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 SEPTEMBER 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.)

1000 BEVERLY WAY
FORT SMITH, ARKANSAS 72919
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (501) 201-2000

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 OCTOBER 29, 1999 -- 102,495,556

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BEVERLY ENTERPRISES, INC.

FORM 10-Q

SEPTEMBER 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............................ 11

PART II -- OTHER INFORMATION

Item 1. Legal Proceedings................................................. 19
Item 6. Exhibits and Reports on Form 8-K.................................. 20

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PART I

BEVERLY ENTERPRISES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

SEPTEMBER 30, 1999 AND DECEMBER 31, 1998

(DOLLARS IN THOUSANDS)

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

ASSETS
Current assets:
Cash and cash equivalents ................................................... $ 17,462 $ 17,278
Accounts receivable - patient, less allowance for doubtful accounts:
1999 - $60,073; 1998 - $21,764 ........................................... 341,658 463,822
Accounts receivable - nonpatient, less allowance for doubtful accounts:
1999 - $631; 1998 - $441 ................................................. 18,519 85,585
Notes receivable ............................................................ 21,560 21,075
Operating supplies .......................................................... 32,577 32,133
Deferred income taxes ....................................................... 44,028 56,512
Prepaid expenses and other .................................................. 16,415 19,565
----------- -----------
Total current assets .................................................. 492,219 695,970
Property and equipment, net of accumulated depreciation and amortization:
1999 - $750,494; 1998 - $694,322 ............................................ 1,108,188 1,120,315
Other assets:
Notes receivable, less allowance for doubtful notes:
1999 - $2,462; 1998 - $2,921 ............................................. 4,003 21,263
Designated funds ............................................................ 3,092 4,029
Goodwill, net ............................................................... 229,479 217,066
Other, net .................................................................. 133,091 101,868
----------- -----------
Total other assets .................................................... 369,665 344,226
----------- -----------

$ 1,970,072 $ 2,160,511
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Accounts payable ............................................................ $ 71,660 $ 85,533
Accrued wages and related liabilities ....................................... 88,368 96,092
Accrued interest ............................................................ 12,236 12,783
Other accrued liabilities ................................................... 149,120 134,975
Current portion of long-term debt ........................................... 23,810 27,773
----------- -----------
Total current liabilities ............................................. 345,194 357,156
Long-term debt ................................................................. 776,276 878,270
Deferred income taxes payable .................................................. 39,566 114,962
Other liabilities and deferred items ........................................... 135,130 33,917
Commitments and contingencies
Stockholders' equity:
Preferred stock, shares authorized: 25,000,000 ............................. -- --
Common stock, shares issued: 1999 - 110,382,356; 1998 - 110,275,714 ........ 11,038 11,028
Additional paid-in capital .................................................. 875,850 876,383
Accumulated deficit ......................................................... (106,835) (4,782)
Accumulated other comprehensive income ...................................... 1,036 760
Treasury stock, at cost: 7,886,800 shares .................................. (107,183) (107,183)
----------- -----------
Total stockholders' equity ............................................ 673,906 776,206
----------- -----------
$ 1,970,072 $ 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 NINE-MONTH PERIODS ENDED SEPTEMBER 30, 1999 AND 1998

(UNAUDITED)

(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- -----------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------

Net operating revenues ..................................... $ 637,396 $ 697,937 $ 1,903,748 $ 2,107,752
Interest income............................................. 935 2,698 3,290 7,958
------------ ------------ ------------ ------------
Total revenues.................................... 638,331 700,635 1,907,038 2,115,710

Costs and expenses:
Operating and administrative:
Wages and related.................................... 389,710 428,284 1,177,676 1,284,506
Other................................................ 186,993 196,493 549,692 614,293
Interest................................................ 20,001 16,788 54,029 48,869
Depreciation and amortization........................... 25,669 23,711 74,511 69,947
Special charges related to tentative settlements of
federal government investigations.................... -- -- 199,043 --
Year 2000 remediation................................... 3,423 2,041 10,672 3,875
Investigation costs..................................... -- 496 3,404 496
------------ ------------ ------------ ------------
Total costs and expenses.......................... 625,796 667,813 2,069,027 2,021,986
------------ ------------ ------------ ------------

Income (loss) before provision for (benefit from) income
taxes and cumulative effect of change in accounting
for start-up costs...................................... 12,535 32,822 (161,989) 93,724
Provision for (benefit from) income taxes................... 4,638 11,487 (59,936) 32,803
------------ ------------ ------------ ------------

Income (loss) before cumulative effect of change in
accounting for start-up costs........................... 7,897 21,335 (102,053) 60,921
Cumulative effect of change in accounting for start-up costs,
net of income tax benefit of $2,811..................... -- -- -- (4,415)
------------ ------------ ------------ ------------
Net income (loss)........................................... $ 7,897 $ 21,335 $ (102,053) $ 56,506
============ ============ ============ ============

