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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)

FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)

COMMISSION FILE NUMBER: 1-9550

BEVERLY ENTERPRISES, INC.
(Exact name of Registrant as specified in its charter)

DELAWARE 62-1691861
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5111 ROGERS AVENUE, SUITE 40-A
FORT SMITH, ARKANSAS 72919-0155
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: (501) 452-6712

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

NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- ---------------------

Common Stock, $.10 par value New York Stock Exchange
Pacific Stock Exchange
9% Senior Notes due February 15, 2006 New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: NONE

INDICATE BY CHECK MARK WHETHER REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT REGISTRANT
WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS. YES [X] No [ ]

INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM
405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS
FORM 10-K. [ ]

THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY NONAFFILIATES OF
REGISTRANT WAS $1,598,662,838 AS OF FEBRUARY 27, 1998.

106,027,451

(NUMBER OF SHARES OF COMMON STOCK OUTSTANDING, NET OF TREASURY SHARES, AS
OF FEBRUARY 27, 1998)

PART III IS INCORPORATED BY REFERENCE FROM THE PROXY STATEMENT FOR THE
ANNUAL MEETING OF STOCKHOLDERS TO BE HELD ON MAY 28, 1998.

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2

PART I

ITEM 1. BUSINESS.

GENERAL

References herein to the Company include Beverly Enterprises, Inc. and its
wholly-owned subsidiaries.

Beverly Enterprises, Inc. (formerly known as New Beverly Holdings, Inc.),
which was incorporated on April 15, 1997 ("New Beverly"), is the successor to
the former Beverly Enterprises, Inc., which was incorporated on February 27,
1987 ("Old Beverly"), as the result of a tax-free reorganization completed
December 3, 1997 (the "Reorganization") in order to facilitate the Merger of PCA
with Capstone (as discussed below). The Reorganization was accomplished in two
steps. Old Beverly transferred or contributed to New Beverly all of its assets
and liabilities, except for its institutional pharmacy business conducted by its
wholly-owned subsidiary, Pharmacy Corporation of America and its subsidiaries
("PCA"), (the "Remaining Healthcare Business"), in exchange for all of the
issued and outstanding common stock of New Beverly. Old Beverly immediately
distributed the common stock of New Beverly to its stockholders on a one-for-one
basis (the "Distribution"). As a result of the Distribution, New Beverly became
an independent, publicly-traded company engaged in the Remaining Healthcare
Business and owned by the stockholders of Old Beverly. Following the
Distribution, Old Beverly, whose only assets consisted of the stock of PCA and
its subsidiaries, merged with and into Capstone Pharmacy Services, Inc.
("Capstone"), with Capstone being the surviving corporation (the "Merger").
Immediately after the Merger, Capstone changed its name to PharMerica, Inc. and
New Beverly changed its name to Beverly Enterprises, Inc. References to Beverly
Enterprises, Inc., or the Company, prior to December 3, 1997 will mean the
predecessor corporation, Old Beverly. References to Beverly Enterprises, Inc.,
or the Company, on or after December 3, 1997 will mean New Beverly, and New
Beverly will be treated for accounting purposes as the continuing reporting
entity with respect to the historical and future operations of the Company. See
"Part II, Item 8 -- Note 2 of Notes to Consolidated Financial Statements" for
additional information.

The business of the Company consists principally of providing long-term
healthcare, including the operation of nursing facilities, acute long-term
transitional hospitals, rehabilitation therapy services, outpatient therapy
clinics, assisted living centers and home health centers.

The Company is one of the largest operators of nursing facilities in the
United States. At January 31, 1998, the Company operated 568 nursing facilities
with 63,376 licensed beds. The facilities are located in 29 states and the
District of Columbia, and range in capacity from 20 to 355 beds. At January 31,
1998, the Company also operated 34 assisted living centers containing 901 units,
13 transitional hospitals containing 671 beds, 70 outpatient therapy clinics,
and 25 home health centers. The Company's facilities had average occupancy of
88.9%, 87.4% and 88.1% during the years ended December 31, 1997, 1996 and 1995,
respectively. See "Item 2. Properties."

Information provided by the Company from time to time may contain certain
"forward-looking" information regarding continued performance improvements made
pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. Forward-looking statements involve known and unknown risks
and uncertainties that may cause the Company's actual results in future periods
to differ materially from forecasted results. These risks and uncertainties
include, but are not limited to, national and local economic conditions, the
effect of government regulation, the competitive environment in which the
Company operates, and the availability and cost of labor and materials. These,
and other risks and uncertainties that could affect future results, are
discussed in greater detail throughout this Annual Report on Form 10-K.

Healthcare service providers, such as the Company, operate in an industry
that is subject to significant changes from business combinations, new strategic
alliances, legislative reform, aggressive marketing practices by competitors and
market pressures. In this environment, the Company is frequently contacted by,
and otherwise engages in discussions with, other healthcare companies and
financial advisors regarding possible strategic alliances, joint ventures,
business combinations and other financial alternatives.

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OPERATIONS

The Company is organized into three operating units, which support the
Company's delivery of vertically integrated services to the long-term healthcare
market. These operating units include: (i) Beverly Healthcare, which provides
long-term and subacute care through the operation of nursing facilities and
assisted living centers; (ii) Beverly Care Alliance, which operates outpatient
therapy clinics and home health centers, and manages Beverly Healthcare's
rehabilitation services business; and (iii) Beverly Specialty Hospitals, which
operates the Company's transitional hospitals. Business in each operating unit
is conducted by one or more corporations headed by a President who is also a
senior officer of the Company and reports directly to the President of the
Company. Each of the three operating units also has a separate Board of
Directors consisting of four senior executives of the Company and the President
of the unit.

Long-Term Care. Beverly Healthcare's nursing facilities provide residents
with routine long-term care services, including daily dietary, social and
recreational services and a full range of pharmacy services and medical
supplies. Beverly Healthcare's highly skilled staff also offers complex and
intensive medical services to patients with higher acuity disorders outside the
traditional acute care hospital setting.

Rehabilitation Therapies. Through Beverly Care Alliance, the Company offers
industrial rehabilitation, outpatient therapy clinics, acute hospital therapy
contracts, management/consulting rehabilitation programs and home health
services within the Company's network of facilities and to other healthcare
providers.

Transitional Care. Beverly Specialty Hospitals operates transitional
hospitals which address the needs of patients requiring intense therapy
regimens, but not necessarily the breadth of services provided within
traditional acute care hospitals. The typical Beverly Specialty Hospital patient
requires an average of six hours of nursing care per day for 30 to 45 days.

Other Services. The Company offers other healthcare related services to
payors and patients, including assisted living services and information and
referral systems that link payors and employees to long-term care providers.

The Company has a Quality Management ("QM") program to help ensure that
high quality care is provided in each of its nursing, transitional and
outpatient facilities. The Company's QM program has been a key factor in helping
the Company to exceed the industry's nationwide average compliance statistics,
as determined by the Health Care Financing Administration of the Department of
Health and Human Services ("HCFA"). The Company's nationwide QM network of
healthcare professionals includes physician medical directors, registered
nurses, dieticians, social workers and other specialists who work in conjunction
with regional and facility based QM professionals. Facility based QM is
structured through the Company's Quality Assessment and Assurance Committee.
With a philosophy of quality improvement, Company-wide clinical indicators are
utilized as a database to set goals and monitor thresholds in critical areas
directly related to the delivery of healthcare related services. These internal
evaluations are used by local quality improvement teams, which include QM
advisors, to identify and correct possible problems. The Senior Vice President
of QM reports directly to the President of the Company and the QM Committee of
the Company's Board of Directors.

GOVERNMENTAL REGULATION AND REIMBURSEMENT

The Company's nursing facilities are subject to compliance with various
federal, state and local healthcare statutes and regulations. Compliance with
state licensing requirements imposed upon all healthcare facilities is a
prerequisite for the operation of the facilities and for participation in
government-sponsored healthcare funding programs, such as Medicaid and Medicare.
Medicaid is a medical assistance program for the indigent, operated by
individual states with the financial participation of the federal government.
Medicare is a health insurance program for the aged and certain other
chronically disabled individuals, operated by the federal government. Changes in
the reimbursement policies of such funding programs as a result of budget cuts
by federal and state governments or other legislative and regulatory actions
could have a material adverse effect on the Company's consolidated financial
position, results of operations and cash flows.

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The Company receives payments for services rendered to patients from (a)
each of the states in which its nursing facilities are located under the
Medicaid program; (b) the federal government under the Medicare program; and (c)
private payors, including commercial insurers and managed care payors, and
Veterans Administration ("VA"). The following table sets forth: (i) patient days
derived from the indicated sources of payment as a percentage of total patient
days, (ii) room and board revenues derived from the indicated sources of payment
as a percentage of net operating revenues, and (iii) ancillary and other
revenues derived from all sources of payment as a percentage of net operating
revenues, for the periods indicated:

MEDICAID MEDICARE PRIVATE AND VA
------------------ ------------------ ------------------
ROOM AND ROOM AND ROOM AND
PATIENT BOARD PATIENT BOARD PATIENT BOARD ANCILLARY AND
DAYS REVENUES DAYS REVENUES DAYS REVENUES OTHER REVENUES
------- -------- ------- -------- ------- -------- --------------

Year ended:
December 31, 1997.... 68% 40% 12% 12% 20% 16% 32%
December 31, 1996.... 69% 42% 12% 12% 19% 14% 32%
December 31, 1995.... 68% 43% 12% 11% 20% 15% 31%

Consistent with the long-term care industry in general, changes in the mix
of the Company's patient population among the Medicaid, Medicare and private
categories can significantly affect revenues and profitability. Although the
level of cost reimbursement for Medicare patients typically generates the
highest revenue per patient day, profitability is not proportionally increased
due to the additional costs associated with the required higher level of nursing
care and other services for such patients. In most states, private patients are
the most profitable, and Medicaid patients are the least profitable.

The Company has experienced significant growth in ancillary revenues over
the past several years. Ancillary revenues are derived from providing services
to residents beyond room, board and custodial care and include occupational,
physical, speech, respiratory and intravenous ("IV") therapy, as well as sales
of pharmaceuticals and other services. Such services are currently provided
primarily to Medicare and private pay patients, consistent with the trend in
healthcare of providing a broader range of services in a lower cost setting,
such as the Company's nursing facilities. The Company is pursuing further growth
of ancillary revenues, through acquisitions as well as internal expansion of
specialty services such as rehabilitation. Due to the Company's continuing
efforts to bring therapists on staff as opposed to contracting for their
services, and the corresponding reduction in costs, the overall rate of growth
in ancillary revenues has been adversely impacted.

Medicaid programs are currently in existence in all of the states in which
the Company operates nursing facilities. While these programs differ in certain
respects from state to state, they are all subject to federally-imposed
requirements, and at least 50% of the funds available under these programs is
provided by the federal government under a matching program.

The Medicaid and Medicare programs each contain specific requirements which
must be adhered to by healthcare facilities in order to qualify under the
programs. Currently, Medicare and most state Medicaid programs utilize a
cost-based reimbursement system for nursing facilities which reimburses
facilities for the reasonable direct and indirect allowable costs incurred in
providing routine patient care services (as defined by the programs) plus, in
certain states, efficiency incentives or a return on equity, subject to certain
cost ceilings. These costs normally include allowances for administrative and
general costs as well as the costs of property and equipment (e.g. depreciation
and interest, fair rental allowance or rental expense). In some states, cost-
based reimbursement is subject to retrospective adjustment through cost report
settlement. In other states, payments made to a facility on an interim basis
that are subsequently determined to be less than or in excess of allowable costs
may be adjusted through future payments to the affected facility and to other
facilities owned by the same owner. State Medicaid reimbursement programs vary
as to methodology used to determine the level of allowable costs which are
reimbursed to operators.

Arkansas and California provide for reimbursement at a flat daily rate, as
determined by the responsible state agency. Several states in which the Company
currently operates have enacted payment mechanisms which are based on patient
acuity versus traditional cost-based methodologies. Many other states are
actively

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developing similar payment systems. There can be no assurances made as to the
ultimate impact of these changes in payment mechanisms on the Company's
consolidated financial position, results of operations, or cash flows.

Governmental funding for healthcare programs is subject to statutory and
regulatory changes, administrative rulings, interpretations of policy,
intermediary determinations and governmental funding restrictions, all of which
may materially increase or decrease program reimbursement to healthcare
facilities. In August 1997, the President signed into law the Balanced Budget
Act of 1997 (the "1997 Act") in which Congress included numerous program changes
directed at balancing the federal budget. The legislation changes Medicare and
Medicaid policy in a number of ways, including: (i) development of new Medicare
and Medicaid health plan options; (ii) creation of additional safeguards against
healthcare fraud and abuse; (iii) repeal of the Medicaid "Boren Amendment"
payment standard; (iv) a 10% reduction in Part B therapy costs for the period
from January 1, 1998 through July 1, 1998, at which time reimbursement for these
services will be based on HCFA established fee schedules; (v) the phasing in of
a Medicare prospective payment system ("PPS") for skilled nursing facilities
effective July 1, 1998 (which will be in effect for the Company in January
1999); and (vi) establishment of limitations on Part B therapy charges per
beneficiary per year. The legislation includes new opportunities for providers
to focus further on patient outcomes by creating alternative patient delivery
structures. At this time, the Company has not been able to fully assess the
impact of these changes, due in part to uncertainty as to the details of
implementation and interpretation of the legislation by HCFA and, therefore, no
assurances can be made as to the ultimate impact of this legislation or future
healthcare reform legislation on the Company's consolidated financial position,
results of operations, or cash flows. However, future federal budget legislation
and regulatory changes may negatively impact the Company.

During the first quarter of 1998, proposed rules were issued by HCFA which,
if implemented in their proposed form, would establish guidelines for maximum
reimbursement to skilled nursing facilities for contracted speech and
occupational therapy services based on equivalent salary amounts for on-staff
therapists. In addition, these proposed rules would revise the salary
equivalency rules currently in effect for physical and respiratory therapy
services. The Company does not expect the new rules to have a material adverse
effect on its consolidated results of operations or cash flows based on the
following: (i) the Company currently provides the majority of its therapy
services through on-staff therapists; and (ii) the salary equivalency guidelines
cease to apply to skilled nursing facilities once the 1997 Act provisions for
PPS become effective.

In addition to the requirements to be met by the Company's facilities for
annual licensure renewal, the Company's healthcare facilities are subject to
annual surveys and inspections in order to be certified for participation in the
Medicare and Medicaid programs. In order to maintain their operator's licenses
and their certification for participation in Medicare and Medicaid programs, the
nursing facilities must meet certain statutory and administrative requirements.
These requirements relate to the condition of the facilities and the adequacy
and condition of the equipment used therein, the quality and adequacy of
personnel, and the quality of medical care. Such requirements are subject to
change. There can be no assurance that, in the future, the Company will be able
to maintain such licenses for its facilities or that the Company will not be
required to expend significant sums in order to do so.

HCFA adopted survey, certification and enforcement procedures by
regulations effective July 1, 1995 to implement the Medicare and Medicaid
provisions of the Omnibus Budget Reconciliation Act of 1987 ("OBRA 1987")
governing survey, certification and enforcement of the requirements for contract
participation by skilled nursing facilities under Medicare and nursing
facilities under Medicaid. Among the provisions that HCFA has adopted are
requirements that (i) surveys focus on residents' outcomes; (ii) all deviations
from the participation requirements will be considered deficiencies, but all
deficiencies will not constitute noncompliance; and (iii) certain types of
deficiencies must result in the imposition of a sanction. The regulations also
identify alternative remedies and specify the categories of deficiencies for
which they will be applied. These remedies include: temporary management; denial
of payment for new admissions; denial of payment for all residents; civil money
penalties of $50 to $10,000 per day of violation; closure of facility and/or
transfer of residents in emergencies; directed plans of correction; and directed
in service training. The regulations also specify under what circumstances
alternative enforcement remedies or termination, or both,
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will be imposed on facilities which are not in compliance with the participation
requirements. The Company has undertaken an analysis of the procedures in
respect of its programs and facilities covered by the final HCFA regulations.
While the Company is unable to predict with total accuracy the degree to which
its programs and facilities will be determined to be in compliance with
regulations in the future, compliance data for the past year is available.
Results of HCFA surveys for the past year have determined that in the states
where the Company operates nursing facilities, the Company has a higher
percentage of deficiency-free facilities than the rest of the facilities in
those states combined. Furthermore, the Company's facilities that are cited with
deficiencies are cited less frequently than the rest of the facilities in the
industry. Although the Company could be adversely affected if a substantial
portion of its programs or facilities were eventually determined not to be in
compliance with the HCFA regulations, the Company believes its programs and
facilities generally exceed industry standards.

The Company believes that its facilities are in substantial compliance with
the various Medicaid and Medicare regulatory requirements currently applicable
to them. In the ordinary course of its business, however, the Company receives
notices of deficiencies for failure to comply with various regulatory
requirements. The Company reviews such notices and takes appropriate corrective
action. In most cases, the Company and the reviewing agency will agree upon the
steps to be taken to bring the facility into compliance with regulatory
requirements. In some cases or upon repeat violations, the reviewing agency may
take a number of adverse actions against a facility. These adverse actions can
include the imposition of fines, temporary suspension of admission of new
patients to the facility, decertification from participation in the Medicaid or
Medicare programs and, in extreme circumstances, revocation of a facility's
license.

The Medicaid and Medicare programs provide criminal penalties for entities
that knowingly and willfully offer, pay, solicit or receive remuneration in
order to induce business that is reimbursed under these programs. The illegal
remuneration provisions of the Social Security Act, also known as the
"anti-kickback" statute, prohibit the payment or receipt of remuneration
intended to induce the purchasing, leasing, ordering or arranging for any good,
facility, service or item paid by Medicaid or Medicare programs. The violation
of the illegal remuneration provisions is a felony and can result in the
imposition of fines of up to $25,000 per occurrence. In addition, certain states
in which the Company's facilities are located have enacted statutes which
prohibit the payment of kickbacks, bribes and rebates for the referral of
patients. The Medicare program has published certain "Safe Harbor" regulations
which describe various criteria and guidelines for transactions which are deemed
to be in compliance with the anti-remuneration provisions. Although the Company
has contractual arrangements with some healthcare providers, management believes
it is in compliance with the anti-kickback statute and other provisions of the
Social Security Act and with the applicable state statutes. However, there can
be no assurance that government officials responsible for enforcing these
statutes will not assert that the Company or certain transactions in which it is
involved are in violation of these statutes. The Social Security Act also
imposes criminal and civil penalties for making false claims to the Medicaid and
Medicare programs for services not rendered or for misrepresenting actual
services rendered in order to obtain higher reimbursement.

The Medicare and Medicaid programs also provide for the mandatory and/or
permissive exclusion of providers of services who are convicted of certain
offenses or who have been found to have violated certain laws or regulations. In
certain circumstances, conviction of abusive or fraudulent behavior with respect
to one facility may subject other facilities under common control or ownership
to disqualification from participation in Medicaid and Medicare programs. In
addition, some federal and state regulations provide that all facilities under
common control or ownership licensed to do business within a state are subject
to delicensure if any one or more of such facilities is delicensed.

While federal regulations do not provide states with grounds to curtail
funding of their Medicaid cost reimbursement programs due to state budget
deficiencies, states have nevertheless curtailed funding in such circumstances
in the past. No assurance can be given that states will not do so in the future
or that the future funding of Medicaid programs will remain at levels comparable
to the present levels. The United States Supreme Court ruled in 1990 that
healthcare providers could use the Boren Amendment to require states to comply
with their legal obligation to adequately fund Medicaid programs. The 1997 Act
repeals the Boren Amendment and authorizes states to develop their own standards
for setting payment rates. It requires each
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state to use a public process for establishing proposed rates whereby the
methodologies and justifications used for setting such rates are available for
public review and comment. This will require facilities to become more involved
in the rate setting process and failure to do so may interfere with a facility's
ability to challenge rates later.

