BEVERLY ENTERPRISES INC /DE/, 10-Q, 1996-08-14

BEVERLY ENTERPRISES INC /DE/
10-Q, 1996-08-14
SKILLED NURSING CARE FACILITIES

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<PAGE> 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, 1996

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 95-4100309
(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 31, 1996 -- 99,259,178

________________________________________________________________________________

================================================================================
<PAGE> 2

BEVERLY ENTERPRISES, INC.

FORM 10-Q

JUNE 30, 1996

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PART I -- FINANCIAL INFORMATION
PAGE
----
<S> <C> <C> <C>
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets . . . . . . . . . . 2
Condensed Consolidated Statements of Income . . . . . . . 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 . . . . . . . . . . . 7

PART II -- OTHER INFORMATION

Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . 11
Item 4. Submission of Matters to a Vote of Security Holders. . . . . 11
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . 12
</TABLE>

1
<PAGE> 3
PART I

BEVERLY ENTERPRISES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

JUNE 30, 1996 AND DECEMBER 31, 1995

(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1995
----------- ------------
(UNAUDITED) (NOTE)
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 51,433 $ 56,303
Accounts receivable-patient, less allowance for doubtful accounts:
1996 - $25,396; 1995 - $22,860 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 524,354 514,820
Accounts receivable-nonpatient, less allowance for doubtful accounts:
1996 - $623; 1995 - $497 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,671 15,995
Notes receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,999 7,460
Operating supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56,374 59,109
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,428 24,892
Prepaid expenses and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39,323 38,013
----------- -----------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 707,582 716,592
Property and equipment, net of accumulated depreciation and amortization:
1996 - $613,885; 1995 - $581,025 . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,211,757 1,189,985
Other assets:
Notes receivable, less allowance for doubtful notes:
1996 - $5,022; 1995 - $4,953 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,233 41,915
Designated and restricted funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59,227 57,082
Goodwill, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 387,644 380,681
Operating and leasehold rights and licenses, net . . . . . . . . . . . . . . . . . . . . 17,313 18,086
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101,148 102,120
----------- -----------
Total other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 605,565 599,884
----------- -----------
$ 2,524,904 $ 2,506,461
=========== ===========

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 114,823 $ 155,385
Short-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55,000 78,000
Accrued wages and related liabilities . . . . . . . . . . . . . . . . . . . . . . . . . 147,530 134,391
Accrued interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,637 10,261
Other accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86,087 88,869
Current portion of long-term obligations . . . . . . . . . . . . . . . . . . . . . . . . 37,710 84,639
----------- -----------
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 457,787 551,545
Long-term obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,076,462 988,909
Deferred income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60,578 54,687
Other liabilities and deferred items . . . . . . . . . . . . . . . . . . . . . . . . . . . 86,860 90,987
Commitments and contingencies
Stockholders' equity:
Common stock, shares issued: 1996 - 104,135,592; 1995 - 102,618,241 . . . . . . . . . . 10,414 10,262
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 769,520 766,549
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 114,348 83,657
Treasury stock, at cost: 1996 - 4,879,108; 1995 - 3,972,208 . . . . . . . . . . . . . (51,065) (40,135)
----------- -----------
Total stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 843,217 820,333
----------- -----------
$ 2,524,904 $ 2,506,461
=========== ===========
</TABLE>

NOTE: The balance sheet at December 31, 1995 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.

2
<PAGE> 4
BEVERLY ENTERPRISES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

THREE-MONTH AND SIX-MONTH PERIODS ENDED JUNE 30, 1996 AND 1995

(UNAUDITED)

(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- ----------------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net operating revenues . . . . . . . . . . . . . . . . . . . $ 798,333 $ 790,375 $ 1,609,380 $ 1,585,994
Interest income . . . . . . . . . . . . . . . . . . . . . . . 3,475 3,262 6,935 6,762
--------- --------- ----------- ----------
Total revenues . . . . . . . . . . . . . . . . . . . . 801,808 793,637 1,616,315 1,592,756
Costs and expenses:
Operating and administrative:
Wages and related . . . . . . . . . . . . . . . . . . . 444,527 424,979 894,522 842,412
Other . . . . . . . . . . . . . . . . . . . . . . . . . 280,006 297,772 573,490 606,313
Interest . . . . . . . . . . . . . . . . . . . . . . . . . 22,983 21,725 46,128 42,274
Depreciation and amortization . . . . . . . . . . . . . . 25,967 26,087 51,023 51,991
--------- --------- ----------- ----------
Total costs and expenses . . . . . . . . . . . . . . . 773,483 770,563 1,565,163 1,542,990
--------- --------- ----------- ----------

Income before provision for income taxes . . . . . . . . . . 28,325 23,074 51,152 49,766
Provision for income taxes . . . . . . . . . . . . . . . . . 11,330 8,768 20,461 18,911
--------- --------- ----------- ----------
Net income . . . . . . . . . . . . . . . . . . . . . . . . . $ 16,995 $ 14,306 $ 30,691 $ 30,855
========= ========= =========== ==========

Net income per share of common stock:
Primary:
Net income applicable to common shares . . . . . . . . . $ 16,995 $ 12,244 $ 30,691 $ 26,730
========= ========= =========== ==========
Net income per share of common stock . . . . . . . . . . $ .17 $ .14 $ .31 $ .31
========= ========= =========== ==========
Shares used to compute net income per share . . . . . . 100,079 87,864 100,028 87,593
========= ========= =========== ==========

Fully diluted:
Net income applicable to common shares . . . . . . . . . $ 18,233 $ 12,244 $ 33,167 $ 26,730
========= ========= =========== ==========
Net income per share of common stock . . . . . . . . . . $ .16 $ .14 $ .30 $ .30
========= ========= =========== ==========
Shares used to compute net income per share . . . . . . 111,341 87,864 111,299 87,659
========= ========= =========== ==========
</TABLE>

For the three-month and six-month periods ended June 30, 1995, net
income applicable to common shares was computed by deducting preferred stock
dividends from net income. During the fourth quarter of 1995, the Company
exchanged its cumulative convertible exchangeable preferred stock into 5 1/2%
convertible subordinated debentures. Primary earnings per share for the
three-month and six-month periods ended June 30, 1996 and 1995 and fully
diluted earnings per share for the three-month and six-month periods ended June
30, 1995 were computed by dividing net income applicable to common shares by
the weighted average number of shares of common stock outstanding during the
period and the weighted average number of shares issuable upon exercise of
stock options, calculated using the treasury stock method. Fully diluted
earnings per share for the three-month and six-month periods ended June 30,
1996 were computed as above and assumed conversion of the Company's 5 1/2%
convertible subordinated debentures. Conversion of the Company's 7 5/8%
convertible subordinated debentures and zero coupon notes would have an
anti-dilutive effect and, therefore, were not assumed.

See accompanying notes.

3
<PAGE> 5
BEVERLY ENTERPRISES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

SIX MONTHS ENDED JUNE 30, 1996 AND 1995

(UNAUDITED)

(IN THOUSANDS)

<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 30,691 $ 30,855
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . 51,023 51,991
Provision for reserves and discounts on patient, notes and other receivables, net 11,549 8,336
Amortization of deferred financing costs . . . . . . . . . . . . . . . . . . . . 2,726 2,193
(Gains) losses on dispositions of facilities and other assets, net . . . . . . . (2,890) 3,848
Deferred taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,271 2,398
Net decrease in insurance related accounts . . . . . . . . . . . . . . . . . . . (8,204) (3,597)
Changes in operating assets and liabilities, net of acquisitions and dispositions:
Accounts receivable - patient . . . . . . . . . . . . . . . . . . . . . . . . (22,809) (42,390)
Operating supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,247 944
Prepaid expenses and other receivables . . . . . . . . . . . . . . . . . . . . (1,752) (1,624)
Accounts payable and other accrued expenses . . . . . . . . . . . . . . . . . (19,662) 1,481
Income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,199 1,645
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,169) (598)
----------- ----------
Total adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,529 24,627
----------- ----------
Net cash provided by operating activities . . . . . . . . . . . . . . . . . 56,220 55,482
Cash flows from investing activities:
Payments for acquisitions, net of cash acquired . . . . . . . . . . . . . . . . . . (25,721) (18,159)
Proceeds from dispositions of facilities and other assets . . . . . . . . . . . . . 12,579 14,068
Collections on notes receivable and REMIC investment . . . . . . . . . . . . . . . . 6,815 10,445
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (79,806) (63,257)
Construction and development in progress, net . . . . . . . . . . . . . . . . . . . 18,414 (17,527)
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4,820) (5,433)
----------- ----------
Net cash used for investing activities . . . . . . . . . . . . . . . . . . (72,539) (79,863)

Cash flows from financing activities:
Revolver borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 601,000 391,000
Repayments of Revolver borrowings . . . . . . . . . . . . . . . . . . . . . . . . . (624,000) (382,000)
Proceeds from issuance of long-term obligations . . . . . . . . . . . . . . . . . . 180,000 25,000
Repayments of long-term obligations . . . . . . . . . . . . . . . . . . . . . . . . (136,834) (24,896)
Purchase of common stock into treasury . . . . . . . . . . . . . . . . . . . . . . . (6,238) ---
Proceeds from exercise of stock options . . . . . . . . . . . . . . . . . . . . . . 2,426 683
Deferred financing costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (5,893) (1,329)
Dividends paid on preferred stock . . . . . . . . . . . . . . . . . . . . . . . . . (688) (4,125)
Proceeds from designated funds, net . . . . . . . . . . . . . . . . . . . . . . . . 1,676 554
----------- ----------
Net cash provided by financing activities . . . . . . . . . . . . . . . . . 11,449 4,887
----------- ----------
Net decrease in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . (4,870) (19,494)
Cash and cash equivalents at beginning of period . . . . . . . . . . . . . . . . . . . . . 56,303 67,964
----------- ----------
Cash and cash equivalents at end of period . . . . . . . . . . . . . . . . . . . . . . . . $ 51,433 $ 48,470
=========== ==========

Supplemental schedule of cash flow information:
Cash paid during the period for:
Interest (net of amount capitalized) . . . . . . . . . . . . . . . . . . . . . . . . $ 37,026 $ 39,345
Income taxes (net of refunds) . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,991 14,868
</TABLE>

See accompanying notes.

4
<PAGE> 6
BEVERLY ENTERPRISES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 1996

(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, 1996 and 1995 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 1995 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, 1996 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.

Certain prior year amounts have been reclassified to conform with the 1996
presentation.

(ii) The provisions for income taxes for the three-month and six-month
periods ended June 30, 1996 and 1995 were based on estimated annual effective
tax rates of 40% and 38%, respectively. The Company's estimated annual
effective tax rates for 1996 and 1995 are different than the federal statutory
rate primarily due to the impact of state income taxes and amortization of
nondeductible goodwill. The Company's estimated annual effective tax rate
increased to 40% in 1996 primarily as a result of amortization of nondeductible
goodwill. The provisions for income taxes consist of the following for the
three-month and six-month periods ended June 30 (in thousands):

<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- --------------------

1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Federal:
Current . . . . . . . . . . . . . $ 4,946 $ 5,871 $ 9,499 $ 12,985
Deferred . . . . . . . . . . . . . 4,074 1,051 6,839 1,945

State:
Current . . . . . . . . . . . . . 1,377 1,569 2,691 3,528
Deferred . . . . . . . . . . . . . 933 277 1,432 453
-------- -------- -------- --------
$ 11,330 $ 8,768 $ 20,461 $ 18,911
======== ======== ======== ========
</TABLE>

(iii) During the six months ended June 30, 1996, the Company purchased five
previously leased nursing facilities (500 beds) and certain other assets,
including among other things hospice and outpatient therapy businesses, for
approximately $26,400,000 cash. Also during such period, the Company sold or
terminated the leases on 67 nursing facilities (3,540 beds) for cash proceeds
of approximately $12,400,000. The Company recognized net pre-tax gains of
approximately $2,900,000 as a result of these dispositions. The operations of
these facilities were immaterial to the Company's financial position and
results of operations.

(iv) In February 1996, the Company completed the sale of $180,000,000 of
9% Senior Notes due February 15, 2006 (the "Senior Notes") through a public
offering (the "Senior Notes offering") for net cash proceeds of approximately
$174,850,000. The Company used approximately $87,500,000 of such net proceeds
to prepay certain scheduled maturities under its 1994 Term Loan, approximately
$28,000,000 to prepay certain scheduled maturities under its 1992 Term
Loan, approximately $8,750,000 to prepay certain scheduled maturities under its
Nippon Term Loan, and the

5
<PAGE> 7
BEVERLY ENTERPRISES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

JUNE 30, 1996

(UNAUDITED)

remaining net proceeds to repay Revolver borrowings and for general corporate
purposes. The Senior Notes are unsecured obligations, guaranteed by
substantially all of the Company's present and future subsidiaries, and impose
on the Company certain restrictive covenants. In addition, the Company amended
certain of its other credit agreements during the second quarter of 1996 to
change various restrictive covenants.

In May 1996, the Company filed a Registration Statement covering
$200,000,000 of debt securities, shares of preferred stock, shares of Common
Stock and warrants to purchase Common Stock which may be offered, separately or
together, in separate series in amounts, at prices and on terms to be
determined at the time of sale. The net proceeds from the offerings are
anticipated to be used for general corporate purposes, which may include, but
are not limited to, working capital, capital expenditures, repayments of
indebtedness and acquisitions. As of June 30, 1996, no securities have been
issued under such registration.

On June 13, 1996, the Company announced that its Board of Directors had, on
that date, authorized a stock repurchase program whereby the Company may
repurchase, from time to time on the open market, up to a total of 10,000,000
shares of its outstanding Common Stock. During June 1996, the Company
repurchased approximately 900,000 shares of its Common Stock at a cost of
approximately $10,900,000. The repurchases were financed primarily through
proceeds from dispositions and borrowings under the Company's revolving credit
facility.

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

(vi) Effective July 31, 1987, Beverly Enterprises, a California corporation
("Beverly California"), became a wholly-owned subsidiary of Beverly
Enterprises, Inc., a Delaware corporation ("Beverly Delaware"). Effective
January 1, 1995, Beverly California changed its name to Beverly Health and
Rehabilitation Services, Inc. ("BHRS") and distributed certain of its
wholly-owned subsidiaries to Beverly Delaware in an effort to better
focus management's attention on specific services delivered by the Company
within the long-term healthcare arena. Such subsidiaries include, among
others, Pharmacy Corporation of America, American Transitional Hospitals, Inc.
and Beverly Indemnity, Ltd. Beverly Delaware (the parent) provides financial,
administrative and legal services to these subsidiaries, including BHRS, for
which it charges management fees.

The following summarized unaudited financial information concerning BHRS is
being reported because BHRS's 7 5/8% convertible subordinated debentures due
March 2003 and its zero coupon notes (collectively, the "Debt Securities") are
publicly held. Beverly Delaware is co-obligor of the Debt Securities. Summary
unaudited financial information for BHRS is as follows (in thousands):

<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- -----------------------
1996 1995 1996 1995
---------- ---------- ---------- ----------
<S> <C> <C>
Total revenues . . . . . . . . . . . . . . . . . . . $ 664,929 $ 697,967 $1,345,202 $1,400,205
Total costs and expenses . . . . . . . . . . . . . . 635,114 676,533 1,293,854 1,358,365
Net income . . . . . . . . . . . . . . . . . . . . . 17,889 13,289 30,809 25,941

AS OF AS OF
JUNE 30, 1996 DECEMBER 31, 1995
------------- -----------------
Current assets . . . . . . . . . . . . . . . . . . . $ 417,420 $ 421,641
Long-term assets . . . . . . . . . . . . . . . . . . 1,382,670 1,365,413
Current liabilities . . . . . . . . . . . . . . . . . 274,821 367,074
Long-term liabilities . . . . . . . . . . . . . . . . 780,371 709,515
</TABLE>

6
<PAGE> 8
BEVERLY ENTERPRISES, INC.

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

JUNE 30, 1996

(UNAUDITED)

GENERAL

Healthcare system reform and concerns over rising Medicare and Medicaid
costs continue to be high priorities for both federal and state
governments. Although no comprehensive healthcare, Medicare or Medicaid reform
legislation has yet been implemented, pressures to contain costs and the active
discussion and issues raised by the Clinton Administration, Congress and
various other groups have impacted the healthcare delivery system. Many states
are experimenting with alternatives to traditional Medicaid delivery systems
through federal waiver programs, and efforts to provide these services more
efficiently will continue to be a priority in the upcoming year. In August
1996, Congress passed the Health Insurance Portability and Accountability Act
of 1996 which, among other things, provides favorable changes in the tax
treatment of long-term care insurance and allows inclusion of long-term care
insurance in medical savings accounts. Although the Company believes this
legislation will have a favorable impact on the long-term care industry,
regulations detailing the implementation of such legislation have not yet been
released, and as such, the full effect is not readily determinable. There can
be no assurances made as to the ultimate impact of this, or future healthcare
reform legislation, on the Company's financial position, results of operations
or cash flows. However, future healthcare reform legislation and regulatory
changes may negatively impact the Company.

Congress recently approved legislation that, upon approval by the President,
would increase the minimum wage. The Company does not anticipate that this
legislation will require a material increase in its wage rates, since a
substantial portion of the Company's associates currently earn in excess of the
proposed new minimum wage levels; however, the Company believes there may be
competitive pressures to increase the wage levels of associates earning above
the proposed new minimum wage. Although the full impact of the proposed new
minimum wage has not yet been determined, the effect on the Company's future
operations is not expected to be material as the Company believes that a
significant portion of such increase will be reimbursed through Medicare and
Medicaid rate increases.

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

As a general matter, increases in the Company's operating costs result in
higher patient rates under Medicaid programs in subsequent periods. However,
the Company's results of operations will continue to be affected by the time
lag in most states between increases in reimbursable costs and the receipt of
related reimbursement rate increases. Medicaid rate increases, adjusted for
inflation, are generally based upon changes in costs for a full calendar year
period. The time lag before such costs are reflected in permitted rates varies
from state to state, with a substantial portion of the increases taking effect
up to 18 months after the related cost increases.

OPERATING RESULTS

SECOND QUARTER 1996 COMPARED TO SECOND QUARTER 1995

Net income was $16,995,000 for the second quarter of 1996, as compared to
net income of $14,306,000 for the same period in 1995. Income before provision
for income taxes was $28,325,000 for the second quarter of 1996, as compared to
$23,074,000 for the same period in 1995. The Company's net income for the
second quarter of 1995 was adversely impacted by a $4,000,000 pre-tax loss on
the early termination of leases on four Connecticut nursing facilities, and
operating shortfalls in its wholly-owned subsidiary, Pharmacy Corporation of
America ("PCA"). The Company's estimated annual effective tax rate increased
to 40% in 1996, compared to 38% in 1995, primarily as a result of amortization
of nondeductible goodwill.

Net operating revenues and operating and administrative costs increased
approximately $7,900,000 and $1,800,000, respectively, for the second quarter
of 1996, as compared to the same period in 1995. These increases consist of the
following: increases in net operating revenues and operating and
administrative costs for facilities which the Company operated during each

7
<PAGE> 9
BEVERLY ENTERPRISES, INC.

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

JUNE 30, 1996

(UNAUDITED)

of the quarters ended June 30, 1996 and 1995 ("same facility operations") of
approximately $6,400,000 and $6,100,000, respectively; increases in net
operating revenues and operating and administrative costs of approximately
$40,700,000 and $34,200,000, respectively, related to the acquisition of
Pharmacy Management Services, Inc. ("PMSI") in mid-1995 and the expanded
operations of American Transitional Hospitals, Inc. ("ATH"); and decreases in
net operating revenues and operating and administrative costs of approximately
$39,200,000 and $38,500,000, respectively, due to the disposition of, or lease
terminations on, 67 facilities in 1996 and 29 facilities in 1995.

The increase in net operating revenues for same facility operations for the
second quarter of 1996, as compared to the same period in 1995, was due
primarily to increases in Medicare and Medicaid room and board rates of
approximately $24,500,000. This increase in net operating revenues was
partially offset by the following: approximately $7,600,000 due to a decrease
in same facility occupancy to 87.4% for the second quarter of 1996, as compared
to 88.7% for the same period in 1995; approximately $4,400,000 due to decreases
in ancillary revenues primarily due to the Company's continuing efforts to
bring therapists on staff as opposed to contracting for their services; and
approximately $6,100,000 due to various other items.

The increase in operating and administrative costs for same facility
operations for the second quarter of 1996, as compared to the same period in
1995, was due to the following: approximately $25,300,000 due to increased
wages and related expenses (excluding pharmacy) principally due to higher wages
and greater benefits required to attract and retain qualified personnel, the
hiring of therapists on staff as opposed to contracting for their services and
increased staffing levels in the Company's nursing facilities to cover
increased patient acuity; approximately $3,000,000 due to increases in nursing
supplies and other variable costs; and approximately $3,700,000 due to various
other items. These increases in operating and administrative costs were
partially offset by approximately $25,900,000 due to a decrease in contracted
therapy expenses as a result of hiring therapists on staff as opposed to
contracting for their services.

Interest expense increased approximately $1,300,000 as compared to the
same period in 1995 primarily due to the exchange of Preferred Stock into 5
1/2% Convertible Subordinated Debentures in November 1995, as well as the
issuance of $25,000,000 of taxable revenue bonds ("Series 1995 Bonds") during
1995, partially offset by a reduction of approximately $52,800,000 of long-term
obligations in conjunction with the disposition of certain facilities.
Although depreciation and amortization expense remained flat quarter over
quarter, it was affected by the following: approximately $2,200,000 decrease
related to the disposition of, or lease terminations on, certain facilities,
offset by an increase of approximately $2,100,000 due to the acquisition of
PMSI in mid-1995 and the expanded operations of ATH.

SIX MONTHS 1996 COMPARED TO SIX MONTHS 1995

Net income was $30,691,000 for the six months ended June 30, 1996, as
compared to net income of $30,855,000 for the same period in 1995. Income
before provision for income taxes was $51,152,000 for the six months ended June
30, 1996, as compared to $49,766,000 for the same period in 1995.

Net operating revenues and operating and administrative costs increased
approximately $23,400,000 and $19,300,000, respectively, for the six months
ended June 30, 1996, as compared to the same period in 1995. These increases
consist of the following: increases in net operating revenues and operating
and administrative costs for facilities which the Company operated during each
of the six-month periods ended June 30, 1996 and 1995 ("same facility
operations") of approximately $11,700,000 and $19,000,000, respectively;
increases in net operating revenues and operating and administrative costs of
approximately $79,100,000 and $66,700,000, respectively, related to the
acquisition of PMSI in mid-1995 and the expanded operations of ATH; and
decreases in net operating revenues and operating and administrative costs of
approximately $67,400,000 and $66,400,000, respectively, due to the disposition
of, or lease terminations on, 67 facilities in 1996 and 29 facilities in 1995.

The increase in net operating revenues for same facility operations for the
six months ended June 30, 1996, as compared to the same period in 1995, was due
to the following: approximately $45,800,000 due primarily to increases in
Medicare and Medicaid room and board rates; and approximately $5,600,000 due to
one additional calendar day for the six months ended June 30, 1996, as compared
to the same period in 1995. These increases in net operating revenues were
partially offset by approximately $17,100,000 due to a decrease in same
facility occupancy to 87.6% for the six months ended June 30, 1996, as

8
<PAGE> 10
BEVERLY ENTERPRISES, INC.

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

JUNE 30, 1996

(UNAUDITED)

compared to 89.1% for the same period in 1995; approximately $10,700,000 due to
decreases in ancillary revenues primarily due to the Company's continuing
efforts to bring therapists on staff as opposed to contracting for their
services; approximately $4,500,000 due to decreases in pharmacy-related
revenues primarily related to changes in pricing and service levels at PCA; and
approximately $7,400,000 due to various other items.

The increase in operating and administrative costs for same facility
operations for the six months ended June 30, 1996, as compared to the same
period in 1995, was due to the following: approximately $56,100,000 due to
increased wages and related expenses (excluding pharmacy) principally due to
the hiring of therapists on staff as opposed to contracting for their services,
higher wages and greater benefits required to attract and retain qualified
personnel and increased staffing levels in the Company's nursing facilities to
cover increased patient acuity; approximately $5,400,000 due to increases in
nursing supplies and other variable costs; and approximately $10,900,000 due
primarily to increases in pharmacy-related costs and various other items.
These increases in operating and administrative costs were partially offset by
approximately $53,400,000 due to a decrease in contracted therapy expenses as a
result of hiring therapists on staff as opposed to contracting for their
services.

Interest expense increased approximately $3,900,000 as compared to the
same period in 1995 primarily due to the exchange of Preferred Stock into 5
1/2% Convertible Subordinated Debentures in November 1995, write-off of
unamortized deferred financing costs associated with certain debt that was
repaid with the net cash proceeds from the issuance of Senior Notes (as
discussed below), as well as the issuance and assumption of approximately
$40,000,000 of long-term obligations in conjunction with certain acquisitions
and the issuance of $25,000,000 Series 1995 Bonds during 1995, partially offset
by a reduction of approximately $52,800,000 of long-term obligations in
conjunction with the disposition of certain facilities. Although depreciation
and amortization expense decreased only $1,000,000 as compared to the same
period in 1995, it was affected by the following: approximately $4,900,000
decrease related to the disposition of, or lease terminations on, certain
facilities, offset by an increase of approximately $3,900,000 due to the
acquisition of PMSI in mid-1995 and the expanded operations of ATH.

LIQUIDITY AND CAPITAL RESOURCES

At June 30, 1996, the Company had approximately $51,400,000 in cash and
cash equivalents and net working capital of approximately $249,800,000. The
Company anticipates that approximately $28,600,000 of its existing cash at June
30, 1996, while not legally restricted, will be utilized to fund certain
workers' compensation and general liability claims, and the Company does not
expect to use such cash for other purposes. The Company had approximately
$63,700,000 of unused commitments under its Revolver/Letter of Credit Facility
as of June 30, 1996.

