time, of an
outstanding certificate or certificates which immediately prior to the Effective
Time represented shares of GranCare Common Stock (the "Certificates") a form
letter of transmittal (which shall specify that delivery shall be effected, and
risk of loss and title to the Certificates shall pass, only upon proper delivery
of the Certificates to Vitalink) and instructions for use in effecting the
surrender of the Certificates for exchange thereof.  Upon surrender to Vitalink
of a Certificate, together with such letter of transmittal duly
<PAGE>
 
                                      -7-

executed, the holder of such Certificate shall be entitled to receive in
exchange therefor that number of shares of Vitalink Common Stock which such
holder has the right to receive under this Article II, and such Certificate
shall forthwith be cancelled.  If any shares of Vitalink Common Stock are to be
issued to a person other than the person in whose name the Certificate
surrendered is registered, it shall be a condition of exchange that the
Certificate so surrendered shall be properly endorsed or otherwise in proper
form for transfer and that the person requesting such exchange shall pay any
transfer or other taxes required by reason of the exchange of the Certificate
surrendered to a person other than the registered holder or such person shall
establish to the satisfaction of the Surviving Corporation that such tax has
been paid or is not applicable.  Until surrendered in accordance with the
provisions of this Section 2.02, each Certificate shall represent, for all
purposes, the right to receive the Closing Consideration in respect of the
number of shares of GranCare Common Stock evidenced by such Certificate, without
any interest thereon.

          (b)  From and after the Effective Time there shall be no transfers on
the stock transfer books of the Surviving   Corporation of the shares of
GranCare Common Stock which were outstanding immediately prior to the Effective
Time.  If, after the Effective Time, Certificates are presented to the Surviving
Corporation, they shall be cancelled and exchanged as provided in this Article
II.

          (c)  The Surviving Corporation shall not be liable to any holder of
shares of GranCare Common Stock delivered to a public official pursuant to any
applicable abandoned property, escheat or similar law.

          Section 2.03  Effect on GranCare Options.  (a)  As of the Effective
                        --------------------------                           
Time, by virtue of the Merger and without any action on the part of the holders
thereof, each option to purchase shares of GranCare Common Stock that is
outstanding under the GranCare Plans (as hereinafter defined) immediately prior
to the Effective Time, whether or not exercisable, shall be assumed by Vitalink
and each such option shall be exercisable upon the same terms and conditions as
under the applicable GranCare Plan and the applicable option agreement issued
thereunder, except that (i) each such option shall be exercisable for that
number of shares of Vitalink Common Stock (rounded in accordance with
established mathematical convention to the nearest whole share) into which the
number of shares of GranCare Common Stock subject to such option immediately
prior to the Effective Time determined after giving effect to the adjustments
set forth in the Employee Benefit Agreement (as defined
<PAGE>
 
                                      -8-

in the Distribution Agreement), would be converted under Section 2.01(a) if such
option were exercised prior to the Effective Time, and (ii) the option price per
share of Vitalink Common Stock determined after giving effect to the adjustments
set forth in the Employee Benefit Matters Agreement (as defined in the
Distribution Agreement), shall be an amount equal to such adjusted option price
per share of GranCare Common Stock subject to such option in effect immediately
prior to the Effective Time divided by the Exchange Ratio (rounded in accordance
with established mathematical convention to the nearest whole cent).

          (b)  Prior to the Effective Time, GranCare shall (i) obtain any
consents from holders of outstanding options to purchase GranCare Common Stock
granted under the GranCare Plans and (ii) make any amendments to the terms of
the GranCare Plans or any award granted thereunder that are necessary to give
effect to the transactions contemplated by this Section 2.03 and the Employee
Benefits Matters Agreement referred to in clause (a) above.

          Section 2.04  Fractional Shares.  Notwithstanding any other provision
                        -----------------                                      
of this Agreement, each holder of shares of GranCare Common Stock who upon
surrender of Certificates would be entitled to receive a fraction of a share of
Vitalink Common Stock shall not be entitled to receive any dividends on or vote
such fractional share and shall receive, in lieu of such fractional share, cash
in an amount equal to such fraction multiplied by the Average Market Value.
"Average Market Value" shall mean the arithmetic average of the last reported
sale price per share of Vitalink Common Stock as reported on the National
Association of Securities Dealers Automated Quotation System (NASDAQ) ("Nasdaq")
for the fifteen (15) consecutive trading days ending with the last trading day
prior to the scheduled date of the Special Meeting specified in the Proxy
Statement.  The fractional share interests of each GranCare stockholder will be
aggregated, and no GranCare stockholder will receive cash in an amount equal to
or greater than the value of one full share of Vitalink Common Stock.  All
references in this Agreement to shares of Vitalink Common Stock to be issued as
Closing Consideration shall be deemed to include any cash in lieu of fractional
shares payable pursuant to this Section 2.04.

                                  ARTICLE III.

                         REPRESENTATIONS AND WARRANTIES
                                  OF VITALINK

          Except as set forth in the Vitalink Disclosure Statement delivered by
Vitalink to GranCare at or prior to the execution of this Agreement (the
"Vitalink Disclosure Statement") (each section
<PAGE>
 
                                      -9-

of which qualifies the correspondingly numbered representation and warranty and
covenant), Vitalink represents and warrants to GranCare as follows:

          Section 3.01  Organization and Qualification.  Each of Vitalink and
                        ------------------------------                       
its Subsidiaries is a corporation duly organized, validly existing and in good
standing under the laws of the jurisdiction of its incorporation and has the
corporate power and authority to own, lease and operate its properties and to
conduct its business as described in the Vitalink SEC Reports (as hereinafter
defined).  Each of Vitalink and its Subsidiaries is duly qualified to transact
business as a foreign corporation and is in good standing in each jurisdiction
in which the conduct of its business or the ownership, leasing or operation of
its property requires such qualification, except for failures to be so qualified
or in good standing which would not, singly or in the aggregate with all such
other failures, have an Vitalink Material Adverse Effect.  "Vitalink Material
Adverse Effect" means, (i) with respect to any event, occurrence, failure of
event or occurrence, change, effect, state of affairs, breach, default,
violation, fine, penalty or  failure to comply (each, a "circumstance"),
individually or taken together with all other circumstances contemplated by or
in connection with any or all of the representations and warranties made in this
Agreement, a material adverse effect on the business, properties, assets,
condition (financial or otherwise), results of operations or prospects of
Vitalink and its Subsidiaries, taken as a whole or (ii) circumstances resulting
in the impairment of Vitalink's ability to perform its obligations under this
Agreement and to consummate the transactions contemplated hereby.  Neither
Vitalink nor any of its Subsidiaries is in violation of any of the provisions of
its certificate of incorporation (or other applicable charter document) or By-
Laws.  True and complete copies of the Certificate of Incorporation and By-Laws,
as currently in effect, of Vitalink and of each Subsidiary of Vitalink have been
previously delivered or made available to GranCare.  No amendments to the
articles of incorporation (or other similar charter documents) and By-Laws of
Vitalink have been authorized since December 31, 1995.

          Section 3.02  Authority Relative to This Agreement. Vitalink has full
                        ------------------------------------
corporate power and authority to execute and deliver this Agreement and, upon
obtaining the approval of a majority of the outstanding shares of Vitalink
Common Stock through the Stockholder Approval to consummate the Merger and the
other transactions contemplated hereby. The execution and delivery of this
Agreement and the consummation of the Merger and the other transactions
contemplated hereby have been duly and validly authorized by the Board of
Directors of Vitalink and no other corporate proceedings on the part of Vitalink
are necessary to
<PAGE>
 
                                      -10-

authorize this Agreement or to consummate the Merger and the other transactions
contemplated hereby (other than, with respect to the Merger, the Amendment and
the issuance of the additional Vitalink Common Stock at the Effective Time, the
approval of a majority of the outstanding shares of Vitalink Common Stock).
This Agreement has been duly and validly executed and delivered by Vitalink and,
assuming the due authorization, execution and delivery hereof by GranCare,
constitutes a valid and binding agreement of Vitalink, enforceable against
Vitalink in accordance with its terms, except to the extent that its
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other laws affecting the enforcement of creditors'
rights generally or by general equitable principles.

          Section 3.03  Consents, No Conflicts.  (a)  Except for the filings of
                        ----------------------                                 
the Certificate of Merger, the Certified  Agreement and the Vitalink Information
Statement (as hereinafter defined), the filing and effectiveness of the
Registration Statement (as hereinafter defined) and the filings required under
and in connection with the applicable requirements of the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended (the "HSR Act"), and filings
required pursuant to any state securities or "blue sky" laws, no filing or
registration with, notification or disclosure to, or permit, authorization,
consent or approval of, (i) any court, (ii) any government agency or body or
(iii) any third party, whether acting in an individual, fiduciary or other
capacity, is required for the consummation by Vitalink of the Merger, the
adoption of the Amendment or the other transactions contemplated hereby except
such as are set forth in Section 3.03(a) of the Vitalink Disclosure Statement,
which will have been obtained or made prior to the Effective Time and will then
be in full force and effect or which would not, singly or in the aggregate with
all other such consents which have not been obtained, have an Vitalink Material
Adverse Effect.

          (b)  The execution, delivery and performance of this Agreement, the
consummation of the Merger, the adoption of the Amendment and the other
transactions contemplated hereby and compliance by Vitalink with any of the
provisions hereof do not and will not (i) subject to obtaining the approval of a
majority of the outstanding shares of Vitalink Common Stock, conflict with or
result in any breach or violation of any provision of the Certificate of
Incorporation (or other comparable charter documents) or By-Laws of Vitalink or
any of its Subsidiaries, (ii) result in (1) a breach or violation of, a default
under or an event triggering any payment or other obligation pursuant to any of
Vitalink's existing pension plans, welfare plans, multiemployer plans, employee
benefit plans, benefit arrangements or similar
<PAGE>
 
                                      -11-

plans, arrangements or policies including bonus, incentive, deferred
compensation, stock purchase, stock option, stock appreciation right, health or
group insurance, severance pay, retirement or other benefit plans, and all
similar arrangements or policies of Vitalink and its Subsidiaries (the "Vitalink
Compensation and Benefit Plans") or any grant or award made under any of the
foregoing, (2) a breach, violation or event triggering a right of termination
of, a default under, or the acceleration of any obligation or the creation of a
lien, pledge, security interest or other encumbrance on assets (with or without
the giving of notice or the lapse of time or both) pursuant to any provision of,
any agreement, lease of real or personal property, marketing agreement,
contract, note, mortgage, indenture, arrangement or other  obligation of
Vitalink or any of its Subsidiaries ("Vitalink Contracts") or any law, rule,
ordinance or regulation or judgment, decree, order or award to which Vitalink or
any of its Subsidiaries is subject or any governmental or non-governmental
authorization, consent, approval, registration, franchise, license or permit
under which Vitalink or any of its Subsidiaries conducts any of its business, or
(3) any other change in the rights or obligations of any party under any of the
Vitalink Contracts.

          Section 3.04  Board Recommendation.  The Board of Directors of
                        --------------------                            
Vitalink has, by a unanimous vote at a meeting of such Board duly held on
September 3, 1996, approved and adopted this Agreement, the Merger, the
Amendment and the other transactions contemplated hereby.  At such meeting, the
Board of Directors of Vitalink determined that the consideration to be paid by
Vitalink pursuant to the Merger is fair to the holders of shares of Vitalink
Common Stock and recommended that the holders of such shares approve and adopt
this Agreement, the Merger, the Amendment and the other transactions
contemplated hereby.

          Section 3.05  State Antitakeover Statutes.  Vitalink has granted all
                        ---------------------------                           
approvals and taken all other steps necessary to exempt the Merger and the other
transactions contemplated hereby from the requirements and provisions of (S) 203
of the Delaware Act and any other state antitakeover statute or regulation such
that none of the other provisions of such "business combination," "moratorium,"
"control share" or other state antitakeover statute or regulation (x) prohibits
or restricts either Vitalink's ability to perform its obligations under this
Agreement or its ability to consummate the Merger and the other transactions
contemplated hereby, (y) would have the effect of invalidating or voiding this
Agreement or any provision hereof, or (z) would subject GranCare to any material
impediment or condition in connection with the exercise of any of its rights
under this Agreement.
<PAGE>
 
                                      -12-

          Section 3.06  No Existing Violation, Default, Etc.  None of Vitalink
                        -----------------------------------                   
or its Subsidiaries is in violation (except for any violations which would not,
singly or in the aggregate with all such other violations, have an Vitalink
Material Adverse Effect) of (A) any applicable law, ordinance, administrative or
governmental rule or regulation or (B) any order, decree or judgment of any
court or governmental agency or body having jurisdiction over Vitalink or any of
its Subsidiaries.  No event of default or event that, but for the giving of
notice  or the lapse of time or both, would constitute an event of default
exists under any Vitalink Contract or any lease, permit, license or other
agreement or instrument to which Vitalink or any of its Subsidiaries is a party
or by which any of them is bound or to which any of the properties, assets or
operations of Vitalink or any of its Subsidiaries is subject (except for any
events of default or other defaults which would not, singly or in the aggregate
with all such other defaults, have an Vitalink Material Adverse Effect).

          Section 3.07  Licenses and Permits.  Each of Vitalink and its
                        --------------------                           
Subsidiaries has such certificates, permits, licenses, franchises, consents,
approvals, orders, authorizations and clearances from appropriate governmental
agencies and bodies ("Vitalink Licenses") as are necessary to own, lease or
operate its properties and to conduct its business in the manner described in
the Vitalink SEC Reports and as presently conducted and all such Vitalink
Licenses are valid and in full force and effect, other than any failure to have
any such Vitalink License or any failure of any such Vitalink License to be
valid and in full force and effect as would not, singly or in the aggregate with
all such other failures, have an Vitalink Material Adverse Effect.  Each of
Vitalink and its Subsidiaries is and, within the period of all applicable
statutes of limitation, has been in compliance with its obligations under such
Vitalink Licenses and no event has occurred that allows, or after notice or
lapse of time would allow, revocation or termination of such Vitalink Licenses,
other than any such failure to be in compliance with such obligations or any
such revocation or termination as would not, singly or in the aggregate with all
such other failures, revocations or terminations, have an Vitalink Material
Adverse Effect.  Vitalink has no knowledge of any facts or circumstances that
could reasonably be expected to result in an inability of Vitalink or any of its
Subsidiaries to renew any Vitalink License.  Neither the execution and delivery
by Vitalink of this Agreement nor the consummation of any of the transactions
contemplated herein will result in any revocation or termination of any Vitalink
License.  Set forth in Section 3.07 of the Vitalink Disclosure Statement is a
true and complete list of all Vitalink Licenses which are necessary for the
conduct of the business presently conducted by Vitalink and its Subsidiaries.
<PAGE>
 
                                      -13-

          Section 3.08  Registration Statement; Information Statement.  None of
                        ---------------------------------------------          
the information supplied by Vitalink for inclusion or incorporation by reference
in (i) the registration statement registering under the Securities Act of 1933,
as  amended, and the rules and regulations promulgated thereunder (the
"Securities Act") the Vitalink Common Stock to be issued at the Effective Time
(such registration statement as amended by any amendments thereto being referred
to herein as the "Registration Statement") or (ii) the information statement or
proxy statement to be sent to the stockholders of Vitalink in connection with
the Stockholder Approval, including all amendments and supplements thereto (the
"Vitalink Information Statement"), shall, in the case of the Registration
Statement, at (i) the time the Registration Statement becomes effective and (ii)
the Effective Time, and in the case of the Vitalink Information Statement, on
the date the Vitalink Information Statement is first mailed to stockholders, at
the date of the Stockholder Approval and at the Effective Time, contain any
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary in order to make the statements therein not
misleading.  If at any time prior to the Effective Time any event with respect
to Vitalink or any of its Subsidiaries shall occur which is required to be
described in the Registration Statement, the Vitalink Information Statement or
the Proxy Statement (as hereinafter defined), such event shall be so described,
and an amendment or supplement shall be promptly filed with the Securities and
Exchange Commission (the "SEC") and, as required by law, disseminated to the
stockholders of Vitalink and GranCare.  The Registration Statement and the
Vitalink Information Statement will (with respect to Vitalink) comply as to form
in all material respects with the applicable provisions of the Securities Act
and the Securities Exchange Act of 1934, as amended, and the rules and
regulations promulgated thereunder (the "Exchange Act"), as the case may be.

          Section 3.09  Finders or Brokers. Neither Vitalink nor any Subsidiary
                        ------------------
of Vitalink has employed any investment banker, broker, finder or intermediary
in connection with the transactions contemplated hereby who might be entitled to
a fee or any commission the receipt of which is conditioned upon consummation of
the Merger.

          Section 3.10  SEC Filings.  (a)  Vitalink has filed with the SEC all
                        -----------                                           
required forms, reports and documents required to be filed by it with the SEC
since May 31, 1992  (collectively, the "Vitalink SEC Reports"), all of which
complied as to form when filed in all material respects with the applicable
provisions of the Securities Act and the Exchange Act, as the case may be.  As
of their respective dates the Vitalink SEC Reports (including
<PAGE>
 
                                      -14-

documents incorporated by reference therein)  did not contain any 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, in light of the
circumstances under which they were made, not misleading.

          (b)  Vitalink will deliver to GranCare as soon as they become
available true and complete copies of any report or statement mailed by Vitalink
to its securityholders generally or filed by it with the SEC, in each case
subsequent to the date hereof and prior to the Effective Time.  As of their
respective dates, such reports and statements (excluding any information therein
provided by GranCare, as to which Vitalink makes no representation) will not
contain any 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, in
light of the circumstances under which they are made, not misleading and will
comply in all material respects with all applicable requirements of law.  The
audited consolidated financial statements and unaudited consolidated interim
financial statements of Vitalink and its Subsidiaries to be included or
incorporated by reference in such reports and statements will be prepared in
accordance with generally accepted accounting principles applied on a consistent
basis throughout the periods involved and will fairly present the consolidated
financial position of Vitalink and its Subsidiaries as of the dates thereof and
the consolidated results of operations and consolidated cash flow for the
periods then ended (subject, in the case of any unaudited interim financial
statements, to normal year-end adjustments and to the extent they may not
include footnotes or may be condensed or summary statements).

          Section 3.11  Financial Statements.  The audited consolidated
                        --------------------                           
financial statements and unaudited consolidated interim financial statements of
Vitalink and its Subsidiaries included or incorporated by reference in the
Vitalink SEC Reports have been prepared in accordance with generally accepted
accounting principles applied on a consistent basis during the periods involved,
and fairly presented the consolidated financial position of Vitalink and its
Subsidiaries as of the dates thereof and the consolidated results of operations
and consolidated cash flows for the periods then ended (subject, in the case of
any unaudited interim financial statements, to normal year-end adjustments and
to the extent they may not include footnotes or may be condensed or summary
statements) and such audited financial statements have been certified as such
(without exception) by Vitalink's independent accountants.
<PAGE>
 
                                      -15-

          Section 3.12  Absence of Undisclosed Liabilities.  Neither Vitalink
                        ----------------------------------                   
nor any of its Subsidiaries has any liabilities or obligations of any nature,
whether absolute, accrued, unmatured, contingent or otherwise, or any
unsatisfied judgments or any leases of personalty or realty or unusual or
extraordinary commitments, except the liabilities recorded on the Vitalink
Balance Sheet (as hereinafter defined) and the notes thereto, and except for
liabilities or obligations incurred in the ordinary course of business and
consistent with past practice since May 31, 1996 that would not, singly or in
the aggregate, be reasonably expected to have an Vitalink Material Adverse
Effect.

          Section 3.13  Absence of Changes or Events.  (a)  Since May 31, 1996
                        ----------------------------                          
(i) Vitalink and its Subsidiaries have conducted their business in the ordinary
course and have not incurred any material liability or obligation (indirect,
direct or contingent) or entered into any material oral or written agreement or
other transaction that is not in the ordinary course of business (other than the
Voting Agreement, the Shareholders Agreement (as hereinafter defined) and this
Agreement) or that could reasonably be expected to result in any Vitalink
Material Adverse Effect; (ii) neither Vitalink nor its Subsidiaries have
sustained any material loss or interference with their business or properties
from fire, flood, windstorm, accident, strike or other calamity (whether or not
covered by insurance); (iii) there has been no material change in the
indebtedness of Vitalink and its Subsidiaries, no change in the capital stock of
Vitalink and no dividend or distribution of any kind declared, paid or made by
Vitalink on any class of its capital stock; (iv) there has been no event or
condition which has caused an Vitalink Material Adverse Effect, nor any
development, occurrence or state of facts or circumstances that could, singly or
in the aggregate, reasonably be expected to result in an Vitalink Material
Adverse Effect; (v) there has been no amendment, modification or supplement to
any material term of any Vitalink Contract required to be identified in Section
3.20 of the Vitalink Disclosure Statement or any equity security; and (vi) there
has been no material change by Vitalink in its accounting principles, practices
or methods.

          (b)  Since May 31, 1996, other than in the ordinary course of business
consistent with past practice, there has not been any increase in the
compensation or other benefits payable, or which could become payable, by
Vitalink, to its officers or key employees, or any amendment of any of the
Vitalink Compensation and Benefit Plans.

          Section 3.14  Capitalization.  (a)  The authorized capital stock of
                        --------------                                       
Vitalink consists of 30,000,000 shares of Vitalink
<PAGE>
 
                                      -16-

Common Stock and 10,000,000 shares of Preferred Stock (the "Vitalink Preferred
Stock").  As of August 26, 1996, there were 13,979,700 shares of Vitalink Common
Stock and no shares of Vitalink Preferred Stock outstanding and no shares of
Vitalink Common Stock were held in Vitalink's treasury; and except for shares
which were reserved for issuance and which may have been issued pursuant to the
following sentence there have been no issuances of capital stock of Vitalink
since August 26, 1996.  As of August 26, 1996, 1,070,300 shares of Vitalink
Common Stock were reserved for issuance upon the exercise of outstanding options
and options (the "Vitalink Options") which may be granted under the stock option
plans of Vitalink (the "Vitalink Option Plans"), 100,000 shares of Vitalink
Common Stock were reserved for issuance to four former shareholders of an
acquired business, and no other shares of Vitalink Common Stock are reserved for
any purpose.  Except for the Vitalink Common Stock reserved for issuance upon
exercise of the Vitalink Options and as contemplated by this Agreement, there
are not any existing options, warrants, calls, subscriptions, or other rights or
other agreements or commitments obligating Vitalink to issue, transfer or sell
any shares of capital stock of Vitalink or any of its Subsidiaries or any other
securities convertible into or evidencing the right to subscribe for any such
shares.  There are no outstanding stock appreciation rights with respect to the
capital stock of Vitalink or any of its Subsidiaries.  All issued and
outstanding shares of Vitalink Common Stock are duly authorized and validly
issued, fully paid and nonassessable and have not been issued in violation of
(nor are any of the authorized shares of capital stock of, or other equity
interests in, Vitalink subject to) any preemptive or similar rights created by
statute, the Certificate of Incorporation or By-Laws of Vitalink or any
agreement to which Vitalink is a party or bound.  The Vitalink Common Stock to
be issued in accordance with Section 2.01 of this Agreement, when so issued,
will be duly authorized and validly issued, fully paid and nonassessable.