Income (loss) per share of common stock:
Basic:
Before cumulative effect of change in accounting
for start-up costs................................ $ 0.08 $ 0.21 $ (1.00) $ 0.58
Cumulative effect of change in accounting for
start-up costs.................................... -- -- -- (0.04)
------------ ------------ ------------ ------------
Net income (loss).................................... $ 0.08 $ 0.21 $ (1.00) $ 0.54
============ ============ ============ ============
Shares used to compute per share amounts............. 102,495 103,019 102,490 104,225
============ ============ ============ ============

Diluted:
Before cumulative effect of change in accounting
for start-up costs................................ $ 0.08 $ 0.21 $ (1.00) $ 0.58
Cumulative effect of change in accounting for
start-up costs.................................... -- -- -- (0.04)
------------ ------------ ------------ ------------
Net income (loss).................................... $ 0.08 $ 0.21 $ (1.00) $ 0.54
============ ============ ============ ============
Shares used to compute per share amounts............. 102,715 103,610 102,490 105,391
============ ============ ============ ============

See accompanying notes.

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BEVERLY ENTERPRISES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998

(UNAUDITED)

(IN THOUSANDS)

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

Cash flows from operating activities:
Net income (loss)............................................................................. $ (102,053) $ 56,506
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization............................................................... 74,511 69,947
Provision for reserves on patient, notes and other receivables, net......................... 20,345 13,626
Amortization of deferred financing costs.................................................... 2,562 1,784
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.......................... 4,002 (20,496)
Deferred taxes.............................................................................. (62,122) 12,877
Net increase (decrease) in insurance related accounts....................................... 4,008 (26,906)
Changes in operating assets and liabilities, net of acquisitions and dispositions:
Accounts receivable - patient............................................................. (8,927) (89,693)
Operating supplies........................................................................ (495) (437)
Prepaid expenses and other receivables.................................................... 523 2,170
Accounts payable and other accrued expenses............................................... (31,706) 14,584
Income taxes payable...................................................................... 21,545 (4,919)
Other, net................................................................................ (2,549) (3,997)
---------- ---------
Total adjustments....................................................................... 220,740 (24,234)
---------- ---------
Net cash provided by operating activities............................................... 118,687 32,272
Cash flows from investing activities:
Proceeds from dispositions of facilities and other assets................................... 41,044 67,740
Payments for acquisitions, net of cash acquired............................................. (5,927) (146,672)
Capital expenditures........................................................................ (69,007) (103,234)
Collections on notes receivable............................................................. 16,589 3,800
Other, net.................................................................................. (27,886) (11,422)
---------- --------

Net cash used for investing activities................................................. (45,187) (189,788)
Cash flows from financing activities:
Revolver borrowings......................................................................... 854,000 944,000
Repayments of Revolver borrowings........................................................... (975,000) (763,000)
Proceeds from issuance of long-term debt.................................................... 125,820 --
Repayments of long-term debt................................................................ (75,602) (52,040)
Purchase of common stock for treasury....................................................... -- (56,332)
Proceeds from exercise of stock options..................................................... 129 3,090
Deferred financing costs.................................................................... (2,963) (624)
Proceeds from designated funds, net......................................................... 300 730
---------- ---------
Net cash provided by (used for) financing activities.................................... (73,316) 75,824
---------- ---------
Net increase (decrease) in cash and cash equivalents............................................. 184 (81,692)
Cash and cash equivalents at beginning of period................................................. 17,278 105,230
---------- ---------
Cash and cash equivalents at end of period....................................................... $ 17,462 $ 23,538
========== =========

Supplemental schedule of cash flow information: Cash paid (received) during the
period for:
Interest, net of amounts capitalized........................................................ $ 52,014 $ 52,078
Income tax payments (refunds), net.......................................................... (19,359) 22,034

See accompanying notes.

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BEVERLY ENTERPRISES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 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
nine-month periods ended September 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
nine-month periods ended September 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 nine-month
periods ended September 30 (in thousands):

THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------------
1999 1998 1999 1998
---------- --------- ---------- ---------

NUMERATOR:
Numerator for basic and diluted income (loss) per share
from continuing operations................................... $ 7,897 $ 21,335 $ (102,053) $ 60,921
========== ========= ========== =========
DENOMINATOR:
Denominator for basic income (loss) per share - weighted
average shares............................................... 102,495 103,019 102,490 104,225
Effect of dilutive securities:
Employee stock options....................................... 220 591 -- 1,166
---------- --------- ---------- ---------

Denominator for diluted income (loss) per share - adjusted
weighted average shares and assumed conversions.............. 102,715 103,610 102,490 105,391
========== ========= ========== =========

Basic income (loss) per share.................................. $ 0.08 $ 0.21 $ (1.00) $ 0.58
========== ========= ========== =========

Diluted income (loss) per share................................ $ 0.08 $ 0.21 $ (1.00) $ 0.58
========== ========= ========== =========

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BEVERLY ENTERPRISES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

SEPTEMBER 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 nine-month periods ended
September 30 (in thousands):

THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
1999 1998 1999 1998
---------- -------- --------- ---------

Net income (loss)........................................ $ 7,897 $ 21,335 $(102,053) $ 56,506
Unrealized gains on securities, net of income taxes...... 324 505 276 682
---------- -------- --------- ---------
Comprehensive income (loss).............................. $ 8,221 $ 21,840 $(101,777) $ 57,188
========== ======== ========= =========

Accumulated other comprehensive income, net of income taxes, consists of
unrealized gains on securities of $1,036,000 and $760,000 at September 30, 1999
and December 31, 1998, respectively.

