Tax Allocation And Indemnification Agreement

EXHIBIT 10.39


TAX ALLOCATION AND INDEMNIFICATION AGREEMENT


This Tax Allocation and Indemnification Agreement dated as of February 12, 1997, is entered into by and among GranCare, Inc., a California corporation ("GCI"), New GranCare, Inc., a Delaware corporation, and the successor by merger to GCI Properties, Inc., a California corporation, ("New GranCare"), and each of the following corporations:


TeamCare, Inc., a Delaware corporation, and the successor by merger to each of the following corporations: GranCare Health Services, Inc. a California corporation; TCI, Inc., a Delaware corporation that formerly was known as TeamCare, Inc. and, prior to that, CompuPharm, Inc.; TeamCare of New Jersey, Inc., a New Jersey corporation that formerly was known as CompuPharm New Jersey, Inc.; CompuPharm of Southern California, Inc., a California corporation that formerly was known as GCI-Cal Pharmacies, Inc.; Drug Systems, Inc., a California corporation; TeamCare of Wisconsin, Inc., a Wisconsin corporation that formerly was known as TeamCare Pharmacy, Inc.; CapCare Health Services, Inc., an Illinois corporation; Winyah Dispensary, LTC of North Carolina, Inc., a North Carolina corporation; and TeamCare of South Carolina, Inc., a South Carolina corporation that formerly was known as GCI-Winyah, Inc.; ("TeamCare")


TeamCare Clinical Services, Inc., a New Jersey corporation that formerly was known as CompuPharm Clinical Services, Inc. ("TCSI")


CompuPharm of Northern California, Inc., a California corporation that formerly was known as CompuPharm Diagnostics, Inc., and the successor by merger to Patient Therapy Systems, Inc., a California corporation, ("CompuPharm NC")


TeamCare of Indiana, Inc., an Indiana corporation that formerly was known as CompuPharm LTC, Inc. ("TeamCare Indiana")


TeamCare of Virginia, Inc., a Virginia corporation that formerly was known as CompuPharm of Virginia, Inc. ("TeamCare VA")


CompuPharm Ohio Pharmacy, Inc., an Ohio corporation ("CompuPharm Ohio")


GCI Innovative Pharmacy, Inc., a Wisconsin corporation ("GCI Innovative")


Span Purchasing, Inc., a Virginia corporation ("Span")


GCI-Cal Therapies, Inc., a California corporation ("GCI-Cal Therapies") GCI Therapies, Inc., a California corporation ("GCI Therapies") AMS Green Tree, Inc., a Wisconsin corporation ("AMS-GT") American-Cal Medical Services, Inc., a California corporation ("Am-Cal") HMI Convalescent Care, Inc., a California corporation ("HMI") GranCare South Carolina, Inc., a South Carolina corporation ("GC-SC") GCI Palm Court, Inc., a California corporation ("GCI-PC") GCI East Valley Medical & Rehabilitation Center, Inc., an Arizona corporation ("GCI-EV")