COMPETITION

The long-term care industry is highly competitive. The Company's
competitive position varies from facility to facility, from community to
community and from state to state. Some of the significant competitive factors
for the placing of patients in a nursing facility include quality of care,
reputation, physical appearance of facilities, services offered, family
preferences, location, physician services and price. The Company's operations
compete with services provided by nursing facilities, acute care hospitals,
subacute facilities, transitional hospitals, rehabilitation facilities, hospices
and home healthcare centers. The Company also competes with a number of
tax-exempt nonprofit organizations which can finance acquisitions and capital
expenditures on a tax-exempt basis or receive charitable contributions
unavailable to the Company. There can be no assurance that the Company will not
encounter increased competition which could adversely affect its business,
results of operations or financial condition.

EMPLOYEES

At December 31, 1997, the Company had approximately 74,000 employees. The
Company is subject to both federal minimum wage and applicable federal and state
wage and hour laws and maintains various employee benefit plans.

The federal government passed legislation in 1996 to increase the minimum
wage in two phases. The initial increase took effect October 1, 1996, with the
final increase effective September 1, 1997. This new legislation did not result
in a material increase in the Company's wage rates in 1997 or 1996, because a
substantial portion of the Company's associates earn in excess of the new
minimum wage levels. The effect of the new minimum wage on the Company's future
operations is not expected to be material as the Company believes that a
significant portion of such increase will be reimbursed through Medicare and
Medicaid rate increases.

In recent years, the Company has experienced increases in its labor costs
primarily due to higher wages and greater benefits required to attract and
retain qualified personnel, increased staffing levels in its nursing facilities
due to greater patient acuity and the hiring of therapists on staff. The
Company's ability to control costs, including its wages and related expenses
which continue to rise and represent the largest component of the Company's
operating and administrative expenses, will significantly impact its future
operating results. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Operating Results."

In the past, the healthcare industry, including the Company's long-term
care facilities, has experienced a shortage of nurses to staff healthcare
operations, and, more recently, the healthcare industry has experienced a
shortage of therapists. The Company is not currently experiencing a nursing or
therapist shortage, but it competes with other healthcare providers for nursing
and therapist personnel and may compete with other service industries for
persons serving the Company in other capacities, such as nurses' aides. A
nursing, therapist or nurse's aide shortage could force the Company to pay even
higher salaries and make greater use of higher cost temporary personnel. A lack
of qualified personnel might also require the Company to reduce its census or
admit patients requiring a lower level of care, both of which could adversely
affect operating results.

Approximately 100 of the Company's facilities, or 7% of the Company's
employees, are represented by various labor unions. Certain labor unions have
publicly stated that they are concentrating their organizing efforts within the
long-term healthcare industry. The Company, being one of the largest employers
within the long-term healthcare industry, has been the target of a "corporate
campaign" by two AFL-CIO affiliated unions attempting to organize certain of the
Company's facilities. Although the Company has never experienced any material
work stoppages and believes that its relations with its employees are generally
good, the Company cannot predict the effect continued union representation or
organizational activities will have on
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the Company's future activities. There can be no assurance that continued union
representation and organizational activities will not result in material work
stoppages, which could have a material adverse effect on the Company's
operations.

Excessive litigation is a tactic common to "corporate campaigns" and one
that is being employed against the Company. There have been several proceedings
against facilities operated by the Company before the National Labor Relations
Board ("NLRB"). These proceedings consolidate individual cases from separate
facilities, and certain of these proceedings are currently pending before the
NLRB. The Company is vigorously defending these proceedings. The Company
believes, based on advice of its general counsel, that many of these cases are
without merit, and further, it is the Company's belief that the NLRB-related
proceedings, individually and in the aggregate, are not material to the
Company's consolidated financial position, results of operations, or cash flows.

ITEM 2. PROPERTIES.

At January 31, 1998, the Company operated 568 nursing facilities, 34
assisted living centers, 13 transitional hospitals, 70 outpatient therapy
clinics and 25 home health centers in 31 states and the District of Columbia.
Most of the Company's 188 leased nursing facilities are subject to "net" leases
which require the Company to pay all taxes, insurance and maintenance costs.
Most of the Company's leases have original terms from ten to fifteen years and
contain at least one renewal option, which could extend the original term of the
leases by five to fifteen years. Many of the Company's leases also contain
purchase options. The Company considers its physical properties to be in good
operating condition and suitable for the purposes for which they are being used.
Certain of the nursing facilities and assisted living centers owned by the
Company are included in the collateral securing the obligations under its
various debt agreements. See "Part II, Item 8 -- Note 4 of Notes to Consolidated
Financial Statements."

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The following is a summary of the Company's nursing facilities, assisted
living centers, transitional hospitals, outpatient therapy clinics and home
health centers at January 31, 1998:

OUTPATIENT HOME
NURSING ASSISTED TRANSITIONAL THERAPY HEALTH
FACILITIES LIVING CENTERS HOSPITALS CLINICS CENTERS
------------------ -------------- ----------------- ---------- -------
TOTAL TOTAL
LICENSED TOTAL LICENSED
LOCATION NUMBER BEDS NUMBER UNITS NUMBER BEDS NUMBER NUMBER
-------- ------ --------- ------ ----- ------ -------- ---------- -------

Alabama..................... 21 2,725 -- -- -- -- -- --
Arizona..................... 3 480 -- -- 1 48 -- --
Arkansas.................... 31 3,827 3 48 1 38 -- 2
California.................. 68 7,238 2 113 -- -- -- 9
District of Columbia........ 1 355 -- -- -- -- -- --
Florida..................... 61 7,704 5 290 -- -- -- --
Georgia..................... 17 2,100 4 72 -- -- 18 2
Hawaii...................... 2 396 -- -- -- -- -- --
Illinois.................... 3 275 -- -- -- -- -- --
Indiana..................... 26 3,817 1 16 1 40 -- 1
Kansas...................... 33 2,164 3 39 -- -- -- --
Kentucky.................... 8 1,037 -- -- -- -- -- --
Maryland.................... 4 585 1 16 -- -- 9 --
Massachusetts............... 24 2,402 -- -- -- -- -- --
Michigan.................... 2 206 -- -- -- -- -- --
Minnesota................... 35 3,152 3 32 -- -- -- --
Mississippi................. 21 2,466 -- -- -- -- -- --
Missouri.................... 29 3,038 3 101 -- -- -- 1
Nebraska.................... 24 2,173 1 16 -- -- -- 3
New Jersey.................. 1 120 -- -- -- -- -- --
North Carolina.............. 11 1,398 1 16 -- -- -- --
Ohio........................ 12 1,433 -- -- 1 44 3 --
Oklahoma.................... -- -- -- -- 2 64 -- --
Pennsylvania................ 42 4,785 3 53 -- -- -- 3
South Carolina.............. 3 302 -- -- -- -- 2 --
South Dakota................ 17 1,232 -- -- -- -- -- --
Tennessee................... 7 948 2 57 3 105 -- --
Texas....................... -- -- -- -- 4 332 38 3
Virginia.................... 16 2,113 2 32 -- -- -- --
Washington.................. 11 1,082 -- -- -- -- -- --
West Virginia............... 3 310 -- -- -- -- -- --
Wisconsin................... 32 3,513 -- -- -- -- -- 1
--- ------ -- --- -- --- -- --
568 63,376 34 901 13 671 70 25
=== ====== == === == === == ==
CLASSIFICATION
- -----------
Owned....................... 378 41,561 30 709 1 198 -- --
Leased...................... 188 21,680 4 192 12 473 70 25
Managed..................... 2 135 -- -- -- -- -- --
--- ------ -- --- -- --- -- --
568 63,376 34 901 13 671 70 25
=== ====== == === == === == ==

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ITEM 3. LEGAL PROCEEDINGS.

On March 4, 1998, a jury in California returned a verdict of $95.1 million
against a nursing facility operated by a subsidiary of the Company. The verdict,
which was based on findings of fraud as well as negligence and abuse, consisted
of $365,580 in compensatory damages and $94.7 million in punitive damages. Since
punitive damages are generally not covered by insurance, a final judgement of
this size could have a material adverse effect on the Company's consolidated
results of operations and financial position. However, it is the Company's
belief, based on discussions with its trial and appellate counsel, that many of
the jury's findings, including fraud, are not supportable from the evidence
presented in the case, and the judgement entered will be significantly reduced
by the trial court or an appeal. The Company intends to aggressively pursue all
post-trial remedies available to it.

There are various other lawsuits and regulatory actions pending against the
Company arising in the normal course of business, some of which seek punitive
damages which are generally not covered by insurance. The Company does not
believe that the ultimate resolution of these matters will have a material
adverse effect on the Company's consolidated financial position or results of
operations.

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

On November 20, 1997, in conjunction with the Reorganization, the Company
held a Special Meeting of Stockholders in Fort Smith, Arkansas, for the purposes
of approving and adopting an Agreement and Plan of Distribution, approving and
adopting an Agreement and Plan of Merger, approving the New Beverly 1997
Long-Term Incentive Plan, approving the New Beverly Non-Employee Directors Stock
Option Plan, approving the possible adjournment of the Special Meeting of
Stockholders for purposes of soliciting additional votes in favor of the above
proposals and transacting such other business as may have properly come before
the meeting or any adjournment thereof.

The Agreement and Plan of Distribution was approved at the meeting. The
following table sets forth the number of votes for and against, as well as
abstentions as to this matter:

For...................................................... 88,956,221
Against.................................................. 153,732
Abstentions.............................................. 184,382

The Agreement and Plan of Merger was approved at the meeting. The following
table sets forth the number of votes for and against, as well as abstentions as
to this matter:

For...................................................... 88,958,901
Against.................................................. 150,959
Abstentions.............................................. 184,475

The New Beverly 1997 Long-Term Incentive Plan was approved at the meeting.
The following table sets forth the number of votes for and against, as well as
abstentions as to this matter:

For...................................................... 83,453,156
Against.................................................. 5,560,086
Abstentions.............................................. 281,093

The New Beverly Non-Employee Directors Stock Option Plan was approved at
the meeting. The following table sets forth the number of votes for and against,
as well as abstentions as to this matter:

For...................................................... 81,970,461
Against.................................................. 6,971,231
Abstentions.............................................. 352,643

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11

The possible adjournment of the Special Meeting was approved at the
meeting. The following table sets forth the number of votes for and against, as
well as abstentions as to this matter:

For...................................................... 63,009,792
Against.................................................. 25,144,748
Abstentions.............................................. 1,139,795

EXECUTIVE OFFICERS AND DIRECTORS

The table below sets forth, as to each executive officer and director of
the Company, such person's name, positions with the Company and age. Each
executive officer and director of the Company holds office until a successor is
elected, or until the earliest of death, resignation or removal. Each executive
officer is elected or appointed by the Board of Directors. The information below
is given as of March 18, 1998.

NAME POSITION AGE
---- -------- ---

David R. Banks(1)............................ Chairman of the Board, Chief Executive Officer
and Director 61
Boyd W. Hendrickson(1)....................... President, Chief Operating Officer and Director 53
William A. Mathies........................... Executive Vice President and President -- Beverly
Healthcare 38
T. Jerald Moore.............................. Executive Vice President and President -- Beverly
Specialty Hospitals 57
Robert W. Pommerville........................ Executive Vice President, General Counsel and
Secretary 57
Bobby W. Stephens............................ Executive Vice President -- Asset Management 53
Scott M. Tabakin............................. Executive Vice President and Chief Financial
Officer 39
Mark D. Wortley.............................. Executive Vice President and President -- Beverly
Care Alliance 42
Pamela H. Daniels............................ Vice President, Controller and Chief Accounting
Officer 34
Beryl F. Anthony, Jr.(1)(3)(5)............... Director 60
Carolyne K. Davis, R.N., Ph.D.(1)(4)......... Director 66
James R. Greene(2)(3)(4)..................... Director 76
Edith E. Holiday(2)(4)(5).................... Director 46
Jon E. M. Jacoby(1)(2)....................... Director 59
Risa J. Lavizzo-Mourey, M.D.(3)(4)........... Director 43
Marilyn R. Seymann(2)(4)(5).................. Director 55

- ---------------

(1) Member of the Executive Committee.

(2) Member of the Audit Committee.

(3) Member of the Compensation Committee.

(4) Member of the Quality Management Committee.

(5) Member of the Nominating Committee.

Mr. Banks has been a director of the Company since 1979 and has served as
Chief Executive Officer since May 1989 and Chairman of the Board since March
1990. Mr. Banks was President of the Company from 1979 to September 1995. Mr.
Banks is a director of Nationwide Health Properties, Inc., Ralston Purina
Company, Wellpoint Health Networks, Inc., and trustee for Occidental College.
Mr. Banks also serves as a director of PharMerica, Inc., a major supplier of
institutional pharmacy services to the Company.

Mr. Hendrickson joined the Company in 1988 as a Division President. He was
elected Vice President of Marketing in May 1989, Executive Vice President of
Operations and Marketing in February 1990, President of Beverly Healthcare in
January 1995 and President, Chief Operating Officer and a director of the
Company in September 1995. He is a director of PharMerica, Inc.

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Mr. Mathies joined the Company in 1981 as an Administrator in training. He
was an Administrator until 1986 at which time he became a Regional Manager. In
1988, Mr. Mathies was elected Vice President of Operations for the California
region and was elected Executive Vice President of the Company and President of
the corporations within Beverly Healthcare in September 1995.

Mr. Moore joined the Company as Executive Vice President in December 1992
and was elected President of the corporations within Beverly Specialty Hospitals
in June 1996. Mr. Moore was employed at Aetna Life and Casualty from 1963 to
1992 and was elected Senior Vice President in 1990.

Mr. Pommerville first joined the Company in 1970 and left in 1976. He
rejoined the Company as Vice President and General Counsel in 1984 and was
elected Secretary in February 1990, Senior Vice President in March 1990 and
Executive Vice President and Acting Compliance Officer in February 1995.

Mr. Stephens joined the Company as a staff accountant in 1969. He was
elected Assistant Vice President in 1978, Vice President of the Company and
President of the Company's Central Division in 1980, and Executive Vice
President in February 1990. Mr. Stephens is a director of City National Bank in
Fort Smith, Arkansas, Beverly Japan Corporation, and Harbortown Properties, Inc.

Mr. Tabakin joined the Company in October 1992 as Vice President,
Controller and Chief Accounting Officer. He was elected Senior Vice President in
May 1995, Acting Chief Financial Officer in September 1995 and Executive Vice
President and Chief Financial Officer in October 1996. From 1980 to 1992, Mr.
Tabakin was with Ernst & Young LLP.

Mr. Wortley joined the Company as Senior Vice President and President of
the corporations within Beverly Care Alliance in September 1994 and was elected
Executive Vice President in February 1996. From 1988 to 1994, Mr. Wortley was an
officer of Therapy Management Innovations.

Ms. Daniels joined the Company in May 1988 as Audit Coordinator. She was
promoted to Financial Reporting Senior Manager in 1991 and Director of Financial
Reporting in 1992. She was elected Vice President, Controller and Chief
Accounting Officer in October 1996. From 1985 to 1988, Ms. Daniels was with
Price Waterhouse LLP.

Mr. Anthony served as a member of the United States Congress and was
Chairman of the Democratic Congressional Campaign Committee from 1987 through
1990. In 1993, he became a partner in the Winston & Strawn law firm. He has been
a director of the Company since January 1993.

Dr. Davis is currently a part-time scholar in residence at the Sloan Health
Management Program at Cornell University, Ithaca, New York. She served as
Administrator of the Health Care Financing Administration of the U.S. Department
of Health and Human Services from 1981 to 1985. She was a director of the
Company from 1985 to 1989 and served as consultant and advisor to the Company's
Board of Directors from 1989 to 1997. She was a national and international
health care advisor to Ernst & Young LLP from 1985 to 1997. She is a member of
the Institute of Medicine and the National Academy of Science, a trustee for the
University of Pennsylvania Medical Center, a member of the board of directors
for Georgetown University, a director of Beckman Instruments, Inc., Merck & Co.,
Inc., The Prudential Insurance Company of North America, Pharmaceutical
Marketing Services, Inc. and MiniMed, Inc. She has been a director of the
Company since December 1997.

Mr. Greene's principal occupation has been that of a director and
consultant to various U.S. and international businesses since 1986. He is a
director of Buck Engineering Company and Bank Leumi. He has been a director of
the Company since January 1991.

Ms. Holiday is an attorney. She served as White House Liaison for the
Cabinet and all federal agencies during the Bush administration. Prior to that,
Ms. Holiday served as General Counsel of the U.S. Treasury Department, as well
as its Assistant Secretary of Treasury for Public Affairs and Public Liaison.
She is a director of Amerada Hess Corporation, Hercules Incorporated and H.J.
Heinz Company and a director or trustee of various investment companies in the
Franklin Templeton Group of Funds. She has been a director of the Company since
March 1995.

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Mr. Jacoby is Executive Vice President, Chief Financial Officer and a
director of Stephens Group, Inc. Mr. Jacoby has held the indicated positions
with Stephens Group, Inc. since 1986, and prior to that time, served as Manager
of the Corporate Finance Department and Assistant to the President of Stephens
Inc. Mr. Jacoby is a director of Power-One, Inc. and Delta and Pine Land
Company, Inc. He has been a director of the Company since February 1987.

Dr. Lavizzo-Mourey is Director of the Institute of Aging, Chief of the
Division of Geriatric Medicine, Associate Executive Vice President for health
policy, and Professor of Medicine at the University of Pennsylvania. From 1992
to 1994, Dr. Lavizzo-Mourey was in the Senior Executive Service in the Agency
for Health Care Policy and Research, U.S. Public Health Service of the
Department of Health and Human Services. She is a director of Managed Care
Solutions, Inc. and Kapson Senior Quarters Corp. She has been a director of the
Company since March 1995.

Ms. Seymann is President and Chief Executive Officer of M One, Inc., a
management and information systems consulting firm specializing in the financial
services industry. From 1990 to 1993, Ms. Seymann was Director and Vice Chairman
of the Federal Housing Finance Board. Prior to that, she served as Managing
Director of Andersen Asset Based Services, a unit of Arthur Andersen LLP. From
1986 to 1990, Ms. Seymann was Executive Vice President of Chase Bank of Arizona
and served as President, Private Banking of Chase Trust Company from 1987 to
1990. She is a director of Claremont Technology Group, Inc. She has been a
director of the Company since March 1995.

During 1997, there were eight meetings of the Board of Directors. Each
director attended 75% or more of the meetings of the Board and committees on
which he or she served.

In 1997, directors, other than Mr. Banks and Mr. Hendrickson, received a
retainer fee of $25,000 for serving on the Board and an additional fee of $1,000
for each Board or committee meeting attended. The chairperson of each committee
received an additional $1,000 for each committee meeting attended. Mr. Banks,
the Company's current Chairman of the Board and Chief Executive Officer, and Mr.
Hendrickson, the Company's current President and Chief Operating Officer,
received no additional cash compensation for serving on the Board or its
committees.

During 1997, the Beverly Enterprises, Inc. Non-Employee Director Deferred
Compensation Plan (the "Non-Employee Director Deferred Compensation Plan") was
approved. Such plan provides each nonemployee director the opportunity to
receive awards equivalent to shares of Common Stock ("deferred share units") and
to defer receipt of compensation for services rendered to the Company. There are
three types of contributions available under the plan. First, nonemployee
directors can defer all or part of retainer and meeting fees to a pre-tax
deferred compensation account with two investment options. The first investment
option is a cash account which is credited with interest, and the second
investment option is a deferred share unit account, with each unit having a
value equivalent to one share of Common Stock. The second type of contribution
is a Company matching contribution whereby the Company matches 25% of the amount
of fees deferred, to the extent the deferral is in the deferred share unit
account. Third, as a replacement for the prior benefits under the retirement
plan for outside directors, each nonemployee director receives a grant of 500
deferred share units each year which is automatically credited to the deferred
share unit account. Distributions under the plan will commence upon retirement,
termination, death or disability and will be made in shares of Common Stock
unless the Board of Directors approves payment in cash.

