<PAGE>


                                                                     EXHIBIT 2.2

 
 
                       AGREEMENT AND PLAN OF DISTRIBUTION
 
                                 BY AND BETWEEN
 
                                 GRANCARE, INC.
 
                                      AND
 
                              GCI PROPERTIES, INC.
 
                                  DATED AS OF
 
                               SEPTEMBER 3, 1996
<PAGE>
 
                               TABLE OF CONTENTS
 
<TABLE>
<CAPTION>
                                                                          PAGE
                                                                          ----
 <C>           <S>                                                        <C>
 ARTICLE I.    DEFINITIONS..............................................    1
                                                                        
 Section 1.1.  General..................................................    1
 Section 1.2.  Incorporation of Merger Agreement Definitions............    5
 Section 1.3.  References; Interpretation...............................    5
 ARTICLE II.   DISTRIBUTION AND OTHER TRANSACTIONS; CERTAIN COVENANTS...    6
 Section 2.1.  Transfer of Assets and Liabilities.......................    6
    (a)        Certain Transactions.....................................    6
    (b)        Stock Dividend to GranCare...............................    6
    (c)        Charters; Bylaws.........................................    6
    (d)        Directors; Officers......................................    6
    (e)        Certain Licenses and Permits.............................    6
    (f)        Transfer of Agreements...................................    6
    (g)        Services Agreement.......................................    6
    (h)        Delivery of Shares to Transfer Agent.....................    6
    (i)        Other Transactions.......................................    8
 Section 2.2.  Certain Financial and Other Arrangements.................    8
    (a)        Intercompany Accounts....................................    8
    (b)        Operations in Ordinary Course............................    8
 Section 2.3.  Assumption of Indebtedness; Allocation of Expenses.......    8
 Section 2.4.  Assumption and Satisfaction of Liabilities; Management     
               Responsibility for Shared Liabilities; Obligations,        
               Rights and Assets Relating to Shared Liabilities.........    9
 Section 2.5.  Resignations.............................................    9
 Section 2.6.  Further Assurances.......................................   10
 Section 2.7.  No Representations or Warranties.........................   10
 Section 2.8.  Guarantees...............................................   11
 Section 2.9.  Witness Services.........................................   11
 Section 2.10. Certain Post-Distribution Transactions...................   11
 Section 2.11. Directors and Officers Liability Insurance...............   11
 Section 2.12. Insurance................................................   11
 Section 2.13. Ancillary Agreements.....................................   11
 ARTICLE III.  INDEMNIFICATION..........................................   12
 Section 3.1.  Indemnification by GranCare..............................   12
 Section 3.2.  Indemnification by SNFCo.................................   12
 Section 3.3.  Limitations on Indemnification Obligations...............   12
 Section 3.4.  Procedures for Indemnification...........................   12
 Section 3.5.  Indemnification Payments.................................   13
 Section 3.6.  Other Adjustments........................................   14
 Section 3.7.  Survival of Indemnities..................................   14
 ARTICLE IV.   ACCESS TO INFORMATION....................................   14
 Section 4.1.  Provision of Corporate Records...........................   14
 Section 4.2.  Access to Information....................................   14
 Section 4.3.  Reimbursement; Other Matters.............................   15
 Section 4.4.  Confidentiality..........................................   15
</TABLE>
 
                                       i


<PAGE>
 
                         TABLE OF CONTENTS--(CONTINUED)
<TABLE>
<CAPTION>
                                                                            PAGE
                                                                            ----
 <C>           <S>                                                          <C>
 ARTICLE V.    INSURANCE..................................................
 Section 5.1.  Policies and Rights Included Within Assets.................   16
 Section 5.2.  Post-Time of Distribution Claims Against SNFCo.............   16
 Section 5.3.  Administration; Other Matters..............................   16
    (b)        Allocation of Insurance Proceeds...........................   17
 Section 5.4.  Agreement for Waiver of Conflict and Shared Defense........   17
 Section 5.5.  Cooperation................................................   17
 ARTICLE VI.   DISPUTE RESOLUTION.........................................   18
 ARTICLE VII.  MISCELLANEOUS..............................................   18
 Section 7.1.  Complete Agreement; Construction...........................   18
 Section 7.2.  Counterparts...............................................   19
 Section 7.3.  Survival of Agreements.....................................   19
 Section 7.4.  Notices....................................................   19
 Section 7.5.  Waivers....................................................   19
 Section 7.6.  Amendments.................................................   19
 Section 7.7.  Assignment.................................................   19
 Section 7.8.  Successors and Assigns.....................................   19
 Section 7.9.  Termination................................................   19
 Section 7.10. Subsidiaries...............................................   20
 Section 7.11. Third Party Beneficiaries..................................   20
 Section 7.12. Attorney Fees..............................................   20
 Section 7.13. Title and Headings.........................................   20
 Section 7.14. Schedules..................................................   20
 Section 7.15. Specific Performance.......................................   20
 Section 7.16. Governing Law..............................................   20
 Section 7.17. Severability...............................................   20
</TABLE>
 
                                       ii

<PAGE>
 
                       AGREEMENT AND PLAN OF DISTRIBUTION
 
  THIS AGREEMENT AND PLAN OF DISTRIBUTION (the "Distribution Agreement"), dated
as of September 3, 1996, by and between GranCare, Inc., a California
corporation (the "Company"), and GCI Properties, Inc., a California corporation
("SNFCo").
 
                                  WITNESSETH:
 
  WHEREAS, the Company and Vitalink Pharmacy Services, Inc., a Delaware
corporation ("Vitalink"), contemporaneously herewith are entering into an
Agreement and Plan of Merger, dated as of September 3, 1996 (the "Merger
Agreement"), providing for the merger (the "Merger") of the Company's
Institutional Pharmacy Business with Vitalink;
 
  WHEREAS, prior to the Effective Time (as defined in the Merger Agreement) of
the Merger the Company intends to transfer its Skilled Nursing Business (as
hereinafter defined) to SNFCo in exchange for the issuance of shares of SNFCo
Common Stock;
 
  WHEREAS, immediately prior to the Effective Time of the Merger, the Company's
Board of Directors, subject to the approval of the Company's shareholders,
expects to complete the Distribution (as hereinafter defined); and
 
  WHEREAS, the purpose of the Distribution is to make possible the Merger by
divesting the Company of the Skilled Nursing Business, with which Vitalink is
unwilling to merge, and this Distribution Agreement sets forth the various
agreements between GranCare and SNFCo relating to the separation of the
Institutional Pharmacy Business from the Skilled Nursing Business.
 
  NOW, THEREFORE, in consideration of the premises and of the representations,
warranties, covenants and agreements set forth herein, and intending to be
legally bound (subject to shareholder approval), the parties hereto hereby
agree as follows:
 
                                   ARTICLE I.
 
                                  DEFINITIONS
 
  Section l.1. General. As used in this Agreement, the following terms shall
have the following meanings (such meanings to be equally applicable to both the
singular and plural forms of the terms defined):
 
  "Action" shall mean any action, suit, claim, arbitration, inquiry, proceeding
or investigation by or before any court, any governmental or other regulatory
or administrative agency, body or commission or any arbitration tribunal.
 
  "Affiliate" shall mean, when used with respect to a specified Person, another
Person that directly, or indirectly through one or more intermediaries,
controls or is controlled by or is under common control with the Person
specified.
 
  "Ancillary Agreements" shall mean all of the written agreements, instruments,
understandings, assignments or other arrangements (other than this Distribution
Agreement and the Merger Agreement) entered into in connection with the
transactions contemplated hereby, including, without limitation, the Transfer
and Assumption Instruments, the Employee Benefits Matters Agreement, the Tax
Allocation Agreement, the Interim Services Agreement and the Non-competition
Agreement; provided, however, that in no event shall any agreement constitute
an Ancillary Agreement unless consented to by each of GranCare, SNFCo and
Vitalink.
 
  "Assignee" shall have the meaning as defined in Section 2.1(f)(ii).
 
                                       1
<PAGE>
 
  "Claims Administration" shall mean the processing of claims made under the
Company Policies, including, without limitation, the reporting of claims to the
insurance carriers, as well as the management and defense of claims and
providing for appropriate releases upon settlement of claims.
 
  "Code" shall mean the Internal Revenue Code of 1986, as amended, and the
Treasury regulations promulgated thereunder, including any successor
legislation.
 
  "Commission" shall mean the Securities and Exchange Commission.
 
  "Company Policies" shall mean all Policies which are or at any time were
maintained by or on behalf of or for the benefit or protection of GranCare or
SNFCo or any of their respective predecessors or Subsidiaries which relate to
any Shared Liability, the Skilled Nursing Business or the Institutional
Pharmacy Business, or current or past directors, officers, employees or agents
of any of the foregoing businesses.
 
  "D&O Insurance Policies" shall have the meaning as defined in Section 2.11.
 
  "Distribution" shall mean the distribution on the Distribution Date to
holders of record of shares of GranCare Common Stock as of the Distribution
Record Date of the SNFCo Common Stock owned by GranCare on the basis of one
share of SNFCo Common Stock for each outstanding share of GranCare Common
Stock.
 
  "Distribution Agreement Dispute" shall have the meaning as defined in Article
VI.
 
  "Distribution Date" shall mean such date as may hereafter be determined by
GranCare's Board of Directors as the date of which the Distribution shall be
effected.
 
  "Distribution Record Date" shall mean such date as may hereafter be
determined by GranCare's Board of Directors as the record date for determining
the shareholders of GranCare entitled to receive the Distribution.
 
  "Employee Benefits Matters Agreement" shall mean the Agreement Respecting
Employee Benefit Matters dated as of the Time of Distribution among GranCare
and SNFCo setting forth the manner in which various employee benefit
entitlements will be treated in connection with the Distribution.
 
  "GranCare Common Stock" shall mean the common stock, without par value per
share, of GranCare.
 
  "GranCare Disclosure Statement" shall mean the Disclosure Statement delivered
by GranCare to Vitalink contemporaneously with GranCare's execution and
delivery of the Merger Agreement.
 
