1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

(MARK ONE)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
--- EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
--- SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM
TO
--- ---

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

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
--- ---

SHARES OF REGISTRANT'S COMMON STOCK, $.10 PAR VALUE, OUTSTANDING,
EXCLUSIVE OF TREASURY SHARES, AT JULY 30, 1999 -- 102,495,556

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BEVERLY ENTERPRISES, INC.

FORM 10-Q

JUNE 30, 1999

TABLE OF CONTENTS

PART I -- FINANCIAL INFORMATION PAGE

Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets ...................... 2
Condensed Consolidated Statements of Operations ............ 3
Condensed Consolidated Statements of Cash Flows ............ 4
Notes to Condensed Consolidated Financial Statements ....... 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ............................ 12

PART II -- OTHER INFORMATION

Item 1. Legal Proceedings ................................................. 20
Item 4. Submission of Matters to a Vote of Security Holders ............... 22
Item 6. Exhibits and Reports on Form 8-K .................................. 22

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PART I

BEVERLY ENTERPRISES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

JUNE 30, 1999 AND DECEMBER 31, 1998

(DOLLARS IN THOUSANDS)

JUNE 30, DECEMBER 31,
1999 1998
----------- -----------
(UNAUDITED) (NOTE)

ASSETS
Current assets:
Cash and cash equivalents .............................................. $ 8,169 $ 17,278
Accounts receivable - patient, less allowance for doubtful accounts:
1999 - $63,428; 1998 - $21,764 ...................................... 370,229 463,822
Accounts receivable - nonpatient, less allowance for doubtful accounts:
1999 - $691; 1998 - $441 ............................................ 24,161 85,585
Notes receivable ....................................................... 21,280 21,075
Operating supplies ..................................................... 32,577 32,133
Deferred income taxes .................................................. 45,827 56,512
Prepaid expenses and other ............................................. 16,247 19,565
----------- -----------
Total current assets ............................................. 518,490 695,970
Property and equipment, net of accumulated depreciation and amortization:
1999 - $733,862; 1998 - $694,322 ....................................... 1,109,340 1,120,315
Other assets:
Notes receivable, less allowance for doubtful notes:
1999 - $2,465; 1998 - $2,921 ........................................ 9,777 21,263
Designated funds ....................................................... 3,845 4,029
Goodwill, net .......................................................... 229,967 217,066
Other, net ............................................................. 119,395 101,868
----------- -----------
Total other assets ............................................... 362,984 344,226
----------- -----------
$ 1,990,814 $ 2,160,511
=========== ===========

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Accounts payable ....................................................... $ 92,543 $ 85,533
Accrued wages and related liabilities .................................. 93,227 96,092
Accrued interest ....................................................... 13,992 12,783
Other accrued liabilities .............................................. 150,587 134,975
Current portion of long-term debt ...................................... 52,791 27,773
----------- -----------
Total current liabilities ........................................ 403,140 357,156
Long-term debt ............................................................ 746,982 878,270
Deferred income taxes payable ............................................. 38,571 114,962
Other liabilities and deferred items ...................................... 136,202 33,917
Commitments and contingencies
Stockholders' equity:
Preferred stock, shares authorized: 25,000,000 ........................ -- --
Common stock, shares issued: 1999 - 110,380,455; 1998 - 110,275,714 ... 11,038 11,028
Additional paid-in capital ............................................. 876,084 876,383
Accumulated deficit..................................................... (114,732) (4,782)
Accumulated other comprehensive income ................................. 712 760
Treasury stock, at cost: 7,886,800 shares ............................. (107,183) (107,183)
----------- -----------
Total stockholders' equity ....................................... 665,919 776,206
----------- -----------
$ 1,990,814 $ 2,160,511
=========== ===========

NOTE: The balance sheet at December 31, 1998 has been derived from the audited
consolidated financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements.

See accompanying notes.

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BEVERLY ENTERPRISES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

THREE-MONTH AND SIX-MONTH PERIODS ENDED JUNE 30, 1999 AND 1998

(UNAUDITED)

(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

THREE MONTHS ENDED SIX MONTHS ENDED
---------------------------- ----------------------------
JUNE 30, JUNE 30,
1999 1998 1999 1998
----------- ----------- ----------- -----------

Net operating revenues ...................................... $ 632,751 $ 715,415 $ 1,266,352 $ 1,409,815
Interest income ............................................. 927 2,233 2,355 5,260
----------- ----------- ----------- -----------
Total revenues .................................... 633,678 717,648 1,268,707 1,415,075

Costs and expenses:
Operating and administrative:
Wages and related .................................... 392,297 437,135 787,966 856,222
Other ................................................ 178,832 207,620 362,699 417,800
Interest ................................................ 17,045 16,593 34,028 32,081
Depreciation and amortization ........................... 24,600 23,118 48,842 46,236
Special charges related to tentative settlements of
federal government investigations .................... 199,043 -- 199,043 --
Year 2000 remediation ................................... 4,263 1,379 7,249 1,834
Investigation costs ..................................... 1,499 -- 3,404 --
----------- ----------- ----------- -----------
Total costs and expenses .......................... 817,579 685,845 1,443,231 1,354,173
----------- ----------- ----------- -----------

Income (loss) before provision for (benefit from) income
taxes and cumulative effect of change in accounting for
start-up costs .......................................... (183,901) 31,803 (174,524) 60,902
Provision for (benefit from) income taxes ................... (68,044) 10,258 (64,574) 21,316
----------- ----------- ----------- -----------

Income (loss) before cumulative effect of change in
accounting for start-up costs ........................... (115,857) 21,545 (109,950) 39,586
Cumulative effect of change in accounting for start-up costs,
net of income tax benefit of $2,811 ..................... -- -- -- (4,415)
----------- ----------- ----------- -----------
Net income (loss) ........................................... $ (115,857) $ 21,545 $ (109,950) $ 35,171
=========== =========== =========== ===========

Income (loss) per share of common stock:
Basic:
Before cumulative effect of change in accounting
for start-up costs ................................ $ (1.13) $ 0.21 $ (1.07) $ 0.38
Cumulative effect of change in accounting for
start-up costs .................................... -- -- -- (0.04)
----------- ----------- ----------- -----------
Net income (loss) .................................... $ (1.13) $ 0.21 $ (1.07) $ 0.34
=========== =========== =========== ===========
Shares used to compute per share amounts ............. 102,494 103,682 102,487 104,838
=========== =========== =========== ===========

Diluted:
Before cumulative effect of change in accounting
for start-up costs ................................ $ (1.13) $ 0.20 $ (1.07) $ 0.37
Cumulative effect of change in accounting for
start-up costs .................................... -- -- -- (0.04)
----------- ----------- ----------- -----------
Net income (loss) .................................... $ (1.13) $ 0.20 $ (1.07) $ 0.33
=========== =========== =========== ===========
Shares used to compute per share amounts ............. 102,494 105,112 102,487 106,289
=========== =========== =========== ===========

See accompanying notes.