During 1997, the New Beverly Non-Employee Directors Stock Option Plan (the
"Non-Employee Directors Stock Option Plan") was approved. Such plan became
effective December 3, 1997 and will remain in effect until December 31, 2007,
subject to earlier termination by the Board of Directors. Such plan replaced the
Nonemployee Directors' Plan entered into in 1994. There are 300,000 shares of
the Company's $.10 par value common stock ("Common Stock") authorized for
issuance, subject to certain adjustments, under the Non-Employee Directors Stock
Option Plan. The Non-Employee Directors Stock Option Plan was amended by the
Board of Directors on December 11, 1997 to provide that 3,375 stock options be
granted to each nonemployee director on June 1 of each year until the plan is
terminated, subject to the availability of shares. Such grants have been made
since 1994 to each of the nonemployee directors. Such stock options are granted
at a purchase price equal to fair market value on the date of grant, become
exercisable one year after date of grant and expire ten years after date of
grant.

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PART II

ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

The Company's Common Stock is listed on the New York and Pacific Stock
Exchanges. The table below sets forth, for the periods indicated, the range of
high and low sales prices of the Common Stock as reported on the New York Stock
Exchange composite tape.

PRICES
-----------
HIGH LOW
---- ---

1996
First Quarter............................................. $12 3/8 $10 1/8
Second Quarter............................................ 12 5/8 11
Third Quarter............................................. 12 1/8 9 1/4
Fourth Quarter............................................ 13 3/4 10 5/8
1997
First Quarter............................................. $16 1/8 $12 1/4
Second Quarter............................................ 16 7/8 13 1/8
Third Quarter............................................. 17 1/2 14 9/16
Fourth Quarter............................................ 17 1/2 12 1/8(1)
1998
First Quarter (through March 18).......................... $15 9/16 $12 5/16

- ---------------

(1) After the effect of the Reorganization on December 3, 1997 (as discussed
herein).

The Company is subject to certain restrictions under its long-term debt
agreements related to the payment of cash dividends on its Common Stock. During
1997 and 1996, no cash dividends were paid on the Company's Common Stock and no
future dividends are currently planned.

At March 18, 1998, there were 5,824 record holders of the Common Stock.

EMPLOYEE STOCK PURCHASE PLAN

The Beverly Enterprises 1988 Employee Stock Purchase Plan (as amended and
restated) enables all full-time employees having completed one year of
continuous service to purchase shares of Common Stock at the current market
price through payroll deductions. The Company makes contributions in the amount
of 30% of the participant's contribution. Each participant specifies the amount
to be withheld from earnings per two-week pay period, subject to certain
limitations. The total charge to the Company's statement of operations for the
year ended December 31, 1997 related to this plan was approximately $2,449,000.
At December 31, 1997, there were approximately 4,700 participants in the plan.

Merrill Lynch & Co., Merrill Lynch World Headquarters, North Tower, World
Financial Center, New York, New York 10281, was appointed broker to open and
maintain an account in each participant's name and to purchase shares of Common
Stock on the New York Stock Exchange for each participant.

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ITEM 6. SELECTED FINANCIAL DATA.

The following table of selected financial data should be read in
conjunction with the Company's consolidated financial statements and related
notes thereto included elsewhere in this Annual Report on Form 10-K.

AT OR FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------------------------------
1997(1) 1996 1995 1994 1993
----------- ----------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net operating revenues............................... $ 3,217,099 $ 3,267,189 $3,228,553 $2,969,239 $2,884,451
Interest income...................................... 13,201 13,839 14,228 14,578 15,269
----------- ----------- ---------- ---------- ----------
Total revenues............................... 3,230,300 3,281,028 3,242,781 2,983,817 2,899,720
Costs and expenses:
Operating and administrative:
Wages and related................................ 1,772,429 1,819,500 1,736,151 1,600,580 1,593,410
Other............................................ 1,115,592 1,139,442 1,224,681 1,114,916 1,069,536
Interest........................................... 82,713 91,111 84,245 64,792 66,196
Depreciation and amortization...................... 107,060 105,468 103,581 88,734 82,938
Transaction costs.................................. 44,000 -- -- -- --
Impairment of long-lived assets:
Adoption of SFAS No. 121......................... -- -- 68,130 -- --
Development and other costs...................... -- -- 32,147 -- --
----------- ----------- ---------- ---------- ----------
Total costs and expenses..................... 3,121,794 3,155,521 3,248,935 2,869,022 2,812,080
----------- ----------- ---------- ---------- ----------
Income (loss) before provision for income taxes and
extraordinary charge............................... 108,506 125,507 (6,154) 114,795 87,640
Provision for income taxes........................... 49,913 73,481 1,969 37,882 29,684
----------- ----------- ---------- ---------- ----------
Income (loss) before extraordinary charge............ 58,593 52,026 (8,123) 76,913 57,956
Extraordinary charge, net of income tax benefit of
$1,099 in 1996, $1,188 in 1994 and $1,155 in
1993............................................... -- (1,726) -- (2,412) (2,345)
----------- ----------- ---------- ---------- ----------
Net income (loss).................................... $ 58,593 $ 50,300 $ (8,123) $ 74,501 $ 55,611
=========== =========== ========== ========== ==========
Net income (loss) applicable to common shares........ $ 58,593 $ 50,300 $ (14,998) $ 66,251 $ 31,173
=========== =========== ========== ========== ==========
Income (loss) per share of common stock(2):
Basic:
Before redemption premium on preferred stock and
extraordinary charge........................... $ .57 $ .53 $ (.16) $ .80 $ .67
Redemption premium on preferred stock............ -- -- -- -- (.25)
----------- ----------- ---------- ---------- ----------
Before extraordinary charge...................... .57 .53 (.16) .80 .42
Extraordinary charge............................. -- (.02) -- (.02) (.03)
----------- ----------- ---------- ---------- ----------
Net income (loss)................................ $ .57 $ .51 $ (.16) $ .78 $ .39
=========== =========== ========== ========== ==========
Shares used to compute per share amounts......... 102,060,000 98,574,000 92,233,000 85,430,000 79,735,000
Diluted:
Before redemption premium on preferred stock and
extraordinary charge........................... $ .57 $ .50 $ (.16) $ .78 $ .65
Redemption premium on preferred stock............ -- -- -- -- (.23)
----------- ----------- ---------- ---------- ----------
Before extraordinary charge...................... .57 .50 (.16) .78 .42
Extraordinary charge............................. -- (.01) -- (.02) (.03)
----------- ----------- ---------- ---------- ----------
Net income (loss)................................ $ .57 $ .49 $ (.16) $ .76 $ .39
=========== =========== ========== ========== ==========
Shares used to compute per share amounts........... 103,422,000 110,726,000 92,233,000 98,016,000 85,243,000
CONSOLIDATED BALANCE SHEET DATA:
Total assets......................................... $ 2,073,469 $ 2,525,082 $2,506,461 $2,322,578 $2,000,804
Current portion of long-term obligations............. $ 31,551 $ 38,826 $ 84,639 $ 60,199 $ 43,125
Long-term obligations, excluding current portion..... $ 686,941 $ 1,106,256 $1,066,909 $ 918,018 $ 706,917
Stockholders' equity................................. $ 862,505 $ 861,095 $ 820,333 $ 827,244 $ 742,862
OTHER DATA:
Patient days......................................... 21,676,000 23,670,000 25,297,000 26,766,000 29,041,000
Average occupancy percentage(3)...................... 88.9% 87.4% 88.1% 88.5% 88.5%
Number of nursing home beds.......................... 63,552 71,204 75,669 78,058 85,001

- ---------------
(1) Amounts for 1997 include the operations of PCA up until the effective date
of the Merger (as discussed herein).
(2) The earnings per share amounts prior to 1997 were restated as required to
comply with Statement of Financial Accounting Standards No. 128, "Earnings
per Share." See "Part II, Item 8 -- Note 1 of Notes to Consolidated
Financial Statements."
(3) Average occupancy percentage for 1997 was based on operational beds, and for
all periods prior to 1997, such percentage was based on licensed beds.
Average occupancy percentage for 1997 based on licensed beds was 87.1%.

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16

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.

GENERAL

Healthcare system reform and concerns over rising Medicare and Medicaid
costs continue to be high priorities for both federal and state governments. In
August 1997, the President signed into law the Balanced Budget Act of 1997 (the
"1997 Act") in which Congress included numerous program changes directed at
balancing the federal budget. The legislation changes Medicare and Medicaid
policy in a number of ways, including: (i) development of new Medicare and
Medicaid health plan options; (ii) creation of additional safeguards against
healthcare fraud and abuse; (iii) repeal of the Medicaid "Boren Amendment"
payment standard; (iv) a 10% reduction in Part B therapy costs for the period
from January 1, 1998 through July 1, 1998, at which time reimbursement for these
services will be based on HCFA established fee schedules; (v) the phase in of a
Medicare prospective payment system ("PPS") for skilled nursing facilities
effective July 1, 1998 (which will be in effect for the Company in January
1999); and (vi) establishment of limitations on Part B therapy charges per
beneficiary per year. The legislation includes new opportunities for providers
to focus further on patient outcomes by creating alternative patient delivery
structures. At this time, the Company has not been able to fully assess the
impact of these changes, due in part to uncertainty as to the details of
implementation and interpretation of the legislation by the Health Care
Financing Administration of the Department of Health and Human Services ("HCFA")
and, therefore, no assurances can be made as to the ultimate impact of this
legislation or future healthcare reform legislation on the Company's
consolidated financial position, results of operations, or cash flows. However,
future federal budget legislation and regulatory changes may negatively impact
the Company.

During the first quarter of 1998, proposed rules were issued by HCFA which,
if implemented in their proposed form, would establish guidelines for maximum
reimbursement to skilled nursing facilities for contracted speech and
occupational therapy services, based on equivalent salary amounts for on-staff
therapists. In addition, these proposed rules would revise the salary
equivalency rules currently in effect for physical and respiratory therapy
services. The Company does not expect the regulations to have a material adverse
effect on its consolidated results of operations or cash flows based on the
following: (i) the Company currently provides the majority of its therapy
services through on-staff therapists; and (ii) the salary equivalency guidelines
cease to apply to skilled nursing facilities once the 1997 Act provisions for
PPS become effective.

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17

The Company's future operating performance will continue to be affected by
the issues facing the long-term healthcare industry as a whole, including the
maintenance of occupancy, its ability to continue to expand higher margin
businesses, the availability of nursing, therapy and other personnel, the
adequacy of funding of governmental reimbursement programs, the demand for
nursing home care and the nature of any healthcare reform measures that may be
taken by the federal government, as discussed above, as well as by any state
governments. The Company's ability to control costs, including its wages and
related expenses which continue to rise and represent the largest component of
the Company's operating and administrative expenses, will also significantly
impact its future operating results.

IMPACT OF THE YEAR 2000 ISSUE

The Year 2000 Issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the Company's
computer programs that have date-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities.

The Company has determined that it will be required to modify or replace
significant portions of its software so that its computer systems will function
properly with respect to dates in the year 2000 and thereafter. The Company will
utilize both internal and external resources to reprogram, or replace, and test
the software for Year 2000 modifications. The full effect of the Year 2000
Issue, including the total costs to complete such project, is not readily
determinable at this time. The Company presently believes that with
modifications to existing software and conversions to new software, the Year
2000 Issue will not pose significant operational problems for its computer
systems. However, if such modifications and conversions are not made, or are not
completed timely, the Year 2000 Issue could have a material impact on the
operations of the Company.

The Company is in the process of initiating formal communications with all
of its significant suppliers and large customers to determine the extent to
which the Company's interface systems are vulnerable to those third parties'
failure to remediate their own Year 2000 Issues. There can be no guarantee that
the systems of other companies on which the Company's systems rely will be
timely converted and will not have an adverse effect on the Company's systems or
ongoing operations.

OPERATING RESULTS

1997 COMPARED TO 1996

Operating results for 1997 include the operations of PCA up until the
effective date of the Merger (as discussed herein). Net income was $58,593,000
for the year ended December 31, 1997, as compared to net income of $50,300,000
for the same period in 1996. Net income for 1997 included a pre-tax charge of
$44,000,000 relating to the Reorganization on December 3, 1997 (as discussed
herein). Net income for 1996 included a $1,726,000 extraordinary charge, net of
income taxes, related to the write-off of unamortized deferred financing costs
related to certain refinanced debt.

The Company had an annual effective tax rate of 46% for the year ended
December 31, 1997, compared to an annual effective tax rate of 59% for the same
period in 1996. The annual effective tax rate in 1997 was different than the
federal statutory rate primarily due to the impact of nondeductible transaction
costs associated with the Reorganization. In addition, the annual effective tax
rate in 1996 was different than the

16
18

federal statutory rate primarily due to the impact of nondeductible goodwill
associated with the sale of the Company's MedView Services unit ("MedView").

Net operating revenues and operating and administrative costs decreased
approximately $50,100,000 and $70,900,000, respectively, for the year ended
December 31, 1997, as compared to the same period in 1996. These decreases
consist of the following: decreases in net operating revenues and operating and
administrative costs of approximately $246,500,000 and $215,900,000,
respectively, due to the disposition of, or lease terminations on 68 nursing
facilities in 1997 and 83 nursing facilities and MedView in 1996; partially
offset by increases in net operating revenues and operating and administrative
costs of approximately $100,300,000 and $77,600,000, respectively, for
facilities which the Company operated during each of the years ended December
31, 1997 and 1996 ("same facility operations"); increases in net operating
revenues and operating and administrative costs of approximately $57,800,000 and
$51,500,000, respectively, related to the acquisitions of eight nursing
facilities in 1996, as well as certain outpatient therapy and hospice businesses
acquired in 1997 and 1996; and increases in net operating revenues and operating
and administrative costs of approximately $38,300,000 and $15,900,000,
respectively, due to the operations of PCA.

The increase in net operating revenues for same facility operations for the
year ended December 31, 1997, as compared to the same period in 1996, was due to
the following: approximately $103,200,000 due to increases in room and board
rates and approximately $11,800,000 due primarily to increases in ancillary
revenues and various other items. These increases in net operating revenues were
partially offset by approximately $9,300,000 due to a decrease in same facility
occupancy to 89.8% for the year ended December 31, 1997, as compared to 90.3%
for the same period in 1996 and approximately $5,400,000 due to one less
calendar day for the year ended December 31, 1997, as compared to the same
period in 1996.

The increase in operating and administrative costs for same facility
operations for the year ended December 31, 1997, as compared to the same period
in 1996, was due to the following: approximately $55,600,000 due to increased
wages and related expenses principally due to higher wages and greater benefits
required to attract and retain qualified personnel, the hiring of therapists on
staff as opposed to contracting for their services and increased staffing levels
in the Company's nursing facilities to cover increased patient acuity;
approximately $18,200,000 due primarily to increases in purchased ancillary
products; approximately $14,300,000 due to increases in nursing supplies and
other variable costs; and approximately $10,200,000 due to various other items.
These increases in operating and administrative costs were partially offset by
approximately $20,700,000 due to a decrease in contracted therapy expenses as a
result of hiring therapists on staff as opposed to contracting for their
services.

Interest expense decreased approximately $8,400,000 as compared to the same
period in 1996 primarily due to repayments of the term loan and revolver
borrowings under the Company's 1994 Credit Agreement, the term loan under the
Company's 1992 Credit Facility and the Nippon Term Loan during late 1996 with
the proceeds from a new credit facility, as well as the redemption of the
Company's 5 1/2% Debentures in the third quarter of 1997 and the debt repayments
made during the fourth quarter of 1997 with the proceeds from the Merger (as
discussed below). The increase in depreciation and amortization expense of
approximately $1,600,000 as compared to the same period in 1996, was affected by
the following: approximately $9,900,000 increase primarily due to capital
additions and improvements, as well as acquisitions; partially offset by a
decrease of approximately $8,300,000 related to the disposition of, or lease
terminations on, certain nursing facilities and MedView.

In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings per Share," ("SFAS No.
128"). SFAS No. 128 replaced the calculation of primary and fully diluted
earnings per share with basic and diluted earnings per share. Unlike primary
earnings per share, basic earnings per share excludes any dilutive effects of
options, warrants and convertible securities. Diluted earnings per share is very
similar to the previously reported fully diluted earnings per share. Earnings
per share amounts for all periods have been presented, and where appropriate,
restated to conform to the SFAS No. 128 requirements.

in financial statements for periods beginning after December 15, 1997. SFAS No.
130 requires the presentation of comprehensive income in a company's financial
statements. Comprehensive income represents all changes in the equity of a
company during the reporting period, including net income and charges directly
to retained earnings which are excluded from net income. The Company will adopt
SFAS No. 130 in its consolidated financial statements during the first quarter
of 1998 and does not expect there to be a material effect on its consolidated
financial position or results of operations.

In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information," ("SFAS No. 131") which is required to be
adopted in financial statements for periods beginning after December 15, 1997.
SFAS No. 131 provides revised disclosure guidelines for segments of a company
based on a management approach to defining operating segments. The Company will
provide reporting disclosures as required by SFAS No. 131 for the year ending
December 31, 1998. The Company has not completed its review of SFAS No. 131, but
does not anticipate that there will be a significant effect on the Company's
reporting disclosures.

1996 COMPARED TO 1995

Net income was $50,300,000 for the year ended December 31, 1996, as
compared to a net loss of $8,123,000 for the same period in 1995. Net income for
1996 included a $1,726,000 extraordinary charge, net of income taxes, related to
the write-off of unamortized deferred financing costs related to certain
refinanced debt. Net loss for 1995 included a pretax charge of $100,277,000 for
impaired long-lived assets related primarily to the adoption of SFAS No. 121 (as
defined below) and the write-off of software and business development costs, as
well as a charge of $4,000,000 related to an overhead and staff reduction
program implemented during the fourth quarter of 1995.

In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of," ("SFAS No. 121")
which requires impairment losses to be recognized for long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows are not sufficient to recover the assets' carrying amounts. The impairment
loss is measured by comparing the fair value of the asset to its carrying
amount.

In the fourth quarter of 1995, the Company recorded an impairment loss of
approximately $68,130,000 upon adoption of SFAS No. 121. Such loss primarily
related to certain nursing facilities, transitional hospitals, institutional
pharmacies and assisted living centers with current period operating losses.
Such current period operating losses, combined with a history of operating
losses and anticipated future operating losses, led management to believe that
impairment existed at such facilities. In addition, there were certain nursing
facilities for which management expected an adverse impact on future earnings
and cash flows as a result of recent changes in state Medicaid reimbursement
programs. Accordingly, management estimated the undiscounted future cash flows
to be generated by each facility. If the undiscounted future cash flow estimates
were less than the carrying value of the corresponding facility, management
estimated the fair value of such facility and wrote the carrying value down to
its estimate of fair value. Management calculated the fair value of the impaired
facilities by using the present value of estimated future cash flows, or its
best estimate of what such facility, or similar facilities in that state, would
sell for in the open market. Management believes it has the knowledge to make
such estimates of open market sales prices based on the volume of facilities the
Company has purchased and sold in previous years.

In addition to the SFAS No. 121 charge, the Company recorded a fourth
quarter of 1995 impairment loss for other long-lived assets of approximately
$32,147,000 primarily related to the write-off of software and business
development costs. During the fourth quarter of 1995, the Company hired a new
Senior Vice President of Information Technology, who redirected the Company's
systems development initiatives, causing a write-down, or a write-off, of
certain software and software development projects. In addition, the Company
wrote off certain business development and other costs where the Company
believed the carrying amounts were unrecoverable.

18
20

The Company had an annual effective tax rate of 59% for the year ended
December 31, 1996, compared to a negative annual effective tax rate of 32% for
the same period in 1995. The annual effective tax rate in 1996 was different
than the federal statutory rate primarily due to the impact of nondeductible
goodwill associated with the sale of MedView. In addition, the annual effective
tax rate in 1995 was different than the federal statutory rate primarily due to
the impact of nondeductible goodwill included in the adjustments resulting from
the adoption of SFAS No. 121. At December 31, 1996, the Company had general
business tax credit carryforwards of $12,236,000 for income tax purposes which
expire in years 2005 through 2011. For financial reporting purposes, the general
business tax credit carryforwards have been utilized to offset existing net
taxable temporary differences reversing during the carryforward periods.