  "GranCare Indemnitees" shall mean GranCare, each Pharmacy Subsidiary, the
directors and officers of GranCare and the Pharmacy Subsidiaries and each of
the heirs, executors, successors and assigns of any of the foregoing.
 
  "Indemnifiable Losses" shall mean any and all losses, liabilities, claims,
damages, demands, reasonable costs or expenses (including, without limitation,
attorneys' fees and any and all out-of-pocket expenses) whatsoever reasonably
incurred in investigating, preparing for or defending against any Actions or
potential Actions.
 
  "Indemnifying Party" shall have the meaning as defined in Section 3.3.
 
  "Indemnitee" shall have the meaning as defined in Section 3.3.
 
  "Institutional Pharmacy Business" shall mean the business of providing
pharmaceutical supplies and services primarily to health care institutions such
as the Skilled Nursing Business conducted by GranCare and its Pharmacy
Subsidiaries.
 
 
                                       2
<PAGE>
 
  "Institutional Pharmacy Assets" shall mean, collectively, all the rights and
assets of GranCare and its Subsidiaries that are used primarily in the conduct
of the Institutional Pharmacy Business, including, without limitation, (i) the
assets included on the balance sheet of GranCare as of May 31, 1996, prepared
on a pro forma basis giving effect to the Distribution and included in the
GranCare Disclosure Statement attached to the Merger Agreement, and not
disposed of in the ordinary course of business prior to the Time of
Distribution, (ii) any assets acquired by GranCare or any of its Subsidiaries
that are used primarily in the conduct of the Institutional Pharmacy Business
from May 31, 1996, to the Time of Distribution and not disposed of in the
ordinary course of business, (iii) all the outstanding capital stock or other
interests of GranCare in the Subsidiaries listed on Schedule 1.1(b), (iv)
rights arising pursuant to the Company Policies to the extent set forth in
Article V hereof and (v) the cash proceeds received upon exercise prior to the
Time of Distribution of any stock options to acquire GranCare Common Stock.
Notwithstanding the foregoing, the Institutional Pharmacy Assets shall not
include any assets retained by SNFCo or any of the SNFCo Subsidiaries pursuant
to the terms of any Ancillary Agreement.
 
  "Institutional Pharmacy Liabilities" shall mean, collectively, (i) the
Liabilities included on the balance sheet of GranCare as of May 31, 1996,
prepared on a pro forma basis giving affect to the Distribution and included in
the GranCare Disclosure Statement attached to the Merger Agreement, and any
Liabilities of the same kind or nature incurred by GranCare or any of its
Subsidiaries relating primarily to or arising primarily in connection with the
conduct of the Institutional Pharmacy Business from May 31, 1996, to the Time
of Distribution other than indebtedness for borrowed money except as may
otherwise be provided for elsewhere herein, (ii) all the Liabilities of
GranCare and the Pharmacy Subsidiaries, if any, under this Distribution
Agreement and any of the Ancillary Agreements, (iii) all the Liabilities of
GranCare or its Subsidiaries (whenever arising whether prior to, at or
following the Time of Distribution) to the extent the Liabilities arise out of
or in connection with or otherwise relate primarily to (a) the management or
conduct before or after the Time of Distribution of the Institutional Pharmacy
Business or (b) any properties owned, leased, operated or otherwise used
primarily in the conduct of the Institutional Pharmacy Business, (iv) the
indebtedness outstanding at the Time of Distribution that is listed on Schedule
2.3 (the Liabilities listed in clauses (i) through (iv) above being
collectively referred to as the "True GranCare Liabilities") and (v) one-half (
1/2) of the amount of all other Shared Liabilities.
 
  "Insurance Administration" shall mean, with respect to each Company Policy,
the accounting for Insurance Proceeds, premiums, defense costs, indemnity
payments, deductibles and retentions, as appropriate, under the terms and
conditions of each of the Company Policies; and the report to excess insurance
carriers of any losses or claims which may cause the per-occurrence, per claim
or aggregate limits of any Company Policy to be exceeded, and the distribution
of Insurance Proceeds as contemplated by this Distribution Agreement.
 
  "Insurance Proceeds" shall mean those monies (i) received by an insured from
an insurance carrier or (ii) paid by an insurance carrier on behalf of an
insured.
 
  "Insured Claims" shall mean those Liabilities that, individually or in the
aggregate, are covered within the terms and conditions of any of the Company
Policies, whether or not subject to deductibles, co-insurance, uncollectability
or premium adjustments, but only to the extent that such Liabilities are within
applicable Company Policy limits, including aggregates.
 
  "Liabilities" shall mean any and all debts, liabilities and obligations,
absolute or contingent, matured or unmatured, liquidated or unliquidated,
accrued or unaccrued, known or unknown, whenever arising, including, without
limitation, those debts, liabilities and obligations arising under any law,
rule, regulation, Action, order or consent decree of any court, any
governmental or other regulatory or administrative agency or commission or any
award of any arbitration tribunal, and those arising under any contract,
guarantee, commitment or undertaking.
 
  "Non-competition Agreement" shall mean the agreement dated as of the Time of
Distribution between Parent (as defined in the Merger Agreement), Vitalink and
SNFCo setting forth the basis for the intercompany relationships that shall
exist between and among the parties during the term of such agreement.
 
                                       3
<PAGE>
 
  "Person" shall mean any natural person, corporation, business trust, joint
venture, association, company, partnership or government, or any agency or
political subdivision thereof.
 
  "Pharmacy Subsidiaries" shall mean those subsidiaries of GranCare listed on
Schedule 1.1(b) hereto.
 
  "Policies" shall mean insurance policies and insurance contracts of any kind
(other than life and benefits policies or contracts), including, without
limitation, primary, excess and umbrella policies, comprehensive general
liability, fiduciary liability, automobile, aircraft, property and casualty,
environmental, workers' compensation and employee dishonesty insurance policies
and bonds and captive insurance company arrangements, together with the rights,
benefits and privileges thereunder.
 
  "Proxy Statement/Prospectus" shall mean the Proxy Statement/Prospectus
contained in the Registration Statement on Form S-4 relating to the shares of
Vitalink Common Stock to be issued in connection with the Merger sent to the
holders of shares of GranCare Common Stock in connection with obtaining
shareholder approval of, inter alia, the Distribution and the Merger, including
any amendment or supplement thereto.
 
  "Records" shall have the meaning as defined in Section 4.1(a).
 
  "Services Agreement" shall mean the Interim Services Agreement dated as of
the Time of Distribution by and between SNFCo and GranCare pursuant to which
SNFCo shall provide, for the benefit of Vitalink (as the successor to
GranCare), such services as may be requested from time to time by Vitalink as
were provided on a centralized basis by GranCare for the benefit of GranCare
and its Subsidiaries prior to the Distribution.
 
  "Settling Party" shall have the meaning as defined in Section 2.4(b).
 
  "Shared Liability" means any Liability of the parties hereto or their
respective Subsidiaries (whether arising prior to, at or following the Time of
Distribution) (i) which is not a True GranCare Liability or True SNFCo
Liability or (ii) the responsibility for which is allocated between GranCare
and SNFCo in this Distribution Agreement or the Ancillary Agreements. Shared
Liability includes, without limitation, the Shared Liabilities listed on
Schedule 1.1(c) hereto.
  "Shared Transaction Expenses" shall have the meaning as defined in Section
2.3(d).
 
  "Shared Transaction Expense Settlement Amount" shall have the meaning as
defined in Section 2.3(d).
 
  "Skilled Nursing Assets" shall mean, collectively, all the rights and assets
of GranCare and its Subsidiaries immediately prior to the Time of Distribution
that are not Institutional Pharmacy Assets, including, without limitation, (i)
all outstanding capital stock or other interests of SNFCo in the SNFCo
Subsidiaries listed on Schedule 1.1(a), (ii) the right to the name "GranCare"
and the other trademarks, trade names, logos, symbols and similar marks listed
in Schedule 1.1(d) and (iii) rights arising pursuant to the Company Policies to
the extent set forth in Article V hereof. Notwithstanding the foregoing, the
Skilled Nursing Assets shall not include any assets retained by GranCare or any
of the Pharmacy Subsidiaries pursuant to the terms of any Ancillary Agreement.
 
  "Skilled Nursing Business" shall mean the skilled nursing, contract
management, home health and assisted living business conducted by GranCare,
SNFCo and their respective Subsidiaries and successors.
 
  "Skilled Nursing Liabilities" shall mean, collectively, (i) all of the
Liabilities of GranCare and its Subsidiaries immediately prior to the Time of
Distribution other than the Institutional Pharmacy Liabilities and (ii) all the
Liabilities of SNFCo and the SNFCo Subsidiaries, if any, under this
Distribution Agreement and any of the Ancillary Agreements (the Liabilities
listed in clauses (i) through (ii) above being collectively referred to as the
"True SNFCo Liabilities") and (iii) one-half ( 1/2) of the amount of all Shared
Liabilities, unless otherwise allocated in this Distribution Agreement.
 
  "SNFCo Common Stock" shall mean the common stock of SNFCo.
 
                                       4
<PAGE>
 
  "SNFCo Indemnitees" shall mean SNFCo, each SNFCo Subsidiary, the directors
and officers of SNFCo and the SNFCo Subsidiaries and each of the heirs,
executors, successors and assigns of any of the foregoing.
 
  "SNFCo Subsidiaries" shall mean all of the subsidiaries of GranCare other
than SNFCo and the Pharmacy Subsidiaries, including, without limitation, those
Subsidiaries listed on Schedule 1.1(a) hereto.
 
  "Subsidiary" shall mean any Person of which another Person (i) owns, directly
or indirectly, ownership interests sufficient to elect a majority of the Board
of Directors (or persons performing similar functions (irrespective of whether
at the time any other class or classes of ownership interests of such Person
shall or might have such voting power upon the occurrence of any contingency))
or (ii) is a general partner or an entity performing similar functions (e.g., a
trustee).
 
  "Tax" shall mean all Federal, state, local and foreign taxes and assessments
of any kind, including all interest, penalties and additions imposed with
respect to such amounts.
 