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BEVERLY ENTERPRISES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

SIX MONTHS ENDED JUNE 30, 1999 AND 1998

(UNAUDITED)

(IN THOUSANDS)

1999 1998
--------- ---------

Cash flows from operating activities:
Net income (loss) ..................................................................... $(109,950) $ 35,171
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization ....................................................... 48,842 46,236
Provision for reserves on patient, notes and other receivables, net ................. 11,176 9,495
Amortization of deferred financing costs ............................................ 1,066 1,207
Special charges related to tentative settlements of federal government
investigations .................................................................. 199,043 --
Cumulative effect of change in accounting for start-up costs ........................ -- 7,226
Losses (gains) on dispositions of facilities and other assets, net .................. 2,563 (15,160)
Deferred taxes ...................................................................... (66,929) 9,509
Net increase (decrease) in insurance related accounts ............................... 3,086 (19,959)
Changes in operating assets and liabilities, net of acquisitions and dispositions:
Accounts receivable - patient ..................................................... (28,178) (46,992)
Operating supplies ................................................................ (388) (391)
Prepaid expenses and other receivables ............................................ 953 1,690
Accounts payable and other accrued expenses ....................................... (3,645) 16,599
Income taxes payable .............................................................. 23,745 (6,350)
Other, net ........................................................................ (5,696) 311
--------- ---------
Total adjustments ............................................................... 185,638 3,421
--------- ---------
Net cash provided by operating activities ....................................... 75,688 38,592
Cash flows from investing activities:
Proceeds from dispositions of facilities and other assets ........................... 39,308 67,274
Payments for acquisitions, net of cash acquired ..................................... (4,160) (127,632)
Capital expenditures ................................................................ (51,439) (63,539)
Collections on notes receivable ..................................................... 10,982 764
Other, net .......................................................................... (13,807) (11,793)
--------- ---------

Net cash used for investing activities ......................................... (19,116) (134,926)
Cash flows from financing activities:
Revolver borrowings ................................................................. 678,000 571,000
Repayments of Revolver borrowings ................................................... (799,000) (476,000)
Proceeds from issuance of long-term debt ............................................ 125,820 --
Repayments of long-term debt ........................................................ (69,315) (16,286)
Purchase of common stock for treasury ............................................... -- (49,263)
Proceeds from exercise of stock options ............................................. 129 2,977
Deferred financing costs ............................................................ (1,293) (582)
Proceeds from designated funds, net ................................................. (22) 731
--------- ---------
Net cash provided by (used for) financing activities ............................ (65,681) 32,577
--------- ---------
Net decrease in cash and cash equivalents ................................................ (9,109) (63,757)
Cash and cash equivalents at beginning of period ......................................... 17,278 105,230
--------- ---------
Cash and cash equivalents at end of period ............................................... $ 8,169 $ 41,473
========= =========

Supplemental schedule of cash flow information:
Cash paid (received) during the period for:
Interest, net of amounts capitalized ................................................ $ 31,753 $ 31,464
Income tax payments (refunds), net .................................................. (21,390) 15,346

See accompanying notes.

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BEVERLY ENTERPRISES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 1999

(UNAUDITED)

(i) The condensed consolidated financial statements included herein
have been prepared by the Company, without audit, and include all adjustments
of a normal recurring nature which are, in the opinion of management, necessary
for a fair presentation of the results of operations for the three-month and
six-month periods ended June 30, 1999 and 1998 pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations, although the Company believes
that the disclosures in these condensed consolidated financial statements are
adequate to make the information presented not misleading. These condensed
consolidated financial statements should be read in conjunction with the
Company's consolidated financial statements and the notes thereto included in
the Company's 1998 Annual Report on Form 10-K filed with the Securities and
Exchange Commission. The results of operations for the three-month and
six-month periods ended June 30, 1999 are not necessarily indicative of the
results for a full year. Unless the context indicates otherwise, the Company
means Beverly Enterprises, Inc. and its consolidated subsidiaries.

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.

The following table sets forth the computation of basic and diluted
earnings per share from continuing operations for the three-month and six-month
periods ended June 30 (in thousands):

THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- --------------------------
1999 1998 1999 1998
------------ -------- ------------ --------

NUMERATOR:
Numerator for basic and diluted income (loss) per share
from continuing operations ............................. $ (115,857) $ 21,545 $ (109,950) $ 39,586
============ ======== ============ ========

DENOMINATOR:
Denominator for basic income (loss) per share - weighted
average shares ......................................... 102,494 103,682 102,487 104,838
Effect of dilutive securities:
Employee stock options ................................. -- 1,430 -- 1,451
------------ -------- ------------ --------

Denominator for diluted income (loss) per share - adjusted
weighted average shares and assumed conversions ........ 102,494 105,112 102,487 106,289
============ ======== ============ ========

Basic income (loss) per share ............................ $ (1.13) $ 0.21 $ (1.07) $ 0.38
============ ======== ============ ========

Diluted income (loss) per share .......................... $ (1.13) $ 0.20 $ (1.07) $ 0.37
============ ======== ============ ========

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BEVERLY ENTERPRISES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

JUNE 30, 1999

(UNAUDITED)

Comprehensive income (loss) includes net income (loss), as well as
charges and credits directly to stockholders' equity which are excluded from
net income (loss). The components of comprehensive income (loss), net of income
taxes, consist of the following for the three-month and six-month periods ended
June 30 (in thousands):

THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ ------------------------
1999 1998 1999 1998
--------- --------- --------- ---------

Net income (loss) .......................................... $(115,857) $ 21,545 $(109,950) $ 35,171
Unrealized gains (losses) on securities, net of income
taxes..................................................... 399 (269) (48) 177
--------- --------- --------- ---------
Comprehensive income (loss) ................................ $(115,458) $ 21,276 $(109,998) $ 35,348
========= ========= ========= =========

Accumulated other comprehensive income, net of income taxes, consists
of unrealized gains on securities of $712,000 and $760,000 at June 30, 1999 and
December 31, 1998, respectively.

Results of operations for the six months ended June 30, 1998 have been
restated for a cumulative effect adjustment of $4,415,000, net of income taxes,
or $0.04 per share, resulting from the adoption, effective January 1, 1998, of
Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities,"
which requires costs of start-up activities and organization costs to be
expensed as incurred.

Certain prior year amounts have been reclassified to conform with the
1999 presentation.

(ii) The provision for (benefit from) taxes on income (loss) before the
cumulative effect of a change in accounting for start-up costs for the
three-month and six-month periods ended June 30, 1999 and 1998 were based on
estimated annual effective tax rates of 37% and 38%, respectively. The Company's
estimated annual effective tax rates for 1999 and 1998 were different than the
federal statutory rate primarily due to the impact of state income taxes,
amortization of nondeductible goodwill and the benefit of certain tax credits.
The Company's net deferred tax assets at June 30, 1999 will be realized
primarily through the reversal of temporary taxable differences and future
taxable income. Accordingly, the Company does not believe that a deferred tax
valuation allowance is necessary at June 30, 1999. The provision for (benefit
from) taxes on income (loss) before the cumulative effect of a change in
accounting for start-up costs consists of the following for the three-month and
six-month periods ended June 30 (in thousands):

THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- ----------------------
1999 1998 1999 1998
-------- -------- -------- --------

Federal:
Current ..... $ (792) $ 5,276 $ -- $ 9,337
Deferred .... (61,237) 2,877 (59,212) 7,825

State:
Current ..... 1,918 1,392 2,355 2,470
Deferred .... (7,933) 713 (7,717) 1,684
-------- -------- -------- --------
$(68,044) $ 10,258 $(64,574) $ 21,316
======== ======== ======== ========

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BEVERLY ENTERPRISES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

JUNE 30, 1999

(UNAUDITED)

(iii) During the six months ended June 30, 1999, the Company purchased
three outpatient clinics, two home care centers, two nursing facilities (284
beds) and certain other assets for cash of approximately $3,500,000, acquired
debt of approximately $8,700,000 and closing and other costs of approximately
$1,600,000. The acquisitions of such facilities and other assets were accounted
for as purchases. Also during such period, the Company sold or terminated the
leases on seven nursing facilities (719 beds), one assisted living center (10
units), seven home care centers and certain other assets for cash proceeds of
approximately $4,400,000. The Company did not operate one of these nursing
facilities (86 beds) which was leased to another nursing home operator in a
prior year transaction. The Company recognized net pre-tax losses, which were
included in net operating revenues during the six months ended June 30, 1999,
of approximately $2,600,000 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.