Results of operations for the nine months ended September 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 nine-month periods ended September 30, 1999 and 1998 were based
on estimated annual effective tax rates of 37% and 35%, 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 1998 estimated annual effective tax rate was further
impacted by the sale of American Transitional Hospitals, Inc., which operated as
Beverly Specialty Hospitals, in 1998. The Company's net deferred tax assets at
September 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 September 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 nine-month periods ended September 30 (in
thousands):

THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- ---------------------
1999 1998 1999 1998
--------- -------- --------- ---------

Federal:
Current................................................ $ -- $ 6,348 $ -- $ 15,685
Deferred............................................... 3,168 3,036 (56,044) 10,861

State:
Current................................................ (169) 1,771 2,186 4,241
Deferred............................................... 1,639 332 (6,078) 2,016
--------- -------- --------- ---------
$ 4,638 $ 11,487 $ (59,936) $ 32,803
========= ======== ========= =========

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BEVERLY ENTERPRISES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

SEPTEMBER 30, 1999

(UNAUDITED)

(iii) During the nine months ended September 30, 1999, the Company
purchased three outpatient clinics, two home care centers, two nursing
facilities (284 beds), one previously leased nursing facility (190 beds) and
certain other assets for cash of approximately $5,000,000, acquired debt of
approximately $15,100,000 and closing and other costs of approximately
$1,700,000. 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 10 nursing facilities (1,075 beds), one assisted living center (10
units), 17 home care centers and certain other assets for cash proceeds of
approximately $6,200,000 and notes receivable of approximately $1,000,000. The
Company did not operate two of these nursing facilities (166 beds) which were
leased to other nursing home operators in prior year transactions. The Company
recognized net pre-tax losses, which were included in net operating revenues
during the nine months ended September 30, 1999, of approximately $4,000,000 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%. In October 1999, the note was
renegotiated to allow the Company to make an interest-only payment in January
2000 at an annual interest rate of 6.50%, with the principal balance payable in
two equal installments in January 2001 and in January 2002 at an annual interest
rate of 7.00%. The proceeds from this promissory note were used to pay down
Revolver borrowings and is secured by a surety bond. During the nine months
ended September 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. Also during such period, the
Company entered into promissory notes totaling approximately $15,100,000 in
conjunction with the acquisitions of certain facilities (see Note iii). Such
debt instruments bear interest at rates ranging from 7.00% 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 acquired 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 ("BFC"), 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 BFC. 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 BFC, 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 BFC
as an increase in other, net assets.

During July 1999, BFC increased its borrowings under the Medium Term Notes
to $70,000,000. In conjunction therewith, the Company, through BHRS, sold an
additional $25,000,000 of patient accounts receivable and made an additional
capital contribution of $5,000,000 to BFC. At September 30, 1999, BFC had total
assets of approximately $108,000,000, total liabilities of approximately
$74,100,000, and total stockholder's equity of approximately $33,900,000. The
Company's Statement of Cash Flows reflects the change from June 30, 1999 to
September 30, 1999 in receivables sold to BFC in the caption Accounts receivable
- - patient and the change from June 30, 1999 to September 30, 1999 in the
Company's investment in BFC in the caption Other, net - investing.

Effective September 30, 1999, the Company executed an amendment to the
Credit Agreement covering the Company's $375,000,000 Revolver/Letter of Credit
Facility, as well as amendments with certain of its other lenders covering debt
of approximately $199,000,000 (collectively, the "Amendments"). Such Amendments
were required since recording of the special charges related to the tentative
settlements, as discussed in Note vii, would have resulted in the Company's
noncompliance with certain financial covenants contained in those debt
agreements. The Amendments modify certain financial covenant levels and increase
the annual interest rates for such debt.