Net cash provided by operating activities for the six months ended June 30,
1996 was approximately $56,200,000. Net cash used for investing activities
and net cash provided by financing activities were approximately $72,500,000
and $11,400,000, respectively, for the six months ended June 30, 1996. The
Company primarily used cash generated from operations to fund capital
expenditures, construction and development costs totaling approximately
$61,400,000. The Company received net cash proceeds of approximately
$174,850,000 from the issuance of Senior Notes (as discussed below) and
approximately $12,600,000 from the dispositions of facilities and other assets
which were primarily used to repay approximately $136,800,000 of long-term
obligations, to fund acquisitions of approximately $25,700,000, to repurchase
shares of common stock (as discussed below), and to repay Revolver borrowings.

In February 1996, the Company completed the sale of $180,000,000 of 9%
Senior Notes due February 15, 2006 (the "Senior Notes") through a public
offering (the "Senior Notes offering") for net cash proceeds of approximately
$174,850,000. The Company used approximately $87,500,000 of such net proceeds
to prepay certain scheduled maturities under its 1994 Term Loan, approximately
$28,000,000 to prepay certain scheduled maturities under its 1992 Term Loan,
approximately $8,750,000 to prepay certain scheduled maturities under its
Nippon Term Loan, and the remaining net proceeds to repay Revolver borrowings
and for general corporate purposes. The Senior Notes are unsecured
obligations, guaranteed by substantially all of the Company's present and
future subsidiaries, and impose on the Company certain restrictive covenants.
In addition, the Company amended certain of its other credit agreements during
the second quarter of 1996 to change various restrictive covenants.

9
<PAGE> 11
BEVERLY ENTERPRISES, INC.

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

JUNE 30, 1996

(UNAUDITED)

The Company believes that its existing cash and cash equivalents, working
capital from operations, borrowings under its banking arrangements, issuance of
certain debt securities and refinancings of certain existing indebtedness will
be adequate to repay its debts due within one year of approximately
$37,700,000, to make normal recurring capital additions and improvements for
the twelve months ending June 30, 1996 of approximately $170,000,000, to make
selective acquisitions, including the purchase of previously leased facilities,
and to meet working capital requirements.

As of June 30, 1996, the Company had total indebtedness of approximately
$1,114,200,000 (excluding $55,000,000 of Revolver borrowings) and total
stockholders' equity of approximately $843,200,000. The ability of the
Company to satisfy its long-term obligations will be dependent upon its future
performance, which will be subject to prevailing economic conditions and to
financial, business and other factors beyond the Company's control, such as
federal and state healthcare reform. In addition, healthcare service
providers, such as the Company, operate in an industry that is currently
subject to significant changes from business combinations, new strategic
alliances, legislative reform, increased regulatory oversight, aggressive
marketing practices by competitors and market pressures. In this environment,
the Company is frequently contacted by, and otherwise engages in discussions
with, other healthcare companies and financial advisors regarding possible
strategic alliances, joint ventures, business combinations and other financial
alternatives. The terms of substantially all of the Company's debt instruments
require the Company to repay or refinance indebtedness under such debt
instruments in the event of a change of control. There can be no assurance
that the Company will have the financial resources to repay such indebtedness
upon a change of control. See "-- General."

10
<PAGE> 12

PART II

BEVERLY ENTERPRISES, INC.

OTHER INFORMATION

JUNE 30, 1996

(UNAUDITED)

ITEM 1. LEGAL PROCEEDINGS

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

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

On June 13, 1996, the Company held its Annual Meeting of Stockholders in
Fort Smith, Arkansas, for the purposes of electing nine members of the Board of
Directors, considering the Beverly Enterprises, Inc. 1996 Long-Term Incentive
Plan, ratifying the appointment of Ernst & Young LLP as independent auditors
for 1996 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:

<TABLE>
<CAPTION>
DIRECTOR FOR WITHHELD
----------------------- ---------- ---------
<S> <C> <C>
Beryl F. Anthony, Jr. . . . . . . . . . . . 78,503,862 5,682,067
David R. Banks . . . . . . . . . . . . . . 82,736,073 1,449,856
James R. Greene . . . . . . . . . . . . . . 78,500,742 5,685,187
Boyd W. Hendrickson . . . . . . . . . . . . 82,741,019 1,444,910
Edith E. Holiday . . . . . . . . . . . . . 78,506,683 5,679,246
Jon E. M. Jacoby . . . . . . . . . . . . . 78,507,647 5,678,282
Risa J. Lavizzo-Mourey, M.D. . . . . . . . 78,507,647 5,678,282
Louis W. Menk . . . . . . . . . . . . . . . 78,499,879 5,686,050
Marilyn R. Seymann . . . . . . . . . . . . 78,508,499 5,677,430
</TABLE>

The Beverly Enterprises, Inc. 1996 Long-Term Incentive Plan was approved at
the meeting. The following table sets forth the number of votes for and
against, as well as abstentions as to this matter:

<TABLE>
<S> <C>
For . . . . . . . . . . . . . . . . . . . . . 58,928,016
Against . . . . . . . . . . . . . . . . . . . 23,278,542
Abstentions . . . . . . . . . . . . . . . . . 1,979,371
</TABLE>

The appointment of Ernst & Young LLP as independent auditors for 1996 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:

<TABLE>
<S> <C>
For . . . . . . . . . . . . . . . . . . . . . 83,689,570
Against . . . . . . . . . . . . . . . . . . . 273,385
Abstentions . . . . . . . . . . . . . . . . . 222,994
</TABLE>

11
<PAGE> 13
BEVERLY ENTERPRISES, INC.

OTHER INFORMATION (CONTINUED)

JUNE 30, 1996

(UNAUDITED)

ITEM 6(a). EXHIBITS

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
10.1* Beverly Enterprises, Inc. 1996 Long-Term Incentive Plan
10.2* Employment Contract, made as of December 8, 1995, between Beverly
Enterprises, Inc. and David R. Banks
10.3* Employment Contract, made as of December 8, 1995, between Beverly
Enterprises, Inc. and Boyd W. Hendrickson
10.4* Employment Contract, made as of June 3, 1996, between Beverly
Enterprises, Inc. and C. Arnold Renschler
10.5* Addendum to Employment Contract between Beverly Enterprises, Inc. and
C. Arnold Renschler
10.6 Sixteenth Amendment dated as of June 5, 1996 to the LTCB Credit
Agreement
10.7 Seventeenth Amendment dated as of June 28, 1996 to the LTCB Credit
Agreement
10.8 Tenth Amendment dated as of June 28, 1996 to the Nippon Credit
Agreement
10.9 Fourth Amendment dated as of June 28, 1996 to the Morgan Credit
Agreement
11.1 Computation of Net Income Per Share
27.1 Financial Data Schedule for the six months ended June 30, 1996
</TABLE>

* Exhibits 10.1 through 10.5 are the management contracts,
compensatory plans, contracts, and arrangements in which any
director or named executive officer participates.

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

No reports on Form 8-K were filed by the Company during the quarter ended
June 30, 1996.

12
<PAGE> 14
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 14, 1996 By: /s/ SCOTT M. TABAKIN
----------------------------------
Scott M. Tabakin
Senior Vice President, Controller,
Chief Accounting Officer and
Acting Chief Financial Officer

<PAGE> 15

EXHIBIT INDEX

* Exhibits 10.1 through 10.5 are the management contracts,
compensatory plans, contracts, and arrangements in which any
director or named executive officer participates.

<PAGE> 1
EXHIBIT 10.1

BEVERLY ENTERPRISES, INC.
1996 LONG-TERM INCENTIVE PLAN

SECTION 1. PURPOSE

Beverly Enterprises, Inc. (hereinafter referred to as the "Company"), a
Delaware corporation, hereby establishes the Beverly Enterprises, Inc. 1996
Long-Term Incentive Plan (the "Plan") to promote the interests of the Company
and its stockholders through the (i) attraction and retention of executive
officers and other key employees essential to the success of the Company; (ii)
motivation of executive officers and other key employees using
performance-related incentives linked to longer-range performance goals and the
interests of Company stockholders; and (iii) enabling of such employees to
share in the long-term growth and success of the Company. The Plan permits the
grant of Nonqualified Stock Options, Incentive Stock Options (intended to
qualify under Section 422 of the Internal Revenue Code of 1986, as amended),
Stock Appreciation Rights, Restricted Stock, Restricted Stock Units,
Performance Shares, Performance Units, Bonus Stock, and any other Stock Unit
Awards or stock-based forms of awards as the Committee may determine under its
sole and complete discretion at the time of grant.

SECTION 2. DEFINITIONS

Except as otherwise defined in the Plan, the following terms shall have the
meanings set forth below:

2.1 "Affiliate" shall have the meaning ascribed to such term in Rule
12b-2 under the Exchange Act.

2.2 "Agreement" means a written agreement implementing the grant of
each Award signed by an authorized officer of the Company and by
the Participant.

2.3 "Award" means individually or collectively, a grant under this Plan
of any one of Nonqualified Stock Options, Incentive Stock Options,
Stock Appreciation Rights, Restricted Stock, Restricted Stock
Units, Performance Units, Performance Shares, Bonus Stock or Other
Stock Unit Awards.

2.4 "Award Date" or "Grant Date" means the date on which an Award is
made by the Committee under this Plan.

2.5 "Beneficial Owner" shall have the meaning ascribed to such term in
Rule 13d-3 under the Exchange Act.

1
<PAGE> 2

2.6 "Board" or "Board of Directors" means the Board of Directors of the
Company.

2.7 "Bonus Stock" means an Award granted pursuant to Section 10 of the
Plan expressed as a Share which may or may not be subject to
restrictions.

2.8 "Cashless Exercise" means the exercise of an Option by the
Participant through the use of a brokerage firm to make payment to
the Company of the Exercise Price either from the proceeds of a
loan to the Participant from the brokerage firm or from the
proceeds of the sale of Stock issued pursuant to the exercise of
the Option, and upon receipt of such payment, the Company delivers
the exercised Shares to the brokerage firm.

2.9 "Change in Control" shall be deemed to have occurred if the
conditions set forth in any one of the following paragraphs shall
have been satisfied:

(a) Any person, corporation or other entity or group, including
any "group" as defined in Section 13 (d) (3) of the Exchange
Act, becomes the beneficial owner of Shares having 30% or
more of the total number of votes that may be cast for the
election of directors of the Company; or

(b) As the result of, or in connection with, any tender or
exchange offer, merger or other business combination, sale of
assets or contested election, or any combination of the
foregoing (a "Transaction"), the persons who were directors
of the Company before the Transaction shall cease to
constitute a majority of the Board of Directors of the
Company or any successor to the Company or its assets; or

(c) If at any time, (i) the Company shall consolidate with, or
merge with, any other Person and the Company shall not be the
continuing or surviving corporation, (ii) any Person shall
consolidate with, or merge with, the Company, and the Company
shall be the continuing or surviving corporation and in
connection therewith, all or part of the outstanding Stock
shall be changed into or exchanged for stock or other
securities of any other Person or cash or any other property,
(iii) the Company shall be a party to a statutory share
exchange with any other Person after which the Company is a
Subsidiary of any other Person, or (iv) the Company shall
sell or otherwise transfer 50% or more of the assets or
earnings power of the Company and its Subsidiaries (taken as
a whole) to any Person or Persons.

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

2.11 "Committee" means the Compensation Committee of the Board which
will administer the Plan pursuant to Section 3 herein, provided
however, any member who is not both a "disinterested director"
within the meaning of Rule 16b-3 and an "outside director" within
the meaning of Section 162(m) shall not serve as a Committee member
for the purpose of this Plan unless there would otherwise be less
than two members of the Committee.

2
<PAGE> 3

2.12 "Common Stock" or "Stock" means the Common Stock of the Company,
with a par value of $.10 per share, or such other security or right
or instrument into which such Common Stock may be changed or
converted in the future.

2.13 "Company" means Beverly Enterprises, Inc., including all Affiliates
and wholly owned Subsidiaries, or any successor thereto.

2.14 "Covered Participant" means a Participant who is a "covered
employee" as defined in Section 162 (m) (3) of the Code, and the
regulations promulgated thereunder, or who the Committee believes
will be such a covered employee for a Performance Period.

2.15 "Department" means the Compensation and Benefits Department of the
Company.

2.16 "Designated Beneficiary" means the beneficiary designated by the
Participant, pursuant to procedures established by the Department,
to receive amounts due to the Participant in the event of the
Participant's death. If the Participant does not make an effective
designation, then the Designated Beneficiary will be deemed to be
the Participant's estate.

2.17 "Disability" means (i) the mental or physical disability, either
occupational or non-occupational in origin, of the Participant
defined as "Total Disability" in the Disability Plan of the Company
currently in effect and as amended from time to time; or (ii) a
determination by the Committee of "Total Disability" based on
medical evidence that precludes the Participant from engaging in
any occupation or employment for wage or profit for at least twelve
months and appears to be permanent.

2.18 "Divestiture" means the sale of, out sourcing of, or closing by,
the Company of the business operations in which the Participant is
employed, or the elimination of the Participant's position at the
Company's discretion.

2.19 "Early Retirement" means retirement of a Participant from
employment with the Company after age 55, but prior to age 65, as
approved by the Committee.

2.20 "Exchange Act" means the Securities Exchange Act of 1934, as
amended.

2.21 "Exercise Price" means the price per share determined on the Grant
Date by the Committee, provided that except as set forth in Section
6.2, the Exercise Price shall not be less than 100% of Fair Market
Value on the Grant Date.

2.22 "Executive Officer" means any employee designated by the Company as
an officer or any employee covered by Rule 16b-3 of the Exchange
Act.

2.23 "Fair Market Value" means, on any given date, the closing price of
Stock as reported on the New York Stock Exchange composite tape on
such day or, if no Shares were traded on the New York Stock
Exchange on such day, then on the next preceding day that Stock was
traded on such exchange, all as reported by such source as the
Committee may select.

3
<PAGE> 4

2.24 "Full-time Employee" means an employee designated by the Company's
Department as being a "permanent, full-time employee" who is
eligible for all plans and programs of the Company set forth for
such employees. This designation excludes all part-time, temporary,
or contract employees or consultants to the Company.

2.25 "Incentive Stock Option" or "ISO" means an option to purchase
Stock, granted under Section 6 herein, which is designated as an
incentive stock option and is intended to meet the requirements of
Section 422 of the Code.

2.26 "Key Employee" means an officer or other key employee of the
Company or its Subsidiaries, who, in the opinion of the Committee,
can contribute significantly to the growth and profitability of, or
perform services of major importance to, the Company and its
Subsidiaries.

2.27 "Nonqualified Stock Option" or "NQSO" means an option to purchase
Stock, granted under Article 6 herein, which is not intended to be
an Incentive Stock Option.

2.28 "Normal Retirement" means the retirement of any Participant at age
65 or at some earlier date if approved by the Committee.

2.29 "Option" means an Incentive Stock Option or a Nonqualified Stock
Option.

2.30 "Other Stock Unit Award" means awards, granted pursuant to Section
11 herein, of Stock or other securities that are valued in whole or
in part by reference to, or are otherwise based on, Shares or other
securities of the Company.

2.31 "Participant" means a Key Employee who has been granted an Award
under the Plan.

2.32 "Performance Criteria" or "Performance Goals" or "Performance
Measures" mean the objectives established by the Committee for a
Performance Period, for the purpose of determining when an Award
subject to such objectives are earned which shall consist of any
one or more of the following business or financial goals of the
Company: absolute or relative increases in total stockholder
return, economic value added, return on capital employed, revenues,
sales, net income, earnings per share, return on equity, cash flow,
operating margin, or net worth of the Company, any of its
subsidiaries, divisions or other areas of the Company.

2.33 "Performance Award" means a performance-based Award, which may be
in the form of either Performance Shares or Performance Units.

2.34 "Performance Period" means the time period designated by the
Committee during which performance goals must be met.

2.35 "Performance Share" means an Award, designated as a Performance
Share, granted to a Participant pursuant to Section 9 herein, the
value of which is determined, in whole

4
<PAGE> 5

or in part, by the value of Stock in a manner deemed appropriate by
the Committee and described in the Agreement.

2.36 "Performance Unit" means an Award, designated as a Performance
Unit, granted to a Participant pursuant to Section 9 herein, the
value of which is determined, in whole or in part, by the
attainment of pre-established performance goals relating to
Company financial or operating performance as deemed appropriate by
the Committee and described in the Agreement.

2.37 "Period of Restriction" means the period during which the transfer
of Shares of Restricted Stock is restricted, pursuant to Section 8
herein.

2.38 "Person" shall have the meaning ascribed to such term in Section 3
(a) (9) of the Exchange Act and used in Sections 13 (d) and 14 (d)
thereof, including a "group" as defined in Section 13 (d).

2.39 "Plan" means the Beverly Enterprises, Inc. 1996 Long-Term Incentive
Plan as herein described and as hereafter from time to time
amended.

2.40 "Restricted Stock" means an Award of Stock granted to a Participant
pursuant to Section 8 herein.

2.41 "Restricted Stock Unit" means a fixed or variable dollar
denominated right to acquire Stock, which may or may not be subject
to restrictions, contingently awarded under Section 8 of the Plan.

2.42 "Rule 16b-3" means Rule 16b-3 under Section 16(b) of the Exchange
Act as adopted in Exchange Act Release No. 34-29131 (April 26,
1991), or any successor rule as amended from time to time.

2.43 "Section 16" means Section 16 of the Exchange Act, or any successor
section under the Exchange Act, and as amended from time to time
and as interpreted by regulations and rules promulgated thereunder
from time to time.

2.44 "Section 162(m)" means Section 162(m) of the Code, or any successor
section under the Code, as amended from time to time and as
interpreted by final or proposed regulations promulgated thereunder
from time to time.

2.45 "Securities Act" means the Securities Act of 1933 and the rules and
regulations promulgated thereunder, or any successor law, as
amended from time to time.

2.46 "Shares" means shares of the Common Stock of the Company.

2.47 "Stock Appreciation Right" means the right to receive an amount
equal to the excess of the Fair Market Value of a share of Stock
(as determined on the date of exercise) over the Exercise Price of
a related Option or the Fair Market Value of the Stock on the Date
of Grant of the Stock Appreciation Right.

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2.48 "Subsidiary" means a corporation in which the Company owns, either
directly or through one or more of its Subsidiaries, at least 50%
of the total combined voting power of all classes of stock.

SECTION 3. ADMINISTRATION

3.1 The Committee. The Plan shall be administered and interpreted by the
Committee which shall have full authority and all powers necessary or desirable
for such administration. The express grant in this Plan of any specific power
to the Committee shall not be construed as limiting any power or authority of
the Committee. In its sole and complete discretion the Committee may adopt,
alter, suspend or repeal any such administrative rules, regulations,
guidelines, and practices governing the operation of the Plan as it shall from
time to time deem advisable. In addition to any other powers and, subject to
the provisions of the Plan, the Committee shall have the following specific
powers: (i) to determine the terms and conditions upon which the Awards may be
made and exercised; (ii) to determine all terms and provisions of each
Agreement, which need not be identical for types of awards nor for the same
type of award to different participants; (iii) to construe and interpret the
Agreements and the Plan; (iv) to establish, amend, or waive rules or
regulations for the Plan's administration; (v) to accelerate the exercisability
of any Award, the length of a Performance Period or the termination of any
Period of Restriction; and (vi) to make all other determinations and take all
other actions necessary or advisable for the administration of the Plan. The
Committee may take action by a meeting in person, by unanimous written consent,
or by meeting with the assistance of communications equipment which allows all
Committee members participating in the meeting to communicate in either oral or
written form. The Committee may seek the assistance or advice of any persons it
deems necessary to the proper administration of the Plan.

3.2 Selection of Participants. The Committee shall have sole and complete
discretion in determining those Key Employees who shall participate in the
Plan. The Committee may request recommendations for individual awards from the
Chief Executive Officer of the Company and may delegate to the Chief Executive
Officer of the Company the authority to make Awards to Participants who are not
Executive Officers of the Company or Covered Participants, subject to a fixed
maximum Award amount for such a group and a maximum Award amount for any one
Participant, as determined by the Committee. Awards made to the Executive
Officers or Covered Participants shall be determined by the Committee.

3.3 Committee Decisions. All determinations and decisions made by the
Committee pursuant to the provisions of the Plan shall be final, conclusive,
and binding upon all persons, including the Company, its stockholders,
employees, Participants, and Designated Beneficiaries, except when the terms of
any sale or award of shares of Stock or any grant of rights or Options under
the Plan are required by law or by the Articles of Incorporation or Bylaws of
the Company to be approved by the Company's Board of Directors or stockholders
prior to any such sale, award or grant.

3.4 Rule 16b-3 Requirements. Notwithstanding any other provision of the Plan,
the Committee may impose such conditions on any Award, and the Board may amend
the Plan in any such respects, as may be required to satisfy the requirements
of Rule 16b-3 or Section 162(m).

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3.5 Indemnification of Committee. In addition to such other rights of
indemnification as they may have as directors or as members of the Committee,
the members of the Committee shall be indemnified by the Company against
reasonable expenses incurred from their administration of the Plan. Such
reasonable expenses include, but are not limited to, attorneys' fees, actually
and reasonably incurred in connection with the defense of any action, suit or
proceeding, or in connection with any appeal therein, to which they or any of
them may be a party by reason of any action taken or failure to act under or in
connection with the Plan or any Award granted or made hereunder, and against
all reasonable amounts paid by them in settlement thereof or paid by them in
satisfaction of a judgment in any such action, suit or proceeding, if such
members acted in good faith and in a manner which they believed to be in, and
not opposed to, the best interests of the Company and its Subsidiaries.

SECTION 4. ELIGIBILITY

The Committee in its sole and complete discretion shall determine the Key
Employees, including officers, who shall be eligible for participation under
the Plan, subject to the following limitations: (i) no non-Employee director
of the Company shall be eligible to participate under the Plan; (ii) no member
of the Committee shall be eligible to participate under the Plan; (iii) no
person owning, directly or indirectly, more than 5% of the total combined
voting power of all classes of stock of the Company shall be eligible to
participate under the Plan; and (iv) only Full-Time Employees shall be eligible
to participate under the Plan.

SECTION 5. SHARES SUBJECT TO THE PLAN

5.1 Number of Shares. Subject to adjustment as provided in Section 5.4 herein
and except as limited below, the maximum aggregate number of Shares that may
be issued pursuant to Awards made under the Plan shall not exceed 4,000,000
Shares which may be in any combination of Options, Stock Appreciation Rights;
Restricted Stock, Restricted Stock Units, Performance Shares, Performance
Units, Bonus Stock, or Other Stock Unit Awards. No more than 2,000,000 Shares
may be issued pursuant to Awards of Restricted Stock, Restricted Stock Units,
Performance Shares, Performance Units, Bonus Stock or Other Stock Unit Awards.
Shares of Common Stock may be available from the authorized, but unissued
Shares or Shares acquired by the Company, including Shares purchased in the
open market. Except as provided in Sections 5.2 and 5.3 herein, the issuance
of Shares in connection with the exercise of, or as other payment for, Awards
under the Plan shall reduce the number of Shares available for future Awards
under the Plan.

5.2 Lapsed Awards of Forfeited Shares. Except as provided below, in the event
that (i) any Option or other Award granted under the Plan terminates, expires,
or lapses for any reason other than exercise of the Award, or (ii) if Shares
issued pursuant to the Awards are canceled or forfeited for any reason, such
Shares subject to such Award shall thereafter be again available for grant of
an Award under the Plan. Notwithstanding the above, with respect to Covered
Participants, Options may not be granted that exceed the maximum number of
Shares for which Options may be issued to the Participants hereunder and
cancelled or forfeited Shares shall continue to be counted against the maximum
aggregate number of Shares that may be granted pursuant to Awards.

5.3 Delivery of Shares as Payment. In the event a Participant pays for any
Option or other Award granted under the Plan through the delivery of previously
acquired Shares the number of Shares

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<PAGE> 8

available for Awards under the Plan shall be increased by the number of shares
surrendered by the Participant.

5.4 Capital Adjustments. The number and class of Shares subject to each
outstanding Award, the Exercise Price and the aggregate number, type and class
of Shares for which Awards thereafter may be made shall be subject to
adjustment, if any, as the Committee deems appropriate, based on the occurrence
of a number of specified and non-specified events. Such specified events are
discussed in this Section 5.4, but such discussion is not intended to provide
an exhaustive list of such events which may necessitate such adjustments.

(a) If the outstanding Shares are increased, decreased or exchanged through
merger, consolidation, sale of all or substantially all of the property of
the Company, reorganization, recapitalization, reclassification, stock
dividend, stock split or other distribution in respect to such Shares, for
a different number of Shares or type of securities, or if additional Shares
or new or different Shares or other securities are distributed with respect
to such Shares, an appropriate and proportionate adjustment shall be made
in: (i) the maximum number of shares of Stock available for the Plan as
provided in Section 5.1 herein, (ii) the type of shares or other securities
available for the Plan, (iii) the number of shares subject to any then
outstanding Awards under the Plan, and (iv) the price (including Exercise
Price) for each share (or other kind of shares or securities) subject to
then outstanding Awards, but without change in the aggregate purchase price
as to which such Options remain exercisable or Restricted Stock releasable.

(b) In the event other events not specified above in this Section 5.4, such as
any extraordinary cash dividend, split-up, spin-off, combination, exchange
of shares, warrants or rights offering to purchase Common Stock, or other
similar corporate event, affect the Common Stock such that an adjustment is
necessary to maintain the benefits or potential benefits intended to be
provided under this Plan, then the Committee in its discretion may make
adjustments to any or all of (i) the number and type of shares which
thereafter may be optioned and sold or awarded or made subject to Stock
Appreciation Rights under the Plan, (ii) the Exercise Price of any Award
made under the Plan thereafter, and (iii) the number and Exercise Price of
each Share (or other kind of shares or securities) subject to then
outstanding awards, but without change in the aggregate purchase price as
to which such Options remain exercisable or Restricted Stock releasable.