(iv) In January 1999, the Company entered into a $65,000,000
promissory note at an annual interest rate of 6.50%, payable in three annual
installments beginning in January 2000 and maturing in January 2002. The
proceeds from this promissory note were used to pay down Revolver borrowings
and is secured by a surety bond. In addition, during the six months ended June
30, 1999, the Company entered into promissory notes totaling approximately
$10,820,000 in conjunction with the construction of certain nursing facilities.
Such debt instruments bear interest at rates ranging from 7.75% to 8.00%,
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 nursing facilities.

In June 1999, the Company refinanced its Medium Term Notes, increasing
its borrowings from $40,000,000 to $50,000,000. The Medium Term Notes are
collateralized by patient accounts receivable, which are sold by Beverly Health
and Rehabilitation Services, Inc. ("BHRS") (currently operating as Beverly
Healthcare), a wholly-owned subsidiary of the Company, to Beverly Funding
Corporation, a wholly-owned bankruptcy remote subsidiary of the Company. As a
result of this refinancing, the Company was required by Statement of Financial
Accounting Standards No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities," ("SFAS No. 125") to
deconsolidate Beverly Funding Corporation. SFAS No. 125 provides accounting and
reporting standards for sales, securitizations, and servicing of receivables and
other financial assets, secured borrowing and collateral transactions, and the
extinguishments of liabilities. It requires companies to recognize the financial
and servicing assets it controls and the liabilities it has incurred and to
deconsolidate financial assets when control has been surrendered in accordance
with the criteria provided in SFAS No. 125. Deconsolidation of Beverly Funding
Corporation, which had total assets of approximately $74,200,000, total
liabilities of approximately $55,800,000 and total stockholder's equity of
approximately $18,400,000 at June 30, 1999, caused a reduction in the Company's
accounts receivable-patient and long-term debt. In addition, the Company
recorded its ongoing investment in Beverly Funding Corporation as an increase in
other, net assets. During July 1999, the Company, through BHRS, sold $25,000,000
of patient accounts receivable and made a capital contribution of $5,000,000 to
Beverly Funding Corporation. The net proceeds of $20,000,000 are expected to be
used in conjunction with additional borrowings under its Revolver/Letter of
Credit Facility to make the initial $30,000,000 payment under the tentative
civil and criminal settlements (see Notes vi and vii).

(v) 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
provides revised disclosure guidelines for segments of a company based on a
management approach to defining operating segments.

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BEVERLY ENTERPRISES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

JUNE 30, 1999

(UNAUDITED)

The following table summarizes certain information for each of the
Company's operating segments (in thousands):

BEVERLY BEVERLY
BEVERLY CARE SPECIALTY
HEALTHCARE ALLIANCE HOSPITALS(1) ALL OTHER(2) TOTALS
----------- ----------- ----------- ----------- -----------

Three months ended June 30, 1999

Revenues from external customers ... $ 567,092 $ 64,638 $ -- $ 1,021 $ 632,751
Intercompany revenues .............. -- 34,951 -- 2,939 37,890
Interest income .................... 37 15 -- 875 927
Interest expense ................... 6,701 120 -- 10,224 17,045
Depreciation and amortization ...... 19,742 3,354 -- 1,504 24,600
Pre-tax income (loss) .............. 27,874 9,701 -- (221,476) (183,901)
Total assets ....................... 1,532,574 326,242 -- 131,998 1,990,814
Capital expenditures ............... 20,855 2,717 -- 2,694 26,266

Three months ended June 30, 1998

Revenues from external customers ... $ 632,058 $ 44,525 $ 32,544 $ 6,288 $ 715,415
Intercompany revenues .............. -- 3,496 414 2,698 6,608
Interest income .................... 75 -- 3 2,155 2,233
Interest expense ................... 7,489 12 45 9,047 16,593
Depreciation and amortization ...... 19,370 1,882 809 1,057 23,118
Pre-tax income (loss) .............. 47,728 2,095 (783) (17,237) 31,803
Total assets ....................... 1,517,649 197,049 -- 425,366 2,140,064
Capital expenditures ............... 20,208 3,098 3,160 5,941 32,407

Six months ended June 30, 1999

Revenues from external customers ... $ 1,135,285 $ 129,209 $ -- $ 1,858 $ 1,266,352
Intercompany revenues .............. -- 70,928 -- 5,616 76,544
Interest income .................... 108 30 -- 2,217 2,355
Interest expense ................... 13,313 227 -- 20,488 34,028
Depreciation and amortization ...... 39,483 6,405 -- 2,954 48,842
Pre-tax income (loss) .............. 58,067 11,969 -- (244,560) (174,524)
Total assets ....................... 1,532,574 326,242 -- 131,998 1,990,814
Capital expenditures ............... 39,501 6,282 -- 5,656 51,439

Six months ended June 30, 1998

Revenues from external customers ... $ 1,262,211 $ 78,174 $ 61,775 $ 7,655 $ 1,409,815
Intercompany revenues .............. -- 7,075 539 5,224 12,838
Interest income .................... 157 -- 3 5,100 5,260
Interest expense ................... 15,049 15 93 16,924 32,081
Depreciation and amortization ...... 38,625 3,532 1,578 2,501 46,236
Pre-tax income (loss) .............. 86,806 4,636 (670) (29,870) 60,902
Total assets ....................... 1,517,649 197,049 -- 425,366 2,140,064
Capital expenditures ............... 40,781 5,213 4,937 12,608 63,539

- -----------
(1)The Company completed the sale of Beverly Specialty Hospitals in June 1998.
(2) All Other consists of the operations of the Company's corporate headquarters
and related overhead, as well as certain other non-operating costs and expenses.

8
10
BEVERLY ENTERPRISES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

JUNE 30, 1999

(UNAUDITED)

(vi) The Company has been the subject of a federal government
investigation relating to the allocation to the Medicare program of certain
nursing labor costs in its skilled nursing facilities from 1990 to 1998. The
investigation has been conducted by the Office of Inspector General of the
Department of Health and Human Services and by the U.S. Department of Justice.
In addition, a federal grand jury in San Francisco has investigated business
practices which are the subject of the above civil investigation. In addition,
the Company's current Medicare fiscal intermediary, Blue Cross of California, is
examining cost reports of the Company's facilities with respect to the areas
that are the focus of the government investigation.

In late July 1999, the Company reached a tentative understanding with
the U.S. Department of Justice to settle the civil and criminal aspects of all
investigations by the federal government and its fiscal intermediary into the
allocation of nursing labor hours to the Medicare program from 1990 to 1998 (the
"Allocation Investigations"). The proposed civil and criminal settlements are
subject to completion and execution of definitive settlement documents,
satisfaction of certain conditions and court approval.

If the tentative civil settlement is consummated, the Company would be
obligated to reimburse the federal government $170,000,000 as follows: (i)
$25,000,000 within 30 days of signing the definitive civil settlement agreement;
and (ii) $145,000,000 to be withheld from the Company's biweekly Medicare
periodic interim payments in equal installments over eight years. In addition,
the Company would agree to resubmit certain Medicare filings to reflect reduced
direct labor costs.

If the tentative criminal settlement is consummated, a subsidiary of
the Company would pay a fine of $5,000,000. The effect of this settlement would
be to exclude such subsidiary's nursing facilities from the Medicare and
Medicaid programs. It is expected that this will affect no more than ten nursing
facilities.