  "Tax Allocation Agreement" shall mean the Tax Allocation and Indemnification
Agreement dated as of the Time of Distribution among GranCare and SNFCo and the
other Subsidiaries of GranCare named therein.
 
  "Third Party Claim" shall have the meaning as set forth in Section 3.4.
 
  "Time of Distribution" shall mean the time on the Distribution Date as of
which the Distribution is effective, and unless otherwise agreed between the
parties, shall be immediately prior to the Effective Time.
 
  "Transfer Agent" shall mean First Union National Bank, Two First Union
Center, 230 South Tryon Street, Charlotte, North Carolina, the transfer agent
for GranCare Common Stock.
 
  "Transfer and Assumption Instruments" shall mean, collectively, the various
agreements, instruments and other documents to be entered into among or between
any of GranCare, SNFCo, the Pharmacy Subsidiaries and the SNFCo Subsidiaries
and approved by Vitalink (which approval shall not be unreasonably withheld) to
effect the transfer of assets and the assumption of Liabilities relating to the
Skilled Nursing Business and the Institutional Pharmacy Business in the manner
contemplated by this Distribution Agreement, including, without limitation,
real estate transfer documents and leases and all other instruments, documents
and agreements delivered in accordance with Section 2.6 hereof.
 
  "True GranCare Liabilities" shall have the meaning as set forth under
"Institutional Pharmacy Liabilities."
 
  "True SNFCo Liabilities" shall have the meaning as set forth under "Skilled
Nursing Liabilities."
 
  "Vitalink Common Stock" shall mean the common stock, $.01 par value per
share, of Vitalink.
 
  Section 1.2. Incorporation of Merger Agreement Definitions. Except to the
extent set forth herein, capitalized terms used herein shall have the same
definitions as such terms have in the Merger Agreement.
 
  Section 1.3. References; Interpretation. References to a "Schedule" or an
"Exhibit" are, unless otherwise specified, to one of the Schedules or Exhibits
attached to this Distribution Agreement, and references to a "Section" are,
unless otherwise specified, to one of the Sections of this Distribution
Agreement.
 
                                       5
<PAGE>
 
                                  ARTICLE II.
 
             DISTRIBUTION AND OTHER TRANSACTIONS; CERTAIN COVENANTS
 
  Section 2.1. Transfer of Assets and Liabilities.
 
  (a) Certain Transactions. On or prior to the Distribution Date GranCare
shall, on behalf of itself and its Subsidiaries, transfer to SNFCo all of
GranCare's and its Subsidiaries' right, title and interest in the Skilled
Nursing Assets in the manner contemplated by the internal restructuring plan
attached hereto as Exhibit A and incorporated herein by reference and SNFCo
shall assume the Skilled Nursing Liabilities.
 
  (b) Stock Dividend to GranCare. On or prior to the Distribution Date SNFCo
shall issue to GranCare as a stock dividend such number of shares of SNFCo
Common Stock as shall be required to effect the Distribution, as certified by
the Transfer Agent. In connection therewith GranCare shall deliver to SNFCo for
cancellation the share certificate currently held by GranCare representing
shares of SNFCo Common Stock.
 
  (c) Charters; Bylaws. On or prior to the Distribution Date all necessary
actions shall have been taken to provide for the adoption of the form of
Articles of Incorporation and Bylaws to be filed by SNFCo with the Commission.
 
  (d) Directors; Officers. On or prior to the Distribution Date, GranCare, as
the sole shareholder of SNFCo, (i) shall have taken all necessary action by
written consent to elect to the Board of Directors of SNFCo, the individuals to
be identified in the Proxy Statement/Prospectus as directors of SNFCo,
effective upon the Distribution, and (ii) shall have caused the directors of
SNFCo to elect as officers of SNFCo the individuals to be identified in the
Proxy Statement/Prospectus as the officers of SNFCo, effective upon the
Distribution.
 
  (e) Certain Licenses and Permits. On or prior to the Distribution Date or as
soon as reasonably practicable thereafter, all transferrable licenses, permits
and authorizations issued by governmental or regulatory entities which relate
to the Skilled Nursing Business but which are held in the name of GranCare or
any of the Pharmacy Subsidiaries which licenses, permits and authorizations are
listed on Schedule 2.1(e), shall be duly and validly transferred by GranCare
(or such Pharmacy Subsidiaries) to SNFCo or such SNFCo Subsidiary as SNFCo may
designate.
 
  (f) Transfer of Agreements.
 
    (i) On or prior to the Distribution Date or as soon as reasonably
  practicable thereafter, subject to the limitations set forth in this
  Section 2.1(f), GranCare will, and it will cause the Pharmacy Subsidiaries
  to, assign, transfer and convey to SNFCo or such SNFCo Subsidiary as SNFCo
  may designate, all of GranCare's or such Pharmacy Subsidiary's respective
  right, title and interest in and to any and all agreements that do not
  relate primarily to the Institutional Pharmacy Business, to the extent such
  agreements were not previously so transferred in connection with the
  transactions contemplated by Section 2.1(a) hereof.
 
    (ii) The assignee of any agreement assigned, in whole or in part,
  hereunder (an "Assignee") shall assume and agree to pay, perform, and fully
  discharge all obligations of the assignor under such agreement and shall
  indemnify the assignor against any and all liabilities in connection
  therewith.
 
    (iii) Notwithstanding anything in this Distribution Agreement to the
  contrary, this Distribution Agreement shall not constitute an agreement to
  assign any agreement, in whole or in part, or any rights thereunder if the
  agreement to assign or any attempted assignment, without the consent of a
  third party, would constitute a breach thereof or in any way adversely
  affect the rights of the Assignee thereof; provided, however, that the
  provisions of Section 2.6 shall be applicable thereto.
 
  (g) Services Agreement. On or before the Distribution Date, GranCare and
SNFCo will execute and deliver the Services Agreement setting forth the terms
upon which SNFCo shall, subsequent to the Time of Distribution, provide such
centralized back office support services to GranCare (and Vitalink as the
successor to GranCare) as
 
                                       6
<PAGE>
 
may be determined by the parties to be appropriate and as may be requested by
Vitalink from time to time until such time (not to exceed the term established
in such agreement) as Vitalink (as the successor to GranCare) shall no longer
require such services.
 
  (h) Delivery of Shares to Transfer Agent. GranCare shall deliver to the
Transfer Agent the share certificates representing the shares of SNFCo Common
Stock issued to GranCare by SNFCo pursuant to Section 2.1(b) and shall instruct
the Transfer Agent to distribute, on or as soon as practicable following the
Time of Distribution, such SNFCo Common Stock to holders of record of shares of
GranCare Common Stock on the Distribution Record Date as further contemplated
by the Proxy Statement/Prospectus and herein. SNFCo shall provide all share
certificates that the Transfer Agent shall require in order to effect the
Distribution.
 
  (i) Other Transactions.
 
    (i) On or prior to the Distribution Date, or as soon thereafter as is
  reasonably practical, GranCare will, and it will cause the Pharmacy
  Subsidiaries (other than SNFCo or any of the SNFCo Subsidiaries) to,
  assign, transfer and convey to SNFCo (or such SNFCo Subsidiary as SNFCo may
  direct) all of GranCare's right, title and interest in and to (a) all items
  of GranCare's intellectual property except for those items listed on
  Schedule 2.1(i), which shall be retained by GranCare, (b) all of the
  various assets listed on GranCare's General Ledger Account Number 1.01
  except for those specific assets listed on Schedule 2.1(i), which shall be
  retained by GranCare, and (c) all real estate leases, utility accounts,
  trade organization memberships, vendor service contracts, warranty
  contracts and items of a similar nature except for those items listed on
  Schedule 2.1(i), which shall be retained by GranCare.
 
    (ii) On or prior to the Distribution Date, GranCare and the Pharmacy
  Subsidiaries shall take or cause to be taken such action as shall be
  necessary to assign and transfer all pending litigation, arbitration,
  mediation and matters of a similar nature ("Pending Litigation Matters") to
  SNFCo or such SNFCo Subsidiary as SNFCo may designate, including, without
  limitation, instructing counsel of record to enter appropriate motions or
  pleadings to accomplish the foregoing, except for such Pending Litigation
  Matters as are listed on Schedule 2.1(i), which shall be retained by
  GranCare. SNFCo and GranCare will each indemnify the other against any and
  all liabilities, costs and expenses incurred in connection with any of the
  Pending Litigation Matters for which it is responsible pursuant to this
  Section 2.1(ii) following the Time of Distribution and each of GranCare and
  SNFCo shall, subsequent to the Time of Distribution, be solely responsible
  for the prosecution, defense, settlement or other conduct of Pending
  Litigation Matters as are to be retained by each of them pursuant to this
  Section 2.1(ii).
 
  Section 2.2. Certain Financial and Other Arrangements.
 
  (a) Intercompany Accounts. At the Time of Distribution, all intercompany
receivables, payables and loans (other than receivables, payables and loans
otherwise specifically provided for in any of the Ancillary Agreements or
hereunder), including, without limitation, in respect of any cash balances, any
cash balances representing deposited checks or drafts for which only a
provisional credit has been allowed or any cash held in any centralized cash
management system, between GranCare and any of its Subsidiaries (other than the
Pharmacy Subsidiaries), on the one hand, and the Pharmacy Subsidiaries, on the
other hand, shall be netted out, in each case in such manner and amount as may
be agreed in writing by duly authorized representatives of GranCare, Vitalink
and SNFCo and the resulting net balance due from the Pharmacy Subsidiaries to
GranCare and any of its Subsidiaries (other than the Pharmacy Subsidiaries)
shall be contributed to the appropriate Pharmacy Subsidiaries as additional
capital.
 