Net operating revenues increased approximately $38,600,000 for the year
ended December 31, 1996, as compared to the same period in 1995. This increase
consists of the following: increases of approximately $62,300,000 for facilities
which the Company operated during each of the years ended December 31, 1996 and
1995 ("same facility operations"); increases of approximately $91,700,000
related to the acquisition of Pharmacy Management Services, Inc. ("PMSI") in
mid-1995, acquisitions of eight nursing facilities, and certain pharmacy,
hospice and outpatient therapy businesses during 1996 and the expanded
operations of American Transitional Hospitals, Inc. ("ATH"); partially offset by
decreases of approximately $115,400,000 due to the disposition of, or lease
terminations on, 83 nursing facilities and MedView in 1996 and 29 nursing
facilities in 1995. Operating and administrative costs decreased approximately
$1,900,000 for the year ended December 31, 1996, as compared to the same period
in 1995. This decrease consists of the following: decreases of approximately
$114,200,000 due to the disposition of, or lease terminations on, 83 nursing
facilities and MedView in 1996 and 29 nursing facilities in 1995; offset by
increases of approximately $39,000,000 for same facility operations and
increases of approximately $73,300,000 related to the acquisition of PMSI in
mid-1995, acquisitions of eight nursing facilities, and certain pharmacy,
hospice and outpatient therapy businesses during 1996 and the expanded
operations of ATH.

The increase in net operating revenues for same facility operations for the
year ended December 31, 1996, as compared to the same period in 1995, was due to
the following: approximately $110,500,000 due primarily to increases in room and
board rates; and approximately $5,600,000 due to one additional calendar day for
the year ended December 31, 1996, as compared to the same period in 1995. These
increases in net operating revenues were partially offset by approximately
$28,500,000 due to a decrease in same facility occupancy to 87.7% for the year
ended December 31, 1996, as compared to 88.9% for the same period in 1995;
approximately $19,700,000 due to decreases in ancillary revenues primarily due
to the Company's continuing efforts to bring therapists on staff as opposed to
contracting for their services; and approximately $5,600,000 due to various
other items.

The increase in operating and administrative costs for same facility
operations for the year ended December 31, 1996, as compared to the same period
in 1995, was due to the following: approximately $109,000,000 due to increased
wages and related expenses (excluding pharmacy) principally due to higher wages
and greater benefits required to attract and retain qualified personnel, the
hiring of therapists on staff as opposed to contracting for their services and
increased staffing levels in the Company's nursing facilities to cover increased
patient acuity; approximately $8,300,000 due to increases in nursing supplies
and other variable costs; and approximately $19,100,000 due to various other
items. These increases in operating and administrative costs were partially
offset by approximately $93,400,000 due to a decrease in contracted therapy
expenses as a result of hiring therapists on staff as opposed to contracting for
their services; and approximately $4,000,000 due to an overhead and staff
reduction program implemented during the fourth quarter of 1995.

Interest expense increased approximately $6,900,000 as compared to the same
period in 1995 primarily due to the exchange of Preferred Stock into 5 1/2%
Debentures in November 1995, the issuance and assumption of approximately
$40,000,000 of long-term obligations in conjunction with certain acquisitions
and the issuance of $25,000,000 of taxable revenue bonds during 1995, partially
offset by a reduction of approximately $52,800,000 of long-term obligations in
conjunction with the disposition of certain facilities. Although depreciation
and amortization expense increased only $1,900,000 as compared to the same
period in 1995, it was affected by the following: approximately $5,800,000
increase primarily due to capital additions and

19
21

improvements and, to a lesser extent, acquisitions; partially offset by a
decrease of approximately $3,900,000 related to the disposition of, or lease
terminations on, certain nursing facilities.

LIQUIDITY AND CAPITAL RESOURCES

At December 31, 1997, the Company had approximately $105,200,000 in cash
and cash equivalents and net working capital of approximately $282,300,000. The
Company anticipates that approximately $36,100,000 of its existing cash at
December 31, 1997, while not legally restricted, will be utilized to fund
certain workers' compensation and general liability claims, and the Company does
not expect to use such cash for other purposes. The Company had approximately
$324,300,000 of unused commitments under its Revolver/Letter of Credit Facility
as of December 31, 1997.

Net cash provided by operating activities for the year ended December 31,
1997 was approximately $144,200,000. Net cash provided by investing activities
and net cash used for financing activities were approximately $230,900,000 and
$339,600,000, respectively, for the year ended December 31, 1997. The Company
primarily used cash generated from operations to fund capital expenditures
totaling approximately $133,100,000. The Company received net cash proceeds of
approximately $421,400,000 from the dispositions of facilities and other assets
(which includes approximately $281,000,000 of cash from the Merger of PCA with
Capstone), approximately $32,300,000 from collections on notes receivable and
the Company's REMIC investment and approximately $31,100,000 from the issuance
of long-term obligations. Such net cash proceeds were used to fund acquisitions
of approximately $61,600,000, to repay approximately $166,400,000 of long-term
obligations, to repurchase shares of Common Stock, and to repay Revolver
borrowings.

As a result of the Merger of PCA with Capstone, the Company received
approximately $281,000,000 of cash as partial repayment for PCA's intercompany
debt, with a charge to the Company's retained earnings of approximately
$45,100,000 for the remaining intercompany balance which was not repaid. The
Company used such cash to repay Revolver borrowings, to redeem the 7 5/8%
convertible subordinated debentures, to pay off the 8 3/4% Notes, to repay
certain other notes and mortgages and for general corporate purposes. Pursuant
to the Reorganization, each of the Company's stockholders of record at the close
of business on December 3, 1997 received .4551 shares of PharMerica, Inc.'s
common stock for each share of the Company's Common Stock held. The conversion
ratio was based on a total of 109,873,230 outstanding shares of the Company's
Common Stock at the close of business on December 3, 1997 divided into the
50,000,000 shares issued by PharMerica, Inc.

In connection with the Reorganization, the Company incurred $44,000,000 of
transaction costs related to the restructuring, repayment or renegotiating of
substantially all of the Company's outstanding debt instruments, as well as the
renegotiating or making of certain payments, primarily in the form of
accelerated vesting of stock-based awards, under various employment agreements
with officers of the Company. Such amounts were funded with a portion of the
$281,000,000 proceeds received as partial repayment of PCA's intercompany debt,
as discussed above. Included in the $44,000,000 of transaction costs were
approximately $18,000,000 of non-cash expenses related to various long-term
incentive agreements.

On July 17, 1997, the Company called its 5 1/2% convertible subordinated
debentures (the "5 1/2% Debentures") for redemption on August 18, 1997. A total
of $149,162,550 of the $150,000,000 aggregate principal amount outstanding was
converted to 11,189,924 shares of the Company's Common Stock, increasing the
Company's outstanding shares. The remaining principal amount of $837,450 was
redeemed at 103.30% of the principal amount. Had the conversion been completed
prior to January 1, 1997, the pro forma diluted net income per share for the
year ended December 31, 1997 would have been $.56.

During 1997, the Company entered into promissory notes totaling
approximately $25,800,000 in conjunction with its purchase of certain nursing
facilities. Such debt instruments bear interest at rates ranging from 7.78% to
8.63%, require monthly installments of principal and interest, and are secured
by mortgage interests in the real property and security interests in the
personal property of the purchased nursing facilities.

20
22

based on the three-year U.S. Treasury Note rate plus 230 basis points at the
date of funding. The GE Capital Facility requires monthly principal and interest
payments and is secured by a security interest in certain lighting equipment of
various nursing facilities. As of December 31, 1997, approximately $9,600,000 of
aggregate principal amount under the GE Capital Facility remained unissued.

In June 1996, the Company announced that its Board of Directors had
authorized a stock repurchase program whereby the Company may repurchase, from
time to time on the open market, up to a total of 10,000,000 shares of its
outstanding Common Stock. During 1997, the Company repurchased approximately
4,900,000 shares of its Common Stock at a cost of approximately $62,700,000. The
repurchases were financed primarily through proceeds from dispositions and
borrowings under the Company's Revolver/Letter of Credit Facility. In connection
with the Reorganization, the Company cancelled and retired 6,274,108 shares of
Common Stock, with a book value of approximately $70,300,000, held in treasury
on the effective date of the Reorganization.

The Company believes that its existing cash and cash equivalents, working
capital from operations, borrowings under its banking arrangements, issuance of
certain debt securities and refinancings of certain existing indebtedness will
be adequate to repay its debts due within one year of approximately $31,600,000,
to make normal recurring capital additions and improvements of approximately
$102,000,000, to make selective acquisitions, including the purchase of
previously leased facilities, to construct new facilities, and to meet working
capital requirements for the twelve months ending December 31, 1998.

As of December 31, 1997, the Company had total indebtedness of
approximately $718,500,000 and total stockholders' equity of approximately
$862,500,000. The ability of the Company to satisfy its long-term obligations
will be dependent upon its future performance, which will be subject to
prevailing economic conditions and to financial, business and other factors
beyond the Company's control, such as federal and state healthcare reform. In
addition, healthcare service providers, such as the Company, operate in an
industry that is currently subject to significant changes from business
combinations, new strategic alliances, legislative reform, increased regulatory
oversight, aggressive marketing practices by competitors and market pressures.
In this environment, the Company is frequently contacted by, and otherwise
engages in discussions with, other healthcare companies and financial advisors
regarding possible strategic alliances, joint ventures, business combinations
and other financial alternatives. The terms of substantially all of the
Company's debt instruments require the Company to repay or refinance
indebtedness under such debt instruments in the event of a change of control.
There can be no assurance that the Company will have the financial resources to
repay such indebtedness upon a change of control. See "-- General."

21
23

ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

PAGE
----

Report of Ernst & Young LLP, Independent Auditors........... 23
Consolidated Balance Sheets................................. 24
Consolidated Statements of Operations....................... 25
Consolidated Statements of Stockholders' Equity............. 26
Consolidated Statements of Cash Flows....................... 27
Notes to Consolidated Financial Statements.................. 28
Supplementary Data (Unaudited) -- Quarterly Financial
Data...................................................... 47

22
24

REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

The Board of Directors and Stockholders
Beverly Enterprises, Inc.

We have audited the accompanying consolidated balance sheets of Beverly
Enterprises, Inc. as of December 31, 1997 and 1996, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 1997. Our audits also included the
financial statement schedule listed in the Index at Item 14(a). These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.

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

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Beverly Enterprises, Inc. at December 31, 1997 and 1996, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1997, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information set forth
therein.

/s/ ERNST & YOUNG LLP

Little Rock, Arkansas
February 6, 1998, except
for Note 5, paragraph 6,
as to which the date is
March 4, 1998

23
25

BEVERLY ENTERPRISES, INC.

CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)

ASSETS
DECEMBER 31,
------------------------
1997 1996
---------- ----------

Current assets:
Cash and cash equivalents................................. $ 105,230 $ 69,761
Accounts receivable -- patient, less allowance for
doubtful accounts: 1997 -- $17,879; 1996 -- $25,618.... 384,833 491,063
Accounts receivable -- nonpatient, less allowance for
doubtful accounts:
1997 -- $626; 1996 -- $401............................. 14,400 13,480
Notes receivable.......................................... 4,409 10,746
Operating supplies........................................ 30,439 55,348
Deferred income taxes..................................... 27,304 14,543
Prepaid expenses and other................................ 59,703 42,304
---------- ----------
Total current assets.............................. 626,318 697,245
Property and equipment, net................................. 1,158,329 1,248,785
Other assets:
Notes receivable, less allowance for doubtful notes:
1997 -- $2,917; 1996 -- $4,951......................... 20,564 37,306
Designated and restricted funds........................... 64,233 75,848
Goodwill, net............................................. 99,280 356,197
Other, net................................................ 104,745 109,701
---------- ----------
Total other assets................................ 288,822 579,052
---------- ----------
$2,073,469 $2,525,082
========== ==========

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Accounts payable.......................................... $ 75,791 $ 99,121
Accrued wages and related liabilities..................... 123,146 131,072
Accrued interest.......................................... 15,108 16,969
Other accrued liabilities................................. 98,421 93,042
Current portion of long-term obligations.................. 31,551 38,826
---------- ----------
Total current liabilities......................... 344,017 379,030
Long-term obligations....................................... 686,941 1,106,256
Deferred income taxes payable............................... 111,388 83,610
Other liabilities and deferred items........................ 68,618 95,091
Commitments and contingencies
Stockholders' equity:
Preferred stock, shares authorized: 25,000,000............ -- --
Common stock, shares issued: 1997 -- 109,890,205;
1996 -- 104,432,848.................................... 10,989 10,443
Additional paid-in capital................................ 874,335 774,672
Retained earnings......................................... 27,571 133,957
Treasury stock, at cost: 1997 -- 4,000,000 shares;
1996 -- 5,423,408 shares............................... (50,390) (57,977)
---------- ----------
Total stockholders' equity........................ 862,505 861,095
---------- ----------
$2,073,469 $2,525,082
========== ==========

See accompanying notes.
24
26

BEVERLY ENTERPRISES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

YEARS ENDED DECEMBER 31,
--------------------------------------
1997 1996 1995
---------- ---------- ----------

Net operating revenues................................. $3,217,099 $3,267,189 $3,228,553
Interest income........................................ 13,201 13,839 14,228
---------- ---------- ----------
Total revenues............................... 3,230,300 3,281,028 3,242,781
Costs and expenses:
Operating and administrative:
Wages and related................................. 1,772,429 1,819,500 1,736,151
Other............................................. 1,115,592 1,139,442 1,224,681
Interest............................................. 82,713 91,111 84,245
Depreciation and amortization........................ 107,060 105,468 103,581
Transaction costs.................................... 44,000 -- --
Impairment of long-lived assets:
Adoption of SFAS No. 121.......................... -- -- 68,130
Development and other costs....................... -- -- 32,147
---------- ---------- ----------
Total costs and expenses..................... 3,121,794 3,155,521 3,248,935
---------- ---------- ----------
Income (loss) before provision for income taxes and
extraordinary charge................................. 108,506 125,507 (6,154)
Provision for income taxes............................. 49,913 73,481 1,969
---------- ---------- ----------
Income (loss) before extraordinary charge.............. 58,593 52,026 (8,123)
Extraordinary charge, net of income tax benefit of
$1,099............................................... -- (1,726) --
---------- ---------- ----------
Net income (loss)...................................... $ 58,593 $ 50,300 $ (8,123)
========== ========== ==========
Net income (loss) applicable to common shares.......... $ 58,593 $ 50,300 $ (14,998)
========== ========== ==========
Income (loss) per share of common stock:
Basic:
Before extraordinary charge....................... $ .57 $ .53 $ (.16)
Extraordinary charge.............................. -- (.02) --
---------- ---------- ----------
Net income (loss)................................. $ .57 $ .51 $ (.16)
========== ========== ==========
Shares used to compute per share amounts.......... 102,060 98,574 92,233
========== ========== ==========
Diluted:
Before extraordinary charge....................... $ .57 $ .50 $ (.16)
Extraordinary charge.............................. -- (.01) --
---------- ---------- ----------
Net income (loss)................................. $ .57 $ .49 $ (.16)
========== ========== ==========
Shares used to compute per share amounts.......... 103,422 110,726 92,233
========== ========== ==========

See accompanying notes.

25
27

BEVERLY ENTERPRISES, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)

ADDITIONAL
PREFERRED COMMON PAID-IN RETAINED TREASURY
STOCK STOCK CAPITAL EARNINGS STOCK TOTAL
--------- ------- ---------- --------- -------- ---------

Balances at January 1, 1995....... $ 150,000 $ 8,962 $609,762 $ 98,655 $(40,135) $ 827,244
Issuance of 12,361,184 shares of
common stock for the purchase
of PMSI...................... -- 1,236 149,693 -- -- 150,929
Exchange of Preferred Stock into
5 1/2% Debentures............ (150,000) -- -- -- -- (150,000)
Employee stock transactions,
net.......................... -- 64 7,094 -- -- 7,158
Preferred stock dividends....... -- -- -- (6,875) -- (6,875)
Net loss........................ -- -- -- (8,123) -- (8,123)
--------- ------- -------- --------- -------- ---------
Balances at December 31, 1995..... -- 10,262 766,549 83,657 (40,135) 820,333
Employee stock transactions,
net.......................... -- 181 8,123 -- -- 8,304
Purchase of 1,451,200 shares of
common stock for treasury.... -- -- -- -- (17,842) (17,842)
Net income...................... -- -- -- 50,300 -- 50,300
--------- ------- -------- --------- -------- ---------
Balances at December 31, 1996..... -- 10,443 774,672 133,957 (57,977) 861,095
Employee stock transactions,
net.......................... -- 54 21,314 -- -- 21,368
Purchase of 4,850,700 shares of
common stock for treasury.... -- -- -- -- (62,729) (62,729)
Cancellation and retirement of
6,274,108 shares of common
stock held in treasury....... -- (627) (69,689) -- 70,316 --
Disposition of PCA.............. -- -- -- (121,230) -- (121,230)
Forgiveness of PCA intercompany
balance...................... -- -- -- (45,081) -- (45,081)
Conversion of 5 1/2% Debentures
into common stock............ -- 1,119 147,991 -- -- 149,110
Conversion of 7 5/8% Debentures
into common stock............ -- -- 47 -- -- 47
Unrealized gains on securities,
net of income taxes of
$896......................... -- -- -- 1,332 -- 1,332
Net income...................... -- -- -- 58,593 -- 58,593
--------- ------- -------- --------- -------- ---------
Balances at December 31, 1997..... $ -- $10,989 $874,335 $ 27,571 $(50,390) $ 862,505
========= ======= ======== ========= ======== =========

See accompanying notes.

26
28

BEVERLY ENTERPRISES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

YEARS ENDED DECEMBER 31,
-----------------------------------------
1997 1996 1995
----------- ----------- -----------

Cash flows from operating activities:
Net income (loss).................................. $ 58,593 $ 50,300 $ (8,123)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization................... 107,060 105,468 103,581
Impairment of long-lived assets................. -- -- 100,277
Provision for reserves on patient, notes and
other receivables, net........................ 34,341 28,544 15,889
Amortization of deferred financing costs........ 3,163 3,210 4,379
Transaction costs............................... 44,000 -- --
Extraordinary charge............................ -- 2,825 --
Gains on dispositions of facilities and other
assets, net................................... (19,901) (20,951) (2,253)
Deferred taxes.................................. 20,247 33,765 (20,394)
Net decrease in insurance related accounts...... (25,432) (22,336) (10,531)
Changes in operating assets and liabilities, net
of acquisitions and dispositions:
Accounts receivable -- patient................ (46,639) (25,851) (84,420)
Operating supplies............................ (3,911) 3,226 1,649
Prepaid expenses and other receivables........ (18,749) 771 (154)
Accounts payable and other accrued expenses... 3,377 (53,029) 16,370
Income taxes payable.......................... (7,305) 26,711 (6,194)
Other, net.................................... (4,640) 527 (3,867)
----------- ----------- -----------
Total adjustments.......................... 85,611 82,880 114,332
----------- ----------- -----------
Net cash provided by operating
activities............................... 144,204 133,180 106,209
Cash flows from investing activities:
Capital expenditures............................... (133,087) (136,442) (161,911)
Payments for acquisitions, net of cash acquired.... (61,567) (80,981) (34,184)
Proceeds from dispositions of facilities and other
assets.......................................... 421,412 121,660 46,892
Collections on notes receivable and REMIC
investment...................................... 32,273 12,809 15,594
Other, net......................................... (28,178) (8,547) (10,945)
----------- ----------- -----------
Net cash provided by (used for) investing
activities............................... 230,853 (91,501) (144,554)
Cash flows from financing activities:
Revolver borrowings................................ 1,604,000 1,308,000 1,017,000
Repayments of Revolver borrowings.................. (1,745,000) (1,230,000) (939,000)
Proceeds from issuance of long-term obligations.... 31,137 228,862 25,000
Repayments of long-term obligations................ (166,369) (318,447) (68,400)
Purchase of common stock for treasury.............. (65,126) (15,445) --
Proceeds from exercise of stock options............ 5,401 3,620 2,146
Deferred financing costs........................... (1,251) (7,560) (2,161)
Dividends paid on preferred stock.................. -- (688) (8,250)
Proceeds from designated funds, net................ (2,380) 3,437 349
----------- ----------- -----------
Net cash provided by (used for) financing
activities............................... (339,588) (28,221) 26,684
----------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents........................................ 35,469 13,458 (11,661)
Cash and cash equivalents at beginning of year....... 69,761 56,303 67,964
----------- ----------- -----------
Cash and cash equivalents at end of year............. $ 105,230 $ 69,761 $ 56,303
=========== =========== ===========
Supplemental schedule of cash flow information:
Cash paid during the year for:
Interest (net of amount capitalized)............ $ 81,411 $ 81,193 $ 80,433
Income taxes (net of refunds)................... 36,971 11,906 28,557

See accompanying notes.