          (b)  There are no obligations, contingent or otherwise, of Vitalink to
(i) repurchase, redeem or otherwise acquire any shares of Vitalink Common Stock;
or (ii) provide funds to, or make any investment in (in the form of a loan,
capital contribution or otherwise), or provide any guarantee with respect to the
obligations of, any other person.  There are no agreements, arrangements or
commitments of any character (contingent or otherwise) pursuant to which any
person is or  may be entitled to receive any payment based on the revenues or
earnings, or calculated in accordance therewith, of Vitalink.  Except for the
Voting Agreement and the Shareholders Agreement (as hereinafter defined), there
are no voting trusts, proxies or other agreements or understandings to which
Vitalink is a party or by which Vitalink
<PAGE>
 
                                      -17-

is bound with respect to the voting of any shares of capital stock of Vitalink.

          (c)  Vitalink has delivered or made available to GranCare complete and
correct copies of each of the Vitalink Option Plans, including all amendments
thereto.  Section 3.14(c) of the Vitalink Disclosure Statement sets forth a
complete and correct list of all outstanding options, setting forth (i) the
exercise price of each outstanding Vitalink Option, (ii) the number of Vitalink
Options, (iii) the date of grant of each such Vitalink Option.  Section 3.14(c)
of the Vitalink Disclosure Statement sets forth a complete and correct list of
all restricted stock awards including the recipients and the number of shares of
Vitalink Common Stock received or to be received by each.

          Section 3.15  Capital Stock of Subsidiaries.  The only direct or
                        -----------------------------                     
indirect Subsidiaries of Vitalink are those listed in Section 3.15 of the
Vitalink Disclosure Statement.  Vitalink is directly or indirectly the record
(except for directors' qualifying shares as reflected in such Section 3.15) and
beneficial owner (including all such qualifying shares) of all of the
outstanding shares of capital stock of each of its Subsidiaries, there are no
proxies with respect to such shares, and there are not any existing options,
warrants, calls, subscriptions, or other rights or other agreements or
commitments obligating Vitalink or any of such Subsidiaries to issue, transfer
or sell any shares of capital stock of such Subsidiary or any other securities
convertible into or evidencing the right to subscribe for any such shares.  All
of such shares beneficially owned by Vitalink are duly authorized and validly
issued, fully paid, nonassessable and free of preemptive rights with respect
thereto and are owned by Vitalink free and clear of any claim, lien or
encumbrance of any kind with respect thereto.  Vitalink does not directly or
indirectly own any interest in any corporation, partnership, joint venture or
other business association or entity.

          Section 3.16  Litigation.  There are no pending actions, suits,
                        ----------                                       
proceedings or, to the best knowledge of Vitalink after due inquiry,
investigations by, against or affecting Vitalink, any of its Subsidiaries or any
of their  properties, assets or operations, or with respect to which Vitalink or
any of its Subsidiaries is responsible by way of indemnity or otherwise.  No
pending or, to the knowledge of Vitalink, threatened actions, suits, proceedings
or investigations by, against or affecting Vitalink, any of its Subsidiaries or
any of their properties, assets or operations, or with respect to which they are
responsible by way of indemnity or otherwise, whether or not disclosed in such
Vitalink SEC Reports, would, singly or in the aggregate with all such other
actions,
<PAGE>
 
                                      -18-

suits, investigations or proceedings, reasonably be expected to have an Vitalink
Material Adverse Effect; and, to the best knowledge of Vitalink after due
inquiry, no such actions, suits, proceedings or investigations which would
reasonably be expected to have an Vitalink Material Adverse Effect are
threatened or contemplated and there is no reasonable basis, to the best
knowledge of Vitalink after due inquiry, for any such action, suit, proceeding
or investigation whether or not threatened or contemplated.

          Section 3.17  Insurance.  Vitalink has insurance policies and fidelity
                        ---------                                               
bonds covering it and its Subsidiaries' assets, business, equipment, properties,
operations, employees, officers and directors of the type and in amounts
customarily carried by persons conducting business similar to that of Vitalink
and such Subsidiaries.  All premiums due and payable under all such policies and
bonds have been paid, and Vitalink is otherwise in full compliance with the
terms and conditions of all such policies and bonds, except where the failure to
have made payment or to be in full compliance would not, singularly or in the
aggregate with all such other failures, have an Vitalink Material Adverse
Effect.  The reserves established by Vitalink in respect of all matters as to
which Vitalink self-insures or carries retention and/or deductibles, including
for workers' medical coverage and workers' compensation, are adequate and
appropriate in light of Vitalink's experience since May 31, 1992 with respect
thereto and Vitalink is not aware, after due inquiry, of any facts or
circumstances existing as of the date hereof that could reasonably be expected
to cause such reserves to be inadequate or inappropriate.  Section 3.17 of the
Vitalink Disclosure Statement sets forth a true and complete list of all
insurance policies, including retention and/or deductible programs, and fidelity
bonds of Vitalink.

          Section 3.18  Title to and Condition of Properties.  Vitalink and its
                        ------------------------------------                   
Subsidiaries have good title to all of the real property and personal property
reflected on Vitalink's May 31, 1996 audited consolidated balance sheet
contained in  Vitalink's Form 10-K for the fiscal year ended May 31, 1996 filed
with the SEC (the "Vitalink Balance Sheet") except for property since sold or
otherwise disposed of in the ordinary course of business and consistent with
past practice.  Set forth in Section 3.18(a) of the Vitalink Disclosure
Statement is a true and complete list of all real properties owned by Vitalink
and its Subsidiaries, all of which real properties are reflected on the Vitalink
Balance Sheet.  No such real or personal property is subject to claims, liens or
other encumbrances of any kind or character, including, without limitation,
mortgages, pledges, liens, conditional sale agreements, charges, security
interests, easements, restrictive covenants,
<PAGE>
 
                                      -19-

rights of way or options, except for (i) liens for taxes not yet delinquent or
which are being contested in good faith by appropriate proceedings and in
respect of which Vitalink or its appropriate Subsidiary has set aside on its
books adequate reserves in accordance with generally accepted accounting
principles; (ii) mechanics', carriers', workers', repairers', materialmen's and
other similar statutory liens incurred in the ordinary course of business for
obligations not yet delinquent or the validity of which is being contested in
good faith by appropriate proceedings and in respect of which Vitalink or its
appropriate Subsidiary has set aside on its books adequate reserves in
accordance with generally accepted accounting principles; (iii) in the case of
real property, easements, rights of way, restrictions, minor defects or
irregularities in title that do not individually or in the aggregate have a
material adverse effect on the value or use of the real property encumbered
thereby as currently used in the operation of the business of Vitalink or its
Subsidiaries; or (iv) those which would not materially interfere with the
conduct of the business of Vitalink and its Subsidiaries or impair Vitalink's
ability to perform its obligations under this Agreement and to consummate the
transactions contemplated hereby (the encumbrances described in clauses (i)
through (iv) of this sentence, collectively, the "Vitalink Permitted
Encumbrances").  There are no eminent domain proceedings pending or, to
Vitalink's knowledge, threatened against any owned property or any material
portion thereof which proceedings (if resulting in a taking) could reasonably be
expected to have a material adverse effect on the value or use of such property
as currently used in the operation of the business of Vitalink or its
Subsidiaries.  To the knowledge of Vitalink, (i) the real properties and the
improvements located thereon (including the roof and structural portions of each
building) are in good operating order and condition, subject to ordinary wear
and tear, (ii) there are no structural, mechanical or other defects of a
material nature in  any improvements located on the real properties, (iii) all
building systems in respect of the real properties are in all material respects
in good condition and working order, subject to ordinary wear and tear, and (iv)
the real properties are served by all utilities required or necessary for the
present use thereof.  Vitalink has made available to GranCare true and correct
copies of all title insurance commitments, title insurance policies and surveys
in the possession of Vitalink or its Subsidiaries relating to its real
properties set forth in Section 3.18(a) of the Vitalink Disclosure Statement.

          Section 3.19  Leases.  There have been delivered or made available to
                        ------                                                 
GranCare true and complete copies of each lease requiring the payment of rentals
aggregating, or pursuant to which the annual rentals are reasonably expected to
be, at least $100,000
<PAGE>
 
                                      -20-

per annum pursuant to which real or personal property is held under lease by
Vitalink or any of its Subsidiaries, and true and complete copies of each lease
pursuant to which Vitalink or any of its Subsidiaries leases real or personal
property to others.  Section 3.19 of the Vitalink Disclosure Statement sets
forth a true and complete list of all such leases and such leases are the only
leases that are material to the business conducted by Vitalink and its
Subsidiaries.  All of the leases so listed are valid and subsisting and in full
force and effect with respect to Vitalink and its Subsidiaries, as the case may
be, and, to Vitalink's knowledge, with respect to any other party thereto and
Vitalink or its Subsidiaries, as the case may be, have valid leasehold interests
in all properties leased thereunder free and clear of all liens created by,
through or under Vitalink or its Subsidiaries other than Vitalink Permitted
Encumbrances.  The leased real properties are in good operating order and
condition, subject to ordinary wear and tear.

          Section 3.20  Contracts and Commitments.  Neither Vitalink nor any of
                        -------------------------                              
its Subsidiaries is a party to any existing contract, obligation or commitment
of any type in any of the following categories:

          (a)  contracts for the purchase by Vitalink or any of its Subsidiaries
     of medicines, materials, supplies or equipment which are not cancellable
     upon 30 days' or less notice and which either (i) have not been entered
     into in the ordinary course of business and consistent with past practice
     or (ii) provide for purchase prices substantially greater than those
     presently prevailing for such materials, supplies or equipment, or (iii)
     contracts obligating  Vitalink or its Subsidiaries to make capital
     expenditures in excess of $200,000;

          (b)  contracts under which Vitalink has, except by way of endorsement
     of negotiable instruments for collection in the ordinary course of business
     and consistent with past practice, become absolutely or contingently or
     otherwise liable for (i) the performance of any other person, firm or
     corporation under a contract, or (ii) the whole or any part of the
     indebtedness or liabilities of any other person, firm or corporation;

          (c)  powers of attorney outstanding from Vitalink other than as issued
     in the ordinary course of business and consistent with past practice with
     respect to customs, insurance, patent, trademark or tax matters, or to
     agents for service of process;
<PAGE>
 
                                      -21-

          (d)  contracts under which any amount payable by Vitalink is dependent
     upon, or calculated in accordance with, the revenues or profits of Vitalink
     or any of its Subsidiaries;

          (e)  contracts with any director, officer or employee of Vitalink
     other than in such person's capacity as a director, officer or employee of
     Vitalink;

          (f)  contracts which limit or restrict where Vitalink or any of its
     Subsidiaries may conduct its business or the type or line of business which
     Vitalink or any of its Subsidiaries may engage in;

          (g)  contracts with any party for the loan of money or availability of
     credit to or from Vitalink or any of its Subsidiaries (except credit
     extended by Vitalink or any of its Subsidiaries to its customers in the
     ordinary course of business and consistent with past practice); or

          (h)  any hedging, option, derivative or other similar transaction.

True and complete copies of all contracts, obligations and commitments listed in
Section 3.20 of the Vitalink Disclosure Statement have been delivered or made
available to GranCare.  All such contracts are in full force and effect.  None
of Vitalink or its Subsidiaries or, to the best of Vitalink's knowledge, any
other party is in breach of or default under any  such contracts (and no facts
or circumstances exist which could reasonably support the assertion of any such
breach or default) except for breaches and defaults by parties other than
Vitalink and its Subsidiaries which would not, singly or in the aggregate with
all other such breaches, have an Vitalink Material Adverse Effect.

          Section 3.21  Labor Matters.  None of Vitalink or its Subsidiaries is
                        -------------                                          
a party to any union contract or other collective bargaining agreement.  Each of
Vitalink and its Subsidiaries is in compliance in all material respects with all
applicable laws respecting employment and employment practices, terms and
conditions of employment, safety, wages and hours, and neither Vitalink nor any
of its Subsidiaries is engaged in any unfair labor practice.  There is no labor
strike, slowdown or stoppage pending (or, to the best knowledge of Vitalink, any
labor strike or stoppage threatened) against or affecting Vitalink or any of its
Subsidiaries.  To the best of Vitalink's knowledge, no union organizing
activities with respect to any of its or its Subsidiaries' employees are
occurring or threatened.
<PAGE>
 
                                      -22-

          Section 3.22  No Change of Control Puts.  Neither the execution and
                        -------------------------                            
delivery by Vitalink of this Agreement nor the consummation of any of the
transactions contemplated hereby gives rise to any obligation of Vitalink or any
of its Subsidiaries to, or any right of any holder of any security of Vitalink
or any of its Subsidiaries to, require Vitalink to purchase, offer to purchase,
redeem or otherwise prepay or repay any such security, or deposit any funds to
effect the same.

          Section 3.23  Employment and Labor Contracts.  Neither Vitalink nor
                        ------------------------------                       
any of its Subsidiaries is a party to any employment, management services,
consultation or other contract or agreement with any past or present officer,
director or employee or, to the best of Vitalink's knowledge, any entity
affiliated with any past or present officer, director or employee, other than
the agreements executed by employees generally, the forms of which have been
provided to GranCare.

          Section 3.24  Intellectual Property Rights.  Vitalink or its
                        ----------------------------                  
Subsidiaries own or have the right to use all Intellectual Property Rights (as
hereinafter defined) necessary to the conduct of their respective businesses.
Section 3.24 of the Vitalink Disclosure Statement contains a worldwide list of
all patents, trade names, registered and unregistered copyrights,  trademarks
and service marks, mask works and applications for the foregoing owned by
Vitalink or its Subsidiaries.  Vitalink and/or its Subsidiaries have clear and
unencumbered title to the Intellectual Property Rights set forth in such Section
3.24 and such title has not been challenged (pending or threatened) by others
except for the encumbrances listed therein.  Such Section 3.24 also contains a
list of unpatented inventions used or planned for use by Vitalink or its
Subsidiaries.  No rights or licenses to use Intellectual Property Rights have
been granted or acquired by Vitalink or its Subsidiaries.  There have been no
claims or assertions made by others that Vitalink has infringed any Intellectual
Property Rights of others by the sale of products or any other activity in the
preceding six-year period and, to the knowledge of Vitalink, there has been no
such infringement by Vitalink or any of its Subsidiaries during this period.
Vitalink has no knowledge of any infringement of Intellectual Property Rights of
Vitalink or any of its Subsidiaries by others.  All such patents, registered
trademarks, service marks and copyrights owned by Vitalink or its Subsidiaries
are in good standing, and are recorded on the public record in the name of
Vitalink or its Subsidiaries.  True and complete copies of all material listed
in Section 3.24 of the Vitalink Disclosure Statement have been delivered or made
available to GranCare.
<PAGE>
 
                                      -23-

          "Intellectual Property Rights" shall mean and include rights relating
to patents, trademarks, service marks, trade names, copyrights, mask works,
inventions, processes, trade secrets, know-how, confidentiality agreements,
consulting agreements, software and any documentation relating to the
manufacture, marketing and maintenance of products.

          Section 3.25  Taxes.  (i)  Vitalink and its Subsidiaries have prepared
                        -----                                                   
and timely filed or will timely file with the appropriate governmental agencies
all franchise, income and all other Tax (as hereinafter defined) returns and
reports (Tax returns and reports are hereinafter collectively referred to as
"Tax Returns") required to be filed by them on or before the Effective Time,
taking into account any extension of time to file granted to or obtained on
behalf of Vitalink and/or its Subsidiaries (copies of which for the past three
fiscal years have been delivered or made available to GranCare); (ii) all Taxes
of Vitalink and its Subsidiaries have been paid in full to the proper
authorities or fully accrued for with respect to fiscal periods for which there
are publicly available financial statements and otherwise on the books of
Vitalink, other than such Taxes as are being contested in good faith by
appropriate  proceedings and are adequately reserved for in accordance with
generally accepted accounting principles; (iii) all deficiencies asserted in
writing as a result of Tax examinations of federal, state and foreign income,
sales and franchise and all other Tax Returns filed by Vitalink and its
Subsidiaries have either been paid or adequately reserved for in accordance with
generally accepted accounting principles; (iv) to the best knowledge of
Vitalink, no unpaid deficiency has been asserted or assessed against Vitalink or
any of its Subsidiaries, and no examination of Vitalink or any of its
Subsidiaries is pending or threatened for any material amount of Tax by any
taxing authority (with respect to any such action, Section 3.25 of the Vitalink
Disclosure Statement sets forth the periods at issue and the category of Tax,
and the examining authority's and any corresponding revenue agents' reports
relating to the issue have been delivered or made available to GranCare); (v) no
extension of the period for assessment or collection of any Tax of Vitalink or
any of its Subsidiaries is currently in effect and no extension of time within
which to file any Tax Return of Vitalink or any of its Subsidiaries has been
requested, which Tax Return has not since been filed; (vi) no Tax liens have
been filed with respect to any Taxes of Vitalink or any of its Subsidiaries
except for property taxes which have accrued but with respect to which penalty
for nonpayment has not occurred; (vii) neither Vitalink nor any of its
Subsidiaries has agreed to make any adjustment by reason of a change in its
accounting methods that would affect the taxable income or deductions of
Vitalink or any of its Subsidiaries for any
<PAGE>
 
                                      -24-

period ending after the Effective Time; (viii) Vitalink and its Subsidiaries
have made timely payments of the Taxes required to be deducted and withheld from
the wages paid to their employees; (ix) there are no Tax sharing agreements or
arrangements under which Vitalink or any Subsidiary will have any obligation or
liability on or after the Effective Time; (x) Vitalink and its Subsidiaries have
no foreign losses as defined in Section 904(f)(2) of the Internal Revenue Code
of 1986, as amended (the "Code"); (xi) to the best knowledge of Vitalink, there
are no transfer pricing agreements made by or on behalf of Vitalink or any of
its Subsidiaries with any taxation authority; (xii) no asset of Vitalink or any
of its Subsidiaries is held in an arrangement for which partnership Tax Returns
are being filed and neither Vitalink nor any of its Subsidiaries is a partner in
any partnership; (xiii) neither Vitalink nor any of its Subsidiaries owns any
interest in any "controlled foreign corporation" (within the meaning of Section
957 of the Code), "passive foreign investment company" (within the meaning of
Section 1296 of the Code) or other entity the income of which is required to be
included in the income of Vitalink or such Subsidiary; (xiv) neither Vitalink
nor any of its Subsidiaries has made an election under Section 341(f) of the
Code; and (xv) neither Vitalink nor any of its Subsidiaries is obligated to make
any payments that would constitute excess parachute payments within the meaning
of Section 280G of the Code.

          "Tax" or "Taxes" shall mean all federal, state, local and foreign
taxes, duties, levies, charges and assessments of any nature, including social
security payments and deductibles relating to wages, salaries and benefits and
payments to subcontractors (to the extent required under applicable Tax law),
and also including all interest, penalties and additions imposed with respect to
such amounts.

          Section 3.26  Employee Benefit Plans; ERISA.  (a)  There are no
                        -----------------------------                    
"employee pension benefit plans" as defined in Section 3(2) of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), covering employees
(or former employees) employed in the United States, maintained or contributed
to by Vitalink or any of its Subsidiaries or any of their ERISA Affiliates (as
hereinafter defined), or to which Vitalink or any of its Subsidiaries or any of
their ERISA Affiliates contributes or is obligated to make payments thereunder
or otherwise may have any liability ("Vitalink Pension Benefit Plans").  For
purposes of this Agreement, "ERISA Affiliate" shall mean any person (as defined
in Section 3(9) of ERISA) that is a member of any group of persons described in
Section 414(b), (c), (m) or (o) of the Code which includes the referent person
or its Subsidiaries.
<PAGE>
 
                                      -25-

          (b)  Vitalink has delivered or made available to GranCare true and
complete copies of all "welfare benefit plans" (as defined in Section 3(1) of
ERISA) covering employees (or former employees) employed in the United States,
maintained or contributed to by Vitalink or any of its Subsidiaries ("Vitalink
Welfare Plans"), all multiemployer plans (as defined in Section 3(37) of ERISA)
covering employees (or former employees) employed in the United States to which
Vitalink or any of its Subsidiaries or any of their ERISA Affiliates is required
to make contributions or otherwise may have any liability, and, to the extent
covering employees (or former employees) employed in the United States, all
stock bonus, stock option, restricted stock, stock appreciation right, stock
purchase, bonus, incentive, deferred compensation, severance and vacation plans
maintained or contributed to by Vitalink or a Subsidiary of Vitalink.

          (c)  Vitalink and each of its Subsidiaries, and each of the Vitalink
Pension Benefit Plans and Vitalink Welfare Plans, are in compliance with the
applicable provisions of ERISA and other applicable laws except where the
failure to comply would not, singly or in the aggregate, reasonably be expected
to have an Vitalink Material Adverse Effect.

          (d)  All contributions to, and payments from, the Vitalink Pension
Benefit Plans which are required to have been made in accordance with the
Vitalink Pension Benefit Plans and, when applicable, Section 302 of ERISA or
Section 412 of the Code have been timely made except where the failure to make
such contributions or payments on a timely basis would not, singly or in the
aggregate, reasonably be expected to have an Vitalink Material Adverse Effect.

          (e)  The Vitalink Pension Benefit Plans intended to qualify under
Section 401 of the Code have been determined by the Internal Revenue Service
("IRS") to be so qualified and nothing has occurred with respect to the
operation of such Vitalink Pension Benefit Plans which would cause the loss of
such qualification or exemption or the imposition of any material liability,
penalty or tax under ERISA or the Code.  Such plans have been or will be amended
on a timely basis to comply with changes to the Code made by the Tax Reform Act
of 1986 and other applicable legislative, regulatory or administrative
requirements.

          (f)  There are (i) no investigations pending, to the best knowledge of
Vitalink, by any governmental entity involving the Vitalink Pension Benefit
Plans or Vitalink Welfare Plans, (ii) no termination proceedings involving the
Vitalink Pension Benefit Plans and (iii) no pending or, to the best of
Vitalink's knowledge,
<PAGE>
 
                                      -26-

threatened claims (other than routine claims for benefits), suits or proceedings
against any Vitalink Pension Benefit Plan or Vitalink Welfare Plan, against the
assets of any of the trusts under any Vitalink Pension Benefit Plan or Vitalink
Welfare Plan or against any fiduciary of any Vitalink Pension Benefit or
Vitalink Welfare Plan with respect to the operation of such plan or asserting
any rights or claims to benefits under any Vitalink Pension Benefit Plan or
against the assets of any trust under such plan, except for those which would
not, singly or in the aggregate, give rise to any liability which would
reasonably be expected to have an Vitalink Material Adverse Effect, nor, to the
best of Vitalink's knowledge, are there any facts which would give rise to any
liability except for those which would not, singly or in the  aggregate,
reasonably be expected to have an Vitalink Material Adverse Effect in the event
of any such investigation, claim, suit or proceeding.

          (g)  None of Vitalink, any of its Subsidiaries or any employee of the
foregoing, nor any trustee, administrator, other fiduciary or any other "party
in interest" or "disqualified person" with respect to the Vitalink Pension
Benefit Plans or Vitalink Welfare Plans, has engaged in a "prohibited
transaction" (as such term is defined in Section 4975 of the Code or Section 406
of ERISA) which would be reasonably likely to result in a tax or penalty on
Vitalink or any of its Subsidiaries under Section 4975 of the Code or Section
502(i) of ERISA, except any such event which would not, singly or in the
aggregate, reasonably be expected to have an Vitalink Material Adverse Effect.