GCI Realty, Inc., a Delaware corporation ("GCI Realty") GCI Jolley Acres, Inc., a South Carolina corporation ("GCI-JA") GCI Prince George, Inc, a South Carolina corporation ("GCI-PG") GCI Springdale Village, Inc., a South Carolina corporation ("GCI-SV") GCI Village Green, Inc., a South Carolina corporation ("GCI-VG") GCI Faith Nursing Home, Inc., a South Carolina corporation ("GCI-FN") GCI Rehab, Inc., a California corporation ("GCI Rehab") GCI-Cal Health Care Centers, Inc., a California corporation ("GCI-Cal HCC") GranCare Home Health Services, Inc., a California corporation ("GCI-Cal HH") Renaissance Mental Health Center, Inc., a Wisconsin corporation ("Renaissance") Coordinated Home Health Services, Inc., a California corporation ("CHHS") GranCare Nursing Services and Hospice, Inc., a Wisconsin corporation ("GCNSH") AMS Properties, Inc., a California corporation ("AMS-Properties") Evergreen Health Care, Inc., a Georgia corporation ("Evergreen") National Heritage Realty, Inc., a Louisiana corporation ("NHRI") Omega/Indiana Care Corporation, a Delaware corporation ("OICC") EH Acquisition Corp., Inc., a Georgia corporation ("EHAC I") EH Acquisition Corp. II, Inc., a Georgia corporation ("EHAC II") EH Acquisition Corp. III, Inc., a Georgia corporation ("EHAC III") Heritage of Louisiana, Inc., a Louisiana corporation ("HOLI") Health Resources, Inc., a Nevada corporation ("HRI") National Heritage Pharmacy, Inc., a Nevada corporation ("NHPI") Heritage Sterling Financial Services, Inc., an inactive corporation ("HSFSI") Sterling Health Care, Inc., an inactive corporation ("SHCI") EH Resources, Inc., a Georgia corporation ("EHRI") Evergreen Retirement Management Company, a Delaware corporation ("ERMC") GCI Health Care Centers, Inc., a Delaware corporation ("GCI-HCC") GC Services, Inc., a California corporation ("GC-Services") GranCare Trading, Inc., a Georgia corporation ("Trading") GCI Valley Manor Health Care Center, Inc., a Colorado corporation ("GCI-VM") GCI Camelia Care Center, Inc., a Colorado corporation ("GCI-Camelia") Cornerstone Health Management Company, a Delaware corporation ("Cornerstone") StoneCreek Management Company, Inc. a Missouri corporation ("StoneCreek") HostMasters, Inc., a California corporation ("HostMasters") GCI Colter Village, Inc., an Arizona corporation ("GCI-Colter") GCI Indemnity, Inc., a Hawaii corporation ("GCI-Indemnity") GCI Bella Vita, Inc., a California corporation ("GCI Bella Vita") GCI Wisconsin Properties, Inc., a Wisconsin corporation ("GCI-Wisconsin") GCI Ashland Health Care Center, Inc., a Wisconsin corporation ("GCI-Ashland") GCI North Shore Health Care Center, Inc., a Wisconsin corporation ("GCI-North Shore") GCI Hillside Health Care Center, Inc., a Wisconsin corporation ("GCI- Hillside") GCI Family Nursing Home and Rehabilitation Center, Inc., a Wisconsin corporation ("GCI-Family")


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GranCare GPO Services, Inc., a Georgia corporation ("GranCare GPO") GCI Simi Valley Healthcare Center, Inc., a California corporation ("GCI-Simi") Professional Health Care Management, Inc., a Michigan corporation ("PHCM") Cambridge Bedford, Inc., a Michigan corporation ("CBI") Cambridge East, Inc., a Michigan corporation ("CEI") Cambridge North, Inc., a Michigan corporation ("CNI") Cambridge South, Inc., a Michigan corporation ("CSI") Clintonaire Nursing Home, Inc., a Michigan corporation ("CNHI") Crestmont Health Center, Inc., a Michigan corporation ("CHCI") Frenchtown Nursing Home, Inc., a Michigan corporation ("FNHI") Heritage Nursing Home, Inc., a Michigan corporation ("HNHI") Madonna Nursing Center, Inc., a Michigan corporation ("MNCI") Middlebelt Nursing Home, Inc., a Michigan corporation ("MNHI") Middlebelt-Hope Nursing Home, Inc., a Michigan corporation ("MHNHI") Nightingale East Nursing Center, Inc., a Michigan corporation ("NENCI") St. Anthony Nursing Home, Inc., a Michigan corporation ("SANHI") International Health Care Management, Inc., a Michigan corporation ("IHCMI") International X-Ray, Inc., a Michigan corporation ("IXRI")


(individually, sometimes referred to as a "Subsidiary" and, collectively, the "Subsidiaries").