27
29

BEVERLY ENTERPRISES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

References herein to the Company include Beverly Enterprises, Inc. and its
wholly-owned subsidiaries.

The Company provides long-term healthcare in 31 states and the District of
Columbia. Its operations include nursing facilities, acute long-term
transitional hospitals, rehabilitation therapy services, outpatient therapy
clinics, assisted living centers and home health centers. The consolidated
financial statements of the Company include the accounts of the Company and all
of its wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated.

Use of Estimates

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

Cash and Cash Equivalents

Cash and cash equivalents include time deposits and certificates of deposit
with original maturities of three months or less.

Property and Equipment

Property and equipment is stated at cost less accumulated depreciation or,
where appropriate, the present value of the related capital lease obligations
less accumulated amortization. Depreciation and amortization are computed by the
straight-line method over the estimated useful lives of the assets.

28
30
BEVERLY ENTERPRISES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Intangible Assets

Goodwill (stated at cost less accumulated amortization of $21,610,000 in
1997 and $38,446,000 in 1996) is being amortized over 40 years or, if
applicable, the life of the lease using the straight-line method. Operating and
leasehold rights and licenses, which are included in the consolidated balance
sheet caption "Other, net," (stated at cost less accumulated amortization of
$17,442,000 in 1997 and $18,716,000 in 1996) are being amortized over the lives
of the related assets (principally 40 years) and leases (principally 10 to 15
years), using the straight-line method.

On an ongoing basis, the Company reviews the carrying value of its
intangible assets in light of any events or circumstances that indicate they may
be impaired or that the amortization period may need to be adjusted. If such
circumstances suggest the intangible value cannot be recovered, calculated based
on undiscounted cash flows over the remaining amortization period, the carrying
value of the intangible will be reduced by such shortfall. As of December 31,
1997, the Company does not believe there is any indication that the carrying
value or the amortization period of its intangibles needs to be adjusted. See
"-- Impairment of Long-Lived Assets."

Impairment of Long-Lived Assets

29
31
BEVERLY ENTERPRISES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
wrote off certain business development and other costs where the Company
believed the carrying amounts were unrecoverable.

Insurance

The Company insures auto liability, general liability and workers'
compensation risks, in most states, through insurance policies with third
parties, some of which may be subject to reinsurance agreements between the
insurer and Beverly Indemnity, Ltd., a wholly-owned subsidiary of the Company.
The liabilities for estimated incurred losses not covered by third party
insurance are discounted at 10% to their present value based on expected loss
payment patterns determined by independent actuaries. Had the discount rate been
reduced by one-half of a percentage point, the Company would have incurred a
pre-tax charge of approximately $1,100,000 for the year ended December 31, 1997.
The discounted insurance liabilities are included in the consolidated balance
sheet captions as follows (in thousands):

1997 1996
------- --------

Accrued wages and related liabilities....................... $28,484 $ 32,644
Other accrued liabilities................................... 6,874 8,226
Other liabilities and deferred items........................ 50,366 90,714
------- --------
$85,724 $131,584
======= ========

On an undiscounted basis, the total insurance liabilities as of December
31, 1997 and 1996 were $111,200,000 and $170,099,000, respectively. As of
December 31, 1997, the Company had deposited approximately $80,800,000 in funds
(the "Beverly Indemnity funds") that are restricted for the payment of insured
claims. In addition, the Company anticipates that approximately $36,100,000 of
its existing cash at December 31, 1997, while not legally restricted, will be
utilized to fund certain workers' compensation and general liability claims, and
the Company does not expect to use such cash for other purposes.

During 1997, the Company transferred a portion of its liabilities for
workers' compensation and general liability related to certain of its sold
nursing facilities to a third-party indemnity insurance company. In addition,
the Company purchased traditional indemnity insurance coverage for its 1997
workers' compensation and auto liabilities. Since the Company does not need to
set aside funds nor estimate liabilities for future payments of these claims,
these transactions resulted in a significant reduction in the Company's
insurance liabilities during the year ended December 31, 1997, as compared to
the same period in 1996.

Stock-Based Awards

In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," ("SFAS No. 123") which encourages, but does not require,
companies to recognize compensation expense for stock-based awards based on
their fair value on the date of grant. The Company has elected to continue to
account for its stock-based awards in accordance with Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees," and,
accordingly, recognizes no compensation expense for its stock option grants. See
Note 6 for the pro forma effects on the Company's reported net income and
earnings per share assuming the election had been made to recognize compensation
expense on stock-based awards in accordance with SFAS No. 123.

30
32
BEVERLY ENTERPRISES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Revenues

The Company's revenues are derived primarily from providing long-term
healthcare services. Approximately 74%, 75% and 77% of the Company's net
operating revenues for 1997, 1996 and 1995, respectively, were derived from
funds under federal and state medical assistance programs, and approximately 68%
and 73% of the Company's net patient accounts receivable at December 31, 1997
and 1996, respectively, are due from such programs. These revenues and
receivables are reported at their estimated net realizable amounts and are
subject to audit and retroactive adjustment. Provisions for estimated
third-party payor settlements are provided in the period the related services
are rendered and are adjusted in the period of settlement. Changes in estimates
related to third party receivables resulted in the recording of approximately
$8,900,000, $10,900,000 and $19,700,000 of net operating revenues for the years
ended December 31, 1997, 1996 and 1995, respectively.

Concentration of Credit Risk

The Company has significant accounts receivable, notes receivable and other
assets whose collectibility or realizability is dependent upon the performance
of certain governmental programs, primarily Medicaid and Medicare. These
receivables and other assets represent the only concentration of credit risk for
the Company. The Company does not believe there are significant credit risks
associated with these governmental programs. The Company believes that an
adequate provision has been made for the possibility of these receivables and
other assets proving uncollectible and continually monitors and adjusts these
allowances as necessary.

Income Taxes

The Company follows the liability method in accounting for deferred income
taxes. The liability method provides that deferred tax assets and liabilities
are recorded at currently enacted tax rates based on the difference between the
tax basis of assets and liabilities and their carrying amounts for financial
reporting purposes, referred to as temporary differences.

Earnings per Share

31
33
BEVERLY ENTERPRISES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
The following table sets forth the computation of basic and diluted
earnings per share for the years ended December 31 (in thousands):

1997 1996 1995
-------- -------- --------

NUMERATOR:
Income (loss) from continuing operations............. $ 58,593 $ 52,026 $ (8,123)
Preferred stock dividends............................ -- -- (6,875)
-------- -------- --------
Numerator for basic earnings per share -- income
(loss) available to common stockholders........... 58,593 52,026 (14,998)
Effect of dilutive securities:
5 1/2% Debentures................................. -- 3,420 --
-------- -------- --------
Numerator for diluted earnings per share -- income
(loss) available to common stockholders after
assumed conversions............................... $ 58,593 $ 55,446 $(14,998)
======== ======== ========
DENOMINATOR:
Denominator for basic earnings per share -- weighted
average shares.................................... 102,060 98,574 92,233
Effect of dilutive securities:
Employee stock options............................ 1,236 899 --
Performance shares................................ 126 -- --
5 1/2% Debentures................................. -- 11,253 --
-------- -------- --------
Dilutive potential common shares..................... 1,362 12,152 --
-------- -------- --------
Denominator for diluted earnings per share --adjusted
weighted average shares and assumed conversions... 103,422 110,726 92,233
======== ======== ========
Basic earnings per share............................... $ 0.57 $ 0.53 $ (0.16)
======== ======== ========
Diluted earnings per share............................. $ 0.57 $ 0.50 $ (0.16)
======== ======== ========

New Accounting Standards

In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income," ("SFAS
No. 130") which is required to be adopted in financial statements for periods
beginning after December 15, 1997. SFAS No. 130 requires the presentation of
comprehensive income in a company's financial statements. Comprehensive income
represents all changes in the equity of a company during the reporting period,
including net income and charges directly to retained earnings which are
excluded from net income. The Company will adopt SFAS No. 130 in its
consolidated financial statements during the first quarter of 1998 and does not
expect there to be a material effect on its consolidated financial position or
results of operations.

32
34
BEVERLY ENTERPRISES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
review of SFAS No. 131, but does not anticipate that there will be a significant
effect on the Company's reporting disclosures.

Other

Certain prior year amounts have been reclassified to conform with the 1997
presentation.

2. ACQUISITIONS AND DISPOSITIONS

During the year ended December 31, 1997, the Company purchased six
previously leased nursing facilities (758 beds) and certain other assets
including, among other things, 14 institutional pharmacies and 40 outpatient
therapy clinics, for approximately $60,800,000 cash and approximately $9,500,000
closing and other costs. Also during such period, the Company sold or terminated
the leases on 68 nursing facilities (8,314 beds) and certain other assets for
cash proceeds of approximately $146,800,000. The Company primarily used the net
cash proceeds from the disposition of facilities and other assets to repay
Revolver borrowings, to repurchase the zero coupon notes and to repay various
other indebtedness. The Company recognized net pre-tax gains of approximately
$19,900,000 as a result of these dispositions. The operations of these
facilities and certain other assets were immaterial to the Company's
consolidated financial position and results of operations.

On December 3, 1997, the Company completed its previously announced Merger
of PCA with Capstone. As a result of the Merger, the Company received
approximately $281,000,000 of cash as partial repayment for PCA's intercompany
debt, with a charge to the Company's retained earnings of approximately
$45,100,000 for the remaining intercompany balance which was not repaid. The
Company used such cash to repay Revolver borrowings, to redeem the 7 5/8%
convertible subordinated debentures, to pay off the 8 3/4% Notes, to repay
certain other notes and mortgages and for general corporate purposes. Pursuant
to the Reorganization, each of the Company's stockholders of record at the close
of business on December 3, 1997 received .4551 shares of PharMerica, Inc.'s
common stock for each share of the Company's Common Stock held. The conversion
ratio was based on a total of 109,873,230 outstanding shares of the Company's
Common Stock at the close of business on December 3, 1997 divided into the
50,000,000 shares issued by PharMerica, Inc.

At the date of the Merger, PCA had total assets of approximately
$489,200,000, total liabilities of approximately $368,000,000 and total
stockholder's equity of approximately $121,200,000. Total net operating revenues
for PCA for the years ended December 31, 1997, 1996 and 1995 were approximately
$564,200,000, $516,400,000 and $451,700,000, respectively. Total net operating
revenues for the year ended December 31, 1997 represent the operations of PCA
prior to the Merger.

During the year ended December 31, 1996, the Company acquired 22 nursing
facilities (2,138 beds)(15 of such facilities (1,747 beds) were previously
leased), one previously managed nursing facility (180 beds) and certain other
assets including, among other things, pharmacy, hospice and outpatient therapy
businesses, for approximately $80,000,000 cash, approximately $7,500,000
acquired debt, approximately $7,000,000

33
35
BEVERLY ENTERPRISES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995

2. ACQUISITIONS AND DISPOSITIONS -- (CONTINUED)
closing and other costs, approximately $4,800,000 reduction in receivables and
approximately $1,900,000 security and other deposits. The acquisitions of such
facilities and other assets were accounted for as purchases. The Company did not
operate three of such nursing facilities which were subleased to other nursing
home operators in prior year transactions. Also during such period, the Company
sold or terminated the leases on 83 nursing facilities (5,230 beds) (including
the three nursing facilities which were not operated by the Company, as
mentioned above) and certain other assets for cash proceeds of approximately
$36,700,000 and approximately $4,200,000 of notes receivable. The Company
recognized net pre-tax gains of approximately $6,300,000 as a result of these
dispositions. The operations of these facilities and certain other assets were
immaterial to the Company's consolidated financial position and results of
operations.

In November 1996, the Company sold its MedView Services unit ("MedView")
for cash of approximately $89,700,000 (approximately $2,200,000 of which was
included in accounts receivable-nonpatient at December 31, 1996). MedView
provides a full range of managed care services to the workers' compensation
market and is the nation's largest workers' compensation-related preferred
provider organization with 120,000 member providers. It also offers case
management and injury reporting and tracking services. The Company recognized
net pre-tax gains of approximately $14,700,000 as a result of this disposition.
The operations of MedView were immaterial to the Company's consolidated
financial position and results of operations.

During the year ended December 31, 1995, the Company purchased 17
previously leased nursing facilities (2,118 beds), one previously leased
retirement living center (17 units) and certain other assets for approximately
$32,700,000 cash, approximately $40,400,000 acquired debt and approximately
$1,700,000 security and other deposits. The Company did not operate four of such
facilities which were subleased to other nursing home operators in prior year
transactions. Also during such period, the Company sold, subleased or terminated
the leases on 11 nursing facilities (1,199 beds), 12 homes for the
developmentally disabled (1,065 beds), six retirement living centers (1,141
units) and certain other assets for cash proceeds of approximately $39,400,000,
approximately $3,700,000 of notes receivable and the assumption of approximately
$52,800,000 of debt. In addition, the Company terminated a management agreement
on two nursing facilities (150 beds) and four assisted living centers (510
units). The Company recognized net pre-tax gains of approximately $2,300,000 as
a result of these dispositions. The operations of these facilities and certain
other assets were immaterial to the Company's consolidated financial position
and results of operations.

In June 1995, the Company acquired Pharmacy Management Services, Inc.
("PMSI") in exchange for approximately 12,400,000 shares of the Company's Common
Stock plus closing and related costs. PMSI is a leading nationwide provider of
medical cost containment and managed care services to workers' compensation
payors and claimants. The acquisition was accounted for as a purchase and was
not material to the Company's consolidated financial position or results of
operations.

34
36
BEVERLY ENTERPRISES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995

3. PROPERTY AND EQUIPMENT

Following is a summary of property and equipment and related accumulated
depreciation and amortization, by major classification, at December 31 (in
thousands):

TOTAL OWNED LEASED
----------------------- ----------------------- -----------------
1997 1996 1997 1996 1997 1996
---------- ---------- ---------- ---------- ------- -------

Land, buildings and
improvements................... $1,437,334 $1,476,988 $1,395,859 $1,424,517 $41,475 $52,471
Furniture and equipment.......... 329,222 375,479 324,309 365,678 4,913 9,801
Construction in progress......... 30,607 39,403 30,607 39,403 -- --
---------- ---------- ---------- ---------- ------- -------
1,797,163 1,891,870 1,750,775 1,829,598 46,388 62,272
Less accumulated depreciation and
amortization................... 638,834 643,085 606,541 601,330 32,293 41,755
---------- ---------- ---------- ---------- ------- -------
$1,158,329 $1,248,785 $1,144,234 $1,228,268 $14,095 $20,517
========== ========== ========== ========== ======= =======

The Company provides depreciation and amortization using the straight-line
method over the following estimated useful lives: land improvements -- 5 to 15
years; buildings -- 35 to 40 years; building improvements -- 5 to 20 years;
leasehold improvements -- 5 to 20 years or term of lease, if less; furniture and
equipment -- 5 to 15 years. Capitalized lease assets are amortized over the
remaining initial terms of the leases.

Depreciation and amortization expense related to property and equipment for
the years ended December 31, 1997, 1996 and 1995 was $87,286,000, $85,221,000
and $82,752,000, respectively.

35
37
BEVERLY ENTERPRISES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995

4. LONG-TERM OBLIGATIONS

Long-term obligations consist of the following at December 31 (dollars in
thousands, except per share amounts):

1997 1996
---------- ----------

Notes and mortgages, less imputed interest: 1997 -- $203,
1996 -- $257; due in installments through the year 2031,
at effective interest rates of 5.93% to 12.50%, a portion
of which is secured by property, equipment and other
assets with a net book value of $229,062 at December 31,
1997...................................................... $ 170,738 $ 178,983
Industrial development revenue bonds, less imputed interest:
1997 -- $19, 1996 -- $48; due in installments through the
year 2013, at effective interest rates of 5.08% to 10.52%,
a portion of which is secured by property and other assets
with a net book value of $227,917 at December 31, 1997.... 188,711 203,606
9% Senior Notes due February 15, 2006, unsecured............ 180,000 180,000
1996 Credit Agreement due December 31, 2001................. 15,000 156,000
Term Loan under the GE Capital Facility..................... 10,505 9,547
8 3/4% First Mortgage Bonds due July 1, 2008, secured by
first mortgages on eight nursing facilities with an
aggregate net book value of $16,342 at December 31,
1997...................................................... 18,750 19,362
8 5/8% First Mortgage Bonds due October 1, 2008, secured by
first mortgages on ten nursing facilities with an
aggregate net book value of $27,673 at December 31,
1997...................................................... 28,195 29,062
8 3/4% Notes due December 31, 2003, unsecured (repaid in
October 1997)............................................. -- 24,845
7 3/4% Note due in quarterly installments through June 1,
2001, secured by first mortgages on 11 nursing facilities
and one assisted living center with an aggregate net book
value of $21,679 at December 31, 1997..................... 21,437 22,554
Series 1995 Bonds due June 2005, at an interest rate of
6.88% with respect to $7,000 and 7.24% with respect to
$18,000, secured by a letter of credit.................... 25,000 25,000
Medium Term Notes due June 15, 2000, at an interest rate
based on LIBOR, as defined, plus .35%, secured by eligible
receivables of selected nursing facilities of $54,722 at
December 31, 1997, which cannot be used to satisfy claims
of the Company or any of its subsidiaries................. 40,000 50,000
7 5/8% convertible subordinated debentures due March 15,
2003, convertible at $20.47 per share of Common Stock
(redeemed in December 1997)............................... -- 67,924
5 1/2% convertible subordinated debentures due August 1,
2018, convertible at $13.33 per share of Common Stock
(called for redemption on August 18, 1997)................ -- 150,000
Zero coupon notes, face amount, less unamortized discount:
1996 -- $785 (repurchased in May 1997).................... -- 1,172
---------- ----------
698,336 1,118,055
Present value of capital lease obligations, less imputed
interest: 1997 -- $456, 1996 -- $863, at effective
interest rates of 5.83% to 13.00%......................... 20,156 27,027
---------- ----------
718,492 1,145,082
Less amounts due within one year............................ 31,551 38,826
---------- ----------
$ 686,941 $1,106,256
========== ==========

36
38
BEVERLY ENTERPRISES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995

4. LONG-TERM OBLIGATIONS -- (CONTINUED)
On July 17, 1997, the Company called its 5 1/2% convertible subordinated
debentures (the "5 1/2% Debentures") for redemption on August 18, 1997. A total
of $149,162,550 of the $150,000,000 aggregate principal amount outstanding was
converted to 11,189,924 shares of the Company's Common Stock, increasing the
Company's outstanding shares. The remaining principal amount of $837,450 was
redeemed at 103.30% of the principal amount. Had the conversion been completed
prior to January 1, 1997, the pro forma diluted net income per share for the
year ended December 31, 1997 would have been $.56.

The Company primarily used the net cash proceeds from the disposition of
facilities and other assets, as well as the cash received from the Merger, to
repay Revolver borrowings, to repurchase the zero coupon notes, to redeem the
7 5/8% convertible subordinated debentures, to pay off the 8 3/4% Notes, to
repay certain other notes and mortgages and for general corporate purposes (See
Note 2).

In December 1996, the Company entered into a $375,000,000 Amended and
Restated Credit Agreement (the "1996 Credit Agreement") which provides for a
Revolver/Letter of Credit Facility (the "Revolver/LOC Facility"). Borrowings
under the 1996 Credit Agreement bear interest at adjusted LIBOR plus .875%, the
Prime Rate, as defined, or the adjusted CD rate, as defined, plus 1%, at the
Company's option. Such interest rates may be adjusted quarterly based on certain
financial ratio calculations. The Company pays certain commitment fees and
commissions with respect to the Revolver/LOC Facility and had approximately
$324,300,000 of unused commitments under such facility at December 31, 1997. The
1996 Credit Agreement is secured by a security interest in the stock of certain
of the Company's subsidiaries and imposes on the Company certain financial tests
and restrictive covenants.