  (b) Operations in Ordinary Course. Each of GranCare and SNFCo covenants and
agrees that, except as otherwise provided in any Ancillary Agreement, during
the period from the date of this Distribution Agreement through the Time of
Distribution, it will, and will cause any entity that is a Subsidiary of such
party at any time during such period to, conduct its business in a manner
substantially consistent with current and past operating practices and in the
ordinary course, including, without limitation, with respect to the payment and
administration of accounts payable and the collection and administration of
accounts receivable, the purchase of capital assets
 
                                       7
<PAGE>
 
and equipment, the management of inventories, cash management practices, the
allocation of interest, corporate overhead, costs of legal, insurance and other
centralized functions and shall, at all times prior to the Time of
Distribution, conduct its business in a manner consistent with the provisions
of Section 5.01 of the Merger Agreement.
 
  Section 2.3. Assumption of Indebtedness; Allocation of Expenses.
 
  (a) GranCare and SNFCo shall take such action as shall be necessary or
appropriate to cause SNFCo to assume all of the items of GranCare's
consolidated indebtedness other than those items listed on Schedule 2.3(a).
 
  (b) In connection with the retention by GranCare of the Senior Subordinated
Notes (as defined in the Merger Agreement), SNFCo shall, prior to the Time of
Distribution, conduct a consent solicitation to obtain the approval of the
holders of the required principal amount of such Notes of the transactions
contemplated by this Distribution Agreement and the Merger Agreement and to
such modifications in the covenants contained in the Note Indenture (as defined
in the Merger Agreement) as may be reasonably requested by Vitalink in exchange
for the payment to such holders of a consent fee in such amount as is approved
by GranCare, SNFCo and Vitalink, which fee shall be paid equally by GranCare
and SNFCo (and Vitalink as the successor to GranCare).
 
  (c) On or prior to the Distribution Date, GranCare shall take such action as
shall be necessary to redeem the Debentures (as defined in the Merger
Agreement) at a redemption price not to exceed 104.55% of the outstanding
principal amount thereof as of the date of this Distribution Agreement plus
accrued and unpaid interest thereon to the date of redemption. The redemption
premium incurred by GranCare in connection with accomplishing such redemption
shall be shared equally by GranCare and SNFCo (and Vitalink as the successor to
GranCare) but SNFCo shall be solely responsible for the payment of any accrued
interest to the date of redemption.
 
  (d) In connection with accomplishing the various transactions contemplated by
the Merger Agreement, this Distribution Agreement and the Ancillary Agreements,
SNFCo (on behalf of itself and GranCare) and Vitalink each shall be responsible
for one-half of the total documented fees, expenses and other items of cost of
SNFCo, GranCare and Vitalink set forth on Schedule 2.3(d) (the "Shared
Transaction Expenses"). As soon as reasonably practical following the Effective
Time of the Merger, representatives of SNFCo and Vitalink each shall submit to
the other appropriate documentation substantiating the nature and amount of all
Shared Transaction Expenses actually incurred and paid by SNFCo (on behalf of
itself and GranCare) and Vitalink, respectively. The amounts of Shared
Transaction Expenses actually paid by each of SNFCo and Vitalink shall be
netted out in the manner hereinafter described and SNFCo or Vitalink, whichever
shall have paid the least amount of Shared Transaction Expenses, shall
reimburse the other pursuant to the provisions of Section 2.3(e) hereof in an
amount (the "Shared Transaction Expense Settlement Amount") equal to one-half
of the difference between (i) the amount of Shared Transaction Expenses paid by
SNFCo minus (ii) the amount of Shared Transaction Expenses paid by Vitalink. If
the result obtained from the foregoing calculation is a negative number, then
SNFCo shall reimburse Vitalink pursuant to the provisions of Section 2.3(e)
hereof in an amount equal to one-half of the aggregate difference so
determined. All Shared Transaction Expenses actually paid by GranCare prior to
the Time of Distribution shall be deemed to have been paid by SNFCo for
purposes of this Section 2.3(d). Except as set forth in Schedule 2.3(d) or as
otherwise contemplated by Section 5.11 of the Merger Agreement, GranCare and
SNFCo, on the one hand, and Vitalink, in its individual capacity and not as the
successor to GranCare, will each be solely responsible for their respective
fees and expenses incurred in connection with the transactions contemplated by
the Merger Agreement, this Distribution Agreement and the Ancillary Agreements.
 
  (e) Immediately following the determination of the Shared Transaction Expense
Settlement Amount, representatives of Vitalink and SNFCo also shall determine
jointly the total outstanding indebtedness (determined in accordance with
generally accepted accounting principles consistently applied) of the
Institutional Pharmacy Business as of the Effective Time of the Merger being
assumed by Vitalink which shall include, but not be limited to, $100.0 million
attributable to the Senior Subordinated Notes and an amount equal to the amount
of GranCare's indebtedness incurred in connection with the acquisition of
Institutional Pharmacy Businesses during
 
                                       8
<PAGE>
 
the period commencing on June 1, 1996 and ending at the Time of Distribution
("Closing Debt") and the amount of GranCare's cash and cash equivalents as of
the Effective Time of the Merger (excluding cash attributable to the exercise
of GranCare Options and warrants to purchase GranCare Common Stock occurring
after the date hereof and prior to the Effective Time and excluding any cash
attributable to checks or similar instruments outstanding and subject to
collection) ("Cash"). As soon as practicable after the Effective Time of the
Merger, Vitalink shall pay to SNFCo an amount equal to the difference between
(i) the sum of (A) $88,383,000 plus (B) the total purchase price paid by SNFCo
in connection with the acquisition of Institutional Pharmacy Businesses
approved by Vitalink during the period commencing on June 1, 1996 and ending at
the Time of Distribution, including, without limitation, the total purchase
price paid in connection with the acquisition of Emery Pharmacy, Inc., plus (C)
the Shared Transaction Expense Settlement Amount (or less such amount if such
amount is a negative number) plus (D) an amount equal to GranCare's Cash minus
(ii) the sum of (A) the amount of Closing Debt plus (B) $6.0 million. If the
result obtained by subtracting the sum determined pursuant to subclause
2.3(e)(ii) from the sum determined pursuant to subclause 2.3(e)(i) is a
negative amount, then such amount shall be paid by SNFCo to Vitalink and used
by Vitalink to pay liabilities to creditors of GranCare assumed by Vitalink in
the Merger. All payments to be made pursuant to this Section 2.3(e) shall be
made by wire transfer of immediately available funds to an account designated
by the recipient of such payment.
 
  Section 2.4. Assumption and Satisfaction of Liabilities; Management
Responsibility for Shared Liabilities; Obligations, Rights and Assets Relating
to Shared Liabilities.
 
  (a) Except as otherwise specifically set forth in any Ancillary Agreement,
from and after the Time of Distribution, (i) GranCare shall, and shall cause
the Pharmacy Subsidiaries and any and all successors and assigns to assume,
pay, perform and discharge all Institutional Pharmacy Liabilities as and when
due, and (ii) SNFCo shall, and shall cause the SNFCo Subsidiaries and any and
all successors and assigns to assume, pay, perform and discharge all Skilled
Nursing Liabilities as and when due.
 
  (b) GranCare and SNFCo (and Vitalink as successor to GranCare) shall each
direct its own defense of any Shared Liability at its own expense; provided,
however, that (i) each party shall provide the other with copies of all
pleading, motions, items of correspondence and other documentation pertaining
to any Shared Liability contemporaneously with the first release of any such
material and (ii) no party hereto (or its successor) will admit any liability
with respect to, or settle, compromise or discharge, any Shared Liability
without the other party's prior written consent (which consent shall not be
unreasonably withheld) except as hereinafter provided. Any party seeking to
settle, compromise or discharge a Shared Liability (a "Settling Party") shall
have the right to settle, compromise or discharge a Shared Liability without
the other party's consent if the Settling Party releases the non-settling party
from any obligation in respect of such Shared Liability and indemnifies the
non-settling party against any and all liabilities in connection therewith and
such settlement, compromise or discharge would not otherwise adversely affect
the non-settling party.
 
  (c) Upon the compromise, settlement or other resolution of any Shared
Liability, SNFCo and GranCare (and Vitalink as the successor to GranCare) shall
share in any obligation or liability arising as a result thereof in the same
proportion in which the Shared Liability is shared. The parties hereto shall
share in any rights and assets (including, without limitation, recoveries,
claims, rights of subrogation and proceeds of asset sales) that relate to
Shared Liabilities in the same proportions in which the related Shared
Liability is shared.
 
  Section 2.5. Resignations. GranCare shall cause all its officers who shall
not continue as employees of SNFCo subsequent to the Time of Distribution to
resign, effective as of the Time of Distribution, from all positions as
directors or officers of SNFCo or as officers or directors of any SNFCo
Subsidiary in which they serve. SNFCo shall cause all its officers who shall
not continue as employees of GranCare subsequent to the Time of Distribution to
resign, effective as of the Time of Distribution, from all positions as
directors or officers of GranCare or as officers or directors of any Pharmacy
Subsidiary in which they serve.
 
                                       9
<PAGE>
 
  Section 2.6. Further Assurances.
 
  (a) In case at any time after the Time of Distribution any further action is
reasonably necessary or desirable to carry out the purposes of this
Distribution Agreement and the Ancillary Agreements, the proper officers of
each party to this Distribution Agreement shall take, or cause the proper
officers of their respective Subsidiaries to take, all such necessary action.
Without limiting the foregoing, GranCare and SNFCo shall use their commercially
reasonable efforts to obtain all required consents and approvals of third
parties, to enter into all amendatory agreements and to make all filings and
applications that may be required for the consummation of the transactions
contemplated by this Distribution Agreement, the Merger Agreement and the
Ancillary Agreements, including, without limitation, all applicable
governmental and regulatory filings.
 