WITNESSETH:


WHEREAS GCI adopted a plan of distribution, as set forth in that certain Agreement and Plan of Distribution dated September 3, 1996 (the "Distribution Agreement"), whereby it contemplates a distribution to its shareholders of all the outstanding common stock of New GranCare, a corporation which will hold (directly or indirectly) its skilled nursing facilities business and certain other non-pharmacy businesses (the "Distribution"), and GCI and New GranCare have agreed to enter into certain agreements, including the Distribution Agreement and this Tax Allocation and Indemnification Agreement, setting forth their respective rights, duties, and obligations with respect to liabilities of the Parties, including Tax liabilities, attributable to events that occurred in periods prior to the Distribution;


WHEREAS, as a consequence of the Distribution, New GranCare and the Subsidiaries that will become members of the New GranCare Group (as hereinafter defined) will no longer be members of the GCI Group (as hereinafter defined) or of any other group of which GCI and the subsidiaries who are members of the Post-Distribution GCI Group (as hereinafter defined) become members;


WHEREAS, pursuant to Treas. Reg. Section 1.1502-6, GCI and each Subsidiary will be severally liable for the consolidated federal income tax liability of the GCI Group for any period during which GCI and such Subsidiary were members of the GCI Group during any part of a consolidated return year; and


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WHEREAS, GCI, New GranCare, and the Subsidiaries desire to set forth their rights and obligations with respect to foreign, federal, state and local taxes for periods both before and after the Distribution and with respect to certain tax liabilities that may be asserted in connection with the Distribution.


NOW THEREFORE, GCI, New GranCare, and the Subsidiaries, in consideration of the mutual covenants contained herein, agree as follows:


ARTICLE I.


DEFINITIONS
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For purposes of this Agreement, the following definitions shall apply:


1.1 "Code" means the Internal Revenue Code of 1986, as amended from time to time.


1.2 "Consolidated Return" means a consolidated United States federal income tax return or any consolidated or combined state, county, or local income tax return which includes any Party to this agreement.


1.3 "Date of Distribution" or "Distribution Date" means the date on which the stock of New GranCare is distributed by GCI to its shareholders.


1.4 "Employee Benefits Matters Agreement" means that certain agreement of even date herewith entitled Employee Benefit Matters Agreement which was entered into by the Parties to this Agreement in connection with the Distribution Agreement.


1.5 "Expenses" means out-of-pocket expenses paid to third parties and shall not include any overhead or indirect costs.


1.6 "Final Determination" means the final resolution of liability for any Tax for a taxable period (i) by IRS Form 870 or 870-AD (or any successor forms thereto), on the date of acceptance by or on behalf of the IRS, or by a comparable agreement or form under the laws of other jurisdictions, except that a Form 870 or 870-AD or comparable form that reserves the right of the taxpayer to file a claim for refund and/or the right of the taxing authority to assert a further deficiency shall not constitute a Final Determination; (ii) by a decision, judgment, decree, or other order by a court of competent jurisdiction which has become final and unappealable; (iii) by a closing agreement or compromise under Section 7121 or 7122 of the Code or any subsequently enacted corresponding provisions of the Code, or comparable agreements under the laws of other jurisdictions; (iv) by an allowance of a refund or credit in respect of an overpayment of Tax, but only after the expiration of all periods during which such


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refund may be recovered (including by way of offset) by the Tax-imposing jurisdiction; or (v) by any other final disposition by reason of the expiration of the applicable statutes of limitations.


1.7 "GCI Group" means the affiliated group (within the meaning of Section 1504(a) of the Code) of which GCI is the common parent, including periods before GCI became the common parent.


1.8 "GCI Tainting Act" means any breach by GCI or any member of the Post- Distribution GCI Group of a representation or covenant relating to the qualification of the Distribution as a distribution described in Section 355 of the Code which is given by GCI and the members of the Post-Distribution GCI Group in connection with the Tax Certificate dated February ___, 1997 , unless either (a) New GranCare consents in writing to such action, or (b) New GranCare is provided (at GCI's expense) an IRS ruling that such action will not cause the Distribution to fail to qualify as a distribution described in Section 355 of the Code.


1.9 "IRS" means the Internal Revenue Service.


1.10 "Merger" shall have the same meaning as given that term in the Distribution Agreement.