          (h)  Neither the Vitalink Pension Benefit Plans subject to Title IV of
ERISA nor any trust created thereunder has been terminated nor have there been
any "reportable events" (as defined in Section 4043 of ERISA and the regulations
thereunder) with respect to either thereof, except any such event which would
not, singly or in the aggregate, reasonably be expected to have an Vitalink
Material Adverse Effect nor has there been any event with respect to any
Vitalink Pension Benefit Plan requiring disclosure under Section 4063(a) of
ERISA or any event with respect to any Vitalink Pension Benefit Plan requiring
disclosure under Section 4041(c)(3)(C) of ERISA, except any such event which
would not, singly or in the aggregate, reasonably be expected to have an
Vitalink Material Adverse Effect.

          (i)  Neither Vitalink nor any Subsidiary of Vitalink nor any ERISA
Affiliate has incurred any currently outstanding liability to the Pension
Benefit Guaranty Corporation (the "PBGC") or to a trustee appointed under
Section 4042(b) or (c) of ERISA other than for the payment of premiums, all of
which have been paid
<PAGE>
 
                                      -27-

when due.  No Vitalink Pension Benefit Plan has applied for, or received, a
waiver of the minimum funding standards imposed by Section 412 of the Code.  The
information supplied to the actuary by Vitalink or any of its Subsidiaries for
use in preparing the most recent actuarial report for the Vitalink Pension
Benefit Plans is complete and accurate in all material respects.

          (j)  Neither Vitalink, any of its Subsidiaries nor any of their ERISA
Affiliates has any liability (including any  contingent liability under Section
4204 of ERISA) with respect to any multiemployer plan, within the meaning of
Section 3(37) of ERISA, covering employees (or former employees) employed in the
United States.

          (k)  With respect to each of the Vitalink Pension Benefit Plans and
Vitalink Welfare Plans, true, correct and complete copies of the following
documents have been delivered or made available to GranCare:  (i) the current
plans and related trust documents, including amendments thereto, (ii) any
current summary plan descriptions, (iii) the most recent Forms 5500, financial
statements and actuarial reports, if applicable, and (iv) the most recent IRS
determination letter, if applicable.

          (l)  Neither Vitalink, any of its Subsidiaries, any organization to
which Vitalink is a successor or parent corporation, within the meaning of
Section 4069(b) of ERISA, nor any of their ERISA Affiliates has engaged in any
transaction, within the meaning of Section 4069(a) of ERISA, except where the
liability therefor would not, singly or in the aggregate, reasonably be expected
to have an Vitalink Material Adverse Effect.

          (m)  None of the Vitalink Welfare Plans maintained by Vitalink or any
of its Subsidiaries are retiree life or retiree health insurance plans which
provide for continuing benefits or coverage for any participant or any
beneficiary of a participant following termination of employment, except as may
be required under the Consolidated Omnibus Budget Reconciliation Act of 1985, as
amended ("COBRA"), or except at the expense of the participant or the
participant's beneficiary.  Vitalink and each of its Subsidiaries which maintain
a "group health plan" within the meaning of Section 5000(b)(1) of the Code have
complied with the notice and continuation requirements of Section 4980B of the
Code, COBRA, Part 6 of Subtitle B of Title I of ERISA and the regulations
thereunder except where the failure to comply would not, singly or in the
aggregate, reasonably be expected to have an Vitalink Material Adverse Effect.
<PAGE>
 
                                      -28-

          (n)  No liability under any Vitalink Pension Benefit Plan or Vitalink
Welfare Plan has been funded nor has any such obligation been satisfied with the
purchase of a contract from an insurance company as to which Vitalink or any of
its Subsidiaries has received notice that such insurance company is in
rehabilitation.

          (o)  The consummation of the transactions contemplated by this
Agreement will not result in an increase in the amount of compensation or
benefits or accelerate the vesting or timing of payment of any benefits or
compensation payable to or in respect of any employee of Vitalink or any of its
Subsidiaries.

          (p)  Vitalink has disclosed to GranCare in Section 3.26 of the
Vitalink Disclosure Statement each of Vitalink's material Foreign Plans (as
hereinafter defined) to the extent the benefits provided thereunder are not
mandated by the laws of the applicable foreign jurisdiction.  Vitalink and each
of its Subsidiaries and each of such Foreign Plans are in compliance with
applicable laws and all required contributions have been made to the Foreign
Plans, except where the failure to comply or make contributions would not,
singly or in the aggregate, reasonably be expected to have an Vitalink Material
Adverse Effect.  For purposes of this Agreement, the term "Foreign Plan" shall
mean any plan, program, policy, arrangement or agreement maintained or
contributed to by, or entered into with, a person or any of its Subsidiaries
with respect to employees (or former employees) employed outside the United
States.

          Section 3.27  Environmental Matters.  (a)  Except as would not, singly
                        ---------------------                                   
or in the aggregate with all other such non-compliances, have an Vitalink
Material Adverse Effect, Vitalink and its Subsidiaries are, and within the
period of all applicable statutes of limitation have been, in compliance with
all applicable Environmental Laws (as hereinafter defined), which compliance
includes, without limitation, the possession of all licenses, permits,
registrations and other governmental authorizations (collectively,
"Environmental Authorizations") required under applicable Environmental Laws,
and compliance with the terms and conditions thereof, and there are no
circumstances of which Vitalink is aware which may materially prevent or
interfere with compliance in the future.  To Vitalink's knowledge, all
Environmental Authorizations currently held by Vitalink and its Subsidiaries
pursuant to Environmental Laws are identified in Section 3.27(a)(1) of the
Vitalink Disclosure Statement and represent all Environmental Authorizations
necessary for the conduct of the businesses of Vitalink and its Subsidiaries as
currently conducted.  Neither Vitalink nor any of its Subsidiaries
<PAGE>
 
                                      -29-

has been notified, or has any reasonable basis to believe, that any such
Environmental Authorizations will be modified, suspended or revoked or cannot be
renewed or otherwise maintained in the ordinary course of business.  To
Vitalink's knowledge after due inquiry, the execution and delivery of this
Agreement and the consummation by Vitalink of the transactions contemplated
hereby will not affect the validity or require the transfer of any Environmental
Authorizations, and will not require any notification, registration, reporting,
filing, investigation or remediation under any Environmental Law.

          (b)  There are no Environmental Notices (as hereinafter defined) that,
singularly or in the aggregate, reasonably could be expected to have an Vitalink
Material Adverse Effect (i) pending or, to the best knowledge of Vitalink,
threatened against Vitalink or any of its Subsidiaries, (ii) to Vitalink's
knowledge pending or threatened against any person or entity whose liability for
such Environmental Notice may have been retained or assumed by or could
reasonably be imputed or attributed by law or contract to Vitalink or any of its
Subsidiaries, (iii) that to Vitalink's knowledge could subject Vitalink to any
material risk of liability, loss or damages, or (iv) that to Vitalink's
knowledge could reasonably be expected to require investigation, removal or
remedial or corrective action by Vitalink or any of its Subsidiaries.  Since May
31, 1996, neither Vitalink nor any of its Subsidiaries has received any
Environmental Notice alleging that Vitalink or any of its Subsidiaries is
subject to liability under any Environmental Law or that Vitalink or any of its
Subsidiaries is not in full compliance with Environmental Laws.

          (c)  There is no civil, criminal or administrative action, suit,
demand, claim, hearing, notice of violation, notice or demand letter or request
for information or, to the best knowledge of Vitalink, investigation pending or
threatened under any Environmental Law (i) against Vitalink or any of its
Subsidiaries, or (ii) to the knowledge of Vitalink against any person or entity
in connection with which liability could reasonably be imputed or attributed by
law or contract to Vitalink or any of its Subsidiaries, except with respect to
each of clause (i) and (ii) for such demands, claims, notices of violation,
notice or demand letters or requests for information which singly or in the
aggregate could not reasonably be expected to have a GranCare Material Adverse
Effect.

          (d)  No property or facility presently or to the knowledge of Vitalink
formerly owned, operated or leased by Vitalink or any of its present
Subsidiaries, or to the knowledge of Vitalink any of its former Subsidiaries, or
any of their respective
<PAGE>
 
                                      -30-

predecessors in interest, is listed or  proposed for listing on the National
Priorities List or the Comprehensive Environmental Response, Compensation and
Liability Information System, both promulgated under the Comprehensive
Environmental Response, Compensation and Liability Act, as amended ("CERCLA"),
or on any comparable list established under any Environmental Law, nor has
Vitalink or any of its Subsidiaries received any written notification of
potential or actual liability or any request for information under CERCLA or any
comparable foreign, state or local law.

          (e)  There has been no disposal, spill, discharge or release of any
Hazardous Materials (as hereinafter defined) generated, used, owned, stored or
controlled by Vitalink, or to Vitalink's knowledge any of its Subsidiaries or
any of their respective predecessors in interest, on, at or under any property
presently or formerly owned, leased or operated by Vitalink, or to Vitalink's
knowledge its Subsidiaries, or any predecessors in interest, and to Vitalink's
knowledge there are no Hazardous Materials located in, at, on or under, or in
the vicinity of, any such facility or property, or at any other location, that
(i) could reasonably be expected to subject Vitalink to a material risk of
liability, loss or damages, or result in the incurrence by Vitalink of costs
under Environmental Laws, (ii) could reasonably be expected to form the basis of
any Environmental Notice against or with respect to Vitalink or any of its
Subsidiaries, or against any person or entity whose liability for any
Environmental Notice may have been retained or assumed by or could be imputed or
attributed by law or contract to Vitalink or any of its Subsidiaries or (iii)
could reasonably be expected to require investigation, removal or remedial or
corrective action by Vitalink or any of its Subsidiaries, that in any case
singularly or in the aggregate, reasonably could be expected to have an Vitalink
Material Adverse Effect.

          (f)  Without in any way limiting the generality of the foregoing, to
Vitalink's knowledge (i) there are and have been no underground or aboveground
storage tanks or other storage receptacles, or related piping or other disposal
areas containing Hazardous Materials, located on, at or under property owned,
operated or leased by Vitalink, any of its Subsidiaries or any of their
respective predecessors in interest, (ii) there are and have been no
polychlorinated biphenyls located on any properties owned, operated or leased by
Vitalink or any of its Subsidiaries, and (iii) there is no asbestos contained in
or forming part of any building, building component, structure or  office space
owned, operated or leased by Vitalink or any of its Subsidiaries.
<PAGE>
 
                                      -31-

          (g)  To Vitalink's knowledge no lien has been recorded under
Environmental Laws with respect to any properties, assets or facilities owned,
operated or leased by Vitalink or any of its Subsidiaries.

          (h)  In accordance with Section 5.05, Vitalink has given GranCare and
its authorized representatives access to all records and files in its possession
or control relating to actual or potential compliance or liability issues of
Vitalink or its Subsidiaries and any of their respective predecessors in
interest under Environmental Laws, including, without limitation, all reports,
studies, analyses, tests or monitoring results pertaining to the existence of
Hazardous Material or any other environmental concern relating to properties,
assets or facilities currently or formerly owned, operated, managed, leased,
used or controlled by Vitalink or any of its Subsidiaries, or otherwise
concerning compliance with or liability under Environmental Laws.

          For purposes of this Agreement:

          (i) "Environment" shall mean any surface water, groundwater or
       drinking water supply, land surface or subsurface strata or ambient air
       and includes, without limitation, any indoor location.

          (ii) "Environmental Laws" shall mean CERCLA, the Resource
       Conservation and Recovery Act of 1976, as amended, and any other federal,
       state, local or foreign statute, rule, regulation, order, judgment,
       directive, decree or common law, as now or previously in effect and
       regulating, relating to or imposing liability or standards of conduct
       concerning air emissions, water discharges, noise emissions, the release
       or threatened release or discharge of any Hazardous Material into the
       environment, the generation, handling, treatment, storage, transport or
       disposal of any Hazardous Material or otherwise concerning pollution or
       the protection of the outdoor or indoor environment, or employee health
       or safety.  The term shall also include laws governing the transfer of
       real property that require notification, registration, reporting, filing,
       investigation or remediation prior to, concurrent with or following sale
       or transfer of control of any property, facility or establishment in
       connection with the  actual or threatened presence or release of
       Hazardous Materials at such property, facility or establishment.

          (iii)  "Environmental Notice" shall mean any written communication,
       notice or claim by any Governmental Authority
<PAGE>
 
                                      -32-

       or other third party alleging civil or criminal liability (including,
       without limitation, liability for investigatory costs, cleanup costs,
       governmental costs, compliance costs or harm, injuries or damages to any
       person, property, natural resources, or any fines or penalties) or
       alleging noncompliance arising out of, based upon, resulting from or
       relating to any Environmental Law.

          (iv) "Hazardous Material" shall mean any pollutant, contaminant or
       hazardous, toxic or dangerous waste, substance, constituent or material
       defined or regulated as such in, or for purposes of, any Environmental
       Law, including, without limitation, any medical waste, any biochemical
       waste, any asbestos, radon, any petroleum, oil (including crude oil or
       any fraction thereof), any radioactive substance, any polychlorinated
       biphenyls, any toxin, chemical, virus, infectious disease agent and any
       other substance that can give rise to liability under any Environmental
       Law.

          Section 3.28  Directors, Officers and Compensation of Employees.
                        -------------------------------------------------  
There is set forth in Section 3.28 of the Vitalink Disclosure Statement a true
and complete list showing (a) the names and addresses of all directors and
officers of Vitalink and its Subsidiaries and (b) the names of all salaried
persons whose aggregate compensation for purposes of federal income tax
reporting from Vitalink and its Subsidiaries in the fiscal year ended May 31,
1996 was, or in the fiscal year ending May 31, 1997 is expected to be, U.S.
$100,000 or more per year, together with a statement of the full amount expected
to be paid to such person for services in all capacities to be rendered in the
fiscal year ending May 31, 1997, and the basis thereof, separately including the
amounts paid or payable, or expected to be paid or payable during such fiscal
years, under bonus or incentive arrangements, if any.

          Section 3.29  Banks.  There is set forth in Section 3.29 of the
                        -----                                            
Vitalink Disclosure Statement a true and complete list showing the account
numbers and name of each bank in which Vitalink or any of its Subsidiaries has
an account or safe deposit box and the names of all persons authorized to draw
thereon or to have access thereto.

          Section 3.30  Disclosure.  No representation or warranty by Vitalink
                        ----------                                            
and no statement or information relating to Vitalink or any of its Subsidiaries
contained herein, or in any certificate furnished by or on behalf of Vitalink to
GranCare in connection herewith contains or will contain any untrue statement of
a material fact or omits or will omit to state a material fact
<PAGE>
 
                                      -33-

necessary in order to make the statements herein or therein, in light of the
circumstances under which they were made, not misleading.

          Section 3.31  Institutional Pharmacy Business.  (a) Section 3.31 of
                        -------------------------------                      
the Vitalink Disclosure Statement lists each Pharmacy utilized by Vitalink in
connection with its pharmacy business and indicates (i) the location of each
such Pharmacy and (ii) whether such Pharmacy is owned or held pursuant to a
leasehold interest.  No other person or entity has any beneficial ownership or
interest in or to any such Pharmacy nor does any other person or entity have any
right or option to acquire any beneficial ownership or interest in or to any
such Pharmacy.

          (b)  Section 3.31 of the Vitalink Disclosure Statement lists all of
the customers to which Vitalink and its Subsidiaries provide pharmacy services
pursuant to oral or written contracts.  Vitalink has not been informed and has
no reason to believe that any Vitalink Pharmacy Contract will be terminated for
or without cause.

          (c)  Vitalink has not violated, and is not now in violation of, the
Medicare and Medicaid fraud and abuse provisions of the Social Security Act, the
Civil Monetary Penalties Law of the Social Security Act, or any other federal or
state law, statute, rule or regulation relating to Vitalink and its
Subsidiaries.

          (d)  Vitalink is duly licensed to provide pharmacy services in all
states in which it does business, and is also a participant in the Medicare
program and the Medicaid programs of the states listed in Section 3.07 of the
Vitalink Disclosure Statement.  Vitalink is in compliance with all laws, rules
and regulations affecting or in connection with the Pharmacies, Vitalink and
their licenses with respect thereto and their participation in the Medicare and
Medicaid programs.

          (e)  Vitalink has delivered or made available true and correct billing
requests for reimbursement and underlying information to all governmental
programs, including but not  limited to the Medicare and Medicaid programs, in
compliance with all rules, regulations, policies and procedures of such
governmental programs and of the fiscal intermediaries of such programs.  To the
best of Vitalink's knowledge all such billings were for goods actually provided,
and at appropriate charges or costs, and Vitalink has appropriate documentation
to support such billing requests.
<PAGE>
 
                                      -34-

                                 ARTICLE IV.

                   REPRESENTATIONS AND WARRANTIES OF GRANCARE

          Except as set forth in the GranCare Disclosure Statement delivered by
GranCare to Vitalink at or prior to the execution of this Agreement (the
"GranCare Disclosure Statement") (each section of which qualifies the
correspondingly numbered representation and warranty and covenant), GranCare
represents and warrants to Vitalink as follows:

          Section 4.01  Organization and Qualification.  Each of GranCare and
                        ------------------------------                       
its Pharmacy Subsidiaries (as defined in the Distribution Agreement) is a
corporation duly organized, validly existing and in good standing under the laws
of the jurisdiction of its incorporation and has the corporate power and
authority to own, lease and operate its properties and to conduct its business
as described in the GranCare SEC Reports (as hereinafter defined).  Each of
GranCare and its Pharmacy Subsidiaries is duly qualified to transact business as
a foreign corporation and is in good standing in each jurisdiction in which the
conduct of its business or the ownership, leasing or operation of its property
requires such qualification, except for failures to be so qualified or in good
standing which would not, singly or in the aggregate with all such other
failures, have a GranCare Material Adverse Effect.  "GranCare Material Adverse
Effect" means (i) with respect to any event, occurrence, failure of event or
occurrence, change, effect, state of affairs, breach, default, violation, fine,
penalty or failure to comply (each, a "circumstance"), individually or taken
together with all other circumstances contemplated by or in connection with any
or all of the representations and warranties made in this Agreement, (a) a
material adverse effect on the business, properties, assets, condition
(financial or otherwise), results of operations or prospects of the
Institutional Pharmacy Business, taken as a whole, or (b) an impairment on the
ability of SNFCo to conduct as a going concern the Skilled Nursing Business (as
defined in the Distribution Agreement) subsequent to the Distribution or (ii)
circumstances  resulting in the impairment of GranCare's ability to perform its
obligations under this Agreement or the Distribution Agreement and to consummate
the transactions contemplated hereby and thereby.  Neither GranCare nor any of
its Pharmacy Subsidiaries is in violation of any of the provisions of its
articles of incorporation (or other applicable charter document) or by-laws.
True and complete copies of the Restated Articles of Incorporation and By-Laws,
as currently in effect, of GranCare and of each Pharmacy Subsidiary of GranCare
have been previously delivered or made available to Vitalink.  No amendments to
the articles of incorporation (or other similar charter doc-
<PAGE>
 
                                      -35-

uments) and By-Laws of GranCare have been authorized since December 31, 1995.

          Section 4.02  Authority Relative to This Agreement. GranCare has full
                        ------------------------------------ 
corporate power and authority to execute and deliver this Agreement and the
Distribution Agreement and, upon obtaining the approval of a majority of the
outstanding shares of GranCare Common Stock at the Special Meeting or or
adjournment thereof, as may be required by the California Act to consummate the
Merger, the Distribution and complete the other transactions contemplated
hereby. The execution and delivery of this Agreement and the Distribution
Agreement and the consummation of the Merger, the Distribution and the other
transactions contemplated hereby have been duly and validly authorized by the
Board of Directors of GranCare and no other corporate proceedings on the part of
GranCare are necessary to authorize this Agreement and the Distribution
Agreement or to consummate the Merger, the Distribution and the other
transactions contemplated hereby (other than, with respect to the Merger and the
Distribution, the approval of a majority of the outstanding shares of GranCare
Common Stock at the Special Meeting or any adjournment thereof as required by
the California Act and, with respect to the Distribution, the declaration by the
GranCare Board of Directors of the Distribution). This Agreement and the
Distribution Agreement have been duly and validly executed and delivered by
GranCare and, assuming, in the case of this Agreement and the Distribution
Agreement, the due authorization, execution and delivery of each such agreement
by Vitalink, constitute valid and binding agreements of GranCare, enforceable
against GranCare in accordance with their terms, except to the extent that their
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other laws affecting the enforcement of creditors'
rights generally or by general equitable principles.

          Section 4.03  Consents, No Conflicts.  (a) Except for the filings of
                        ----------------------                                
the Certificate of Merger, the Certified Agreement and the Proxy Statement, the
filing and effectiveness of the Registration Statement and the SNFCo
Registration Document (as hereinafter defined) and the filings required under
and in connection with the applicable requirements of the HSR Act, and filings
required pursuant to any state securities or "blue sky" laws, no filing or
registration with, notification or disclosure to, or permit, authorization,
consent or approval of, (i) any court, (ii) any government agency or body or
(iii) any third party, whether acting in an individual, fiduciary or other
capacity, is required for the consummation by GranCare of the Merger, the
Distribution or the other transactions contemplated hereby or by the
Distribution Agreement except such as are set forth in Section 4.03(a) of the
GranCare Disclosure Statement, which will have been
<PAGE>
 
                                      -36-

obtained or made prior to the Effective Time and will then be in full force and
effect or which would not, singly or in the aggregate with all other such
consents which have not been obtained, have a GranCare Material Adverse Effect.

          (b)  The execution, delivery and performance of this Agreement, the
Distribution Agreement, the consummation of the Distribution, the Merger and the
other transactions contemplated hereby (or thereby) and compliance by GranCare
with any of the provisions hereof (or thereof) do not and will not (i) subject
to obtaining the approval of a majority of the outstanding shares of GranCare
Common Stock at the Special Meeting or any adjournment thereof as required by
the California Act, conflict with or result in any breach or violation of any
provision of the Restated Articles of Incorporation (or other comparable charter
documents) or By-Laws of GranCare or any of its Pharmacy Subsidiaries, (ii)
result in (1) a breach or violation of, a default under or an event triggering
any payment or other obligation pursuant to any of GranCare's existing pension
plans, welfare plans, multiemployer plans, employee benefit plans, benefit
arrangements or similar plans, arrangements or policies, including bonus,
incentive, deferred compensation, stock purchase, stock option, stock
appreciation right, health or group insurance, severance pay, retirement or
other benefit plans, and all similar arrangements or policies of GranCare and
its Subsidiaries (the "GranCare Compensation and Benefit Plans") or any grant or
award made under any of the foregoing in any case for which GranCare or any of
the Pharmacy Subsidiaries would be responsible after the Distribution, (2) a
breach, violation or event triggering a right of termination of, a default
under, the acceleration of any obligation, or the  creation of a lien, pledge,
security interest or other encumbrance on assets (with or without the giving of
notice or the lapse of time or both) pursuant to any provision of any agreement,
lease of real or personal property, marketing agreement, contract, note,
mortgage, indenture, arrangement or other obligation of GranCare or any of its
Pharmacy Subsidiaries ("GranCare Contracts") or any law, rule, ordinance or
regulation or judgment, decree, order or award to which GranCare or any of its
Pharmacy Subsidiaries is subject or any governmental or non-governmental
authorization, consent, approval, registration, franchise, license or permit
under which GranCare or any of its Pharmacy Subsidiaries conducts the
Institutional Pharmacy Business, or (3) any other change in the rights or
obligations of any party under any of the GranCare Contracts.