  (b) In the event that subsequent to the Time of Distribution, GranCare or any
Pharmacy Subsidiaries shall either (i) receive written notice from SNFCo that
certain specified assets or Liabilities of GranCare or any Pharmacy
Subsidiaries which properly constitute Skilled Nursing Assets or Skilled
Nursing Liabilities were not transferred to SNFCo on or prior to the Time of
Distribution or (ii) determine that certain assets or Liabilities of GranCare
or any Pharmacy Subsidiaries which constitute Skilled Nursing Assets or Skilled
Nursing Liabilities were not transferred to SNFCo on or prior to the Time of
Distribution, then as promptly as practical thereafter, GranCare shall, and
shall cause the Pharmacy Subsidiaries to, take all steps reasonably necessary
to (A) transfer and deliver any and all of such assets to SNFCo without the
payment by SNFCo of any consideration therefor or (B) assign and transfer any
and all such Liabilities to SNFCo which shall assume and discharge the same
without payment to or by GranCare of any consideration in respect thereof. In
the event that, subsequent to the Time of Distribution, SNFCo or any SNFCo
Subsidiaries shall either (i) receive written notice from GranCare or any of
the Pharmacy Subsidiaries that certain specified assets or Liabilities were
transferred to SNFCo which properly constitute Institutional Pharmacy Assets or
Institutional Pharmacy Liabilities or (ii) determine that certain assets or
Liabilities of SNFCo which constitute Institutional Pharmacy Assets or
Institutional Pharmacy Liabilities were transferred to SNFCo, then as promptly
as practicable thereafter, SNFCO shall, and shall cause the SNFCo Subsidiaries
to, take all steps reasonably necessary to (A) transfer and deliver any and all
such assets to GranCare or the Pharmacy Subsidiaries without the payment by
GranCare of any consideration therefor or (B) assign and transfer any and all
such liabilities to GranCare which shall assume and discharge the same without
payment to or by SNFCo of any consideration in respect thereof.
 
  (c) Nothing in this Distribution Agreement shall be deemed to require the
transfer of any assets or the assumption of any Liabilities which by their
terms or operation of law cannot be transferred; provided, however, that the
parties hereto and their respective Subsidiaries shall cooperate to seek to
obtain any necessary consents or approvals for the transfer of all assets and
Liabilities contemplated to be transferred pursuant to this Article II. In the
event that any such transfer of assets or Liabilities has not been consummated
as of the Time of Distribution, from and after the Time of Distribution the
party retaining such asset shall hold such asset in trust for the use and
benefit of the party entitled thereto (at the expense of the party entitled
thereto) or retain such Liability for the account of the party by whom such
Liability is to be assumed pursuant hereto, as the case may be, and take such
other action as may be reasonably requested by the party to whom such asset is
to be transferred, or by whom such Liability is to be assumed, as the case may
be, in order to place such party, insofar as is reasonably possible, in the
same position as would have existed had such asset or Liability been
transferred as contemplated hereby. As and when any such asset or Liability
becomes transferable, such transfer shall be effected forthwith. As of the Time
of Distribution, each party hereto shall be deemed to have acquired complete
and sole beneficial ownership over all of the assets held by it, together with
all rights, powers and privileges incident thereto, and shall be deemed to have
assumed in accordance with the terms of this Distribution Agreement all of the
Liabilities, and all duties, obligations and responsibilities incident thereto,
which such party is entitled to acquire or required to assume pursuant to the
terms of this Distribution Agreement.
 
  Section 2.7. No Representations or Warranties. Each of the parties hereto
understands and agrees that, except as otherwise expressly provided in the
Merger Agreement, no party hereto is, in this Distribution Agreement or in any
other agreement or document contemplated by this Distribution Agreement or
otherwise, making any representation or warranty whatsoever, including, without
limitation, as to title, value or legal
 
                                      10
<PAGE>
 
sufficiency. It is also agreed and understood that all assets either
transferred to or retained by the parties, as the case may be, shall be "as is,
where is" and that (subject to Section 2.6) the party to which such assets are
to be transferred hereunder shall bear economic and legal risk that any
conveyances of such assets shall prove to be insufficient or that such party's
or any Subsidiary's title to any such assets shall be other than good and
marketable and free from encumbrances.
 
  Section 2.8. Guarantees. Except as otherwise specified in any Ancillary
Agreement, each of GranCare and SNFCo shall use its commercially reasonable
efforts to have, on or prior to the Time of Distribution, or as soon as
practicable thereafter, (a) GranCare and any of the Pharmacy Subsidiaries
removed as guarantor of or obligor for any True SNFCo Liability and (b) SNFCo
and any of the SNFCo Subsidiaries removed as a guarantor of or obligor for any
True GranCare Liability, in each case, without the requirement that it pay any
additional consideration in connection with obtaining the same.
 
  Section 2.9. Witness Services. At all times from and after the Distribution
Date, each of GranCare and SNFCo shall use their commercially reasonable
efforts to make available to the other, upon reasonable written request, its
and its Subsidiaries' officers, directors, employees and agents as witnesses to
the extent that (a) such persons may reasonably be required in connection with
the prosecution or defense of any Action in which the requesting party may from
time to time be involved and (b) there is no conflict of interest in the Action
between the requesting party and GranCare or SNFCo, as applicable. A party
providing witness services to the other party under this Section shall be
entitled to receive from the recipient of such services, upon the presentation
of invoices therefor, payments for such amounts, relating to supplies,
disbursements and other out-of-pocket expenses and direct costs of employees
who are witnesses, as may be reasonably incurred in providing such witness
services.
 
  Section 2.10. Certain Post-Distribution Transactions.
 
  (a) GranCare shall comply with and otherwise not take any action inconsistent
with each representation, covenant and statement made, or to be made, to
GranCare's tax counsel in connection with such firm's rendering of an opinion
to GranCare and SNFCo as to certain tax aspects of the Distribution.
 
  (b) SNFCo shall comply with and otherwise not take any action inconsistent
with each representation, covenant and statement made, or to be made, to
SNFCo's tax counsel in connection with such firm's rendering of an opinion to
GranCare and SNFCo as to certain tax aspects of the Distribution.
 
  Section 2.11. Directors and Officers Liability Insurance. From and after the
Time of Distribution to the third anniversary of the Distribution Date,
GranCare and SNFCo (and Vitalink as the successor to GranCare) will maintain in
full force and effect in such manner as is contemplated by Section 5.10 of the
Merger Agreement, all Company Policies providing directors and officers
liability insurance ("D&O Insurance Policies") (or, through the purchase of an
alternative policy, the full benefits and coverage of such D&O Insurance
Policies) and shall not consent to any amendment of the terms of such policies
that may be adverse to any persons covered by such insurance except as may
otherwise be permitted by Section 5.10 of the Merger Agreement. The provisions
of this Section 2.11 are intended for the benefit of, and shall be enforced by,
each of the persons covered by the D&O Insurance Policies.
 
  Section 2.12. Insurance. Except as contemplated by Article V and Section 2.11
hereof, any and all omnibus coverage of GranCare and the Pharmacy Subsidiaries
under Company Policies will terminate (and will not be replaced) as of the Time
of Distribution and from and after the Time of Distribution GranCare and SNFCo
shall each obtain such continuing coverage as may be deemed necessary or
appropriate.
 
  Section 2.13. Ancillary Agreements. Effective as of the Time of Distribution,
each of GranCare and SNFCo shall enter into, and/or (where applicable) shall
cause their respective Subsidiaries to enter into, the Ancillary Agreements
and, subject to Vitalink's prior approval, which shall not be unreasonably
withheld, any other agreements in respect of the Distribution reasonably
necessary or appropriate in connection with the transactions contemplated
hereby and thereby.
 
                                      11
<PAGE>
 
                                  ARTICLE III.
 
                                INDEMNIFICATION
 
  Section 3.1. Indemnification by GranCare. Subsequent to the Time of
Distribution, except as otherwise specifically set forth in any provision of
this Distribution Agreement or of any Ancillary Agreement, GranCare (and
Vitalink as the successor to GranCare) shall indemnify, defend and hold
harmless the SNFCo Indemnitees from and against any and all Indemnifiable
Losses of the SNFCo Indemnitees arising out of, by reason of or otherwise in
connection with (a) the Institutional Pharmacy Liabilities, (b) the breach,
whether before or after the Time of Distribution, by GranCare or the Pharmacy
Subsidiaries of any provision of this Distribution Agreement or any Ancillary
Agreement or (c) the Proxy Statement/Prospectus to the extent that such
Indemnifiable Loss relates to or arises out of information contained in the
Proxy Statement/Prospectus that specifically relates to Vitalink.
 
  Section 3.2. Indemnification by SNFCo. Subsequent to the Time of
Distribution, except as otherwise specifically set forth in any provision of
this Distribution Agreement or of any Ancillary Agreement, SNFCo shall
indemnify, defend and hold harmless the GranCare Indemnitees from and against
any and all Indemnifiable Losses of the GranCare Indemnitees arising out of, by
reason of or otherwise in connection with (a) the Skilled Nursing Liabilities,
(b) the breach, whether before or after the Time of Distribution, by SNFCo or
the SNFCo Subsidiaries of any provision of this Distribution Agreement or any
Ancillary Agreement, (c) the Spin Registration Document (as defined in the
Merger Agreement) that shall be prepared by SNFCo and filed with the Commission
pertaining to the registration of the SNFCo Common Stock to be issued in the
Distribution or (d) the Proxy Statement/Prospectus to the extent that such
Indemnifiable Loss relates to or arises out of information contained in the
Proxy Statement/Prospectus that specifically relates to SNFCo or GranCare.
 
  Section 3.3. Limitations on Indemnification Obligations.
 
  (a) The amount that any party (an "Indemnifying Party") is or may be required
to pay to any other person (an "Indemnitee") pursuant to Section 3.1 or Section
3.2, as applicable, shall be reduced (retroactively or prospectively) by any
Insurance Proceeds or other amounts actually recovered by or on behalf of such
Indemnitee in respect of the related Indemnifiable Loss. If an Indemnitee shall
have received the payment required by this Distribution Agreement from an
Indemnifying Party in respect of an Indemnifiable Loss and shall subsequently
receive Insurance Proceeds or other amounts in respect of such Indemnifiable
Loss, then such Indemnitee shall pay to such Indemnifying Party a sum equal to
the amount of such Insurance Proceeds or other amounts actually received, up to
the aggregate amount of any payments received from such Indemnifying Party
pursuant to this Distribution Agreement in respect of such Indemnifiable Loss.
 