(c) Any adjustment made by the Committee pursuant to the provisions of this
Section 5.4 subject to approval by the Board of Directors, shall be final,
binding and conclusive. A notice of such adjustment, including
identification of the event causing such an adjustment, the calculation
method of such adjustment, and the change in price and the number of Shares
or securities, cash or property purchasable subject to each Award shall be
sent to each Participant. No fractional interests shall be issued under the
Plan based on such adjustments.

SECTION 6. STOCK OPTIONS

6.1 Grant of Stock Options. Subject to the terms and provisions of the Plan
and applicable law, the Committee, at any time and from time to time, may grant
Options to Key Employees as it shall determine. The Committee shall have sole
and complete discretion in determining the type of

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<PAGE> 9

Option granted, the Exercise Price, the duration of the Option, the number of
Shares to which an Option pertains, any conditions imposed upon the
exercisability of the Options, the conditions under which the Option may be
terminated and any such other provisions as may be warranted to comply with the
law or rules of any securities trading system or stock exchange. Each Option
grant shall have such specified terms and conditions detailed in an Agreement.
The Agreement shall specify whether the Option is intended to be an Incentive
Stock Option within the meaning of Section 422 of the Code, or a Nonqualified
Stock Option not intended to be within the provisions of Section 422 of the
Code.

6.2 Exercise Price. The Exercise Price per Share covered by an Option shall be
determined at the time of grant by the Committee, subject to the limitation
that the Exercise Price shall not be less than 100% of Fair Market Value on the
Grant Date. However, Options issued upon assumption of an acquired company's
options may be issued at an Exercise Price less than 100% of the Fair Market
Value.

6.3 Exercisability. Options granted under the Plan shall be exercisable at
such times and be subject to such restrictions and conditions as the Committee
shall determine, which will be specified in the Agreement and need not be the
same for each Participant. However, for Participants subject to Section 16, no
Option granted under the Plan may be exercisable until the expiration of at
least six months after the Grant Date (except that such limitations shall not
apply in the case of death or Disability of the Participant, or a Change in
Control of the Company), nor after the expiration of ten years from the Grant
Date.

6.4 Method of Exercise. Options shall be exercised by the delivery of a
written notice from the Participant to the Company in the form prescribed by
the Committee setting forth the number of Shares with respect to which the
Option is to be exercised, accompanied by full payment of the Exercise Price
for the Shares. The Exercise Price shall be payable to the Company in full in
cash, or its equivalent, or by delivery of Shares (not subject to any security
interest or pledge) valued at Fair Market Value at the time of exercise or by a
combination of the foregoing. In addition, at the request of the Participant,
and subject to applicable laws and regulations, the Company may (but shall not
be required to) cooperate in a Cashless Exercise of the Option. As soon as
practicable, after receipt of written notice and payment, the Company shall
deliver to the Participant, stock certificates in an appropriate amount based
upon the number of Shares with respect to which the option is exercised, issued
in the Participant's name.

SECTION 7. STOCK APPRECIATION RIGHTS

7.1 Grant of Stock Appreciation Rights. Subject to the terms and provisions of
the Plan and applicable law, the Committee, at any time and from time to time,
may grant freestanding Stock Appreciation Rights, Stock Appreciation Rights in
tandem with an Option, or Stock Appreciation Rights in addition to an Option.
Stock Appreciation Rights granted in tandem with an Option or in addition to an
Option may be granted at the time of the Option or at a later time. For
Participants subject to Section 16, no Stock Appreciation Rights granted under
the Plan may be exercisable until the expiration of at least six months after
the Grant Date (except that such limitations shall not apply in the case of
death or disability of the Participant, or a Change in Control of the Company),
nor after the expiration of ten years from the Grant Date.

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<PAGE> 10

7.2 Exercise Price. The Exercise Price of each Stock Appreciation Right shall
be determined on the grant date by the Committee, subject to the limitation
that the Exercise Price shall not be less than 100% of Fair Market Value on the
Grant Date.

7.3 Exercise. The Participant is entitled to receive an amount equal to its
excess of the Fair Market Value over the Exercise Price thereof on the date of
exercise of the Stock Appreciation Right. However, for administrative
purposes, the Committee may determine that, with respect to any Stock
Appreciation Right that is not related to an Incentive Stock Option and that
can only be exercised for cash during limited periods of time in order to
satisfy the conditions of Rule 16b-3, the exercise of such Stock Appreciation
Right for cash during such limited period shall be deemed to occur for all
purposes hereunder on the day during such limited period on which the Fair
Market Value is the highest. The Committee may alter such determination at any
time and such change may govern the exercise of Stock Appreciation Rights
granted prior to such determination as well as Stock Appreciation Rights
granted thereafter.

7.4 Payment. Payment upon exercise of the Stock Appreciation Right shall be
made in the form of cash, Shares or a combination thereof, as determined in the
sole and complete discretion of the Committee. However, if any payment in the
form of Shares results in a fractional share, such payment for the fractional
share shall be made in cash.

SECTION 8. RESTRICTED STOCK AND RESTRICTED STOCK UNITS

8.1 Grant of Restricted Stock. Subject to the terms and provisions of the
Plan and applicable law, the Committee, at any time and from time to time, may
grant Shares of Restricted Stock and Restricted Stock Units under the Plan to
such Participants, and in such amounts and for such duration of the Period of
Restriction and/or conditions of removal of restrictions as it shall determine.
Participants receiving Restricted Stock and Restricted Stock Units are not
required to pay the Company therefor (except for applicable tax withholding).

8.2 Restricted Stock Agreement. Each Restricted Stock and Restricted Stock
Unit grant shall be evidenced by an Agreement that shall specify the Period of
Restriction; the conditions which must be satisfied prior to removal of the
restriction; the number of Shares of Restricted Stock granted; and such other
provisions as the Committee shall determine. The Committee may specify, but is
not limited to, the following types of restrictions in the Agreement: (i)
restrictions on acceleration or achievement of terms of vesting based on any
business or financial goals of the Company, including: absolute or relative
increases in total stockholder return, economic value added, return on capital
employed, revenues, sales, net income, earnings per share, return on equity,
cash flow, operating margin or net worth of the Company, any of its
Subsidiaries, divisions or other areas of the Company; and (ii) any other
further restrictions that may be advisable under the law, including
requirements set forth by the Exchange Act, the Securities Act, any securities
trading system or stock exchange upon which such Shares under are listed.

8.3 Nontransferability. Except as provided in this Section 8 and subject to
applicable law, the Shares of Restricted Stock or Restricted Stock Units
granted under the Plan may not be sold, transferred, pledged, assigned, or
otherwise alienated or hypothecated until the termination of the applicable
Period of Restriction or upon earlier satisfaction of other conditions as
specified by the Committee in its sole discretion and set forth in the
Agreement. All rights with respect to the

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Restricted Stock and Restricted Stock Units granted to a Participant under the
Plan shall be exercisable during his or her lifetime only by such Participant
or his or her guardian or legal representative.

8.4 Removal of Restrictions. Except as otherwise noted in this Section 8,
Restricted Stock and Restricted Stock Units covered by each Award shall be
provided to and become freely transferable by the Participant after the last
day of the Period of Restriction and/or upon the satisfaction of other
conditions as determined by the Committee. Except as specifically provided in
this Section 8, the Committee shall have no authority to reduce or remove the
restrictions or to reduce or remove the Period of Restriction without the
express consent of the stockholders of the Company. Except where
performance-based conditions or restrictions are placed on the grant, or except
in the event of the death or disability of the Participant, or a Change in
Control of the Company, the minimum Period of Restriction shall be three (3)
years, which Period of Restriction would permit the removal of restrictions on
no more than one-third (1/3) of the Restricted Stock or Restricted Stock Units
at the end of the first year following the Grant Date, and the removal of the
restrictions on an additional one-third (1/3) at the end of each subsequent
year. Except in the event of the death or disability of the Participant, or a
Change in Control of the Company, no restrictions may be removed from
Restricted Stock or Restricted Stock Units during the first year following the
Grant Date. If there are performance-based conditions placed on the grant of
Restricted Stock or Restricted Stock Units the total Period of Restriction
shall be no less than one (1) year from the Grant Date.

8.5 Voting Rights. During the Period of Restriction, Participants in whose
name Restricted Stock is granted under the Plan may exercise full voting rights
with respect to those Shares.

8.6 Dividends and Other Distributions. During the Period of Restriction,
Participants in whose name Restricted Stock is granted shall be entitled to
receive all dividends and other distributions paid with respect to those
Shares. If any such dividends or distributions are paid in Shares, the Shares
shall be subject to the same restrictions on transferability as the Restricted
Stock with respect to which they were distributed.

SECTION 9. PERFORMANCE AWARDS

9.1 Grant of Performance Awards. Subject to the terms and provisions of the
Plan and applicable law, the Committee at any time and from time to time may
grant Performance Awards in the form of either Performance Units or Performance
Shares to Participants subject to the Performance Goals and Performance Period
as it shall determine. The Committee shall have complete discretion in
determining the number and value of Performance Units or Performance Shares
granted to each Participant. Participants receiving Performance Awards are not
required to pay the Company therefor (except for applicable tax withholding)
other than the rendering of services.

9.2 Value of Performance Awards. The Committee shall determine the number and
value of Performance Units or Performance Shares granted to each Participant as
a Performance Award. The Committee shall set Performance Goals in its
discretion for each Participant who is granted a Performance Award. The extent
to which such Performance Goals are met will determine the value of the
Performance Unit or Performance Share to the Participant. Such Performance
Goals may be particular to a Participant, may relate to the performance of the
Subsidiary which employs

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him or her, may be based on the division which employs him or her, may be based
on the performance of the Company generally, or a combination of the foregoing.
The Performance Goals may be based on achievement of balance sheet or income
statement objectives, or any other objectives established by the Committee.
The Performance Goals may be absolute in their terms or measured against or in
relationship to other companies comparably, similarly or otherwise situated.
The terms and conditions of each Performance Award will be set forth in an
Agreement.

9.3 Settlement of Performance Awards. After a Performance Period has ended,
the holder of a Performance Unit or Performance Share shall be entitled to
receive the value thereof based on the degree to which the Performance Goals
established by the Committee and set forth in the Agreement have been
satisfied.

9.4 Form of Payment. Payment of the amount to which a Participant shall be
entitled upon the settlement of a Performance Award shall be made in cash,
Stock, or a combination thereof as determined by the Committee. Payment may be
made as prescribed by the Committee.

SECTION 10. BONUS STOCK

Subject to the terms and provisions of the Plan and applicable law, the
Committee, at any time and from time to time, may award Shares of Bonus Stock
to Participants without cash consideration. The Committee shall determine and
indicate in the related Agreement whether such Shares of Bonus Stock shall be
unincumbered of any restrictions (other than those advisable to comply with
law) or shall be subject to restrictions and limitations similar to those
referred to in Section 9. In the event the Committee assigns any restrictions
on the Shares of Bonus Stock then such Shares shall be subject to at least the
following restrictions:

(a) No Shares of Bonus Stock may be sold, transferred, pledged,
assigned or otherwise alienated or hypothecated if such Shares are
subject to restrictions which have not lapsed or have not been
vested.

(b) If any condition of vesting of the Shares of Bonus Stock are not
met, all such Shares subject to such vesting shall be delivered to
the Company and cancelled (in a manner determined by the
Committee) within 60 days of the failure to meet such conditions
without any payment from the Company.

SECTION 11. OTHER STOCK UNIT AWARDS

11.1 Grant of Other Stock Unit Awards. Subject to the terms and provisions of
the Plan and applicable law, the Committee, at any time and from time to time,
may issue to Participants, either alone or in addition to other Awards made
under the Plan, Other Stock Unit Awards which may be in the form of Common
Stock or other securities. The value of each such Award shall be based, in
whole or in part, on the value of the underlying Common Stock or other
securities. The Committee, in its sole and complete discretion, may determine
that an Award, either in the form of a Other Stock Unit Award under this
Section 11 or as an Award granted pursuant to Sections 6 through 10, may
provide to the Participant (i) dividends or dividend equivalents (payable on a
current or deferred basis) and (ii) cash payments in lieu of or in addition to
an Award. Subject to the provisions of the Plan, the Committee in its sole and
complete discretion, shall determine the

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terms, restrictions, conditions, vesting requirements, and payment rules (all
of which are sometimes hereinafter collectively referred to as "Rules") of the
Award. The Agreement shall specify the Rules of each Award as determined by
the Committee. However, each Other Stock Unit Award need not be subject to
identical Rules.

11.2 Rules. The Committee, in its sole and complete discretion, may grant an
Other Stock Unit Award subject to the following Rules:

(a) Common Stock or other securities issued pursuant to Other Stock
Unit Awards may not be sold, transferred, pledged, assigned or
otherwise alienated or hypothecated by a Participant until the
expiration of at least six months from the Award Date, except that
such limitation shall not apply in the case of death or disability
of the Participant or a Change in Control of the Company. For
Participants subject to Section 16 and to the extent Other Stock
Unit Awards are deemed to be derivative securities within the
meaning of Rule 16b-3 a Participant's rights with respect to such
Awards shall not: (i) vest or be exercisable until the expiration
of at least six months from the Award Date, nor (ii) be sold,
transferred, pledged, assigned, or otherwise alienated or
hypothecated, otherwise than by will or by laws of descent and
distribution. All rights with respect to such Other Stock Unit
Awards granted to a Participant shall be exercisable during his or
her lifetime only by such Participant or his or her guardian or
legal representative.

(b) Other Stock Unit Awards may require the payment of cash
consideration by the Participant upon receipt of the Award or
provide that the Award, and any Common Stock or other securities
issued in conjunction with the Award be delivered without the
payment of cash consideration.

(c) The Committee, in its sole and complete discretion, may establish
certain Performance Criteria that may relate in whole or in part to
receipt of the Other Stock Unit Awards.

(d) Other Stock Unit Awards may be subject to a deferred payment
schedule and/or vesting over a specified employment period.

(e) The Committee, in its sole and complete discretion, as a result of
certain circumstances, may waive or otherwise remove, in whole or
in part, any restriction or condition imposed on an Other Stock
Unit Award at the time of grant.

SECTION 12. SPECIAL PROVISIONS APPLICABLE TO COVERED PARTICIPANTS

Awards subject to Performance Criteria paid to Covered Participants under this
Plan shall be governed by the conditions of this Section 12 in addition to the
requirements of Sections 8, 9, 10 and 11 above. Should conditions set forth
under this Section 12 conflict with the requirements of Sections 8, 9, 10 and
11, the conditions of this Section 12 shall prevail.

(a) All Performance Measures relating to Covered Participants for a
relevant Performance Period shall be established by the Committee
in writing prior to the beginning of the Performance Period, or by
such other later date for the Performance Period as may be
permitted under Section 162(m). Performance Measures may include
alternative and

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<PAGE> 14

multiple Performance Measures and may be based on one or more
business criteria. In establishing Performance Measures, the
Committee shall consider one or more of the following business or
financial goals of the Company: absolute or relative increases in
total stockholder return, economic value added, return on capital
employed, revenues, sales, net income, earnings per share, return
on equity, cash flow, operating margin or net worth of the Company,
any of its Subsidiaries, divisions, or other areas of the Company.

(b) The Performance Measures must be substantially uncertain of
attainment at the time established, must be objective and must
satisfy third party "objectivity" standards under Section 162(m).

(c) The Performance Measures shall not allow for any discretion by the
Committee as to an increase in any Award, but discretion to lower
an Award is permissible.

(d) The Award and payment of any Award under this Plan to a Covered
Participant with respect to a relevant Performance Period shall be
contingent upon the attainment of the Performance Measures that are
applicable to such Covered Participant. The Committee shall certify
in writing prior to payment of any such Award that such applicable
Performance Measures relating to the Award are satisfied. Approved
minutes of the Committee may be used for this purpose.

(e) The maximum Award that may be paid to any Covered Participant under
the Plan pursuant to Sections 8, 9, 10 and 11 for any Performance
Period is the lessor of $1 Million or 100 percent of the Covered
Participant's base salary as of the first day of that Performance
Period. The maximum number of Shares subject to Options Stock
Appreciation Rights or Restricted Stock granted to any Covered
Participant for any fiscal year shall be 300,000.

(f) All Awards to Covered Participants under this Plan shall be further
subject to such other conditions, restrictions, and requirements as
the Committee may determine to be necessary to carry out the
purpose of this Section 12.

SECTION 13. GENERAL PROVISIONS

13.1 Plan Term. The Plan was adopted on April 11, 1996 by the Board. Subject
to stockholder approval, the Plan shall be effective on July 1, 1996; however,
no Stock, rights or Options may be sold, awarded or granted under the Plan
until the Company is in receipt of a Registration Statement under the
Securities Act covering the Shares to be issued under the Plan. Any Stock,
right, or Options granted under this Plan prior to stockholder approval of the
Plan, shall be granted subject to such approval.

The Plan terminates December 31, 2006; however, all Awards made prior to, and
outstanding on such date, shall remain valid in accordance with their terms and
conditions.

13.2 Withholding. The Company shall have the right to deduct or withhold, or
require a Participant to remit to the Company, any taxes required by law to be
withheld from Awards. In the event an

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Award is paid in the form of Common Stock, the Committee may require the
Participant to remit to the Company the amount of any taxes required to be
withheld from such payment in Common Stock, or, in lieu thereof, the Company
may withhold (or the Participant may be provided the opportunity to elect to
tender) the number of shares of Common Stock equal in Fair Market Value to the
amount required to be withheld.

13.3 Awards. Each Award shall be evidenced in a corresponding Agreement
provided in writing to the Participant, which shall specify the terms,
conditions and any Rules applicable to the Award, including but not limited to
the effect of a Change in Control, or death, Disability, Divestiture, Early
Retirement, Normal Retirement or other termination of employment of the
Participant on the Award.

13.4 Nontransferability. No Award may be sold, transferred, pledged, assigned,
or otherwise alienated or hypothecated, except by will or the laws of descent
and distribution or, except in the case of an ISO, by a qualified domestic
relations order. Further, no lien, obligation, or liability of the Participant
may be assigned to any right or interest of any Participant in an Award.

13.5 No Right to Employment. No granting of an Award shall be construed as a
right to employment with the Company.

13.6 Rights as Stockholder. Subject to the Award provisions, no Participant or
Designated Beneficiary shall be deemed a stockholder of the Company nor have
any rights as such with respect to any Shares to be provided under the Plan
until he or she has become the holder of such Shares. Notwithstanding the
aforementioned, with respect to Stock granted as Restricted Stock, Bonus Stock
or Other Stock Unit Awards under this Plan, the Participant or Designated
Beneficiary of such Award shall be deemed the owner of such Shares provided
herein. As such, unless contrary to the provisions herein or in any such
related Agreement, such stockholder shall be entitled to full voting, dividend
and distribution rights as provided any other Company stockholder for as long
as the Participant continues to be deemed the owner of such stock.

13.7 Construction of the Plan. The Plan, and its rules, rights, agreements and
regulations, shall be governed, construed, interpreted and administered solely
in accordance with the laws of the state of Delaware. In the event any
provision of the Plan shall be held invalid, illegal or unenforceable, in whole
or in part, for any reason, such determination shall not affect the validity,
legality or enforceability of any remaining provision, portion of provision or
Plan overall, which shall remain in full force and effect as if the Plan had
been absent the invalid, illegal or unenforceable provision or portion thereof.

13.8 Amendment of Plan. The Committee or Board of Directors may amend,
suspend, or terminate the Plan or any portion thereof at any time, provided
such amendment is made with stockholder approval if such approval is necessary
to comply with any tax or regulatory requirement, including for these purposes
any approval which is a requirement for exemptive relief under Section 16(b) of
the Exchange Act or which is a requirement for the performance-based
compensation exception under Section 162(m). The Committee in its discretion
may amend the Plan so as to conform with local rules and regulations subject to
any provisions to the contrary specified herein.

13.9 Amendment of Award. In its sole and complete discretion, the Committee
may at any time amend any Award for the following reasons: (i) additions and/or
changes to the Code, any federal

15
<PAGE> 16

or state securities law, or other law or regulations applicable to the Award,
made prior to the Date of Grant, and such additions and/or changes have some
effect on the Award; or (ii) any other event not described in clause (i) occurs
and the Participant gives his or her consent to such amendment, provided
however, except for capital adjustments described in Section 5.4, the Committee
may not reduce the Exercise Price of an Award.

13.10 Exemption from Computation of Compensation for Other Purposes. By
acceptance of an applicable Award, subject to the conditions of such Award,
each Participant shall be considered in agreement that all Shares sold or
awarded and all Options granted under this Plan shall be considered special
incentive compensation and will be exempt from inclusion as "wages" or "salary"
in pension, retirement, life insurance, and other employee benefits
arrangements of the Company, except as determined otherwise by the Company. In
addition, each Designated Beneficiary of a deceased Participant shall be in
agreement that all such Awards will be exempt from inclusion in "wages" or
"salary" for purposes of calculating benefits of any life insurance coverage
sponsored by the Company.

13.11 Legend. In its sole and complete discretion, the Committee may elect to
legend certificates representing Shares sold or awarded under the Plan, to make
appropriate references to the restrictions imposed on such shares.

13.12 Certain Participants. All Agreements for Participants subject to Section
16(b) of the Exchange Act shall be deemed to include any such additional terms,
conditions, limitations and provisions as Rule 16b-3 requires, unless the
Committee in its discretion determines that any such Award should not be
governed by Rule 16b-3. All performance-based Awards shall be deemed to
include any such additional terms, conditions, limitations and provisions as
are necessary to comply with the performance-based compensation exemption of
Section 162(m) unless the Committee in its discretion determines that any such
Award to a Covered Participant is not intended to qualify for the exemption
for performance-based compensation under Section 162(m).

13.13 Change in Control. In the event of a Change in Control, the Committee is
permitted to accelerate the payment or vesting and release any restrictions on
any Awards.

<PAGE> 1

EXHIBIT 10.2

EMPLOYMENT CONTRACT

AGREEMENT made as of December 8, 1995 between BEVERLY ENTERPRISES,
INC., a Delaware corporation (the "Company"), and David R. Banks (the
"Executive").

WHEREAS, the Company desires to assure itself of the management
services of the Executive by directly engaging the Executive as the Chairman
and Chief Executive Officer of the Company;

WHEREAS, the Executive currently serves as Chairman of the Company's
Board of Directors;

WHEREAS, the Company recognizes that the Executive's contribution to
the Company's growth and success has been and continues to be substantial;

WHEREAS, the Company wishes to encourage the Executive to remain with
and devote full time and attention to the business affairs of the Company and
wishes to provide income protection to the Executive for a period of time in
the event of a Change in Control;

NOW, THEREFORE, in consideration of the mutual agreements and
understandings set forth herein and for other good and valuable consideration,
the receipt and adequacy of which is hereby acknowledged, the Company and the
Executive hereby agrees as follows:

1. Definitions.

(a) "Base Salary" shall mean the Executive's
regular annual rate of base pay, as set forth in Paragraph 4(a), as of
the date in question.

(b) The "Benefit Multiplier" shall be equal to
1.0 except that if Executive's Termination of Employment is pursuant
to Paragraphs 6(b) or 6(c) it shall be equal to 3.0.

(c) The Benefit Period" shall be the period of
years equal to the Benefit Multiplier which follows the Executive's
Termination of Employment.

(d) "Cause" shall mean the Executive's (i)
conviction of a crime involving moral turpitude or theft or
embezzlement of property from the Company or (ii) willful misconduct
or willful failure substantially to perform the duties of his
position, but only if such has continued after receipt of notice from
the Company's Board of Directors and such reasonable cure period as is
set forth in such notice.

(e) A "Change in Control" shall be deemed to have
taken place if: (i) any person, corporation, or other entity or group,
including any "group" as defined in Section l3(d)(3) of the Securities
Exchange Act of 1934, other than any employee benefit plan then
maintained by the Company, becomes the beneficial owner of shares of
the Company having 30 percent or more of the total number of votes
that may be cast for the election of Directors of the Company; (ii) as
the result of, or in connection with, any contested election for the
Board of Directors of the Company, or any tender or exchange offer,
merger or other business combination or sale of assets, or any
combination of the foregoing (a "Transaction"), the persons who were
Directors of the Company before the Transaction shall cease to
constitute a majority of the Board of Directors of the Company or any
successor to the Company or its assets, or (iii) at any time (a) the
Company shall consolidate with, or merge with, any other Person and
the Company shall not be the continuing or surviving corporation, (b)
any Person shall consolidate with, or merge with the Company, and the
Company shall be the continuing
<PAGE> 2
or surviving corporation and in connection therewith, all or part of
the outstanding Company stock shall be changed into or exchanged for
stock or other securities of any other Person or cash or any other
property, (c) the Company shall be a party to a statutory share
exchange with any other Person after which the Company is a subsidiary
of any other Person, or (d) the Company shall sell or otherwise
transfer 50% or more of the assets or earning power of the Company and
its subsidiaries (taken as a whole) to any Person or Persons.

(f) The "Change in Control Date" shall mean the
date immediately prior to the effectiveness of the Change in Control.

(g) The "Committee" shall mean the Compensation
Committee of the Company's Board of Directors.

(h) The "Competitive Businesses" shall mean any
of the health care businesses in which the Company is engaged on the
execution date of this Agreement, except that ownership of nursing
homes or other medical facilities (as distinguished from the operation
of said facilities) shall not be deemed to be competitive businesses,
and the Executive's serving on the Board of Directors or as the
Chairman of such Board of Directors of Nationwide Health Properties,
Inc. or of Wellpoint Health Networks, Inc. is specifically excluded
from the definition of competitive businesses.