          Section 4.04  Board Recommendation.  The Board of Directors of
                        --------------------                            
GranCare has, by a unanimous vote at a meeting of such Board duly held on
September 3, 1996, approved and adopted this
<PAGE>
 
                                      -37-

Agreement, the Distribution Agreement, the Merger and the other transactions
contemplated hereby or by the Distribution Agreement, determined that the
consideration to be received by the holders of shares of GranCare Common Stock
pursuant to the Merger is fair to the holders of such shares and recommended
that the holders of such shares approve and adopt this Agreement, the
Distribution Agreement, the Merger and the other transactions contemplated
hereby.

          Section 4.05  State Antitakeover Statutes.  GranCare has granted all
                        ---------------------------                           
approvals and taken all other steps necessary to exempt the Merger and the other
transactions contemplated hereby from the requirements and provisions of any
state antitakeover statute or regulation such that none of the provisions of
such "business combination," "moratorium," "control share," or other state
antitakeover statute or regulation (x) prohibits or restricts GranCare's ability
to perform its obligations under this Agreement or its ability to consummate the
Merger and the other transactions contemplated hereby, (y) would have the effect
of invalidating or voiding this Agreement or any provision hereof, or (z) would
subject Vitalink to any material impediment or condition in connection with the
exercise of any of their respective rights under this Agreement.

          Section 4.06  No Existing Violation, Default, Etc.  None of GranCare
                        -----------------------------------                   
or any of its Subsidiaries is in violation (except for any violations which
would not, singly or in the aggregate with all such other violations, have a
GranCare Material Adverse Effect) of (A) any applicable law, ordinance,
administrative or governmental rule or regulation or (B) any order, decree or
judgment of any court or governmental agency or body having jurisdiction over
GranCare or any of its Subsidiaries.  No event of default or event that, but for
the giving of notice or the lapse of time or both, would constitute an event of
default exists under any GranCare Contract or any lease, permit, license or
other agreement or instrument to which GranCare or any of its Subsidiaries is a
party or by which any of them is bound or to which any of the properties, assets
or operations of GranCare or any of its Subsidiaries is subject (except for any
events of default or other defaults which would not, singly or in the aggregate
with all such other defaults, have a GranCare Material Adverse Effect).

          Section 4.07  Affiliates. GranCare has delivered to Vitalink a letter
                        ---------- 
identifying all persons who, as of the date hereof, may be deemed to be
"affiliates" of GranCare for purposes of Rule 145 under the Securities Act
("Affiliates") and the written agreement of each such person, substantially in
the form of Exhibit C hereto.
<PAGE>
 
                                      -38-

          Section 4.08  Licenses and Permits.  Each of GranCare and its
                        --------------------                           
Subsidiaries has such certificates, permits, licenses, franchises, consents,
approvals, orders, authorizations and clearances from appropriate governmental
agencies and bodies ("GranCare Licenses") as are necessary to own, lease or
operate its properties and to conduct its business in the manner described in
the GranCare SEC Reports and as presently conducted and all such GranCare
Licenses are valid and in full force and effect, other than any failure to have
any such GranCare License or any failure of any such GranCare License to be
valid and in full force and effect as would not, singly or in the aggregate with
all such other failures, have a GranCare Material Adverse Effect.  Each of
GranCare and its Subsidiaries is, and within the period of all applicable
statutes of limitation has been, in compliance with its obligations under such
GranCare Licenses and no event has occurred that allows, or after notice or
lapse of time would allow, revocation or termination of such GranCare Licenses,
other than any such failure to be in compliance with such obligations or any
such revocation or termination as would not, singly or in the aggregate with all
such other failures, revocations or terminations, have a GranCare Material
Adverse Effect.  GranCare has no knowledge of any facts or circumstances that
could reasonably be expected to result in an inability of GranCare or any of its
Pharmacy Subsidiaries to renew any GranCare License.  Neither the execution and
delivery by GranCare of this Agreement or the  Distribution Agreement nor the
consummation of the Distribution, the Merger or any of the other transactions
contemplated herein will result in any revocation or termination of any GranCare
License or any requirement that the Surviving Corporation be licensed in respect
of any of the GranCare Licenses.  Set forth in Section 4.08 of the GranCare
Disclosure Statement is a true and complete list of all GranCare Licenses which
are necessary for the conduct of the Institutional Pharmacy Business as
presently conducted by GranCare and its Subsidiaries and which are, or will
subsequent to the Reorganization be, held by GranCare and the Pharmacy
Subsidiaries.

          Section 4.09  Registration Statement; Proxy Statement; SNFCo
                        ----------------------------------------------
Registration Documents.  (a)  None of the information supplied by GranCare for
----------------------                                                        
inclusion or incorporation by reference in (i) the Registration Statement, (ii)
the proxy statement/prospectus to be sent to the shareholders of GranCare in
connection with the Special Meeting, including all amendments and supplements
thereto (the "Proxy Statement"), or (iii) the Vitalink Information Statement,
including all amendments and supplements thereto, shall, in the case of the
Registration Statement, at (i) the time the Registration Statement becomes
effective and (ii) the Effective Time and, in the case of the Proxy Statement or
the Vitalink Information Statement, on the date the Proxy Statement or the
<PAGE>
 
                                      -39-

Vitalink Information Statement is first mailed to stockholders, at the time of
the Special Meeting and at the Effective Time, contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary in order to make the statements therein not misleading.  If at any
time prior to the Effective Time any event with respect to GranCare or any of
its Subsidiaries shall occur which is required to be described in the
Registration Statement, the Proxy Statement or the Vitalink Information
Statement, such event shall be so described, and an amendment or supplement
shall be promptly filed with the SEC and, as required by law, disseminated to
the shareholders of GranCare and Vitalink.  The Registration Statement and Proxy
Statement will (with respect to GranCare and its Subsidiaries) comply as to form
in all material respects with the applicable provisions of the Exchange Act.

          (b)  The Form S-1 or 10 or other appropriate filing to be made to
register the SNFCo Common Stock under the Securities Act or the Exchange Act, as
appropriate, as such filing may be, amended or supplemented (the "SNFCo
Registration Document"), will not, at the date the SNFCo Registration Document
(or any amendment or supplement thereto), at the time that the  SNFCo
Registration Document becomes effective, at the time of the Special Meeting and
at the Effective Time, contain any untrue statement of a material fact or omit
to state any material fact required to be stated therein or necessary in order
to make the statements made therein not misleading.  The SNFCo Registration
Document will comply as to form in all material respects with the applicable
provisions of the Securities Act or the Exchange Act, as the case may be.

          Section 4.10  Finders or Brokers.  Except for PaineWebber
                        ------------------                         
Incorporated, neither GranCare nor any Subsidiary of GranCare has employed any
investment banker, broker, finder or intermediary in connection with the
transactions contemplated hereby who might be entitled to a fee or any
commission the receipt of which is conditioned upon consummation of the Merger
or the Distribution.

          Section 4.11  SEC Filings.  (a)  GranCare has filed with the SEC all
                        -----------                                           
required forms, reports and documents required to be filed by it with the SEC
since December 31, 1992 (collectively, the "GranCare SEC Reports"), all of which
complied as to form when filed in all material respects with the applicable
provisions of the Securities Act and the Exchange Act, as the case may be.  As
of their respective dates the GranCare SEC Reports (including documents
incorporated by reference therein) did not contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the
<PAGE>
 
                                      -40-

statements therein, in light of the circumstances under which they were made,
not misleading.

          (b)  GranCare will deliver to Vitalink as soon as they become
available true and complete copies of any report or statement mailed by GranCare
to its securityholders generally or filed by it with the SEC, in each case
subsequent to the date hereof and prior to the Effective Time.  As of their
respective dates, such reports and statements (excluding any information therein
provided by Vitalink, as to which GranCare makes no representation) will not
contain any 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, in
light of the circumstances under which they are made, not misleading and will
comply in all material respects with all applicable requirements of law.  The
audited consolidated financial statements and unaudited consolidated interim
financial statements of GranCare and its Subsidiaries to be included or
incorporated by reference in such reports and statements will be prepared in
accordance with generally accepted  accounting principles applied on a
consistent basis throughout the periods involved and will fairly present the
consolidated financial position of GranCare and its Subsidiaries as of the dates
thereof and the consolidated results of operations and consolidated cash flow
for the periods then ended (subject, in the case of any unaudited interim
financial statements, to normal year-end adjustments and to the extent they may
not include footnotes or may be condensed or summary statements).

          Section 4.12  Financial Statements.  The audited consolidated
                        --------------------                           
financial statements and unaudited consolidated interim financial statements of
GranCare and its Subsidiaries included or incorporated by reference in the
GranCare SEC Reports and the unaudited Institutional Pharmacy Business Financial
Statements as set forth in Section 4.12 of the GranCare Disclosure Schedule have
been prepared in accordance with generally accepted accounting principles
applied on a consistent basis during the periods involved, and fairly presented
the consolidated financial position of GranCare and its Subsidiaries and the
Institutional Pharmacy Business, respectively, as of the dates thereof and the
consolidated results of operations and consolidated cash flows for the periods
then ended (subject, in the case of any unaudited interim financial statements,
to normal year-end adjustments and to the extent they may not include footnotes
or may be condensed or summary statements) and such audited financial statements
have been certified as such (without exception) by GranCare's independent
accountants.
<PAGE>
 
                                      -41-

          Section 4.13  Absence of Undisclosed Liabilities.  Neither GranCare
                        ----------------------------------                   
nor its Subsidiaries has any liabilities or obligations of any nature, whether
absolute, accrued, unmatured, contingent or otherwise, or any unsatisfied
judgments or any leases of personalty or realty or unusual or extraordinary
commitments, except the liabilities recorded on the GranCare Balance Sheet (as
hereinafter defined) and the notes thereto, and except for liabilities or
obligations incurred in the ordinary course of business and consistent with past
practice since December 31, 1995 that would not, singly or in the aggregate, be
reasonably expected to have a GranCare Material Adverse Effect.

          Section 4.14  Absence of Changes or Events.  (a)  Since December 31,
                        ----------------------------                          
1995 (i) GranCare and its Subsidiaries have conducted their business in the
ordinary course and have not incurred any material liability or obligation
(indirect, direct or contingent) or entered into any material oral or written
agreement or other transaction that is not in the ordinary course of business
(other than the Distribution Agreement and this Agreement) or that could
reasonably be expected to result in any GranCare Material Adverse Effect; (ii)
neither GranCare nor its Pharmacy Subsidiaries have sustained any material loss
or interference with their business or properties from fire, flood, windstorm,
accident, strike or other calamity (whether or not covered by insurance); (iii)
there has been no material change in the indebtedness of GranCare and its
Pharmacy Subsidiaries, no change in the authorized capital stock of GranCare and
no dividend or distribution of any kind declared, paid or made by GranCare on
any class of its capital stock other than the Distribution; (iv) there has been
no event or condition which has caused a GranCare Material Adverse Effect, nor
any development, occurrence or state of facts or circumstances that could,
singly or in the aggregate, reasonably be expected to result in a GranCare
Material Adverse Effect; (v) there has been no amendment, modification or
supplement to any material term of any GranCare Contract to which a Pharmacy
Subsidiary is a party required to be identified in Section 4.21 of the GranCare
Disclosure Statement or any equity security; and (vi) there has been no material
change by GranCare in its accounting principles, practices or methods.

          (b)  Since December 31, 1995, other than in the ordinary course of
business consistent with past practice, there has not been any increase in the
compensation or other benefits payable, or which could become payable, by
GranCare, to its officers or key employees, or any amendment of any of the
GranCare Compensation and Benefit Plans.

          Section 4.15  Capitalization.  (a)  The authorized capital stock of
                        --------------                                       
GranCare consists of 50,000,000 shares of GranCare
<PAGE>
 
                                      -42-

Common Stock and 2,000,000 shares of Preferred Stock (the "GranCare Preferred
Stock"), of which (i) 390,000 shares have been authorized as Series A
Convertible Preferred, (ii) 175,000 shares have been authorized as Series B
Mandatorily Redeemable Preferred Stock, (iii) 665,000 shares have been
authorized as Series C Convertible Preferred Stock and (iv) 4,500 shares have
been authorized as Series D Exchangeable Preferred Stock.  As of August 26,
1996, there are 23,370,693 shares of GranCare Common Stock (including shares in
respect of Evergreen Healthcare, Inc. common stock and National Heritage, Inc.
common stock for which certificates have not been tendered for exchange), no
shares of GranCare Preferred Stock outstanding and 200,100 shares of GranCare
Common Stock owned by a wholly-owned subsidiary of GranCare; and except for
shares  which were reserved for issuance and which may have been issued pursuant
to the following sentence there have been no issuances of capital stock of
GranCare since August 26, 1996.  As of August 26, 1996, 2,355,250 shares of
GranCare Common Stock were reserved for issuance upon the exercise of
outstanding options (the "GranCare Options") granted under the stock option
plans of GranCare (the "GranCare Option Plans"), 2,210,351 shares were reserved
for issuance upon conversion of GranCare's 6-1/2% Convertible Subordinated
Debentures due 2003 (the "Convertible Debentures"), 2,500 shares were committed
to be issued to employees of GranCare and its subsidiaries in recognition of 25
years of service, 304,803 shares were reserved for issuance upon the exercise of
GranCare's Series D, E and F warrants and no other shares of GranCare Common
Stock are reserved for any purpose.  Except for the foregoing, there are not any
existing options, warrants, calls, subscriptions, or other rights or other
agreements or commitments obligating GranCare to issue, transfer or sell any
shares of capital stock of GranCare or any of its Subsidiaries or any other
securities convertible into or evidencing the right to subscribe for any such
shares.  There are no outstanding stock appreciation rights with respect to the
capital stock of GranCare or any of its Subsidiaries.  All issued and
outstanding shares of GranCare Common Stock are duly authorized and validly
issued, fully paid and non-assessable and have not been issued in violation of
(nor are any of the authorized shares of capital stock of, or other equity
interests in, GranCare subject to) any preemptive or similar rights created by
statute, the Restated Articles of Incorporation or By-Laws of GranCare or any
agreement to which GranCare is a party or bound.

          (b)  There are no obligations, contingent or otherwise, of GranCare to
(i) repurchase, redeem or otherwise acquire any shares of GranCare Common Stock;
or (ii) provide funds to, or make any investment in (in the form of a loan,
capital contribution or otherwise except for transactions described in Exhibit A
to the
<PAGE>
 
                                      -43-

Distribution Agreement), or provide any guarantee with respect to the
obligations of, any other person.  There are no agreements, arrangements or
commitments of any character (contingent or otherwise) pursuant to which any
person is or may be entitled to receive any payment based on the revenues or
earnings, or calculated in accordance therewith, of GranCare.  There are no
voting trusts, proxies or other agreements or understandings to which GranCare
is a party or by which GranCare is bound with respect to the voting of any
shares of capital stock of GranCare.

          (c)  GranCare has delivered or made available to Vitalink complete and
correct copies of each of the GranCare Option Plans, including all amendments
thereto.  Section 4.15(c) of the GranCare Disclosure Statement sets forth a
complete and correct list of all outstanding options setting forth (i) the
exercise price of each outstanding GranCare Option, (ii) the number of GranCare
Options, (iii) the date of grant of each such GranCare Option.  Section 4.15(c)
of the GranCare Disclosure Statement sets forth a complete and correct list of
all restricted stock awards including the recipients and the number of shares of
GranCare Common Stock received or to be received by each.

          Section 4.16  Capital Stock of Subsidiaries.  The only direct or
                        -----------------------------                     
indirect Subsidiaries of GranCare are those listed in Section 4.16 of the
GranCare Disclosure Statement, which Section 4.16 separately sets forth the
Pharmacy Subsidiaries.  GranCare is directly or indirectly the record (except
for directors' qualifying shares as reflected in such Section 4.16) and
beneficial owner (including all such qualifying shares) of all of the
outstanding shares of capital stock of each of its Pharmacy Subsidiaries, there
are no proxies with respect to such shares, and there are not any existing
options, warrants, calls, subscriptions, or other rights or other agreements or
commitments obligating GranCare or any of such Subsidiaries to issue, transfer
or sell any shares of capital stock of such Subsidiary or any other securities
convertible into or evidencing the right to subscribe for any such shares.  All
of such shares beneficially owned by GranCare are duly authorized and validly
issued, fully paid, nonassessable and free of preemptive rights with respect
thereto and are owned by GranCare free and clear of any claim, lien or
encumbrance of any kind with respect thereto.  GranCare does not directly or
indirectly own any interest in any corporation, partnership, joint venture or
other business association or entity.

          Section 4.17  Litigation.  There are no pending actions, suits,
                        ----------                                       
proceedings or, to the best knowledge of GranCare after due inquiry,
investigations by, against or affecting GranCare, any of its Pharmacy
Subsidiaries or any of their properties, assets or
<PAGE>
 
                                      -44-

operations, or with respect to which GranCare or any of its Pharmacy
Subsidiaries is responsible by way of indemnity or otherwise.  No pending or, to
the knowledge of GranCare, threatened actions, suits, proceedings or
investigations by, against or affecting GranCare, any of its Subsidiaries or any
of their properties, assets or operations, or with respect to which they are
responsible by way of  indemnity or otherwise, whether or not disclosed in such
GranCare SEC Reports, would, singly or in the aggregate with all such other
actions, suits, investigations or proceedings, reasonably be expected to have a
GranCare Material Adverse Effect; and, to the best knowledge of GranCare after
due inquiry, no actions, suits, proceedings or investigations which would
reasonably be expected to have a GranCare Material Adverse Effect are threatened
or contemplated and there is no reasonable basis, to the best knowledge of
GranCare after due inquiry, for any such action, suit, proceeding or
investigation, whether or not threatened or contemplated.

          Section 4.18  Insurance.  GranCare has insurance policies and fidelity
                        ---------                                               
bonds covering it and its Subsidiaries' assets, business, equipment, properties,
operations, employees, officers and directors of the type and in amounts
customarily carried by persons conducting business similar to that of GranCare
and such Subsidiaries.  All premiums due and payable under all such policies and
bonds have been paid, and GranCare is otherwise in full compliance with the
terms and conditions of all such policies and bonds, except where the failure to
have made payment or to be in full compliance would not, singly or in the
aggregate with all such other failures, have a GranCare Material Adverse Effect.
The reserves established by GranCare in respect of all matters as to which
GranCare self-insures or carries retentions and/or deductibles, including for
workers' medical coverage and workers' compensation, are adequate and
appropriate in light of GranCare's experience since December 31, 1992 with
respect thereto and GranCare is not aware, after due inquiry, of any facts or
circumstances existing as of the date hereof that could reasonably be expected
to cause such reserves to be inadequate or inappropriate.  Section 4.18 of the
GranCare Disclosure Statement sets forth a true and complete list of all
insurance policies including retention and/or deductible programs, and fidelity
bonds of GranCare.

          Section 4.19  Title to and Condition of Properties. GranCare and its
                        ------------------------------------                  
Pharmacy Subsidiaries have good title to all of the real property and personal
property which is reflected on GranCare's December 31, 1995 audited consolidated
balance sheet contained in GranCare's Form 10-K for the fiscal year ended
December 31, 1995 filed with the SEC (the "GranCare Balance Sheet")
<PAGE>
 
                                      -45-

except for property since sold or otherwise disposed of in the ordinary course
of business and consistent with past practice.  Set forth in Section 4.19(a) of
the GranCare Disclosure Statement is a true and complete list of all real
properties owned by GranCare and its Pharmacy Subsidiaries and  used in
connection with the Institutional Pharmacy Business, all of which real
properties are reflected on the GranCare Balance Sheet.  No such real or
personal property is subject to claims, liens or other encumbrances of any kind
or character, including, without limitation, mortgages, pledges, liens,
conditional sale agreements, charges, security interests, easements, restrictive
covenants, rights of way or options, except for (i) liens for taxes not yet
delinquent or which are being contested in good faith by appropriate proceedings
and in respect of which GranCare or its appropriate Subsidiary has set aside on
its books adequate reserves in accordance with generally accepted accounting
principles; (ii) mechanics', carriers', workers', repairers', materialmen's and
other similar statutory liens incurred in the ordinary course of business for
obligations not yet delinquent or the validity of which are being contested in
good faith by appropriate proceedings and in respect of which GranCare or its
appropriate Subsidiary has set aside on its books adequate reserves in
accordance with generally accepted accounting principles; (iii) in the case of
real property, easements, rights of way, restrictions, minor defects or
irregularities in title that do not individually or in the aggregate have a
material adverse effect on the value or use of the real property encumbered
thereby as currently used in the operation of the business of GranCare or its
Subsidiaries; or (iv) those which would not materially interfere with the
conduct of the business of GranCare and its Pharmacy Subsidiaries or impair
GranCare's ability to perform its obligations under this Agreement and to
consummate the transactions contemplated hereby (the encumbrances described in
clauses (i) through (iv) of this sentence, collectively, the "GranCare Permitted
Encumbrances").  There are no eminent domain proceedings pending or, to the
knowledge of GranCare, threatened against any owned property or any material
portion thereof which proceedings (if resulting in a taking) could reasonably be
expected to have a material adverse effect on the value or use of such property
as currently used in the operation of the pharmacy business of GranCare or its
Subsidiaries.  To the knowledge of GranCare, (i) the real properties and the
improvements located thereon (including the roof and structural portions of each
building) are in good operating order and condition, subject to ordinary wear
and tear, (ii) there are no structural, mechanical or other defects of a
material nature in any improvements located on the real properties, (iii) all
building systems in respect of the real properties are in all material respects
in good condition and working order, subject to ordinary wear and tear, and (iv)
the real properties are served
<PAGE>
 
                                      -46-

by all utilities required or necessary for the present use thereof.  GranCare
has made available to Vitalink true and correct copies of all title insurance
commitments, title insurance policies and surveys in the possession of GranCare
or its Subsidiaries relating to the real properties set forth in Section 4.19(a)
of the GranCare Disclosure Statement.

          Section 4.20  Leases.  There have been delivered or made available to
                        ------                                                 
Vitalink true and complete copies of each lease requiring the payment of rentals
aggregating, or pursuant to which the annual rentals are reasonably expected to
be, at least $100,000 per annum pursuant to which real or personal property is
held under lease by GranCare (other than those properties held by GranCare and
utilized solely with respect to the Skilled Nursing Business) or any of its
Pharmacy Subsidiaries, and true and complete copies of each lease pursuant to
which GranCare or any of its Pharmacy Subsidiaries leases real or personal
property to others for use in a pharmacy related business.  Section 4.20 of the
GranCare Disclosure Statement sets forth a true and complete list of all such
leases and such leases are the only leases that are material to the current
operations of the Institutional Pharmacy Business.  All of the leases so listed
are valid and subsisting and in full force and effect with respect to GranCare
and the Pharmacy Subsidiaries, as the case may be, and, to GranCare's knowledge,
with respect to any other party thereto and GranCare or its Pharmacy
Subsidiaries, as the case may be, have valid leasehold interests in all
properties leased thereunder free and clear of all liens created by, through or
under GranCare or its Pharmacy Subsidiaries other than GranCare Permitted
Encumbrances.  The leased real properties are in good operating order and
condition, subject to ordinary wear and tear.