On July 6, 1999, an amended complaint was filed by the plaintiffs in
the previously disclosed purported class action lawsuit pending against the
Company and certain of its officers in the United States District Court for the
Eastern District of Arkansas (the "Class Action"). The amended complaint asserts
claims under Section 10(b) (including Rule 10b-5 promulgated thereunder) and
under Section 20 of the Securities Exchange Act of 1934 arising from practices
that are the subject of the Allocation Investigations. Due to the preliminary
state of the Class Action and the fact the amended complaint does not allege
damages with any specificity, the Company is unable at this time to assess the
probable outcome of the Class Action or the materiality of the risk of loss.
However, the Company believes that it acted lawfully with respect to plaintiff
investors and will vigorously defend the Class Action.

In addition, since July 29, 1999, five derivative lawsuits have been
filed in the state courts of Arkansas, California and Delaware (Norman M. Lyons
v. David R. Banks, et. al., Case No. OT94-4041, filed in the Chancery Court of
Pulaski County, Arkansas (4th Division) filed on or about July 29, 1999; James
L. Laurita v. David R. Banks, et. al., Case No. 17348NC, filed in the Delaware
Chancery Court on or about August 2, 1999; Elles Trading Company v. David R.
Banks, et. al., filed in the Superior Court for San Francisco County, California
on or about August 4, 1999; Kenneth Abbey v. David R. Banks, et. al., Case No.
17352NC filed in the Delaware Chancery Court on or about August 4, 1999; Alan
Friedman v. David R. Banks, et. al., Case No. 17355NC filed in the Delaware
Chancery Court on or about August 9, 1999 - collectively, the "Derivative
Lawsuits"). The Derivative Lawsuits, which each name the Company as a nominal
defendant, allege claims for breach of fiduciary duties to the Company and its
stockholders arising out of the Company's alleged exposure to loss due to the
Class Action and the Allocation Investigations.

9
11

BEVERLY ENTERPRISES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

JUNE 30, 1999

(UNAUDITED)

On March 4, 1998, a jury in California returned a verdict of
$95,100,000 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 $94,700,000 in
punitive damages. At a post-trial hearing on June 3, 1998, the trial judge
reduced the compensatory damages to $125,000 and reduced the punitive damages
to $3,000,000. The Company believes that these reduced damages are excessive
and has appealed on this basis. The plaintiff has cross-appealed. The Company
intends to aggressively pursue all appellate remedies available.

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 that are generally not covered by insurance. The Company
does not believe that the ultimate resolution of such other matters will have a
material adverse effect on the Company's consolidated financial position or
results of operations.

(vii) In late July 1999, the Company reached a tentative understanding
with the U.S. Department of Justice to settle the Allocation Investigations (See
Note vi). As a result, during the second quarter ended June 30, 1999, the
Company recorded a special pre-tax charge of approximately $199,000,000
($125,400,000, net of income taxes, or $1.22 per share diluted) which includes:
(i) provisions totaling approximately $128,800,000 representing the net present
value of the tentative civil and criminal settlements; (ii) impairment losses of
approximately $17,000,000 on certain nursing facilities which would be excluded
from the Medicare and Medicaid programs in conjunction with the tentative
criminal settlement; (iii) approximately $39,000,000 for certain prior year cost
report related items affected by the tentative settlements; (iv) approximately
$3,100,000 of debt issuance and refinancing costs related to various bank debt
modifications as a result of the tentative settlements; and (v) approximately
$11,100,000 for other investigation and settlement related costs.

10
12

BEVERLY ENTERPRISES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

JUNE 30, 1999

(UNAUDITED)

Effective June 30, 1999, the Company entered into a Waiver Agreement
with the banks party to the Credit Agreement covering the Company's $375,000,000
Revolver/Letter of Credit Facility, and waiver agreements with certain of its
other lenders covering debt of approximately $184,000,000 (collectively, the
"waivers"). Such waivers were required since recording of the special charges
related to the tentative settlements, as discussed above, would have resulted in
the Company's noncompliance with certain financial covenants contained in those
debt agreements. The waivers will remain in effect until October 15, 1999. The
waivers restrict the amount of the Company's total debt to $1,000,000,000 during
the waiver period. At June 30, 1999, the Company had total debt of approximately
$799,800,000. The Company, its banks and other lenders expect to renegotiate
such debt agreements before the expiration date of the waivers; however, no
assurance can be given that they will be able to do so.

11
13

BEVERLY ENTERPRISES, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

JUNE 30, 1999

(UNAUDITED)

GENERAL

FORWARD LOOKING STATEMENTS

This Quarterly Report on Form 10-Q, and other information provided by
the Company from time to time, contains certain "forward-looking" statements as
that term is defined by the Private Securities Litigation Reform Act of 1995.
All statements regarding the Company's expected future financial position,
results of operations, cash flows, continued performance improvements, ability
to settle the civil and criminal aspects of the federal government
investigations, ability to service and refinance its debt obligations, ability
to finance growth opportunities, ability to respond to changes in government
regulations, and similar statements including, without limitation, those
containing words such as "believes," "anticipates," "expects," "intends,"
"estimates," "plans," and other similar expressions are forward-looking
statements. 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 those projected or contemplated in the forward-looking
statements as a result of, but not limited to, the following factors: national
and local economic conditions; the effect of government regulations and changes
in regulations governing the healthcare industry, including the Company's
compliance with such regulations; changes in Medicare and Medicaid payment
levels; liabilities and other claims asserted against the Company, including the
final settlements of the criminal and civil aspects of the federal government
investigations and the outcome of the Derivative Lawsuits (see "Part II, Item 1.
Legal Proceedings"); the ability to renegotiate its existing credit agreements
and other debt affected by the tentative settlements; the ability to attract and
retain qualified personnel; the availability and terms of capital to fund
acquisitions and capital improvements; the competitive environment in which the
Company operates; demographic changes; the ability of the Company and its
significant vendors, suppliers and payors to timely locate and correct all
relevant computer codes and identify and remediate date-sensitive embedded chips
prior to the year 2000; and the availability and cost of labor and materials.
Given these risks and uncertainties, the Company can give no assurances that
these forward-looking statements will, in fact, transpire and, therefore,
cautions investors not to place undue reliance on them.

Investors also should refer to Item 1. Business - Governmental
Regulation and Reimbursement in the Company's Form 10-K for the year ended
December 31, 1998 for a discussion of various governmental regulations relating
to the healthcare industry and various risk factors inherent in them.

YEAR 2000 REMEDIATION

GENERAL

Computer programs and embedded chips that utilize a two digit year in
their processing logic may interpret the year "00" as the year 1900 rather than
the year 2000. This could result in 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. Through the year 2000 project (the "Y2K Project"), the Company is
addressing its own processing logic issues, as well as those of third parties,
which may impact the Company.

In 1996, the Company began a major systems initiative to upgrade or
replace all of its integrated financial application software to facilitate the
adoption of a new standard chart of accounts. As part of that major initiative,
the Company took the necessary steps to upgrade or replace the applications
with year 2000 compliant releases of the software whenever possible. For those
purchased software applications where the year 2000 release was not available
at that time, the upgrades to the compliant releases are being addressed as
part of the Y2K Project. The Company has not postponed any of its other
significant information technology projects as a result of the Y2K Project.

Y2K PROJECT

The Company's Y2K Project is divided into four major components:
technology infrastructure; applications software; third party vendors,
suppliers and major customers; and business unit operating equipment. The
phases of the Y2K Project that are common to all components include: inventory
of date-dependent hardware, software, and operating equipment; assessment of
identified items to determine current year 2000 compliance status; repair or
replacement of material non-compliant items; testing of material items for
compliance; and development of contingency plans for each operating unit.