  (b) Any loss, liability, claim, damage, demand, cost or expense relating to
or arising out of information contained in the Proxy Statement/Prospectus that
does not specifically relate to either Vitalink, on the one hand, or SNFCo or
GranCare, on the other hand, shall constitute a Shared Liability for purposes
of this Distribution Agreement and no party hereto or their successor shall be
entitled to indemnification in respect thereof.
 
  Section 3.4. Procedures for Indemnification. If a claim or demand is made
against an Indemnitee by any person who is not a party to this Distribution
Agreement (a "Third Party Claim") as to which such Indemnitee is entitled to
indemnification pursuant to this Distribution Agreement, such Indemnitee shall
notify the Indemnifying Party in writing, and in reasonable detail, of the
Third Party Claim promptly (and in any event within 20 business days) after
receipt by such Indemnitee of written notice of the Third Party Claim;
provided, however, that failure to give such notification within such 20
business day period shall not affect the indemnification provided hereunder
except to the extent the Indemnifying Party shall have been actually prejudiced
as a result of such failure (except that the Indemnifying Party shall not be
liable for any expenses incurred during the period in which the Indemnitee
failed to give such notice). Thereafter, the Indemnitee shall deliver to the
Indemnifying Party, promptly (and in any event within 20 business days) after
the Indemnitee's receipt thereof, copies of all notices and documents
(including court papers) received by the Indemnitee relating to the Third Party
Claim.
 
                                      12
<PAGE>
 
  If a Third Party Claim is made against an Indemnitee, the Indemnifying Party
shall be entitled to participate in the defense thereof and, if it so chooses
and acknowledges in writing its obligation to indemnify the Indemnitee
therefor, to assume the defense thereof with counsel selected by the
Indemnifying Party; provided that such counsel is not reasonably objected to by
the Indemnitee. Should the Indemnifying Party so elect to assume the defense of
a Third Party Claim, the Indemnifying Party shall not be liable to the
Indemnitee for legal or other expenses subsequently incurred by the Indemnitee
in connection with the defense thereof except as otherwise expressly provided
for in Section 2.9 of this Distribution Agreement. If the Indemnifying Party
assumes such defense, the Indemnitee shall have the right to participate in the
defense thereof and to employ counsel, at its own expense, separate from the
counsel employed by the Indemnifying Party, it being understood that the
Indemnifying Party shall control such defense. The Indemnifying Party shall be
liable for the fees and expenses of counsel employed by the Indemnitee (i) for
any period during which the Indemnifying Party has failed to assume the defense
thereof (other than during the 20 business day period prior to the time the
Indemnitee shall have given notice of the Third Party Claim as provided above)
or (ii) in the event the Indemnitee reasonably determines, based on the advice
of its counsel that there shall exist a conflict of interest between the
Indemnitee and the Indemnifying Party or that there are defenses available to
the Indemnitee that are not available to the Indemnifying Party, the effect of
which shall be to make it impractical for the Indemnitee and the Indemnifying
Party to be jointly represented by the same counsel, in which case the
Indemnifying Party shall be liable for the fees and expenses of one counsel for
all Indemnitees in any single or series of related Actions. If the Indemnifying
Party so elects to assume the defense of any Third Party Claim, the Indemnitee
shall cooperate with the Indemnifying Party in the defense or prosecution
thereof.
 
  If the Indemnifying Party acknowledges in writing liability for
indemnification of a Third Party Claim, then in no event will the Indemnitee
admit any liability with respect to, or settle, compromise or discharge, any
Third Party Claim without the Indemnifying Party's prior written consent;
provided, however, that the Indemnitee shall have the right to settle,
compromise or discharge such Third Party Claim without the consent of the
Indemnifying Party if the Indemnitee releases the Indemnifying Party from its
indemnification obligation hereunder with respect to such Third Party Claim and
such settlement, compromise or discharge would not otherwise adversely affect
the Indemnifying Party. If the Indemnifying Party acknowledges in writing
liability for indemnification of a Third Party Claim, the Indemnitee will agree
to any settlement, compromise or discharge of a Third Party Claim that the
Indemnifying Party may recommend that by its terms (i) obligates the
Indemnifying Party to pay the full amount of the liability in connection with
such Third Party Claim, (ii) releases the Indemnitee completely in connection
with such Third Party Claim and (iii) would not otherwise adversely affect the
Indemnitee; provided, however, that the Indemnitee may refuse to agree to any
such settlement, compromise or discharge and may assume the defense of such
Third Party Claim if the Indemnitee agrees (A) that the Indemnifying Party's
indemnification obligation with respect to such Third Party Claim shall not
exceed the amount that would have been required to be paid by or on behalf of
the Indemnifying Party in connection with such settlement, compromise or
discharge and (B) to assume all costs and expenses thereafter incurred in
connection with the defense of such Third Party Claim (other than those
contemplated by subclause (A) herein above).
 
  Notwithstanding the foregoing, the Indemnifying Party shall not be entitled
to assume the defense of any Third Party Claim (and shall be liable for the
fees and expenses of counsel incurred by the Indemnitee in defending such Third
Party Claim) if the Third Party Claim seeks an order, injunction or other
equitable relief or relief other than money damages against the Indemnitee
which the Indemnitee reasonably determines, based on the advice of its counsel,
cannot be separated from any related claim for money damages. If such equitable
or other relief portion of the Third Party Claim can be so separated from the
claim for money damages, the Indemnifying Party shall be entitled to assume the
defense of the portion relating to money damages.
 
  Section 3.5. Indemnification Payments. Indemnification required by this
Article III shall be made by periodic payments of the amount thereof during the
course of the investigation or defense, as and when bills are received or loss,
liability, claim, damage or expense is incurred.
 
                                      13
<PAGE>
 
  Section 3.6. Other Adjustments.
 
  (a) The amount of any Indemnifiable Loss shall be (i) increased to take into
account any net Tax cost actually incurred by the Indemnitee arising from any
payments received from the Indemnifying Party (grossed up for such increase)
and (ii) reduced to take account of any net Tax benefit actually realized by
the Indemnitee arising from the incurrence or payment of any such Indemnifiable
Loss. In computing the amount of such Tax cost or Tax benefit, the Indemnitee
shall be deemed to recognize all other items of income, gain, loss, deduction
or credit before recognizing any item arising from the receipt of any payment
with respect to an Indemnifiable Loss or the incurrence or payment of any
Indemnifiable Loss.
 
  (b) In addition to any adjustments required pursuant to Section 3.3 hereof or
clause (a) of this Section 3.6, if the amount of any Indemnifiable Loss shall,
at any time subsequent to the payment required by this Distribution Agreement,
be reduced by recovery, settlement or otherwise, the amount of such reduction,
less any expenses incurred in connection therewith, shall promptly be repaid by
the Indemnitee to the Indemnifying Party, up to the aggregate amount of any
payments received from such Indemnifying Party pursuant to this Distribution
Agreement in respect of such Indemnifiable Loss.
 
  Section 3.7. Survival of Indemnities. The obligations of GranCare and SNFCo
under this Article III shall survive the sale or other transfer by either of
them of any assets or businesses or the assignment by either of them of any
Liabilities, with respect to any Indemnifiable Loss of any Indemnitee related
to such assets, businesses or Liabilities and shall be binding on the
successors and assigns of all, or substantially all, of their respective assets
and business.
 
                                  ARTICLE IV.
 
                             ACCESS TO INFORMATION
 
  Section 4.1. Provision of Corporate Records.
 
  (a) Unless otherwise specified in the procedures set forth in Schedule 4.3(b)
hereto, after the Distribution Date, upon the prior written request by SNFCo
for specific and identified agreements, documents, books, records or files
(collectively, "Records") relating to or affecting SNFCo, GranCare shall
arrange, as soon as reasonably practicable following the receipt of such
request, for the provision of appropriate copies of such Records (or the
originals thereof if SNFCo has a reasonable need for such originals) in the
possession of GranCare or any of its Subsidiaries, but only to the extent such
items are not already in the possession SNFCo.
 
  (b) Unless otherwise specified in the procedures set forth in Schedule 4.3(b)
hereto, after the Distribution Date, upon the prior written request by GranCare
for specific and identified Records relating to or affecting GranCare, SNFCo
shall arrange, as soon as reasonably practicable following the receipt of such
request, for the provision of appropriate copies of such Records (or the
originals thereof if GranCare has a reasonable need for such originals) in the
possession of SNFCo or any of its Subsidiaries, but only to the extent such
items are not already in the possession of GranCare.
 
  Section 4.2. Access to Information.
 
  (a) Unless otherwise specified in the procedures set forth in Schedule 4.3(b)
hereto, from and after the Distribution Date, each of GranCare and SNFCo shall
afford to the other and its authorized accountants, counsel and other
designated representatives reasonable access during normal business hours,
subject to appropriate restrictions for classified, privileged or confidential
information, to the personnel, properties, books and records of such party and
its Subsidiaries insofar as such access is reasonably required by the other
party.
 
  (b) For a period of five years following the Distribution Date, each of
GranCare and SNFCo shall provide to the other, promptly upon request, all
documents that shall be publicly filed by it and by any of its respective
 
                                      14
<PAGE>
 
Subsidiaries with the Commission pursuant to the periodic and interim reporting
requirements of the Exchange Act, and the rules and regulations of the
Commission promulgated thereunder.
 
  (c) Each of GranCare and SNFCo shall afford to the other access during normal
business hours to their respective properties, subject to appropriate
restrictions and limitations, and will consult and cooperate with each other
for the purpose of conducting air, water or soil testing reasonably necessary
in connection with the determination and fulfillment of indemnification
obligations or in connection with Shared Liabilities under this Distribution
Agreement.
 
  Section 4.3. Reimbursement; Other Matters.
 
  (a) Except to the extent otherwise contemplated by any Ancillary Agreement
and except as limited by any indemnification obligation set forth in this
Distribution Agreement, a party providing Records or access to information or
properties under this Article IV shall be entitled to receive from the
recipient, upon the presentation of invoices therefor, payments for such
amounts, relating to supplies, disbursements and other out-of-pocket expenses,
as may be reasonably incurred in providing such Records or access to
information or properties.
 