          Section 4.21  Contracts and Commitments.  Neither GranCare nor the
                        -------------------------                           
Pharmacy Subsidiaries are a party to any existing contract, obligation or
commitment of any type in any of the following categories:

          (a)  contracts for the purchase by GranCare or any of its Pharmacy
       Subsidiaries of medicine, materials, supplies or equipment which are not
       cancellable upon 30 days' or less notice and which either (i) have not
       been entered into in the ordinary course of business and consistent with
       past practice or (ii) provide for purchase prices substantially greater
       than those presently prevailing for such materials, supplies or
       equipment, or (iii) contracts obligating GranCare or any of its Pharmacy
       Subsidiaries to make capital expenditures in excess of $200,000;
<PAGE>
 
                                      -47-

          (b)  contracts under which GranCare or any Pharmacy Subsidiary has,
       except by way of endorsement of negotiable instruments for collection in
       the ordinary course of business and consistent with past practice, become
       absolutely or contingently or otherwise liable for (i) the performance of
       any other person, firm or corporation under a contract, or (ii) the whole
       or any part of the indebtedness or liabilities of any other person, firm
       or corporation, except in either case for any such contracts for which
       GranCare and its Pharmacy Subsidiaries would not be responsible after the
       Distribution;

          (c)  powers of attorney outstanding from GranCare other than as issued
       in the ordinary course of business and consistent with past practice with
       respect to customs, insurance, patent, trademark or tax matters, or to
       agents for service of process;

          (d)  contracts under which any amount payable by GranCare is dependent
       upon, or calculated in accordance with, the revenues or profits of
       GranCare, any of its Subsidiaries or SNFCo;

          (e)  contracts with any director, officer or employee of GranCare
       other than in such person's capacity as a director, officer or employee
       of GranCare;

          (f)  contracts which limit or restrict where GranCare or any of its
       Pharmacy Subsidiaries may conduct its or their business or the type or
       line of business which GranCare or any of its Subsidiaries may engage in;

          (g)  other than attached as exhibits to the Distribution Agreement,
       any contracts, obligations or commitments which will exist following the
       Distribution between GranCare or the Pharmacy Subsidiaries on the one
       hand, and the Non-Institutional Pharmacy Business on the other;

          (h)  contracts with any party for the loan of money or availability of
       credit to or from GranCare or any of its Pharmacy Subsidiaries (except
       credit extended by GranCare or any of its Pharmacy Subsidiaries to its or
       their customers in the ordinary course of business and consistent with
       past practice); or

          (i)  any hedging, option, derivative or other similar transaction.
<PAGE>
 
                                      -48-

True and complete copies of all contracts, obligations and commitments listed in
Section 4.21 of the GranCare Disclosure Statement have been delivered or made
available to Vitalink.  All such contracts are in full force and effect.  None
of GranCare or its Pharmacy Subsidiaries or, to the best of GranCare's
knowledge, any other party is in breach of or default under any such contracts
(and no facts or circumstances exist which could reasonably support the
assertion of any such breach or default) except for breaches and defaults by
parties other than GranCare and its Pharmacy Subsidiaries which would not,
singly or in the aggregate with all other such breaches, have a GranCare
Material Adverse Effect.

          Section 4.22  Labor Matters.  None of GranCare or any of its Pharmacy
                        -------------                                          
Subsidiaries is a party to any union contract or other collective bargaining
agreement, true and complete copies of which contracts have been delivered to
Vitalink.  Each of GranCare and its Pharmacy Subsidiaries is in compliance in
all material respects with all applicable laws respecting employment and
employment practices, terms and conditions of employment, safety, wages and
hours, and neither GranCare nor any of its Pharmacy Subsidiaries is engaged in
any unfair labor practice.  There is no labor strike, slowdown or stoppage
pending (or, to the best knowledge of GranCare, any labor strike or stoppage
threatened) against or affecting GranCare or any of its Pharmacy Subsidiaries.
To the best of GranCare's knowledge, no union organizing activities with respect
to any of its or its Pharmacy Subsidiaries' employees are occurring or
threatened.

          Section 4.23  No Change of Control Puts.  Neither the execution and
                        -------------------------                            
delivery by GranCare of this Agreement or the Distribution Agreement nor the
consummation of the Distribution, the Merger or any of the other transactions
contemplated hereby gives rise to any obligation of GranCare or any of its
Subsidiaries to, or any right of any holder of any security of GranCare or any
of its Subsidiaries to, require GranCare to purchase, offer to purchase, redeem
or otherwise prepay or repay any such security, or deposit any funds to effect
the same.

          Section 4.24  Employment and Labor Contracts.  Neither GranCare nor
                        ------------------------------                       
any of its Pharmacy Subsidiaries is a party to any employment, management
services, consultation or other contract or agreement (except for any such
contracts or agreements for which GranCare would not be responsible after the
Distribution) with any past or present officer, director or  employee or, to the
best of GranCare's knowledge, any entity affiliated with any past or present
officer, director or employee, in each case true and complete copies of which
contracts have been delivered to Vitalink,
<PAGE>
 
                                      -49-

and other than the agreements executed by employees generally, the forms of
which have been provided to Vitalink.

          Section 4.25  Intellectual Property Rights.  GranCare or its Pharmacy
                        ----------------------------                           
Subsidiaries own or have the right to use all Intellectual Property Rights
necessary to the conduct of their respective businesses.  Section 4.25 of the
GranCare Disclosure Statement contains a worldwide list of all patents, trade
names, registered and unregistered copyrights, trademarks and service marks,
mask works and applications for the foregoing owned by GranCare or its Pharmacy
Subsidiaries.  GranCare and/or its Pharmacy Subsidiaries have clear and
unencumbered title to the Intellectual Property Rights set forth in such Section
4.25 and such title has not been challenged (pending or threatened) by others
except for the encumbrances listed therein.  Such Section 4.25 also contains a
list of unpatented inventions used or planned for use by GranCare or its
Pharmacy Subsidiaries.  No rights or licenses to use Intellectual Property
Rights have been granted or acquired by GranCare or its Pharmacy Subsidiaries.
There have been no claims or assertions made by others that GranCare has
infringed any Intellectual Property Rights of others by the sale of products or
any other activity in the preceding six year period and, to the knowledge of
GranCare, there has been no such infringement by GranCare or any of its Pharmacy
Subsidiaries during this period.  GranCare has no knowledge of any infringement
of Intellectual Property Rights of GranCare or any of its Pharmacy Subsidiaries
by others.  All such patents, registered trademarks, service marks, and
copyrights owned by GranCare or its Pharmacy Subsidiaries are in good standing,
and are recorded on the public record in the name of GranCare or its Pharmacy
Subsidiaries.  True and complete copies of all material listed in Section 4.25
of the GranCare Disclosure Statement have been delivered or made available to
Vitalink.

          Section 4.26  Taxes.  (i) GranCare and its Subsidiaries have prepared
                        -----                                                  
and timely filed or will timely file with the appropriate governmental agencies
all franchise, income and all other Tax Returns required to be filed by them on
or before the Effective Time, taking into account any extension of time to file
granted to or obtained on behalf of GranCare and/or its Subsidiaries (copies of
which for the past three fiscal years have been delivered or made available to
Vitalink); (ii) all  Taxes of GranCare and its Subsidiaries have been paid in
full to the proper authorities or fully accrued for with respect to fiscal
periods for which there are publicly available financial statements and
otherwise on the books of GranCare, other than such Taxes as are being contested
in good faith by appropriate proceedings and are adequately reserved for in
accordance with generally accepted accounting principles; (iii) all deficiencies
asserted in writing
<PAGE>
 
                                      -50-

as a result of Tax examinations of federal, state and foreign income, sales and
franchise and all other Tax Returns filed by GranCare and its Subsidiaries have
either been paid or adequately reserved for in accordance with generally
accepted accounting principles; (iv) to the best knowledge of GranCare, no
unpaid deficiency has been asserted or assessed against GranCare or any of its
Subsidiaries, and no examination of GranCare or any of its Subsidiaries is
pending or threatened for any material amount of Tax by any taxing authority
(with respect to any such action, Section 4.26 of the GranCare Disclosure
Statement sets forth the periods at issue and the category of Tax, and the
examining authority's and any corresponding revenue agents' reports relating to
the issue have been delivered or made available to Vitalink); (v) no extension
of the period for assessment or collection of any Tax of GranCare or any of its
Subsidiaries is currently in effect and no extension of time within which to
file any Tax Return of GranCare or any of its Subsidiaries has been requested,
which Tax Return has not since been filed; (vi) no Tax liens have been filed
with respect to any Taxes of GranCare or any of its Subsidiaries except for
property taxes which have accrued but with respect to which penalty for non-
payment has not occurred; (vii) neither GranCare nor any of its Subsidiaries has
agreed to make any adjustment by reason of a change in their accounting methods
that would affect the taxable income or deductions of GranCare or any of its
Subsidiaries for any period ending after the Effective Time; (viii) GranCare and
its Subsidiaries have made timely payments of the Taxes required to be deducted
and withheld from the wages paid to their employees; (ix) there are no Tax
sharing agreements or arrangements under which GranCare or any Subsidiary will
have any obligation or liability on or after the Effective Time; (x) GranCare
and its Subsidiaries have no foreign losses as defined in Section 904(f)(2) of
the Code; (xi) to the best knowledge of GranCare, there are no transfer pricing
agreements made by or on behalf of GranCare or any of its Subsidiaries with any
taxation authority; (xii) no assets of GranCare or any of its Subsidiaries is
held in an arrangement for which partnership Tax Returns are being filed and
neither GranCare nor any of its Subsidiaries is a partner in any partnership;
(xiii) neither GranCare  nor any of its Subsidiaries owns any interest in any
"controlled foreign corporation" (within the meaning of Section 957 of the
Code), "passive foreign investment company" (within the meaning of Section 1296
of the Code) or other entity the income of which is required to be included in
the income of GranCare or such Subsidiary; (xiv) neither GranCare nor any of its
Subsidiaries has made an election under Section 341(f) of the Code; and (xv)
neither GranCare nor any of its Subsidiaries is obligated to make any payments
that would constitute excess parachute payments within the meaning of Section
280G of the Code.
<PAGE>
 
                                      -51-

          Section 4.27  Employee Benefit Plans; ERISA.  (a)  There are no
                        -----------------------------                    
"employee pension benefit plans" as defined in Section 3(2) of ERISA covering
employees (or former employees) employed in the United States, maintained or
contributed to by GranCare or any of its Subsidiaries or any of their ERISA
Affiliates, or to which GranCare or any of its Subsidiaries or any of their
ERISA Affiliates contributes or is obligated to make payments thereunder or
otherwise may have any liability ("GranCare Pension Benefit Plans").

          (b)  GranCare has delivered or made available to Vitalink true and
complete copies of all "welfare benefit plans" (as defined in Section 3(1) of
ERISA) covering employees (or former employees) employed in the United States,
maintained or contributed to by GranCare or any of its Subsidiaries (other than
fully insured welfare benefit plans that will be assumed by SNFCo) ("GranCare
Welfare Plans"), all multiemployer plans (as defined in Section 3(37) of ERISA)
covering employees (or former employees) employed in the United States to which
GranCare or any of its Subsidiaries or any of their ERISA Affiliates is required
to make contributions or otherwise may have any liability, and, to the extent
covering employees (or former employees) employed in the United States, all
stock bonus, stock option, restricted stock, stock appreciation right, stock
purchase, bonus, incentive, deferred compensation, severance and vacation plans
maintained or contributed to by GranCare or a Subsidiary of GranCare.

          (c)  GranCare and each of its Subsidiaries, and each of the GranCare
Pension Benefit Plans and GranCare Welfare Plans, are in compliance with the
applicable provisions of ERISA and other applicable laws except where the
failure to comply would not, singly or in the aggregate, reasonably be expected
to have a GranCare Material Adverse Effect.

          (d)  All contributions to, and payments from, the GranCare Pension
Benefit Plans which are required to have been made in accordance with the
GranCare Pension Benefit Plans and, when applicable, Section 302 of ERISA or
Section 412 of the Code have been timely made except where the failure to make
such contributions or payments on a timely basis would not, singly or in the
aggregate, reasonably be expected to have a GranCare Material Adverse Effect.

          (e)  The GranCare Pension Benefit Plans intended to qualify under
Section 401 of the Code have been determined by the IRS to be so qualified and
nothing has occurred with respect to the operation of such GranCare Pension
Benefit Plans which would cause the loss of such qualification or exemption or
the imposition of
<PAGE>
 
                                      -52-

any material liability, penalty or tax under ERISA or the Code.  Such plans have
been or will be amended on a timely basis to comply with changes to the Code
made by the Tax Reform Act of 1986 and other applicable legislative, regulatory
or administrative requirements.

          (f)  There are (i) no investigations pending, to the best knowledge of
GranCare, by any governmental entity involving the GranCare Pension Benefit
Plans or GranCare Welfare Plans, (ii) no termination proceedings involving the
GranCare Pension Benefit Plans and (iii) no pending or, to the best of
GranCare's knowledge, threatened claims (other than routine claims for
benefits), suits or proceedings against any GranCare Pension Benefit Plan or
GranCare Welfare Plan, against the assets of any of the trusts under any
GranCare Pension Benefit Plan or GranCare Welfare Plan or against any fiduciary
of any GranCare Pension Benefit Plan or GranCare Welfare Plan with respect to
the operation of such plan or asserting any rights or claims to benefits under
any GranCare Pension Benefit Plan or against the assets of any trust under such
plan, except for those which would not, singly or in the aggregate, give rise to
any liability which would reasonably be expected to have a GranCare Material
Adverse Effect, nor, to the best of GranCare's knowledge, are there any facts
which would give rise to any liability except for those which would not, singly
or in the aggregate, reasonably be expected to have a GranCare Material Adverse
Effect in the event of any such investigation, claim, suit or proceeding.

          (g)  None of GranCare, any of its Subsidiaries or any employee of the
foregoing, nor any trustee, administrator, other fiduciary or any other "party
in interest" or "disqualified person" with respect to the GranCare Pension
Benefit Plans  or GranCare Welfare Plans, has engaged in a "prohibited
transaction" (as such term is defined in Section 4975 of the Code or Section 406
of ERISA) which would be reasonably likely to result in a tax or penalty on
GranCare or any of its Subsidiaries under Section 4975 of the Code or Section
502(i) of ERISA, except any such event which would not, singly or in the
aggregate, reasonably be expected to have a GranCare Material Adverse Effect.

          (h)  Neither the GranCare Pension Benefit Plans subject to Title IV of
ERISA nor any trust created thereunder has been terminated nor have there been
any "reportable events" (as defined in Section 4043 of ERISA and the regulations
thereunder) with respect to either thereof, except any such event which would
not, singly or in the aggregate, reasonably be expected to have a GranCare
Material Adverse Effect nor has there been any event with respect to any
GranCare Pension Benefit Plan requiring disclosure
<PAGE>
 
                                      -53-

under Section 4063(a) of ERISA or any event with respect to any GranCare Pension
Benefit Plan requiring disclosure under Section 4041(c)(3)(C) of ERISA, except
any such event which would not, singly or in the aggregate, reasonably be
expected to have a GranCare Material Adverse Effect.

          (i)  Neither GranCare nor any Subsidiary of GranCare nor any ERISA
Affiliate has incurred any currently outstanding liability to the PBGC or to a
trustee appointed under Section 4042(b) or (c) of ERISA other than for the
payment of premiums, all of which have been paid when due.  No GranCare Pension
Benefit Plan has applied for, or received, a waiver of the minimum funding
standards imposed by Section 412 of the Code.  The information supplied to the
actuary by GranCare or any of its Subsidiaries for use in preparing the most
recent actuarial report for the GranCare Pension Benefit Plans is complete and
accurate in all material respects.

          (j)  Neither GranCare, any of its Subsidiaries nor any of their ERISA
Affiliates has any liability (including any contingent liability under Section
4204 of ERISA) with respect to any multiemployer plan, within the meaning of
Section 3(37) of ERISA, covering employees (or former employees) employed in the
United States.

          (k)  With respect to each of the GranCare Pension Benefit Plans and
GranCare Welfare Plans, true, correct and complete copies of the following
documents have been delivered or made available to Vitalink:  (i) the current
plans and  related trust documents, including amendments thereto, (ii) any
current summary plan descriptions, (iii) the most recent Forms 5500, financial
statements and actuarial reports, if applicable, and (iv) the most recent IRS
determination letter, if applicable.

          (l)  Neither GranCare, any of its Subsidiaries, any organization to
which GranCare is a successor or parent corporation, within the meaning of
Section 4069(b) of ERISA, nor any of their ERISA Affiliates has engaged in any
transaction, within the meaning of Section 4069(a) of ERISA, except where the
liability for which would not, singly or in the aggregate, reasonably be
expected to have a GranCare Material Adverse Effect.

          (m)  None of the GranCare Welfare Plans maintained by GranCare or any
of its Subsidiaries are retiree life or retiree health insurance plans which
provide for continuing benefits or coverage for any participant or any
beneficiary of a participant following termination of employment, except as may
be required under COBRA or except at the expense of the participant or the
<PAGE>
 
                                      -54-

participant's beneficiary.  GranCare and each of its Subsidiaries which maintain
a "group health plan" within the meaning of Section 5000(b)(1) of the Code have
complied with the notice and continuation requirements of Section 4980B of the
Code, COBRA, Part 6 of Subtitle B of Title I of ERISA and the regulations
thereunder except where the failure to comply would not, singly or in the
aggregate, reasonably be expected to have a GranCare Material Adverse Effect.

          (n)  No liability under any GranCare Pension Benefit Plan or GranCare
Welfare Plan has been funded nor has any such obligation been satisfied with the
purchase of a contract from an insurance company as to which GranCare or any of
its Subsidiaries has received notice that such insurance company is in
rehabilitation.

          (o)  The consummation of the transactions contemplated by this
Agreement will not result in an increase in the amount of compensation or
benefits or accelerate the vesting or timing of payment of any benefits or
compensation payable to or in respect of any employee of GranCare or any of its
Subsidiaries.

          (p)  GranCare has disclosed to Vitalink in Section 4.27 of the
GranCare Disclosure Statement each of GranCare's material Foreign Plans to the
extent the benefits provided  thereunder are not mandated by the laws of the
applicable foreign jurisdiction.  GranCare and each of its Subsidiaries and each
of such Foreign Plans are in compliance with applicable laws and all required
contributions have been made to such Foreign Plans, except where the failure to
comply or make contributions would not, singly or in the aggregate, reasonably
be expected to have a GranCare Material Adverse Effect.

          Section 4.28  Environmental Matters.  (a)  Except as would not, singly
                        ---------------------                                   
or in the aggregate with all other such non-compliances, have a GranCare
Material Adverse Effect, GranCare and its Subsidiaries are, and within the
period of all applicable statutes of limitation have been, in compliance with
all applicable Environmental Laws, which compliance includes, without
limitation, the possession of all Environmental Authorizations required under
applicable Environmental Laws, and compliance with the terms and conditions
thereof, and there are no circumstances of which GranCare is aware which may
materially prevent or interfere with compliance in the future.  To GranCare's
knowledge GranCare and its Subsidiaries have all Environmental Authorizations
necessary for the conduct of the businesses of GranCare and its Subsidiaries as
currently conducted.  Neither GranCare nor any of its Subsidiaries has been
notified, or has any reasonable basis to believe, that any
<PAGE>
 
                                      -55-

such Environmental Authorizations will be modified, suspended or revoked or
cannot be renewed or otherwise maintained in the ordinary course of business.
To GranCare's knowledge after due inquiry, the execution and delivery of this
Agreement and the consummation by GranCare of the Merger, the Distribution and
the other transactions contemplated hereby will not affect the validity or
require the transfer of any Environmental Authorizations associated with the
Institutional Pharmacy Business, and will not require any notification,
registration, reporting, filing, investigation or remediation under any
Environmental Law.

          (b)  There are no Environmental Notices that, singularly or in the
aggregate, could reasonably be expected to have a GranCare Material Adverse
Effect (i) pending or, to the best knowledge of GranCare, threatened against
GranCare or any of its Subsidiaries, (ii) to GranCare's knowledge pending or
threatened against any person or entity whose liability for such Environmental
Notice may have been retained or assumed by or could reasonably be imputed or
attributed by law or contract to GranCare or any of its Subsidiaries, (iii) that
to GranCare's knowledge could subject GranCare to any material risk of
liability, loss or damages, or (iv) that to GranCare's  knowledge could
reasonably be expected to require investigation, removal or remedial or
corrective action by GranCare or any of its Subsidiaries.  Since May 31, 1996,
neither GranCare nor any of its Subsidiaries has received any Environmental
Notice alleging that GranCare or any of its Subsidiaries is subject to liability
under any Environmental Law or that GranCare or any of its Subsidiaries is not
in full compliance with Environmental Laws.

          (c)  There is no civil, criminal or administrative action, suit,
demand, claim, hearing, notice of violation, notice or demand letter or request
for information or to the best knowledge of GranCare, investigation pending or
threatened under any Environmental Law (i) against GranCare or any of its
Subsidiaries, or (ii) to the knowledge of GranCare, against any person or entity
in connection with which liability could reasonably be imputed or attributed by
law or contract to GranCare or any of its Subsidiaries except with respect to
each of clause (i) and (ii) for such demands, claims, notices of violation,
notice or demand letters or requests for information which singly or in the
aggregate could not reasonably be expected to have a GranCare Material Adverse
Effect.

          (d)  No property or facility presently or to the knowledge of GranCare
formerly owned, operated or leased by GranCare or any of its present
Subsidiaries, or to the knowledge of GranCare any of its former Subsidiaries, or
any of their respective predecessors in interest, is listed or proposed for
listing on the
<PAGE>
 
                                      -56-

National Priorities List or the Comprehensive Environmental Response,
Compensation and Liability Information System, both promulgated under CERCLA, or
on any comparable list established under any Environmental Law, nor has GranCare
or any of its Subsidiaries received any written notification of potential or
actual liability or any request for information under CERCLA or any comparable
foreign, state or local law.

          (e)  There has been no disposal, spill, discharge or release of any
Hazardous Materials generated, used, owned, stored or controlled by GranCare, or
to GranCare's knowledge any of its Subsidiaries, or any of their respective
predecessors in interest, on, at or under any property presently or formerly
owned, leased or operated by GranCare, or to GranCare's knowledge its
Subsidiaries, or any predecessors in interest, and to GranCare's knowledge there
are no Hazardous Materials located in, at, on or under, or in the vicinity of,
any such facility or property, or at any other location, that  (i) could
reasonably be expected to subject GranCare to a material risk of liability, loss
or damages, or result in the incurrence by GranCare of costs under Environmental
Laws, (ii) could reasonably be expected to form the basis of any Environmental
Notice against or with respect to GranCare or any of its Subsidiaries, or
against any person or entity whose liability for any Environmental Notice may
have been retained or assumed by or could be imputed or attributed by law or
contract to GranCare or any of its Subsidiaries or (iii) could reasonably be
expected to require investigation, removal or remedial or corrective action by
GranCare or any of its Subsidiaries, that in any case singularly or in the
aggregate reasonably could be expected to have a GranCare Material Adverse
Effect.

          (f)  Without in any way limiting the generality of the foregoing, to
GranCare's knowledge (i) there are and have been no underground or aboveground
storage tanks or other storage receptacles, or related piping or other disposal
areas containing Hazardous Materials, located on, at or under property owned,
operated or leased by GranCare, any of its Subsidiaries or any of their
respective predecessors in interest, (ii) there are and have been no
polychlorinated biphenyls located on any properties owned, operated or leased by
GranCare or any of its Subsidiaries, and (iii) there is no asbestos contained in
or forming part of any building, building component, structure or office space
owned, operated or leased by GranCare or any of its Subsidiaries.