(i) The Executive shall have "Good Reason" to
terminate employment if: (i) the Executive is not elected,
reelected, or otherwise continued in the office of the Company or
any of its subsidiaries which he held immediately prior to the
Change in Control Date, or he is removed as a member of the Board
of Directors of the Company or any of its subsidiaries if the
Executive was a director immediately prior to the Change in
Control Date; (ii) the Executive's duties, responsibilities or
authority as an employee are materially reduced or diminished
from those in effect on the Change in Control Date without the
Executive's consent; (iii) the Executive's duties,
responsibilities or authority as an employee are materially
reduced or diminished from those in effect on the date hereof
without the Executive's consent; (iv) the Executive's
compensation or benefits are reduced without the Executive's
consent, unless all Executive-level officers have their salaries
reduced in the same percentage amount; (v) the Company reduces
the potential earnings of the Executive under any
performance-based bonus or incentive plan of the Company in
effect immediately prior to the Change in Control Date; (vi) the
Company requires that the Executive's employment be based other
than at Fort Smith, Arkansas, without his consent; (vii) any
purchaser, assign, surviving corporation, or successor of the
Company or its business or assets (whether by acquisition,
merger, liquidation, consolidation, reorganization, sale or
transfer of assets or business, or otherwise) fails or refuses to
expressly assume in writing this Agreement and all of the duties
and obligations of the Company hereunder pursuant to Section 16
hereof; or (viii) the Company breaches any of the provisions of
this Agreement.

(j) "Person" shall have the meaning ascribed to
such term in Section 3(a)(9) of the Securities Exchange Act of 1934
and used in Sections 13(d) and 14(d) thereof, including a "group" as
defined in Section 13(d).

(k) "Target Bonus" shall mean the target bonus
(100% level) established for the Executive for the year in question
under the Company's "Annual Incentive Plan."

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<PAGE> 3

(l) "Termination of Employment" shall mean the
termination of the Executive's employment by the Company other than
such a termination in connection with an offer of immediate
reemployment by a successor or assign of the Company or purchaser of
the Company or its assets under terms and conditions which would not
permit the Executive to terminate his employment for Good Reason.

2. Term. The initial term of this Agreement shall be
for the period commencing on December 8, 1995 (the "Effective Date") and ending
on December 7, 1998. The Term shall be automatically extended by one
additional day for each day beyond the Effective Date of this Agreement that
the Executive remains employed by the Company until such time as the Company
elects to cease such extension by giving written notice of such to the
Executive. (In such event, the Agreement shall thus terminate on the third
anniversary of the effective date of such notice).

3. Position and Duties. During the Term, the Executive
shall serve, as an employee, as the Chairman of the Board of Directors and
Chief Executive Officer of the Company and shall have such duties, functions,
responsibilities and authority as are consistent with the Executive's position
as the senior executive officer in charge of the general management, business
and affairs of the Company.

4. Compensation and Related Matters.

(a) Annual Base Salary. The Executive shall
receive a Base Salary at a rate of $627,500 per annum through December
31, 1995 and thereafter at any such greater rate as is determined by
the Committee.

(b) Benefits. During the Term, the Executive
shall be entitled to all of the following and any other benefits and
prerequisites offered by the Company to executives generally:

(i) Participate in the Company's present
and future stock option, restricted stock, phantom stock and
other similar equity-based incentive plans, pursuant to their
terms;

(ii) Participate in the Company's
Employee Stock Purchase Plan, pursuant to its terms;

(iii) Retain his interest in the Company's
terminated Deferred Compensation Plan pursuant to its terms
with the Executive's units 100% vested, locked in at the
Company's stock price on July 17, 1991, and credited with
interest (with quarterly compounding) at a rate to be
determined, from time to time, by the Committee;

(iv) Participate in the Company's
Executive Retirement Plan, pursuant to its terms;

(v) $600,000 of individual life
insurance coverage under the Company's Executive Life
Insurance Plan, which coverage shall be 70% vested as of the
date hereof, and shall vest an additional 10% on January 1,
1995 and each of the next two annual anniversaries thereof so
long as Executive is employed by the Company on any of such
dates;

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<PAGE> 4
(vi) $628,000 (or such greater amount as
the Company may make available to its senior executives
generally) of group term life insurance coverage;

(vii) $100,000 (or such greater amount as
the Company may make available to its senior executives
generally) of business travel accident insurance coverage when
traveling on Company business;

(viii) Participate in the Company's Medical
Plan, and Dental Plan, pursuant to their terms, except that
the premium cost for such shall be treated as a benefit under
the Company's Executive Medical Reimbursement Plan, described
below, (and therefore at the present time, there shall be no
payroll deduction as a condition of coverage in the Medical
Plan and Dental Plan);

(ix) Participate in the Company's
Executive Medical Reimbursement Plan (with a maximum benefit
of $11,500 (or such greater amount as the Company may make
available to its senior executives generally), a portion of
which shall be deemed applied to the payment of premiums under
the Company's Medical Plan and Dental Plan as described
above), pursuant to its terms;

(x) Participate in the Company's group
Long-Term Disability Plan, at the maximum benefit level,
pursuant to its terms;

(xi) 4 weeks of paid vacation;

(xii) Participate in or receive benefits
under any other employee benefit plan or other arrangement
made available by the Company to any of its employees, subject
to and on a basis consistent with the terms, conditions and
overall administration of such plan or arrangement.

(c) Annual Bonus. As additional compensation for
services rendered, the Executive shall be eligible to receive an
annual bonus in cash pursuant to the Company's Annual Incentive Plan.

(d) Expenses. The Company shall promptly
reimburse the Executive for all reasonable travel and other business
expenses incurred by the Executive in the performance of his duties to
the Company hereunder.

5. Competition.

(a) Executive shall not, at any time during the
period of his employment with the Company, or, if his Termination of
Employment is for Cause or without Good Reason, during the two year
period following his Termination of Employment with the Company
("Non-Compete Period"), without the prior written consent of the
Board, directly or indirectly engage in, or have any interest in, or
manage or operate any person, firm, corporation, partnership or
business (whether as director, officer, employee, agent,
representative, partner, security holder, consultant or otherwise)
that engages in any of the Competitive Businesses in any State of the
United States or any foreign country in which the Company is then
engaged in any of such businesses; provided, however, that Executive
shall be permitted to acquire a stock interest in such a corporation
provided such stock is publicly traded and the stock so acquired is
not more than one percent of the outstanding shares of such
corporation, and provided further, that Executive may engage in
business that is a non-competitive supplier to the Company or that is
a customer of Company products or services.

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<PAGE> 5

(b) The Executive covenants that a breach of
subparagraph (a) above would immediately and irreparably harm the
Company and that a remedy at law would be inadequate to compensate the
Company for its losses by reason of such breach and therefore that the
Company shall, in addition to any other rights and remedies available
under this Agreement, at law or otherwise, be entitled to an
injunction to be issued by any court of competent jurisdiction
enjoining and restraining the Executive from committing any violation
of subparagraph (a) above, and the Executive hereby consents to the
issuance of such injunction.

6. Eligibility for Severance Benefits. The Executive
shall be eligible for the benefits described in Paragraph 7 (the "Severance
Benefits") if:

(a) during the Term, the Executive has a
Termination of Employment initiated (i) by the Company without Cause
or (ii) by the Executive for Good Reason, and, in either case,
subsection (c) does not apply,

(b) during the Term there has been a Change in
Control and during the 31 day period commencing on the first day of
the 13th calendar month following the Change in Control Date (e.g. the
period April 1, 1996 - May 1, 1996, inclusive, for a Change in Control
which is effective in the month of March, 1995), the Executive has a
Termination of Employment initiated by the Executive without Good
Reason, or

(c) during the Term there has been a Change in
Control and during the two year period commencing on the Change in
Control Date the Executive has a Termination of Employment which is
initiated by the Company without Cause or by the Executive for Good
Reason.

7. Severance Benefit. Upon satisfaction of the
requirements set forth in Paragraph 6, and subject to Paragraphs 8 and 11, the
Executive shall be entitled to the following Severance Benefits:

(a) Cash Payment. The Executive shall be
entitled to receive an amount of cash equal to the Benefit Multiplier
times the greater of

(i) the sum of the Executive's Base Salary
as in effect upon the Termination of Employment, and the
greater of

(A) the Executive's Target Bonus as
in effect upon the Termination of Employment or,

(B) the Executive's actual bonus
under the Company's "Annual Incentive Plan" for the
year prior to the year of the Executive's Termination
of Employment,

(ii) the sum of the Executive's Base
Salary as in effect on the Change in Control Date, and the
greater of

(A) the Executive's Target Bonus as
in effect upon the Change in Control Date or,

(B) the Executive's actual bonus
under the Company's "Annual Incentive Plan" for the
year prior to the Change in Control Date.

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<PAGE> 6
The payment shall be made in a single lump sum within ten days following the
Executive's Termination of Employment.

(b) Long-Term Incentive Award; Equity-Based
Compensation. The Executive's interest under all of the Company's
long-term incentive plans shall be fully vested. Any and all (i)
options to purchase Company stock and (ii) restricted stock of the
Company, owned by the Executive shall be fully vested.

(i) For the Benefit Period, or for two
(2) years, whichever is longer, the Executive shall be treated
as if he had continued to be an executive employee for all
purposes under the Company's Medical Plan, Executive Medical
Reimbursement Plan and Dental Plan, as described in Paragraph
4(b). Following this period, the Executive shall be entitled
to receive continuation coverage under Part Six of Title I of
ERISA ("COBRA Benefits") treating the end of this period as a
termination of the Executive's employment other than for gross
misconduct.

(ii) The Company shall fully vest and
maintain in force, at its own expense, for the remainder of
the Executive's life, the life insurance in effect under the
Company's Executive Life Insurance Plan (as described in
Paragraph 4(b)) as of the Change in Control Date or as of the
date of Termination of Employment, whichever is greater.

(d) Relocation Benefit; Office.

(i) If, within three years after the
Executive's Termination of Employment with the Company, the
Executive gives the Company written notice that he desires to
relocate within the continental United States, the Company
will reimburse the Executive for any reasonable relocation
expenses (in accordance with the Company's general relocation
policy for executives as then in effect, or, at the
Executive's election, as in effect on the Change in Control
Date) in connection with such relocation.

(ii) For the lesser of the Benefit Period
or the date Executive commences such employment which provides
an office to Executive, the Company shall provide Executive
with first-class office space of not more than 800 square feet
in a city to be selected by the Executive and approved by the
Company (with such approval not to be unreasonably withheld).

(e) Executive Retirement Plan. For the year of
the Executive's Termination of Employment, the Company will make the
contribution to the Retirement Plan on behalf of the Executive that it
would have made if the Executive had not had a Termination of
Employment, but in no event less than the percentage contribution it
made for the Executive in the immediately preceding year (and
increased to take account of the additional year of service), in each
case taking account of the Executive's annualized rate of
"Compensation" (as defined in the Retirement Plan) and the percentage
of such Compensation that the Executive is contributing to the
Retirement Plan, as of the date of Termination of Employment, and the
Company's matching contribution rate for such year (or, if greater,
the preceding year). The portion of the Company's matching
contribution which is based on the preceding year's contribution
percentage shall be contributed to the Retirement Plan on behalf of
the Executive immediately upon the Executive's Termination

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<PAGE> 7
of Employment and any additional contribution required shall be paid
as soon as the amount is determined.

(f) Disability. For the Benefit Period, the
Company shall provide long-term disability insurance benefits coverage
to Executive equivalent to the coverage that the Executive would have
had had he remained employed under the Company's Long-Term Disability
Plan as described in Paragraph 4(b) applicable to Executive on the
date of Termination of Employment, or, at the Executive's election,
the plan applicable to Executive as of the Change in Control Date.
Should Executive become disabled during such period, Executive shall
be entitled to receive such benefits, and for such duration, as the
applicable plan provides.

(g) Plan Amendments. The Company shall adopt such
amendments to its employee benefit plans and insurance policies as are
necessary to effectuate the provisions of this Agreement. If and to
the extent any benefits under this Paragraph 7 are not paid or payable
or otherwise provided to the Executive or his dependents or
beneficiaries under any such plan or policy (whether due to the terms
of the plan or policy, the termination thereof, applicable law, or
otherwise), then the Company itself shall pay or provide for such
benefits.

8. Golden Parachute Gross-Up. If, in the written opinion
of a Big 6 accounting firm engaged by either the Company or the Executive for
this purpose (at the Company's expense), or if so alleged by the Internal
Revenue Service, the aggregate of the benefit payments under Paragraph 7 would
cause the payment of one or more of such benefits to constitute an "excess
parachute payment" as defined in Section 280G(b) of the Internal Revenue Code
("Code"), then the Company will pay to the Executive an additional amount in
cash (the "Gross-Up Payment") equal to the amount necessary to cause the net
amount retained by the Executive, after deduction of any (i) excise tax on the
payments under Paragraph 7, (ii) federal, state or local income tax on the
Gross-Up Payment, and (iii) excise tax on the Gross-Up Payment, to be equal to
the aggregate remuneration the Executive would have received under Section 7,
excluding such Gross-Up Payment (net of all federal, state and local excise and
income taxes), as if Sections 280G and 4999 of the Code (and any successor
provisions thereto) had not been enacted into law. The Gross-Up Payment
provided for in this Paragraph shall be made within ten (10) days after the
termination of Executive's employment, provided however that if the amount of
the payment cannot be finally determined at the time, the Company shall pay to
Executive an estimate as determined in good faith by the Company of such
payments (together with interest at the rate provided in section 1274(b)(2)(B)
of the Code) as soon as the amount thereof can be determined but in no event
later than the thirtieth (30th) day after the date of termination. Any dispute
concerning the application of this Paragraph shall be resolved pursuant to
Paragraph 10, and if Paragraph 11 applies, any reference in this Paragraph to
Paragraph 7 shall also be deemed to include a reference to Paragraph 11 as
well.

9. Waiver of Other Severance Benefits. The benefits
payable pursuant to this Agreement are in lieu of any other severance benefits
which may otherwise be payable to the Executive upon termination following a
Change in Control (including, without limitation, any benefits to which
Executive might otherwise have been entitled under the "Agreement Concerning
Benefits Upon Severance" dated as of September l, 1990 to which Executive and
the Company are parties), except those benefits which are to be made available
to the Executive as required by applicable law.

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<PAGE> 8
Arbitration Association, and judgment upon the award may be entered in any
court having jurisdiction thereof. The arbitrator shall have the power to
order specific performance, mandamus, or other appropriate legal or equitable
relief to enforce the provisions of this Agreement. The Company shall pay all
costs of the arbitration and all reasonable attorney's and accountant's fees of
the Executive in connection therewith.

11. Additional Payments Due to Dispute. Notwithstanding
anything to the contrary herein, and without limiting the Executive's rights at
law or in equity, if the Company fails or refuses to timely pay to the
Executive the benefits due under Paragraphs 7 and/or 8 hereof, then the
benefits under Paragraph 7(a) shall be increased and the benefits under
Paragraphs 7(c), 7(d), and 7(f) shall each be continued by one additional day
for each day of any such failure or refusal of the Company to pay. In
addition, any Gross-Up Payment due under Paragraph 8 shall be increased to take
into account any increased benefits under this Paragraph.

12. No Set-Off. There shall be no right of set-off or
counterclaim in respect of any claim, debt, or obligation against any payment
to or benefit for the Executive provided for in this Agreement.

13. No Mitigation Obligation. The parties hereto
expressly agree that the payment of the benefits by the Company to the
Executive in accordance with the terms of this Agreement will be liquidated
damages, and that the Executive shall not be required to mitigate the amount of
any payment provided for in this Agreement by seeking other employment or
otherwise, nor shall any profits, income, earnings or other benefits from any
source whatsoever create any mitigation, offset, reduction or any other
obligation on the part of the Executive hereunder or otherwise.

14. Trust. Any payments or installments that may be
required to be made to Executive under this Agreement shall be funded
immediately prior to any Change of Control Date (or, if earlier, within ten
(10) days after any Termination of Employment) by a contribution by the Company
of the necessary amount of cash, as determined by independent actuaries
acceptable to both Executive and the Company, to the irrevocable grantor trust
created for such purpose by the Company, with Chemical Bank as Trustee dated
July 18, 1995, a copy of which Trust Agreement may be obtained from the Company
or the Trustee.

15. Letter of Credit for Legal Fees. In order to ensure
the benefits intended to be provided to the Executive hereunder, immediately
prior to any Change of Control Date the Company shall establish and hereby
agrees to maintain throughout the remaining Term an irrevocable standby Letter
of Credit in favor of the Executive and each other person who is named an
Executive under similar agreements, drawn on a bank selected by the Company
(the "Letter of Credit") which provides for a credit amount of $250,000 being
made available to the Executive against presentation at any time and from time
to time of his clean sight drafts, accompanied by statements of his counsel for
fees and expenses, in an aggregate amount not to exceed $250,000, unless a
larger amount is authorized by either the Chief Executive Officer, General
Counsel, Chief Financial Officer, or a Senior Vice President of the Company.

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<PAGE> 9
to the benefit of the Company and any purchaser, assign, surviving corporation
or successor to the Company, including without limitation any persons acquiring
directly or indirectly all or substantially all of the business and/or assets
of the Company whether by purchase, merger, consolidation, reorganization,
transfer of all or substantially all of the business or assets of the Company,
or otherwise (and such purchaser, assign, surviving corporation or successor
shall thereafter be deemed the "Company" for the purposes of this Agreement),
but this Agreement shall not otherwise be assignable, transferable or delegable
by the Company.

(b) This Agreement shall inure to the benefit of
and be enforceable by the Executive's personal or legal
representatives, executors, administrators, successors, heirs,
distributees and/or legatees.

(c) This Agreement is personal in nature and
neither of the parties hereto shall, without the consent of the other,
assign, transfer or delegate this Agreement or any rights or
obligations hereunder except as expressly provided in this Section 16.
Without limiting the generality of the foregoing, the Executive's
right to receive payments hereunder shall not be assignable,
transferable or delegable, whether by pledge, creation of a security
interest or otherwise, or otherwise subject to anticipation,
alienation, sale, encumbrance, charge, hypothecation, or set-off in
respect of any claim, debt, or obligation, or to execution,
attachment, levy or similar process, or assignment by operation of
law, other than by a transfer by his will or by the laws of descent
and distribution. Any attempt, voluntarily or involuntarily, to
effect any action prohibited by this Paragraph shall be null, void,
and of no effect.

17. Notices. Any notice, request, claim, demand,
document and other communication hereunder to any party shall be effective upon
receipt (or refusal of receipt) and shall be writing and delivered personally
or sent by telex, telecopy, or certified or registered mail, postage prepaid,
or other similar means of communication, as follows:

(a) If to the Company, addressed to its principal
executive offices to the attention of its Secretary;

(b) If to the Executive, to him at the address
set forth below under the Executive's signature, or at any such other
address as either party shall have specified by notice in writing to
the other.

18. Amendments; Waivers. This Agreement may not be
modified, amended, or terminated except by an instrument in writing, signed by
the Executive and by a duly authorized representative of the Board of
Directors. By an instrument in writing similarly executed, either party may
waive compliance by the other party with any provision of this Agreement that
such other party was or is obligated to comply with or perform; provided,
however, that such waiver shall not operate as a waiver of, or estoppel with
respect to, any other or subsequent failure. No failure to exercise and no
delay in exercising any right, remedy, or power hereunder shall operate as a
waiver thereof, nor shall any single or partial exercise of any right, remedy,
or power hereunder preclude any other or further exercise thereof or the
exercise of any other right, remedy, or power provided herein or by law or in
equity.

19. Entire Agreement. This Agreement sets forth the
entire agreement of the parties hereto in respect of the subject matter
contained herein and supersedes all prior agreements, promises, covenants,
arrangements, communications, representations or warranties, whether oral or
written, by any officer, employee or representative of any party hereto. The
parties further intend that this Agreement shall constitute the complete and
exclusive statement of its terms and that no

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<PAGE> 10
extrinsic evidence whatsoever may be introduced in any judicial,
administrative, or other legal proceeding involving this Agreement.

20. Severability; Enforcement. If any provision of this
Agreement, or the application thereof to any person, place, or circumstance
shall be held by a court of competent jurisdiction to be invalid, unenforceable
or void, the remainder of this Agreement and such provisions as applied to
other persons, places and circumstances shall remain in full force and effect.

21. Indemnification. The Company shall indemnify,
defend, and hold the Executive harmless from and against any liability,
damages, costs, or expenses (including attorney's fees) in connection with any
claim, cause of action, investigation, litigation, or proceeding involving him
by reason of his having been an officer, director, employee, or agent of the
Company, unless it is judicially determined, in a final, nonappealable order
that the Executive was guilty of gross negligence or willful misconduct. The
Company also agrees to maintain adequate directors and officers liability
insurance for the benefit of Executive for the term of this Agreement and for
at least three years thereafter.

22. Governing Law. This Agreement shall be interpreted,
administered and enforced in accordance with the law of the State of Arkansas,
except to the extent pre-empted by Federal law.

The parties have duly executed this Agreement as of the date
first written above.

BEVERLY ENTERPRISES, INC. EXECUTIVE

By:
----------------------------------- ---------------------------
Robert W. Pommerville David R. Banks
Executive Vice President, 3421 Free Ferry Road
General Counsel and Secretary Fort Smith, AR 72903

By:-----------------------------------
Christine Murray
Assistant Secretary

5111 Rogers Avenue, Suite 40A
Fort Smith, AR 72919

Attention: Secretary

<PAGE> 1
EXHIBIT 10.3

EMPLOYMENT CONTRACT

AGREEMENT made as of December 8, 1995 between BEVERLY ENTERPRISES,
INC., a Delaware corporation (the "Company"), and Boyd W. Hendrickson (the
"Executive").

WHEREAS, the Company desires to assure itself of the management
services of the Executive by directly engaging the Executive as the President
and Chief Operating Officer of the Company;

WHEREAS, the Company recognizes that the Executive's contribution to
the Company's growth and success has been and continues to be substantial;

1. Definitions.

(a) "Base Salary" shall mean the Executive's
regular annual rate of base pay, as set forth in Paragraph 4(a), as of
the date in question.

(b) The "Benefit Multiplier" shall be equal to
1.0 except that if Executive's Termination of Employment is pursuant
to Paragraphs 6(b) or 6(c) it shall be equal to 3.0.

(c) The "Benefit Period" shall be the period of
years equal to the Benefit Multiplier which follows the Executive's
Termination of Employment.

(e) A "Change of Control" shall be deemed to have
taken place if: (i) any person, corporation, or other entity or group,
including any "group" as defined in Section 13(d)(3) of the Securities
Exchange Act of 1934, other than any employee benefit plan then
maintained by the Company, becomes the beneficial owner of shares of
the Company having 30 percent or more of the total number of votes
that may be cast for the election of Directors of the Company; (ii) as
the result of, or in connection with, any contested election for the
Board of Directors of the Company, or any tender or exchange offer,
merger or other business combination or sale of assets, or any
combination of the foregoing (a "Transaction"), the persons who were
Directors of the Company before the Transaction shall cease to
constitute a majority of the Board of Directors of the Company or any
successor to the Company or its assets, or (iii) at any time a the
Company shall consolidate with, or merge with, any other Person and
the Company shall not be the continuing or surviving

<PAGE> 2
corporation, b any Person shall consolidate with, or merge with, the
Company, and the Company shall be the continuing or surviving
corporation and in connection therewith, all or part of the
outstanding Company stock shall be changed into or exchanged for stock
or other securities of any other Person or cash or any other property,
c the Company shall be a party to a statutory share exchange with any
other Person after which the Company is a subsidiary of any other
Person, or d the Company shall sell or otherwise transfer 50% or more
of the assets or earning power of the Company and its subsidiaries
(taken as a whole) to any Person or Persons.

(f) The "Change in Control Date" shall mean the
date immediately prior to the effectiveness of the Change in Control.

(g) The "Committee" shall mean the Compensation
Committee of the Company's Board of Directors.

(h) The "Competitive Businesses" shall mean any
of the health care businesses in which the Company is engaged on the
execution date of this Agreement.

(i) The Executive shall have "Good Reason" to
terminate employment if: (i) the Executive is not elected, reelected
or otherwise continued in the office of the Company or any of its
subsidiaries which he held immediately prior to the Change in Control
Date, or he is removed as a member of the Board of Directors of the
Company or any of its subsidiaries if the Executive was a director
immediately prior to the Change in Control Date (ii) the Executive's
duties, responsibilities or authority as an employee are materially
reduced or diminished from those in effect on the Change in Control
Date without the Executive's consent; (iii) the Executive's duties,
responsibilities or authority as an employee are materially reduced or
diminished from those in effect on the date hereof without the
Executive's consent; (iv) the Executive's compensation or benefits are
reduced without the Executive's consent, unless all Executive-level
officers have their salaries reduced in the same percentage amount;
(v) the Company reduces the potential earnings of the Executive under
any performance-based bonus or incentive plan of the Company in effect
immediately prior to the Change in Control Date; (vi) the Company
requires that the Executive's employment be based other than at Fort
Smith, Arkansas, without his consent; (vii) any purchaser, assign,
surviving corporation, or successor of the Company or its business or
assets (whether by acquisition, merger, liquidation, consolidation,
reorganization, sale or transfer of assets or business, or otherwise)
fails or refuses to expressly assume in writing this Agreement and
all of the duties and obligations of the Company hereunder pursuant to
Section 16 hereof, or (viii) the Company breaches any of the
provisions of this Agreement.

(k) "Target Bonus" shall mean the target bonus
(100% level) established for the Executive for the year in question
under the Company's "Annual Incentive Plan."

2
<PAGE> 3
under terms and conditions which would not permit the Executive to
terminate his employment for Good Reason.