12
14

BEVERLY ENTERPRISES, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

JUNE 30, 1999

(UNAUDITED)

The technology infrastructure component and the applications software
component, together, comprise all of the Company's hardware and systems
software, as well as all electronic interfaces with external parties. The
testing phase for these components is divided into two distinct types of
testing, each with its own timetable. The initial phase of year 2000 testing
consists of remediating, upgrading, or replacing hardware and software. Upon
successful completion of this phase of testing, the application is moved back
into the production environment. At that time, the second phase of year 2000
testing is done in a parallel operating environment in which the applications
are tested using year 2000 dates. The remediation, upgrade, replacement, and
initial testing of all mission critical mainframe hardware and software was
substantially complete as of June 30, 1999. Trans-century compliance testing
began during the first quarter of 1999 and is expected to continue throughout
most of 1999.

The third party vendors, suppliers and major customers component of
the Y2K Project includes the process of identifying and prioritizing critical
vendors, suppliers and customers, and communicating with them about their plans
and progress in addressing the year 2000 problem. The Company has completed the
inventory phase of this component of the Y2K Project and has initiated formal
communications with all of the vendors, suppliers, and customers identified as
critical to the Company's operations. During the fourth quarter of 1998,
follow-up inquiries were initiated with any critical third parties that did not
respond to the first communication, and detailed evaluations of the responses
for the most critical third parties were initiated. Based on the data obtained
and the detailed evaluations performed, contingency planning began in the
fourth quarter of 1998 and is expected to be completed by the end of the third
quarter of 1999. The Company has no means of ensuring that third parties will be
year 2000 ready. The inability of third parties to complete their year 2000
resolution process in a timely manner could materially impact the Company. The
Company cannot determine the effect of non-compliance by third parties. Due to
these and other uncertainties, as part of the Company's contingency planning
process, the Company is taking appropriate measures to ensure that an
uninterrupted supply of critical products is available into the new century,
including additional monitoring of the Company's critical third party vendors
and suppliers, replacing vendors and suppliers where necessary and increasing
inventories when possible.

For the business unit operating equipment component of the Y2K
Project, the inventories of each individual operating unit were completed
during the third quarter of 1998, and the data has been compiled and summarized
by major operating category, including: medical devices and equipment;
environmental systems; security systems; telecommunication and office
equipment. The Company is utilizing external resources to test critical
equipment impacted by the year 2000 problem, retrofit or replace equipment
where necessary, and certify year 2000 compliance of all material
date-sensitive equipment. The Company estimates that all such remediation and
testing will be completed by the third quarter of 1999.

COSTS

The Company has, and will continue to, utilize both internal and
external resources to reprogram or replace, test, and implement the software
and operating equipment for year 2000 modifications. The total cost of the
Company's Y2K Project is estimated at approximately $41,100,000 and is being
funded through operating cash flows. The total amount expended on the Y2K
Project through June 30, 1999 was approximately $18,500,000 ($17,000,000
expensed and $1,500,000 capitalized for new systems and equipment), related to
the activities completed to date for all components and phases of the Y2K
Project. Of the total remaining Y2K Project costs, $12,900,000 is attributable
to the purchase of new hardware, software and operating equipment, which will
be capitalized. The remaining $9,700,000 relates to remediation of hardware,
software, and operating equipment, and will be expensed as incurred.

13
15
BEVERLY ENTERPRISES, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

JUNE 30, 1999

(UNAUDITED)

RISKS

The failure to correct a material year 2000 problem could result in
significant disruptions in, or failures of, normal business activities. Due to
the general uncertainty inherent in the year 2000 problem, due in part to the
uncertainty of the year 2000 readiness of third party vendors, suppliers and
customers, the Company is unable to determine at this time if it will be
impacted by year 2000 disruptions or failures, or whether the consequences of
such year 2000 disruptions or failures will have a material impact on the
Company's consolidated financial position, results of operations or cash flows.
The Company believes that, with the completion of all phases of each component
of the Y2K Project as scheduled, the possibility of significant disruptions of
normal operations should be significantly reduced. However, in the event that
the Company fails to complete the remaining phases of any component of the Y2K
Project, a possible worst case scenario might be that the Company would be
unable to provide uninterrupted service to its patients, invoice customers, or
collect payments. In addition, due to the Company's dependence on Medicare and
Medicaid revenue sources, disruptions in the processing and payment of Medicare
or Medicaid claims could also materially adversely affect the Company. The
General Accounting Office has reported that the Health Care Financing
Administration, which runs Medicare, is behind schedule in taking steps to deal
with the year 2000 issue, and that it is highly unlikely that all of the
Medicare systems will be compliant in time to ensure the delivery of
uninterrupted benefits and services into the year 2000. The Company does not
know at this time whether there will in fact be a disruption of Medicare or
Medicaid reimbursements and is, therefore, unable to determine the impact on
the Company, its operations or cash flows. In addition, the Company could be
subject to litigation for equipment shutdown or failure to properly date
business records. The amount of potential liability and lost revenue cannot be
reasonably estimated at this time.

The Company is in the process of developing contingency plans for
certain critical applications and will continue development and enhancement of
such plans for all critical business functions throughout 1999. These
contingency plans involve, among other actions, manual workarounds, increasing
inventories and staffing adjustments.

The dates on which the Company believes the Y2K Project will be
completed are based on management's best estimates, which were derived
utilizing assumptions of future events, including the continued availability of
certain resources, third party modification plans, and other factors. However,
there can be no assurance that these estimates will be achieved, or that there
will not be a delay in, or increased costs associated with, the implementation
of the Y2K Project. Specific factors that could cause differences between the
estimates and actual results include, but are not limited to, the availability
and cost of personnel trained in these areas, the ability to locate and correct
all relevant computer codes, timely responses to and corrections by third
parties, and similar uncertainties.

OPERATING RESULTS

SECOND QUARTER 1999 COMPARED TO SECOND QUARTER 1998

RESULTS OF OPERATIONS

Net loss was $115,857,000 for the second quarter of 1999, as compared
to net income of $21,545,000 for the same period in 1998. Net loss for the
second quarter of 1999 included a special pre-tax charge of approximately
$199,000,000 related to the tentative settlements of the Allocation
Investigations (as discussed herein). The Company had an estimated annual
effective tax rate of 37% and 38% in 1999 and 1998, respectively. The Company's
estimated annual effective tax rates for 1999 and 1998 were different than the
federal statutory rate primarily due to the impact of state income taxes,
amortization of nondeductible goodwill and the benefit of certain tax credits.
The Company's net deferred tax assets at June 30, 1999 will be realized
primarily through the reversal of temporary taxable differences and future
taxable income. Accordingly, the Company does not believe that a deferred tax
valuation allowance is necessary at June 30, 1999.

In late July 1999, the Company reached a tentative understanding with
the U.S. Department of Justice to settle the civil and criminal aspects of all
investigations by the federal government and its fiscal intermediary into the
allocation of nursing labor hours to the Medicare program from 1990 to 1998 (the
"Allocation Investigations") (See "Part II, Item 1. Legal Proceedings"). As a
result, during the second quarter ended June 30, 1999, the Company recorded a
special pre-tax charge of approximately $199,000,000 ($125,400,000, net of tax,
or $1.22 per share diluted) which includes: (i) provisions totaling
approximately $128,800,000 representing the net present value of the tentative
civil and

14
16
BEVERLY ENTERPRISES, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

JUNE 30, 1999

(UNAUDITED)

criminal settlements; (ii) impairment losses of approximately $17,000,000 on
certain nursing facilities which would be excluded from the Medicare and
Medicaid programs in conjunction with the tentative criminal settlement; (iii)
approximately $39,000,000 for certain prior year cost report related items
affected by the tentative settlements; (iv) approximately $3,100,000 of debt
issuance and refinancing costs related to various bank debt modifications as a
result of the tentative settlements; and (v) approximately $11,100,000 for other
investigation and settlement related costs.