          (g)  To GranCare's knowledge no lien has been recorded under
Environmental Laws with respect to any properties, assets or facilities owned,
operated or leased by GranCare or any of its Subsidiaries.
<PAGE>
 
                                      -57-

          (h)  In accordance with Section 5.05, GranCare has given Vitalink and
its authorized representatives access to all records and files in its possession
or control relating to actual or potential compliance or liability issues of
GranCare or its Subsidiaries and any of their respective predecessors in
interest under Environmental Laws, including, without limitation, all reports,
studies, analyses, tests or monitoring results pertaining to the existence of
Hazardous Material or any other environmental concern relating to properties,
assets or facilities currently or formerly owned, operated, managed, leased,
used or controlled by GranCare any of its Subsidiaries, or otherwise concerning
compliance with or liability under Environmental Laws.

          Section 4.29  Directors, Officers and Compensation of Employees.
                        -------------------------------------------------  
There is set forth in Section 4.29 of the GranCare Disclosure Statement a true
and complete list showing, to the extent they are expected to become directors,
officers or employees of Vitalink subsequent to the Effective Date, (a) the
names and addresses of all such directors and officers of GranCare and its
Pharmacy Subsidiaries and (b) the names of all salaried persons whose aggregate
compensation for purposes of Federal income tax reporting from GranCare and its
Pharmacy Subsidiaries in the fiscal year ended December 31, 1995 was, or in the
fiscal year ending December 31, 1996 is expected to be, U.S. $100,000 or more
per year, together with a statement of the full amount expected to be paid to
such person for services in all capacities to be rendered in the fiscal year
ending December 31, 1996, and the basis thereof, separately including the
amounts paid or payable during such fiscal years, or expected to be paid or
payable, under bonus or incentive arrangements, if any.

          Section 4.30  Banks.  There is set forth in Section 4.30 of the
                        -----                                            
GranCare Disclosure Statement a true and complete list showing the account
numbers and name of each bank in which any of the Pharmacy Subsidiaries has an
account or safe deposit box and the names of all persons authorized to draw
thereon or to have access thereto.

          Section 4.31  Disclosure.  No representation or warranty by GranCare
                        ----------                                            
and no statement or information relating to GranCare or any of its Subsidiaries
contained herein, or in any certificate furnished by or on behalf of GranCare to
Vitalink in connection herewith contains or will contain any untrue statement of
a material fact or omits or will omit to state a material fact necessary in
order to make the statements herein or therein, in light of the circumstances
under which they were made, not misleading.
<PAGE>
 
                                      -58-

          Section 4.32  Institutional Pharmacy Business.  (a)  Section 4.32 of
                        -------------------------------                        
the GranCare Disclosure Statement lists each Pharmacy utilized by GranCare in
connection with its pharmacy business and indicates (i) the location of such
Pharmacy and (ii) whether such Pharmacy is owned or held pursuant to a leasehold
interest.  No other person or entity has any beneficial ownership or interest in
or to any such Pharmacy nor does any other person or entity have any right or
option to acquire any beneficial ownership or interest in or to any such
Pharmacy.

          (b)  Section 4.32 of the GranCare Disclosure Statement lists all of
the customers to which GranCare and its Subsidiaries provide pharmacy services
pursuant to oral or written contracts ("GranCare Pharmacy Contracts").  GranCare
has not been informed and has no reason to believe that any GranCare Pharmacy
Contract will be terminated for or without cause.  Each of the Subsidiaries of
GranCare involved in the Skilled Nursing Business listed on Schedule 4.16 of the
GranCare Disclosure Schedule has agreements for the provision of institutional
pharmacy services in form and substance equivalent to the form of agreement set
forth in Section 4.32 of the GranCare Disclosure Schedule (each a "Pharmacy
Agreement").

          (c)  GranCare has not violated, and is not now in violation of, the
Medicare and Medicaid fraud and abuse provisions of the Social Security Act, the
Civil Monetary Penalties Law of the Social Security Act, or any other Federal or
State law, statute, rule or regulation relating to GranCare and its
Subsidiaries.

          (d)  GranCare is duly licensed to provide pharmacy services in all
states in which it does business, and is also a participant in the Medicare
program and the Medicaid programs of the states listed in Section 4.08 of the
GranCare Disclosure Statement.  GranCare is in compliance with all laws, rules
and regulations affecting or in connection with the Pharmacies, GranCare and
their licenses with respect thereto and their participation in the Medicare and
Medicaid programs.

          (e)  GranCare has delivered or made available true and correct billing
requests for reimbursement and underlying information to all governmental
programs, including but not limited to the Medicare and Medicaid programs, in
compliance with all rules, regulations, policies and procedures of such
governmental programs and of the fiscal intermediaries of such programs.  To the
best of GranCare's knowledge all such billings were for goods actually provided,
and at appropriate charges or costs, and GranCare has appropriate documentation
to support such billing requests.
<PAGE>
 
                                      -59-

          Section 4.33  Fairness Opinion.  GranCare has received the opinion of
                        ----------------                                       
PaineWebber Incorporated to the effect that as of the date hereof the financial
terms of the Merger are fair to GranCare's stockholders from a financial point
of view.

          Section 4.34  Sufficiency of Assets.  Subsequent to the Restructuring,
                        ---------------------                                   
GranCare and its Pharmacy Subsidiaries will own, lease, hold or otherwise have
the right to use all of the assets, properties, Intellectual Property Rights and
GranCare Licenses which are material to the conduct of the Institutional
Pharmacy Business as presently conducted by GranCare and its Subsidiaries.

                                   ARTICLE V.

                                   COVENANTS

          Section 5.01  Conduct of Business of GranCare. Except as contemplated
                        -------------------------------
by this Agreement, the Distribution Agreement and the GranCare Disclosure
Statement or as expressly agreed to in writing by Vitalink, during the period
from the date of this Agreement to the Effective Time, GranCare will and will
cause its Subsidiaries each to conduct its operations according to its ordinary
and usual course of business consistent with past practice, and will use all
commercially reasonable efforts to preserve intact its business organization, to
keep available the services of its officers and employees and to maintain
satisfactory relationships with suppliers, distributors, customers and others
having business relationships with it and will take no action which would
adversely affect its ability to consummate the Merger, the Distribution or the
other transactions contemplated hereby. Without limiting the generality of the
foregoing, and except as otherwise expressly contemplated by this Agreement, the
Distribution Agreement or the GranCare Disclosure Statement, prior to the
Effective Time, neither GranCare nor any of its Subsidiaries will, without the
prior written consent of Vitalink which shall not be unreasonably withheld:

          (a) amend its Restated Articles of Incorporation (or other applicable
       charter document) or By-Laws, other than the charter and by-laws of
       SNFCo;

          (b) authorize for issuance, issue, sell, deliver, grant any options
       for, or otherwise agree or commit to issue, sell or deliver any shares of
       any class of capital stock of GranCare or its Subsidiaries or any
       securities convertible into or exchangeable or exercisable for shares of
       any class of capital stock of GranCare or its Subsidiaries, other than
       (i) pursuant to and in accordance with the terms of GranCare
<PAGE>
 
                                      -60-

       Options outstanding on the date hereof under the GranCare Option Plans
       listed in  Section 4.15 of the GranCare Disclosure Statement or (ii)
       except as set forth in Schedule 5.01(b) of the GranCare Disclosure
       Schedule;

          (c) split, combine or reclassify any shares of its capital stock,
       declare, set aside or pay any dividend or other distribution (whether in
       cash, stock or property or any combination thereof) in respect of its
       capital stock or purchase, redeem or otherwise acquire any shares of its
       own capital stock or that of any of its Subsidiaries except as may be
       necessary to consummate the Restructuring or the Distribution;

          (d) except in the ordinary course of business and consistent with past
       practice (i) create, incur, assume, maintain or permit to exist any long-
       term debt or any short-term debt for borrowed money other than under
       existing lines of credit; (ii) assume, guarantee, endorse or otherwise
       become liable or responsible (whether directly, contingently or
       otherwise) for the obligations of any other person except wholly owned
       Pharmacy Subsidiaries in the ordinary course of business and consistent
       with past practices; or (iii) make any loans, advances or capital
       contributions to, or investments in, any other person, other than
       indebtedness, obligations, loans, advances or investments in any other
       person that are to be assigned to and assumed by SNFCo prior to the
       Effective Time and as to which GranCare will be relieved of liability
       with respect thereto prior to the Effective Time;

          (e) with respect to GranCare and its Pharmacy Subsidiaries, (i)
       increase in any manner the compensation of any of its directors or
       officers, except in the ordinary course of business and consistent with
       past practice or increase in any manner the compensation of any of its
       other employees; (ii) pay or agree to pay any pension, retirement
       allowance or other employee benefit not required, or enter into or agree
       to enter into any agreement or arrangement with any of its past or
       present employees relating to any such pension, retirement allowance or
       other employee benefit, except as required under currently existing
       agreements, plans or arrangements; (iii) grant any severance or
       termination pay to, or enter into any employment or severance agreement
       with, any of its past or present employees; (iv) except to the extent
       permitted by the foregoing clause (i), enter into any contract, agreement
       or understanding with any of its past or  present directors or
<PAGE>
 
                                      -61-

       officers; or (v) except in the ordinary course of business and consistent
       with past practice or as may be required to comply with applicable law,
       become obligated (other than pursuant to any new or renewed collective
       bargaining agreement) under any new pension plan, welfare plan,
       multiemployer plan, employee benefit plan, benefit arrangement, or
       similar plan, arrangement or policy which was not in existence on the
       date hereof, including any bonus, incentive, deferred compensation, stock
       purchase, stock option, stock appreciation right, health or group
       insurance, severance pay, retirement or other benefit plan, agreement or
       arrangement, or employment or consulting agreement with or for the
       benefit of any person, or amend any of such plans or any of such
       agreements in existence on the date hereof other than as contemplated by
       the Employee Benefits Matters Agreement (as defined in the Distribution
       Agreement);

          (f) except in the ordinary course of business and consistent with past
       practice, as disclosed in Section 5.01(f) of the GranCare Disclosure
       Statement or as otherwise expressly contemplated hereby or the
       Distribution Agreement, with respect to GranCare and its Pharmacy
       Subsidiaries sell, transfer, lease, license, pledge, mortgage, or
       otherwise dispose of, or encumber, or agree to sell, transfer, lease,
       license, pledge, mortgage or otherwise dispose of or encumber, any
       material properties, real, personal or mixed;

          (g) except as otherwise expressly contemplated hereby, with respect to
       GranCare and its Pharmacy Subsidiaries enter into any other agreements,
       commitments or contracts, except agreements, commitments or contracts for
       the purchase, sale or lease of goods or services in the ordinary course
       of business and consistent with past practice and having a term of no
       more than one year;

          (h) authorize, recommend, propose or announce an intention to
       authorize, recommend or propose, or enter into any agreement in principle
       or an agreement with respect to, any plan of liquidation or dissolution,
       any acquisition of a material amount of assets or securities, any
       disposition of a material amount of assets or securities or any material
       change in its capitalization, or any entry into a material contract or
       any amendment or modification of any material contract or any release or
       relinquishment of any material contract rights not in the  ordinary
       course of business and consistent with past practice except as expressly
<PAGE>
 
                                      -62-

       contemplated by this Agreement or the Distribution Agreement;

          (i) except as previously approved by GranCare prior to the date hereof
       and as identified to Vitalink prior to the date hereof, authorize or
       commit to make capital expenditures in excess of $200,000 for which
       GranCare or any of its Pharmacy Subsidiaries would be responsible
       subsequent to the Merger;

          (j) permit any insurance policy naming it as a beneficiary or a loss
       payee to be cancelled, terminated or materially altered, except in the
       ordinary course of business and consistent with past practice and
       following written notice to Vitalink;

          (k) maintain its books and records in a manner not in the ordinary
       course of business and consistent with past practice;

          (l) enter into any hedging, option, derivative or other similar
       transaction;

          (m) change any assumption underlying, or method of calculating, any
       bad debt, contingency, provision or other reserve;

          (n) pay, discharge or satisfy any claims, liabilities or obligations
       (absolute, accrued, contingent or otherwise), other than the payment,
       discharge or satisfaction of liabilities (including accounts payable) in
       the ordinary course of business and consistent with past practice, or
       collect, or accelerate the collection of, any amounts owed (including
       accounts receivable) other than the collection in the ordinary course of
       business;

          (o) make any changes in their prior practices of allocating interest,
       corporate overhead, cost of legal, insurance and other staff functions or
       other inter-company charges; (p) make any changes in their current cash
       management practices; (q) cancel, compromise, settle or reduce any inter-
       company accounts except by the payment of cash for the full amount
       thereof; (r) permit any cash paid as the exercise price of outstanding
       GranCare Options to be retained by SNFCo or any of its Subsidiaries;

          (p) cancel any Pharmacy Agreement or amend, alter, waive or otherwise
       modify the terms thereof; and
<PAGE>
 
                                      -63-

          (q)  agree to do any of the foregoing.

          Section 5.02  Conduct of Business of Vitalink. Except as contemplated
                        -------------------------------
by this Agreement, the Voting Agreement, the Shareholder Agreement (as
hereinafter defined) or the Vitalink Disclosure Statement or as expressly agreed
to in writing by GranCare, during the period from the date of this Agreement to
the Effective Time, Vitalink and its Subsidiaries will each conduct its
operations according to its ordinary and usual course of business consistent
with past practice, and will use all commercially reasonable efforts to preserve
intact its business organization, to keep available the services of its officers
and employees and to maintain satisfactory relationships with suppliers,
distributors, customers and others having business relationships with it and
will take no action which would adversely affect its ability to consummate the
Merger or the other transactions contemplated hereby. Without limiting the
generality of the foregoing, and except as otherwise expressly contemplated by
this Agreement or the Vitalink Disclosure Statement, prior to the Effective
Time, neither Vitalink nor any of its Subsidiaries will, without the prior
written consent of GranCare which shall not be unreasonably withheld:

          (a) amend its Certificate of Incorporation (or other applicable
       charter document) or By-Laws;

          (b) authorize for issuance, issue, sell, deliver, grant any options
       for, or otherwise agree or commit to issue, sell or deliver any shares of
       any class of capital stock of Vitalink or its Subsidiaries or any
       securities convertible into or exchangeable or exercisable for shares of
       any class of capital stock of Vitalink or its Subsidiaries, other than
       pursuant to and in accordance with the terms of the Vitalink Option Plans
       listed in Section 3.14 of the Vitalink Disclosure Statement;

          (c) split, combine or reclassify any shares of its capital stock,
       declare, set aside or pay any dividend or other distribution (whether in
       cash, stock or property or any combination thereof) in respect of its
       capital stock or purchase, redeem or otherwise acquire any shares of its
       own capital stock or that of any of its Subsidiaries;

          (d) except in the ordinary course of business and consistent with past
       practice (i) create, incur, assume, maintain or permit to exist any long-
       term debt or any short-term debt for borrowed money other than under
       existing lines of credit; (ii) assume, guarantee, endorse or
<PAGE>
 
                                      -64-

       otherwise become liable or responsible (whether directly, contingently or
       otherwise) for the obligations of any other person except wholly owned
       Subsidiaries of Vitalink in the ordinary course of business and
       consistent with past practices; or (iii) make any loans, advances or
       capital contributions to, or investments in, any other person;

          (e) (i) increase in any manner the compensation of any of its
       directors or officers, except in the ordinary course of business and
       consistent with past practice or increase in any manner the compensation
       of any of its other employees; (ii) pay or agree to pay any pension,
       retirement allowance or other employee benefit not required, or enter
       into or agree to enter into any agreement or arrangement with any of its
       past or present employees relating to any such pension, retirement
       allowance or other employee benefit, except as required under currently
       existing agreements, plans or arrangements; (iii) grant any severance or
       termination pay to, or enter into any employment or severance agreement
       with, any of its past or present employees; (iv) except to the extent
       permitted by the foregoing clause (i), enter into any contract, agreement
       or understanding with any of its past or present directors or officers;
       or (v) except in the ordinary course of business and consistent with past
       practice or as may be required to comply with applicable law, become
       obligated (other than pursuant to any new or renewed collective
       bargaining agreement) under any new pension plan, welfare plan,
       multiemployer plan, employee benefit plan, benefit arrangement, or
       similar plan, arrangement or policy which was not in existence on the
       date hereof, including any bonus, incentive, deferred compensation, stock
       purchase, stock option, stock appreciation right, health or group
       insurance, severance pay, retirement or other benefit plan, agreement or
       arrangement, or employment or consulting agreement with or for the
       benefit of any person, or amend any of such plans or any of such
       agreements in existence on the date hereof;

          (f) except in the ordinary course of business and consistent with past
       practice or as otherwise expressly contemplated hereby, sell, transfer,
       lease, license,  pledge, mortgage, or otherwise dispose of, or encumber,
       or agree to sell, transfer, lease, license, pledge, mortgage or otherwise
       dispose of or encumber, any material properties, real, personal or mixed;

          (g) except as otherwise expressly contemplated hereby, enter into any
       other agreements, commitments or contracts,
<PAGE>
 
                                      -65-

       except agreements, commitments or contracts for the purchase, sale or
       lease of goods or services in the ordinary course of business and
       consistent with past practice and having a term of no more than one year;

          (h) authorize, recommend, propose or announce an intention to
       authorize, recommend or propose, or enter into any agreement in principle
       or an agreement with respect to, any plan of liquidation or dissolution,
       any acquisition of a material amount of assets or securities, any
       disposition of a material amount of assets or securities or any material
       change in its capitalization, or any entry into a material contract or
       any amendment or modification of any material contract or any release or
       relinquishment of any material contract rights not in the ordinary course
       of business and consistent with past practice except as expressly
       contemplated by this Agreement;

          (i) except as previously approved by the Board of Directors of
       Vitalink prior to the date hereof and as identified to GranCare prior to
       the date hereof, authorize or commit to make capital expenditures in
       excess of $200,000;

          (j) permit any insurance policy naming it as a beneficiary or a loss
       payee to be cancelled, terminated or materially altered, except in the
       ordinary course of business and consistent with past practice and
       following written notice to Vitalink;

          (k) maintain its books and records in a manner not in the ordinary
       course of business and consistent with past practice;

          (l) enter into any hedging, option, derivative or other similar
       transaction;

          (m) change any assumption underlying, or method of calculating, any
       bad debt, contingency, provision or other reserve;

          (n) pay, discharge or satisfy any claims, liabilities or obligations
       (absolute, accrued, contingent or otherwise), other than the payment,
       discharge or satisfaction of liabilities (including accounts payable) in
       the ordinary course of business and consistent with past practice, or
       collect, or accelerate the collection of, any amounts owed
<PAGE>
 
                                      -66-

       (including accounts receivable) other than the collection in the ordinary
       course of business; or

          (o)  agree to do any of the foregoing.

          Section 5.03  No Solicitation by GranCare. (a) GranCare agrees that,
                        ---------------------------
prior to the Effective Time, it shall not, and shall not authorize or permit any
of its Subsidiaries or any of its or its Subsidiaries' directors, officers,
employees, agents or representatives to, directly or indirectly, solicit,
initiate, facilitate or encourage (including by way of furnishing or disclosing
information) any merger, consolidation, other business combination involving
GranCare or its Subsidiaries (except to the extent such merger, consolidation or
other business combination relates exclusively to GranCare's Skilled Nursing
Business), acquisition of all or a substantial portion of the assets or capital
stock of GranCare and its Subsidiaries (except to the extent such acquisition
relates exclusively to GranCare's Skilled Nursing Business) or inquiries or
proposals concerning or which may reasonably be expected to lead to, any of the
foregoing (a "GranCare Acquisition Transaction") or negotiate, explore or
otherwise communicate in any way with any third party (other than Vitalink or
its affiliates) with respect to any GranCare Acquisition Transaction or enter
into any agreement, arrangement or understanding requiring it to abandon,
terminate or fail to consummate the Merger or any other transactions
contemplated by this Agreement. GranCare shall immediately advise Vitalink of
any inquiries or proposals relating to a GranCare Acquisition Transaction.

          (b) Notwithstanding the foregoing, in the event that there is an
unsolicited written proposal for a GranCare Acquisition Transaction from a bona
fide financially capable third party, GranCare may furnish non-public
information to, and negotiate with, such third party only if (i) three business
days' written notice shall have been given to Vitalink; and (ii)(A) GranCare's
Board of Directors shall have been advised in writing by its investment banker
that such third party is financially capable of consummating a GranCare
Acquisition Transaction that would yield a higher value to GranCare's
stockholders than will the Merger, (B) GranCare's Board of  Directors shall have
been advised, by the written opinion of outside counsel to GranCare, that any
failure to provide such non-public information to, or negotiate with, such party
would be inconsistent with GranCare's Board of Directors' fiduciary duties to
the stockholders of GranCare (in providing such opinion GranCare's counsel may
assume that California law is not materially different from Delaware law) and
(C) GranCare's Board of Directors in good faith, after weighing such advice,
determines that taking
<PAGE>
 
                                      -67-

such action is more likely than not to lead to a GranCare Acquisition
Transaction with such third party that would yield a higher value to GranCare's
stockholders than will the Merger and that failing to furnish such information,
or to commence negotiations would be inconsistent with the Board's fiduciary
duties.

          Section 5.04  No Solicitation by Vitalink. (a) Vitalink agrees that,
                        ---------------------------
prior to the Effective Time, it shall not, and shall not authorize or permit any
of its Subsidiaries or any of its or its Subsidiaries' directors, officers,
employees, agents or representatives to, directly or indirectly, solicit,
initiate, facilitate or encourage (including by way of furnishing or disclosing
information) any merger, consolidation, other business combination involving
Vitalink or its Subsidiaries, acquisition of all or any substantial portion of
the assets or capital stock of Vitalink and its Subsidiaries taken as a whole,
or inquiries or proposals concerning or which may reasonably be expected to lead
to, any of the foregoing (an "Vitalink Acquisition Transaction") or negotiate,
explore or otherwise communicate in any way with any third party (other than
GranCare or its affiliates) with respect to any Vitalink Acquisition Transaction
or enter into any agreement, arrangement or understanding requiring it to
abandon, terminate or fail to consummate the Merger or any other transactions
contemplated by this Agreement. Vitalink shall immediately advise GranCare of
any inquiries or proposals relating to an Vitalink Acquisition Transaction.

          (b) Notwithstanding the foregoing, in the event that there is an
unsolicited written proposal for an Vitalink Acquisition Transaction from a bona
fide financially capable third party, Vitalink may furnish non-public
information to, and negotiate with, such third party only if (i) three business
days' written notice shall have been given to GranCare; and (ii)(A) Vitalink's
Board of Directors shall have been advised in writing by its investment banker
that such third party is financially capable of consummating an Vitalink
Acquisition Transaction that would yield a higher value to Vitalink's
stockholders than will the Merger, (B) Vitalink's Board of Directors shall have
been advised, by the written opinion of outside counsel to Vitalink, that any
failure to provide such non-public information to, or negotiate with, such party
would be inconsistent with GranCare's Board of Directors' fiduciary duties to
the stockholders of Vitalink and (C) Vitalink's Board of Directors in good
faith, after weighing such advice, determines that taking such action is more
likely than not to lead to an Vitalink Acquisition Transaction with such third
party that would yield a higher value to Vitalink's stockholders than will the
<PAGE>
 
                                      -68-

Merger and that failing to furnish such information, or to commence negotiations
would be inconsistent with the Board's fiduciary duties.

          Section 5.05  Access to Information.  (a)  From the date of this
                        ---------------------                             
Agreement until the Effective Time, GranCare will give Vitalink and its
authorized representatives (including counsel, environmental and other
consultants, accountants, auditors, and intellectual property counsel and
agents) reasonable access in light of the terms of this Agreement during normal
business hours to all facilities, personnel and operations and to all books and
records of GranCare and its Subsidiaries, will permit Vitalink to make such
inspections as it may reasonably require (including without limitation any air,
water or soil testing or sampling deemed necessary by it) and will cause its
officers and those of its Subsidiaries to furnish Vitalink with such financial
and operating data and other information with respect to the businesses and
properties of GranCare and its Subsidiaries as Vitalink may from time to time
reasonably request.

