ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS




AGREEMENTS WITH APOLLO



The Company was previously a party to certain agreements with Apollo
Management, L.P., certain of their affiliates and certain other investors
entered into in connection with the November 4, 1997 recapitalization of Living
Centers of America, Inc. ("Living Centers") and subsequent acquisition by Living
Centers of GranCare, Inc. these included (i) a Stockholders Agreement dated
November 4, 1997, as amended (the "Stockholders Agreement") and (ii) a Proxy and
Voting Agreement dated November 4, 1997, as amended (the "Proxy and Voting
Agreement"). The Stockholders Agreement and Proxy and Voting Agreement
(collectively the "Agreements") were terminated on December 20, 1999. The
Agreements provided for, among other things, Apollo's right to designate members
for election to the Company's Board of Directors, certain standstill provisions
and control of certain of the shares of Company Common Stock by Apollo. Apollo
sold its shares of Company Common Stock to Credit Suisse First Boston in
December 1999. On January 2, 2000, the members of the Company's Board of
Directors appointed by Apollo resigned.



CERTAIN ARRANGEMENTS WITH THE KELLETTS AND THEIR AFFILIATES



Samuel B. Kellett resigned from the Company's Board of Directors
effective August 31, 2000. In January 1996, Mariner Health Group, Inc. ("Mariner
Health") engaged in a merger transaction (the "CSI Merger") with Convalescent
Services, Inc. ("CSI"), an entity owned by Samuel B. Kellett and Stiles A.
Kellett, Jr. (collectively, the "Kelletts"). Samuel B. Kellett is a member of
the Company's Board of Directors. In addition to the CSI Merger, Mariner Health
acquired certain assets consisting of the skilled nursing facilities known as
Arlington Heights Nursing Center in Fort Worth, Texas, and Randol Mill Manor in
Arlington, Texas. Prior to the CSI Merger, these facilities were leased by CSI
from partnerships owned by the Kelletts. As part of the aforementioned asset
purchase transaction, Mariner Health made interest-free loans to the
partnerships that owned Arlington Heights Nursing Center (the "Arlington Heights
Partnership") and Randol Mill Manor, in the principal amounts of $955,521 (the
"Arlington Heights Note") and $663,256 (the "Randol Mill Note" together with the
Arlington Heights Note, the "Kellett Partnership Notes"), respectively, which
mature on May 24, 1999 and 2000, respectively. The Kelletts have personally
guaranteed the repayment of these loans.


On October 13, 1999, Mariner Health delivered to the Arlington Heights
Partnership a demand for payment of the Arlington Heights Promissory Note that
matured on May 24, 1999, as well as a demand for performance by the Kelletts of
their obligations arising pursuant to their respective personal guarantees of
such note. The Kelletts have advised Mariner Health that the promissory note
will not be paid and that they will not fulfill their obligations arising under
their personal guarantees. The Kelletts have asserted that certain partnerships
controlled by the Kelletts that own nursing facilities previously managed by
Mariner Health incurred damages as a result of certain alleged acts of
mismanagement by Mariner Health. The Kelletts further allege that the amount of
such alleged damages exceeds, in the aggregate, the outstanding principal
amounts of both promissory notes, and that such damages can be offset against
any obligations of the Kelletts or the Arlington Heights Partnership under the
above note. Mariner Health disputes the alleged mismanagement and the Kelletts'
right to offset any such alleged damages against the obligations relating to the
note or the Kelletts' guarantee thereof. The Arlington Heights Note provides
that, as a result of the failure to pay the promissory note at maturity, the
note will accrue interest from May 24, 1999 at the lesser of 12% per annum or
the maximum interest rate allowed by applicable law. The terms of such note also
provide that Mariner Health is entitled to reimbursement for all collection
costs, including reasonable attorney's fees and court costs.



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Also in connection with the CSI Merger, Mariner Health entered into
leases for 14 skilled nursing facilities (collectively, the "Leased Facilities")
from partnerships owned or controlled by the Kelletts. Most of the leases for
the Leased Facilities (the "Leases"), certain of which were amended in
connection with the Mariner Merger as described below, have a base term of eight
years and four months from January 2, 1996 as well as three five-year renewal
terms at the option of Mariner Health, except that the Lease for Mariner Health
of Tallahassee has a term of seven years and four months with two five-year
renewal terms; Mariner Health of Woodwind Lakes, a term of eight years and four
months with one five-year renewal term; Mariner Health of North Dallas, a term
of eight years and four months with two five-year renewal terms; Mariner Health
of Belleair, a term of thirteen years and four months with three five-year
terms; Mariner Health of Port Charlotte, a term of thirteen years and four
months with two five-year renewal terms; and Mariner Health of Denver, a term of
eighteen years and four months with one five-year renewal term. Each Lease
provides for a fixed rent, which will not increase over the base or renewal
terms of such Lease. The aggregate annual rent for the Leased Facilities is
approximately $8.0 million. In addition to paying scheduled rent for each Leased
Facility, Mariner Health is required to pay all utilities, insurance and
property taxes and to maintain the condition of the Leased Facility. On March
30, 2000, the Bankruptcy Court approved the rejection and termination of the
lease relating to the Bethany facility. As of September 11, 2000, the management
of the Bethany facility was transitioned to a manager designated by the
Kelletts.


In addition, Mariner Health managed certain nursing facilities on behalf
of partnerships controlled by the Kelletts, for which Mariner Health earned
approximately $350,000 in the aggregate during the fiscal year ended September
30, 1999. As a result of certain disagreements with Mariner Health, the Kelletts
terminated all of the management arrangements during fiscal 1999. As of
September 30, 1999, Mariner Health believes that it is owed approximately
$600,000 in unpaid management fees.


Under the subject management arrangements, the owner of the managed
facility is responsible for the fees and expenses of the managed facility, which
were generally paid by Mariner Health and reimbursed by the owner. As of
September 30, 1999, Mariner Health believes that it is owed approximately $3.1
million, net of payables owing to the Kelletts or Kellett partnerships, in
respect of these working capital advances primarily related to for units
that were vacated in accordance with membership agreements and recoupment
requirements from a third party intermediary. Mariner Health and the Kelletts
are presently in discussions regarding the actual amounts owed to Mariner
Health. Mariner Health also provided rehabilitation therapy services to one of
the managed facilities, for which Mariner Health received approximately $500,000
during the fiscal year ended September 30, 1999.



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