(v) Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information" provides 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)

SEPTEMBER 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 September 30, 1999

Revenues from external customers ............. $ 580,961 $ 55,128 $ -- $ 1,307 $ 637,396
Intercompany revenues ........................ -- 34,263 -- 2,937 37,200
Interest income .............................. 61 20 -- 854 935
Interest expense ............................. 7,933 107 -- 11,961 20,001
Depreciation and amortization ................ 20,537 3,401 -- 1,731 25,669
Pre-tax income (loss) ........................ 26,643 4,279 -- (18,387) 12,535
Total assets ................................. 1,543,726 327,219 -- 99,127 1,970,072
Capital expenditures ......................... 16,401 2,491 -- (1,324) 17,568

Three months ended September 30, 1998

Revenues from external customers ............. $ 642,209 $ 53,740 $ -- $ 1,988 $ 697,937
Intercompany revenues ........................ -- 3,416 -- 2,741 6,157
Interest income .............................. 100 34 -- 2,564 2,698
Interest expense ............................. 7,277 46 -- 9,465 16,788
Depreciation and amortization ................ 19,499 2,426 -- 1,786 23,711
Pre-tax income (loss) ........................ 42,535 2,595 -- (12,308) 32,822
Total assets ................................. 1,550,126 296,208 -- 352,619 2,198,953
Capital expenditures ......................... 16,065 4,372 -- 19,258 39,695

Nine months ended September 30, 1999

Revenues from external customers ............. $ 1,716,246 $ 184,337 $ -- $ 3,165 $ 1,903,748
Intercompany revenues ........................ -- 105,191 -- 8,553 113,744
Interest income .............................. 169 50 -- 3,071 3,290
Interest expense ............................. 21,246 334 -- 32,449 54,029
Depreciation and amortization ................ 60,020 9,806 -- 4,685 74,511
Pre-tax income (loss) ........................ 84,710 16,248 -- (262,947) (161,989)
Total assets ................................. 1,543,726 327,219 -- 99,127 1,970,072
Capital expenditures ......................... 55,902 8,773 -- 4,332 69,007

Nine months ended September 30, 1998

Revenues from external customers ............. $ 1,904,420 $ 131,914 $ 61,775 $ 9,643 $ 2,107,752
Intercompany revenues ........................ -- 10,491 539 7,965 18,995
Interest income .............................. 257 34 3 7,664 7,958
Interest expense ............................. 22,326 61 93 26,389 48,869
Depreciation and amortization ................ 58,124 5,958 1,578 4,287 69,947
Pre-tax income (loss) ........................ 129,341 7,231 (670) (42,178) 93,724
Total assets ................................. 1,550,126 296,208 -- 352,619 2,198,953
Capital expenditures ......................... 56,846 9,585 4,937 31,866 103,234

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

(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 revenues and
expenses.

8
10

BEVERLY ENTERPRISES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

SEPTEMBER 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, and 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 announced it had 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"). Since that time, the
Company has continued to negotiate with the federal government to complete and
execute definitive settlement documents, certain of which are subject to court
approval.

As previously reported, 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 and would require the subsidiary to dispose of such facilities. It is
expected that this will affect no more than 10 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"). Plaintiffs filed a second amended
complaint on September 9, 1999 which asserted 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. The defendants filed a motion to dismiss that
complaint on October 8, 1999. Due to the preliminary state of the Class Action
and the fact the second 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, seven derivative lawsuits have been filed
in the state courts of Arkansas, California and Delaware (collectively, the
"Derivative Actions"). Norman M. Lyons v. David R. Banks, et al., Case No.
OT99-4041, was filed in the Chancery Court of Pulaski County, Arkansas (4th
Division) on or about July 29, 1999; Alfred Badger, Jr. v. David R. Banks, et
al., Case No. OT99-4353, was filed in the Chancery Court of Pulaski County,
Arkansas (1st Division) on or about August 17, 1999 and voluntarily dismissed on
November 3, 1999. On November 1, 1999, the defendants filed a motion to dismiss
the Lyons and Badger actions. James L. Laurita v. David R. Banks, et al., Case
No. 17348NC, was filed in the Delaware Chancery Court on or about August 2,
1999; Kenneth Abbey v. David R. Banks, et al., Case No. 17352NC, was filed in
the Delaware Chancery Court on or about August 4, 1999; Alan Friedman v. David
R. Banks, et al., Case No. 17355NC, was filed in the Delaware Chancery Court on
or about August 9, 1999. The Laurita, Abbey and Friedman actions were
subsequently consolidated by order of the Delaware Chancery Court. On or about
October 1, 1999, the defendants moved to dismiss the Laurita, Abbey and Friedman
actions. Elles Trading Company v. David R. Banks, et al., was filed in the
Superior Court for San Francisco County, California on or about August 4, 1999.
That action was removed to United States District Court for the Northern
District, and plaintiff filed a motion to remand the action to state court on or
about October 14, 1999. The defendants have not yet responded to the complaint
in the Elles Trading Company action. Richardson v. David R. Banks, et al., Case
No. LR-C-99-826, was filed in United States District Court for the Eastern
District of Arkansas (Western Division) on November 4, 1999. The Derivative
Actions each name the Company's directors as defendants, as well as the Company
as a nominal defendant. The Badger and Lyons actions also name as defendants
certain of the Company's officers. The Derivative Actions each allege breach of
fiduciary duties to the Company and its stockholders arising

9
11
BEVERLY ENTERPRISES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

SEPTEMBER 30, 1999

(UNAUDITED)

primarily out of the Company's alleged exposure to loss due to the Class Action
and the Allocation Investigations. The Lyons, Badger and Richardson actions also
assert claims for abuse of control and constructive fraud arising from the same
allegations, and the Richardson action also claims unjust enrichment. Due to the
preliminary state of the Derivative Actions and the fact the complaints do not
allege damages with any specificity, the Company is unable at this time to
assess the probable outcome of the Derivative Actions or the materiality of the
risk of loss. However, the Company believes that it acted lawfully with respect
to the allegations of the Derivative Actions and will vigorously defend the
Derivative Actions.