2. Term. The initial term of this Agreement shall be
for the period commencing on December 8, 1995 (the "Effective Date") and ending
on December 7, 1998. The Term shall be automatically extended by one additional
day for each day beyond the Effective Date of this Agreement that the Executive
remains employed by the Company until such time as the Company elects to cease
such extension by giving written notice of such to the Executive. (In such
event, the Agreement shall thus terminate on the third anniversary of the
effective date of such notice).

3. Position and Duties. During the Term, the Executive
shall serve as an employee, as the President and Chief Operating Officer of the
Company and shall have such duties, functions, responsibilities and authority
as are consistent with the Executive's position as the senior executive officer
in charge of the general management, business and affairs of the Company.
Executive also currently serves on the Company's Board of Directors.

4. Compensation and Related Matters.

(a) Annual Base Salary. The Executive shall receive
a Base Salary at a rate of $450,000 per annum through December 31,
1995 and thereafter at any such greater rate as is determined by the
Committee.

(b) Benefits. During the Term, the Executive shall
be entitled to all of the following and any other benefits and
perquisites offered by the Company to executives generally:

(i) Participate in the Company's present
and future stock option, restricted stock, phantom stock and
other similar equity-based incentive plans, pursuant to their
terms;

(ii) Participate in the Company's
Employee Stock Purchase Plan, pursuant to its terms;

(iii) Participate in the Company's
Executive Retirement Plan, pursuant to its terms;

(iv) $500,000 of individual life
insurance coverage under the Company's Executive Life
Insurance Plan, which coverage shall be 0% vested as of the
date hereof, and shall vest 10% on his fiftieth birthday and
shall vest an additional 10% each year thereafter on his
birthday while the Executive is employed by the Company;

(v) $450,000 (or such greater amount as
the Company may make available to its senior executives
generally) of group term life insurance coverage;

(vi) $100,000 (or such greater amount as
the Company may make available to its senior executives
generally) of business travel accident insurance coverage when
traveling on Company business;

3
<PAGE> 4
(vii) Participate in the Company's Medical
Plan, and Dental Plan, pursuant to their terms, except that
the premium cost for such shall be treated as a benefit under
the Company's Executive Medical Reimbursement Plan, described
below, (and therefore at the present time, there shall be no
payroll deduction as a condition of coverage in the Medical
Plan and Dental Plan);

(viii) Participate in the Company's
Executive Medical Reimbursement Plan (with a maximum annual
benefit of $11,500 (or such greater amount as the Company may
make available to its senior executives generally), a portion
of which shall be deemed applied to the payment of premiums
under the Company's Medical Plan and Dental Plan as described
above), pursuant to its terms;

(ix) Participate in the Company's group
Long-Term Disability Plan, at the maximum benefit level,
pursuant to its terms;

(x) 4 weeks of paid vacation;

(xi) Participate in or receive benefits
under any other employee benefit plan or other arrangement
made available by the Company to any of its employees, subject
to and on a basis consistent with the terms, conditions and
overall administration of such plan or arrangement.

(c) Annual Bonus. As additional compensation for
services rendered, the Executive shall be eligible to receive an
annual bonus in cash pursuant to the Company's Annual Incentive Plan.

(e) Reporting. The Executive shall report
directly to the Chief Executive Officer of the Company.

5. Competition.

(a) Executive shall not, at any time during the
period of his employment with the Company, or, if his Termination of
Employment is for Cause, if initiated by the Company, or without Good
Reason, if initiated by the Executive, during the one year period
following his Termination of Employment with the Company ("Non-Compete
Period"), without the prior written consent of the Board, directly or
indirectly engage in, or have any interest in, or manage or operate
any person, firm, corporation, partnership or business (whether as
director, officer, employee, agent, representative, partner, security
holder, consultant or otherwise) that engages in any of the
Competitive Businesses in any State of the United States or any
foreign country in which the Company is then engaged in any of such
businesses; provided, however, that Executive shall be permitted to
acquire a stock interest in such a corporation provided such stock is
publicly traded and the stock so acquired is not more than one percent
of the outstanding shares of such corporation, and provided further,
that Executive may engage in a business that is a non-competitive
supplier to the Company or that is a customer of Company products or
services.

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<PAGE> 5
(b) The Executive covenants that a breach of
subparagraph (a) above would immediately and irreparably harm the
Company and that a remedy at law would be inadequate to compensate the
Company for its losses by reason of such breach and therefore that the
Company shall, in addition to any other rights and remedies available
under this Agreement, at law or otherwise, be entitled to an
injunction to be issued by any court of competent jurisdiction
enjoining and restraining the Executive from committing any violation
of subparagraph (a) above, and the Executive hereby consents to the
issuance of such injunction.

6. Eligibility for Severance Benefits. The Executive
shall be eligible for the benefits described in Paragraph 7 (the "Severance
Benefits") if:

7. Severance Benefit. Upon satisfaction of the
requirements set forth in Paragraph 6, and subject to Paragraphs 8 and 11, the
Executive shall be entitled to the following Severance Benefits:

(a) Cash Payment. The Executive shall be entitled
to receive an amount of cash equal to the Benefit Multiplier times the
greater of

(i) the sum of the Executive's Base
Salary as in effect upon the Termination of Employment, and
the greater of

(A) the Executive's Target Bonus as
in effect upon the Termination of Employment or,

(B) the Executive's actual bonus
under the Company's "Annual Incentive Plan" for the
year prior to the year of the Executive's Termination
of Employment,

(ii) the sum of the Executive's Base
Salary as in effect on the Change in Control Date, and the
greater of

(A) the Executive's Target Bonus as
in effect upon the Change in Control Date or,

5
<PAGE> 6
(B) the Executive's actual bonus
under the Company's "Annual Incentive Plan"
for the year prior to the Change in Control
Date.

The payment shall be made in a single lump sum within ten days
following the Executive's Termination of Employment.

(i) For the Benefit Period, or for two
(2) years, whichever is longer, the Executive shall be treated
as if he had continued to be an executive employee for all
purposes under the Company's Medical Plan, Executive Medical
Reimbursement Plan and Dental Plan (as described in Paragraph
4(b). Following this period the Executive shall be entitled to
receive continuation coverage under Part Six of Title I of
ERISA ("COBRA Benefits) treating the end of this period as a
termination of the Executive's employment (other than for
gross misconduct).

(d) Relocation Benefit. If, within three years
after the Executive's Termination of Employment with the Company, the
Executive gives the Company written notice that he desires to relocate
within the continental United States, the Company will reimburse the
Executive for any reasonable relocation expenses (in accordance with
the Company's general relocation policy for executives as then in
effect, or, at the Executive's election, as in effect on the Change in
Control Date) in connection with such relocation.

(f) Disability. For the Benefit Period, the
Company shall provide long-term disability insurance benefits coverage
to Executive equivalent to the coverage that the Executive

6
<PAGE> 7
would have had had he remained employed under the Company's Long-Term
Disability Plan as described in Paragraph 4(b) applicable to Executive
on the date of Termination of Employment, or, at the Executive's
election, the plan applicable to Executive as of the Change in Control
Date. Should Executive become disabled during such period, Executive
shall be entitled to receive such benefits, and for such duration, as
the applicable plan provides.

9. Waiver of Other Severance Benefits. The benefits
payable pursuant to this Agreement are in lieu of any other severance benefits
which may otherwise be payable to the Executive upon termination following a
Change in Control (including, without limitation, any benefits to which
Executive might otherwise have been entitled under the "Agreement Concerning
Benefits Upon Severance" dated as of September 1, 1990 to which Executive and
the Company are parties), except those benefits which are to be made available
to the Executive as required by applicable law.

10. Disputes. Any dispute or controversy arising under,
out of, in connection with or in relation to this Agreement shall, at the
election and upon written demand of either party, be finally determined and
settled by binding arbitration in the city of Fort Smith, Arkansas, using a
single arbitrator, in accordance with the Labor Arbitration rules and
procedures of the American Arbitration Association, and judgment upon the award
may be entered in any court having jurisdiction thereof. The arbitrator shall
have the power to order specific performance, mandamus, or other appropriate
legal or equitable relief to enforce the provisions of this Agreement. The
Company shall pay all costs of the arbitration and all reasonable attorney's
and accountant's fees of the Executive in connection therewith.

7
<PAGE> 8
11. Additional Payments Due to Dispute. Notwithstanding
anything to the contrary herein, and without limiting the Executive's rights at
law or in equity, if the Company fails or refuses to timely pay to the
Executive the benefits due under Paragraphs 7 and/or 8 hereof, then the
benefits under Paragraph 7(a) shall be increased and the benefits under
Paragraphs 7(c), 7(d), and 7(f) shall each be continued by one additional day
for each day of any such failure or refusal of the Company to pay. In
addition, any Gross-Up Payment due under Paragraph 8 shall be increased to take
into account any increased benefits under this Paragraph.

12. No Set-Off. There shall be no right of set-off or
counterclaim in respect of any claim, debt, or obligation against any payment
to or benefit for the Executive provided for in this Agreement.

16. Successors; Binding Agreement. (a) This Agreement
shall not be terminated by the voluntary or involuntary dissolution of the
Company or by any merger or consolidation where the Company is not the
surviving corporation, or upon any transfer of all or substantially all of the
Company's assets, or any other Change in Control. The Company shall require
any purchaser, assign, surviving corporation or successor (whether direct or
indirect, by purchase, merger, consolidation, reorganization or otherwise) to
all or substantially all of the business and/or assets of the Company, by
agreement in form and substance satisfactory to the Executive, expressly to
assume and agree to perform this Agreement in the same manner and to the same
extent the Company would be required to perform if no such succession had taken
place. This Agreement shall be binding upon and inure to the benefit of the
Company and any purchaser, assign, surviving corporation or successor to the
Company, including without limitation any persons acquiring directly or
indirectly all or substantially all of the business and/or assets of the
Company whether by purchase, merger, consolidation, reorganization, transfer of
all or substantially all of the business or assets

8
<PAGE> 9
of the Company, or otherwise (and such purchaser, assign, surviving corporation
or successor shall thereafter be deemed the "Company" for the purposes of this
Agreement), but this Agreement shall not otherwise be assignable, transferable
or delegable by the Company.

(b) This Agreement shall inure to the benefit of
and be enforceable by the Executive's personal or legal
representatives, executors, administrators, successors, heirs,
distributees and/or legatees.

(a) If to the Company, addressed to its principal
executive offices to the attention of its Secretary;

(b) If to the Executive, to him at the address
set forth below under the Executive's signature, or at any such other
address as either party shall have specified by notice in writing to
the other.

9
<PAGE> 10
20. Severability; Enforcement. If any provision of this
Agreement, or the application thereof to any person, place, or circumstance
shall be held by a court of competent jurisdiction to be invalid, unenforceable
or void, the remainder of this Agreement and such provisions as applied to
other persons, places and circumstances shall remain in full force and effect.

22. Governing Law. This Agreement shall be interpreted,
administered and enforced in accordance with the law of the State of Arkansas,
except to the extent pre-empted by Federal law.

The parties have duly executed this Agreement as of the date
first written above.

BEVERLY ENTERPRISES, INC. EXECUTIVE

By:
------------------------------------ ----------------------------
David R. Banks Boyd W. Hendrickson
Chairman and Chief Executive Officer 3816 Spring Mountain Road
Fort Smith, AR 72903

By:
------------------------------------
Robert W. Pommerville
Executive Vice President,
General Counsel and Secretary

5111 Rogers Avenue, Suite 40A
Fort Smith, AR 72919

Attention: Secretary

<PAGE> 1
EXHIBIT 10.4

EMPLOYMENT CONTRACT

AGREEMENT made as of June 3, 1996 between BEVERLY ENTERPRISES, INC., a
Delaware corporation (the "Company"), and C. Arnold Renschler (the
"Executive").

WHEREAS, the Company desires to assure itself of the management
services of the Executive by directly engaging the Executive as an Executive
Vice President of the Company and as the President and Chief Executive Officer
of Pharmacy Corporation of America ("PCA");

WHEREAS, the Company recognizes that the Executive's contribution to
the Company's growth and success will be substantial;

1. Definitions.

(a) "Base Salary" shall mean the Executive's
regular annual rate of base pay, as set forth in Paragraph 4(a), as of
the date in question.

(b) The "Benefit Multiplier" shall be equal to
1.0 except that if Executive's Termination of Employment is pursuant
to Paragraphs 6(b) or 6(c) it shall be equal to 3.0.

(c) The "Benefit Period" shall be the period of
years equal to the Benefit Multiplier which follows the Executive's
Termination of Employment.

<PAGE> 2
with, or merge with, any other Person and the Company shall not be the
continuing or surviving corporation, b any Person shall consolidate
with, or merge with, the Company, and the Company shall be the
continuing or surviving corporation and in connection therewith, all
or part of the outstanding Company stock shall be changed into or
exchanged for stock or other securities of any other Person or cash or
any other property, c the Company shall be a party to a statutory
share exchange with any other Person after which the Company is a
subsidiary of any other Person, or d the Company shall sell or
otherwise transfer 50% or more of the assets or earning power of the
Company and its subsidiaries (taken as a whole) to any Person or
Persons.

(f) The "Change in Control Date" shall mean the
date immediately prior to the effectiveness of the Change in Control.

(g) The "Committee" shall mean the Compensation
Committee of the Company's Board of Directors.

(h) The "Competitive Businesses" shall mean any
of the health care businesses in which the Company is engaged on the
execution date of this Agreement.

(i) The Executive shall have "Good Reason" to
terminate employment if: (i) the Executive is not elected, reelected
or otherwise continued in the office of the Company or any of its
subsidiaries which he held immediately prior to the Change in Control
Date, (ii) the Executive's duties, responsibilities or authority as an
employee are materially reduced or diminished from those in effect on
the Change in Control Date without the Executive's consent; (iii) the
Executive's duties, responsibilities or authority as an employee are
materially reduced or diminished from those in effect on the date
hereof without the Executive's consent; (iv) the Executive's
compensation or benefits are reduced without the Executive's consent,
unless all officers at the Executive Vice President level have their
salaries reduced in the same percentage amount; (v) the Company
reduces the potential earnings of the Executive under any
performance-based bonus or incentive plan of the Company in effect
immediately prior to the Change in Control Date; (vi) the Company
requires that the Executive's employment be based other than at Tampa,
Florida, without his consent; (vii) any purchaser, assign, surviving
corporation, or successor of the Company or its business or assets
(whether by acquisition, merger, liquidation, consolidation,
reorganization, sale or transfer of assets or business, or otherwise)
fails or refuses to expressly assume in writing this Agreement and
all of the duties and obligations of the Company hereunder pursuant to
Section 16 hereof, or (viii) the Company breaches any of the
provisions of this Agreement.

(k) "Target Bonus" shall mean the target bonus
(100% level) established for the Executive for the year in question
under the Company's "Annual Incentive Plan."

2
<PAGE> 3
2. Term. The initial term of this Agreement shall be
for the period commencing on June 3, 1996 (the "Effective Date") and ending on
June 2, 1999. The Term shall be automatically extended by one additional day
for each day beyond the Effective Date of this Agreement that the Executive
remains employed by the Company until such time as the Company elects to cease
such extension by giving written notice of such to the Executive. (In such
event, the Agreement shall thus terminate on the third anniversary of the
effective date of such notice).

3. Position and Duties. During the Term, the Executive
shall serve as an employee, as an Executive Vice President of the Company and
as the President and Chief Executive Officer of PCA and shall have such duties,
functions, responsibilities and authority as are consistent with the
Executive's position as the senior executive officer in charge of the general
management, business and affairs of PCA.

4. Compensation and Related Matters.

(a) Annual Base Salary. The Executive shall receive
a Base Salary at a rate of $375,000 per annum through December 31,
1996 and thereafter at any such greater rate as is determined by the
Committee.

(b) Benefits. During the Term, the Executive shall
be entitled to all of the following and any other benefits and
perquisites offered by the Company to executives generally:

(i) Participate in the Company's present
and future stock option, restricted stock, phantom stock and
other similar equity-based incentive plans, pursuant to their
terms;

(ii) Participate in the Company's
Employee Stock Purchase Plan, pursuant to its terms;

(iii) Participate in the Company's
Executive Retirement Plan, pursuant to its terms;

(iv) $300,000 of individual life
insurance coverage under the Company's Executive Life
Insurance Plan, which coverage shall be 0% vested as of the
date hereof, and shall vest 10% on his fiftieth birthday and
shall vest an additional 10% each year thereafter on his
birthday while the Executive is employed by the Company;

(v) $375,000 (or such greater amount as
the Company may make available to its senior executives
generally) of group term life insurance coverage;

(vi) $100,000 (or such greater amount as
the Company may make available to its senior executives
generally) of business travel accident insurance coverage when
traveling on Company business;

(vii) Participate in the Company's Medical
Plan, and Dental Plan, pursuant to their terms, except that
the premium cost for such shall be treated as a benefit under
the Company's Executive Medical Reimbursement Plan, described
below, (and therefore at the present time, there shall be no
payroll deduction as a condition of coverage in the Medical
Plan and Dental Plan);

3
<PAGE> 4
(viii) Participate in the Company's
Executive Medical Reimbursement Plan (with a maximum annual
benefit of $11,500 (or such greater amount as the Company may
make available to its senior executives generally), a portion
of which shall be deemed applied to the payment of premiums
under the Company's Medical Plan and Dental Plan as described
above), pursuant to its terms;

(ix) Participate in the Company's group
Long-Term Disability Plan, at the maximum benefit level,
pursuant to its terms;

(x) 4 weeks of paid vacation;

(c) Annual Bonus. As additional compensation for
services rendered, the Executive shall be eligible to receive an
annual bonus in cash pursuant to the Company's Annual Incentive Plan.

(e) Reporting. The Executive shall report
directly to the President and Chief Operating Officer of the Company.

5. Competition.

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<PAGE> 5
and restraining the Executive from committing any violation of
subparagraph (a) above, and the Executive hereby consents to the
issuance of such injunction.

6. Eligibility for Severance Benefits. The Executive
shall be eligible for the benefits described in Paragraph 7 (the "Severance
Benefits") if:

7. Severance Benefit. Upon satisfaction of the
requirements set forth in Paragraph 6, and subject to Paragraphs 8 and 11, the
Executive shall be entitled to the following Severance Benefits:

(a) Cash Payment. The Executive shall be entitled
to receive an amount of cash equal to the Benefit Multiplier times the
greater of

(i) the sum of the Executive's Base Salary
as in effect upon the Termination of Employment, and the
greater of

(A) the Executive's Target Bonus as
in effect upon the Termination of Employment or,

(B) the Executive's actual bonus
under the Company's "Annual Incentive Plan" for the
year prior to the year of the Executive's Termination
of Employment,

(ii) the sum of the Executive's Base Salary
as in effect on the Change in Control Date, and the greater of

(A) the Executive's Target Bonus as
in effect upon the Change in Control Date or,

(B) the Executive's actual bonus
under the Company's "Annual Incentive Plan" for the
year prior to the Change in Control Date.

The payment shall be made in a single lump sum within ten days
following the Executive's Termination of Employment.

5
<PAGE> 6
(b) Long-Term Incentive Award; Equity-Based
Compensation. The Executive's interest under all of the
Company's long-term incentive plans shall be fully vested. Any
and all (i) options to purchase Company stock and (ii)
restricted stock of the Company, owned by the Executive shall
be fully vested.

(i) For the Benefit Period, or for two
(2) years, whichever is longer, the Executive shall be treated
as if he had continued to be an executive employee for all
purposes under the Company's Medical Plan, Executive Medical
Reimbursement Plan and Dental Plan (as described in Paragraph
4(b). Following this period the Executive shall be entitled to
receive continuation coverage under Part Six of Title I of
ERISA ("COBRA Benefits) treating the end of this period as a
termination of the Executive's employment (other than for
gross misconduct).

6
<PAGE> 7
(g) Plan Amendments. The Company shall adopt
such amendments to its employee benefit plans and insurance policies
as are necessary to effectuate the provisions of this Agreement. If
and to the extent any benefits under this Paragraph 7 are not paid or
payable or otherwise provided to the Executive or his dependents or
beneficiaries under any such plan or policy (whether due to the terms
of the plan or policy, the termination thereof, applicable law, or
otherwise), then the Company itself shall pay or provide for such
benefits.

8. Golden Parachute Gross-Up. If, in the written
opinion of a Big 6 accounting firm engaged by either the Company or the
Executive for this purpose (at the Company's expense), or if so alleged by the
Internal Revenue Service, the aggregate of the benefit payments under Paragraph
7 would cause the payment of one or more of such benefits to constitute an
"excess parachute payment" as defined in Section 280G(b) of the Internal
Revenue Code ("Code"), then the Company will pay to the Executive an additional
amount in cash (the "Gross-Up Payment") equal to the amount necessary to cause
the net amount retained by the Executive, after deduction of any (i) excise tax
on the payments under Paragraph 7, (ii) federal, state or local income tax on
the Gross-Up Payment, and (iii) excise tax on the Gross-Up Payment, to be equal
to the aggregate remuneration the Executive would have received under Section
7, excluding such Gross-Up Payment (net of all federal, state and local excise
and income taxes), as if Sections 280G and 4999 of the Code (and any successor
provisions thereto) had not been enacted into law. The Gross-Up Payment
provided for in this Paragraph shall be made within ten (10) days after the
termination of Executive's employment, provided however that if the amount of
the payment cannot be finally determined at the time, the Company shall pay to
Executive an estimate as determined in good faith by the Company of such
payments (together with interest at the rate provided in section 1274(b)(2)(B)
of the Code) as soon as the amount thereof can be determined but in no event
later than the thirtieth (30th) day after the date of termination. Any dispute
concerning the application of this Paragraph shall be resolved pursuant to
Paragraph 10, and if Paragraph 11 applies, any reference in this Paragraph to
Paragraph 7 shall also be deemed to include a reference to Paragraph 11 as
well.

9. Waiver of Other Severance Benefits. The benefits
payable pursuant to this Agreement are in lieu of any other severance benefits
which may otherwise be payable to the Executive upon termination following a
Change in Control (including, without limitation, any benefits to which
Executive might otherwise have been entitled under the "Agreement Concerning
Benefits Upon Severance" dated as of September 1, 1990 to which Executive and
the Company are parties), except those benefits which are to be made available
to the Executive as required by applicable law.

10. Disputes. Any dispute or controversy arising
under, out of, in connection with or in relation to this Agreement shall, at
the election and upon written demand of either party, be finally determined and
settled by binding arbitration in the city of Fort Smith, Arkansas, using a
single arbitrator, in accordance with the Labor Arbitration rules and
procedures of the American Arbitration Association, and judgment upon the award
may be entered in any court having jurisdiction thereof. The arbitrator shall
have the power to order specific performance, mandamus, or other appropriate
legal or equitable relief to enforce the provisions of this Agreement. The
Company shall pay all costs of the arbitration and all reasonable attorney's
and accountant's fees of the Executive in connection therewith.

7
<PAGE> 8
addition, any Gross-Up Payment due under Paragraph 8 shall be increased to take
into account any increased benefits under this Paragraph.

12. No Set-Off. There shall be no right of set-off or
counterclaim in respect of any claim, debt, or obligation against any payment
to or benefit for the Executive provided for in this Agreement.

8
<PAGE> 9
(b) This Agreement shall inure to the benefit of
and be enforceable by the Executive's personal or legal
representatives, executors, administrators, successors, heirs,
distributees and/or legatees.

(a) If to the Company, addressed to its principal
executive offices to the attention of its Secretary;

(b) If to the Executive, to him at the address
set forth below under the Executive's signature, or at any such other
address as either party shall have specified by notice in writing to
the other.

19. Entire Agreement. This Agreement and the Employment
Contract Addendum (the "Addendum") executed concurrently herewith, together set
forth the entire agreement of the parties hereto in respect of the subject
matter contained herein and supersede all prior agreements, promises,
covenants, arrangements, communications, representations or warranties, whether
oral or written, by any officer, employee or representative of any party
hereto. The parties further intend that this Agreement and the Addendum shall
constitute the complete and exclusive statement of their terms and that no
extrinsic evidence whatsoever may be introduced in any judicial,
administrative, or other legal proceeding involving this Agreement or the
Addendum.
20. Severability; Enforcement. If any provision of this
Agreement, or the application thereof to any person, place, or circumstance
shall be held by a court of competent jurisdiction to be invalid,

9
<PAGE> 10
unenforceable or void, the remainder of this Agreement and such provisions as
applied to other persons, places and circumstances shall remain in full force
and effect.

22. Governing Law. This Agreement shall be interpreted,
administered and enforced in accordance with the law of the State of Arkansas,
except to the extent pre-empted by Federal law.

The parties have duly executed this Agreement as of the date
first written above.

BEVERLY ENTERPRISES, INC. EXECUTIVE

By:
------------------------------------- ----------------------------
David R. Banks C. Arnold Renschler
Chairman and Chief Executive Officer 408 Barbara Lane
Bryn Mawr, PA 19010

By:
-------------------------------------
Boyd W. Hendrickson
President and Chief Operating Officer

5111 Rogers Avenue, Suite 40A
Fort Smith, AR 72919

<PAGE> 1
EXHIBIT 10.5

EMPLOYMENT CONTRACT ADDENDUM

This ADDENDUM to the EMPLOYMENT CONTRACT ("AGREEMENT") between
BEVERLY ENTERPRISES, INC. and C. ARNOLD RENSCHLER, M.D. is a fully integrated
part of the AGREEMENT and provides as follows:

1. Annual Incentive Plan. With respect to Paragraph
4(c), the Company shall pay the Executive a guaranteed bonus for 1996
performance at no less than 50% of Base Salary and up to 100% of Base Salary.

2. Contract Buyout. With respect to Paragraph 4, in
addition to the provisions therein, the Company will pay to Executive the sum
of $400,000, payable in four (4) quarterly installments of $100,000 each on
June 3, 1996, September 1, 1996, December 1, 1996, and March 1, 1997, each
payment subject to all applicable withholding.