Effective June 30, 1999, the Company entered into a Waiver Agreement
with the banks party to the Credit Agreement covering the Company's $375,000,000
Revolver/Letter of Credit Facility and waiver agreements with certain of its
other lenders covering debt of approximately $184,000,000 (collectively, the
"waivers"). Such waivers were required since recording of the special charges
related to the tentative settlements, as discussed above, would have resulted in
the Company's noncompliance with certain financial covenants contained in those
debt agreements. The waivers will remain in effect until October 15, 1999. The
waivers restrict the amount of the Company's total debt to $1,000,000,000 during
the waiver period. At June 30, 1999, the Company had total debt of approximately
$799,800,000. The Company, its banks and other lenders expect to renegotiate
such debt agreements before the expiration date of the waivers; however, no
assurance can be given that they will be able to do so.

It is anticipated that the tentative civil settlement will include a
$170,000,000 non-interest bearing obligation due as follows: (i) $25,000,000 due
within 30 days of signing the final civil settlement documents; and (ii) the
$145,000,000 balance due over an eight-year period in the form of reductions in
the Company's future biweekly Medicare periodic interim payments. Because this
obligation will not bear interest, the Company is required to impute interest
over the eight-year period. This imputed interest expense, along with an
increased rate of interest anticipated upon refinancing of the Company's
variable rate bank debt, will adversely impact the Company's future operating
results. In addition, it is anticipated that a subsidiary of the Company will
pay a fine of approximately $5,000,000 in connection with the criminal
settlement. The effect of this settlement would be to exclude such subsidiary's
nursing facilities from the Medicare and Medicaid programs. It is expected that
this will affect no more than ten nursing facilities.

If, prior to January 1, 1999, the tentative settlement obligations and
related items had been finalized and recorded, the Company's bank debt had been
refinanced and the Company had closed or sold the facilities that are expected
to be impacted by the tentative criminal settlement, the Company's net income
would have been reduced by approximately $3,500,000, or $.03 per share diluted,
for the quarter ended June 30, 1999, and approximately $6,600,000, or $.06 per
share diluted, for the six months ended June 30, 1999.

NET OPERATING REVENUES

The Company reported net operating revenues of $632,751,000 during the
second quarter of 1999 compared to $715,415,000 for the same period in 1998.
Approximately 90% and 88% of the Company's total net operating revenues for the
quarters ended June 30, 1999 and 1998, respectively, were derived from services
provided by the Company's Beverly Healthcare segment. The decrease in net
operating revenues of approximately $82,700,000 for the second quarter of 1999,
as compared to the same period in 1998, consists of the following: a decrease of
approximately $68,000,000 due to the disposition of, or lease terminations on,
seven nursing facilities, one assisted living center and seven home care centers
in 1999 and 26 nursing facilities and American Transitional Hospitals, Inc.
("ATH"), which operated as Beverly Specialty Hospitals, in 1998; a decrease of
approximately $55,300,000 due to facilities which the Company operated during
each of the quarters ended June 30, 1999 and 1998 ("same facility operations");
partially offset by an increase of approximately $40,600,000 due to the
acquisitions of nursing facilities and outpatient and home care businesses
during 1999 and 1998.

The decrease in net operating revenues of approximately $68,000,000 for
the second quarter of 1999, as compared to the same period in 1998, resulting
from dispositions and lease terminations that occurred during the six months
ended June 30, 1999 and the year ended December 31, 1998 are described below.
During the six months ended June 30, 1999, the Company sold or terminated the
leases on seven nursing facilities (719 beds), one assisted living center (10
units), seven home care centers and certain other assets. The Company did not
operate one of these nursing facilities (86 beds) which was leased to another
nursing home operator in a prior year transaction. The Company recognized net
pre-tax losses, which were included

15
17

BEVERLY ENTERPRISES, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

JUNE 30, 1999

(UNAUDITED)

in net operating revenues during the six months ended June 30, 1999, of
approximately $2,600,000 as a result of these dispositions. During the year
ended December 31, 1998, the Company sold or terminated the leases on 26
nursing facilities (3,203 beds) and certain other assets. The Company did not
operate seven of these nursing facilities (893 beds) which were leased to other
nursing home operators in prior year transactions.

In June 1998, the Company completed the sale of its ATH subsidiary to
Select Medical Corporation. Prior to the sale, ATH operated 15 transitional
hospitals (743 beds) in eight states which addressed the needs of patients
requiring intense therapy regimens, but not necessarily the breadth of services
provided within traditional acute care hospitals.

The decrease in net operating revenues of approximately $55,300,000 for same
facility operations for the second quarter of 1999, as compared to the same
period in 1998, was due to the following: approximately $28,300,000 decrease in
ancillary revenues and approximately $13,400,000 decrease in Medicare room and
board rates primarily due to the impact of the Medicare prospective payment
system ("PPS") and other provisions of the Balanced Budget Act of 1997;
approximately $13,800,000 decrease due to a shift in the Company's patient mix;
approximately $12,400,000 decrease due to a decline in same facility occupancy;
and approximately $4,700,000 due to various other items; partially offset by an
increase of approximately $17,300,000 due primarily to increases in Medicaid and
private room and board rates. The Company's same facility occupancy was 87.2%
for the second quarter of 1999, as compared to 88.7% for the same period in
1998. The Company is in the process of implementing a series of initiatives to
improve its occupancy levels; however, it is still too early to determine the
effectiveness of these initiatives. No assurance can be given that these
initiatives will in fact improve the Company's occupancy levels. The Company's
Medicare, private and Medicaid census for same facility operations was 9%, 19%
and 71%, respectively, for the second quarter of 1999, as compared to 11%, 20%
and 68%, respectively, for the same period in 1998.

The increase in net operating revenues of approximately $40,600,000
for the second quarter of 1999, as compared to the same period in 1998,
resulting from acquisitions which occurred during the six months ended June 30,
1999 and the year ended December 31, 1998 are described below. During the six
months ended June 30, 1999, the Company purchased three outpatient clinics, two
home care centers, two nursing facilities (284 beds) and certain other assets.
During the year ended December 31, 1998, the Company purchased 111 outpatient
clinics, 50 home care centers, eight nursing facilities (823 beds), one
assisted living center (48 units), two previously leased nursing facilities
(228 beds) and certain other assets.

OPERATING AND ADMINISTRATIVE EXPENSES

The Company reported operating and administrative expenses of
$571,129,000 during the second quarter of 1999 compared to $644,755,000 for the
same period in 1998. The decrease of approximately $73,600,000 consists of the
following: a decrease of approximately $59,600,000 due to dispositions; a
decrease of approximately $50,600,000 due to same facility operations;
partially offset by an increase of approximately $36,600,000 due to
acquisitions. (See above for a discussion of dispositions and acquisitions.)

The decrease in operating and administrative expenses of approximately
$50,600,000 for same facility operations for the second quarter of 1999, as
compared to the same period in 1998, was due primarily to a decline in the
Company's Medicare census, as well as a decline in same facility occupancy, and
consists of the following: approximately $26,500,000 due to a decrease in wages
and related expenses; approximately $14,500,000 due to a decrease in contracted
therapy expenses; and approximately $9,600,000 due primarily to decreases in
purchased ancillary products, nursing supplies and other variable costs.

INTEREST EXPENSE, NET

Interest income decreased to $927,000 for the second quarter of 1999,
as compared to $2,233,000 for the same period in 1998 primarily due to a
decrease in invested funds resulting from the sale of securities in conjunction
with a loss portfolio transfer transaction during the fourth quarter of 1998.
Interest expense increased to $17,045,000 for the second quarter of 1999, as
compared to $16,593,000 for the same period in 1998 primarily due to an increase
in net borrowings under the Revolver/Letter of Credit Facility during the second
quarter of 1999 as compared to the same period in 1998.