1.11 "New GranCare Group" means New GranCare, any subsidiaries that become members of the New GranCare consolidated group after the Distribution Date, and the following Subsidiaries:


GCI-Cal Therapies AMS-GT EHAC II
GCI Therapies Am-Cal EHAC III
Cornerstone HMI HOLI
StoneCreek GC-SC HRI
HostMasters GCI-PC NHPI
GCI-Colter GCI-EV HSFSI
GCI-Indemnity GCI Realty SHCI
GCI Bella Vita GCI-JA EHRI
GCI-Wisconsin GCI-PG ERMC
GCI-Ashland GCI-SV GCI-HCC
GCI-North Shore GCI-VG GC-Services
GCI-Hillside GCI FN Trading
GCI-Family GCI Rehab GCI-VM
GranCare GPO GCI-Cal HCC GCI-Camelia
GCI-Simi GCI-Cal HH HNHI
PHCM Renaissance MNCI
CBI CHHS MNHI
CEI GCNSH MHNHI


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CNI AMS-Properties NENCI
CSI Evergreen SANHI
CNHI NHRI IHCMI
CHCI OICC IXRI
FNHI EHAC I


1.12 "New GranCare Tainting Act" means any breach by New GranCare or any member of the New GranCare Group of a representation or covenant relating to the qualification of the Distribution as a distribution described in Section 355 of the Code which is given by New GranCare and the members of the New GranCare Group in connection with the Tax Certificate dated February __, 1997 , unless either (a) GCI consents in writing to such action, or (b) GCI is provided (at New GranCare's expense) an IRS ruling that such action will not cause the Distribution to fail to qualify as a distribution described in Section 355 of the Code.


1.13 "Party" or "Parties" means any of the parties to this Agreement.


1.14 "Post-Distribution GCI Group" means GCI and the following Subsidiaries:


TeamCare TCSI
CompuPharm NC TeamCare Indiana
TeamCare VA CompuPharm Ohio
GCI Innovative Span


1.15 "Personal and Real Property Taxes" mean all Taxes which are assessed upon the value of real or personal property owned, leased, rented or used by any of the Parties to this Agreement, including, but not limited to, real and personal property taxes, use taxes, value added taxes or other ad valorem taxes.


1.16 "Restructuring Taxes" means any Taxes resulting from the failure of the restructuring transactions contemplated by the Distribution Agreement to qualify as a "tax-free" reorganization and distribution within the meaning of Sections 368(a)(1)(D) and 355 of the Code or otherwise as "tax-free" under the Code.


1.17 "Tax Benefit" means any Tax Item which decreases Taxes paid or payable.


1.18 "Tax" or "Taxes" means all forms of taxation, whenever created or imposed, whether domestic or foreign, and whether imposed by a nation, locality, municipality, government, state, federation, or other body (a "Taxing Authority"), and without limiting the generality of the foregoing, shall include net income, alternative or add-on minimum tax, gross income, sales, use, franchise, gross receipts, value added, ad valorem, profits, license, payroll, withholding, social security, unemployment insurance, employment, property, transfer, recording, excise, severance, stamp, occupation, premium, windfall profit, custom duty, or other


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tax, governmental fee or other like assessment or charge of any kind whatsoever, together with any related interest, penalties or other additions to tax, or additional amounts imposed by any such Taxing Authority.


1.19 "Tax Controversy" means any audit, examination, dispute, suit, action, litigation or other judicial or administrative proceeding by or against the IRS or any other Taxing Authority.


1.20 "Tax Item" means any item of income, gain, loss, deduction, credit, recapture of credit or any other item, including, but not limited to, an adjustment under Code Section 481 resulting from a change in accounting method, which increases or decreases Taxes paid or payable.


1.21 "Tax Returns" means all reports, estimates, declarations of estimated tax, information statements, returns or other documents required to be filed by a Party in connection with any Taxes, including but not limited to requests for extensions of time, information statements and reports, claims for refund, and amended returns.


ARTICLE II.