3. Stock Options and PCA Equity. With respect to
Paragraph 4(b)(i), subject to grant by the Compensation Committee, and
effective upon the date of such grant or the Date of Employment, whichever last
occurs, the Executive will be eligible for a minimum of 140,000 stock awards in
the following form:

<TABLE>
<S> <C>
Restricted Stock (4 year vesting) 15,000
Performance Shares (5 year vesting) 40,000
Non-Qualified Stock Options (4 year vesting) 35,000
Performance Options (based on PCA performance) 50,000
</TABLE>

In addition, the Executive will be granted 160,000 stock options upon
shareholder approval on June 13, 1996. In the event PCA goes public within two
years, the Executive's Company stock options, performance shares, performance
options, and restricted stock shall be converted to a PCA stock package of
equivalent value consistent with the "Potential Approach to PCA Executive
Compensation Package" developed by Towers Perrin, attached hereto as Exhibit
"A."

4. Exercise of NovaCare Stock Options. With respect to
Paragraph 4, the Company will be a co-signor on a note, in a form
substantially in accord with the attached Exhibit "A," enabling the Executive
to exercise 200,000 NovaCare stock options.

5. COBRA Reimbursement. With respect to Paragraph
4(b)(vii), the Company will pay the COBRA premiums, in the amount of Four
Hundred Eighty-Seven Dollars and Sixty-Five Cents ($487.65) per month to
maintain health benefits with NovaCare until he and his spouse become eligible
participants in the Company's plans after three (3) months of full-time service
(i.e. July, August and
<PAGE> 2
September, 1996). These COBRA payments will not be treated as a benefit under
the Company's Executive Medical Reimbursement Plan.

6. Executive Physicals. With respect to Paragraph 4, the
Company will pay for the annual physical which is required of all executives.

7. Executive Retirement Plan. With respect to Paragraph
4(b)(iii), the Executive will be eligible to receive a Company matching
contribution at the maximum level provided in the plan. For 1996, the Company
match, if anything, will be up to 6%, depending upon Company performance.

8. Group Universal Life. With respect to Paragraph 4,
the Executive shall be entitled to participate in the Group Universal Life
program during the next enrollment by which the Executive may purchase up to a
maximum of $1,000,000 in additional insurance coverage.

9. Employee Stock Purchase Plan. With respect to
Paragraph 4(b)(ii), after one year of full-time employment the Executive may
participate in the Employee Stock Purchase Plan. Currently, the plan allows
eligible employees to purchase Company stock through payroll deductions with a
30% Company match.

10. Relocation Benefit. With respect to Paragraph 4, the
Company will make a lump sum payment to the Executive of $20,000 to relocate to
the Tampa, Florida area. This amount is subject to graduated repayment should
the Executive voluntarily terminate his employment without Good Reason within
six (6) months of the date of hire. The Executive will receive up to an
additional $60,000 if needed for relocation. In the event the Executive
requests payment for more than the $20,000 for relocation expenses, he must
then submit receipts for both the initial lump sum and the additional amounts.

11. Home Purchase. With respect to Paragraph 4, the
Company will purchase the Executive's current home at a price that is equal to
the average price of three appraisal companies if the Executive is unable to
sell it on his own within 60 days of listing.

12. Financial Planning. With respect to Paragraph 4, the
Executive is eligible to receive $175 toward the cost of a financial planner of
the Executive's choice.

-2-
<PAGE> 3
13. Continuing Education. With respect to Paragraph 4,
the Company will pay the Executive's costs for continuing education to maintain
appropriate licenses. Time required to attend classes will be counted as work
time.

BEVERLY ENTERPRISES, INC. C. ARNOLD RENSCHLER, M.D.

By: /s/ DAVID R. BANKS /s/ C. ARNOLD RENSCHLER
------------------------------ ------------------------------
David R. Banks
Chairman and Chief Executive
Officer

By: /s/ ROBERT W. POMMERVILLE
------------------------------
Robert W. Pommerville
Executive Vice President
General Counsel and Secretary
5111 Rogers Avenue, Suite 40A
Fort Smith, AR 72919
Attention: Secretary

-3-

<PAGE> 4
EXHIBIT A

BEVERLY ENTERPRISES, INC.
- --------------------------------------------------------------------------------

POTENTIAL APPROACH TO PCA EXECUTIVE COMPENSATION PACKAGE

APRIL 10, 1996

TOWERS PERRIN
<PAGE> 5
April 1996 1
- --------------------------------------------------------------------------------

INTRODUCTION

- - Towers Perrin has been asked to assist with the development of an
executive compensation approach for the potential head of PCA.

- - The estimated IPO values are for illustrative purposes only; they are
not meant to reflect a formal valuation of PCA.

- - The Black-Scholes values used in this report are estimates only. A
formal valuation of PCA options would require a more in-depth study of
industry volatility.

Towers Perrin
<PAGE> 6
April 1996 2
- --------------------------------------------------------------------------------

PROPOSED PLAN APPROACH

1. The PCA executive is granted a package of BEI stock options and
restricted stock.

2. If PCA goes public in two years, the BEI stock package is converted to
a PCA stock package of equivalent value.

3. If PCA does not go public, the executive retains the BEI stock
package.

Towers Perrin
<PAGE> 7

April 1996 3
- --------------------------------------------------------------------------------

THE PCA EXECUTIVE IS GRANTED A PACKAGE OF BEI STOCK OPTIONS AND RESTRICTED
STOCK . . .

<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Estimated Fair
Package Component Number of Shares Market Value (1) Comments
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
STOCK OPTIONS
This represents the
NQSOs (pending June shareholder approval) 160,000 $1,054,400 Black-Scholes value of
NQSOs 35,000 230,650 stock options granted.
Performance Options 50,000 329,500
------- ---------- The executive does not
245,000 $1,614,550 realize any value unless
the share price rises
substantially over the
exercise price.

- ------------------------------------------------------------------------------------------------------------------------------------
RESTRICTED STOCK
This represents the fair
Restricted Stock 15,000 $168,750 market value of the BEI
Performance Shares 40,000 450,000 stock today.
------ --------
55,000 $618,750 If the stock price does
not rise over today's
price, the executive
still realizes the full
face value of these
shares.
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL 300,000 $2,233,300
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

(1) Assumes share price of $11.25; Black-Scholes value of 10-year BEI option
estimated as $6.59.

TOWERS PERRIN
<PAGE> 8

April 1996 4
- --------------------------------------------------------------------------------
IF PCA GOES PUBLIC IN TWO YEARS, THE BEI STOCK PACKAGE IS CONVERTED TO A PCA
STOCK PACKAGE OF EQUIVALENT VALUE . . .

* Assuming that PCA goes public in two years and that BEI stock has risen to
$14.88 per share (15% per year), the following would represent the value of
the original BEI stock package:

- -------------------------------------------------------------------------------------------------------------------------------
Estimated Fair
Package Component Number of Shares Market Value in Year 2 (1) Comments
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>

STOCK OPTIONS
This represents the
NQSOs (pending June shareholder approval) 160,000 $1,424,000 Black-Scholes value of
NQSOs 35,000 311,500 stock options granted
Performance Options 50,000 445,000 REVALUED to reflect
------- ---------- the increase in BEI
245,000 $2,180,500 share price.

The actual gain at the
IPO for these options
would be:

245,000 x (14.88 -
$11.25) = $889,350
- -------------------------------------------------------------------------------------------------------------------------------
RESTRICTED STOCK
This represents the fair
Restricted Stock 15,000 $223,200 market value of BEI
Performance Shares 40,000 595,200 stock in two years at a
------ -------- share price of $14.88.
55,000 $818,400
If the stock price does
not rise over today's
price, the executive
still realizes the full
face value of these
shares.
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL 300,000 $2,998,900
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>

(1) Black-Scholes value of 8-year BEI option estimated at $8.90 (assumes $14.88
stock price and $11.25 exercise price).

TOWERS PERRIN
<PAGE> 9

April 1996 5
- --------------------------------------------------------------------------------
THE $3 MILLION VALUE OF THE BEI STOCK PACKAGE WOULD BE CONVERTED TO AN
EQUIVALENT VALUE PCA STOCK PACKAGE AT THE IPO . . .

A. STOCK OPTIONS
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
ASSUMPTION:
VALUE OF BEI STOCK OPTION TO CONVERT TO PCA STOCK OPTION = $2,180,500
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Value of IPO $500.0 million $700.0 million $1.0 billion
- -----------------------------------------------------------------------------------------------------------------------------------
# of Shares Outstanding 100 million 100 million 100 million
- -----------------------------------------------------------------------------------------------------------------------------------
IPO Share Price $5.00 $7.00 $10.00
- -----------------------------------------------------------------------------------------------------------------------------------
Estimated Black-Scholes Value of PCA Option $3.00 $4.20 $6.00
(1)
- -----------------------------------------------------------------------------------------------------------------------------------
Option Grant 726,833 options 519,167 options 363,417 options
(assuming $2.180M grant value)
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>

(1) Assumes a Black-Scholes ratio of 60% on the date of grant.

B. RESTRICTED STOCK
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
ASSUMPTION:
VALUE OF BEI RESTRICTED STOCK TO CONVERT TO PCA RESTRICTED STOCK = $818,400
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Value of IPO $500.0 million $700.0 million $1.0 billion
- -----------------------------------------------------------------------------------------------------------------------------------
# of Shares Outstanding 100 million 100 million 100 million
- -----------------------------------------------------------------------------------------------------------------------------------
IPO Share Price $5.00 $7.00 $10.00
- -----------------------------------------------------------------------------------------------------------------------------------
Restricted Stock Grant 163,680 restricted 116,914 restricted 81,840 restricted
(assuming $818,400 grant value) shares shares shares
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>

TOWERS PERRIN
<PAGE> 10

April 1996 6
- --------------------------------------------------------------------------------
AN ALTERNATIVE APPROACH . . .

Convert the gain in BEI stock options ($889k) plus the value of BEI restricted
shares ($818k) to PCA restricted shares at the IPO price (for a total value of
$1.7M in PCA restricted shares):

$1.7 million / $5.00 IPO price = 340,000 PCA restricted shares

$1.7 million / $7.00 IPO price = 242,857 PCA restricted shares

$1.7 million / $10.00 IPO price = 170,000 PCA restricted shares

PLUS

Convert the BEI stock options to an equivalent face value of PCA options:

245,000 BEI options X $11.25 = $2.75 million face value of BEI options to
be converted to:

$2.75 million / $5.00 IPO price = 550,000 PCA stock options

$2.75 million / $7.00 IPO price = 392,857 PCA stock options

$2.75 million / $10.00 IPO price = 275,000 PCA stock options

TOWERS PERRIN
<PAGE> 11

TERM / TIME NOTE PNCBANK

$1,200,000.00 July 1, 1996

FOR VALUE RECEIVED, C. ARNOLD RENSCHLER, M.D. AND BEVERLY ENTERPRISES, INC.,
(the "Borrower"), with an address at 408 Barbara Lane, Bryn Mawr, PA 19010,
jointly and severally promise to pay to the order of PNC BANK, NATIONAL
ASSOCIATION (the "Bank"), in lawful money of the United States of America in
immediately available funds at its offices located at 100 South Broad Street,
Philadelphia, Pennsylvania 19110, or at such other location as the Bank may
designate from time to time, the principal sum of One-million Two-hundred
thousand and 00/100 DOLLARS ($1,200,000.00), together with interest accruing on
the outstanding principal balance from the date hereof, as provided below:

1. Rate of Interest. Amounts outstanding under this Note will bear interest
at a rate per annum which is at all times zero percentage points (0%) per annum
in excess of the rate of interest which is the highest prime rate as published
in The Wall Street Journal from time to time ("Prime Rate"), such rate to
change automatically effective as of the dates of changes in the Prime Rate
without prior notice to the Borrower. The Prime Rate does not necessarily
reflect the lowest rate of interest actually charged by the Bank to any
particular class or category of customers. In no event shall the interest rate
exceed the maximum rate allowed by law. Interest will be calculated on the basis
of a year of 365 days for the actual number of days elapsed.

2. Payment Terms. Principal will be due and payable on June 30, 1997.

Interest shall be due and payable monthly as billed commencing on August 1,
1996, and on the same day of each month thereafter until June 30, 1997 on which
date all outstanding principal and accrued interest shall be due and payable in
full.

In any payment under this Note shall become due on a Saturday, Sunday or public
holiday under the laws of the State where the Bank's office indicated above is
located, such payment shall be included in computing interest in connection
with such payment. Payment received will be applied to charges, fees and
expenses (including attorneys' fees), accrued interest and principal in any
order the Bank may choose, in its sole discretion.

3. Default Rate. Upon maturity, whether by acceleration, demand or otherwise,
and at the option of the Bank upon the occurrence of any Event of Default (as
hereinafter defined) and during the continuance thereof, this Note shall bear
interest at a rate per annum (based on a year of 365 days and actual days
elapsed) which shall be five percentage points (5.0%) in excess of the interest
rate in effect from time to time under this Note but not more than the maximum
rate allowed by law (the "Default Rate"). The Default Rate shall continue to
apply whether or not judgment shall be entered on this Note.

4. Prepayment. The indebtedness under this Note may be prepaid in whole or in
part at any time without penalty.

5. Other Loan Documents. None

6. Events of Default. The occurrence of any of the following events will be
deemed to be an "Event of Default" under this Note: (i) the nonpayment of any
principal, interest or other indebtedness under this Note when due; (ii) the
occurrence of any event of default or default and the lapse of any notice or
cure period under any Loan Document or any other debt, liability or obligation
to the Bank of any Obligor; (iii) the filing by or against any Obligor of any
proceeding in bankruptcy, receivership, insolvency, reorganization,
liquidation, conservatorship or similar proceeding, or any assignment by any
Obligor for the benefit of creditors, or any levy, garnishment, attachment or
similar proceeding is instituted against any property of any Obligor held by or
deposited with the Bank; (iv) a default with respect to any other indebtedness
of any Obligor for borrowed money, if the effect of such default is to cause or
permit the acceleration of such debt; (v) the commencement of any foreclosure
proceeding, execution or attachment against any collateral securing the
obligations of any Obligor to the Bank; (vi) the entry of a final judgment
against any Obligor and the failure of such Obligor to discharge the judgment
within ten days of the entry thereof; (vii) in the event that this Note or any
guarantee executed by any Guarantor is secured, the failure of any Obligor to
provide the Bank with additional collateral if in the opinion of the Bank at any
time or times, the market value of any of the collateral securing this Note or
any guarantee has depreciated; (viii) any material adverse change in the
business, assets, operations, financial condition or results of operations of
any Obligor (ix) the revocation or attempted revocation, in whole or in part,
of any guarantee by any Guarantor; (x) the death of any individual Obligor or,
if any Obligor is a partnership, the death of any individual general partner;
(xi) any representation or warranty made by any Obligor to the Bank in any Loan
Document or any other documents now or in the future securing the obligations of
any Obligor to the Bank, is false, erroneous or misleading in any material
respect; or (xii) the failure of any Obligor to observe or perform any covenant
or other agreement with the Bank contained in any Loan Document or any other
documents now or in the future securing the obligations of any Obligor to the
Bank. As used herein, the term "Obligor" means any Borrower and any Guarantor,
and the term "Guarantor" means any guarantor of the obligations of the Borrower
to the Bank existing on the date of this Note or arising in the future.

Upon the occurrence of an Event of Default; (a) if an Event of Default specified
in clause (iii) above shall occur, the outstanding principal balance and accrued
interest hereunder together with any additional amounts payable hereunder shall
be immediately due and payable without demand or notice of any kind; (b) if any
other Event of Default shall occur, the outstanding principal balance and
accrued interest hereunder together with any additional amounts payable
hereunder, at the option of the Bank and without demand or notice of any kind
may be accelerated and become immediately due and payable; (c) at the option of
the Bank, this Note will bear interest at the Default Rate from the date of the
occurrence of the Event of Default; and (d) the Bank may exercise from time to
time any of the rights and remedies available to the Bank under the Loan
Documents or under applicable law.

7. Right of Setoff. In addition to all liens upon and rights of setoff
against the money, securities or other property of the Borrower given to the
Bank by law, the Bank shall have, with respect to the Borrower's obligations to
the Bank under this Note and to the extent permitted by law, a contractual
possessory security interest in and a right of setoff against, and the Borrower
hereby assigns, conveys, delivers, pledges and transfers to the Bank all of the
Borrower's right, title and interest in and to, all deposits, moneys, securities
and other property of the Borrower now or hereafter in the possession of or on
deposit with the Bank whether held in a general or special account or deposit,
whether held jointly with someone else, or whether held for safekeeping or
otherwise, excluding, however, all IRA, Keogh and trust accounts. Every such
security interest and right of setoff may be exercised without demand upon or
notice to the Borrower.

8. Miscellaneous. No delay or omission of the Bank to exercise any right or
power arising hereunder shall impair any such right or power or be considered
to be a waiver of any such right or power or any acquiescence therein, nor
shall the action or inaction of the Bank impair any right or power hereunder.
The Borrower agrees to pay on demand, to the extent permitted by law, all costs
and expenses incurred by the Bank in the enforcement of its rights in this Note
and in any security therefor, including without limitation reasonable fees and
expenses of the Bank's counsel. If any provision of this Note is found to be
invalid by a court, all the other provisions of this Note will remain in full
force and effect. The Borrower and all other makers and endorsers of this Note

EXHIBIT "A"
<PAGE> 12
hereby forever waive presentment, protest, notice of dishonor and notice of
nonpayment. The Borrower also waives all defenses based on suretyship or
impairment of collateral. If this Note is executed by more than one Borrower,
the obligations of such persons or entities hereunder will be joint and
several. This Note shall bind the Borrower and the heirs, executors,
administrators, successors and assigns of the Borrower, and the benefits hereof
shall inure to the benefit of Bank and its successors and assigns.

This Note has been delivered to and accepted by the Bank and will be deemed to
be made in the State where the Bank's office indicated above is located. THIS
NOTE WILL BE INTERPRETED AND THE RIGHTS AND LIABILITIES OF THE PARTIES HERETO
DETERMINED IN ACCORDANCE WITH THE LAWS OF THE STATE WHERE THE BANK'S OFFICE
INDICATED ABOVE IS LOCATED, EXCLUDING ITS CONFLICT OF LAWS RULES. The Borrower
hereby irrevocably consents to the exclusive jurisdiction of any state or
federal court for the county or judicial district where the Bank's office
indicated above is located, and consents that all service of process be sent by
nationally recognized overnight courier service directed to the Borrower at the
Borrower's address set forth herein and service so made will be deemed to be
completed on the business day after deposit with such courier; provided that
nothing contained in this Note will prevent the Bank from bringing any action,
enforcing any award or judgment or exercising any rights against the Borrower
individually, against any security or against any property of the Borrower
within any other county, state or other foreign or domestic jurisdiction. The
Borrower acknowledges and agrees that the venue provided above is the most
convenient forum for both the Bank and the Borrower. The Borrower waives any
objection to venue and any objection based on a more convenient forum in any
action instituted under this Note.

9. WAIVER OF JURY TRIAL. THE BORROWER IRREVOCABLY WAIVES ANY AND ALL RIGHTS
THE BORROWER MAY HAVE TO A TRIAL BY JURY IN ANY ACTION, PROCEEDING OR CLAIM OF
ANY NATURE RELATING TO THIS NOTE, ANY DOCUMENTS EXECUTED IN CONNECTION WITH THIS
NOTE OR ANY TRANSACTION CONTEMPLATED IN ANY OF SUCH DOCUMENTS. THE BORROWER
ACKNOWLEDGES THAT THE FOREGOING WAIVER IS KNOWING AND VOLUNTARY.

The Borrower acknowledges that it has read and understood all the provisions of
this Note, including the waiver of jury trial, and has been advised by counsel
as necessary or appropriate.

WITNESS/ATTEST the due execution hereof as a document under seal, as of the
date first written above, with the intent to be legally bound hereby.

(CORPORATE SEAL)

Attest:
----------------------------------
Print Name:
------------------------------
Title:
-----------------------------------
Witness:
---------------------------------
Print Name:
------------------------------

Beverly Enterprises, Inc.
- -----------------------------------------
(Corporation, Partnership or other Entity)

By:
--------------------------------------
Print Name:
------------------------------
Title:
-----------------------------------

- -----------------------------------------
(Individual)

Print Name: C. Arnold Renschler, M.D.
------------------------------

<PAGE> 1

EXHIBIT 10.6
SIXTEENTH AMENDMENT TO CREDIT AGREEMENT
AMONG
BEVERLY ENTERPRISES, INC.,
BEVERLY HEALTH AND REHABILITATION SERVICES, INC.,
THE SUBSIDIARY GUARANTORS LISTED HEREIN,
THE LENDERS LISTED HEREIN,
BANK OF MONTREAL, AS CO-AGENT,
AND
THE LONG-TERM CREDIT BANK OF JAPAN, LTD.
LOS ANGELES AGENCY, AS AGENT

DATED AS OF JUNE 5, 1996

THIS SIXTEENTH AMENDMENT, dated as of June 5, 1996 (this
"AMENDMENT"), is entered into by and among BEVERLY ENTERPRISES, INC., a
Delaware corporation ("BEI"), BEVERLY HEALTH AND REHABILITATION SERVICES, INC.
(formerly known as Beverly California Corporation), a California corporation
("BORROWER"), the SUBSIDIARY GUARANTORS listed on the signature pages hereof
(together with BEI, the "GUARANTORS"), the LENDERS listed on the signature
pages hereof (such lenders, together with each Person that may or has become a
party to the Credit Agreement (as defined below) pursuant to subsection 10.8
thereof, are referred to herein individually as a "LENDER" and collectively as
the "LENDERS"), BANK OF MONTREAL as co-agent for the Lenders (in such capacity,
the "CO-AGENT"), and THE LONG-TERM CREDIT BANK OF JAPAN, LTD., Los Angeles
Agency ("LTCB"), as agent for the Lenders (in such capacity, the "AGENT"). This
Amendment amends the Credit Agreement dated March 24, 1992 by and among BEI,
Borrower, Co-Agent, Agent and Lenders, as amended by that First Amendment to
Credit Agreement dated April 7, 1992 by and among BEI, Borrower, Co-Agent,
Agent and the Lenders, as further amended by that Second Amendment to Credit
Agreement dated as of May 11, 1992 by and among BEI, Borrower, Co-Agent, Agent
and the Lenders, as further amended by that Third Amendment to Credit Agreement
dated as of March 1, 1993 by and among BEI, Borrower, Co-Agent, Agent and the
Lenders, as further amended by that Fourth Amendment to Credit Agreement dated
as of November 1, 1993 by and among BEI, Borrower, Co-Agent, Agent and the
Lenders, as further amended by that Fifth Amendment to Credit Agreement dated
as of March 21, 1994 by and among BEI, Borrower, Co-Agent, Agent and the
Lenders, as further amended by that Sixth Amendment to Credit Agreement dated
as of April 22, 1994 by and among BEI, Borrower, Co-Agent, Agent and the
Lenders, as further amended by that Seventh Amendment to Credit Agreement dated
as of May 2, 1994 by and among BEI, Borrower, Co-Agent, Agent and the Lenders,
as further amended by that Eighth Amendment to Credit Agreement dated as of
November 1, 1994 by and among BEI, Borrower, Co-Agent, Agent and the Lenders,
as further amended by that Ninth Amendment to Credit Agreement dated as of
November 9, 1994 by and among BEI, Borrower, Co-Agent, Agent and the Lenders,
as further amended by that Tenth Amendment to Credit Agreement dated as of
December 6, 1994 by and
<PAGE> 2
among BEI, Borrower, Co-Agent, Agent and the Lenders, as further amended by
that Eleventh Amendment to Credit Agreement dated as of March 27, 1995 by and
among BEI, Borrower, Co-Agent, Agent and the Lenders, as further amended by
that Twelfth Amendment to Credit Agreement dated as of October 23, 1995 by and
among BEI, Borrower, Co-Agent, Agent and the Lenders, as further amended by
that Thirteenth Amendment to Credit Agreement dated as of September 29, 1995 by
and among BEI, Borrower, Co-Agent, Agent and the Lenders, as further amended by
that Fourteenth Amendment to Credit Agreement dated as of December 7, 1995 by
and among BEI, Borrower, Co-Agent, Agent and the Lenders, as further amended by
that Fifteenth Amendment to Credit Agreement dated as of February 12, 1996 by
and among BEI, Borrower, Co-Agent, Agent and the Lenders (said Credit
Agreement, as so amended, the "CREDIT AGREEMENT"), as set forth herein.
Capitalized terms used herein without definition shall have the same meanings
herein as set forth in the Credit Agreement.