16
18

BEVERLY ENTERPRISES, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

JUNE 30, 1999

(UNAUDITED)

DEPRECIATION AND AMORTIZATION

Depreciation and amortization expense increased to $24,600,000 for the
second quarter of 1999, as compared to $23,118,000 for the same period in 1998.
Such increase was affected by the following: approximately $3,200,000 increase
due to acquisitions, as well as capital additions and improvements; partially
offset by a decrease of approximately $1,700,000 due to dispositions of, or
lease terminations on, certain nursing facilities and ATH.

SIX MONTHS 1999 COMPARED TO SIX MONTHS 1998

RESULTS OF OPERATIONS

Net loss was $109,950,000 for the six months ended June 30, 1999, as
compared to net income of $35,171,000 for the same period in 1998. Net loss for
the six months ended June 30, 1999 included a special pre-tax charge of
approximately $199,000,000 related to the tentative settlements of the
Allocation Investigations (as discussed above). Results of operations for the
six months ended June 30, 1998 have been restated for a cumulative effect
adjustment of $4,415,000, net of income taxes, resulting from the adoption,
effective January 1, 1998, of Statement of Position 98-5, "Reporting on the
Costs of Start-Up Activities," which requires costs of start-up activities and
organization costs to be expensed as incurred.

NET OPERATING REVENUES

The Company reported net operating revenues of $1,266,352,000 during
the six months ended June 30, 1999 compared to $1,409,815,000 for the same
period in 1998. Approximately 90% of the Company's total net operating revenues
for the six months ended June 30, 1999 and 1998 were derived from services
provided by the Company's Beverly Healthcare segment. The decrease in net
operating revenues of approximately $143,500,000 for the six months ended June
30, 1999, as compared to the same period in 1998, consists of the following: a
decrease of approximately $129,500,000 due to dispositions; a decrease of
approximately $101,000,000 due to facilities which the Company operated during
each of the six months ended June 30, 1999 and 1998 ("same facility
operations"); partially offset by an increase of approximately $87,000,000 due
to acquisitions. (See above for a discussion of dispositions and acquisitions.)

The decrease in net operating revenues of approximately $101,000,000
for same facility operations for the six months ended June 30, 1999, as compared
to the same period in 1998, was due to the following: approximately $47,900,000
decrease in ancillary revenues and approximately $23,300,000 decrease in
Medicare room and board rates primarily due to the impact of PPS and other
provisions of the Balanced Budget Act of 1997; approximately $37,100,000
decrease due to a shift in the Company's patient mix; approximately $22,900,000
decrease due to a decline in same facility occupancy; and approximately
$3,900,000 due to various other items; partially offset by an increase of
approximately $34,100,000 due primarily to increases in Medicaid and private
room and board rates. The Company's same facility occupancy was 87.7% for the
six months ended June 30, 1999, as compared to 89.1% for the same period in
1998. The Company is in the process of implementing a series of initiatives to
improve its occupancy levels; however, it is still too early to determine the
effectiveness of these initiatives. No assurance can be given that these
initiatives will in fact improve the Company's occupancy levels. The Company's
Medicare, private and Medicaid census for same facility operations was 9%, 20%
and 70%, respectively, for the six months ended June 30, 1999, as compared to
11%, 20% and 68%, respectively, for the same period in 1998.

OPERATING AND ADMINISTRATIVE EXPENSES

The Company reported operating and administrative expenses of
$1,150,665,000 during the six months ended June 30, 1999 compared to
$1,274,022,000 for the same period in 1998. The decrease of approximately
$123,400,000 consists of the following: a decrease of approximately
$111,600,000 due to dispositions; a decrease of approximately $91,300,000 due
to same facility operations; partially offset by an increase of approximately
$79,500,000 due to acquisitions. (See above for a discussion of dispositions
and acquisitions.)

17
19

BEVERLY ENTERPRISES, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

JUNE 30, 1999

(UNAUDITED)

The decrease in operating and administrative expenses of approximately
$91,300,000 for same facility operations for the six months ended June 30,
1999, as compared to the same period in 1998, was due primarily to a decline in
the Company's Medicare census, as well as a decline in same facility occupancy,
and consists of the following: approximately $41,500,000 due to a decrease in
wages and related expenses; approximately $31,900,000 due to a decrease in
contracted therapy expenses; and approximately $17,900,000 due primarily to
decreases in purchased ancillary products, nursing supplies and other variable
costs.

INTEREST EXPENSE, NET

Interest income decreased to $2,355,000 for the six months ended June
30, 1999, as compared to $5,260,000 for the same period in 1998 primarily due to
a decrease in invested funds resulting from the sale of securities in
conjunction with a loss portfolio transfer transaction during the fourth quarter
of 1998. Interest expense increased to $34,028,000 for the six months ended June
30, 1999, as compared to $32,081,000 for the same period in 1998 primarily due
to an increase in net borrowings under the Revolver/Letter of Credit Facility
during the six months ended June 30, 1999 as compared to the same period in
1998.

DEPRECIATION AND AMORTIZATION

Depreciation and amortization expense increased to $48,842,000 for the
six months ended June 30, 1999, as compared to $46,236,000 for the same period
in 1998. Such increase was affected by the following: approximately $6,000,000
increase due to acquisitions, as well as capital additions and improvements;
partially offset by a decrease of approximately $3,400,000 due to dispositions
of, or lease terminations on, certain nursing facilities and ATH.

LIQUIDITY AND CAPITAL RESOURCES

At June 30, 1999, the Company had approximately $8,200,000 in cash and
cash equivalents, approximately $115,400,000 of net working capital and
approximately $191,600,000 of unused commitments under its Revolver/Letter of
Credit Facility.

Net cash provided by operating activities for the six months ended June
30, 1999 was approximately $75,700,000, an increase of approximately $37,100,000
from the prior year primarily as a result of certain income tax refunds received
during the six months ended June 30, 1999. Net cash used for investing and
financing activities were approximately $19,100,000 and $65,700,000,
respectively, for the six months ended June 30, 1999. The Company received net
cash proceeds of approximately$126,000,000 from the issuance of long-term debt
and approximately $39,300,000 from the dispositions of facilities and other
assets. Such net cash proceeds, along with cash generated from operations and
cash on hand, were used to repay approximately $121,000,000 of net borrowings
under its Revolver/Letter of Credit Facility, to repay approximately $69,300,000
of long-term debt, to fund capital expenditures totaling approximately
$51,400,000, and to fund acquisitions of approximately $4,200,000.

In January 1999, the Company entered into a $65,000,000 promissory
note at an annual interest rate of 6.50%, payable in three annual installments
beginning in January 2000 and maturing in January 2002. The proceeds from this
promissory note were used to pay down Revolver borrowings and is secured by a
surety bond. In addition, during the six months ended June 30, 1999, the
Company entered into promissory notes totaling approximately $10,820,000 in
conjunction with the construction of certain nursing facilities. Such debt
instruments bear interest at rates ranging from 7.75% to 8.00%, 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
nursing facilities.

18
20
BEVERLY ENTERPRISES, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

JUNE 30, 1999

(UNAUDITED)

The Company has a $125,000,000 financing arrangement available for the
construction of certain facilities. The Company will lease the facilities, under
operating leases with the creditor, upon completion of construction. The Company
will have the option to purchase these facilities at the end of the initial
lease terms at fair market value. Total construction advances under the
financing arrangement as of June 30, 1999 were approximately $92,100,000.