  (b) The parties hereto shall comply with those document retention policies as
shall be set forth in Schedule 4.3(b) hereto.
 
  Section 4.4. Confidentiality. Each of (a) GranCare and the Pharmacy
Subsidiaries and (b) SNFCo and the SNFCo Subsidiaries shall not use or permit
the use of (without the prior written consent of the other) and shall hold, and
shall cause its consultants and advisors to hold, in strict confidence, all
information concerning the other party in its possession, its custody or under
its control (except to the extent that (i) such information has been in the
public domain through no fault of such party or (ii) such information has been
later lawfully acquired from other sources by such party or (iii) this
Distribution Agreement or any other Ancillary Agreement or any other agreement
entered into pursuant hereto permits the use or disclosure of such information)
to the extent such information (A) relates to the period up to the Time of
Distribution, (B) relates to any Ancillary Agreement or (C) is obtained in the
course of performing pursuant to any Ancillary Agreement, and each party shall
not (without the prior written consent of the other) otherwise release or
disclose such information to any other person, except such party's auditors,
consultant's or attorneys, unless compelled to disclose such information by
judicial or administrative process or unless such disclosure is required by law
and such party has used commercially reasonable efforts to consult with the
other affected party prior to such disclosure. To the extent that a party
hereto is compelled by judicial or administrative process to disclose such
information under circumstances in which any evidentiary privilege would be
available, such party agrees to assert (or permit the other party a
commercially reasonable opportunity to assert) such privilege in good faith
prior to making such disclosure. Each of the parties hereto agrees to consult
with the other party in connection with any such judicial or administrative
process, including, without limitation, in determining whether any privilege is
available, and further agrees to allow such other party and its counsel to
participate in any hearing or other proceeding (including, without limitation,
any appeal of an initial order to disclose) in respect of such disclosure and
assertion of privilege.
 
                                      15
<PAGE>
 
                                   ARTICLE V.
 
                                   INSURANCE
 
  Section 5.1. Policies and Rights Included Within Assets Maintenance of
Coverage.
 
  (a) The Skilled Nursing Assets shall include any and all rights of an insured
party under each of the Company Policies, subject to the terms of such Company
Policies and any limitations or obligations of SNFCo contemplated by this
Article V, specifically including rights of indemnity and the right to be
defended by or at the expense of the insurer, with respect to all claims,
suits, actions, proceedings, injuries, losses, liabilities, damages and
expenses incurred or claimed to have been incurred prior to the Time of
Distribution by any party in or in connection with the conduct of the Skilled
Nursing Business which claims are asserted subsequent to the Distribution Date.
 
  (b) The Institutional Pharmacy Assets shall include any and all rights of an
insured party under each of the Company Policies, subject to the terms of such
Company Policies and any limitations or obligations of GranCare contemplated by
this Article V, specifically including rights of indemnity and the right to be
defended by or at the expense of the insurer, with respect to all claims,
suits, actions, proceedings, injuries, losses, liabilities, damages and
expenses incurred or claimed to have been incurred prior to the Time of
Distribution by any party in or in connection with the conduct of the
Institutional Pharmacy Business which claims are asserted subsequent to the
Distribution Date.
 
  (c) Except as otherwise agreed to in writing between GranCare and SNFCo
(which agreement shall be acknowledged and consented to by Vitalink), GranCare
shall maintain in effect until the Time of Distribution all Company Policies in
effect as of the date hereof and the insurance coverages and limits will be
maintained at substantially the same levels as are reflected on the schedule of
Company Policies attached hereto as Schedule 5.1(c). Subsequent to the
Distribution Date, the parties hereto will be responsible for maintaining their
respective risk management programs.
 
  Section 5.2. Post-Time of Distribution Claims Against SNFCo. If, subsequent
to the Time of Distribution, any person shall assert a claim against SNFCo or
any of the SNFCo Subsidiaries (including, without limitation, where SNFCo or
the SNFCo Subsidiaries are joint defendants with other persons) with respect to
any claim, suit, action, proceeding, injury, loss, liability, damage or expense
incurred or claimed to have been incurred prior to the Time of Distribution in
or in connection with the conduct of the Skilled Nursing Business, and which
claim, suit, action, proceeding, injury, loss, liability, damage or expense may
arise out of an insured or insurable occurrence under one or more of the
Company Policies, GranCare shall, at the time such claim is asserted, to the
extent any such Company Policy may require that Insurance Proceeds thereunder
be collected directly by the party against whom the Insured Claim is asserted,
be deemed to designate, without need of further documentation, SNFCo as the
agent and attorney-in-fact to assert and to collect any related Insurance
Proceeds under such Company Policy, and shall further be deemed to assign,
without need of further documentation, to SNFCo any and all rights of an
insured party under such Company Policy with respect to such asserted claim,
specifically including rights of indemnity and the right to be defended by or
at the expense of the insurer and the right to any applicable Insurance
Proceeds thereunder.
 
  Section 5.3. Administration; Other Matters.
 
  (a) From and after the Time of Distribution, SNFCo shall be responsible for
(i) Insurance Administration of the Company Policies and (ii) Claims
Administration under such Company Policies with respect to Institutional
Pharmacy Liabilities and Skilled Nursing Liabilities that relate to claims
asserted prior to the Distribution Date and SNFCo shall be responsible for any
premiums, deductibles and retentions in respect of such Company Policies and
the cost of any such claims shall be the sole responsibility and obligation of
SNFCo including, without limitation, claims (and related costs and expenses)
that exceed the limits of the applicable Company Policy or where the limits of
the applicable Company Policy have been exhausted, and any resulting
 
                                      16
<PAGE>
 
actuarial gains or losses shall inure solely to SNFCo. From and after the Time
of Distribution, GranCare shall file with SNFCo all claims asserted subsequent
to the Time of Distribution that relate to occurrences prior to the Time of
Distribution arising out of or in connection with the Institutional Pharmacy
Business and SNFCo shall be responsible for notifying the appropriate insurance
carrier and providing GranCare with copies of all correspondence relating to
such notification. Thereafter, GranCare shall be responsible for Claims
Administration relating to all such claims wherein SNFCo shall not be named as
a co-defendant and GranCare shall provide SNFCo with copies of all
correspondence, documents and other materials that may be material to an
understanding by SNFCo of the status of such claims; it being expressly
acknowledged and agreed that SNFCo's retention of the administrative
responsibilities for submitting notices of claims under the appropriate Company
Policies shall not relieve GranCare of the primary responsibility for reporting
such Insured Claim accurately, completely and in a timely manner. Subject to
the indemnification provisions of Article III, each of the parties hereto shall
administer and pay any costs relating to defending its respective Insured
Claims under Company Policies to the extent such defense costs are not covered
under such Company Policies and shall be responsible for obtaining or reviewing
the appropriateness of releases upon settlement of its respective Insured
Claims under Company Policies.
 
  (b) Allocation of Insurance Proceeds. Except as otherwise provided in
Sections 5.2 and 5.3(a), Insurance Proceeds received with respect to claims,
costs and expenses under the Company Policies shall be paid to SNFCo, which
shall thereafter administer the Company Policies by paying the Insurance
Proceeds, as appropriate, to GranCare with respect to Institutional Pharmacy
Liabilities and retaining such proceeds that relate to Skilled Nursing
Liabilities (except for Insurance Proceeds that are received in respect of
Insured Claims asserted prior to the Time of Distribution relating to
occurrences arising prior to the Time of Distribution which Insurance Proceeds
will be retained by SNFCo). Payment of the allocable portions of indemnity
costs of Insurance Proceeds resulting from such Policies will be made by SNFCo
to GranCare where appropriate upon receipt from the insurance carrier. In the
event that the aggregate limits on any Company Policies are exceeded by the
aggregate outstanding Insured Claims by both of the parties hereto, such
parties shall agree on an equitable allocation of Insurance Proceeds based upon
their respective bona fide claims. The parties agree to use commercially
reasonable efforts to maximize available coverage under those Company Policies
applicable to it, and to take all commercially reasonable steps to recover from
all other responsible parties in respect of an Insured Claim to the extent
coverage limits under a Company Policy have been exceeded or would be exceeded
as a result of such Insured Claim.
 
  Section 5.4. Agreement for Waiver of Conflict and Shared Defense. With
respect to any claims asserted subsequent to the Time of Distribution that
relate to occurrences prior to the Time of Distribution arising out of or in
connection with the Institutional Pharmacy Business as to which GranCare shall
have, in accordance with Section 5.3(a), filed such claim with SNFCo for
purposes of giving notice to the appropriate insurance carrier, if GranCare and
SNFCo are named as co-defendants in respect of such claim then the Claims
Administration relating thereto will be shared equally by GranCare and SNFCo
and any conflict of interest necessary to the conduct of the joint defense
shall be deemed waived. Nothing in this Section 5.4 shall be construed to limit
or otherwise alter in any way the obligations of the parties to this
Distribution Agreement, including those created by this Distribution Agreement,
by operation of law or otherwise.
 
  Section 5.5. Cooperation. The parties agree to use their commercially
reasonable efforts to cooperate with respect to the various insurance matters
contemplated by this Agreement.
 
                                      17
<PAGE>
 
                                  ARTICLE VI.
 
                               DISPUTE RESOLUTION
 
  In the event of a controversy, dispute or claim arising out of, in connection
with, or in relation to the interpretation, performance, nonperformance,
validity or breach of this Distribution Agreement or otherwise arising out of,
or in any way related to this Distribution Agreement, including, without
limitation, any claim based on contract, tort, statute or constitution
(collectively, "Distribution Agreement Disputes"), the party asserting the
Distribution Agreement Dispute shall give written notice to the other party of
the existence and nature of such Distribution Agreement Dispute. Thereafter,
the general counsels of the respective parties shall negotiate in good faith
for a period no less than 60 days after the date of the notice in an attempt to
settle such Distribution Agreement Dispute. If after such 60 calendar day
period such general counsels are unable to settle such Distribution Agreement
Dispute, any party hereto may commence arbitration by giving written notice to
all other party that such Distribution Agreement Dispute has been referred to
the American Arbitration Association for arbitration in accordance with the
provisions of this Article.
 