In July 1996, the Company entered into a term loan facility (the "GE
Capital Facility"), whereby the Company may borrow up to $25,000,000 from time
to time in separate series, in amounts and at interest rates based on the
three-year U.S. Treasury Note rate plus 230 basis points at the date of funding.
The GE Capital Facility requires monthly principal and interest payments and is
secured by a security interest in certain lighting equipment of various nursing
facilities. As of December 31, 1997, approximately $9,600,000 of aggregate
principal amount under the GE Capital Facility remained unissued.

In February 1996, the Company completed the sale of $180,000,000 of 9%
Senior Notes due February 15, 2006 (the "Senior Notes") through a public
offering (the "Senior Notes offering"). The Senior Notes are unsecured
obligations, guaranteed by substantially all of the Company's present and future
subsidiaries (collectively, the "Subsidiary Guarantors"), and impose on the
Company certain restrictive covenants. Separate financial statements of the
Subsidiary Guarantors are not considered to be material to holders of the Senior
Notes since the guaranty of each of the Subsidiary Guarantors is joint and
several and full and unconditional (except that liability thereunder is limited
to an aggregate amount equal to the largest amount that would not render its
obligations thereunder subject to avoidance under Section 548 of the Bankruptcy
Code of 1978, as amended, or any comparable provisions of applicable state law),
and Beverly Enterprises, Inc., the parent, has no operations or assets separate
from its investment in its subsidiaries.

37
39
BEVERLY ENTERPRISES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995

4. LONG-TERM OBLIGATIONS -- (CONTINUED)
Maturities and sinking fund requirements of long-term obligations,
including capital leases, for the years ending December 31 are as follows (in
thousands):

1998 1999 2000 2001 2002 THEREAFTER TOTAL
------- ------- ------- ------- ------- ---------- --------

Future minimum lease
payments................. $ 3,713 $ 3,127 $ 2,802 $ 2,667 $ 2,763 $ 22,156 $ 37,228
Less interest.............. 1,816 1,642 1,510 1,399 1,273 9,432 17,072
------- ------- ------- ------- ------- -------- --------
Net present value of future
minimum lease payments... 1,897 1,485 1,292 1,268 1,490 12,724 20,156
Notes, mortgages, bonds and
debentures............... 29,654 25,588 71,425 55,909 46,356 469,404 698,336
------- ------- ------- ------- ------- -------- --------
$31,551 $27,073 $72,717 $57,177 $47,846 $482,128 $718,492
======= ======= ======= ======= ======= ======== ========

Many of the capital and operating leases contain at least one renewal
option (which could extend the term of the leases by five to fifteen years),
purchase options, escalation clauses and provisions for payments by the Company
of real estate taxes, insurance and maintenance costs.

The industrial development revenue bonds were originally issued prior to
1985 primarily for the construction or acquisition of nursing facilities. Bond
reserve funds are included in designated funds. These funds are invested
primarily in certificates of deposit and in United States government securities
and are carried at cost, which approximates market value. Net capitalized
interest relating to construction was not material in 1997, 1996 or 1995.

5. COMMITMENTS AND CONTINGENCIES

The future minimum rental commitments required by all noncancelable
operating leases with initial or remaining terms in excess of one year as of
December 31, 1997, are as follows (in thousands):

YEAR ENDING
DECEMBER 31,
------------

1998...................................................... $ 68,799
1999...................................................... 57,451
2000...................................................... 39,308
2001...................................................... 27,897
2002...................................................... 23,019
Thereafter.................................................. 34,702
--------
$251,176
========

Total future minimum rental commitments are net of approximately
$22,594,000 of minimum sublease rental income due in the future under
noncancelable subleases. Rent expense on operating leases, net of sublease
rental income, for the years ended December 31 was as follows:
1997 -- $114,694,000; 1996 -- $116,718,000; 1995 -- $127,074,000. Sublease rent
income was approximately $5,638,000, $4,595,000 and $5,426,000 for the years
ended December 31, 1997, 1996 and 1995, respectively. Contingent rent expense,
based primarily on revenues, was approximately $18,000,000, $18,000,000 and
$22,000,000 for the years ended December 31, 1997, 1996 and 1995, respectively.

38
40
BEVERLY ENTERPRISES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995

5. COMMITMENTS AND CONTINGENCIES -- (CONTINUED)
In 1992, the Company entered into an agreement to outsource its management
information systems functions for a period of seven years, with an option to
renew based on mutual agreement among the parties. Such agreement was
renegotiated during 1997 to allow the Company to bring the programming functions
under its direct control but continue to outsource the data processing
functions. The future minimum commitments as of December 31, 1997 required under
such agreement are as follows: 1998 -- $4,127,000; 1999 -- $4,033,000;
2000 -- $3,944,000; 2001 -- $3,859,000; 2002 -- $2,849,000. The Company incurred
approximately $4,498,000, $8,711,000 and $8,529,000 under such agreement during
the years ended December 31, 1997, 1996 and 1995, respectively.

The Company is contingently liable for approximately $79,375,000 of
long-term obligations maturing on various dates through 2019, as well as annual
interest and letter of credit fees of approximately $7,274,000. Such contingent
liabilities principally arose from the Company's sale of nursing facilities and
retirement living centers. The Company operates the facilities related to
approximately $25,895,000 of the principal amount for which it is contingently
liable, pursuant to long-term agreements accounted for as operating leases. In
addition, the Company is contingently liable for various operating leases that
were assumed by purchasers and are secured by the rights thereto.

Approximately 100 of the Company's facilities, or 7% of the Company's
employees, are represented by various labor unions. Certain labor unions have
publicly stated that they are concentrating their organizing efforts within the
long-term healthcare industry. The Company, being one of the largest employers
within the long-term healthcare industry, has been the target of a "corporate
campaign" by two AFL-CIO affiliated unions attempting to organize certain of the
Company's facilities. Although the Company has never experienced any material
work stoppages and believes that its relations with its employees (and the
existing unions that represent certain of them) are generally good, the Company
cannot predict the effect continued union representation or organizational
activities will have on the Company's future activities. There can be no
assurance that continued union representation and organizational activities will
not result in material work stoppages, which could have a material adverse
effect on the Company's operations.

6. STOCKHOLDERS' EQUITY

The Company had 300,000,000 shares of authorized $.10 par value common
stock ("Common Stock") at December 31, 1997 and 1996. The Company is subject to
certain restrictions under its long-term debt agreements related to the payment
of cash dividends on its Common Stock. The Company had 25,000,000 shares of
authorized $1 par value preferred stock at December 31, 1997 and 1996, all of
which remained
39
41
BEVERLY ENTERPRISES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995

6. STOCKHOLDERS' EQUITY -- (CONTINUED)
unissued. The Board of Directors has authority, without further stockholder
action, to set rights, privileges and preferences for any unissued shares of
preferred stock.

In June 1996, the Company announced that its Board of Directors had
authorized a stock repurchase program whereby the Company may repurchase, from
time to time on the open market, up to a total of 10,000,000 shares of its
outstanding Common Stock. During 1997, the Company repurchased approximately
4,900,000 shares of its Common Stock at a cost of approximately $62,700,000. The
repurchases were financed primarily through proceeds from dispositions and
borrowings under the Company's Revolver/LOC Facility. In connection with the
Reorganization, the Company cancelled and retired 6,274,108 shares of Common
Stock, with a book value of approximately $70,300,000, held in treasury on the
effective date of the Reorganization.

During 1994, the Board of Directors of the Company adopted a Stockholder
Rights Plan (the "Rights Plan"). The Rights Plan provides for the distribution
of one Common Stock Purchase Right (the "Rights") for each share of Common Stock
outstanding at the close of business on November 2, 1994. Under certain
circumstances, the Rights become exercisable to purchase shares of Common Stock,
or securities of an acquiring entity, at one-half of market value. The Rights
are designed to protect stockholders in the event of an unsolicited attempt to
acquire the Company and to deal with the possibility of unilateral actions by
hostile acquirors. These Rights are redeemable at the option of the Company at
$.01 per Right. The issuance of the Rights has no dilutive effect on the
Company's earnings per share. On May 18, 1995, the Company's stockholders
approved certain amendments to the Rights Plan which provided, among other
things, that the Rights Plan will expire on the date of the 1998 Annual Meeting
of Stockholders, which has been set for May 28, 1998, unless an extension of the
term is approved by the stockholders at the 1998 Annual Meeting of Stockholders
(the "Amended Rights Plan"). The Board of Directors adopted a stockholder rights
plan to be effective on the effective date of the Reorganization with the same
terms as the Amended Rights Plan.

During 1997, the New Beverly 1997 Long-Term Incentive Plan was approved
(the "1997 Long-Term Incentive Plan"). Such plan became effective December 3,
1997 and will remain in effect until December 31, 2006, subject to the earlier
termination by the Board of Directors. Such plan replaced the 1996 Long-Term
Incentive Plan, the 1993 Incentive Stock Plan and the 1985 Nonqualified Stock
Option Plan. The Compensation Committee of the Board of Directors (the
"Committee") is responsible for administering the 1997 Long-Term Incentive Plan
and will have complete discretion in determining the number of shares or units
to be granted, in setting performance goals and in applying other restrictions
to awards, as needed, under the plan. The Company has 10,000,000 shares of
Common Stock authorized for issuance, subject to certain adjustments, under the
1997 Long-Term Incentive Plan in the form of nonqualified stock options,
incentive stock options, stock appreciation rights, restricted stock,
performance awards, bonus stock and other stock unit awards. Except for options
granted upon the assumption of, or in substitution for, options of another
company in which the Company participates in a corporate transaction or the
options as described below, nonqualified and incentive stock options must be
granted at a purchase price equal to the market price on the date of grant.
Options shall be exercisable at such times and be subject to such restrictions
and conditions as the Committee shall determine and expire no later than 10
years from the grant date. Stock appreciation rights may be granted alone, in
tandem with an option or in addition to an option. Stock appreciation rights
shall be exercisable at such times and be subject to such restrictions and
conditions as the Committee shall determine and expire no later than 10 years
from the grant date. Restricted stock awards are outright stock grants which
have a minimum vesting period of one year for performance-based awards and three
years for other awards. Performance awards, bonus stock and other stock unit
awards may be granted based on the achievement of certain performance or other
goals and will carry certain restrictions, as defined.

40
42
BEVERLY ENTERPRISES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995

6. STOCKHOLDERS' EQUITY -- (CONTINUED)
During 1997, the New Beverly Non-Employee Directors Stock Option Plan was
approved (the "Non-Employee Directors Stock Option Plan"). Such plan became
effective December 3, 1997 and will remain in effect until December 31, 2007,
subject to the earlier termination by the Board of Directors. Such plan replaced
the Nonemployee Directors' Plan. The Company has 300,000 shares of Common Stock
authorized for issuance, subject to certain adjustments, under its Non-Employee
Directors Stock Option Plan. The Non-Employee Directors Stock Option Plan was
amended by the Board of Directors on December 11, 1997 to provide that each
nonemployee director be granted an option to purchase 3,375 shares of the
Company's Common Stock on June 1 of each year until the plan is terminated,
subject to the availability of shares. Such options are granted at a purchase
price equal to fair market value on the date of grant, become exercisable one
year after date of grant and expire ten years after date of grant.

41
43
BEVERLY ENTERPRISES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995

6. STOCKHOLDERS' EQUITY -- (CONTINUED)
The following table summarizes stock option, restricted stock and other
stock units data relative to the Company's long-term incentive plans for the
years ended December 31:

1997 1996 1995
----------------------------- ---------------------------- ----------------------------
NUMBER WEIGHTED-AVERAGE NUMBER WEIGHTED-AVERAGE NUMBER WEIGHTED-AVERAGE
OF SHARES EXERCISE PRICE OF SHARES EXERCISE PRICE OF SHARES EXERCISE PRICE
---------- ---------------- --------- ---------------- --------- ----------------

Options outstanding at beginning of
year............................. 4,908,727 $10.55 4,394,382 $ 9.02 4,375,441 $ 8.74
Changes during the year:
Granted.......................... 2,944,522 10.87 1,696,500 12.38 355,500 13.04
Acquired......................... -- -- -- -- 342,311 6.17
Exercised........................ (1,047,423) 8.06 (833,587) 5.41 (416,010) 5.22
Cancelled........................ (243,923) 14.64 (348,568) 12.39 (262,860) 12.19
---------- --------- ---------
Options outstanding at end of
year............................. 6,561,903(1) 9.29 4,908,727 10.55 4,394,382 9.02
========== ========= =========
Options exercisable at end of
year............................. 5,073,903 8.23 2,560,209 8.75 3,028,903 7.52
========== ========= =========
Options available for grant at end
of year.......................... 3,738,097 3,052,403 1,243,953
========== ========= =========
Restricted stock outstanding at
beginning of year................ 145,200 306,052 267,353
Changes during the year:
Granted.......................... 10,500 29,000 236,555
Vested........................... (134,711) (148,352) (182,153)
Forfeited........................ (20,989) (41,500) (15,703)
---------- --------- ---------
Restricted stock outstanding at end
of year.......................... -- 145,200 306,052
========== ========= =========
Phantom units outstanding at
beginning of year................ 76,769 90,942 44,529
Changes during the year:
Granted.......................... -- -- 54,110
Vested........................... (76,316) (6,982) --
Cancelled........................ (453) (7,191) (7,697)
---------- --------- ---------
Phantom units outstanding at end of
year............................. -- 76,769 90,942
========== ========= =========
Performance shares outstanding at
beginning of year................ 992,000 -- --
Changes during the year:
Granted.......................... 16,000 1,040,000 --
Vested........................... (759,389) -- --
Cancelled........................ (248,611) (48,000) --
---------- --------- ---------
Performance shares outstanding at
end of year...................... -- 992,000 --
========== ========= =========

- ---------------

(1) Exercise prices for options outstanding as of December 31, 1997 ranged from
$3.24 to $12.88. The weighted-average remaining contractual life of these
options is eight years.

As a result of the Reorganization (as discussed herein), immediately prior
to the Distribution, (i) each option to purchase the Company's Common Stock then
outstanding became fully vested and exercisable, (ii) all restrictions on
outstanding restricted shares lapsed and became fully vested, (iii) each
outstanding award of phantom units became fully vested, and (iv) each
outstanding performance share became fully

42
44
BEVERLY ENTERPRISES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995

6. STOCKHOLDERS' EQUITY -- (CONTINUED)
vested. The Company incurred non-cash expenses of approximately $18,000,000 as
it related to these stock-based awards, which was included in the $44,000,000 of
transaction costs. In addition, all options outstanding immediately after the
Distribution were cancelled and replaced with new options issued by the Company
under the 1997 Long-Term Incentive Plan. Such options are exercisable upon the
same terms and conditions (except that all options are 100% vested) as under the
applicable option agreement issued thereunder, except that (i) the number of
shares for which such options may be converted, and (ii) the option exercise
price per share of such options were adjusted to take into account the effect of
the Reorganization.

The Company accounts for its stock-based awards in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB No. 25") and related Interpretations because, as discussed
below, the alternative fair value accounting provided for under Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," ("SFAS No. 123") requires use of option valuation models that
were not developed for use in valuing employee stock options. Since the exercise
price of the Company's employee stock options equals the market price of the
underlying stock on the date of grant, no compensation expense is recognized for
employee stock options under APB No. 25. The Company recognizes compensation
expense for its restricted stock grants, performance share grants (when the
performance targets are achieved) and other stock unit awards. The total charges
to the Company's consolidated statements of operations for the years ended
December 31, 1997, 1996 and 1995 related to these stock-based awards were
approximately $19,767,000, $509,000 and $3,065,000, respectively. The total
charges for 1997 included approximately $18,000,000 related to the impact of the
Reorganization on the Company's stock-based awards (as discussed above), which
was included in the $44,000,000 of transaction costs.

Pro forma information regarding net income and earnings per share is
required by SFAS No. 123, and has been determined as if the Company had
accounted for its 1997, 1996 and 1995 stock option and performance share grants
under the fair value method as prescribed by such statement. The fair value for
stock options was estimated at the date of grant using a Black-Scholes option
pricing model with the following weighted-average assumptions for the years
ended December 31, 1997, 1996 and 1995, respectively: risk-free interest rates
of 5.9%, 6.5% and 6.0%; volatility factors of the expected market price of the
Company's Common Stock of .35, .34 and .35; and a weighted-average expected life
of the option of 8 years, 10 years and 10 years. The Company does not currently
pay cash dividends on its Common Stock and no future dividends are currently
planned. Such weighted-average assumptions resulted in a weighted average fair
value of options granted during 1997, 1996 and 1995 of $7.84 per share, $7.30
per share and $7.65 per share, respectively. The fair value of the performance
share grants was based on the market value of the Company's Common Stock on the
date of grant.

The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimates, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its stock options.

For purposes of pro forma disclosures, the estimated fair value of the
stock options and performance shares is amortized to expense over their
respective vesting periods. The pro forma effects on reported net income (loss)
and diluted earnings per share assuming the Company had elected to account for
its stock option and performance share grants in accordance with SFAS No. 123
for the years ended December 31, 1997, 1996 and 1995, respectively, would have
been net income of $47,244,000 or $.46 per share, net income

43
45
BEVERLY ENTERPRISES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995

6. STOCKHOLDERS' EQUITY -- (CONTINUED)
of $48,964,000 or $.49 per share and net loss of $8,408,000 or $.17 per share.
The pro forma amounts for 1997 reflect the impact of the Reorganization on the
Company's outstanding stock options (as discussed above). Such pro forma effects
are not necessarily indicative of the effect on future years.

The Beverly Enterprises 1988 Employee Stock Purchase Plan (as amended and
restated) enables all full-time employees having completed one year of
continuous service to purchase shares of Common Stock at the current market
price through payroll deductions. The Company makes contributions in the amount
of 30% of the participant's contribution. Each participant specifies the amount
to be withheld from earnings per two-week pay period, subject to certain
limitations. The total charges to the Company's consolidated statements of
operations for the years ended December 31, 1997, 1996 and 1995 related to this
plan were approximately $2,449,000, $2,258,000 and $2,201,000, respectively.

7. INCOME TAXES

The provisions for taxes on income before extraordinary charge consist of
the following for the years ended December 31 (in thousands):

1997 1996 1995
------- ------- --------

Federal:
Current............................................ $22,997 $31,615 $ 17,518
Deferred........................................... 20,404 29,466 (16,877)
State:
Current............................................ 6,669 8,101 4,845
Deferred........................................... (157) 4,299 (3,517)
------- ------- --------
$49,913 $73,481 $ 1,969
======= ======= ========

The Company had an annual effective tax rate of 46% for the year ended
December 31, 1997, compared to an annual effective tax rate of 59% and a
negative annual effective tax rate of 32% for the years ended December 31, 1996
and 1995, respectively. The annual effective tax rate in 1997 was different than
the federal statutory rate primarily due to the impact of nondeductible
transaction costs associated with the Reorganization (see Note 2). The annual
effective tax rate in 1996 was different than the federal statutory rate
primarily due to the impact of nondeductible goodwill associated with the
MedView disposition (see Note 2). In addition, the annual effective tax rate in
1995 was different than the federal statutory rate primarily due to the impact
of nondeductible goodwill included in the adjustments resulting from the
adoption of SFAS No. 121 (see Note 1).