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.

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

SEPTEMBER 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, including their effect on the availability and cost of
labor and materials; 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 Class Action and
Derivative Lawsuits (see "Part II, Item 1. Legal Proceedings"); 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; and 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. 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.

11
13

BEVERLY ENTERPRISES, INC.

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

SEPTEMBER 30, 1999

(UNAUDITED)

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.

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
complete as of September 30, 1999. Trans-century compliance testing began during
the first quarter of 1999 and was substantially complete as of September 30,
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 was substantially complete as of September 30, 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. All such remediation
and testing will be completed during the fourth 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 $29,000,000 and is being funded
through operating cash flows. The total amount expended on the Y2K Project
through September 30, 1999 was approximately $23,000,000 ($20,400,000 expensed
and $2,600,000 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, $2,000,000 is attributable to the
purchase of new hardware, software and operating equipment, which will be
capitalized. The remaining $4,000,000 relates to remediation of hardware,
software, and operating equipment, as well as expenses related to certain
contingency planning preparations, and will be expensed as incurred.

BEVERLY ENTERPRISES, INC.

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

SEPTEMBER 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 of any
unforeseen Y2K issues not discovered during the remediation and testing phases,
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.

OPERATING RESULTS

THIRD QUARTER 1999 COMPARED TO THIRD QUARTER 1998

RESULTS OF OPERATIONS

Net income was $7,897,000 for the third quarter of 1999, as compared to net
income of $21,335,000 for the same period in 1998. The Company had an estimated
annual effective tax rate of 37% and 35% 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 1998 estimated annual effective tax rate was further
impacted by the sale of American Transitional Hospitals, Inc. ("ATH"), which
operated as Beverly Specialty Hospitals, in 1998. The Company's net deferred tax
assets at September 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
September 30, 1999.

NET OPERATING REVENUES

The Company reported net operating revenues of $637,396,000 during the
third quarter of 1999 compared to $697,937,000 for the same period in 1998.
Approximately 91% and 92% of the Company's total net operating revenues for the
quarters ended September 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 $60,500,000 for the third quarter of
1999, as compared to the same period in 1998, consists of the following: a
decrease of approximately $54,100,000 due to facilities which the Company
operated during each of the quarters ended September 30, 1999 and 1998 ("same
facility operations"); a decrease of approximately $31,800,000 due to the
disposition of, or lease terminations on, 10 nursing facilities, one assisted
living center and 17 home care centers in 1999 and 26 nursing facilities in
1998; partially offset by an increase of approximately $25,400,000 due to the
acquisitions of nursing facilities and outpatient and home care businesses
during 1999 and 1998.

13
15

BEVERLY ENTERPRISES, INC.

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

SEPTEMBER 30, 1999

(UNAUDITED)

The decrease in net operating revenues of approximately $54,100,000 for
same facility operations for the third quarter of 1999, as compared to the same
period in 1998, was due to the following: approximately $31,300,000 decrease in
ancillary revenues and approximately $13,500,000 decrease in Medicare rates both
primarily due to the impact of the Medicare prospective payment system ("PPS")
and other provisions of the Balanced Budget Act of 1997; approximately
$13,400,000 decrease due to a decline in same facility occupancy; approximately
$9,000,000 decrease due to a shift in the Company's patient mix; and
approximately $7,700,000 due to various other items; partially offset by an
increase of approximately $20,800,000 due primarily to increases in Medicaid and
private rates. The Company's same facility occupancy was 87.7% for the third
quarter of 1999, as compared to 89.3% for the same period in 1998. The Company
has implemented a series of initiatives to improve its occupancy levels and has
experienced some initial success; however, it is still too early to determine
the long-term 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 third quarter of 1999, as compared to
10%, 20% and 69%, respectively, for the same period in 1998.

The decrease in net operating revenues of approximately $31,800,000 for the
third quarter of 1999, as compared to the same period in 1998, resulting from
dispositions and lease terminations that occurred during the nine months ended
September 30, 1999 and the year ended December 31, 1998 are described below.
During the nine months ended September 30, 1999, the Company sold or terminated
the leases on 10 nursing facilities (1,075 beds), one assisted living center (10
units), 17 home care centers and certain other assets. The Company did not
operate two of these nursing facilities (166 beds) which were leased to other
nursing home operators in prior year transactions. The Company recognized net
pre-tax losses, which were included in net operating revenues during the nine
months ended September 30, 1999, of approximately $4,000,000 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.