RECITALS

WHEREAS, Borrower desires to amend the Credit Agreement in
certain respects;

WHEREAS, Lenders, Co-Agent and Agent have agreed to approve
such amendments;

WHEREAS, Guarantors desire to reaffirm the effectiveness
respectively of the Subsidiary Guaranty Agreement and the BEI Guaranty
Agreement;

NOW, THEREFORE, in consideration of the terms and conditions
herein contained, BEI, Borrower, Guarantors, Co-Agent, Agent and Lenders agree
as follows:

AGREEMENT

SECTION 1. AMENDMENT TO SUBSECTION 5.18 OF THE CREDIT AGREEMENT

Subsection 5.18B of the Credit Agreement is hereby amended,
effective as of December 31, 1995, by deleting it in its entirety and replacing
it with the following:

"B. CERTAIN APPRAISALS REQUIRED. The Borrower shall deliver to the
Agent and the Collateral Agent an Appraisal with respect to Eligible
Collateral that has Eligible Collateral Appraisal Value not less than
125% (or, if the percentage set forth in the second line of subsection
2.6B is hereafter amended, such amended percentage) of the aggregate
outstanding principal amount of the Loans on each December 31 of 1996
and 1997 (each such Appraisal shall be dated as of a date no more than
<PAGE> 3
45 days prior to the date of its delivery and is referred to herein as
a "SCHEDULED APPRAISAL"). The Agent may require the Borrower to
provide any such Scheduled Appraisal on a date that is earlier than
the applicable date set forth above by giving the Borrower a written
request therefor at least 75 days prior to such earlier date;
provided, however, that the Agent may not so require such Scheduled
Appraisal on a date that is earlier than the first anniversary date of
the most recent Scheduled Appraisal or Agent Appraisal that has been
delivered or obtained hereunder; provided, further that if the
Borrower requests the release of any Eligible Collateral pursuant to
subsection 5.18D after December 31, 1995 and prior to December 31,
1996, the Borrower shall provide the Scheduled Appraisal that is
scheduled to be delivered on December 31, 1996 up to ten Business Days
prior to the date of any such release. In addition to the Scheduled
Appraisals, the Borrower shall, upon the occurrence and continuation
of an Event of Default and if the Agent so requests, deliver to the
Agent and the Collateral Agent a new Appraisal (the "DEFAULT
APPRAISAL") with respect to all Collateral within 75 days of such
request. In addition, the Borrower shall, concurrently with the
pledge of any Additional Collateral to the Agent or the Collateral
Agent, deliver to the Agent and the Collateral Agent an Additional
Collateral Appraisal with respect to such Additional Collateral dated
not earlier than the most recent Appraisal delivered or obtained
hereunder. All Appraisals and Additional Collateral Appraisals
delivered pursuant to this subsection 5.18B shall be at the expense of
the Borrower."

SECTION 2. REPRESENTATIONS AND WARRANTIES

In order to induce Agent, Co-Agent and Lenders to enter into
this Amendment, each of BEI and Borrower represents and warrants to Agent,
Co-Agent and Lenders that:

(a) The representations and warranties of each Loan Party
contained in the Credit Agreement are true, correct and complete in all
material respects on and as of the date hereof to the same extent as though
made on and as of the date hereof except to the extent that such
representations and warranties specifically relate to an earlier date, in which
case they are true, correct and complete in all material respects as of such
earlier date;

(b) No event has occurred and is continuing or would
result from the execution of this Amendment that constitutes an Event of
Default or Potential Event of Default;

(c) Each Loan Party has performed in all material
respects all agreements and satisfied all conditions that the
<PAGE> 4
Credit Agreement and this Amendment provide shall be performed by it on or
before the date hereof;

(d) The execution, delivery and performance of this
Amendment and the Credit Agreement as amended by this Amendment, by each Loan
Party are within the corporate power and authority of each such Loan Party and,
as of the Sixteenth Amendment Effective Date (as hereinafter defined), will be
duly authorized by all necessary corporate action on the part of each Loan
Party, and this Amendment, as of the Sixteenth Amendment Effective Date, is
duly executed and delivered by each of such Loan Parties and will
constitute a valid and binding agreement of each of such Loan Parties,
enforceable against such Loan Parties in accordance with its terms, except as
may be limited by bankruptcy, insolvency, reorganization, moratorium or similar
laws or equitable principles relating to or limiting creditors' rights
generally or by equitable principles relating to enforceability. The Credit
Agreement constitutes and, as of the Sixteenth Amendment Effective Date, the
Credit Agreement, as amended by this Amendment, will constitute, a valid and
binding agreement of BEI and Borrower, enforceable against BEI and Borrower in
accordance with its terms, except as may be limited by bankruptcy, insolvency,
reorganization, moratorium or similar laws or equitable principles, relating to
or limiting creditors' rights generally or by equitable principles relating to
enforceability;

(e) The execution and delivery by each Loan Party of this
Amendment and the performance by each Loan Party of the Credit Agreement as
amended by this Amendment, do not and will not (i) violate any provision of any
law or any governmental rule or regulation applicable to any Loan Party, the
Certificate or Articles of Incorporation or Bylaws of any Loan Party or any
order, judgment or decree of any court or other agency of government binding on
any Loan Party, (ii) conflict with, result in a breach of or constitute (with
due notice or lapse of time or both) a default under any instrument that is
material, individually or in the aggregate, and that is binding on such Loan
Party, (iii) result in or require the creation or imposition of any Lien upon
any of the properties or assets of any Loan Party (other than any Liens created
under any of the Loan Documents in favor of Agent on behalf of Lenders), or
(iv) require any approval or consent of any Person under any instrument that is
material, individually or in the aggregate, and that is binding on such Loan
Party; and

(f) The execution and delivery by each Loan Party of this
Amendment and the performance by each Loan Party of the Credit Agreement as
amended by this Amendment, do not and will not require any registration with,
consent or approval of, or notice to, or other action to, with or by, any
federal, state or other governmental authority or regulatory body.
<PAGE> 5
SECTION 3. CONDITIONS TO EFFECTIVENESS

Section 1 of this Amendment shall become effective only upon
the satisfaction of all of the following conditions precedent (the date of
satisfaction of such conditions being referred to herein as the "SIXTEENTH
AMENDMENT EFFECTIVE DATE"):

A. On or before the Sixteenth Amendment Effective Date,
BEI, Borrower and each Subsidiary Guarantor shall deliver to Lenders (or to
Agent for Lenders with sufficient originally executed copies, as appropriate,
for each Lender and its counsel) the following, each, unless otherwise noted,
dated the Sixteenth Amendment Effective Date:

(i) Signature and incumbency certificates of its
officers executing this Amendment certified by its secretary or an
assistant secretary; and

(ii) Executed counterparts of this Amendment.

B. On or before the Sixteenth Amendment Effective Date,
Requisite Lenders shall have delivered to Agent a counterpart of this Amendment
originally executed by a duly authorized officer of such Lender or by telex or
telephonic confirmation.

SECTION 4. THE GUARANTIES

Each Guarantor acknowledges that it has reviewed the terms and
provisions of the Credit Agreement and this Amendment and consents to the
amendment of the Credit Agreement effected pursuant to this Amendment.
Each Guarantor hereby confirms that the Guaranty Agreement and the Collateral
Documents to which it is a party or otherwise bound and all Collateral
encumbered thereby will continue to guaranty or secure, as the case may be, to
the fullest extent possible the payment and performance of all Obligations,
Guarantied Obligations (as defined in the applicable Guaranty Agreements) and
Secured Obligations (as defined in the Collateral Documents), as the case may
be, including, without limitation, the payment and performance of all
Obligations of Borrower now or hereafter existing under or in respect of the
Credit Agreement as amended by this Amendment and the Notes defined therein.

Each Guarantor acknowledges and agrees that any of the
Guaranty Agreements and the Collateral Documents to which it is a party or
otherwise bound shall continue in full force and effect and that all of its
obligations thereunder shall be valid and enforceable and shall not be impaired
or limited by the execution or effectiveness of this Amendment. Each Guarantor
represents and warrants that all representations and warranties contained in
the Credit Agreement as amended by this Amendment and the Guaranty Agreements
and the Collateral Documents to which it is a party or otherwise bound are
true, correct and complete in all material respects on and as of the Sixteenth
Amendment Effective Date to the
<PAGE> 6
same extent as though made on and as of that date except to the extent that
such representations and warranties specifically relate to an earlier date, in
which case they are true, correct and complete in all material respects as of
such earlier date.

Each Guarantor acknowledges and agrees that (i)
notwithstanding the conditions to effectiveness set forth in this Amendment,
such Guarantor is not required by the terms of the Credit Agreement or any
other Loan Document to consent to the amendments to the Credit Agreement
effected pursuant to this Amendment or any other Loan Document and (ii) that
neither the terms of the Credit Agreement, any other Loan Document nor this
Amendment shall be deemed to require the consent of any Guarantor to any future
amendments to the Credit Agreement.

SECTION 5. COUNTERPARTS; EFFECTIVENESS

This Amendment may be executed in any number of counterparts,
and by different parties hereto in separate counterparts, each of which when so
executed and delivered shall be deemed an original, but all such counterparts
together shall constitute but one and the same instrument. This Amendment
(other than the provisions of Section 1 hereof) shall become effective upon the
execution of a counterpart hereof by Requisite Lenders and each of the Loan
Parties and receipt of written or telephonic notification of such execution and
authorization of delivery thereof.

SECTION 6. FEES AND EXPENSES

Borrower acknowledges that all costs, fees and expenses as
described in subsection 10.4 of the Credit Agreement incurred by Agent and its
counsel with respect to this Amendment and the documents and transactions
contemplated hereby shall be for the account of Borrower.

SECTION 7. EFFECT OF AMENDMENT

It is hereby agreed that, except as specifically provided
herein, this Amendment does not in any way affect or impair the terms and
conditions of the Credit Agreement, and all terms and conditions of the Credit
Agreement are to remain in full force and effect unless otherwise specifically
amended or changed pursuant to the terms and conditions of this Amendment.

SECTION 8. APPLICABLE LAW

This Amendment and the rights and obligations of the parties
hereto and all other aspects hereof shall be deemed to be made under, shall be
governed by, and shall be construed and
<PAGE> 7
enforced in accordance with, the laws of the State of New York without regard
to principles of conflicts of laws.

[Remainder of page intentionally left blank]

<PAGE> 1
EXHIBIT 10.7

SEVENTEENTH AMENDMENT TO CREDIT AGREEMENT
AMONG
BEVERLY ENTERPRISES, INC.,
BEVERLY HEALTH AND REHABILITATION SERVICES, INC.,
THE SUBSIDIARY GUARANTORS LISTED HEREIN,
THE LENDERS LISTED HEREIN,
BANK OF MONTREAL AS CO-AGENT,
AND
THE LONG-TERM CREDIT BANK OF JAPAN, LTD.
LOS ANGELES AGENCY, AS AGENT

DATED AS OF JUNE 28, 1996

THIS SEVENTEENTH AMENDMENT, dated as of June 28, 1996 (this
"AMENDMENT"), is entered into by and among BEVERLY ENTERPRISES, INC., a
Delaware corporation ("BEI"), BEVERLY HEALTH AND REHABILITATION SERVICES, INC.
(formerly known as Beverly California Corporation), a California corporation
("BORROWER"), the SUBSIDIARY GUARANTORS listed on the signature pages hereof
(together with BEI, the "GUARANTORS"), the LENDERS listed on the signature
pages hereof (such lenders, together with each Person that may or has become a
party to the Credit Agreement (as defined below) pursuant to subsection 10.8
thereof, are referred to herein individually as a "LENDER" and collectively as
the "LENDERS"), BANK OF MONTREAL as co-agent for the Lenders (in such capacity,
the "COAGENT"), and THE LONG-TERM CREDIT BANK OF JAPAN, LTD., Los Angeles
Agency ("LTCB"), as agent for the Lenders (in such capacity, the "AGENT").
This Amendment amends the Credit Agreement dated March 24, 1992 by and among
BEI, Borrower, Co-Agent, Agent and Lenders, as amended by that First Amendment
to Credit Agreement dated April 7, 1992 by and among BEI, Borrower, Co-Agent,
Agent and the Lenders, as further amended by that Second Amendment to Credit
Agreement dated as of May 11, 1992 by and among BEI, Borrower, CoAgent, Agent
and the Lenders, as further amended by that Third Amendment to Credit Agreement
dated as of March 1, 1993 by and among BEI, Borrower, Co-Agent, Agent and the
Lenders, as further amended by that Fourth Amendment to Credit Agreement dated
as of November 1, 1993 by and among BEI, Borrower, Co-Agent, Agent and the
Lenders, as further amended by that Fifth Amendment to Credit Agreement dated
as of March 21, 1994 by and among BEI, Borrower, Co-Agent, Agent and the
Lenders, as further amended by that Sixth Amendment to Credit Agreement dated
as of April 22, 1994 by and among BEI, Borrower, Co-Agent, Agent and the
Lenders, as further amended by that Seventh Amendment to Credit Agreement dated
as of May 2, 1994 by and among BEI, Borrower, Co-Agent, Agent and the Lenders,
as further amended by that Eighth Amendment to Credit Agreement dated as of
November 1, 1994 by and among BEI, Borrower, Co-Agent, Agent and the Lenders,
as further amended by that Ninth Amendment to Credit Agreement dated as of
November 9, 1994 by and among BEI, Borrower, Co-Agent, Agent and the
Lenders, as further amended by that Tenth Amendment to Credit Agreement dated
as of
<PAGE> 2

December 6, 1994 by and among BEI, Borrower, Co-Agent, Agent and the Lenders,
as further amended by that Eleventh Amendment to Credit Agreement dated as of
March 27, 1995 by and among BEI, Borrower, Co-Agent, Agent and the Lenders, as
further amended by that Twelfth Amendment to Credit Agreement dated as of
October 23, 1995 by and among BEI, Borrower, Co-Agent, Agent and the Lenders,
as further amended by that Thirteenth Amendment to Credit Agreement dated as of
September 29, 1995 by and among BEI, Borrower, Co-Agent, Agent and the Lenders,
as further amended by that Fourteenth Amendment to Credit Agreement dated as of
December 7, 1995 by and among BEI, Borrower, Co-Agent, Agent and the Lenders,
as further amended by that Fifteenth Amendment to Credit Agreement dated as of
February 12, 1996 by and among BEI, Borrower, Co-Agent, Agent and the Lenders,
as further amended by that Sixteenth Amendment to Credit Agreement dated as of
June 5, 1996 by and among BEI, Borrower, Co-Agent, Agent and the Lenders (said
Credit Agreement, as so amended, the "CREDIT AGREEMENT"), as set forth
herein. Capitalized terms used herein without definition shall have the same
meanings herein as set forth in the Credit Agreement.

RECITALS

WHEREAS, Borrower desires to amend the Credit Agreement in
certain respects;

WHEREAS, Lenders, Co-Agent and Agent have agreed to approve
such amendments;

WHEREAS, Guarantors desire to reaffirm the effectiveness
respectively of the Subsidiary Guaranty Agreement and the BEI Guaranty
Agreement;

NOW, THEREFORE, in consideration of the terms and conditions
herein contained, BEI, Borrower, Guarantors, Co-Agent, Agent and Lenders agree
as follows:

AGREEMENT

SECTION 1. AMENDMENT TO SUBSECTION 5.5 OF THE CREDIT AGREEMENT

Subsection 5.5 of the Credit Agreement is hereby amended
<PAGE> 3
by deleting the table set forth therein in its entirety and replacing it with
the following table:

<TABLE>
<CAPTION>
Period Ratio
------ -----
<S> <C>
Effective Date through December 30, 1995 1.10 to 1

December 31, 1995 through June 29, 1996 1.15 to 1

June 30, 1996 through December 30, 1996 1.10 to 1

December 31, 1996 through December 30, 1997 1.15 to 1

December 31, 1997 and thereafter 1.20 to 1
</TABLE>

SECTION 2. REPRESENTATIONS AND WARRANTIES

In order to induce Agent, Co-Agent and Lenders to enter into
this Amendment, each of BEI and Borrower represents and warrants to Agent,
Co-Agent and Lenders that:

(b) No event has occurred and is continuing or would
result from the execution of this Amendment that constitutes an Event of
Default or Potential Event of Default;

(c) Each Loan Party has performed in all material
respects all agreements and satisfied all conditions that the Credit Agreement
and this Amendment provide shall be performed by it on or before the date
hereof;

(d) The execution, delivery and performance of this
Amendment and the Credit Agreement as amended by this Amendment, by each Loan
Party are within the corporate power and authority of each such Loan Party and,
as of the Seventeenth Amendment Effective Date (as hereinafter defined), will
be duly authorized by all necessary corporate action on the part of each Loan
Party, and this Amendment, as of the Seventeenth Amendment Effective Date, is
duly executed and delivered by each of such Loan Parties and will constitute a
valid and binding agreement of each of such Loan Parties, enforceable against
such Loan Parties in accordance with its terms, except as may be limited by
bankruptcy, insolvency, reorganization, moratorium or similar laws or equitable
principles relating to or limiting creditors' rights generally or by equitable
principles relating to enforceability. The Credit Agreement constitutes and, as
of the Seventeenth Amendment Effective Date,
<PAGE> 4
the Credit Agreement, as amended by this Amendment, will constitute, a valid
and binding agreement of BEI and Borrower, enforceable against BEI and Borrower
in accordance with its terms, except as may be limited by bankruptcy,
insolvency, reorganization, moratorium or similar laws or equitable principles,
relating to or limiting creditors' rights generally or by equitable principles
relating to enforceability;

(e) The execution and delivery by each Loan Party of this Amendment
and the performance by each Loan Party of the Credit Agreement as amended by
this Amendment, do not and will not (i) violate any provision of any law or any
governmental rule or regulation applicable to any Loan Party, the Certificate or
Articles of Incorporation or Bylaws of any Loan Party or any order, judgment or
decree of any court or other agency of government binding on any Loan Party,
(ii) conflict with, result in a breach of or constitute (with due notice or
lapse of time or both) a default under any instrument that is material,
individually or in the aggregate, and that is binding on such Loan Party, (iii)
result in or require the creation or imposition of any Lien upon any of the
properties or assets of any Loan Party (other than any Liens created under any
of the Loan Documents in favor of Agent on behalf of Lenders), or (iv) require
any approval or consent of any Person under any instrument that is material,
individually or in the aggregate, and that is binding on such Loan Party; and

(f) The execution and delivery by each Loan Party of this Amendment
and the performance by each Loan Party of the Credit Agreement as amended by
this Amendment, do not and will not require any registration with, consent or
approval of, or notice to, or other action to, with or by, any federal, state or
other governmental authority or regulatory body.

SECTION 3. CONDITIONS TO EFFECTIVENESS

Section 1 of this Amendment shall become effective only upon the
satisfaction of all of the following conditions precedent (the date of
satisfaction of such conditions being referred to herein as the "SEVENTEENTH
AMENDMENT EFFECTIVE DATE"):

A. On or before the Seventeenth Amendment Effective Date, BEI,
Borrower and each Subsidiary Guarantor shall deliver to Lenders (or to Agent for
Lenders with sufficient originally executed copies, as appropriate, for each
Lender and its counsel) the following, each, unless otherwise noted, dated the
Seventeenth Amendment Effective Date:

(i) Signature and incumbency certificates of its officers
executing this Amendment certified by its secretary or an assistant
secretary; and

(ii) Executed counterparts of this Amendment.
<PAGE> 5
B. On or before the Seventeenth Amendment Effective Date,
Requisite Lenders shall have delivered to Agent a counterpart of this Amendment
originally executed by a duly authorized officer of such Lender or by telex or
telephonic confirmation.

SECTION 4. THE GUARANTIES

Each Guarantor acknowledges that it has reviewed the terms and
provisions of the Credit Agreement and this Amendment and consents to the
amendment of the Credit Agreement effected pursuant to this Amendment. Each
Guarantor hereby confirms that: the Guaranty Agreement and the Collateral
Documents to which it is a party or otherwise bound and all Collateral
encumbered thereby will continue to guaranty or secure, as the case may be, to
the fullest extent possible the payment and performance of all Obligations,
Guaranteed Obligations (as defined in the applicable Guaranty Agreements) and
Secured Obligations (as defined in the Collateral Documents), as the case may
be, including, without limitation, the payment and performance of all
Obligations of Borrower now or hereafter existing under or in respect of the
Credit Agreement as amended by this Amendment and the Notes defined therein.

Each Guarantor acknowledges and agrees that any of the Guaranty
Agreements and the Collateral Documents to which it is a party or otherwise
bound shall continue in full force and effect and that all of its obligations
thereunder shall be valid and enforceable and shall not be impaired or limited
by the execution or effectiveness of this Amendment. Each Guarantor represents
and warrants that all representations and warranties contained in the Credit
Agreement as amended by this Amendment and the Guaranty Agreements and the
Collateral Documents to which it is a party or otherwise bound are true,
correct and complete in all material respects on and as of the Seventeenth
Amendment Effective Date to the same extent as though made on and as of that
date except to the extent that such representations and warranties specifically
relate to an earlier date, in which case they are true, correct and complete in
all material respects as of such earlier date.

Each Guarantor acknowledges and agrees that (i) notwithstanding the
conditions to effectiveness set forth in this Amendment, such Guarantor is not
required by the terms of the Credit Agreement or any other Loan Document to
consent to the amendments to the Credit Agreement effected pursuant to this
Amendment or any other Loan Document and (ii) that neither the terms of the
Credit Agreement, any other Loan Document nor this Amendment shall be deemed to
require the consent of any Guarantor to any future amendments to the Credit
Agreement.

SECTION 5. COUNTERPARTS; EFFECTIVENESS

This Amendment may be executed in any number of counterparts, and by
different parties hereto in separate
<PAGE> 6
counterparts, each of which when so executed and delivered shall be deemed an
original, but all such counterparts together shall constitute but one and the
same instrument. This Amendment (other than the provisions of Section 1 hereof)
shall become effective upon the execution of a counterpart hereof by Requisite
Lenders and each of the Loan Parties and receipt of written or telephonic
notification of such execution and authorization of delivery thereof.

SECTION 6. FEES AND EXPENSES

Borrower acknowledges that all costs, fees and expenses as described
in subsection 10.4 of the Credit Agreement incurred by Agent and its counsel
with respect to this Amendment and the documents and transactions contemplated
hereby shall be for the account of Borrower.

SECTION 7. EFFECT OF AMENDMENT

It is hereby agreed that, except as specifically provided herein, this
Amendment does not in any way affect or impair the terms and conditions of the
Credit Agreement, and all terms and conditions of the Credit Agreement are to
remain in full force and effect unless otherwise specifically amended or
changed pursuant to the terms and conditions of this Amendment.

SECTION 8. APPLICABLE LAW

This Amendment and the rights and obligations of the parties hereto and
all other aspects hereof shall be deemed to be made under, shall be governed
by, and shall be construed and enforced in accordance with, the laws of the
State of New York without regard to principles of conflicts of laws.

[Remainder of page intentionally left blank]
<PAGE> 7
WITNESS the due execution hereof by the respective duly authorized
officers of the undersigned as of the date first written above.

BEI:
----

BEVERLY ENTERPRISES, INC.

By:
-------------------------------------
Title:
----------------------------------

Borrower:
---------

BEVERLY HEALTH AND REHABILITATION
SERVICES, INC. (formerly known as Beverly
California Corporation)

By:
-------------------------------------
Title:
----------------------------------

Agent, Co-Agent and Lenders:
----------------------------
THE LONG-TERM CREDIT BANK OF JAPAN,
LOS ANGELES AGENCY,
as Agent and as a Lender

By:
-------------------------------------
Title:
----------------------------------

BANK OF MONTREAL,
as Co-Agent and as a Lender

By:
-------------------------------------
Title:
----------------------------------

S-1

<PAGE> 8

LENDERS:

INTERNATIONALE NEDERLANDEN (U.S.)
CAPITAL CORPORATION

By:
-------------------------------------
Title:
----------------------------------

U.S. NATIONAL BANK OF OREGON

By:
-------------------------------------
Title:
----------------------------------

THE SUBSIDIARY GUARANTORS:
--------------------------

A.B.C. Health Equipment Corp.

Alliance Health Services, Inc.

Alliance Home Health Care, Inc.

Amco Medical Service, Inc.

American Transitional Hospitals
-- Texas Medical Center, Inc.

ATH Clear Lake, Inc.

ATH Columbus, Inc.

ATH Oklahoma City, Inc.

Beverly Acquisition Corporation

Beverly Assisted Living, Inc.

Beverly Enterprises - Alabama, Inc.

Beverly Enterprises - Arkansas, Inc.

Beverly Enterprises -- Delaware, Inc.

S-2
<PAGE> 9
Beverly Enterprises -- District of
Columbia, Inc.

Beverly Enterprises - Florida, Inc.

Beverly Enterprises - Georgia, Inc.

Beverly Enterprises -- Iowa, Inc.

Beverly Enterprises -- Maine, Inc.

Beverly Enterprises - Maryland, Inc.

Beverly Enterprises -- Massachusetts, Inc.

Beverly Enterprises -- Minnesota, Inc.

Beverly Enterprises -- Mississippi, Inc.

Beverly Enterprises -- Missouri, Inc.

Beverly Enterprises -- Montana, Inc.

Beverly Enterprises -- Nebraska, Inc.

Beverly Enterprises -- Nevada, Inc.

Beverly Enterprises -- New Hampshire,
Inc.

Beverly Enterprises -- New Mexico, Inc.

Beverly Enterprises -- North Carolina, Inc.

Beverly Enterprises -- North Dakota, Inc.

Beverly Enterprises -- Oklahoma, Inc.

Beverly Enterprises -- Oregon

Beverlv Enterprises -- Rhode Island, Inc.

Beverly Enterprises -- Vermont, Inc.

Beverly Enterprises - Wisconsin, Inc.

Beverly Enterprises -- Wyoming, Inc.

Beverly Enterprises Medical Equipment
Corporation

S-3
<PAGE> 10
Beverly Enterprises Rehabilitation
Corporation

Beverly Holdings I, Inc.

Beverly Real Estate Holdings, Inc.

Beverly Remic Depositor, Inc.

Brownstone Pharmacy, Inc.

Commercial Management, Inc.

DD Wholesale, Inc.

Dunnington Drug, Inc.

Dunnington RX Services of Rhode Island,
Inc.

Dunnington RX Services of Massachusetts,
Inc.

Hallmark Convalescent Homes, Inc.

Healthcare Prescription Services, Inc.

Hospital Facilities Corporation

Insta-Care Holdings, Inc.

Insta-Care Pharmacy Services Corporation

Insurance Software Packages, Inc.

Medical Health Industries, Inc.

Medview Services, Incorporated

Moderncare of Lumberton, Inc.

Nebraska City S-C-H, Inc.

Omni Med B, Inc.

Pharmacy Corporation of America -
Massachusetts, Inc.

Pharmacy Dynamics Group, Inc.

Phymedsco, Inc.

S-4
<PAGE> 11
Resource Opportunities, Inc.

Spectra Rehab Alliance, Inc.

South Dakota - Beverly Enterprises, Inc.

TMD Disposition Company

Vantage Healthcare Corporation

AGI-Camelot, Inc.