It is anticipated that the settlements of the Allocation
Investigations, if consummated, will require payments totaling $30,000,000
($25,000,000 for the tentative civil settlement and $5,000,000 for the tentative
criminal settlement) due within 30 days of signing the final settlement
documents, with the remaining $145,000,000 to be withheld from the Company's
bi-weekly Medicare periodic interim payments beginning in the year 2000 and
continuing for a period of eight years. During July 1999, the Company, through
BHRS, sold $25,000,000 of patient accounts receivable and made a capital
contribution of $5,000,000 to Beverly Funding Corporation. The net proceeds of
$20,000,000 are expected to be used in conjunction with additional borrowings
under its Revolver/Letter of Credit Facility to make the initial $30,000,000
payments. The Company anticipates cash flows from operations to decline
approximately $18,100,000 per year as a result of the reduction in Medicare
periodic interim payments and, therefore, may incur additional borrowings to
fund ongoing cash needs in the future.

The Company currently anticipates that cash flows from operations and
borrowings under its existing and modified banking arrangements will be adequate
to repay its debts due within one year of approximately $52,800,000, to fund the
settlement obligations to the federal government, 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 June 30, 2000. If cash flows from operations or
availability under existing banking arrangements fall below expectations, or if
the Company is unsuccessful in renegotiating its existing banking arrangements,
the Company may be required to delay capital expenditures, dispose of certain
assets, issue additional debt securities, or consider other alternatives to
improve liquidity.

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21

PART II

BEVERLY ENTERPRISES, INC.

OTHER INFORMATION

JUNE 30, 1999

(UNAUDITED)

ITEM 1. LEGAL PROCEEDINGS

The Company has been the subject of a federal government investigation relating
to the allocation to the Medicare program of certain nursing labor costs in its
skilled nursing facilities from 1990 to 1998. The investigation has been
conducted by the Office of Inspector General of the Department of Health and
Human Services and by the U.S. Department of Justice. In addition, a federal
grand jury in San Francisco has investigated business practices which are the
subject of the above civil investigation. In addition, the Company's current
Medicare fiscal intermediary, Blue Cross of California, is examining cost
reports of the Company's facilities with respect to the areas that are the focus
of the government investigation.

In late July 1999, the Company reached a tentative understanding with the U.S.
Department of Justice to settle the civil and criminal aspects of all
investigations by the federal government and its fiscal intermediary into the
allocation of nursing labor hours to the Medicare program from 1990 to 1998 (the
"Allocation Investigations"). The proposed civil and criminal settlements are
subject to completion and execution of definitive settlement documents,
satisfaction of certain conditions and court approval.

If the tentative civil settlement is consummated, the Company would be obligated
to reimburse the federal government $170,000,000 as follows: (i) $25,000,000
within 30 days of signing the definitive civil settlement agreement; and (ii)
$145,000,000 to be withheld from the Company's biweekly Medicare periodic
interim payments in equal installments over eight years. In addition, the
Company would agree to resubmit certain Medicare filings to reflect reduced
direct labor costs.

If the tentative criminal settlement is consummated, a subsidiary of the Company
would pay a fine of $5,000,000. The effect of this settlement would be to
exclude such subsidiary's nursing facilities from the Medicare and Medicaid
programs. It is expected that this will affect no more than ten nursing
facilities.

On July 6, 1999, an amended complaint was filed by the plaintiffs in the
previously disclosed purported class action lawsuit pending against the Company
and certain of its officers in the United States District Court for the Eastern
District of Arkansas (the "Class Action"). The amended complaint asserts claims
under Section 10(b) (including Rule 10b-5 promulgated thereunder) and under
Section 20 of the Securities Exchange Act of 1934 arising from practices that
are the subject of the Allocation Investigations. Due to the preliminary state
of the Class Action and the fact the amended complaint does not allege damages
with any specificity, the Company is unable at this time to assess the probable
outcome of the Class Action or the materiality of the risk of loss. However, the
Company believes that it acted lawfully with respect to plaintiff investors and
will vigorously defend the Class Action.

In addition, since July 29, 1999, five derivative lawsuits have been filed in
the state courts of Arkansas, California and Delaware (Norman M. Lyons v. David
R. Banks, et al., Case No. OT94-4041, filed in the Chancery Court of Pulaski
County, Arkansas (4th Division) filed on or about July 29, 1999; James L.
Laurita v. David R. Banks, et al., Case No. 17348NC, filed in the Delaware
Chancery Court on or about August 2, 1999; Elles Trading Company v. David R.
Banks, et al., filed in the Superior Court for San Francisco County, California
on or about August 4, 1999; Kenneth Abbey v. David R. Banks, et al., Case No.
17352NC filed in the Delaware Chancery Court on or about August 4, 1999; Alan
Friedman v. David R. Banks, et al., Case No. 17355NC filed in the Delaware
Chancery Court on or about August 9, 1999 - collectively, the "Derivative
Lawsuits"). The Derivative Lawsuits, which each name the Company as a nominal
defendant, allege claims for breach of fiduciary duties to the Company and its
stockholders arising out of the Company's alleged exposure to loss due to the
Class Action and the Allocation Investigations.

20
22

BEVERLY ENTERPRISES, INC.

OTHER INFORMATION (CONTINUED)

JUNE 30, 1999

(UNAUDITED)

21
23

BEVERLY ENTERPRISES, INC.

OTHER INFORMATION (CONTINUED)

JUNE 30, 1999

(UNAUDITED)

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

On May 27, 1999, the Company held its Annual Meeting of Stockholders
in Fort Smith, Arkansas, for the purposes of electing nine members of the Board
of Directors, ratifying the appointment of Ernst & Young LLP as independent
auditors for 1999 and transacting such other business as may have properly come
before the meeting or any adjournment thereof.

The following table sets forth the directors elected at such meeting
and the number of votes cast for and withheld for each director:

DIRECTOR FOR WITHHELD
---------------------- --------------- ---------------

Beryl F. Anthony, Jr..................................... 99,458,600 431,026
David R. Banks........................................... 99,460,605 429,021
Carolyne K. Davis, R.N., Ph. D........................... 99,485,932 403,694
James R. Greene.......................................... 99,446,736 442,890
Boyd W. Hendrickson...................................... 99,451,924 437,702
Edith E. Holiday......................................... 99,476,165 413,461
Jon E. M. Jacoby......................................... 99,469,727 419,899
Risa J. Lavizzo-Mourey, M.D.............................. 99,490,505 399,121
Marilyn R. Seymann....................................... 99,483,386 406,240

The appointment of Ernst & Young LLP as independent auditors for 1999
was ratified at the meeting. The following table sets forth the number of votes
for and against, as well as abstentions as to this matter:

For......................................................... 99,690,716
Against..................................................... 109,206
Abstentions................................................. 89,704

ITEM 6(a). EXHIBITS

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

27.1 Financial Data Schedule for the six months ended June 30,
1999
27.2 Restated Financial Data Schedule for the six months ended
June 30, 1998

ITEM 6(b). REPORTS ON FORM 8-K

The Company filed a Current Report on Form 8-K, dated July 27, 1999,
which reported under Item 5 that the Company would record a special pre-tax
charge against 1999 second quarter earnings totaling between $175,000,000 and
$225,000,000, related to a tentative understanding reached with the U.S.
Department of Justice on potential settlements of the previously announced
federal investigations into the allocation of nursing labor hours to the
Medicare Program.

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24

SIGNATURES

Pursuant to the requirements 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: August 20, 1999 By: /s/ PAMELA H. DANIELS
------------------------
Pamela H. Daniels
Vice President, Controller
and Chief Accounting Officer

23
25

INDEX TO EXHIBITS

Exhibit
Number Description
- ------- -----------

27.1 Financial Data Schedule for the six months ended June, 30, 1999

27.2 Restated Financial Data Schedule for the six months ended
June 30, 1998