The increase in net operating revenues of approximately $25,400,000 for the
third quarter of 1999, as compared to the same period in 1998, resulting from
acquisitions which occurred during the nine months ended September 30, 1999 and
the year ended December 31, 1998 are described below. During the nine months
ended September 30, 1999, the Company purchased three outpatient clinics, two
home care centers, two nursing facilities (284 beds), one previously leased
nursing facility (190 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 $576,703,000
during the third quarter of 1999 compared to $624,777,000 for the same period in
1998. The decrease of approximately $48,100,000 consists of the following: a
decrease of approximately $43,800,000 due to same facility operations; a
decrease of approximately $29,900,000 due to dispositions; partially offset by
an increase of approximately $25,600,000 due to acquisitions. (See above for a
discussion of dispositions and acquisitions).

The decrease in operating and administrative expenses of approximately
$43,800,000 for same facility operations for the third quarter of 1999, as
compared to the same period in 1998, was due primarily to a shift in the
Company's patient mix, as well as a decline in same facility occupancy, and
consists of the following: approximately $31,100,000 due to a decrease in wages
and related expenses; approximately $10,700,000 due to a decrease in contracted
therapy expenses; and approximately $2,000,000 due primarily to decreases in
purchased ancillary products, nursing supplies and other variable costs.
Although the Company's wages and related expenses decreased for the third
quarter of 1999, as compared to the same period in 1998, the Company's weighted
average wage rate and use of registry personnel continue to increase, both of
which underscore the increased difficulties many of the Company's nursing
facilities are having attracting nursing aides, assistants and other important
personnel. The Company is addressing this through several ongoing programs and
training initiatives. No assurance can be given that these programs and training
initiatives will in fact improve the Company's ability to attract these nursing
personnel.

14
16

BEVERLY ENTERPRISES, INC.

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

SEPTEMBER 30, 1999

(UNAUDITED)

INTEREST EXPENSE, NET

Interest income decreased to $935,000 for the third quarter of 1999, as
compared to $2,698,000 for the same period in 1998 primarily due to the sale of
securities in conjunction with a loss portfolio transfer transaction during the
fourth quarter of 1998. Interest expense increased to $20,001,000 for the third
quarter of 1999, as compared to $16,788,000 for the same period in 1998
primarily due to imputed interest on the tentative civil settlement of
approximately $2,100,000, an increase in net borrowings under the
Revolver/Letter of Credit Facility during the third quarter of 1999 as compared
to the same period in 1998, and the write-off of deferred financing costs in
conjunction with certain bond refundings.

DEPRECIATION AND AMORTIZATION

Depreciation and amortization expense increased to $25,669,000 for the
third quarter of 1999, as compared to $23,711,000 for the same period in 1998.
Such increase was affected by the following: approximately $2,700,000 increase
due to capital additions and improvements, as well as acquisitions; partially
offset by a decrease of approximately $700,000 due to dispositions of, or lease
terminations on, certain facilities.

NINE MONTHS 1999 COMPARED TO NINE MONTHS 1998

RESULTS OF OPERATIONS

Net loss was $102,053,000 for the nine months ended September 30, 1999, as
compared to net income of $56,506,000 for the same period in 1998. Net loss for
the nine months ended September 30, 1999 included a special pre-tax charge of
approximately $199,000,000 related to the tentative settlements of the
Allocation Investigations (as discussed herein). Results of operations for the
nine months ended September 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.

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
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 and would be required to be disposed of
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.

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

15
17
BEVERLY ENTERPRISES, INC.

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

SEPTEMBER 30, 1999

(UNAUDITED)

interest expense, along with an increase in interest and rent expense resulting
from the Amendments, 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 and would require the
subsidiary to dispose of such facilities. It is expected that this will affect
no more than 10 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 $4,100,000, or $.04 per share diluted,
for the quarter ended September 30, 1999, and approximately $10,400,000, or $.10
per share diluted, for the nine months ended September 30, 1999.

NET OPERATING REVENUES

The Company reported net operating revenues of $1,903,748,000 during the
nine months ended September 30, 1999 compared to $2,107,752,000 for the same
period in 1998. Approximately 90% of the Company's total net operating revenues
for the nine months ended September 30, 1999 and 1998 were derived from services
provided by the Company's Beverly Healthcare segment. The decrease in net
operating revenues of approximately $204,000,000 for the nine months ended
September 30, 1999, as compared to the same period in 1998, consists of the
following: a decrease of approximately $161,400,000 due to dispositions (as
discussed above), as well as the sale of ATH in June 1998 to Select Medical
Corporation; a decrease of approximately $152,000,000 due to facilities which
the Company operated during each of the nine months ended September 30, 1999 and
1998 ("same facility operations"); partially offset by an increase of
approximately $109,400,000 due to acquisitions. (See above for a discussion of
dispositions and acquisitions).