TAX RETURN PREPARATION
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2.1 Consolidated Returns. (a) New GranCare shall prepare and timely file
-------------------- any Consolidated Return which includes one or more, but only, members of the GCI Group for any taxable period which ends on or prior to the Distribution Date. The Consolidated Return shall be prepared by New GranCare in compliance with applicable tax laws and on a basis that is consistent with any IRS ruling or opinion of tax counsel obtained by GCI or New GranCare and with prior Consolidated Returns (to the extent applicable). Not later than 60 days prior to the due date for filing the Consolidated Return (including extensions), New GranCare shall provide a copy of the Consolidated Return to GCI for its review and consent prior to the filing of the Consolidated Return. GCI shall notify New GranCare in writing of any objections it has to the treatment of any Tax Item on the Consolidated Return within 30 days after the receipt of the Consolidated Return; provided, however, that when such objections relate to items which do not affect the Tax liability of the Post-Distribution GCI Group or adversely affect the "tax-free" treatment of the Distribution or the Restructuring Taxes, the objections shall be set forth in writing, specifically stating that there does not exist a reasonable basis or substantial authority for the tax treatment being accorded such item. Any failure to provide such objection shall be considered acceptance by GCI of the Consolidated Return as prepared by New GranCare. If a written objection is made by GCI, the tax managers of GCI and New GranCare will meet and try in good faith to resolve all disagreements with respect to the treatment of the Tax Item(s) in question within 5 days of the receipt of the written objection. If the tax managers are unable to resolve all disagreements with respect to the treatment of the Tax Item(s) in question, then one of the "Big Six" certified public accounting firms will be chosen by GCI and New GranCare


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to advise as to the proper treatment of the Tax Item(s) in dispute; provided, however, that when any disagreement which relates to an item which does not affect the Tax liability of the Post-Distribution GCI Group or adversely affect the "tax-free" treatment of the Distribution or the Restructuring Taxes, the item shall be reported in accordance with the tax treatment determined by New GranCare provided that GCI has received a letter from the chief financial officer of New GranCare that, after consultation with its tax adviser, substantial authority exists for the tax treatment being accorded the item by New GranCare. New GranCare will provide GCI with a copy of the Consolidated Return as filed, along with documentation establishing proof of timely filing.


(b) New GranCare shall prepare and timely file any Consolidated Return which includes one or more, but only, members of the GCI Group for any taxable period which ends after the Distribution Date, but includes the Distribution Date. The Consolidated Returns shall be prepared by New GranCare in compliance with applicable tax laws and on a basis that is consistent with any IRS ruling or opinion of tax counsel obtained by GCI or New GranCare and with prior Consolidated Returns (to the extent applicable). GCI shall provide New GranCare with (i) separate, pro forma Tax Returns covering the period beginning with the day after the Distribution Date and running through the close of the taxable period reported on such Consolidated Return for each of the members of the Post- Distribution GCI Group included in such Consolidated Return, and (ii) any information in support of such separate, pro forma returns or which might otherwise be necessary or helpful in the preparation of the Consolidated Return. GCI shall provide such separate, pro forma returns and information not later than 60 days prior to the due date of the Consolidated Return (including extensions). Not later than 45 days prior to the due date for filing the Consolidated Return (including extensions), New GranCare shall provide a copy of the Consolidated Return to GCI for its review and consent prior to the filing of the Consolidated Return. GCI shall notify New GranCare in writing of any objections it has to the treatment of any Tax Item on the Consolidated Return within 30 days after the receipt of the Consolidated Return; provided, however, that when such objections relate to items which do not affect the Tax liability of the Post-Distribution GCI Group or adversely affect the "tax-free" treatment of the Distribution or the Restructuring Taxes, the objections shall be set forth in writing, specifically stating that there does not exist a reasonable basis or substantial authority for the tax treatment being accorded such item. Any failure to provide such objection shall be considered acceptance by GCI of the Consolidated Return as prepared by New GranCare. If a written objection is made by GCI, the tax managers of GCI and New GranCare will meet and try in good faith to resolve all disagreements with respect to the treatment of the Tax Item(s) in question within 5 days of the receipt of the written objection. If the tax managers are unable to resolve all disagreements with respect to the treatment of the Tax Item(s) in question, then one of the "Big Six" certified public accounting firms will be chosen by GCI and New GranCare to advise as to the proper treatment of the Tax Item(s) in dispute; provided, however, that when any disagreement which relates to an item which does not affect the Tax liability of the Post-Distribution GCI Group or adversely affect the "tax-free" treatment of the Distribution or the Restructuring Taxes, the item shall be reported in accordance with the tax treatment determined by New GranCare provided that GCI has received a letter from the chief


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financial officer of New GranCare that, after consultation with its tax adviser, substantial authority exists for the tax treatment being accorded the item by New GranCare.. New GranCare will provide GCI with a copy of the Consolidated Return as filed, along with documentation establishing proof of timely filing.