AGI-McDonald County Health Care, Inc.

Beverly Enterprises - Arizona, Inc.

Beverly Enterprises - California, Inc.

Beverly Enterprises - Colorado, Inc.

Beverly Enterprises - Connecticut, Inc.

Beverly Enterprises - Garden Terrace, Inc.

Beverly Enterprises - Hawaii, Inc.

Beverly Enterprises - Idaho, Inc.

Beverly Enterprises - Illinois, Inc.

Beverly Enterprises - Indiana, Inc.

Beverly Enterprises - Kansas, Inc.

Beverly Enterprises - Kentucky, Inc.

Beverly Enterprises - Louisiana, Inc.

Beverly Enterprises - Michigan, Inc.

Beverly Enterprises - New Jersey, Inc.

Beverly Enterprises - Ohio, Inc.

Beverly Enterprises - Pennsylvania, Inc.

Beverly Enterprises - South Carolina, Inc.

Beverly Enterprises - Tennessee, Inc.

Beverly Enterprises - Texas, Inc.

Beverly Enterprises - Utah Inc.

S-5
<PAGE> 12
Beverly Enterprises - Virginia, Inc.

Beverly Enterprises - Washington, Inc.

Beverly Enterprises - West Virginia, Inc.

Beverly Indemnity, Ltd.

Beverly Manor Inc. of Hawaii

Beverly Savana Cay Manor, Inc.

Columbia-Valley Nursing Home, Inc.

Computran Systems, Inc.

Continental Care Centers of Council
Bluffs, Inc.

Forest City Building Ltd.

Home Medical Systems, Inc.

Kenwood View Nursing Home, Inc.

Liberty Nursing Homes, Incorporated

Medical Arts Health Facility of
Lawrenceville, Inc.

Nursing Home Operators, Inc.

Petersen Health Care, Inc.

Pharmacy Corporation of America

Salem No.1, Inc.

South Alabama Nursing Home, Inc.

American Transitional Care Centers of
Texas, Inc.

American Transitional Care Dallas-Ft.
Worth, Inc.

American Transitional Health Care, Inc.

American Transitional Hospitals, Inc.

American Transitional Hospitals of
Indiana, Inc.

American Transitional Hospitals of

S-6
<PAGE> 13
Oklahoma, Inc.

American Transitional Hospitals of
Tennessee, Inc.

ATH Del Oro, Inc.

ATH Heights, Inc.

ATH Tucson, Inc.

Beverly Enterprises Japan Limited

AdviNet, Inc.

Beverly Crest Corporation

Beverly Enterprises-Distribution Services,
Inc.

Hospice Preferred Choice, Inc.

Beverly Rehabilitation Services, Inc.

Synergos, Inc.

Synergos-Scottsdale, Inc.

Synergos-Pleasanthill, Inc.

Synergos-North Hollywood, Inc.

By:

-------------------------------------
Title:
----------------------------------

S-7

<PAGE> 1
EXHIBIT 10.8

EXECUTION COPY

TENTH AMENDMENT
TO CREDIT AGREEMENT
AMONG
BEVERLY ENTERPRISES, INC.,
BEVERLY HEALTH AND REHABILITATION SERVICES, INC.,
(FORMERLY KNOWN AS BEVERLY CALIFORNIA CORPORATION)
THE SUBSIDIARY GUARANTORS LISTED HEREIN,
THE LENDERS LISTED HEREIN,
AND
THE NIPPON CREDIT BANK, LTD.
LOS ANGELES AGENCY, AS AGENT

DATED AS OF JUNE 28, 1996

THIS TENTH AMENDMENT dated as of June 28, 1996 (this
"AMENDMENT"), is entered into by and among BEVERLY ENTERPRISES, INC., a
Delaware corporation ("BEI"), BEVERLY HEALTH AND REHABILITATION SERVICES, INC.
(formerly known as Beverly California Corporation), a California corporation
("BORROWER"), the SUBSIDIARY GUARANTORS listed on the signature pages hereof
(together with BEI, the "GUARANTORS"), the LENDERS listed on the signature
pages hereof (such lenders, together with each Person that may or has become a
party to the Credit Agreement (as hereinafter defined) pursuant to subsection
10.8 thereof, are referred to herein individually as a "LENDER" and
collectively as the "LENDERS"), and THE NIPPON CREDIT BANK, LTD., Los Angeles
Agency ("NIPPON"), as agent for the Lenders (in such capacity, the "AGENT").
This Amendment amends the Credit Agreement dated as of March 2, 1993 by and
among BEI, Borrower, Agent and Lenders, as amended by that certain First
Amendment to Credit Agreement dated as of May 6, 1994, as further amended by
that certain Second Amendment to Credit Agreement dated as of May 19, 1994, as
further amended by that certain Third Amendment to Credit Agreement dated as of
November 1, 1994, as further amended by that certain Fourth Amendment to Credit
Agreement dated as of November 9, 1994, as further amended by that certain
Fifth Amendment to Credit Agreement dated as of December 30, 1994, as further
amended by that certain Sixth Amendment to Credit Agreement dated as of July
25, 1995, as further amended by that certain Seventh Amendment to Credit
Agreement dated as of September 29, 1995, as further amended by that certain
Eighth Amendment to Credit Agreement dated as of February 14, 1996, and as
further amended by that certain Ninth Amendment to Credit Agreement dated as of
April 22, 1996 (as so amended, the "CREDIT AGREEMENT"), as set forth herein.
<PAGE> 2
RECITALS

WHEREAS, Borrower desires to amend the Credit Agreement in
certain respects;

WHEREAS, Lenders and Agent have agreed to approve such
amendments;

WHEREAS, Guarantors desire to reaffirm the effectiveness
respectively of the Subsidiary Guaranty Agreement and the BEI Guaranty
Agreement;

AGREEMENT

NOW, THEREFORE, in consideration of the terms and conditions
herein contained, BEI, Borrower, Guarantors, Agent and Lenders agree as
follows:

1. DEFINITIONS, INTERPRETATION. All capitalized terms defined
above and elsewhere in this Amendment shall be used herein as so defined.
Unless otherwise defined herein, all other capitalized terms used herein shall
have the respective meanings given to those terms in the Credit Agreement, as
amended by this Amendment. The rules of construction set forth in Section I of
the Credit Agreement shall, to the extent not inconsistent with the terms of
this Amendment, apply to this Amendment and are hereby incorporated by
reference.

2. AMENDMENT TO CREDIT AGREEMENT. Subject to conditions set forth
in paragraph 4 hereof, the Credit Agreement is hereby amended by deleting
Section 5.5 in its entirety and replacing it with the following:

The Fixed Charge Coverage Ratio at any date shall not
be less than the ratio set forth below opposite the period in which
such date falls:

<TABLE>
<CAPTION>
Period Ratio
------ -----
<S> <C>
Closing Date through 12/30/95 1.10 to 1.00
12/31/95 through 06/29/96 1.15 to 1.00
06/30/96 through 12/30/96 1.10 to 1.00
12/31/96 through 12/30/97 1.15 to 1.00
12/31/97 and thereafter 1.20 to 1.00

</TABLE>

3. REPRESENTATIONS AND WARRANTIES. In order to induce the Agent
and the Lenders to enter into this Amendment, each of BEI and Borrower
represents and warrants to the Agent and the Lenders that:

(a) The representations and warranties of each Loan Party
contained in the Credit Agreement are true, correct and complete in
all material respects on and as of the date

2
<PAGE> 3
hereof to the same extent as though made on and as of the date hereof
except to the extent that such representations and warranties
specifically relate to an earlier date, in which case they are true,
correct and complete in all material respects as of such earlier date;

(b) No event has occurred and is continuing or would
result from the execution of this Amendment that constitutes an Event
of Default or Potential Event of Default;

(c) Each Loan Party has performed in all material
respects all agreements and satisfied all conditions that the Credit
Agreement and this Amendment provide shall be performed by it on or
before the date hereof;

(d) The execution, delivery and performance of this
Amendment, and the Credit Agreement as amended by this Amendment, by
each Loan Party which is a party thereto are within the corporate
power and authority of each such Loan Party and, as of the Tenth
Amendment Effective Date (as hereinafter defined), will be duly
authorized by all necessary corporate action on the part of each Loan
Party, and this Amendment as of the Tenth Amendment Effective Date,
are duly executed and delivered by each of such Loan Parties which is
a party thereto and will constitute a valid and binding agreement of
each of such Loan Parties, enforceable against such Loan Parties in
accordance with their terms, except as may be limited by bankruptcy,
insolvency, reorganization, moratorium or similar laws or equitable
principles relating to or limiting creditors' rights generally or by
equitable principles relating to enforceability. The Credit Agreement
constitutes and, as of the Tenth Amendment Effective Date, the Credit
Agreement, as amended by this Amendment, will constitute, a valid and
binding agreement of each applicable Loan Party, enforceable against
each applicable Loan Party in accordance with their respective terms,
except as may be limited by bankruptcy, insolvency, reorganization,
moratorium or similar laws or equitable principles, relating to or
limiting creditors' rights generally or by equitable principles
relating to enforceability.

(e) The execution and delivery by each applicable Loan
Party of this Amendment, and the performance by each such Loan Party
of the Credit Agreement as amended by this Amendment, do not and will
not (i) violate any provision of any law or any governmental rule or
regulation applicable to any Loan Party, the Certificate or Articles
of Incorporation or Bylaws of any Loan Party or any order, judgment or
decree of any court or other agency of government binding on any Loan
Party, (ii) conflict with, result in a breach of or constitute (with
due notice or lapse of time or both) a default under any instrument
that is material, individually or in the aggregate, and that is
binding on such Loan Party,

3
<PAGE> 4
(iii) result in or require the creation or imposition of any Lien
upon any of the properties or assets of any Loan Party, or (iv)
require any approval or consent of any Person under any instrument
that is material, individually or in the aggregate, and that is
binding on such Loan Party.

(f) The execution and delivery by each applicable Loan
Party of this Amendment, and the performance by each such Loan Party
of the Credit Agreement as amended by this Amendment, do not and will
not require any registration with, consent or approval of, or notice
to, or other action to, with or by, any federal, state or other
governmental authority or regulatory body.

4. CONDITIONS TO EFFECTIVENESS. Section 2 of this Amendment shall
become effective only upon the satisfaction of all of the following conditions
precedent (the date of satisfaction of such conditions being referred to herein
as the "TENTH AMENDMENT EFFECTIVE DATE"):

(a) On or before the Tenth Amendment Effective Date,
Borrower shall deliver to the Lenders (or to the Agent for the Lenders
with sufficient originally executed copies, as appropriate, for each
Lender and its counsel) the following, each, unless otherwise noted,
dated the Tenth Amendment Effective Date, duly executed and delivered
by the parties thereto:

(i) Signature and incumbency certificates of each
of BEI, Borrower and each Subsidiary Guarantor of its
respective officers executing this Amendment certified by such
party's respective secretary or assistant secretary; and

(ii) Executed counterparts of this Amendment.

(b) On or before the Tenth Amendment Effective Date, all
corporate and other proceedings taken or to be taken in connection
with the transactions contemplated hereby and all documents incidental
thereto not previously found acceptable by the Agent, acting on behalf
of the Lenders, and its counsel shall be satisfactory in form and
substance to the Agent and such counsel, and the Agent and such
counsel shall have received all such counterpart originals or
certified copies of such documents as the Agent may reasonably
request.

(c) On or before the Tenth Amendment Effective Date, the
Borrower shall have caused payment to the Agent of all amounts
regarding the costs and expenses reasonably incurred by Agent in
connection with this Amendment.

5. ACKNOWLEDGMENT AND AGREEMENT OF GUARANTORS. Each Guarantor
acknowledges that it has reviewed the terms and

4
<PAGE> 5
provisions of the Credit Agreement and this Amendment and consents to the
amendment of the Credit Agreement effected pursuant to this Amendment. Each
Guarantor hereby confirms that the Guaranty Agreement and the Collateral
Documents to which it is a party or otherwise bound and all Collateral
encumbered thereby will continue to guaranty or secure, as the case may be, to
the fullest extent possible the payment and performance of all Obligations,
Guarantied Obligations (as defined in the applicable Guaranty Agreements) and
Secured Obligations (as defined in the Collateral Documents), as the case may
be, including, without limitation, the payment and performance of all
Obligations of Borrower now or hereafter existing under or in respect of the
Credit Agreement as amended by this Amendment and the Notes defined therein.

Each Guarantor acknowledges and agrees that any of the
Guaranty Agreements and the Collateral Documents to which it is a party or
otherwise bound shall continue in full force and effect and that all of its
obligations thereunder shall be valid and enforceable and shall not be impaired
or limited by the execution or effectiveness of this Amendment. Each Guarantor
represents and warrants that all representations and warranties contained in
the Credit Agreement as amended by this Amendment and the Guaranty Agreements
and the Collateral Documents to which it is a party or otherwise bound are
true, correct and complete in all material respects on and as of the Tenth
Amendment Effective Date to the same extent as though made on and as of that
date except to the extent that such representations and warranties specifically
relate to an earlier date, in which case they are true, correct and complete in
all material respects as of such earlier date.

Each Guarantor acknowledges and agrees that in addition to all
the other waivers agreed to and made by Guarantor as set forth in the Guaranty
Agreement and the Collateral Documents to which it is a party or otherwise
bound, and pursuant to the provisions of California Civil Code Section 2856,
"Guarantor waives all rights and defenses arising out of an election of
remedies by the creditor, even though that election of remedies, such as a
nonjudicial foreclosure with respect to security for a guaranteed obligation,
has destroyed the Guarantor's rights of subrogation and reimbursement against
the principal by the operation of Section 580d of the Code of Civil Procedure
or otherwise."

5
<PAGE> 6
6. EFFECTIVENESS: COUNTERPARTS. This Amendment may be executed in
any number of counterparts, and by different parties hereto in separate
counterparts, each of which when so executed and delivered shall be deemed an
original, but all such counterparts together shall constitute but one and the
same instrument. This Amendment (other than the provisions of Section 2) shall
become effective upon the execution of a counterpart hereof by all Lenders and
each of the Loan Parties and receipt of written or telephonic notification of
such execution and authorization of delivery thereof.

7. FEES AND EXPENSES. The Borrower acknowledges that all costs,
fees and expenses as described in subsection 10.4 of the Credit Agreement
incurred by the Agent and its counsel with respect to this Amendment and the
documents and transactions contemplated hereby shall be for the account of the
Borrower.

8. EFFECT OF AMENDMENT. It is hereby agreed that, except as
specifically provided herein, this Amendment does not in any way affect or
impair the terms and conditions of the Credit Agreement, and all terms and
conditions of the Credit Agreement are to remain in full force and effect
unless otherwise specifically amended or changed pursuant to the terms and
conditions of this Amendment.

9. APPLICABLE LAW. This Amendment and the rights and obligations
of the parties hereto and all other aspects hereof shall be deemed to be made
under, shall be governed by, and shall be construed and enforced in accordance
with, the laws of the State of New York without regard to principles of
conflicts of laws.

6
<PAGE> 7
WITNESS the due execution hereof by the respective duly
authorized officers of the undersigned as of the date first written above.

BEI:
----

BEVERLY ENTERPRISES, INC.

BY: /s/ SCHUYLER HOLLINGSWORTH, JR.
----------------------------------
Title: SR. VICE PRESIDENT & TREASURER
--------------------------------

Borrower:
---------

BEVERLY HEALTH AND REHABILITATION
SERVICES, INC.

BY: /s/ SCHUYLER HOLLINGSWORTH, JR.
----------------------------------
Title: SR. VICE PRESIDENT & TREASURER
--------------------------------

Agent:
------

THE NIPPON CREDIT BANK, LTD.,
LOS ANGELES AGENCY,
as Agent

BY: /s/ BERNARDO E. CORREA-HENSCHKE
----------------------------------
Title: VICE PRESIDENT & SENIOR MANAGER
--------------------------------

S-1
<PAGE> 8
Lenders:

THE NIPPON CREDIT BANK, LTD.,
LOS ANGELES AGENCY,
as a Lender

BY: /s/ BERNARDO E. CORREA-HENSCHKE
------------------------------------
Title: VICE PRESIDENT & SENIOR MANAGER
--------------------------------

TORONTO-DOMINION (TEXAS), INC.,
as a Lender

BY: /s/ DAVID G. PARKER
-----------------------------------
Title: VICE PRESIDENT
---------------------------------

(Signatures Continued]

S-2

<PAGE> 9
THE SUBSIDIARY GUARANTORS:

American Transitional Care
Centers of Texas, Inc.

American Transitional Care
Dallas-Ft. Worth, Inc.

American Transitional Health Care, Inc.

American Transitional
Hospitals, Inc.

American Transitional
Hospitals of Indiana, Inc.

American Transitional
Hospitals of Oklahoma, Inc.

American Transitional
Hospitals of Tennessee, Inc.

ATH Del Oro, Inc.

ATH Heights, Inc.

ATH Tucson, Inc.

Beverly Enterprises -
Alabama, Inc.

Beverly Enterprises -
Arkansas, Inc.

Beverly Enterprises -
Florida, Inc.

Beverly Enterprises -
Georgia, Inc.

Beverly Enterprises
Japan Limited

Beverly Enterprises -
Maryland, Inc.

Beverly Enterprises -
Massachusetts, Inc.

Beverly Enterprises -
Minnesota, Inc.

S-3
<PAGE> 10

Beverly Enterprises -
Mississippi, Inc.

Beverly Enterprises -
Missouri, Inc.

Beverly Enterprises -
Nebraska, Inc.

Beverly Enterprises -
North Carolina, Inc.

Beverly Enterprises -
Oregon

Beverly Enterprises -
Wisconsin, Inc.

Commercial Management, Inc.

Hallmark Convalescent
Homes, Inc.

Hospital Facilities
Corporation

Moderncare of Lumberton,
Inc.

Nebraska City S-C-H, Inc.

South Dakota - Beverly
Enterprises, Inc.

Vantage Healthcare
Corporation

AGI-Camelot, Inc.

AGI-McDonald County
Health Care, Inc.

Beverly Enterprises -
Arizona, Inc.

Beverly Enterprises -
California, Inc.

Beverly Enterprises -
Colorado, Inc.

Beverly Enterprises -
Connecticut, Inc.

S-4
<PAGE> 11

Beverly Enterprises -
Garden Terrace, Inc.

Beverly Enterprises -
Hawaii, Inc.

Beverly Enterprises -
Idaho, Inc.

Beverly Enterprises -
Illinois, Inc.

Beverly Enterprises -
Indiana, Inc.

Beverly Enterprises -
Kansas, Inc.

Beverly Enterprises -
Kentucky, Inc.

Beverly Enterprises -
Louisiana, Inc.

Beverly Enterprises -
Michigan, Inc.

Beverly Enterprises -
New Jersey, Inc.

Beverly Enterprises -
Ohio, Inc.

Beverly Enterprises -
Pennsylvania, Inc.

Beverly Enterprises -
South Carolina, Inc.

Beverly Enterprises -
Tennessee, Inc.

Beverly Enterprises -
Texas, Inc.

Beverly Enterprises -
Utah, Inc.

Beverly Enterprises -
Virginia, Inc.

Beverly Enterprises -
Washington, Inc.

S-5
<PAGE> 12
Beverly Enterprises -
West Virginia, Inc.

Beverly Indemnity, Ltd.

Beverly Manor Inc. of
Hawaii

Beverly Savana Cay Manor,
Inc.

Columbia-Valley Nursing
Home, Inc.

Computran Systems, Inc.

Continental Care Centers
of Council Bluffs, Inc.

Forest City Building Ltd.

Home Medical Systems,
Inc.

Kenwood View Nursing
Home, Inc.

Liberty Nursing Homes,
Incorporated

Medical Arts Health
Facility of
Lawrenceville, Inc.

Nursing Home Operators,
Inc.

Petersen Health Care,
Inc.

Pharmacy Corporation of
America

Salem No. 1, Inc.

South Alabama Nursing
Home, Inc.

S-6
<PAGE> 13
Taylor County Health
Facility, Incorporated

Alliance Health Services,
Inc.

Healthcare Prescription
Services, Inc.

Dunnington Drugs, Inc.

Insta-Care Holdings, Inc.

AdviNet, Inc.

Beverly Crest Corporation

Beverly Enterprises-
Distribution Services, Inc.

Hospice Preferred Choice,
Inc.

Beverly Rehabilitation
Services, Inc.

Synergos, Inc.

Synergos-Scottsdale, Inc.

Synergos-Pleasanthill, Inc.

Synergos-North Hollywood,
Inc.

By: /s/ SCHUYLER HOLLINGSWORTH, JR.
--------------------------------------

Title: SR. VICE PRESIDENT & TREASURER
-----------------------------------

S-7
<PAGE> 14
CERTIFICATE OF ASSISTANT SECRETARY

BEVERLY ENTERPRISES, INC.

I, Holly A. Odom, Assistant Secretary of Beverly Enterprises, Inc., a
Delaware corporation (the "Corporation"), DO HEREBY CERTIFY:

1) That the person named below is, as of the date hereof, a duly
elected, qualified and acting officer of the Corporation, as
indicated, and that the signature opposite his name is his true and
genuine signature:

NAME POSITION SIGNATURE
- ---- -------- ---------

Schuyler Hollingsworth, Jr. Senior Vice
President and /s/ SCHUYLER HOLLINGSWORTH
Treasurer ----------------------------

IN WITNESS WHEREOF, I have executed this Certificate as of this 28th
day of June, 1996.

(SEAL) /s/ HOLLY A. ODOM
-----------------------------
Holly A. Odom
Assistant Secretary
<PAGE> 15

CERTIFICATE OF ASSISTANT SECRETARY

BEVERLY HEALTH AND REHABILITATION SERVICES, INC.

I, Holly A. Odom, Assistant Secretary of Beverly Health and
Rehabilitation Services, Inc., a California corporation (the "Corporation"), DO
HEREBY CERTIFY:

1. That the person named below is, as of the date hereof, a duly
elected, qualified and acting officer of the Corporation, as
indicated, and that the signature opposite his name is his true and
genuine signature:

NAME POSITION SIGNATURE
- ---- -------- ---------

Schuyler Hollingsworth, Jr. Senior Vice
President and /s/ SCHUYLER HOLLINGSWORTH
Treasurer --------------------------

IN WITNESS WHEREOF, I have executed this Certificate as of this 28th
day of June, 1996.

(SEAL) /s/ HOLLY A. ODOM
---------------------------
Holly A. Odom
Assistant Secretary

<PAGE> 1
EXHIBIT 10.9
[EXECUTION COPY]

AMENDMENT NO. 4 TO CREDIT AGREEMENT

AMENDMENT dated as of June 28, 1996 among BEVERLY HEALTH &
REHABILITATION SERVICES, INC., a California corporation (the "Borrower"),
BEVERLY ENTERPRISES, INC., a Delaware corporation (the "Guarantor"), the BANKS
listed on the signature pages hereof (the "Banks") and MORGAN GUARANTY TRUST
COMPANY OF NEW YORK, as Agent and Issuing Bank.

W I T N E S S E T H:

WHEREAS, the parties hereto have heretofore entered into a
Credit Agreement dated as of November 1, 1994 (as amended, the "Credit
Agreement"); and

WHEREAS, the parties hereto desire to amend the Credit
Agreement as hereinafter provided;

NOW, THEREFORE, the parties hereto agree as follows:

SECTION 1. Definitions; References. Unless otherwise
specifically defined herein, each term used herein which is defined in the
Credit Agreement shall have the meaning assigned to such term in the Credit
Agreement. Each reference to "hereof", "hereunder", "herein" and "hereby" and
each other similar reference and each reference to "this Agreement" and each
other similar reference contained in the Credit Agreement shall from and after
the date hereof refer to the Credit Agreement as amended hereby.

SECTION 2. Amendment of Section 5.06 of the Credit Agreement.
Section 5.06 of the Credit Agreement is hereby amended by replacing the table
set forth therein in its entirety with the following table:

<TABLE>
<CAPTION>
Period Ratio
------ -----
<S> <C> <C> <C>
Effective Date through December 30, 1995 1.10 to 1
December 31, 1995 through June 29, 1996 1.15 to 1
June 30, 1996 through December 30, 1996 1.10 to 1
December 31, 1996 through December 30, 1997 1.15 to 1
December 31, 1997 and thereafter 1.20 to 1
</TABLE>
<PAGE> 2
SECTION 3. Governing Law. This Amendment shall be governed by
and construed in accordance with the laws of the State of New York.

SECTION 4. Counterparts; Effectiveness. This Amendment may be
signed in any number of counterparts, each of which shall be an original, with
the same effect as if the signatures thereto and hereto were upon the same
instrument. This Amendment shall become effective as of the date hereof when
the Agent shall have received duly executed counterparts hereof signed by the
Borrower, the Guarantor and the Required Banks (or, in the case of any party as
to which an executed counterpart shall not have been received, the Agent shall
have received telegraphic, telex or other written confirmation from such party
of execution of a counterpart hereof by such party).

IN WITNESS WHEREOF, the parties hereto have caused this
Amendment to be duly executed as of the date first above written.

THE BORROWER

BEVERLY HEALTH & REHABILITATION
SERVICES, INC.

By
-------------------------------------
Title:

THE GUARANTOR

BEVERLY ENTERPRISES, INC.

By
-------------------------------------
Title:

2
<PAGE> 3

BANKS

MORGAN GUARANTY TRUST COMPANY
OF NEW YORK

By
----------------------------------
Title:

CHEMICAL BANK

By
----------------------------------
Title:

THE BANK OF NEW YORK

By
----------------------------------
Title:

THE LONG-TERM CREDIT BANK OF
JAPAN, LTD.,
LOS ANGELES AGENCY

By
----------------------------------
Title:

3
<PAGE> 4
NATIONSBANK OF TEXAS, N.A.

By
---------------------------------
Title: Vice President

PNC BANK, NATIONAL ASSOCIATION