The decrease in net operating revenues of approximately $152,000,000 for
same facility operations for the nine months ended September 30, 1999, as
compared to the same period in 1998, was due to the following: approximately
$74,200,000 decrease in ancillary revenues and approximately $36,400,000
decrease in Medicare rates both primarily due to the impact of PPS and other
provisions of the Balanced Budget Act of 1997; approximately $45,800,000
decrease due to a shift in the Company's patient mix; approximately $37,400,000
decrease due to a decline in same facility occupancy; and approximately
$12,600,000 due to various other items; partially offset by an increase of
approximately $54,400,000 due primarily to increases in Medicaid and private
rates. The Company's same facility occupancy was 87.7% for the nine months ended
September 30, 1999, as compared to 89.2% for the same period in 1998. The
Company has implemented a series of initiatives to improve its occupancy levels
and has experienced some initial success; however, it is still too early to
determine the long-term 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 nine months ended
September 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
$1,727,368,000 during the nine months ended September 30, 1999 compared to
$1,898,799,000 for the same period in 1998. The decrease of approximately
$171,400,000 consists of the following: a decrease of approximately $141,300,000
due to dispositions; a decrease of approximately $132,600,000 due to same
facility operations; partially offset by an increase of approximately
$102,500,000 due to acquisitions. (See above for a discussion of dispositions
and acquisitions).

The decrease in operating and administrative expenses of approximately
$132,600,000 for same facility operations for the nine months ended September
30, 1999, as compared to the same period in 1998, was due primarily to a shift
in the Company's patient mix, as well as a decline in same facility occupancy,
and consists of the following: approximately $70,300,000 due to a decrease in
wages and related expenses; approximately $42,300,000 due to a decrease in
contracted therapy expenses; and approximately $20,000,000 due primarily to
decreases in purchased ancillary products, nursing supplies and other variable
costs. Although, the Company's wages and related expenses decreased for the nine
months ended September 30, 1999, as compared to the same period in 1998, the
Company's weighted average wage rate and use of registry personnel continue to
increase, both of which underscore the increased difficulties many of the
Company's nursing facilities are having attracting nursing aides, assistants and
other important personnel. The Company is addressing this through several
ongoing programs and training initiatives. No assurance can be given that these
programs and training initiatives will in fact improve the Company's ability to
attract these nursing personnel.

16
18

BEVERLY ENTERPRISES, INC.

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

SEPTEMBER 30, 1999

(UNAUDITED)

INTEREST EXPENSE, NET

Interest income decreased to $3,290,000 for the nine months ended September
30, 1999, as compared to $7,958,000 for the same period in 1998 primarily due to
the sale of securities in conjunction with a loss portfolio transfer transaction
during the fourth quarter of 1998. Interest expense increased to $54,029,000 for
the nine months ended September 30, 1999, as compared to $48,869,000 for the
same period in 1998 primarily due to an increase in net borrowings under the
Revolver/Letter of Credit Facility during the nine months ended September 30,
1999 as compared to the same period in 1998, imputed interest on the tentative
civil settlement of approximately $2,100,000, and the write-off of deferred
financing costs in conjunction with certain bond refundings.

DEPRECIATION AND AMORTIZATION

Depreciation and amortization expense increased to $74,511,000 for the nine
months ended September 30, 1999, as compared to $69,947,000 for the same period
in 1998. Such increase was affected by the following: approximately $8,800,000
increase due to acquisitions, as well as capital additions and improvements;
partially offset by a decrease of approximately $4,200,000 due to dispositions
of, or lease terminations on, certain facilities and ATH.

LIQUIDITY AND CAPITAL RESOURCES

At September 30, 1999, the Company had approximately $17,500,000 in cash
and cash equivalents, approximately $147,000,000 of net working capital and
approximately $191,700,000 of unused commitments under its Revolver/Letter of
Credit Facility.

Net cash provided by operating activities for the nine months ended
September 30, 1999 was approximately $118,700,000, an increase of approximately
$86,400,000 from the prior year primarily due to a reduction in patient accounts
receivable as a result of the sale of receivables to BFC (as defined below), as
well as the Company's continuing focus on cash collections, and certain income
tax refunds received during the nine months ended September 30, 1999. Net cash
used for investing and financing activities were approximately $45,200,000 and
$73,300,000, respectively, for the nine months ended September 30, 1999. The
Company received net cash proceeds of approximately $126,000,000 from the
issuance of long-term debt, approximately $41,000,000 from the dispositions of
facilities and other assets and approximately $16,600,000 from collections on
notes receivable. 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 $75,600,000 of long-term debt and to fund capital expenditures
totaling approximately $69,000,000.

In January 1999, the Company entered into a $65,000,000 promissory note at
an annual interest rate of 6.50%. In October 1999, the note was renegotiated to
allow the Company to make an interest-only payment in January 2000 at an annual
interest rate of 6.50%, with the principal balance payable in two equal
installments in January 2001 and in January 2002 at an annual interest rate of
7.00%. The proceeds from this promissory note were used to pay down Revolver
borrowings and is secured by a surety bond. During the nine months ended
September 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. Also during such period, the
Company entered into promissory notes totaling approximately $15,100,000 in
conjunction with the acquisitions of certain facilities. Such debt instruments
bear interest at rates ranging from 7.00% 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 acquired
facilities.