A reconciliation of the provision for (benefit from) income taxes, computed
at the statutory rate, to the Company's annual effective tax rate is summarized
as follows (dollars in thousands):

1997 1996 1995
-------------- -------------- --------------
AMOUNT % AMOUNT % AMOUNT %
------- --- ------- --- ------- ---

Tax (benefit) at statutory
rate........................... $37,977 35 $43,927 35 $(2,154) 35
General business tax credits..... -- -- -- -- (1,014) 17
State tax provision, net......... 4,233 4 8,060 6 863 (14)
Nondeductible intangibles........ 1,702 2 20,881 17 3,797 (62)
Effect of Merger................. 5,618 5 -- -- -- --
Other............................ 383 -- 613 1 477 (8)
------- --- ------- --- ------- ---
$49,913 46 $73,481 59 $ 1,969 (32)
======= === ======= === ======= ===

44
46
BEVERLY ENTERPRISES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995

7. INCOME TAXES -- (CONTINUED)
Deferred income taxes reflect the impact of temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. The tax effects of temporary
differences giving rise to the Company's deferred tax assets and liabilities at
December 31, 1997 and 1996 are as follows (in thousands):

DECEMBER 31, 1997 DECEMBER 31, 1996
-------------------- --------------------
ASSET LIABILITY ASSET LIABILITY
-------- --------- -------- ---------

Insurance reserves.......................... $ 36,104 $ -- $ 55,540 $ --
General business tax credit carryforwards... -- -- 12,236 --
Alternative minimum tax credit
carryforwards............................. 13,969 -- 14,698 --
Provision for dispositions.................. 32,591 5,776 11,009 6,152
Depreciation and amortization............... 29 140,062 1,401 141,804
Operating supplies.......................... -- 12,907 -- 14,206
Other....................................... 18,304 26,336 22,995 24,784
-------- -------- -------- --------
$100,997 $185,081 $117,879 $186,946
======== ======== ======== ========

8. FAIR VALUES OF FINANCIAL INSTRUMENTS

Financial Accounting Standards Statement No. 107, "Disclosures about Fair
Value of Financial Instruments," requires disclosure of fair value information
about financial instruments, whether or not recognized in the balance sheet, for
which it is practicable to estimate that value. In cases where quoted market
prices are not available, fair values are based on estimates using present value
or other valuation techniques. Those techniques are significantly affected by
the assumptions used, including the discount rate and estimates of future cash
flows. In that regard, the derived fair value estimates cannot be substantiated
by comparison to independent markets and, in many cases, could not be realized
in immediate settlement of the instrument. Statement No. 107 excludes certain
financial instruments and all nonfinancial instruments from its disclosure
requirements. Accordingly, the aggregate fair value amounts presented do not
represent the underlying value of the Company. The following methods and
assumptions were used by the Company in estimating its fair value disclosures
for financial instruments:

Cash and Cash Equivalents

The carrying amount reported in the consolidated balance sheets for cash
and cash equivalents approximates its fair value.

Notes Receivable, Net (Including Current Portion)

For variable-rate notes that reprice frequently and with no significant
change in credit risk, fair values are based on carrying values. The fair values
for fixed-rate notes are estimated using discounted cash flow analyses, using
interest rates currently being offered for loans with similar terms to borrowers
of similar credit quality.

Beverly Indemnity Funds

The fair value of the Beverly Indemnity funds is based on information
obtained from the trustee and the manager of such funds. Such funds are included
in the consolidated balance sheet captions "Prepaid expenses and other" and
"Designated and restricted funds" based on when the corresponding claims are
expected to be paid. These funds are invested primarily in United States
government securities with maturity dates ranging

45
47
BEVERLY ENTERPRISES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995

8. FAIR VALUES OF FINANCIAL INSTRUMENTS -- (CONTINUED)
primarily from one to five years. During 1997, the Company purchased traditional
indemnity insurance coverage for its 1997 workers' compensation and auto
liabilities (see Note 1) which resulted in the Company selling a portion of
these securities, with a book value of approximately $10,100,000, to fund such
purchase. The gain on the sale of such securities was immaterial to the
Company's consolidated results of operations for the year ended December 31,
1997. The remaining securities are classified as available-for-sale and as such
are carried at fair value.

Investment in a Real Estate Mortgage Investment Conduit (REMIC)

The fair value of the Company's REMIC investment, which was included in the
consolidated balance sheet caption "Other, net" in 1996, is based on information
obtained from the REMIC servicer. The Company converted the REMIC investment to
notes receivable from the underlying note makers during 1997.

Long-term Obligations (Including Current Portion)

The carrying amounts of the Company's variable-rate borrowings approximate
their fair values. The fair values of the remaining long-term obligations are
estimated using discounted cash flow analyses, based on the Company's
incremental borrowing rates for similar types of borrowing arrangements.

The carrying amounts and estimated fair values of the Company's financial
instruments at December 31, 1997 and 1996 are as follows (in thousands):

1997 1996
-------------------- ------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- -------- ---------- ----------

Cash and cash equivalents............ $105,230 $105,230 $ 69,761 $ 69,761
Notes receivable, net (including
current portion)................... 24,973 26,400 48,052 49,900
Beverly Indemnity funds.............. 80,804 80,804 94,472 94,821
REMIC investment..................... -- -- 8,052 8,084
Long-term obligations (including
current portion)................... 718,492 746,439 1,145,082 1,161,031

In order to consummate certain dispositions and other transactions, the
Company has agreed to guarantee the debt assumed or acquired by the purchaser or
the performance under a lease, by the lessor. It was not practicable to estimate
the fair value of the Company's off-balance sheet guarantees (See Note 5). The
Company does not charge a fee for entering into such agreements and contracting
with a financial institution to estimate such amounts could not be done without
incurring excessive costs. In addition, unlike the Company, a financial
institution would not be in a position to assume the underlying obligations and
operate the nursing facilities collateralizing the obligations, which would
significantly impact the calculation of the fair value of such off-balance sheet
guarantees.

46
48

SUPPLEMENTARY DATA (UNAUDITED)
QUARTERLY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)

The following is a summary of the quarterly results of operations for the
years ended December 31, 1997 and 1996.

1997 1996
------------------------------------------------------ -----------------------------------------
1ST 2ND 3RD 4TH TOTAL 1ST 2ND 3RD 4TH
-------- -------- -------- -------- ---------- -------- -------- -------- --------

Revenues:
Remaining Healthcare
Business................ $697,899 $692,033 $676,938 $690,444 $2,757,314 $709,166 $696,922 $716,300 $724,226
PCA....................... 147,639 153,770 155,573 107,342 564,324 124,418 124,898 130,413 136,847
Elimination of
intercompany revenues... (25,257) (25,139) (24,585) (16,357) (91,338) (19,077) (20,012) (20,774) (22,299)
-------- -------- -------- -------- ---------- -------- -------- -------- --------
Total revenues...... $820,281 $820,664 $807,926 $781,429 $3,230,300 $814,507 $801,808 $825,939 $838,774
======== ======== ======== ======== ========== ======== ======== ======== ========
Income (loss) before
provision for income taxes
and extraordinary
charge.................... $ 30,772 $ 34,950 $ 45,222 $ (2,438) $ 108,506 $ 22,827 $ 28,325 $ 38,130 $ 36,225
Provision for income
taxes..................... 12,309 13,980 18,089 5,535 49,913 9,131 11,330 15,252 37,768
-------- -------- -------- -------- ---------- -------- -------- -------- --------
Income (loss) before
extraordinary charge...... 18,463 20,970 27,133 (7,973) 58,593 13,696 16,995 22,878 (1,543)
Extraordinary charge........ -- -- -- -- -- -- -- -- (1,726)
-------- -------- -------- -------- ---------- -------- -------- -------- --------
Net income (loss)........... $ 18,463 $ 20,970 $ 27,133 $ (7,973) $ 58,593 $ 13,696 $ 16,995 $ 22,878 $ (3,269)
======== ======== ======== ======== ========== ======== ======== ======== ========
Income (loss) per share of
common stock:
Basic:
Before extraordinary
charge................ $ .19 $ .21 $ .26 $ (.07) $ .57 $ .14 $ .17 $ .23 $ (.01)
Extraordinary charge.... -- -- -- -- -- -- -- -- (.02)
-------- -------- -------- -------- ---------- -------- -------- -------- --------
Net income (loss)....... $ .19 $ .21 $ .26 $ (.07) $ .57 $ .14 $ .17 $ .23 $ (.03)
======== ======== ======== ======== ========== ======== ======== ======== ========
Shares used to compute
per share amounts..... 98,144 97,736 103,508 108,719 102,060 98,739 98,981 98,239 98,341
======== ======== ======== ======== ========== ======== ======== ======== ========
Diluted:
Before extraordinary
charge................ $ .18 $ .20 $ .26 $ (.07) $ .57 $ .13 $ .16 $ .22 $ (.01)
Extraordinary charge.... -- -- -- -- -- -- -- -- (.02)
-------- -------- -------- -------- ---------- -------- -------- -------- --------
Net income (loss)....... $ .18 $ .20 $ .26 $ (.07) $ .57 $ .13 $ .16 $ .22 $ (.03)
======== ======== ======== ======== ========== ======== ======== ======== ========
Shares used to compute
per share amounts..... 110,386 109,993 107,751 108,719 103,422 111,053 111,154 110,261 98,341
======== ======== ======== ======== ========== ======== ======== ======== ========
Common stock price range:
High...................... $ 16.13 $ 16.88 $ 17.50 $ 17.50 $ 12.38 $ 12.63 $ 12.13 $ 13.75
Low....................... $ 12.25 $ 13.13 14.56 $ 12.13(1) $ 10.13 $ 11.00 $ 9.25 $ 10.63

1996
----------
TOTAL
----------

Revenues:
Remaining Healthcare
Business................ $2,846,614
PCA....................... 516,576
Elimination of
intercompany revenues... (82,162)
----------
Total revenues...... $3,281,028
==========
Income (loss) before
provision for income taxes
and extraordinary
charge.................... $ 125,507
Provision for income
taxes..................... 73,481
----------
Income (loss) before
extraordinary charge...... 52,026
Extraordinary charge........ (1,726)
----------
Net income (loss)........... $ 50,300
==========
Income (loss) per share of
common stock:
Basic:
Before extraordinary
charge................ $ .53
Extraordinary charge.... (.02)
----------
Net income (loss)....... $ .51
==========
Shares used to compute
per share amounts..... 98,574
==========
Diluted:
Before extraordinary
charge................ $ .50
Extraordinary charge.... (.01)
----------
Net income (loss)....... $ .49
==========
Shares used to compute
per share amounts..... 110,726
==========
Common stock price range:
High......................
Low.......................

- ---------------

(1) After the effect of the Reorganization on December 3, 1997 (as discussed
herein).

The Company had an annual effective tax rate of 46% for the year ended
December 31, 1997 compared to an annual effective tax rate of 59% for the year
ended December 31, 1996. The annual effective tax rate in 1997 was different
than the federal statutory rate primarily due to the impact of nondeductible
transaction costs associated with the Reorganization (as discussed herein). In
addition, the annual effective tax rate in 1996 was different than the federal
statutory rate primarily due to the impact of nondeductible goodwill associated
with the MedView disposition (as discussed herein).

Earnings per share for 1996 and the first three quarters of 1997 have been
restated to comply with Statement of Financial Accounting Standards No. 128,
"Earnings per Share." See "Part II, Item 8 -- Note 1 of Notes to Consolidated
Financial Statements."

47
49

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.

Incorporated herein by reference from the Company's definitive proxy
statement for the Annual Meeting of Stockholders to be held on May 28, 1998, to
be filed pursuant to Regulation 14A.

ITEM 11. EXECUTIVE COMPENSATION.

Incorporated herein by reference from the Company's definitive proxy
statement for the Annual Meeting of Stockholders to be held on May 28, 1998, to
be filed pursuant to Regulation 14A.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

Incorporated herein by reference from the Company's definitive proxy
statement for the Annual Meeting of Stockholders to be held on May 28, 1998, to
be filed pursuant to Regulation 14A.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

Incorporated herein by reference from the Company's definitive proxy
statement for the Annual Meeting of Stockholders to be held on May 28, 1998, to
be filed pursuant to Regulation 14A.

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.

(a) 1 and 2. The Consolidated Financial Statements and Consolidated Financial
Statement Schedule

The consolidated financial statements and consolidated financial statement
schedule listed in the accompanying index to consolidated financial statements
and financial statement schedules are filed as part of this annual report.

3. Exhibits

The exhibits listed in the accompanying index to exhibits are incorporated
by reference herein or are filed as part of this annual report.

(b) Reports on Form 8-K

The Company filed a Current Report on Form 8-K, dated December 3, 1997,
which reported under Item 5 that the Company completed the closing of the
transactions contemplated by the definitive Agreement and Plan of Merger dated
April 15, 1997 which combined Pharmacy Corporation of America with Capstone
Pharmacy Services, Inc. to create one of the nation's largest independent
institutional pharmacy companies and filed under Item 7 the Company's press
releases dated December 3, 1997 and December 10, 1997.

See the accompanying index to exhibits referenced in Item 14(a)(3) above
for a list of exhibits incorporated herein by reference or filed as part of this
annual report.

(d) Financial Statement Schedule

See the accompanying index to consolidated financial statements and
financial statement schedules referenced in Item 14(a)1 and 2, above.

48
50

BEVERLY ENTERPRISES, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULES
(ITEM 14(a))

PAGE
----

1. Consolidated financial statements:
Report of Ernst & Young LLP, Independent Auditors........... 23
Consolidated Balance Sheets at December 31, 1997 and 1996... 24
Consolidated Statements of Operations for each of the three
years in the period ended December 31, 1997............... 25
Consolidated Statements of Stockholders' Equity for each of
the three years in the period ended December 31, 1997..... 26
Consolidated Statements of Cash Flows for each of the three
years in the period ended December 31, 1997............... 27
Notes to Consolidated Financial Statements.................. 28
Supplementary Data (Unaudited) -- Quarterly Financial
Data...................................................... 47
2. Consolidated financial statement schedule for each of the three
years in the period ended December 31, 1997:
II -- Valuation and Qualifying Accounts..................... 50

All other schedules are omitted because they are either not applicable or
the items do not exceed the various disclosure levels.

49
51

BEVERLY ENTERPRISES, INC.

SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)

CHARGED DUE TO
BALANCE AT (CREDITED) ACQUISITIONS BALANCE
BEGINNING TO AND AT END
DESCRIPTION OF YEAR OPERATIONS WRITE-OFFS DISPOSITIONS OTHER OF YEAR
----------- ---------- ---------- ---------- ------------ ------ -------

Year ended December 31, 1997:
Allowance for doubtful
accounts:
Accounts
receivable -- patient..... $25,618 $35,343 $(34,858) $(8,224) $ -- $17,879
Accounts receivable --
nonpatient................ 637 209 (218) -- 234 862*
Notes receivable............ 4,951 (1,211) (306) (1,453) 936 2,917
------- ------- -------- ------- ------ -------
$31,206 $34,341 $(35,382) $(9,677) $1,170 $21,658
======= ======= ======== ======= ====== =======
Year ended December 31, 1996:
Allowance for doubtful
accounts:
Accounts
receivable -- patient..... $22,860 $28,637 $(29,163) $ 2,555 $ 729 $25,618
Accounts receivable --
nonpatient................ 813 56 (223) -- (9) 637*
Notes receivable............ 4,953 (149) (257) 24 380 4,951
------- ------- -------- ------- ------ -------
$28,626 $28,544 $(29,643) $ 2,579 $1,100 $31,206
======= ======= ======== ======= ====== =======
Year ended December 31, 1995:
Allowance for doubtful
accounts:
Accounts
receivable -- patient..... $28,293 $21,008 $(30,326) $ 3,885 $ -- $22,860
Accounts receivable --
nonpatient................ 2,802 (1,919) (70) -- -- 813*
Notes receivable............ 6,429 (3,200) (61) 1,285 500 4,953
------- ------- -------- ------- ------ -------
$37,524 $15,889 $(30,457) $ 5,170 $ 500 $28,626
======= ======= ======== ======= ====== =======
Valuation allowance on deferred
tax assets..................... $ 198 $ (198) $ -- $ -- $ -- $ --
======= ======= ======== ======= ====== =======

- ---------------

* Includes amounts classified in long-term other assets as well as current
assets.

50
52

BEVERLY ENTERPRISES, INC.
INDEX TO EXHIBITS
(ITEM 14(a)(3))

EXHIBIT
NUMBER DESCRIPTION
------- -----------

3.1 -- Form of Restated Certificate of Incorporation of New
Beverly Holdings, Inc.
3.2 -- Form of Certificate of Amendment of Certificate of
Incorporation of New Beverly Holdings Inc., changing its
name to Beverly Enterprises, Inc.
3.3 -- By-Laws of Beverly Enterprises, Inc. (incorporated by
reference to Exhibit 3.4 to Beverly Enterprises, Inc.'s
Registration Statement on Form S-1 filed on June 4, 1997
(File No. 333-28521))
4.1 -- Indenture dated as of February 1, 1996 between Beverly
Enterprises, Inc. and Chemical Bank, as Trustee, with
respect to Beverly Enterprises, Inc.'s 9% Senior Notes
due February 15, 2006 (the "9% Indenture") (incorporated
by reference to Exhibit 4.1 to Beverly Enterprises,
Inc.'s Annual Report on Form 10-K for the year ended
December 31, 1995)
4.2 -- Form of Supplemental Indenture No. 2 to the 9% Indenture
dated as of November 19, 1997 (incorporated by reference
to Exhibit 4.2 to Beverly Enterprises, Inc.'s
Registration Statement of Form S-4 filed on September 8,
1997 (File No. 333-35137))
4.3 -- Indenture dated as of April 1, 1993 (the "First Mortgage
Bond Indenture"), among Beverly Enterprises, Inc.,
Delaware Trust Company, as Corporate Trustee, and Richard
N. Smith, as Individual Trustee, with respect to First
Mortgage Bonds (incorporated by reference to Exhibit 4.1
to Beverly Enterprises, Inc.'s Quarterly Report on Form
10-Q for the quarter ended March 31, 1993)
4.4 -- First Supplemental Indenture dated as of April 1, 1993 to
the First Mortgage Bond Indenture, with respect to 8 3/4%
First Mortgage Bonds due 2008 (incorporated by reference
to Exhibit 4.2 to Beverly Enterprises, Inc.'s Quarterly
Report on Form 10-Q for the quarter ended March 31, 1993)
4.5 -- Second Supplemental Indenture dated as of July 1, 1993 to
the First Mortgage Bond Indenture, with respect to 8 5/8%
First Mortgage Bonds due 2008 (replaces Exhibit 4.1 to
Beverly Enterprises, Inc.'s Current Report on Form 8-K
dated July 15, 1993)(incorporated by reference to Exhibit
4.15 to Beverly Enterprises, Inc.'s Quarterly Report on
Form 10-Q for the quarter ended June 30, 1993)
4.6 -- Rights Agreement dated as of December 3, 1997, between
Beverly Enterprises, Inc. and The Bank of New York, as
Rights Agent
In accordance with item 601(b)(4)(iii) of Regulation S-K,
certain instruments pertaining to Beverly Enterprises,
Inc.'s long-term obligations have not been filed; copies
thereof will be furnished to the Securities and Exchange
Commission upon request.
10.1* -- Beverly Enterprises, Inc. Annual Incentive Plan
(incorporated by reference to Exhibit 10.4 to Beverly
Enterprises, Inc.'s Registration Statement on Form S-4
filed on February 13, 1995 (File No. 33-57663))
10.2* -- New Beverly Holdings, Inc. 1997 Long-Term Incentive Plan
(the "1997 LTIP") (incorporated by reference to Exhibit
4.1 to Beverly Enterprises, Inc.'s Registration Statement
on Form S-8 filed on December 8, 1997 (File No.
333-41669))
10.3* -- Amendment No. 1 to the 1997 LTIP dated as of December 3,
1997
10.4* -- New Beverly Holdings, Inc. Non-Employee Directors' Stock
Option Plan (the "Directors' Option Plan") (incorporated
by reference to Exhibit 4.1 to Beverly Enterprises,
Inc.'s Registration Statement on Form S-8 filed on
December 12, 1997 (File No. 333-42131))