  All Distribution Agreement Disputes shall be settled by arbitration in
Atlanta, Georgia, before a single arbitrator in accordance with the rules of
the American Arbitration Association (the "Rules"). The arbitrator shall be
selected by the mutual agreement of all parties, but if they do not so agree
within twenty (20) days after the date of the notice of arbitration referred to
above, the selection shall be made pursuant to the Rules from the panels of
arbitrators maintained by the American Arbitration Association. The arbitrator
shall be an individual with substantial professional experience with regard to
resolving or settling sophisticated commercial disputes.
 
  Any award rendered by the arbitrator shall be conclusive and binding upon the
parties hereto; provided, however, that any such award shall be accompanied by
a written opinion of the arbitrator giving the reasons for the award. This
provision for arbitration shall be specifically enforceable by the parties and
the decision of the arbitrator in accordance therewith shall be final and
binding and there shall be no right of appeal therefrom. The parties agree to
comply with any award made in any such arbitration proceedings that has become
final in accordance with the Rules, and agree to the entry of a judgment in any
jurisdiction upon any award rendered in such proceedings becoming final under
the Rules.
 
  In the award the arbitrator shall allocate, in his or her discretion, among
the parties to the arbitration all costs of the arbitration, including, without
limitation, the fees and expenses of the arbitrator and reasonable attorneys'
fees, costs and expert witness expenses of the parties. Absent such an
allocation by the arbitrator, each party shall pay its own expenses of
arbitration, and the expenses of the arbitrator shall be equally shared.
 
  Nothing contained in this Article shall prevent the parties from settling any
Distribution Agreement Dispute by mutual agreement at any time.
 
                                  ARTICLE VII.
 
                                 MISCELLANEOUS
 
  Section 7.1. Complete Agreement; Construction. This Distribution Agreement,
including the Schedules and the Ancillary Agreements constitute the entire
agreement between the parties with respect to the subject matter hereof and
supersedes all previous negotiations, commitments and writings with respect to
such subject matter. In the event of any inconsistency between this
Distribution Agreement and any Schedule hereto, the Schedule shall prevail. In
the event and to the extent that there shall be a conflict between the
provisions of this Distribution Agreement and the Schedules and the provisions
of (i) the Merger Agreement, the Merger Agreement shall control and (ii) an
Ancillary Agreement, such Ancillary Agreement shall control; provided, however,
that the provisions of this Distribution Agreement shall govern in the event of
and to the extent of any conflict between the provisions of this Distribution
Agreement and the provisions of the Transfer and Assumption Instruments.
 
                                      18
<PAGE>
 
  Section 7.2. Counterparts. This Distribution Agreement may be executed in one
or more counterparts, each of which shall be considered one and the same
agreement, and shall become effective when one or more such counterparts have
been signed by each of the parties and delivered to the other parties.
 
  Section 7.3. Survival of Agreements. Except as otherwise contemplated by this
Distribution Agreement, all covenants and agreements of the parties contained
in this Distribution Agreement shall survive the Distribution Date.
 
  Section 7.4. Notices. All notices and other communications hereunder shall be
in writing and hand delivered or mailed by registered or certified mail (return
receipt requested) or sent by any means of electronic message transmission with
delivery confirmed (by voice or automatic machine generated confirmation) to
the parties at the following address (or at such other addresses for a party as
shall be specified by like notice) and will be deemed given on the date on
which such notice is received:
 
  To GranCare:
 
  GranCare, Inc.
  One Ravinia Drive
  Suite 1500
  Atlanta, Georgia 30346
  Attn: General Counsel and Secretary
  Telecopy: (770) 698-8199
 
  To SNFCo:
 
  GCI Properties, Inc.
  c/o GranCare, Inc.
  One Ravinia Drive
  Suite 1500
  Atlanta, Georgia 30346
  Attn: General Counsel and Secretary
  Telecopy: (770) 698-8199
 
  Section 7.5. Waivers. The failure of either party to require strict
performance by the other party of any provision in this Distribution Agreement
will not waive or diminish that party's right to demand strict performance
thereafter of that or any other provision hereof.
 
  Section 7.6. Amendments. Subject to the terms of Section 7.9 hereof, this
Distribution Agreement and the Ancillary Agreements may not be modified or
amended except by an agreement in writing signed by the parties and, for so
long as the Merger Agreement shall be in effect, approved by Vitalink.
 
  Section 7.7. Assignment. This Distribution Agreement shall be assignable in
whole in connection with a merger or consolidation or the sale of all or
substantially all the assets of a party hereto. Otherwise this Distribution
Agreement shall not be assignable, in whole or in part, directly or indirectly,
by any party hereto without the prior written consent of the other party, and
any attempt to assign any rights or obligations arising under this Distribution
Agreement without such consent shall be void.
 
  Section 7.8. Successors and Assigns. The provisions of this Distribution
Agreement shall be binding upon, inure to the benefit of and be enforceable by
the parties and their respective successors and permitted assigns, including,
without limitation, Vitalink.
 
  Section 7.9. Termination. This Agreement (including, without limitation,
Section 2.11 and Article III hereof) may be terminated and the Distribution may
be amended, modified or abandoned at any time prior to the Distribution by and
in the sole discretion of GranCare without the approval of SNFCo or the
shareholders of
 
                                      19
<PAGE>
 
GranCare. In the event of such termination, no party shall have any liability
of any kind to any other party or any other person. After the Distribution,
this Distribution Agreement may not be terminated except by an agreement in
writing signed by the parties; provided, however, that Section 2.11 shall not
be terminated or amended after the Distribution in respect of the third party
beneficiaries thereto without the consent of such persons.
 
  Section 7.10. Subsidiaries. Each of the parties hereto shall cause to be
performed, and hereby guarantees the performance of, all actions, agreements
and obligations set forth herein to be performed by any Subsidiary of such
party or by any entity that is contemplated to be a Subsidiary of such party on
and after the Distribution Date.
 
  Section 7.11. Third Party Beneficiaries. The parties expressly acknowledge
that at the Effective Time GranCare will be merged with and into Vitalink, all
obligations of GranCare hereunder shall become obligations of Vitalink, and
actions of GranCare hereunder to be taken after the Time of Distribution shall
be taken by Vitalink. Except as provided in Section 2.11 relating to directors
and officers liability insurance, this Distribution Agreement is solely for the
benefit of the parties hereto and their respective Subsidiaries and Affiliates
and permitted successors and assigns and shall not be deemed to confer upon
third parties any remedy, claim, liability, reimbursement, claim of action or
other right in excess of those existing without reference to this Distribution
Agreement.
 
  Section 7.12. Attorney Fees. Except as contemplated by an arbitrator's
decision pursuant to Article VI hereof, a party in breach of this Distribution
Agreement shall, on demand, indemnify and hold harmless the other party hereto
for and against all reasonable out-of-pocket expenses, including, without
limitation, reasonable legal fees, incurred by such other party by reason of
the enforcement and protection of its rights under this Distribution Agreement.
The payment of such expenses is in addition to any other relief to which such
other party may be entitled hereunder or otherwise.
 
  Section 7.13. Title and Headings. Titles and headings to sections herein are
inserted for the convenience of reference only and are not intended to be a
part of or to affect the meaning or interpretation of this Distribution
Agreement.
 
  Section 7.14. Schedules. The Schedules shall be construed with and as an
integral part of this Distribution Agreement to the same extent as if the same
had been set forth verbatim herein.
 
  Section 7.15. Specific Performance. Each of the parties hereto acknowledges
that there is no adequate remedy at law for failure by such parties to comply
with the provisions of this Distribution Agreement and that such failure would
cause immediate harm that would not be adequately compensable in damages, and
therefore agree that their agreements contained herein may be specifically
enforced without the requirement of posting a bond or other security, in
addition to all other remedies available to the parties hereto under this
Distribution Agreement.
 
  Section 7.16. Governing Law. This Distribution Agreement shall be governed by
and construed in accordance with the laws of the state of Georgia applicable to
contracts executed in and to be performed in that state.
 
  Section 7.17. Severability. In the event any one or more of the provisions
contained in this Distribution Agreement should be held invalid, illegal or
unenforceable in any respect, the validity, legality and enforceability of the
remaining provisions contained herein and therein shall not in any way be
affected or impaired thereby. The parties shall endeavor in good faith
negotiations to replace the invalid, illegal or unenforceable provisions with
valid provisions, the economic effect of which shall, to the greatest extent
possible, approximate that of the invalid, illegal or unenforceable provisions.
 
                                      20
<PAGE>
 
  IN WITNESS WHEREOF, the parties have caused this Distribution Agreement to be
duly executed as of the day and year first written above.
 
                                          GRANCARE, INC.
 
                                          By: 
                                             ---------------------------------- 
                                             Name: 
                                                   ----------------------------
                                             Title:  President and Chief
                                                     Executive Officer
 
                                          GCI PROPERTIES, INC.
 
                                          By: 
                                             ---------------------------------- 
                                             Name: 
                                                   ----------------------------
                                             Title:  President and Chief
                                                     Executive Officer
 
                                      21
<PAGE>
 
                                   SCHEDULES
                                   ---------


1.1(a)    SNFCo Subsidiaries

1.1(b)    Pharmacy Subsidiaries

1.1(c)    Shared Liabilities

2.1(e)    Licenses, Permits and Authorizations Relating to the
          Skilled Nursing Business to be Transferred by GranCare
          to SNFCo

2.1(i)    Intellectual Property, General Ledger 1.01 Assets, Other
          Common Assets and Litigation Matters Retained by GranCare

2.3(a)    Indebtedness Retained by GranCare

2.3(d)    Shared Transaction Expenses

4.3(b)    Document Retention Policies

5.1(c)    Company Policies to be Maintained to the Time of
          Distribution



                                    EXHIBITS
                                    --------

A         Internal Restructuring Plan