17
19

BEVERLY ENTERPRISES, INC.

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

SEPTEMBER 30, 1999

(UNAUDITED)

The Company has a $125,000,000 financing arrangement available for the
construction of certain facilities. The Company leases the facilities, under
operating leases with the creditor, upon completion of construction. The Company
has 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 September 30, 1999 were approximately $107,100,000.

Effective September 30, 1999, the Company executed an amendment to the
Credit Agreement covering the Company's $375,000,000 Revolver/Letter of Credit
Facility, as well as amendments with certain of its other lenders covering debt
of approximately $199,000,000 (collectively, the "Amendments"). Such Amendments
were required since recording of the special charges related to the tentative
settlements, as discussed herein, would have resulted in the Company's
noncompliance with certain financial covenants contained in those debt
agreements. The Amendments modify certain financial covenant levels and increase
the annual interest rates for such debt.

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. The Company expects to use 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 banking arrangements will be adequate to repay its debts
due within one year of approximately $23,800,000, 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 September 30, 2000. If cash flows from operations or
availability under existing banking arrangements fall below expectations, the
Company may be required to delay capital expenditures, dispose of certain
assets, issue additional debt securities, or consider other alternatives to
improve liquidity.

18
20

PART II

BEVERLY ENTERPRISES, INC.

OTHER INFORMATION

SEPTEMBER 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, and 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.

19
21
BEVERLY ENTERPRISES, INC.

OTHER INFORMATION (CONTINUED)

SEPTEMBER 30, 1999

(UNAUDITED)

remand the action to state court on or about October 14, 1999. The defendants
have not yet responded to the complaint in the Elles Trading Company action.
Richardson v. David R. Banks, et al., Case No. LR-C-99-826, was filed in the
United States District Court for the Eastern District of Arkansas (Western
Division) on November 4, 1999. The Derivative Actions each name the Company's
directors as defendants, as well as the Company as a nominal defendant. The
Badger and Lyons actions also name as defendants certain of the Company's
officers. The Derivative Actions each allege breach of fiduciary duties to the
Company and its stockholders arising primarily out of the Company's alleged
exposure to loss due to the Class Action and the Allocation Investigations. The
Lyons, Badger and Richardson actions also assert claims for abuse of control
and constructive fraud arising from the same allegations, and the Richardson
action also claims unjust enrichment. Due to the preliminary state of the
Derivative Actions and the fact the complaints do not allege damages with any
specificity, the Company is unable at this time to assess the probable outcome
of the Derivative Actions or the materiality of the risk of loss. However, the
Company believes that it acted lawfully with respect to the allegations of the
Derivative Actions and will vigorously defend the Derivative Actions.

ITEM 6(a). EXHIBITS

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

10.1 Amendment No. 1 to Amended and Restated Credit Agreement,
dated as of September 30, 1999, among Beverly Enterprises,
Inc., the Banks listed therein and Morgan Guaranty Trust
Company of New York, as Issuing Bank and Agent

10.2 First Amendment and Restatement, dated as of June 1, 1999, of
Trust Indenture, dated as of December 1, 1994, from Beverly
Funding Corporation, as Issuer, to The Chase Manhattan Bank, as
Trustee

10.3 Series Supplement, dated as of June 1, 1999, by and between
Beverly Funding Corporation and The Chase Manhattan Bank ("1999-1
Series Supplement")

10.4 First Amendment, dated as of July 14, 1999, to the 1999-1 Series
Supplement

10.5 Master Amendment No. 1 to Amended and Restated Participation
Agreement and Amended and Restated Master Lease and Open-End
Mortgage, entered into as of September 30, 1999, among Beverly
Enterprises, Inc. as Representative, Construction Agent, Parent
Guarantor and Lessee; Bank of Montreal Global Capital Solutions,
Inc., as Lessor and Agent Lessor; and Bank of Montreal, as
Administrative Agent, Arranger and Syndication Agent

27.1 Financial Data Schedule for the nine months ended September 30,
1999

27.2 Restated Financial Data Schedule for the nine months ended
September 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.

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: November 15, 1999 By: /s/ PAMELA H. DANIELS
------------------------
Pamela H. Daniels
Vice President,
Controller and Chief
Accounting Officer

EXHIBIT INDEX

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

10.2 First Amendment and Restatement, dated as of June 1, 1999, of
Trust Indenture, dated as of December 1, 1994, from Beverly
Funding Corporation, as Issuer, to The Chase Manhattan Bank, as
Trustee

10.3 Series Supplement, dated as of June 1, 1999, by and between
Beverly Funding Corporation and The Chase Manhattan Bank ("1999-1
Series Supplement")

10.4 First Amendment, dated as of July 14, 1999, to the 1999-1 Series
Supplement

27.1 Financial Data Schedule for the nine months ended September 30,
1999

27.2 Restated Financial Data Schedule for the nine months ended
September 30, 1998