          (b) From the date of this Agreement until the Effective Time, Vitalink
will give GranCare and its authorized representatives (including counsel,
environmental and other consultants, accountants, auditors, and intellectual
property counsel and agents) reasonable access in light of the terms of this
Agreement during normal business hours to all facilities, personnel and
operations and to all books and records of Vitalink and its Subsidiaries, will
permit GranCare to make such inspections as it may reasonably require (including
without limitation any air, water or soil testing or sampling deemed necessary
by them) and will cause its officers and those of its Subsidiaries to furnish
GranCare with such financial and operating data and other information with
respect to the businesses and properties of Vitalink and its Subsidiaries as
GranCare may from time to time reasonably request.

          Section 5.06  Registration Statement and Proxy Statement.  GranCare
                        ------------------------------------------           
shall file with the SEC as soon as is reasonably practicable after the date
hereof the SNFCo Registration Document and the Proxy Statement and Vitalink
shall file with the SEC the Vitalink Information Statement and the Registration
Statement in which the Proxy Statement shall be included.  Vitalink and GranCare
shall use all commercially reasonable efforts to have the Registration Statement
declared effective by the SEC and the Proxy Statement and the Vitalink
Information Statement cleared by the staff of the SEC as promptly as
practicable.  GranCare shall use all commercially reasonable efforts to have the
SNFCo Registration Document declared effective by the SEC.  Vitalink shall also
take
<PAGE>
 
                                      -69-

any action required to be taken under applicable state blue sky or securities
laws in connection with shares of Vitalink Common Stock to be issued as Closing
Consideration.  Vitalink and GranCare shall promptly furnish to each other all
information, and take such other actions (including without limitation using all
commercially reasonable efforts to provide any required consents of their
respective independent auditors and investment banking advisors), as may
reasonably be requested in connection with any action by any of them in
connection with the preceding sentences of this Section 5.06.

          Section 5.07  Commercially Reasonable Efforts; Other Actions.  (a)
                        ----------------------------------------------       
Subject to the terms and conditions provided in this Agreement and the
Distribution Agreement, Vitalink and GranCare shall use all commercially
reasonable efforts to take, or cause to be taken, all other actions and do, or
cause to be done, all other things necessary, proper or appropriate under
applicable laws and regulations to consummate and make effective the
transactions contemplated by this Agreement and the Distribution Agreement,
including, without limitation, (i) the filing of Notification and Report Forms
under the HSR Act with the Federal Trade Commission (the "FTC") and the
Antitrust Division of the Department of Justice (the "Antitrust Division") and
using all commercially reasonable efforts to respond as promptly as practicable
to all inquiries received from the FTC or the Antitrust Division for additional
information or documentation, (ii) the obtaining of all necessary consents,
approvals or waivers, and (iii) the lifting of any legal bar to the Merger or
the Distribution.  Vitalink shall not take any action which would cause GranCare
to fail to perform its obligations hereunder or under the Distribution
Agreement.  GranCare shall not take any action which would cause Vitalink to
fail to perform its obligations hereunder or under the Distribution Agreement.

          (b) GranCare shall use all commercially reasonable efforts to cause to
be delivered to Vitalink a comfort letter of its independent auditors, dated a
date within two business days of the effective date of the Registration
Statement, in form reasonably satisfactory to Vitalink and customary in scope
and substance for such letters in connection with similar registration
statements.

          (c) Vitalink shall use all commercially reasonable efforts to cause to
be delivered to GranCare a comfort letter of its independent auditors, dated a
date within two business days of the effective date of the Registration
Statement, in form reasonably satisfactory to GranCare and customary in scope
and
<PAGE>
 
                                      -70-

substance for such letters in connection with similar registration statements.

          Section 5.08  Public Announcements.  Before issuing any press release
                        --------------------                                   
or otherwise making any public statement with respect to the Merger, the
Distribution or any of the other transactions contemplated hereby, Vitalink and
GranCare will consult with, and obtain the consent of, each other as to its form
and substance and shall not issue any such press release or make any such public
statement prior to obtaining such consent, except as may be required by law or
pursuant to any order of any court or governmental agency, tribunal or
regulatory authority.

          Section 5.09  Notification of Certain Matters.  Each of GranCare and
                        -------------------------------                       
Vitalink shall give prompt notice to the other party of any notice of, or other
communication relating to, a default or event which, with notice or lapse of
time or both, would become a default, received by GranCare, Vitalink or any of
their respective Subsidiaries subsequent to the date of this Agreement and prior
to the Effective Time, which could be reasonably expected to have a GranCare
Material Adverse Effect or Vitalink Material Adverse Effect.  Each of GranCare
and Vitalink shall give prompt notice to the other party of (a) any notice or
other communication from any third party alleging that the consent of such third
party is or may be required in connection with the Merger, the Distribution or
any other transactions contemplated by this Agreement or the Distribution
Agreement, or (b) any GranCare Material Adverse Effect or Vitalink Material
Adverse Effect.

          Section 5.10  Indemnification.  (a)  Vitalink shall cause the
                        ---------------                                
Surviving Corporation to indemnify, defend and hold harmless the present and
former directors and officers of  GranCare against all losses, claims, damages,
expenses or liabilities arising out of actions or omissions or alleged actions
or omissions occurring at or prior to the Effective Time to the same extent and
on the same terms and conditions (including with respect to advancement of
expenses) permitted or required under applicable law and GranCare's Restated
Articles of Incorporation and By-Laws in effect at the date hereof.

          (b) For a period of three years after the Effective Time, the
Surviving Corporation shall cause to be maintained in effect the current
policies of directors' and officers' liability insurance maintained by GranCare
(provided that the Surviving Corporation may substitute therefor policies of at
least the same coverage and amounts containing terms and conditions which are no
less advantageous) with respect to claims arising from facts or events which
occurred before the Effective Time; provided, however,
                                    --------  ------- 
<PAGE>
 
                                      -71-

that if the premiums with respect to such insurance exceed 150% of the annual
premiums paid as of the date hereof by GranCare for such insurance, the
Surviving Corporation shall be obligated to purchase directors' and officers'
liability insurance with the maximum coverage as can be obtained at an annual
premium equal to 150% of the annual premiums paid by GranCare as of the date
hereof.

          Section 5.11  Expenses.  Except as set forth in Section 10.05,
                        --------                                        
Vitalink, on the one hand, and GranCare, on the other hand, shall bear their
respective expenses incurred in connection with the Merger and the Distribution,
including, without limitation, the preparation, execution and performance of
this Agreement, the Distribution Agreement and the transactions contemplated
hereby and all fees and expenses of investment bankers, finders, brokers,
agents, representatives, counsel and accountants, except that expenses incurred
in printing, mailing and filing (including without limitation, SEC filing fees,
fees related to any state securities or "blue sky" laws and stock exchange
listing application fees) the Proxy Statement, the Vitalink Information
Statement, the SNFCo Reorganization Document and the Registration Statement
shall be shared equally by GranCare and Vitalink; provided, however, that SNFCo
                                                  --------  -------            
will bear one half of the premiums associated with the directors' and officers'
insurance referred to in Section 5.10(b) hereof and all of GranCare's legal fees
and expenses and the fees and expenses associated with obtaining the fairness
opinion referred to in Section 4.33 hereof.

          Section 5.12  Stock Exchange Listings.  Vitalink shall use all
                        -----------------------                         
commercially reasonable efforts to have the  Vitalink Common Stock to be issued
in connection with the Merger authorized for quotation on NASDAQ or listed on
the New York Stock Exchange subject to notice of issuance.

          Section 5.13  GranCare and Subsidiary Actions.  (a)  GranCare shall
                        -------------------------------                      
not take or omit to take, and shall not cause or permit any of its subsidiaries
to take or omit to take, any action which would cause a breach of any
representation or warranty of GranCare contained in this Agreement or the
Distribution Agreement such that the Closing condition set forth in Section 7.01
would not be satisfied.

          (b) GranCare shall not and shall not authorize or permit any of its
Subsidiaries or any of its Subsidiaries' directors, officers, employees, agents
or representatives to amend, modify, waive or withdraw any term of, the
Distribution Agreement prior to the Effective Time which amendment,
modification, waiver or withdrawal could, directly or indirectly, reasonably be
expected to have an adverse effect on the business, operations, assets,
<PAGE>
 
                                      -72-

condition (financial or otherwise) or prospects of the Surviving Corporation
following the Merger without the prior written consent of Vitalink.

          Section 5.14  Vitalink and Subsidiary Actions.  Vitalink shall not
                        -------------------------------                     
take or omit to take, and shall not cause or permit any of its subsidiaries to
take or omit to take, any action which would cause a breach of any
representation or warranty of Vitalink contained in this Agreement such that the
Closing condition set forth in Section 8.01 would not be satisfied.

          Section 5.15  Environmental Matters.  (a)  GranCare shall promptly
                        ---------------------                               
provide Vitalink with any Environmental Notices it receives and shall make all
filings and take all actions necessary to materially comply with all
Environmental Laws, including but not limited to those applicable to the Merger
and other non-routine transactions contemplated hereby.  GranCare shall keep
Vitalink informed of all actions taken in connection with the foregoing and all
such actions shall be on terms and conditions satisfactory to Vitalink whose
consent to such actions shall not be unreasonably withheld.

          (b) Vitalink shall promptly provide GranCare with any Environmental
Notices it receives and shall make all filings and take all actions necessary to
materially comply with all Environmental Laws, including but not limited to
those applicable to the Merger and other transactions contemplated  hereby.
Vitalink shall keep GranCare informed of all non-routine actions taken in
connection with the foregoing and all such actions shall be on terms and
conditions satisfactory to GranCare whose consent to such actions shall not be
unreasonably withheld.

          Section 5.16  Actions Regarding Outstanding Debt.  Prior to the
                        ----------------------------------               
Effective Time, GranCare agrees to use all commercially reasonable efforts to
(i) call for redemption all of the outstanding 6 1/2% Convertible Subordinated
Debentures due 2003 (the "Debentures") that are issued and outstanding
immediately prior to the Effective Time in accordance with the terms of the
Indenture dated January 29, 1993 between GranCare and First Fidelity Trust
Company, New York (the "Indenture"), (ii) obtain the consent (the "Consent") of
the holders of GranCare's outstanding 9 3/8% Senior Subordinated Notes due 2005
(the "Notes") to the Restructuring and the Merger (including the assumption by
the Surviving Corporation of GranCare's obligations under the Notes and under
the Indenture, dated as of September 15, 1995, between GranCare and Marine
Midland Bank, governing the Notes (the "Note Indenture")) as well as the other
transactions contemplated hereby which Consent shall be in form and substance
reasonably
<PAGE>
 
                                      -73-

satisfactory to Vitalink, and (iii) obtain all necessary consents, approvals,
waivers or other agreements by the holders of other indebtedness of GranCare to
the assignment to and the assumption by SNFCo of such indebtedness at the time
of the Distribution.

                                  ARTICLE VI.

             CONDITIONS TO THE OBLIGATIONS OF VITALINK AND GRANCARE

          The respective obligations of each party to effect the Merger shall be
subject to the fulfillment at or prior to the Closing of each of the following
conditions:

          Section 6.01 Registration Statements. The Registration Statement and
                       -----------------------
the SNFCo Registration Statement shall have become effective in accordance with
the provisions of the Securities Act. No stop order suspending the effectiveness
of the Registration Statement and the SNFCo Registration Statement shall have
been issued by the SEC and remain in effect. All necessary state securities or
blue sky authorizations for the Merger and the Distribution shall have been
received.

          Section 6.02  Stockholder Approval.  The approval of the Merger and
                        --------------------                                 
the Distribution, including the execution and  performance of this Agreement,
the Distribution Agreement and all of the transactions contemplated hereby or
thereby shall be approved by a majority of the outstanding shares of GranCare
Common Stock cast at the Special Meeting or any adjournment thereof shall have
been obtained.

          Section 6.03  Listings.  The Vitalink Common Stock issuable in the
                        --------                                            
Merger shall have been authorized for quotation on NASDAQ or listed on the New
York Stock Exchange subject to official notice of issuance.

          Section 6.04  Certain Proceedings.  No writ, order, decree or
                        -------------------                            
injunction of a court of competent jurisdiction or governmental entity shall
have been entered against Vitalink or GranCare which, and no proceedings
therefor shall have been threatened or commenced by any governmental entity
which seek to, prohibit or restrict the consummation of the Merger or the
Distribution or would otherwise restrict Vitalink's or the Surviving
Corporation's exercise of full rights to own and operate the Institutional
Pharmacy Business of GranCare.

          Section 6.05  Consents and Approvals.  All necessary consents and
                        ----------------------                             
approvals of, and notifications and disclosures to, and filings and
registrations with, any United States or any other
<PAGE>
 
                                      -74-

governmental authority or any other third party required for the consummation of
the Merger and the other transactions contemplated hereby (including without
limitation any consents, approvals, notifications, disclosures, filings and
registrations required under any Environmental Law) shall have been obtained
except where failure to obtain such consents or approvals would not, singly or
in the aggregate with all such other failures, have an Vitalink Material Adverse
Effect, and any waiting period applicable to the consummation of the Merger
under the HSR Act shall have expired or been terminated.

          Section 6.06  Distribution. (i) The Distribution Agreement shall have
                        ------------
been approved by a majority of GranCare's shareholders at the Special Meeting;
(ii) the Distribution Agreement shall have been executed and shall be in full
force and effect on and as of the Effective Time; and (iii) the Distribution
shall have been completed.

          Section 6.07  Dissenting Shares.  Holders of not more than 5% of the
                        -----------------                                     
GranCare Common Stock issued and outstanding as of the record date for the
Special Meeting shall have demanded payment pursuant to the provisions of
Section 1300 of the California Act.

          Section 6.08  Opinions.  (a)GranCare and Vitalink shall have received
                        --------
opinions of Powell, Goldstein, Frazer & Murphy and Cahill Gordon & Reindel,
reasonably acceptable to GranCare and Vitalink, to the effect that:

        (i)    the distribution of the SNFCo Common Stock will be tax-free for
               federal income tax purposes to GranCare under Section 355(c)(1)
               of the Code and to the stockholders of GranCare under Section
               355(a) of the Code;

        (ii)   the Restructuring will be tax-free for federal income tax
               purposes under Sections 361(a)l and 368(a)(1)(D) of the Code;

        (iii)  the Merger will qualify as a tax-free reorganization within the
               meaning of Section 368(a) of the Code; and

        (iv)   Vitalink and GranCare will each be a "party to a reorganization"
               within the meaning of Section 368(b) of the Code with respect to
               the Merger.

               (b) The respective counsels of GranCare and Vitalink shall have
each delivered an opinion covering the matters set forth on Exhibit G hereto.
  
<PAGE>
 
                                      -75-

          Section 6.09  Existing Indebtedness.  The Debentures shall have been
                        ---------------------                                 
called for redemption in accordance with the Indenture and GranCare shall have
obtained the Consent in form and substance reasonably satisfactory to GranCare
and Vitalink.

                                  ARTICLE VII.

                   CONDITIONS TO THE OBLIGATIONS OF VITALINK

          The obligation of Vitalink to effect the Merger and to perform its
other obligations to be performed at or subsequent to the Closing shall be
subject to the fulfillment at or prior to the Closing of the following
additional conditions, any one or more of which may be waived by Vitalink:

          Section 7.01  Representations and Warranties True.  The
                        -----------------------------------      
representations and warranties of GranCare contained herein and in the
Distribution Agreement (without regard to any materiality exceptions or provisos
contained in this Agreement or the Distribution Agreement) shall be true and
correct in all respects on the date of this Agreement, the date of the
Distribution Agreement and the Closing Date as though such representations and
warranties were made at and on such date, except (i) for those untruths or
inaccuracies which would not, singly or in the aggregate, reasonably be expected
to have a GranCare Material Adverse Effect and (ii) for changes expressly
permitted or contemplated by this Agreement or the Distribution Agreement.

          Section 7.02  Performance. GranCare shall have performed and complied
                        -----------
in all material respects with all agreements, obligations and conditions
required by this Agreement and the Distribution Agreement to be performed or
complied with by it on or prior to the Closing Date except for those failures to
so perform or comply which would not, singly or in the aggregate, reasonably be
expected to have a GranCare Material Adverse Effect.

          Section 7.03  Certificates.  GranCare shall furnish such certificates
                        ------------                                           
of its officers to evidence compliance with the conditions set forth in Sections
7.01, 7.02 and 7.04 as may be reasonably requested by Vitalink.

          Section 7.04  Material Adverse Change.  There shall not have occurred
                        -----------------------                                
since December 31, 1995 any event, condition, change, occurrence or circumstance
which has had or is reasonably likely to have, singly or in the aggregate, a
GranCare Material Adverse Effect.

<PAGE>
 
                                      -76-

          Section 7.05  Pharmacy Financial Statements.  GranCare shall have
                        -----------------------------                      
delivered audited financial statements of the Institutional Pharmacy Business
audited by GranCares existing independent auditors which financial statements do
not reflect (i) reductions in the carrying values of assets, or increases in the
carrying values of the liabilities, as at May 31, 1996, of the Institutional
Pharmacy Business on a pro forma basis, in the aggregate of more than $2,000,000
as compared to such carrying values as shown on the balance sheet of the
Institutional Pharmacy Business as at May 31, 1996 included in the GranCare
Disclosure Statement, (ii) a decrease of more than $500,000 in earnings before
interest, taxes, depreciation and amortization (as such terms are defined in
generally accepted accounting principles consistently applied by GranCare,
"EBITDA") for the twelve-month period ending December 31, 1995, or a decrease of
more than $250,000 in the EBITDA for the five-month period ending May 31, 1996,
on a pro forma basis as compared to the EBITDAs for the same periods shown on
the  unaudited statements of income included in the GranCare Disclosure
Statement.

          Section 7.06  Auditors' Letter.  Vitalink shall have received from
                        ----------------                                    
GranCare's independent auditors a letter dated the Closing Date confirming the
matters set forth in the letter contemplated by Section 5.07(b).

                                 ARTICLE VIII.

                   CONDITIONS TO THE OBLIGATIONS OF GRANCARE

          The obligations of GranCare under this Agreement to effect the Merger
shall be subject to the fulfillment on or before the Closing Date of each of the
following additional conditions, any one or more of which may be waived by
GranCare:

          Section 8.01  Representations and Warranties True.  The
                        -----------------------------------      
representations and warranties of Vitalink contained herein (without regard to
any materiality exceptions or provisos therein) shall be true and correct in all
material respects on the date of this Agreement and the Closing Date as though
such representations and warranties were made at and on such date, except (i)
for those untruths or inaccuracies which would not, singly or in the aggregate,
reasonably be expected to have an Vitalink Material Adverse Effect and (ii) for
changes permitted or contemplated by this Agreement.

          Section 8.02  Performance. Vitalink shall have performed and complied
                        -----------
in all material respects with all agreements, obligations and conditions
required by this Agreement to be

<PAGE>
 
                                      -77-

performed or complied with by it on or prior to the Closing Date except for
those failures to so perform or comply which would not, singly or in the
aggregate, reasonably be expected to have an Vitalink Material Adverse Effect.

          Section 8.03  Certificates.  Vitalink shall furnish such certificates
                         ------------                                           
of its officers to evidence compliance with the conditions set forth in Sections
8.01, 8.02 and 8.04 as may be reasonably requested by GranCare.

          Section 8.04  Material Adverse Change.  There shall not have occurred
                        -----------------------                                
since May 31, 1996 any event, condition, change, occurrence or circumstance
which has had or is reasonably likely to have, singly or in the aggregate, an
Vitalink Material Adverse Effect.

          Section 8.05  Shareholders Agreement.  Parent and Vitalink shall have
                        ----------------------                                 
executed the Shareholder's Agreement in the form attached hereto as Exhibit D
and each such party shall have performed and complied with its obligations under
the Shareholders Agreement.

          Section 8.06  Auditors' Letter.  GranCare shall have received from
                        ----------------                                    
Vitalink's independent auditors a letter dated the Closing Date confirming the
matters set forth in the letter contemplated by Section 5.07(c).

                                  ARTICLE IX.

                                    CLOSING

          Section 9.01  Time And Place.  Subject to the provisions of Articles
                        --------------                                        
VI, VII, VIII and X, the closing of the Merger (the "Closing") shall take place
at the offices of Cahill Gordon & Reindel, as soon as practicable but in no
event later than 9:30 A.M., local time, on the first business day after the date
on which each of the conditions set forth in Articles VI, VII and VIII have been
satisfied or waived by the party or parties entitled to the benefit of such
conditions; or at such other place, at such other time, or on such other date as
Vitalink and GranCare may mutually agree.  The date on which the Closing
actually occurs is herein referred to as the "Closing Date."

          Section 9.02  Filings at the Closing.  Subject to the provisions of
                        ----------------------                               
Articles VI, VII, VIII and X hereof, GranCare, and Vitalink shall cause to be
executed at the Closing the Certificate of Merger and the Certified Agreement
and shall cause the Certificate of Merger to be filed and recorded in accordance
with

<PAGE>
 
                                      -78-

the applicable provisions of the Delaware Act and shall cause the Certified
Agreement to be filed in accordance with the applicable provisions of the
California Act and shall take any and all other lawful actions and do any and
all other lawful things necessary to cause the Merger to become effective.

                                   ARTICLE X.

                          TERMINATION AND ABANDONMENT

          Section 10.01  Termination.  This Agreement may be terminated and the
                         -----------                                           
Merger may be abandoned any time prior to  the Effective Time, whether before or
after approval by the stockholders of GranCare:

          (a) by mutual consent of the Boards of Directors of Vitalink and
     GranCare;

          (b) by either Vitalink or GranCare if, without fault of such
     terminating party, the Merger shall not have been consummated on or before
     December 31, 1996, which date may be extended by mutual consent of the
     parties hereto;

          (c) by either Vitalink or GranCare, if any court of competent
     jurisdiction in the United States or other governmental body in the United
     States shall have issued an order (other than a temporary restraining
     order), decree or ruling or taken any other action restraining, enjoining
     or otherwise prohibiting the Merger or the Distribution, and such order,
     decree, ruling or other action shall have become final and nonappealable;
     or

          (d) by either Vitalink or GranCare, if the approval of a majority of
     the outstanding shares of GranCare Common Stock cast at the Special Meeting
     or any adjournment thereof is not obtained with respect to each of the
     Merger and the Distribution.