51
53

EXHIBIT
NUMBER DESCRIPTION
------- -----------

10.5* -- Amendment No. 1 to the Directors' Option Plan dated as of
December 3, 1997
10.6* -- Executive Medical Reimbursement Plan (incorporated by
reference to Exhibit 10.5 to Beverly Enterprises, Inc.'s
Annual Report on Form 10-K for the year ended December
31, 1987)
10.7* -- Amended and Restated Beverly Enterprises, Inc. Executive
Life Insurance Plan and Summary Plan Description (the
"Executive Life Plan") (incorporated by reference to
Exhibit 10.7 to Beverly Enterprises, Inc.'s Annual Report
on Form 10-K for the year ended December 31, 1993)
10.8* -- Amendment No. 1, effective September 29, 1994, to the
Executive Life Plan (incorporated by reference to Exhibit
10.10 to Beverly Enterprises, Inc.'s Registration
Statement on Form S-4 filed on February 13, 1995 (File
No. 33-57663))
10.9* -- Executive Physicals Policy (incorporated by reference to
Exhibit 10.8 to Beverly Enterprises, Inc.'s Quarterly
Report on Form 10-Q for the quarter ended June 30, 1993)
10.10* -- Amended and Restated Deferred Compensation Plan effective
July 18, 1991 (incorporated by reference to Exhibit 10.6
to Beverly Enterprises, Inc.'s Annual Report on Form 10-K
for the year ended December 31, 1991)
10.11* -- Amendment No. 1, effective September 29, 1994, to the
Deferred Compensation Plan (incorporated by reference to
Exhibit 10.13 to Beverly Enterprises, Inc.'s Registration
Statement on Form S-4 filed on February 13, 1995 (File
No. 33-57663))
10.12* -- Executive Retirement Plan (incorporated by reference to
Exhibit 10.9 to Beverly Enterprises, Inc.'s Annual Report
on Form 10-K for the year ended December 31, 1987)
10.13* -- Amendment No. 1, effective as of July 1, 1991, to the
Executive Retirement Plan (incorporated by reference to
Exhibit 10.8 to Beverly Enterprises, Inc.'s Annual Report
on Form 10-K for the year ended December 31, 1991)
10.14* -- Amendment No. 2, effective as of December 12, 1991, to
the Executive Retirement Plan (incorporated by reference
to Exhibit 10.9 to Beverly Enterprises, Inc.'s Annual
Report on Form 10-K for the year ended December 31, 1991)
10.15* -- Amendment No. 3, effective as of July 31, 1992, to the
Executive Retirement Plan (incorporated by reference to
Exhibit 10.10 to Beverly Enterprises, Inc.'s Annual
Report on Form 10-K for the year ended December 31, 1992)
10.16* -- Amendment No. 4, effective as of January 1, 1993, to the
Executive Retirement Plan (incorporated by reference to
Exhibit 10.18 to Beverly Enterprises, Inc.'s Annual
Report on Form 10-K for the year ended December 31, 1994)
10.17* -- Amendment No. 5, effective as of September 29, 1994, to
the Executive Retirement Plan (incorporated by reference
to Exhibit 10.19 to Beverly Enterprises, Inc.'s Annual
Report on Form 10-K for the year ended December 31, 1994)
10.18* -- Amendment No. 6, effective as of January 1, 1996, to the
Executive Retirement Plan
10.19* -- Amendment No. 7, effective as of September 1, 1997, to
the Executive Retirement Plan
10.20* -- Amendment No. 8, dated as of December 11, 1997, to the
Executive Retirement Plan, changing its name to the
"Executive SavingsPlus Plan"
10.21* -- Beverly Enterprises, Inc.'s Supplemental Executive
Retirement Plan effective as of January 1, 1998
10.22* -- Beverly Enterprises, Inc.'s Executive Deferred
Compensation Plan (incorporated by reference to Exhibit
4.1 to Beverly Enterprises, Inc.'s Registration Statement
on Form S-8 filed on December 5, 1997 (File No.
333-41673))

52
54

EXHIBIT
NUMBER DESCRIPTION
------- -----------

10.23* -- Amendment No. 1 to the Executive Deferred Compensation
Plan made as of December 11, 1997
10.24* -- Amendment No. 2 to the Executive Deferred Compensation
Plan made as of December 11, 1997
10.25* -- Beverly Enterprises, Inc. Non-Employee Director Deferred
Compensation Plan (the "Directors' Plan")(incorporated by
reference to Exhibit 10.1 to Beverly Enterprises, Inc.'s
Quarterly Report on Form 10-Q for the quarter ended June
30, 1997)
10.26* -- Amendment No. 1, effective as of December 3, 1997, to the
Directors' Plan
10.27* -- Beverly Enterprises, Inc.'s Supplemental Long-Term
Disability Plan (incorporated by reference to Exhibit
10.24 to Beverly Enterprises, Inc.'s Annual Report on
Form 10-K for the year ended December 31, 1996)
10.28* -- Form of Indemnification Agreement between Beverly
Enterprises, Inc. and its officers, directors and certain
of its employees (incorporated by reference to Exhibit
19.14 to Beverly Enterprises, Inc.'s Quarterly Report on
Form 10-Q for the quarter ended June 30, 1987)
10.29* -- Form of request by Beverly Enterprises, Inc. to certain
of its officers or directors relating to indemnification
rights (incorporated by reference to Exhibit 19.5 to
Beverly Enterprises, Inc.'s Quarterly Report on Form 10-Q
for the quarter ended September 30, 1987)
10.30* -- Form of request by Beverly Enterprises, Inc. to certain
of its officers or employees relating to indemnification
rights (incorporated by reference to Exhibit 19.6 to
Beverly Enterprises, Inc.'s Quarterly Report on Form 10-Q
for the quarter ended September 30, 1987)
10.31* -- Agreement dated December 29, 1986 between Beverly
Enterprises, Inc. and Stephens Inc. (incorporated by
reference to Exhibit 10.20 to Beverly Enterprises, Inc.'s
Registration Statement on Form S-1 filed on January 18,
1990 (File No. 33-33052))
10.32* -- Employment Contract, made as of August 22, 1997, between
New Beverly Holdings, Inc. and David R. Banks
(incorporated by reference to Exhibit 10.17 to Amendment
No. 2 to Beverly Enterprises, Inc.'s Registration
Statement on Form S-1 filed on September 22, 1997 (File
No. 333-28521))
10.33* -- Form of Employment Contract, made as of August 22, 1997,
between New Beverly Holdings, Inc. and certain of its
officers (incorporated by reference to Exhibit 10.20 to
Amendment No. 2 to Beverly Enterprises, Inc.'s
Registration Statement on Form S-1 filed on September 22,
1997 (File No. 333-28521))
10.34 -- Master Lease Document -- General Terms and Conditions
dated December 30, 1985 for Leases between Beverly
California Corporation and various subsidiaries thereof
as lessees and Beverly Investment Properties, Inc. as
lessor (incorporated by reference to Exhibit 10.12 to
Beverly California Corporation's Annual Report on Form
10-K for the year ended December 31, 1985)
10.35 -- Agreement dated as of December 29, 1986 among Beverly
California Corporation, Beverly Enterprises -- Texas,
Inc., Stephens Inc. and Real Properties, Inc.
(incorporated by reference to Exhibit 28 to Beverly
California Corporation's Current Report on Form 8-K dated
December 30, 1986) and letter agreement dated as of July
31, 1987 among Beverly Enterprises, Inc., Beverly
California Corporation, Beverly Enterprises -- Texas,
Inc. and Stephens Inc. with reference thereto
(incorporated by reference to Exhibit 19.13 to Beverly
Enterprises, Inc.'s Quarterly Report on Form 10-Q for the
quarter ended June 30, 1987)

53
55

EXHIBIT
NUMBER DESCRIPTION
------- -----------

10.36 -- Participation Agreement, dated as of March 21, 1997,
among Vantage Healthcare Corporation, Petersen Health
Care, Inc., Beverly Savana Cay Manor, Inc., Beverly
Enterprises -- Georgia, Inc., and Beverly
Enterprises -- California, Inc. as Lessees and Structural
Guarantors; Beverly Enterprises, Inc. as Representative,
Construction Agent and Parent Guarantor; BMO Leasing
(U.S.), Inc. as Agent Lessor and Lessor; The Long-Term
Credit Bank of Japan, LTD., Los Angeles Agency and Bank
of Montreal, as Lenders; The Long-Term Credit Bank of
Japan, LTD., Los Angeles Agency as Arranger and
Administrative Agent for the Lenders; and Bank of
Montreal as Co-Arranger and Syndication Agent with
respect to the Lease Financing of Assisted Living and
Nursing Facilities for Beverly Enterprises, Inc.
(incorporated by reference to Exhibit 10.2 to Beverly
Enterprises, Inc.'s Quarterly Report on Form 10-Q for the
quarter ended June 30, 1997)
10.37 -- Amendment No. 1 and Waiver to Participation Agreement,
dated as of May 27, 1997 (incorporated by reference to
Exhibit 10.31 to Amendment No. 2 to Beverly Enterprises,
Inc.'s Registration Statement on Form S-1 filed on
September 22, 1997 (File No. 333-28521))
10.38 -- Amendment No. 2 to Participation Agreement, dated as of
August 20, 1997 (incorporated by reference to Exhibit
10.32 to Amendment No. 2 to Beverly Enterprises, Inc.'s
Registration Statement of Form S-1 filed on September 22,
1997 (File No. 333-28521))
10.39 -- Trust Indenture dated as of December 1, 1994 from Beverly
Funding Corporation, as Issuer, to Chemical Bank, as
Trustee (the "Chemical Indenture") (incorporated by
reference to Exhibit 10.45 to Beverly Enterprises, Inc.'s
Registration Statement on Form S-4 filed on February 13,
1995 (File No. 33-57663))
10.40 -- Series Supplement dated as of December 1, 1994 to the
Chemical Indenture (incorporated by reference to Exhibit
10.46 to Beverly Enterprises, Inc.'s Registration
Statement on Form S-4 filed on February 13, 1995 (File
No. 33-57663))
10.41 -- Data Processing Agreement, dated as of August 1, 1992, by
and between Systematics Telecommunications Services, Inc.
and Beverly California Corporation (incorporated by
reference to Exhibit 10 to Beverly Enterprises, Inc.'s
Quarterly Report on Form 10-Q for the quarter ended June
30, 1992)
10.42 -- Form of Irrevocable Trust Agreement for the Beverly
Enterprises, Inc. Executive Benefits Plan (incorporated
by reference to Exhibit 10.55 to Beverly Enterprises,
Inc.'s Registration Statement on Form S-4 filed on
February 13, 1995 (File No. 33-57663))
11.1 -- Computation of Net Income (Loss) Per Share for the years
ended December 31, 1997, 1996, 1995, 1994 and 1993
21.1 -- Subsidiaries of Registrant
23.1 -- Consent of Ernst & Young LLP, Independent Auditors
27.1 -- Financial Data Schedule for the year ended December 31,
1997
27.2 -- Restated Financial Data Schedule for the year ended
December 31, 1996
27.3 -- Restated Financial Data Schedule for the year ended
December 31, 1995

- ---------------

* Exhibits 10.1 through 10.33 are the management contracts, compensatory plans,
contracts and arrangements in which any director or named executive officer
participates.

54
56

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

BEVERLY ENTERPRISES, INC.
Registrant
Dated: March 27, 1998 By: /s/ DAVID R. BANKS
-------------------------------------------
David R. Banks
Chairman of the Board, Chief
Executive Officer and Director

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of Registrant
and in the capacities and on the dates indicated:

/s/ DAVID R. BANKS Chairman of the Board, Chief
- ----------------------------------------------------- Executive Officer and
David R. Banks Director March 27, 1998

/s/ BOYD W. HENDRICKSON President, Chief Operating
- ----------------------------------------------------- Officer and Director
Boyd W. Hendrickson March 27, 1998

/s/ SCOTT M. TABAKIN Executive Vice President and
- ----------------------------------------------------- Chief Financial Officer
Scott M. Tabakin March 27, 1998

/s/ PAMELA H. DANIELS Vice President, Controller and
- ----------------------------------------------------- Chief Accounting Officer
Pamela H. Daniels March 27, 1998
/s/ BERYL F. ANTHONY, JR. Director March 27, 1998
- -----------------------------------------------------
Beryl F. Anthony, Jr.

CAROLYNE K. DAVIS Director March 27, 1998
- -----------------------------------------------------
Carolyne K. Davis

/s/ JAMES R. GREENE Director March 27, 1998
- -----------------------------------------------------
James R. Greene

/s/ EDITH E. HOLIDAY Director March 27, 1998
- -----------------------------------------------------
Edith E. Holiday

/s/ JON E. M. JACOBY Director March 27, 1998
- -----------------------------------------------------
Jon E. M. Jacoby

/s/ RISA J. LAVIZZO-MOUREY Director March 27, 1998
- -----------------------------------------------------
Risa J. Lavizzo-Mourey

/s/ MARILYN R. SEYMANN Director March 27, 1998
- -----------------------------------------------------
Marilyn R. Seymann

55
57

BEVERLY ENTERPRISES, INC.

INDEX TO EXHIBITS
(ITEM 14(A)(3))

EXHIBIT
NUMBER DESCRIPTION
------- -----------

10.6* -- Executive Medical Reimbursement Plan (incorporated by
reference to Exhibit 10.5 to Beverly Enterprises, Inc.'s
Annual Report on Form 10-K for the year ended December
31, 1987)
10.7* -- Amended and Restated Beverly Enterprises, Inc. Executive
Life Insurance Plan and Summary Plan Description (the
"Executive Life Plan") (incorporated by reference to
Exhibit 10.7 to Beverly Enterprises, Inc.'s Annual Report
on Form 10-K for the year ended December 31, 1993)
10.8* -- Amendment No. 1, effective September 29, 1994, to the
Executive Life Plan (incorporated by reference to Exhibit
10.10 to Beverly Enterprises, Inc.'s Registration
Statement on Form S-4 filed on February 13, 1995 (File
No. 33-57663))
10.9* -- Executive Physicals Policy (incorporated by reference to
Exhibit 10.8 to Beverly Enterprises, Inc.'s Quarterly
Report on Form 10-Q for the quarter ended June 30, 1993)
10.10* -- Amended and Restated Deferred Compensation Plan effective
July 18, 1991 (incorporated by reference to Exhibit 10.6
to Beverly Enterprises, Inc.'s Annual Report on Form 10-K
for the year ended December 31, 1991)
10.11* -- Amendment No. 1, effective September 29, 1994, to the
Deferred Compensation Plan (incorporated by reference to
Exhibit 10.13 to Beverly Enterprises, Inc.'s Registration
Statement on Form S-4 filed on February 13, 1995 (File
No. 33-57663))
10.12* -- Executive Retirement Plan (incorporated by reference to
Exhibit 10.9 to Beverly Enterprises, Inc.'s Annual Report
on Form 10-K for the year ended December 31, 1987)
10.13* -- Amendment No. 1, effective as of July 1, 1991, to the
Executive Retirement Plan (incorporated by reference to
Exhibit 10.8 to Beverly Enterprises, Inc.'s Annual Report
on Form 10-K for the year ended December 31, 1991)
10.14* -- Amendment No. 2, effective as of December 12, 1991, to
the Executive Retirement Plan (incorporated by reference
to Exhibit 10.9 to Beverly Enterprises, Inc.'s Annual
Report on Form 10-K for the year ended December 31, 1991)
10.15* -- Amendment No. 3, effective as of July 31, 1992, to the
Executive Retirement Plan (incorporated by reference to
Exhibit 10.10 to Beverly Enterprises, Inc.'s Annual
Report on Form 10-K for the year ended December 31, 1992)
10.16* -- Amendment No. 4, effective as of January 1, 1993, to the
Executive Retirement Plan (incorporated by reference to
Exhibit 10.18 to Beverly Enterprises, Inc.'s Annual
Report on Form 10-K for the year ended December 31, 1994)
10.17* -- Amendment No. 5, effective as of September 29, 1994, to
the Executive Retirement Plan (incorporated by reference
to Exhibit 10.19 to Beverly Enterprises, Inc.'s Annual
Report on Form 10-K for the year ended December 31, 1994)
10.18* -- Amendment No. 6, effective as of January 1, 1996, to the
Executive Retirement Plan
10.19* -- Amendment No. 7, effective as of September 1, 1997, to
the Executive Retirement Plan
10.20* -- Amendment No. 8, dated as of December 11, 1997, to the
Executive Retirement Plan, changing its name to the
"Executive SavingsPlus Plan"
10.21* -- Beverly Enterprises, Inc.'s Supplemental Executive
Retirement Plan effective as of January 1, 1998
10.22* -- Beverly Enterprises, Inc.'s Executive Deferred
Compensation Plan (incorporated by reference to Exhibit
4.1 to Beverly Enterprises, Inc.'s Registration Statement
on Form S-8 filed on December 5, 1997 (File No.
333-41673))
10.23* -- Amendment No. 1 to the Executive Deferred Compensation
Plan made as of December 11, 1997
10.24* -- Amendment No. 2 to the Executive Deferred Compensation
Plan made as of December 11, 1997

EXHIBIT
NUMBER DESCRIPTION
------- -----------

10.25* -- Beverly Enterprises, Inc. Non-Employee Director Deferred
Compensation Plan (the "Directors' Plan")(incorporated by
reference to Exhibit 10.1 to Beverly Enterprises, Inc.'s
Quarterly Report on Form 10-Q for the quarter ended June
30, 1997)
10.26* -- Amendment No. 1, effective as of December 3, 1997, to the
Directors' Plan
10.27* -- Beverly Enterprises, Inc.'s Supplemental Long-Term
Disability Plan (incorporated by reference to Exhibit
10.24 to Beverly Enterprises, Inc.'s Annual Report on
Form 10-K for the year ended December 31, 1996)
10.28* -- Form of Indemnification Agreement between Beverly
Enterprises, Inc. and its officers, directors and certain
of its employees (incorporated by reference to Exhibit
19.14 to Beverly Enterprises, Inc.'s Quarterly Report on
Form 10-Q for the quarter ended June 30, 1987)
10.29* -- Form of request by Beverly Enterprises, Inc. to certain
of its officers or directors relating to indemnification
rights (incorporated by reference to Exhibit 19.5 to
Beverly Enterprises, Inc.'s Quarterly Report on Form 10-Q
for the quarter ended September 30, 1987)
10.30* -- Form of request by Beverly Enterprises, Inc. to certain
of its officers or employees relating to indemnification
rights (incorporated by reference to Exhibit 19.6 to
Beverly Enterprises, Inc.'s Quarterly Report on Form 10-Q
for the quarter ended September 30, 1987)
10.31* -- Agreement dated December 29, 1986 between Beverly
Enterprises, Inc. and Stephens Inc. (incorporated by
reference to Exhibit 10.20 to Beverly Enterprises, Inc.'s
Registration Statement on Form S-1 filed on January 18,
1990 (File No. 33-33052))
10.32* -- Employment Contract, made as of August 22, 1997, between
New Beverly Holdings, Inc. and David R. Banks
(incorporated by reference to Exhibit 10.17 to Amendment
No. 2 to Beverly Enterprises, Inc.'s Registration
Statement on Form S-1 filed on September 22, 1997 (File
No. 333-28521))
10.33* -- Form of Employment Contract, made as of August 22, 1997,
between New Beverly Holdings, Inc. and certain of its
officers (incorporated by reference to Exhibit 10.20 to
Amendment No. 2 to Beverly Enterprises, Inc.'s
Registration Statement on Form S-1 filed on September 22,
1997 (File No. 333-28521))
10.34 -- Master Lease Document -- General Terms and Conditions
dated December 30, 1985 for Leases between Beverly
California Corporation and various subsidiaries thereof
as lessees and Beverly Investment Properties, Inc. as
lessor (incorporated by reference to Exhibit 10.12 to
Beverly California Corporation's Annual Report on Form
10-K for the year ended December 31, 1985)
10.35 -- Agreement dated as of December 29, 1986 among Beverly
California Corporation, Beverly Enterprises -- Texas,
Inc., Stephens Inc. and Real Properties, Inc.
(incorporated by reference to Exhibit 28 to Beverly
California Corporation's Current Report on Form 8-K dated
December 30, 1986) and letter agreement dated as of July
31, 1987 among Beverly Enterprises, Inc., Beverly
California Corporation, Beverly Enterprises -- Texas,
Inc. and Stephens Inc. with reference thereto
(incorporated by reference to Exhibit 19.13 to Beverly
Enterprises, Inc.'s Quarterly Report on Form 10-Q for the
quarter ended June 30, 1987)

EXHIBIT
NUMBER DESCRIPTION
------- -----------

- ---------------

* Exhibits 10.1 through 10.33 are the management contracts, compensatory plans,
contracts and arrangements in which any director or named executive officer
participates.