(c) GCI shall be responsible for preparing and filing any Consolidated Return which includes any member of the Post-Distribution GCI Group for any taxable period which begins after the Distribution Date.


(d) New GranCare shall be responsible for preparing and filing any Consolidated Return which includes only members of the New GranCare Group.


2.2 Separate Returns. (a) New GranCare shall prepare and file any Tax
---------------- Return required to be filed for any member of the Post-Distribution GCI Group not listed on Schedule 2.2 hereto for all taxable periods which end on or before the Distribution Date or which end after the Distribution Date, but include the Distribution Date. If the Tax Return includes any period ending after the Distribution Date, then GCI shall provide New GranCare with (i) a separate, pro forma Tax Return covering the period beginning with the day after the Distribution Date and running through the close of the taxable period reported on such Tax Return, and (ii) any information in support of such separate, pro forma Tax Return or which might otherwise be necessary or helpful in the preparation of the Tax Return. GCI shall provide such separate, pro forma Tax Return and information not later than 60 days prior to the due date of the Tax Return (including extensions). Not later than 45 days prior to the due date for filing the Tax Return, New GranCare shall provide a copy of the Tax Return to GCI for its review and consent prior to the filing of the Tax Return (including extensions). GCI shall notify New GranCare in writing of any objections it has to the treatment of any Tax Item on the Tax Return within 30 days after the receipt of the Tax Return; provided, however, that when such objections relate to items which do not affect the Tax liability of the Post-Distribution GCI Group or adversely affect the "tax-free" treatment of the Distribution or the Restructuring Taxes, the objections shall be set forth in writing, specifically stating that there does not exist a reasonable basis or substantial authority for the tax treatment being accorded such item. Any failure to provide such objection shall be considered acceptance by GCI of the Tax Return as prepared by New GranCare. If a written objection is made by GCI, the tax managers of GCI and New GranCare will meet and try in good faith to resolve all disagreements with respect to the treatment of the Tax Item(s) in question within 5 days of the receipt of the written objection. If the tax managers are unable to resolve all disagreements with respect to the treatment of the Tax Items in question, then one of the "Big Six" certified public accounting firms will be chosen by GCI and New GranCare to advise as to the proper treatment of the Tax Item in dispute; provided, however, that when any disagreement which relates to an item which does not affect the Tax liability of the Post-Distribution GCI Group or adversely affect the "tax-free" treatment of the Distribution or the Restructuring Taxes, the item shall be reported in accordance with the tax treatment determined by New GranCare provided that GCI has received a letter from the chief financial officer of New GranCare that, after consultation with its tax adviser, substantial


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authority exists for the tax treatment being accorded the item by New GranCare. New GranCare will provide GCI with a copy of the Tax Return as filed, along with documentation establishing proof of timely filing.


(b) GCI shall be responsible for causing the preparation and filing of any Tax Return for any member of the Post-Distribution GCI Group listed on Schedule 2.2 hereto for any taxable period which ends on or includes the Distribution Date.


(c) GCI shall be responsible for causing the preparation and filing of any Tax Return for any member of the Post-Distribution GCI Group for any taxable period which begins after the Distribution Date.


(d) New GranCare shall be responsible for preparing and filing all Tax Returns for any member of the New GranCare Group.


2.3 Cooperation and Exchange of Information. Each Party shall be
--------------------------------------- responsible for the timely submission to each other Party of information of which it has knowledge regarding any Tax Item which may properly be included in any Tax Return to be filed by the other Party, and shall provide any and all other information and documentation (including, but not by way of limitation, working papers and schedules) reasonably requested by any Party for use in connection with the preparation and filing of any Tax Returns ...