Notwithstanding anything contained in clause (b) of this Section 10.01, in the
event the Registration Statement or the SNFCo Registration Document has not been
declared effective by the SEC by November 1, 1996, then the date referred to in
clause (b) of this Section shall be automatically extended for a period of two
months from the later of the declaration of effectiveness by the SEC of the
Registration Statement or SNFCo Registration Document but in no event shall such
date be extended to a date later than three months from the date referenced in
clause (b) of this section.
<PAGE>
 
                                      -79-

          Section 10.02  Termination by Vitalink.  This Agreement may be
                         -----------------------                        
terminated and the Merger may be abandoned by action of the Board of Directors
of Vitalink, at any time prior to the Effective Time, before or after the
approval by the stockholders of Vitalink, if (a) GranCare shall have failed to
comply in any material respect with any of the covenants or agreements contained
in Articles I and V of this Agreement to be complied with or performed by
GranCare at or prior to such date of termination, (b) there exists a breach or
breaches of any representation or warranty of GranCare contained in this
Agreement or the Distribution Agreement such that the Closing condition set
forth in Section 7.01 would not be satisfied; provided, however, that if such
                                              --------  -------              
breach or breaches are capable of being cured prior to the Effective Time, such
breaches shall not have been cured within 15 calendar days of delivery to
GranCare of written notice of such breach or breaches, (c) GranCare shall have
furnished or disclosed non-public information to, or commenced negotiations
with, a third party with respect to a GranCare Acquisition Transaction or shall
have resolved to do either of the foregoing and publicly disclosed such
resolution, (d) the Board of Directors of GranCare shall have withdrawn,
changed, modified in any manner or taken action inconsistent with its
recommendation of the Distribution Agreement, the Distribution, this Agreement,
the Merger or the other transactions contemplated hereby or thereby or shall
have resolved to do any of the foregoing and publicly disclosed such resolution;
or (e) a definitive agreement with respect to an Vitalink Business Combination
Transaction (as hereinafter defined) shall have been negotiated and Vitalink's
Board of Directors (i) shall have been advised (A) in writing by its investment
banker that such Vitalink Business Combination Transaction (as hereinafter
defined) would yield a higher value to Vitalink's stockholders than would the
Merger and the other party to such agreement is financially capable of
consummating such Vitalink Business Combination Transaction (as hereinafter
defined) and (B) by the written opinion of outside counsel to Vitalink that
failure to terminate this Agreement would be inconsistent with such Board's
fiduciary duties to the stockholders of Vitalink, and (ii) after weighing such
advice, shall determine in good faith that failure to terminate this Agreement
would be inconsistent with such Board's fiduciary duties; provided, however,
                                                          --------  ------- 
that five business days prior written notice shall have been given to GranCare
(which notice shall include the material terms and conditions and financing
arrangements of, and the identity of the third party proposing, the Vitalink
Business Combination Transaction (as hereinafter defined)) and that prior to
terminating this Agreement Vitalink shall have made all the Vitalink Payments
required by the terms of Section 10.05(c) hereof.
<PAGE>
 
                                      -80-

          Section 10.03  Termination by GranCare.  This Agreement may be
                         -----------------------                        
terminated and the Merger may be abandoned at any time prior to the Effective
Time, before or after the approval by the stockholders of GranCare, by action of
the Board of the Directors of GranCare, if (a) Vitalink shall have failed to
comply in any material respect with any of the covenants or agreements contained
in Articles I and V of this Agreement to  be complied with or performed by
Vitalink at or prior to such date of termination, (b) there exists a breach or
breaches of any representation or warranty of Vitalink contained in this
Agreement such that the Closing condition set forth in Section 8.01 would not be
satisfied; provided, however, that if such breach or breaches are capable of
           --------  -------                                                
being cured prior to the Effective Time, such breaches shall not be cured within
15 calendar days of delivery to Vitalink of written notice of such breach or
breaches, (c) Vitalink shall have furnished or disclosed non-public information
to, or commenced negotiations with, a third party with respect to an Vitalink
Acquisition Transaction or shall have resolved to do either of the foregoing and
publicly disclosed such resolution or (d) the Board of Directors of Vitalink
shall have withdrawn, changed, modified in any manner or taken action
inconsistent with its recommendation of the Distribution Agreement, the
Distribution, this Agreement, the Merger or the other transactions contemplated
hereby or thereby or shall have resolved to do any of the foregoing and publicly
disclosed such resolution, (e) a definitive agreement with respect to a GranCare
Business Combination Transaction (as hereinafter defined) shall have been
negotiated and GranCare's Board of Directors (i) shall have been advised (A) in
writing by its investment banker that such GranCare Business Combination
Transaction (as hereinafter defined) could yield a higher value to GranCare's
stockholders than will the Merger and the other party to such agreement is
financially capable of consummating such GranCare Business Combination
Transaction (as hereinafter defined) and (B) by the written opinion of outside
counsel to GranCare that failure to terminate this agreement would be
inconsistent with the Board's fiduciary duties to the stockholders of GranCare
(in providing such opinion outside counsel to GranCare may assume that
California law is not materially different from Delaware law), and (ii) after
weighing such advice, shall determine in good faith that failure to terminate
this Agreement would be inconsistent with the Board's fiduciary duties;
provided, however, that five business days prior written notice shall have been
--------  -------                                                              
given to Vitalink (which notice shall include the material terms and conditions,
and financing arrangements of, and the identity of the third party proposing,
the GranCare Business Combination Transaction (as hereinafter defined)) and that
prior to terminating this Agreement GranCare shall have made all the GranCare
Payments required by the
<PAGE>
 
                                      -81-

terms of Section 10.05(b) hereof, or (f) Parent shall have breached its
obligations pursuant to Section 1.2 of the Voting Agreement.

          Section 10.04  Procedure for Termination.  In the event of termination
                         -------------------------                              
and abandonment of the Merger by Vitalink or GranCare pursuant to this Article
X, written notice thereof shall forthwith be given to the other.

          Section 10.05  Effect of Termination and Abandonment.  (a)  In the
                         -------------------------------------              
event of termination of this Agreement and abandonment of the Merger pursuant to
this Article X, no party hereto (or any of its directors or officers) shall have
any liability or further obligation to any other party to this Agreement, except
as provided in Section 5.11 and this Section 10.05 and except that nothing
herein shall relieve any party from liability for any breach of this Agreement.

          (b) In the event of (i) a termination of this Agreement pursuant to
Section 10.01(b), (c) or (d) and if prior thereto any person shall have made a
bona fide proposal concerning a GranCare Business Combination Transaction (as
hereinafter defined) or (ii) any termination of this Agreement by Vitalink
pursuant to Section 10.02(a), (b), (c) or (d) or any termination of this
Agreement by GranCare pursuant to Section 10.03(e), then GranCare shall promptly
pay Vitalink by wire transfer of immediately available funds to an account
specified by Vitalink up to $2.5 million for all documented fees and expenses
incurred by Vitalink (including the fees and expenses of counsel, accountants,
consultants and advisors) in connection with this Agreement and the transactions
contemplated hereby.  In the event of a termination of this Agreement pursuant
to Section 10.03(e), GranCare shall be obligated to pay Vitalink an additional
fee of $17.5 million (the "GranCare Termination Payment") payable prior to and
as a condition of such termination as follows:  (i) $7.5 million promptly by
wire transfer of immediately available funds to an account specified by Vitalink
and (ii) $10 million by either, at GranCare's discretion, (x) delivery to
Vitalink of an irrevocable letter of credit for $10 million or (y) deposit of
$10 million in immediately available funds to an escrow, in the case of each of
clause (x) and (y) on terms satisfactory to Vitalink with payment of such $10
million to be made to Vitalink in immediately available funds immediately prior
to and as a condition of effecting the GranCare Business Combination Transaction
contemplated by such definitive agreement (the amount of such payments and the
manner specified herein for making such payments, the "GranCare Payments").  To
the extent a GranCare Termination Payment has not already become payable and
been paid and if, prior to any termination pursuant to Section 10.01(b), (c) or
(d) or 10.02(a), (b), (c) or (d), any person shall
<PAGE>
 
                                      -82-

have  submitted a bona fide proposal concerning a GranCare Business Combination
Transaction and within eighteen months after the termination of this Agreement,
GranCare or any of its Subsidiaries proposes to enter into a definitive
agreement with a third party with respect to a GranCare Business Combination
Transaction or a GranCare Business Combination Transaction is proposed to be
effected, then GranCare, prior to entering into any such definitive agreement or
any such GranCare Business Combination Transaction being effected, shall be
obligated to pay Vitalink an additional fee of $17.5 million payable as follows:
(i) in the case of the proposed execution of a definitive agreement for a
GranCare Business Combination Transaction, prior to and as a condition of
entering into such definitive agreement, GranCare shall have made all the
GranCare Payments and (ii) in the case of a GranCare Business Combination
Transaction proposed to be effected without any agreement, prior to and as a
condition of effecting such GranCare Business Combination Transaction, GranCare
shall promptly pay Vitalink $17.5 million by wire transfer of immediately
available funds to an account specified by Vitalink.  As used in this Section
10.05, the term "GranCare Business Combination Transaction" shall mean any of
the following involving GranCare or any Pharmacy Subsidiary that is material to
the business, results of operation, prospects or financial condition of the
Institutional Pharmacy Business taken as a whole:  (1) any merger,
consolidation, share exchange, business combination or other similar transaction
(other than the Merger) including the Skilled Nursing Business; (2) any sale,
lease, exchange, transfer or other disposition of 25% or more of the assets of
GranCare (other than assets related to the Skilled Nursing Business) and its
Pharmacy Subsidiaries, taken as a whole, in a single transaction or series of
transactions; or (3) the acquisition by a person or entity, or any "group" (as
such term is defined under Section 13(d) of the Exchange Act and the rules and
regulations thereunder) of beneficial ownership of 33 1/3% or more of GranCare
Common Stock, whether by tender offer, exchange offer or otherwise.

          (c) In the event of (i) a termination of this Agreement pursuant to
Section 10.01(b), (c) or (d) and if prior thereto any person shall have made a
bona fide proposal concerning an Vitalink Business Combination Transaction (as
hereinafter defined) or (ii) any termination of this Agreement by GranCare
pursuant to Section 10.03(a), (b), (c), (d) or (f) or any termination of this
Agreement by Vitalink pursuant to Section 10.02(e), then Vitalink shall promptly
pay GranCare by wire transfer of immediately available funds to an account
specified by GranCare up to $2.5 million for all documented fees and expenses
incurred by GranCare (including the fees and expenses of counsel, accountants,
consultants and advisors) in connection with this Agreement, the
<PAGE>
 
                                      -83-

Distribution Agreement and the transactions contemplated hereby or thereby.  In
the event of a termination of this Agreement pursuant to Section 10.02(e)
Vitalink shall be obligated to pay GranCare an additional fee of $17.5 million
(the "Vitalink Termination Payment") payable prior to and as a condition of such
termination as follows:  (i) $7.5 million promptly by wire transfer of
immediately available funds to an account specified by GranCare, (ii) $10
million by either, at Vitalink's discretion, (x) delivery to GranCare of an
irrevocable letter of credit for $10 million or (y) deposit of $10 million in
immediately available funds to an escrow, in the case of each of clause (x) and
(y) on terms satisfactory to GranCare with payment of such $10 million to be
made to GranCare in immediately available funds immediately prior to and as a
condition of effecting the Vitalink Business Combination Transaction
contemplated by such definitive agreement (the amount of such payments and the
manner specified herein for making such payments, the "Vitalink Payments").  To
the extent an Vitalink Termination Payment has not already become payable and
been paid and if, prior to any termination pursuant to Section 10.01(b), (c) or
(d) or 10.03(a), (b), (c), (d) or (f), any person shall have submitted a bona
fide proposal concerning an Vitalink Business Combination Transaction and within
eighteen months after the termination of this Agreement, Vitalink or any of its
Subsidiaries proposes to enter into a definitive agreement with a third party
with respect to a Vitalink Business Combination Transaction or a Vitalink
Business Combination Transaction is proposed to be effected, then Vitalink,
prior to entering into any such definitive agreement or any such Vitalink
Business Combination Transaction being effected, shall be obligated to pay
GranCare an additional fee of $17.5 million payable as follows:  (i) in the case
of the proposed execution of a definitive agreement for an Vitalink Business
Combination Transaction, prior to and as a condition of entering into such
definitive agreement, Vitalink shall have made all the Vitalink Payments and
(ii) in the case of an Vitalink Business Combination Transaction proposed to be
effected without any agreement, prior to and as a condition of effecting such
Vitalink Business Combination Transaction, Vitalink shall promptly pay GranCare
$17.5 million by wire transfer of immediately available funds to an account
specified by GranCare.  As used in this Section 10.05, the term "Vitalink
Business Combination Transaction" shall mean any of the following involving
Vitalink or any Subsidiary that is material to  the business, results of
operation, prospects or financial condition of Vitalink and its Subsidiaries
taken as a whole:  (1) any merger, consolidation, share exchange, business
combination or other similar transaction (other than the Merger); (2) any sale,
lease, exchange, transfer or other disposition of 25% or more of the assets of
Vitalink and its Subsidiaries, taken as a whole, in a single transaction or
series
<PAGE>
 
                                      -84-

of transactions; or (3) the acquisition by a person or entity, or any "group"
(as such term is defined under Section 13(d) of the Exchange Act and the rules
and regulations thereunder) of beneficial ownership of 33 1/3% or more of
Vitalink Common Stock, whether by tender offer, exchange offer or otherwise.

                                  ARTICLE XI.

                                  DEFINITIONS

          Section 11.01  Terms Defined in This Agreement.  The following
                         -------------------------------                
capitalized terms used herein shall have the meanings ascribed in the indicated
sections.

<TABLE>
<CAPTION>
 
<S>                                             <C>
   Affiliates.................................  4.07
   Agreement..................................  First Paragraph
   Amendment..................................  1.03
   Antitrust Division.........................  5.07
   Average Market Value.......................  2.04
   California Act.............................  1.01
   CERCLA.....................................  3.27
   Certificate of Merger......................  1.02
   Certificates...............................  2.02
   Certified Agreement........................  1.02
   Closing....................................  9.01
   Closing Consideration......................  2.01
   Closing Date...............................  9.01
   COBRA......................................  3.26
   Code.......................................  3.25
   Consent....................................  5.16
   Constituent Corporations...................  First Paragraph
   Debenture..................................  5.16
   Delaware Act...............................  1.01
   Dissenting Shares..........................  2.01
   Distribution...............................  Recitals
   Distribution Agreement.....................  Recitals
   Effective Time.............................  1.02
   Environment................................  3.27
   Environmental Authorizations...............  3.27
   Environmental Laws.........................  3.27
   Environmental Notice.......................  3.27
   ERISA......................................  3.26
   ERISA Affiliate............................  3.26
   Exchange Act...............................  3.08
   Exchange Ratio.............................  2.01
   Vitalink...................................  First Paragraph
   Vitalink Acquisition Transaction...........  5.04
   Vitalink Balance Sheet.....................  3.18
 
</TABLE>
<PAGE>
 
                                      -85-

<TABLE>

<S>                                             <C>
   Vitalink Business Combination Transaction..  10.05
   Vitalink Common Stock......................  2.01
   Vitalink Compensation and Benefit Plans....  3.03
   Vitalink Contracts.........................  3.03
   Vitalink Disclosure Statement..............  Article III
   Vitalink Information Statement.............  3.08
   Vitalink Licenses..........................  3.07
   Vitalink Material Adverse Effect...........  3.01
   Vitalink Option Plans......................  3.14
   Vitalink Options...........................  3.14
   Vitalink Payments..........................  10.05
   Vitalink Pension Benefit Plans.............  3.26
   Vitalink Permitted Encumbrance.............  3.18
   Vitalink Pharmacy Contracts................  3.31
   Vitalink Preferred Stock...................  3.14
   Vitalink SEC Reports.......................  3.10
   Vitalink Termination Payment...............  10.05
   Vitalink Welfare Plans.....................  3.26
   Foreign Plan...............................  3.26
   FTC........................................  5.07
   Hazardous Material.........................  3.27
   HSR Act....................................  3.03
   Indenture..................................  5.16
   Institutional Pharmacy Business............  Recitals
   Intellectual Property Rights...............  3.24
   IRS........................................  3.26
   Merger.....................................  1.01
   Multiemployer Plan.........................  3.26
   NASDAQ.....................................  2.02
   Note Indenture.............................  5.16
   Parent.....................................  Recitals
   PBGC.......................................  3.26
   Pharmacy Agreement.........................  4.32
   Pharmacy Subsidiaries......................  4.01
   Proxy Statement............................  4.09
   Registration Statement.....................  3.08
   Restructuring..............................  Recitals
   GranCare...................................  First Paragraph
   GranCare Acquisition Transaction...........  5.03
   GranCare Balance Sheet.....................  4.19
   GranCare Business Combination
     Transaction..............................  10.05
   GranCare Common Stock......................  2.01
   GranCare Compensation and Benefit Plans....  4.03
   GranCare Contract..........................  4.03
   GranCare Disclosure Statement..............  Article IV
   GranCare Licenses..........................  4.08
   GranCare Material Adverse Effect...........  4.01
 
</TABLE>
<PAGE>
 
                                      -86-

<TABLE>

<S>                                             <C>
   GranCare Option Plans......................  4.15
   GranCare Options...........................  4.15
   GranCare Payments..........................  10.05
   GranCare Pension Benefit Plans.............  4.27
   GranCare Permitted Encumbrance.............  4.19
   GranCare Pharmacy Contracts................  4.32
   GranCare Preferred Stock...................  4.15
   GranCare SEC Reports.......................  4.11
   GranCare Termination Payment...............  10.05
   GranCare Welfare Plans.....................  4.27
   SEC........................................  3.08
   Securities Act.............................  3.08
   Shareholders Agreement.....................  8.02
   Skilled Nursing Assets.....................  Recitals
   Skilled Nursing Business...................  4.01
   Skilled Nursing Liabilities................  Recitals
   Special Meeting............................  1.05
   SNFCo......................................  Recitals
   SNFCo Registration Document................  4.09
   SNFCo Stock................................  Recitals
   Stockholder Approval.......................  1.05
   Subsidiary.................................  12.09
   Surviving Corporation......................  1.01
   Tax Returns................................  3.25
   Taxes......................................  3.25
   Voting Agreement...........................  Recitals
</TABLE>

                                  ARTICLE XII.

                                 MISCELLANEOUS

        Section 12.01  Amendment and Modification.  Subject to applicable law,
                       --------------------------                             
this Agreement may be amended, modified or supplemented only by written
agreement of Vitalink and GranCare at any time prior to the Effective Time with
respect to any of  the terms contained herein; provided, however, that after
                                               --------  -------            
this Agreement is adopted by the stockholders of GranCare, no such amendment or
modification shall change the amount or form of the Closing Consideration.

        Section 12.02  Waiver of Compliance; Consents.  Any failure of Vitalink,
                       ------------------------------                           
on the one hand, or GranCare, on the other hand, to comply with any obligation,
covenant, agreement or condition herein may be waived by GranCare or Vitalink,
respectively, only by a written instrument signed by the party granting such
waiver, but such waiver or failure to insist upon strict compliance with such
obligation, covenant, agreement or condition shall not operate as a waiver of,
or estoppel with respect to, any
<PAGE>
 
                                      -87-

subsequent or other failure.  Whenever this Agreement requires or permits
consent by or on behalf of any party hereto, such consent shall be given in
writing in a manner consistent with the requirements for a waiver of compliance
as set forth in this Section 12.02.

        Section 12.03  Survivability; Investigations.  The respective
                       -----------------------------                 
representations and warranties of Vitalink and GranCare contained herein or in
any certificates or other documents delivered prior to or at the Closing shall
not be deemed waived or otherwise affected by any investigation made by any
party hereto and shall not survive the Closing.

        Section 12.04  Notices.  All notices and other communications hereunder
                       -------                                                 
shall be in writing and shall be delivered personally, by next-day courier or
mailed by registered or certified mail (return receipt requested) with first
class postage prepaid, or telecopied with written machine generated confirmation
of receipt, to the parties at the addresses specified below (or at such other
address for a party as shall be specified by like notice; provided, that notices
of a change of address shall be effective only upon receipt thereof).  Any such
notice shall be effective upon receipt, if personally delivered or telecopied,
one day after delivery to a courier for next-day delivery, or three days after
mailing, if deposited in the U.S. mail, first class postage prepaid.

        (a)  if to GranCare, to

             GranCare, Inc.
             One Ravinia Drive
             Suite 1500
             Atlanta, GA 30346
             Telecopy:  (770) 698-8199

             Attention: Evrett W. Benton, Esq.

             with a copy to

             Powell, Goldstein, Frazer & Murphy
             16th floor
             191 Peachtree Street, N.E.
             Atlanta, GA  30303
             Telecopy:  (404) 572-5958

             Attention: Richard H. Miller, Esq.
<PAGE>
 
                                      -88-

        (b)  if to Vitalink, to

             Vitalink Pharmacy Services, Inc.
             10750 Columbia Pike
             Silver Spring, MD 20901
             Telecopy:  (301) 905-4007

             Attention: James H. Rempe, Esq.

             with a copy to

             Cahill Gordon & Reindel
             80 Pine Street
             New York, New York  10005
             Telecopy:  (212) 269-5420

             Attention:  W. Leslie Duffy, Esq.

        Section 12.05  Assignment.  This Agreement and all of the provisions
                       ----------                                           
hereof shall be binding upon and inure to the benefit of the parties hereto and
their respective successors and permitted assigns, but neither this Agreement
nor any of the rights, interests or obligations hereunder shall be assigned by
any of the parties hereto without the prior written consent of the other
parties, nor is this Agreement intended to confer any rights or remedies
hereunder upon any other person  except the parties hereto and, with respect to
Section 5.10, the officers and directors of GranCare.

        Section 12.06  Governing Law.  Except as the laws of the State of
                       -------------                                     
California are by their terms applicable, this Agreement shall be governed by
the laws of the State of Delaware (regardless of the laws that might otherwise
govern under applicable Delaware principles of conflicts of law) as to all
matters, including but not limited to matters of validity, construction, effect,
performance and remedies.

        Section 12.07  Counterparts.  This Agreement may be executed in two or
                       ------------                                           
more counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.

        Section 12.08  Severability.  In case any one or more of the provisions
                       ------------                                            
contained in this Agreement should be invalid, illegal or unenforceable in any
respect against a party hereto, the validity, legality and enforceability of the
remaining provisions contained herein shall not in any way be affected or
impaired thereby and such invalidity, illegality or unenforceability shall

<PAGE>
 
                                      -89-

only apply as to such party in the specific jurisdiction where such judgment
shall be made.

        Section 12.09  Interpretation.  The article and section headings
                       --------------                                   
contained in this Agreement are solely for the purpose of reference, are not
part of the agreement of the parties and shall not in any way affect the meaning
or interpretation of this Agreement.  As used in this Agreement, (i) the term
"person" shall mean and include an individual, a partnership, a joint venture, a
corporation, a trust, an unincorporated organization and a government or any
department or agency thereof; and (ii) the term "Subsidiary" of any specified
corporation shall mean any corporation of which a majority of the outstanding
securities having ordinary voting power to elect a majority of the board of
directors is directly or indirectly beneficially owned by such specified
corporation or any other person of which a majority of the equity interests
therein is, directly or indirectly, owned by such specified corporation.

        Section 12.10  Entire Agreement.  This Agreement, including the exhibits
                       ----------------                                         
hereto and the documents and instruments referred to herein (including the
Confidentiality Agreement dated May 26, 1996 between Vitalink and GranCare),
embodies the entire agreement and understanding of the parties hereto in
respect of the subject matter contained herein and supersedes all prior
agreements and the understandings between the parties with respect to such
subject matter.  There are no representations, promises, warranties, covenants,
or undertakings, other than those expressly set forth or referred to herein and
therein.
<PAGE>
 
                                      S-1

        IN WITNESS WHEREOF, Vitalink and GranCare have caused this Agreement to
be signed by their respective duly authorized officers as of the date first
above written.


                              VITALINK PHARMACY SERVICES, INC.


                              By: 
                                  ------------------------------
                                  Name:
                                  Title:


                              GRANCARE, INC.


                              By:
                                  ------------------------------
                                  Name:
                                  Title: